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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 2002 Commission file number: 333-86276,
333-86278,
333-60016
ING Life Insurance and Annuity Company
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(Exact name of registrant as specified in its charter)
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Connecticut 71-0294708
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(State or other jurisdiction of incorporation or (IRS employer
organization identification no.)
151 Farmington Avenue, Hartford, Connecticut 06156
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(Address of principal executive offices) (Zip code)
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Registrant's telephone number, including area code (866) 723-4646
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Former name, former address and former fiscal year, if changed since last report
Securities registered pursuant to Section 12(b) of Act: None
Securities registered pursuant to Section 12(g) of Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes __X__ No ______
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this form 10-K or any amendment to this
Form 10-K.
Yes __X__ No ______
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 55,000 shares of Common Stock
as of March 25, 2003, all of which were directly owned by ING Retirement
Holdings, Inc.
NOTE: WHEREAS ING LIFE INSURANCE AND ANNUITY COMPANY MEETS THE CONDITIONS SET
FORTH IN GENERAL INSTRUCTION I(1)(a) AND (b) OF FORM 10-K, THIS FORM IS BEING
FILED WITH THE REDUCED DISCLOSURE FORMAT PURSUANT TO GENERAL INSTRUCTION I(2).
<Page>
ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly-owned subsidiary of ING Retirement Holdings, Inc.)
Annual Report on Form 10-K
For the year ended December 31, 2002
TABLE OF CONTENTS
<Table>
<Caption>
Form 10-K
Item No. Page
- --------- ----
PART I
Item 1. Business**.............................. 3
Item 2. Properties**............................ 8
Item 3. Legal Proceedings....................... 8
Item 4. Submission of Matters to a Vote of
Security Holders*....................... 8
PART II
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters......... 9
Item 6. Selected Financial Data*................ 9
Item 7. Management's Narrative Analysis of the
Results of Operations and Financial
Condition**........................... 9
Item 7A. Quantitative and Qualitative Disclosure
About Market Risk....................... 17
Item 8. Financial Statements and Supplementary
Data.................................... 18
Item 9. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure.................. 63
PART III
Item 10. Directors and Executive Officers of the
Registrant*............................. 63
Item 11. Executive Compensation*................. 63
Item 12. Security Ownership of Certain Beneficial
Owners and Management*.................. 63
Item 13. Certain Relationships and Related
Transactions* .......................... 63
Item 14. Controls and Procedures................. 63
PART IV
Item 15. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K................. 63
Index on Financial Statement
Schedules............................... 68
Signatures.............................. 75
</Table>
* Item omitted pursuant to General Instruction I(2) of Form 10-K
** Item prepared in accordance with General Instruction I(2) of Form 10-K
2
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PART 1
ITEM 1. BUSINESS.
ORGANIZATION OF BUSINESS
ING Life Insurance and Annuity Company ("ILIAC" or the "Company"), formerly
known as Aetna Life Insurance and Annuity Company ("ALIAC"), is a Connecticut
stock life insurance company, which was originally organized in 1976. ILIAC,
together with its wholly-owned subsidiaries, ING Insurance Company of America
("IICA"), ING Financial Advisers, LLC ("IFA"), and, through February 28, 2002,
ING Investment Adviser Holding Company, Inc. ("IA Holdco") is herein called the
"Company." 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 December 13, 2000, ING America Insurance Holdings, Inc. ("ING AIH"), an
indirect wholly-owned subsidiary of ING, acquired Aetna Inc., comprised of the
Aetna Financial Services business, of which the Company is a part, and Aetna
International businesses, for approximately $7,700.0 million. The purchase price
was comprised of approximately $5,000.0 million in cash and the assumption of
$2,700.0 million of outstanding debt and other net liabilities. In connection
with the acquisition, Aetna Inc. was renamed Lion Connecticut Holdings Inc.
("Lion"). At the time of the sale, Lion entered into certain transition services
agreements with a former related party, Aetna U.S. Healthcare, which was renamed
Aetna Inc. ("former Aetna").
HOLDCO contributed IFA to the Company on June 30, 2000. On February 28, 2002,
ILIAC distributed 100% of the stock of IA Holdco to HOLDCO in the form of a
$60.1 million dividend distribution. The primary operating subsidiary of IA
Holdco is Aeltus Investment Management, Inc. ("Aeltus"). Accordingly, fees
earned by Aeltus were not included in Company results subsequent to the dividend
date. As a result of this transaction, the Investment Management Services is no
longer reflected as an operating segment of the Company.
PRODUCTS AND SERVICES
Management has determined that under Statements of Financial Accounting
Standards Number 131 "Disclosure about Segments of an Enterprise and Related
Information," the Company has one operating segment, ING U.S. Financial Services
("USFS").
The Company's USFS segment 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 variety of investment options, including affiliated and
nonaffiliated mutual funds and variable and fixed investment options. In
addition, the Company also offers wrapper agreements entered into with
retirement plans which contain certain benefit responsive guarantees (i.e.
liquidity guarantees of principal and previously accrued interest for benefits
paid under the terms of the plan) with respect to portfolios of
3
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ITEM 1. BUSINESS. (continued)
plan-owned assets not invested with the Company. The Company also offers
investment advisory services and pension plan administrative services.
INVESTMENT OPTIONS
Annuity contracts offered by the Company contain variable and/or fixed
investment options. Variable options generally provide for full assumption (and,
in limited cases, provide for partial assumption) by the customer of investment
risks. Assets supporting variable annuity options are held in separate accounts
that invest in affiliated and/or unaffiliated mutual funds. Affiliated mutual
funds include funds managed by Aeltus, a subsidiary of HOLDCO, funds managed by
ING Investment Management, LLC ("IIM"), an affiliate, and funds managed by ILIAC
and subadvised by outside investment advisers. Variable separate account
investment income and realized capital gains and losses are not reflected in the
Company's consolidated statements of income. Fixed options are either
"fully-guaranteed" or "experience-rated". Fully-guaranteed fixed options provide
guarantees on investment return, maturity values and, if applicable, benefit
payments. Experience-rated fixed options require the customer to assume
investment risks (including realized capital gains and losses on the sale of
invested assets) and other risks subject to, among other things, principal and
interest guarantees.
FEES AND MARGINS
Insurance and expense charges, investment management fees and other fees earned
by the Company vary by product and depend on, among other factors, the funding
option selected by the customer under the product. For annuity products where
assets are allocated to variable funding options, the Company may charge the
separate account asset-based insurance and expense fees.
In addition, where the customer selects an affiliated mutual fund as a variable
funding option, ILIAC may receive compensation from the fund's adviser,
administrator or other affiliated entity for the performance of certain
shareholder services, which is reflected in the USFS segment's results. In the
case of funds advised by Aeltus, these fees are equal to one-half the investment
advisory fee Aeltus receives. Aeltus, whose operating results were reported in
the Investment Management Services' segment, through February 28, 2002, records
the advisory fees net of the amount it pays to ILIAC. In the case of the
variable option mutual funds advised by ILIAC and subadvised by outside
managers, ILIAC receives an investment advisory fee from which it pays a
subadvisory fee to the outside manager.
Additionally, ILIAC may receive administrative service, distribution (12b-1) and
service plan fees. If the customer selects an unaffiliated mutual fund as a
variable funding option, ILIAC and/or IFA may receive 12b-1 and service plan
fees, as well as, compensation from the fund's adviser, administrator or other
affiliated entity for the performance of certain shareholder services.
In connection with programs offered to qualified plans and nonqualified deferred
compensation plans that package administrative and recordkeeping services along
with a menu of investment options, ILIAC and/or IFA may receive 12b-1 and
service plan fees, as well as, compensation from the affiliated or unaffiliated
fund's adviser, administrator or other affiliated entity for the performance of
certain shareholder services. For fixed funding options, ILIAC earns a margin,
which is based on the difference between income earned on the investments
supporting the liability and interest credited to
4
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ITEM 1. BUSINESS. (continued)
customers. The Company may also receive other fees or charges depending on the
nature of the products.
ASSETS UNDER MANAGEMENT AND ADMINISTRATION
The substantial portion of the Company's fees or other charges and margins are
based on assets under management. Assets under management are principally
affected by net deposits (i.e., deposits less surrenders), investment
performance (i.e., interest credited to customer accounts for fixed options or
market performance for variable options) and customer retention. The Company's
assets under management, excluding net unrealized capital gains and losses on
debt securities that support fixed annuities, were $46,426.7 million,
$50,781.4 million and $53,262.4 million at December 31, 2002, 2001, and 2000,
respectively.
Approximately 94% and 93% of assets under management at December 31, 2002 and
2001, respectively, allowed for contractholder withdrawal. Approximately 85% and
82% of assets under management at December 31, 2002 and 2001, respectively, are
subject to market value adjustments and/or deferred surrender charges. To
encourage customer retention and recover acquisition expenses, contracts
typically impose a surrender charge on policyholder balances withdrawn within a
period of time after the contract's inception. The period of time and level of
the charge vary by product. In addition, an approach incorporated into certain
recent variable annuity contracts with fixed funding options allows
contractholders to receive an incremental interest rate if withdrawals from the
fixed account are spread over a period of five years. Further, more favorable
credited rates may be offered after policies have been in force for a period of
time. Existing tax penalties on annuity and certain custodial account
distributions prior to age 59 1/2 provide further disincentive to customers for
premature surrenders of account balances, but generally do not impede transfers
of those balances to products of competitors.
Assets under management are summarized in the Results of Operations section of
Management's Narrative Analysis of the Results of Operations and Financial
Condition.
A portion of the Company's fee revenue is also based on assets under
administration. Assets under administration are assets for which the Company
provides administrative services only. Assets under administration were
$13,613.0 million at December 31, 2002, $10,317.4 million at December 31, 2001
and $8,293.7 million at December 31, 2000.
PRINCIPAL MARKETS AND METHOD OF DISTRIBUTION
The Company's products are offered primarily to individuals, pension plans,
small businesses and employer-sponsored groups in the health care, government,
education (collectively "not-for-profit" organizations) and corporate markets.
The Company's products generally are sold through pension professionals,
independent agents and brokers, third party administrators, banks, dedicated
career agents and financial planners.
COMPETITION
Competition arises from an array of financial services companies including other
insurance companies, banks, mutual funds and other investment managers.
Principal competitive factors are
5
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ITEM 1. BUSINESS. (continued)
reputation for investment performance, product features, service, cost and the
perceived financial strength of the investment manager or sponsor. Competition
may affect, among other matters, both business growth and the pricing of the
Company's products and services.
RESERVES
Reserves for limited payment contracts (i.e. annuities with life contingent
payout) are computed on the basis of assumed investment yield and mortality,
including a margin for adverse deviation, which is assumed to provide for
expenses. The assumptions vary by plan, year of issue and policy duration.
Reserves for investment contracts (i.e. deferred annuities and immediate
annuities without life contingent payouts) are equal to cumulative deposits plus
credited interest for fixed options less withdrawals and charges thereon. Of
those investment contracts which are "experience-rated", the reserves also
reflect net realized capital gains/losses on the sale of invested assets, which
the Company reflects through credited rates on an amortized basis, and
unrealized capital gains/losses related to FAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities."
Reserves, as described above, are computed amounts that, with additions from
premiums and deposits to be received and with interest on such reserves
compounded annually at assumed rates, are expected to be sufficient to meet the
Company's policy obligations at their maturities or to pay expected death or
retirement benefits or other withdrawal requests.
OTHER MATTERS
REGULATION
The Company's operations are subject to comprehensive regulation throughout the
United States. The laws of the various jurisdictions establish supervisory
agencies, including the state insurance departments, with broad authority to
grant licenses to transact business and regulate many aspects of the products
and services offered by the Company, as well as solvency and reserve adequacy.
Many agencies also regulate investment activities on the basis of quality,
diversification, and other quantitative criteria. The Company's operations and
accounts are subject to examination at regular intervals by certain of these
regulators.
Operations conducted by the Company are subject to regulation by various state
insurance departments in the states where the Company conducts business, in
particular the insurance departments of Connecticut, Florida and New York. Among
other matters, these agencies may regulate premium rates, trade practices, agent
licensing, policy forms, underwriting and claims practices and the maximum
interest rates that can be charged on policy loans.
The Securities and Exchange Commission ("SEC"), the National Association of
Securities Dealers ("NASD") and, to a lesser extent, the states regulate the
sales and investment management activities and operations of the Company.
Regulations of the SEC, Department of Labor ("DOL") and Internal Revenue Service
also impact certain of the Company's annuity, life insurance and other
investment and retirement products. These products involve Separate Accounts and
mutual funds registered under the Investment Company Act of 1940. The Company
also provides a variety of products and services to employee benefit plans that
are covered by the Employee Retirement Income Security Act of 1974 ("ERISA").
6
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ITEM 1. BUSINESS. (continued)
OTHER MATTERS (continued)
On June 7, 2001 the Economic Growth and Tax Relief Reconciliation Act of 2001
("EGTRRA") was signed into law. EGTRRA contains important changes to many of the
Internal Revenue Code provisions governing qualified defined contribution and
defined benefit plans, Section 457 deferred compensation plans, Section 403(b)
tax sheltered annuity arrangements and individual retirement accounts and
annuities ("IRAs"). These changes include significant increases in the
contribution limits under retirement plans and IRAs and new rollover provisions
that increase the portability of retirement account assets.
Insurance Holding Company Laws
A number of states, including Connecticut and Florida, regulate affiliated
groups of insurers such as the Company under holding company statutes. These
laws, among other things, place certain restrictions on transactions between
affiliates such as dividends and other distributions that may be paid to the
Company's parent corporation.
Insurance Company Guaranty Fund Assessments
Under insurance guaranty fund laws existing in all states, insurers doing
business in those states can be assessed (up to prescribed limits) for certain
obligations of insolvent insurance companies to policyholders and claimants.
There were no charges to earnings for guaranty fund obligations during 2002 and
no material charges during 2001 and 2000. While the Company has historically
recovered more than half of its guaranty fund assessments through statutorily
permitted premium tax offsets, significant increases in assessments could
jeopardize future efforts to recover such assessments. For information regarding
certain other potential regulatory changes relating to the Company's businesses,
see Management's Analysis of the Results of Operations--Forward-Looking
Information/ Risk Factors.
MISCELLANEOUS
In addition to its own employees and computer facilities and systems, the
Company also uses the services of employees, computer facilities and systems of
certain affiliates. Management believes that the Company's computer facilities,
systems and related procedures are adequate to meet its business needs. The
Company's data processing systems and backup and security policies, practices
and procedures are regularly evaluated by the Company's management and internal
auditors and are modified as considered necessary.
The Company is not dependent upon any single customer and no single customer
accounted for more than 10% of consolidated revenue in 2002. In addition, the
loss of business from any one, or a few, independent brokers or agents would not
have a material adverse effect on the earnings of the Company.
ITEM 2. PROPERTIES
The Company's home office is located at 151 Farmington Avenue, Hartford,
Connecticut, 06156. All Company office space is leased or subleased by the
Company or its other affiliates. The Company
7
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ITEM 2. PROPERTIES (continued)
pays substantially all expenses associated with its leased and subleased office
properties. Expenses not paid directly by the Company are paid for by an
affiliate and allocated back to the Company.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to threatened or pending lawsuits arising, from the
normal conduct of business. Due to the climate in insurance and business
litigation, suits against the Company sometimes include claims for substantial
compensatory, consequential or punitive damages and other types of relief.
Moreover, certain claims are asserted as class actions, purporting to represent
a group of similarly situated individuals. While it is not possible to forecast
the outcome of such lawsuits, in light of existing insurance, reinsurance and
established reserves, it is the opinion of management that the disposition of
such lawsuits will not have a materially adverse effect on the Company's
operations or financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Omitted pursuant to General Instruction I(2)(c) of Form 10-K.
8
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
All of the Company's outstanding shares are owned by HOLDCO which is a
wholly-owned subsidiary of IRSI whose ultimate parent is ING.
ITEM 6. SELECTED FINANCIAL DATA
Omitted pursuant to General Instruction I(2)(a) of Form 10-K.
ITEM 7. MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
OVERVIEW
The following narrative analysis of the results of operations and financial
condition presents a review of the Company for the twelve month periods ended
December 31, 2002 versus 2001.
CHANGE IN ACCOUNTING PRINCIPLE
In June 2001, the Financial Accounting Standards Board ("FASB") issued FAS
No. 142, "Goodwill and Other Intangible Assets," effective for fiscal years
beginning after December 15, 2001. Under FAS No. 142, goodwill and intangible
assets deemed to have indefinite lives are no longer amortized but are subject
to annual impairment tests. Other intangible assets are still amortized over
their estimated useful lives. The Company adopted the new standard effective
January 1, 2002.
As required under FAS No. 142, the Company completed the first of the required
impairment tests as of January 1, 2002. Step one of the impairment test was a
screen for potential impairment, while step two measured the amount of the
impairment. All of the Company's operations fall under one reporting unit, USFS,
due to the consolidated nature of the Company's operations. Step one of the
impairment test required the Company to estimate the fair value of the reporting
unit and compare the estimated fair value to its carrying value. The Company
determined the estimated fair value utilizing a discounted cash flow approach
and applying a discount rate equivalent to the Company's weighted average cost
of capital. Fair value was determined to be less than carrying value which
required the Company to complete step two of the test. In step two, the Company
allocated the fair value of the reporting unit determined in step one to the
assets and liabilities of the reporting unit resulting in an implied fair value
of goodwill of zero.
The comparison of the fair value amount allocated to goodwill and the carrying
value of goodwill resulted in an impairment loss upon adoption of
$2,412.1 million, which represents the entire carrying amount of goodwill, net
of accumulated amortization. This impairment charge is shown as a change in
accounting principle on the Consolidated Income Statement.
9
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ITEM 7. MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (continued)
RESULTS OF OPERATIONS
USFS
<Table>
<Caption>
(Millions) 2002 2001 2000 (1)
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Premiums (2) $ 98.7 $ 114.2 $ 154.2
Fee income 408.5 470.8 537.9
Net investment income 959.2 885.5 905.8
Net realized capital (losses) (101.0) (21.1) (35.6)
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Total revenue 1,365.4 1,449.4 1,562.3
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Interest credited and other
benefits to policyholders 746.4 729.6 795.6
Operating expenses 358.7 401.8 390.5
Amortization of goodwill -- 61.9 --
Amortization of deferred policy
acquisition costs and value of
business acquired 181.5 112.0 126.9
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Total benefits and expenses 1,286.6 1,305.3 1,313.0
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Income from operations before
income taxes 78.8 144.1 249.3
Income tax expense 16.0 71.7 75.0
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Income before cumulative effect of
change 62.8 72.4 174.3
Cumulative effect of change in
accounting principle (2412.1) -- --
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Net income (loss) $(2,349.3) $ 72.4 $ 174.3
======================================================================
Net realized capital (losses), net
of tax (included above) $ (58.3) $ (13.8) $ (23.1)
======================================================================
Deposits (not included in premiums
above)
Annuities--fixed options $ 1,195.2 $ 1,440.5 $ 1,479.1
Annuities--variable options 4,335.2 4,155.8 4,678.7
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Total--deposits $ 5,530.4 $ 5,596.3 $ 6,157.8
======================================================================
Assets under management
Annuities--fixed options (3) $14,984.5 $13,291.9 $12,450.3
Annuities--variable options (4) 23,148.0 28,495.8 33,084.0
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Subtotal--annuities 38,132.5 41,787.7 45,534.3
Plan Sponsored and Other 8,294.2 8,993.7 7,728.1
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Total--assets under management 46,426.7 50,781.4 53,262.4
Assets under administration (5) 13,613.0 10,317.4 8,293.7
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Total assets under management and
administration $60,039.7 $61,098.8 $61,556.1
======================================================================
</Table>
(1) Year ended 2000 reflects an aggregation of the pre-acquisition period of
the eleven months ended November 30, 2000 and the post acquisition period
of one month ended December 31, 2000.
(2) Includes $64.8 million in 2002, $75.0 million in 2001 and $107.8 million in
2000 for annuity premiums on contracts converting from the accumulation
phase to payout options with life contingencies.
(3) Excludes net unrealized capital gains of $725.9, $291.0 and $126.9 at
December 31, 2002, 2001 and 2000, respectively.
(4) Includes $9,304.1 million, $11,272.2 million and $13,492.1 million at
December 31, 2002, 2001 and 2000, respectively, of assets invested through
the Company's products in unaffiliated mutual funds.
(5) Represents assets for which the Company provides administrative services
only.
Premiums for the year ended December 31, 2002 decreased by $15.5 million
compared to the same period in 2001, reflecting a decrease in immediate
annuities with life contingencies.
Fee income for the year ended December 31, 2002 decreased by $62.3 million
compared to the same period in 2001, primarily due to the decrease in average
variable assets under management by the
10
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ITEM 7. MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (continued)
RESULTS OF OPERATIONS (continued)
Company. Substantially all of the fee income on variable assets is calculated
based on assets under management and administration, which decreased due to the
continued decline in the equity markets, and customer transfers to fixed
options.
Net investment income for the year ended December 31, 2002 increased by
$73.7 million compared to the same period in 2001. This increase in net
investment income is primarily due to an increase in assets under management
with fixed options partially offset by lower investments yields.
Net realized capital losses for the year ended in December 31, 2002 increased by
$79.9 million compared to the same period in 2001. The increase in capital
losses are primarily due to impairments of certain fixed maturities (referred to
in Note 2 of the Notes to Financial Statements).
Interest credited and other benefits to the policyholders for the year ended
December 31, 2002 increased by $16.8 million compared to the same period in
2001, primarily due to an increase in assets under management with fixed options
partially offset by a decrease in credited rates to policyholders.
Operating expenses for the year ended December 31, 2002 decreased by $43.1
million compared to the same period in 2001. The Company incurred a $29.2
million restructuring charge in 2001, there were no restructuring charges in
2002. Operating expenses, excluding the restructuring charge, decreased $13.9
million primarily due to lower employee related costs due to the Company's 2002
restructuring efforts, the reduced employee related costs were partially offset
by higher expense allocations from the Company's parent and affiliates.
Goodwill amortization for the year ended December 31, 2002 decreased by
$61.9 million compared to the same period in 2001. This reduction is based on
the change in accounting principle FAS No. 142 that eliminates amortization of
goodwill.
Amortization of deferred policy acquisition costs and value of business acquired
for the year ended December 31, 2002, increased by $69.5 million compared to the
same period in 2001. Amortization of long-duration products is reflected in
proportion to actual and estimated future gross profits. Estimated future gross
profits are computed based on underlying assumptions related to the underlying
contracts, including but not limited to interest margins, mortality lapse,
premium persistency, expenses, and asset growth. The increase in the
amortization of deferred policy acquisition costs and value of insurance
acquired reflects the impact of these variables on the overall book of business.
The cumulative effect of the change in accounting principle for the year ended
December 31, 2002 of $2,412.1 million is an impairment charge related to the
implementation of FAS No. 142, which addresses accounting for goodwill and other
intangible assets.
Earnings, excluding goodwill amortization, change in accounting principle and
net realized capital gains and losses (net of tax), decreased by $27.0 million
for the year ended December 31, 2002, as compared to the year ended
December 31, 2001. Lower earnings are primarily the result of increases
11
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ITEM 7. MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (continued)
RESULTS OF OPERATIONS (continued)
to the amortization of deferred policy acquisition costs and value of business
acquired, and lower fee income partially offset by higher investment income and
lower expenses.
NON-OPERATING SEGMENT
The non-operating segment of the Company relates to Investment Management
Services, which is comprised of IA Holdco and its subsidiaries, which were
distributed to HOLDCO on February 28, 2002.
Investment Management Services' net income for the year ended December 31, 2002,
was $4.7 million. The 2002 results reflect operating results through
February 28, 2002 only.
FINANCIAL CONDITION
INVESTMENTS
FIXED MATURITIES
At December 31, 2002 and 2001, respectively, the Company's carrying value of
available for sale fixed maturities including fixed maturities pledged to
creditors (hereinafter referred to as "total fixed maturities") represented 94%
and 96% of the total general account invested assets, respectively. For the same
periods, $11,808.4 million, or 74% of total fixed maturities including
securities pledged to creditors, and $11,404.0 million, or 81% of total fixed
maturities, respectively, supported experience-rated products. Total fixed
maturities including securities pledged to creditors reflected net unrealized
capital gains of $725.9 million and $291.0 million at December 31, 2002 and
2001, respectively.
It is management's objective that the portfolio of fixed maturities is of high
quality and be well diversified by market sector. The fixed maturities in the
Company's portfolio are generally rated by external rating agencies and, if not
externally rated, are rated by the Company on a basis believed to be similar to
that used by the rating agencies. The average quality rating of the Company's
fixed maturities portfolio was AA- at December 31, 2002 and 2001.
Fixed maturities rated BBB and below may have speculative characteristics and
changes in economic conditions or other circumstances are more likely to lead to
a weakened capacity of the issuer to make principal and interest payments than
is the case with higher rated fixed maturities.
12
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ITEM 7. MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (continued)
INVESTMENTS (continued)
The percentage of total fixed maturities by quality rating category is as
follows:
<Table>
<Caption>
December 31, 2002 December 31, 2001
- ------------------------------------------------------------------------------------
AAA 51.9% 54.0%
AA 5.0 6.6
A 20.2 18.0
BBB 19.2 16.1
BB 2.5 2.8
B and Below 1.2 2.5
- ------------------------------------------------------------------------------------
Total 100.0% 100.0%
====================================================================================
</Table>
The percentage of total fixed maturities by market sector is as follows:
<Table>
<Caption>
December 31, 2002 December 31, 2001
- ------------------------------------------------------------------------------------
U.S. Corporate 47.4% 41.5%
Residential Mortgage-backed 34.6 32.7
Commercial/Multifamily Mortgage-backed 8.6 9.5
Foreign (1) 3.1 8.5
U.S. Treasuries/Agencies 0.5 2.0
Asset-backed 5.8 5.8
- ------------------------------------------------------------------------------------
Total 100.0% 100.0%
====================================================================================
</Table>
(1) Primarily U.S. dollar denominated
The Company analyzes the general account investments to determine whether there
has been an other than temporary decline in fair value below the amortized cost
basis in accordance with FAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." Management considers the length of time and the
extent to which the fair value has been less than amortized cost; the financial
condition and near-term prospects of the issuer; future economic conditions and
market forecasts; and the Company's intent and ability to retain the investment
in the issuer for a period of time sufficient to allow for recovery in fair
value. If it is probable that all amounts due according to the contractual terms
of a debt security will not be collected, an other than temporary impairment is
considered to have occurred.
In addition, the Company invests in structured securities that meet the criteria
of Emerging Issues Task Force ("EITF") Issue No. 99-20 "Recognition of Interest
Income and Impairment on Purchased and Retained Beneficial Interests in
Securitized Financial Assets." Under EITF Issue No. 99-20, a determination of
the required impairment is based on credit risk and the possibility of
significant prepayment risk that restricts the Company's ability to recover the
investment. An impairment is recognized if the fair value of the security is
less than book value and there has been an adverse change in cash flow since the
last remeasurement date.
When a decline in fair value is determined to be other than temporary, the
individual security is written down to fair value and the loss is accounted for
as a realized loss.
13
<Page>
ITEM 7. MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (continued)
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is the ability of the Company to generate sufficient cash flows to
meet the cash requirements of operating, investing, and financing activities.
The Company's principal sources of liquidity are deposits on contracts, product
charges, investment income, maturing investments, and capital contributions.
Primary uses of liquidity are payments of commissions and operating expenses,
interest and premium credits, investment purchases, as well as withdrawals and
surrenders.
The Company's liquidity position is managed by maintaining adequate levels of
liquid assets, such as cash or cash equivalents and short-term investments.
Additional sources of liquidity include a borrowing facility to meet short-term
cash requirements. The Company maintains a reciprocal loan agreement with ING
AIH, a Delaware corporation and affiliate. Under this agreement, which became
effective in June 2001 and expires in April, 2011, the Company and ING AIH can
borrow up to 3% of the Company's statutory admitted assets as of the preceding
December 31 from one another. Management believes that its sources of liquidity
are adequate to meet the Company's short-term cash obligations.
The National Association of Insurance Commissioners' ("NAIC") risk-based capital
requirements require insurance companies to calculate and report information
under a risk-based capital formula. These requirements are intended to allow
insurance regulators to monitor the capitalization of insurance companies based
upon the type and mixture of risks inherent in a Company's operations. The
formula includes components for asset risk, liability risk, interest rate
exposure, and other factors. The Company has complied with the NAIC's risk-based
capital reporting requirements. Amounts reported indicate that the Company has
total adjusted capital above all required capital levels.
In 2002, the Company received capital contributions in the form of investments
in affiliated mutual funds of $164.3 million from HOLDCO. The Company did not
receive capital contributions in 2001. In 2000, the Company received capital
contributions of $73.5 million in cash and $56.0 million in assets from HOLDCO.
In conjunction with the sale of Aetna, Inc. to ING AIH, the Company was
restricted from paying any dividends to its parent for a two year period from
the date of sale without prior approval by the Insurance Commissioner of the
State of Connecticut. This restriction expired on December 13, 2002. The Company
did not pay dividends to its parent in 2002 or 2001. The Company paid
$10.1 million in cash dividends to HOLDCO in 2000.
On February 28, 2002, ILIAC distributed 100% of the stock of IA Holdco to HOLDCO
in the form of a $60.1 million distribution.
During 2002, liabilities totaling $15.1 million were allocated to the Company
related to a Supplemental Excess Retirement Plan ("SERP") that covers certain
employees of ING Life Insurance Company of America and Aeltus, affiliates of the
Company.
14
<Page>
ITEM 7. MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (continued)
CRITICAL ACCOUNTING POLICIES
GENERAL
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires the use of estimates and
assumptions in certain circumstances. 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
affected in a materially adverse manner by the need to make future accounting
adjustments to reflect changes in these estimates and assumptions from time to
time.
The Company has identified the following estimates as critical in that they
involve a higher degree of judgment and are subject to a significant degree of
variability; goodwill impairment testing, investment impairment testing and
amortization of deferred acquisition costs and value of business acquired. In
developing these estimates management makes subjective and complex judgments
that are inherently uncertain and subject to material change as facts and
circumstances develop. Although variability is inherent in these estimates,
management believes the amounts provided are appropriate based upon the facts
available upon compilation of the consolidated financial statements.
GOODWILL IMPAIRMENT TESTING
The Company tested goodwill as of January 1, 2002, for impairment using fair
value calculations based on the present value of estimated future cash flows
from business currently in force and business that we estimate we will add in
the future. These calculations require management to make estimates on the
amount of future revenues and the appropriate discount rate. The calculated fair
value of goodwill and the resulting impairment loss recorded is based on these
estimates, which require a significant amount of management judgment. Refer to
Note 1 of the Consolidated Financial Statements for a discussion of the results
of the Company's goodwill testing procedures and to Management's Narrative
Analysis of the Results of Operations for the impact these procedures had on the
Company's income.
INVESTMENT IMPAIRMENT TESTING
The Company reviews the general account investments for impairments by analyzing
the amount and length of time amortized cost has exceeded fair value, and by
making certain estimates and assumptions regarding the issuing companies'
business prospects, future economic conditions and market forecasts. Based on
the facts and circumstances of each case, management uses judgment in deciding
whether any calculated impairments are temporary or other than temporary. For
those impairments judged to be other than temporary, the Company reduces the
carrying value of those investments to the current fair value and record
impairment losses for the difference.
15
<Page>
ITEM 7. MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (continued)
CRITICAL ACCOUNTING POLICIES (continued)
AMORTIZATION OF DEFERRED ACQUISITION COSTS AND VALUE OF BUSINESS ACQUIRED
Deferred policy acquisition costs ("DAC") and value of business acquired
("VOBA") are amortized with interest over the life of the contracts (usually 25
years) in relation to the present value of estimated gross profits from
projected interest margins, asset-based fees, policy administration and
surrender charges less policy maintenance fees.
Changes in assumptions can have a significant impact on the calculation of
DAC/VOBA and its related amortization patterns. Due to the relative size of the
DAC/VOBA balance and the sensitivity of the calculation to minor changes in the
underlying assumptions and the related volatility that could result in the
reported DAC/VOBA balance, the Company performs a quarterly analysis of DAC/
VOBA. At each balance sheet date, actual historical gross profits are reflected
and expected future gross profits and related assumptions are evaluated for
continued reasonableness.
Any adjustment in estimated profit requires that the amortization rate be
revised retroactively to the date of policy or contract issuance ("unlocking"),
which could be significant. The cumulative difference related to prior periods
is recognized as a component of the current period's amortization, along with
amortization associated with the actual gross profits of the period. In general,
increases in estimated returns result in increased expected future profitability
and may lower the rate of amortization, while increases in lapse/surrender and
mortality assumptions or decreases in returns reduce the expected future
profitability of the underlying business and may increase the rate of
amortization.
One of the most significant assumptions involved in the estimation of future
gross profits for variable universal life and deferred annuity products is the
assumed return associated with future separate account performance. To reflect
the near-term and long-term volatility in the equity markets this assumption
involves a combination of near-term expectations and a long-term assumption
about market performance. The overall return generated by the separate account
is dependent on several factors, including the relative mix of the underlying
sub-accounts among bond funds and equity funds as well as equity sector
weightings.
As part of the regular analysis of DAC/VOBA, at the end of third quarter 2002,
the Company unlocked its assumptions by resetting its near-term and long-term
assumptions for the separate account returns to 9% (gross before fund management
fees and mortality and expense and other policy charges), reflecting a blended
return of equity and other sub-accounts. This unlocking adjustment was primarily
driven by the sustained downturn in the equity markets and revised expectations
for future returns. For the year ended December 31, 2002, the Company recorded
an acceleration of DAC/VOBA amortization totaling $45.6 million before tax, or
$29.7 million, net of $15.9 million of federal income tax benefit.
FORWARD-LOOKING INFORMATION/RISK FACTORS
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the Company cautions readers regarding certain
forward-looking statements contained in this
16
<Page>
ITEM 7. MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (continued)
FORWARD-LOOKING INFORMATION/RISK FACTORS (continued)
report and in any other statements made by, or on behalf of, the Company,
whether or not in future filings with the SEC. Forward-looking statements are
statements not based on historical information and which relate to future
operations, strategies, financial results, or other developments. Statements
using verbs such as "expect," "anticipate," "believe" or words of similar import
generally involve forward-looking statements. Without limiting the foregoing,
forward-looking statements include statements which represent the Company's
beliefs concerning future levels of sales and redemptions of the Company's
products, investment spreads and yields, or the earnings and profitability of
the Company's activities.
Forward-looking statements are necessarily based on estimates and assumptions
that are inherently subject to significant business, economic and competitive
uncertainties and contingencies, many of which are beyond the Company's control
and many of which are subject to change. These uncertainties and contingencies
could cause actual results to differ materially from those expressed in any
forward-looking statements made by, or on behalf of, the Company.
Whether or not actual results differ materially from forward-looking statements
may depend on numerous foreseeable and unforeseeable developments. Some may be
national in scope, such as general economic conditions, changes in tax law and
changes in interest rates. Some may be related to the insurance industry
generally, such as pricing competition, regulatory developments and industry
consolidation. Others may relate to the Company specifically, such as credit,
volatility and other risks associated with the Company's investment portfolio.
Investors are also directed to consider other risks and uncertainties discussed
in documents filed by the Company with the SEC. The Company disclaims any
obligation to update forward-looking information.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Asset/liability management is integrated into many aspects of the Company's
operations, including investment decisions, product development, and
determination of crediting rates. As part of the risk management process,
different economic scenarios are modeled, including cash flow testing required
for insurance regulatory purposes, to determine that existing assets are
adequate to meet projected liability cash flows. Key variables in the modeling
process include interest rates, anticipated contractholder behavior and variable
separate account performance. Contractholders bear the majority of the
investment risk related to variable insurance products.
The fixed account liabilities are supported by a portfolio principally composed
of fixed rate investments that can generate predictable, steady rates of return.
The portfolio management strategy for the fixed account considers the assets
available for sale. This enables the Company to respond to changes in market
interest rates, changes in prepayment risk, changes in relative values of asset
sectors and individual securities and loans, changes in credit quality outlook,
and other relevant factors. The objective of portfolio management is to maximize
returns, taking in to account interest rate and credit risk, as well as other
risks. The Company's asset/liability management discipline includes strategies
to minimize exposure to loss as interest rates and economic and market
conditions change.
On the basis of these analyses, management believes there is currently no
material solvency risk to the Company.
17
<Page>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<Table>
<Caption>
Page
----
Reports of Independent Auditors................... 19
Consolidated Financial Statements:
Consolidated Income Statements for the years
ended December 31, 2002 and 2001, one month
ended December 31, 2000 and eleven months
ended November 30, 2000.................... 21
Consolidated Balance Sheets as of
December 31, 2002 and 2001................. 22
Consolidated Statements of Changes in
Shareholder's Equity for the years ended
December 31, 2002 and 2001, one month ended
December 31, 2000 and eleven months ended
November 30, 2000.......................... 23
Consolidated Statements of Cash Flows for the
years ended December 31, 2002 and 2001, one
month ended December 31, 2000 and eleven
months ended November 30, 2000............. 24
Notes to Consolidated Financial Statements.... 25
</Table>
18
<Page>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
ING Life Insurance and Annuity Company
We have audited the accompanying consolidated balance sheets of ING Life
Insurance and Annuity Company as of December 31, 2002 and 2001, and the related
income statements, statements of changes in shareholder's equity, and statements
of cash flows for each of the years then ended. 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 auditing standards generally accepted
in the 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 examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of ING Life Insurance
and Annuity Company at December 31, 2002 and 2001, and the results of its
operations and its cash flows for each of the years then ended, in conformity
with accounting principles generally accepted in the United States.
As discussed in Note 1 to the financial statements, the Company changed the
accounting principle for goodwill and other intangible assets effective
January 1, 2002.
/s/ Ernst & Young LLP
Atlanta, Georgia
March 25, 2003
19
<Page>
INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Directors
ING Life Insurance and Annuity Company
We have audited the accompanying consolidated statements of income, changes in
shareholder's equity and cash flows of ING Life Insurance and Annuity Company
and Subsidiaries, formerly known as Aetna Life Insurance and Annuity Company and
Subsidiaries, for the period from December 1, 2000 to December 31, 2000
("Successor Company"), and for the period from January 1, 2000 to November 30,
2000 ("Preacquisition Company"). These consolidated financial statements are the
responsibility of the Companies' management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. 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 examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the Successor Company's consolidated financial statements
referred to above present fairly, in all material respects, the results of
operations and cash flows of ING Life Insurance and Annuity Company and
Subsidiaries for the period from December 1, 2000 to December 31, 2000, in
conformity with accounting principles generally accepted in the United States of
America. Further, in our opinion, the Preacquisition Company's consolidated
financial statements referred to above present fairly, in all material respects,
the results of their operations and their cash flows for the period from
January 1, 2000 to November 30, 2000, in conformity with accounting principles
generally accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, effective
November 30, 2000, ING America Insurance Holdings Inc. acquired all of the
outstanding stock of Aetna Inc., Aetna Life Insurance and Annuity Company's
indirect parent and sole shareholder in a business combination accounted for as
a purchase. As a result of the acquisition, the consolidated financial
information for the periods after the acquisition is presented on a different
cost basis than that for the periods before the acquisition and, therefore, is
not comparable.
/s/ KPMG LLP
Hartford, Connecticut
March 27, 2001
20
<Page>
ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly-owned subsidiary of ING Retirement Holdings, Inc.)
CONSOLIDATED INCOME STATEMENTS
(Millions)
<Table>
<Caption>
Preacquisition
One month Eleven months
Year ended Year ended ended ended
December 31, December 31, December 31, November 30,
2002 2001 2000 2000
------------- ------------- ------------- --------------
Revenues:
Premiums $ 98.7 $ 114.2 $ 16.5 $ 137.7
Fee income 418.2 553.4 49.8 573.3
Net investment income 959.5 888.4 78.6 833.8
Net realized capital gains
(losses) (101.0) (21.0) 1.8 (37.2)
--------- -------- ------ --------
Total revenue 1,375.4 1,535.0 146.7 1,507.6
--------- -------- ------ --------
Benefits, losses and expenses:
Benefits:
Interest credited and
other benefits to
policyholders 746.4 729.6 68.9 726.7
Underwriting, acquisition,
and insurance expenses:
Operating expenses 361.4 444.2 49.1 414.6
Amortization:
Deferred policy
acquisition costs and
value of business
acquired 181.5 112.0 10.2 116.7
Goodwill -- 61.9 -- --
--------- -------- ------ --------
Total benefits, losses
and expenses 1,289.3 1,347.7 128.2 1,258.0
--------- -------- ------ --------
Income before income taxes,
discontinued operations and
cumulative effect of change
in accounting principle 86.1 187.3 18.5 249.6
Income tax expense 18.6 87.4 5.9 78.1
--------- -------- ------ --------
Income before discontinued
operations and cumulative
effect of change in
accounting principle 67.5 99.9 12.6 171.5
Discontinued operations, net
of tax -- -- -- 5.7
Cumulative effect of change in
accounting principle (2,412.1) -- -- --
--------- -------- ------ --------
Net income (loss) $(2,344.6) $ 99.9 $ 12.6 $ 177.2
========= ======== ====== ========
</Table>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
21
<Page>
ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly-owned subsidiary of ING Retirement Holdings, Inc.)
CONSOLIDATED BALANCE SHEETS
(Millions, except share data)
<Table>
<Caption>
As of December 31,
--------------------
2002 2001
--------- ---------
ASSETS
Investments:
Fixed maturities, available for sale,
at fair value (amortized cost of
$15,041.2 at 2002 and $13,249.2 at
2001) $15,767.0 $13,539.9
Equity securities at fair value:
Nonredeemable preferred stock (cost
of $34.2 at 2002 and $27.0 at
2001) 34.2 24.6
Investment in affiliated mutual
funds (cost of $203.9 at 2002 and
$22.9 at 2001) 201.0 25.0
Common stock (cost of $0.2 at 2002
and $2.3 at 2001) 0.2 0.7
Mortgage loans on real estate 576.6 241.3
Policy loans 296.3 329.0
Short-term investments 6.2 31.7
Other investments 52.2 18.2
Securities pledged to creditors
(amortized cost of $154.9 at 2002
and $466.9 at 2001) 155.0 467.2
--------- ---------
Total investments 17,088.7 14,677.6
Cash and cash equivalents 65.4 82.0
Short term investments under securities
loan agreement 164.3 488.8
Accrued investment income 170.9 160.9
Reciprocal loan with affiliate -- 191.1
Reinsurance recoverable 2,986.5 2,990.7
Deferred policy acquisition costs 229.8 121.3
Value of business acquired 1,438.4 1,601.8
Goodwill (net of accumulated
amortization of $61.9 at 2001) -- 2,412.1
Property, plant and equipment (net of
accumulated depreciation of $56.0 at
2002 and $33.9 at 2001) 49.8 66.1
Other assets 145.8 149.7
Assets held in separate accounts 28,071.1 32,663.1
--------- ---------
Total assets $50,410.7 $55,605.2
========= =========
LIABILITIES AND SHAREHOLDER'S EQUITY
Policy liabilities and accruals:
Future policy benefits and claims'
reserves $ 3,305.2 $ 3,996.8
Unpaid claims and claim expenses 30.0 28.8
Other policyholder's funds 14,756.0 12,135.8
--------- ---------
Total policy liabilities and
accruals 18,091.2 16,161.4
Payables under securities loan
agreement 164.3 488.8
Current income taxes 84.5 59.2
Deferred income taxes 163.1 153.7
Other liabilities 1,573.7 1,624.7
Liabilities related to separate
accounts 28,071.1 32,663.1
--------- ---------
Total liabilities 48,147.9 51,150.9
--------- ---------
Shareholder's equity:
Common stock (100,000 shares
authorized; 55,000 shares issued and
outstanding, $50.00 per share par
value) 2.8 2.8
Additional paid-in capital 4,416.5 4,292.4
Accumulated other comprehensive income 108.3 46.6
Retained earnings (deficit) (2,264.8) 112.5
--------- ---------
Total shareholder's equity 2,262.8 4,454.3
--------- ---------
Total liabilities and
shareholder's equity $50,410.7 $55,605.2
========= =========
</Table>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
22
<Page>
ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly-owned subsidiary of ING Retirement Holdings, Inc.)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
(Millions)
<Table>
<Caption>
Accumulated
Other
Additional Comprehensive Retained Total
Common Paid-in- Income Earnings Shareholder's
Stock Capital (Loss) (Deficit) Equity
------ ---------- ------------- --------- -------------
Balance at December 31,
1999 $2.8 $ 431.9 $(44.8) $ 995.8 $ 1,385.7
Comprehensive income:
Net income -- -- -- 177.2 177.2
Other comprehensive
income net of tax:
Unrealized gain on
securities ($79.4
pretax) -- -- 51.6 -- 51.6
---------
Comprehensive income 228.8
Adjustment for purchase
accounting -- 3,751.7 -- (1,173.0) 2,578.7
Capital contributions -- 129.5 -- -- 129.5
Common stock dividends -- (10.1) -- -- (10.1)
Other changes -- 0.8 -- -- 0.8
---- -------- ------ --------- ---------
Balance at November 30,
2000 2.8 4,303.8 6.8 -- 4,313.4
Comprehensive income:
Net income -- -- -- 12.6 12.6
Other comprehensive
income net of tax:
Unrealized gain on
securities ($28.7
pretax) -- -- 18.6 -- 18.6
---------
Comprehensive income 31.2
---- -------- ------ --------- ---------
Balance at December 31,
2000 2.8 4,303.8 25.4 12.6 4,344.6
Comprehensive income:
Net income -- -- -- 99.9 99.9
Other comprehensive
income net of tax:
Unrealized gain on
securities ($32.5
pretax) -- -- 21.2 -- 21.2
---------
Comprehensive income 121.1
Return of capital -- (11.3) -- -- (11.3)
Other changes -- (0.1) -- -- (0.1)
---- -------- ------ --------- ---------
Balance at December 31,
2001 2.8 4,292.4 46.6 112.5 4,454.3
Comprehensive income:
Net (loss) -- -- -- (2,344.6) (2,344.6)
Other comprehensive
income net of tax:
Unrealized gain on
securities ($94.9
pretax) -- -- 61.7 -- 61.7
---------
Comprehensive (loss) (2,282.9)
Distribution of IA Holdco -- (27.4) -- (32.7) (60.1)
Capital contributions -- 164.3 -- -- 164.3
SERP -- transfer -- (15.1) -- -- (15.1)
Other changes -- 2.3 -- -- 2.3
---- -------- ------ --------- ---------
Balance at December 31,
2002 $2.8 $4,416.5 $108.3 $(2,264.8) $ 2,262.8
---- -------- ------ --------- ---------
</Table>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
23
<Page>
ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A wholly-owned subsidiary of ING Retirement Holdings, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Millions)
<Table>
<Caption>
Preacquisition
--------------
One month Eleven months
Year ended Year ended ended ended
December 31, December 31, December 31, November 30,
2002 2001 2000 2000
----------------------- --------------- --------------- --------------
Cash Flows from Operating
Activities:
Net income (loss) $ (2,344.6) $ 99.9 $ 12.6 $ 177.2
Adjustments to reconcile net
income to net cash provided
by operating activities:
Net amortization or
(accretion) of discount on
investments 115.5 (1.2) (2.7) (32.6)
Amortization of deferred
gain on sale -- -- -- (5.7)
Net realized capital (gains)
losses 101.0 21.0 (1.8) 37.2
(Increase) decrease in
accrued investment income (10.0) (13.7) 6.6 (3.1)
(Increase) decrease in
premiums due and other
receivables 172.7 (95.6) 31.1 (23.7)
(Increase) decrease in
policy loans -- 10.3 0.1 (25.4)
(Increase) decrease in
deferred policy
acquisition costs (108.5) (121.3) (12.2) (136.6)
(Increase) decrease in value
of business acquired 139.4 13.9 -- --
Amortization of goodwill -- 61.9 -- --
Impairment of goodwill 2,412.1 -- -- --
Increase (decrease) in
universal life account
balances -- 17.6 (3.8) 23.8
Change in other insurance
reserve liabilities 953.7 (136.3) (5.3) 85.6
Change in other assets and
liabilities 72.8 (68.0) 103.9 (75.2)
Provision for deferred
income taxes 23.6 89.5 (14.3) 23.1
---------- ---------- ------- ----------
Net cash provided by (used
for) operating activities 1,527.7 (122.0) 114.2 44.6
---------- ---------- ------- ----------
Cash Flows from Investing
Activities:
Proceeds from the sale of:
Fixed maturities available
for sale 24,980.4 14,216.7 233.0 10,083.2
Equity securities 57.2 4.4 1.5 118.4
Mortgages 2.0 5.2 0.1 2.1
Investment maturities and
collections of:
Fixed maturities available
for sale 1,334.9 1,121.8 53.7 573.1
Short-term investments 11,796.7 7,087.3 0.4 59.9
Acquisition of investments:
Fixed maturities available
for sale (28,105.5) (16,489.8) (230.7) (10,505.5)
Equity securities (81.8) (50.0) (27.8) (17.6)
Short-term investments (11,771.3) (6,991.1) (10.0) (113.1)
Mortgages (343.7) (242.0) -- --
(Increase) decrease in
policy loans 32.7 -- -- --
(Increase) decrease in
property and equipment (5.8) 7.4 1.9 5.4
Other, net (47.8) (4.7) 0.3 (4.0)
---------- ---------- ------- ----------
Net cash provided by (used
for) investing activities (2,152.0) (1,334.8) 22.4 201.9
---------- ---------- ------- ----------
Cash Flows from Financing
Activities:
Deposits and interest
credited for investment
contracts 1,332.5 1,941.5 164.2 1,529.7
Maturities and withdrawals
from insurance contracts (741.4) (1,082.7) (156.3) (1,832.6)
Capital contribution from
HOLDCO -- -- -- 73.5
Return of capital -- (11.3) -- --
Dividends paid to shareholder -- -- -- (10.1)
Other, net 16.6 (105.0) (73.6) 22.0
---------- ---------- ------- ----------
Net cash provided by (used
for) financing activities 607.7 742.5 (65.7) (217.5)
---------- ---------- ------- ----------
Net increase (decrease) in
cash and cash equivalents (16.6) (714.3) 70.9 29.0
Effect of exchange rate
changes on cash and cash
equivalents -- -- -- 2.0
Cash and cash equivalents,
beginning of period 82.0 796.3 725.4 694.4
---------- ---------- ------- ----------
Cash and cash equivalents, end
of period $ 65.4 $ 82.0 $ 796.3 $ 725.4
========== ========== ======= ==========
Supplemental cash flow
information:
Income taxes (received) paid,
net $ 6.7 $ (12.3) $ 20.3 $ 39.9
========== ========== ======= ==========
</Table>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
24
<Page>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include ING Life Insurance and Annuity
Company ("ILAIC" or the "Company") and its wholly-owned subsidiaries, ING
Insurance Company of America ("IICA"), ING Financial Advisors, LLC ("IFA"),
and through February 28, 2002, Aetna Investment Adviser Holding
Company, Inc. ("IA Holdco"). The Company 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.
HOLDCO contributed IFA to the Company on June 30, 2000 and contributed IA
Holdco to the Company on July 1, 1999. On February 28, 2002, ILIAC
distributed 100% of the stock of IA Holdco to HOLDCO in the form of a $60.1
million dividend distribution. The primary operating subsidiary of IA Holdco
is Aeltus Investment Management, Inc. ("Aeltus"). Accordingly, fees earned
by Aeltus were not included in Company results subsequent to the dividend
date. As a result of this transaction, the Investment Management Services is
no longer reflected as an operating segment of the Company.
On December 13, 2000, ING America Insurance Holdings, Inc. ("ING AIH"), an
indirect wholly-owned subsidiary of ING, acquired Aetna Inc., comprised of
the Aetna Financial Services business, of which the Company is a part, and
Aetna International businesses, for approximately $7,700.0 million. The
purchase price was comprised of approximately $5,000.0 million in cash and
the assumption of $2,700.0 million of outstanding debt and other net
liabilities. In connection with the acquisition, Aetna Inc. was renamed Lion
Connecticut Holdings Inc. ("Lion"). At the time of the sale, Lion entered
into certain transition services agreements with a former related party,
Aetna U.S. Healthcare, which was renamed Aetna Inc. ("former Aetna").
For accounting purposes, the acquisition was recorded as of November 30,
2000 using the purchase method. The effects of this transaction, including
the recognition of goodwill, were pushed down and reflected on the financial
statements of certain IRSI (a subsidiary of Lion) subsidiaries, including
the Company. The Balance Sheet changes related to accounting for this
purchase were entirely non-cash in nature and accordingly were excluded from
the pre-acquisition Consolidated Statement of Cash Flows for the eleven
months ended November 30, 2000.
The purchase price was allocated to assets and liabilities based on their
respective fair values. This revaluation resulted in a net increase to
assets, excluding the effects of goodwill, of $592.0 million and a net
increase to liabilities of $310.6 million. Additionally, the Company
established goodwill of $2,297.4 million. Goodwill was amortized over a
period of 40 years prior to January 1, 2002.
The allocation of the purchase price to assets and liabilities was subjected
to further refinement throughout 2001 as additional information became
available to more precisely estimate the fair
25
<Page>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (continued)
values of the Company's respective assets and liabilities at the purchase
date. The refinements to the Company's purchase price allocations were as
follows:
The Company completed a full review relative to the assumptions and profit
streams utilized in the development of value of business acquired ("VOBA")
and determined that certain refinements were necessary. Such refinements
resulted in a reduction of VOBA;
The Company completed the review of the fixed assets that existed at or
prior to the acquisition and determined that an additional write down was
necessary;
The Company completed the review of severance actions related to individuals
who were employed before or at the acquisition date and determined that an
additional severance accrual was necessary;
The Company completed its valuation of certain benefit plan liabilities and,
as a result, reduced those benefit plan liabilities;
The Company adjusted its reserve for other policyholders' funds in order to
conform its accounting policies with those of ING;
The Company, after giving further consideration to certain exposures in the
general market place, determined that a reduction of its investment
portfolio carrying value was warranted;
The Company determined that the establishment of a liability for certain
noncancellable operating leases that existed prior to or at the acquisition
date but were no longer providing a benefit to the Company's operations, was
warranted; and
The Company determined that the contractual lease payment of one of its
operating leases was more than the current market rate, and established a
corresponding unfavorable lease liability.
The net impact of the refinements in purchase price allocations, as
described above, resulted in a net decrease to assets, excluding the effects
of goodwill, of $236.4 million, a net decrease to liabilities of $59.8
million and a net increase to the Company's goodwill of $176.6 million.
Unaudited proforma consolidated income from continuing operations and net
income of the Company for the period from January 1, 2000 to November 30,
2000, assuming that the acquisition of the Company occurred at the beginning
of each period, would have been approximately $118.1 million. The pro forma
adjustments, which did not affect revenues, reflect primarily goodwill
amortization, amortization of the favorable lease asset and the elimination
of amortization of the deferred gain on sale associated with the life
business.
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").
26
<Page>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
Investment Management Services, through February 28, 2002, provided:
investment advisory services to affiliated and unaffiliated institutional
and retail clients on a fee-for-service basis; underwriting services to the
ING Series Fund, Inc. (formerly known as the Aetna Series Fund, Inc.), and
the ING Variable Portfolios, Inc. (formerly known as the Aetna Variable
Portfolios, Inc.); distribution services for other company products; and
trustee, administrative, and other fiduciary services to retirement plans
requiring or otherwise utilizing a trustee or custodian.
Discontinued Operations included universal life, variable universal life,
traditional whole life and term insurance.
DESCRIPTION OF BUSINESS
The Company offers annuity contracts that include a variety of funding and
payout options for employer-sponsored retirement plans qualified under
Internal Revenue Code Sections 401, 403, 408 and 457, as well as
nonqualified deferred. The Company's products are offered primarily to
individuals, pension plans, small businesses and employer-sponsored groups
in the health care, government, educations (collectively "not-for-profit"
organizations) and corporate markets. The Company's products generally are
sold through pension professionals, independent agents and brokers, third
party administrators, banks, dedicated career agents and financial planners.
NEW ACCOUNTING STANDARDS
ACCOUNTING FOR GOODWILL AND INTANGIBLE ASSETS
In June 2001, the Financial Accounting Standards Board ("FASB") issued FAS
No. 142, "Goodwill and Other Intangible Assets," ("FAS No.142"), effective
for fiscal years beginning after December 15, 2001. Under FAS No. 142,
goodwill and intangible assets deemed to have indefinite lives will no
longer be amortized but will be subject to annual impairment tests. Other
intangible assets are still amortized over their estimated useful lives. The
Company adopted the new standard effective January 1, 2002.
27
<Page>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (continued)
As required under FAS No. 142, the Company completed the first of the
required impairment tests as of January 1, 2002. Step one of the impairment
test was a screen for potential impairment, while step two measured the
amount of the impairment. All of the Company's operations fall under one
reporting unit, USFS, due to the consolidated nature of the Company's
operations. Step one of the impairment test required the Company to estimate
the fair value of the reporting unit and compare the estimated fair value to
its carrying value. The Company determined the estimated fair value
utilizing a discounted cash flow approach and applying a discount rate
equivalent to the Company's weighted average cost of capital. Fair value was
determined to be less than carrying value which required the Company to
complete step two of the test. In step two, the Company allocated the fair
value of the reporting unit determined in step one to the assets and
liabilities of the reporting unit resulting in an implied fair value of
goodwill of zero.
The comparison of the fair value amount allocated to goodwill and the
carrying value of goodwill resulted in an impairment loss of $2,412.1
million, which represents the entire carrying amount of goodwill, net of
accumulated amortization. This impairment charge is shown as a change in
accounting principle on the Consolidated Income Statement.
Application of the nonamortization provision (net of tax) of the new
standard resulted in an increase in net income of $61.9 million for the
twelve months ended December 31, 2002. Had the Company been accounting for
goodwill under FAS No. 142 for all periods presented, the Company's net
income would have been as follows:
<Table>
<Caption>
Preacquisition
--------------
One month Eleven months
Year ended ended ended
December 31, December 31, November 30,
(Millions) 2001 2000 2000
Reported net income after tax $ 99.9 $12.6 $177.2
Add back goodwill amortization, net
of tax 61.9 -- --
-------------------------------------------------------------------------------------
Adjusted net income after tax $161.8 $12.6 $177.2
=====================================================================================
</Table>
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, the FASB issued FAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended and interpreted by FAS No.
137, Accounting for Derivative Instruments and Hedging Activities --
Deferral of the Effective Date of FASB Statement 133, FAS No.138, Accounting
for Certain Derivative Instruments and Certain Hedging Activities -- an
Amendment of FAS No. 133, and certain FAS No. 133 implementation issues.
This standard, as amended, requires companies to record all derivatives on
the balance sheet as either assets or liabilities and measure those
instruments at fair value. The manner in which companies are to record gains
or losses resulting from changes in the fair values of those derivatives
depends on the use of the derivative and whether it qualifies for hedge
accounting. FAS No. 133 was effective for the Company's financial statements
beginning January 1, 2001.
28
<Page>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (continued)
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 and embedded derivative holdings.
The Company utilizes, interest rate swaps, caps and floors, foreign exchange
swaps and warrants in order to manage interest rate and price risk
(collectively, market risk). These financial exposures are monitored and
managed by the Company as an integral part of the overall risk management
program. Derivatives are recognized on the balance sheet at their fair
value. The Company chose not to designate its derivative instruments as part
of hedge transactions.
Therefore, changes in the fair value of the Company's derivative instruments
are recorded immediately in the consolidated statements of income as part of
realized capital gains and losses.
Warrants are carried at fair value and are recorded as either derivative
instruments or FAS No. 115 available for sale securities. Warrants that are
considered derivatives are carried at fair value if they are readily
convertible to cash. The values of these warrants can fluctuate given that
the companies that underlie the warrants are non-public companies. At
December 31, 2002 and 2001, the estimated value of these warrants, including
the value of their effectiveness, in managing market risk, was immaterial.
These warrants will be revalued each quarter and the change in the value of
the warrants will be included in the consolidated statements of income.
The Company, at times, may own warrants on common stock which are not
readily convertible to cash as they contain certain conditions which
preclude their convertibility and therefore, will not be included in assets
or liabilities as derivatives. If conditions are satisfied and the
underlying stocks become marketable, the warrants would be reclassified as
derivatives and recorded at fair value as an adjustment through current
period results of operations.
The Company occasionally purchases a financial instrument that contains a
derivative that is "embedded" in the instrument. In addition, the Company's
insurance products are reviewed to determine whether they contain an
embedded derivative. The Company assesses whether the economic
characteristics of the embedded derivative are clearly and closely related
to the economic characteristics of the remaining component of the financial
instrument or insurance product (i.e., the host contract) and whether a
separate instrument with the same terms as the embedded instrument would
meet the definition of a derivative instrument. When it is determined that
the embedded derivative possesses economic characteristics that are not
clearly and closely related to the economic characteristics of the host
contract and that a separate instrument with the same terms would qualify as
a derivative instrument, the embedded derivative is separated from the host
contract and carried at fair value. However, in cases where the host
contract is measured at fair value, with changes in fair value reported in
current period earnings or the Company is unable to reliably identify and
measure the embedded derivative for separation from its host contracts, the
entire contract is carried on the balance sheet at fair value and is not
designated as a hedging instrument.
29
<Page>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (continued)
GUARANTEES
In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others," to clarify
accounting and disclosure requirements relating to a guarantor's issuance of
certain types of guarantees. FIN 45 requires entities to disclose additional
information of certain guarantees, or groups of similar guarantees, even if
the likelihood of the guarantor's having to make any payments under the
guarantee is remote. The disclosure provisions are effective for financial
statements for fiscal years ended after December 15, 2002. For certain
guarantees, the interpretation also requires that guarantors recognize a
liability equal to the fair value of the guarantee upon its issuance. This
initial recognition and measurement provision is to be applied only on a
prospective basis to guarantees issued or modified after December 31, 2002.
The Company has performed an assessment of its guarantees and believes that
all of its guarantees are excluded from the scope of this interpretation.
FUTURE ACCOUNTING STANDARDS
EMBEDDED DERIVATIVES
The FASB issued Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("FAS
No.133") in 1998 and continues to issue guidance for implementation through
its Derivative Implementation Group ("DIG"). DIG recently released a draft
of FASB Statement 133 Implementation Issue B36, "Embedded Derivatives:
Bifurcation of a Debt Instrument That Incorporates Both Interest Rate Risk
and Credit Risk Exposures That are Unrelated or Only Partially Related to
the Creditworthiness of the Issuer of That Instrument" ("DIG B36"). Under
this interpretation, modified coinsurance and coinsurance with funds
withheld reinsurance agreements as well as other types of receivables and
payables where interest is determined by reference to a pool of fixed
maturity assets or total return debt index may be determined to contain
bifurcatable embedded derivatives. The required date of adoption of DIG B36
has not been determined. If the guidance is finalized in its current form,
the Company has determined that certain of its existing reinsurance
receivables (payables), investments or insurance products contain embedded
derivatives that may require bifurcation. The Company has not yet completed
its evaluation of the potential impact, if any, on its consolidated
financial positions, results of operations, or cash flows.
FASB INTERPRETATION NO. 46 CONSOLIDATION OF VARIABLE INTEREST ENTITIES
In January 2003, FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities" ("VIE"), an interpretation of
Accounting Research Bulletin ("ARB") No. 51. This Interpretation addresses
consolidation by business enterprises of variable interest entities, which
have one or both of the following characteristics: a) insufficient equity
investment at risk, or b) insufficient control by equity investors. This
guidance is effective for VIEs created after January 31, 2003 and for
existing VIEs as of July 1, 2003. An entity with variable interest in VIEs
created before February 1, 2003 shall apply the guidance no later than the
beginning of the first interim or annual reporting period beginning after
June 15, 2003.
30
<Page>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (continued)
In conjunction with the issuance of this guidance, the Company conducted a
review of its involvement with the VIEs and does not believe it has any
significant investments or ownership in VIEs.
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.
RECLASSIFICATIONS
Certain reclassifications have been made to prior year financial information
to conform to the current year classifications.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand, money market instruments and
other debt issues with a maturity of 90 days or less when purchased.
INVESTMENTS
All of the Company's fixed maturity and equity securities are currently
designated as available-for-sale. Available-for-sale securities are reported
at fair value and unrealized gains and losses on these securities are
included directly in shareholder's equity, after adjustment for related
charges in deferred policy acquisition costs, value of business acquired,
and deferred income taxes.
The Company analyzes the general account investments to determine whether
there has been an other than temporary decline in fair value below the
amortized cost basis in accordance with FAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." Management considers the length
of time and the extent to which the fair value has been less than amortized
cost; the financial condition and near-term prospects of the issuer; future
economic conditions and market forecasts; and the Company's intent and
ability to retain the investment in the issuer for a period of time
sufficient to allow for recovery in fair value. If it is probable that all
amounts due according to the contractual terms of a debt security will not
be collected, an other than temporary impairment is considered to have
occurred.
In addition, the Company invests in structured securities that meet the
criteria of Emerging Issues Task Force ("EITF") Issue No. 99-20 "Recognition
of Interest Income and Impairment on Purchased and Retained Beneficial
Interests in Securitized Financial Assets." Under Issue No. EITF 99-20, a
determination of the required impairment is based on credit risk and the
possibility of significant prepayment risk that restricts the Company's
ability to recover the investment. An impairment is recognized if the fair
value of the security is less than amortized cost and there has been an
adverse change in cash flow since the last remeasurement date.
31
<Page>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
Included in available-for-sale securities are investments that support
experience-rated products. Experience-rated products are products where the
customer, not the Company, assumes investment (including realized capital
gains and losses) and other risks, subject to, among other things, minimum
guarantees. Realized gains and losses on the sale of, as well as unrealized
capital gains and losses on, investments supporting these products are
reflected in other policyholders' funds. Realized capital gains and losses
on all other investments are reflected on all other investments are
reflected in the Company's results of operations.
Unrealized capital gains and losses on all other investments are reflected
in shareholder's equity, net of related income taxes.
Purchases and sales 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 maturity securities 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.
The Company engages in securities lending whereby certain securities from
its portfolio are loaned to other institutions for short periods of time.
Initial collateral, primarily cash, is required at a rate of 102% of the
market value of the loaned domestic securities. The collateral is deposited
by the borrower with a lending agent, and retained and invested by the
lending agent according to the Company's guidelines to generate additional
income. The market value of the loaned securities is monitored on a daily
basis with additional collateral obtained or refunded as the market value of
the loaned securities fluctuates.
In September 2000, the FASB issued FAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities." In
accordance with this new standard,
32
<Page>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (continued)
general account securities on loan are reflected on the Consolidated Balance
Sheet as "Securities pledged to creditors", which includes the following:
<Table>
<Caption>
Gross Gross
December 31, 2002 Amortized Unrealized Unrealized Fair
(Millions) Cost Gains Losses Value
Total securities pledged to
creditors $154.9 $0.1 $ -- $155.0
===========================================================================
</Table>
<Table>
<Caption>
Gross Gross
December 31, 2001 Amortized Unrealized Unrealized Fair
(Millions) Cost Gains Losses Value
Total securities pledged to
creditors $466.9 $1.1 $0.8 $467.2
===========================================================================
</Table>
Total securities pledged to creditors at December 31, 2002 and 2001
consisted entirely of fixed maturity securities.
The investment in affiliated mutual funds represents an investment in mutual
funds managed by the Company and its affiliates, and is carried at fair
value.
Mortgage loans on real estate are reported at amortized cost less impairment
writedowns. If the value of any mortgage loan is determined to be impaired
(i.e., when it is probable the Company will be unable to collect all amounts
due according to the contractual terms of the loan agreement), the carrying
value of the mortgage loan is reduced to the present value of expected cash
flows from the loan, discounted at the loan's effective interest rate, or to
the loan's observable market price, or the fair value of the underlying
collateral. The carrying value of the impaired loans is reduced by
establishing a permanent writedown charged to realized loss.
Policy loans are carried at unpaid principal balances, net of impairment
reserves.
Short-term investments, consisting primarily of money market instruments and
other fixed maturity securities 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.
Reverse dollar repurchase agreement and reverse repurchase agreement
transactions are accounted for as collateralized borrowings, where the
amount borrowed is equal to the sales price of the underlying securities.
These transactions are reported in "Other Liabilities."
The Company's use of derivatives is limited to economic hedging purposes.
The Company enters into interest rate and currency contracts, including
swaps, caps, and floors 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.
33
<Page>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (continued)
On occasion, the Company sells call options written on underlying securities
that are carried at fair value. Changes in the fair value of these options
are recorded in net realized capital gains or losses.
DEFERRED POLICY ACQUISITION COSTS AND VALUE OF BUSINESS ACQUIRED
Deferred Policy 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. VOBA is an asset, which represents the present
value of estimated net cash flows embedded in the Company's contracts, which
existed at the time the Company was acquired by ING. DAC and VOBA are
evaluated for recoverability at each balance sheet date and these assets
would be reduced to the extent that gross profits are inadequate to recover
the asset.
The amortization methodology varies by product type based upon two
accounting standards: FAS No. 60, "Accounting and Reporting by Insurance
Enterprises" ("FAS No. 60") and FAS No. 97, "Accounting and Reporting by
Insurance Enterprises for Certain Long-Duration Contracts and Realized Gains
and Losses from the Sale of Investments" ("FAS No. 97").
Under FAS No. 60, acquisition costs for traditional life insurance products,
which primarily include whole life and term life insurance contracts, are
amortized over the premium payment period in proportion to the premium
revenue recognition.
Under FAS No. 97, acquisition costs for universal life and investment-type
products, which include universal life policies and fixed and variable
deferred annuities, are amortized over the life of the blocks of policies
(usually 25 years) in relation to the emergence of estimated gross profits
from surrender charges, investment margins, mortality and expense margins,
asset-based fee income, and actual realized gains (losses) on investments.
Amortization is adjusted retrospectively when estimates of current or future
gross profits to be realized from a group of products are revised.
DAC and VOBA are written off to the extent that it is determined that future
policy premiums and investment income or gross profits are not adequate to
cover related expenses.
Activity for the year-ended December 31, 2002 within VOBA was as follows:
<Table>
<Caption>
(Millions)
Balance at December 31, 2001 $1,601.8
Adjustment for unrealized gain (loss) (21.9)
Additions 25.0
Interest accrued at 7% 86.8
Amortization (253.3)
------------------------------------------------------------
Balance at December 31, 2002 $1,438.4
============================================================
</Table>
34
<Page>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (continued)
The estimated amount of VOBA to be amortized, net of interest, over the next
five years is $105.6 million, $102.1 million, $101.9 million, $91.5 million
and $88.3 million for the years 2003, 2004, 2005, 2006 and 2007,
respectively. Actual amortization incurred during these years may vary as
assumptions are modified to incorporate actual results.
As part of the regular analysis of DAC/VOBA, at the end of third quarter
2002, the Company unlocked its assumptions by resetting its near-term and
long-term assumptions for the separate account returns to 9% (gross before
fund management fees and mortality and expense and other policy charges),
reflecting a blended return of equity and other sub-accounts. This unlocking
adjustment was primarily driven by the sustained downturn in the equity
markets and revised expectations for future returns. In 2002, the Company
recorded an acceleration of DAC/VOBA amortization totaling $45.6 million
before tax, or $29.7 million, net $15.9 million of federal income tax
benefit.
POLICY LIABILITIES AND ACCRUALS
Future policy benefits and claims reserves include reserves for universal
life, immediate annuities with life contingent payouts and traditional life
insurance contracts. Reserves for universal life products are equal to
cumulative deposits less withdrawals and charges plus credited interest
thereon. Reserves for traditional life insurance contracts represent the
present value of future benefits to be paid to or on behalf of policyholders
and related expenses less the present value of future net premiums.
Reserves for immediate annuities with life contingent payout contracts are
computed on the basis of assumed investment yield, mortality, and expenses,
including a margin for adverse deviations. Such assumptions generally vary
by plan, year of issue and policy duration. Reserve interest rates range
from 2.0% to 9.5% for all years presented. Investment yield is based on the
Company's experience.
Mortality and withdrawal rate assumptions are based on relevant Company
experience and are periodically reviewed against both industry standards and
experience.
Because the sale of the domestic individual life insurance business was
substantially in the form of an indemnity reinsurance agreement, the Company
reported an addition to its reinsurance recoverable approximating the
Company's total individual life reserves at the sale date.
Other policyholders' funds include reserves for deferred annuity investment
contracts and immediate annuities without life contingent payouts. Reserves
on such contracts are equal to cumulative deposits less charges and
withdrawals plus credited interest thereon (rates range from 2.0% to 12.3%
for all years presented) net of adjustments for investment experience that
the Company is entitled to reflect in future credited interest. These
reserves also include unrealized gains/losses related to FAS No.115 for
experience-rated contracts. Reserves on contracts subject to experience
rating reflect the rights of contractholders, plan participants and the
Company.
35
<Page>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (continued)
Unpaid claims and claim expenses for all lines of insurance include benefits
for reported losses and estimates of benefits for losses incurred but not
reported.
REVENUE RECOGNITION
For certain annuity contracts, fee income for the cost of insurance,
expenses, and other fees are recorded as revenue in and are included in the
fee income line on the Income Statements assessed against policyholders.
Other amounts received for these contracts are reflected as deposits and are
not recorded as revenue but are included in the other policyholders' funds
line on the Balance Sheets. Related policy benefits are recorded in relation
to the associated premiums or gross profit so that profits are recognized
over the expected lives of the contracts. When annuity payments with life
contingencies begin under contracts that were initially investment
contracts, the accumulated balance in the account is treated as a single
premium for the purchase of an annuity and reflected as an offsetting amount
in both premiums and current and future benefits in the Consolidated Income
Statements.
SEPARATE ACCOUNTS
Separate Account assets and liabilities generally represent funds maintained
to meet specific investment objectives of contractholders who bear the
investment risk, subject, in some cases, to minimum guaranteed rates.
Investment income and investment gains and losses generally accrue directly
to such contractholders. The assets of each account are legally segregated
and are not subject to claims that arise out of any other business of the
Company.
Separate Account assets supporting variable options under universal life and
annuity contracts are invested, as designated by the contractholder or
participant under a contract (who bears the investment risk subject, in
limited cases, to minimum guaranteed rates) in shares of mutual funds which
are managed by the Company, or other selected mutual funds not managed by
the Company.
Separate Account assets are carried at fair value. At December 31, 2002 and
2001, unrealized gains of $29.7 million and of $10.8 million, respectively,
after taxes, on assets supporting a guaranteed interest option are reflected
in shareholder's equity.
Separate Account liabilities are carried at fair value, except for those
relating to the guaranteed interest option. Reserves relating to the
guaranteed interest option are maintained at fund value and reflect interest
credited at rates ranging from 3.0% to 10.0% in 2002 and 3.0% to 14.0% in
2001.
Separate Account assets and liabilities are shown as separate captions in
the Consolidated Balance Sheets. Deposits, investment income and net
realized and unrealized capital gains and losses of the Separate Accounts
are not reflected in the Consolidated Financial Statements (with the
exception of realized and unrealized capital gains and losses on the assets
supporting the
36
<Page>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (continued)
guaranteed interest option). The Consolidated Statements of Cash Flows do
not reflect investment activity of the Separate Accounts.
REINSURANCE
The Company utilizes indemnity reinsurance agreements to reduce its exposure
to large losses in all aspects of its insurance business. Such reinsurance
permits recovery of a portion of losses from reinsurers, although it does
not discharge the primary liability of the Company as direct insurer of the
risks reinsured. The Company evaluates the financial strength of potential
reinsurers and continually monitors the financial condition of reinsurers.
Only those reinsurance recoverable balances deemed probable of recovery are
reflected as assets on the Company's Balance Sheets. Of the reinsurance
recoverable on the Balance Sheets, $3.0 billion at both December 31, 2002
and 2001 is related to the reinsurance recoverable from Lincoln arising from
the sale of the Company's domestic life insurance business.
INCOME TAXES
The Company files a consolidated federal income tax return with its
subsidiary IICA. The Company is taxed at regular corporate rates after
adjusting income reported for financial statement purposes for certain
items. Deferred income tax expenses/benefits result from changes during the
year in cumulative temporary differences between the tax basis and book
basis of assets and liabilities.
37
<Page>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. INVESTMENTS
Fixed maturities available for sale as of December 31 were as follows:
<Table>
<Caption>
Gross Gross
Amortized Unrealized Unrealized Fair
2002 (Millions) Cost Gains Losses Value
U.S. government and government
agencies and authorities $ 74.2 $ 2.9 $ -- $ 77.1
States, municipalities and
political subdivisions 10.2 2.5 -- 12.7
U.S. corporate securities:
Public utilities 627.6 28.1 6.4 649.3
Other corporate securities 7,742.6 543.5 33.1 8,253.0
------------------------------------------------------------------------------
Total U.S. corporate
securities 8,370.2 571.6 39.5 8,902.3
------------------------------------------------------------------------------
Foreign securities:
Government 336.9 18.2 6.6 348.5
Other 148.0 8.4 1.2 155.2
------------------------------------------------------------------------------
Total foreign securities 484.9 26.6 7.8 503.7
------------------------------------------------------------------------------
Mortgage-backed securities 5,374.2 167.1 34.0 5,507.3
Other asset-backed securities 882.4 47.0 10.5 918.9
------------------------------------------------------------------------------
Total fixed maturities,
including fixed maturities
pledged to creditors 15,196.1 817.7 91.8 15,922.0
Less: Fixed maturities pledged
to creditors 154.9 0.1 -- 155.0
------------------------------------------------------------------------------
Fixed maturities $15,041.2 $817.6 $91.8 $15,767.0
==============================================================================
</Table>
38
<Page>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. INVESTMENTS (continued)
<Table>
<Caption>
Gross Gross
Amortized Unrealized Unrealized Fair
2001 (Millions) Cost Gains Losses Value
U.S. government and government
agencies and authorities $ 391.0 $ 11.0 $ 4.2 $ 397.8
States, municipalities and
political subdivisions 173.7 7.7 -- 181.4
U.S. corporate securities:
Public utilities 268.5 6.5 7.9 267.1
Other corporate securities 6,138.8 203.0 62.6 6,279.2
------------------------------------------------------------------------------
Total U.S. corporate
securities 6,407.3 209.5 70.5 6,546.3
------------------------------------------------------------------------------
Foreign securities:
Government 153.2 5.2 0.9 157.5
------------------------------------------------------------------------------
Total foreign securities 153.2 5.2 0.9 157.5
------------------------------------------------------------------------------
Mortgage-backed securities 4,513.3 90.1 15.9 4,587.5
Other asset-backed
securities 2,077.6 67.1 8.1 2,136.6
------------------------------------------------------------------------------
Total fixed maturities,
including fixed maturities
pledged to creditors 13,716.1 390.6 99.6 14,007.1
Less: Fixed maturities pledged
to creditors 466.9 1.1 0.8 467.2
------------------------------------------------------------------------------
Fixed maturities $13,249.2 $389.5 $98.8 $13,539.9
==============================================================================
</Table>
At December 31, 2002 and 2001, net unrealized appreciation of
$725.9 million and $291.0 million, respectively, on available-for-sale fixed
maturities including fixed maturities pledged to creditors included
$563.1 million and $233.0 million, respectively, related to experience-rated
contracts, which were not reflected in shareholder's equity but in other
policyholders' funds.
39
<Page>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. INVESTMENTS (continued)
The amortized cost and fair value of total fixed maturities for the
year-ended December 31, 2002 are shown below by contractual maturity. Actual
maturities may differ from contractual maturities because securities may be
restructured, called, or prepaid.
<Table>
<Caption>
Amortized Fair
(Millions) Cost Value
Due to mature:
One year or less $ -- $ --
After one year through five years 1,826.6 1,907.8
After five years through ten years 3,455.2 3,673.3
After ten years 3,657.7 3,914.7
Mortgage-backed securities 5,374.2 5,507.3
Other asset-backed securities 882.4 918.9
Less: Fixed maturities securities
pledged to creditor 154.9 155.0
--------------------------------------------------------------
Fixed maturities $15,041.2 $15,767.0
==============================================================
</Table>
At December 31, 2002 and 2001, fixed maturities with carrying values of
$10.5 million and $9.0 million, respectively, were on deposit as required by
regulatory authorities.
The Company did not have any investments in a single issuer, other than
obligations of the U.S. government, with a carrying value in excess of 10%
of the Company's shareholder's equity at December 31, 2002 or 2001.
The Company has various categories of CMOs that are subject to different
degrees of risk from changes in interest rates and, for CMOs that are not
agency-backed, defaults. The principal risks inherent in holding CMOs are
prepayment and extension risks related to dramatic decreases and increases
in interest rates resulting in the repayment of principal from the
underlying mortgages either earlier or later than originally anticipated. At
December 31, 2002 and 2001, approximately 5.5% and 3.0%, respectively, of
the Company's CMO holdings were invested in types of CMOs which are subject
to more prepayment and extension risk than traditional CMOs (such as
interest-only or principal-only strips).
Investments in equity securities as of December 31 were as follows:
<Table>
<Caption>
(Millions) 2002 2001
Amortized Cost $238.3 $52.2
Gross unrealized gains -- 4.5
Gross unrealized losses 2.9 6.4
-------------------------------------------------------
Fair Value $235.4 $50.3
=======================================================
</Table>
Beginning in April 2001, the Company entered into reverse dollar repurchase
agreement and reverse repurchase agreement transactions to increase its
return on investments and improve liquidity. These transactions involve a
sale of securities and an agreement to repurchase
40
<Page>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. INVESTMENTS (continued)
substantially the same securities as those sold. The dollar rolls and
reverse repurchase agreements are accounted for as short-term collateralized
financings and the repurchase obligation is reported as borrowed money in
"Other Liabilities" on the Consolidated Balance Sheets. The repurchase
obligation totaled $1.3 billion at December 31, 2002. The primary risk
associated with short-term collateralized borrowings is that the
counterparty will be unable to perform under the terms of the contract. The
Company's exposure is limited to the excess of the net replacement cost of
the securities over the value of the short-term investments, an amount that
was not material at December 31, 2002. The Company believes the
counterparties to the dollar roll and reverse repurchase agreements are
financially responsible and that the counterparty risk is immaterial.
IMPAIRMENTS
During 2002, the Company determined that fifty-six fixed maturity securities
had other than temporary impairments. As a result, at December 31, 2002, the
Company recognized a pre-tax loss of $106.4 million to reduce the carrying
value of the fixed maturity securities to their combined fair value of
$124.7 million. During 2001, the Company determined that fourteen fixed
maturity securities had other than temporary impairments. As a result, at
December 31, 2001, the Company recognized a pre-tax loss of $51.8 million to
reduce the carrying value of the fixed maturities to their value of
$10.5 million.
3. FINANCIAL INSTRUMENTS
ESTIMATED FAIR VALUE
The following disclosures are made in accordance with the requirements of
FAS No. 107, "Disclosures about Fair Value of Financial Instruments." FAS
No. 107 requires disclosure of fair value information about financial
instruments, whether or not recognized in the balance sheet, for which it is
practicable to estimate that value. In cases where quoted market prices are
not available, fair values are based on estimates using present value or
other valuation techniques. Those techniques are significantly affected by
the assumptions used, including the discount rate and estimates of future
cash flows. In that regard, the derived fair value estimates, in many cases,
could not be realized in immediate settlement of the instrument.
FAS No. 107 excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements. Accordingly, the aggregate
fair value amounts presented do not represent the underlying value of the
Company.
The following valuation methods and assumptions were used by the Company in
estimating the fair value of the above financial instruments:
FIXED MATURITIES: The fair values for the actively traded marketable bonds
are determined based upon the quoted market prices. The fair values for
marketable bonds without an active market are obtained through several
commercial pricing services which provide the estimated fair values. Fair
values of privately placed bonds are determined using a matrix-based pricing
model. The model considers the current level of risk-free interest rates,
current corporate spreads, the credit
41
<Page>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. FINANCIAL INSTRUMENTS (continued)
quality of the issuer and cash flow characteristics of the security. Using
this data, the model generates estimated market values which the Company
considers reflective of the fair value of each privately placed bond. Fair
values for privately placed bonds are determined through consideration of
factors such as the net worth of the borrower, the value of collateral, the
capital structure of the borrower, the presence of guarantees and the
Company's evaluation of the borrower's ability to compete in their relevant
market.
EQUITY SECURITIES: Fair values of these securities are based upon quoted
market value.
MORTGAGE LOANS ON REAL ESTATE: The fair values for mortgage loans on real
estate are estimated using discounted cash flow analyses and rates currently
being offered in the marketplace for similar loans to borrowers with similar
credit ratings. Loans with similar characteristics are aggregated for
purposes of the calculations.
CASH, SHORT-TERM INVESTMENTS AND POLICY LOANS: The carrying amounts for
these assets approximate the assets' fair values.
OTHER FINANCIAL INSTRUMENTS REPORTED AS ASSETS: The carrying amounts for
these financial instruments (primarily premiums and other accounts
receivable and accrued investment income) approximate those assets' fair
values.
INVESTMENT CONTRACT LIABILITIES (INCLUDED IN OTHER POLICYHOLDERS' FUNDS):
WITH A FIXED MATURITY: Fair value is estimated by discounting cash flows at
interest rates currently being offered by, or available to, the Company for
similar contracts.
WITHOUT A FIXED MATURITY: Fair value is estimated as the amount payable to
the contractholder upon demand. However, the Company has the right under
such contracts to delay payment of withdrawals which may ultimately result
in paying an amount different than that determined to be payable on demand.
42
<Page>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. FINANCIAL INSTRUMENTS (continued)
The carrying values and estimated fair values of certain of the Company's
financial instruments at December 31, 2002 and 2001 were as follows:
<Table>
<Caption>
2002 2001
---------------------- ----------------------
Carrying Fair Carrying Fair
(Millions) Value Value Value Value
Assets:
Fixed maturity securities $ 15,767.0 $ 15,767.0 $ 13,539.9 $ 13,539.9
Equity securities 235.4 235.4 50.3 50.3
Mortgage loans 576.6 632.6 241.3 247.7
Policy loans 296.3 296.3 329.0 329.0
Short term investments 6.2 6.2 31.7 31.7
Cash and cash equivalents 65.4 65.4 82.0 82.0
Liabilities:
Investment contract
liabilities:
With a fixed maturity (1,129.8) (1,121.4) (1,021.7) (846.5)
Without a fixed maturity (10,783.6) (10,733.8) (11,114.1) (10,624.3)
------------------------------------------------------------------------------
</Table>
Fair value estimates are made at a specific point in time, based on
available market information and judgments about various financial
instruments, such as estimates of timing and amounts of future cash flows.
Such estimates do not reflect any premium or discount that could result from
offering for sale at one time the Company's entire holdings of a particular
financial instrument, nor do they consider the tax impact of the realization
of unrealized gains or losses. In many cases, the fair value estimates
cannot be substantiated by comparison to independent markets, nor can the
disclosed value be realized in immediate settlement of the instruments. In
evaluating the Company's management of interest rate, price and liquidity
risks, the fair values of all assets and liabilities should be taken into
consideration, not only those presented above.
DERIVATIVE FINANCIAL INSTRUMENTS
INTEREST RATE FLOORS
Interest rate floors are used to manage the interest rate risk in the
Company's bond portfolio. Interest rate floors are purchased contracts that
provide the Company with an annuity in a declining interest rate
environment. The Company had no open interest rate floors at December 31,
2002 or 2001.
INTEREST RATE CAPS
Interest rate caps are used to manage the interest rate risk in the
Company's bond portfolio. Interest rate caps are purchased contracts that
provide the Company with an annuity in an increasing interest rate
environment. The notional amount, carrying value and estimated fair value of
the Company's open interest rate caps as of December 31, 2002 were
$256.4 million, $0.7 million and $0.7 million, respectively. The Company did
not have interest rate caps at December 31, 2001.
43
<Page>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. FINANCIAL INSTRUMENTS (continued)
INTEREST RATE SWAPS
Interest rate swaps are used to manage the interest rate risk in the
Company's bond portfolio and well as the Company's liabilities. Interest
rate swaps represent contracts that require the exchange of cash flows at
regular interim periods, typically monthly or quarterly. The notional
amount, carrying value and estimated fair value of the Company's open
interest rate swaps as of December 31, 2002 were $400.0 million,
$(6.8) million and $(6.8) million, respectively. The Company did not have
interest rate swaps at December 31, 2001.
FOREIGN EXCHANGE SWAPS
Foreign exchange swaps are used to reduce the risk of a change in the value,
yield or cash flow with respect to invested assets. Foreign exchange swaps
represent contracts that require the exchange of foreign currency cash flows
for US dollar cash flows at regular interim periods, typically quarterly or
semi-annually. The notional amount, carrying value and estimated fair value
of the Company's open foreign exchange rate swaps as of December 31, 2002
were $49.4 million, $(0.5) million and $(0.5) million, respectively. The
notional amount, carrying value and estimated fair value of the Company's
open foreign exchange rate swaps as of December 31, 2001 were 25.0 million,
$0.7 million and $0.7 million, respectively.
EMBEDDED DERIVATIVES
The Company also had investments in certain fixed maturity instruments that
contain embedded derivatives, including those whose market value is at least
partially determined by, among other things, levels of or changes in
domestic and/or foreign interest rates (short- or long-term), exchange
rates, prepayment rates, equity markets or credit ratings/spreads. The
estimated fair value of the embedded derivatives within such securities as
of December 31, 2002 and 2001 was $(1.4) and $(15.5) million, respectively.
44
<Page>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. NET INVESTMENT INCOME
Sources of net investment income were as follows:
<Table>
<Caption>
Preacquisition
--------------
One Eleven
Year ended Year ended month ended months ended
December 31, December 31, December 31, November 30,
(Millions) 2002 2001 2000 2000
Fixed maturities $ 964.1 $887.2 $70.3 $768.9
Nonredeemable preferred stock 3.9 1.5 1.8 9.5
Investment in affiliated
mutual funds -- 7.2 0.5 2.1
Mortgage loans 23.3 5.9 0.1 0.5
Policy loans 8.7 8.9 0.7 7.9
Cash equivalents 1.7 18.2 4.4 50.3
Other 23.4 15.9 2.6 13.1
-------------------------------------------------------------------------------------------------
Gross investment income 1,025.1 944.8 80.4 852.3
Less: investment expenses 65.6 56.4 1.8 18.5
-------------------------------------------------------------------------------------------------
Net investment income $ 959.5 $888.4 $78.6 $833.8
=================================================================================================
</Table>
Net investment income includes amounts allocable to experience rated
contractholders of $766.9 million for the year-ended December 31, 2002,
$704.2 million for the year-ended December 31, 2001, and $55.9 million and
$622.2 million for the one and eleven month periods ended December 31, 2000
and November 30, 2000, respectively. Interest credited to contractholders is
included in future policy benefits and claims reserves.
5. DIVIDEND RESTRICTIONS AND SHAREHOLDER'S EQUITY
In conjunction with the sale of Aetna, Inc. to ING AIH, the Company was
restricted from paying any dividends to its parent for a two year period
from the date of sale without prior approval by the Insurance Commissioner
of the State of Connecticut. This restriction expired on December 13, 2002.
The Company did not pay dividends to its parent in 2002 or 2001.
The Insurance Department of the State of Connecticut (the "Department")
recognizes as net income and capital and surplus those amounts determined in
conformity with statutory accounting practices prescribed or permitted by
the Department, which differ in certain respects from accounting principles
generally accepted in the United States of America. Statutory net income
(loss) was $148.8 million, $(92.3) million and $100.6 million for the
years-ended December 31, 2002, 2001, and 2000, respectively. Statutory
capital and surplus was $1,006.0 million and $826.2 million as of
December 31, 2002 and 2001, respectively.
45
<Page>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. DIVIDEND RESTRICTIONS AND SHAREHOLDER'S EQUITY (continued)
As of December 31, 2002, the Company does 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.
For 2001, the Company was required to implement statutory accounting changes
("Codification") ratified by the National Association of Insurance
Commissioners ("NAIC") and state insurance departments. The cumulative
effect of Codification to the Company's statutory surplus as of January 1,
2001 was a decrease of $12.5 million.
6. CAPITAL GAINS AND LOSSES ON INVESTMENT OPERATIONS
Realized capital gains or losses are the difference between the carrying
value and sale proceeds of specific investments sold. Net realized capital
gains (losses) on investments were as follows:
<Table>
<Caption>
Preacquisition
--------------
One Eleven
Year ended Year ended month ended months ended
December 31, December 31, December 31, November 30,
(Millions) 2002 2001 2000 2000
Fixed maturities $ (97.5) $(20.6) $1.2 $(36.3)
Equity securities (3.5) (0.4) 0.6 (0.9)
-------------------------------------------------------------------------------------------------
Pretax realized capital gains
(losses) $(101.0) $(21.0) $1.8 $(37.2)
=================================================================================================
After-tax realized capital
gains (losses) $ (58.3) $(13.7) $1.3 $(24.3)
=================================================================================================
</Table>
Net realized capital gains (losses) of $63.6 million, $117.0 million,
$0.9 million and $(17.7) million for the years ended December 31, 2002 and
2001, the one month period ended December 31, 2000 and the eleven month
period ended November 30, 2000, respectively, allocable to experience rated
contracts, were deducted from net realized capital gains and an offsetting
amount was reflected in other policyholders' funds. Net unamortized gains
(losses) allocable to experienced-rated contractholders were
$199.3 million, $172.7 million, $(2.5) million and $47.6 million at
December 31, 2002 and 2001, the one month ended December 31, 2000 and the
eleven months ended November 30, 2000, respectively.
46
<Page>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. CAPITAL GAINS AND LOSSES ON INVESTMENT OPERATIONS (continued)
Proceeds from the sale of total fixed maturities and the related gross gains
and losses (excluding those related to experience-related contractholders)
were as follows:
<Table>
<Caption>
Preacquisition
--------------
One Eleven
Year ended Year ended month ended months ended
December 31, December 31, December 31, November 30,
(Millions) 2002 2001 2000 2000
Proceeds on sales $24,980.4 $14,216.7 $233.0 $10,083.2
Gross gains 276.7 57.0 1.2 2.5
Gross losses 374.2 77.6 -- 38.8
-------------------------------------------------------------------------------------------------
</Table>
Changes in shareholder's equity related to changes in accumulated other
comprehensive income (unrealized capital gains and losses on securities
including securities pledged to creditors and excluding those related to
experience-rated contractholders) were as follows:
<Table>
<Caption>
Preacquisition
--------------
One Eleven
Year ended Year ended month ended months ended
December 31, December 31, December 31, November 30,
(Millions) 2002 2001 2000 2000
Fixed maturities $104.8 $24.0 $24.5 $ 67.6
Equity securities (1.6) 2.0 (1.5) (4.0)
Other investments (8.3) 6.5 5.7 (15.8)
-------------------------------------------------------------------------------------------------
Subtotal 94.9 32.5 28.7 79.4
Increase in deferred income
taxes 33.2 11.3 10.1 27.8
-------------------------------------------------------------------------------------------------
Net changes in accumulated
other comprehensive income
(loss) $ 61.7 $21.2 $18.6 $ 51.6
=================================================================================================
</Table>
Net unrealized capital gains (losses) allocable to experience-rated
contracts of $563.1 million and $233.0 million at December 31, 2002 and
2001, respectively, are reflected on the Consolidated Balance Sheets in
other policyholders' funds and are not included in shareholder's equity.
47
<Page>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. CAPITAL GAINS AND LOSSES ON INVESTMENT OPERATIONS (continued)
Shareholder's equity included the following accumulated other comprehensive
income (loss), which is net of amounts allocable to experience-rated
contractholders:
<Table>
<Caption>
Preacquisition
--------------
As of As of As of As of
December 31, December 31, December 31, November 30,
(Millions) 2002 2001 2000 2000
Net unrealized capital gains
(losses):
Fixed maturities $162.8 $58.0 $34.0 $ 9.5
Equity securities (3.5) (1.9) (3.9) (2.4)
Other investments 7.3 15.6 9.1 3.4
-------------------------------------------------------------------------------------------------
166.6 71.7 39.2 10.5
Deferred income taxes 58.3 25.1 13.8 3.7
-------------------------------------------------------------------------------------------------
Net accumulated other
comprehensive income $108.3 $46.6 $25.4 $ 6.8
=================================================================================================
</Table>
Changes in accumulated other comprehensive income related to changes in
unrealized gains (losses) on securities, including securities pledged to
creditors (excluding those related to experience-rated contractholders) were
as follows:
<Table>
<Caption>
Preacquisition
--------------
One Eleven
Year ended Year ended month ended months ended
December 31, December 31, December 31, November 30,
(Millions) 2002 2001 2000 2000
Unrealized holding gains
(losses) arising the year
(1) $(127.4) $ 8.3 $18.6 $51.4
Less: reclassification
adjustment for gains
(losses) and other items
included in net income (2) 65.7 (12.9) -- (0.2)
-------------------------------------------------------------------------------------------------
Net unrealized gains (losses)
on securities $ 61.7 $ 21.2 $18.6 $51.6
=================================================================================================
</Table>
(1) Pretax unrealized holding gains (losses) arising during the year were
$196.0 million, $12.7 million, $28.6 million and $79.4 million for
the years ended December 31, 2002 and 2001, the one month ended
December 31, 2000 and the eleven months ended November 31, 2000,
respectively.
(2) Pretax reclassification adjustments for gains (losses) and other items
included in net income were $101.0 million, $(19.8) million and
$(0.1) million for the years ended December 31, 2002 and 2001, and the
eleven months ended November 30, 2000, respectively. There were no
pretax reclassification adjustments for gains (losses) and other items
included in net income for the one month ended December 31, 2000.
48
<Page>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
7. SEVERANCE
In December 2001, ING announced its intentions to further integrate and
streamline the U.S.-based operations of ING Americas (a business division of
ING which includes the Company) 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 ($0.8 million pretax) of
the charge represents the amount to be incurred by the Company to terminate
a contractual lease obligation.
Activity for the year ended December 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 (19.2) (440)
------------------------------------------------------------------------
Balance at December 31, 2002 $ 9.2 140
========================================================================
</Table>
8. INCOME TAXES
The Company files a consolidated federal income tax return with IICA. The
Company has a tax allocation agreement with IICA whereby the Company charges
its subsidiary for taxes it would have incurred were it not a member of the
consolidated group and credits the member for losses at the statutory tax
rate.
Income taxes from continuing operations consist of the following:
<Table>
<Caption>
Preacquisition
--------------
One month Eleven months
Year ended Year ended ended ended
December 31, December 31, December 31, November 30,
(Millions) 2002 2001 2000 2000
Current taxes (benefits):
Federal $ 28.9 $ 3.2 $ 9.4 $ 5.3
State 1.8 2.2 0.2 2.6
Net realized capital gains
(losses) 11.5 16.1 0.3 (11.5)
- -------------------------------------------------------------------------------------------------
Total current taxes
(benefits) 42.2 21.5 9.9 (3.6)
- -------------------------------------------------------------------------------------------------
Deferred taxes (benefits):
Federal 30.6 89.3 (4.3) 83.2
Net realized capital gains
(losses) (54.2) (23.4) 0.3 (1.5)
- -------------------------------------------------------------------------------------------------
Total deferred taxes
(benefits) (23.6) 65.9 (4.0) 81.7
- -------------------------------------------------------------------------------------------------
Total income tax expense $ 18.6 $ 87.4 $ 5.9 $ 78.1
=================================================================================================
</Table>
49
<Page>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
8. INCOME TAXES (continued)
Income taxes were different from the amount computed by applying the federal
income tax rate to income from continuing operations before income taxes for
the following reasons:
<Table>
<Caption>
Preacquisition
--------------
One month Eleven months
Year ended Year ended ended ended
December 31, December 31, December 31, November 30,
(Millions) 2002 2001 2000 2000
Income from continuing
operations before income
taxes and cumulative effect
of change in accounting
principle $86.1 $187.3 $18.5 $249.6
Tax rate 35% 35% 35% 35%
- -------------------------------------------------------------------------------------------------
Application of the tax rate 30.1 65.6 6.4 87.4
Tax effect of:
State income tax, net of
federal benefit 1.2 1.4 0.1 1.7
Excludable dividends (5.3) (1.8) (0.9) (12.6)
Goodwill amortization -- 21.6 -- --
Transfer of mutual fund
shares (6.7) -- -- --
Other, net (0.7) 0.6 0.3 1.6
- -------------------------------------------------------------------------------------------------
Income taxes $18.6 $ 87.4 $ 5.9 $ 78.1
=================================================================================================
</Table>
50
<Page>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
8. INCOME TAXES (continued)
The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities at December 31 are presented below:
<Table>
<Caption>
(Millions) 2002 2001
Deferred tax assets:
Deferred policy acquisition costs $ -- $ 11.7
Insurance reserves 269.8 286.9
Unrealized gains allocable to
experience rated contracts 197.1 81.5
Investment losses 69.7 36.7
Postretirement benefits 29.5 26.3
Deferred compensation 58.6 52.0
Other 19.5 27.7
----------------------------------------------------------
Total gross assets 644.2 522.8
----------------------------------------------------------
Deferred tax liabilities:
Value of business acquired 509.7 558.5
Market discount 4.1 4.6
Net unrealized capital gains 255.4 106.6
Depreciation 3.8 5.1
Deferred policy acquisition costs 29.2 --
Other 5.1 1.7
----------------------------------------------------------
Total gross liabilities 807.3 676.5
----------------------------------------------------------
Net deferred tax liability $(163.1) $(153.7)
==========================================================
</Table>
Net unrealized capital gains and losses are presented in shareholder's
equity net of deferred taxes.
The "Policyholders' Surplus Account," which arose under prior tax law, is
generally that portion of a life insurance company's statutory income that
has not been subject to taxation. As of December 31, 1983, no further
additions could be made to the Policyholders' Surplus Account for tax return
purposes under the Deficit Reduction Act of 1984. The balance in such
account was approximately $17.2 million at December 31, 2002. This amount
would be taxed only under certain conditions. No income taxes have been
provided on this amount since management believes under current tax law the
conditions under which such taxes would become payable are remote.
The Internal Revenue Service (the "Service") has completed examinations of
the federal income tax returns of the Company through 1997. Discussions are
being held with the Service with respect to proposed adjustments. Management
believes there are adequate defenses against, or sufficient reserves to
provide for, any such adjustments. The Service has commenced its
examinations for the years 1998 through 2000.
51
<Page>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
9. BENEFIT PLANS
Prior to December 31, 2001, ILIAC, in conjunction with ING, had a qualified
defined benefit pension plan covering substantially all employees
("Transition Pension Plan"). The Transition Pension Plan provided pension
benefits based on a cash balance formula, which credited employees annually
with an amount equal to a percentage of eligible pay based on age and years
of service as well as an interest credit based on individual account
balances. Contributions were determined using the Projected Unit Credit
Method and were limited to the amounts that are tax-deductible. The
accumulated benefit obligation and plan assets were recorded by ILIAC.
As of December 31, 2001, the Transition Pension Plan merged into the ING
Americas Retirement Plan ("ING Pension Plan"), which is sponsored by ING
North America Insurance Corporation ("ING North America"), an affiliate of
ILIAC. The ING Pension Plan covers substantially all U.S. employees.
Accordingly, the Company transferred $17.4 million of net assets ($11.3
million after tax) related to the movement of the Transition Pension Plan to
ING North America. The Company reported this transfer of net assets as a
$11.3 million reduction in paid in capital. The new plan's benefits are
based on years of service and the employee's average annual compensation
during the last five years of employment. Contributions are determined using
the Projected Unit Credit Method and are limited to the amounts that are
tax-deductible. The costs allocated to the Company for its members'
participation in the ING Pension Plan were $6.0 million for 2002.
The benefit obligations and the funded status for the Company's qualified
pension plan over the period ended December 31 are presented below:
<Table>
<Caption>
(Millions) 2001
Change in benefit obligation:
Benefit obligation at January 1 $ 135.1
Service cost 9.4
Interest cost 10.3
Actuarial loss (0.7)
Plan amendments 4.0
Curtailments/settlements 0.4
Benefits paid (3.0)
Effect of transfer of assets (155.5)
-----------------------------------------------------------
Benefit obligation at December 31 $ --
===========================================================
Funded status:
Funded status at December 31 $ (4.3)
Unrecognized past service cost 3.4
Unrecognized net loss 20.4
Transfer of funded status to the parent (19.5)
-----------------------------------------------------------
Net amount recognized $ --
===========================================================
</Table>
52
<Page>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
9. BENEFIT PLANS (continued)
The reconciliation of the plan assets for the year ended December 31 is
presented below:
<Table>
<Caption>
(Millions) 2001
Fair value of plan assets at January 1 $ 160.7
Actual return on plan assets (6.4)
Benefits paid (3.0)
Effect of transfer of assets (151.3)
-----------------------------------------------------------
Fair value of plan assets at December 31 $ --
===========================================================
</Table>
The net periodic benefit cost for the year ended December 31 is presented
below:
<Table>
<Caption>
(Millions) 2001
Service cost $ 9.4
Interest cost 10.2
Expected return on assets (14.6)
----------------------------------------------------------
Net periodic benefit cost $ 5.0
==========================================================
</Table>
The weighted average discount rate, expected rate of return on plan assets,
and rate of compensation increase was 7.5%, 9.3%, and 4.5% for 2001.
POSTRETIREMENT BENEFIT PLANS
In addition to providing pension benefits, ILIAC, in conjunction with ING,
provides certain health care and life insurance benefits for retired
employees and certain agents. Retired employees are generally required to
contribute to the plans based on their years of service with the Company.
The following tables summarize the benefit obligations and the funded status
for
53
<Page>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
9. BENEFIT PLANS (continued)
retired agents' and retired employees' postretirement benefits over the
periods ended December 31:
<Table>
<Caption>
(Millions) 2002 2001
Change in benefit obligation:
Benefit obligation at January 1 $ 25.4 $ 19.1
Service cost 0.5 0.7
Interest cost 1.5 1.7
Actuarial (gain) loss 4.0 1.4
Acquisitions -- 3.7
Plan amendments (6.5) --
Benefits paid (1.2) (1.2)
--------------------------------------------------------
Benefit obligation at December 31 $ 23.7 $ 25.4
========================================================
Funded status:
Funded status at December 31 $(23.7) $(25.4)
Unrecognized past service cost (3.6) --
Unrecognized net loss 5.4 1.4
--------------------------------------------------------
Net amount recognized $(21.9) $(24.0)
========================================================
</Table>
The weighted-average discount rate assumption for retired agents' and
retired employees postretirement benefits was 6.8% for 2002 and 7.5% for
2001.
The medical health care cost trend rates were 10.0%, decreasing to 5.0% by
2008 for 2002; and 8.5%, gradually decreasing to 5.5% by 2007 for 2001.
Increasing the health care trend rate by 1% would increase the benefit
obligation by $1.6 million. Decreasing the health care trend rate by 1%
would decrease the benefit obligation by $1.4 million as of December 31,
2002.
Net periodic benefit costs were as follows:
<Table>
<Caption>
Preacquisition
--------------
One month Eleven months
Year ended Year ended ended ended
December 31, December 31, December 31, November 30,
(Millions) 2002 2001 2000 2000
Service cost $ 0.5 $0.7 $ -- $0.2
Interest cost 1.5 1.7 0.1 1.2
Actuarial (gain) loss -- -- -- 0.2
Unrecognized past service cost (2.9) -- -- --
- -------------------------------------------------------------------------------------------------
Net periodic benefit cost $(0.9) $2.4 $0.1 $1.2
=================================================================================================
</Table>
54
<Page>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
9. BENEFIT PLANS (continued)
There were no gains or losses resulting from curtailments or settlements of
the postretirement benefit plans during 2002, 2001 or 2000.
NON-QUALIFIED DEFINED BENEFIT PENSION PLANS
Prior to December 31, 2001, ILIAC, in conjunction with ING, had a
non-qualified defined benefit pension plan covering certain eligible
employees. The plan provided pension benefits based on a cash balance
formula, which credited employees annually with an amount equal to a
percentage of eligible pay based on age and years of service as well as an
interest credit based on individual account balances. As of December 31,
2001, ILIAC, in conjunction with ING, has a non-qualified defined benefit
pension plan providing benefits to certain eligible employees based on years
of service and the employee's average annual compensation during the last
five years of employment, which was assumed at December 31, 2002 to increase
at an annual rate of 3.8%. Contributions are determined using the Projected
Unit Credit Method. ILIAC, in conjunction with ING, also has a non-qualified
pension plan covering certain agents. The plan provides pension benefits
based on annual commission earnings.
During 2002, liabilities, net of tax, totaling $15.1 million were allocated
to the Company related to a Supplemental Excess Retirement Plan ("SERP")
that covers certain employees of ING Life Insurance Company of America and
Aeltus, affiliates of the Company.
The following tables summarize the benefit obligations and the funded status
for the Company's non-qualified pension plans for the periods ended
December 31, 2002 and 2001. These tables have been presented, for comparison
purposes, as though the SERP transfer had occurred as of January 1, 2001.
The accompanying consolidated balance sheet and income statement do not
reflect the SERP transfer until 12/31/02:
<Table>
<Caption>
(Millions) 2002 2001
Change in benefit obligation:
Benefit obligation at January 1 $ 95.3 $ 88.7
Service cost -- 4.4
Interest cost 6.8 7.1
Actuarial (gain) loss 5.7 0.7
Plan amendments 4.5 (4.1)
Benefits paid (5.5) (1.5)
----------------------------------------------------------
Benefit obligation at December 31 $ 106.8 $ 95.3
==========================================================
Funded status:
Funded status at December 31 $(106.8) $ (95.3)
Unrecognized past service cost 0.8 1.2
Unrecognized net loss (gain) 6.4 (7.1)
----------------------------------------------------------
Net amount recognized $ (99.6) $(101.2)
==========================================================
</Table>
At December 31, 2002 and 2001, the accumulated benefit obligation was $43.8
million and $27.3 million, respectively.
55
<Page>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
9. BENEFIT PLANS (continued)
The weighted-average discount rate assumption for Agents' and employees'
non-qualified pension plans was 6.8%, and 3.8% for 2002 and 7.5% and 5.3%
for 2001.
Net periodic benefit costs were as follows:
<Table>
<Caption>
Preacquisition
--------------
One month Eleven months
Year ended Year ended ended ended
December 31, December 31, December 31, November 30,
(Millions) 2002 2001 2000 2000
Service cost $ 6.8 $ 4.4 $ 0.3 $ 2.1
Interest cost -- 7.1 0.3 3.8
Actuarial (gain) loss -- -- -- 0.2
Return on plan assets -- -- (0.3) (3.2)
Unrecognized past service cost (0.3) -- -- (0.1)
-------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 6.5 $11.5 $ 0.3 $ 2.8
=================================================================================================
</Table>
There was a curtailment of $2.6 million in 2002. There were no gains or
losses resulting from curtailments or settlements of the non-qualified
pension plans during 2000.
ING SAVINGS AND INVESTMENT PLANS
ILIAC, in conjunction with ING, also has a Savings Plan. Substantially all
employees are eligible to participate in a savings plan under which
designated contributions, which may be invested in a variety of financial
instruments, are matched up to 6.0% of compensation by ING. Pretax charges
to operations for the incentive savings plan were $6.8 million, $11.0
million, and $9.0 million in 2002, 2001, and 2000, respectively.
ILIAC, in conjunction with former Aetna, had a stock incentive plan that
provided for stock options, deferred contingent common stock or equivalent
cash awards or restricted stock to employees. Certain executive, middle
management and non-management employees were granted options to purchase
common stock of former Aetna at or above the market price on the date of
grant. Options generally became 100% vested three years after the grant was
made, with one-third of the options vesting each year. The former Aetna did
not recognize compensation expense for stock options granted at or above the
market price on the date of grant under its stock incentive plans. In
addition, executives were, from time to time, granted incentive units which
were rights to receive common stock or an equivalent value in cash. The sale
of the Company to ING AIH by former Aetna caused all outstanding stock
options to vest immediately.
The costs to the Company associated with the former Aetna stock plans for
2001 and 2000 were $1.8 million and $2.7 million, respectively.
56
<Page>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
10. RELATED PARTY TRANSACTIONS
INVESTMENT ADVISORY AND OTHER FEES
ILIAC and Aeltus serve as investment advisors and administrators to the
Company's mutual funds and variable funds (collectively, the Funds). Company
mutual funds pay Aeltus or ILIAC, as investment advisor or administrator, a
daily fee which, on an annual basis, ranged, depending on the fund, from
0.1% to 0.5% of their average daily net assets. All of the funds managed by
ILIAC and certain of the funds managed by Aeltus are subadvised by
investment advisors, in which case, Aeltus or ILIAC pays a subadvisory fee
to the investment advisors. The Company is also compensated by the separate
accounts (variable funds) for bearing mortality and expense risks pertaining
to variable life and annuity contracts. Under the insurance and annuity
contracts, the separate accounts pay the Company a daily fee, which, on an
annual basis is, depending on the product, up to 3.4% of their average daily
net assets. The amount of compensation and fees received from the Company
mutual funds and separate accounts, included in fee income amounted to
$391.8 million, $421.7 million and $506.3 million in 2002, 2001 and 2000,
respectively.
RECIPROCAL LOAN AGREEMENT
ILIAC maintains a reciprocal loan agreement with ING AIH, a Delaware
corporation and affiliate, to facilitate the handling of unusual and/or
unanticipated short-term cash requirements. Under this agreement, which
became effective in June 2001 and expires on April 1, 2011, ILIAC and ING
AIH can borrow up to 3% of ILIAC's statutory admitted assets as of the
preceding December 31 from one another. Interest on any ILIAC borrowings is
charged at the rate of ING AIH's cost of funds for the interest period plus
0.15%. Interest on any ING AIH borrowings is charged at a rate based on the
prevailing interest rate of U.S. commercial paper available for purchase
with a similar duration. Under this agreement, ILIAC incurred interest
expense of $0.1 million for the years ended December 31, 2002 and 2001, and
earned interest income of $2.1 million and $3.3 million for the years ended
December 31, 2002 and 2001, respectively. At December 31, 2002, ILIAC had no
receivables and no outstanding borrowings from ING AIH under this agreement.
CAPITAL TRANSACTIONS
In 2002, the company received capital contributions in the form of
investments in affiliated mutual funds of $164.3 million from HOLDCO. The
Company did not receive capital contributions in 2001.
OTHER
Premiums due and other receivables include $0.1 million and $1.0 million due
from affiliates at December 31, 2002 and 2001, respectively. Other
liabilities include $1.3 million and $0.6 million due to affiliates for the
years ended December 31, 2002 and 2001, respectively.
57
<Page>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
11. REINSURANCE
At December 31, 2002, the Company had reinsurance treaties with six
unaffiliated reinsurers and one affiliated reinsurer covering a significant
portion of the mortality risks and guaranteed death and living benefits
under its variable contracts. The Company remains liable to the extent its
reinsurers do not meet their obligations under the reinsurance agreements.
On October 1, 1998, the Company sold its domestic individual life insurance
business to Lincoln for $1 billion in cash. The transaction is generally in
the form of an indemnity reinsurance arrangement, under which Lincoln
contractually assumed from the Company certain policyholder liabilities and
obligations, although the Company remains directly obligated to
policyholders.
Effective January 1, 1998, 90% of the mortality risk on substantially all
individual universal life product business written from June 1, 1991 through
October 31, 1997 was reinsured externally. Beginning November 1, 1997, 90%
of new business written on these products was reinsured externally.
Effective October 1, 1998 this agreement was assigned from the third party
reinsurer to Lincoln.
Effective December 31, 1988, the Company entered into a modified coinsurance
reinsurance agreement ("MODCO") with Aetna Life Insurance Company ("Aetna
Life"), (formerly an affiliate of the Company), in which substantially all
of the nonparticipating individual life and annuity business written by
Aetna Life prior to 1981 was assumed by the Company. Effective January 1,
1997, this agreement was amended to transition (based on underlying
investment rollover in Aetna Life) from a modified coinsurance arrangement
to a coinsurance agreement. As a result of this change, reserves were ceded
to the Company from Aetna Life as investment rollover occurred. Effective
October 1, 1998, this agreement was fully transitioned to a coinsurance
arrangement and this business along with the Company's direct individual
life insurance business, with the exception of certain supplemental
contracts with reserves of $66.2 million and $69.9 million as of
December 31, 2002 and 2001, respectively, was sold to Lincoln.
On December 16, 1988, the Company assumed $25.0 million of premium revenue
from Aetna Life, for the purchase and administration of a life contingent
single premium variable payout annuity contract. In addition, the Company is
also responsible for administering fixed annuity payments that are made to
annuitants receiving variable payments. Reserves of $19.6 million and $24.1
million were maintained for this contract as of December 31, 2002 and 2001,
respectively.
58
<Page>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
11. REINSURANCE (continued)
The effect of reinsurance on premiums and recoveries was as follows:
<Table>
<Caption>
Preacquisition
--------------
One month Eleven months
Year ended Year ended ended ended
December 31, December 31, December 31, November 30,
(Millions) 2002 2001 2000 2000
Direct Premiums Federal $ 97.3 $112.3 $17.2 $143.2
Reinsurance assumed 9.7 0.6 0.1 0.8
Reinsurance ceded 8.3 (1.3) 0.8 6.3
-------------------------------------------------------------------------------------------------
Net Premiums 98.7 114.2 16.5 137.7
-------------------------------------------------------------------------------------------------
Reinsurance Recoveries $317.6 $363.7 $44.5 $371.6
=================================================================================================
</Table>
12. COMMITMENTS AND CONTINGENT LIABILITIES
LEASES
For the year ended December 31, 2002 rent expense for leases was $18.1
million. The future net minimum payments under noncancelable leases for the
years ended December 31, 2003 through 2007 are estimated to be
$17.5 million, $15.7 million, $14.9 million, $13.6 million and
$12.1 million, respectively, and $0.2 million, thereafter. The Company pays
substantially all expenses associated with its leased and subleased office
properties. Expenses not paid directly by the Company are paid for by an
affiliate and allocated back to the Company.
COMMITMENTS
Through the normal course of investment operations, the Company commits to
either purchase or sell securities, commercial mortgage loans or money
market instruments at a specified future date and at a specified price or
yield. The inability of counterparties to honor these commitments may result
in either higher or lower replacement cost. Also, there is likely to be a
change in the value of the securities underlying the commitments. At
December 31, 2002 and 2001, the Company had off-balance sheet commitments to
purchase investments of $236.7 million with an estimated fair value of
$236.7 million and $92.7 million with an estimated fair value of
$92.7 million, respectively.
LITIGATION
The Company is a party to threatened or pending lawsuits arising, from the
normal conduct of business. Due to the climate in insurance and business
litigation, suits against the Company sometimes include claims for
substantial compensatory, consequential or punitive damages and other types
of relief. Moreover, certain claims are asserted as class actions,
purporting to represent a group of similarly situated individuals. While it
is not possible to forecast the outcome of such lawsuits, in light of
existing insurance, reinsurance and established reserves, it is
59
<Page>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
12. COMMITMENTS AND CONTINGENT LIABILITIES (continued)
the opinion of management that the disposition of such lawsuits will not
have materially adverse effect on the Company's operations or financial
position.
13. 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 December 31, 2001 and 2000 in
the table below. Effective with the third quarter of 2002, items that were
previously not allocated back to USFS but reported in Other are now
allocated to USFS and reported in the restated financial information for the
period ending December 31, 2001 and 2000.
Summarized financial information for the Company's principal operations for
December 31, were as follows:
<Table>
<Caption>
Non-Operating
Segments
-----------------------
Investment
Management
(Millions) USFS (1) Services (2) Other (3) Total
2002
------------------------------
Revenues from external
customers $ 507.2 $ 19.2 $ (9.5) $ 516.9
Net investment income 959.2 0.2 0.1 959.5
------------------------------------------------------------------------------
Total revenue excluding net
realized capital gains
(losses) $1,466.4 $ 19.4 $ (9.4) $ 1,476.4
==============================================================================
Operating earnings (4) $ 121.1 $ 4.7 $ -- $ 125.8
Cumulative effect of
accounting change (2,412.1) -- -- (2,412.1)
Net realized capital losses,
net of tax (58.3) -- -- (58.3)
------------------------------------------------------------------------------
Net income (loss) $(2,349.3) $ 4.7 -- $(2,344.6)
==============================================================================
2001
------------------------------
Revenues from external
customers $ 585.0 $119.6 $(37.0) $ 667.6
Net investment income 885.5 1.7 1.2 888.4
------------------------------------------------------------------------------
Total revenue excluding net
realized capital gains
(losses) $1,470.5 $121.3 $(35.8) $ 1,556.0
==============================================================================
Operating earnings (4) $ 86.2 $ 27.4 $ -- $ 113.6
Net realized capital gains,
net of tax (13.8) 0.1 -- (13.7)
------------------------------------------------------------------------------
Net income $ 72.4 $ 27.5 $ -- $ 99.9
==============================================================================
</Table>
60
<Page>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
13. SEGMENT INFORMATION (continued)
<Table>
<Caption>
Non-Operating
Segments
-----------------------
Investment
Management
(Millions) USFS (1) Services (2) Other (3) Total
2000
------------------------------
Revenues from external
customers $ 692.1 $138.2 $(53.0) $ 777.3
Net investment income 905.8 2.8 3.8 912.4
------------------------------------------------------------------------------
Total revenue excluding net
realized capital gains
(losses) $1,597.9 $141.0 $(49.2) $ 1,689.7
==============================================================================
Operating earnings (4) $ 197.4 $ 9.7 $ -- $ 207.1
Net realized capital gains,
net of tax (23.1) 0.1 -- (23.0)
------------------------------------------------------------------------------
Net income from continuing
operations $ 174.3 $ 9.8 $ -- $ 184.1
==============================================================================
</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 include: investment advisory services
to affiliated and unaffiliated institutional and retail clients;
underwriting; distribution for Company mutual funds and a former
affiliate's separate ccounts; 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 1).
(3) Other includes consolidating adjustments between USFS and Investment
Management Services.
(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.
14. DISCONTINUED OPERATIONS--INDIVIDUAL LIFE INSURANCE
On October 1, 1998, the Company sold its domestic individual life insurance
business to Lincoln for $1,000.0 million in cash. The transaction was
generally in the form of an indemnity reinsurance arrangement, under which
Lincoln contractually assumed from the Company certain policyholder
liabilities and obligations, although the Company remains directly obligated
to policyholders. Assets related to and supporting the life policies were
transferred to Lincoln and the Company recorded a reinsurance recoverable
from Lincoln. The transaction resulted in an after-tax gain on the sale of
approximately $117.0 million, of which $57.7 million was deferred and was
being recognized over approximately 15 years. The remaining portion of the
gain was recognized immediately in net income and was largely attributed to
access to the agency sales force and brokerage distribution channel.
Approximately $5.7 million (after tax) of amortization related to the
deferred gain was recognized in both 2000 and 1999. During the fourth
quarter of 1999, the Company refined certain accrual and tax estimates which
had been established in
61
<Page>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
14. DISCONTINUED OPERATIONS--INDIVIDUAL LIFE INSURANCE (continued)
connection with the recording of the deferred gain. As a result, the
deferred gain was increased by $12.9 million (after tax) to $65.4 million at
December 31, 1999.
In conjunction with the accounting for the 2000 acquisition of the Aetna
Financial Services business, of which the Company is a part, the deferred
gain, which was previously part of other liabilities, was written off (Refer
to Note 1).
QUARTERLY DATA (UNAUDITED)
<Table>
<Caption>
2002 (Millions) First Second Third Fourth
Total Revenue $363.5 $351.3 $349.8 $ 310.8
-----------------------------------------------------------------
Income (loss) from continuing
operations before income
taxes 44.1 39.3 (23.1) 25.8
Income tax expense (benefit) 15.2 12.9 (9.9) 0.4
Income (loss) from continuing
operations 28.9 26.4 (13.2) 25.4
-----------------------------------------------------------------
Cumulative effect of change in
accounting principle -- -- -- (2,412.1)
-----------------------------------------------------------------
Net income (loss) $ 28.9 $26.4 $(13.2) $(2,386.7)
-----------------------------------------------------------------
<Caption>
2001 (Millions) First Second Third Fourth
Total Revenue $395.5 $411.9 $387.2 $ 340.4
-----------------------------------------------------------------
Income (loss) from continuing
operations before income
taxes 64.3 95.0 68.9 (40.9)
Income tax expense (benefit) 28.2 39.1 27.1 (7.0)
-----------------------------------------------------------------
Income from continuing
operations 36.1 55.9 41.8 (33.9)
-----------------------------------------------------------------
Net (loss) $ 36.1 $55.9 $ 41.8 $ (33.9)
-----------------------------------------------------------------
</Table>
62
<Page>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Omitted pursuant to General Instruction I(2) of Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
Omitted pursuant to General Instruction I(2) of Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Omitted pursuant to General Instruction I(2) of Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Omitted pursuant to General Instruction I(2) of Form 10-K.
ITEM 14. CONTROLS AND PROCEDURES
(a) Within the 90-day period prior to the filing of this report, the Company
carried out an evaluation, under the supervision and with the participation
of its management, including its Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures (as defined in Rule 13a-14 of
the Securities Exchange Act of 1934). Based on that evaluation, the Chief
Executive Officer and the Chief Financial Officer have concluded that the
Company's current disclosure controls and procedures are effective in
ensuring that material information relating to the Company required to be
disclosed in the Company's periodic SEC filings is made known to them in a
timely manner.
(b) There have not been any significant changes in the internal controls of the
Company or other factors that could significantly affect these internal
controls subsequent to the date the Company carried out its evaluation.
PART IV
ITEM 15. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
The following documents are filed as part of this report:
1. Financial statements. See Item 8 on Page 17.
2. Financial statement schedules. See Index on Financial Statement
Schedules on Page 62.
EXHIBITS
3.(i) Certificate of Incorporation as amended and restated January 1,
2002. Incorporated by reference to the ING Life Insurance and
Annuity Company Annual Report on Form 10-K for the year ending
December 31, 2002 (File No. 33-23376), as filed on March 28,
2002.
63
<Page>
ITEM 15. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K (continued)
3.(ii) By-Laws, as restated January 1, 2002. Incorporated by reference
to the ING Life Insurance and Annuity Company Annual Report on
Form 10-K for the year ending December 31, 2002 (File No.
33-23376), as filed on March 28, 2002.
4.(a) Instruments Defining the Rights of Security Holders, Including
Indentures (Annuity Contracts)
Incorporated by reference to Post-Effective Amendment No. 14 to
Registration Statement on Form N-4 (File No. 33-75964), as filed
on July 29, 1997.
Incorporated by reference to Post-Effective Amendment No. 6 to
Registration Statement on Form N-4 (File No. 33-75980), as filed
on February 12, 1997.
Incorporated by reference to Post-Effective Amendment No. 12 to
Registration Statement on Form N-4 (File No. 33-75964), as filed
on February 11, 1997.
Incorporated by reference to Post-Effective Amendment No. 5 to
Registration Statement on Form N-4 (File No. 33-75986), as filed
on April 12, 1996.
Incorporated by reference to Post-Effective Amendment No. 12 to
Registration Statement on Form N-4 (File No. 333-01107), as filed
on February 4, 1999.
Incorporated by reference to Post-Effective Amendment No. 4 to
Registration Statement on Form N-4 (File No. 33-75988), as filed
on April 15, 1996.
Incorporated by reference to Post-Effective Amendment No. 3 to
Registration Statement on Form N-4 (File No. 33-81216), as filed
on April 17, 1996.
Incorporated by reference to Post-Effective Amendment No. 3 to
Registration Statement on Form N-4 (File No. 33-91846), as filed
on April 15, 1996.
Incorporated by reference to Post-Effective Amendment No. 6 to
Registration Statement on Form N-4 (File No. 33-91846), as filed
on August 6, 1996.
Incorporated by reference to Registration Statement on Form N-4
(File No. 333-01107), as filed on February 21, 1996.
Incorporated by reference to Post-Effective Amendment No. 12 to
Registration Statement on Form N-4 (File No. 33-75982), as filed
on February 20, 1997.
Incorporated by reference to Post-Effective Amendment No. 7 to
Registration Statement on Form N-4 (File No. 33-75992), as filed
on February 13, 1997.
64
<Page>
ITEM 15. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K (continued)
Incorporated by reference to Post-Effective Amendment No. 6 to
Registration Statement on Form N-4 (File No. 33-75974), as filed
on February 28, 1997.
Incorporated by reference to Post-Effective Amendment No. 6 to
Registration Statement on Form N-4 (File No. 33-75962), as filed
on April 17, 1996.
Incorporated by reference to Post-Effective Amendment No. 14 to
Registration Statement on Form N-4 (File No. 33-75962), as filed
on April 17, 1998.
Incorporated by reference to Post-Effective Amendment No. 6 to
Registration Statement on Form N-4 (File No. 33-75982), as filed
on April 22, 1996.
Incorporated by reference to Post-Effective Amendment No. 8 to
Registration Statement on Form N-4 (File No. 33-75980), as filed
on August 19, 1997.
Incorporated by reference to Registration Statement on Form N-4
(File No. 333-56297), as filed on June 8, 1998.
Incorporated by reference to Post-Effective Amendment No. 3 to
Registration Statement on Form N-4 (File No. 33-79122), as filed
on August 16, 1995.
Incorporated by reference to Post-Effective Amendment No. 32 to
Registration Statement on Form N-4 (File No. 33-34370), as filed
on December 16, 1997.
Incorporated by reference to Post-Effective Amendment No. 30 to
Registration Statement on Form N-4 (File No. 33-34370), as filed
on September 29, 1997.
Incorporated by reference to Post-Effective Amendment No. 26 to
Registration Statement on Form N-4 (File No. 33-34370), as filed
on February 21, 1997.
Incorporated by reference to Post-Effective Amendment No. 35 to
Registration Statement on Form N-4 (File No. 33-34370), as filed
on April 17, 1998.
Incorporated by reference to Post-Effective Amendment No. 1 to
Registration Statement on Form N-4 (File No. 33-87932), as filed
on September 19, 1995.
Incorporated by reference to Post-Effective Amendment No. 8 to
Registration Statement on Form N-4 (File No. 33-79122), as filed
on April 17, 1998.
Incorporated by reference to Post-Effective Amendment No. 7 to
Registration Statement on Form N-4 (File No. 33-79122), as filed
on April 22, 1997.
Incorporated by reference to Post-Effective Amendment No. 21 to
Registration Statement on Form N-4 (File No. 33-75996), as filed
on February 16, 2000.
65
<Page>
ITEM 15. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K (continued)
Incorporated by reference to Post-Effective Amendment No. 13 to
Registration Statement on Form N-4 (File No. 333-01107), as filed
on April 7, 1999.
Incorporated by reference to Post-Effective Amendment No. 37 to
Registration Statement on Form N-4 (File No. 33-34370), as filed
on April 9, 1999.
Incorporated by reference to Post-Effective Amendment No. 1 to
Registration Statement on Form N-4 (File No. 333-87305), as filed
on December 13, 1999.
Incorporated by reference to Post-Effective Amendment No. 18 to
Registration Statement on Form N-4 (File No. 33-56297), as filed
on August 30, 2000.
Incorporated by reference to Post-Effective Amendment No. 17 to
Registration Statement on Form N-4 (File No. 33-75996), as filed
on April 7, 1999.
Incorporated by reference to Post-Effective Amendment No. 19 to
Registration Statement on From N-4 (File No. 333-01107), as filed
on February 16, 2000.
Incorporated by reference to the Registration Statement on Form
S-2 (File No. 33-64331), as filed on November 16, 1995.
Incorporated by reference to Pre-Effective Amendment No. 2 to the
Registration Statement on Form S-2 (File No. 33-64331), as filed
on January 17,1996.
10. Material Contracts
10.(a) Amended and Restated Asset Purchase Agreement by and among Aetna
Life Insurance Company, ING Life Insurance and Annuity Company,
The Lincoln National Life Insurance Company and Lincoln Life &
Annuity Company of New York, dated May 21, 1998, incorporated
herein by reference to the Company's Form 10-Q filed on August 8,
1998. (The Company will provide to the Securities and Exchange
Commission a copy of omitted schedules or similar attachments upon
request.)
10.(b) Distribution Agreement, dated as of December 13, 2000, between
Lion Connecticut Holdings Inc. and Aetna Inc., incorporated by
reference to the Company's Form 10-K filed on March 30, 2001.
10.(c) Employee Benefits Agreement, dated as of December 13, 2000,
between Lion Connecticut Holdings Inc. and Aetna Inc.,
incorporated by reference to the Company's Form 10-K filed on
March 30, 2001.
66
<Page>
ITEM 15. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K (continued)
10.(d) Tax Sharing Agreement, dated as of December 13, 2000, among Lion
Connecticut Holdings Inc., Aetna Inc. and ING America Insurance
Holdings, Inc., incorporated by reference to the Company's Form
10-K filed on March 30, 2001.
10.(e) Transition Services Agreement, dated as of December 13, 2000,
between Lion Connecticut Holdings Inc. and Aetna Inc.,
incorporated by reference to the Company's Form 10-K filed on
March 30, 2001.
10.(f) Lease Agreement, dated as of December 13, 2000, by and between ING
Life Insurance Company and ING Life Insurance and Annuity Company,
incorporated by reference to the Company's Form 10-K filed on
March 30, 2001.
10.(g) Real Estate Services Agreement, dated as of December 13, 2000,
between Aetna Inc. and ING Life Insurance and Annuity Company,
incorporated by reference to the Company's Form 10-K filed on
March 30, 2001.
10.(h) 10 State House Square Services Agreement, dated as of
December 13, 2000, between Aetna Inc. and Lion Connecticut
Holdings Inc., incorporated by reference to the Company's Form
10-K filed on March 30, 2001.
(b) Reports on form 8-K.
None.
67
<Page>
INDEX TO CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
<Table>
<Caption>
Page
----
Reports of Independent Auditors................... 69
I. Summary of Investments December 31,
2002.................................. 71
III. Supplementary Insurance Information as
of and for the years ended
December 31, 2002, 2001 and one month
ended December 31, 2000 and eleven
months ended November 30, 2000........ 72
IV. Reinsurance as of and for the years ended
December 31, 2002, 2001 and one month
ended December 31, 2000 and eleven
months ended November 30, 2000........ 74
</Table>
Schedules other than those listed above are omitted because they are not
required or not applicable.
68
<Page>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
ING Life Insurance and Annuity Company
We have audited the consolidated financial statements of ING Life Insurance and
Annuity Company and Subsidiaries as of December 31, 2002 and 2001, and for each
of the years then ended, and have issued our report thereon dated March 25,
2003. Our audits also included the financial statement schedules listed in Item
15. These schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.
/s/ Ernst & Young LLP
Atlanta, Georgia
March 25, 2003
69
<Page>
INDEPENDENT AUDITORS' REPORT
The Shareholder and Board of Directors
ING Life Insurance and Annuity Company
Under date of March 27, 2001, we reported on the consolidated statements of
income, changes in shareholder's equity and cash flows of ING Life Insurance
Company of America and Subsidiaries, formerly known as Aetna Life Insurance and
Annuity Company and Subsidiaries, for the period from December 1, 2000 to
December 31, 2000 ("Successor Company"), and for the period from January 1, 2000
to November 30, 2000 ("Preacquisition Company"), as included herein. In
connection with our audit of the aforementioned financial statements, we audited
the related financial statement schedules as listed in the accompanying index.
These financial statement schedules are the responsibility of the Companies'
management. Our responsibility is to express an opinion on these financial
statement schedules based on our audit.
In our opinion, such financial statement schedules, when considered in relation
to the basic consolidated financial statements taken as a whole, present fairly,
in all material respects, the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, effective
November 30, 2000, ING America Insurance Holdings Inc. acquired all of the
outstanding stock of Aetna Inc., Aetna Life Insurance and Annuity Company's
indirect parent and sole shareholder in a business combination accounted for as
a purchase. As a result of the acquisition, the consolidated financial
information for the periods after the acquisition is presented on a different
cost basis than that for the periods before the acquisition and, therefore, is
not comparable.
/s/ KPMG LLP
Hartford, Connecticut
March 27, 2001
70
<Page>
SCHEDULE I
Summary of Investments
As of December 31, 2002
(Millions)
<Table>
<Caption>
Amount shown on
Type of Investment Cost Value* Balance Sheet
------------------ --------- --------- ---------------
Fixed maturities:
U.S. government and government
agencies and authorities $ 74.2 $ 77.1 $ 77.1
States, municipalities and
political subdivisions 10.2 12.7 12.7
U.S. corporate securities 8,370.2 8,902.3 8,902.3
Foreign securities (1) 484.9 503.7 503.7
Mortgage-backed securities 5,374.2 5,507.3 5,507.3
Other asset-backed securities 882.4 918.9 918.9
Less: Fixed maturities pledged to
creditors 154.9 155.0 155.0
--------- --------- ---------
Total fixed maturities
securities 15,041.2 15,767.0 15,767.0
--------- --------- ---------
Equity securities:
Non-redeemable preferred stock 34.2 34.2 34.2
Investment in affiliated mutual
funds 203.9 201.0 201.0
Common stock 0.2 0.2 0.2
--------- --------- ---------
Total equity securities 238.3 235.4 235.4
--------- --------- ---------
Short term investments 6.2 6.2 6.2
Mortgage loans 576.6 632.6 576.6
Policy loans 296.3 296.3 296.3
Other investments 52.2 52.2 52.2
Securities pledged to creditors 154.9 155.0 155.0
--------- --------- ---------
Total investments $16,365.7 $17,144.7 $17,088.7
========= ========= =========
</Table>
* See Notes 2 and 3 of Notes to Consolidated Financial Statements.
(1) The term "foreign" includes foreign governments, foreign political
subdivisions, foreign public utilities and all other bonds of foreign
issuers. Substantially all of the Company's foreign securities are
denominated in U.S. dollars.
71
<Page>
SCHEDULE III
Supplementary Insurance Information
As of and for the years ended December 31, 2002 and 2001
and one month ended December 31, 2000
and eleven months ended November 30, 2000
(Millions)
<Table>
<Caption>
Future
Deferred policy Unpaid
policy benefits claims Other
acquisition and claims' and claim Unearned policyholders'
Segment costs reserves expenses premiums funds
========================================================================================
YEAR ENDED DECEMBER 31,
2002
USFS $229.8 $3,305.2 $30.0 $ -- $14,756.0
Investment Management
Services -- -- -- -- --
Other -- -- -- -- --
- ----------------------------------------------------------------------------------------
Total $229.8 $3,305.2 $30.0 $ -- $14,756.0
========================================================================================
YEAR ENDED DECEMBER 31,
2001
USFS $121.3 $1,044.8 $ 4.2 $0.8 $12,129.1
Investment Management
Services -- -- -- -- --
Other -- -- -- -- --
Discontinued operations
(1) -- 2,952.0 24.6 -- 6.7
- ----------------------------------------------------------------------------------------
Total $121.3 $3,996.8 $28.8 $0.8 $12,135.8
========================================================================================
</Table>
(1) Domestic individual life insurance business.
72
<Page>
SCHEDULE III (continued)
Supplementary Insurance Information
As of and for the years ended December 31, 2002 and 2001
and one month ended December 31, 2000
and eleven months ended November 30, 2000
(Millions)
<Table>
<Caption>
Amortization of
Interest credited deferred policy
Net and other acquisition costs
investment Other benefits to and value of
Segment Premiums income (2) Income (3) policyholders business acquired Operating expenses
=====================================================================================================================
YEAR ENDED DECEMBER 31,
2002
USFS $ 98.7 $959.2 $307.5 $746.4 $181.5 $358.7
Investment Management
Services -- 0.2 19.2 -- -- 12.0
Other -- 0.1 (9.5) -- -- (9.3)
- ---------------------------------------------------------------------------------------------------------------------
Total $ 98.7 $959.5 $317.2 $746.4 $181.5 $361.4
=====================================================================================================================
YEAR ENDED DECEMBER 31,
2001
USFS $114.2 $885.5 $449.7 $729.6 $112.0 $463.7
Investment Management
Services -- 1.7 119.7 -- -- 78.2
Other -- 1.2 (37.0) -- -- (35.8)
- ---------------------------------------------------------------------------------------------------------------------
Total $114.2 $888.4 $532.4 $729.6 $112.0 $506.1
=====================================================================================================================
ONE MONTH ENDED
DECEMBER 31, 2000
USFS $ 16.5 $ 78.3 $ 44.5 $ 68.9 $ 10.2 $ 43.0
Investment Management
Services -- -- 11.5 -- -- 10.2
Other -- 0.3 (4.4) -- -- (4.1)
- ---------------------------------------------------------------------------------------------------------------------
Total from continuing
operations $ 16.5 $ 78.6 $ 51.6 $ 68.9 $ 10.2 $ 49.1
=====================================================================================================================
Discontinued operations $ -- $ -- $ 0.8 $ -- $ -- $ --
=====================================================================================================================
ELEVEN MONTHS ENDED
NOVEMBER 30, 2000
USFS $137.7 $827.5 $457.8 $726.7 $116.7 $347.5
Investment Management
Services -- 2.8 126.9 -- -- 112.1
Other -- 3.5 (48.6) -- -- (45.0)
- ---------------------------------------------------------------------------------------------------------------------
Total from continuing
operations $137.7 $833.8 $536.1 $726.7 $116.7 $414.6
=====================================================================================================================
Discontinued operations $ -- $ -- $ 8.2 $ -- $ -- $ --
=====================================================================================================================
</Table>
(2) The allocation of net investment income is based upon the investment year
method or specific identification of certain portfolios within specific
segments.
(3) Includes net realized capital gains and losses and fee income.
73
<Page>
SCHEDULE IV
Reinsurance Information
As of and for the years ended December 31, 2002 and 2001
and one month ended December 31, 2000
and eleven months ended November 30, 2000
(Millions)
<Table>
<Caption>
Percentage of
(Millions) Gross Ceded Assumed Net assumed to net
==================================================================================
YEAR ENDED DECEMBER 31,
2002
Life insurance in Force $32,064.0 $31,853.2 $995.7 $1,206.5
Premiums:
Discontinued operations 255.7 272.7 17.0 --
Accident and Health
Insurance 2.0 2.0 -- --
Annuities 97.3 8.3 9.7 98.7 9.8%
- ----------------------------------------------------------------------------------
Total Premiums $ 355.0 $ 283.0 $ 26.7 $ 98.7
==================================================================================
YEAR ENDED DECEMBER 31,
2001
Life insurance in Force $34,645.5 $34,614.0 $883.7 $ 915.2
Premiums:
Discontinued operations 301.2 315.0 13.8 --
Accident and Health
Insurance 4.5 4.5 -- --
Annuities 112.3 (1.3) 0.6 114.2 0.5%
- ----------------------------------------------------------------------------------
Total Premiums $ 418.0 $ 318.2 $ 14.4 $ 114.2
==================================================================================
ONE MONTH ENDED
DECEMBER 31, 2000
Life insurance in Force $ 4,027.1 $ 4,024.4 $103.1 $ 105.8
Premiums:
Discontinued operations 39.2 40.9 1.7 --
Accident and Health
Insurance 1.6 1.6 -- --
Annuities 17.2 0.8 0.1 16.5 0.6%
- ----------------------------------------------------------------------------------
Total Premiums $ 58.0 $ 43.3 $ 1.8 $ 16.5
==================================================================================
ELEVEN MONTHS ENDED
NOVEMBER 30, 2000
Life insurance in Force $33,607.6 $33,585.7 $860.3 $ 882.2
Premiums:
Discontinued operations 327.4 341.5 14.1 --
Accident and Health
Insurance 13.6 13.6 -- --
Annuities 143.2 6.3 0.8 137.7 0.6%
- ----------------------------------------------------------------------------------
Total Premiums $ 484.2 $ 361.4 $ 14.9 $ 137.7
==================================================================================
</Table>
74
<Page>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
ING LIFE INSURANCE AND ANNUITY COMPANY
(Registrant)
<Table>
March 25, 2003 By /s/ Cheryl L. Price
- ------------------- -----------------------
(Date) Cheryl L. Price
Vice President, Chief Financial Officer and
Chief Accounting Officer
(Duly Authorized Officer and Principal
Financial Officer)
</Table>
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on or before March 27, 2003.
<Table>
<Caption>
SIGNATURES TITLE
/s/ Cheryl L. Price
- ----------------------------------------------
Cheryl L. Price Vice President, Chief Financial Officer and Chief
Accounting Officer
/s/ Keith Gubbay
- ----------------------------------------------
Keith Gubbay Director and President
/s/ Thomas J. McInerney
- ----------------------------------------------
Thomas J. McInerney Director
/s/ P. Randall Lowery
- ----------------------------------------------
P. Randall Lowery Director
/s/ Mark A. Tullis
- ----------------------------------------------
Mark A. Tullis Director
</Table>
75
<Page>
CERTIFICATION
I, Cheryl L. Price, certify that:
1. I have reviewed this annual report on Form 10-K of ING Life Insurance and
Annuity Company;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusion about the effectiveness
of the disclosure controls and procedures based on our evaluation as
of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies, defenses and
material weaknesses.
<Table>
Date: March 25, 2003
By /s/ Cheryl L. Price
- --------------------------------------------------
Cheryl L. Price
Vice President, Chief Financial Officer and Chief
Accounting Officer
(Duly Authorized Officer and Principal Financial
Officer)
</Table>
76
<Page>
CERTIFICATION
I, Keith Gubbay, certify that:
1. I have reviewed this annual report on Form 10-K of ING Life Insurance and
Annuity Company;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusion about the effectiveness
of the disclosure controls and procedures based on our evaluation as
of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies, defenses and
material weaknesses.
<Table>
Date March 25, 2003
By /s/ Keith Gubbay
- --------------------------------------------------
Keith Gubbay
President
(Duly Authorized Officer and Principal Officer)
</Table>
77
<Page>
CERTIFICATION
Pursuant to 18 U.S.C. Section 1350, the undersigned officer of ING Life
Insurance and Annuity Company (the "Company") hereby certifies that, to the
officer's knowledge, the Company's Annual Report on Form 10-K for the year ended
December 31, 2002 (the "Report") fully complies with the requirements of
Section 13 or 15(d), as applicable, of the Securities Exchange Act of 1934 and
that the information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
<Table>
March 25, 2003 By /s/ Cheryl L. Price
- ---------------------------------------- -------------------------------------------------
(Date) Cheryl L. Price
Vice President, Chief Financial Officer and
Chief Accounting Officer
</Table>
The foregoing certification is being furnished solely pursuant to 18 U.S.C.
Section 1350 and is not being filed as part of the Report or as a separate
disclosure document.
78
<Page>
CERTIFICATION
Pursuant to 18 U.S.C. Section 1350, the undersigned officer of ING Life
Insurance and Annuity Company (the "Company") hereby certifies that, to the
officer's knowledge, the Company's Annual Report on Form 10-K for the year ended
December 31, 2002 (the "Report") fully complies with the requirements of
Section 13 or 15(d), as applicable, of the Securities Exchange Act of 1934 and
that the information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
<Table>
March 25, 2003 By /s/ Keith Gubbay
- ---------------------------------------- -------------------------------------------------
(Date) Keith Gubbay
President
</Table>
The foregoing certification is being furnished solely pursuant to 18 U.S.C.
Section 1350 and is not being filed as part of the Report or as a separate
disclosure document.
79