<Page>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2002
--------------
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________________to
Commission file number: 333-84299, 333-30694, 333-34014, 333-86278,
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333-49593, 333-48774, 333-75062, 333-86276
-------------------------------------------
ING LIFE INSURANCE AND ANNUITY COMPANY
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(Exact name of registrant as specified in its charter)
CONNECTICUT 71-0294708
- --------------------------------------------------------------------------------
(State or other jurisdiction of (IRS employer
incorporation or organization) identification no.)
151 FARMINGTON AVENUE, HARTFORD, CONNECTICUT 06156
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (860) 273-0123
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- --------------------------------------------------------------------------------
Former name, former address and formal fiscal year, if changed since last report
Indicate by check /X/ whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes __X__ No _____
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 55,000 shares of Common Stock
as of August 12, 2002.
NOTE: WHEREAS ING LIFE INSURANCE AND ANNUITY COMPANY MEETS THE CONDITIONS SET
FORTH IN GENERAL INSTRUCTION H(1)(a) AND (b) OF FORM 10Q, THIS FORM IS BEING
FILED WITH THE REDUCED DISCLOSURE FORMAT PURSUANT TO GENERAL INSTRUCTION H(2).
<Page>
ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly-owned subsidiary of ING 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
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
Signature 21
</Table>
2
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PART I. FINANCIAL INFORMATION
ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly-owned subsidiary of ING Retirement Holdings, Inc.)
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(millions)
<Table>
<Caption>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
2002 2001 2002 2001
---- ---- ---- ----
Revenue:
Premiums $ 24.5 $ 29.1 $ 51.7 $ 60.9
Contract and other charges assessed against
policyholders 110.8 143.0 229.4 286.5
Net investment income 265.0 215.5 499.4 439.7
Net realized capital (losses) gains (49.0) 24.3 (65.7) 20.3
------ ------ ------ ------
Total revenue 351.3 411.9 714.8 807.4
Benefits and expenses:
Interest credited and other benefits to
policyholders 193.1 182.0 376.1 365.4
Operating expenses 82.4 92.4 186.3 195.1
Amortization:
Deferred policy acquisition costs and value
of business acquired 36.5 27.9 69.0 58.7
Goodwill -- 14.6 - 28.9
------ ------ ------ ------
Total benefits and expenses 312.0 316.9 631.4 648.1
------ ------ ------ ------
Income before income taxes 39.3 95.0 83.4 159.3
Income taxes 12.9 39.1 28.1 67.3
------ ------ ------ ------
Net income $ 26.4 $ 55.9 $ 55.3 $ 92.0
====== ====== ====== ======
</Table>
See Notes to Condensed Consolidated Financial Statements.
3
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ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly-owned subsidiary of ING Retirement Holdings, Inc.)
CONDENSED BALANCE SHEETS
(millions, except share data)
<Table>
<Caption>
JUNE 30, DECEMBER 31,
2002 2001
-------- ------------
ASSETS (Unaudited)
Investments:
Debt securities, available for sale, at fair value
(amortized cost: $13,124.6 and $13,249.2) $ 13,473.4 $ 13,539.9
Equity securities, at fair value (cost: $94.5 and $52.2) 98.7 50.3
Short-term investments 7.7 31.7
Mortgage loans 341.5 241.3
Policy loans 310.2 329.0
Other investments 49.7 18.2
Securities pledged to creditors (amortized cost: $886.9
and $466.9) 891.4 467.2
---------- ----------
Total investments 15,172.6 14,677.6
Cash and cash equivalents -- 82.0
Short-term investments under securities loan agreement 974.4 488.8
Accrued investment income 162.6 160.9
Reciprocal loan with affiliate 61.3 191.1
Reinsurance recoverable 2,938.9 2,990.7
Deferred policy acquisition costs 176.8 121.3
Value of business acquired 1,559.3 1,601.8
Goodwill (net of accumulated amortization of $61.8 in
2002 and 2001) 2,412.1 2,412.1
Other assets 305.8 215.8
Separate Accounts assets 30,965.2 32,663.1
---------- ----------
Total assets $ 54,729.0 $ 55,605.2
========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Future policy benefits $ 4,017.0 $ 3,996.8
Unpaid claims and claim expenses 20.7 28.8
Policyholders' funds left with the Company 12,547.0 12,135.8
---------- ----------
Total insurance reserve liabilities 16,584.7 16,161.4
Payables under securities loan agreement 974.4 488.8
Current income taxes 90.6 59.2
Deferred income taxes 169.5 153.7
Cash overdrafts 10.3 -
Other liabilities 1,472.6 1,624.7
Separate Accounts liabilities 30,965.2 32,663.1
---------- ----------
Total liabilities 50,267.3 51,150.9
Shareholder's equity:
Common capital stock, par value $50 (100,000 shares
authorized, 55,000 issued and outstanding) 2.8 2.8
Paid-in capital 4,265.1 4,292.4
Accumulated other comprehensive gain 58.8 46.6
Retained earnings 135.0 112.5
---------- ----------
Total shareholder's equity 4,461.7 4,454.3
---------- ----------
Total liabilities and shareholder's equity $ 54,729.0 $ 55,605.2
========== ==========
</Table>
See Notes to Condensed Consolidated Financial Statements.
4
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ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly-owned subsidiary of ING Retirement Holdings, Inc.)
CONDENSED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
(Unaudited)
(millions)
<Table>
<Caption>
SIX MONTHS ENDED JUNE 30,
-------------------------
2002 2001
--------- ---------
Shareholder's equity, beginning of period $ 4,454.3 $ 4,344.6
Comprehensive income
Net income 55.3 92.0
Other comprehensive income, net of tax:
Unrealized gains (losses) on securities
($17.6 million, $(5.1) million, pretax) 12.2 (3.3)
--------- ---------
Total comprehensive income 67.5 88.7
Distribution of IA Holdco (60.1) --
--------- ---------
Shareholder's equity, end of period $ 4,461.7 $ 4,433.3
========= =========
</Table>
See Notes to Condensed Consolidated Financial Statements.
5
<Page>
ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly-owned subsidiary of ING Retirement Holdings, Inc.)
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(millions)
<Table>
<Caption>
SIX MONTHS ENDED JUNE 30,
-------------------------
2002 2001
--------- ---------
Net cash used for operating activities $ (85.0) $ (76.3)
Cash Flows from Investing Activities:
Proceeds from sales of:
Debt securities available for sale 7,591.0 5,063.7
Equity securities 0.2 4.9
Other investments 245.5 2.6
Investment maturities and collections of:
Debt securities available for sale 799.8 525.0
Short-term investments 6,536.1 2,609.7
Cost of investment purchases in:
Debt securities available for sale (8,920.0) (6,897.4)
Equity securities (59.2) (13.7)
Short-term investments (6,330.1) (1,850.1)
Mortgages (345.7) -
Decrease in policy loans 18.9 3.5
Decrease in property and equipment 7.1 22.5
Other, net (36.2) 0.3
--------- ---------
Net cash used for investing activities (492.6) (529.0)
Cash Flows from Financing Activities:
Deposits and interest credited for investment contracts 967.6 985.4
Withdrawals of investment contracts (526.5) (670.9)
Transfers from (to) separate accounts 44.2 (90.1)
--------- ---------
Net cash provided by financing activities 485.3 224.4
--------- ---------
Net decrease in cash and cash equivalents (92.3) (380.9)
Cash and cash equivalents, beginning of period 82.0 796.3
--------- ---------
Cash and cash equivalents, end of period $ (10.3) $ 415.4
========= =========
</Table>
See Notes to Condensed Consolidated Financial Statements.
6
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ITEM 1. FINANCIAL STATEMENTS (continued)
NOTES TO CONDENSED 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, LLC, and, through February 28, 2002, Aetna
Investment Adviser Holding Company, Inc. ("IA Holdco"). ILIAC is a
wholly-owned subsidiary of ING Retirement Holdings, Inc. ("HOLDCO"), which
is a wholly-owned subsidiary of ING Retirement Services, Inc. ("IRSI").
IRSI 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 six months ended June 30, 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>
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 investment advisory services and 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 and $30.9 million for the
three months and six months ended June 30, 2002, respectively. The Company
performed the first of the required impairment tests for goodwill as of
January 1, 2002. The results indicate an impairment of goodwill exists. The
required steps for measuring the amount of the impairment will be completed
and the resulting impairment loss will be recorded as a change in
accounting principle prior to December 31, 2002. The impairment loss
recorded will be the difference between the carrying amount and the
estimated fair value of goodwill.
Had the Company been accounting for its goodwill under FAS 142 for all
periods presented, the Company's net income for the three months and six
months ended June 30, 2001 would have been as follows:
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
(MILLIONS) JUNE 30, 2001 JUNE 30, 2001
------------------------------------------- ----------------------- -----------------------
Reported net income $ 55.9 $ 92.0
Add back goodwill amortization 14.6 28.9
------------------------------------------- ----------------------- -----------------------
Adjusted net income $ 70.5 $ 120.9
=========================================== ======================= =======================
</Table>
8
<Page>
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 effect on the Company's financial
position or results of operations given the Company's limited derivative
holdings and embedded derivatives . There have been no significant changes
in the values of the Company's holdings of derivatives and embedded
derivative instruments since December 31, 2001.
3. RECENT DEVELOPMENTS
On February 28, 2002, ILIAC distributed 100% of the stock of IA Holdco to
HOLDCO resulting in a distribution totaling $60.1 million. 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 JUNE 30, SIX MONTHS ENDED JUNE 30,
(MILLIONS) 2002 2001 2002 2001
----------------------------------------------------------------------------------------------------------------------------
Unrealized holding gains (losses) arising during
the period (1) $ 26.9 $(17.6) $(11.3) $15.0
Less: Reclassification adjustments for accretion of
net investment discounts and (losses) gains included
in net income (2) $(21.4) $ 16.2 $(23.5) $18.3
------------------------------------------------------- ----------------- ------------------ -------------- ----------------
Net unrealized gains (losses) on securities $ 48.3 $(33.8) $ 12.2 $(3.3)
======================================================= ================= ================== ============== ================
</Table>
(1) Pretax unrealized holding gains (losses) were $(18.5) million and
$23.1 million for the six months ended June 30, 2002 and June 30,
2001, respectively and were $40.4 million and $(27.0) million for the
three months ended June 30, 2002 and 2001, respectively.
(2) Pretax reclassification adjustments for accretion of net investment
discounts and (losses) gains included in net income were $(36.1)
million and $28.2 million for the six months ended June 30, 2002 and
June 30, 2001, respectively and were $(32.8) million and $25 million
for the three months ended June 30, 2002 and 2001, respectively.
9
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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 life of
the contracts (up to 30 years for annuity contracts and pension contracts).
Activity for the six months ended June 30, 2002 and 2001 for VOBA was as
follows:
<Table>
<Caption>
(MILLIONS) 2002 2001
-------------------------------------------------- ----------------- ----------------
Balance at January 1 $1,601.8 $1,780.9
Additions 13.7 49.9
Interest 49.1 60.5
Amortization (105.3) (116.9)
-------------------------------------------------- ----------------- ----------------
Balance at June 30 $1,559.3 $1,774.4
================================================== ================= ================
</Table>
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 six months ended June 30, 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 12.2 341
------------------------------------------- --------------------- ------------------
Balance at June 30, 2002 16.2 239
=========================================== ===================== ==================
</Table>
In accounting for its acquisition by ING, the Company established a
severance liability of $13.6 million for costs related to the elimination
of 132 positions in conjunction with the integration of the Company's and
ING's businesses. The liability was later revised to $16.9 million for the
elimination of 233 positions. These severance actions were substantially
completed during the second quarter of 2002.
10
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7. INCOME TAXES
The Company's effective tax rates for the six months ended June 30, 2002
and June 30, 2001 were 33.4% and 42.2%, respectively. This decrease
reflects the implementation of FAS 142 (refer to Note 2) which ceased the
amortization of goodwill, a nondeductible expense, and an increase in the
deduction allowed for dividends received.
11
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8. 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 June 30,
2001 in the chart below and on the following page (refer to Note 3).
Summarized financial information for the Company's principal operations for
the three months ended June 30, 2002 and 2001 was as follows:
<Table>
<Caption>
NON-OPERATING SEGMENTS
---------------------------
INVESTMENT
MANAGEMENT
(MILLIONS) USFS (1) SERVICES (2) OTHER (3) TOTAL
--------------------------------- ------------- ------------- ------------ ----------------
2002
Revenues from external customers $141.7 $ -- $ (6.4) $135.3
Net investment income 254.0 -- 11.0 265.0
-------------------------------- ------------- ------------- ------------ ----------------
Total revenue excluding net
realized capital gains
(losses) $395.7 $ -- $ 4.6 $400.3
================================ ============= ============= ============ ================
Operating earnings (4) $ 40.2 $ -- $ 18.1 $ 58.3
Net realized capital losses,
net of tax (2.0) -- $(29.9) (31.9)
-------------------------------- ------------- ------------- ------------ ----------------
Net income (loss) $ 38.2 $ -- $(11.8) $ 26.4
================================ ============= ============= ============ ================
2001
Revenues from external customers $158.4 $29.7 $(16.0) $172.1
Net investment income 221.5 0.5 (6.5) 215.5
-------------------------------- ------------- ------------- ------------ ----------------
Total revenue excluding net
realized capital gains
(losses) $379.9 $30.2 $(22.5) $387.6
================================ ============= ============= ============ ================
Operating earnings (4) $ 59.4 $ 7.1 $(26.2) $ 40.2
Net realized capital gains, net
of tax 15.7 -- -- 15.7
-------------------------------- ------------- ------------- ------------ ----------------
Net income (loss) $ 75.1 $ 7.1 $(26.2) $ 55.9
================================ ============= ============= ============ ================
</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 include: 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
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Summarized financial information for the Company's principal operations for
the six months ended June 30, 2002 and 2001 was as follows:
<Table>
<Caption>
NON-OPERATING SEGMENTS
---------------------------
INVESTMENT
MANAGEMENT
(MILLIONS) USFS (1) SERVICES (2) OTHER (3) TOTAL
-------------------------------- ------------- ------------- ------------- ---------------
2002
Revenues from external customers $284.2 $19.2 $(22.3) $281.1
Net investment income 488.9 0.2 10.3 499.4
-------------------------------- ------------- ------------- ------------- ---------------
Total revenue excluding net
realized capital gains
(losses) $773.1 $19.4 $(12.0) $780.5
================================ ============= ============= ============= ===============
Operating earnings (4) $ 79.3 $ 4.7 $ 14.0 $ 98.0
Net realized capital losses,
net of tax (11.8) -- (30.9) (42.7)
-------------------------------- ------------- ------------- ------------- ---------------
Net income (loss) $ 67.5 $ 4.7 $(16.9) $ 55.3
================================ ============= ============= ============= ===============
2001
Revenues from external customers $319.7 $62.2 $(34.5) $347.4
Net investment income 444.0 0.9 (5.2) 439.7
-------------------------------- ------------- ------------- ------------- ---------------
Total revenue excluding net
realized capital gains
(losses) $763.7 $63.1 $(39.7) $787.1
================================ ============= ============= ============= ===============
Operating earnings (4) $111.3 $15.1 (47.6) $ 78.8
Net realized capital gains, net
of tax 13.2 -- -- 13.2
-------------------------------- ------------- ------------- ------------- ---------------
Net income (loss) $124.5 $15.1 $(47.6) $ 92.0
================================ ============= ============= ============= ===============
</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 include: 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.
13
<Page>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following analysis presents a review of the Company for the three month and
six month periods ended June 30, 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 Discussion and Analysis of Financial
Condition and 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
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"). Accordingly, the financial results of
the prior period were restated to align with this new reporting segment.
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 non-amortization provisions of the new standard resulted in an increase in
net income of $15.5 million and $30.9 million for the three months and six
months ended June 30, 2002, respectively. The Company performed the first of the
required impairment tests for goodwill as of January 1, 2002. The results
indicate an impairment of goodwill exists. The required steps for measuring the
amount of the impairment will be completed and the resulting impairment loss
will be recorded as a change in accounting principle prior to December 31, 2002.
The impairment loss recorded will be the difference between the carrying amount
and the estimated fair value of goodwill.
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 investment
advisory services and pension plan administrative services.
14
<Page>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 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 critical accounting policies, which are most sensitive to
estimates and judgments and involve a higher degree of judgment and complexity.
15
<Page>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
USFS
OPERATING SUMMARY
<Table>
<Caption>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
----------------------------------- ---------------------------------
(Millions) 2002 2001 2002 2001
- ---------------------------------------------------------------------------- ----------------- --------------- -----------------
Premiums (1) $ 24.5 $ 29.1 $ 51.7 $ 60.9
Contract and other charges assessed against
policyholders 117.2 129.3 232.5 258.8
Net investment income 254.0 221.5 488.9 444.0
Net realized capital (losses) gains (3.0) 24.3 (18.2) 20.3
- ----------------------------------------------------------- ---------------- ------------------ --------------- ----------------
Total revenue 392.7 404.2 754.9 784.0
- ----------------------------------------------------------- ---------------- ------------------ --------------- ----------------
Interest credited and other benefits to policyholders 193.1 182.0 376.1 365.4
Operating expenses 80.0 78.8 181.7 168.5
Amortization of deferred policy acquisition costs and
value of business acquired 59.5 27.9 92.0 58.7
- ----------------------------------------------------------- ---------------- ------------------ --------------- ----------------
Total benefits and expenses 332.6 288.7 649.8 592.6
- ----------------------------------------------------------- ---------------- ------------------ --------------- ----------------
Income from operations before income taxes 60.1 115.5 105.1 191.4
Income taxes 21.9 40.4 37.6 66.9
- ----------------------------------------------------------- ---------------- ------------------ --------------- -----------------
Net income $ 38.2 $ 75.1 $ 67.5 $ 124.5
=========================================================== ================ ================== =============== =================
Net realized capital (losses) gains, net of tax (included
above) $ (2.0) $ 15.7 $ (11.8) $ 13.2
=========================================================== ================ ================== =============== =================
Deposits (not included in premiums above)
Annuities -fixed options $ 338.2 $ 387.4 $ 655.6 $ 797.7
Annuities -variable options 1,082.4 1,035.1 2,439.6 2,265.9
- ----------------------------------------------------------- ---------------- ------------------ --------------- -----------------
Total - deposits $ 1,420.6 $ 1,422.5 $ 3,095.2 $ 3,063.6
=========================================================== ================ ================== =============== =================
Assets Under Management
Annuities - fixed options (2) $ 13,792.1 $ 12,870.3
Annuities - variable options (3) 26,106.0 30,495.4
- ----------------------------------------------------------- ---------------- ------------------ --------------- -----------------
Subtotal - annuities 39,898.1 43,365.7
Plan Sponsored and Other 9,323.5 8,423.5
- ----------------------------------------------------------- ---------------- ------------------ --------------- -----------------
Total - assets under management 49,221.6 51,789.2
Assets under administration (4) 11,048.4 9,985.1
- ----------------------------------------------------------- ---------------- ------------------ --------------- -----------------
Total assets under management and administration $ 60,270.0 $ 61,774.3
=========================================================== ================ ================== =============== =================
</Table>
(1) Includes $18.4 million and $21.9 million for the three months ended June
30, 2002 and 2001, respectively, and $39.1 million and $46.0 million for
the six months ended June 30, 2002 and 2001, respectively, of annuity
premiums on contracts converting from the accumulation phase to payout
options with life contingencies.
(2) Excludes net unrealized capital gains of $353.3 million and $146.9 million
at June 30, 2002 and 2001, respectively.
(3) Includes $10,512.2 million at June 30, 2002 and $12,201.4 million at June
30, 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 $36.9 million for the three months ended June 30, 2002
compared to the same period in 2001. Excluding net realized capital losses and
gains, net income for the three months ended June 30, 2002 decreased $19.2
million, or 32%, compared to the same period in 2001. Net income decreased by
$57.0 million for the six months ended June 30, 2002 compared to the same period
in 2001. Excluding net realized capital losses and gains, net income for the six
months ended June 30, 2002 decreased $32.0 million, or 29%, compared to the same
period in 2001.
16
<Page>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The decrease in net income, excluding realized capital losses and gains, for the
three and six months ended June 30, 2002, is primarily the result of an increase
in amortization of deferred policy acquisition costs and value of business
acquired and a decrease in contract and other charges assessed against
customers, partially offset by an increase in net investment income (net of
interest credited to policyholders). The decrease for the six months ended June
30, 2002 also reflects an increase in operating expenses.
Amortization of deferred policy acquisition costs and value of business acquired
increased $31.6 million and $33.3 million for the three and six months ended
June 30, 2002, respectively, primarily due to a decline in variable assets and
revised estimates for future asset growth due to the decline in the stock
market.
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"). Contract and other charges
assessed to policyholders decreased $12.1 million and $26.3 million for the
three and six months ended June 30, 2002, respectively, compared to the same
periods in 2001, primarily due to the decrease in average variable assets. On
average, for the first six months of 2002, variable assets were significantly
lower than the first six months of 2001 due to a decline in the stock market
that began late in the first quarter of 2001, partially offset by additional net
deposits.
Net investment income (net of interest credited to policyholders) increased for
the three and the six months ended June 30, 2002 compared to the same periods in
2001 primarily due to an increase in assets under management related to
annuities with fixed options and higher investment yields.
Operating expenses increased $13.2 million for the six months ended June 30,
2002 compared to the same period in 2001, primarily due to higher allocations of
corporate and service charges from the Company's parent and other affiliates who
provide services to the Company.
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 six months ended June 30,
2002 was $4.7 million compared to $15.1 million for the same period in 2001. The
2002 results reflect operating results through February 28, 2002 only.
17
<Page>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL ACCOUNT INVESTMENTS
The Company's invested assets were comprised of the following:
<Table>
<Caption>
(MILLIONS) JUNE 30, 2002 DECEMBER 31, 2001
-------------------------------------------------------------- ------------------------- ----------------------
Debt securities, available for sale, at fair value (1) $ 14,364.8 $ 14,007.1
Equity securities, at fair value 98.7 50.3
Short-term investments 7.7 31.7
Mortgage loans 341.5 241.3
Policy loans 310.2 329.0
Other investments 49.7 18.2
--------------------------------------------------------------------------------------- -----------------------
Total Investments $ 15,172.6 $ 14,677.6
============================================================== ========================= ==========================
</Table>
(1) At June 30, 2002 and December 31, 2001, $891.4 million and $467.2
million, respectively, of debt securities were pledged to creditors.
18
<Page>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
DEBT SECURITIES
At both June 30, 2002 and December 31, 2001, the Company's carrying value of
available for sale debt securities including debt securities pledged to
creditors (hereinafter referred to as "total debt securities") represented 95%
of the total general account invested assets. For the same periods, $10.5
billion, or 73% 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 $353.3 million and $291.0
million at June 30, 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 June 30, 2002 and December 31, 2001.
The percentage of total debt securities by quality rating category is as
follows:
<Table>
<Caption>
JUNE 30, 2002 DECEMBER 31, 2001
- ------------------------------------- ---------------------------- -----------------------------
AAA 52.5% 54.0%
AA 6.9 6.6
A 19.5 18.0
BBB 16.9 16.1
BB 2.6 2.8
B and Below 1.6 2.5
- ------------------------------------- ---------------------------- -----------------------------
Total 100.0% 100.0%
===================================== ============================ =============================
</Table>
The percentage of total debt securities by market sector is as follows:
<Table>
<Caption>
JUNE 30, 2002 DECEMBER 31, 2001
- --------------------------------------------------------------- ------------------------ -----------------------
U.S. Corporate 41.4% 41.5%
Residential Mortgage-backed 33.3 32.7
Commercial/Multifamily Mortgage-backed 9.2 9.5
Foreign (1) 9.1 8.5
U.S. Treasuries/Agencies 1.0 2.0
Asset-backed 6.0 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.
19
<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 August 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
20
<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)
August 9, 2002 By /s/ Chris Duane Schreier
- --------------- -----------------------------------
(Date) Chris Duane Schreier
Director and Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
21