<Page>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2004
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________ to
Commission file number: 333-86276, 333-86278, 333-104456
ING LIFE INSURANCE AND ANNUITY COMPANY
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Connecticut 71-0294708
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(State or other jurisdiction of (IRS employer identification no.)
incorporation or organization)
151 Farmington Avenue, Hartford, Connecticut 06156
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (860) 723-4646
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by 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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes / / No /X/
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 55,000 shares of Common Stock
as of August 12, 2004, all of which were directly owned by Lion Connecticut
Holdings Inc.
NOTE: WHEREAS ING LIFE INSURANCE AND ANNUITY COMPANY MEETS THE CONDITIONS SET
FORTH IN GENERAL INSTRUCTION H(1)(a) AND (b) OF FORM 10Q, THIS FORM IS BEING
FILED WITH THE REDUCED DISCLOSURE FORMAT PURSUANT TO GENERAL INSTRUCTION H(2).
<Page>
ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF LION CONNECTICUT HOLDINGS INC.)
FORM 10-Q FOR THE PERIOD ENDED JUNE 30, 2004
INDEX
<Table>
<Caption>
PAGE
----
PART I. FINANCIAL INFORMATION (UNAUDITED)
Item 1. Financial Statements:
Condensed Consolidated Statements of Income 3
Condensed Consolidated Balance Sheets 4
Condensed Consolidated Statements of Changes in Shareholder's Equity 6
Condensed Consolidated Statements of Cash Flows 7
Notes to Condensed Consolidated Financial Statements 8
Item 2. Management's Narrative Analysis of the Results of
Operations and Financial Condition 17
Item 4. Controls and Procedures 27
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 28
Item 6. Exhibits and Reports on Form 8-K 28
Signatures 29
</Table>
2
<Page>
ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF LION CONNECTICUT HOLDINGS INC.)
PART I. FINANCIAL INFORMATION (UNAUDITED)
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Millions)
<Table>
<Caption>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2004 2003 2004 2003
------------ ------------ ------------ ------------
Revenue:
Premiums $ 7.8 $ 17.8 $ 17.8 $ 28.3
Fee income 115.8 96.0 235.0 189.1
Net investment income 241.4 236.5 478.9 481.0
Net realized capital gains (losses) (2.6) 29.9 15.9 33.4
------------ ------------ ------------ ------------
Total revenue 362.4 380.2 747.6 731.8
------------ ------------ ------------ ------------
Benefits, losses and expenses:
Benefits:
Interest credited and other benefits to policyholders 178.7 176.2 367.5 362.8
Underwriting, acquisition, and insurance expenses:
General expenses 104.0 105.9 207.0 207.6
Commissions 30.1 29.5 63.2 58.3
Policy acquisition costs deferred (41.4) (40.1) (83.4) (79.6)
Amortization of deferred policy acquisition
costs and value of business acquired 36.3 (0.5) 74.2 56.0
------------ ------------ ------------ ------------
Total benefits, losses and expenses 307.7 271.0 628.5 605.1
------------ ------------ ------------ ------------
Income before income taxes 54.7 109.2 119.1 126.7
Income tax expense 17.0 35.4 37.4 40.5
------------ ------------ ------------ ------------
Net income $ 37.7 $ 73.8 $ 81.7 $ 86.2
============ ============ ============ ============
</Table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
3
<Page>
CONDENSED CONSOLIDATED BALANCE SHEETS
(Millions, except share data)
<Table>
<Caption>
JUNE 30, DECEMBER 31,
2004 2003
------------ ------------
(UNAUDITED)
ASSETS
Investments:
Fixed maturities, available for sale, at fair value (amortized cost of
$17,124.2 at 2004 and $16,961.7 at 2003) $ 17,288.5 $ 17,574.3
Equity securities, at fair value:
Nonredeemable preferred stock (cost of $51.7 at 2004 and $34.1 at 2003) 52.0 34.4
Investment in affiliated mutual funds (cost of $102.2 at 2004
and $112.3 at 2003) 114.3 127.4
Common stock (cost of $0.1 at 2004 and 2003) 0.1 0.1
Mortgage loans on real estate 999.0 754.5
Policy loans 263.5 270.3
Short-term investments - 1.0
Other investments 43.7 52.6
Securities pledged to creditors under securities lending agreement (amortized
cost of $727.2 at 2004 and $117.7 at 2003) 721.6 120.2
------------ ------------
Total investments 19,482.7 18,934.8
Cash and cash equivalents 91.6 57.8
Short-term investments under securities loan agreement 729.0 123.9
Accrued investment income 178.7 169.6
Reinsurance recoverable 2,915.6 2,953.2
Deferred policy acquisition costs 355.6 307.9
Sales inducements to contractholders 20.1 -
Value of business acquired 1,392.4 1,415.4
Property, plant and equipment (net of accumulated depreciation
of $83.9 at 2004 and $79.8 at 2003) 25.3 31.7
Due from affiliates 126.9 41.5
Other assets 173.2 174.5
Assets held in separate accounts 31,276.8 33,014.7
------------ ------------
Total assets $ 56,767.9 $ 57,225.0
============ ============
</Table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
4
<Page>
<Table>
<Caption>
JUNE 30 DECEMBER 31,
2004 2003
------------ ------------
(UNAUDITED)
LIABILITIES AND SHAREHOLDER'S EQUITY
Policy liabilities and accruals:
Future policy benefits and claims reserves $ 3,328.4 $ 3,379.9
Unpaid claims and claim expenses 30.0 25.4
Other policyholders' funds 16,757.4 15,871.3
------------ ------------
Total policy liabilities and accruals 20,115.8 19,276.6
Due to affiliates 55.6 92.4
Payables under securities loan agreement 729.0 123.9
Borrowed money 1,256.6 1,519.3
Current income taxes 84.0 85.6
Deferred income taxes 141.4 184.7
Other liabilities 459.2 281.9
Liabilities related to separate accounts 31,276.8 33,014.7
------------ ------------
Total liabilities 54,118.4 54,579.1
------------ ------------
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 4,646.5 4,646.5
Accumulated other comprehensive income 30.8 106.8
Retained deficit (2,030.6) (2,110.2)
------------ ------------
Total shareholder's equity 2,649.5 2,645.9
------------ ------------
Total liabilities and shareholder's equity $ 56,767.9 $ 57,225.0
============ ============
</Table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
5
<Page>
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
(Unaudited)
(Millions)
<Table>
<Caption>
SIX MONTHS ENDED JUNE 30,
2004 2003
------------ ------------
Shareholder's equity, beginning of period $ 2,645.9 $ 2,262.8
Comprehensive income:
Net income 81.7 86.2
Other comprehensive income net of tax: Unrealized gain (loss)
on securities ($(116.9) and $49.4, pretax year to date) (76.0) 32.1
Other (2.1) -
------------ ------------
Total comprehensive income 3.6 118.3
------------ ------------
Capital contributions - 200.0
------------ ------------
Shareholder's equity, end of period $ 2,649.5 $ 2,581.1
============ ============
</Table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
6
<Page>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Millions)
<Table>
<Caption>
SIX MONTHS ENDED JUNE 30,
2004 2003
------------ ------------
Net cash provided by operating activities $ 119.9 $ 961.8
Cash flows from investing activities
Proceeds from the sale, maturity or repayment of:
Fixed maturities available for sale 15,421.2 13,913.1
Equity securities 28.5 27.0
Mortgages 7.0 9.4
Short-term and other investments 22.7 2.9
Acquisition of investments:
Fixed maturities available for sale (15,280.9) (15,682.0)
Equity securities (34.0) (18.1)
Short-term and other investments (18.8) (27.5)
Mortgages (251.5) (105.5)
Change in policy loans 6.9 17.6
Purchases of property and equipment (0.1) (0.9)
Other, net - (7.9)
------------ ------------
Net cash used for investing activities (99.0) (1,871.9)
Cash flows from financing activities
Deposits for investment contracts 1,020.3 666.3
Maturities and withdrawals from insurance and
investment contracts (872.8) (370.7)
Capital contribution - 200.0
Transfers from (to) separate accounts 128.1 (27.0)
Change in short-term loans (262.7) 391.3
------------ ------------
Net cash provided by financing activities 12.9 859.9
------------ ------------
Net increase (decrease) in cash and cash equivalents 33.8 (50.2)
Cash and cash equivalents, beginning of period 57.8 65.4
------------ ------------
Cash and cash equivalents, end of period $ 91.6 $ 15.2
============ ============
</Table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
7
<Page>
ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF LION CONNECTICUT HOLDINGS INC.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
ING Life Insurance and Annuity Company ("ILIAC"), and its wholly-owned
subsidiaries (collectively, the "Company") are providers of financial
products and services in the United States. These condensed consolidated
financial statements include ILIAC and its wholly-owned subsidiaries, ING
Insurance Company of America ("IICA"), ING Financial Advisers, LLC, and,
through February 28, 2002, Aetna Investment Adviser Holding Company, Inc.
("IA Holdco"). ILIAC was a wholly-owned subsidiary of ING Retirement
Holdings, Inc. ("HOLDCO"), which was a wholly-owned subsidiary of ING
Retirement Services, Inc, ("IRSI"). IRSI was a wholly-owned subsidiary of
Lion Connecticut Holdings, Inc, ("Lion"), which in turn was ultimately
owned by ING Groep N.V. ("ING"), a financial services company based in The
Netherlands. However, on March 30, 2003, a series of mergers occurred in
the following order: IRSI merged into Lion, HOLDCO merged into Lion and IA
Holdco merged into Lion. As a result, ILIAC is now a direct wholly-owned
subsidiary of Lion.
On February 28, 2002, ILIAC contributed 100% of the stock of IA Holdco and
its subsidiaries to HOLDCO, (former ILIAC parent company), resulting in a
distribution totaling $60.1 million. As a result of this transaction, the
Investment Management Services segment is no longer reflected as an
operating segment of the Company.
The condensed consolidated financial statements and notes as of June 30,
2004 and December 31, 2003 and for the three and six-months ended June 30,
2004 and 2003 ("interim periods") have been prepared in accordance with
U.S. generally accepted accounting principles and are unaudited. The
condensed consolidated financial statements reflect all adjustments
(consisting only of normal recurring accruals), which are, in the opinion
of management, necessary for the fair presentation of the consolidated
financial position, results of operations and cash flows for the interim
periods. These condensed consolidated financial statements and notes should
be read in conjunction with the consolidated financial statements and
related notes as presented in the Company's 2003 Annual Report on Form
10-K. The results of operations for the interim periods should not be
considered indicative of results to be expected for the full year. Certain
reclassifications have been made to 2003 financial information to conform
to the 2004 presentation.
The Company conducts its business through one reporting segment, U.S.
Financial Services ("USFS"), and revenue reported by the Company is
predominantly derived from external customers.
8
<Page>
2. RECENTLY ADOPTED ACCOUNTING STANDARDS
ACCOUNTING AND REPORTING BY INSURANCE ENTERPRISES FOR CERTAIN
NONTRADITIONAL LONG-DURATION CONTRACTS AND FOR SEPARATE ACCOUNTS
The Company adopted Statement of Position ("SOP") 03-1, "Accounting and
Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration
Contracts and for Separate Accounts," on January 1, 2004. SOP 03-1
establishes several new accounting and disclosure requirements for certain
nontraditional long-duration contracts and for separate accounts including,
among other things, a requirement that assets and liabilities of separate
account arrangements that do not meet certain criteria be accounted for as
general account assets and liabilities, and that revenues and expenses
related to such arrangements be consolidated with the respective revenue
and expense lines in the Condensed Consolidated Statement of Operations. In
addition, the SOP requires additional liabilities be established for
certain guaranteed death and other benefits and for Universal Life products
with certain patterns of cost of insurance charges, and that sales
inducements provided to contractholders be recognized on the balance sheet
separately from deferred acquisition costs and amortized as a component of
benefits expense using methodology and assumptions consistent with those
used for amortization of deferred policy acquisition costs.
The Company evaluated all requirements of SOP 03-1 and determined that it
is affected by the SOP's requirements to account for certain separate
account arrangements as general account arrangements and to defer,
amortize, and recognize separately, sales inducements to contractholders.
Requirements to establish additional liabilities for minimum guarantee
benefits are applicable to the Company, however, the Company's policies on
contract liabilities have historically been, and continue to be, in
conformity with the requirements newly established. Requirements for
recognition of additional liabilities for products with certain patterns of
cost of insurance charges are not applicable to the Company.
The adoption of SOP 03-1 did not have a significant effect on the Company's
results of operations, and had no impact on the Company's net income.
THE MEANING OF OTHER-THAN-TEMPORARY IMPAIRMENT AND ITS APPLICATION TO
CERTAIN INVESTMENTS
In March 2004, the Emerging Issues Task Force ("EITF") reached a final
consensus on EITF Issue No. 03-1, "The Meaning of Other-Than-Temporary
Impairment and its Application to Certain Investments," adopting a
three-step impairment model for securities within its scope. The
three-step model is to be applied on a security-by-security basis as
follows:
Step 1: Determine whether an investment is impaired. An investment is
impaired if its fair value of the investment is less than its cost
basis.
Step 2: Evaluate whether an impairment is other-than-temporary.
Step 3: If the impairment is other-than-temporary, recognize an impairment
loss equal to the difference between the investment's cost and its
fair value.
The Company included this three-stop model in the impairment evaluation for
the quarter ended June 30, 2004. This guidance resulted in no additional
impairments for the Company.
Earlier consensus reached by the EITF on this issue required that certain
quantitative and qualitative disclosures be made for unrealized losses on
debt and equity securities that have not been recognized as
other-than-temporary impairments. These disclosures were adopted by the
Company, effective December 31, 2003, and included in the Investments
footnote of the Notes to Consolidated Financial Statments included in the
Company's 2003 form 10-K. In addition to the disclosure requirements
adopted by the Company effective December 31, 2003, the final consensus of
EITF 03-01 reached in March 2004 included additional disclosure
requirements that are effective for fiscal years ending after
June 15, 2004.
In 2003, the Derivative Implementation Group ("DIG") responsible for
issuing guidance on behalf of the FASB for implementation of FAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" issued
Statement Implementation Issue No. B36, "Embedded Derivatives: Modified
Coinsurance Arrangements and Debt Instruments That Incorporate Credit Risk
Exposures That Are Unrelated or Only Partially Related to the Credit
Worthiness of the Obligor under Those Instruments" ("DIG 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 embedded
derivatives that are required to be bifurcated. The Company adopted DIG B36
on October 1, 2003. The Company has modified coinsurance treaties that are
applicable to the guidance. The applicable contracts, however, have been
determined to generate embedded derivatives with a fair value of zero.
Therefore, the guidance has no impact on the Company's financial position,
results of operations or cash flows.
9
<Page>
3. NEW ACCOUNTING PRONOUNCEMENTS
FSP FAS 97-1
The implementation of the American Institute of Certified Public
Accountants ("AICPA") SOP 03-01, "Accounting and Reporting by Insurance
Enterprises for certain Nontraditional Long-Duration Contracts and for
Separate Accounts," has raised questions regarding the interpretation of
the requirements of SFAS No. 97, concerning when it is appropriate to
record an unearned revenue liability related to the insurance benefit
function. To clarify its position, in June of 2004 the Financial Accounting
Standards Board ("FASB") issued FSP FAS 97-1, "Situations in which
paragraphs 17(b) and 20 of FASB Statement No. 97, Accounting and Reporting
by Insurance Enterprises for certain Long-Duration Contracts and for
Realized Gains and Losses from the Sale of Investments, Permit or Require
Accrual of an Unearned Revenue Liability." FSP FAS 97-1 outlines that SFAS
No. 97 is clear in its intent and language, and requires the recognition of
an unearned revenue liability for amounts that have been assessed to
compensate insurers for services provided over future periods. The
requirement of SOP 03-01 is not intended to amend or limit the requirement
of SFAS No. 97 to recognize a liability for unearned revenue only to those
situations where profits are expected to be followed by a loss. The
guidance contained in FSP FAS 97-1 is effective for financial statements
with fiscal periods beginning subsequent to July 18, 2004. The Company is
currently evaluating the impact of FSP FAS 97-1 and related accounting
guidance and anticipates a potential increase in the (net) liability
established under SOP 03-01 in future accounting periods.
4. 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. Value of business acquired ("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").
10
<Page>
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.
VOBA activity for the six month periods ended June 30, 2004 and 2003 was as
follows:
<Table>
<Caption>
(MILLIONS) 2004 2003
---------- ---------- ----------
Balance at December 31 $ 1,415.4 $ 1,438.4
Adjustment for FAS No. 115 11.9 (8.6)
Additions 27.2 25.0
Interest accrued at 5% to 7% 46.5 48.0
Amortization (108.6) (91.4)
---------- ----------
Balance at June 30 $ 1,392.4 $ 1,411.4
========== ==========
</Table>
5. INVESTMENTS
IMPAIRMENTS
During the three months ended June 30, 2004, the Company determined that 7
fixed maturities had other than temporary impairments. As a result, for the
three months ended June 30, 2004, the Company recognized a pre-tax loss of
$0.6 million to reduce the carrying value of the fixed maturities to their
fair value at the time of impairment. During the three months ended June
30, 2003, the Company determined that 53 fixed maturities had other than
temporary impairments. As a result, for the three months ended June 30,
2003, the Company recognized a pre-tax loss of $24.1 million to reduce the
carrying value of the fixed maturities to their fair value at the time of
impairment.
During the six months ended June 30, 2004, the Company determined that 42
fixed maturities had other than temporary impairments. As a result, for the
six months ended June 30, 2004, the Company recognized a pre-tax loss of
$5.8 million to reduce the carrying value of the fixed maturities to their
fair value at the time of impairment. During the six months ended June 30,
2003, the Company determined that 75 fixed maturities had other than
temporary impairments. As a result, for the six months ended June 30, 2003,
the Company recognized a pre-tax loss of $66.2 million to reduce the
carrying value of the fixed maturities to their fair value at the time of
impairment.
The fair value of the remaining impaired fixed maturities at June 30, 2004
and 2003 is $71.1 million and $152.9 million, respectively.
11
<Page>
6. 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 limited 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 policyholder or
participant (who bears the investment risk subject, in limited cases, to
minimum guaranteed rates) under a contract in shares of mutual funds which
are managed by the Company, or in other selected mutual funds not managed
by the Company.
Separate Account assets and liabilities are carried at fair value and shown
as separate captions in the Condensed Consolidated Balance Sheets.
Deposits, investment income and net realized and unrealized capital gains
and losses of the Separate Accounts are not reflected in the Condensed
Consolidated Financial Statements (with the exception of realized and
unrealized capital gains and losses on the assets supporting the guaranteed
interest option). The Condensed Consolidated Statements of Cash Flows do
not reflect investment activity of the Separate Accounts.
Assets and liabilities of separate account arrangements that do not meet
the criteria in SOP 03-1 for separate presentation in the Condensed
Consolidated Balance Sheets (those arrangements supporting the guaranteed
interest option), and revenues and expenses related to such arrangements,
were reclassified to the general account on January 1, 2004, in accordance
with the SOP requirements.
7. ADDITIONAL INSURANCE BENEFITS AND MINIMUM GUARANTEES
Under SOP 03-1, the Company calculates an additional liability (the "SOP
reserve") for certain guaranteed benefits in order to recognize the
expected value of death benefits in excess of the projected account balance
over the accumulation period based on total expected assessments.
12
<Page>
The SOP reserve calculated is the minimum guaranteed death benefits
("MGDB") reserve and is determined each period by estimating the expected
value of death benefits in excess of the projected account balance and
recognizing the excess ratably over the accumulation period based on total
expected assessments. The Company regularly evaluates estimates used to
adjust the additional liability balance, with a related charge or credit to
benefit expense, if actual experience or other evidence suggests that
earlier assumptions should be revised. The following assumptions and
methodology were used to determine the MGDB SOP reserve at June 30, 2004:
<Table>
<Caption>
AREA ASSUMPTIONS/BASIS FOR ASSUMPTIONS
--------------------------- -----------------------------------------------------------------------
Data used Based on 101 investment performance scenarios stratified based on
10,000 random generated scenarios
Mean investment performance 8.5%
Volatility 18.0%
Mortality 60.0%, 60.0%, 75.0% of the 90-95 ultimate mortality table for standard,
rachet, and rollup, respectively
Lapse rates Vary by contract type and duration; range between 1.0% and 40.0%
Discount rates 6.5%, based on the portfolio earned rate of the general account
</Table>
As of June 30, 2004, the separate account liability subject to SOP 03-1 for
minimum guaranteed benefits and the additional liability recognized related
to minimum guarantees is $4,570.8 million and $0.9 million, respectively.
During the six months ended June 30, 2004, incurred guaranteed benefits and
paid guaranteed benefits were $0.2 million and $0.1 million, respectively.
The net amount at risk (net of reinsurance) and the weighted average
attained age of contractholders is $43.2 million and 67, respectively, as
of June 30, 2004.
The aggregate fair value of equity securities (including mutual funds), by
major investment asset category, supporting separate accounts with
additional insurance benefits and minimum investment return guarantees as
of June 30, 2004 is $4,570.8 million.
8. SALES INDUCEMENTS
Sales inducements represent benefits paid to contractholders that are
incremental to the amounts the Company credits on similar contracts and are
higher than the contract's expected ongoing crediting rates for periods
after the inducement. As of January 1, 2004, such amounts are reported
separately on the balance sheet in accordance with SOP 03-1. Prior to 2004,
sales inducements were recorded as a component of other assets on the
Condensed Consolidated Balance Sheets. Sales inducements are amortized as a
component of benefit expense using methodology and assumptions consistent
with those used for amortization of DAC. During the three months ended June
30, 2004, the Company capitalized $0.6 million and amortized $1.9 million
of sales inducements,
13
<Page>
respectively. During the six months ended June 30, 2004, the Company
capitalized $1.3 million and amortized $3.3 million of sales inducements,
respectively. The unamortized balance of capitalized sales inducements as
of June 30, 2004 is $20.1 million.
9. BENEFIT PLANS
NON-QUALIFIED RETIREMENT PLANS
As of December 31, 2001, the Company, in conjunction with ING, offers
certain eligible employees (excluding, among others, Career Agents (as
defined below)) the Supplemental ING Retirement Plan for Aetna Financial
Services and Aetna International Employees ("SERP"). Effective January 1,
2002, the Company, in conjunction with ING, offers certain employees (other
than Career Agents) supplemental retirement benefits under the ING Americas
Supplemental Executive Retirement Plan (the "Americas Supplemental Plan").
The Company, in conjunction with ING, sponsors the Pension Plan for Certain
Producers of ING Life Insurance and Annuity Company (formerly the Pension
Plan for Certain Producers of Aetna Life Insurance and Annuity Company)
(the "Agents Non-Qualified Plan"), a non-qualified defined benefit pension
plan. The Company also sponsors the Producers' Incentive Savings Plan
("PIP"), which is a non-qualified deferred compensation plan for eligible
Career Agents and certain other individuals who meet the eligibility
criteria specified in the PIP. The Company also sponsors the Producers'
Deferred Compensation Plan ("DCP"), which is a non-qualified deferred
compensation plan for eligible Career Agents and certain other individuals
who meet the eligibility criteria specified in the DCP. Benefit accruals
under the SERPs ceased effective as of December 31, 2001.
Net periodic benefit costs for the SERP and the Agents Non-Qualified Plan
for the periods ended June 30, 2004 and 2003 were as follows:
<Table>
<Caption>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
(MILLIONS) 2004 2003 2004 2003
----------------------------------------- ------------ ------------ ------------ ------------
Interest cost $ 1.5 $ 1.8 $ 3.0 $ 3.5
Net actuarial loss recognized in the year - 0.2 - 0.4
Unrecognized past service cost
recognized in year - - 0.1 0.1
------------ ------------ ------------ ------------
Net periodic benefit cost $ 1.5 $ 2.0 $ 3.1 $ 4.0
============ ============ ============ ============
</Table>
Contributions for the SERP and Agents' Non-Qualified Plan are expected to
be $9.4 million during 2004.
POST-RETIREMENT BENEFITS
In addition to providing pension benefits, the Company, in conjunction with
ING, provides certain health care and life insurance benefits for retired
employees and certain
14
<Page>
agents, including certain Career Agents. Generally, retired employees and
eligible Career Agents pay a portion of the cost of these post-retirement
benefits, usually based on their years of service with the Company. The
amount a retiree or eligible Career Agent pays for such coverage is subject
to change in the future.
Net periodic benefit costs for retired employees' and retired agents'
post-retirement health care benefits for the periods ended June 30, 2004
and 2003 were as follows:
<Table>
<Caption>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
(MILLIONS) 2004 2003 2004 2003
----------------------------------------- ------------ ------------ ------------ ------------
Service cost $ 0.3 $ 0.2 $ 0.6 $ 0.4
Interest cost 0.5 0.4 0.9 0.8
Net actuarial loss recognized in the year 0.2 0.1 0.3 0.2
Past service cost - recognized this year (0.2) (0.1) (0.2) (0.2)
------------ ------------ ------------ ------------
Net periodic benefit cost $ 0.8 $ 0.6 $ 1.6 $ 1.2
============ ============ ============ ============
</Table>
Contributions for retired employees' and retired agents' post-retirement
health care benefits are expected to be $1.6 million during 2004.
CHANGES IN ASSUMPTIONS
Changes in the weighted-average assumptions used in the measurement of the
benefit obligation for the Retirement Plan were as follows:
<Table>
<Caption>
2004 2003
------------ ------------
Discount rate at beginning of period 6.25% 6.75%
</Table>
EFFECT OF RECENTLY ENACTED LEGISLATION
On December 8, 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 ("the Act") was enacted. The Act introduced both
a Medicare prescription drug benefit and a federal subsidy to sponsors of
retiree healthcare plans. In January 2004, the FASB issued FASB Staff
Position No. 106-1 ("FSP 106-1"), "Accounting and Disclosure Requirements
Related to the Medicare Prescription Drug, Improvement and Modernization
Act of 2003." This statement permitted a sponsor of a postretirement
benefit plan that provides a prescription drug benefit to make a one-time
election to defer recognizing the effects of the Act until authoritative
guidance on accounting for the federal subsidy was issued or until certain
other events occurred. In May 2004, the FASB issued FASB Staff Position No.
106-2 ("FSP 106-2"), "Accounting and Disclosure Requirements Related to the
Medicare Prescription Drug, Improvement and Modernization Act of 2003,"
which superseded FSP 106-1. FSP 106-2 provides guidance on the accounting
for the effects of the Act and requires certain disclosures regarding the
effect of the federal subsidy provided by the Act. FSP 106-2 will become
effective for the Company in the third quarter of 2004. The Company
maintains a postretirement benefit plan that provides a prescription drug
benefit. The Company expects that application of
15
<Page>
this guidance will not have a material impact on the Company's condensed
consolidated financial statements.
10. INCOME TAXES
The Company's effective tax rates for the three months ended June 30, 2004
and 2003 were 31.1% and 32.4%, respectively. Effective tax rates for the
six months ended June 30, 2004 and 2003 were 31.4% and 32.0%, respectively.
The decrease in the effective tax rates is attributable to the current year
decrease in pre-tax income being larger than the relative decrease in the
deduction allowed for dividends received.
11. COMMITMENTS AND CONTINGENT LIABILITIES
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
June 30, 2004 and December 31, 2003, the Company had off-balance sheet
commitments to purchase investments equal to the fair value of $239.3
million and $154.3 million, respectively.
LITIGATION
The Company is a party to threatened or pending lawsuits/arbitrations
arising from the normal conduct of business. Due to the climate in
insurance and business litigation, suits against the Company sometimes
include claims for substantial compensatory, consequential or punitive
damages and other types of relief. Moreover, certain claims are asserted as
class actions, purporting to represent a group of similarly situated
individuals. While it is not possible to forecast the outcome of such
lawsuits/arbitrations, in light of existing insurance, reinsurance and
established reserves, it is the opinion of management that the disposition
of such lawsuits/arbitrations will not have a materially adverse effect on
the Company's operations or financial position.
12. SUBSEQUENT EVENT
The Congressional Joint Committee on Taxation has finalized it review of
the Lion tax return through tax year 2000 and has sent the audit
examination back to the Internal Revenue Service for finalization. The
Company was a member of the Lion tax return filings through December 13,
2000. As a result of the resolution of these audits, the Company expects to
record a favorable adjustment to its existing tax liability reserves in the
third quarter of 2004.
16
<Page>
ITEM 2. 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 ING Life Insurance and
Annuity Company and its wholly-owned subsidiaries ("ILIAC", or the
"Company") as of June 30, 2004 and December 31, 2003 and for the three
and six-month periods ended June 30, 2004 and 2003. This review should
be read in conjunction with the condensed consolidated financial
statements and other data presented herein, as well as the
"Management's Narrative Analysis of the Results of Operations and
Financial Condition" section contained in the Company's 2003 Annual
Report on Form 10-K.
NATURE OF BUSINESS
The Company 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 plan-owned assets not invested with the Company. The
Company also offers investment advisory services and pension plan
administrative services.
RECENTLY ADOPTED ACCOUNTING STANDARDS
ACCOUNTING AND REPORTING BY INSURANCE ENTERPRISES FOR CERTAIN
NONTRADITIONAL LONG-DURATION CONTRACTS AND FOR SEPARATE ACCOUNTS
The Company adopted Statement of Position ("SOP") 03-1, "Accounting
and Reporting by Insurance Enterprises for Certain Nontraditional
Long-Duration Contracts and for Separate Accounts," on January 1,
2004. SOP 03-1 establishes several new accounting and disclosure
requirements for certain nontraditional long-duration contracts and
for separate accounts including, among other things, a requirement
that assets and liabilities of separate account arrangements that do
not meet certain criteria be accounted for as general account assets
and liabilities, and that revenues and expenses related to such
arrangements be consolidated with the respective revenue and expense
lines in the Condensed Consolidated Statement of Operations. In
addition, the SOP requires additional liabilities be established for
certain guaranteed death and other benefits and for Universal Life
products with certain patterns of cost of insurance charges, and that
sales inducements provided to contractholders be recognized on the
balance sheet separately from deferred acquisition costs and amortized
as a component of benefits expense using methodology and assumptions
consistent with those used for amortization of deferred policy
acquisition costs.
17
<Page>
The Company evaluated all requirements of SOP 03-1 and determined that
it is affected by the SOP's requirements to account for certain
separate account arrangements as general account arrangements, and to
recognize sales inducements to contractholders. Requirements to
establish additional liabilities for minimum guarantee benefits are
applicable to the Company, however, the Company's policies on policy
liabilities have historically been, and continue to be, in conformity
with the requirements newly established. Requirements for recognition
of additional liabilities for products with certain patterns of cost
of insurance charges are not applicable to the Company.
The adoption of SOP 03-1 did not have a significant effect on the
Company's results of operations, and had no impact on the Company's
net income.
THE MEANING OF OTHER-THAN-TEMPORARY IMPAIRMENT AND ITS APPLICATION TO
CERTAIN INVESTMENTS
In March 2004, the Emerging Issues Task Force ("EITF") reached a
final consensus on EITF Issue No. 03-1, "The Meaning of
Other-Than-Temporary Impairment and its Application to Certain
Investments," adopting a three-step impairment model for securities
within its scope. The three-step model is to be applied on a
security-by-security basis as follows:
Step 1: Determine whether an investment is impaired. An investment is
impaired if its fair value of the investment is less than its
cost basis.
Step 2: Evaluate whether an impairment is other-than-temporary.
Step 3: If the impairment is other-than-temporary, recognize an
impairment loss equal to the difference between the
investment's cost and its fair value.
The Company included this three-stop model in the impairment
evaluation for the quarter ended June 30, 2004. This guidance resulted
in no additional impairments for the Company.
Earlier consensus reached by the EITF on this issue required that
certain quantitative and qualitative disclosures be made for
unrealized losses on debt and equity securities that have not been
recognized as other-than-temporary impairments. These disclosures were
adopted by the Company, effective December 31, 2003, and included in
the Investments footnote of the Notes to Consolidated Financial
Statments included in the Company's 2003 form 10-K. In addition to
the disclosure requirements adopted by the Company effective
December 31, 2003, the final consensus of EITF 03-01 reached in
March 2004 included additional disclosure requirements that are
effective for fiscal years ending after June 15, 2004.
In 2003, the Derivative Implementation Group ("DIG") responsible for
issuing guidance on behalf of the FASB for implementation of FAS No.
133, "Accounting for Derivative Instruments and Hedging Activities"
issued Statement Implementation Issue No. B36, "Embedded Derivatives:
Modified Coinsurance Arrangements and Debt Instruments That
Incorporate Credit Risk Exposures That Are Unrelated or Only Partially
Related to the Credit Worthiness of the Obligor under Those
Instruments" ("DIG 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 embedded derivatives
that are required to be bifurcated. The Company adopted DIG B36 on
October 1, 2003. The Company has modified coinsurance treaties that
are applicable to the guidance. The applicable contracts, however,
have been determined to generate embedded derivatives with a fair
value of zero. Therefore, the guidance has no impact on the Company's
financial position, results of operations or cash flows.
NEW ACCOUNTING PRONOUNCEMENTS
FSP FAS 97-1
The implementation of the American Institute of Certified Public
Accountants ("AICPA") SOP 03-01, "Accounting and Reporting by
Insurance Enterprises for certain Nontraditional Long-Duration
Contracts and for Separate Accounts," has raised questions regarding
the interpretation of the requirements of SFAS No. 97, concerning when
it is appropriate to record an unearned revenue liability related to
the insurance benefit function. To clarify its position, in June of
2004 the Financial Accounting Standards Board ("FASB") issued FSP FAS
97-1, "Situations in which paragraphs 17(b) and 20 of FASB Statement
No. 97, Accounting and Reporting by Insurance Enterprises for certain
Long-Duration Contracts and for Realized Gains and Losses from the
Sale of Investments, Permit or Require Accrual of an Unearned Revenue
Liability." FSP FAS 97-1 outlines that SFAS No. 97 is clear in its
intent and language, and requires the recognition of an unearned
revenue liability for amounts that have been assessed to compensate
insurers for services provided over future periods. The requirement of
SOP 03-01 is not intended to amend or limit the requirement of SFAS
No. 97 to recognize a liability for unearned revenue only to those
situations where profits are expected to be followed by a loss. The
guidance contained in FSP FAS 97-1 is effective for financial
statements with fiscal periods
18
<Page>
beginning subsequent to July 18, 2004. The Company is currently
evaluating the impact of FSP FAS 97-1 and related accounting guidance
and anticipates a potential increase in the (net) liability
established under SOP 03-01 in future accounting periods.
CRITICAL ACCOUNTING POLICIES
GENERAL
The preparation of financial statements in conformity with U.S.
generally accepted accounting principles 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. 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 condensed consolidated
financial statements.
INVESTMENT IMPAIRMENT TESTING
The Company reviews the general account investments for impairments by
considering 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. 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
records impairment losses for the difference.
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
19
<Page>
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.
SALES INDUCEMENTS
Sales inducements represent benefits paid to contractholders that are
incremental to the amounts the Company credits on similar contracts
and are higher than the contract's expected ongoing crediting rates
for periods after the inducement. Such amounts are reported separately
on the balance sheet and are amortized as a component of benefit
expense using methodology and assumptions consistent with those used
for amortization of DAC.
FORWARD-LOOKING INFORMATION/RISK FACTORS
In connection with the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, the Company cautions readers
regarding certain forward-looking statements contained in this report
and in any other statements made by, or on behalf of, the Company,
whether or not in future filings with the Securities and Exchange
Commission ("SEC"). Forward-looking statements are statements not
based on historical information and which relate to future operations,
strategies, financial results, or other developments. Statements using
verbs such as "expect," "anticipate," "believe" or words of similar
import generally involve forward-looking statements. Without limiting
the foregoing, forward-looking statements include statements which
represent the Company's beliefs concerning future levels of sales and
redemptions of the Company's products, investment spreads and yields,
or the earnings and profitability of the Company's activities.
Forward-looking statements are necessarily based on estimates and
assumptions that are inherently subject to significant business,
economic and competitive uncertainties
20
<Page>
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 (for
additional information, see the Legislative Initiatives section
below). Some may relate 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.
RESULTS OF OPERATIONS
Premiums decreased by $10.0 million and $10.5 million for the three
and six months ended June 30, 2004, respectively, compared to the same
periods in 2003, primarily due to lower single premium immediate
annuity sales in 2004 versus 2003.
Fee income increased by $19.8 million and $45.9 million for the three
and six months ended June 30, 2004, respectively, compared to the same
periods in 2003. The increase in fee income during the comparative
periods was principally due to higher average variable assets under
management. Substantially all of the fee income on variable assets is
calculated based on variable assets under management, which increased
between June 30, 2003 and 2004.
Net investment income increased by $4.9 million during the three
months ended June 30, 2004 compared to the same period in 2003. The
increase in net investment income is primarily due to an increase in
average assets under management with fixed options, partially offset
by lower investment yields. Net investment income decreased $2.1
million during the six months ended June 30, 2004 compared to the same
periods in 2003. The decrease in net investment income is primarily
due to lower investment yields, partially offset by an increase in
average assets under management with fixed options.
Net realized capital gains decreased by $32.5 million and $17.5
million for the three and six months ended June 30, 2004,
respectively, compared to the same periods in 2003. Net realized gains
result from sales of fixed maturities having a fair value greater than
book value and are dependent on the volume of trades in the current
interest rate environment. The 10-year treasury yield has risen from
an average of 3.77% in the first half of 2003 to 4.31% in the first
half of 2004, an increase of 54 basis points. In a rising rate
environment, the market value of fixed maturities held in the
Company's portfolio decreases. The decrease in net realized gains
reflects the impact of this variable on the overall sale of fixed
maturities.
Interest credited and other benefits to contractholders increased by
$2.5 million and $4.7 million for the three and six months ended June
30, 2004, respectively,
21
<Page>
compared to the same periods in 2003. An increase in average assets
under management with fixed options, offset by a decrease in credited
rates to contractholders, resulted in the overall increase in interest
credited and other benefits to contractholders.
Underwriting, acquisition, and insurance expenses declined by $2.6
million for the three months ended June 30, 2004, compared to the same
period in 2003. During the six months ended June 30, 2004,
underwriting, acquisition, and insurance expenses increased by $0.5
million compared to same period in 2003. In both periods, a decrease
in general expenses and an increase in policy acquisition costs
deferred were offset by an increase in commissions. Policy acquisition
costs deferred were primarily affected by the increase in commissions.
Commissions increased during the period due to an increase in new
business.
Amortization of deferred policy acquisition costs and value of
business acquired increased by $36.8 million and $18.2 million for the
three and six months ended June 30, 2004, respectively, compared to
the same periods in 2003. Amortization during the three and six months
ended June 30, 2003 was low primarily due to improved stock market and
fund performance compared to the prior year. The positive market
conditions resulted in negative amortization for the three months
ended June 30, 2003. Amortization of long-duration products is
recorded in proportion to actual and estimated future gross profits.
Estimated 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.
Net income decreased by $36.1 million and $4.5 million for the three
and six months ended June 30, 2004, respectively, compared to the
three and six months ended June 30, 2003. The decline in earnings is
primarily the result of decreased net realized gains and an increase
in total benefits, expenses and amortization of long-duration
products, partially offset by an increase in fee income.
22
<Page>
The Company's annuity deposits and assets under management are as
follows:
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
(MILLIONS) (UNAUDITED) 2004 2003 2004 2003
----------- ----------- ----------- -----------
Deposits:
Annuities-fixed options $ 352.4 $ 411.8 $ 842.2 $ 838.7
Annuities-variable options 1,054.6 904.3 2,336.7 1,959.8
----------- ----------- ----------- -----------
Total deposits $ 1,407.0 $ 1,316.1 $ 3,178.9 $ 2,798.5
=========== =========== =========== ===========
Assets under management:
Annuities-fixed options (1) $ 16,360.4 $ 15,613.0
Annuities-variable options (2) 29,894.3 25,319.4
----------- -----------
Subtotal-annuities 46,254.7 40,932.4
Plan sponsored and other 5,314.0 6,830.0
----------- -----------
Total-assets under management 51,568.7 47,762.4
Assets under administration (3) 22,607.1 19,214.8
----------- -----------
Total assets under management
and administration $ 74,175.8 $ 66,977.2
=========== ===========
</Table>
(1) Excludes net unrealized capital gains of $158.7 million and
$1,016.1 million at June 30, 2004 and 2003, respectively.
(2) Includes $13,863.3 million at June 30, 2004 and $10,618.7 million
at June 30, 2003 related to deposits into the Company's products
and invested in unaffiliated mutual funds.
(3) Represents assets for which the Company provides administrative
services only.
FINANCIAL CONDITION
INVESTMENTS
FIXED MATURITIES
At June 30, 2004 and December 31, 2003, the Company's carrying value
of available for sale fixed maturities including securities pledged
under securities lending agreement (hereinafter referred to as "total
fixed maturities") represented 92.4% and 93.5%, respectively, of the
total general account invested assets. For the same periods, $13,719.1
million, or 76.2% of total fixed maturities, and $13,744.9 million, or
77.7% of total fixed maturities, respectively, supported
experience-rated products. Total fixed maturities reflected net
unrealized capital gains of $158.7 million and $615.1 million at June
30, 2004 and December 31, 2003, respectively.
It is management's objective that the portfolio of fixed maturities be
of high quality and be well diversified by market sector. The fixed
maturities in the Company's portfolio are generally rated by external
rating agencies and, if not externally rated, are rated by the Company
on a basis believed to be similar to that used by the rating agencies.
The average quality rating of the Company's fixed maturities portfolio
was AA- at June 30, 2004 and December 31, 2003.
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
23
<Page>
weakened capacity of the issuer to make principal and interest
payments than is the case with higher rated fixed maturities.
The percentage of total fixed maturities by quality rating category is
as follows:
<Table>
<Caption>
JUNE 30, DECEMBER 31,
2004 2003
---------- ------------
AAA 48.7% 51.1%
AA 4.9 4.3
A 19.3 19.1
BBB 23.0 21.3
BB 3.2 3.2
B and below 0.9 1.0
---------- ------------
Total 100.0% 100.0%
========== ============
</Table>
The percentage of total fixed maturities by market sector is as
follows:
<Table>
<Caption>
JUNE 30, DECEMBER 31,
2004 2003
---------- ------------
U.S. Corporate 39.5% 38.9%
Residential Mortgaged-backed 30.9 33.7
Foreign (1) 12.3 11.6
Commercial/Multifamily Mortgage-backed 8.5 7.8
Asset-backed 7.5 6.0
U.S. Treasuries/Agencies 1.3 2.0
---------- ------------
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 fixed maturity investment will
not be collected, an other than temporary impairment is considered to
have occurred.
In addition, the Company invests in structured securities that meet
the criteria of 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.
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<Page>
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.
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 America Insurance
Holdings, Inc. ("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 3.0% 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.
LEGISLATIVE INITIATIVES
The Jobs and Growth Tax Relief Reconciliation Act of 2003, which was
enacted in the second quarter, may impact the Company. The Act's
provisions, which reduce the tax rates on long-term capital gains and
corporate dividends, impact the relative competitiveness of the
Company's products, especially variable annuities.
Other legislative proposals under consideration include repealing the
estate tax, changing the taxation of products, changing life insurance
company taxation and making changes to nonqualified deferred
compensation arrangements. Some of these proposals, if enacted, could
have a material effect on life insurance, annuity and other retirement
savings product sales.
The impact on the tax position of the Company's products cannot be
predicted.
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SUBSEQUENT EVENT
The Congressional Joint Committee on Taxation has finalized it review
of the Lion tax return through tax year 2000 and has sent the audit
examination back to the Internal Revenue Service for finalization. The
Company was a member of the Lion tax return filings through December
13, 2000. As a result of the resolution of these audits, the Company
expects to record a favorable adjustment to its existing tax liability
reserves in the third quarter of 2004.
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ITEM 4. CONTROLS AND PROCEDURES
a) The Company carried out an evaluation, under the supervision and
with the participation of its management, including its Chief
Executive Officer and Chief Financial Officer, of the
effectiveness of the Company's disclosure controls and procedures
(as defined in Rule 13a-15(e) and 15d-15(e) of the Securities
Exchange Act of 1934) as of the end of the period covered by this
report. Based on that evaluation, the Chief Executive Officer and
the Chief Financial Officer have concluded that the Company's
current disclosure controls and procedures are effective in
ensuring that material information relating to the Company
required to be disclosed in the Company's periodic SEC filings is
made known to them in a timely manner.
b) There has not been any change in the internal controls over
financial reporting of the Company that occurred during the period
covered by this report that has materially affected or is
reasonably likely to materially affect these internal controls.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is a party to threatened or pending lawsuits/arbitrations
arising from the normal conduct of business. Due to the climate in
insurance and business litigation, suits against the Company sometimes
include claims for substantial compensatory, consequential or punitive
damages and other types of relief. Moreover, certain claims are
asserted as class actions, purporting to represent a group of
similarly situated individuals. While it is not possible to forecast
the outcome of such lawsuits/arbitrations, in light of existing
insurance, reinsurance and established reserves, it is the opinion of
management that the disposition of such lawsuits/arbitrations will not
have a materially adverse effect on the Company's operations or
financial position.
As with many financial services companies, the Company and affiliates
of the Company have received requests for information from various
governmental and self-regulatory agencies in connection with
investigations related to trading in investment company shares. In
each case, full cooperation and responses are being provided. The
Company is also reviewing its policies and procedures in this area.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
31.1 Certificate of David A. Wheat pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certificate of Brian D. Comer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32.1 Certificate of David A. Wheat pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
32.2 Certificate of Brian D. Comer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
(b) Reports on form 8-K.
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ING LIFE INSURANCE AND ANNUITY
COMPANY
(Registrant)
August 12, 2004 By /s/ David A. Wheat
- --------------- ---------------------------------------------
(Date) David A. Wheat
Director, Senior Vice President and
Chief Financial Officer