<Page>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2002 Commission file number 33-23376
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ING LIFE INSURANCE AND ANNUITY COMPANY
- --------------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CONNECTICUT 71-0294708
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
151 FARMINGTON AVENUE, HARTFORD, CONNECTICUT 06156
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code (860) 273-0123
--------------------
NONE
- --------------------------------------------------------------------------------
FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR IF CHANGED SINCE LAST REPORT
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 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
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Shares Outstanding
Title of Class at May 13, 2002
- -------------- ----------------
Common Stock, par value $50 55,000
The registrant meets the conditions set forth in General Instruction H(1)(a) and
(b) of Form 10-Q and is therefore filing this Form with the reduced disclosure
format.
<Page>
ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly-owned subsidiary of Aetna Retirement Holdings, Inc.)
TABLE OF CONTENTS
<Table>
<Caption>
PAGE
----
PART I. FINANCIAL INFORMATION (UNAUDITED)
Item 1. Financial Statements:
Condensed Consolidated Statements of Income 3
Condensed Consolidated Balance Sheets 4
Condensed Consolidated Statements of Changes in Shareholder's Equity 5
Condensed Consolidated Statements of Cash Flows 6
Condensed Notes to Consolidated Financial Statements 7
Item 2. Management's Analysis of the Results of Operations 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
Signature 20
</Table>
2
<Page>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly-owned subsidiary of Aetna Retirement Holdings, Inc.)
Condensed Consolidated Statements of Income
(Unaudited)
(millions)
<Table>
<Caption>
Three Months Ended March 31,
2002 2001
-------------------------------
Revenue:
Premiums $ 27.2 $ 31.8
Contract and other charges assessed against policyholders 118.6 143.5
Net investment income 234.4 224.2
Net realized capital losses (16.7) (4.0)
------------ ------------
Total revenue 363.5 395.5
Benefits and expenses:
Interest credited and other benefits to policyholders 183.0 183.4
Operating expenses 103.9 102.7
Amortization of deferred policy acquisition costs
and value of business acquired 32.5 30.8
Amortization of goodwill -- 14.3
------------ ------------
Total benefits and expenses 319.4 331.2
Income before income taxes 44.1 64.3
Income taxes 15.2 28.2
------------ ------------
Net income $ 28.9 $ 36.1
============ ============
</Table>
See Condensed Notes to Consolidated Financial Statements.
3
<Page>
ITEM 1. FINANCIAL STATEMENTS (continued)
ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly-owned subsidiary of Aetna Retirement Holdings, Inc.)
Condensed Consolidated Balance Sheets
(Unaudited)
(millions, except share data)
<Table>
<Caption>
March 31, December 31,
Assets 2002 2001
- ------ ---- ----
Investments:
Debt securities available for sale, at fair value
(amortized cost: $13,038.0 and $13,249.2) $13,135.1 $13,539.9
Equity securities, at fair value:
Nonredeemable preferred stock (cost: $27.0 and $27.0) 25.1 24.6
Investment in affiliated mutual funds (cost: $21.9 and $22.9) 23.8 25.0
Common stock (cost: $0.4 and $2.3) 0.2 0.7
Short-term investments 8.7 31.7
Mortgage loans 251.5 241.3
Policy loans 317.9 329.0
Other investments 30.8 18.2
Securities pledged to creditors (amortized cost: $795.5 and $466.9) 796.7 467.2
---------- -----------
Total investments 14,589.8 14,677.6
Cash and cash equivalents 60.5 82.0
Short-term investments under securities loan agreement 919.0 488.8
Accrued investment income 174.8 160.9
Reciprocal loan with affiliate 137.5 191.1
Reinsurance recoverable 2,984.9 2,990.7
Deferred policy acquisition costs 154.6 121.3
Value of business acquired 1,578.4 1,601.8
Goodwill (net of accumulated amortization of $61.8 in
2002 and 2001) 2,412.1 2,412.1
Other assets 224.4 215.8
Separate Accounts assets 32,911.1 32,663.1
---------- -----------
Total assets $56,147.1 $55,605.2
========== ===========
<Caption>
Liabilities and Shareholder's Equity
- ------------------------------------
Liabilities:
Future policy benefits $ 4,000.5 $ 3,996.8
Unpaid claims and claim expenses 25.8 28.8
Policyholders' funds left with the Company 12,147.1 12,135.8
---------- -----------
Total insurance reserve liabilities 16,173.4 16,161.4
Payables under securities loan agreement 919.0 488.8
Current income taxes 59.2 59.2
Deferred income taxes 157.3 153.7
Other liabilities 1,540.1 1,624.7
Separate Accounts liabilities 32,911.1 32,663.1
---------- -----------
Total liabilities 51,760.1 51,150.9
---------- -----------
Shareholder's equity:
Common stock, par value $50 (100,000 shares
authorized; 55,000 shares issued and outstanding) 2.8 2.8
Paid-in capital 4,265.1 4,292.4
Accumulated other comprehensive gain 10.5 46.6
Retained earnings 108.6 112.5
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Total shareholder's equity 4,387.0 4,454.3
---------- -----------
Total liabilities and shareholder's equity $56,147.1 $55,605.2
========== ===========
</Table>
See Condensed Notes to Consolidated Financial Statements.
4
<Page>
ITEM 1. FINANCIAL STATEMENTS (continued)
ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly-owned subsidiary of Aetna Retirement Holdings, Inc.)
Condensed Consolidated Statements of Changes in Shareholder's Equity
(Unaudited)
(millions)
<Table>
<Caption>
Three Months Ended March 31,
2002 2001
---- ----
Shareholder's equity, beginning of period $4,454.3 $4,344.6
Comprehensive income:
Net income 28.9 36.1
Other comprehensive (loss) income, net of tax:
Unrealized (losses) gains on securities
($(55.6), $46.9 pretax) (1) (36.1) 30.6
--------- ---------
Total comprehensive income (7.2) 66.7
Distribution of IA Holdco (60.1) --
--------- ---------
Shareholder's equity, end of period $4,387.0 $4,411.3
========= =========
</Table>
(1) Net of reclassification adjustments.
See Condensed Notes to Consolidated Financial Statements.
5
<Page>
ITEM 1. FINANCIAL STATEMENTS (continued)
ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly-owned subsidiary of Aetna Retirement Holdings, Inc.)
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(millions)
<Table>
<Caption>
Three Months Ended March 31,
2002 2001
---- ----
Net cash provided by (used for) operating activities (45.9) (204.3)
---------- ----------
Cash Flows from Investing Activities:
Proceeds from sales of:
Debt securities available for sale 4,710.4 969.1
Equity securities 2.2 4.3
Other investments 2.6 --
Investment maturities and collections of:
Debt securities available for sale 488.3 170.1
Short-term investments 2,644.0 96.6
Cost of investment purchases in:
Debt securities available for sale (5,575.7) (1,544.0)
Equity securities - (3.9)
Short-term investments (2,620.9) (2.8)
Mortgages (12.6) --
Decrease in policy loans 11.1 2.8
Decrease in property and equipment 2.7 3.3
Other, net (16.3) 0.1
---------- ----------
Net cash used for investing activities (364.2) (304.4)
---------- ----------
Cash Flows from Financing Activities:
Deposits and interest credited for investment contracts 525.2 518.3
Withdrawals of investment contracts (263.2) (270.0)
Transfers from (to) separate accounts 126.6 (70.3)
---------- ----------
Net cash provided by (used for) financing activities 388.6 178.0
---------- ----------
Net decrease in cash and cash equivalents (21.5) (330.7)
Cash and cash equivalents, beginning of period 82.0 796.3
---------- ----------
Cash and cash equivalents, end of period 60.5 465.6
========== ==========
</Table>
See Condensed Notes to Consolidated Financial Statements.
6
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ITEM 1. FINANCIAL STATEMENTS (continued)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
ING Life Insurance and Annuity Company ("ILIAC"), formerly known as Aetna
Life Insurance and Annuity Company ("ALIAC") and its wholly-owned
subsidiaries (collectively, the "Company") are providers of financial
products and services in the United States.
Effective January 1, 2002, the board of directors of the Company approved
an amendment to the Certificate of Incorporation of the Company to change
the name of the corporation to ING Life Insurance and Annuity Company.
These condensed interim consolidated financial statements include ILIAC and
its wholly-owned subsidiaries, ING Insurance Company of America ("IICA"),
ING Financial Advisers, and, through February 28, 2002, Aetna Investment
Adviser Holding Company, Inc. ("IA Holdco"). ILIAC is a wholly-owned
subsidiary of Aetna Retirement Holdings, Inc. ("HOLDCO"), which is a
wholly-owned subsidiary of Aetna Retirement Services, Inc. ("ARSI"). ARSI
is ultimately owned by ING Groep N.V. ("ING"), a financial services company
based in The Netherlands.
On February 28, 2002, IA Holdco was distributed by ILIAC to HOLDCO (refer
to Note 3).
These consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of
America and are unaudited. These interim financial statements necessarily
rely on estimates, including assumptions as to annualized tax rates. In the
opinion of management, all adjustments necessary for a fair statement of
results for the interim periods have been made. All such adjustments are of
a normal, recurring nature. Certain reclassifications have been made to
2001 financial information to conform to the 2002 presentation.
The accompanying condensed consolidated financial statements should be read
in conjunction with the consolidated financial statements and related notes
as presented in ILIAC's 2001 Annual Report on Form 10-K. Certain financial
information that is normally included in annual financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America, but that is not required for interim reporting
purposes, has been condensed or omitted.
Operating results for three months ended March 31, 2002, are not
necessarily indicative of the results that may be expected for the year
ended December 31, 2002.
Effective with the first quarter of 2002, the Company has one operating
segment for its continuing operations, U.S. Financial Services ("USFS")
(refer to Note 3).
USFS offers qualified and nonqualified annuity contracts that include a
variety of funding and payout options for individuals and employer
sponsored retirement plans qualified under Internal Revenue Code Sections
401, 403 and 457, as well as nonqualified deferred compensation plans.
Annuity contracts may be
7
<Page>
ITEM 1. FINANCIAL STATEMENTS (continued)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
1. BASIS OF PRESENTATION (continued)
deferred or immediate (payout annuities). These products also include
programs offered to qualified plans and nonqualified deferred compensation
plans that package administrative and record-keeping services along with a
menu of investment options, including affiliated and nonaffiliated mutual
funds and variable and fixed investment options. In addition, USFS offers
wrapper agreements entered into with retirement plans which contain certain
benefit responsive guarantees (i.e. liquidity guarantees of principal and
previously accrued interest for benefits paid under the terms of the plan)
with respect to portfolios of plan-owned assets not invested with the
Company. USFS also offers pension plan administrative services.
2. NEW ACCOUNTING STANDARDS
ACCOUNTING FOR GOODWILL AND OTHER INTANGIBLE ASSETS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Financial Accounting Standard ("FAS") No. 142, Accounting for Goodwill and
Other Intangible Assets, effective for fiscal years beginning after
December 15, 2001. Under the new statement, goodwill and intangible assets
deemed to have indefinite lives will no longer be amortized but will be
subject to annual impairment tests in accordance with the new statement.
Other intangible assets will continue to be amortized over their estimated
useful lives.
The Company adopted the new statement effective January 1, 2002.
Application of the nonamortization provisions of the new statement resulted
in an increase in net income of $15.5 million for the three months ended
March 31, 2002. The Company is performing the first of the required
impairment tests for goodwill as of January 1, 2002 and will complete this
calculation as required by June 30, 2002. The Company has not yet
determined the effect of adoption on its financial position and results of
operations.
Had the Company been accounting for its goodwill under FAS 142 for all
periods presented, the Company's net income for the three months ended
March 31, 2001 would have been as follows:
<Table>
<Caption>
Three months ended
(Millions) March 31, 2001
--------------------------------------------------------------------
Reported net income $ 36.1
Add back goodwill amortization 14.3
--------------------------------------------------------------------
Adjusted net income $ 50.4
====================================================================
</Table>
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
FAS No., 133, Accounting for Derivative Instruments and Hedging Activities,
was effective for the Company's financial statements beginning January 1,
2001, and requires companies to record all derivatives on the balance sheet
as either assets or liabilities and to measure them at fair value. Adoption
of FAS No. 133 did not have a material affect on the Company's financial
position or results of operations given the Company's limited derivatives
and embedded derivative holdings. There have been no significant changes in
the values of the Company's holdings of derivative instruments since
December 31, 2001.
8
<Page>
ITEM 1. FINANCIAL STATEMENTS (continued)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
3. RECENT DEVELOPMENTS
Effective February 28, 2002, ILIAC distributed 100% of the stock of IA
Holdco to HOLDCO. As a result of this transaction, the Investment
Management Services segment will no longer be reflected as an operating
segment of the Company (refer to Note 9).
In the fourth quarter of 2001, ING announced its decision to pursue a move
to a fully integrated U.S. structure that would separate manufacturing from
distribution in its retail and worksite operations to support a more
customer-focused business strategy. As a result of the integration, the
Company's Worksite Products and Individual Products operating segments were
realigned into one reporting segment, U.S. Financial Services ("USFS")
(refer to Note 9).
4. ADDITIONAL INFORMATION -- ACCUMULATED OTHER COMPREHENSIVE INCOME
Changes in accumulated other comprehensive income related to changes in
unrealized (losses) gains on securities (excluding those related to
experience-rated policyholders) were as follows:
<Table>
<Caption>
Three months ended March 31,
-----------------------------------
(Millions) 2002 2001
----------------------------------------------------------------------------------------------------------------
Unrealized holding (losses) gains arising during the period (1) $(38.2) $32.6
Less: Reclassification adjustments for accretion of net investment
discounts and (losses) gains included in net income (2) (2.1) 2.0
----------------------------------------------------------------------------------------------------------------
Net unrealized (losses) gains on securities $(36.1) $30.6
================================================================================================================
</Table>
(1) Pretax unrealized holding (losses) gains arising during the period
were $(58.9) million and $50.1 million for the three months ended
March 31, 2002 and March 31, 2001, respectively.
(2) Pretax reclassification adjustments for accretion of net investment
discounts and (losses) gains included in net income for the period
were $(3.3) million and $3.2 million for the three months ended March
31, 2002 and March 31, 2001, respectively.
5. VALUE OF BUSINESS ACQUIRED
Value of business acquired ("VOBA") is an asset and represents the present
value of estimated net cash flows embedded in the Company's contracts
indirectly acquired by ING. VOBA is amortized in proportion to estimated
gross profits and adjusted to reflect actual gross profits over the
contracts (up to 30 years for annuity contracts and pension contracts).
Activity for the three months ended March 31, 2002 and 2001 for VOBA was as
follows:
<Table>
<Caption>
(Millions) 2002 2001
--------------------------------------------------------------------
Balance at January 1 $ 1,601.8 $ 1,780.9
Additions 3.0 25.1
Interest accrued at 7 % 22.1 30.3
Amortization (48.5) (60.7)
--------------------------------------------------------------------
Balance at March 31 $ 1,578.4 $ 1,775.6
====================================================================
</Table>
9
<Page>
ITEM 1. FINANCIAL STATEMENTS (continued)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
6. SEVERANCE
In December 2001, ING announced its intentions to further integrate and
streamline the U.S.-based operations of ING Americas, of which the Company
is part, in order to build a more customer-focused organization. In
connection with these actions, the Company recorded a charge of $29.2
million pretax. The severance portion of this charge ($28.4 million pretax)
is based on a plan to eliminate 580 positions (primarily operations,
information technology and other administrative/staff support personnel).
Severance actions are expected to be substantially complete by March 31,
2003. The facilities portion ($.8 million pretax) of the charge represents
the amount to be incurred by the Company to terminate a contractual
obligation.
Activity for the three months ended March 31, 2002 within the severance
liability and positions eliminated related to such actions were as follows:
<Table>
<Caption>
(Millions) Severance Liability Positions
--------------------------------------------------------------------
Balance at December 31, 2001 $ 28.4 580
Actions taken (6.0) (277)
--------------------------------------------------------------------
Balance at March 31, 2002 $ 22.4 303
====================================================================
</Table>
In December 2000, the Company, in accounting for its acquisition by ING,
established a severance liability related to actions taken or expected to
be taken with respect to the integration of the Company's and ING's
businesses. Subsequent to the date of the acquisition, the Company
completed a full review of severance actions related to individuals who
were employed before or at the acquisition date and determined that certain
refinements in the allocation of the purchase price to the severance
liability were necessary.
Activity for the three months ended March 31, 2002 within the severance
liability and positions eliminated related to such actions were as follows:
<Table>
<Caption>
(Millions) Severance Liability Positions
--------------------------------------------------------------------
Balance at December 31, 2001 $ 5.2 31
Actions taken (1.4) (17)
Other * (1.4) --
--------------------------------------------------------------------
Balance at March 31, 2002 $ 2.4 14
====================================================================
</Table>
* Relates to IA Holdco portion of liability (refer to Note 3).
These severance actions will be substantially completed during the second
quarter of 2002.
7. INCOME TAXES
The Company's effective tax rates for the three months ended March 31,
2002 and March 31, 2001 were 35% and 44%, respectively. The primary cause
of this decrease was the implementation of FAS 142 and the resulting
omission in the period ended March 31, 2002 of goodwill amortization, a
nondeductible expense (refer to Note 2).
10
<Page>
ITEM 1. FINANCIAL STATEMENTS (continued)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
8. COMMITMENTS AND CONTINGENT LIABILITIES
COMMITMENTS
Through the normal course of investment operations, the Company commits to
either purchase or sell securities 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 higher or
lower replacement cost. Also, there is likely to be a change in the value
of the securities underlying the commitments. At March 31, 2002, the
Company had off-balance sheet commitments to purchase investments of $16.4
million with an estimated fair value of $16.4 million. As of March 31,
2001, there were no such off-balance sheet commitments.
LITIGATION
In recent years, a number of life insurance companies have been named as
defendants in class action lawsuits relating to life insurance sales
practices. The Company is currently a defendant in one such lawsuit.
A purported class action complaint was filed in the United States District
Court for the Middle District of Florida on June 30, 2000, by Helen Reese,
Richard Reese, Villere Bergeron and Allan Eckert against ALIAC (the "Reese
Complaint"). The Reese Complaint seeks compensatory and punitive damages
and injunctive relief from ALIAC. The Reese Complaint claims that ALIAC
engaged in unlawful sales practices in marketing life insurance policies.
ALIAC has moved to dismiss the Reese Complaint for failure to state a claim
upon which relief can be granted. Certain discovery is underway. The
Company intends to defend the action vigorously.
The Company is also involved in other lawsuits arising, for the most part,
in the ordinary course of its business operations. While the outcome of
these other lawsuits cannot be determined at this time, after consideration
of the defenses available to the Company, applicable insurance coverage and
any related reserves established, these other lawsuits are not currently
expected to result in liability for amounts material to the financial
condition of the Company, although they may adversely affect results of
operations in future periods.
11
<Page>
ITEM 1. FINANCIAL STATEMENTS (continued)
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
9. SEGMENT INFORMATION
The Company's realignment of Worksite Products and Individual Products
operating segments into one reporting segment (USFS) is reflected in the
restated summarized financial information for the period ended March 31,
2001 in the chart below (refer to Note 3).
Summarized financial information for the Company's principal operations for
the three months ended March 31, was as follows:
<Table>
<Caption>
Non-Operating Segments
---------------------------------
Investment
Management
(Millions) USFS (1) Services (2) Other (3) Total
---------------------------------------------------------------------------------------------------------
2002
Revenues from external customers $142.5 $19.2 $(15.9) $145.8
Net investment income 234.9 0.2 (0.7) 234.4
---------------------------------------------------------------------------------------------------------
Total revenue excluding net realized
capital losses $377.4 $19.4 $(16.6) $380.2
=========================================================================================================
Operating earnings (4) $39.2 $4.7 $(4.1) $39.8
Net realized capital losses, net of
tax (9.9) -- (1.0) (10.9)
---------------------------------------------------------------------------------------------------------
Net income (loss) $29.3 $4.7 $(5.1) $28.9
=========================================================================================================
2001
Revenues from external customers $161.3 $32.5 $(18.5) $175.3
Net investment income 222.5 0.4 1.3 224.2
---------------------------------------------------------------------------------------------------------
Total revenue excluding net realized
capital (losses) gains $383.8 $32.9 $(17.2) $399.5
=========================================================================================================
Operating earnings (4) $51.9 $8.0 $(21.3) $38.6
Net realized capital losses, net of
tax (2.5) -- -- (2.5)
------------------------------------- ---------------- -------------- ------------------ ----------------
Net income (loss) $49.4 $8.0 (21.3) $36.1
===================================== ================ ============== ================== ================
</Table>
(1) USFS includes deferred annuity contracts that fund defined
contribution and deferred compensation plans, immediate annuity
contracts, mutual funds, distribution services for annuities and
mutual funds, programs offered to qualified plans and nonqualified
deferred compensation plans that package administrative and
record-keeping services along with a menu of investment options,
wrapper agreements containing certain benefit responsive guarantees
that are entered into with retirement plans, whose assets are not
invested with the Company, investment advisory services and pension
plan administrative services. USFS also includes deferred and
immediate annuity contracts, both qualified and nonqualified, that are
sold to individuals and provide variable or fixed investment options
or a combination of both.
(2) Investment Management Services includes investment advisory services
to affiliated and unaffiliated institutional and retail clients,
underwriting, distribution for Company mutual funds and a former
affiliate's separate accounts, and trustee, administrative and other
services to retirement plans. On February 28, 2002, IA Holdco and its
subsidiaries, which comprised this segment, were distributed to HOLDCO
(refer to Note 3).
(3) In 2002, Other includes consolidating adjustments and other items not
allocated back to the USFS segment. In 2001, Other includes
consolidating adjustments, amortization of goodwill and other items
not allocated back to the USFS segment.
(4) Operating earnings is comprised of net income (loss) excluding net
realized capital gains and losses. While operating earnings is the
measure of profit or loss used by the Company's management when
assessing performance or making operating decisions, it does not
replace net income as a measure of profitability.
12
<Page>
ITEM 2. MANAGEMENT'S ANALYSIS OF THE RESULTS OF OPERATIONS
- -----------------------------------------------------------
The following analysis presents a review of the Company for the three month
periods ended March 31, 2002 and 2001. This review should be read in conjunction
with the consolidated financial statements and other data presented herein, as
well as the "Management's Analysis of the Results of Operations" section
contained in ILIAC's 2001 Annual Report on Form 10-K.
OVERVIEW
RECENT DEVELOPMENTS
In the fourth quarter of 2001, ING announced its decision to pursue a more fully
intergrated U.S. structure that would separate manufacturing from distribution
in its retail and worksite operations to support a more customer-focused
business strategy. As a result of the integration, the Company's Worksite
Products and Individual Products operating segments were realigned into one
reporting segment, U.S. Financial Services ("USFS"). Accordingly, the financial
results of the prior period were restated.
In June 2001, the Financial Accounting Standards Board ("FASB") issued FAS No.
142, Accounting for Goodwill and Other Intangible Assets, effective for fiscal
years beginning after December 15, 2001. Under the new statement, goodwill and
intangible assets deemed to have indefinite lives will no longer be amortized
but will be subject to annual impairment tests in accordance with the new
statement. Other intangible assets will continue to be amortized over their
estimated useful lives.
The Company adopted the new statement effective January 1, 2002. Application of
the nonamortization provisions of the new standards resulted in an increase in
net income of $15.5 million for the three months ended March 31, 2002. The
Company is performing the first of the required impairment tests for goodwill
as of January 1, 2002 and will complete this calculation as required by June
30, 2002. The Company has not yet determined the effect of adoption on its
financial position and results of operations.
NATURE OF BUSINESS
USFS offers qualified and nonqualified annuity contracts that include a variety
of funding and payout options for individuals and employer sponsored retirement
plans qualified under Internal Revenue Code Sections 401, 403 and 457, as well
as nonqualified deferred compensation plans. Annuity contracts may be deferred
or immediate (payout annuities). These products also include programs offered to
qualified plans and nonqualified deferred compensation plans that package
administrative and record-keeping services along with a menu of investment
options, including affiliated and nonaffiliated mutual funds and variable and
fixed investment options. In addition, USFS offers wrapper agreements entered
into with retirement plans which contain certain benefit responsive guarantees
(i.e. liquidity guarantees of principal and previously accrued interest for
benefits paid under the terms of the plan) with respect to portfolios of
plan-owned assets not invested with the Company. USFS also offers pension plan
administrative services.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires the use of estimates and
assumptions in certain circumstances that affect amounts reported in the
accompanying condensed consolidated financial statements and related footnotes.
These estimates and assumptions are evaluated on an on-going basis based on
historical
13
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ITEM 2. MANAGEMENT'S ANALYSIS OF THE RESULTS OF OPERATIONS (CONTINUED)
CRITICAL ACCOUNTING POLICIES (CONTINUED)
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
accounting adjustments to reflect changes in these estimates and assumptions
from time to time. Item 7 of the Company's Annual Report on Form 10-K discusses
several critical accounting policies which are most sensitive to estimates and
judgments and involve a higher degree of judgment and complexity. There have
been no material changes to that information during the first quarter of 2002.
14
<Page>
ITEM 2. MANAGEMENT'S ANALYSIS OF THE RESULTS OF OPERATIONS (CONTINUED)
U.S. FINANCIAL SERVICES
OPERATING SUMMARY
<Table>
<Caption>
Three Months Ended March 31,
------------------------------------
(Millions) 2002 2001
- --------------------------------------------------------------------------------------------------------------------
Premiums (1) $ 27.2 $ 31.8
Contract and other charges assessed against policyholders 115.3 129.5
Net investment income 234.9 222.5
Net realized capital losses (15.2) (4.0)
- --------------------------------------------------------------------------------------------------------------------
Total revenue 362.2 379.8
- --------------------------------------------------------------------------------------------------------------------
Interest credited and other benefits to policyholders 183.0 183.4
Operating expenses 101.7 89.7
Amortization of deferred policy acquisition costs and value of business
acquired 32.5 30.8
- --------------------------------------------------------------------------------------------------------------------
Total benefits and expenses 317.2 303.9
- --------------------------------------------------------------------------------------------------------------------
Income from operations before income taxes 45.0 75.9
Income taxes 15.7 26.5
- --------------------------------------------------------------------------------------------------------------------
Net income $ 29.3 $ 49.4
====================================================================================================================
Net realized capital losses, net of tax (included above) $ (9.9) $ (2.5)
====================================================================================================================
Deposits (not included in premiums above)
Annuities--fixed options $ 317.4 $ 410.3
Annuities--variable options 1,357.2 1,230.8
- --------------------------------------------------------------------------------------------------------------------
Total--deposits $ 1,674.6 $ 1,641.1
====================================================================================================================
Assets Under Management
Annuities--fixed options (2) $ 13,615.3 $ 12,770.8
Annuities--variable options (3) 28,789.0 28,774.9
- --------------------------------------------------------------------------------------------------------------------
Subtotal - annuities 42,404.3 41,545.7
Plan Sponsored and Other 9,154.3 8,180.3
- --------------------------------------------------------------------------------------------------------------------
Total--assets under management 51,558.6 49,726.0
Assets under administration (4) 11,470.0 8,636.5
- --------------------------------------------------------------------------------------------------------------------
Total assets under management and administration $ 63,028.6 $ 58,362.5
====================================================================================================================
</Table>
(1) Includes $20.7 million and $24.2 million for the three months ended March
31, 2002 and 2001, respectively, for annuity premiums on contracts
converting from the accumulation phase to payout options with life
contingencies.
(2) Excludes net unrealized capital gains of $98.4 million and $293.5 million
at March 31, 2002 and 2001, respectively.
(3) Includes $11,704.5 million at March 31, 2002 and $11,392.6 million at March
31, 2001 related to assets invested through the Company's products in
unaffiliated mutual funds.
(4) Represents assets for which the Company provides administrative services
only.
USFS net income decreased $20.1 million for the three months ended March 31,
2002 compared to the same period in 2001. Excluding net realized capital losses,
net income for the three months ended March 31, 2002 decreased $12.7 million, or
25%, compared to the same period in 2001. The decrease in net income excluding
realized capital losses is primarily the result of a decrease in contract and
other charges assessed against customers and an increase in operating expenses,
partially offset by an increase in net investment income.
15
<Page>
ITEM 2. MANAGEMENT'S ANALYSIS OF THE RESULTS OF OPERATIONS (continued)
U.S. FINANCIAL SERVICES (continued)
Substantially all of the contract and other charges assessed to policyholders
are calculated based on assets under management and administration, excluding
annuities with fixed options ("variable assets"). Compared to March 31, 2001,
variable assets increased 8% due to additional net deposits partially offset by
a decline in the stock market. However, contract and other charges assessed to
policyholders decreased $14.2 million for the three months ended March 31, 2002
compared to the same period in 2001, primarily due to the decrease in average
variable assets. On average, for the first quarter of 2002, variable assets were
significantly lower than the first quarter of 2001 due to a decline in the stock
market that began late in the first quarter of 2001.
Operating expenses increased $12.0 million for the three months ended March 31,
2002 compared to the same period in 2001, primarily due to higher corporate and
service charges from the Company's parent and other affiliates who provide
services to the Company.
Net investment income increased $12.4 million for the three months ended March
31, 2002 compared to the same period in 2001 primarily due to an increase in
assets under management related to annuities with fixed options.
Annuity deposits relate to annuity contracts not containing life contingencies.
Compared to the first quarter of 2001, deposits for the three months ended March
31, 2002 increased 2%.
NON-OPERATING SEGMENTS
The non-operating segments of the Company include Investment Management
Services, which is comprised of IA Holdco and its subsidiaries, which were
distributed to Holdco on February 28, 2002 (refer to Note 3 of the Condensed
Notes to the Financial Statements). Non-operating segments also include other
items not directly allocable to the USFS operating segment, such as amortization
of goodwill for 2001 (refer to Note 9 of the Condensed Notes to the Financial
Statements).
Investment Management Services' net income for the three months ended March 31,
2002 was $4.7 million compared to $8.0 million for the same period in 2001. The
2002 results reflect operating results through February 28, 2002 only.
16
<Page>
ITEM 2. MANAGEMENT'S ANALYSIS OF THE RESULTS OF OPERATIONS (CONTINUED)
GENERAL ACCOUNT INVESTMENTS
The Company's invested assets were comprised of the following:
<Table>
<Caption>
(Millions) March 31, 2002 December 31, 2001
-----------------------------------------------------------------------------------------------------------
Debt securities, available for sale, at fair value (1) $ 13,931.8 $ 14,007.1
Equity securities, at fair value:
Non-redeemable preferred stock 25.1 24.6
Investment in affiliated mutual funds 23.8 25.0
Common stock 0.2 0.7
Short-term investments 8.7 31.7
Mortgage loans 251.5 241.3
Policy loans 317.9 329.0
Other investments 30.8 18.2
-----------------------------------------------------------------------------------------------------------
Total Investments $ 14,589.8 $ 14,677.6
===========================================================================================================
</Table>
(1) At March 31, 2002 and December 31, 2001, $796.7 million and $467.2
million, respectively, of debt securities were pledged to creditors.
17
<Page>
ITEM 2. MANAGEMENT'S ANALYSIS OF THE RESULTS OF OPERATIONS (continued)
GENERAL ACCOUNT INVESTMENTS (continued)
DEBT SECURITIES
At both March 31, 2002 and December 31, 2001, the Company's carrying value of
available for sale debt securities including debt securities pledged to
creditors (herein after referred to as "total debt securities") represented 95%
of the total general account invested assets. For the same periods, $10.7
billion, or 77% of total debt securities, and $11.4 billion, or 81% of total
debt securities, respectively, supported experience-rated products. Total debt
securities reflected net unrealized capital gains of $98.4 million and $291.0
million at March 31, 2002 and December 31, 2001, respectively.
It is management's objective that the portfolio of debt securities be of high
quality and be well diversified by market sector. The debt securities 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
debt security portfolio was AA- at March 31, 2002 and December 31, 2001.
The percentage of total debt securities by quality rating category is as
follows:
<Table>
<Caption>
March 31, 2002 December 31, 2001
- --------------------------------------------------------------------------------------
AAA 54.3% 54.0%
AA 6.6 6.6
A 18.5 18.0
BBB 16.0 16.1
BB 2.3 2.8
B and Below 2.3 2.5
- --------------------------------------------------------------------------------------
Total 100.0% 100.0%
======================================================================================
</Table>
The percentage of total debt securities by market sector is as follows:
<Table>
<Caption>
March 31, 2002 December 31, 2001
- --------------------------------------------------------------------------------------
U.S. Corporate 40.3% 41.5%
Residential Mortgage-backed 35.2 32.7
Commercial/Multifamily Mortgage-backed 9.2 9.5
Foreign (1) 8.2 8.5
U.S. Treasuries/Agencies 1.4 2.0
Asset-backed 5.7 5.8
- ------------------------------------------------------ -----------------------
Total 100.0% 100.0%
====================================================== =======================
</Table>
(1) Primarily U.S. dollar denominated
FORWARD-LOOKING INFORMATION/RISK FACTORS
The "Forward-Looking Information/Risk Factors" section of ILIAC's 2001 Annual
Report on Form 10-K contains discussions of important risk factors related to
the Company's businesses.
18
<Page>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In recent years, a number of life insurance companies have been named as
defendants in class action lawsuits relating to life insurance sales practices.
The Company is currently a defendant in one such lawsuit.
A purported class action complaint was filed in the United States District Court
for the Middle District of Florida on June 30, 2000, by Helen Reese, Richard
Reese, Villere Bergeron and Allan Eckert against ALIAC (the "Reese Complaint").
The Reese Complaint seeks compensatory and punitive damages and injunctive
relief from ALIAC. The Reese Complaint claims that ALIAC engaged in unlawful
sales practices in marketing life insurance policies. ALIAC has moved to dismiss
the Reese Complaint for failure to state a claim upon which relief can be
granted. Certain discovery is underway. The Company intends to defend the action
vigorously.
The Company is also involved in other lawsuits arising, for the most part, in
the ordinary course of its business operations. While the outcome of these other
lawsuits cannot be determined at this time, after consideration of the defenses
available to the Company, applicable insurance coverage and any related reserves
established, these other lawsuits are not currently expected to result in
liability for amounts material to the financial condition of the Company,
although they may adversely affect results of operations in future periods.
ITEM 5. OTHER INFORMATION
RATINGS
The Company's financial strength ratings at May 7, 2002 are as follows:
<Table>
<Caption>
Rating Agencies
----------------------------------------------------------------------------------
Moody's Investors
A.M. Best Fitch Service Standard & Poor's
----------------------------------------------------------------------------------
A+ AA+ Aa2 AA+
</Table>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K.
None
19
<Page>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ING LIFE INSURANCE AND ANNUITY COMPANY
--------------------------------------
(Registrant)
May 14, 2002 By /s/ Wayne R. Huneke
- ---------------------- ---------------------------------
(Date) Wayne R. Huneke
Director and Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
20