AUDITED FINANCIAL STATEMENTS
ING Individual Re Business
For the Nine Months Ended September 30, 2004 and the
Years Ended December 31, 2003 and 2002
ING Individual Re Business
Index
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Page
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Report of Independent Registered Public Accounting Firm 3
Financial Statements:
Statements of Operations 4
Balance Sheets 5
Statements of Changes in Equity 6
Statements of Cash Flows 7
Notes to Financial Statements 8
Report of Independent Registered Public Accounting Firm
To the Board of Directors of
ING America Insurance Holdings Inc.
We have audited the accompanying balance sheets of ING Individual Re Business, a
wholly owned entity of ING America Insurance Holdings Inc., as of September 30,
2004 and December 31, 2003, and the related statements of operations, changes in
equity, and cash flows for the nine months ended September 30, 2004 and the
years ended December 31, 2003 and 2002. 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
expressing 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 financial position of ING Individual Re Business as
of September 30, 2004 and December 31, 2003, and the results of its operations
and its cash flows for the nine months ended September 30, 2004 and the years
ended December 31, 2003 and 2002, in conformity with U.S. generally accepted
accounting principles.
/s/ Ernst & Young LLP
Ernst & Young LLP
Atlanta, Georgia
February 14, 2005
ING Individual Re Business
Statements of Operations
(in millions)
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Nine Months
Ended
September 30, Years Ended December 31,
2004 2003 2002
------------- ------------ ------------
Revenues:
Premiums $ 874.5 $ 911.5 $ 788.7
Net investment income 79.5 104.6 110.4
Net realized capital gains (losses) 29.3 (11.0) 32.4
------------- ------------ ------------
Total revenue 983.3 1,005.1 931.5
Benefits, losses, and expenses:
Benefits:
Claims (456.4) (602.4) (440.4)
Increase in reserves (197.8) (225.9) (199.0)
Underwriting, acquisition, and insurance expenses:
Commissions (300.6) (302.1) (257.7)
General and administrative expenses (42.2) (44.8) (32.0)
Acquisition costs deferred 314.3 359.9 216.5
Amortization of deferred acquisition costs (434.8) (247.1) (119.1)
------------- ------------ ------------
Total benefits, losses, and expenses (1,117.5) (1,062.4) (831.7)
------------- ------------ ------------
Income (loss) before tax (134.2) (57.3) 99.8
Tax benefit (expense) 47.0 20.0 (34.9)
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Net income (loss) $ (87.2) $ (37.3) $ 64.9
============= ============ ============
The accompanying notes are an integral part of these financial statements.
4
ING Individual Re Business
Balance Sheets
(in millions)
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September 30, December 31,
2004 2003
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Assets:
Cash (overdraft) $ 9.8 $ (11.3)
Investments:
Fixed maturities, available-for-sale, at fair value
(amortized cost of $1,287.5 and $1,291.2) 1,338.9 1,338.8
Equity securities, available-for-sale, at fair value
(amortized cost of $14.2 and $11.7) 11.9 8.9
Short-term investments 53.9 1.1
Mortgage loans on real estate 285.0 236.0
Other investments 42.0 19.4
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Total investments 1,731.7 1,604.2
Accrued investment income 16.5 19.3
Premiums receivable 204.0 152.7
Reinsurance recoverable 203.9 41.0
Deferred acquisition costs 513.3 633.8
Due from SLD and SLDI 182.7 102.9
Receivable for securities sold 11.1 -
Other assets 29.9 50.4
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Total assets $ 2,902.9 $ 2,593.0
============= ============
Liabilities:
Future policy benefits $ 1,274.6 $ 1,077.6
Life claim reserves 431.8 293.9
Disability reserves 7.9 6.6
Funds held under reinsurance treaties 55.8 60.8
Deferred income taxes 23.5 69.0
Reinsurance payable 94.1 77.2
Payable for securities purchased - 1.0
Other liabilities 59.0 51.1
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Total liabilities 1,946.7 $ 1,637.2
Equity:
Allocated equity 924.3 926.7
Accumulated other comprehensive income 31.9 29.1
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Total equity 956.2 955.8
------------- ------------
Total liabilities and equity $ 2,902.9 $ 2,593.0
============= ============
The accompanying notes are an integral part of these financial statements.
5
ING Individual Re Business
Statements of Changes in Equity
(in millions)
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Total
Equity
---------
Balance at December 31, 2001 $ 752.7
Comprehensive income:
Net income 64.9
Other comprehensive income, net of tax:
Unrealized gain on securities ($3.8 pretax) 2.5
---------
Total comprehensive income 67.4
Contribution of allocated equity 61.2
---------
Balance at December 31, 2002 881.3
Comprehensive (loss):
Net loss (37.3)
Other comprehensive income, net of tax:
Unrealized gain on securities ($8.1 pretax) 5.3
---------
Total comprehensive (loss) (32.0)
Contribution of allocated equity 106.5
---------
Balance at December 31, 2003 955.8
Comprehensive (loss):
Net loss (87.2)
Other comprehensive income, net of tax:
Unrealized gain on securities ($4.3 pretax) 2.8
---------
Total comprehensive (loss) (84.4)
Contribution of allocated equity 84.8
---------
Balance at September 30, 2004 $ 956.2
=========
The accompanying notes are an integral part of these financial statements.
6
ING Individual Re Business
Statements of Cash Flows
(in millions)
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Nine
Months Ended
September 30, Years Ended December 31,
2004 2003 2002
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Cash Flows from Operating Activities:
Net income (loss) $ (87.2) $ (37.3) $ 64.9
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Deferral of acquisition costs (314.3) (359.9) (216.5)
Amortization of deferred acquisition costs 434.8 247.1 119.1
Amortization of premiums on investments 14.2 30.6 22.8
Net realized capital (gains) losses (29.3) 11.0 (32.4)
Change in:
Future policy benefits and claims reserves 336.2 323.6 233.2
Reinsurance payable 16.9 45.6 6.7
Other payables and accruals 1.9 49.2 28.5
Other assets and receivables (197.0) 11.1 (121.6)
Provision for deferred income taxes (47.0) (20.0) 34.9
------------- ------------ ------------
Net cash provided by operating activities 129.2 301.0 139.6
------------- ------------ ------------
Cash Flows from Investing Activities:
Proceeds from the sale, maturity, or redemption of:
Fixed maturities 708.5 925.7 806.8
Equity securities - 0.6 1.4
Mortgage loans on real estate 19.0 7.4 7.3
Short-term investments 3,099.8 1,806.4 -
Acquisition of:
Fixed maturities (716.3) (1,221.7) (982.7)
Equity securities (2.5) (0.6) -
Mortgage loans on real estate originated (68.0) (31.0) (62.9)
Short-term investments (3,152.6) (1,807.5) -
Other investments 4.0 (0.2) 95.7
------------- ------------ ------------
Net cash used in investing activities (108.1) (320.9) (134.4)
------------- ------------ ------------
Net increase (decrease) in cash and cash equivalents 21.1 (19.9) 5.2
Cash (overdraft), beginning of period (11.3) 8.6 3.4
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Cash (overdraft), end of period $ 9.8 $ (11.3) $ 8.6
============= ============ ============
The accompanying notes are an integral part of these financial statements.
7
ING Individual Re Business
Notes to Financial Statements
(in millions, unless otherwise stated)
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1. Nature of Operations and Significant Accounting Policies
Description of Business
The individual life reinsurance business of ING America Insurance Holdings,
Inc. ("ING") in the United States, the ING Individual Re Business
("Individual Re"), is written through Security Life of Denver Insurance
Company ("SLD"), a Colorado domiciled insurance company, and Security Life
of Denver International, Limited ("SLDI"), a Bermuda domiciled insurance
company. ING is a wholly-owned subsidiary of the ING Groep, NV, a global
financial services holding company based in the Netherlands.
Pursuant to an asset purchase agreement dated October 17, 2004, SLD and
SLDI transferred substantially all of Individual Re to Scottish Re Group
Limited through a coinsurance transaction and related asset purchase,
service and trust agreements. The transaction closed on December 31, 2004.
Basis of Presentation
The accompanying combined financial statements of Individual Re have been
prepared in accordance with United States generally accepted accounting
principles ("GAAP").
The financial statements of Individual Re do not represent the financial
statements of the separate legal entities of SLD and SLDI. The financial
condition, results of operations and cash flows presented as Individual Re
represent the combined individual life reinsurance business written through
SLD and SLDI, which is a carved out portion of the multiple combined
business operations that were historically included in SLD and SLDI. These
financial statements are not representative of a complete legal entity's
business operations as would otherwise be presented. Accordingly, the
financial statements include allocations and estimates of direct and
indirect general and administrative costs attributable to the operations of
Individual Re. However, the allocations may not necessarily be indicative
of the costs and expenses that would have resulted if Individual Re had
been operated as a separate legal entity. Certain legal entity overhead
costs, such as costs associated with defined benefit plans, have been
excluded from the Individual Re financial statements for all periods
presented. The legal entity costs, including employer benefit plan expenses
are liabilities of the legal entity and not the Individual Re business. In
addition, certain disclosures, such as disclosures about agreements and
contracts that are normally executed on a legal entity level, have been
excluded from the Individual Re financial statements and notes herein.
Management believes that the assumptions, estimates, allocations and
exclusions used to prepare the financial statements are reasonable. These
financial statements were derived from Individual Re's management reports
for its traditional mortality risk reinsurance business. All material
intercompany transactions and balances related to the individual life
reinsurance business have been eliminated in combination.
8
ING Individual Re Business
Notes to Financial Statements
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Recently Adopted Accounting Standards
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 to be applied on a security-by-security basis as follows:
Step 1: Determine whether an investment is impaired. An investment is
impaired if its 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 Financial Accounting Standards Board ("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 EITF 03-1's original effective date of July 1,
2004 for the paragraphs of the guidance surrounding 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
Individual Re, effective December 31, 2003. In addition to the disclosure
requirements adopted by Individual Re, effective December 31, 2003, the
final consensus of EITF 03-01 reached in March 2004 included additional
disclosure requirements that are effective for fiscal years ending after
June 15, 2004.
Accounting for Derivative Instruments and Hedging Activities
In April 2003, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 149, "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities." SFAS No. 149 amends and clarifies financial accounting
and reporting for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities under
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 149 was effective, with certain exceptions, for
contracts entered into or modified after June 30, 2003. Adoption of SFAS
No. 149 did not have a material effect on Individual Re's financial
position, results of operations or cash flows.
9
ING Individual Re Business
Notes to Financial Statements
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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. The adoption of FIN 46 did not have
a material impact on Individual Re's financial condition, results of
operations or cash flows as there were no VIEs identified which required
consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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.
Cash
Cash includes cash on hand, money market instruments and other debt issues
with a maturity of 90 days or less when purchased.
Investments
All of Individual Re'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 equity, after adjustment for deferred income
taxes.
Individual Re analyzes investments to determine whether there has been an
other than temporary decline in fair value below the amortized cost basis
in accordance with SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." 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 Individual Re'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.
10
ING Individual Re Business
Notes to Financial Statements
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In addition, Individual Re 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 Individual Re'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. Unrealized capital gains and losses on all
investments, except derivatives (discussed below), are reflected in equity,
net of related income taxes. Realized capital gains and losses on all
investments, are included in the Statements of Operations and are
determined on a specific identification basis.
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.
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 equity securities are based on quoted market
prices. For equity securities not actively traded, estimated fair values
are based upon values of issues of comparable yield and quality or
conversion value where applicable.
Mortgage loans on real estate are reported at amortized cost less
impairment writedowns. If the value of any mortgage loan is determined to
be impaired (i.e., when it is probable that the Company will be able to
collect all amounts due according to the contractual terms of the loan
agreement), the carrying value of the mortgage loan is reduced to the
present value of the expected cash flows for the loan, discounted at the
loans effective interest rate, or to the loan's observable market price, or
the fair value of the underlying collateral. The carrying value of the
impaired loan is reduced by establishing a permanent writedown charged to
realized loss.
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.
11
ING Individual Re Business
Notes to Financial Statements
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Derivatives
SFAS No. 133, as amended, requires all derivatives to be recognized on the
balance sheet at fair value. Derivatives that do not qualify for hedge
accounting under SFAS No. 133 must be adjusted to fair value through
income. If the derivative qualifies as a hedge, the related accounting
would depend upon whether the hedge was classified as a fair value, cash
flow or foreign currency hedge. Changes in the fair value of derivatives
are either offset against the change in fair value of assets, liabilities
or firm commitments through earnings or recognized in other comprehensive
income until the hedge items are recognized in earnings. The ineffective
portion of the derivatives change in fair value must be immediately
recognized in earnings.
Individual Re's use of derivatives is limited to hedging purposes which do
not qualify for hedge accounting treatment under SFAS No. 133. Individual
Re enters into interest rate and currency contracts, including swaps, caps,
floors, options, futures, and embedded derivatives, 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. 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.
In April 2003, the FASB issued Statement No. 133 Implementation Issue No.
B-36, "Embedded Derivatives: Modified Coinsurance Arrangement and Debt
Instruments That Incorporate Credit Risk Exposures That Are Unrelated or
Only Partially Related to the Credit Worthiness of the Obligor under Those
Instruments" ("DIG B-36"). The issue indicates that any funds held
arrangements on which the investment return is not linked to a specific
rate but rather the rate of return on an underlying pool of fixed maturity
assets or total return debt index contains an embedded derivative which
must be bifurcated and marked-to-market in accordance with SFAS No. 133.
Typically these arrangements occur in modified coinsurance arrangements but
they may occur in any funds held arrangement. Individual Re has reviewed
all funds held arrangements and the adoption of this issue on October 1,
2003 did not have any impact on Individual Re's financial position, results
of operations or cash flows.
Funds Held Under Reinsurance Treaties
Funds held under reinsurance treaties represent amounts held on behalf of
companies assuming the Individual Re business in conjunction with certain
reinsurance treaties.
Deferred Acquisition Costs
Deferred acquisition costs ("DAC") is an asset, which represents certain
costs of acquiring certain insurance business, which are deferred and
amortized. These costs, all of which vary with and are primarily related to
the production of new and renewal business, consist principally of
commissions, certain underwriting and contract issuance expenses, and
certain agency expenses. Under SFAS No. 60, "Accounting and Reporting by
Insurance Enterprises," acquisition costs for traditional life insurance
products, which
12
ING Individual Re Business
Notes to Financial Statements
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primarily include whole life and term life insurance contracts, are
amortized over the premium payment period in proportion to the premium
revenue recognition. DAC is evaluated for recoverability at each balance
sheet date and the asset would be reduced to the extent that future
premiums are inadequate to recover the asset.
Future Policy Benefits
Liabilities for future benefits on life insurance policies are established
in an amount believed to be adequate to meet the estimated future
obligations on policies in force. Liabilities for future policy benefits
under long-term life insurance policies have been computed based on
estimates of investment yields, mortality and withdrawal rates expected at
the time the policies are reinsured, and other assumptions including
estimates for incurred but not reported claims. These assumptions include a
margin for adverse deviation and vary with the characteristics of the plan
of insurance, year of issue, age of insured and other appropriate factors.
The assumptions for estimated investment yields are based upon various
factors including then current yields on Individual Re's investment
portfolio and market rates for new investments. Interest rates used in
estimating future policy benefits ranged from 5.5% to 8.0% at the time the
policies in force were reinsured. The mortality and withdrawal assumptions
are based on Individual Re's experience.
Life Claim Reserves
A life claim reserve is established when a claim is incurred or is
estimated to have been incurred but not reported. Life claim reserve equal
reported claims plus an estimate of incurred but unreported claims based on
actuarial projections applied to historical claim payment data.
Income Taxes
The financial statements were prepared with an assumed tax rate of 35%.
Deferred income taxes arise from temporary differences between the tax
bases of assets and liabilities and their reported amounts in Individual
Re's financial statements. Deferred income taxes are also provided for
unrealized gains (losses) on available-for-sale fixed maturity securities
and equity securities by a charge or credit directly to equity. A valuation
allowance is recorded to reduce deferred tax assets if it is determined
that it is more likely than not that such assets will not be realized.
Equity
ING allocates adequate levels of capital to its U.S. insurance businesses,
including Individual Re, based on a capital model which quantifies
statutory asset, insurance, interest rate, and business risks. Changes in
the capital levels beyond earnings and investment fair value adjustments
are deemed to be infusions into or dividends out of the business.
Management believes that the allocation methodology is both prudent and
reasonable.
13
ING Individual Re Business
Notes to Financial Statements
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Reinsurance
Individual Re is involved in both ceded and assumed reinsurance with other
companies. Reinsurance is accounted for on a basis consistent with the
terms of the underlying policies and the terms of the reinsurance contract.
To the extent that the assuming companies become unable to meet their
obligations under these treaties, Individual Re remains contingently liable
to its policy holders for the portion reinsured. To minimize its exposure
to significant losses from retrocessionaire insolvencies, Individual Re
evaluates the financial condition of the retrocessionaire and monitors
concentration of credit risk. Individual Re had no reinsurance related
concentration of credit risk greater than 10% of Individual Re's allocated
equity.
Premiums
Reinsurance premiums received under the renewable term agreements are
recognized as revenue over the premium paying periods of the reinsured
policies. Benefits and expenses are associated with earned premiums so that
profits are recognized over the life of the related contract. This
association is accomplished through the provision for future policy
benefits and the amortization of deferred acquisition costs.
2. Investments
Fixed maturities and equity securities available-for-sale as of September
30, 2004, were as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ----------- ------------ -----------
Fixed maturities:
U.S. government and government
agencies and authorities $ 50.7 $ 0.7 $ (0.4) $ 51.0
State, municipalities and political
subdivisions 1.7 0.2 - 1.9
U.S. corporate securities:
Public utilities 128.8 7.9 (0.5) 136.2
Other corporate securities 632.5 24.8 (7.0) 650.3
----------- ----------- ------------ -----------
Total U.S. corporate securities 761.3 32.7 (7.5) 786.5
----------- ----------- ------------ -----------
Foreign securities:
Government 47.4 8.7 (0.2) 55.9
Other 148.0 10.2 (1.1) 157.1
----------- ----------- ------------ -----------
Total foreign securities 195.4 18.9 (1.3) 213.0
----------- ----------- ------------ -----------
Mortgage-backed securities 227.7 10.8 (3.6) 234.9
Other asset-backed securities 50.7 2.4 (1.5) 51.6
----------- ----------- ------------ -----------
Total fixed maturities 1,287.5 65.7 (14.3) 1,338.9
Equity securities 14.2 0.1 (2.4) 11.9
----------- ----------- ------------ -----------
Total investments available-for-sale $ 1,301.7 $ 65.8 $ (16.7) $ 1,350.8
=========== =========== ============ ===========
14
ING Individual Re Business
Notes to Financial Statements
- --------------------------------------------------------------------------------
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 $ 155.5 $ 0.5 $ (1.8) $ 154.2
U.S. corporate securities:
Public utilities 116.3 8.6 (0.6) 124.3
Other corporate securities 539.3 23.6 (12.7) 550.2
----------- ----------- ------------ ----------
Total U.S. corporate securities 655.6 32.2 (13.3) 674.5
----------- ----------- ------------ ----------
Foreign securities:
Government 74.7 10.7 (0.1) 85.3
Other 120.7 10.5 (2.0) 129.2
----------- ----------- ------------ ----------
Total foreign securities 195.4 21.2 (2.1) 214.5
----------- ----------- ------------ ----------
Mortgage-backed securities 217.9 10.4 (1.1) 227.2
Other asset-backed securities 66.8 3.2 (1.6) 68.4
----------- ----------- ------------ ----------
Total fixed maturities 1,291.2 67.5 (19.9) 1,338.8
Equity securities 11.7 - (2.8) 8.9
----------- ----------- ------------ ----------
Total investments available-for-sale $ 1,302.9 $ 67.5 $ (22.7) $ 1,347.7
=========== =========== ============ ==========
The aggregate unrealized losses and related fair values of total fixed
maturities and equity securities with unrealized losses as of September 30,
2004 and December 31, 2003, are shown below by duration:
September 30, 2004 December 31, 2003
--------------------------- --------------------------
Unrealized Fair Unrealized Fair
Loss Value Loss Value
------------ ------------ ------------ -----------
Duration category:
Less than six months below cost $ 1.7 $ 69.0 $ 4.5 $ 308.3
More than six months and less
than twelve months below cost 4.4 175.6 11.6 160.6
More than twelve months below cost 10.6 128.1 6.6 34.6
------------ ------------ ------------ -----------
Total $ 16.7 $ 372.7 $ 22.7 $ 503.5
============ ============ ============ ===========
The unrealized losses less than 6 months in duration of $1.7 as of
September 30, 2004 are primarily related to interest rate movement or
spread widening for other than credit-related reasons. Business and
operating fundamentals are performing as expected.
15
ING Individual Re Business
Notes to Financial Statements
- --------------------------------------------------------------------------------
Of the unrealized losses more than 6 months and less than 12 months in
duration of $4.4 as of September 30, 2004, there were $3.3 in unrealized
losses that are primarily related to interest rate movement or spread
widening for other than credit-related reasons. Business and operating
fundamentals are performing as expected. The remaining unrealized losses of
$1.1 relate to securities reviewed for impairment under the guidance
prescribed by EITF 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 $24.5.
Of the unrealized losses more than 12 months in duration of $10.6 as of
September 30, 2004, there were $6.0, in unrealized losses that are
primarily related to interest rate movement or spread widening for other
than credit-related reasons. Business and operating fundamentals are
performing as expected. Unrealized losses of $2.2 relate to securities
within the communications industry, for which the carrying amounts was
$38.2. The remaining unrealized losses of $2.4 related to equity securities
for which the carrying value was $11.9.
The amortized cost and fair value of total fixed maturities as of September
30, 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 $ 13.1 $ 13.2
After one year through five years 83.3 89.3
After five years through ten years 131.5 141.8
After ten years 781.2 808.1
Mortgage-backed securities 227.7 234.9
Other asset-backed securities 50.7 51.6
---------- ----------
Fixed maturities $ 1,287.5 $ 1,338.9
========== ==========
Individual Re did not have any investments in a single issuer, other than
obligations of the U.S. government, with a carrying value in excess of
10.0% of equity at September 30, 2004 and December 31, 2003.
During the nine months ended September 30, 2004, Individual Re determined
that 39 fixed maturities had an other than temporary impairment. As a
result, Individual Re recognized a pretax loss of $5.0 to reduce the
carrying value of the fixed maturities to their fair value at the time of
impairment. During 2003, Individual Re determined that 69 fixed maturities
had other than temporary impairments. As a result, Individual Re recognized
a pretax loss of $21.4 to reduce the carrying value of the fixed maturities
to their fair value at the time of impairment. During 2002, Individual Re
determined that 55 fixed maturities had other than temporary impairments.
As a result, Individual Re recognized a pretax loss of $22.8 to reduce the
carrying value of the fixed maturities to their fair value at the time of
impairment.
16
ING Individual Re Business
Notes to Financial Statements
- --------------------------------------------------------------------------------
The fair value of the impaired fixed maturities at September 30, 2004 and
December 31, 2003, is $20.7 and $42.0, respectively.
Net Investment Income
Sources of net investment income were as follows:
Nine Months
Ended
September 30, Years Ended December 31,
2004 2003 2002
------------- ------------ -----------
Fixed maturities $ 72.6 $ 93.6 $ 92.3
Equity securities 1.7 0.7 0.7
Short-term investments 0.6 0.4 -
Other investments 4.6 9.9 17.4
------------- ------------ -----------
Net investment income $ 79.5 $ 104.6 $ 110.4
============= ============ ===========
Realized Capital Gains and Losses
Realized capital gains and losses are comprised of the difference between
the carrying value of investments and proceeds from sale, maturity, and
redemption, losses incurred due to the impairment of investments, as well
as periodic adjusting for differences between the carrying value and fair
value of derivatives. Net realized capital gains (losses) on investments
were as follows:
Nine Months
Ended
September 30, Years Ended December 31,
2004 2003 2002
------------- ------------ -----------
Fixed maturities $ 2.6 $ (2.9) $ 5.2
Other investments 26.7 (8.1) 27.2
------------- ------------ -----------
Pretax realized capital gains (losses) $ 29.3 $ (11.0) $ 32.4
============= ============ ===========
After-tax realized capital gains (losses) $ 19.0 $ (7.2) $ 21.0
============= ============ ===========
Proceeds from the sale of fixed maturities and equity securities and the
related gross gains and losses were as follows:
Nine Months
Ended
September 30, Years Ended December 31,
2004 2003 2002
------------- ------------ ------------
Proceeds on sales $ 631.3 $ 757.0 $ 682.1
Gross gains 14.7 28.0 38.2
Gross (losses) (7.5) (10.7) (9.5)
17
ING Individual Re Business
Notes to Financial Statements
- --------------------------------------------------------------------------------
Changes in equity related to changes in accumulated other comprehensive
income resulted from changes in market values of available for sale
securities were as follows:
Nine Months
Ended
September 30, Years Ended December 31,
2004 2003 2002
------------- ------------ -----------
Fixed maturities $ 3.8 $ 9.3 $ 6.9
Equity securities 0.5 (1.2) (3.1)
------------- ------------ -----------
Subtotal 4.3 8.1 3.8
Decrease (increase) in deferred income taxes (1.5) (2.8) (1.3)
------------- ------------ -----------
Net changes in accumulated other
comprehensive income $ 2.8 $ 5.3 $ 2.5
============= ============ ===========
Equity included the following accumulated other comprehensive income:
September 30, December 31,
2004 2003
------------ ------------
Net unrealized capital gains (losses):
Fixed maturities $ 51.4 $ 47.6
Equity securities (2.3) (2.8)
------------ ------------
Subtotal 49.1 44.8
Less: deferred income taxes (17.2) (15.7)
------------ ------------
Net accumulated other comprehensive income $ 31.9 $ 29.1
============ ============
Changes in accumulated other comprehensive income related to changes in
unrealized gains (losses) on securities, were as follows:
Nine Months
Ended
September 30, Years Ended December 31,
2004 2003 2002
------------- ------------ -----------
Unrealized holding gains (losses) arising
during the year(l) $ 6.6 $ 3.5 $ 13.9
Less: reclassification adjustment for gains
(losses) and other items included in
net income(2) 3.8 (1.8) 11.4
------------- ------------ -----------
Net unrealized gains (losses) on securities $ 2.8 $ 5.3 $ 2.5
============= ============ ===========
(1) Pretax unrealized holding gains (losses) arising during the period
were $10.1, $5.3 and $21.3, for the nine months ended September 30,
2004 and the years ended December 31, 2003 and 2002, respectively.
(2) Pretax reclassification adjustments for gains (losses) and other items
included in net income were $5.8, $(2.8) and $17.5, for the nine
months ended September 30, 2004 and the years ended December 31, 2003
and 2002, respectively.
18
ING Individual Re Business
Notes to Financial Statements
- --------------------------------------------------------------------------------
Derivative Financial Instruments
Interest Rate Caps
Interest rate caps are used to manage the interest rate risk in Individual
Re's bond portfolio. Interest rate caps are purchased contracts that
provide Individual Re with an annuity in an increasing interest rate
environment. The notional amount, carrying value and estimated fair value
of Individual Re's open interest rate caps as of September 30, 2004, were
$150, $0 and $0, respectively. The notional amount, carrying value and
estimated fair value of Individual Re's open interest rate caps as of
December 31, 2003 were $150, $28 thousand and $28 thousand, respectively.
Interest Rate Swaps
Interest rate swaps are used to manage the interest rate risk in Individual
Re's bond portfolio as well as Individual Re'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 Individual Re's open
interest rate swaps as of September 30, 2004 were $868, $19.1 and $19.1,
respectively. The notional amount, carrying value and estimated fair value
(liabilities are denoted with parentheses) of Individual Re's open interest
rate swaps as of December 31, 2003 were $893, $(7.7) and $(7.7),
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 U.S. dollar cash flows at regular interim periods, typically
quarterly or semi-annually. The notional amount, carrying value and
estimated fair value (liabilities are denoted with parentheses) of
Individual Re's open foreign exchange rate swaps as of September 30, 2004
were $7.8, ($3.0) and ($3.0), respectively. The notional amount, carrying
value and estimated fair value of Individual Re's open foreign exchange
rate swaps as of December 31, 2003 were $7.8, ($2.5) and ($2.5),
respectively.
19
ING Individual Re Business
Notes to Financial Statements
- --------------------------------------------------------------------------------
3. Financial Instruments
Estimated Fair Value
The following disclosures are made in accordance with the requirements of
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments." SFAS
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. SFAS 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 Individual Re.
The following valuation methods and assumptions were used by Individual Re
in estimating the fair value of financial instruments:
Fixed maturities 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
Individual Re's evaluation of the borrower's ability to compete in their
relevant market. Using this data, the model generates estimated market
values which Individual Re considers reflective of the fair value of each
privately placed bond.
Equity securities: Fair values of these securities are based upon quoted
market value.
Mortgage loans on real estate: The fair value 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.
Derivative financial instruments: The fair value for derivative
instruments, included in other investments, is based upon quoted market
prices or internally established valuations that consider interest rates,
volatilities and the credit worthiness of the counterparties.
Cash and short-term investments: The carrying amounts for these assets
approximate the assets' fair values.
20
ING Individual Re Business
Notes to Financial Statements
- --------------------------------------------------------------------------------
The carrying values and estimated fair values of certain of Individual Re's
financial instruments at September 30, 2004 and December 31, 2003, were as
follows:
September 30, 2004 December 31, 2003
----------------------- ------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ---------- ---------- ----------
Cash and short-term investments $ 63.7 $ 63.7 $ (10.2) $ (10.2)
Fixed maturities 1,338.9 1,338.9 1,338.8 1,338.8
Equity securities 11.9 11.9 8.9 8.9
Mortgage loans 285.0 306.8 236.0 261.7
Other investments 42.0 41.8 19.4 19.8
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 Individual Re'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. In
evaluating Individual Re'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.
4. Deferred Acquisition Costs
During 2004, Individual Re reviewed its individual reinsurance business due
to potential loss recognition issues related primarily to mortality
experience. As a result, during the nine months ended September 30, 2004,
Individual Re recorded a charge of $137 million after tax ($209 million
before taxes) to reduce deferred acquisition costs pursuant to the loss
recognition testing as defined in SFAS No. 60. The primary cause of this
charge was an increase to the anticipated mortality experience of the
business.
5. Reinsurance
The net effect of all reinsurance agreements on premiums and policy
revenues is as follows:
Nine Months
Ended
September 30, Years Ended December 31,
2004 2003 2002
------------- ----------- ------------
Assumed premium $ 948.9 $ 1,036.0 $ 816.4
Reinsurance premiums ceded (74.4) (124.5) (27.7)
------------- ----------- ------------
Net earned premiums $ 874.5 $ 911.5 $ 788.7
============= =========== ============
21
ING Individual Re Business
Notes to Financial Statements
- --------------------------------------------------------------------------------
Details of reinsurance recoveries netted against claims (expense) are as
follows:
Nine Months
Ended
September 30, Years Ended December 31,
2004 2003 2002
------------- ----------- ------------
Claims $ 856.0 $ 861.7 $ 444.5
Reinsurance recoveries (399.6) (259.3) (4.1)
------------- ----------- ------------
Net claims $ 456.4 $ 602.4 $ 440.4
============= =========== ============
6. Life Claim Reserves
The following table displays the development of the claim reserves:
Nine Months
Ended
September 30, Years Ended December 31,
2004 2003 2002
------------- ----------- ------------
Beginning life claim reserves - gross $ 293.9 $ 196.3 $ 224.0
Reinsurance recoverables 41.0 21.4 36.3
------------- ----------- ------------
Beginning life claim reserves - net 252.9 174.9 187.7
Incurred expenses related to
Current year 402.2 567.1 424.6
Prior years 54.2 35.3 15.8
------------- ----------- ------------
Total incurred 456.4 602.4 440.4
------------- ----------- ------------
Paid expenses related to
Current year 298.0 419.5 381.4
Prior years 183.4 104.9 71.8
------------- ----------- ------------
Total paid 481.4 524.4 453.2
------------- ----------- ------------
Ending life claim reserves - net 227.9 252.9 174.9
Reinsurance recoverables 203.9 41.0 21.4
------------- ----------- ------------
Ending life claim reserves - gross $ 431.8 $ 293.9 $ 196.3
------------- ----------- ------------
Incurred expenses related to the prior year are a result of higher than
expected mortality rates.
7. Income Taxes
SLD and SLDI have entered into federal tax sharing agreements with members
of an affiliated group as defined in Section 1504 of the Internal Revenue
Code of 1986, as amended. The agreement provides for the manner of
calculation and the amounts/timing
22
ING Individual Re Business
Notes to Financial Statements
- --------------------------------------------------------------------------------
of the payments between the parties as well as other related matters in
connection with the filing of consolidated federal income tax returns.
The amounts presented below relate only to Individual Re and were
calculated as if Individual Re filed separate federal and state income tax
returns.
Income tax (benefit) expense included in the financial statements is
comprised of deferred income taxes resulting from operations and capital
loss carryfowards. Income tax (benefit) expense is $(47.0) for the nine
months ended September 30, 2004, and $(20.0) and $34.9, for the years ended
December 31, 2003 and 2002, respectively.
The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities at September 30, 2004 and December 31,
2003 are presented below:
September 30, December 31,
2004 2003
------------- ------------
Deferred tax assets:
Investments $ (0.1) $ 19.6
Net operating loss carryovers 570.4 374.6
Other 0.1 -
------------- ------------
Total deferred tax assets 570.4 394.2
Deferred tax liabilities:
Net unrealized gains on investments (17.2) (15.7)
Deferred policy acquisition costs (179.7) (221.8)
Future policy benefits (397.0) (225.7)
Other - -
------------- ------------
Total deferred tax liabilities (593.9) (463.2)
------------- ------------
Net deferred income tax liability $ (23.5) $ (69.0)
============= ============
At September 30, 2004, Individual Re has available unused net operating
loss carryforwards that may be applied against future taxable income and
that expire as follows:
Year of Expiration
2015 $ 93.0
2016 33.2
2017 307.1
2018 637.0
2019 559.4
----------
$ 1,629.7
==========
8. Statutory Results
SLD statutory results were prepared in accordance with accounting
principles prescribed or permitted by the Insurance Department of the State
of Colorado (the "Department").
23
ING Individual Re Business
Notes to Financial Statements
- --------------------------------------------------------------------------------
The Department recognizes as net income and capital and surplus those
amounts determined in conformity with statutory accounting practices
prescribed or permitted by the Department, which differ in certain respects
from accounting principles generally accepted in the United States.
Statutory net income (loss) for SLD was $130.8, $(142.5) and $137.2, for
the nine months ended September 30, 2004 and the years ended December 31,
2003 and 2002, respectively. SLDI statutory results were prepared in
compliance with the criteria established by provisions of the Insurance Act
of 1978 of Bermuda, amendments thereto and related regulations insofar as
such provisions relate to accounting and financial reporting matters.
Statutory net income (loss) for SLDI was $31.0, $28.2 and $(11.4), for the
nine months ended September 30, 2004 and the years ended December 31, 2003
and 2002, respectively.
Statutory capital and surplus of SLD and SLDI are in excess of required
minimums promulgated by Colorado and Bermuda insurance regulations.
As of September 30, 2004, SLD and SLDI do not utilize any statutory
accounting practices, which are not prescribed by state regulatory
authorities that, individually or in the aggregate, materially affect
statutory capital and surplus.
9. Related Party Transactions
SLD and SLDI have entered into various agreements with related parties.
Agreements consist primarily of service contracts with affiliated insurance
companies for administrative, management, professional advisory and
consulting services. In addition, SLD and SLDI have entered into an
investment advisory agreement and an administrative services agreement with
ING Investment Management, LLC ("IIM") under which IIM provides Individual
Re with investment management and asset liability management services.
Management and service contracts and all cost sharing arrangements with
other affiliated companies are allocated amongst companies and businesses
in accordance with normal, generally accepted expense and cost allocation
methods. Total fees allocated to Individual Re were approximately $12.6,
$13.6 and $8.6 for the nine months ended September 30, 2004 and the years
ended December 31, 2003 and 2002, respectively.
In accordance with ING's operating policies and procedures, IIM manages the
portfolios of each of ING's business operations to support the individual
business' estimated contract reserves plus its target surplus. The process
of portfolio management and reallocation is ongoing to support actual
reserve results (premiums received and claims paid) as well as updated
estimates of future reserves. As a result of the ongoing nature of ING's
portfolio management, the asset portfolio of each individual business
within a legal entity is often either over or under the funding required to
support targeted surplus and estimated reserves for the respective business
at any given point in time. IIM manages the total of all portfolios within
a legal entity to ensure that the combined over or under funding of the
individual portfolios would be eliminated upon legal entity consolidation.
However, due to the carved out scope of the financial statements of
Individual Re, over or under funding of the portfolio as of any point of
time will likely exist. The portfolio of Individual Re was under funded by
$182.7 and $102.9 as of
24
ING Individual Re Business
Notes to Financial Statements
- --------------------------------------------------------------------------------
September 30, 2004 and December 31, 2003, respectively. These amounts are
considered due from other business portfolios within SLD and SLDI.
10. Subsequent Events
Subsequent to September 30, 2004, SLD and SLDI transferred substantially
all of Individual Re to Scottish Re Group Limited through a coinsurance
transaction and related asset purchase service and trust agreements. The
transaction closed on December 31, 2004.
At September 30, 2004, SLD and SLDI had deferred tax assets recognized
related to net operating loss carryforwards. Individual Re considered the
need for a valuation allowance and determined that there was significant
positive evidence to support its conclusion not to record an allowance.
Management believed that SLD and SLDI would utilize the loss carryforwards.
Due to the transfer of substantially all of the Individual Re business,
there can be no assurance that SLD and SLDI will generate taxable income or
that all of its loss carryforwards will be utilized.
25