As filed with the Securities and Exchange Registration No. 333-57212
Commission on April 7, 2005
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Post-Effective Amendment No. 4
to
FORM S-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
ING USA Annuity and Life Insurance Company
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41-0991508
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Linda E. Senker, Esq. James A. Shuchart, Esq.
ING ING
1475 Dunwoody Drive 1475 Dunwoody Drive
West Chester, PA 19380-1478 West Chester, PA 19380-1478
(610) 425-4139 (610) 425-3563
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
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The annuities covered by this registration statement are to be issued from time
to time after the effective date of this registration statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box............................................ [XX]
If the registrant elects to deliver its latest annual report to security
holders, or a complete and legible 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, please 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 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 the delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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PART I
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ING USA GUARANTEED ACCOUNT PROSPECTUS - APRIL 29, 2005
INTRODUCTION
The ING USA Guaranteed Account (the Guaranteed Account) is a fixed interest
option available during the accumulation phase under the Smart Design variable
annuity contract issued by ING USA Annuity and Life Insurance Company (the
Company, we, us, our). Read this prospectus carefully before investing in the
Guaranteed Account and save it for future reference.
GENERAL DESCRIPTION
The Guaranteed Account offers investors an opportunity to earn specified
guaranteed rates of interest for specified periods of time, called guaranteed
terms. We generally offer several guaranteed terms at any one time for those
considering investing in the Guaranteed Account. The number of guaranteed terms
offered may vary by state, we may not offer all guaranteed terms on all
contracts, and the rates for a given guaranteed term may vary among contracts.
Each guaranteed term offers a guaranteed interest rate for investments that
remain in the Guaranteed Account for the duration of the specific guaranteed
term. The guaranteed term establishes both the length of time for which we agree
to credit a guaranteed interest rate and how long your investment must remain in
the Guaranteed Account in order to receive the guaranteed interest rate.
We guarantee both principal and interest if, and only if, your investment
remains invested for the full guaranteed term. Charges related to the contract,
such as a maintenance fee or early withdrawal charge, may still apply even if
you do not withdraw until the end of a guaranteed term. INVESTMENTS TAKEN OUT OF
THE GUARANTEED ACCOUNT PRIOR TO THE END OF A GUARANTEED TERM MAY BE SUBJECT TO A
MARKET VALUE ADJUSTMENT WHICH MAY RESULT IN AN INVESTMENT GAIN OR LOSS. SEE
"MARKET VALUE ADJUSTMENT (MVA)."
PREMIUM BONUS OPTION. If the premium bonus option is available under your
contract and you elect that option, we will credit a premium bonus to your
contract for each purchase payment you make during the first account year. There
is an additional charge for this option during the first seven account years.
For amounts allocated to the Guaranteed Account, the assessment of this charge
will result in a reduction in the interest which would have been credited to
your account during the first seven account years if you had not elected the
premium bonus option. Therefore, the fees you will pay if you elect the premium
bonus option will be greater than the fees you will pay if you do not elect the
premium bonus option. The premium bonus option may not be right for you if you
expect to make additional purchase payments after the first account year or if
you anticipate that you will need to make withdrawals during the first seven
account years. In these circumstances the amount of the premium bonus option
charge may be more than the amount of the premium bonus we credit to your
contract. See the "Premium Bonus Option-Suitability" section of the contract
prospectus. The premium bonus option may not be available in all states.
This prospectus will explain:
o Guaranteed interest rates and guaranteed terms;
o Contributions to the Guaranteed Account;
o Types of investments available;
o How rates are offered;
o How there can be an investment risk and how we calculate gain or
loss;
o Contract charges that can affect your account value in the
Guaranteed Account;
o Taking investments out of the Guaranteed Account; and
o How to reinvest or withdraw at maturity.
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 OR JURISDICTION
THAT DOES NOT PERMIT THEIR SALE. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU
WITH INFORMATION THAT IS DIFFERENT THAN THAT CONTAINED IN THIS PROSPECTUS.
Our Customer Service Center:
P.O. Box 9271
Des Moines, IA 50306-9271
1-800-366-0066
GA Guaranteed Account - 135034
TABLE OF CONTENTS
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PAGE
SUMMARY 3
DESCRIPTION OF THE GUARANTEED ACCOUNT 7
General, Contributions to the Guaranteed Account, Deposit Period,
Guaranteed Terms, Guaranteed Interest Rates,
Maturity Value Transfer Provision
TRANSFERS 10
WITHDRAWALS 10
Deferral of Payments, Reinstatement Privilege
MARKET VALUE ADJUSTMENT (MVA) 12
Calculation of the MVA, Deposit Period Yield, Current Yield, MVA Formula
CONTRACT CHARGES 14
OTHER TOPICS 15
The Company, Income Phase, Investments, Distribution of Contracts,
Taxation, Experts, Legal Proceedings, Further Information, Incorporation
of Certain Documents by Reference, Inquiries
APPENDIX I - EXAMPLES OF MARKET VALUE ADJUSTMENT CALCULATIONS 19
APPENDIX II - EXAMPLES OF MARKET VALUE ADJUSTMENT YIELDS 21
GA Guaranteed Account - 135034
SUMMARY
The Guaranteed Account is a fixed interest option that may be available during
the accumulation phase of your variable annuity contract. The following is a
summary of certain facts about the Guaranteed Account.
IN GENERAL. Amounts that you invest in the Guaranteed Account will earn a
guaranteed interest rate if left in the Guaranteed Account for a specified
period of time (the guaranteed term). You must invest amounts in the Guaranteed
Account for the full guaranteed term in order to receive the quoted guaranteed
interest rate. If you withdraw or transfer those amounts before the end of the
guaranteed term, we may apply a "market value adjustment," which may be positive
or negative.
DEPOSIT PERIODS. A deposit period is the time during which we offer a specific
guaranteed interest rate if you deposit dollars for a specific guaranteed term.
For a particular guaranteed interest rate and guaranteed term to apply to your
account dollars, you must invest them during the deposit period in which that
rate and term are offered.
GUARANTEED TERMS. A guaranteed term is the period of time account dollars must
be left in the Guaranteed Account in order to earn the guaranteed interest rate
specified for that guaranteed term. We offer different guaranteed terms at
different times. We may also offer more than one guaranteed term of the same
duration with different guaranteed interest rates. Check with your sales
representative or the Company to learn the details about the guaranteed term(s)
currently offered. We reserve the right to limit the number of guaranteed terms
or the availability of certain guaranteed terms. The number of guaranteed terms
offered may vary by state, we may not offer all guaranteed terms on all
contracts, and the rates for a given guaranteed term may vary among contracts.
GUARANTEED INTEREST RATES. We guarantee different interest rates, depending upon
when account dollars are invested in the Guaranteed Account. For guaranteed
terms one year or longer, we may offer different rates for specified time
periods within a guaranteed term. The interest rate we guarantee is an annual
effective yield; that means that the rate reflects a full year's interest. We
credit interest at a rate that will provide the guaranteed annual effective
yield over one year. The guaranteed interest rate(s) is guaranteed for that
deposit period and for the length of the guaranteed term.
The guaranteed interest rates we offer will always meet or exceed the minimum
interest rates agreed to in the contract. Apart from meeting the contractual
minimum interest rates, we cannot guarantee any aspect of future offerings.
FEES AND OTHER DEDUCTIONS. We do not make deductions from amounts in the
Guaranteed Account to cover mortality and expense risks. We consider these risks
when determining the credited rate. The following other types of charges may be
deducted from amounts held in, withdrawn or transferred from the Guaranteed
Account:
> Market Value Adjustment (MVA). An MVA may be applied to amounts
transferred or withdrawn prior to the end of a guaranteed term, which
reflects changes in interest rates since the deposit period. The MVA may
be positive or negative and therefore may increase or decrease the amount
withdrawn to satisfy a transfer or withdrawal request. See "Market Value
Adjustment (MVA)."
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GA Guaranteed Account - 135034
> Tax Penalties and/or Tax Withholding. Amounts withdrawn may be subject to
withholding for federal income taxes, as well as a 10% penalty tax for
amounts withdrawn prior to your having attained age 59 1/2. See
"Taxation"; see also the "Taxation" section of the contract prospectus.
> Early Withdrawal Charge. An early withdrawal charge, which is a deferred
sales charge, may apply to amounts withdrawn from the contract, in order
to reimburse us for some of the sales and administrative expenses
associated with the contract. See "Contract Charges"; see also the "Fees"
section of the contract prospectus.
> Maintenance Fee. A maintenance fee of up to $30 may be deducted, on an
annual basis, pro rata from all funding options including the Guaranteed
Account. See "Contract Charges"; see also the "Fees" section of the
contract prospectus.
> Transfer Fees. During the accumulation phase, transfer fees of up to $10
per transfer may be deducted from amounts held in or transferred from the
Guaranteed Account. See "Contract Charges"; see also the "Fees" section of
the contract prospectus.
> Premium Taxes. We may deduct premium taxes of up to 4% from amounts in the
Guaranteed Account. See "Contract Charges"; see also the "Fees" section of
the contract prospectus.
> Premium Bonus Option Charge. If you elected the premium bonus option, a
charge will be deducted from amounts allocated to the Guaranteed Account,
resulting in a 0.50% reduction in the interest which would have been
credited to your account during the first seven account years if you had
not elected the premium bonus option. See "Contract Charges"; see also the
"Fee Tables," "Fees" and "Premium Bonus Option" sections of the contract
prospectus.
MARKET VALUE ADJUSTMENT (MVA). If you withdraw or transfer your account value
from the Guaranteed Account before a guaranteed term is complete, 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 deposit. The MVA may be positive or negative
depending upon interest rate activity at the time of withdrawal or transfer.
An MVA will not apply to:
> Amounts transferred or withdrawn at the end of a guaranteed term;
> Transactions made under the maturity value transfer provision;
> Transfers due to participation in the dollar cost averaging program (see
"Market Value Adjustment" for certain restrictions);
> Amounts distributed under a systematic distribution option (see
"Systematic Distribution Options" in the contract prospectus);
> Withdrawals for minimum distributions required by the Internal Revenue
Code of 1986, as amended (Tax Code), and for which the early withdrawal
charge is waived; and
> Withdrawals due to your exercise of the right to cancel your contract. See
the "Right to Cancel" section of the contract prospectus.
MVAs applied to withdrawals or transfers from the Guaranteed Account will be
calculated as an "aggregate MVA," which is the sum of all MVAs applicable due to
the withdrawal (see sidebar on "Market Value Adjustment (MVA)" section of this
prospectus). The following withdrawals will be subject to an aggregate MVA only
if it is positive:
> Withdrawals due to the election of a lifetime income option; and
> Unless otherwise noted, payment of a guaranteed death benefit (if paid
within the first six months following death).
All other withdrawals will be subject to an aggregate MVA, regardless of whether
it is positive or negative, including:
> Withdrawals due to the election of a nonlifetime income option;
> Payment of a guaranteed death benefit due to the death of a spousal
beneficiary or a joint contract holder who continued the account in his or
her name after the death of the other joint contract holder;
> Payment of a guaranteed death benefit more than six months after the date
of death; and
> Full or partial withdrawals during the accumulation phase (an MVA may not
apply in certain situations, see "Market Value Adjustment (MVA)").
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GA Guaranteed Account - 135034
See "Description of the Guaranteed Account" and "Market Value Adjustment (MVA)."
MATURITY OF A GUARANTEED TERM. On or before the end of a guaranteed term, you
may instruct us to:
> Transfer the matured amount to one or more new guaranteed terms available
under the current deposit period;
> Transfer the matured amount to other available investment options; or
> Withdraw the matured amount.
Amounts withdrawn may be subject to an early withdrawal charge, a maintenance
fee, tax withholding and, if you are under age 59 1/2, tax penalties.
Withdrawals may also result in the forfeiture of all or part of any premium
bonus credited to the Guaranteed Account (see "Premium Bonus Option" in the
contract prospectus).
See "Contract Charges"; see also the "Fees" and "Taxation" sections of the
contract prospectus.
DESCRIPTION OF THE GUARANTEED ACCOUNT
GENERAL
The Guaranteed Account offers guaranteed interest rates for specific guaranteed
terms. For a particular guaranteed interest rate and guaranteed term to apply to
your account dollars, you must invest them during the deposit period in which
that rate and term are offered. For guaranteed terms of one year or longer, we
may offer different interest rates for specified time periods within a
guaranteed term. We may also offer more than one guaranteed term of the same
duration with different guaranteed interest rates.
An MVA may be applied to any values withdrawn or transferred from a guaranteed
term prior to the end of that guaranteed term, except for amounts transferred
under the maturity value transfer provision, amounts transferred under the
dollar cost averaging program, amounts withdrawn under a systematic distribution
option, amounts withdrawn for minimum distributions required by the Tax Code and
withdrawals due to your exercise of the right to cancel your contract.
MVAs applied to withdrawals or transfers from the Guaranteed Account will be
calculated as an "aggregate MVA," which is the sum of all MVAs applicable due to
the withdrawal (see sidebar in "Market Value Adjustment (MVA)" section of this
prospectus for an example of the calculation of the aggregate MVA). The
following withdrawals will be subject to an aggregate MVA only if it is
positive:
> Withdrawals due to the election of a lifetime income option; and
> Unless otherwise noted, payment of a guaranteed death benefit (if paid
within the first six months following death).
All other withdrawals will be subject to an aggregate MVA, regardless of whether
it is positive or negative, including:
> Withdrawals due to the election of a nonlifetime income option;
> Payment of a guaranteed death benefit due to the death of a spousal
beneficiary or a joint contract holder who continued the account in his or
her name after the death of the other joint contract holder;
> Payment of a guaranteed death benefit more than six months after the date
of death; and
> Full or partial withdrawals during the accumulation phase (an MVA may not
apply in certain situations, see "Market Value Adjustment (MVA)").
We maintain a toll-free telephone number for those wishing to obtain information
concerning available deposit periods, guaranteed interest rates and guaranteed
terms. The telephone number is 1-800-366-0066. At least 18 calendar days before
a guaranteed term matures we will notify you of the upcoming deposit period
dates and information on the current guaranteed interest rates, guaranteed terms
and projected matured guaranteed term values.
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GA Guaranteed Account - 135034
CONTRIBUTIONS TO THE GUARANTEED ACCOUNT
You may invest in the guaranteed terms available in the current deposit period
by allocating new payments to the Guaranteed Account or by transferring a sum
from other funding options available under the contract or from other guaranteed
terms of the Guaranteed Account, subject to the transfer limitations described
in the contract. We may limit the number of guaranteed terms you may select.
Currently, if the dollar cost averaging program is in effect in a guaranteed
term and you wish to add an additional deposit to be dollar cost averaged, all
amounts to be dollar cost averaged will be combined and the dollar cost
averaging amount will be recalculated. This will affect the duration of amounts
in the guaranteed term.
Although there is currently no limit, we reserve the right to limit the total
number of investment options you may select at any one time during the life of
the contract. For purposes of determining any limit, each guaranteed term counts
as one investment option. Although we may require a minimum payment(s) to a
contract, we do not require a minimum investment for a guaranteed term. Refer to
the contract prospectus. There is a $500 minimum for transfers from other
funding options.
Investments may not be transferred from a guaranteed term during the deposit
period in which the investment is applied or during the first 90 days after the
close of the deposit period. This restriction does not apply to amounts
transferred or withdrawn under the maturity value transfer provision, to amounts
transferred under the dollar cost averaging program or, in some situations,
withdrawn because you discontinued the dollar cost averaging program, or to
amounts distributed under a systematic distribution option. See "Maturity Value
Transfer Provision" and "Transfers."
DEPOSIT PERIOD
The deposit period is the period of time during which you may direct investments
to a particular guaranteed term(s) and receive a stipulated guaranteed interest
rate(s). The deposit period for a guaranteed term ends upon the commencement of
that specific guaranteed term. Each deposit period may be a month, a calendar
quarter or any other period of time we specify.
GUARANTEED TERMS
A guaranteed term is the time we specify during which we credit the guaranteed
interest rate. We offer guaranteed terms at our discretion for various periods
ranging up to and including ten years. We may limit the number of guaranteed
terms you may select and may require enrollment in the dollar cost averaging
program.
GUARANTEED INTEREST RATES
Guaranteed interest rates are the rates that we guarantee will be credited on
amounts applied during a deposit period for a specific guaranteed term. We may
offer different guaranteed interest rates on guaranteed terms of the same
duration. Guaranteed interest rates are annual effective yields, reflecting a
full year's interest. We credit interest at a rate that will provide the
guaranteed annual effective yield over one year. Guaranteed interest rates are
credited according to the length of the guaranteed term as follows:
GUARANTEED TERMS OF ONE YEAR OR LESS. The guaranteed interest rate is credited
from the date of deposit to the last day of the guaranteed term.
GUARANTEED TERMS OF GREATER THAN ONE YEAR. Several different guaranteed interest
rates may be applicable during a guaranteed term of more than one year. The
initial guaranteed interest rate is credited from the date of deposit to the end
of a specified period within the guaranteed term. We may credit several
different guaranteed interest rates for subsequent specific periods of time
within the guaranteed term. For example, for a five-year guaranteed term we may
guarantee 7% for the first year, 6.75% for the next two years and 6.5% for the
remaining two years. We reserve the right, however, to apply one guaranteed
interest rate for an entire guaranteed term.
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GA Guaranteed Account - 135034
We will not guarantee or credit a guaranteed interest rate below the minimum
rate specified in the contract, nor will we credit interest at a rate above the
guaranteed interest rate we announce prior to the start of a deposit period.
Our guaranteed interest rates are influenced by, but are not determined by,
interest rates available on fixed income investments we may buy using deposits
directed to the Guaranteed Account (see "Investments"). We consider other
factors when determining guaranteed interest rates including regulatory and tax
requirements, sales commissions and administrative expenses borne by the
Company, general economic trends and competitive factors. WE MAKE THE FINAL
DETERMINATION REGARDING GUARANTEED INTEREST RATES. WE CANNOT PREDICT THE LEVEL
OF FUTURE GUARANTEED INTEREST RATES.
MATURITY OF A GUARANTEED TERM. At least 18 calendar days prior to the maturity
of a guaranteed term we will notify you of the upcoming deposit period, the
projected value of the amount maturing at the end of the guaranteed term and the
guaranteed interest rate(s) and guaranteed term(s) available for the current
deposit period.
When a guaranteed term matures, the amounts in any maturing guaranteed term may
be:
> Transferred to a new guaranteed term(s), if available under the contract;
> Transferred to any of the allowable investment options available under the
contract; or
> Withdrawn from the contract.
We do not apply an MVA to amounts transferred or withdrawn from a guaranteed
term on the date the guaranteed term matures. Amounts withdrawn, however, may be
subject to an early withdrawal charge, a maintenance fee, taxation and, if the
contract holder is under age 59 1/2, tax penalties. Withdrawals may also result
in the forfeiture of all or part of any premium bonus credited to the Guaranteed
Account (see "Premium Bonus Option" in the contract prospectus).
If we have not received direction from you by the maturity date of a guaranteed
term, we will automatically transfer the matured term value to a new guaranteed
term of similar length. If the same guaranteed term is no longer available, the
next shortest guaranteed term available in the current deposit period will be
used. If no shorter guaranteed term is available, the next longest guaranteed
term will be used.
Under the Guaranteed Account, each guaranteed term is counted as one funding
option. If a guaranteed term matures, and is renewed for the same term, it will
not count as an additional investment option for purposes of any limitation on
the number of investment options.
You will receive a confirmation statement, plus information on the new
guaranteed rate(s) and guaranteed term.
MATURITY VALUE TRANSFER PROVISION
If we automatically reinvest the proceeds from a matured guaranteed term, you
may transfer or withdraw from the Guaranteed Account the amount that was
reinvested without an MVA.
An early withdrawal charge and maintenance fee may apply to withdrawals. If the
full amount reinvested is transferred or withdrawn, we will include interest
credited to the date of the transfer or withdrawal. This provision is only
available until the last business day of the month following the maturity date
of the prior guaranteed term. This provision only applies to the first transfer
or withdrawal request received from the contract holder with respect to a
particular matured guaranteed term value, regardless of the amount involved in
the transaction.
TRANSFERS
We allow you to transfer all or a portion of your account value to the
Guaranteed Account or to other investment options under the contract. We do not
allow transfers from any guaranteed term to any other guaranteed term or
investment option during the deposit period for that guaranteed term or for 90
days following the close of that deposit period. The 90-day wait does not apply
to:
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GA Guaranteed Account - 135034
> Amounts transferred on the maturity date or under the maturity value
transfer provision;
> Amounts transferred from the Guaranteed Account before the maturity date
due to the election of an income phase payment option;
> Amounts distributed under a systematic distribution option;
> Amounts transferred from an available guaranteed term in connection with
the dollar cost averaging program; and
> Withdrawals due to your exercise of the right to cancel your contract. See
the "Right to Cancel" section of the contract prospectus.
Transfers after the 90-day period are permitted from a guaranteed term(s) to
another guaranteed term(s) available during a deposit period or to other
available investment options. We will apply an MVA to transfers made before the
end of a guaranteed term. Transfers within one calendar month of a term's
maturity date are not counted as one of the 12 free transfers of accumulated
values in the account.
When the contract holder requests the transfer of a specific dollar amount, we
account for any applicable MVA in determining the amount to be withdrawn from a
guaranteed term(s) to fulfill the request. Therefore, the amount we actually
withdraw from the guaranteed term(s) may be more or less than the requested
dollar amount (see "Appendix I" for an example). For more information on
transfers, see the contract prospectus.
WITHDRAWALS
The contract allows for full or partial withdrawals from the Guaranteed Account
at any time during the accumulation phase. To make a full or partial withdrawal,
a request form (available from us) must be properly completed and submitted to
our Home Office (or other designated office as provided in the contract).
Partial withdrawals are made pro rata from each guaranteed term group. Within
each guaranteed term group, we will first withdraw funds from the oldest deposit
period until depleted, then from the next oldest and so on.
We may apply an MVA to withdrawals made prior to the end of a guaranteed term,
except for withdrawals made under the maturity value transfer provision (see
"Market Value Adjustment"). We may deduct an early withdrawal charge and
maintenance fee. The early withdrawal charge is a deferred sales charge which
may be deducted upon withdrawal to reimburse us for some of the sales and
administrative expenses associated with the contract. A maintenance fee, up to
$30, may be deducted pro rata from each of the funding options, including the
Guaranteed Account. Refer to the contract prospectus for a description of these
charges. When a request for a partial withdrawal of a specific dollar amount is
made, we will include the MVA in determining the amount to be withdrawn from the
guaranteed term(s) to fulfill the request. Therefore, the amount we actually
take from the guaranteed term(s) may be more or less than the dollar amount
requested. See "Appendix I" for an example.
DEFERRAL OF PAYMENTS
Under certain emergency conditions, we may defer payment of a Guaranteed Account
withdrawal for up to six months. Refer to the contract prospectus for more
details.
REINSTATEMENT PRIVILEGE
You may elect to reinstate all or a portion of a full withdrawal during the 30
days following such a withdrawal. We must receive amounts for reinstatement
within 60 days of the withdrawal.
We will apply reinstated amounts to the current deposit period(s). This means
that the guaranteed annual interest rate(s) and guaranteed terms available on
the date of reinstatement will apply. Amounts will be reinstated to the
guaranteed terms in the same proportion as prior to the full withdrawal. We will
not credit your account for market value adjustments or any premium bonus
forfeited that we deducted at the time of withdrawal or refund any taxes that
were withheld. Refer to the contract prospectus for further details.
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GA Guaranteed Account - 135034
MARKET VALUE ADJUSTMENT (MVA)
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We apply an MVA to amounts transferred or withdrawn from the Guaranteed Account
prior to the end of a guaranteed term. To accommodate early withdrawals or
transfers, we may need to liquidate certain assets or use cash that could
otherwise be invested at current interest rates. When we sell assets prematurely
we could realize a profit or loss depending upon market conditions.
The MVA reflects changes in interest rates since the deposit period. When
interest rates increase after the deposit period, the value of the investment
decreases and the MVA amount will be negative. Conversely, when interest rates
decrease after the deposit period, the value of the investment increases and the
MVA amount will be positive. Therefore, the application of an MVA may increase
or decrease the amount withdrawn from a guaranteed term to satisfy a withdrawal
or transfer request.
An MVA will not apply to:
> Amounts transferred or withdrawn at the end of a guaranteed term;
> Transactions made under the maturity value transfer provision;
> Transfers due to participation in the dollar cost averaging program*;
> Amounts distributed under a systematic distribution option--see
"Systematic Distribution Options" in the contract prospectus; or
> Withdrawals for minimum distributions required by the Tax Code and for
which the early withdrawal charge is waived.
* If you discontinue the dollar cost averaging program and transfer
the amounts in it, subject to the Company's terms and conditions
governing guaranteed terms, to another guaranteed term, an MVA will
apply.
MVAs applied to withdrawals or transfers from the Guaranteed Account will be
calculated as an "aggregate MVA," which is the sum of all MVAs applicable due to
the withdrawal (see sidebar for an example of the calculation of the aggregate
MVA). The following withdrawals will be subject to an aggregate MVA only if it
is positive:
> Withdrawals due to the election of a lifetime income option; and
> Unless otherwise noted, payment of a guaranteed death benefit (if paid
within the first six months following death).
All other withdrawals will be subject to an aggregate MVA, regardless of whether
it is positive or negative, including:
> Withdrawals due to the election of a nonlifetime income option;
> Payment of a guaranteed death benefit due to the death of a spousal
beneficiary or a joint contract holder who continued the account in his or
her name after the death of the other joint contract holder;
> Payment of a guaranteed death benefit more than six months after the date
of death; and
> Full or partial withdrawals during the accumulation phase (an MVA may not
apply in certain situations, as noted above).
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AGGREGATE MVA--The total of all MVAs applied due to a transfer or withdrawal.
CALCULATION OF THE AGGREGATE MVA--In order to satisfy a transfer or withdrawal,
amounts may be withdrawn from more than one guaranteed term, with more than one
guaranteed interest rate. In order to determine the MVA applicable to such a
transfer or withdrawal, the MVAs applicable to each guaranteed term will be
added together, in order to determine the "aggregate MVA."
Example:
$1,000 withdrawal, two guaranteed terms,
MVA1 = $10, MVA2 = $-30
$10 + $-30 = $-20.
Aggregate MVA = $-20.
Example:
$1,000 withdrawal, two guaranteed terms,
MVA1 = $30, MVA2 = $-10
$30 + $-10 = $20.
Aggregate MVA = $20.
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GA Guaranteed Account - 135034
CALCULATION OF THE MVA
The amount of the MVA depends upon the relationship between:
> The deposit period yield of U.S. Treasury Notes that will mature in the
last quarter of the guaranteed term; and
> The current yield of such U. S. Treasury Notes at the time of withdrawal.
If the current yield is less than the deposit period yield, the MVA will
decrease the amount withdrawn from a guaranteed term to satisfy a transfer or
withdrawal request (the MVA will be positive). If the current yield is greater
than the deposit period yield, the MVA will increase the amount withdrawn from a
guaranteed term (the MVA will be negative or detrimental to the investor).
DEPOSIT PERIOD YIELD
We determine the deposit period yield used in the MVA calculation by considering
interest rates prevailing during the deposit period of the guaranteed term from
which the transfer or withdrawal will be made. First, we identify the Treasury
Notes that mature in the last three months of the guaranteed term. Then, we
determine their yield-to-maturity percentages for the last business day of each
week in the deposit period. We then average the resulting percentages to
determine the deposit period yield.
Treasury Note 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.
CURRENT YIELD
We use the same Treasury Notes identified for the deposit period yield to
determine the current yield--Treasury Notes that mature in the last three months
of the guaranteed term. However, we use the yield-to-maturity percentages for
the last business day of the week preceding the withdrawal and average those
percentages to get the current yield.
MVA FORMULA
The mathematical formula used to determine the MVA is:
{(1+i)/(1+j)}^(X/365)
where i is the deposit period yield; j is the current yield; and x is the number
of days remaining (computed from Wednesday of the week of withdrawal) in the
guaranteed term. (For examples of how we calculate MVA, refer to Appendix I.)
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.
CONTRACT CHARGES
Certain charges may be deducted directly or indirectly from the funding options
available under the contract, including the Guaranteed Account. The contract may
have a maintenance fee of up to $30 that we will deduct, on an annual basis, pro
rata from all funding options including the Guaranteed Account. We may also
deduct a maintenance fee upon full withdrawal of a contract.
The contract may have an early withdrawal charge that we will deduct, if
applicable, upon a full or partial withdrawal from the contract. If the
withdrawal occurs prior to the maturity of a guaranteed term, both the early
withdrawal charge and an MVA may be assessed.
We do not make deductions from amounts in the Guaranteed Account to cover
mortality and expense risks. Rather, we consider these risks when determining
the interest rate to be credited.
10
GA Guaranteed Account - 135034
Also, if you elected the premium bonus option, a charge will be deducted from
amounts allocated to the Guaranteed Account, resulting in a 0.50% reduction in
the interest which would have been credited to your account during the first
seven account years if you had not elected the premium bonus option. See the
"Fee Tables," "Fees" and "Premium Bonus Option" sections of the contract
prospectus.
We may deduct a charge for premium taxes of up to 4% from amounts in the
Guaranteed Account.
During the accumulation phase, we reserve the right to charge transfer fees of
up to $10 per transfer from amounts held in or transferred from the Guaranteed
Account.
Refer to the contract prospectus for details on contract deductions.
OTHER TOPICS
THE COMPANY
ING USA Annuity and Life Insurance Company, ("ING USA") is an Iowa stock life
insurance company, which was originally incorporated in Minnesota on January 2,
1973. ING USA is a wholly owned subsidiary of Lion Connecticut Holdings Inc.
("Lion Connecticut"), which in turn is a wholly owned subsidiary of ING Groep
N.V. ("ING"), a global financial services holding company based in The
Netherlands. ING USA is authorized to sell insurance and annuities in all
states, except New York, and the District of Columbia. Lion Connecticut is the
holding company for Directed Services, Inc., distributor of the Contracts, and
other interests.
Our principal office is located at:
1475 Dunwoody Drive
West Chester, Pennsylvania 19380
INCOME PHASE
The Guaranteed Account may not be used as a funding option during the income
phase. Amounts invested in guaranteed terms must be transferred to one or more
of the options available to fund income payments before income payments can
begin.
An aggregate MVA, as previously described, may be applied to amounts transferred
to fund income payments before the end of a guaranteed term. Amounts used to
fund lifetime income payments will receive either a positive aggregate MVA or
none at all; however, amounts transferred to fund a nonlifetime income payment
option may receive either a positive or negative aggregate MVA. Refer to the
contract prospectus for a discussion of the income phase.
INVESTMENTS
Amounts applied to the Guaranteed Account will be allocated to a nonunitized
separate account established under Iowa law. A nonunitized separate account is a
separate account in which the contract holder does not participate in the
performance of the assets through unit values or any other interest. Contract
holders allocating funds to the nonunitized separate account do not receive a
unit value of ownership of assets accounted for in this separate account. The
risk of investment gain or loss is borne entirely by the Company. All Company
obligations due to allocations to the nonunitized separate account are
contractual guarantees of the Company and are accounted for in the separate
account. All of the general assets of the Company are available to meet our
contractual guarantees. Income, gains and losses of the separate account are
credited to or charged against the separate account without regard to other
income, gains or losses of the Company.
TYPES OF INVESTMENTS. We intend to invest primarily in investment-grade fixed
income securities including:
> Securities issued by the United States Government;
11
GA Guaranteed Account - 135034
> Issues of United States Government agencies or instrumentalities (these
issues may or may not be guaranteed by the United States Government);
> Debt securities which have an investment grade, at the time of purchase,
within the four highest grades assigned by Moody's Investors Services,
Inc. (Aaa, Aa, A or Baa), Standard & Poor's Corporation (AAA, AA, A or
BBB) or any other nationally-recognized rating service;
> 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 services,
are deemed by the Company's management to have an investment quality
comparable to securities which may be purchased as stated above; and
> 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.
We may invest in futures and options. We purchase financial futures, related
options and options on securities solely for non-speculative hedging purposes.
Should securities prices be expected 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 may purchase
options on securities.
WE ARE NOT OBLIGATED TO INVEST THE ASSETS ATTRIBUTABLE TO THE CONTRACT ACCORDING
TO ANY PARTICULAR STRATEGY, EXCEPT AS REQUIRED BY IOWA AND OTHER STATE INSURANCE
LAWS. THE GUARANTEED INTEREST RATES ESTABLISHED BY THE COMPANY ARE NOT
DETERMINED BY THE PERFORMANCE OF THE NONUNITIZED SEPARATE ACCOUNT.
DISTRIBUTION OF CONTRACTS
Directed Services, Inc. (DSI) is principal underwriter and distributor of the
contract as well as for other contracts issued through the separate account and
other separate accounts of ING USA. The principal address of DSI is 1475
Dunwoody Drive, West Chester, Pennsylvania 19380.
DSI enters into sales agreements with broker-dealers to sell the contracts
through registered representatives who are licensed to sell securities and
variable insurance products. These broker-dealers are registered with the SEC
and are members of the National Association of Securities Dealers, Inc. (NASD).
For additional information, see the contract prospectus.
TAXATION
You should seek advice from your tax adviser as to the application of federal
(and where applicable, state and local) tax laws to amounts paid to or
distributed under the contract. Refer to the contract prospectus for a
discussion of tax considerations.
TAXATION OF THE COMPANY. We are taxed as a life insurance company under Part I
of Subchapter L of the Internal Revenue Code of 1986, as amended. We own all
assets supporting the contract obligations of the Guaranteed Account. Any income
earned on such assets is considered income to the Company. We do not intend to
make any provision or impose a charge under the contract with respect to any tax
liability of the Company.
TAXATION OF PAYMENTS AND DISTRIBUTIONS. For information concerning the tax
treatment of payments to and distributions from the contract, please refer to
the contract prospectus.
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.
12
GA Guaranteed Account - 135034
LEGAL PROCEEDINGS
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.
Directed Services, Inc., the principal underwriter and distributor of the
contract, is not involved in any legal proceeding which, in the opinion of
management, is likely to have a 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 at www.ing.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:
13
GA Guaranteed Account - 135034
ING USA Annuity and Life Insurance Company
Attn: Customer Service Department
P.O. Box 9271
Des Moines, Iowa 50306-9271
1-800-366-0066
INQUIRIES
You may contact us directly by writing or calling us at the address or phone
number shown above.
14
GA Guaranteed Account - 135034
APPENDIX I
EXAMPLES OF MARKET VALUE ADJUSTMENT CALCULATIONS
- --------------------------------------------------------------------------------
The following are examples of market value adjustment (MVA) calculations using
several hypothetical deposit period yields and current yields. These examples do
not include the effect of any early withdrawal charge or other fees or
deductions 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.
15
GA Guaranteed Account - 135034
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.
16
GA Guaranteed Account - 135034
APPENDIX II
EXAMPLES OF MARKET VALUE ADJUSTMENT YIELDS
- --------------------------------------------------------------------------------
The following hypothetical examples show the MVA based upon a given current
yield at various times remaining in the guaranteed term. Table A illustrates the
application of the MVA based upon a deposit period yield of 6%; Table B
illustrates the application of the MVA based upon a deposit period yield of 5%.
The MVA will have either a positive or negative influence on the amount
withdrawn from or remaining in a guaranteed term. Also, the amount of the MVA
generally decreases as the end of the guaranteed term approaches.
TABLE A: DEPOSIT PERIOD YIELD OF 6%
CHANGE IN
DEPOSIT
CURRENT PERIOD TIME REMAINING TO
YIELD YIELD MATURITY OF GUARANTEED TERM
- ----------- ------------ ----------------------------------------------------------------
8 YEARS 6 YEARS 4 YEARS 2 YEARS 1 YEAR 3 MONTHS
------- ------- ------- ------- ------ --------
9% 3% -20.0% -15.4% -10.6% -5.4% -2.8% -0.7%
8% 2% -13.9% -10.6% -7.2% -3.7% -1.9% -0.5%
7% 1% -7.2% -5.5% -3.7% -1.9% -0.9% -0.2%
6% 0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
4% -2% 16.5% 12.1% 7.9% 3.9% 1.9% 0.5%
3% -3% 25.8% 18.8% 12.2% 5.9% 2.9% 0.7%
2% -4% 36.0% 26.0% 16.6% 8.0% 3.9% 1.0%
1% -5% 47.2% 33.6% 21.3% 10.1% 5.0% 1.2%
TABLE B: DEPOSIT PERIOD YIELD OF 5%
CHANGE IN
DEPOSIT
CURRENT PERIOD TIME REMAINING TO
YIELD YIELD MATURITY OF GUARANTEED TERM
- ----------- ------------ ----------------------------------------------------------------
8 YEARS 6 YEARS 4 YEARS 2 YEARS 1 YEAR 3 MONTHS
------- ------- ------- ------- ------ --------
9% 3% -25.9% -20.1% -13.9% -7.2% -3.7% -0.9%
8% 2% -20.2% -15.6% -10.7% -5.5% -2.8% -0.7%
7% 1% -14.0% -10.7% -7.3% -3.7% -1.9% -0.5%
6% 0% -7.3% -5.5% -3.7% -1.9% -0.9% -0.2%
4% -2% 8.0% 5.9% 3.9% 1.9% 1.0% 0.2%
3% -3% 16.6% 12.2% 8.0% 3.9% 1.9% 0.5%
2% -4% 26.1% 19.0% 12.3% 6.0% 2.9% 0.7%
1% -5% 36.4% 26.2% 16.8% 8.1% 4.0% 1.0%
17
GA Guaranteed Account - 135034
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
For the fiscal year ended December 31, 2004
-----------------
Commission file number: 333-57212, 333-104539, 333-104546,
333-104547, 333-104548, and 333-116137
--------------------------------------
ING USA Annuity and Life Insurance Company
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Iowa 41-0991508
- --------------------------------------------------------------------------------
(State or other jurisdiction (IRS employer
of incorporation or organization) identification no.)
1475 Dunwoody Drive, West Chester, Pennsylvania 19380-1478
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (610) 425-3400
--------------
- --------------------------------------------------------------------------------
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: 250,000 shares of Common Stock
as of March 17, 2005, all of which were directly owned by Lion Connecticut
Holdings Inc.
NOTE: WHEREAS ING USA ANNUITY AND LIFE INSURANCE COMPANY MEETS THE CONDITIONS
SET FORTH IN GENERAL INSTRUCTION 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).
ING USA Annuity and Life Insurance Company,
(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
Form 10-K
Item No. Page
- --------- ----
PART I
Item 1. Business** 3
Item 2. Properties** 16
Item 3. Legal Proceedings 16
Item 4. Submission of Matters to a Vote of Security Holders* 16
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 17
Item 6. Selected Financial Data*** 18
Item 7. Management's Narrative Analysis of the Results of Operations and Financial Condition** 19
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 45
Item 8. Financial Statements and Supplementary Data 49
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 100
Item 9A. Controls and Procedures 100
Item 9B Other Information 100
PART III
Item 10. Directors and Executive Officers of the Registrant* 101
Item 11. Executive Compensation* 101
Item 12. Security Ownership of Certain Beneficial Owners and Management* 101
Item 13. Certain Relationships and Related Transactions* 101
Item 14. Principal Accountant Fees and Services 101
PART IV
Item 15. Exhibits and Financial Statement Schedules 104
Index on Financial Statement Schedules 110
Signatures 114
* 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.
** Item prepared in accordance with General Instruction I(2) of Form 10-K.
*** Although item may be omitted pursuant to Georgia Instruction I(2) of Form
10-K, the Company has provided certain disclosure under this Item.
PART I
Item 1. Business (Dollar amounts in millions, unless otherwise stated)
Organization of Business
ING USA Annuity and Life Insurance Company ("ING USA" or the
"Company"), a wholly-owned subsidiary of Lion Connecticut Holdings
Inc. ("Lion" or "Parent"), is a stock life insurance company organized
under the laws of the State of Iowa.
Lion is an indirect, wholly-owned subsidiary of ING Groep N.V.
("ING"), a global financial services holding company based in The
Netherlands, with American Depository Shares listed on the New York
Stock Exchange under the symbol "ING". ING USA is authorized to
conduct its insurance business in the District of Columbia and all
states except New York. ING USA was domiciled as a life insurance
company under the laws of the State of Delaware until December 31,
2003 and has been domiciled in Iowa since January 1, 2004.
On January 1, 2004 (the "Merger Date"), the Company simultaneously
redomesticated from Delaware to Iowa, changed its name from Golden
American Life Insurance Company ("Golden American") to ING USA Annuity
and Life Insurance Company, and merged the following affiliates into
the Company: Equitable Life Insurance Company of Iowa ("Equitable
Life"), USG Annuity & Life Company ("USG"), and United Life & Annuity
Insurance Company ("ULA") (collectively, the "Merger Companies").
Prior to the Merger Date, the Company was a wholly-owned subsidiary of
Equitable Life. Equitable Life merged its affiliate, Ameribest Life
Insurance Company ("AMB"), a life insurance company domiciled in
Georgia, into its operations on January 1, 2003.
Description of Business
ING's U.S.-based operations offer a broad range of life insurance,
annuities, mutual funds, employee benefit, defined contribution,
guaranteed investment contracts and funding agreements. For the year
ended December 31, 2004, ING's U.S.-based operations were ranked sixth
in sales of variable annuities according to data published by
Morningstar and sixth in sales of fixed annuities according to data
published by LIMRA International Inc. ("LIMRA"). The Company serves as
one of the primary vehicles through which ING's U.S.-based operations
write this fixed and variable annuity business. According to LIMRA's
fourth quarter 2004 sales report on Stable Value and Funding Agreement
products, ING's U.S.-based operations were ranked fifth in market
share for funding agreement contracts, and tenth for traditional
general account guaranteed investment contracts, in terms of total
assets.
The Company offers various insurance products including immediate and
deferred variable and fixed annuities. The Company's annuity products
are distributed by national wirehouses, regional securities firms,
independent National Association of Securities Dealers, Inc. ("NASD")
firms with licensed registered representatives, banks, life insurance
companies with captive agency sales forces, independent insurance
agents, independent marketing organizations, and the ING broker-dealer
network. The Company's primary annuity customers are retail consumers.
3
The Company also offers guaranteed investment contracts and funding
agreements primarily to institutional investors and corporate benefit
plans. These products are directly sold by home office personnel or
through specialty insurance brokers to institutional purchasers.
The Company previously provided interest-sensitive, traditional and
variable life insurance, and health insurance products. The Company no
longer issues these products. The life insurance business is in
run-off and the Company has ceded to other insurers all health
insurance.
See "Reserves" for a discussion of the Company's reserves by product
type.
The Company has one operating segment, ING U.S. Financial Services
("USFS") which offers the products described below.
Products and Services
The Company offers a portfolio of immediate and deferred fixed and
variable annuities designed to address customer needs for
tax-advantaged savings, retirement needs, and wealth-protection
concerns.
The fixed annuities offered by the Company are General Account
products and include single premium immediate, multi-year guaranteed,
annual reset, and equity index annuities. For these contracts, the
principal amount is guaranteed, and for a specified time period, the
Company credits interest to the customer's account at a fixed interest
rate. The Company's major source of income from fixed annuities is the
spread between the investment income earned on the underlying General
Account assets and the interest rate credited to customers' accounts.
The Company bears the investment risk because, while the Company
credits customers' accounts with a stated interest rate, the Company
cannot be certain the investment income earned on the General Account
assets will exceed that rate. With respect to indexed annuities, the
Company hedges the equity risk exposure by purchasing derivative
instruments on the relevant equity index.
The variable annuities offered by the Company are savings vehicles in
which contract owner deposits are recorded and primarily maintained in
Separate Accounts established for the Company and registered with the
Securities and Exchange Commission ("SEC") as a unit investment trust.
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 guarantees. 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. Separate Account
assets supporting variable options under variable annuity contracts
are invested, as designated by the contractowner or participant under
a contract, in shares of mutual funds which are managed by the Company
or its affiliates, or in other selected mutual funds not managed by
the Company or its affiliates. Variable annuity deposits are allocated
to various subaccounts established within the Separate Account. Each
subaccount represents a different investment option into which the
4
contractowner may allocate deposits. The account value of a variable
annuity contract is equal to the aggregate value of the subaccounts
selected by the contractowner (including the value allocated to any
fixed account) less fees and expenses. The Company offers investment
options for its variable annuities covering a wide range of investment
styles, including large, mid and small cap equity funds, as well as
fixed income alternatives. Unlike fixed annuities, variable annuity
contract owners bear the risk of investment gains and losses
associated with the selected investment allocation. The Company,
however, offers certain guaranteed death and living benefits
(described below) under which it bears specific risks associated with
these products. Many of the variable annuities issued by ING USA are
combination variable and fixed deferred annuity contracts under which
some or all of the deposits may be allocated by the contract owner to
a fixed account available under the contract. The Company's major
source of income from variable annuities is the base contract
mortality fee and expense fees and guaranteed living and death benefit
rider fees charged to the customer, less the cost of administering the
product, as well as the cost of providing for the guaranteed living
and death benefits.
The Company sells variable annuity contracts that offer one or more of
the following guaranteed death benefits and living benefits:
Guaranteed Minimum Death Benefits ("GMDB"): The Company has offered
the following guaranteed death benefits:
- Standard - This guarantees that upon the death of the annuitant
the death benefit will be no less than the premiums paid by the
contractowner net of any contract withdrawals.
- Ratchet - This guarantees that upon the death of the annuitant
the death benefit will be no less than the greater of (1)
Standard or (2) the maximum anniversary (or quarterly) value of
the variable annuity.
- Rollup (7% or 5.5% Solution) - This guarantees that upon the
death of the annuitant the death benefit will be no less than the
aggregate premiums paid by the contractowner accruing interest at
7% or 5.5% per annum, subject to a maximum cap on the account
value. (The Company has discontinued this option for new sales.)
- Combo (Max 7) - This guarantees that upon the death of the
annuitant the death benefit will be no less than the greater of
(1) Ratchet or (2) Rollup.
At December 31, 2004, the guaranteed value of these death benefits in
excess of account values was estimated to be $2.5 billion, before
reinsurance, which was a $0.4 billion decrease from the estimated $2.9
billion at December 31, 2003. The decrease was primarily driven by the
improved equity markets in 2004. For contracts issued prior to January
1, 2000, most contracts with enhanced death benefit guarantees were
reinsured to third party reinsurers to mitigate the risk produced by
such guaranteed death benefits. For contracts issued after December
31, 1999, the Company has instituted an equity hedging program in lieu
of reinsurance, to mitigate the risk produced by the guaranteed death
benefits. The equity hedging program is based on the Company entering
into derivative positions to offset exposures to guaranteed minimum
death benefits due to adverse changes in the equity markets. At
December 31, 2004, the guaranteed value of minimum guaranteed death
benefits in excess of account values, net of reinsurance, was
estimated to be $1.4 billion, of which $748.7 is projected to be
covered by the Company's equity hedging program, consistent with the
5
Company's exposure as of December 31, 2003. As of December 31, 2004,
the Company has recorded a liability of $66.9, net of reinsurance,
representing the estimated net present value of the Company's future
obligation for guaranteed minimum death benefits in excess of account
values. The liability increased $0.5 from $66.5 at December 31, 2003,
mainly due to the increase in fee income collected from customers used
to fund the reserve exceeding the decrease in the reserve, due to the
improved equity markets during 2004. The liability is recorded in
accordance with the provisions of the Financial Accounting Standards
Board ("FASB") Statement of Position 03-1, "Accounting and Reporting
by Insurance Enterprises for Certain Nontraditional Long-Duration
Contracts and for Separate Accounts" ("SOP 03-1").
Guaranteed Living Benefits: The Company offers the following
guaranteed living benefits:
- Guaranteed Minimum Income Benefit ("GMIB") - This guarantees a
minimum income payout, exercisable each contract anniversary on
or after the 10th rider anniversary. This type of living benefit
is the predominant selection in the Company's sales of variable
annuities.
- Guaranteed Minimum Withdrawal Benefit ("GMWB") - This guarantees
that annual withdrawals of up to 7% of eligible premiums may be
made until eligible premiums previously paid by the contractowner
are returned, regardless of account value performance. The new
2004 GMWB rider (ING Principal Guard) provides reset and step-up
features, which provide, in certain instances, for increases in
the amount available for withdrawal.
- Guaranteed Minimum Accumulation Benefit ("GMAB") - Guarantees
that the account value will be at least 100% of the premiums paid
by the contractowner after 10 years (GMAB10) or 200% after 20
years (GMAB20).
At December 31, 2004, the guaranteed value of these living benefits in
excess of account values was estimated to be $269.7, which is a
decrease of $38.5 from an estimated $308.2 at December 31, 2003. The
decrease was primarily driven by the improved equity markets during
2004. All living benefits are covered by the Company's equity hedging
program. As of December 31, 2004, the Company has recorded a liability
of $40.3 representing the estimated net present value of its future
obligation for living benefits in excess of account values. The
liability increased $26.4 from $13.9 at December 31, 2003, mainly due
to the increase in fee income collected from customers used to fund
the reserve exceeding the decrease in the reserve, due to the improved
equity market during 2004. For GMIBs, the liability is recorded in
accordance with the provisions of SOP 03-1. For GMABs and GMWBs, the
liability is held at fair value in accordance with Statement of
Financial Accounting Standards ("FAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities".
Variable annuity contracts containing guaranteed death and living
benefits expose the Company to equity risk. An increase in the value
of the equity markets will increase account values for these
contracts, thereby decreasing the Company's risk associated with the
MGDBs, GMIBs, GMWBs, and GMABs. A decrease in the equity markets, that
causes a decrease in the account values, will increase the possibility
that the Company may be required to pay amounts to customers due to
guaranteed death and living benefits.
6
The Company also is a provider of institutional investment products,
primarily guaranteed investment contracts and funding agreements,
collectively referred to as "GICs," issued to the stable value market
and other institutional customers. The Company intends to issue GICs
to one or more special purpose vehicles, which sell notes to
institutional and retail investors in order to fund the purchase of
those GICs. The Company profits from the sale of GICs by earning
income in excess of the amount credited to the customer accounts less
the cost of administering the product.
Historically, the Company has provided interest-sensitive, traditional
and variable life insurance, and health insurance. All health
insurance has been ceded to other insurers and new policies are no
longer written. The Company ceased the issuance of life insurance
policies in 2001, and all life insurance business is currently in
run-off. A certain portion of the assets held in the general account
are dedicated to funding this block of business.
Strategy, Method of Distribution, and Principal Markets
The Company believes longer life expectancies, an aging population,
and growing concern over the stability and availability of the Social
Security system have made retirement planning a priority for many
Americans. The target market for the Company's annuity products is
primarily individuals, while the target market for GICs is primarily
institutional investors and corporate benefit plans.
The principal distribution channels of the Company's variable and
fixed annuities include national wirehouses, regional securities
firms, independent NASD firms with licensed registered
representatives, banks, life insurance companies with captive agency
sales forces, independent insurance agents, independent marketing
organizations, and the ING broker-dealer network. GICs are distributed
primarily to institutional investors and corporate benefit plans
through direct sales by home office personnel or through specialty
insurance brokers.
The Company markets its variable annuities primarily on the underlying
guarantee features, positioning the product line as a risk management
tool for clients and advisors. Indexed annuities are marketed
primarily based on underlying guarantee features coupled with
consumer-friendly product designs offering the potential for equity
market upside potential. The Company also offers fixed annuities
offering a guaranteed interest rate or annuity payment suitable for
clients seeking a stable return.
The Company also utilizes sales inducements as part of its
distribution strategy for annuities. Sales inducements represent
benefits paid to contractowners for a specified period 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.
The Company continued to expand distribution systems during 2004 and 2003. The
Company believes that broad-based distribution networks are key to realizing a
growing share of the wealth accumulation marketplace. The Company plans to
establish new relationships and implement strategies to increase penetration
with key distributors in existing channels. Other than Morgan Stanley which
produced approximately 6% of annuity sales and ING Advisors Network (a group of
broker-dealers affiliated with the Company) which produced approxmiately 13% of
7
annuity sales, no other broker or agency firm accounted for more than
5% of sales of the Company's annuity products in 2004.
The Company is not dependent upon any single customer and no single
customer accounted for 10% or more of revenue in 2004.
Assets Under Management
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., annuity premiums and
GIC deposits less surrenders), investment performance (i.e., interest
credited to customer accounts for fixed options or market performance
for variable options), and customer retention. The Company's customer
assets under management, that support fixed and variable annuities,
were as follows:
December 31,
2004 2003
----------------- -----------------
Variable annuities $ 25,847.0 $ 19,448.0
Fixed annuities 17,160.2 15,625.0
GICs 1,797.4 425.4
----------------- -----------------
Total $ 44,804.6 $ 35,498.4
================= =================
Competition
The annuity competitive environment remains intense and is dominated
by a number of large, highly-rated insurance companies. Increasing
competition within the retirement savings business from traditional
insurance carriers, as well as banks and mutual fund companies, offers
consumers many choices. The Company's annuity products compete in the
annuity market principally on the basis of investment performance,
product design, brand recognition, financial strength ratings,
distribution capabilities, levels of charges and credited rates,
reputation, and customer service.
The Company competes in the GIC market primarily on the basis of its
capital markets, product structuring, and risk management expertise,
as well as its brand recognition and financial strength ratings. Other
competitors in this market include other life insurance companies, as
well as banks and other financial institutions.
Reserves
The Company records as liabilities actuarially-determined reserves
that are calculated to meet the Company's future obligations under its
variable annuity, fixed annuity, GIC products, and other insurance
products.
Reserves for deferred annuity investment contracts and immediate
annuity without life contingent payouts equal cumulative deposits,
less charges and withdrawals, plus credited interest thereon (reserve
interest rates vary by product up to 10.0% for the years 2004, 2003,
and 2002).
Reserves for immediate annuities with life contingent payout 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
8
duration. For the years 2004, 2003, and 2002, reserve interest rates
ranged from 3.0% to 8.0%. Mortality and withdrawal rate assumptions
are based on relevant Company experience and are periodically reviewed
against both industry standards and experience.
As discussed above under "Products and Services," the Company has
established reserves for the guaranteed death and living benefits
included in variable annuities.
Reserves for GICs are calculated using the amount deposited with the
Company, less withdrawals, plus interest accrued to the ending
valuation date. Interest on these contracts is accrued by a
predetermined index plus a spread or a fixed rate, established at
contract issuance.
Reserves for universal life products are equal to cumulative deposits
less withdrawals and charges plus credited interest thereon. In
addition, the Company holds reserves as required for SOP 03-1 for
certain products with anticipated losses in later policy durations.
Reserves for traditional life insurance contracts represent the
present value of future benefits to be paid to or on behalf of
contractowners and related expenses less the present value of future
net premiums.
As of December 31, 2004, ING USA's $47,707.7 of life and annuity
insurance reserves (general and separate account), and deposit-type
funds were comprised of each type of the following products:
Reserves % of Total
----------------- -----------------
Variable and Fixed Annuity $ 43,271.9 90.7%
GICs 3,060.1 6.4%
Other 1,375.7 2.9%
================= =================
Total $ 47,707.7 100.0%
================= =================
The Other category primarily consists of relatively small closed
blocks of health insurance products and interest-sensitive, universal,
and traditional life insurance products.
Reinsurance Arrangements
The Company utilizes indemnity reinsurance agreements to reduce its
exposure to large losses from its life and annuity insurance
businesses. Reinsurance permits recovery of a portion of losses,
although it does not discharge the Company's liability as the direct
insurer of the risks. Reinsurance treaties are structured as yearly
renewable term, coinsurance, or modified coinsurance. All treaties are
closed for new business, including variable annuity guarantees and the
life business in force under those treaties is in run-off. Thus, the
Company is currently not selecting new reinsurers. If in a position to
select a reinsurer, the Company would primarily base its selection on
the financial strength of the reinsurer. The Company currently has no
significant concentration with reinsurers. The Company has $1.3
billion of reinsurance related to GICs with its affiliate, Security
Life of Denver Insurance Company ("Security Life"), and has a minimal
level of other affiliate reinsurance.
One of the main risks reinsured by the Company is the GMDB on its
variable annuity policies issued prior to January 1, 2000. For
contracts issued after December 31, 1999, the Company hedges its
9
exposure due to these products. Other reinsurance contracts coinsure
life, accident and health, and annuity businesses. The Company
continually monitors and evaluates the financial strength and credit
ratings of its reinsurers. Only those reinsurance recoverable balances
deemed probable of recovery are reflected as assets on the Company's
Balance Sheets.
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 prepayment options and interest rate
options embedded in collateralized mortgage obligations and call
options embedded in corporate bonds. The investment management
function is centralized under ING Investment Management LLC ("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'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 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. See "Liquidity
and Capital Resources - Derivatives" for further discussion of the
Company's use of derivatives.
Ratings
On December 15, 2004, Standard & Poor's 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. Standard & Poor's 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 February 9,
10
2005, Standard & Poor's assigned its A-1+ short-term counterparty
credit rating to the Company. Standard & Poor's noted that the ratings
are based on the Company's status as a core member of ING U.S.
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.
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.
ING USA is subject to the insurance laws of the state in which it is
organized and of the other jurisdictions in which it transacts
business. The primary regulator of the Company's insurance operations
is the Division of Insurance for the State of Iowa. Among other
matters, these agencies may regulate premium rates, trade practices,
agent licensing, policy forms, underwriting and claims practices,
minimum interest rate to be credited to fixed annuity customer
accounts, and the maximum interest rates that can be charged on policy
loans.
The SEC, NASD and, to a lesser extent, the states, regulate 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
also impact certain of the Company's annuity, life insurance, and
other investment products. These products may involve separate
accounts and mutual funds registered under the Investment Company Act
of 1940.
11
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 $13.8 and $18.4
as of December 31, 2004 and 2003, respectively and has recorded a
reserve. The Company has also recorded an asset of $3.7 and $0.6 as of
December 31, 2004 and 2003, respectively, for future credits to
premium taxes for assessments already paid.
For information regarding certain other potential regulatory changes
relating to the Company's businesses, see "Risk Factors" in Item 1 -
Business.
Employees
The Company had 1,204 employees as of December 31, 2004, primarily
focused on managing the product distribution, marketing, customer
service, and product and financial management of the Company and
certain of its affiliates. The Company also makes use of other
services provided by ING North America Insurance Corporation and other
affiliates. These services include underwriting and 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
discussed below.
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 through other financial products. 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
12
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. For some of its
products, such as guaranteed investment contracts and funding
agreements, the Company is unable to lower the rate it credits to
customers in response to the lower return it will earn on its
investments. In addition, certain of its products provide a minimum
rate which the Company must credit to its customers. 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.
Equity market volatility could negatively impact the Company's
profitability and financial condition
The sales and profitability of certain of the Company's annuity
products which provide returns based on equities or equity indices
could be impacted by declines in the equity markets. Generally, sales
of equity-linked annuity products, including 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.
In addition, certain of its products provide guarantees which are
related to the equity markets. A sustained decline in the equity
markets will increase the Company's exposure to such guarantees, while
at the same time it is receiving less fees from such products. The
Company tries to minimize its exposure to these guarantees through
reinsurance and other risk management strategies, including the
Company's hedging program. The Company's future profitability may be
negatively impacted by its failure to successfully minimize these
risks, which could result from a number of efforts, including the
failure of a reinsurer or other counterparty to make payments due to
the Company, the unavailability or increase in costs of such
reinsurance or other risk management strategies, and the Company's
inability to implement an effective risk management strategy. 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 policy acquisition cost amortization in a given
period, potentially negatively impacting its net income in a period.
13
A downgrade in any of the Company's ratings 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 Company's ratings could, among other things:
|X| Materially increase the number of annuity contract surrenders and
withdrawals;
|X| Result in the termination of relationships with broker-dealers,
banks, agents, wholesalers, and other distributors of the
Company's products and services; and
|X| Reduce new sales of certain products including annuities, GICs
and other investment products.
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
organizations' 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 large part upon the
continued availability of capital
Lion has recently contributed significant amounts of capital to the
Company to support its sales activities. The Company has also used
capital primarily to support sales growth and also to strengthen
reserves associated with its annuity products. Although the equity
markets have had positive performance recently, deterioration in these
markets could lead to further capital consumption from guaranteed
benefits related to policy liabilities. There is no formal obligation
or requirement for Lion to contribute capital to the Company.
Therefore, 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.
14
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:
|X| The Company may experience an increase in defaults or delinquency
in the investment portfolios, including the commercial mortgage
loan portfolio.
|X| The Company may have greater difficulty selling privately placed
fixed maturity securities, commercial mortgage loans, and real
estate investments at attractive prices, in a timely manner, or
both, because they are less liquid than its publicly traded fixed
maturity securities.
|X| 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.
|X| Environmental liability exposure may result from the Company's
commercial mortgage loan portfolio and real estate investments.
|X| 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.
|X| The Company may experience volatility of earnings to the extent
that the derivative positions entered into by the Company do not
qualify for hedge accounting under GAAP.
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,
15
including certain ING affiliatesand the Company, 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 principal office is located at 1475 Dunwoody Drive, West
Chester, Pennsylvania, 19380-1478. The Company's annuity operations
and customer service center are located at 909 Locust Street, Des
Moines, Iowa 50309. All Company office space is leased or subleased by
the Company or its other affiliates. The Company pays substantially
all 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.
16
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
(Dollar amounts in millions, unless otherwise stated)
There is no public trading market for the Company's common stock. As
of January 1, 2004, all of the Company's outstanding common stock was
owned by its parent, Lion, as a result of the affiliate mergers
described in Part I, Item 1. All of the outstanding common stock of
Lion is owned by ING AIH, whose ultimate parent is ING. As of December
31, 2003, prior to the merger, all of the Company's common stock was
owned by Equitable Life, a wholly owned subsidiary of Lion.
The Company's ability to pay dividends to its parent is subject to the
prior approval of the Iowa Division of Insurance for payment of any
dividend, which, when combined with other dividends paid within the
preceding twelve months, exceeds the greater of (1) ten percent (10%)
of the Company's statutory surplus at the prior year end or (2) the
Company's prior year statutory net gain from operations. The Company
did not pay any dividends on its common stock during 2004 or 2002.
During 2003, the Company paid $12.4 in dividends on its common stock
to its Parent.
During 2004, 2003, and 2002, ING USA received capital contributions of
$230.0, $88.7, and $456.3, respectively, from Lion. Lion has recently
contributed significant amounts of capital to the Company to support
its sales activities. The Company has also used capital primarily to
support sales growth and also to strengthen reserves associated with
its annuity products.
17
Item 6. Selected Financial Data
(Dollar amounts in millions unless otherwise stated)
ING USA ANNUITY AND LIFE INSURANCE COMPANY
3-YEAR SUMMARY OF SELECTED FINANCIAL DATA
2004 2003* 2002*
-----------------------------------------
OPERATING RESULTS
Net investment income $ 1,023.9 $ 974.6 $ 989.3
Fee income 566.7 397.7 295.7
Premiums 22.8 26.0 36.8
Net realized capital gains (losses) 57.6 106.9 (196.5)
Total revenue 1,673.8 1,509.0 1,141.6
Interest credited and other benefits to
contractowners 1,134.0 925.7 848.0
Amortization of deferred policy acquisition
costs and value of business acquired 186.8 347.9 302.0
Income (loss) before cumulative effect of
change in accounting principle 92.9 57.3 (116.1)
Cumulative effect of change in accounting
principle, net of tax (1.0) - (1,298.4)
Net income (loss) 91.9 57.3 (1,414.5)
FINANCIAL POSITION
Total investments $ 22,882.7 $ 19,844.6 $ 18,413.4
Assets held in separate accounts 24,746.7 18,220.1 12,052.4
Total assets 52,417.6 41,097.4 33,460.1
Future policy benefits and claims reserves 22,961.0 19,400.5 18,404.9
Liabilities related to separate accounts 24,746.7 18,220.1 12,052.4
Notes to affiliates 435.0 85.0 85.0
Total shareholder's equity 2,774.5 2,528.0 2,339.5
* These amounts have been restated due to the merger that occurred
on January 1, 2004, which was accounted for in a manner similar
to a pooling-of-interests.
18
Item 7. Management's Narrative Analysis of the Results of Operations and
Financial Condition
(Dollar amounts in millions, unless otherwise stated)
Overview
The following narrative analysis of the results of operations presents
a review of ING USA Annuity and Life Insurance Company ("ING USA" or
"the Company") for each of the three years ended December 31, 2004,
2003, and 2002 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, 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 and Exchange
Commission ("SEC"). Forward-looking statements are statements not
based on historical information and which relate to future operations,
strategies, financial results, or other developments. Statements using
verbs such as "expect," "anticipate," "believe" or words of similar
import generally involve forward-looking statements. Without limiting
the foregoing, forward-looking statements include statements 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.
19
Basis of Presentation
ING USA Annuity and Life Insurance Company ("ING USA" or the
"Company"), a wholly-owned subsidiary of Lion Connecticut Holdings
Inc. ("Lion" or "Parent"), is a stock life insurance company organized
under the laws of the State of Iowa.
Lion is an indirect, wholly-owned subsidiary of ING Groep N.V.
("ING"), a global financial services holding company based in The
Netherlands, with American Depository Shares on the New York Stock
Exchange under the symbol "ING". ING USA is authorized to do business
in the District of Columbia and all states except New York. ING USA
was domiciled as a life insurance company under the laws of the State
of Delaware until December 31, 2003 and has been domiciled as such in
Iowa since January 1, 2004.
On January 1, 2004 (the "Merger Date"), the Company simultaneously
redomesticated from Delaware to Iowa, changed its name from Golden
American Life Insurance Company to ING USA Annuity and Life Insurance
Company, and merged the following affiliates into the Company:
Equitable Life Insurance Company of Iowa ("Equitable Life"), USG
Annuity & Life Company ("USG"), and United Life & Annuity Insurance
Company ("ULA") (collectively, the "Merger Companies"). Prior to the
merger date, ING USA was a wholly-owned subsidiary of Equitable Life.
Equitable Life merged its affiliate, Ameribest Life Insurance Company
("AMB"), a life insurance company domiciled in Georgia, into its
operations on January 1, 2003.
Statement of Financial Accounting Standards ("FAS") No. 141, "Business
Combinations", excludes transfers of net assets or exchanges of shares
between entities under common control, and notes that certain
provisions under Accounting Principles Board ("APB") Opinion No. 16,
"Business Combinations", provide a source of guidance for such
transactions. In accordance with APB Opinion No. 16, financial
information of the combined entity is presented as if the entities had
been combined for the full year, and all comparative financial
statements are restated and presented as if the entities had
previously been combined, in a manner similar to a
pooling-of-interests. The Balance Sheets and Statements of Operations
give effect to the consolidation transactions as if they had occurred
on December 31, 2003 and January 1, 2002, respectively.
Critical Accounting Policies
General
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States ("GAAP") requires
the use of estimates and assumptions in certain circumstances that
affect amounts reported in the accompanying 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 adversely affected by the need to
make future accounting adjustments to reflect changes in these
estimates and assumptions from time to time.
20
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, amortization of deferred policy acquisition costs
and value of business acquired, and valuation of derivatives
instruments. 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 financial statements.
Reserves
The Company establishes and carries actuarially determined reserves
which are calculated to meet its future obligations. Reserves are
calculated using mortality and withdrawal rate assumptions based on
relevant Company experience and are periodically reviewed against both
industry standards and experience. Changes in or deviations from the
assumptions used can significantly affect the Company's reserve levels
and related future operations.
Future policy benefits and claims reserves include reserves for
universal life insurance contracts, traditional life insurance
contracts, immediate and deferred annuities with life contingent
payouts, and guaranteed investment contracts ("GICs").
Reserves for deferred annuity investment contracts and immediate
annuity without life contingent payouts are equal to cumulative
deposits less charges and withdrawals, plus credited interest thereon
(reserve interest rates vary by product up to 10.0% for 2004, 2003,
and 2002).
Reserves for immediate annuities with life contingent payout 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 annuity plan type, year of issue,
and policy duration. For 2004, 2003, and 2002, reserve interest rates
ranged from 3.0% to 8.0%.
Certain variable annuity contracts offer guaranteed minimum death
benefits ("GMDB"), as well as guaranteed living benefits. The GMDB is
provided in the event the customer's account value at death is below
the guaranteed value. Guaranteed living benefits offered include
guaranteed minimum income benefits, guaranteed minimum withdrawal
benefits, and guaranteed minimum accumulation benefits. See Item I,
Business, "Products and Services", for a description of the guaranteed
living benefits. Although the Company reinsures or hedges a
significant portion of the death and living benefit guarantees
associated with its in force business, declines in the equity market
may increase the Company's net exposure to the death and living
benefits under these contracts.
Reserves for GICs are calculated using the amount deposited with the
Company, less withdrawals, plus interest accrued to the ending
valuation date. Interest on these contracts is accrued by a
predetermined index plus a spread or a fixed rate, established at the
issue date of the contract.
21
Reserves for universal life products are equal to cumulative deposits
less withdrawals and charges plus credited interest thereon. In
addition, the Company holds reserves as required for Statement of
Position ("SOP") 03-1, "Accounting and Reporting by Insurance
Enterprises for Certain Long-Duration Contracts and for Separate
Accounts", for certain products with anticipated losses in later
policy durations. Reserves for traditional life insurance contracts
represent the present value of future benefits to be paid to or on
behalf of contractowners and related expenses less the present value
of future net premiums.
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.
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
Company's 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 Policy Acquisition Costs and Value of
Business Acquired
Deferred policy acquisition costs ("DAC") represent policy acquisition
costs that have been capitalized and are subject to amortization. Such
costs consist principally of certain commissions, underwriting,
contract issuance, and agency expenses, related to the production of
new and renewal business.
Value of business acquired ("VOBA") represents the outstanding value
of in force business capitalized and amortized 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.
22
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. DAC
related to guaranteed investment contracts, however, are amortized on
a straight-line basis over the life of the contract.
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 universal life and 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.
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 unlocking 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.
23
Analysis of DAC/VOBA-Annuity
The variance in amortization expense in 2004 versus 2003 was impacted
by SOP 03-1. In prior years, amortization of inducements was included
in amortization of DAC and VOBA. Beginning in 2004, sales inducement
amortization is included as a component of benefit expense in
accordance with SOP 03-1. Therefore, the decrease in amortization of
DAC and VOBA is partially related to 2004 sales inducement
amortization being included in interest credited instead of
amortization of DAC and VOBA. Also contributing to the decrease is the
improved market performance during 2003, which lowered the
amortization rate for 2004. Amortization expense in 2003 was higher
than 2002 due in part to the poor equity market performance in 2002,
which increased the amortization rate in 2003, as well as to the
amortization of acquisition costs related to increased sales of fixed
annuities during 2002. 2003 was the first full year of amortization
for this block of acquisition costs. Also impacting amortization of
DAC and VOBA are unlocking adjustments discussed below.
The actual separate account market return exhibited by the variable
deposits invested in mutual funds associated with the Company's
liabilities in 2004 exceeded the long-term assumption, thereby
producing deceleration of DAC/VOBA amortization of $6.6, before tax.
As a part of the regular analysis of DAC/VOBA, at the end of the first
quarter of 2004, the Company modified its assumptions regarding the
future rate of spread income on some of its fixed annuity liabilities.
The assumption modification was in the direction of lower spread
income, and produced an acceleration of DAC/VOBA amortization of $5.0,
before tax. Similar regular analysis of DAC/VOBA at the end of the
third quarter of 2004 included unlocking of the Company's assumptions
regarding contractowner withdrawal behavior. Based on experience
studies, assumed rates of full surrender for both fixed and variable
annuities and rates of partial withdrawal of account balance for
variable annuities were all modified downward, producing a
deceleration of DAC/VOBA amortization of $4.2, before tax. The
combined effect of the three factors of actual variable return for
2004 exceeding long-term assumptions, modification of future spread
income expectations, and modification of expectations regarding future
withdrawal behavior was a deceleration of DAC/VOBA amortization
totaling $5.8, before tax, or $3.8, net of $2.0 of federal income tax
expense.
The Company reset long-term return assumptions for the separate
account to 8.5% from 9.0% (gross before fund management fees and
mortality and expense and other policy charges) as of December 31,
2003, reflecting a blended return of equity and other sub-accounts.
The largest component of the 2003 unlocking adjustment comprised a
deceleration of DAC/VOBA amortization totaling $41.3, before tax. This
component was primarily driven by improved market performance. The
Company also unlocked assumptions regarding future lapse rates for
fixed annuities during the analysis at the end of the third quarter of
2003, resulting in an acceleration of DAC/VOBA amortization of $6.0,
before tax. In each of the regular analyses of DAC/VOBA at the end of
the third and fourth quarters of 2003, expectations regarding yields
on assets backing fixed annuity liabilities were revised downward,
resulting in respective accelerations of DAC/VOBA amortization
measuring $2.1, before tax and $6.0, before tax. The combined effect
of all unlocking in 2003 was a deceleration of DAC/VOBA amortization
totaling $27.2, before tax, or $17.7, net of $9.5 of federal income
tax expense.
24
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 assumptions for the separate
account return to 9.0% (gross before fund management fees, and
mortality and expense and other policy charges), as of December 31,
2002, reflecting a blended return of equity and other sub-accounts.
The largest component of the 2002 unlocking adjustment comprised an
acceleration of DAC/VOBA amortization totaling $91.5, before tax. This
component was primarily driven by the sustained downturn in the equity
markets and revised expectations for future returns. The Company also
unlocked assumptions regarding future lapse and partial withdrawal
rates for fixed annuities during the analysis at the end of the third
quarter of 2002, resulting in an acceleration of DAC/VOBA amortization
measuring $2.0, before tax. During the regular analysis at the end of
the fourth quarter of 2002, expectations regarding the assets backing
the fixed annuity liabilities were revised to reflect higher
anticipated default rates. This fourth quarter adjustment resulted in
an acceleration of DAC/VOBA amortization of $8.0, before tax. The
combined effect of all unlocking adjustments in 2002 was an
acceleration of DAC/VOBA amortization totaling $101.5 before tax, or
$66.0, net of $35.5 of federal income tax benefit.
Analysis DAC/VOBA - Life
As part of the regular analysis of DAC/VOBA for the life insurance
block, at the end of each of the years ended December 31, 2004, 2003,
and 2002, the Company unlocked due to assumption changes related
primarily to mortality, lapse, expense, and interest amounts. The
impact of unlocking on the amortization of DAC/VOBA was a decrease of
$1.2 in 2004, an increase of $6.0 in 2003, and an increase of $5.2 in
2002.
Valuation of Derivative Instruments
Derivative instruments are reported at fair value and are obtained
internally from the derivative accounting system. Embedded derivative
instruments are reported at fair value based upon internally
established valuations that are consistent with external valuation
models or market quotations. Guaranteed minimum withdrawals benefits
("GMWBs") and guaranteed minimum accumulation benefits ("GMABs")
represent an embedded derivative liability in the variable annuity
contract that are required to be reported separately from the host
variable annuity contract. GMWBs and GMABs are carried at fair value
based on actuarial assumptions related to projected cash flows,
including benefits and related contract charges, over the lives of the
contracts, incorporating expectations concerning contractowner
behavior. Estimating cash flows involves numerous estimates and
subjective judgments including those regarding expected market rates
of return, market volatility, correlations of market returns, and
discount rates.
Results of Operations
Year ended December 31, 2004 compared to year ended December 31, 2003
Net Income: Net income increased by $34.6 to $91.9 for 2004 from $57.3
for 2003. The increase in income is primarily the result of higher fee
income and lower amortization of DAC and VOBA, partially offset by
higher benefits to contractowners, operating expenses, and taxes.
25
Net Investment Income: Net investment income from general account
assets increased by $49.3 to $1,023.9 for 2004 from $974.6 for 2003.
The increase in net investment income is partially due to higher fixed
assets under management due to higher net cash flows into fixed
products. Also contributing to the increase was a rise in income on
derivatives, specifically interest rates swaps and call options, which
are used to manage interest rate and equity risk. Partially offsetting
the increase in income is a rise in investment management fees and
decline in yields.
Fee Income: Fee income increased by $169.0 to $566.7 for 2004 from
$397.7 for 2003. The increase is primarily due to a $6.2 billion
increase in the average variable annuity assets under management by
the Company resulting from continued growth in sales related to the
Company's variable annuity product lines and equity market performance
in 2003 and 2004. Also contributing to the increase in fee income were
sales of products with higher charges for living benefits during 2004.
Premiums: Premiums, primarily related to traditional life insurance
products, decreased by $3.2 to $22.8 for 2004 from $26.0 for 2003.
This decrease in premium is primarily related to this line of business
being in run-off since 2001.
Net Realized Capital Gains (Losses): Net realized capital gains
decreased by $49.3 to $57.6 for 2004 from $106.9 for 2003. The
decrease in gains is primarily due to rising interest rates in 2004
and a decline 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 by $208.3 to
$1,134.0 for 2004 from $925.7 for 2003. The increase is primarily
related to: (i) an increase in the cost of guaranteed benefits mainly
due to an increase in average variable assets under management in
2004; (ii) higher fixed annuity deposits and GICs which resulted in
higher interest credited to contractowner accounts; and (iii) the
amortization of deferred sales inducements are included in this line
item in 2004 in accordance with SOP 03-1. In 2003 and 2002, the
amortization of deferred sales inducements is included in the
amortization of DAC and VOBA.
Amortization of DAC and VOBA: Amortization of DAC and VOBA decreased
by $161.1 to $186.8 for 2004 from $347.9 for 2003. In prior years,
amortization of deferred sales inducements is included in amortization
of DAC and VOBA. Beginning in 2004, deferred sales inducement
amortization is included as a component of interest credited and other
benefits in accordance with SOP 03-1. Therefore, the decrease in
amortization of DAC and VOBA is partially related to 2004 deferred
sales inducement amortization of $65 being included in interest
credited and other benefits instead of amortization of DAC and VOBA.
Also contributing to the decrease is the improved market performance
during 2003, which lowered the amortization rate for 2004.
Income Tax Expense (Benefit): Income tax expense increased by $81.5 to
$80.7 for 2004 from a benefit of $(0.8) for 2003. The increase is
primarily due to the increase in pre-tax income in 2004 and the
establishment of a valuation allowance due to clarifying tax guidance.
Also contributing to the increase is a decrease in the dividend
received deduction.
26
Year ended December 31, 2003 compared to year ended December 31, 2002
Net Income (Loss): Net income (loss) increased by $1,471.8 to $57.3
for 2003 from a loss of $(1,414.5) for 2002. This increase is
primarily due to the 2003 cumulative effect of change in accounting
principle, an increase in fee income and net realized capital gains,
partially offset by an increase in interest credited and other
benefits to contractowners, amortization of DAC/VOBA, and a decrease
in the income tax benefit.
Net Investment Income: Net investment income from general account
assets decreased by $14.7 to $974.6 for 2003 from $989.3 for 2002.
This decrease was primarily due to a rise in losses on derivatives due
to a loss on futures trading in 2003 to mitigate exposure to GICs.
Partially offsetting this decrease is a rise in investment income
driven by increased assets under management, and a reduction in losses
related to other derivatives. Other derivative losses decreased
primarily due to an increase in gains on derivative products hedging
the Company's exposure in its indexed annuities, reflecting the
improved market environment in 2003 over 2002.
Fee Income: Fee income increased by $102.0 to $397.7 for 2003 from
$295.7 for 2002. The increase is mainly due to a $3.0 billion increase
in average variable annuity assets under management by the Company,
resulting from the growth in sales related to the Company's variable
annuity product lines, and growth in the percentage of customers
choosing products with higher charges for living benefits.
Premiums: Premiums decreased by $10.8 to $26.0 for 2003 from $36.8 for
2002. This decrease is related to the lapse, surrender, or pay-up of
policies in the closed block of participating life business, which was
closed to new sales during 2001.
Net Realized Capital Gains (Losses): Net realized capital gains
increased by $303.4 to $106.9 for 2003 from a loss of $(196.5) for
2002. The increase is primarily due to the declining interest rates in
2003. In a declining rate environment, the market value of fixed
maturities in the portfolios increases, which in turn, results in
higher realized gains upon sale. Also contributing to the increase is
a rise in realized gains on derivatives due to changes in the value of
open derivative contracts.
Interest Credited and Other Benefits to Contractowners: Interest
credited and other benefits to contractowners increased $77.7 to
$925.7 for 2003 from $848.0 for 2002. This increase is primarily due
to an increase in interest credited on higher average fixed annuity
assets under management due to increased sales of fixed annuity
products during 2002 and 2003.
Amortization of DAC and VOBA: The amortization of DAC and VOBA
increased by $45.9 to $347.9 for 2003 from $302.0 for 2002. This
increase is due in part to the poor equity market performance in 2002,
which increased the amortization rate in 2003, as well as to the
amortization of acquisition costs related to increased sales of fixed
annuities during 2002. 2003 was the first full year of amortization
for this block of acquisition costs.
27
Cumulative Effect of Change in Accounting Principle: The 2002
cumulative effect of the change in accounting principle reflects the
Company's adoption of Financial Accounting Standards Board ("FASB")
Statement of Financial Accounting Standards ("FAS") No. 142, "Goodwill
and Other Intangible Assets". The adoption of this standard resulted
in a goodwill impairment loss of $1,298.4, net of $699.1 of income
taxes, related to prior acquisitions. This impairment loss represented
the entire carrying amount of goodwill, net of accumulated
amortization.
Income Tax Expense (Benefit): Income tax benefit decreased $59.4 to
$(0.8) for 2003 from $(60.2) for 2002. This decrease is primarily
driven by the change in pre-tax income and utilization of operations
and capital loss carryforwards in 2003. Offsetting those decreases is
an increase in the dividend received deduction and a benefit related
to refinement of the Company's method of calculating deferred tax
inventories.
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 Companypursuant 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 that are reported with bonds,
based on Standard & Poor's ratings classifications.
For a discussion of the Company's use of derivatives, see "Liquidity
and Capital Resources - Derivatives."
28
Portfolio Composition
The following table presents the investment portfolio at December 31,
2004 and 2003.
2004 2003
---------------------------- ----------------------------
Fair Value % Fair Value %
----------------- --------- ----------------- ---------
Fixed maturities, including
securities pledged $ 18,597.8 81.3% $ 16,097.8 81.1%
Equity securities 35.3 0.2% 120.2 0.6%
Mortgage loans on real estate 3,851.8 16.8% 3,388.7 17.1%
Real estate 1.8 0.0% 4.5 0.0%
Policy loans 169.0 0.7% 177.1 0.9%
Short-term investments 6.9 0.0% 0.3 0.0%
Other investments 220.1 1.0% 56.0 0.3%
----------------- --------- ----------------- ---------
$ 22,882.7 100.0% $ 19,844.6 100.0%
================= ========= ================= =========
Fixed Maturities
Fixed maturities available-for-sale as of December 31, 2004 were as
follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------- -------------- -------------- ---------------
Fixed maturities:
U.S. government and government
agencies and authorities $ 464.0 $ 1.8 $ 1.1 $ 464.7
State, municipalities and political
subdivisions 20.7 - 0.8 19.9
U.S. corporate securities:
Public utilities 1,796.9 78.4 8.9 1,866.4
Other corporate securities 6,292.4 243.5 22.7 6,513.2
--------------- -------------- -------------- ---------------
Total U.S. corporate securities 8,089.3 321.9 31.6 8,379.6
--------------- -------------- -------------- ---------------
Foreign securities:
Government 518.9 24.2 2.2 540.9
Other 2,571.2 97.7 11.5 2,657.4
--------------- -------------- -------------- ----------------
Total foreign securities 3,090.1 121.9 13.7 3,198.3
--------------- -------------- -------------- ----------------
Residential mortgage-backed securities 3,440.3 43.9 22.4 3,461.8
Commercial mortgaged-backed securities 1,107.8 34.9 3.0 1,139.7
Other asset-backed securities 1,934.2 14.3 14.7 1,933.8
--------------- -------------- -------------- ----------------
Total fixed maturities, including fixed
maturities pledged 18,146.4 538.7 87.3 18,597.8
Less: fixed maturities pledged 1,100.5 9.8 1.7 1,108.6
--------------- -------------- -------------- ----------------
Fixed maturities $ 17,045.9 $ 528.9 $ 85.6 $ 17,489.2
=============== ============== ============== ================
29
Fixed maturities available-for-sale as of December 31, 2003 were as
follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------- -------------- -------------- ---------------
Fixed maturities:
U.S. government and government
agencies and authorities $ 195.5 $ 2.0 $ 0.1 $ 197.4
State, municipalities and political
subdivisions 31.7 - 2.5 29.2
U.S. corporate securities:
Public utilities 1,341.2 84.3 8.0 1,417.5
Other corporate securities 6,246.4 300.9 33.7 6,513.6
--------------- -------------- -------------- ----------------
Total U.S. corporate securities 7,587.6 385.2 41.7 7,931.1
--------------- -------------- -------------- ----------------
Foreign securities:
Government 487.1 21.7 3.9 504.9
Other 1,984.4 96.0 24.1 2,056.3
--------------- -------------- -------------- ----------------
Total foreign securities 2,471.5 117.7 28.0 2,561.2
--------------- -------------- -------------- ----------------
Residential mortgage-backed securities 3,247.0 66.7 21.8 3,291.9
Commercial mortgaged-backed securities 774.2 45.8 2.1 817.9
Other asset-backed securities 1,273.0 17.2 21.1 1,269.1
Total fixed maturities, including fixed
maturities pledged 15,580.5 634.6 117.3 16,097.8
Less: fixed maturities pledged 555.5 6.4 2.8 559.1
--------------- -------------- -------------- ----------------
Total fixed maturities $ 15,025.0 $ 628.2 $ 114.5 $ 15,538.7
=============== ============== ============== ================
It is management's objective that the portfolio of fixed maturities be
of high quality and be well diversified by market sector. The fixed
maturities in the Company's portfolio are generally rated by external
rating agencies and, if not externally rated, are rated by the Company
on a basis believed to be similar to that used by the rating agencies.
The average quality rating of the Company's fixed maturities portfolio
was A+ at December 31, 2004 and December 31, 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, 2004
and 2003:
2004 2003
--------------------------- ---------------------------
Fair % of Fair % of
Value Total Value Total
--------------- ---------- -------------- -----------
AAA $ 6,542.5 35.2% $ 5,690.2 35.3%
AA 865.3 4.7% 760.8 4.7%
A 4,035.7 21.7% 3,427.4 21.3%
BBB 6,325.2 34.0% 5,369.8 33.4%
BB 710.7 3.8% 642.4 4.0%
B and below 118.4 0.6% 207.2 1.3%
--------------- ---------- -------------- -----------
Total $ 18,597.8 100.0% $ 16,097.8 100.0%
=============== ========== ============== ===========
30
95.6% and 94.7% of the fixed maturities were invested in securities
rated BBB and above (Investment Grade) at December 31, 2004 and 2003,
respectively.
Fixed maturities rated BB and below (Below Investment Grade) may have
speculative characteristics, and changes in economic conditions or
other circumstances are more likely to lead to a weakened capacity of
the issuer to make principal and interest payments than is the case
with higher rated fixed maturities.
Total fixed maturities by market sector, including fixed maturities
pledged to creditors, were as follows at December 31, 2004 and 2003:
2004 2003
--------------------------- ---------------------------
Fair % of Fair % of
Value Total Value Total
--------------- ---------- -------------- -----------
U.S. Corporate $ 8,399.5 45.2% $ 7,960.3 49.5%
Residential mortgage-backed 3,461.8 18.6% 3,291.9 20.5%
Commercial/multifamily mortgage-backed 1,139.7 6.1% 817.9 5.0%
Foreign(1) 3,198.3 17.2% 2,561.2 15.9%
U.S. Treasuries/Agencies 464.7 2.5% 197.4 1.2%
Asset-backed 1,933.8 10.4% 1,269.1 7.9%
--------------- ---------- -------------- -----------
Total $ 18,597.8 100.0% $ 16,097.8 100.0%
=============== ========== ============== ===========
(1)Primarily U.S. dollar denominated
The amortized cost and fair value of 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.
Amortized Fair
Cost Value
--------------- ---------------
Due to mature:
One year or less $ 336.8 $ 341.5
After one year through five years 4,066.3 4,151.2
After five years through ten years 4,209.5 4,403.0
After ten years 3,051.6 3,166.9
Mortgage-backed securities 4,548.0 4,601.4
Other asset-backed securities 1,934.2 1,933.8
Less: fixed maturities pledged 1,100.5 1,108.6
--------------- ----------------
Fixed maturities, excluding
fixed maturities pledged $ 17,045.9 $ 17,489.2
=============== ================
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.
At December 31, 2004 and 2003, fixed maturities with fair values of
$11.9 and $20.1, respectively, were on deposit as required by
regulatory authorities.
31
The Company is a member of the Federal Home Loan Bank of Des Moines
("FHLB") and is required to maintain a collateral deposit that backs
funding agreements issued to the FHLB. At December 31, 2004 and 2003,
respectively, the Company had $376.3 and $125.3 in non-putable funding
agreements issued to FHLB. At December 31, 2004 and 2003,
respectively, assets with a carrying value of approximately $422.0 and
$148.2 collateralized the funding agreements issued to the FHLB.
Collateralized assets are included in fixed maturities in the Balance
Sheets.
Mortgage Loans
Mortgage loans, primarily commercial mortgage loans, totaled $3,851.8
at December 31, 2004 and $3,388.7 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.
Unrealized Losses
Fixed maturities, including securities pledged to creditors, comprise
81.3% and 81.1% of the Company's total investment portfolio at
December 31, 2004 and 2003, respectively. Unrealized losses related to
fixed maturities are analyzed in detail in the following tables.
Fixed maturities, including securities pledged to creditors, in
unrealized loss positions for Investment Grade ("IG") and Below
Investment Grade ("BIG") securities by duration were as follows at
December 31, 2004 and 2003:
2004 2003
---------------------------------------- ----------------------------------------
% of IG % of IG % of IG % of IG
IG and BIG BIG and BIG IG and BIG BIG and BIG
--------- --------- --------- --------- --------- --------- --------- ---------
Less than six months below
amortized cost $ 26.6 30.5% $ 0.6 0.7% $ 24.9 21.2% $ 1.3 1.1%
More than six months
and less than twelve months
below amortized cost 28.0 32.0% 1.9 2.2% 64.1 54.7% 5.3 4.5%
More than twelve months
below amortized cost 26.1 29.9% 4.1 4.7% 10.1 8.6% 11.6 9.9%
--------- --------- --------- --------- --------- --------- --------- ---------
Total unrealized loss $ 80.7 92.4% $ 6.6 7.6% $ 99.1 84.5% $ 18.2 15.5%
========= ========= ========= ========= ========= ========= ========= =========
Of the unrealized losses less than 6 months in duration of $27.2,
there were $12.3 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 $14.9 as of
December 31, 2004, relates to securities under the guidance prescribed
by EITF Issue No. 99-20. This category includes U.S. government-backed
32
securities, principal protected securities, and structured securities,
which did not have an adverse change in cash flows for which the
carrying amount was $1,560.4.
Of the unrealized losses more than 6 months and less than 12 months in
duration of $29.9, there were $16.9 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
$13.0 as of December 31, 2004, relates to securities under the
guidance prescribed in 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 $768.8.
Of the unrealized losses more than 12 months in duration of $30.2,
there were $18.0, 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 $12.2 as of
December 31, 2004, relates to securities under the guidance prescribed
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 $222.8.
Fixed maturities, including securities pledged to creditors, in
unrealized loss positions by market sector and duration were as
follows at December 31, 2004:
Commercial/
Residential Multi-family U.S.
U.S. Mortgage- Mortgage- Treasuries/ Asset-
Corporate Backed Backed Foreign Agencies Backed Total
------------ ------------ ------------- --------- ---------- --------- -----------
Less than six months below
amortized cost $ 8.7 $ 11.4 $ 1.3 $ 2.6 $ 1.0 $ 2.2 $ 27.2
More than six month and less than
twelve months below
amortized cost 15.4 6.8 1.4 1.5 - 4.8 29.9
More than twelve months
below amortized cost 8.3 4.1 0.3 9.6 0.1 7.8 30.2
------------ ------------ ------------- --------- ---------- --------- -----------
Total unrealized loss $ 32.4 $ 22.3 $ 3.0 $ 13.7 $ 1.1 $ 14.8 $ 87.3
============ ============ ============= ========= ========== ========= ===========
Other-Than-Temporary Impairments
The Company analyzes the general account investments to determine
whether there has been an other-than-temporary decline in fair value
below amortized cost basis. Management considers the length of the
time and the extent to which the market value has been less than 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 for a period of time sufficient to
allow for recovery in market 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 EITF Issue No. 99-20 as described in "Critical
Accounting Policies - Other-Than-Temporary Impairment Testing". Under
EITF Issue No. 99-20, a determination of the required impairment is
33
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.
The following table identifies the Company's other-than-temporary
impairments by type as of December 31:
2004 2003 2002
---------------------------- ---------------------------- ---------------------------
No. of No. of No. of
Impairment Securities Impairment Securities Impairment Securities
--------------- ------------ --------------- ------------ -------------- ------------
U.S. Corporate $ - - $ 23.7 16 $ 0.1 1
Residential mortgage-backed 9.1 88 81.3 173 81.3 125
Foreign 8.5 4 11.5 2 8.5 3
Asset-backed 11.5 6 5.8 7 31.1 14
Equity - - - - - 1
Limited partnerships 2.2 1 - - - -
--------------- ------------ --------------- ------------ -------------- ------------
Total $ 31.3 99 $ 122.3 198 $ 121.0 144
=============== ============ =============== ============ ============== ============
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 the
impairment of investments. Net realized capital gains (losses) on
investments were as follows:
Year ended December 31,
2004 2003 2002
----------------- ------------------ -----------------
Fixed maturities $ 44.0 $ 108.7 $ (105.9)
Equity securities 6.4 0.2 0.1
Derivatives 9.3 1.7 (92.0)
Real estate - (3.4) 1.7
Other (2.1) (0.3) (0.4)
----------------- ------------------ -----------------
Pretax net realized capital gains (losses) $ 57.6 $ 106.9 $ (196.5)
================= ================== =================
After-tax net realized capital gains (losses) $ 37.4 $ 69.5 $ (127.7)
================= ================== =================
Liquidity and Capital Resources
Liquidity is the ability of the Company to generate sufficient cash
flows to meet the cash requirements of operating, investing, and
financing activities.
Sources and Uses of Liquidity
The Company's principal sources of liquidity are annuity premiums and
product charges, GIC deposits, investment income, proceeds from the
maturing and sale of investments, proceeds from debt issuance, and
capital contributions. Primary uses of these funds are payments of
commissions and operating expenses, interest and premium credits,
payments under guaranteed death and living benefits, investment
34
purchases, repayment of debt, as well as contract maturities,
withdrawals and surrenders.
The Company's liquidity position is managed by maintaining adequate
levels of liquid assets, such as cash or cash equivalents and
short-term investments. For a description of the Company's
asset/liability management, see Item 7A, "Quantitative and Qualitative
Disclosures About Market Risk."
Additional sources of liquidity include borrowing facilities to meet
short-term cash requirements. The Company maintains a reciprocal loan
agreement with ING America Insurance Holding Company, Inc. ("ING AIH")
whereby either party can borrow from the other up to 3% of the
Company's total admitted assets, a $100 revolving note facility with
Bank of New York, and a $125 revolving note facility with SunTrust
Bank, which expires on July 30, 2005. The Company has 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.
The Company is a member of the FHLB and is required to maintain a
collateral deposit that backs funding agreements issued to the FHLB.
At December 31, 2004 and 2003, respectively, the Company had $376.3
and $125.3 in non-putable funding agreements issued to FHLB. At
December 31, 2004 and 2003, respectively, assets with a carrying value
of approximately $422.0 and $148.2 collateralized the funding
agreements issued to the FHLB. Assets pledged to the FHLB are included
in fixed maturities in the Balance Sheets.
Capital Contributions
During 2004, 2003 and 2002, ING USA received capital contributions of
$230.0, $88.7, and $456.3, respectively. Lion has recently contributed
significant amounts of capital to the Company to support its sales
activities. The Company has also used capital primarily to support
sales growth and also to strengthen reserves associated with its
annuity products.
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 guarantees. 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. Separate Account
assets supporting variable options under variable 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 in other selected
mutual funds not managed by the Company or its affiliates. Variable
annuity premiums are allocated to various subaccounts established
within the separate account. Each subaccount represents a different
investment option into which the contract owner may allocate premiums.
The account value of a variable annuity contract is equal to the
aggregate value of the subaccounts selected by the contract owner
(including the value allocated to any fixed account) less fees and
35
expenses. The Company offers investment options for its variable
annuities covering a wide range of investment styles, including large,
mid and small cap equity funds, as well as fixed income alternatives.
Therefore, unlike fixed annuities, under variable annuities
contractowners bear the risk of investment gains and losses associated
with the selected investment allocation. The Company, however, offers
certain guaranteed death and living benefits (described below) under
which it bears specific risks associated with these products. Many of
the variable annuities issued by ING USA are combination variable and
fixed deferred annuity contracts under which some or all of the
premiums may be allocated by the contractowner to a fixed account
available under the contract. The Company's major source of income
from variable annuities is the base contract mortality fee and expense
fees and guaranteed living and death benefit rider fees charged to the
customer, less the cost of administering the product as well as the
cost of providing for the guaranteed living and death benefits.
Minimum Guarantees
The Company sells variable annuity contracts that offer one or more of
the following guaranteed death benefits and living benefits:
Guaranteed Minimum Death Benefits ("GMDB"): The Company has offered
the following guaranteed death benefits:
- Standard - This guarantees that upon the death of the annuitant
the death benefit will be no less than the premiums paid by the
contractowner net of any contract withdrawals.
- Ratchet - This guarantees that upon the death of the annuitant
the death benefit will be no less than the greater of (1)
Standard or (2) the maximum anniversary (or quarterly) value of
the variable annuity.
- Rollup (7% or 5.5% Solution) - This guarantees that upon the
death of the annuitant the death benefit will be no less than the
aggregate premiums paid by the contractowner accruing interest at
7% or 5.5% per annum, subject to a maximum cap on the account
value. (The Company has discontinued this option for new sales.)
- Combo (Max 7) - This guarantees that upon the death of the
annuitant the death benefit will be no less than the greater of
(1) Ratchet or (2) Rollup.
At December 31, 2004, the guaranteed value of these death benefits in
excess of account values was estimated to be $2.5 billion before
reinsurance, which was a $0.4 billion decrease from the estimated $2.9
billion at December 31, 2003. The decrease was primarily driven by the
improved equity markets in 2004. For contracts issued prior to January
1, 2000, most contracts with enhanced death benefit guarantees were
reinsured to third party reinsurers to mitigate the risk produced by
such guaranteed death benefits. For contracts issued after December
31, 1999, the Company has instituted an equity hedging program in lieu
of reinsurance, to mitigate the risk produced by the guaranteed death
benefits. The equity hedging program is based on the Company entering
into derivative positions to offset exposures to guaranteed minimum
death benefits due to adverse changes in the equity markets. At
December 31, 2004, the guaranteed value of minimum guaranteed death
benefits in excess of account values, net of reinsurance, was
estimated to be $1.4 billion, of which $748.7 is projected to be
36
covered by the Company's equity hedging program. These amounts are
consistent with December 31, 2003. As of December 31, 2004, the
Company has recorded a liability of $66.9, net of reinsurance,
representing the estimated net present value of the Company's future
obligation for guaranteed minimum death benefits in excess of account
values. The liability increased $0.5 from $66.5 at December 31, 2003,
mainly due to the increase in fees used to fund the reserve exceeding
the decrease in the reserve, due to the improved equity markets during
2004. The liability is recorded in accordance with the provisions of
SOP 03-1.
Guaranteed Living Benefits: The Company offers the following
guaranteed living benefits:
- Guaranteed Minimum Income Benefit ("GMIB") - This guarantees a
minimum income payout, exercisable each contract anniversary on
or after the 10th rider anniversary. This type of living benefit
is the predominant selection in the Company's sales of variable
annuities.
- Guaranteed Minimum Withdrawal Benefit - This guarantees that
annual withdrawals of up to 7% of eligible premiums may be made
until eligible premiums previously paid by the contractowner are
returned, regardless of account value performance. The new 2004
GMWB rider (ING Principal Guard) provides reset and step-up
features, which provide, in certain instances, for increases in
the amount available for withdrawal.
- Guaranteed Minimum Accumulation Benefit - Guarantees that the
account value will be at least 100% of the premiums paid by the
contractowner after 10 years (GMAB10) or 200% after 20 years
(GMAB20).
At December 31, 2004, the guaranteed value of these living benefits in
excess of account values was estimated to be $269.7, which is a
decrease of $38.5 from an estimated $308.2 at December 31, 2003. The
decrease was primarily driven by the improved equity markets during
2004. All living benefits are covered by the Company's equity hedging
program. As of December 31, 2004, the Company has recorded a liability
of $40.3 representing the estimated net present value of its future
obligation for living benefits in excess of account values. The
liability increased $26.4 from $13.9 at December 31, 2003, mainly due
to the increase in fees used to fund the reserve exceeding the
decrease in the reserve, due to the improved equity market in 2004.
For GMIBs, the liability is recorded in accordance with the provisions
of SOP 03-1. For GMABs and GMWBs, the liability is held at fair value
in accordance with FAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities".
Variable annuity contracts containing guaranteed death and living
benefits expose the Company to equity risk. An increase in the value
of the equity markets will increase account values for these
contracts, thereby decreasing the Company's risk associated with the
GMDBs, GMIBs, GMWBs, and GMABs. A decrease in the equity markets, that
causes a decrease in the account values, will increase the possibility
that the Company may be required to pay amounts to customers due to
guaranteed death or living benefits.
37
Derivatives
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. These
derivatives are not accounted for using hedge accounting treatment
under FAS No. 133, as the Company does not seek hedge accounting
treatment. The Company enters into interest rate and currency
contracts, including swaps, caps, floors, options, and futures, to
reduce and manage risks associated with changes in value, yield,
price, cash flow, or exchange rates of assets or liabilities held or
intended to be held. The Company also purchases options on equity
indexes to reduce and manage risks associated with its equity-index
annuity products. 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 Balance Sheets.
The Company also had investments in certain fixed maturity instruments
and 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 Statements of Operations. Embedded
derivatives within securities are included in fixed maturities on the
Balance Sheets. Embedded derivatives within retail annuity products
are included in future policy benefits and claims reserves on the
Balance Sheets.
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 $175.3 and $154.0, respectively.
As of December 31, 2004, the Company had certain contractual
obligations due over a period of time as summarized in the following
table:
Payments due by Period
----------------------------------------------------------------------
Less than More than
Contractual Obligations Total 1 Year 1-3 Years 3-5 Years 5 Years
------------------------------------- ------------ ------------ -------------- ------------ ------------
Long-Term Debt $ 1,266.4 $ 28.2 $ 56.3 $ 56.4 $ 1,125.5
Operating Lease Obligations 77.6 7.8 15.4 15.0 39.4
Purchase Obligations 175.3 175.3 - - -
Reserves for Insurance Obligations 55,581.9 6,332.4 10,978.8 10,201.3 28,069.4
------------ ------------ -------------- ------------ ------------
Total $57,101.2 $6,543.7 $ 11,050.5 $10,272.7 $29,234.3
============ ============ ============== ============ ============
38
The Company's long-term debt, including interest, consists of the
following:
|X| A surplus note in the principal amount of $35.0 and the related
interest payable, to its affiliate, Security Life of Denver
Insurance Company. As of December 31, 2004, the outstanding
principal, interest rate, and maturity date of the surplus note
are $35.0, 7.98%, and December 7, 2029, respectively.
|X| Surplus notes in the aggregate principal amount of $400.0 and the
related interest payable to its affiliates, ING Life Insurance
and Annuity Company ("ILIAC"), ReliaStar Life, and Security Life
of Denver International Limited ("SLDI"). As of December 31,
2004, the aggregate amount of outstanding principal, interest
rate, and maturity date of these surplus notes are $400.0, 6.26%,
and December 29, 2034, respectively.
Operating lease obligations relate to the rental of office space under
various non-cancelable operating lease agreements that expire through
May 2017.
Purchase obligations consist primarily of commitments to purchase
investments during 2005.
Reserves for insurance obligations consist of actuarially determined
amounts required for the Company to meet its future obligations under
its variable annuity, fixed annuity, GIC, and other insurance
products.
Reinsurance Recoverable
The reinsurance recoverable increased by $736.2 to $1,388.1 for the
year ended December 31, 2004, from $651.9 for the year ended December
31, 2003. The increase is primarily due to increased reinsurance of
GICs to an affiliate company, Security Life of Denver Insurance
Company, of approximately $762.2.
Repurchase Agreements
The Company engages in dollar repurchase agreements ("dollar rolls")
and repurchase agreements to increase its 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 Balance Sheets. At
December 31, 2004 and 2003, the carrying value of the securities
pledged in dollar rolls and repurchase agreement transactions was
$715.9 and $536.8, respectively. The carrying value of the securities
pledged in dollar rolls and repurchase agreement transactions is
included in pledged securities on the Balance Sheets. The repurchase
obligation related to dollar rolls and repurchase agreements totaled
$713.4 and $534.2 at December 31, 2004 and 2003, respectively. The
repurchase obligation related to dollar rolls and repurchase
agreements is included in borrowed money on the Balance Sheets.
39
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 reverse repurchase agreements are financially responsible and that
the counterparty risk is immaterial.
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.
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 for asset risk, liability risk, interest rate
exposure, and other factors. The Company has complied with the NAIC's
risk-based capital reporting requirements. Amounts reported indicate
that, as of December 31, 2004, the Company has total adjusted capital
above all required capital levels.
Recently Adopted Accounting Standards
(See the Significant Accounting Policies Footnote to the Financial
Statements for further information.)
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 and liabilities of separate account arrangements that do
not meet certain criteria be accounted for as general account assets
and liabilities, and that the revenue and expenses related to such
arrangements be consolidated with the respective line items in the
Statements of Operations. In addition, the SOP requires additional
liabilities be established for certain guaranteed death benefits and
for products with certain patterns of cost of insurance charges. In
addition, sales inducements provided to contractowners must be
40
recognized on the balance sheet separately from deferred policy
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 and determined that
it is affected by the SOP's requirements to establish additional
liabilities for certain guaranteed benefits and products with patterns
of cost of insurance charges resulting in losses in later policy
durations from the insurance benefit function and to defer, amortize,
and recognize separately, sales inducements to contractowners. Upon
adoption of SOP 03-1 on January 1, 2004, the Company recognized a
cumulative effect of a change in accounting principle of $(3.6),
before tax or $(2.3), net of $1.3 of income taxes. Requirements for
certain separate account arrangements that do not meet the established
criteria for separate asset and liability recognition are applicable
to the Company, however, the Company's policies on separate account
assets and liabilities have historically been, and continue to be, in
conformity with the requirements newly established.
In the fourth quarter of 2004, the cumulative effect of a change in
accounting principle was revised due to the Company's implementation
of 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
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. While the TPA was implemented
during the fourth quarter of 2004, the TPA is retroactive to the
original implementation date of SOP 03-1, January 1, 2004 and is
reported as an adjustment to SOP 03-1's cumulative effect of a change
in accounting principle. The adoption of the TPA reduced the Company's
cumulative effect of a change in accounting principle by $2.0, before
tax and decreased quarterly 2004 net income approximately $0.6 in each
quarter, for a total decrease of $2.3.
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 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, `Accounting
and Reporting by Insurance Enterprises for Certain Long-Duration
Contracts and for Realized Gains and Losses from the Sale of
Investments,' 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.
41
New Accounting Pronouncements
In December 2004, the FASB issued FAS No. 123 (revised 2004),
"Shared-Based Payment" ("FAS 123R"), which requires all share-based
payments to employees 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 provision 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 disclosure 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. Due to the
Company's few number of employees, 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 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 the products do not appear to have been
reduced to date, the long-term effect of the Jobs 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 $14.4 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 $14.4.
42
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.
Other Regulatory Matters
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 ING, 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 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.
43
Other regulators, including the SEC and the New York Attorney General,
are also likely to take some action with respect to the Company or
certain affiliates before concluding their investigation of ING
relating to fund trading. The potential outcome of such action is
difficult to predict but could subject the Company or 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 Securities and Exchange
Commission ("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
our business practices are appropriate.
For further discussion of the Company's regulatory matters, see "Risk
Factors" in Part I, Item 1 "Business".
44
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
(Dollar amounts in millions, unless otherwise stated)
Asset/liability management is integrated into many aspects of the
Company's operations, including investment decisions, product
development, and determination of crediting rates. As part of the risk
management process, different economic scenarios are modeled,
including cash flow testing required for insurance regulatory
purposes, to determine that existing assets are adequate to meet
projected liability cash flows. Key variables in the modeling process
include interest rates, anticipated contractowner behavior, and
variable separate account performance. Contractowners bear the
investment risk related to variable annuity products, subject to the
minimum guaranteed death and living benefits included in these
contracts.
The fixed account liabilities are supported by a general account
portfolio principally composed of fixed rate investments with matching
duration characteristics that can generate predictable, steady rates
of return. The portfolio management strategy for the fixed account
considers the assets available-for-sale. This enables the Company to
respond to changes in market interest rates, prepayment risk, relative
values of asset sectors and individual securities and loans, credit
quality outlook, and other relevant factors. The objective of
portfolio management is to maximize returns, taking into account
interest rate and credit risk, as well as other risks. The Company's
asset/liability management discipline includes strategies to minimize
exposure to loss as interest rates and economic and market conditions
change.
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 and GIC
deposits 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.
45
Duration calculations related to annuities as of December 31, 2004
indicate that the Company is well matched. The asset duration was 4.3
and the liability duration was 4.2. Given the duration match and an
$18.5 billion general account annuity portfolio, a 100 basis point
immediate parallel increase in interest rates as of December 31, 2004
would decrease the market values of the annuity assets by
approximately $0.8 billion and would decrease the liabilities by
approximately $0.8 billion. Similarly, a 100 basis point parallel
decrease in interest rates as of December 31, 2004 would increase the
market value of the general account annuity assets by approximately
$0.8 billion and would increase the liabilities by approximately $0.8
billion.
To calculate duration related to GICs, the Company projects and values
asset and liability cash flows using arbitrage free interest rate
scenarios based on the swap curve's implied forward rates. Ten key
points on the curve are then increased by 10 basis points, arbitrage
free interest rate scenarios are regenerated based on the increased
implied forward rates for each increased point, and cash flows are
reprojected and re-valued. The Company's net duration for a key rate
increase of 10 basis points is 0.18.
Further, market value changes are also calculated after applying
parallel and increases and decreases of 100 basis points to all ten
key points on the curve. Arbitrage free interest rate scenarios are
regenerated based on the increased implied forward rates, and cash
flows are re-projected and revalued. The Company's $1.8 billion GIC
portfolio at December 31, 2004, would decrease by $4.8 due to a 100
basis point increase in interest rates, and decrease by $1.0 due to a
100 basis point decrease in interest rates.
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 and indexed
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
46
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 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".
Hedging of Minimum Guarantees
The Company sells variable annuity contracts that offer various
guaranteed death and living benefits including GMDBs, GMIBs, GMWBs and
GMABs. See discussion above, "Minimum Guarantees".
The liability associated with GMDBs and GMIBs is recorded in
accordance with SOP 03-1. The GMWBs and GMABs represent an embedded
derivative liability in the variable annuity contract that is required
to be reported separately from the host variable annuity contract. It
is carried at fair value in accordance with FAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities" and is reported in
future policy benefits and claims reserves in the Balance Sheets. The
fair value of the GMWB and GMAB obligations are calculated based on
actuarial assumptions related to projected cash flows, including
benefits and related contract charges, over the lives of the
contracts, incorporating expectations concerning policyholder
behavior. Estimating cash flows involves numerous estimates and
subjective judgments including those regarding expected market rates
of return, market volatility, correlations of market returns, and
discount rates. The liability assumptions, such as lapses, partial
withdrawals and mortality, used by the Company to estimate the risk
exposures to GMDB are based on company experience and are consistent
with those used for DAC/VOBA, SOP 03-1 reserves.
Declines in the equity market may increase the Company's net exposure
to the various death benefit and living benefit guarantees offered
under these contracts. For a portion of the GMDBs issued prior to
2000, the Company mitigates market exposure with reinsurance. For most
other pre-2000 GMDBs, and for all death benefit and living benefits
guarantees issued after 1999, the Company mitigates equity market risk
with a Capital Market Hedging Program ("Hedging Program"). The Hedging
Program primarily uses exchange traded index futures contracts to
mitigate equity market fluctuations. In addition, the Hedging Program
uses interest rate swaps to mitigate certain interest rate exposures
associated with these guarantees. The change in value of the
derivatives used in the Hedging Program is recorded in net realized
capital gains (losses) in the Statement of Operations.
47
Hedging of Indexed Annuity Guarantees
The crediting mechanism for Indexed Annuities ("IAs") exposes the
company to increases in the equity market ("S&P 500"). The Company
mitigates this exposure by purchasing over-the-counter ("OTC") S&P 500
call options from broker-dealer derivative counterparties who
generally have a minimum credit rating of Aa3 from Moody's and AA-
from Standard & Poor's. For each broker-dealer counterparty, the
Company's derivative exposure to that counterparty is aggregated with
any fixed income exposure to the same counterparty and is maintained
within applicable state requirements and NAIC insurance regulatory
guidelines.
48
Item 8. Financial Statements and Supplementary Data
Index to Financial Statements
Page
----
Report of Independent Registered Public Accounting Firm 50
Financial Statements:
Statements of Operations for the years ended
December 31, 2004, 2003 and 2002 51
Balance Sheets as of December 31, 2004 and 2003 52
Statements of Changes in Shareholder's Equity for the years ended
December 31, 2004, 2003 and 2002 54
Statements of Cash Flows for the years ended
December 31, 2004, 2003 and 2002 55
Notes to Financial Statements 57
Report of Independent Registered Public Accounting Firm
The Board of Directors
ING USA Annuity and Life Insurance Company
We have audited the accompanying balance sheets of ING USA Annuity and Life
Insurance Company as of December 31, 2004 and 2003, and the related statements
of operations, statements of changes in shareholder's equity, and statements of
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. An audit includes 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 USA Annuity
and Life Insurance 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 and changed the accounting principle for certain non-traditional long
duration contracts and for separate accounts effective January 1, 2004.
/s/ Ernst & Young LLP
Atlanta, Georgia
March 18, 2005
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Statements of Operations
(In millions)
Year ended December 31,
2004 2003 2002
----------------- ----------------- -----------------
Revenue:
Net investment income $ 1,023.9 $ 974.6 $ 989.3
Fee income 566.7 397.7 295.7
Premiums 22.8 26.0 36.8
Net realized capital gains (losses) 57.6 106.9 (196.5)
Other income 2.8 3.8 16.3
----------------- ----------------- -----------------
Total revenue 1,673.8 1,509.0 1,141.6
----------------- ----------------- -----------------
Benefits and expenses:
Interest credited and other benefits to contractowners 1,134.0 925.7 848.0
Operating expenses 162.6 162.1 155.1
Amortization of deferred policy acquisition costs
and value of business acquired 186.8 347.9 302.0
Interest expense 14.6 15.8 16.9
Other 2.2 1.0 (4.1)
----------------- ----------------- -----------------
Total benefits and expenses 1,500.2 1,452.5 1,317.9
----------------- ----------------- -----------------
Income (loss) before income taxes and cumulative effect
of change in accounting principle 173.6 56.5 (176.3)
Income tax expense (benefit) 80.7 (0.8) (60.2)
----------------- ----------------- -----------------
Income (loss) before cumulative effect of change
in accounting principle 92.9 57.3 (116.1)
Cumulative effect of change in accounting
principle, net of tax (1.0) - (1,298.4)
----------------- ----------------- -----------------
Net income (loss) $ 91.9 $ 57.3 $ (1,414.5)
================= ================= =================
The accompanying notes are an integral part of these financial statements.
51
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Balance Sheets
(In millions, except share data)
As of December 31,
2004 2003
----------------- -----------------
Assets
Investments:
Fixed maturities, available-for-sale, at fair value (amortized cost of
$17,045.9 at 2004 and $15,025.0 at 2003) $ 17,489.2 $ 15,538.7
Equity securities, available-for-sale, at fair value
(cost of $34.8 at 2004 and $115.2 at 2003) 35.3 120.2
Mortgage loans on real estate 3,851.8 3,388.7
Policy loans 169.0 177.1
Other investments 228.8 60.8
Securities pledged (amortized cost of $1,100.5 at 2004 and $555.5 at 2003) 1,108.6 559.1
----------------- -----------------
Total investments 22,882.7 19,844.6
Cash and cash equivalents 209.0 65.1
Short-term investments under securities loan agreement 402.8 22.9
Accrued investment income 205.8 185.7
Receivable for securities sold 38.9 11.7
Reinsurance recoverable 1,388.1 651.9
Deferred policy acquisition costs 1,704.1 1,826.7
Value of business acquired 112.2 111.5
Sales inducements to contractowners 514.6 -
Due from affiliates 184.3 117.7
Deferred income taxes - 19.4
Other assets 28.4 20.1
Assets held in separate accounts 24,746.7 18,220.1
----------------- -----------------
Total assets $ 52,417.6 $ 41,097.4
================= =================
The accompanying notes are an integral part of these financial statements.
52
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Balance Sheets
(In millions, except share data)
As of December 31,
2004 2003
----------------- -----------------
Liabilities and Shareholder's Equity
Future policy benefits and claims reserves $ 22,961.0 $ 19,400.5
Notes to affiliates 435.0 85.0
Due to affiliates 43.6 60.7
Payables for securities purchased 35.9 -
Payables under securities loan agreement 402.8 22.9
Borrowed money 713.4 534.2
Current income taxes 15.7 19.4
Deferred income taxes 12.6 -
Other liabilities 276.4 226.6
Liabilities related to separate accounts 24,746.7 18,220.1
----------------- ----------------
Total liabilities 49,643.1 38,569.4
----------------- ----------------
Shareholder's equity
Common stock (250,000 shares authorized, issued and outstanding;
$10.00 per share value) 2.5 2.5
Additional paid-in capital 4,041.1 3,811.1
Accumulated other comprehensive income 112.7 188.1
Retained earnings (deficit) (1,381.8) (1,473.7)
----------------- ----------------
Total shareholder's equity 2,774.5 2,528.0
----------------- ----------------
Total liabilities and shareholder's equity $ 52,417.6 $ 41,097.4
================= ================
The accompanying notes are an integral part of these financial statements.
53
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Statements of Changes in Shareholder's Equity
(In millions)
Accumulated
Additional Other Retained Total
Common Paid-In Comprehensive Earnings Shareholder's
Stock Capital Income (Deficit) Equity
------------- --------------- ---------------- -------------- ----------------
Balance at December 31, 2001
Excluding impact of merger $ 2.5 $ 780.4 $ 3.8 $ 31.1 $ 817.8
Impact of merger - 2,493.9 (73.8) (135.2) 2,284.9
------------- --------------- ---------------- -------------- ----------------
Balance at December 31, 2001
Including impact of merger 2.5 3,274.3 (70.0) (104.1) 3,102.7
Comprehensive loss:
Net loss - - - (1,414.5) (1,414.5)
Other comprehensive loss
net of tax:
Net unrealized gain on
securities ($202.3 pretax) - - 203.2 - 203.2
----------------
Comprehensive loss (1,211.3)
----------------
Contribution of capital - 456.3 - - 456.3
Other - (8.2) - - (8.2)
------------- --------------- ---------------- -------------- ----------------
Balance at December 31, 2002 2.5 3,722.4 133.2 (1,518.6) 2,339.5
Comprehensive income:
Net income - - - 57.3 57.3
Other comprehensive income
net of tax:
Net unrealized gain on
securities ($82.8 pretax) - - 54.9 - 54.9
----------------
Comprehensive income 112.2
----------------
Dividends paid - - - (12.4) (12.4)
Contribution of capital - 88.7 - - 88.7
------------- --------------- ---------------- -------------- ----------------
Balance at December 31, 2003 2.5 3,811.1 188.1 (1,473.7) 2,528.0
Comprehensive income:
Net income 91.9 91.9
Other comprehensive loss
net of tax:
Net unrealized loss on
securities (($113.9) pretax) (70.5) (70.5)
Minimum pension liability (4.9) (4.9)
----------------
Comprehensive income 16.5
----------------
Contribution of capital 230.0 230.0
------------- --------------- ---------------- -------------- ----------------
Balance at December 31, 2004 $ 2.5 4 4,041.1 $ 112.7 $(1,381.8) $ 2,774.5
============= =============== ================ ============== ================
The accompanying notes are an integral part of these financial statements.
54
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Statements of Cash Flows
(In millions)
Year ended December 31,
2004 2003 2002
--------------- --------------- ----------------
Cash Flows from Operating Activities:
Net income (loss) $ 91.9 $ 57.3 $ (1,414.5)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Capitalization of deferred policy acquisition costs (688.3) (396.9) (469.5)
Amortization of deferred policy acquisition costs
and value of business acquired 241.0 252.9 210.8
Net accretion/decretion of discount/premium 139.6 218.2 173.3
Future policy benefits, claims reserves, and interest credited 916.7 1,196.8 926.6
Impairment of goodwill - - 1,314.4
Provision for deferred income taxes 75.5 (1.9) (43.5)
Net realized capital (gains) losses (57.3) (110.0) 151.5
Depreciation - - 0.2
Change in:
Accrued investment income (20.1) 9.3 (45.4)
Accounts receivables and asset accruals (35.5) (2.4) (2.3)
Due to/from affiliates (83.7) (68.4) 76.4
Other payables and accruals 77.1 73.1 (219.8)
--------------- --------------- ----------------
Net cash provided by operating activities 656.9 1,228.0 658.2
Cash Flows from Investing Activities:
Proceeds from the sale, maturity, or redemption of:
Fixed maturities, available-for-sale 17,903.6 20,179.8 20,419.3
Equity securities, available-for-sale 106.8 45.7 0.7
Mortgage loans on real estate originated 388.6 561.1 667.6
Short-term investments 2,854.0 15,364.1 8,638.3
Acquisition of:
Fixed maturities, available-for-sale (20,553.5) (21,223.3) (24,532.0)
Equity securities, available-for-sale (20.2) (16.2) (144.1)
Mortgage loans on real estate (856.4) (1,075.5) (782.1)
Short-term investments (2,860.6) (15,362.2) (8,580.9)
Proceeds from sale of interest in subsidiary - - 27.7
Other investments (152.9) (84.0) 74.1
Other, net 10.8 2.7 10.8
--------------- --------------- ----------------
Net cash used in investing activities (3,179.8) (1,607.8) (4,200.6)
The accompanying notes are an integral part of these financial statements.
55
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Statements of Cash Flows
(In millions)
Year ended December 31,
2004 2003 2002
--------------- --------------- ----------------
Cash Flows from Financing Activities:
Deposits received for investment contracts 5,474.7 1,475.3 4,826.1
Maturities and withdrawals from investment contracts (2,830.9) (1,676.5) (1,636.3)
Reinsurance recapture - 134.5 -
Change in reinsurance recoverable (736.2) 25.6 (211.3)
Net short-term loans 179.2 210.6 48.6
Intercompany dividends - (12.4) -
Intercompany loans 350.0 - -
Contribution of capital from Parent 230.0 88.7 456.3
Other - - (8.2)
--------------- --------------- ----------------
Net cash provided by financing activities 2,666.8 245.8 3,475.2
--------------- --------------- ----------------
Net increase (decrease) in cash and cash equivalents 143.9 (134.0) (67.2)
Cash and cash equivalents, beginning of year 65.1 199.1 266.3
--------------- --------------- ----------------
Cash and cash equivalents, end of year $ 209.0 $ 65.1 $ 199.1
=============== =============== ================
Supplemental cash flow information:
Income taxes paid (received), net $ 8.3 $ 53.0 $ (41.7)
=============== =============== ================
Interest paid $ 14.2 $ 10.8 $ 13.5
=============== =============== ================
The accompanying notes are an integral part of these financial statements.
56
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Financial Statements
(Dollar amounts in millions, unless otherwise stated)
- --------------------------------------------------------------------------------
1. Organization and Significant Accounting Policies
Basis of Presentation
ING USA Annuity and Life Insurance Company ("ING USA" or the "Company" as
appropriate), a wholly-owned subsidiary of Lion Connecticut Holdings Inc.
("Lion" or "Parent"), is a stock life insurance company organized under the
laws of the State of Iowa.
Lion is an indirect, wholly-owned subsidiary of ING Groep N.V. ("ING"), a
global financial services holding company based in The Netherlands, with
American Depository Shares listed on the New York Stock Exchange under the
symbol "ING". ING USA is authorized to conduct its insurance business in
the District of Columbia and all states except New York. ING USA was
domiciled as a life insurance company under the laws of the State of
Delaware until December 31, 2003 and has been domiciled as such in Iowa
since January 1, 2004.
On January 1, 2004 (the "Merger Date"), the Company simultaneously
redomesticated from Delaware to Iowa, changed its name from Golden American
Life Insurance Company to ING USA Annuity and Life Insurance Company, and
merged the following affiliates into the Company: Equitable Life Insurance
Company of Iowa ("Equitable Life"), USG Annuity & Life Company ("USG"), and
United Life & Annuity Insurance Company ("ULA") (the collectively, "Merger
Companies"). Prior to the merger date, ING USA was a wholly-owned
subsidiary of Equitable Life. Equitable Life merged its affiliate,
Ameribest Life Insurance Company ("AMB"), a life insurance company
domiciled in Georgia, into its operations on January 1, 2003.
Statement of Financial Accounting Standards ("FAS") No. 141, "Business
Combinations", excludes transfers of net assets or exchanges of shares
between entities under common control, and notes that certain provisions
under Accounting Principles Board ("APB") Opinion No. 16, "Business
Combinations", provide a source of guidance for such transactions. In
accordance with APB Opinion No. 16, financial information of the combined
entity is presented as if the entities had been combined for the full year,
and all comparative financial statements are restated and presented as if
the entities had previously been combined, in a manner similar to a
pooling-of-interests. The Balance Sheets and Statements of Operations give
effect to the consolidation transactions as if they had occurred on
December 31, 2003 and January 1, 2002, respectively.
As of April 1, 2002, ING USA sold First Golden American Life Insurance
Company of New York ("First Golden") to its sister company, ReliaStar Life
Insurance Company ("ReliaStar"). ReliaStar, the parent of
Security-Connecticut Life Insurance Company ("Security-Connecticut"), which
in turn is the parent of ReliaStar Life Insurance Company of New York
("RLNY"), merged the First Golden business into RLNY operations and
dissolved First Golden at book value for $27.7 in cash and a receivable
57
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Financial Statements
(Dollar amounts in millions, unless otherwise stated)
- --------------------------------------------------------------------------------
totaling $0.2 from RLNY. The receivable from RLNY was assumed by Equitable
Life, and ultimately by ING USA. The consideration was based on First
Golden's statutory-basis book value. RLNY's payable to the Company was
assumed by ING USA and subsequently forgiven. ING USA realized a loss of
$3.0 related to the sale of First Golden, which was recorded as a capital
transaction. Approval for the merger was obtained from the Insurance
Departments of the States of New York and Delaware. As of October 1, 2003,
RLNY's parent, Security-Connecticut merged with and into its parent,
ReliaStar.
In accordance with APB Opinion No. 16, RLNY presented combined results of
operations including First Golden activity as of the beginning of the year
ended December 31, 2002. The first three months of First Golden activity is
not reflected in the ING USA's Statement of Operations for the period ended
December 31, 2002, as the amounts were not material.
Description of Business
The Company offers various insurance products including immediate and
deferred variable and fixed annuities. The Company's annuity products are
distributed by national wirehouses, regional securities firms, independent
National Association of Securities Dealers, Inc. ("NASD") firms with
licensed registered representatives, banks, life insurance companies with
captive agency sales forces, independent insurance agents, independent
marketing organizations and the ING broker-dealer network. The Company also
offers guaranteed investment contracts ("GICs") and funding agreements
marketed by direct sale by home office personnel or through specialty
insurance brokers. Historically, the Company has provided
interest-sensitive, traditional and variable life insurance, and health
insurance. All health insurance is ceded to other insurers and new policies
are no longer written. The Company ceased the issuance of life insurance
policies in 2001, and all life insurance business is currently in run-off.
The Company's primary customers are retail consumers and corporations.
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 and liabilities of separate
account arrangements that do not meet certain criteria be accounted for as
general account assets and liabilities, and that the revenue and expenses
related to such arrangements be consolidated within the respective line
items in the Statements of Operations. In addition, the SOP requires
58
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Financial Statements
(Dollar amounts in millions, unless otherwise stated)
- --------------------------------------------------------------------------------
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 balance sheet separately from deferred policy 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 and determined that it
is affected by the SOP's requirements to establish additional liabilities
for certain guaranteed benefits and products with patterns of cost of
insurance charges resulting in losses in later policy durations from the
insurance benefit function and to defer, amortize, and recognize
separately, sales inducements to contractowners. Upon adoption of SOP 03-1
on January 1, 2004, the Company recognized a cumulative effect of a change
in accounting principle of $(3.6), before tax or $(2.3), net of $1.3 of
income taxes. In addition, requirements for certain separate account
arrangements that do not meet the established criteria for separate asset
and liability recognition are applicable to the Company, however, the
Company's policies on separate account assets and liabilities have
historically been, and continue to be, in conformity with the requirements
newly established.
In the fourth quarter of 2004, the cumulative effect of a change in
accounting principle was revised due to the Company's implementation of
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 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.
While the TPA was implemented during the fourth quarter of 2004, the TPA is
retroactive to the original implementation date of SOP 03-1, January 1,
2004 and is reported as an adjustment to the SOP 03-1 cumulative effect of
change in accounting principle. The adoption of the TPA reduced the
Company's cumulative effect of change in accounting principle by $2.0,
before tax and decreased quarterly 2004 net income approximately $0.6 in
each quarter, for a total decrease of $2.3.
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" ("FAS 97"),
concerning when it is appropriate to record an unearned revenue liability
related to the insurance benefit function. To clarify its position, the
59
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Financial Statements
(Dollar amounts in millions, unless otherwise stated)
- --------------------------------------------------------------------------------
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, `Accounting and Reporting by Insurance
Enterprises for Certain Long-Duration Contracts and for Realized Gains and
Losses from the Sale of Investments,' 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 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, "The Meaning of Other-Than-Temporary
Impairment and its Application to Certain Investments," adopting a
three-step impairment model for 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
In 2003, the Derivative Implementation Group ("DIG") who was 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
60
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Financial Statements
(Dollar amounts in millions, unless otherwise stated)
- --------------------------------------------------------------------------------
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 Company adopted DIG B36 on October 1, 2003 and has modified
coinsurance treaties that are applicable to the guidance. The applicable
contracts, however, were determined to generate embedded derivatives with a
fair value of zero. Therefore, implementation of DIG B36 did not impact the
Company's financial position, results of operations, or cash flows.
Variable Interest Entities
In January 2003, the FASB issued FASB Interpretation 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
corrections 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.
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 not required to
consolidate but in which it has a significant variable interest.
61
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Financial Statements
(Dollar amounts in millions, unless otherwise stated)
- --------------------------------------------------------------------------------
The Company holds investments in variable interest entities ("VIEs") in the
form of private placement securities, structured securities, securitization
transactions and limited partnerships with an aggregate fair value of $7.0
billion 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
$6.9 billion represents the maximum exposure to loss except for those
structures for which the Company also receives asset management fees.
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 $1,298.4, net of $699.1 of income
taxes, related to a prior acquisition, 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 2002 Statement of Operations.
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 ending 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 provisions are to be applied 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.
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 to employees
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.
62
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Financial Statements
(Dollar amounts in millions, unless otherwise stated)
- --------------------------------------------------------------------------------
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 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. Due to the Company's few
number of employees, 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 year financial
information to conform to the current year classifications.
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
are included directly in shareholder's equity, after adjustment for related
63
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Financial Statements
(Dollar amounts in millions, unless otherwise stated)
- --------------------------------------------------------------------------------
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. Management considers the length of the time and the
extent to which the market value has been less than 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 market 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 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.
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 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.
64
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Financial Statements
(Dollar amounts in millions, unless otherwise stated)
- --------------------------------------------------------------------------------
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 that 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 either
the present value of expected cash flows from the loan (discounted at the
loan's effective interest rate), or fair value of the collateral. If the
loan is in foreclosure, the carrying value is reduced to the fair value of
the underlying collateral, net of estimated costs to obtain and sell. The
carrying value of the impaired loans is reduced by establishing a permanent
writedown charged to realized loss.
Investments in real estate are reported at historical cost, less
accumulated depreciation and impairment writedowns, with the exception of
land, which is not depreciated. If the value of any real estate is
determined to be impaired (i.e., when it is probable that the Company will
be unable to recover the carrying value of the real estate), the carrying
value of the real estate is reduced to the current fair value. The carrying
value of the impaired real estate 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 maturity 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.
Derivative instruments are reported at fair value and are obtained
internally from the derivative accounting system. Embedded derivative
instruments are reported at fair value based upon internally established
valuations that are consistent with external valuation models or market
quotations. Guaranteed minimum withdrawals benefits ("GMWBs") and
guaranteed minimum accumulation benefits ("GMABs") represent an embedded
derivative liability in the variable annuity contract that is required to
be reported separately from the host variable annuity contract. GMWBs and
GMABs are carried at fair value based on actuarial assumptions related to
projected cash flows, including benefits and related contract charges, over
the lives of the contracts, incorporating expectations concerning
contractowner behavior. Estimating cash flows involves numerous estimates
and subjective judgments including those regarding expected market rates of
return, market volatility, correlations of market returns, and discount
rates.
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
65
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Financial Statements
(Dollar amounts in millions, unless otherwise stated)
- --------------------------------------------------------------------------------
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
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, as the Company does not seek hedge accounting
treatment. The Company enters into interest rate, equity market, and
currency contracts, including swaps, caps, floors, options and futures, 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 in the Statements of Operations.
Derivatives are included in other investments on the Balance Sheets.
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 Statements of
Operations. Embedded derivatives within securities are included in fixed
maturities in the Balance Sheets. Embedded derivatives within retail
annuity products are included in future policy benefits and claims reserves
on the Balance Sheets.
Deferred Policy Acquisition Costs and Value of Business Acquired
Deferred policy acquisition costs ("DAC") represent policy acquisition
costs that have been capitalized and are subject to amortization. Such
costs consist principally of certain commissions, underwriting, contract
issuance, and agency expenses, related to the production of new and renewal
business.
66
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Financial Statements
(Dollar amounts in millions, unless otherwise stated)
- --------------------------------------------------------------------------------
Value of business acquired ("VOBA") represents the outstanding value of in
force business capitalized and are 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 traditional 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. Guaranteed investment contracts, however, are amortized on a
straight-line basis over the life of the contract.
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 universal life and 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.
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,
67
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Financial Statements
(Dollar amounts in millions, unless otherwise stated)
- --------------------------------------------------------------------------------
increases in investment returns, and thus estimated profits, lower the rate
of amortization. Increases in surrender charges and mortality margins,
decreases in investment returns, and decreases in estimated profits,
increase the rate of amortization.
Reserves
Future policy benefits include reserves for universal life, immediate
annuities with life contingent payouts, and traditional life insurance
contracts. Reserves for universal life products are equal to cumulative
deposits less withdrawals and charges plus credited interest thereon.
Reserves for traditional life insurance contracts represent the present
value of future benefits to be paid to or on behalf of contractowners and
related expenses less the present value of future net premiums.
Reserves for deferred annuity investment contracts and immediate annuity
without life contingent payouts are equal to cumulative deposits less
charges and withdrawals, plus credited interest thereon (reserve interest
rates vary by product up to 10.0% for all periods presented).
Reserves for immediate annuities with life contingent payout benefits are
computed on the basis of assumed interest discount rate, mortality, and
expenses, including a margin for adverse deviations. Such assumptions
generally vary by plan, year of issue and policy duration. Reserve interest
rates ranged from 3.0% to 8.0% for all periods presented. Mortality and
withdrawal rate assumptions are based on relevant Company experience and
are periodically reviewed against both industry standards and experience.
Certain variable annuity contracts offer guaranteed minimum death benefits
("GMDB"), as well as guaranteed living benefits. The GMDB is provided in
the event the customer's account value at death is below the guaranteed
value. Guaranteed living benefits offered include guaranteed minimum income
benefits, guaranteed minimum withdrawal benefits, and guaranteed minimum
accumulation benefits. Although the Company reinsures or hedges a
significant portion of the death and living benefit guarantees associated
with its in force business, declines in the equity market may increase the
Company's net exposure to the death and living benefits under these
contracts.
Reserves for GICs are calculated using the principal amount deposited with
the Company, less withdrawals, plus interest accrued to the ending
valuation date. Interest on these contracts is accrued by a predetermined
index plus a spread or a fixed rate, established at the issue date of the
contract.
Reserves for universal life products are equal to cumulative deposits less
withdrawals and charges plus credited interest thereon. In addition, the
Company holds reserves as required for SOP 03-1 for certain products with
anticipated losses in later policy durations. Reserves for traditional life
insurance contracts represent the present value of future benefits to be
68
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Financial Statements
(Dollar amounts in millions, unless otherwise stated)
- --------------------------------------------------------------------------------
paid to or on behalf of contractowners and related expenses less the
present value of future net premiums.
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 on the balance sheet in accordance with SOP 03-1. Prior to 2004,
sales inducements were recorded as a component of DAC on the 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.
Revenue Recognition
For universal life and most annuity contracts, charges assessed against
contractowners' funds for the cost of insurance, surrender, 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 premium 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 benefits
in the Statements of Operations.
Premiums on the Statements of Operations primarily represent amounts
received under traditional life insurance policies.
For GICs, deposits made to the Company are not recorded as revenue in the
Statements of Operations and are recorded directly to policy liabilities
and accruals on the Balance Sheet.
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
guarantees. 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.
69
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Financial Statements
(Dollar amounts in millions, unless otherwise stated)
- --------------------------------------------------------------------------------
Separate Account assets supporting variable options under annuity and
universal life 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 in 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 Balance Sheets. Deposits, investment income and
net realized and unrealized capital gains and losses of the Separate
Accounts are not reflected in the Statement of Operations. The 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
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 $100.5 and $112.8, respectively, after taxes, 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 certain 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 Company's Balance
Sheets.
Participating Insurance
Participating business approximates 10% of the Company's ordinary life
insurance in force and 26% of premium income. The amount of dividends to be
paid is determined annually by the Board of Directors. Amounts allocable to
participating contractowners are based on published dividend projections or
expected dividend scales. Dividends to participating policyholders of
$16.2, $17.2, and $23.7, were incurred during the years ended December 31,
2004, 2003 and 2002, respectively.
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.
70
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Financial Statements
(Dollar amounts in millions, unless otherwise stated)
- --------------------------------------------------------------------------------
2. Investments
Fixed maturities and equity securities available-for-sale as of December
31, 2004 were as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------- -------------- --------------- --------------
Fixed maturities:
U.S. government and government
agencies and authorities $ 464.0 $ 1.8 $ 1.1 $ 464.7
State, municipalities and political
subdivisions 20.7 - 0.8 19.9
U.S. corporate securities:
Public utilities 1,796.9 78.4 8.9 1,866.4
Other corporate securities 6,292.4 243.5 22.7 6,513.2
-------------- -------------- --------------- --------------
Total U.S. corporate securities 8,089.3 321.9 31.6 8,379.6
-------------- -------------- --------------- --------------
Foreign securities:
Government 518.9 24.2 2.2 540.9
Other 2,571.2 97.7 11.5 2,657.4
-------------- -------------- --------------- --------------
Total foreign securities 3,090.1 121.9 13.7 3,198.3
-------------- -------------- --------------- --------------
Residential mortgage-backed securities 3,440.3 43.9 22.4 3,461.8
Commercial mortgaged-backed securities 1,107.8 34.9 3.0 1,139.7
Other asset-backed securities 1,934.2 14.3 14.7 1,933.8
-------------- -------------- --------------- --------------
Total fixed maturities, including fixed
maturities pledged 18,146.4 538.7 87.3 18,597.8
Less: fixed maturities pledged 1,100.5 9.8 1.7 1,108.6
-------------- -------------- --------------- --------------
Fixed maturities 17,045.9 528.9 85.6 17,489.2
Equity securities 34.8 0.5 - 35.3
-------------- -------------- --------------- --------------
Total investments available-for-sale $ 17,080.7 $ 529.4 $ $ 85.6 $ 17,524.5
============== ============== =============== ==============
71
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Financial Statements
(Dollar amounts in millions, unless otherwise stated)
- --------------------------------------------------------------------------------
Fixed maturities and equity securities available-for-sale as of December
31, 2003 were as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------- -------------- --------------- --------------
Fixed maturities:
U.S. government and government
agencies and authorities $ 195.5 $ 2.0 $ 0.1 $ 197.4
State, municipalities and political
subdivisions 31.7 - 2.5 29.2
U.S. corporate securities:
Public utilities 1,341.2 84.3 8.0 1,417.5
Other corporate securities 6,246.4 300.9 33.7 6,513.6
-------------- -------------- --------------- --------------
Total U.S. corporate securities 7,587.6 385.2 41.7 7,931.1
-------------- -------------- --------------- --------------
Foreign securities:
Government 487.1 21.7 3.9 504.9
Other 1,984.4 96.0 24.1 2,056.3
-------------- -------------- --------------- --------------
Total foreign securities 2,471.5 117.7 28.0 2,561.2
-------------- -------------- --------------- --------------
Residential mortgage-backed securities 3,247.0 66.7 21.8 3,291.9
Commercial mortgage-backed securities 774.2 45.8 2.1 817.9
Other asset-backed securities 1,273.0 17.2 21.1 1,269.1
Total fixed maturities, including fixed
maturities pledged 15,580.5 634.6 117.3 16,097.8
Less: fixed maturities pledged 555.5 6.4 2.8 559.1
-------------- -------------- --------------- --------------
Fixed maturities 15,025.0 628.2 114.5 15,538.7
Equity securities 115.2 5.0 - 120.2
-------------- -------------- --------------- --------------
Total investments available-for-sale $ 15,140.2 $ 633.2 $ 114.5 $ 15,658.9
============== ============== =============== ==============
At December 31, 2004 and 2003, net unrealized appreciation is $451.9 and
$522.3, respectively, on total fixed maturities, including fixed maturities
pledged to creditors, and equity securities.
72
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Financial Statements
(Dollar amounts in millions, unless otherwise stated)
- --------------------------------------------------------------------------------
The aggregate unrealized losses and related fair values of total fixed
maturities, including fixed maturities pledged to creditors, and equity
securities with unrealized losses as of December 31, 2004, are shown below
by duration:
Unrealized Fair
Loss Value
----------------- -----------------
Duration category:
Less than six months below cost $ 27.2 $ 3,199.9
More than six months and less
than twelve months below cost 29.9 1,710.7
More than twelve months below cost 30.2 709.1
----------------- -----------------
$ 87.3 $ 5,619.7
================= =================
Of the unrealized losses less than 6 months in duration of $27.2, there
were $12.3 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 $14.9 as of December 31, 2004, relates to
securities under the guidance prescribed 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 $1,560.4.
Of the unrealized losses more than 6 months and less than 12 months in
duration of $29.9, there were $16.9 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 $13.0 as of
December 31, 2004, relates to securities under the guidance prescribed 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 $768.8.
Of the unrealized losses more than 12 months in duration of $30.2, there
were $18.0, 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 $12.2 as of December 31, 2004, relates to
securities under the guidance prescribed 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 $222.8.
73
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Financial Statements
(Dollar amounts in millions, unless otherwise stated)
- --------------------------------------------------------------------------------
The amortized cost and fair value of 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.
Amortized Fair
Cost Value
----------------- -----------------
Due to mature:
One year or less $ 336.8 $ 341.5
After one year through five years 4,066.3 4,151.2
After five years through ten years 4,209.5 4,403.0
After ten years 3,051.6 3,166.9
Mortgage-backed securities 4,548.0 4,601.4
Other asset-backed securities 1,934.2 1,933.8
Less: fixed maturities pledged 1,100.5 1,108.6
----------------- -----------------
Fixed maturities, excluding fixed
maturities pledged $ 17,045.9 $ 17,489.2
================= =================
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.
At December 31, 2004 and 2003, fixed maturities with fair values of $11.9
and $20.1, respectively, were on deposit as required by regulatory
authorities.
The Company is a member of the Federal Home Loan Bank of Des Moines
("FHLB") and is required to maintain a collateral deposit that backs
funding agreements issued to the FHLB. At December 31, 2004 and 2003,
respectively, the Company had $376.3 and $125.3 in non-putable funding
agreements issued to the FHLB. At December 31, 2004 and 2003, respectively,
assets with a carrying value of approximately $422.0 and $148.2
collateralized the funding agreements to the FHLB. Collateralized assets
are included in fixed maturities in the Balance Sheets.
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 $715.9 and
$536.8, 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 $713.4 and $534.2 at December 31, 2004 and
2003, respectively. The repurchase obligation related to dollar rolls and
repurchase agreements is included in borrowed money on the Balance Sheets.
74
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Financial Statements
(Dollar amounts in millions, unless otherwise stated)
- --------------------------------------------------------------------------------
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.
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 rolls, repurchase
agreements, reverse repurchase agreements, and securities lending are
financially responsible and that the counterparty risk is immaterial.
Impairments
The following table identifies the Company's other-than-temporary
impairments by type as of December 31:
2004 2003 2002
---------------------------- ---------------------------- ---------------------------
No. of No. of No. of
Impairment Securities Impairment Securities Impairment Securities
--------------- ------------ --------------- ------------ -------------- ------------
U.S. Corporate $ - - $ 23.7 16 $ 0.1 1
Residential mortgage-backed 9.1 88 81.3 173 81.3 125
Foreign 8.5 4 11.5 2 8.5 3
Asset-backed 11.5 6 5.8 7 31.1 14
Equity - - - - - 1
Limited partnerships 2.2 1 - - - -
--------------- ------------ --------------- ------------ -------------- ------------
Total $ 31.3 99 $ 122.3 198 $ 121.0 144
=============== ============ =============== ============ ============== ============
The remaining fair value of the impaired fixed maturities at December 31,
2004 and 2003 is $168.7 and $192.0, respectively.
75
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Financial Statements
(Dollar amounts in millions, unless otherwise stated)
- --------------------------------------------------------------------------------
Net Investment Income
Sources of net investment income were as follows:
Year ended December 31,
2004 2003 2002
----------------- ----------------- ------------------
Fixed maturities $ 960.5 $ 957.6 $ 946.1
Equity securities 0.3 0.2 -
Mortgage loans on real estate 221.8 208.5 202.2
Real estate 0.2 0.6 0.3
Policy loans 9.8 8.8 9.5
Short-term investments and cash equivalents 1.4 1.5 3.7
Other (98.4) (138.6) (127.9)
----------------- ----------------- ------------------
Gross investment income 1,095.6 1,038.6 1,033.9
Less: investment expenses 71.7 64.0 44.6
----------------- ----------------- ------------------
Net investment income $ 1,023.9 $ 974.6 $ 989.3
================= ================= ==================
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 the impairment of
investments. Net realized capital gains (losses) on investments were as
follows:
Year ended December 31,
2004 2003 2002
----------------- ------------------ -----------------
Fixed maturities $ 44.0 $ 108.7 $ (105.9)
Equity securities 6.4 0.2 0.1
Derivatives 9.3 1.7 (92.0)
Real estate - (3.4) 1.7
Other (2.1) (0.3) (0.4)
----------------- ------------------ -----------------
Pretax net realized capital gains (losses) $ 57.6 $ 106.9 $ (196.5)
================= ================== =================
After-tax net realized capital gains (losses) $ 37.4 $ 69.5 $ (127.7)
================= ================== =================
Proceeds from the sale of fixed maturities and equity securities and the
related gross gains and losses were as follows:
Year ended December 31,
2004 2003 2002
----------------- ----------------- -----------------
Proceeds on sales $ 9,916.3 $ 13,664.8 $ 15,027.8
Gross gains 145.5 297.6 253.3
Gross losses 59.3 60.4 224.2
76
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Financial Statements
(Dollar amounts in millions, unless otherwise stated)
- --------------------------------------------------------------------------------
Changes in accumulated other comprehensive income related to changes in net
unrealized capital gains and losses on securities, including securities
pledged were as follows:
Year ended December 31,
2004 2003 2002
----------------- ----------------- -----------------
Fixed maturities $ (65.9) $ (90.4) $ 556.5
Equity securities (4.5) 8.6 (3.9)
DAC/VOBA (48.1) 151.2 (353.1)
Sales inducements (6.7) - -
Other 11.3 13.4 2.8
----------------- ----------------- -----------------
Subtotal (113.9) 82.8 202.3
Deferred income taxes 43.4 (27.9) 0.9
----------------- ----------------- -----------------
Net unrealized capital gains (losses) $ (70.5) $ 54.9 $ 203.2
================= ================= =================
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.
The following valuation methods and assumptions were used by the Company in
estimating the fair value of the following financial instruments:
Fixed maturity securities: 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
77
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Financial Statements
(Dollar amounts in millions, unless otherwise stated)
- --------------------------------------------------------------------------------
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, cash equivalents, short-term investments under securities loan
agreement and policy loans: The carrying amounts for these assets
approximate the assets' fair values. Derivatives are carried at fair value
on the Balance Sheets.
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.
Other financial instruments reported as assets: The carrying amounts for
these financial instruments (primarily derivatives) approximate those
assets' fair values. Derivatives are carried at fair value on the Balance
Sheets.
Notes to affiliates: Estimated fair value of the Company's notes to
affiliates are based upon discounted future cash flows using a discount
rate approximating the current market value.
Investment contract liabilities (included in future policy benefits and
claims reserves):
With a fixed maturity: Fair value is estimated by discounting cash
flows at interest rates currently being offered by, or available to,
the Company for similar contracts.
Without a fixed maturity: Fair value is estimated as the amount
payable to the contractowner upon demand. However, the Company has the
right under such contracts to delay payment of withdrawals which may
ultimately result in paying an amount different than that determined
to be payable on demand.
Liabilities related to separate accounts: Liabilities related to separate
accounts are reported at full account value in the Company's Balance
Sheets. Estimated fair values of separate account liabilities are equal to
their carrying amount.
78
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Financial Statements
(Dollar amounts in millions, unless otherwise stated)
- --------------------------------------------------------------------------------
The carrying values and estimated fair values of certain of the Company's
financial instruments at December 31, 2004 and 2003 were as follows:
2004 2003
------------------------------ ------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
-------------- -------------- -------------- --------------
Assets:
Fixed maturity, including securities
pledged $ 18,597.8 $ 18,597.8 $ 16,097.8 $ 16,097.8
Equity securities 35.3 35.3 120.2 120.2
Mortgage loans on real estate 3,851.8 3,969.4 3,388.7 3,581.4
Policy loans 169.0 169.0 177.1 177.1
Cash, cash equivalents,
and short-term investments
under securities loan agreement 611.8 611.8 88.0 88.0
Other investments 228.8 229.0 60.8 61.1
Assets held in separate accounts 24,746.7 24,746.7 18,220.1 18,220.1
Liabilities:
Notes to affiliates 435.0 508.5 85.0 145.2
Investment contract liabilities:
Deferred annuities 17,525.9 16,344.6 16,072.4 15,069.0
Supplementary contracts and
immediate annuities 864.9 864.9 840.1 840.1
Liabilities related to separate accounts 24,746.7 24,746.7 18,220.1 18,220.1
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 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 of the Company's open interest rate caps
as of December 31, 2004 was $236.2. Carrying value and estimated fair value
of the open interest rate caps was minimal as of December 31, 2004. The
notional amount of the Company's open interest rate caps as of December 31,
79
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Financial Statements
(Dollar amounts in millions, unless otherwise stated)
- --------------------------------------------------------------------------------
2003 was $1,036.2. Carrying value and estimated fair value of the open
interest rate caps were minimal as of December 31, 2003.
Interest Rate Swaps
Interest rate swaps are used to manage the interest rate risk in the
Company's bond portfolio as well as the Company's liabilities. Interest
rate swaps represent contracts that require the exchange of cash flows at
regular interim periods, typically monthly or quarterly. The notional
amount, carrying value and estimated fair value of the Company's open
interest rate swaps as of December 31, 2004 were $2,832.8, $34.0 and $34.0,
respectively. The notional amount, carrying value and estimated fair value
of the Company's open interest rate swaps as of December 31, 2003 were
$1,266.5, $(91.2) and $(91.2), respectively.
Futures
Futures contracts are used to hedge against a decrease in certain indexes.
Such decrease results in increased reserve liabilities, and the futures
offset this increased expense. The underlying reserve liabilities are
carried at market value with the change in value recorded in the Statements
of Operations, which is offset by the daily cash movement of the futures.
The notional amount, carrying value and estimated fair value of the
Company's open futures contracts as of December 31, 2004, were $1,177.9,
$(0.2) and $(0.2), respectively. The notional amount, carrying value and
estimated fair value of the Company's open futures contracts as of December
31, 2003, were $491.3, $0.8 and $0.8, 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 $146.7, $(34.5) and $(34.5), 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 $128.2,
$(19.4) and $(19.4), respectively.
Options
Standard & Poor's ("S&P") Options are used to hedge against an increase in
the S&P Index. Such increase results in increased reserve liabilities, and
the options offset this increased expense. The options are accounted for in
80
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Financial Statements
(Dollar amounts in millions, unless otherwise stated)
- --------------------------------------------------------------------------------
a consistent manner with the underlying reserve liabilities, both of which
are carried at fair value with the change in value recorded in the
Statements of Operations. If the options mature in the money, the amount
received is recorded in income to offset the increased expense for the
reserve liabilities. The notional amount, carrying value and estimated fair
value of the Company's open options as of December 31, 2004 were $2,335.4,
$166.0, and $166.0, respectively. The notional amount, carrying value and
estimated fair value of the Company's open options as of December 31, 2003
were $1,287.8, $100.9, and $100.9, respectively.
Embedded Derivatives
The Company also has investments in certain fixed maturity instruments and
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. The estimated fair value of the embedded derivatives
within securities as of December 31, 2004 and 2003 was $(4.6) and $(1.1),
respectively. The estimated fair value of the embedded derivatives within
retail annuity products as of December 31, 2004 and 2003, was $479.9 and
$238.9, respectively.
4. Deferred Policy Acquisition Costs and Value of Business Acquired
Activity for the years ended December 31, 2004, 2003 and 2002, within VOBA
was as follows:
Balance at December 31, 2001 $ 202.5
Adjustment for unrealized gains/losses (34.2)
Interest accrued at 4% - 5% 10.1
Amortization (43.9)
-----------------
Balance at December 31, 2002 134.5
Adjustment for unrealized gains/losses 7.0
Interest accrued at 4% - 5% 6.6
Amortization (36.6)
-----------------
Balance at December 31, 2003 111.5
Adjustment for unrealized gains/losses (0.5)
Interest accrued at 4% - 5% 6.8
Amortization (5.6)
-----------------
Balance at December 31, 2004 $ 112.2
=================
The estimated amount of VOBA to be amortized, net of interest, over the
next five years is $15.5, $13.6, $11.0, $10.1, and $12.3, 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.
81
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Financial Statements
(Dollar amounts in millions, unless otherwise stated)
- --------------------------------------------------------------------------------
Analysis of DAC/VOBA - Annuity
The variance in amortization expense in 2004 versus 2003 was impacted by
SOP 03-1. In prior years, amortization of inducements was included in
amortization of DAC and VOBA. Beginning in 2004, sales inducement
amortization is included as a component of benefit expense in accordance
with SOP 03-1. Therefore, the decrease in amortization of DAC and VOBA is
partially related to 2004 sales inducement amortization being included in
interest credited instead of amortization of DAC and VOBA. Also
contributing to the decrease is the improved market performance during
2003, which lowered the amortization rate for 2004. Amortization expense in
2003 was higher than 2002 due in part to the poor equity market performance
in 2002, which increased the amortization rate in 2003, as well as to the
amortization of acquisition costs related to increased sales of fixed
annuities during 2002. 2003 was the first full year of amortization for
this block of acquisition costs. Also impacting amortization of DAC and
VOBA are unlocking adjustments discussed below.
The actual separate account market return exhibited by the variable
deposits invested in mutual funds associated with the Company's liabilities
in 2004 exceeded the long-term assumption, thereby producing deceleration
of DAC/VOBA amortization of $6.6, before tax. As a part of the regular
analysis of DAC/VOBA, at the end of the first quarter of 2004, the Company
modified its assumptions regarding the future rate of spread income on some
of its fixed annuity liabilities. The assumption modification was in the
direction of lower spread income, and produced an acceleration of DAC/VOBA
amortization of $5.0, before tax. Similar regular analysis of DAC\VOBA at
the end of the third quarter of 2004 included unlocking of the Company's
assumptions regarding contractowner withdrawal behavior. Based on
experience studies, assumed rates of full surrender for both fixed and
variable annuities and rates of partial withdrawal of account balance for
variable annuities were all modified downward, producing a deceleration of
DAC/VOBA amortization of $4.2, before tax. The combined effect of the three
factors of actual variable return for 2004 exceeding long-term assumptions,
modification of future spread income expectations, and modification of
expectations regarding future withdrawal behavior was a deceleration of
DAC/VOBA amortization totaling $5.8, before tax, or $3.8, net of $2.0 of
federal income tax expense.
The Company reset long-term return assumptions for the separate account to
8.5% from 9.0% (gross before fund management fees and mortality, expense,
and other policy charges) as of December 31, 2003, reflecting a blended
return of equity and other sub-accounts. The largest component of the 2003
unlocking adjustment comprised a deceleration of DAC/VOBA amortization
totaling $41.3, before tax. This component was primarily driven by improved
market performance. The Company also unlocked assumptions regarding future
lapse rates for fixed annuities during the analysis at the end of 2003,
resulting in an acceleration of DAC/VOBA amortization of $6.0, before tax.
In each of the regular analyses of DAC/VOBA at the end of the third and
fourth quarters of 2003, expectations regarding yields on assets backing
82
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Financial Statements
(Dollar amounts in millions, unless otherwise stated)
- --------------------------------------------------------------------------------
fixed annuity liabilities were revised downward, resulting in respective
accelerations of DAC/VOBA amortization measuring $2.1, before tax and $6.0,
before tax. The combined effect of all unlocking in 2003 was a deceleration
of DAC/VOBA amortization totaling $27.2, before tax, or $17.7, net of $9.5
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 assumptions for the separate account return 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 largest component of the 2002 unlocking
adjustment comprised an acceleration of DAC/VOBA amortization totaling
$91.5, before tax. This component was primarily driven by the sustained
downturn in the equity markets and revised expectations for future returns.
The Company also unlocked assumptions regarding future lapse and partial
withdrawal rates for fixed annuities during the analysis at the end of the
third quarter of 2002, resulting in an acceleration of DAC/VOBA
amortization measuring $2.0, before tax. During the regular analysis at the
end of the fourth quarter of 2002, expectations regarding the assets
backing the fixed annuity liabilities were revised to reflect higher
anticipated default rates. This fourth quarter adjustment resulted in an
acceleration of DAC/VOBA amortization of $8.0, before tax. The combined
effect of all unlocking adjustments in 2002 was an acceleration of DAC/VOBA
amortization totaling $101.5 before tax, or $66.0, net of $35.5 of federal
income tax benefit.
Analysis DAC/VOBA - Life
As part of the regular analysis of DAC/VOBA for the life insurance block,
at the end of each of the years ended December 31, 2004, 2003, and 2002,
the Company unlocked due to assumption changes related primarily to
mortality, lapse, expense, and interest amounts. The impact of unlocking on
the amortization of DAC/VOBA was a decrease of $1.2 in 2004, an increase of
$6.0 in 2003, and an increase of $5.2 in 2002.
5. Dividend Restrictions and Shareholder's Equity
The Company's ability to pay dividends to its parent is subject to the
prior approval of the Iowa Division of Insurance for payment of any
dividend, which, when combined with other dividends paid within the
preceding twelve months, exceeds the greater of (1) ten percent (10%) of
the Company's statutory surplus at the prior year end or (2) the Company's
prior year statutory net gain from operations. The Company did not pay any
dividends on its common stock during 2004 or 2002. During 2003, the Company
paid $12.4 in dividends on its common stock to its Parent.
83
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Financial Statements
(Dollar amounts in millions, unless otherwise stated)
- --------------------------------------------------------------------------------
The Insurance Division of the State of Iowa (the "Division"), effective
January 1, 2004, recognizes as net income and capital and surplus those
amounts determined in conformity with statutory accounting practices
prescribed or permitted by the Division, which differ in certain respects
from accounting principles generally accepted in the United States.
Statutory net income (loss) was $96.1, $(85.1), and $(328.0), for the years
ended December 31, 2004, 2003 and 2002, respectively. Statutory capital and
surplus was $1,668.3 and $1,081.1 as of December 31, 2004 and 2003,
respectively.
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 affected
statutory capital and surplus.
6. Additional Insurance Benefits and Minimum Guarantees
Under SOP 03-1, the Company calculates additional liabilities ("SOP
reserves") for certain guaranteed benefits and for universal life products
with certain patterns of cost of insurance charges and certain other fees.
The SOP reserve recognized for such products is in addition to the
liability previously held (the "Account Value") and recognizes the portion
of contract assessments received in early years used to compensate the
insurer for services provided in later years.
ING USA calculates a benefit ratio for each block of business subject to
the SOP, and calculates an SOP reserve by accumulating amounts equal to the
benefit ratio multiplied by the assessments for each period, reduced by
excess death benefits during the period. The SOP reserve is accumulated at
interest rates using the contract-credited rate for the period. The
calculated reserve includes a provision for universal life contracts with
patterns of cost of insurance charges that produce expected gains from the
insurance benefit function followed by losses from that function in later
years.
84
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Financial Statements
(Dollar amounts in millions, unless otherwise stated)
- --------------------------------------------------------------------------------
The SOP reserve for annuities with GMDBs is determined each period by
estimating the expected value of death benefits in excess of the projected
account balance and recognizing the excess ratably 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. The following
assumptions and methodology were used to determine the GMDB SOP reserve at
December 31, 2004:
Area Assumptions/Basis for Assumptions
------------------------- ---------------------------------------
Data used Based on 101 investment performance
scenarios stratified based on 10,000
random generated scenarios
Mean investment performance 8.5%
Volatility 18.0%
Mortality 60.0%, 60.0%, 75.0%, 75.0% of the
90-95 ultimate mortality table for
standard, rachet, rollup and
combination rollup and rachet,
respectively
Lapse rates Vary by contract type and duration;
range between 1.0% and 40.0%
Discount rates 6.5%, based on the portfolio earned
rate of the general account
The SOP reserve for annuities with GMABs and GMWBs are considered to be
derivatives under FAS No. 133 and are recognized at fair value through
earnings.
The SOP reserve for the guaranteed minimum income benefits ("GMIB") is
determined each period by estimating the expected value of the annutization
benefits in excess of the projected account balance at the date of
annuitization and recognizing the excess ratably over the accumulation
period based on total expected assessments. The Company regularly evaluates
estimates used and adjusts the additional liability balance, with a related
charge or credit to benefit expense, if the actual experience or other
evidence suggests that earlier assumptions should be revised. The
assumptions used for calculating the additional GMIB liability at December
31, 2004, are consistent with those used for the calculating the additional
GMDB liability. In addition, the calculation of the GMIB liability assumes
dynamic surrenders and dynamic annuitization reflecting the extent to which
the benefit, at the time of payment, has a positive value.
85
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Financial Statements
(Dollar amounts in millions, unless otherwise stated)
- --------------------------------------------------------------------------------
The separate account liabilities subject to SOP 03-1 for minimum guaranteed
benefits, and the additional liabilities recognized related to minimum
guarantees, by type, as of December 31, 2004, and the paid and incurred
amounts by type for the year ended December 31, 2004 were as follows:
Guaranteed Guaranteed Guaranteed
Minimum Minimum Minimum
Death Accumulation/ Income
Benefit Withdrawal Benefit Benefit
(GMDB) (GMAB/GMWB) (GMIB)
-------------- --------------------- --------------
Separate account liability
balance $ 25,843.4 $ 1,826.7 $ 9,079.6
============== ===================== ==============
Additional liability balance:
Balance at January 1, 2004 $ 56.5 $ 14.5 $ 13.6
Incurred guaranteed benefits 39.0 (4.9) 17.1
Paid guaranteed benefits (28.6) - -
-------------- --------------------- --------------
Balance at December 31, 2004 $ 66.9 $ 9.6 $ 30.7
============== ===================== ==============
The net amount at risk (net of reinsurance) and the weighted average
attained age of contractowners by type of minimum guaranteed benefit, were
as follows as of December 31, 2004:
Guaranteed Guaranteed Guaranteed
Minimum Minimum Minimum
Death Accumulation/ Income
Benefit Withdrawal Benefit Benefit
(GMDB) (GMAB/GMWB) (GMIB)
--------------- --------------------- ---------------
Net Amount at Risk (net of reinsurance) $ 1,365.7 $ 65.4 $ 204.3
Weighted Average Attained Age 63 61 61
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 $24,746.7.
7. 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. Such amounts are reported separately on the balance
sheet as of January 1, 2004. Prior to 2004, these amounts were included in
DAC. Sales inducements are amortized as a component of benefit expense
using methodologies and assumptions consistent with those used for
amortization of DAC. During the year ended December 31, 2004, the Company
86
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Financial Statements
(Dollar amounts in millions, unless otherwise stated)
- --------------------------------------------------------------------------------
capitalized and amortized $100.9 and $65.5, respectively, of sales
inducements. The unamortized balance of capitalized sales inducements, net
of unrealized gains and losses, is $514.6 as of December 31, 2004.
8. Income Taxes
Effective January 1, 2004, the Company files a stand-alone federal income
tax return. Prior to that date, the Company and each of the Merger
Companies, filed federal income tax returns with their respective filing
groups.
Income tax expense (benefit) from continuing operations included in the
financial statements are as follows:
Year ended December 31,
2004 2003 2002
----------------- ----------------- ------------------
Current tax expense (benefit):
Federal $ 4.7 $ 1.2 $ (19.9)
----------------- ----------------- ------------------
Total current tax expense (benefit) 4.7 1.2 (19.9)
----------------- ----------------- ------------------
Deferred tax expense (benefit):
Operations and capital loss carryforwards 31.5 53.3 (3.9)
Other federal deferred tax 44.5 (55.3) (36.4)
----------------- ----------------- ------------------
Total deferred tax expense (benefit) 76.0 (2.0) (40.3)
----------------- ----------------- ------------------
Total income tax expense (benefit) $ 80.7 $ (0.8) $ (60.2)
================= ================= ==================
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:
Year ended December 31,
2004 2003 2002
----------------- ----------------- ------------------
Income before income taxes and cumulative
effect of change in accounting principle $ 173.6 $ 56.5 $ (176.3)
Tax rate 35% 35% 35%
----------------- ----------------- ------------------
Income tax at federal statutory rate 60.8 19.8 (61.7)
Tax effect of:
Meals and entertainment 0.5 0.4 0.6
Dividend received deduction 1.3 (11.5) 0.8
Product reserves 3.0 - -
Investments 15.0 - -
Refinement of deferred tax balances - (9.5) -
Other 0.1 - 0.1
----------------- ----------------- ------------------
Income tax expense (benefit) $ 80.7 $ (0.8) $ (60.2)
================= ================= ==================
87
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Financial Statements
(Dollar amounts in millions, unless otherwise stated)
- --------------------------------------------------------------------------------
The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities at December 31, 2004 and 2003 are
presented below:
2004 2003
----------------- -----------------
Deferred tax assets:
Operations and capital loss carryforwards $ 133.5 $ 168.5
Future policy benefits 619.9 517.4
Goodwill 9.3 9.8
Investments 42.4 20.5
Employee compensation and benefits 19.9 16.8
Other 19.5 33.4
----------------- -----------------
Total gross assets 844.5 766.4
Deferred tax liabilities:
Unrealized gains on investments (157.1) (170.1)
Deferred policy acquisition cost (663.1) (529.1)
Value of purchased insurance in force (33.4) (38.3)
Other (3.5) (9.5)
----------------- -----------------
Total gross liabilities (857.1) (747.0)
----------------- -----------------
Net deferred income tax asset (liability) $ (12.6) $ 19.4
================= =================
Valuation allowances are provided when it is considered unlikely that
deferred tax assets will be realized. No valuation allowance has been
established at this time as management believes the above conditions
presently do not exist.
At December 31, 2004, the Company has operating loss carryforwards of
approximately $381.5, for federal income tax purposes, which are available
to offset future taxable income. If not used, these carryforwards will
expire between 2015 and 2019.
Net unrealized capital gains and losses are presented in shareholder's
equity net of deferred taxes.
Under prior law, life insurance companies were allowed to defer from
taxation a portion of income. The deferred income was accumulated in the
Policyholders' Surplus Account. Equitable Life had a Policyholders' Surplus
Account prior to the merger, which carried over to the Company. This
deferred income 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 $14.4.
The Company establishes reserves for possible proposed adjustments by
various taxing authorities. Management believes there are sufficient
reserves provided for, or adequate defenses against any such adjustments.
88
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Financial Statements
(Dollar amounts in millions, unless otherwise stated)
- --------------------------------------------------------------------------------
Currently, the Internal Revenue Service is conducting examinations for the
years 2000 and 2001 and various state tax audits are in process.
9. 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.
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 $11.4, $9.3, and $4.8, for the
years ended 2004, 2003 and 2002, respectively.
Defined Contribution Plans
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) are eligible to
participate, including the Company's employees other than Company agents.
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 to operations
of the Company for the Savings Plan were $3.5, $2.8, and $3.0, for the
years ended December 31, 2004, 2003 and 2002, respectively.
89
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Financial Statements
(Dollar amounts in millions, unless otherwise stated)
- --------------------------------------------------------------------------------
Other Benefit Plans
In addition to providing retirement plan benefits, the Company, in
conjunction with ING North America, provides certain supplemental
retirement benefits to eligible employees and health care and life
insurance benefits to retired employees and other eligible dependents. The
supplemental retirement plan includes a non-qualified defined benefit
pension plan, and a non-qualified defined contribution plan, which means
all benefits are payable from the general assets of the Company. The
post-retirement health care plan include contributory, with retiree
contribution levels adjusted annually. The life insurance plan provides a
flat amount of noncontributory coverage and optional contributory coverage.
The benefits charges allocated to the Company related to all of these plans
for the years ended December 31, 2004, 2003, and 2002 were not significant.
10. Related Party Transactions
Operating Agreements
The Company has certain agreements whereby it generates revenues and incurs
expenses with affiliated entities. The agreements are as follows:
|X| Underwriting and distribution agreement with Directed Services, Inc.
("DSI"), for the variable insurance products issued by the Company.
DSI is authorized to enter into agreements with broker-dealers to
distribute the Company's variable products and appoint representatives
of the broker-dealers as agents. For the years ended December 31,
2004, 2003 and 2002, expenses were incurred in the amounts of $371.4,
$269.3, and $287.1, respectively.
|X| Asset management 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 $69.8, $62.4,
and $43.4, respectively.
|X| Service agreement with DSI, in which the Company provides managerial
and supervisory services to DSI and earns a fee that is calculated as
a percentage of average assets in the variable separate accounts. For
the years ended December 31, 2004, 2003, and 2002, revenue for these
services was $36.4, $27.8, and $25.8 respectively.
|X| Expense sharing agreements with ING North America Insurance
Corporation ("NAC") for administrative, management, financial, and
information technology services, which were approved in 2001. For the
years ended December 31, 2004, 2003 and 2002, expenses were incurred
in the amounts of $65.0, $67.5, and $70.6, respectively.
|X| Services agreement between the Company and its affiliates dated
January 1, 2001, and amended effective January 1, 2002. For the years
ended December 31, 2004, 2003, and 2002, net expenses related to the
90
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Financial Statements
(Dollar amounts in millions, unless otherwise stated)
- --------------------------------------------------------------------------------
agreement were incurred in the amount of $5.1, $16.2, and $17.1,
respectively.
|X| ING Advisors Network, a group of broker-dealers affiliated with the
Company, distributes the Company's annuity products. For the years
ended December 31, 2004, 2003, and 2002, ING Advisors Network sold new
contracts of $1,121.8, $765.8, and $949.1, 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.
Reinsurance Agreements
ING USA entered into a reinsurance agreement with Security Life of Denver
International, Limited. ("SLDI"), an affiliate, covering variable annuity
minimum guaranteed death benefits and minimum guaranteed living benefits of
variable annuities issued after January 1, 2000. In March 2003, the Company
amended its reinsurance agreement with SLDI. Under this amendment, the
Company terminated the reinsurance agreement for all in force and new
business and recaptured all in force business reinsured under the
reinsurance agreement between the Company and SLDI retroactive to January
1, 2003 and the Company reduced its reinsurance recoverable related to
these liabilities by $150.1. On March 28, 2003, SLDI transferred assets to
the Company in the amount of $185.6. The difference in amounts transferred
on March 28, 2003 and the reduction of the reinsurance recoverables as of
January 1, 2003, reflects adjustments on the investment of the reinsurance
recoverable as of January 1, 2003. It also reflects adjustments on the
investment income on the assets and letter of credit costs between January
1, 2003 and the date of the asset transfer. It also encompasses the net
effect of a recapture fee paid in the amount of $5.0 offset by the receipt
of a $24.1 negative ceding commission. The net impact of which was deferred
in policy acquisition costs and is being amortized over the period of
estimated future profits.
The Company is a party to a Facultative Reinsurance Agreement with its
affiliate, Security Life of Denver Insurance Company ("Security Life")
dated August 20, 1999. Under the terms of the Agreement, the Company
facultatively cedes certain GICs and funding agreements to Security Life on
a 100% coinsurance basis. As of December 31, 2004, the value of GIC and
funding agreement reserves ceded by the Company under this agreement was
$1,262.7.
Reciprocal Loan Agreement
On January 1, 2004, the Company entered into a new reciprocal loan
agreement with ING America Insurance Holding Company, Inc. ("ING AIH"), a
Delaware corporation and affiliate, to facilitate the handling of unusual
and/or unanticipated short-term cash requirements. In accordance with this
91
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Financial Statements
(Dollar amounts in millions, unless otherwise stated)
- --------------------------------------------------------------------------------
agreement, the maximum outstanding amount to be borrowed or lent shall not
exceed 3% of ING USA's total admitted assets as of the preceding December
31. This agreement supersedes previous reciprocal loan agreements between
each of the Merged Companies and ING AIH, which contained various terms and
maximum borrowing/lending limits.
Under the previous and current reciprocal loan agreements, interest on any
ING USA borrowings was charged at the rate of ING AIH's cost of funds for
the interest period plus 0.15%. Interest on any ING AIH borrowings was
charged at a rate based on the prevailing interest rate of U.S. commercial
paper available for purchase with a similar duration. Under these
agreements, ING USA incurred interest expense of $0.2, $0.3, and $0.3, for
the years ended December 31, 2004, 2003, and 2002, respectively. ING USA
earned interest of $2.5, $1.0, and $1.3, for the years ended December 31,
2004, 2003 and 2002, respectively. At December 31, 2004 and 2003, ING USA
had $184.2 and $120.4 receivable from ING AIH under these agreements
included in due from affiliates.
Notes to Affiliates
The Company's promissory note in the amount of $50.0 payable to Lion was
repaid on May 17, 2004. The note was issued on April 15, 1997. Interest was
charged at an annual rate of 8.75% and the face amount was due on demand.
The Company incurred interest expense of $1.7, $4.4, and $4.4, for the
years ended December 31, 2004, 2003, and 2002, respectively.
ING USA issued a 30-year surplus note in the principal amount of $35.0 on
December 8, 1999, to its affiliate, Security Life of Denver Insurance
Company (successor-in-interest to First Columbine Life Insurance Company),
which matures on December 7, 2029. Interest is charged at an annual rate of
7.98%. Payment of the note and related accrued interest is subordinate to
payments due to contractowners and claimant and beneficiary claims, as well
as debts owed to all other classes of debtors, other than surplus note
holders, of ING USA. Any payment of principal and/or interest made is
subject to the prior approval of the Iowa Insurance Commissioner. Interest
expense was $2.8, $2.8, and $2.8, for the years ended December 31, 2004,
2003, and 2002, respectively.
On December 29, 2004, the Company issued surplus notes in the aggregate
principal amount of $400.0 (the "Notes"), scheduled to mature on December
29, 2034, to its affiliates, ING Life Insurance and Annuity Company
("ILIAC"), ReliaStar Life and SLDI, in an offering that was exempt from the
registration requirements of the Securities Act of 1933. The Notes bear
interest at a rate of 6.26% per year. Any payment of principle and/or
interest is subject to the prior approval of the Iowa Insurance
Commissioner. Interest is scheduled to be paid semi-annually in arrears on
June 29 and December 29 of each year, commencing on June 29, 2005. Interest
expense was $0.2 for the year ended December 31, 2004.
92
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Financial Statements
(Dollar amounts in millions, unless otherwise stated)
- --------------------------------------------------------------------------------
Tax Sharing Agreements
The Company has 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
During the years ended December 31, 2004, 2003, and 2002, ING USA received
capital contributions of $230.0, $88.7, and $456.3, respectively.
11. 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 from the Bank. Interest on any borrowing
accrues at an annual rate equal to 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 from BONY. Interest on any of the Company borrowing accrues at an
annual rate equal to 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.
12. Reinsurance
At December 31, 2004, ING USA had reinsurance treaties with 17 unaffiliated
reinsurers and 1 affiliated reinsurer covering a portion of the mortality
risks and guaranteed death and living benefits under its variable
contracts. ING USA remains liable to the extent its reinsurers do not meet
their obligations under the reinsurance agreements.
93
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Financial Statements
(Dollar amounts in millions, unless otherwise stated)
- --------------------------------------------------------------------------------
Reinsurance ceded in force for life mortality risks were $906.0 and
$1,209.4 at December 31, 2004 and 2003, respectively. At December 31, 2004
and 2003, net receivables were comprised of the following:
2004 2003
----------------- -----------------
Claims recoverable from reinsurers $ 13.4 $ 17.1
Payable for reinsurance premiums (3.2) (6.6)
Reinsured amounts due to an
unaffiliated reinsurer (3.2) (3.1)
Reserve credits 17.6 21.1
Reinsurance ceded 1,359.9 619.4
Other 3.6 4.0
------------------ -----------------
Total $ 1,388.1 $ 651.9
================== =================
Included in the accompanying financial statements are net policy benefit
recoveries of $48.4, $48.4, and $60.0, for the years ended December 31,
2004, 2003, and 2002, respectively.
Interest credited and other benefits to contractowners included the
following premiums ceded and reinsurance recoveries:
Year ended December 31,
2004 2003 2002
----------------- ----------------- ------------------
Premiums ceded under reinsurance $ 12.5 $ 16.4 $ 59.6
Reinsurance recoveries 0.8 2.2 2.7
13. Commitments and Contingent Liabilities
Leases
The Company leases its office space and certain other equipment under
operating leases that expire through 2017.
For the years ended December 31, 2004, 2003, and 2002, rent expense for
leases was $7.6, $7.4, and $6.6, respectively. The future net minimum
payments under noncancelable leases for the years ended December 31, 2005
through 2009 are estimated to be $7.8, $7.8, $7.6, $7.5, and $7.5,
respectively, and $39.4, 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.
94
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Financial Statements
(Dollar amounts in millions, unless otherwise stated)
- --------------------------------------------------------------------------------
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 and 2003, the Company had off-balance sheet
commitments to purchase investments equal to their fair value of $175.3 and
$154.0, respectively.
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/arbitrations, suits against the Company
sometimes include claims for substantial compensatory, consequential or
punitive damages and other types of relief. Moreover, certain claims are
asserted as class actions, purporting to represent a group of similarly
situated individuals. While it is not possible to forecast the outcome of
such lawsuits/arbitrations, in light of existing insurance, reinsurance and
established reserves, it is the opinion of management that the disposition
of such lawsuits/arbitrations will not have a materially adverse effect on
the Company's operations or financial position.
Other Regulatory Matters
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
95
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Financial Statements
(Dollar amounts in millions, unless otherwise stated)
- --------------------------------------------------------------------------------
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 ING, 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 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 the Company or certain
affiliates before concluding their investigation of ING relating to fund
trading. The potential outcome of such action is difficult to predict but
could subject the Company or 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 Securities and Exchange
Commission ("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.
96
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Financial Statements
(Dollar amounts in millions, unless otherwise stated)
- --------------------------------------------------------------------------------
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 our business
practices are appropriate.
14. Other Comprehensive Income
The components of other comprehensive income for the years ended December
31, 2004 and 2003 were as follows:
2004 2003
------------------ -----------------
Net unrealized capital gains (losses):
Fixed maturities $ 451.4 $ 517.3
Equity securities 0.5 5.0
DAC/VOBA (258.6) (210.5)
Sales inducements (6.7) -
Other (2.6) (13.9)
------------------ -----------------
Subtotal 184.0 297.9
Less: Deferred income taxes (66.4) (109.8)
------------------ -----------------
Net unrealized capital gains (losses) 117.6 188.1
Minimum pension liability (4.9) -
------------------ -----------------
Net accumulated other comprehensive income $ 112.7 $ 188.1
================== =================
97
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Financial Statements
(Dollar amounts in millions, unless otherwise stated)
- --------------------------------------------------------------------------------
Changes in accumulated other comprehensive income related to changes in net
unrealized gains (losses) on securities, including securities pledged, were
as follows:
Year ended December 31,
2004 2003 2002
------------------ ----------------- -----------------
Unrealized holding gains (losses) arising
during the year (1) $ (26.8) $ 125.9 $ 152.6
Less: reclassification adjustment for gains
(losses) and other items included in
net income (2) 43.7 71.0 (50.6)
------------------ ----------------- -----------------
Net unrealized gains (losses) on securities $ (70.5) $ 54.9 $ 203.2
================== ================= =================
(1) Pretax unrealized holding gains (losses) were $(41.2), $193.7 and $234.8,
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 $67.2, $109.2 and $(77.8), for the years ended
December 31, 2004, 2003 and 2002, respectively.
98
QUARTERLY DATA (UNAUDITED)
2004 (In millions) First Second Third Fourth
- ----- ------------- ------------- ------------- -------------
Total revenue $ 435.7 $ 430.2 $ 435.8 $ 372.1
------------- ------------- ------------- -------------
Income before income taxes and
cumulative effect of change in accounting principle 32.0 ** 69.2 ** 39.7 ** 32.7
Income tax expense 9.8 ** 23.0 ** 37.0 ** 10.9
------------- ------------- ------------- -------------
Net income before cumulative effect of
change in accounting principle 22.2 ** 46.2 ** 2.7 ** 21.8
Cumulative effect of change in accounting principle (1.0)** - - -
------------- ------------- ------------- -------------
Net income $ 21.2 ** $ 46.2 ** $ 2.7 ** $ 21.8
============= ============= ============= =============
2003 (In millions) First* Second* Third* Fourth*
- ---- ------------- ------------- ------------- -------------
Total revenue $ 365.0 $ 392.0 $ 406.3 $ 345.7
------------- ------------- ------------- -------------
Income (loss) before income taxes (21.0) 46.5 32.6 (1.6)
Income tax expense (benefit) (7.5) 14.4 3.8 (11.5)
------------- ------------- ------------- -------------
Net income (loss) $ (13.5) $ 32.1 $ 28.8 $ 9.9
============= ============= ============= =============
* 2003 amounts have been restated due to the merger on January 1, 2004. See
the "Significant Accounting Policies" footnote for further information
regarding the merger.
** Income before cumulative effect of change in accounting principle for the
first, second, and third quarters of 2004 has been restated to include the
impact of the implementation of the TPA, effective January 1, 2004. The
quarterly adjustment was approximately $(0.6), resulting in a total 2004
reduction of $(2.3). Also, the cumulative effect of change in accounting
principal was reduced by $(2.0) before tax due to the implementation of the
TPA. See "Recently Adopted Accounting Standards" in the "Significant
Accounting Policies" footnote for further information.
99
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 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.
100
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 (which was filed as Exhibit 14 to the
Company's Form 10-K, as filed with the SEC on March 29, 2004,
File No. 033-87270), pursuant to the requirements of Section 406
of the Sarbanes-Oxley Act of 2002. 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 ING USA. ING
subsidiaries, including ING USA, 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
101
and 2003 are detailed below along with a description of the services
rendered by Ernst & Young to the Company:
2004 2003
------------------- -------------------
Audit fees $ 2.6 $ 1.8
Audit-related fees 0.5 0.1
Tax fees -* 0.1
All other fees -* -
------------------- -------------------
$ 3.1 $ 2.0
=================== ===================
*Less than $0.1.
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 ING USA 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 audit of
SEC product filings, advice on accounting matters, and progress review
on International Financial Reporting Standards and Sarbanes-Oxley
projects.
Tax Fees
Tax fees allocated to ING USA were for tax compliance, tax advice, and
tax planning professional services. These services consisted 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 ING USA under the category "all
other fees" in 2004, and no amounts in 2003. 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
ING USA 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
102
ING audit committee is required to pre-approve all services provided
by ING's independent auditors to ING and its majority owned
legalentities, 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, 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.
103
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) The following documents are filed as part of this report:
1. Financial statements. See Item 8 on Page 49
2. Financial statement schedules. See Index to Financial
Statement Schedules on Page 110
Exhibits
2. Agreement and Plan of Merger dated June 25, 2003, by and
between USG Annuity & Life Company, United Life & Annuity
Insurance Company, Equitable Life Insurance Company of Iowa
and Golden American, incorporated by reference in Exhibit
99-8 in the Company's Form 8K filed with the SEC on January
2, 2004 (File No. 333-87270).
3.(i)Restated Articles of Incorporation Providing for the
Redomestication of Golden American Life Insurance Company
dated July 2 and 3, 2003, effective January 1, 2004,
incorporated by reference to Company's 10-K, as filed with
the SEC on March 29, 2004 (File No. 033-87270).
Amendment to Articles of Incorporation Providing for the
Name Change of Golden American Life Insurance Company dated
November 20, 2003, effective January 1, 2004, incorporated
by reference to the Company's 10-K, as filed with the SEC on
March 29, 2004 (File No. 033-87270).
Amendment to Articles of Incorporation Providing for the
Change in Purpose and Powers of ING USA Annuity and Life
Insurance Company dated March 3 and 4, 2004, effective March
11, 2004, incorporated by reference to the Company's 10-Q,
as filed with the SEC on May 17, 2004 (File No. 033-87270).
(ii) Amended and Restated By-Laws of ING USA Annuity and Life
Insurance Company, adopted by the Board of Directors of the
Company on June 25, 2003, as amended November 11, 2003 and
February 25, 2004, incorporated by reference to the
Company's Form 10-Q, as filed with the SEC on May 17, 2004
(File No. 033-87270).
104
4. Instruments Defining the Rights of Security Holders,
including Indentures (Annuity Contracts).
(a) Single Premium Deferred Modified Guaranteed Annuity
Contract, Single Premium Deferred modified Guaranteed
Annuity Master Contract, and Single Premium Deferred
Modified Guaranteed Annuity Certificate - Incorporated
herein by reference to Pre-Effective Amendment No. 1 to
Registration Statement on Form S-1 for Golden American
Life Insurance Company as filed with the SEC on
February 8, 2002 (File No. 333-67660).
(b) Single Premium Deferred Modified Guaranteed Annuity
Contract - Incorporated herein by reference to the
initial Registration Statement on Form S-1 for Golden
American Life Insurance Company, as filed with the SEC
on June 30, 2000 (File No. 333-40596).
(b.1)Single Premium Deferred Modified Guaranteed Annuity
Master Contract and Single Premium Deferred Modified
guaranteed Annuity Certificate - Incorporated by
reference to Post-Effective Amendment No. 1 to
Registration Statement on Form S-1 for Golden American
Life Insurance Company, as filed with the SEC on
September 13, 2000 (File No. 333-40596).
(c) Individual Retirement Rider; Roth Individual Retirement
Annuity Rider; Individual Retirement Annuity Rider; and
Simple Retirement Account Rider - Incorporated herein
by reference to Post-Effective Amendment No. 34 to
Registration Statement on Form N-4 for Golden American
Life Insurance Company Separate Account B, as filed
with the SEC on April 15, 2003 (File No. 033-23351).
(c.1)403(b) Rider - Incorporated herein by reference to
Initial Registration Statement on Form S-2 for Golden
American Life Insurance Company, as filed with the SEC
on April 15, 2003 (File No. 333-104547).
(d) Single Premium Deferred Equity Indexed Modified
Guaranteed Annuity Contract; Single Premium Deferred
Modified Guaranteed Annuity Group Master Contract; and
Single Premium Deferred Equity Indexed Modified
Guaranteed Annuity Certificate, - Incorporated herein
by reference to Pre-Effective Amendment No. 1 to
Registration Statement on Form S-2, as filed with the
SEC on August 13, 2004 (File No. 333-116137).
(e) Interest in Fixed Account I under Variable Annuity
Contracts - Incorporated herein by reference to:
Post-Effective Amendment No. 12 to Registration
Statement on Form N-4 for Golden American Life
105
Insurance Company Separate Account B, as filed with the
Securities and Exchange Commission on April 23, 1999
(File Nos. 333-59261, 811-5626); Incorporated by
reference to Post-Effective Amendment No. 3 to
Registration Statement on Form N-4 for Golden American
life Insurance Company, as filed with the SEC on April
23, 1999 (File Nos. 333-28769, 811-5626); and
Incorporated by reference to Pre-Effective Amendment
No. 1 to Registration statement on Form N-4 for Golden
American Life Insurance Company Separate Account B, as
filed with the SEC on June 24, 2000 (File Nos.
333-33914, 811-5626).
(f) Interests in Fixed Account II under Variable Annuity
Contracts - Incorporated herein by reference to
Post-Effective Amendment No. 7 to Registration
Statement on Form N-4 for Separate Account B of Golden
American Life Insurance Company as filed with the SEC
on October 2, 2000 (File No. 333-28679, 811-5626),
Incorporated herein by reference to Post-Effective
Amendment No. 2 to Registration Statement on Form N-4
for Separate Account B of Golden American Life
Insurance Company as filed with the SEC on October 2,
2000 (File No. 333-30180, 811-5626), Incorporated
herein by reference to Post-Effective Amendment No. 5
to Registration Statement on Form N-4 for Separate
Account B of Golden American Life Insurance Company as
filed with the SEC on April 23, 1999 (File No.
333-28755, 811-5626), Incorporated herein by reference
to Post-Effective Amendment No. 1 to Registration
Statement on Form N-4 for Separate Account B of Golden
American Life Insurance Company as filed with the SEC
on April 23, 1999 (File No. 333-66757, 811-5626),
Incorporated herein by reference to Pre-Effective
Amendment No. 1 to Registration Statement on Form N-4
for Separate Account B of Golden American Life
Insurance Company as filed with the SEC on October 26,
2001 (File No. 333-63692, 811-5626), Incorporated
herein by reference to Pre-Effective Amendment No. 1 to
Registration Statement on Form N-4 for Separate Account
B of Golden American Life Insurance Company as filed
with the SEC on December 11, 2001 (File No.333-70600,
811-5626), and Incorporated by reference to
Post-Effective Amendment No. 1 to Registration
Statement on Form N-4 for Golden American Life
Insurance Company Separate Account B, as filed with the
SEC on April 16, 2003 (File No. 333-90516, 811-5626).
(g) Interest in the Guaranteed Account under Variable
Annuity Contracts - Incorporated herein by reference to
Pre-Effective Amendment No. 1 to Registration Statement
on Form S-2 for Golden American Life Insurance Company,
as filed with the SEC on June 29, 2001 (File No.
333-57212).
10. Material Contracts
(a) Service Agreement, dated as of January 1, 1994, between
Golden American and Directed Services, Inc.,
incorporated by reference from Exhibit 10(b) to a
Registration Statement on Form S-1 filed with the SEC
on April 29, 1998 (File No. 333-51353).
106
(b) Asset Management Agreement, dated January 20, 1998,
between Golden American and ING Investment Management
LLC, incorporated by reference from Exhibit 10(f) to
Golden American's Form 10-Q filed with the SEC on
August 14, 1998 (File No. 033-87270).
(c) Reciprocal Loan Agreement dated January 1, 2004,
between ING USA Annuity and Life Insurance Company and
ING America Insurance Holdings, Inc., incorporated by
reference from Exhibit 10.A(a) to ING USA Annuity and
Life Insurance Company's Form 10-Q filed with the SEC
on or about May 17, 2004 (File No. 333-87270).
(d) Surplus Note, dated December 8, 1999, between Golden
American and First Columbine Life Insurance Company,
incorporated by reference from Exhibit 10(g) to
Amendment No. 7 to a Registration Statement for Golden
American on Form S-1 filed with the SEC on or about
January 27, 2000 (File No. 333-28765).
(e) Services Agreement between Golden American and the
affiliated companies listed in Exhibit B to that
Agreement, dated as of January 1, 2001, as amended
effective January 1, 2002, incorporated by reference
from Exhibit 10.A (k) to ING USA Annuity and Life
Insurance Company's Form 10-K filed with the SEC on
March 29, 2004 (File No. 033-87270).
(f) Services Agreement between Golden American and ING
North America Insurance Corporation effective January
1, 2001, incorporated by reference from Exhibit 10.A
(g) to ING USA Annuity and Life Insurance Company's
Form 10-K filed with the SEC on March 29, 2004 (File
No. 033-87270).
(g) Form of Shared Services Center Services Agreement by
and among ING North America Insurance Corporation
("Service Provider") and Ameribest Life Insurance
Company, a Georgia corporation; Equitable Life
Insurance Company of Iowa, an Iowa corporation; USG
Annuity & Life Company, an Oklahoma corporation; Golden
American, a Delaware corporation; First Columbine Life
Insurance Company, a Colorado corporation; Life
Insurance Company of Georgia, a Georgia corporation;
Southland Life Insurance Company, a Texas corporation;
Security Life of Denver Insurance Company, a Colorado
corporation; Midwestern United Life Insurance Company,
an Indiana corporation; and United Life & Annuity
Insurance Company, a Texas corporation, incorporated by
reference from Exhibit 10(r) to Pre-Effective Amendment
No. 1 to a Registration Statement on Form S-1 filed by
Registrant with the SEC on or about December 11, 2001
(File No. 333-70602).
107
(h) Tax Sharing Agreement between Golden American, ING
America Insurance Holdings, Inc. and affiliated
companies, effective January 1, 2001, incorporated by
reference from Exhibit 10.A (j) to ING USA Annuity and
Life Insurance Company's Form 10-K filed with the SEC
on March 29, 2004 (File No. 033-87270).
(i) Administrative Services Agreement between Golden
American, ReliaStar Life Insurance Company of New York
and affiliated companies listed on Exhibit A to the
Agreement, effective March 1, 2003, incorporated by
reference from Exhibit 10.A (m) to ING USA Annuity and
Life Insurance Company's Form 10-K filed with the SEC
on March 29, 2004 (File No. 033-87270).
(j) First Amendment to the Administrative Services
Agreement between ING USA Annuity and Life Insurance
Company and its affiliates, effective as of August 1,
2004.
(k) Amendment to Asset Management Agreement between Golden
American and ING Investment Management LLC, effective
January 1, 2003, incorporated by reference from Exhibit
10.A (l) to ING USA Annuity and Life Insurance
Company's Form 10-K filed with the SEC on March 29,
2004 (File No. 033-87270).
(l) Third Amendment to the Asset Management Agreement,
between Golden American and ING Investment Management
LLC, effective August 18, 2003, incorporated by
reference from Exhibit 10.A (n) to ING USA Annuity and
Life Insurance Company's Form 10-K filed with the SEC
on March 29, 2004 (File No. 033-87270).
(m) Lease Agreement, dated as of April 16, 1998, by and
between Golden American and Dunwoody Associates,
incorporated by reference from Exhibit 10.A (o) to ING
USA Annuity and Life Insurance Company's Form 10-K
filed with the SEC on March 29, 2004 (File No.
033-87270).
(n) First Amendment to Lease Agreement, dated November 4,
1998, between Golden American and Dunwoody Associates,
incorporated by reference from Exhibit 10.A (p) to ING
USA Annuity and Life Insurance Company's Form 10-K
filed with the SEC on March 29, 2004 (File No.
033-87270).
(o) Second Amendment to Lease Agreement, dated June 1,
2000, between Golden American and Dunwoody Associates,
incorporated by reference from Exhibit 10.A (q) to ING
USA Annuity and Life Insurance Company's Form 10-K
filed with the SEC on March 29, 2004 (File No.
033-87270).
(p) Services Agreement with ING Financial Advisers, LLC
("INGFA"), entered into June 1, 2002 by Equitable Life
Insurance Company of Iowa, as subsumed by ING USA
pursuant to the January 1, 2004 merger.
108
(q) Surplus Note for $50,000,000 aggregate principal
amount, dated December 29, 2004, issued by ING USA
Annuity and Life Insurance Company to its affiliate,
Security Life of Denver International Limited.
(r) 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,
ING Life Insurance and Annuity Company.
(s) 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,
ReliaStar Life Insurance Company.
(t) Lease Agreement dated August 31, 1995, between The
Graham Group, Inc. and Equitable Life Insurance Company
of Iowa, as subsumed by ING USA Annuity and Life
Insurance Company pursuant to the January 1, 2004
merger.
(u) Underwriting Agreement between Golden American Life
Insurance Company ("Golden American" or "Registrant")
and Directed Services, Inc., incorporated by reference
from Exhibit 1 to Amendment No. 9 to Registrant's
Registration Statement on Form S-1 filed with the
Securities and Exchange Commission ("SEC") on or about
February 17, 1998 (File No. 333-87272).
14. ING Code of Ethics for Financial Professionals, incorporated
by reference from Exhibit 14 to ING USA Annuity and Life
Insurance Company's Form 10-K filed with the SEC on March
29, 2004 (File No. 033-87270).
31.1 Certificate of David A. Wheat pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certificate of Harry N. Stout 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 Harry N. Stout pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
109
Index to Financial Statement Schedules
Page
----
Report of Independent Registered Public Accounting Firm 111
I. Summary of Investments - Other than Investments in Affiliates as of
December 31, 2004 112
IV. Reinsurance Information as of and for the years ended
December 31, 2004, 2003 and 2002 113
Schedules other than those listed above are omitted because they are not
required or not applicable.
Report of Independent Registered Public Accounting Firm
The Board of Directors
ING USA Annuity and Life Insurance Company
We have audited the consolidated financial statements of ING USA Annuity and
Life Insurance 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 18, 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 18, 2005
ING USA Annuity and Life Insurance Company,
(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)
Amount
Shown on
Type of Investments Cost Value* Balance Sheet
--------------- --------------- ----------------
Fixed maturities:
U.S. government and government agencies and authorities $ 464.0 $ 464.7 $ 464.7
State, municipalities and political subdivisions 20.7 19.9 19.9
Public utilities securities 1,796.9 1,866.4 1,866.4
Other U.S. corporate securities 6,292.4 6,513.2 6,513.2
Foreign securities (1) 3,090.1 3,198.3 3,198.3
Residential mortgage-backed securities 3,440.3 3,461.8 3,461.8
jCommercial mortgage-backed securities 1,107.8 1,139.7 1,139.7
Other asset-backed securities 1,934.2 1,933.8 1,933.8
--------------- --------------- ----------------
Total fixed maturities, including fixed maturities pledged $ 18,146.4 $ 18,597.8 $ 18,597.8
=============== =============== ================
Total equity securities $ 34.8 $ 35.3 $ 35.3
=============== =============== ================
Mortgage loans $ 3,851.8 $ 3,969.4 $ 3,851.8
Policy loans 169.0 169.0 169.0
Other investments 228.8 229.0 228.8
--------------- --------------- ----------------
Total investments $ 22,430.8 $ 23,000.5 $ 22,882.7
=============== =============== ================
* See Notes 2 and 3 of Notes to 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.
112
ING USA Annuity and Life Insurance Company,
(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)
Percentage of
Gross Ceded Assumed Net assumed to net
------------- ------------- ------------- ------------- ---------------
Year ended December 31, 2004
Life insurance in force $ 7,405.6 $ 906.0 $ - $ 6,499.6 0.0%
Premiums:
Life insurance 25.0 2.2 - 22.8
Accident and health insurance 0.4 0.4 - -
------------- ------------- ------------- -------------
Total premiums $ 25.4 $ 2.6 $ - $ 22.8
============= ============= ============= =============
Year ended December 31, 2003
Life insurance in force $ 8,001.4 $ 1,209.4 $ - $ 6,792.0 0.0%
Premiums:
Life insurance 27.4 1.4 - 26.0
Accident and health insurance 0.2 0.2 - -
------------- ------------- ------------- -------------
Total premiums $ 27.6 $ 1.6 $ - $ 26.0
============= ============= ============= =============
Year ended December 31, 2002
Life insurance in force $ 8,722.9 $ 1,370.5 $ - $ 7,352.4 0.0%
Premiums:
Life insurance 38.4 1.6 - 36.8
Accident and health insurance 0.2 0.2 - -
------------- ------------- ------------- -------------
Total premiums $ 38.6 $ 1.8 $ - $ 36.8
============= ============= ============= =============
113
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 USA Annuity and Life Insurance Company
(Registrant)
March 17, 2005 By /s/ David A. Wheat
- -------------- -----------------------------------------
(Date) 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 18, 2005.
Signatures Title
/s/ David A. Wheat
- ------------------------------------- Director, Senior Vice President and
David A. Wheat Chief Financial Officer
/s/ Jacques de Vaucleroy
- ------------------------------------- Director
Jacques de Vaucleroy
/s/ Thomas J. McInerney
- ------------------------------------- Director and Chairman
Thomas J. McInerney
/s/ Kathleen A. Murphy
- ------------------------------------- Director
Kathleen A. Murphy
/s/ Catherine H. Smith
- ------------------------------------- Director
Catherine H. Smith
/s/ Harry N. Stout
- ------------------------------------- President
Harry N. Stout
/s/ Roger W. Fisher
- ------------------------------------- Vice President and Director
Roger W. Fisher Chief Accounting Officer
114
Exhibit 31.1
CERTIFICATION
I, David A. Wheat, certify that:
1. I have reviewed this annual report on Form 10-K of ING USA Annuity and Life
Insurance Company and Subsidiary;
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 17, 2005
------------------
By /s/ David A. Wheat
--------------------------------------
David A. Wheat
Director, Senior Vice President and
Chief Financial Officer
Duly Authorized Officer and Principal Financial Officer)
Exhibit 31.2
CERTIFICATION
I, Harry N. Stout, certify that:
1. I have reviewed this annual report on Form 10-K of ING USA Annuity and Life
Insurance Company and Subsidiary;
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 17, 2005
---------------
By /s/ Harry N. Stout
--------------------------------------
Harry N. Stout
President
Duly Authorized Officer and Principal Officer)
Exhibit 32.1
CERTIFICATION
Pursuant to 18 U.S.C. ss.1350, the undersigned officer of ING USA Annuity and
Life Insurance 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.
March 17, 2005 By: /s/ David A. Wheat
- -------------- ------------------------------------
(Date) David A. Wheat
Director, Senior Vice President
and Chief Financial Officer
Exhibit 32.2
CERTIFICATION
Pursuant to 18 U.S.C. ss.1350, the undersigned officer of ING USA Annuity and
Life Insurance 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.
March 17, 2005 By /s/ Harry N. Stout
- -------------- ----------------------------------
(Date) Harry N. Stout
President
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Not Applicable
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
ING USA Annuity and Life Insurance Company (ING USA) shall indemnify (including
therein the prepayment of expenses) any person who is or was a director, officer
or employee, or who is or was serving at the request of ING USA as a director,
officer or employee of another corporation, partnership, joint venture, trust or
other enterprise for expenses (including attorney's fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by him with respect
to any threatened, pending or completed action, suit or proceedings against him
by reason of the fact that he is or was such a director, officer or employee to
the extent and in the manner permitted by law.
ING USA may also, to the extent permitted by law, indemnify any other person who
is or was serving ING USA in any capacity. The Board of Directors shall have the
power and authority to determine who may be indemnified under this paragraph and
to what extent (not to exceed the extent provided in the above paragraph) any
such person may be indemnified.
ING Groep N.V. maintains an umbrella insurance policy with an international
insurer. The policy covers ING Groep N.V. and any company in which ING Groep
N.V. has an ownership control of over 50%. This would encompass the principal
underwriter as well as the depositor. The policy provides for the following
types of coverage; errors and ommissions, directors and officers, employment
practices, fiduciary and fidelity.
Insofar as indemnification for liabilities arising under the Securities Act of
1933, as amended, may be permitted to directors, officers and controlling
persons of the Registrant, as provided above or otherwise, the Registrant has
been advised that in the opinion of the SEC such indemnification by the
Depositor is against public policy, as expressed in the Securities Act of 1933,
and therefore may be unenforceable. In the event that a claim of such
indemnification (except insofar as it provides for the payment by the Depositor
of expenses incurred or paid by a director, officer or controlling person in the
successful defense of any action, suit or proceeding) is asserted against the
Depositor by such director, officer or controlling person and the SEC is still
of the same opinion, the Depositor or 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 of whether such indemnification
by the Depositor is against public policy as expressed by the Securities Act of
1933 and will be governed by the final adjudication of such issue.
ITEM 16. EXHIBITS
Exhibits
(3)(a) Amended and Restated Articles of Incorporation of ING USA Annuity and
Life Insurance Company, dated (01/01/04). (3)
(b) Amended and Restated By-Laws of ING USA annuity and Life Insurance
Company, dated (01/01/04). (3)
(c) Resolution of Board of Directors for Powers of Attorney. (04/23/99) (4)
(d) Articles of Merger and Agreement and Plan of Merger of USGALC, ULAIC,
ELICI into GALIC and renamed ING USA Annuity and Life Insurance Company,
dated (06/25/03). (3)
(4) Instruments Defining the Rights of Security Holders:
(a) Variable Annuity Group Master Contract (1)
(b) Variable Annuity Contract (1)
(c) Variable Annuity Certificate (1)
(d) Individual Retirement Annuity Rider (2)
(e) Roth Individual Retirement Annuity Rider (2)
(f) Simple Retirement Account Rider (2)
(g) 403(b) Rider (2)
(h) Company Address and Name Change Endorsement (3)
5 Opinion and Consent of James A. Shuchart.
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 Nos. 333-104539,
333-104546, 333-57212, 333-104548, 333-104547, 333-116137), as filed with
the Commission on March 18, 2005. Each of the Exhibits so listed is
incorporated by reference as indicated in the Form 10-K.
13(a)ING USA Annuity and Life Insurance 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 James A. Shuchart, incorporated in Item 5 of this Part II,
together with the Opinion of James A. Shuchart.
(24) Powers of Attorney (6)
Exhibits other than those listed above are omitted because they are not required
or are not applicable.
- -------------------------
(1) Incorporated herein by reference to Pre-Effective Amendment No. 1 to a
Registration Statement on Form S-2 for Registrant's Separate Account B
Filed June 29, 2001 (File No. 333-57212).
(2) Incorporated herein by reference to Post-Effective Amendment No. 34 to a
Registration Statement on Form N-4 for Golden American Life Insurance
Company Separate Account B filed on April 15, 2003
(File Nos. 033-23351, 811-5626).
(3) Incorporated herein by reference to Post-Effective Amendment No. 25 to a
Registration Statement on Form N-4 for ING USA Annuity and Life Insurance
Company Separate Account B filed with the Securities and Exchange
Commission on February 13, 2004 (File Nos. 333-28679, 811-5626).
(4) Incorporated by reference to Amendment No. 5 to a Registration Statement
for Golden American Life Insurance Company filed with the Securities and
Exchange Commission on April 23, 1999 (File No. 333-28755).
(5) Incorporated by reference to Post-Effective Amendment No. 1 to Registration
Statement on Form S-2 of ING Life Insurance and Annuity Company (File No.
333-104456), as filed on April 5, 2004.
(6) Incorporated herein by reference to Registration Statement on Form S-2
for ING Insurance Company of America Variable Annuity Account I as filed
with the Securities and Exchange Commission on April 7, 2005
(File No. 333-49581).
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 Amendment to
Registration Statement 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 USA ANNUITY AND LIFE
INSURANCE COMPANY
(Registrant)
By:
--------------------
Harry Stout*
President (principle executive officer)
By: /s/ Linda E. Senker
-------------------
Linda E. Senker
Counsel of Registrant
As required by the Securities Act of 1933, this Amendment to Registration
Statement has been signed by the following persons in the capacities indicated
on April 7, 2005.
Signature Title
- --------- -----
President
- -------------------- (principle executive officer)
Harry Stout*
- -------------------- Chief Accounting Officer
Roger W. Fisher*
DIRECTORS
- ---------------------- Chief Financial Officer
David A. Wheat*
- ----------------------
Jacques de Vaucleroy*
- ----------------------
Thomas J. McInerney*
- ----------------------
Kathleen A. Murphy*
- ----------------------
Catherine H. Smith*
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
ITEM EXHIBIT PAGE #
- ---- ------- ------
5 Opinion and Consent of James A. Shuchart EX-5
13(a) ING USA Annuity and Life Insurance Company Form 10-K *
for the fiscal year ended December 31, 2004.
23(a) Consent of Independent Registered Public Accounting Firm EX-23.A
23(b) Consent of Legal Counsel **
- -----------------------------
* See Module No. ING_10K-1204
** Included in Exhibit 5 above