10-Q 1 inglifeinsuranceandannuity.htm ILIAC 2012 Q1

 
 
 
 
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
——————————————————————
FORM 10-Q
(Mark One)
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2012 
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:   333-133157, 333-133158, 333-130833, 333-130827, 333-162420, 333-166370, 333-180532
 
ING LIFE INSURANCE AND ANNUITY COMPANY
 
 
 
 
 
(Exact name of registrant as specified in its charter)
Connecticut
 
71-0294708
(State or other jurisdiction of incorporation or organization)
 
(IRS Employer Identification No.)
One Orange Way
 
 
Windsor, Connecticut
 
06095-4774
(Address of principal executive offices)
 
(Zip Code)
(860) 580-4646
(Registrant’s telephone number, including area code)
 
 
 
 
 
(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     ý       No    ¨

Indicate by check mark whether the registrant (1) has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes   ý     No   ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer    o
 
Accelerated filer    o
Non-accelerated filer    x
 
Smaller reporting company     o
(Do not check if a smaller reporting company)
 
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ¨  No ý

 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, $50 par value, as of May 4, 2012, are issued and outstanding, 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 10-Q, THIS FORM IS BEING FILED WITH THE REDUCED DISCLOSURE FORMAT PURSUANT TO GENERAL INSTRUCTION H(2). 
 
 
 
 
 

 
 
 

ING Life Insurance and Annuity Company and Subsidiaries
(A wholly owned subsidiary of Lion Connecticut Holdings Inc.)
Form 10-Q for the period ended March 31, 2012

 

 
2
 

NOTE CONCERNING FORWARD-LOOKING STATEMENTS
 
This Quarterly Report on Form 10-Q, including “Management’s Narrative Analysis of the Results of Operations and Financial Condition,” contains statements which constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements relating to trends in operations and financial results and the business and products of ING Life Insurance and Annuity Company and its wholly-owed subsidiaries (collectively, the "Company"), as well as other statements including words such as “anticipate,” “believe,” “plan,” “estimate,” “expect,” “intend” and other similar expressions. Forward-looking statements are made based upon management’s current expectations and beliefs concerning future developments and their potential effects on us. 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. Factors that could cause such differences include, but are not limited to, those discussed in Part II, Item 1A. “Risk Factors” and in the “Forward-Looking Information/Risk Factors” in Part I, Item 2. of this Form 10-Q as well as those discussed in Part I, Item 1A. “Risk Factors” in the Company’s 2011 Annual Report on Form 10-K.


 
3
 

PART I.    FINANCIAL INFORMATION (UNAUDITED)

Item 1.    Financial Statements
 
ING Life Insurance and Annuity Company and Subsidiaries
(A wholly owned subsidiary of Lion Connecticut Holdings Inc.)
Condensed Consolidated Balance Sheets
(Unaudited)
(In millions, except share data)
 
As of
 
As of
 
March 31,
2012
 
December 31,
2011
 
 
 
(As revised)
Assets
 

 
 

Investments:
 

 
 

Fixed maturities, available-for-sale, at fair value (amortized cost of $16,769.7 at 2012 and $16,577.9 at 2011)
$
18,310.4

 
$
18,134.6

Fixed maturities, at fair value using the fair value option
537.4

 
511.9

Equity securities, available-for-sale, at fair value (cost of $131.1 at 2012 and $131.8 at 2011)
143.1

 
144.9

Short-term investments
337.9

 
216.8

Mortgage loans on real estate
2,590.4

 
2,373.5

Loan - Dutch State obligation
392.8

 
417.0

Policy loans
240.8

 
245.9

Limited partnerships/corporations
518.6

 
510.6

Derivatives
392.9

 
446.6

Securities pledged (amortized cost of $187.9 at 2012 and $572.5 at 2011)
202.2

 
593.7

Total investments
23,666.5

 
23,595.5

Cash and cash equivalents
311.3

 
217.1

Short-term investments under securities loan agreement, including collateral delivered
120.2

 
524.8

Accrued investment income
277.5

 
260.2

Receivable for securities sold
43.2

 
16.7

Reinsurance recoverable
2,240.0

 
2,276.3

Deferred policy acquisition costs, Value of business acquired, and Sales inducements to contract owners
892.8

 
947.2

Notes receivable from affiliate
175.0

 
175.0

Short-term loan to affiliate
696.5

 
648.0

Due from affiliates
51.7

 
52.9

Property and equipment
84.1

 
84.7

Other assets
57.6

 
56.3

Assets held in separate accounts
50,983.9

 
45,295.2

Total assets
$
79,600.3

 
$
74,149.9

 
The accompanying notes are an integral part of these consolidated financial statements.

 

 
4
 

ING Life Insurance and Annuity Company and Subsidiaries
(A wholly owned subsidiary of Lion Connecticut Holdings Inc.)
Condensed Consolidated Balance Sheets
(Unaudited)
(In millions, except share data)

 
As of
 
As of
 
March 31,
2012
 
December 31,
2011
 
 
 
(As revised)
Liabilities and Shareholder’s Equity
 

 
 

Future policy benefits and claims reserves
$
23,020.0

 
$
23,062.3

Payable for securities purchased
57.0

 
3.3

Payables under securities loan agreement, including collateral held
218.5

 
634.8

Long-term debt
4.9

 
4.9

Due to affiliates
110.9

 
126.0

Current income tax payable to Parent
39.8

 
1.3

Deferred income taxes
384.6

 
355.2

Other liabilities
676.8

 
690.6

Liabilities related to separate accounts
50,983.9

 
45,295.2

Total liabilities
75,496.4

 
70,173.6

 
 
 
 
Shareholder’s equity:
 
 
 

Common stock (100,000 shares authorized, 55,000 issued and outstanding; $50 per share value)
2.8

 
2.8

Additional paid-in capital
4,556.9

 
4,533.0

Accumulated other comprehensive income
707.2

 
747.5

Retained earnings (deficit)
(1,163.0
)
 
(1,307.0
)
Total shareholder’s equity
4,103.9

 
3,976.3

Total liabilities and shareholder’s equity
$
79,600.3

 
$
74,149.9

 
The accompanying notes are an integral part of these consolidated financial statements.


 
5
 

ING Life Insurance and Annuity Company and Subsidiaries
(A wholly owned subsidiary of Lion Connecticut Holdings Inc.)
Condensed Consolidated Statements of Operations
(Unaudited)
(In millions)

 
Three Months Ended March 31,
 
2012
 
2011
 
 
 
(As revised)
Revenues:
 

 
 

Net investment income
$
352.0

 
$
343.0

Fee income
155.1

 
155.1

Premiums
11.8

 
9.5

Broker-dealer commission revenue
55.7

 
58.5

Net realized capital gains:
 

 
 

Total other-than-temporary impairment losses
(1.4
)
 
(21.8
)
Less: Portion of other-than-temporary impairment losses recognized in Other comprehensive income (loss)
(0.1
)
 
(1.6
)
Net other-than-temporary impairments recognized in earnings
(1.3
)
 
(20.2
)
Other net realized capital gains
128.6

 
39.8

Total net realized capital gains
127.3

 
19.6

Other income
0.5

 
10.3

Total revenue
702.4

 
596.0

Benefits and expenses:
 

 
 

Interest credited and other benefits to contract owners
194.7

 
175.2

Operating expenses
180.4

 
157.1

Broker-dealer commission expense
55.7

 
58.5

Net amortization of deferred policy acquisition costs and value of business acquired
52.8

 
33.1

Interest expense
0.6

 
0.7

Total benefits and expenses
484.2

 
424.6

Income before income taxes
218.2

 
171.4

Income tax expense
74.2

 
84.0

Net income
$
144.0

 
$
87.4

 
The accompanying notes are an integral part of these consolidated financial statements.

 

 
6
 

ING Life Insurance and Annuity Company and Subsidiaries
(A wholly owned subsidiary of Lion Connecticut Holdings Inc.)
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
(In millions)

 
Three Months Ended March 31,
 
2012
 
2011
 
 
 
(As revised)
Net income
$
144.0

 
$
87.4

Other comprehensive income (loss), before tax:
 
 
 
Change in unrealized gains on securities
(72.4
)
 
(16.1
)
Change in other-than-temporary impairment losses
1.6

 
5.3

Pension and other post-employment benefit liability
(0.6
)
 
—

Other comprehensive income (loss), before tax
(71.4
)
 
(10.8
)
Income tax benefit (expense) related to items of other comprehensive income (loss)
31.1

 
(1.9
)
Other comprehensive income (loss), after tax
(40.3
)
 
(12.7
)
 
 
 
 
Comprehensive income
$
103.7

 
$
74.7


The accompanying notes are an integral part of these consolidated financial statements.


 
7
 

ING Life Insurance and Annuity Company and Subsidiaries
(A wholly owned subsidiary of Lion Connecticut Holdings Inc.)
Condensed Consolidated Statements of Changes in Shareholder’s Equity
(Unaudited)
(In millions)

 
Common Stock
 
Additional Paid-In Capital
 
Accumulated Other Comprehensive Income (Loss)
 
Retained Earnings (Deficit)
 
Total Shareholder's Equity
Balance at January 1, 2011 - As previously filed
$
2.8

 
$
4,326.0

 
$
304.5

 
$
(1,175.0
)
 
$
3,458.3

Cumulative effect of changes in accounting:
 
 
 
 
 
 
 
 
 
Deferred policy acquisition costs
—

 
—

 
64.8

 
(431.0
)
 
(366.2
)
Actuarial gains (losses) for pension and post-retirement benefit plans
—

 
—

 
21.3

 
(21.3
)
 
—

Balance at January 1, 2011 - As revised
$
2.8

 
$
4,326.0

 
$
390.6

 
$
(1,627.3
)
 
$
3,092.1

Comprehensive income:
 
 
 
 
 
 
 
 
 
Net income
—

 
—

 
—

 
87.4

 
87.4

Other comprehensive income (loss), after tax
—

 
—

 
(12.7
)
 
—

 
(12.7
)
Total comprehensive income
 
 
 
 
 
 
 
 
74.7

Contribution of capital
—

 
201.0

 
—

 
—

 
201.0

Employee related benefits
—

 
0.2

 
—

 
—

 
0.2

Balance at March 31, 2011 - As revised
$
2.8

 
$
4,527.2

 
$
377.9

 
$
(1,539.9
)
 
$
3,368.0

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2012 - As revised
$
2.8

 
$
4,533.0

 
$
747.5

 
$
(1,307.0
)
 
$
3,976.3

Comprehensive income:
 
 
 
 
 
 
 
 
 
Net income
—

 
—

 
—

 
144.0

 
144.0

Other comprehensive income (loss), after tax
—

 
—

 
(40.3
)
 
—

 
(40.3
)
Total comprehensive income
 
 
 
 
 
 
 
 
103.7

Employee related benefits
—

 
23.9

 
—

 
—

 
23.9

Balance at March 31, 2012
$
2.8

 
$
4,556.9

 
$
707.2

 
$
(1,163.0
)
 
$
4,103.9


The accompanying notes are an integral part of these consolidated financial statements.


 
8
 

ING Life Insurance and Annuity Company and Subsidiaries
(A wholly owned subsidiary of Lion Connecticut Holdings Inc.)
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In millions)

 
Three Months Ended March 31,
 
2012
 
2011
Net cash provided by operating activities
$
324.3

 
$
197.1

Cash Flows from Investing Activities:
 

 
 

Proceeds from the sale, maturity, disposal or redemption of:
 

 
 

Fixed maturities
1,435.4

 
2,229.2

Equity securities, available-for-sale
1.1

 
8.1

Mortgage loans on real estate
105.0

 
31.8

Limited partnerships/corporations
18.1

 
19.3

Acquisition of:
 

 
 

Fixed maturities
(1,255.0
)
 
(2,038.0
)
Equity securities, available-for-sale
(0.7
)
 
(2.9
)
Mortgage loans on real estate
(322.1
)
 
(154.0
)
Limited partnerships/corporations
(18.8
)
 
(12.2
)
Derivatives, net
(1.1
)
 
(11.1
)
Policy loans, net
5.1

 
3.8

Short-term investments, net
(121.3
)
 
17.8

Loan-Dutch State obligation
24.2

 
32.2

Collateral held, net
(11.7
)
 
0.4

Net cash provided by (used in) investing activities
(141.8
)
 
124.4

 
 
 
 
Cash Flows from Financing Activities:
 

 
 

Deposits received for investment contracts
577.4

 
587.6

Maturities and withdrawals from investment contracts
(617.2
)
 
(658.5
)
Short-term loans to affiliates
—

 
(342.7
)
Short-term repayments of repurchase agreements, net
(48.5
)
 
(92.1
)
Contribution of capital from parent
—

 
201.0

Net cash used in financing activities
(88.3
)
 
(304.7
)
Net increase in cash and cash equivalents
94.2

 
16.8

Cash and cash equivalents, beginning of period
217.1

 
231.0

Cash and cash equivalents, end of period
$
311.3

 
$
247.8

 
The accompanying notes are an integral part of these consolidated financial statements.

 
9
 

ING Life Insurance and Annuity Company and Subsidiaries
(A wholly owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 
 


1.    Business, Basis of Presentation and Significant Accounting Policies
 
Business
         
ING Life Insurance and Annuity Company (“ILIAC”) is a stock life insurance company domiciled in the state of Connecticut. ILIAC and its wholly owned subsidiaries (collectively, the “Company”) are providers of financial products and services in the United States.  ILIAC is authorized to conduct its insurance business in all states and the District of Columbia.

ILIAC is a direct, wholly owned subsidiary of Lion Connecticut Holdings Inc. (“Lion” or “Parent”), which is a direct, wholly owned subsidiary of ING America Insurance Holdings, Inc. (“ING AIH”). ING AIH is an indirect, wholly owned subsidiary of ING Groep N.V. (“ING”). ING is a global financial services holding company based in the Netherlands, with American Depository Shares listed on the New York Stock Exchange under the symbol “ING.”
 
ING has announced the anticipated separation of its banking and insurance businesses. While all options for effecting this separation remain open, on November 10, 2010, ING announced that, in connection with the separation plan, it will prepare for a base case of an initial public offering of ING U.S., which constitutes ING's U.S.-based retirement, insurance and investment management operations, including the Company.

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, 408, and 457, as well as nonqualified deferred compensation plans and related services. The Company's products are offered primarily to individuals, pension plans, small businesses, and employer-sponsored groups in the health care, government, and education markets (collectively “not-for-profit” organizations) and corporate markets. The Company's products are generally distributed through pension professionals, independent agents and brokers, third party administrators, banks, dedicated career agents, and financial planners.
 
Products offered by the Company include deferred and immediate (i.e., payout) annuity contracts.  Company 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 offers wrapper agreements entered into with retirement plans, which contain certain benefit responsive guarantees (i.e., 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 pension and retirement savings plan administrative services.
 
The Company has one operating segment.

Basis of Presentation

The accompanying Condensed Consolidated Financial Statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) and are unaudited. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Those estimates are inherently subject to change and actual results could differ from those estimates.

The Condensed Consolidated Financial Statements include the accounts of ILIAC and its wholly owned subsidiaries, ING Financial Advisers, LLC (“IFA”) and Directed Services LLC (“DSL”). Intercompany transactions and balances have been eliminated.

The accompanying Condensed Consolidated Financial Statements reflect all adjustments (including normal, recurring adjustments) necessary to present fairly the financial position of the Company as of March 31, 2012, its results of operations, comprehensive income, changes in shareholder's equity, and cash flows for the three months ended March 31, 2012 and 2011, in conformity with U.S. GAAP. Interim results are not necessarily indicative of full year performance. The December 31, 2011 Consolidated Balance Sheet is from the audited Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2011, filed with the Securities and Exchange Commission (“SEC”), as adjusted for the retrospective application

 
10
 

ING Life Insurance and Annuity Company and Subsidiaries
(A wholly owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 
 

of certain accounting standards noted below, which includes all disclosures required by U.S. GAAP. Therefore, these Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements of the Company included in the 2011 Annual Report on Form 10-K.

Certain reclassifications have been made to prior year financial information to conform to the current year classifications, including the presentation of changes in fair value of embedded derivatives within annuity products in order to align with the presentation of ING AIH and affiliates. For the three months ended March 31, 2011, $2.2 was reclassified from Interest credited and other benefits to contract owners and $1.3 from Fee income to Other net realized capital gains (losses) in the Condensed Consolidated Statements of Operations. Such reclassifications had no impact on Shareholder's equity or Net income.

Accounting Changes

Employee Benefit Plans

As of January 1, 2012, the Company voluntarily changed its method of recognizing actuarial gains and losses related to its pension and post-retirement benefit plans. Previously, actuarial gains and losses were recognized in Accumulated other comprehensive income and, to the extent outside a corridor, amortized into operating results over the average remaining service period of active plan participants or the average remaining life expectancy of inactive plan participants, as applicable. The Company has elected to immediately recognize actuarial gains and losses in the Condensed Consolidated Statements of Operations in the year in which the gains and losses occur. The new accounting method is preferable, as it eliminates the delay in recognition of actuarial gains and losses. These gains and losses are generally only measured annually as of December 31 and accordingly will be recorded during the fourth quarter.

The Company's change in accounting methodology has been applied retrospectively. The cumulative effect of this change as of January 1, 2011, is a decrease to Retained earnings, with a corresponding increase to Accumulated other comprehensive income, of $21.3, net of tax. In addition, the impact of this change on the Company's Net income was an increase of $0.8 and $0.7 during the three months ended March 31, 2012 and 2011, respectively. The impact of this change as of December 31, 2011, is an additional decrease to Retained earnings, with a corresponding increase to Accumulated other comprehensive income, of $7.2, net of tax.

Adoption of New Pronouncements

Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts
In October 2010, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2010-26, “Financial Services - Insurance (Accounting Standards CodificationTM ("ASC") Topic 944): Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts” (“ASU 2010-26”), which clarifies what costs relating to the acquisition of new or renewal insurance contracts qualify for deferral. Costs that should be capitalized include (1) incremental direct costs of successful contract acquisition and (2) certain costs related directly to successful acquisition activities (underwriting, policy issuance and processing, and sales force contract selling) performed by the insurer for the contract. Advertising costs should be included in deferred acquisition costs only if the capitalization criteria in the U.S. GAAP direct-response advertising guidance are met. All other acquisition-related costs should be charged to expense as incurred.

The provisions of ASU 2010-26 were adopted retrospectively by the Company on January 1, 2012. As a result of implementing ASU 2010-26, the Company recognized a cumulative effect of change in accounting principle of $431.0, net of income taxes of $232.1, as a reduction to January 1, 2011 Retained earnings (deficit). In addition, the Company recognized a $64.8 increase to Accumulated other comprehensive income (“AOCI”).

Reconsideration of Effective Control for Repurchase Agreements
In April 2011, the FASB issued ASU 2011-03, “Transfers and Servicing (ASC Topic 860): Reconsideration of Effective Control for Repurchase Agreements” (“ASU 2011-03”), which removes from the assessment of effective control (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, and (2) the collateral maintenance implementation guidance related to that criterion.


 
11
 

ING Life Insurance and Annuity Company and Subsidiaries
(A wholly owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 
 

The provisions of ASU 2011-03 were adopted by the Company on January 1, 2012. The Company determined, however, that there was no effect on the Company's financial condition, results of operations, or cash flows, as the conclusion is consistent with that previously applied by the Company.

Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (“IFRS”)
In May 2011, the FASB issued ASU 2011-04, “Fair Value Measurement (ASC Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs” (“ASU 2011-04”), which includes the following amendments:

•
The concepts of highest and best use and valuation premise are relevant only when measuring the fair value of nonfinancial assets;
•
The requirements for measuring the fair value of equity instruments are consistent with those for measuring liabilities;
•
An entity is permitted to measure the fair value of financial instruments managed within a portfolio at the price that would be received to sell or transfer a net position for a particular risk; and
•
The application of premiums and discounts in a fair value measurement is related to the unit of account for the asset or liability.

ASU 2011-04 also requires additional disclosures, including use of a nonfinancial asset in a way that differs from its highest and best use, categorization by level for items in which fair value is required to be disclosed, and further information regarding Level 3 fair value measurements.

The provisions of ASU 2011-04 were adopted by the Company on January 1, 2012. The disclosures required by ASU 2011-04 are included in the Financial Instruments note to these Condensed Consolidated Financial Statements. As the pronouncement only pertains to additional disclosures, the adoption had no effect on the Company's financial condition, results of operations, or cash flows.

Presentation of Comprehensive Income
In June 2011, the FASB issued ASU 2011-05, “Comprehensive Income (ASC Topic 220): Presentation of Comprehensive Income” (“ASU 2011-05”), which states that an entity has the option to present total comprehensive income and the components of net income and other comprehensive income either in a single, continuous statement of comprehensive income or in two separate, consecutive statements.

In December 2011, the FASB issued ASU 2011-12, which defers the ASU 2011-05 requirements to present, on the face of the financial statements, the effects of reclassification out of AOCI on the components of net income and other comprehensive income.

The Company early adopted provisions of ASU 2011-05 and ASU 2010-12 as of December 31, 2011, and applied the provisions retrospectively. The Condensed Consolidated Statement of Comprehensive Income, with corresponding revisions to the Condensed Consolidated Statements of Changes in Shareholder's Equity, is included in these Condensed Consolidated Financial Statements. In addition, the required disclosures are included in the Accumulated Other Comprehensive Income (Loss) note to these Condensed Consolidated Financial Statements.

Future Adoption of Accounting Pronouncements

Disclosures about Offsetting Assets and Liabilities
In December 2011, the FASB issued ASU 2011-11, “Balance Sheet (ASC Topic 210): Disclosures about Offsetting Assets and Liabilities” (“ASU 2011-11”), which requires an entity to disclose both gross and net information about instruments and transactions eligible for offset in the statement of financial position, as well as instruments and transactions subject to an agreement similar to a master netting arrangement. In addition, the standard requires disclosure of collateral received and posted in connection with master netting agreements or similar arrangements.

The provisions of ASU 2011-11 are effective, retrospectively, for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual reporting periods. The Company is currently in the process of determining the disclosure impact of adoption of the provisions of ASU 2011-11.

 
12
 

ING Life Insurance and Annuity Company and Subsidiaries
(A wholly owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 
 

2.    Investments
 
Fixed Maturities and Equity Securities
 
Available-for-sale and fair value option fixed maturities and equity securities were as follows as of March 31, 2012.
 
 
Amortized
Cost
 
Gross
Unrealized
Capital
Gains
 
Gross
Unrealized
Capital
Losses
 
Embedded Derivatives(3)
 
Fair
Value
 
OTTI(2)
Fixed maturities:
 

 
 

 
 

 
 
 
 

 
 

U.S. Treasuries
$
736.9

 
$
89.7

 
$
—

 
$
—

 
$
826.6

 
$
—

U.S. government agencies and authorities
378.9

 
27.7

 
—

 
—

 
406.6

 
—

State, municipalities, and political subdivisions
84.9

 
11.9

 
—

 
—

 
96.8

 
—

U.S. corporate securities
8,420.8

 
746.4

 
33.5

 
—

 
9,133.7

 
—

 
 
 
 
 
 
 
 
 
 
 
 
Foreign securities(1):
 

 
 

 
 

 
 
 
 

 
 

Government
393.0

 
33.9

 
2.1

 
—

 
424.8

 
—

Other
4,303.8

 
355.4

 
22.1

 
—

 
4,637.1

 
—

Total foreign securities
4,696.8

 
389.3

 
24.2

 
—

 
5,061.9

 
—

 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Agency
1,433.8

 
198.7

 
5.6

 
35.8

 
1,662.7

 
0.6

Non-Agency
484.1

 
66.0

 
34.8

 
18.5

 
533.8

 
27.4

Total Residential mortgage-backed securities
1,917.9

 
264.7

 
40.4

 
54.3

 
2,196.5

 
28.0

 
 
 
 
 
 
 
 
 
 
 
 
Commercial mortgage-backed securities
854.4

 
69.9

 
1.7

 
—

 
922.6

 
4.4

Other asset-backed securities
404.4

 
20.7

 
19.8

 
—

 
405.3

 
4.0

Total fixed maturities, including securities pledged
17,495.0

 
1,620.3

 
119.6

 
54.3

 
19,050.0

 
36.4

Less: securities pledged
187.9

 
15.3

 
1.0

 
—

 
202.2

 
—

Total fixed maturities
17,307.1

 
1,605.0

 
118.6

 
54.3

 
18,847.8

 
36.4

Equity securities
131.1

 
12.1

 
0.1

 
—

 
143.1

 
—

Total fixed maturities and equity securities
$
17,438.2

 
$
1,617.1

 
$
118.7

 
$
54.3

 
$
18,990.9

 
$
36.4

 
(1) Primarily U.S. dollar denominated.
(2) Represents other-than-temporary impairments ("OTTI") reported as a component of Other comprehensive income.
(3) Embedded derivatives within fixed maturity securities are reported with the host investment. The changes in fair value of embedded derivatives are reported in Other net realized capital gains (losses) in the Condensed Consolidated Statements of Operations.


 
13
 

ING Life Insurance and Annuity Company and Subsidiaries
(A wholly owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 
 

Available-for-sale and fair value option fixed maturities and equity securities were as follows as of December 31, 2011 (As revised).
 
 
Amortized
Cost
 
Gross
Unrealized
Capital
Gains
 
Gross
Unrealized
Capital
Losses
 
Embedded Derivatives(3)
 
Fair
Value
 
OTTI(2)
Fixed maturities:
 

 
 

 
 

 
 
 
 

 
 

U.S. Treasuries
$
1,096.6

 
$
135.0

 
$
—

 
$
—

 
$
1,231.6

 
$
—

U.S. government agencies and authorities
379.7

 
31.0

 
—

 
—

 
410.7

 
—

State, municipalities, and political subdivisions
95.1

 
10.9

 
—

 
—

 
106.0

 
—

U.S. corporate securities
8,166.9

 
770.8

 
31.1

 


 
8,906.6

 
—

 
 
 
 
 
 
 
 
 
 
 
 
Foreign securities(1):
 

 
 

 
 

 
 
 
 

 
 

Government
308.5

 
39.8

 
3.1

 
—

 
345.2

 
—

Other
4,352.5

 
328.8

 
38.4

 
—

 
4,642.9

 
—

Total foreign securities
4,661.0

 
368.6

 
41.5

 
—

 
4,988.1

 
—

 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Agency
1,442.0

 
218.7

 
3.4

 
39.4

 
1,696.7

 
0.7

Non-Agency
513.4

 
66.7

 
49.5

 
19.8

 
550.4

 
28.8

Total Residential mortgage-backed securities
1,955.4

 
285.4

 
52.9

 
59.2

 
2,247.1

 
29.5

 
 
 
 
 
 
 
 
 
 
 
 
Commercial mortgage-backed securities
866.1

 
51.0

 
5.8

 
—

 
911.3

 
4.4

Other asset-backed securities
441.5

 
19.4

 
22.1

 
—

 
438.8

 
4.2

Total fixed maturities, including securities pledged
17,662.3

 
1,672.1

 
153.4

 
59.2

 
19,240.2

 
38.1

Less: securities pledged
572.5

 
22.4

 
1.2

 
—

 
593.7

 
—

Total fixed maturities
17,089.8

 
1,649.7

 
152.2

 
59.2

 
18,646.5

 
38.1

Equity securities
131.8

 
13.1

 
—

 
—

 
144.9

 
—

Total fixed maturities and equity securities
$
17,221.6

 
$
1,662.8

 
$
152.2

 
$
59.2

 
$
18,791.4

 
$
38.1

(1) Primarily U.S. dollar denominated.
(2) Represents other-than-temporary impairments reported as a component of Other comprehensive income.
(3) Embedded derivatives within fixed maturity securities are reported with the host investment. The changes in fair value of embedded derivatives are reported in Other net realized capital gains (losses) in the Condensed Consolidated Statements of Operations.

 

 
14
 

ING Life Insurance and Annuity Company and Subsidiaries
(A wholly owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 
 

The amortized cost and fair value of total fixed maturities, including securities pledged, as of March 31, 2012, are shown below by contractual maturity. Actual maturities may differ from contractual maturities as securities may be restructured, called, or prepaid. Mortgage-backed securities ("MBS") and other asset-backed securities ("ABS") are shown separately because they are not due at a single maturity date.
 
 
Amortized
Cost
 
Fair
Value
Due to mature:
 

 
 

One year or less
$
309.0

 
$
329.4

After one year through five years
3,725.8

 
3,981.6

After five years through ten years
5,300.6

 
5,747.3

After ten years
4,982.9

 
5,467.3

Mortgage-backed securities
2,772.3

 
3,119.1

Other asset-backed securities
404.4

 
405.3

Fixed maturities, including securities pledged
$
17,495.0

 
$
19,050.0

 
The Company did not have any investments in a single issuer, other than obligations of the U.S. government and government agencies and the State of the Netherlands (the “Dutch State”) loan obligation, with a carrying value in excess of 10% of the Company’s Shareholder’s equity at March 31, 2012 and December 31, 2011.
 
The Company invests in various categories of collateralized mortgage obligations (“CMOs”), including CMOs that are not agency-backed, that are subject to different degrees of risk from changes in interest rates and 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 prepayment of principal from the underlying mortgages, either earlier or later than originally anticipated. At March 31, 2012 and December 31, 2011, approximately 43.0% and 41.1%, respectively, of the Company’s CMO holdings were invested in those types of CMOs such as interest-only or principal-only strips, which are subject to more prepayment and extension risk than traditional CMOs.

Certain CMO's primarily interest-only and principal-only strips are counted for as hybrid instruments and valued at fair value with changes in fair value reported in Other net realized gains (losses) in the Condensed Consolidated Statements of Operations.
 
Repurchase Agreements
 
The Company engages in dollar repurchase agreements with mortgage-backed securities (“dollar rolls”) and repurchase agreements with other collateral types to increase its return on investments and improve liquidity. Such arrangements typically meet the requirements to be accounted for as financing arrangements. The Company enters into dollar roll transactions by selling existing mortgage-backed securities and concurrently entering into an agreement to repurchase similar securities within a short time frame in the future at a lower price. Under repurchase agreements, the Company borrows cash from a counterparty at an agreed upon interest rate for an agreed upon time frame and pledges collateral in the form of securities. At the end of the agreement, the counterparty returns the collateral to the Company, and the Company, in turn, repays the loan amount along with the additional agreed upon interest. Company policy requires that at all times during the term of the dollar roll and repurchase agreements that cash or other collateral types obtained is sufficient to allow the Company to fund substantially all of the cost of purchasing replacement assets. Cash collateral received is invested in short-term investments, with the offsetting obligation to repay the loan included as a liability on the Condensed Consolidated Balance Sheets. As of March 31, 2012 and December 31, 2011, the Company did not have any securities pledged in dollar rolls and repurchase agreement transactions.

The Company also enters into reverse repurchase agreements.  These transactions involve a purchase of securities and an agreement to sell substantially the same securities as those purchased.  Company policy requires that, at all times during the term of the reverse repurchase agreements, cash or other collateral types provided is sufficient to allow the counterparty to fund substantially all of the cost of purchasing replacement assets. At March 31, 2012 and December 31, 2011, the Company did not have any securities pledged under reverse repurchase agreements.

 
15
 

ING Life Insurance and Annuity Company and Subsidiaries
(A wholly owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 
 

 
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.  The Company believes the counterparties to the dollar rolls, repurchase, and reverse repurchase agreements are financially responsible and that the counterparty risk is minimal.
 
Securities Lending
 
The Company engages in securities lending whereby certain domestic 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 securities.  Generally, the lending agent retains all of the cash collateral. Collateral retained by the agent is invested in liquid assets on behalf of the Company. 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.

As of March 31, 2012 and December 31, 2011, the fair value of loaned securities was $115.9 and $515.8, respectively, and is included in Securities pledged on the Condensed Consolidated Balance Sheets. Collateral received is included in Short-term investments under securities loan agreement, including collateral delivered. As of March 31, 2012 and December 31, 2011, liabilities to return collateral of $120.2 and $524.8, respectively, are included in Payables under securities loan agreement, including collateral held, on the Condensed Consolidated Balance Sheets.

Variable Interest Entities ("VIEs")
 
The Company holds certain VIEs for investment purposes.  VIEs may be in the form of private placement securities, structured securities, securitization transactions, or limited partnerships. The Company has reviewed each of its holdings and determined that consolidation of these investments in the Company’s financial statements is not required, as the Company is not the primary beneficiary, because the Company does not have both the power to direct the activities that most significantly impact the entity’s economic performance and the obligation or right to potentially significant losses or benefits, for any of its investments in VIEs. The Company provided no non-contractual financial support and its carrying value represents the Company’s exposure to loss. The carrying value of the equity tranches of the collateralized loan obligations ("CLOs") of $1.0 and $0.9 at March 31, 2012 and December 31, 2011, respectively, is included in Limited partnerships/corporations on the Condensed Consolidated Balance Sheets. Income and losses recognized on these investments are reported in Net investment income on the Condensed Consolidated Statements of Operations.
 
Securitizations

The Company invests in various tranches of securitization entities, including Residential Mortgage-backed Securities ("RMBS"), Commercial Mortgage-backed Securities ("CMBS") and ABS. Certain RMBS investments represent agency pass-through securities and close-to-the-index tranches issued by Fannie Mae, Freddie Mac, or similar government-sponsored entity. Investments held by the Company in non-agency RMBS and CMBS also include interest-only, principal-only, and inverse floating securities. Through its investments, the Company is not obligated to provide any financial or other support to these entities.

Each of the RMBS, CMBS, and ABS entities described above are thinly capitalized by design, and considered VIEs under ASC 810-10-25 as amended by ASU 2009-17. As discussed above, the Company's involvement with these entities is limited to that of a passive investor. The Company has no unilateral right to appoint or remove the servicer, special servicer, or investment manager, which are generally viewed to have the power to direct the activities that most significantly impact the securitization entities' economic performance, in any of these entities, nor does the Company function in any of these roles. The Company through its investments or other arrangements does not have the obligation to absorb losses or the right to receive benefits from the entity that could potentially be significant to the entity. Therefore, the Company is not the primary beneficiary and will not consolidate any of the RMBS, CMBS, and ABS entities in which it holds investments. These investments are accounted for as investments as described in the Business, Basis of Presentation and Significant Accounting Policies note to the Consolidated Financial Statements included in the Company's 2011 Annual Report on Form 10-K.


 
16
 

ING Life Insurance and Annuity Company and Subsidiaries
(A wholly owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 
 

Fixed Maturity Securities Credit Quality - Ratings

The Securities Valuation Office ("SVO") of the National Association of Insurance Commissioners (“NAIC”) evaluates the fixed maturity security investments of insurers for regulatory reporting and capital assessment purposes and assigns securities to one of six credit quality categories called “NAIC designations.” An internally developed rating is used as permitted by the NAIC if no rating is available. The NAIC designations are generally similar to the credit quality designations of a Nationally Recognized Statistical Rating Organization (“NRSRO”) for marketable fixed maturity securities, called “rating agency designations,” except for certain structured securities as described below. NAIC designations of "1," highest quality, and "2," high quality, include fixed maturity securities generally considered investment grade (“IG”) by such rating organizations. NAIC designations 3 through 6 include fixed maturity securities generally considered below investment grade (“BIG”) by such rating organizations.

The NAIC adopted revised designation methodologies for non−agency RMBS, including RMBS backed by subprime mortgage loans reported within ABS, and for CMBS. The NAIC's objective with the revised designation methodologies for these structured securities was to increase the accuracy in assessing expected losses, and to use the improved assessment to determine a more appropriate capital requirement for such structured securities. The revised methodologies reduce regulatory reliance on rating agencies and allow for greater regulatory input into the assumptions used to estimate expected losses from such structured securities.

As a result of time lags between the funding of investments, the finalization of legal documents and the completion of the SVO filing process, the fixed maturity portfolio generally includes securities that have not yet been rated by the SVO as of each balance sheet date, such as private placements. Pending receipt of SVO ratings, the categorization of these securities by NAIC designation is based on the expected ratings indicated by internal analysis.

Information about the Company's fixed maturity securities holdings, including securities pledged, by NAIC designations is set forth in the following tables. Corresponding rating agency designation does not directly translate into NAIC designation, but represents the Company's best estimate of comparable ratings from rating agencies, including Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's (“S&P”), and Fitch Ratings Ltd. (“Fitch”). If no rating is available from a rating agency, then an internally developed rating is used.

It is the Company'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. Ratings are derived from three NRSRO ratings and are applied as follows based on the number of agency rating received:

▪
when three ratings are received then the middle rating is applied;
▪
when two ratings are received then the lower rating is applied;
▪
when a single rating is received, the NRSRO rating is applied;
▪
and, when ratings are unavailable then an internal rating is applied.


 
17
 

ING Life Insurance and Annuity Company and Subsidiaries
(A wholly owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 
 

Unrealized Capital Losses
 
Unrealized capital losses (including noncredit impairments) in fixed maturities, including securities pledged to creditors, for IG and BIG securities by duration, based on NAIC designations, were as follows as of March 31, 2012 and December 31, 2011.
 
 
2012
 
2011
 
IG
 
% of IG
and BIG
 
BIG
 
% of IG
and BIG
 
IG
 
% of IG
and BIG
 
BIG
 
% of IG
and BIG
Six months or less below amortized cost
$
31.8

 
26.6
%
 
$
3.1

 
2.6
%
 
$
38.4

 
25.0
%
 
$
7.1

 
4.6
%
More than six months and twelve months or less below amortized cost
8.8

 
7.4
%
 
2.5

 
2.1
%
 
12.5

 
8.1
%
 
4.1

 
2.7
%
More than twelve months below amortized cost
46.1

 
38.5
%
 
27.3

 
22.8
%
 
61.4

 
40.1
%
 
29.9

 
19.5
%
Total unrealized capital losses
$
86.7

 
72.5
%
 
$
32.9

 
27.5
%
 
$
112.3

 
73.2
%
 
$
41.1

 
26.8
%
  
Unrealized capital losses (including noncredit impairments) in fixed maturities, including securities pledged to creditors, for securities rated BBB and above (Investment Grade ("IG")) and securities rated BB and below (Below Investment Grade ("BIG")) by duration, based on NRSRO ratings, were as follows as of March 31, 2012 and December 31, 2011.
 
 
2012
 
2011
 
IG
 
% of IG
and BIG
 
BIG
 
% of IG
and BIG
 
IG
 
% of IG
and BIG
 
BIG
 
% of IG
and BIG
Six months or less below amortized cost
$
31.4

 
26.3
%
 
$
3.5

 
3.0
%
 
$
38.3

 
25.0
%
 
$
7.2

 
4.7
%
More than six months and twelve months or less below amortized cost
7.8

 
6.5
%
 
3.5

 
3.0
%
 
6.8

 
4.4
%
 
9.8

 
6.4
%
More than twelve months below amortized cost
28.5

 
23.7
%
 
44.9

 
37.5
%
 
42.1

 
27.4
%
 
49.2

 
32.1
%
Total unrealized capital losses
$
67.7

 
56.5
%
 
$
51.9

 
43.5
%
 
$
87.2

 
56.8
%
 
$
66.2

 
43.2
%


 
18
 

ING Life Insurance and Annuity Company and Subsidiaries
(A wholly owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 
 

Unrealized capital losses (including noncredit impairments), along with the fair value of fixed maturities, including securities pledged to creditors, by market sector and duration were as follows as of March 31, 2012 and December 31, 2011.
 
 
Six Months or Less
Below Amortized Cost
 
More Than Six
Months and Twelve
Months or Less
Below Amortized Cost
 
More Than Twelve
Months Below
Amortized Cost
 
Total
 
Fair
Value
 
Unrealized
Capital Loss
 
Fair
Value
 
Unrealized
Capital Loss
 
Fair
Value
 
Unrealized
Capital Loss
 
Fair
Value
 
Unrealized
Capital Loss
2012
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

U.S. Treasuries
$
21.0

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
21.0

 
$
—

U.S. corporate, state, and municipalities
865.0

 
22.0

 
143.7

 
5.6

 
52.0

 
5.9

 
1,060.7

 
33.5

Foreign
300.1

 
8.9

 
94.6

 
3.4

 
104.9

 
11.9

 
499.6

 
24.2

Residential mortgage-backed
67.3

 
3.7

 
44.4

 
1.3

 
215.5

 
35.4

 
327.2

 
40.4

Commercial mortgage-backed
11.3

 
0.2

 
19.6

 
0.8

 
10.7

 
0.7

 
41.6

 
1.7

Other asset-backed
1.6

 
0.1

 
6.5

 
0.2

 
49.3

 
19.5

 
57.4

 
19.8

Total
$
1,266.3

 
$
34.9

 
$
308.8

 
$
11.3

 
$
432.4

 
$
73.4

 
$
2,007.5

 
$
119.6

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2011
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

U.S. Treasuries
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

U.S. corporate, state, and municipalities
595.1

 
22.8

 
46.5

 
3.0

 
52.9

 
5.3

 
694.5

 
31.1

Foreign
435.3

 
19.1

 
49.9

 
4.6

 
169.5

 
17.8

 
654.7

 
41.5

Residential mortgage-backed
49.4

 
1.6

 
97.0

 
5.2

 
175.4

 
46.1

 
321.8

 
52.9

Commercial mortgage-backed
28.3

 
1.8

 
69.0

 
2.5

 
8.9

 
1.5

 
106.2

 
5.8

Other asset-backed
32.6

 
0.2

 
4.9

 
1.3

 
44.1

 
20.6

 
81.6

 
22.1

Total
$
1,140.7

 
$
45.5

 
$
267.3

 
$
16.6

 
$
450.8

 
$
91.3

 
$
1,858.8

 
$
153.4


Of the unrealized capital losses aged more than twelve months, the average market value of the related fixed maturities was 85.5% of the average book value as of March 31, 2012.
 

 
19
 

ING Life Insurance and Annuity Company and Subsidiaries
(A wholly owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 
 

Unrealized capital losses (including noncredit impairments) in fixed maturities, including securities pledged to creditors, for instances in which fair value declined below amortized cost by greater than or less than 20% for consecutive periods as indicated in the tables below, were as follows for March 31, 2012 and December 31, 2011.
 
 
Amortized Cost
 
Unrealized Capital Loss
 
Number of Securities
 
< 20%
 
> 20%
 
< 20%
 
> 20%
 
< 20%
 
> 20%
2012
 

 
 

 
 

 
 

 
 

 
 

Six months or less below amortized cost
$
1,335.6

 
$
11.9

 
$
38.2

 
$
4.2

 
232

 
11

More than six months and twelve months or less below amortized cost
312.7

 
45.0

 
10.6

 
14.3

 
64

 
14

More than twelve months below amortized cost
318.9

 
103.0

 
18.4

 
33.9

 
116

 
38

Total
$
1,967.2

 
$
159.9

 
$
67.2

 
$
52.4

 
412

 
63

 
 
 
 
 
 
 
 
 
 
 
 
2011
 

 
 

 
 

 
 

 
 

 
 

Six months or less below amortized cost
$
1,197.2

 
$
60.1

 
$
46.9

 
$
16.9

 
256

 
31

More than six months and twelve months or less below amortized cost
270.3

 
25.1

 
13.9

 
9.1

 
52

 
9

More than twelve months below amortized cost
355.6

 
103.9

 
26.7

 
39.9

 
129

 
37

Total
$
1,823.1

 
$
189.1

 
$
87.5

 
$
65.9

 
437

 
77


Unrealized capital losses (including noncredit impairments) in fixed maturities, including securities pledged to creditors, by market sector for instances in which fair value declined below amortized cost by greater than or less than 20% for consecutive periods as indicated in the tables below, were as follows for March 31, 2012 and December 31, 2011.
 
 
Amortized Cost
 
Unrealized Capital Loss
 
Number of Securities
 
< 20%
 
> 20%
 
< 20%
 
> 20%
 
< 20%
 
> 20%
2012
 

 
 

 
 

 
 

 
 

 
 

U.S. Treasuries
$
21.0

 
$
—

 
$
—

 
$
—

 
4

 
—

U.S. corporate, state and municipalities
1,088.1

 
6.1

 
31.1

 
2.4

 
145

 
1

Foreign
500.9

 
22.9

 
16.8

 
7.4

 
89

 
4

Residential mortgage-backed
282.9

 
84.7

 
14.0

 
26.4

 
129

 
41

Commercial mortgage-backed
43.3

 
—

 
1.7

 
—

 
8

 
—

Other asset-backed
31.0

 
46.2

 
3.6

 
16.2

 
37

 
17

Total
$
1,967.2

 
$
159.9

 
$
67.2

 
$
52.4

 
412

 
63

 
 
 
 
 
 
 
 
 
 
 
 
2011
 

 
 

 
 

 
 

 
 

 
 

U.S. Treasuries
$
—

 
$
—

 
$
—

 
$
—

 
—

 
—

U.S. corporate, state and municipalities
717.7

 
7.9

 
28.8

 
2.3

 
119

 
3

Foreign
670.5

 
25.7

 
31.9

 
9.6

 
122

 
7

Residential mortgage-backed
276.5

 
98.2

 
19.0

 
33.9

 
119

 
47

Commercial mortgage-backed
110.1

 
1.9

 
5.4

 
0.4

 
16

 
1

Other asset-backed
48.3

 
55.4

 
2.4

 
19.7

 
61

 
19

Total
$
1,823.1

 
$
189.1

 
$
87.5

 
$
65.9

 
437

 
77


 
20
 

ING Life Insurance and Annuity Company and Subsidiaries
(A wholly owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 
 

 As of March 31, 2012, and December 31, 2011 the Company held no fixed maturities with an unrealized capital loss in excess of $10.0. 
 
All investments with fair values less than amortized cost are included in the Company’s other-than-temporary impairment analysis, and impairments were recognized as disclosed in the Other-Than-Temporary Impairments section, which follows. After detailed impairment analysis was completed, management determined that the remaining investments in an unrealized loss position were not other-than-temporarily impaired, and therefore no further other-than-temporary impairment was necessary.
 
Other-than-Temporary Impairments

The following table identifies the Company’s credit-related and intent-related other-than-temporary impairments included in the Condensed Consolidated Statements of Operations, excluding noncredit impairments included in AOCI, by type for the three months ended March 31, 2012 and 2011.
 
 
Three Months Ended March 31,
 
2012
 
2011
 
Impairment
 
No. of Securities
 
Impairment
 
No. of Securities
U.S. corporate
$
—

 
—

 
$
3.7

(1) 
1

Foreign(1)
0.4

 
1

 
3.0

 
8

Residential mortgage-backed
0.7

 
23

 
0.3

 
6

Other asset-backed
0.2

 
2

 
13.2

 
38

Total
$
1.3

 
26

 
$
20.2

 
53

(1) Primarily U.S. dollar denominated.
 
The above table includes $0.8 and $2.7 for the three months ended March 31, 2012 and 2011, respectively, in other-than-temporary write-downs related to credit impairments, which are recognized in earnings. The remaining $0.5 and $17.5 in write-downs for the three months ended March 31, 2012 and 2011, respectively, are related to intent impairments.
 
The following table summarizes these intent impairments, which are also recognized in earnings, by type for the three months ended March 31, 2012 and 2011.
 
 
Three Months Ended March 31,
 
2012
 
2011
 
Impairment
 
No. of Securities
 
Impairment
 
No. of Securities
U.S. corporate
$
—

 
—

 
$
3.7

 
1

Foreign(1)
0.4

 
1

 
1.1

 
4

Residential mortgage-backed
—

 
—

 
—

*
1

Other asset-backed
0.1

 
1

 
12.7

 
36

Total
$
0.5

 
2

 
$
17.5

 
42

(1) Primarily U.S. dollar denominated.
* Less than $0.1.

The Company may sell securities during the period in which fair value has declined below amortized cost for fixed maturities or cost for equity securities. In certain situations, new factors, including changes in the business environment, can change the Company’s previous intent to continue holding a security.


 
21
 

ING Life Insurance and Annuity Company and Subsidiaries
(A wholly owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 
 

The fair value of fixed maturities with OTTI as of March 31, 2012 and 2011 was $1.7 billion and $1.9 billion, respectively.
 
The following table identifies the amount of credit impairments on fixed maturities for the three months ended March 31, 2012 and 2011, for which a portion of the OTTI was recognized in AOCI, and the corresponding changes in such amounts.
 
 
Three Months Ended March 31,
 
2012
 
2011
Balance at January 1
$
19.4

 
$
59.2

Additional credit impairments:
 

 
 

On securities not previously impaired
0.1

 
0.2

On securities previously impaired
0.6

 
0.1

Reductions:
 

 
 

Securities intent impairments
—

 
(3.3
)
Securities sold, matured, prepaid or paid down
(0.6
)
 
(3.9
)
Balance at March 31
$
19.5

 
$
52.3

 
Net Investment Income
The Company uses the equity method of accounting for investments in limited partnership interests, primarily private equities and hedge funds. Generally, the Company records its share of earnings using a lag methodology, relying upon the most recent financial information available, where the contractual right exists to receive such financial information on a timely basis. The Company’s equity in earnings from limited partnership interests are accounted for under the equity method and is recorded in Net investment income.
Sources of net investment income were as follows for the three months ended March 31, 2012 and 2011.
 
Three Months Ended March 31,
 
2012
 
2011
Fixed maturities
$
305.8

 
$
298.2

Equity securities, available-for-sale
1.1

 
3.6

Mortgage loans on real estate
33.6

 
26.5

Policy loans
3.3

 
3.3

Short-term investments and cash equivalents
—

 
0.2

Other
19.4

 
21.9

Gross investment income
363.2

 
353.7

Less: investment expenses
(11.2
)
 
(10.7
)
Net investment income
$
352.0

 
$
343.0



 
22
 

ING Life Insurance and Annuity Company and Subsidiaries
(A wholly owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 
 

Net Realized Capital Gains (Losses)
 
Net realized capital gains (losses) are comprised of the difference between the amortized cost of investments and proceeds from sale and redemption, as well as losses incurred due to credit-related and intent-related other-than-temporary impairment of investments. Realized investment gains and losses are also generated from changes in fair value of fixed maturities accounted for using the fair value option and fair value changes including accruals on derivative instruments, except for effective cash flow hedges. The cost of the investments on disposal is determined based on first-in-first-out ("FIFO") methodology. Net realized capital gains (losses) on investments were as follows for the three months ended March 31, 2012 and 2011.
 
 
Three Months Ended March 31,
 
2012
 
2011
Fixed maturities, available-for-sale, including securities pledged
$
39.5

 
$
31.4

Fixed maturities, at fair value using the fair value option
(42.9
)
 
(3.4
)
Equity securities, available-for-sale
—

 
1.6

Derivatives
(13.2
)
 
(9.1
)
Embedded derivatives - fixed maturities
(4.8
)
 
(7.3
)
Embedded derivatives - product guarantees
149.0

 
3.5

Other investments
(0.3
)
 
2.9

Net realized capital gains (losses)
$
127.3

 
$
19.6

After-tax net realized capital gains (losses)
$
78.7

 
$
(10.3
)

Proceeds from the sale of fixed maturities and equity securities and the related gross realized gains and losses were as follows for the three months ended March 31, 2012 and 2011.
 
 
Three Months Ended March 31,
 
2012
 
2011
Proceeds on sales
$
1,267.1

 
$
2,068.8

Gross gains
42.4

 
66.5

Gross losses
3.1

 
13.8



 
23
 

ING Life Insurance and Annuity Company and Subsidiaries
(A wholly owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 
 

3.    Financial Instruments
 
Fair Value Measurement
The Company measures the fair value of its financial assets and liabilities based on assumptions used by market participants in pricing the asset or liability, which may include inherent risk, restrictions on the sale or use of an asset, or non-performance risk, including the Company's non-performance risk. The estimate of an exchange price is the price in an orderly transaction between market participants to sell the asset or transfer the liability (“exit price”) in the principal market, or the most advantageous market in the absence of a principal market, for that asset or liability. The Company utilizes a number of valuation sources to determine the fair values of its financial assets and liabilities, including quoted market prices, third-party commercial pricing services, third party brokers, and industry-standard, vendor-provided software that models the value based on market observable inputs, and other internal modeling techniques based on projected cash flows.

The Company categorizes its financial instruments into a three-level hierarchy based on the priority of the inputs to the valuation technique. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure fair value fall within different levels of the hierarchy, the category level is based on the lowest priority level input that is significant to the fair value measurement of the instrument. Financial assets and liabilities recorded at fair value on the Condensed Consolidated Balance Sheets are categorized as follows:

•
Level 1 - Unadjusted quoted prices for identical assets or liabilities in an active market. The Company defines an active market as a market in which transactions take place with sufficient frequency and volume to provide pricing information on an ongoing basis.
•
Level 2 - Quoted prices in markets that are not active or valuation techniques that require inputs that are observable either directly or indirectly for substantially the full term of the asset or liability. Level 2 inputs include the following:
a) Quoted prices for similar assets or liabilities in active markets;
b) Quoted prices for identical or similar assets or liabilities in non-active markets;
c) Inputs other than quoted market prices that are observable; and
d) Inputs that are derived principally from or corroborated by observable market data through correlation or other means.
•
Level 3 - Prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These valuations, whether derived internally or obtained from a third party, use critical assumptions that are not widely available to estimate market participant expectations in valuing the asset or liability.

When available, the estimated fair value of securities is based on quoted prices in active markets that are readily and regularly obtainable. When quoted prices in active markets are not available, the determination of estimated fair value is based on market standard valuation methodologies, including discounted cash flow methodologies, matrix pricing, or other similar techniques.


 
24
 

ING Life Insurance and Annuity Company and Subsidiaries
(A wholly owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 
 

The following tables present the Company’s hierarchy for its assets and liabilities measured at fair value on a recurring basis as of March 31, 2012 and December 31, 2011.
 
 
2012
 
Level 1
 
Level 2
 
Level 3(1)
 
Total
Assets:
 

 
 

 
 

 
 

Fixed maturities, including securities pledged:
 

 
 

 
 

 
 

U.S. Treasuries
$
778.1

 
$
48.5

 
$
—

 
$
826.6

U.S. government agencies and authorities
—

 
406.6

 
—

 
406.6

U.S. corporate, state and municipalities
—

 
9,083.9

 
146.6

 
9,230.5

Foreign
—

 
5,042.2

 
19.7

 
5,061.9

Residential mortgage-backed securities
—

 
2,185.5

 
11.0

 
2,196.5

Commercial mortgage-backed securities
—

 
922.6

 
—

 
922.6

Other asset-backed securities
—

 
376.6

 
28.7

 
405.3

Equity securities, available-for-sale
124.6

 
—

 
18.5

 
143.1

Derivatives:
 

 
 

 
 

 
 

Interest rate contracts
—

 
390.1

 
—

 
390.1

Foreign exchange contracts
—

 
0.1

 
—

 
0.1

Credit contracts
—

 
2.7

 
—

 
2.7

Cash and cash equivalents, short-term investments, and short-term investments under securities loan agreement
769.0

 
0.4

 
—

 
769.4

Assets held in separate accounts
46,094.5

 
4,866.3

 
23.1

 
50,983.9

Total
$
47,766.2

 
$
23,325.5

 
$
247.6

 
$
71,339.3

 
 
 
 
 
 
 
 
Liabilities:
 

 
 

 
 

 
 

Product guarantees
$
—

 
$
—

 
$
72.0

 
$
72.0

Fixed indexed annuities
—

 
—

 
17.9

 
17.9

Derivatives:
 

 
 

 
 

 
 

Interest rate contracts
3.5

 
305.7

 
—

 
309.2

Foreign exchange contracts
—

 
31.4

 
—

 
31.4

Credit contracts
—

 
0.9

 
—

 
0.9

Total
$
3.5

 
$
338.0

 
$
89.9

 
$
431.4


(1) Level 3 net assets and liabilities accounted for 0.2% of total net assets and liabilities measured at fair value on a recurring basis. Excluding separate accounts assets for which the policyholder bears the risk, the Level 3 net assets and liabilities in relation to total net assets and liabilities measured at fair value on a recurring basis totaled 0.8%.
 

 
25
 

ING Life Insurance and Annuity Company and Subsidiaries
(A wholly owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 
 

 
2011
 
Level 1
 
Level 2
 
Level 3(1)
 
Total
Assets:
 

 
 

 
 

 
 

Fixed maturities, including securities pledged:
 

 
 

 
 

 
 

U.S. Treasuries
$
1,180.3

 
$
51.3

 
$
—

 
$
1,231.6

U.S. government agencies and authorities
—

 
410.7

 
—

 
410.7

U.S. corporate, state and municipalities
—

 
8,883.5

 
129.1

 
9,012.6

Foreign
—

 
4,937.0

 
51.1

 
4,988.1

Residential mortgage-backed securities
—

 
2,206.1

 
41.0

 
2,247.1

Commercial mortgage-backed securities
—

 
911.3

 
—

 
911.3

Other asset-backed securities
—

 
411.1

 
27.7

 
438.8

Equity securities, available-for-sale
125.9

 
—

 
19.0

 
144.9

Derivatives:
 
 
 
 
 
 
 
Interest rate contracts
5.7

 
437.6

 
—

 
443.3

Foreign exchange contracts
—

 
0.7

 
—

 
0.7

Credit contracts
—

 
2.6

 
—

 
2.6

Cash and cash equivalents, short-term investments, and short-term investments under securities loan agreement
953.9

 
4.8

 
—

 
958.7

Assets held in separate accounts
40,556.8

 
4,722.3

 
16.1

 
45,295.2

Total
$
42,822.6

 
$
22,979.0

 
$
284.0

 
$
66,085.6

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Product guarantees
$
—

 
$
—

 
$
221.0

 
$
221.0

Fixed indexed annuities
—

 
—

 
16.3

 
16.3

Derivatives:
 
 
 
 
 
 
 
Interest rate contracts
—

 
306.4

 
—

 
306.4

Foreign exchange contracts
—

 
32.4

 
—

 
32.4

Credit contracts
—

 
8.6

 
12.7

 
21.3

Total
$
—

 
$
347.4

 
$
250.0

 
$
597.4


(1) Level 3 net assets and liabilities accounted for 0.1% of total net assets and liabilities measured at fair value on a recurring basis. Excluding separate accounts assets for which the policyholder bears the risk, the Level 3 net assets and liabilities in relation to total net assets and liabilities measured at fair value on a recurring basis totaled 0.2%.

Transfers in and out of Level 1 and 2
 
There were no transfers between Level 1 and Level 2 during the three months ended March 31, 2012 and 2011.  The Company’s policy is to recognize transfers in and transfers out as of the beginning of the reporting period.
 
Valuation of Financial Assets and Liabilities
 
As described below, certain assets and liabilities are measured at estimated fair value on the Company’s Condensed Consolidated Balance Sheets. In addition, further disclosure of estimated fair values is included in this Financial Instruments footnote. The Company defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The exit price and the transaction (or entry) price will be the same at initial recognition in many circumstances. However, in certain cases, the transaction price may not represent fair value. The fair value of a liability is based on the amount that would be paid to transfer a liability to a third-party with an equal credit standing. Fair value is required to be a market-based

 
26
 

ING Life Insurance and Annuity Company and Subsidiaries
(A wholly owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 
 

measurement which is determined based on a hypothetical transaction at the measurement date, from a market participant’s perspective. The Company considers three broad valuation techniques when a quoted price is unavailable: (i) the market approach, (ii) the income approach and (iii) the cost approach. The Company determines the most appropriate valuation technique to use, given the instrument being measured and the availability of sufficient inputs. The Company prioritizes the inputs to fair valuation techniques and allows for the use of unobservable inputs to the extent that observable inputs are not available.
 
The Company utilizes a number of valuation methodologies to determine the fair values of its financial assets and liabilities in conformity with the concepts of “exit price” and the fair value hierarchy as prescribed in ASC Topic 820. Valuations are obtained from third party commercial pricing services, brokers, and industry-standard, vendor-provided software that models the value based on market observable inputs. The Company reviews the assumptions and inputs used by third party commercial pricing services for each reporting period in order to determine an appropriate fair value hierarchy level. The documentation and analysis obtained from the third party commercial pricing services are reviewed by the Company, including in-depth validation procedures confirming the observability of inputs. The valuations obtained from brokers and third party commercial pricing services are non-binding. The valuations are reviewed and validated monthly through the internal valuation committee price variance review, comparisons to internal pricing models, back testing to recent trades, or monitoring of trading volumes.
 
All valuation methods and assumptions are validated at least quarterly to ensure the accuracy and relevance of the fair values. There were no material changes to the valuation methods or assumptions used to determine fair values during the three months ended March 31, 2012 and the year ended December 31, 2011.
 
The following valuation methods and assumptions were used by the Company in estimating the reported values for the investments and derivatives described below:
 
Fixed maturities: The fair values for the actively traded marketable bonds are determined based upon the quoted market prices and are classified as Level 1 assets.  Assets in this category would primarily include certain U.S. Treasury securities.  The fair values for marketable bonds without an active market are obtained through several commercial pricing services which provide the estimated fair values.  These services incorporate a variety of market observable information in their valuation techniques, including benchmark yields, broker-dealer quotes, credit quality, issuer spreads, bids, offers and other reference data and are classified as Level 2 assets.  This category includes U.S. and foreign corporate bonds, ABS, U.S. agency and government guaranteed securities, CMBS, and all RMBS, including certain CMO and subprime RMBS assets. 
 
Generally, the Company does not obtain more than one vendor price from pricing services per instrument. The Company uses a hierarchy process in which prices are obtained from a primary vendor, and, if that vendor is unable to provide the price, the next vendor in the hierarchy is contacted until a price is obtained or it is determined that a price cannot be obtained from a commercial pricing service. When a price cannot be obtained from a commercial pricing service, independent broker quotes are solicited.  Securities priced using independent broker quotes are classified as Level 3.
 
Broker quotes and prices obtained from pricing services are reviewed and validated monthly through an internal valuation committee price variance review, comparisons to internal pricing models, back testing to recent trades, or monitoring of trading volumes. At March 31, 2012, $149.8 and $14.5 billion of a total of $19.1 billion in fixed maturities were valued using unadjusted broker quotes and unadjusted prices obtained from pricing services, respectively, and verified through the review process. The remaining balance in fixed maturities consisted primarily of privately placed bonds valued using a matrix-based pricing model.
 
All prices and broker quotes obtained go through the review process described above including valuations for which only one broker quote is obtained.  After review, for those instruments where the price is determined to be appropriate, the unadjusted price provided is used for financial statement valuation. If it is determined that the price is questionable, another price may be requested from a different vendor. The internal valuation committee then reviews all prices for the instrument again, along with information from the review, to determine which price best represents “exit price” for the instrument.
 
Fair values of privately placed bonds are primarily determined using a matrix-based pricing model and are classified as Level 2 assets.  The model considers the current level of risk-free interest rates, current corporate spreads, the credit quality of the issuer, and cash flow characteristics of the security.  Also considered are factors such as the net worth of the borrower, the value of collateral, the capital structure of the borrower, the presence of guarantees, and the Company’s evaluation of the borrower’s ability

 
27
 

ING Life Insurance and Annuity Company and Subsidiaries
(A wholly owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 
 

to compete in its relevant market.  Using this data, the model generates estimated market values which the Company considers reflective of the fair value of each privately placed bond.
 
Equity securities, available-for-sale: Fair values of publicly traded equity securities are based upon quoted market price and are classified as Level 1 assets. Other equity securities, typically private equities or equity securities not traded on an exchange, are valued by other methods such as analytics or brokers and are classified as Level 3 assets.
 
Cash and cash equivalents, Short-term investments, and Short-term investments under securities loan agreement: The carrying amounts for cash reflect the assets' fair value. The fair values for cash equivalents and most short-term investments are determined based on quoted market prices. These assets are classified as Level 1. Other short-term investments are valued and classified in the fair value hierarchy consistent with the policies described herein, depending on investment type.
 
Derivatives: Derivatives are carried at fair value, which is determined using the Company’s derivative accounting system in conjunction with observable key financial data from third party sources, such as yield curves, exchange rates, Standard & Poor’s 500 Index prices, and London Interbank Offered Rates, which are obtained from third-party sources and uploaded into the system. For those derivatives that are unable to be valued by the accounting system, the Company typically utilizes values established by third-party brokers. Counterparty credit risk is considered and incorporated in the Company’s valuation process through counterparty credit rating requirements and monitoring of overall exposure.  It is the Company’s policy to transact only with investment grade counterparties with a credit rating of A- or better. The Company’s non-performance risk is also considered and incorporated in the Company’s valuation process. Valuations for the Company’s futures and interest rate forward contracts are based on unadjusted quoted prices from an active exchange and, therefore, are classified as Level 1. The Company also has certain credit default swaps that are priced using models that primarily use market observable inputs, but contain inputs that are not observable to market participants, which have been classified as Level 3.  However, all other derivative instruments are valued based on market observable inputs and are classified as Level 2.

The Company has entered into a number of options as hedges on its Fixed indexed annuities ("FIA") liabilities. The maximum exposure is the current value of the option. The payoff of these contracts depends on market conditions during the lifetime of the option. The fair value measurement of options is highly sensitive to implied equity and interest rate volatility, and the market reflects a considerable variance in broker quotes. The Company uses a third-party vendor to determine the market value of these options.

Product guarantees: The Company records reserves for Stabilizer and Managed custody guarantees ("MCG") contracts containing guaranteed credited rates in accordance with ASC 815.  The guarantee is treated as an embedded derivative or a stand-alone derivative (depending on the underlying product) and is required to be reported at fair value.  The fair value of the obligation is calculated based on the income approach as described in ASC 820.  The income associated with the contracts is projected using actuarial and capital market assumptions, including benefits and related contract charges, over the anticipated life of the related contracts.  The cash flow estimates are produced by using stochastic techniques under a variety of risk neutral scenarios and other market implied assumptions.  These derivatives are classified as Level 3 liabilities. Explicit risk margins in the actuarial assumptions underlying valuations are included, as well as an explicit recognition of all non-performance risks as required by U.S. GAAP.  Non-performance risk for product guarantees contains adjustments to the fair values of these contract liabilities related to the current credit standing of ING Verzekeringen N.V. ("ING Insurance") and the Company based on credit default swaps ("CDS") with similar term to maturity and priority of payment. The ING Insurance credit default spread is applied to the discount factors for product guarantees in the Company’s valuation model in order to incorporate credit risk into the fair values of these product guarantees.

The Company also records for its FIA contracts an embedded derivative liability for interest payments to contract holders above the minimum guaranteed interest rate, in accordance with U.S. GAAP for derivative instruments and hedging activities. The guarantee is treated as an embedded derivative and is required to be reported separately from the host contract. The fair value of the obligation is calculated based on actuarial and capital market assumptions related to the projected cash flows, including benefits and related contract charges, over the anticipated life of the related contracts. The cash flow estimates are produced by market implied assumptions. These derivatives are classified as Level 3 liabilities in the fair value hierarchy.


 
28
 

ING Life Insurance and Annuity Company and Subsidiaries
(A wholly owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 
 

The estimated fair value of the Stabilizer and MCG contracts containing guaranteed credited rates is determined based on the present value of projected future claims, minus the present value of future guaranteed premiums. At inception of the contract, the Company projects a guaranteed premium to be equal to the present value of the projected future claims. The income associated with the contracts is projected using actuarial and capital market assumptions, including benefits and related contract charges, over the anticipated life of the related contracts.
The Company's valuation actuaries are responsible for the policies and procedures for valuing the embedded derivatives, reflecting the capital markets and actuarial valuation inputs and non-performance risk in the estimate of the fair value of the embedded derivatives. The actuarial and capital market assumptions for each liability are approved by each product's Chief Risk Officer (“CRO”), including an independent annual review by the U.S. CRO. Models used to value the embedded derivatives must comply with the Company's actuarial model and governance policies.

Quarterly, an attribution analysis is performed to quantify changes in fair value measurements, and a sensitivity analysis is used to analyze the changes. The changes in fair value measurements are also compared to corresponding movements in the hedge target to assess the validity of the attributions. The results of the attribution analysis are reviewed by the valuation actuaries, responsible CFOs, Controllers, and CROs, the Company's appointed actuary, and/or others as nominated by management.

Assets held in separate accounts: Assets held in separate accounts are reported at the quoted fair values of the underlying investments in the separate accounts.  The underlying investments include mutual funds, short-term investments and cash, the valuations of which are based upon a quoted market price and are included in Level 1.  Bond valuations are obtained from third party commercial pricing services and brokers and are classified in the fair value hierarchy consistent with the policies described above for Fixed maturities.

Level 3 Financial Instruments
 
The fair values of certain assets and liabilities are determined using prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement (i.e., Level 3 as defined by ASC Topic 820), including but not limited to liquidity spreads for investments within markets deemed not currently active. These valuations, whether derived internally or obtained from a third party, use critical assumptions that are not widely available to estimate market participant expectations in valuing the asset or liability. In addition, the Company has determined, for certain financial instruments, an active market is such a significant input to determine fair value that the presence of an inactive market may lead to classification in Level 3. In light of the methodologies employed to obtain the fair values of financial assets and liabilities classified as Level 3, additional information is presented below.


 
29
 

ING Life Insurance and Annuity Company and Subsidiaries
(A wholly owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 
 

The following table summarizes the changes in fair value of the Company’s Level 3 assets and liabilities for the three months ended March 31, 2012.
 
 
Three Months Ended March 31, 2012
 
Fair Value
as of
January 1
 
Total
realized/unrealized
gains (losses) included in:
 
Purchases
 
Issuances
 
Sales
 
Settlements
 
Transfers in to Level 3 (2)
 
Transfers out of Level 3 (2)
 
Fair Value
as of
March 31
 
Change in unrealized gains (losses) included in earnings (3)
 
 
Net income
 
OCI
Fixed maturities, including securities pledged:
 

 
 

 
 

 
 

 
 
 
 
 
 

 
 

 
 

 
 

 
 

U.S. corporate, state and municipalities
$
129.1

 
$
—

 
$
0.3

 
$
0.5

 
$
—

 
$
—

 
$
(4.9
)
 
$
21.6

 
$
—

 
$
146.6

 
$
—

Foreign
51.1

 
0.9

 
(0.9
)
 
—

 
—

 
(5.7
)
 
—

 
—

 
(25.7
)
 
19.7

 
—

Residential mortgage-backed securities
41.0

 
(0.2
)
 
0.2

 
—

 
—

 
—

 
(0.2
)
 
—

 
(29.8
)
 
11.0

 
(0.2
)
Other asset-backed securities
27.7

 
0.2

 
1.0

 
—

 
—

 
—

 
(0.2
)
 
—

 
—

 
28.7

 
0.2

Total fixed maturities, including securities pledged
248.9

 
0.9

 
0.6

 
0.5

 
—

 
(5.7
)
 
(5.3
)
 
21.6

 
(55.5
)
 
206.0

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity securities, available-for-sale
19.0

 
—

 
(0.1
)
 
0.7

 
—

 
(1.1
)
 
—

 
—

 
—

 
18.5

 
—

Derivatives, net
(12.7
)
 
(1.7
)
 
—

 
—

 
—

 
—

 
14.4

 
—

 
—

 
—

 
—

Product guarantees
(221.0
)
 
150.6

(1) 
—

 
(1.6
)
 
—

 
—

 
—

 
—

 
—

 
(72.0
)
 
—

Fixed Indexed Annuities
(16.3
)
 
(1.6
)
(1) 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(17.9
)
 
—

Separate Accounts (4)
16.1

 
0.3

 
—

 
14.8

 
—

 
(8.3
)
 
—

 
0.2

 
—

 
23.1

 
0.4


(1) 
All gains and losses on Level 3 are classified as realized gains (losses) for the purpose of this disclosure because it is impracticable to track realized and unrealized gains (losses) separately on a contract-by-contract basis. These amounts are included in Other net realized gains (losses) in the Condensed Consolidated Statements of Operations.
(2) The Company’s policy is to recognize transfers in and transfers out as of the beginning of the reporting period.
(3) For financial instruments still held as of March 31, amounts are included in Net investment income and Other net realized capital gains (losses) in the Condensed Consolidated Statements of Operations.
(4) The investment income and realized gains (losses) and change in unrealized gains (losses) included in net income for separate account assets are offset by an equal amount for separate liabilities, which result in a net zero impact on net income for the Company.


 
30
 

ING Life Insurance and Annuity Company and Subsidiaries
(A wholly owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 
 

The following table summarizes the changes in fair value of the Company’s Level 3 assets and liabilities for the three months ended March 31, 2011.
 
 
Three Months Ended March 31, 2011
 
Fair Value
as of
January 1
 
Total
realized/unrealized
gains (losses) included in:
 
Purchases
and
issuances
 
Settlements
 
Transfers in to Level 3 (2)
 
Transfers out of Level 3 (2)
 
Fair Value
as of
March 31
 
Change in unrealized gains (losses) included in earnings (3)
 
 
Net income
 
OCI
 
 
 
Fixed maturities, including securities pledged:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

U.S. corporate, state and municipalities
$
11.2

 
$
—

 
$
—

 
$
13.9

 
$
—

 
$
—

 
$
(11.2
)
 
$
13.9

 
$
—

Foreign
11.4

 
—

 
—

 
1.5

 
—

 
5.6

 
(10.9
)
 
7.6

 
—

Residential mortgage-backed securities
254.7

 
(2.7
)
 
1.9

 
4.2

 
(3.1
)
 
79.1

 
(214.2
)
 
119.9

 
(1.6
)
Other asset-backed securities
247.7

 
(1.9
)
 
4.0

 
—

 
(0.3
)
 
1.5

 
(199.0
)
 
52.0

 
(1.9
)
Total fixed maturities, including securities pledged
525.0

 
(4.6
)
 
5.9

 
19.6

 
(3.4
)
 
86.2

 
(435.3
)
 
193.4

 
(3.5
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity securities, available-for-sale
27.7

 
—

 
(0.3
)
 
2.4

 
—

 
—

 
—

 
29.8

 
—

Derivatives, net
(13.6
)
 
2.3

 
—

 
—

 
(0.1
)
 
—

 
—

 
(11.4
)
 
2.2

Product guarantees
(3.0
)
 
6.3

(1) 
—

 
(1.3
)
 
—

 
—

 
—

 
2.0

 
—

Fixed Indexed Annuities
(5.6
)
 
(2.8
)
(1) 
—

 
—

 
—

 
—

 
—

 
(8.4
)
 
—

Separate Accounts (4)
22.3

 
0.1

 
—

 
(0.6
)
 
—

 
2.5

 
(4.2
)
 
20.1

 
0.1


(1) 
All gains and losses on Level 3 are classified as realized gains (losses) for the purpose of this disclosure because it is impracticable to track realized and unrealized gains (losses) separately on a contract-by-contract basis. These amounts are included in Other net realized gains (losses) in the Condensed Consolidated Statements of Operations.
(2) The Company’s policy is to recognize transfers in and transfers out as of the beginning of the reporting period.
(3) For financial instruments still held as of March 31, amounts are included in Net investment income and Other net realized capital gains (losses) in the Condensed Consolidated Statements of Operations.
(4) The investment income and realized gains (losses) and change in unrealized gains (losses) included in net income for separate account assets are offset by an equal amount for separate liabilities, which result in a net zero impact on net income for the Company.




 
31
 

ING Life Insurance and Annuity Company and Subsidiaries
(A wholly owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 
 

The transfers out of Level 3 during the three months ended March 31, 2012, and 2011 in fixed maturities, including securities pledged, are primarily due to the Company’s determination that the market for subprime RMBS securities has become active.  While the valuation methodology has not changed, the Company has concluded that the frequency of transactions in the market for subprime RMBS securities represent regularly occurring market transactions and therefore are now classified as Level 2.
 
The remaining transfers in and out of Level 3 for fixed maturities, equity securities and separate accounts during the three months ended March 31, 2012 and 2011 are due to the variation in inputs relied upon for valuation each quarter. Securities that are primarily valued using independent broker quotes when prices are not available from one of the commercial pricing services are reflected as transfers into Level 3, as these securities are generally less liquid with very limited trading activity or where less transparency exists corroborating the inputs to the valuation methodologies. When securities are valued using more widely available information, the securities are transferred out of Level 3 and into Level 1 or 2, as appropriate.

Significant Unobservable Inputs

Quantitative information about the significant unobservable inputs used in the Company's fair value measurements of Level 3 financial instruments is presented in the following sections and tables.

Valuations for fixed maturity and equity security investments are primarily based on broker quotes for which the quantitative detail of the unobservable inputs is neither provided nor reasonably corroborated, thus negating the ability to perform a sensitivity analysis.  

The significant unobservable inputs used in the fair value measurements of FIAs include non-performance risk and lapses.

The significant unobservable inputs used in the fair value measurement of the Stabilizer and MCG contracts are policyholder deposits, lapse rates, non-performance risk, and interest rate implied volatility.

Following is a description of selected inputs:

Interest Rate Volatility: A term-structure model is used to approximate implied volatility for the swap rates for the Stabilizer and MCG contracts. Where no implied volatility is readily available in the market, an alternative approach is applied based only on historical volatility.

Non-performance Risk: The valuation actuaries obtain the CDS spreads of ING Insurance with similar term to maturity and priority of payment from an external source for use in the estimate of the fair value embedded derivatives.

Actuarial Assumptions: Management regularly reviews actuarial assumptions, which are based on the Company's experience and periodically reviewed against industry standards. Industry standards and Company experience may be limited on certain products.

The following table presents the unobservable inputs about Level 3 fair value measurements for product guarantees:

Unobservable Input
 
FIA
 
Stabilizer / MCG
Interest rate implied volatility
 
-
 
0% - 4%
Non-performance risk
 
0% - 3%
 
0% - 3%
Actuarial Assumptions:
 
 
 
 
Lapses
 
0% - 10%
 
0% - 55%
Policyholder deposits(1)
 
-
 
0% - 15%
(1) Measured as a percentage of assets under management or assets under administration.

 
32
 

ING Life Insurance and Annuity Company and Subsidiaries
(A wholly owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 
 

Sensitivity Analysis
Generally, the following will cause an increase (decrease) in the FIA embedded derivative fair value liability:

•
A decrease (increase) in non-performance risk
•
A decrease (increase) in lapses

Generally, the following will cause an increase (decrease) in the derivative and embedded derivative fair value liabilities related to Stabilizer and MCG:

•
An increase (decrease) in interest rate volatility
•
A decrease (increase) in the non-performance risk
•
An increase (decrease) in lapses
•
A decrease (increase) in policyholder deposits

Other Financial Instruments

The carrying values and estimated fair values of certain of the Company’s financial instruments were as follows at March 31, 2012 and December 31, 2011.
 
 
2012
 
2011
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
Assets:
 

 
 

 
 

 
 

Fixed maturities, available-for-sale, including securities pledged
$
18,512.6

 
$
18,512.6

 
$
18,728.3

 
$
18,728.3

Fixed maturities, at fair value using the fair value option
537.4

 
537.4

 
511.9

 
511.9

Equity securities, available-for-sale
143.1

 
143.1

 
144.9

 
144.9

Mortgage loans on real estate
2,590.4

 
2,664.5

 
2,373.5

 
2,423.1

Loan-Dutch State obligation
392.8

 
399.2

 
417.0

 
421.9

Policy loans
240.8

 
240.8

 
245.9

 
245.9

Limited partnerships/corporations
518.6

 
518.6

 
510.6

 
510.6

Cash and cash equivalents, Short-term investments, and Short-term investments under securities loan agreement
769.4

 
769.4

 
958.7

 
958.7

Derivatives
392.9

 
392.9

 
446.6

 
446.6

Notes receivable from affiliates
175.0

 
171.4

 
175.0

 
165.2

Assets held in separate accounts
50,983.9

 
50,983.9

 
45,295.2

 
45,295.2

Liabilities:
 

 
 

 
 

 
 

Investment contract liabilities:
 

 
 

 
 

 
 

With a fixed maturity
1,194.2

 
1,347.5

 
1,222.4

 
1,369.1

Without a fixed maturity
18,580.0

 
22,705.7

 
18,410.4

 
21,739.8

Product guarantees
72.0

 
72.0

 
221.0

 
221.0

Fixed Indexed Annuities
17.9

 
17.9

 
16.3

 
16.3

Derivatives
341.5

 
341.5

 
360.0

 
360.0

 
The following disclosures are made in accordance with the requirements of ASC Topic 825 which 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

 
33
 

ING Life Insurance and Annuity Company and Subsidiaries
(A wholly owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 
 

cash flows. In that regard, the derived fair value estimates, in many cases, could not be realized in immediate settlement of the instrument.
 
ASC Topic 825 excludes certain financial instruments, including insurance contracts, and all nonfinancial instruments from its disclosure requirements.  Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.
 
The following valuation methods and assumptions were used by the Company in estimating the fair value of the following financial instruments which are not carried at fair value on the Condensed Consolidated Balance Sheets, and therefore not categorized in the fair value hierarchy:
 
Limited partnerships/corporations: The fair value for these investments, primarily private equities and hedge funds, is estimated based on the Net Asset Value as provided by the investee and are classified as Level 3.
 
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. Mortgage loans on real estate are classified as Level 3.
 
Loan - Dutch State obligation: The fair value of the Dutch State loan obligation is estimated utilizing discounted cash flows from the Dutch Strip Yield Curve and is classified as Level 2.
 
Policy loans: The fair value of policy loans is equal to the carrying, or cash surrender, value of the loans.  Policy loans are fully collateralized by the account value of the associated insurance contracts and are classified as Level 2.
 
Investment contract liabilities (included in Future policy benefits and claims reserves):
 
With a fixed maturity: Fair value is estimated by discounting cash flows, including associated expenses for maintaining the contracts, at rates, which are market risk-free rates augmented by credit spreads on current Company credit default swaps.  The augmentation is present to account for non-performance risk. A margin for non-financial risks associated with the contracts is also included. These investments are classified as Level 2.
 
Without a fixed maturity: Fair value is estimated as the mean present value of stochastically modeled cash flows associated with the contract liabilities relevant to both the contract holder and to the Company. Here, the stochastic valuation scenario set is consistent with current market parameters, and discount is taken using stochastically evolving short risk-free rates in the scenarios augmented by credit spreads on current Company debt. The augmentation in the discount is present to account for non-performance risk. Margins for non-financial risks associated with the contract liabilities are also included. These investments are classified as Level 2.
 
Notes receivable from affiliates: Estimated fair value of the Company’s notes receivable from affiliates is based upon discounted future cash flows using a discount rate approximating the current market rate and classified as Level 2.
 
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 capital gains (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.
 

 
34
 

ING Life Insurance and Annuity Company and Subsidiaries
(A wholly owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 
 

Mortgage Loans on Real Estate
 
The Company’s mortgage loans on real estate are summarized as follows at March 31, 2012 and December 31, 2011.
 
 
2012
 
2011
Total commercial mortgage loans
$
2,592.0

 
$
2,374.8

Collective valuation allowance
(1.6
)
 
(1.3
)
Total net commercial mortgage loans
$
2,590.4

 
$
2,373.5

 
As of March 31, 2012, all commercial mortgage loans are held-for-investment. The Company diversifies its commercial mortgage loan portfolio by geographic region and property type to reduce concentration risk.  The Company manages risk when originating commercial mortgage loans by generally lending only up to 75% of the estimated fair value of the underlying real estate.  Subsequently, the Company continuously evaluates all mortgage loans based on relevant current information including an appraisal of loan-specific credit quality, property characteristics and market trends. Loan performance is monitored on a loan-specific basis through the review of submitted appraisals, operating statements, rent revenues and annual inspection reports, among other items. This review ensures properties are performing at a consistent and acceptable level to secure the debt.
 
The Company has established a collective valuation allowance for probable incurred, but not specifically identified, losses related to factors inherent in the lending process. The collective valuation allowance is determined based on historical loss rates as adjusted by current economic information for all loans that are not determined to have an individually-assessed loss. 

The changes in the collective valuation allowance were as follows at March 31, 2012 and December 31, 2011.
 
 
2012
 
2011
Collective valuation allowance for losses, beginning of period
$
1.3

 
$
1.3

Addition to / (release of) allowance for losses
0.3

 
—

Collective valuation allowance for losses, end of period
$
1.6

 
$
1.3

 
The commercial mortgage loan portfolio is the recorded investment, prior to collective valuation allowances, by the indicated loan-to-value ratio and debt service coverage ratio, as reflected in the following tables at March 31, 2012 and December 31, 2011.
 
 
2012(1)
 
2011(1)
Loan-to-Value Ratio:
 

 
 

0% - 50%
$
524.6

 
$
552.4

50% - 60%
837.3

 
771.5

60% - 70%
1,089.4

 
908.2

70% - 80%
123.6

 
125.2

80% - 90%
17.1

 
17.5

Total Commercial Mortgage Loans
$
2,592.0

 
$
2,374.8

(1) Balances do not include allowance for mortgage loan credit losses.
 

 
35
 

ING Life Insurance and Annuity Company and Subsidiaries
(A wholly owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 
 

 
2012(1)
 
2011(1)
Debt Service Coverage Ratio:
 

 
 

Greater than 1.5x
$
1,809.2

 
$
1,600.1

1.25x - 1.5x
403.6

 
408.1

1.0x - 1.25x
301.0

 
286.7

Less than 1.0x
78.2

 
79.9

Mortgages secured by loans on land or construction loans
—

 
—

Total Commercial Mortgage Loans
$
2,592.0

 
$
2,374.8

 (1) Balances do not include allowance for mortgage loan credit losses.
 
The Company believes it has a high quality mortgage loan portfolio with substantially all of commercial mortgages classified as performing. The Company defines delinquent commercial mortgage loans consistent with industry practice as 60 days past due. At March 31, 2012 and December 31, 2011, all mortgage loans in the Company’s portfolio were current with respect to principal and interest.  The Company’s policy is to recognize interest income until a loan becomes 90 days delinquent or foreclosure proceedings are commenced, at which point interest accrual is discontinued. Interest accrual is not resumed until past due payments are brought current.
 
All commercial mortgages are evaluated for the purpose of quantifying the level of risk.  Those loans with higher risk are placed on a watch list and are closely monitored for collateral deficiency or other credit events that may lead to a potential loss of principal or interest.  If the value of any mortgage loan is determined to be impaired (i.e., when it is probable that the Company will be unable to collect on all amounts due according to the contractual terms of the loan agreement), the carrying value of the mortgage loan is reduced to either the present value of expected cash flows from the loan, discounted at the loan’s effective interest rate, or fair value of the collateral.
 
The carrying values and unpaid principal balances (prior to any charge-off) of impaired commercial mortgage loans were as follows as of March 31, 2012 and December 31, 2011.
 
 
2012
 
2011
 
Carrying Value
 
Carrying Value
Impaired loans without valuation allowances
$
5.8

 
$
5.8

 
 
 
 
Unpaid principal balance of impaired loans
$
7.3

 
$
7.3

 

 
36
 

ING Life Insurance and Annuity Company and Subsidiaries
(A wholly owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 
 

The following is information regarding impaired loans, restructured loans, loans 90 days or more past due and loans in the process of foreclosure for the three months ended March 31, 2012 and 2011.
 
 
2012
 
2011
Impaired loans, average investment during the period
$
5.8

 
$
9.5

Interest income recognized on impaired loans, on an accrual basis
0.1

 
0.2

Interest income recognized on impaired loans, on a cash basis
0.1

 
0.2

 
For the three months ended March 31, 2012 and 2011, there were no Restructured loans, Interest income recognized on restructured loans, Loans 90 days or more past due, interest no longer accruing, at amortized cost, Loans in foreclosure, at amortized cost, and Unpaid principal balance of loans 90 days or more past due, interest no longer accruing.

 Troubled Debt Restructuring

The Company believes it has high quality, well performing portfolios of commercial mortgage loans and private placements. Under certain circumstances, modifications to these contracts are granted. Each modification is evaluated as to whether a troubled debt restructuring has occurred. A modification is a troubled debt restructure when the borrower is in financial difficulty and the creditor makes concessions. Generally, the types of concessions may include: reduction of the face amount or maturity amount of the debt as originally stated, reduction of the contractual interest rate, extension of the maturity date at an interest rate lower than current market interest rates and/or reduction of accrued interest. The Company considers the amount, timing and extent of the concession granted in determining any impairment or changes in the specific valuation allowance recorded in connection with the troubled debt restructuring. A valuation allowance may have been recorded prior to the quarter when the loan is modified in a troubled debt restructuring. Accordingly, the carrying value (net of the specific valuation allowance) before and after modification through a troubled debt restructuring may not change significantly, or may increase if the expected recovery is higher than the pre-modification recovery assessment.

During the three months ended March 31, 2012, the Company had no mortgage loans or private placement modified in a troubled debt restructuring with a subsequent payment default.

Derivative Financial Instruments
 
The Company’s use of derivatives is limited mainly to economic hedging purposes to reduce the Company’s exposure to cash flow variability of assets and liabilities, interest rate risk, credit risk, exchange rate risk, and market risk. It is the Company’s policy not to offset fair value amounts recognized for derivative instruments and fair value amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral arising from derivative instruments recognized at fair value executed with the same counterparty under a master netting arrangement.
 
The Company enters into interest rate, equity market, credit default, and currency contracts, including swaps, futures, forwards, caps, floors, and options, to reduce and manage various risks associated with changes in value, yield, price, cash flow, or exchange rates of assets or liabilities held or intended to be held, or to assume or reduce credit exposure associated with a referenced asset, index, or pool.  The Company also utilizes options and futures on equity indices to reduce and manage risks associated with its annuity products.  Open derivative contracts are reported as either Derivatives assets or liabilities on the Condensed Consolidated Balance Sheets at fair value.  Changes in the fair value of derivatives are recorded in Other net realized capital gains (losses) in the Condensed Consolidated Statements of Operations.
 
To qualify for hedge accounting, at the inception of the hedging relationship, the Company formally documents its risk management objective and strategy for undertaking the hedging transaction, as well as its designation of the hedge as either (i) a hedge of the exposure to changes in the estimated fair value of a recognized asset or liability (“fair value hedge”); or (ii) a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow hedge”). In this documentation, the Company sets forth how the hedging instrument is expected to hedge the designated risks related to the hedged item and sets forth the method that will be used to retrospectively and prospectively assess the hedging instrument's effectiveness and the method which will be used to measure ineffectiveness. A derivative designated as a hedging instrument must

 
37
 

ING Life Insurance and Annuity Company and Subsidiaries
(A wholly owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 
 

be assessed as being highly effective in offsetting the designated risk of the hedged item. Hedge effectiveness is formally assessed at inception and periodically throughout the life of the designated hedging relationship.

•
Fair Value Hedge Relationship:  For derivative instruments that are designated and qualify as a fair value hedge (e.g., hedging the exposure to changes in the fair value of an asset or a liability or an identified portion thereof that is attributable to a particular risk), the gain or loss on the derivative instrument as well as the hedged item, to the extent of the risk being hedged, are recognized in Other net realized capital gains (losses).

•
Cash Flow Hedge Relationship: For derivative instruments that are designated and qualify as a cash flow hedge (e.g., hedging the exposure to the variability in expected future cash flows that is attributable to interest rate risk), the effective portion of the gain or loss on the derivative instrument is reported as a component of AOCI and reclassified into earnings in the same period or periods during which the hedged transaction impacts earnings in the same line item associated with the forecasted transaction.  The ineffective portion of the derivative's change in value, if any, along with any of the derivative's change in value that is excluded from the assessment of hedge effectiveness, are recorded in Other net realized capital gains (losses). 

When hedge accounting is discontinued because it is determined that the derivative is no longer expected to be highly effective in offsetting changes in the estimated fair value or cash flows of a hedged item, the derivative continues to be carried in the Condensed Consolidated Balance Sheets at its estimated fair value, with subsequent changes in estimated fair value recognized immediately in Other net realized capital gains (losses). The carrying value of the hedged recognized asset or liability under a fair value hedge is no longer adjusted for changes in its estimated fair value due to the hedged risk, and the cumulative adjustment to its carrying value is amortized into income over the remaining life of the hedged item. Provided the hedged forecasted transaction is still probable of occurrence, the changes in estimated fair value of derivatives recorded in Other comprehensive income (loss) related to discontinued cash flow hedges are released into the Condensed Consolidated Statements of Operations when the Company's earnings are affected by the variability in cash flows of the hedged item.

When hedge accounting is discontinued because it is no longer probable that the forecasted transactions will occur on the anticipated date or within two months of that date, the derivative continues to be carried in the Condensed Consolidated Balance Sheets at its estimated fair value, with changes in estimated fair value recognized currently in Other net realized capital gains (losses). Derivative gains and losses recorded in Other comprehensive income (loss) pursuant to the discontinued cash flow hedge of a forecasted transaction that is no longer probable are recognized immediately in Other net realized capital gains (losses).

If the Company's current debt and claims paying ratings were downgraded in the future, the terms in the Company's derivative agreements may be triggered, which could negatively impact overall liquidity. For the majority of the Company's counterparties, there is a termination event should the Company's long-term debt ratings drop below BBB+/Baa1.

The carrying amounts for these financial instruments, which can be assets or liabilities, reflect the fair value of the assets and liabilities.

The Company also has investments in certain fixed maturities, and has issued certain annuity products, that contain embedded derivatives whose fair value is at least partially determined by levels of or changes in domestic and/or foreign interest rates (short-term or long-term), exchange rates, prepayment rates, equity markets, or credit ratings/spreads. Embedded derivatives within fixed maturities are included with the host contract on the Condensed Consolidated Balance Sheets, and changes in fair value are recorded in Other net realized capital gains (losses) in the Condensed Consolidated Statements of Operations. Embedded derivatives within annuity products are included in Future policy benefits and claims reserves on the Condensed Consolidated Balance Sheets, and changes in the fair value of the embedded derivatives are recorded in Other net realized capital gains (losses) in the Condensed Consolidated Statements of Operations.
 
The Company enters into the following derivatives:
 
Interest rate caps: Interest rate caps are used to manage the interest rate risk in the Company’s fixed maturity portfolio.  Interest rate caps are purchased contracts that are used by the Company to hedge against rising interest rates.
 

 
38
 

ING Life Insurance and Annuity Company and Subsidiaries
(A wholly owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 
 

Interest rate swaps: Interest rate swaps are used to manage the interest rate risk in the Company’s fixed maturity portfolio, as 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.
 
Foreign exchange swaps: Foreign exchange swaps are used to reduce the risk of a change in the value, yield, or cash flow with respect to invested assets.  Foreign exchange swaps represent contracts that require the exchange of foreign currency cash flows for U.S. dollar cash flows at regular interim periods, typically quarterly or semi-annually.
 
Credit default swaps: Credit default swaps are used to reduce the credit loss exposure with respect to certain assets that the Company owns, or to assume credit exposure on certain assets that the Company does not own. Payments are made to or received from the counterparty at specified intervals and amounts for the purchase or sale of credit protection. In the event of a default on the underlying credit exposure, the Company will either receive an additional payment (purchased credit protection) or will be required to make an additional payment (sold credit protection) equal to par minus recovery value of the swap contract.
 
Forwards: Certain forwards are acquired to hedge certain CMO assets held by the Company against movements in interest rates, particularly mortgage rates. On the settlement date, the Company will either receive a payment (interest rate drops on purchased forwards or interest rate rises on sold forwards) or will be required to make a payment (interest rate rises on purchased forwards or interest rate drops on sold forwards).
 
Futures: Futures contracts are used to hedge against a decrease in certain equity indices. Such decreases may result in a decrease in variable annuity account values, which would increase the possibility of the Company incurring an expense for guaranteed benefits in excess of account values. The futures income would serve to offset these effects. Futures contracts are also used to hedge against an increase in certain equity indices. Such increases may result in increased payments to contract holders of fixed indexed annuity contracts, and the futures income would serve to offset this increased expense.
 
Swaptions: Swaptions are used to manage interest rate risk in the Company’s collateralized mortgage obligations portfolio. Swaptions are contracts that give the Company the option to enter into an interest rate swap at a specific future date.
 
Managed Custody Guarantees: The Company issued certain credited rate guarantees on externally managed variable bond funds that represent stand alone derivatives. The market value is partially determined by, among other things, levels of or changes in interest rates, prepayment rates, and credit ratings/spreads.
 
Embedded derivatives: The Company also has issued certain annuity products, that contain embedded derivatives whose fair value is at least partially determined by, among other things, levels of or changes in domestic and/or foreign interest rates (short term or long-term), exchange rates, prepayment rates, equity rates, or credit ratings/spreads.


 
39
 

ING Life Insurance and Annuity Company and Subsidiaries
(A wholly owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 
 

The notional amounts and fair values of derivatives were as follows as of March 31, 2012 and December 31, 2011.
 
2012
 
2011
 
Notional
Amount
 
Asset
Fair Value
 
Liability
Fair Value
 
Notional
Amount
 
Asset
Fair Value
 
Liability
Fair Value
Derivatives: Qualifying for hedge accounting
 

 
 

 
 

 
 

 
 

 
 

Cash flow hedges:
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
1,000.0

 
146.7

 
—

 
1,000.0

 
173.9

 
—

Derivatives: Non-Qualifying for hedge accounting
 

 
 

 
 

 
 

 
 

 
 

Interest rate contracts
13,988.0

 
243.4

 
309.2

 
17,555.1

 
269.4

 
306.4

Foreign exchange contracts
213.4

 
0.1

 
31.4

 
213.4

 
0.7

 
32.4

Equity contracts
13.7

 
—

 
—

 
—

 
—

 
—

Credit contracts
362.7

 
2.7

 
0.9

 
548.4

 
2.6

 
21.3

Managed custody guarantees
N/A

 
—

 
—

 
N/A

 
—

 
1.0

Embedded derivatives:
 

 
 

 
 

 
 

 
 

 
 

Within fixed maturity investments
N/A

 
54.4

 
—

 
N/A

 
59.2

 
—

Within annuity products(2)
N/A

 
—

 
89.9

 
N/A

 
—

 
236.3

Total
 

 
447.3

 
431.4

 
 

 
505.8

 
597.4

 N/A - Not Applicable 

Net realized gains (losses) on derivatives were as follows for the three months ended March 31, 2012 and 2011.

 
Three Months Ended March 31,
 
2012
 
2011
Derivatives: Qualifying for hedge accounting(1)
 

 
 

Cash flow hedges:
 
 
 
Interest rate contracts
$
—

 
$
—

Fair value hedges:
 
 
 
Interest rate contracts
—

 
—

Derivatives: Non-Qualifying for hedge accounting(2)
 
 
 
Interest rate contracts
(23.0
)
 
(6.2
)
Foreign exchange contracts
0.4

 
(8.0
)
Equity contracts
1.6

 
0.3

Credit contracts
7.8

 
4.8

Managed custody guarantees(2)
1.0

 
—

Embedded derivatives(2):
 

 
 
Within fixed maturity investments
(4.8
)
 
(7.3
)
Within annuity products
148.0

 
3.5

Total
$
131.0

 
$
(12.9
)

(1) Changes in value for effective fair value hedges are recorded in Other net realized capital gains (losses). Changes in fair value upon disposal for effective cash flow hedges are recorded in Other net realized capital gains (losses) in the Condensed Consolidated Statements of Operations.
(2) Changes in value are included in Other net capital gains (losses) in the Condensed Consolidated Statements of Operations.


 
40
 

ING Life Insurance and Annuity Company and Subsidiaries
(A wholly owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 
 

Credit Default Swaps
 
The Company has entered into various credit default swaps. When credit default swaps are sold, the Company assumes credit exposure to certain assets that it does not own. Credit default swaps may also be purchased to reduce credit exposure in the Company’s portfolio. Credit default swaps involve a transfer of credit risk from one party to another in exchange for periodic payments. These instruments are typically written for a maturity period of five years and do not contain recourse provisions, which would enable the seller to recover from third parties. The Company has International Swaps and Derivatives Association, Inc. (“ISDA”) agreements with each counterparty with which it conducts business and tracks the collateral positions for each counterparty. To the extent cash collateral is received, it is included in Payables under securities loan agreement, including collateral held, on the Condensed Consolidated Balance Sheets and is reinvested in short-term investments. Collateral held is used in accordance with the Credit Support Annex (“CSA”) to satisfy any obligations. Investment grade bonds owned by the Company are the source of noncash collateral posted, which is reported in Securities pledged on the Condensed Consolidated Balance Sheets. In the event of a default on the underlying credit exposure, the Company will either receive an additional payment (purchased credit protection) or will be required to make an additional payment (sold credit protection) equal to par minus recovery value of the swap contract. At March 31, 2012, the fair value of credit default swaps of $2.7 and $0.9 was included in Derivatives and Other liabilities, respectively, on the Condensed Consolidated Balance Sheets. At December 31, 2011, the fair value of credit default swaps of $2.6 and $21.2 was included in Derivatives and Other liabilities, respectively, on the Condensed Consolidated Balance Sheets. As of March 31, 2012 and December 31, 2011, the maximum potential future exposure to the Company on the sale of credit protection under credit default swaps was $339.0 and $518.3, respectively.
 


4.    Deferred Policy Acquisition Costs (“DAC”) and Value of Business Acquired (“VOBA”)
 
Activity within DAC was as follows for the three months ended March 31, 2012 and 2011.
 
 
2012
 
2011
 
 
 
(As revised)
Balance at January 1
$
335.0

 
$
452.3

Deferrals of commissions and expenses
18.5

 
18.4

Amortization:
 

 
 

Amortization
(19.6
)
 
6.5

Interest accrued at 5% to 7%
7.6

 
(16.6
)
Net amortization included in Condensed Consolidated Statements of Operations
(12.0
)
 
(10.1
)
Change in unrealized capital gains/losses on available-for-sale securities
(5.3
)
 
128.2

Balance at March 31
$
336.2

 
$
588.8

 
Activity within VOBA was as follows for the three months ended March 31, 2012 and 2011.
 
2012
 
2011
 
 
 
(As revised)
Balance at January 1
$
593.7

 
$
719.6

Deferrals of commissions and expenses
2.1

 
2.0

Amortization:
 
 
 

Amortization
(57.8
)
 
(41.1
)
Interest accrued at 5% to 8%
17.0

 
18.1

Net amortization included in Condensed Consolidated Statements of Operations
(40.8
)
 
(23.0
)
Change in unrealized capital gains/losses on available-for-sale securities
(16.5
)
 
11.5

Balance at March 31
$
538.5

 
$
710.1


 
41
 

ING Life Insurance and Annuity Company and Subsidiaries
(A wholly owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 
 


5.     Capital Contributions and Dividends
 
During the three months ended March 31, 2012, ILIAC did not receive any capital contributions from its Parent. During the three months ended March 31, 2011, ILIAC received capital contributions of $201.0 in the aggregate from its Parent.
 
During the three months ended March 31, 2012 and 2011, ILIAC did not pay a dividend on its common stock to its Parent.


6.    Income Taxes
 
The Company’s effective tax rates for the three months ended March 31, 2012 and 2011 were 34.0% and 49.3%, respectively. The effective tax rates differ from the expected rate primarily due to the following items:
 
 
Three Months Ended March 31,
 
2012
 
2011
 
 
 
(As revised)
Statutory rate
35.0
 %
 
35.0
 %
Dividend received deduction
(2.8
)%
 
(1.7
)%
Valuation allowance
1.8
 %
 
13.7
 %
IRS audit adjustment
(0.1
)%
 
2.1
 %
Other
0.1
 %
 
0.2
 %
Effective rate at March 31
34.0
 %
 
49.3
 %
 
Valuation allowances are provided when it is considered unlikely that deferred tax assets will be realized. At March 31, 2012 and December 31, 2011, the Company had a tax valuation allowance of $57.0 and $53.0, respectively, that was allocated to continuing operations and $(56.0) and $(52.0), respectively, that was allocated to other comprehensive income related to realized and unrealized capital losses. As of March 31, 2012 and December 31, 2011, the Company had a full tax valuation allowance of $11.1 related to foreign tax credits, the benefit of which is uncertain.
 
Tax Regulatory Matters
 
In the first quarter of 2012, the Internal Revenue Service (“IRS”) completed its examination of the Company's returns through tax year 2010. The 2010 settlement did not have a material impact on the Company's financial position.

The Company is currently under audit by the IRS and has agreed to participate in the Compliance Assurance Program (“CAP”) for tax years 2011 and 2012.

7.    Financing Agreements
 
Reciprocal Loan Agreement
 
The Company maintains a reciprocal loan agreement with ING America Insurance Holdings, Inc. (“ING AIH”), an affiliate, to facilitate the handling of unanticipated short-term cash requirements that arise in the ordinary course of business.  Under this agreement, which became effective in June 2001 and based upon its renewal on April 1, 2011 expires on April 1, 2016, either party can borrow from the other up to 3% of the Company’s statutory admitted assets as of the preceding December 31.  Interest on any Company borrowing is charged at the rate of ING AIH’s cost of funds for the interest period, plus 0.15%.  Interest on any ING AIH borrowing 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, the Company did not incur any interest expense for the three months ended March 31, 2012 and 2011.  The Company earned interest income of $0.4 and $0.2 for the three months ended March 31, 2012 and 2011, respectively.  Interest

 
42
 

ING Life Insurance and Annuity Company and Subsidiaries
(A wholly owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 
 

expense and income are included in Interest expense and Net investment income, respectively, on the Condensed Consolidated Statements of Operations.  As of March 31, 2012 and December 31, 2011, the Company had an outstanding receivable of $696.4 and $648.0, respectively, from ING AIH under the reciprocal loan agreement.

As of April 20, 2012, the Company had an outstanding receivable of $629.0 under the reciprocal loan agreement, and ING AIH repaid $600.7 of the outstanding receivable on that date. Such repayment was made from the proceeds of ING AIH's $5.0 billion Senior Unsecured Credit Facilities which were entered into as of that same date. The Company and ING AIH continue to maintain the reciprocal loan agreement and future borrowings by either party will be subject to the reciprocal loan terms summarized above.

For information on the Company’s additional financing agreements, see the Financing Agreements note to the Consolidated Financial Statements included in the Company’s 2011 Annual Report on Form 10-K.
 
8.     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 a higher or lower replacement cost. Also, there is likely to be a change in the value of the securities underlying the commitments.
 
At March 31, 2012 and December 31, 2011, the Company had off-balance sheet commitments to purchase investments equal to their fair value of $433.2 and $536.4, respectively.
 
Collateral
 
Under the terms of the Company’s Over-The-Counter Derivative ISDA Agreements (“ISDA Agreements”), the Company may receive from, or deliver to, counterparties, collateral to assure that all terms of the ISDA Agreements will be met with regard to the CSA. The terms of the CSA call for the Company to pay interest on any cash received equal to the Federal Funds rate. As of March 31, 2012 and December 31, 2011, the Company held $98.3 and $110.0, of cash collateral, respectively, which was included in Payables under securities loan agreement, including collateral held, on the Condensed Consolidated Balance Sheets.  In addition, as of March 31, 2012 and December 31, 2011, the Company delivered collateral of $86.3 and $77.9, respectively, in fixed maturities pledged under derivatives contracts, which was included in Securities pledged on the Condensed Consolidated Balance Sheets.
 
Litigation and Regulatory Matters
 
The Company is a defendant in a number of litigation matters arising from the conduct of its business, both in the ordinary course and otherwise. In some of these matters, claimants seek to recover very large or indeterminate amounts, including compensatory, punitive, treble and exemplary damages. Modern pleading practice in the U.S. permits considerable variation in the assertion of monetary damages and other relief. Claimants are not always required to specify the monetary damages they seek or they may be required only to state an amount sufficient to meet a court's jurisdictional requirements. Moreover, some jurisdictions allow claimants to allege monetary damages that far exceed any reasonable possible verdict. The variability in pleading requirement and past experience demonstrates that the monetary and other relief that may be requested in a lawsuit or claim oftentimes bears little relevance to the merits or potential value of a claim. Litigation against the Company includes a variety of claims including negligence, breach of contract, fraud, violation of regulation or statute, breach of fiduciary duty, negligent misrepresentation, failure to supervise, elder abuse, and other torts. Due to the uncertainties of litigation, the outcome of a litigation matter and the amount or range of potential loss is difficult to forecast and a determination of potential losses requires significant management judgment.

As with other financial services companies, the Company periodically receives informal and formal requests for information from various state and federal governmental agencies and self-regulatory organizations in connection with inquiries and investigations of the products and practices of the Company or the financial services industry. It is the practice of the Company to cooperate fully in these matters.


 
43
 

ING Life Insurance and Annuity Company and Subsidiaries
(A wholly owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 
 

It is not possible to predict the ultimate outcome or to provide reasonably possible losses or ranges of losses for all pending regulatory matters and litigation. While it is possible that an adverse outcome in certain cases could have a material adverse effect upon the Company's financial position, based on information currently known, management believes that the outcome of pending litigation and regulatory matters is not likely to have such an effect. However, given the large and indeterminate amounts sought and the inherent unpredictability of such matters, it is possible that an adverse outcome in certain of the Company's litigation or regulatory matters could, from time to time, have a material adverse effect upon the Company's results of operations or cash flows in a particular quarterly or annual period.


For some matters, the Company is able to estimate a possible range of loss. For such matters in which a loss is probable, an accrual has been made. For matters where management, however, believes a loss is reasonably possible, but not probable, no accrual is required to be made. Accordingly, the estimate contained in this paragraph reflects both types of matters. For matters for which an accrual has been made, but there remains a reasonably possible range of loss in excess of the amounts accrued, the estimate reflects the reasonably possible range of loss in excess of the accrued amounts. For other matters included within this estimation, for which a reasonably possible but not probable, range of loss exists, the estimate reflects the reasonably possible and unaccrued loss or range of loss. As of March 31, 2012, the Company estimates the aggregate range of reasonably possible losses, in excess of any amounts accrued for these matters as of such date, to be up to approximately $45.0.

For other matters, the Company is currently not able to estimate the reasonably possible loss or range of loss. It is often unable to estimate the possible loss or range of loss until developments in such matters have provided sufficient information to support an assessment of the range of possible loss, such as quantification of a damage demand from plaintiffs, discovery from plaintiffs and other parties, investigation of factual allegations, rulings by a court on motions or appeals, analysis by experts and the progress of settlement discussions. On a quarterly and annual basis, management reviews relevant information with respect to litigation and regulatory contingencies and updates our accruals, disclosures and reasonably possible losses or ranges of loss based on such reviews.

Litigation against the Company includes a case styled Healthcare Strategies, Inc., Plan Administrator of the Healthcare Strategies Inc. 401(k) Plan  v. ING Life Insurance and Annuity Company (U.S.D.C. D. CT, filed February 22, 2011), which has been filed by the administrator of a 401(k) ERISA Plan who claims that the Company has entered into revenue sharing agreements with mutual funds and others in violation of the prohibited transaction rules of the Employee Retirement Income Act (“ERISA”). Among other things, Claimant seeks declaratory relief and the disgorgement of all revenue sharing payments and profits earned in connection with such payments, as well as attorney's fees. On January 26, 2012, Plaintiff filed a motion requesting to be allowed to represent a class of similarly situated ERISA Plans. The Company denies Claimant's allegations and is vigorously defending this litigation.

Currently, regulatory matters include an examination of the Company's policy for addressing and correcting an error that is made when processing the trade instructions of an ERISA plan or one of its participants. Under that policy, the subsidiary absorbs any loss and retains any gain that results from such an error correction. Some of the investigations, exams, inquiries and audits could result in regulatory action against the Company. The potential outcome of such action is difficult to predict but could subject the Company to adverse consequences, including, but not limited to, settlement payments, additional payments to beneficiaries, additional escheatment of funds deemed abandoned under state laws, and disgorgement of retained gains. They may also result in fines and penalties and changes to the Company's procedures for the identification and escheatment of abandoned property or the correction of processing errors, and other financial liability.


 
44
 

ING Life Insurance and Annuity Company and Subsidiaries
(A wholly owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 
 

9.    Accumulated Other Comprehensive Income (Loss)
 
Shareholder’s equity included the following components of AOCI as of March 31, 2012 and 2011.
 
 
2012
 
2011
 
 
 
(As revised)
Fixed maturities, net of OTTI
$
1,500.7

 
$
902.8

Equity securities, available-for-sale
12.0

 
18.8

Derivatives
146.5

 
10.9

DAC/VOBA adjustment on available-for-sale securities
(624.6
)
 
(225.7
)
Sales inducements adjustment on available-for-sale securities
(0.8
)
 
(125.6
)
Premium deficiency reserve adjustment
(67.6
)
 
(60.0
)
Unrealized capital gains, before tax
966.2

 
521.2

Deferred income tax liability
(271.3
)
 
(151.2
)
Unrealized capital gains, after tax
694.9

 
370.0

Pension and other post-employment benefits liability, net of tax
12.3

 
7.9

Accumulated other comprehensive income
$
707.2

 
$
377.9

 
Changes in AOCI, net of DAC, VOBA, and tax, related to changes in unrealized capital gains (losses) on securities, including securities pledged, were as follows for the three months ended March 31, 2012 and 2011.
 
 
2012
 
2011
 
 
 
(As revised)
Fixed maturities
$
(19.5
)
 
$
(36.3
)
Equity securities, available-for-sale
(1.1
)
 
(2.2
)
Derivatives
(27.2
)
 
10.4

DAC/VOBA adjustment on available-for-sale securities
(21.8
)
 
139.7

Sales inducements adjustment on available-for-sale securities
—

 
(128.7
)
Premium deficiency reserve adjustment
(2.8
)
 
1.0

Change in unrealized gains/loss on securities, before tax
(72.4
)
 
(16.1
)
Deferred income tax asset/liability
31.5

 
(0.2
)
Change in unrealized gains/loss on securities, after tax
(40.9
)
 
(16.3
)
 
 
 
 
Change in OTTI losses, before tax
1.6

 
5.3

Deferred income tax liability
(0.6
)
 
(1.9
)
Change in OTTI losses, after tax
1.0

 
3.4

 
 
 
 
Pension and other post-employment benefit liability, before tax
(0.6
)
 
—

Deferred income tax asset
0.2

 
0.2

Pension and other post-employment benefit liability, after tax
(0.4
)
 
0.2

 
 
 
 
Net change in AOCI, after tax
$
(40.3
)
 
$
(12.7
)


 
45
 

ING Life Insurance and Annuity Company and Subsidiaries
(A wholly owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 
 

 
Changes in unrealized capital gains on securities, including securities pledged and noncredit impairments, as recognized in AOCI, reported net of DAC, VOBA, and income taxes, were as follows for the three months ended March 31, 2012 and 2011.
 
 
2012
 
2011
 
 
 
(As revised)
Net unrealized capital holding gains (losses) arising during the period(1)
$
(19.4
)
 
$
14.8

Reclassification adjustment for gains and other items included in Net income (loss)(2)
(24.5
)
 
(22.0
)
Change in deferred tax valuation allowance
4.0

 
(5.7
)
Net change in unrealized capital gains on securities
$
(39.9
)
 
$
(12.9
)

(1) Pretax net unrealized capital holding gains (losses) arising during the period were $(31.3) and $22.2 for the three months ended March 31, 2012 and 2011, respectively.
(2) Pretax reclassification adjustments for gains and other items included in Net income (loss) were $39.5 and $33.0 for the three months ended March 31, 2012 and 2011, respectively.

The reclassification adjustments for gains (losses) and other items included in Net income (loss) in the above table are generally determined by FIFO methodology.


 
46
 

Item 2.    Management’s Narrative Analysis of the Results of Operations and Financial Condition
(Dollar amounts in millions, unless otherwise stated)
 
Overview
 
The following narrative analysis presents a review of the consolidated results of operations of ING Life Insurance and Annuity Company (“ILIAC”) and its wholly owned subsidiaries (collectively, the “Company”) for each of the three months ended March 31, 2012 and 2011, and financial condition as of March 31, 2012 and December 31, 2011. This item should be read in its entirety and in conjunction with the Condensed Consolidated Financial Statements and related notes, which can be found under Part I, Item 1. contained herein, as well as the “Management’s Narrative Analysis of the Results of Operations and Financial Condition” section contained in the Company’s 2011 Annual Report on Form 10-K.

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 that 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, including, but not limited to the following:
 
1.
While the global economy continues to recover from the financial crisis and subsequent recession, risks remain for the United States and other world economies. The uncertainty concerning current global market conditions, and the impact it has on the U.S. economy, has affected and may continue to affect the Company's results of operations.
2.
The default of a major market participant could disrupt the markets.
3.
Adverse financial market conditions, changes in rating agency standards and practices and/or actions taken by ratings agencies may significantly affect the Company's ability to meet liquidity needs, access to capital and cost of capital.
4.
Circumstances associated with implementation of ING Groep's recently announced global business strategy and the final restructuring plan submitted to the European Commission in connection with its review of ING Groep's receipt of state aid from the Dutch State could adversely affect the Company's results of operations and financial condition.
5.
The amount of statutory capital that the Company holds and its risk-based capital (“RBC”) ratio can vary significantly from time to time and is sensitive to a number of factors, many of which are outside of the Company's control, and influences its financial strength and credit ratings.
6.
The Company has experienced ratings downgrades and may experience additional future downgrades in the Company's ratings, which may negatively affect profitability, financial condition, and access to liquidity.
7.
The new federal financial regulatory reform law, its implementing regulations and other financial regulatory reform initiatives, could have adverse consequences for the financial services industry, including the Company and/or materially affect the Company's results of operations, financial condition and liquidity.
8.
The valuation of many of the Company's financial instruments includes methodologies, estimations and assumptions that are subject to differing interpretations and could result in changes to investment valuations that may materially adversely affect results of operations and financial condition.
9.
The determination of the amount of impairments taken on the Company's investments is subjective and could materially impact results of operations.
10.
The Company may be required to accelerate the amortization of deferred policy acquisition cost (“DAC”), deferred sales inducements (“DSI”) and/or the valuation of business acquired (“VOBA”), any of which could adversely affect the Company's results of operations or financial condition.
11.
Changes in underwriting and actual experience could materially affect profitability.
12.
The Company may be required to establish an additional valuation allowance against the deferred income tax assets if the Company's business does not generate sufficient taxable income or if the Company's tax planning strategies are modified.

 
47
 

Increases in the deferred tax valuation allowance could have a material adverse effect on results of operations and financial condition.
13.
Reinsurance subjects the Company to the credit risk of reinsurers and may not be adequate to protect against losses arising from ceded reinsurance.
14.
The inability to manage market risk successfully through the usage of derivative instruments could adversely affect the Company's business, operations, financial condition and liquidity.
15.
The inability of counterparties to meet their financial obligations could have an adverse effect on the Company's results of operations.
16.
Changes in reserve estimates may reduce profitability.
17.
A loss of or significant change in key product distribution relationships could materially affect sales.
18.
Competition could negatively affect the ability to maintain or increase profitability.
19.
Changes in federal income tax law or interpretations of existing tax law could affect profitability and financial condition by making some products less attractive to contract owners and increasing tax costs of contract owners or the Company.
20.
The Company may be adversely affected by increased governmental and regulatory scrutiny or negative publicity.
21.
The loss of key personnel could negatively affect the Company's financial results and impair its ability to implement the Company's business strategy.
22.
Litigation may adversely affect profitability and financial condition.
23.
The Company's businesses are heavily regulated, and changes in regulation in the United States and regulatory investigations may reduce profitability.
24.
The Company's products are subject to extensive regulation and failure to meet any of the complex product requirements may reduce profitability.
25.
Changes in accounting requirements could negatively impact the Company's reported results of operations and the Company's reported financial position.
26.
Failure of a Company operating or information system or a compromise of security with respect to an operating or information system or portable electronic device or a failure to implement system modifications or a new accounting, actuarial or other operating system effectively could adversely affect the Company's results of operations and financial condition or the effectiveness of internal controls over financial reporting.
27.
Requirements to post collateral or make payments due to declines in market value on assets posted as collateral may adversely affect liquidity.
28.
Defaults or delinquencies in the commercial mortgage loan portfolio may adversely affect the Company's profitability.
29.
The occurrence of unidentified or unanticipated risks within the Company's risk management programs could negatively affect the Company's business or result in losses.
30.
The occurrence of natural or man-made disasters may adversely affect the Company's results of operations and financial condition.
 
Investors are also directed to consider the risks and uncertainties discussed in this Item 2. and in Item 1A. of Part II contained herein, as well as in other documents filed by the Company with the SEC.  Except as may be required by the federal securities laws, the Company disclaims any obligation to update forward-looking information.

Basis of Presentation
ILIAC is a stock life insurance company domiciled in the state of Connecticut. ILIAC and its wholly owned subsidiaries are providers of financial products and services in the United States. ILIAC is authorized to conduct its insurance business in all states and the District of Columbia.

ILIAC is a direct, wholly owned subsidiary of Lion, which is an indirect, wholly owned subsidiary of ING Groep N.V. ("ING"). ING is a global financial services holding company based in the Netherlands, with American Depository Shares listed on the New York Stock Exchange under the symbol “ING”.

ING has announced the anticipated separation of its banking and insurance businesses. While all options for effecting this separation remain open, on November 10, 2010, ING announced that, in connection with the separation plan, it will prepare for a base case of an initial public offering ("IPO") of ING U.S., which constitutes ING's US-based retirement, insurance and investment management operations, including the Company.

The Company has one operating segment.


 
48
 

Critical Accounting Policies, Judgments, and Estimates
 
General

The preparation of financial statements in conformity with U.S. GAAP requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Critical estimates and assumptions are evaluated on an on-going basis based on historical developments, market conditions, industry trends, and other information that is reasonable under the circumstances. There can be no assurance that actual results will conform to estimates and assumptions, and that reported results of operations will not be materially adversely affected by the need to make future accounting adjustments to reflect changes in these estimates and assumptions from time to time.

The Company has identified the following accounting policies, judgments, and estimates as critical in that they involve a higher degree of judgment and are subject to a significant degree of variability:

Reserves for future policy benefits, valuation and amortization of DAC and VOBA, valuation of investments and derivatives, impairments, income taxes, and contingencies.

In developing these accounting estimates and policies, the Company's management makes subjective and complex judgments that are inherently uncertain and subject to material changes 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.

The above critical accounting estimates are described in Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies, Judgments, and Estimates and the Business, Basis of Presentation and Significant Accounting Policies note to the Consolidated Financial Statements in the 2011 Annual Report.

Results of Operations
 
Overview
 
Products currently offered by the Company include 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, 408, and 457, as well as nonqualified deferred compensation plans.
 
On April 9, 2009, the Company’s ultimate parent, ING, announced a global business strategy which identified certain core and non-core businesses and geographies, stated ING’s intention to explore divestiture of non-core businesses over time, withdraw from certain non-core geographies, limit future acquisitions and implement enterprise-wide expense reductions. In particular, with respect to ING’s U.S. insurance operations, ING is seeking to further reduce its risk by focusing on individual life products, retirement services and lower risk annuity products which the Company commenced selling during the first quarter of 2010.
 
The Company derives its revenue mainly from (a) fee income generated from separate account assets supporting variable options under variable annuity contract investments, as designated by contract owners, (b) investment income earned on assets supporting fixed assets under management (“AUM”), mainly generated from annuity products with fixed investment options, and (c) certain other fees. The Company’s expenses primarily consist of (a) interest credited and other benefits to contract owners, (b) amortization of DAC and value of business acquired (“VOBA”), (c) expenses related to the selling and servicing of the various products offered by the Company, and (d) other general business expenses.  In addition, the Company collects broker-dealer commissions through its subsidiaries, Directed Services LLC (“DSL”) and ING Financial Advisers, LLC (“IFA”), which are, in turn, paid to broker-dealers and expensed.
 
Economic Analysis

The pace of economic growth in the U.S. was subdued in 2011, though the U.S. economy performed better in the second half of the year. The pace of growth in the first quarter of 2012 remained subdued, based on the first estimate published by the Bureau of Economic Analysis.  The U.S. economy grew 1.7% on annualized basis in the last year. Industrial production rose approximately 2.8% on an annualized basis in the first quarter of 2012.  The pace of growth has stayed modest and below trend growth rates due to a variety of factors.  Consumer spending has expanded tepidly because of the slow improvement in the labor market, the elevated unemployment rate, and the minimal increase in real disposable income.  Business fixed investment is increasing less rapidly,

 
49
 

while the housing sector is still depressed.  House prices have continued to decline and residential investment remains weak.  Real export growth has been disappointing.  Global industrial production and global trade are expanding but at a fairly modest pace because of the slowing in global growth and investors concerns about global financial fragility. Employment growth did improve late last year and in the first quarter of this year. Meanwhile, initial and continuing unemployment claims have been gradually declining. However, the pace of improvement in non-farm payroll employment appears to have slowed in recent months. Overall inflation, as measured by Consumer Price and Personal Consumption Expenditures indices, was contained during 2011 and in first quarter of 2012, even though energy and commodity prices remained elevated.

The pace of economic growth is still constrained by high unemployment, modest income growth, lower housing wealth, and tepid expansion of credit.  The sustainability of the ongoing recovery still depends on supportive fiscal and monetary policies.

The Federal Reserve (the “Fed”) has continued to extend the average maturity of the securities in its portfolio, as announced in September 2011. The Fed intends to exert downward pressure on long-term rates. To that effect, it has announced that it will purchase, by mid-2012, nearly $400 billion of Treasury securities with remaining maturities of 6 years to 30 years, while selling the same amount of Treasury securities with remaining maturities of 3 years or less during the same period. The Fed will also reinvest principal payment for its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities to support conditions in the mortgage market. Furthermore, based on its assessment of current economic conditions, economic outlook and the balance of risks, the Fed is conditionally committed to keeping the federal funds target rate in the range of 0 to 25 basis points until late-2014.
 
Short-term LIBOR remains low by historic standards but has been gradually rising since mid 2011. However, U.S. Treasury rates have declined noticeably since the beginning of 2011. Long-term U.S. Treasury rates decreased in the first quarter of 2012 as compared to the same period in 2011. The decline in U.S. Treasury rates is mainly due to the Fed's commitment to keep the federal funds target rate low until late 2014, low short-term rates, its policy to exert downward pressure on long-term rates, well-anchored inflationary expectations, and flight to safety arising out of private investors' concerns about public debt and deficits in several euro zone countries.
 
In spite of modest improvement in economic activity in the second half of 2011 and the first quarter of 2012 and accommodative policies, risks to the U.S. economy continue to point to possible negative developments. Risks which could lead to negative developments include strains in global financial conditions; weakness in household financial conditions, which could lead to slower consumer spending; larger-than-expected near-term fiscal tightening, which could lower aggregate demand; financial and economic spillover from the eurozone's inability to contain the region's debt crisis; and crude oil prices spiking in the event of an escalation of conflict between the U.S. and Iran. There could also be a drag on real GDP growth arising from a decrease in public expenditures and potentially higher taxes next year. These economic conditions and risks are not unique to the Company, but present challenges to the entire insurance and financial services industry.


 
50
 


Three Months Ended March 31, 2012 compared to Three Months Ended March 31, 2011
 
The Company’s results of operations for the three months ended March 31, 2012, and changes therein, were primarily impacted by higher Net realized capital gains and increased Net investment income, partially offset by higher Operating expenses, an increase in Net amortization of DAC and VOBA, higher Interest credited and other benefits to contract owners and lower Other income.
 
 
Three Months Ended March 31,
 
$ Increase
 
% Increase
 
2012
 
2011
 
(Decrease)
 
(Decrease)
 
 
 
(As revised)
 
 
 
 
Revenues:
 

 
 

 
 

 
 

Net investment income
$
352.0

 
$
343.0

 
$
9.0

 
2.6
 %
Fee income
155.1

 
155.1

 
—

 
—
 %
Premiums
11.8

 
9.5

 
2.3

 
24.2
 %
Broker-dealer commission revenue
55.7

 
58.5

 
(2.8
)
 
(4.8
)%
Net realized capital gains (losses):
 

 
 

 
 

 
 

Total other-than-temporary impairment losses
(1.4
)
 
(21.8
)
 
20.4

 
93.6
 %
Less: Portion of other-than-temporary impairment losses recognized in Other comprehensive income (loss)
(0.1
)
 
(1.6
)
 
1.5

 
93.8
 %
Net other-than-temporary impairments recognized in earnings
(1.3
)
 
(20.2
)
 
18.9

 
93.6
 %
Other net realized capital gains
128.6

 
39.8

 
88.8

 
NM

Total net realized capital gains
127.3

 
19.6

 
107.7

 
NM

Other income
0.5

 
10.3

 
(9.8
)
 
(95.1
)%
Total revenue
702.4

 
596.0

 
106.4

 
17.9
 %
Benefits and expenses:
 

 
 

 
 

 
 

Interest credited and other benefits to contract owners
194.7

 
175.2

 
19.5

 
11.1
 %
Operating expenses
180.4

 
157.1

 
23.3

 
14.8
 %
Broker-dealer commission expense
55.7

 
58.5

 
(2.8
)
 
(4.8
)%
Net amortization of deferred policy acquisition costs and value of business acquired
52.8

 
33.1

 
19.7

 
59.5
 %
Interest expense
0.6

 
0.7

 
(0.1
)
 
(14.3
)%
Total benefits and expenses
484.2

 
424.6

 
59.6

 
14.0
 %
Income before income taxes
218.2

 
171.4

 
46.8

 
27.3
 %
Income tax expense
74.2

 
84.0

 
(9.8
)
 
(11.7
)%
Net income
$
144.0

 
$
87.4

 
$
56.6

 
64.8
 %
 
NM - Not Meaningful

Revenues

Total revenue increased for the three months ended March 31, 2012 primarily due to higher Net realized capital gains and increased Net investment income, partially offset by lower Other income.

The increase in Net realized capital gains for the three months ended March 31, 2012 is primarily due to a favorable change in the fair value of an embedded derivative within an annuity product, which was favorable due to a change in certain assumptions and due to an increase in interest rates. This was partially offset by an unfavorable change in net realized gains/losses within Fixed maturities, at fair value using the fair value option, due to a decrease in market valuations on certain collateralized mortgage obligation (“CMO”) securities during the three months ended March 31, 2012.


 
51
 

Other income decreased for the three months ended March 31, 2012 as compared to the three months ended March 31, 2011 due to income recognized in the first three months of 2011 related to consideration received for the transfer of representatives and customer accounts associated with the retail broker-dealer business from ING Financial Advisers, LLC to ING Financial Partners, Inc.

Net investment income increased for the first three months ended March 31, 2012 primarily due to an increase in general account assets. The volatility inherent in the equity market during the second half of 2011 resulted in participants transferring fund from variable investment options into the fixed investment option contributing to an increase in average general account assets.

Benefits and Expenses

Total benefits and expenses increased for the three months ended March 31, 2012 primarily due to an increase in Operating expenses, an unfavorable variance in Net amortization of DAC and VOBA and higher Interest credited and other benefits to contract owners.

Operating expenses increased for the three months ended March 31, 2012 reflecting higher compensation related and other general expenses.

The increase in Net amortization of DAC and VOBA for the three months ended March 31, 2012 is primarily due to increased amortization resulting from higher actual gross profits versus the three months ended March 31, 2011. Also, changes in assumptions associated with refinements in DAC models impacted the increase in Net amortization of DAC and VOBA.

Interest credited and other benefits to contract owners was higher for the three months ended March 31, 2012 primarily due to an increase in general account liabilities, as participants transferred funds from variable investment options into the fixed investment option contributing to an increase in average general account assets and corresponding liabilities. The increase was partially offset by a decrease in average credited rates on general account liabilities compared to the prior year due to management actions taken in January 2012 to reflect the current interest rate environment.

Income Taxes

Income tax expense decreased for the three months ended March 31, 2012 primarily due to a decrease in the tax valuation allowance related to net realized capital losses, and an increase in the dividends received deduction.

Financial Condition
 
Investments
 
Investment Strategy

The Company's investment strategy seeks to achieve sustainable risk adjusted returns by focusing on principal preservation, disciplined matching of asset characteristics with liability requirements, and the diversification of risks. Investment activities are undertaken according to investment policy statements that contain internally established guidelines and risk tolerances and in all cases are required to comply with applicable laws and insurance regulations. Risk tolerances are established for credit risk, credit spread risk, market risk, liquidity risk, and concentration risk across issuers, sectors and asset types that seek to mitigate the impact of cash flow variability arising from these risks. Investments are managed by ING Investment Management LLC, an affiliate of the Company, pursuant to an investment advisory agreement. Segmented portfolios are established for groups of products with similar liability characteristics within the Company. The Company's investment portfolio consists largely of high quality fixed maturity securities and short-term investments, investments in commercial loans, limited partnerships, and other instruments, including a small amount of equity holdings. Fixed maturity securities include publicly issued corporate bonds, government bonds, privately placed notes and bonds, mortgage-backed securities, and asset-backed securities. The Company uses derivatives for hedging purposes and to replicate exposure to other assets as a more efficient means of assuming credit exposure similar to bonds of the underlying issuer(s).


 
52
 

Portfolio Composition
 
The following table presents the investment portfolio as of March 31, 2012 and December 31, 2011.
 
 
2012
 
2011
 
Carrying
Value
 
% of
Total
 
Carrying
Value
 
% of
Total
Fixed maturities, available-for-sale, including securities pledged
$
18,512.6

 
78.1
%
 
$
18,728.3

 
79.4
%
Fixed maturities, at fair value using the fair value option
537.4

 
2.3
%
 
511.9

 
2.1
%
Equity securities, available-for-sale
143.1

 
0.6
%
 
144.9

 
0.6
%
Short-term investments
337.9

 
1.4
%
 
216.8

 
0.9
%
Mortgage loans on real estate
2,590.4

 
11.0
%
 
2,373.5

 
10.1
%
Loan-Dutch State obligation
392.8

 
1.7
%
 
417.0

 
1.8
%
Policy loans
240.8

 
1.0
%
 
245.9

 
1.0
%
Limited partnerships/corporations
518.6

 
2.2
%
 
510.6

 
2.2
%
Derivatives
392.9

 
1.7
%
 
446.6

 
1.9
%
Total investments
$
23,666.5

 
100.0
%
 
$
23,595.5

 
100.0
%


 
53
 

Fixed Maturities and Equity Securities
 
Available-for-sale and fair value option fixed maturities and equity securities were as follows as of March 31, 2012.
 
 
Amortized
Cost
 
Gross
Unrealized
Capital
Gains
 
Gross
Unrealized
Capital
Losses
 
Embedded Derivatives(3)
 
Fair
Value
 
OTTI(2)
Fixed maturities:
 

 
 

 
 

 
 
 
 

 
 

U.S. Treasuries
$
736.9

 
$
89.7

 
$
—

 
$
—

 
$
826.6

 
$
—

U.S. government agencies and authorities
378.9

 
27.7

 
—

 
—

 
406.6

 
—

State, municipalities, and political subdivisions
84.9

 
11.9

 
—

 
—

 
96.8

 
—

U.S. corporate securities
8,420.8

 
746.4

 
33.5

 
—

 
9,133.7

 
—

 
 
 
 
 
 
 
 
 
 
 
 
Foreign securities(1):
 

 
 

 
 

 
 
 
 

 
 

Government
393.0

 
33.9

 
2.1

 
—

 
424.8

 
—

Other
4,303.8

 
355.4

 
22.1

 
—

 
4,637.1

 
—

Total foreign securities
4,696.8

 
389.3

 
24.2

 
—

 
5,061.9

 
—

 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Agency
1,433.8

 
198.7

 
5.6

 
35.8

 
1,662.7

 
0.6

Non-Agency
484.1

 
66.0

 
34.8

 
18.5

 
533.8

 
27.4

Total Residential mortgage-backed securities
1,917.9

 
264.7

 
40.4

 
54.3

 
2,196.5

 
28.0

 
 
 
 
 
 
 
 
 
 
 
 
Commercial mortgage-backed securities
854.4

 
69.9

 
1.7

 
—

 
922.6

 
4.4

Other asset-backed securities
404.4

 
20.7

 
19.8

 
—

 
405.3

 
4.0

Total fixed maturities, including securities pledged
17,495.0

 
1,620.3

 
119.6

 
54.3

 
19,050.0

 
36.4

Less: securities pledged
187.9

 
15.3

 
1.0

 
—

 
202.2

 
—

Total fixed maturities
17,307.1

 
1,605.0

 
118.6

 
54.3

 
18,847.8

 
36.4

Equity securities
131.1

 
12.1

 
0.1

 
—

 
143.1

 
—

Total fixed maturities and equity securities
$
17,438.2

 
$
1,617.1

 
$
118.7

 
$
54.3

 
$
18,990.9

 
$
36.4

 
(1) Primarily U.S. dollar denominated.
(2) Represents other-than-temporary impairments ("OTTI") reported as a component of Other comprehensive income.
(3) Embedded derivatives within fixed maturity securities are reported with the host investment. The changes in fair value of embedded derivatives are reported in Other net realized capital gains (losses) in the Condensed Consolidated Statements of Operations.



 
54
 

Available-for-sale and fair value option fixed maturities and equity securities were as follows as of December 31, 2011 (As revised).
  
 
Amortized
Cost
 
Gross
Unrealized
Capital
Gains
 
Gross
Unrealized
Capital
Losses
 
Embedded Derivatives(3)
 
Fair
Value
 
OTTI(2)
Fixed maturities:
 

 
 

 
 

 
 
 
 

 
 

U.S. Treasuries
$
1,096.6

 
$
135.0

 
$
—

 
$
—

 
$
1,231.6

 
$
—

U.S. government agencies and authorities
379.7

 
31.0

 
—

 
—

 
410.7

 
—

State, municipalities, and political subdivisions
95.1

 
10.9

 
—

 
—

 
106.0

 
—

U.S. corporate securities
8,166.9

 
770.8

 
31.1

 


 
8,906.6

 
—

 
 
 
 
 
 
 
 
 
 
 
 
Foreign securities(1):
 

 
 

 
 

 
 
 
 

 
 

Government
308.5

 
39.8

 
3.1

 
—

 
345.2

 
—

Other
4,352.5

 
328.8

 
38.4

 
—

 
4,642.9

 
—

Total foreign securities
4,661.0

 
368.6

 
41.5

 
—

 
4,988.1

 
—

 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Agency
1,442.0

 
218.7

 
3.4

 
39.4

 
1,696.7

 
0.7

Non-Agency
513.4

 
66.7

 
49.5

 
19.8

 
550.4

 
28.8

Total Residential mortgage-backed securities
1,955.4

 
285.4

 
52.9

 
59.2

 
2,247.1

 
29.5

 
 
 
 
 
 
 
 
 
 
 
 
Commercial mortgage-backed securities
866.1

 
51.0

 
5.8

 
—

 
911.3

 
4.4

Other asset-backed securities
441.5

 
19.4

 
22.1

 
—

 
438.8

 
4.2

Total fixed maturities, including securities pledged
17,662.3

 
1,672.1

 
153.4

 
59.2

 
19,240.2

 
38.1

Less: securities pledged
572.5

 
22.4

 
1.2

 
—

 
593.7

 
—

Total fixed maturities
17,089.8

 
1,649.7

 
152.2

 
59.2

 
18,646.5

 
38.1

Equity securities
131.8

 
13.1

 
—

 
—

 
144.9

 
—

Total fixed maturities and equity securities
$
17,221.6

 
$
1,662.8

 
$
152.2

 
$
59.2

 
$
18,791.4

 
$
38.1

 
(1) Primarily U.S. dollar denominated.
(2) Represents other-than-temporary impairments reported as a component of Other comprehensive income.
(3) Embedded derivatives within fixed maturity securities are reported with the host investment. The changes in fair value of embedded derivatives are reported in Other net realized capital gains (losses) in the Condensed Consolidated Statements of Operations.

Fixed Maturity Securities Credit Quality - Ratings

The Securities Valuation Office ("SVO") of the National Association of Insurance Commissioners (“NAIC”) evaluates the fixed maturity security investments of insurers for regulatory reporting and capital assessment purposes and assigns securities to one of six credit quality categories called “NAIC designations.” An internally developed rating is used as permitted by the NAIC if no rating is available. The NAIC designations are generally similar to the credit quality designations of a Nationally Recognized Statistical Rating Organization (“NRSRO”) for marketable fixed maturity securities, called “rating agency designations,” except for certain structured securities as described below. NAIC designations of "1," highest quality, and "2," high quality, include fixed maturity securities generally considered investment grade (“IG”) by such rating organizations. NAIC designations 3 through 6 include fixed maturity securities generally considered below investment grade (“BIG”) by such rating organizations.

The NAIC adopted revised designation methodologies for non−agency Residential Mortgage-backed Securities ("RMBS"), including RMBS backed by subprime mortgage loans reported within Other Asset-backed Securities ("ABS"), and for Commercial

 
55
 

Mortgage-backed Securities ("CMBS"). The NAIC's objective with the revised designation methodologies for these structured securities was to increase the accuracy in assessing expected losses, and to use the improved assessment to determine a more appropriate capital requirement for such structured securities. The revised methodologies reduce regulatory reliance on rating agencies and allow for greater regulatory input into the assumptions used to estimate expected losses from such structured securities.

As a result of time lags between the funding of investments, the finalization of legal documents and the completion of the SVO filing process, the fixed maturity portfolio generally includes securities that have not yet been rated by the SVO as of each balance sheet date, such as private placements. Pending receipt of SVO ratings, the categorization of these securities by NAIC designation is based on the expected ratings indicated by internal analysis.

Information about the Company's fixed maturity securities holdings, including securities pledged, by NAIC designations is set forth in the following tables. Corresponding rating agency designation does not directly translate to NAIC designation, but represents the Company's best estimate of comparable ratings from rating agencies, including Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's (“S&P”), and Fitch Ratings Ltd. (“Fitch”). If no rating is available from a rating agency, then an internally developed rating is used.

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. At March 31, 2012 and December 31, 2011, the average quality rating of the Company’s fixed maturities portfolio was A- and A, respectively. Ratings are derived from three NRSRO ratings and are applied as follows based on the number of agency rating received:

▪
when three ratings are received then the middle rating is applied;
▪
when two ratings are received then the lower rating is applied;
▪
when a single rating is received, the NRSRO rating is applied;
▪
and, when ratings are unavailable then an internal rating is applied.



 
56
 

Total fixed maturities by NAIC quality designation category, including securities pledged to creditors, were as follows as of March 31, 2012 and December 31, 2011.
 
 
 
2012
NAIC Quality
 
Fair
 
% of
 
Amortized
 
% of
Designation
 
Value
 
Total
 
Cost
 
Total
1
 
$
9,373.3

 
49.3
%
 
$
8,549.0

 
48.9
%
2
 
8,592.9

 
45.1
%
 
7,936.1

 
45.3
%
3
 
826.5

 
4.3
%
 
795.3

 
4.5
%
4
 
131.6

 
0.7
%
 
133.3

 
0.8
%
5
 
120.1

 
0.6
%
 
79.0

 
0.5
%
6
 
5.6

 
0.0
%
 
2.3

 
0.0
%
Total
 
$
19,050.0

 
100.0
%
 
$
17,495.0

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
2011
NAIC Quality
 
Fair
 
% of
 
Amortized
 
% of
Designation
 
Value
 
Total
 
Cost
 
Total
1
 
$
9,718.2

 
50.5
%
 
$
8,835.6

 
50.1
%
2
 
8,352.5

 
43.4
%
 
7,722.6

 
43.7
%
3
 
875.0

 
4.6
%
 
850.4

 
4.8
%
4
 
166.1

 
0.9
%
 
170.1

 
1.0
%
5
 
84.7

 
0.4
%
 
77.3

 
0.4
%
6
 
43.7

 
0.2
%
 
6.3

 
0.0
%
Total
 
$
19,240.2

 
100.0
%
 
$
17,662.3

 
100.0
%

Total fixed maturities by NRSRO quality rating category, including securities pledged to creditors, were as follows as of March 31, 2012 and December 31, 2011.
 
 
 
2012
NRSRO Quality
 
Fair
 
% of
 
Amortized
 
% of
Rating
 
Value
 
Total
 
Cost
 
Total
AAA
 
$
3,973.4

 
20.9
%
 
$
3,559.8

 
20.4
%
AA
 
826.3

 
4.3
%
 
758.7

 
4.3
%
A
 
4,427.5

 
23.2
%
 
4,089.5

 
23.4
%
BBB
 
8,510.4

 
44.7
%
 
7,865.1

 
45.0
%
BB
 
820.0

 
4.3
%
 
777.5

 
4.4
%
B and below
 
492.4

 
2.6
%
 
444.4

 
2.5
%
Total
 
$
19,050.0

 
100.0
%
 
$
17,495.0

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
2011
NRSRO Quality
 
Fair
 
% of
 
Amortized
 
% of
Rating
 
Value
 
Total
 
Cost
 
Total
AAA
 
$
4,459.7

 
23.2
%
 
$
3,972.4

 
22.5
%
AA
 
899.0

 
4.7
%
 
813.1

 
4.6
%
A
 
4,273.2

 
22.2
%
 
3,949.9

 
22.4
%
BBB
 
8,244.6

 
42.9
%
 
7,633.0

 
43.2
%
BB
 
835.8

 
4.3
%
 
803.5

 
4.5
%
B and below
 
527.9

 
2.7
%
 
490.4

 
2.8
%
Total
 
$
19,240.2

 
100.0
%
 
$
17,662.3

 
100.0
%

 At March 31, 2012 and December 31, 2011, 93.1% and 93.0% of the fixed maturities were invested in securities rated BBB and above (Investment Grade ("IG")), respectively.

 
57
 

 
Fixed maturities rated BB and below (Below Investment Grade ("BIG")) 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.

Total fixed maturities by market sector, including securities pledged to creditors, were as follows as of March 31, 2012 and December 31, 2011.
 
 
2012
 
Fair
 
% of
 
Amortized
 
% of
 
Value
 
Total
 
Cost
 
Total
U.S. Treasuries
$
826.6

 
4.3
%
 
$
736.9

 
4.2
%
U.S. government agencies and authorities
406.6

 
2.1
%
 
378.9

 
2.2
%
U.S. corporate, state, and municipalities
9,230.5

 
48.6
%
 
8,505.7

 
48.6
%
Foreign
5,061.9

 
26.6
%
 
4,696.8

 
26.8
%
Residential mortgage-backed
2,196.5

 
11.5
%
 
1,917.9

 
11.0
%
Commercial mortgage-backed
922.6

 
4.8
%
 
854.4

 
4.9
%
Other asset-backed
405.3

 
2.1
%
 
404.4

 
2.3
%
Total
$
19,050.0

 
100.0
%
 
$
17,495.0

 
100.0
%
 
 
 
 
 
 
 
 
 
2011
 
Fair
 
% of
 
Amortized
 
% of
 
Value
 
Total
 
Cost
 
Total
U.S. Treasuries
$
1,231.6

 
6.4
%
 
$
1,096.6

 
6.2
%
U.S. government agencies and authorities
410.7

 
2.1
%
 
379.7

 
2.1
%
U.S. corporate, state, and municipalities
9,012.6

 
46.8
%
 
8,262.0

 
46.8
%
Foreign
4,988.1

 
26.0
%
 
4,661.0

 
26.4
%
Residential mortgage-backed
2,247.1

 
11.7
%
 
1,955.4

 
11.1
%
Commercial mortgage-backed
911.3

 
4.7
%
 
866.1

 
4.9
%
Other asset-backed
438.8

 
2.3
%
 
441.5

 
2.5
%
Total
$
19,240.2

 
100.0
%
 
$
17,662.3

 
100.0
%
 
The amortized cost and fair value of fixed maturities, including securities pledged, as of March 31, 2012, are shown below by contractual maturity. Actual maturities may differ from contractual maturities as securities may be restructured, called, or prepaid. Mortgage-backed securities ("MBS") and ABS are shown separately because they are not due at a single maturity date.

 
Amortized Cost
 
Fair Value
Due to mature:
 

 
 

One year or less
$
309.0

 
$
329.4

After one year through five years
3,725.8

 
3,981.6

After five years through ten years
5,300.6

 
5,747.3

After ten years
4,982.9

 
5,467.3

Mortgage-backed securities
2,772.3

 
3,119.1

Other asset-backed securities
404.4

 
405.3

Fixed maturities, including securities pledged
$
17,495.0

 
$
19,050.0


The Company did not have any investments in a single issuer, other than obligations of the U.S. government and government agencies, and the State of the Netherlands (the "Dutch State") loan obligation, with a carrying value in excess of 10% of the Company’s Shareholder’s equity at March 31, 2012 and December 31, 2011.

 
58
 

 
The Company invests in various categories of Collateralized Mortgage Obligations ("CMOs"), including CMOs that are not agency-backed, that are subject to different degrees of risk from changes in interest rates and 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 prepayment of principal from the underlying mortgages, either earlier or later than originally anticipated. At March 31, 2012 and December 31, 2011, approximately 43.0% and 41.1%, respectively, of the Company’s CMO holdings were invested in those types of CMOs, such as interest-only or principal-only strips which are subject to more prepayment and extension risk than traditional CMOs.

Subprime and Alt-A Mortgage Exposure

Underlying collateral has continued to reflect the problems associated with a housing market that has seen substantial price declines and an employment market that has declined significantly and remains under stress.  Credit spreads have widened meaningfully from issuance and rating agency downgrades have been widespread and severe within the sector.  Over the course of 2010 and 2011, market prices and liquidity within the sector have exhibited volatility, driven by various factors, both domestically and globally. During the quarter ended March 31, 2012, market prices and sector liquidity have exhibited increases, given the risk appetite and sentiment regarding the potential for fundamental improvements within the sector.  In managing its risk exposure to subprime mortgages, the Company takes into account collateral performance and structural characteristics associated with its various positions.
The Company does not originate or purchase subprime or Alt-A whole-loan mortgages. The Company does have exposure to RMBS and ABS. Subprime lending is the origination of loans to customers with weaker credit profiles. The Company defines Alt-A Loans to include the following: residential mortgage loans to customers who have strong credit profiles but lack some element(s), such as documentation to substantiate income; residential mortgage loans to borrowers that would otherwise be classified as prime but whose loan structure provides repayment options to the borrower that increase the risk of default; and any securities backed by residential mortgage collateral not clearly identifiable as prime or subprime.

The Company's exposure to subprime mortgages was primarily in the form of ABS structures collateralized by subprime residential mortgages, and the majority of these holdings were included in other asset-backed securities in the fixed maturities by market sector table previously referenced. As of March 31, 2012, the fair value and gross unrealized losses related to the Company's exposure to subprime mortgages were $59.1 and $19.4, respectively, representing 0.3% of total fixed maturities, including securities pledged. As of December 31, 2011, the fair value and gross unrealized losses related to the Company's exposure to subprime mortgages were $59.1 and $21.7, respectively, representing 0.3% of total fixed maturities, including securities pledged.

The following tables summarize the Company’s exposure to subprime mortgage-backed holdings by credit quality using NAIC designations, NRSRO ratings and vintage year as of March 31, 2012 and December 31, 2011:
 
 
% of Total Subprime Mortgage-backed Securities
 
NAIC Designation
 
NRSRO Rating
 
Vintage
2012
1
77.3
%
 
AAA
5.1
%
 
2007
8.4
%
 
2
2.8
%
 
AA
0.0
%
 
2006
4.5
%
 
3
10.1
%
 
A
13.5
%
 
2005 and prior
87.1
%
 
4
9.6
%
 
BBB
24.5
%
 
 
100.0
%
 
5
0.0
%
 
BB and below
56.9
%
 
 
 
 
6
0.2
%
 
 
100.0
%
 
 
 
 
 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2011
1
75.8
%
 
AAA
7.5
%
 
2007
9.1
%
 
2
5.3
%
 
AA
0.0
%
 
2006
4.5
%
 
3
9.3
%
 
A
13.0
%
 
2005 and prior
86.4
%
 
4
9.4
%
 
BBB
33.7
%
 
 
100.0
%
 
5
0.0
%
 
BB and below
45.8
%
 
 
 
 
6
0.2
%
 
 
100.0
%
 
 
 
 
 
100.0
%
 
 
 
 
 
 

 
59
 

 
The Company’s exposure to Alt-A mortgages was included in residential mortgage-backed securities in the fixed maturities by market sector table above. As of March 31, 2012, the fair value and gross unrealized losses aggregated to $110.1 and $15.8, respectively, representing 0.6% of total fixed maturities. As of December 31, 2011, the fair value and gross unrealized losses aggregated to $111.4 and $19.6, respectively, representing 0.6% of total fixed maturities.
 
The following tables summarize the Company’s exposure to Alt-A mortgage-backed holdings by credit quality using NAIC designations, NRSRO ratings and vintage year as of March 31, 2012 and December 31, 2011:
 
 
% of Total Alt-A Mortgage-backed Securities
 
NAIC Designation
 
NRSRO Rating
 
Vintage
2012
1
40.3
%
 
AAA
0.3
%
 
2007
12.4
%
 
2
12.3
%
 
AA
2.7
%
 
2006
28.7
%
 
3
18.0
%
 
A
13.1
%
 
2005 and prior
58.9
%
 
4
20.1
%
 
BBB
4.5
%
 
 
100.0
%
 
5
8.6
%
 
BB and below
79.4
%
 
 
 
 
6
0.7
%
 
 
100.0
%
 
 
 
 
 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2011
1
39.9
%
 
AAA
0.3
%
 
2007
12.0
%
 
2
14.9
%
 
AA
3.1
%
 
2006
28.3
%
 
3
14.7
%
 
A
13.1
%
 
2005 and prior
59.7
%
 
4
21.1
%
 
BBB
4.6
%
 
 
100.0
%
 
5
4.7
%
 
BB and below
78.9
%
 
 
 
 
6
4.7
%
 
 
100.0
%
 
 
 
 
 
100.0
%
 
 
 
 
 
 
 
Commercial Mortgage-backed and Other Asset-backed Securities
 
Delinquency rates on commercial mortgages have remained elevated in recent months. However, the steep pace of increases observed in the months following the credit crisis has slowed, and some recent months have posted month over month declines in delinquent mortgages. In addition, other performance metrics like vacancies, property values and rent levels have exhibited improvements, providing early signals of a recovery in commercial real estate. In addition, the primary market for CMBS continued its recovery from the credit crisis, with total new issuance in 2011 higher for the third straight year. This had the impact of increasing credit availability within the commercial real estate universe. For consumer asset-backed securities, delinquency and loss rates have continued to decline post credit crisis. Improvements in various credit metrics across multiple types of asset-backed loans have been observed on a sustained basis, positively impacting the behavior and market values of consumer asset-backed securities.
 
As of March 31, 2012 and December 31, 2011, the fair value of the Company’s CMBS totaled $922.6 and $911.3, respectively, and other ABS, excluding subprime exposure, totaled $347.6 and $381.0, respectively. As of March 31, 2012, the gross unrealized losses related to CMBS totaled $1.7 and gross unrealized losses related to Other ABS, excluding subprime exposure, totaled $0.6. CMBS investments represent pools of commercial mortgages that are broadly diversified across property types and geographical areas.

As of March 31, 2012, the other ABS was also broadly diversified both by type and issuer with credit card receivables, collateralized loan obligations and automobile receivables, comprising 49.5%, 6.4%, and 15.2%, respectively, of total other ABS, excluding subprime exposure. As of December 31, 2011, the other ABS was also broadly diversified both by type and issuer with credit card receivables, collateralized loan obligations and automobile receivables, comprising 49.3%, 5.5%, and 17.2%, respectively, of total other ABS, excluding subprime exposure.
 
 

 
60
 

The following tables summarize the Company’s exposure to CMBS holdings by credit quality using NAIC designations, NRSRO ratings and vintage year as of March 31, 2012 and December 31, 2011:
 
 
% of Total CMBS
 
NAIC Designation
 
NRSRO Rating
 
Vintage
2012
1
99.6
%
 
AAA
60.8
%
 
2008
0.0
%
 
2
0.2
%
 
AA
2.2
%
 
2007
24.3
%
 
3
0.2
%
 
A
20.7
%
 
2006
18.2
%
 
4
0.0
%
 
BBB
5.7
%
 
2005 and prior
57.5
%
 
5
0.0
%
 
BB and below
10.6
%
 
 
100.0
%
 
6
0.0
%
 
 
100.0
%
 
 
 
 
 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2011
1
97.4
%
 
AAA
63.7
%
 
2007
23.4
%
 
2
0.9
%
 
AA
1.4
%
 
2006
18.2
%
 
3
0.7
%
 
A
21.1
%
 
2005 and prior
58.4
%
 
4
1.0
%
 
BBB
4.0
%
 
 
100.0
%
 
5
0.0
%
 
BB and below
9.8
%
 
 
 
 
6
0.0
%
 
 
100.0
%
 
 
 
 
 
100.0
%
 
 
 
 
 
 

The following tables summarize the Company’s exposure to other ABS holdings, excluding subprime exposure, by credit quality using NAIC designations, NRSRO ratings and vintage year as of March 31, 2012 and December 31, 2011:
 
 
% of Total Other ABS
 
NAIC Designation
 
NRSRO Rating
 
Vintage
2012
1
95.9
%
 
AAA
85.3
%
 
2012
0.9
%
 
2
3.8
%
 
AA
1.3
%
 
2011
11.5
%
 
3
0.0
%
 
A
9.3
%
 
2010
7.7
%
 
4
0.3
%
 
BBB
3.8
%
 
2009
0.4
%
 
5
0.0
%
 
BB and below
0.3
%
 
2008
12.3
%
 
6
0.0
%
 
 
100.0
%
 
2007
29.0
%
 
 
100.0
%
 
 
 
 
2006
7.5
%
 
 
 
 
 
 
 
2005 and prior
30.7
%
 
 
 
 
 
 
 
 
100.0
%
 
 
 
 
 
 
 
 
 
2011
1
95.0
%
 
AAA
82.7
%
 
2011
14.3
%
 
2
4.7
%
 
AA
1.2
%
 
2010
7.3
%
 
3
0.0
%
 
A
8.4
%
 
2009
0.4
%
 
4
0.3
%
 
BBB
7.4
%
 
2008
11.7
%
 
5
0.0
%
 
BB and below
0.3
%
 
2007
30.3
%
 
6
0.0
%
 
 
100.0
%
 
2006
6.8
%
 
 
100.0
%
 
 
 
 
2005 and prior
29.2
%
 
 
 
 
 
 
 
 
100.0
%
 

 
61
 

Mortgage Loans on Real Estate
 
The Company’s mortgage loans on real estate are all commercial mortgage loans, which totaled $2.6 billlion and $2.4 billion as of March 31, 2012 and December 31, 2011, respectively. These loans are reported at amortized cost, less impairment write-downs and allowance for losses.
 
The Company diversifies its commercial mortgage loan portfolio by geographic region and property type to reduce concentration risk.  The Company manages risk when originating commercial mortgage loans by generally lending only up to 75% of the estimated fair value of the underlying real estate.  Subsequently, the Company continuously evaluates all mortgage loans based on relevant current information including an appraisal of loan-specific credit quality, property characteristics and market trends. Loan performance is monitored on a loan-specific basis through the review of submitted appraisals, operating statements, rent revenues and annual inspection reports, among other items. This review ensures properties are performing at a consistent and acceptable level to secure the debt.
 
All commercial mortgages are evaluated for the purpose of quantifying the level of risk.  Those loans with higher risk are placed on a watch list and are closely monitored for collateral deficiency or other credit events that may lead to a potential loss of principal or interest. If the value of any mortgage loan is determined to be impaired (i.e., when it is probable that the Company will be unable to collect on all amounts due according to the contractual terms of the loan agreement), the carrying value of the mortgage loan is reduced to the lower of the present value of expected cash flows from the loan, discounted at the loan’s effective interest rate, or fair value of the collateral.  There were no impairments taken on the mortgage loan portfolio for the three months ended March 31, 2012 and 2011, respectively. For those mortgages that are determined to require foreclosure, the carrying value is reduced to the fair value of the underlying collateral, net of estimated costs to obtain and sell at the point of foreclosure.  At March 31, 2012 and December 31, 2011, all mortgage loans in the Company’s portfolio were current with respect to principal and interest.  Due to challenges that the economy presents to the commercial mortgage market, the Company recorded an allowance for probable incurred, but not specifically identified, losses related to factors inherent in the lending process. At March 31, 2012 and December 31, 2011, the Company had a $1.6 and $1.3 allowance for mortgage loan credit losses.

Loan-to-value (“LTV”) and debt service coverage (“DSC”) ratios are measures commonly used to assess the risk and quality of commercial mortgage loans. The LTV ratio, calculated at time of origination, is expressed as a percentage of the amount of the loan relative to the value of the underlying property.  The DSC ratio, based upon the most recently received financial statements, is expressed as a percentage of the amount of a property’s net income to its debt service payments. These ratios are utilized as part of the review process described above.  LTV and DSC ratios as of March 31, 2012 and December 31, 2011, are as follows:
 
 
2012(1)
 
2011(1)
Loan-to-Value Ratio:
 

 
 

0% - 50%
$
524.6

 
$
552.4

50% - 60%
837.3

 
771.5

60% - 70%
1,089.4

 
908.2

70% - 80%
123.6

 
125.2

80% - 90%
17.1

 
17.5

Total Commercial Mortgage Loans
$
2,592.0

 
$
2,374.8


(1) Balances do not include allowance for mortgage loan credit losses.
 
 
2012(1)
 
2011(1)
Debt Service Coverage Ratio:
 

 
 

Greater than 1.5x
$
1,809.2

 
$
1,600.1

1.25x - 1.5x
403.6

 
408.1

1.0x - 1.25x
301.0

 
286.7

Less than 1.0x
78.2

 
79.9

Mortgages secured by loans on land or construction loans
—

 
—

Total Commercial Mortgage Loans
$
2,592.0

 
$
2,374.8


(1) Balances do not include allowance for mortgage loan credit losses.

 
62
 

 

Properties collateralizing mortgage loans are geographically dispersed throughout the United States, as well as diversified by property type, as reflected in the following tables as of March 31, 2012 and December 31, 2011.
 
 
2012(1)
 
2011(1)
 
Gross
Carrying Value
 
% of
Total
 
Gross
Carrying Value
 
% of
Total
Commercial Mortgage Loans by U.S. Region:
 

 
 

 
 

 
 

Pacific
$
550.1

 
21.2
%
 
$
514.7

 
21.7
%
South Atlantic
474.6

 
18.3
%
 
412.0

 
17.3
%
Middle Atlantic
323.2

 
12.5
%
 
325.9

 
13.7
%
East North Central
310.1

 
12.0
%
 
285.6

 
12.0
%
West South Central
392.4

 
15.1
%
 
358.4

 
15.1
%
Mountain
184.9

 
7.1
%
 
191.2

 
8.0
%
New England
113.5

 
4.4
%
 
94.2

 
4.0
%
West North Central
152.9

 
5.9
%
 
98.9

 
4.2
%
East South Central
90.3

 
3.5
%
 
93.9

 
4.0
%
Total Commercial Mortgage Loans
$
2,592.0

 
100.0
%
 
$
2,374.8

 
100.0
%

(1) Balances do not include allowance for mortgage loan credit losses.

 
2012(1)
 
2011(1)
 
Gross
Carrying Value
 
% of
Total
 
Gross
Carrying Value
 
% of
Total
Commercial Mortgage Loans by Property Type:
 

 
 

 
 

 
 

Industrial
$
983.5

 
38.0
%
 
$
956.4

 
40.3
%
Retail
638.8

 
24.7
%
 
544.7

 
22.9
%
Office
371.3

 
14.3
%
 
351.5

 
14.8
%
Apartments
299.2

 
11.5
%
 
281.7

 
11.9
%
Hotel/Motel
123.1

 
4.7
%
 
132.7

 
5.6
%
Mixed Use
34.6

 
1.3
%
 
0.9

 
0.0
%
Other
141.5

 
5.5
%
 
106.9

 
4.5
%
Total Commercial Mortgage Loans
$
2,592.0

 
100.0
%
 
$
2,374.8

 
100.0
%

(1) Balances do not include allowance for mortgage loan credit losses.
 

 
63
 

The following table sets forth the breakdown of commercial mortgages by year of origination as of March 31, 2012 and December 31, 2011.
 
 
2012(1)
 
2011(1)
Year of Origination:
 

 
 

2012
$
321.7

 
$
—

2011
854.5

 
857.9

2010
161.2

 
161.9

2009
82.6

 
92.6

2008
128.7

 
137.2

2007
197.9

 
202.1

2006 and prior
845.4

 
923.1

Total Commercial Mortgage Loans
$
2,592.0

 
$
2,374.8


(1) Balances do not include allowance for mortgage loan credit losses.
 
Troubled Debt Restructuring

The Company believes it has high quality, well performing portfolios of commercial mortgage loans and private placements. Under certain circumstances, modifications to these contracts are granted. Each modification is evaluated as to whether a troubled debt restructuring has occurred. A modification is a troubled debt restructure when the borrower is in financial difficulty and the creditor makes concessions. Generally, the types of concessions may include: reduction of the face amount or maturity amount of the debt as originally stated, reduction of the contractual interest rate, extension of the maturity date at an interest rate lower than current market interest rates and/or reduction of accrued interest. The Company considers the amount, timing and extent of the concession granted in determining any impairment or changes in the specific valuation allowance recorded in connection with the troubled debt restructuring. A valuation allowance may have been recorded prior to the quarter when the loan is modified in a troubled debt restructuring. Accordingly, the carrying value (net of the specific valuation allowance) before and after modification through a troubled debt restructuring may not change significantly, or may increase if the expected recovery is higher than the pre-modification recovery assessment.

During the three months ended March 31, 2012, the Company had no mortgage loans or private placements modified in a troubled debt restructuring with a subsequent payment default.

Unrealized Capital Losses
 
Unrealized capital losses (including noncredit impairments) in fixed maturities, including securities pledged to creditors, for IG and BIG securities by duration, based on NAIC designations, were as follows as of March 31, 2012 and December 31, 2011.
 
 
2012
 
2011
 
IG
 
% of IG
and BIG
 
BIG
 
% of IG
and BIG
 
IG
 
% of IG
and BIG
 
BIG
 
% of IG
and BIG
Six months or less below amortized cost
$
31.8

 
26.6
%
 
$
3.1

 
2.6
%
 
$
38.4

 
25.0
%
 
$
7.1

 
4.6
%
More than six months and twelve months or less below amortized cost
8.8

 
7.4
%
 
2.5

 
2.1
%
 
12.5

 
8.1
%
 
4.1

 
2.7
%
More than twelve months below amortized cost
46.1

 
38.5
%
 
27.3

 
22.8
%
 
61.4

 
40.1
%
 
29.9

 
19.5
%
Total unrealized capital losses
$
86.7

 
72.5
%
 
$
32.9

 
27.5
%
 
$
112.3

 
73.2
%
 
$
41.1

 
26.8
%
  

 
64
 

Unrealized capital losses (including noncredit impairments) in fixed maturities, including securities pledged to creditors, for securities rated IG and securities rated BIG by duration, based on NRSRO ratings, were as follows as of March 31, 2012 and December 31, 2011.
 
 
2012
 
2011
 
IG
 
% of IG
and BIG
 
BIG
 
% of IG
and BIG
 
IG
 
% of IG
and BIG
 
BIG
 
% of IG
and BIG
Six months or less below amortized cost
$
31.4

 
26.3
%
 
$
3.5

 
3.0
%
 
$
38.3

 
25.0
%
 
$
7.2

 
4.7
%
More than six months and twelve months or less below amortized cost
7.8

 
6.5
%
 
3.5

 
3.0
%
 
6.8

 
4.4
%
 
9.8

 
6.4
%
More than twelve months below amortized cost
28.5

 
23.7
%
 
44.9

 
37.5
%
 
42.1

 
27.4
%
 
49.2

 
32.1
%
Total unrealized capital losses
$
67.7

 
56.5
%
 
$
51.9

 
43.5
%
 
$
87.2

 
56.8
%
 
$
66.2

 
43.2
%


Unrealized capital losses (including noncredit impairments), along with the fair value of fixed maturities, including securities pledged to creditors, by market sector and duration were as follows as of March 31, 2012 and December 31, 2011.
 
 
Six Months or Less
Below Amortized Cost
 
More Than Six
Months and Twelve
Months or Less
Below Amortized Cost
 
More Than Twelve
Months Below
Amortized Cost
 
Total
 
Fair
Value
 
Unrealized
Capital Loss
 
Fair
Value
 
Unrealized
Capital Loss
 
Fair
Value
 
Unrealized
Capital Loss
 
Fair
Value
 
Unrealized
Capital Loss
2012
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

U.S. Treasuries
$
21.0

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
21.0

 
$
—

U.S. corporate, state, and municipalities
865.0

 
22.0

 
143.7

 
5.6

 
52.0

 
5.9

 
1,060.7

 
33.5

Foreign
300.1

 
8.9

 
94.6

 
3.4

 
104.9

 
11.9

 
499.6

 
24.2

Residential mortgage-backed
67.3

 
3.7

 
44.4

 
1.3

 
215.5

 
35.4

 
327.2

 
40.4

Commercial mortgage-backed
11.3

 
0.2

 
19.6

 
0.8

 
10.7

 
0.7

 
41.6

 
1.7

Other asset-backed
1.6

 
0.1

 
6.5

 
0.2

 
49.3

 
19.5

 
57.4

 
19.8

Total
$
1,266.3

 
$
34.9

 
$
308.8

 
$
11.3

 
$
432.4

 
$
73.4

 
$
2,007.5

 
$
119.6

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2011
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

U.S. Treasuries
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

U.S. corporate, state, and municipalities
595.1

 
22.8

 
46.5

 
3.0

 
52.9

 
5.3

 
694.5

 
31.1

Foreign
435.3

 
19.1

 
49.9

 
4.6

 
169.5

 
17.8

 
654.7

 
41.5

Residential mortgage-backed
49.4

 
1.6

 
97.0

 
5.2

 
175.4

 
46.1

 
321.8

 
52.9

Commercial mortgage-backed
28.3

 
1.8

 
69.0

 
2.5

 
8.9

 
1.5

 
106.2

 
5.8

Other asset-backed
32.6

 
0.2

 
4.9

 
1.3

 
44.1

 
20.6

 
81.6

 
22.1

Total
$
1,140.7

 
$
45.5

 
$
267.3

 
$
16.6

 
$
450.8

 
$
91.3

 
$
1,858.8

 
$
153.4

 
Of the unrealized capital losses aged more than twelve months, the average market value of the related fixed maturities was 85.5% of the average book value as of March 31, 2012.

 
65
 


Unrealized capital losses (including noncredit impairments) in fixed maturities, including securities pledged to creditors, for instances in which fair value declined below amortized cost by greater than or less than 20% for consecutive periods as indicated in the tables below, were as follows as of March 31, 2012 and December 31, 2011.
 
 
Amortized Cost
 
Unrealized Capital Loss
 
Number of Securities
 
< 20%
 
> 20%
 
< 20%
 
> 20%
 
< 20%
 
> 20%
2012
 

 
 

 
 

 
 

 
 

 
 

Six months or less below amortized cost
$
1,335.6

 
$
11.9

 
$
38.2

 
$
4.2

 
232

 
11

More than six months and twelve months or less below amortized cost
312.7

 
45.0

 
10.6

 
14.3

 
64

 
14

More than twelve months below amortized cost
318.9

 
103.0

 
18.4

 
33.9

 
116

 
38

Total
$
1,967.2

 
$
159.9

 
$
67.2

 
$
52.4

 
412

 
63

 
 
 
 
 
 
 
 
 
 
 
 
2011
 

 
 

 
 

 
 

 
 

 
 

Six months or less below amortized cost
$
1,197.2

 
$
60.1

 
$
46.9

 
$
16.9

 
256

 
31

More than six months and twelve months or less below amortized cost
270.3

 
25.1

 
13.9

 
9.1

 
52

 
9

More than twelve months below amortized cost
355.6

 
103.9

 
26.7

 
39.9

 
129

 
37

Total
$
1,823.1

 
$
189.1

 
$
87.5

 
$
65.9

 
437

 
77


Unrealized capital losses (including noncredit impairments) in fixed maturities, including securities pledged to creditors, by market sector for instances in which fair value declined below amortized cost by greater than or less than 20% for consecutive periods as indicated in the tables below, were as follows as of March 31, 2012 and December 31, 2011.
 
 
Amortized Cost
 
Unrealized Capital Loss
 
Number of Securities
 
< 20%
 
> 20%
 
< 20%
 
> 20%
 
< 20%
 
> 20%
2012
 

 
 

 
 

 
 

 
 

 
 

U.S. Treasuries
$
21.0

 
$
—

 
$
—

 
$
—

 
4

 
—

U.S. corporate, state and municipalities
1,088.1

 
6.1

 
31.1

 
2.4

 
145

 
1

Foreign
500.9

 
22.9

 
16.8

 
7.4

 
89

 
4

Residential mortgage-backed
282.9

 
84.7

 
14.0

 
26.4

 
129

 
41

Commercial mortgage-backed
43.3

 
—

 
1.7

 
—

 
8

 
—

Other asset-backed
31.0

 
46.2

 
3.6

 
16.2

 
37

 
17

Total
$
1,967.2

 
$
159.9

 
$
67.2

 
$
52.4

 
412

 
63

 
 
 
 
 
 
 
 
 
 
 
 
2011
 

 
 

 
 

 
 

 
 

 
 

U.S. Treasuries
$
—

 
$
—

 
$
—

 
$
—

 
—

 
—

U.S. corporate, state and municipalities
717.7

 
7.9

 
28.8

 
2.3

 
119

 
3

Foreign
670.5

 
25.7

 
31.9

 
9.6

 
122

 
7

Residential mortgage-backed
276.5

 
98.2

 
19.0

 
33.9

 
119

 
47

Commercial mortgage-backed
110.1

 
1.9

 
5.4

 
0.4

 
16

 
1

Other asset-backed
48.3

 
55.4

 
2.4

 
19.7

 
61

 
19

Total
$
1,823.1

 
$
189.1

 
$
87.5

 
$
65.9

 
437

 
77

 

 
66
 

For the three months ended March 31, 2012, unrealized capital losses on fixed maturities decreased by $33.8. The decrease in gross unrealized losses is primarily due to market improvement of the CMBS portfolio and the overall declining yields and tightening spreads, leading to higher fair value of fixed maturities.
 
At March 31, 2012 and December 31, 2011 the Company held no fixed maturities with an unrealized capital loss in excess of $10.0. 
 
All investments with fair values less than amortized cost are included in the Company’s other-than-temporary impairment analysis, and impairments were recognized as disclosed in OTTI, which follows this section. After detailed impairment analysis was completed, the Company determined that the remaining investments in an unrealized loss position were not other-than-temporarily impaired, and therefore no further other-than-temporary impairment was necessary.
 
Other-than-Temporary Impairments

The Company evaluates available-for-sale fixed maturity and equity securities for impairment on a quarterly basis. The assessment of whether impairments have occurred is based on a case-by-case evaluation of the underlying reasons for the decline in estimated fair value.

The following table identifies the Company’s credit-related and intent-related other-than-temporary impairments included in the Condensed Consolidated Statements of Operations, excluding noncredit impairments included in Accumulated other comprehensive income (loss) ("AOCI"), by type for the three months ended March 31, 2012 and 2011.
 
 
Three Months Ended March 31,
 
2012
 
2011
 
Impairment
 
No. of Securities
 
Impairment
 
No. of Securities
U.S. corporate
$
—

 
—

 
$
3.7

(1) 
1

Foreign(1)
0.4

 
1

 
3.0

 
8

Residential mortgage-backed
0.7

 
23

 
0.3

 
6

Other asset-backed
0.2

 
2

 
13.2

 
38

Total
$
1.3

 
26

 
$
20.2

 
53


(1) Primarily U.S. dollar denominated.
 
The above table includes $0.8 and $2.7 for the three months ended March 31, 2012 and 2011, respectively, in other-than-temporary write-downs related to credit impairments, which are recognized in earnings. The remaining $0.5 and $17.5 in write-downs for the three months ended March 31, 2012 and 2011, respectively, are related to intent impairments.
 
The following table summarizes these intent impairments, which are also recognized in earnings, by type for the three months ended March 31, 2012 and 2011.
 
 
Three Months Ended March 31,
 
2012
 
2011
 
Impairment
 
No. of Securities
 
Impairment
 
No. of Securities
U.S. corporate
$
—

 
—

 
$
3.7

 
1

Foreign(1)
0.4

 
1

 
1.1

 
4

Residential mortgage-backed
—

 
—

 
—

*
1

Other asset-backed
0.1

 
1

 
12.7

 
36

Total
$
0.5

 
2

 
$
17.5

 
42


 (1) Primarily U.S. dollar denominated.
* Less than $0.1.


 
67
 

The Company may sell securities during the period in which fair value has declined below amortized cost for fixed maturities or cost for equity securities. In certain situations, new factors, including changes in the business environment, can change the Company’s previous intent to continue holding a security.
 
The fair value of the fixed maturities with OTTI at March 31, 2012 and 2011 was $1.7 billion and $1.9 billion, respectively.

The following table identifies the amount of credit impairments on fixed maturities for the three months ended March 31, 2012 and 2011, for which a portion of the OTTI was recognized in AOCI, and the corresponding changes in such amounts.
 
 
Three Months Ended March 31,
 
2012
 
2011
Balance at January 1
$
19.4

 
$
59.2

Additional credit impairments:
 

 
 

On securities not previously impaired
0.1

 
0.2

On securities previously impaired
0.6

 
0.1

Reductions:
 

 
 

Securities intent impairments
—

 
(3.3
)
Securities sold, matured, prepaid or paid down
(0.6
)
 
(3.9
)
Balance at March 31
$
19.5

 
$
52.3


Net Investment Income
The Company uses the equity method of accounting for investments in limited partnership interests, primarily private equities and hedge funds. Generally, the Company records its share of earnings using a lag methodology, relying upon the most recent financial information available, where the contractual right exists to receive such financial information on a timely basis. The Company’s equity in earnings from limited partnership interests is accounted for under the equity method and is recorded in Net investment income.

Sources of Net investment income were as follows for the three months ended March 31, 2012 and 2011.
 
Three Months Ended March 31,
 
2012
 
2011
Fixed maturities
$
305.8

 
$
298.2

Equity securities, available-for-sale
1.1

 
3.6

Mortgage loans on real estate
33.6

 
26.5

Policy loans
3.3

 
3.3

Short-term investments and cash equivalents
—

 
0.2

Other
19.4

 
21.9

Gross investment income
363.2

 
353.7

Less: investment expenses
(11.2
)
 
(10.7
)
Net investment income
$
352.0

 
$
343.0



 
68
 

Net Realized Capital Gains (Losses)
 
Net realized capital gains (losses) are comprised of the difference between the amortized cost of investments and proceeds from sale and redemption, as well as losses incurred due to credit-related and intent-related other-than-temporary impairment of investments. Realized investment gains and losses are also generated from changes in fair value of fixed maturities accounted for using the fair value option and fair value changes including accruals on derivative instruments, except for effective cash flow hedges. The cost of the investments on disposal is determined based on first-in-first-out ("FIFO") methodology. Net realized capital gains (losses) on investments were as follows for the three months ended March 31, 2012 and 2011.
 
 
Three Months Ended March 31,
 
2012
 
2011
Fixed maturities, available-for-sale, including securities pledged
$
39.5

 
$
31.4

Fixed maturities, at fair value using the fair value option
(42.9
)
 
(3.4
)
Equity securities, available-for-sale
—

 
1.6

Derivatives
(13.2
)
 
(9.1
)
Embedded derivatives - fixed maturities
(4.8
)
 
(7.3
)
Embedded derivatives - product guarantees
149.0

 
3.5

Other investments
(0.3
)
 
2.9

Net realized capital gains (losses)
$
127.3

 
$
19.6

After-tax net realized capital gains (losses)
$
78.7

 
$
(10.3
)


 
69
 

Fair Value Hierarchy
 
The following tables present the Company’s hierarchy for its assets and liabilities measured at fair value on a recurring basis as of March 31, 2012 and December 31, 2011.
 
 
2012
 
Level 1
 
Level 2
 
Level 3(1)
 
Total
Assets:
 

 
 

 
 

 
 

Fixed maturities, including securities pledged:
 

 
 

 
 

 
 

U.S. Treasuries
$
778.1

 
$
48.5

 
$
—

 
$
826.6

U.S. government agencies and authorities
—

 
406.6

 
—

 
406.6

U.S. corporate, state and municipalities
—

 
9,083.9

 
146.6

 
9,230.5

Foreign
—

 
5,042.2

 
19.7

 
5,061.9

Residential mortgage-backed securities
—

 
2,185.5

 
11.0

 
2,196.5

Commercial mortgage-backed securities
—

 
922.6

 
—

 
922.6

Other asset-backed securities
—

 
376.6

 
28.7

 
405.3

Equity securities, available-for-sale
124.6

 
—

 
18.5

 
143.1

Derivatives:
 

 
 

 
 

 
 

Interest rate contracts
—

 
390.1

 
—

 
390.1

Foreign exchange contracts
—

 
0.1

 
—

 
0.1

Credit contracts
—

 
2.7

 
—

 
2.7

Cash and cash equivalents, short-term investments, and short-term investments under securities loan agreement
769.0

 
0.4

 
—

 
769.4

Assets held in separate accounts
46,094.5

 
4,866.3

 
23.1

 
50,983.9

Total
$
47,766.2

 
$
23,325.5

 
$
247.6

 
$
71,339.3

 
 
 
 
 
 
 
 
Liabilities:
 

 
 

 
 

 
 

Product guarantees
$
—

 
$
—

 
$
72.0

 
$
72.0

Fixed indexed annuities
—

 
—

 
17.9

 
17.9

Derivatives:
 

 
 

 
 

 
 

Interest rate contracts
3.5

 
305.7

 
—

 
309.2

Foreign exchange contracts
—

 
31.4

 
—

 
31.4

Credit contracts
—

 
0.9

 
—

 
0.9

Total
$
3.5

 
$
338.0

 
$
89.9

 
$
431.4


(1) Level 3 net assets and liabilities accounted for 0.2% of total net assets and liabilities measured at fair value on a recurring basis.  Excluding separate accounts assets for which the policyholder bears the risk, the Level 3 net assets and liabilities in relation to total net assets and liabilities measured at fair value on a recurring basis totaled 0.8%.

 
70
 

 
2011
 
Level 1
 
Level 2
 
Level 3(1)
 
Total
Assets:
 

 
 

 
 

 
 

Fixed maturities, including securities pledged:
 

 
 

 
 

 
 

U.S. Treasuries
$
1,180.3

 
$
51.3

 
$
—

 
$
1,231.6

U.S. government agencies and authorities
—

 
410.7

 
—

 
410.7

U.S. corporate, state and municipalities
—

 
8,883.5

 
129.1

 
9,012.6

Foreign
—

 
4,937.0

 
51.1

 
4,988.1

Residential mortgage-backed securities
—

 
2,206.1

 
41.0

 
2,247.1

Commercial mortgage-backed securities
—

 
911.3

 
—

 
911.3

Other asset-backed securities
—

 
411.1

 
27.7

 
438.8

Equity securities, available-for-sale
125.9

 
—

 
19.0

 
144.9

Derivatives:
 
 
 
 
 
 
 
Interest rate contracts
5.7

 
437.6

 
—

 
443.3

Foreign exchange contracts
—

 
0.7

 
—

 
0.7

Credit contracts
—

 
2.6

 
—

 
2.6

Cash and cash equivalents, short-term investments, and short-term investments under securities loan agreement
953.9

 
4.8

 
—

 
958.7

Assets held in separate accounts
40,556.8

 
4,722.3

 
16.1

 
45,295.2

Total
$
42,822.6

 
$
22,979.0

 
$
284.0

 
$
66,085.6

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Product guarantees
$
—

 
$
—

 
$
221.0

 
$
221.0

Fixed indexed annuities
—

 
—

 
16.3

 
16.3

Derivatives:
 
 
 
 
 
 
 
Interest rate contracts
—

 
306.4

 
—

 
306.4

Foreign exchange contracts
—

 
32.4

 
—

 
32.4

Credit contracts
—

 
8.6

 
12.7

 
21.3

Total
$
—

 
$
347.4

 
$
250.0

 
$
597.4


(1) Level 3 net assets and liabilities accounted for 0.1% of total net assets and liabilities measured at fair value on a recurring basis.  Excluding separate accounts assets for which the policyholder bears the risk, the Level 3 net assets and liabilities in relation to total net assets and liabilities measured at fair value on a recurring basis totaled 0.2%.


 
71
 

European Exposures

In the first half of 2010 concerns arose regarding the creditworthiness of several southern European countries, which later spread to other European countries. As a result of these concerns the fair value of sovereign debt decreased and those exposures were being monitored more closely. With regard to troubled European countries, the Company's main focus is on Greece, Italy, Ireland, Portugal and Spain (henceforth defined as “peripheral Europe”) as these countries have applied for support from the European Financial Stability Fund (“EFSF”) or received support from the European Central Bank (“ECB”) via government bond purchases in the secondary market.

The financial turmoil in Europe continues to be a dominant investment theme across the global capital markets. While certain aspects of this crisis have been avoided due to actions undertaken by the European Central Bank late in 2011 and during the first quarter of 2012, the crisis continues to pose a challenge to global financial stability. Additionally, the possibility of capital markets volatility spreading through a highly integrated and interdependent banking system remains elevated. Furthermore, it is the Company's view that the risk among European sovereigns and financial institutions warrants specific scrutiny in addition to its customary surveillance and risk monitoring given how highly correlated these sectors of the region have become.

When quantifying its exposure to the region, the Company attempts to identify the economic country of risk by considering all aspects of the risk to which it is exposed. Among these factors are the country of the issuer, the country of the issuer's ultimate parent, the corporate and economic relationship between the issuer and its parent, as well as the political, legal, and economic environment in which each functions. By undertaking this assessment, the Company believes that it develops a more accurate assessment of the actual geographic risk, with a more integrated understanding of all contributing factors to the full risk profile of the issuer.

In the normal course of its on-going risk and portfolio management process, the Company closely monitors compliance with a credit limit hierarchy designed to minimize overly concentrated risk exposures by geography, sector, and issuer. This framework takes into account various factors such as internal and external ratings, capital efficiency, and liquidity and is overseen by a combination of Investment and Corporate Risk Management, as well as insurance portfolio managers focused specifically on managing the investment risk embedded in the Company's portfolio.

As of March 31, 2012, the Company has $361.6 of exposure to peripheral Europe, which consists of a broadly diversified portfolio of credit-related investments in the industrial and utility sectors of $361.6. As of March 31, 2012, there were no derivative assets exposure to financial institutions in peripheral Europe. For purposes of calculating the derivative assets exposure, the Company has aggregated exposure to single name and portfolio product credit default swaps (“CDS”), as well as all non-CDS derivative exposure for which it either has counterparty or direct credit exposure to a company whose country of risk is in scope. Notably, the Company has no fixed maturity and equity securities exposure to sovereigns or financial institutions in peripheral Europe, the market segment the Company believes is most vulnerable to continued uncertainty and risk. Peripheral European exposure includes exposure to Italy of $145.4, Ireland of $123.9 and Spain of $78.9. Notably, the Company has no exposure to Greece.

Among the remaining $2.7 billion of total non-peripheral European exposure, the Company has a portfolio of credit-related assets similarly diversified by country and sector across developed and developing Europe. Sovereign exposure is $544.1, which consists of fixed maturity and equity securities of $151.3 and loans and receivables of $392.8, which consists of the Dutch State payment obligation to the Company under the Illiquid Assets Back-up Facility. The Company also has $404.9 in exposure to non-peripheral financial institutions with a notable concentration in the United Kingdom of $178.2. The balance of $1.8 billion is invested across non-peripheral European non-financials.

In addition to notable aggregate concentration to the State of the Netherlands of $752.8 (which includes the $392.8 Dutch State payment obligation) and the United Kingdom of $718.6, the Company has significant non-peripheral European total country exposures to Switzerland of $288.1, Germany of $212.6, France of $174.1 and Belgium of $184.6. The Company's financial exposure to the United Kingdom is also notable and receives additional scrutiny given the Company's focus on the potential for European contagion to be spread via the banking system. In each case, the Company believes the primary risk is to market value fluctuations resulting from spread volatility followed by modest default risk should the European crisis fail to be resolved as the Company currently expects.
 

 
72
 

The following table represents the Company's European exposures at fair value and amortized cost as of March 31, 2012.

 
Fixed Maturity and Equity Securities
 
 
 
Derivative Assets
 
 
 
Sovereign
 
Financial Institutions
 
Non-Financial Institutions
 
Total
(Fair
Value)
 
Total
(Amortized Cost)
 
Loan and Receivables Sovereign
(Amortized
Cost)
 
Financial Institutions
 
Sovereign
 
Non-Financial Institutions
 
Less: Margin & Collateral
 
Total,
(Fair
Value)
 
Net Non-U.S. Funded at March 31, 2012(1)
Greece
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Ireland
—

 
—

 
123.9

 
123.9

 
115.2

 
—

 
—

 
—

 
—

 
—

 
—

 
123.9

Italy
—

 
—

 
145.4

 
145.4

 
134.2

 
—

 
—

 
—

 
—

 
—

 
—

 
145.4

Portugal
—

 
—

 
13.4

 
13.4

 
12.3

 
—

 
—

 
—

 
—

 
—

 
—

 
13.4

Spain
—

 
—

 
78.9

 
78.9

 
75.2

 
—

 
—

 
—

 
—

 
—

 
—

 
78.9

Total Peripheral Europe
$
—

 
$
—

 
$
361.6

 
$
361.6

 
$
336.9

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
361.6

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Belgium
35.1

 
—

 
149.5

 
184.6

 
158.4

 

 
—

 
—

 
—

 
—

 
—

 
184.6

France
—

 
41.0

 
123.2

 
164.2

 
154.4

 
—

 
9.9

 
—

 
—

 
—

 
9.9

 
174.1

Germany
—

 
34.2

 
178.4

 
212.6

 
191.7

 
—

 
—

 
—

 
—

 
—

 
—

 
212.6

Netherlands
—

 
51.7

 
308.3

 
360.0

 
332.8

 
392.8

 
—

 
—

 
—

 
—

 
—

 
752.8

Switzerland
—

 
49.6

 
212.6

 
262.2

 
238.9

 
—

 
28.2

 
—

 
—

 
2.3

 
25.9

 
288.1

United Kingdom
—

 
161.0

 
551.2

 
712.2

 
662.3

 
—

 
17.2

 
—

 
—

 
10.8

 
6.4

 
718.6

Other non-peripheral(2)
116.2

 
12.1

 
285.2

 
413.5

 
389.4

 
—

 
—

 
—

 
—

 
—

 
—

 
413.5

Total Non-Peripheral Europe
151.3

 
349.6

 
1,808.4

 
2,309.3

 
2,127.9

 
392.8

 
55.3

 
—

 
—

 
13.1

 
42.2

 
2,744.3

Total
$
151.3

 
$
349.6

 
$
2,170.0

 
$
2,670.9

 
$
2,464.8

 
$
392.8

 
$
55.3

 
$
—

 
$
—

 
$
13.1

 
$
42.2

 
$
3,105.9


(1)   
Represents: (i) Fixed maturity and equity securities at fair value; (ii) Loan and receivables sovereign at amortized cost; and (iii) Derivative assets at fair value.
(2)   
Other non-peripheral countries include: Austria, Belgium, Bulgaria, Croatia, Denmark, Finland, Hungary, Kazakhstan, Latvia, Lithuania, Luxembourg, Norway, Russian Federation, Sweden, and Turkey.


 
73
 

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.
 
Liquidity Management
 
The Company’s principal available sources of liquidity are product charges, investment income, proceeds from the maturity and sale of investments, proceeds from debt issuance and borrowing facilities, repurchase agreements, securities lending, and capital contributions.  Primary uses of these funds are payments of commissions and operating expenses, interest credits, investment purchases, and contract maturities, withdrawals, and surrenders.

The Company’s liquidity position is managed by maintaining adequate levels of liquid assets, such as cash, cash equivalents, and short-term investments.  As part of the liquidity management process, different scenarios are modeled to determine whether existing assets are adequate to meet projected cash flows. Key variables in the modeling process include interest rates, equity market movements, quantity and type of interest and equity market hedges, anticipated contract owner behavior, market value of general account assets, variable separate account performance, and implications of rating agency actions.
 
The fixed account liabilities are supported by a general account portfolio, principally composed of fixed rate investments with matching duration characteristics that can generate predictable, steady rates of return. The portfolio management strategy for the fixed account considers the assets available-for-sale. This strategy enables the Company to respond to changes in market interest rates, prepayment risk, relative values of asset sectors and individual securities and loans, credit quality outlook, and other relevant factors. The objective of portfolio management is to maximize returns, taking into 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. In executing this strategy, the Company uses derivative instruments to manage these risks. The Company’s derivative counterparties are of high credit quality.
 
Liquidity and Capital Resources
 
Additional sources of liquidity include borrowing facilities to meet short-term cash requirements that arise in the ordinary course of business. ILIAC maintains the following agreements:
 
•
A reciprocal loan agreement with ING America Insurance Holdings, Inc. (“ING AIH”), an affiliate, whereby either party can borrow from the other up to 3.0% of ILIAC’s statutory admitted assets as of the prior December 31. As of March 31, 2012 and December 31, 2011, the Company had a $696.4 and $648.0 receivable, including interest, from ING AIH, respectively. As of April 20, 2012, the Company has an outstanding receivable of $629.0 under the reciprocal loan agreement, and ING AIH repaid $600.7 of the outstanding receivable on that date. Such repayment was made from the proceeds of ING AIH's $5.0 billion Senior Unsecured Credit Facilities which were entered into as of that same date. The Company and ING AIH continue to maintain the reciprocal loan agreement and future borrowings by either party will be subject to the reciprocal loan terms summarized above.
•
The Company holds approximately 47.0% of its assets in marketable securities. These assets include cash, U.S. Treasuries, Agencies and Public, Corporate Bonds, ABS, CMBS and CMO, and equity securities. In the event of a temporary liquidity need, cash may be raised by entering into reverse repurchase, dollar rolls, and/or security lending agreements by temporarily lending securities and receiving cash collateral. Under the Company’s Liquidity Plan, up to 12% of the Company’s general account statutory admitted assets may be allocated to reverse repurchase, securities lending and dollar roll programs. At the time a temporary cash need arises, the actual percentage of admitted assets available for reverse repurchase transactions will depend upon outstanding allocations to the three programs. As of March 31, 2012, the Company had securities lending obligations of $120.2, which represents 0.2% of the Company’s general account statutory admitted assets.
 
Management believes that its sources of liquidity are adequate to meet the Company’s short-term cash obligations.
 
Capital Contributions and Dividends
 
During the three months ended March 31, 2012, ILIAC did not receive any capital contributions from its Parent. During the three months ended March 31, 2011, ILIAC received capital contributions of $201.0 in the aggregate from its Parent.
 
During the three months ended March 31, 2012 and 2011, ILIAC did not pay a dividend on its common stock to its Parent.
 

 
74
 

Collateral
 
Under the terms of the Company’s Over-The-Counter Derivative International Swaps and Derivatives Association, Inc. Agreements (“ISDA Agreements”), the Company may receive from, or deliver to, counterparties, collateral to assure that all terms of the ISDA Agreements will be met with regard to the Credit Support Annex (“CSA”).  The terms of the CSA call for the Company to pay interest on any cash received equal to the Federal Funds rate.  As of March 31, 2012 and December 31, 2011, the Company held $98.3 and $110.0 of cash collateral, respectively, which was included in Payables under securities loan agreement, including collateral held, on the Condensed Consolidated Balance Sheets. In addition, as of March 31, 2012 and December 31, 2011, the Company delivered collateral of $86.3 and $77.9, respectively, in fixed maturities pledged under derivatives contracts, which was included in Securities pledged on the Condensed Consolidated Balance Sheets.
 
Ratings
 
The Company's access to funding and its related cost of borrowing, requirements for derivatives collateral posting and the attractiveness of certain of its products to customers are affected by Company credit ratings and insurance financial strength ratings, which are periodically reviewed by the rating agencies.

On April 17, 2012, Moody's affirmed the A3 insurance financial strength ratings of the Company with a stable outlook.

On December 7, 2011, Moody's downgraded the insurance financial strength rating of the Company to “A3” from “A2” and revised the outlook to Stable from Negative.

On March 7, 2012, S&P affirmed the counterparty credit and insurance financial strength rating of the Company at “A-“ and revised the outlook to Stable from Watch Negative. On December 8, 2011, S&P downgraded the counterparty credit and insurance financial strength rating of the Company to “A-“ from “A” and revised the outlook to Watch Negative from Stable. On November 17, 2011, S&P affirmed the “A” rating of the Company and revised the outlook to Stable from Negative based on de-risking and improving business fundamentals.

On August 19, 2011, Fitch revised the Company's Rating Watch status to Evolving from Negative.

On December 14, 2011, A.M. Best affirmed the insurance financial strength rating of the Company at “A”, downgraded the issuer credit rating to “a” from “a+” and revised the outlook to Ratings Under Review with Negative Implications from Stable. On June 16, 2011, A.M. Best affirmed the Company's insurance financial strength rating of “A” and the issuer credit rating of “a+”.

The ratings of the Company by S&P, Fitch, A.M. Best and Moody's reflect a broader view of how the financial services industry is being challenged by the current economic environment, but also are based on the rating agencies' specific views of the Company's financial strength.  In making their ratings decisions, the agencies consider past and expected future capital and earnings, asset quality and risk, profitability and risk of existing liabilities and current products, market share and product distribution capabilities, and direct or implied support from parent companies, including implications of the ING restructuring plan, among other factors. The ratings actions, affirmations and outlook changes by S&P, Moody's, and A.M. Best  in December 2011 followed the fourth quarter 2011 announcements by ING regarding a charge of EUR 0.9 billion to EUR 1.1 billion against fourth quarter results of the U.S. Closed Block Variable Annuity business. 
 
Repurchase Agreements
 
The Company engages in dollar repurchase agreements with mortgage-backed securities (“dollar rolls”) and repurchase agreements with other collateral types to increase its return on investments and improve liquidity. Such arrangements typically meet the requirements to be accounted for as financing arrangements. The Company enters into dollar roll transactions by selling existing mortgage-backed securities and concurrently entering into an agreement to repurchase similar securities within a short time frame in the future at a lower price. Under repurchase agreements, the Company borrows cash from a counterparty at an agreed upon interest rate for an agreed upon time frame and pledges collateral in the form of securities. At the end of the agreement, the counterparty returns the collateral to the Company and the Company, in turn, repays the loan amount along with the additional agreed upon interest. Company policy requires that at all times during the term of the dollar roll and repurchase agreements that cash or other collateral types obtained is sufficient to allow the Company to fund substantially all of the cost of purchasing replacement assets. Cash collateral received is invested in short-term investments, with the offsetting obligation to repay the loan included as a liability on the Condensed Consolidated Balance Sheets. As of March 31, 2012 and December 31, 2011, the Company did not have any securities pledged in dollar rolls and repurchase agreement transactions. 
 

 
75
 

The Company also enters into reverse repurchase agreements.  These transactions involve a purchase of securities and an agreement to sell substantially the same securities as those purchased.  Company policy requires that, at all times during the term of the reverse repurchase agreements, cash or other collateral types provided is sufficient to allow the counterparty to fund substantially all of the cost of purchasing replacement assets. At March 31, 2012 and December 31, 2011, the Company did not have any securities pledged under reverse repurchase agreements.
 
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. The Company believes the counterparties to the dollar rolls, repurchase, and reverse repurchase agreements are financially responsible and that the counterparty risk is minimal.
 
Securities Lending
 
The Company engages in securities lending whereby certain domestic 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 securities.  Generally, the lending agent retains all of the cash collateral. Collateral retained by the agent is invested in liquid assets on behalf of the Company. 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.

As of March 31, 2012 and December 31, 2011, the fair value of loaned securities was $115.9 and $515.8, respectively, and is included in Securities pledged on the Condensed Consolidated Balance Sheets. Collateral received is included in Short-term investments under securities loan agreement, including collateral delivered. As of March 31, 2012 and December 31, 2011, liabilities to return collateral of $120.2 and $524.8, respectively, are included in Payables under securities loan agreement, including collateral held, on the Condensed Consolidated Balance Sheets.
 
Recent Initiatives

On April 9, 2009, the Company's ultimate parent, ING, announced a global business strategy which identified certain core and non-core businesses and geographies, stated ING's intention to explore divestiture of non-core businesses over time, withdraw from certain non-core geographies, limit future acquisitions and implement enterprise-wide expense reductions. In particular, with respect to ING's U.S. insurance operations, ING is seeking to further reduce its risk by focusing on individual life products, retirement services and lower risk annuity products which the Company commenced selling during the first quarter of 2010.

On October 26, 2009, ING announced the key components of the final Restructuring Plan ING submitted to the EC as part of the process to receive EC approval for the state aid granted to ING by the Dutch State in the form of EUR 10 billion Core Tier 1 securities issued on November 12, 2008 and the full credit risk transfer to the Dutch State of 80% of ING's Alt-A RMBS on March 31, 2009 (the “ING-Dutch State Transaction”). As part of the Restructuring Plan, ING has agreed to separate its banking and insurance businesses by 2013. ING intends to achieve this separation by divestment of its insurance and investment management operations, including the Company. ING has announced that it will explore all options for implementing the separation including one or more initial public offerings, sales or combinations thereof.

In January 2010, ING lodged an appeal with the General Court of the European Union against specific elements of the European Commission's decision regarding ING's restructuring plan. In its appeal, ING contests the way the European Commission ("EC") has calculated the amount of state aid ING received and the disproportionality of the price leadership restrictions specifically and the disporportionality of restructuring requirements in general. In July 2011, the appeal case was heard orally by the General Court of the European Union. By judgment of March 2, 2012, the Court partially annulled the EC's decision of November 18, 2009, as a result of which a new decision has to be taken by the EC. Interested parties can file an appeal against the General Court's judgment before the Court of Justice of the European Union within two months and ten days after the date of the General Court's judgment. The EC has announced that it will file an appeal and a new decision is expected.

On November 10, 2010, ING announced that, in connection with the Restructuring Plan, while the option of implementing the separation through one global IPO remains open, it will prepare for a base case of an IPO of the Company and its U.S.-based insurance and investment management affiliates. Preparation for this potential IPO will also require its management to prepare consolidated U.S. GAAP financial statements which would likely include the Company and other affiliates.



 
76
 

Impact of New Accounting Pronouncements

For information regarding the impact of new accounting pronouncements, refer to Note 1 to the Condensed Consolidated Financial Statements, Business, Basis of Presentation and Significant Accounting Policies, included in Part I, Item 1., herein.

Recently Enacted Legislation

On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). The Dodd-Frank Act directs existing and newly-created government agencies and bodies to promulgate regulations implementing the law, a process that is underway and is expected to continue over the next few years. While some studies have already been completed and the rulemaking process has begun, there continues to be significant uncertainty regarding the results of ongoing studies and the ultimate requirements of regulations that have not yet been adopted. Until such studies and rulemaking are completed, the precise impact of the Dodd-Frank Act on ING and its affiliates, including the Company cannot be determined. However, there are major elements of the legislation that the Company has identified to date that are of particular significance to ING and/or its affiliates, including the Company, as described below.

The Dodd-Frank Act created a new agency, the Financial Stability Oversight Council (“FSOC”), an inter-agency body that is responsible for monitoring the activities of the U.S. financial system and recommending a framework for substantially increased regulation of significant financial services firms, including large, interconnected bank holding companies and systemically important nonbank financial companies that could consist of securities firms, insurance companies and other providers of financial services, including non-U.S. companies. A company determined to be systemically significant will be supervised by the Federal Reserve Board and will be subject to unspecified heightened prudential standards, including minimum capital requirements, liquidity standards, short-term debt limits, credit exposure requirements, management interlock prohibitions, maintenance of resolution plans, stress testing, additional fees and assessments and restrictions on proprietary trading. If, however, ING or the Company were so designated, failure to meet the requisite measures of financial condition could result in requirements for a capital restoration plan or capital raising; management changes; asset sales; and limitations and restrictions on capital distributions, acquisitions, affiliate transactions and/or product offerings.

On April 3, 2012, the FSOC published final rules and interpretive guidance setting forth the process and standards by which it will designate non-bank financial companies for regulation by the Federal Reserve Board. In order to designate a non-bank financial company as subject to regulation by the Federal Reserve Board, the FSOC would need to affirmatively determine that a subject company could pose a threat to the financial stability of the United States.  It is impossible to predict with certainty whether all or any part of ING's U.S. operations will ultimately receive this designation. Nevertheless, given the high standard for ultimate designation - posing a risk to the financial stability of the United States - as well as the nature of its businesses and role in the U.S. financial system, we believe it is unlikely that the Company, or ING U.S. on a standalone basis, would ultimately receive this designation.  This conclusion is based in part on the anticipated separation and independence of ING U.S.  If the FSOC were, prior to the separation and independence of ING U.S., to consider ING U.S. together with ING's banking operations in the United States, the likelihood of designation may be increased, although even in that circumstance we do not believe ING's U.S. operations would collectively meet the standard for such a designation.
Although existing state insurance regulators will remain the primary regulators of the Company and its U.S. insurance company affiliates, the legislation also creates a Federal Insurance Office to be housed within the Treasury Department, which will be charged with monitoring (but not regulating) the insurance industry, including gathering information to identify issues or gaps in the regulation of insurers that could contribute to systemic crisis in the insurance industry or U.S. financial system; preparing annual reports to Congress on the insurance industry; conducting studies on modernization of U.S. insurance regulation and the global reinsurance market; and entering into/implementing agreements with foreign governments relating to the recognition of prudential measures with respect to insurance and reinsurance (“International Agreements”), including the authority to preempt U.S. state law if it is found to be inconsistent with an International Agreement and treats a non-U.S. insurer less favorably than a U.S. insurer.

The legislation creates a new framework for regulating over-the-counter (“OTC”) derivatives, which may increase the costs of hedging and other permitted derivatives trading activity undertaken by the Company. Under the new regulatory regime and subject to certain exceptions, OTC derivatives will be cleared through a centralized clearinghouse and executed on a centralized exchange. It establishes new regulatory authority for the SEC and the Commodity Futures Trading Commission ("CFTC") over derivatives, and “swap dealers” and “major swap participants”, as to be defined by SEC and CFTC regulation, each of whom will be subject to as yet unspecified capital and margin requirements. Based on draft final rules jointly developed by the CFTC and the SEC and adopted on April 18, 2012, which further define the terms “swap dealer,” “security-based swap dealer,” “major swap participant,” and “major security-based swap participant,” the Company does not believe it should be considered a “swap dealer,” “security-based swap dealer,” “major swap participant,” or “major security-based swap participant.” However, although not expected to

 
77
 

change at this stage of rulemaking, the final regulations have not yet been published and could provide otherwise. In addition, whether the Company will meet the criteria and possibly be subject to regulation under one of these definitions depends on the separate pronouncements by the CFTC and SEC on the final definitions of "swap" and "security-based swap" expected later in 2012. Once rulemaking is complete, if there is a determination that the Company meets one of these definitions, it could substantially increase the amount of regulatory requirements for the Company and the cost of hedging and other permitted derivatives trading activity undertaken by the Company. The legislation also requires the SEC and CFTC to conduct a study to determine whether stable value contracts fall within the definition of swap contracts, and if so, to determine whether an exemption to their regulation is appropriate. Stable value contracts are exempt from the legislation's swap provisions, pending the effective date of any such regulatory action.

The Dodd-Frank Act imposes various ex-post assessments on certain financial companies, which may include the Company, to provide funds necessary to repay any borrowings and to cover the costs of any special resolution of a financial company under the new resolution authority established under the legislation (although assessments already imposed under state insurance guaranty funds will be taken into account in calculating such assessments).

The Company will continue to monitor and assess the potential effects of the Dodd-Frank Act as regulatory requirements are finalized and mandated studies are conducted.

The Small Business Job Act of 2010, signed into law on September 27, 2010, contained provisions that could provide additional opportunities to the Company's retirement business by allowing individuals greater flexibility to manage their retirement savings, through products and services offered by the Company. The new legislation permits both the partial annuitization of non-qualified annuity account balances as well as in-plan Roth conversions of distribution-eligible amounts by 401(k), 403(b) and 457 defined contribution plan participants.

Legislative and Regulatory Initiatives

Legislative proposals, which have been or may again be considered by Congress, include changing the taxation of annuity benefits, changing the tax treatment of insurance products relative to other financial products, and changing life insurance company taxation. Some of these proposals, if enacted, either on their own or as part of an omnibus deficit reduction package could have a material adverse effect on life insurance, annuity, and other retirement savings product sales, while others could have a material beneficial effect. Administrative budget proposals to disallow insurance companies a portion of the dividends received deduction in connection with variable product separate accounts could increase the cost of such products to policyholders. In 2011, the Department of Labor (“DOL”) issued interim final regulations concerning the fee disclosure obligations under Employee Retirement Income Security Act of 1974 (“ERISA”) for service providers to defined contribution plans as well as final regulations addressing fee disclosure obligations to plan participants. Final plan sponsor fee disclosure regulations were issued on February 2, 2012. In the final regulations, the DOL extended the effective date of provider fee disclosure to July 1, 2012. The effective date for fee disclosure to plan participants was extended to August 30, 2012. These fee disclosure developments could heighten fee sensitivities in the defined contribution marketplace, and could potentially generate pressure on the pricing of the Company's defined contribution retirement products and services. In the fourth quarter of 2011, the DOL withdrew a proposed rule under ERISA that would more broadly define the circumstances under which a person is considered to be a “fiduciary” by reason of giving investment advice to an employee benefit plan or a plan's participants. The DOL has indicated that it expects to issue a new proposed regulation in 2012. The rule, if ultimately re-proposed and finalized, could potentially alter the way products and services of the Company are marketed and sold to ERISA plans and to ERISA plan participants.

The SEC proposed in the third quarter of 2010, rescinding Rule 12b-1 under the Investment Company Act of 1940 and adopting a new Rule 12b-2. If adopted, the proposal would impose new limitations on the level of distribution-related charges that could be paid by mutual funds, including funds offered for sale through the Company's annuity and other products, and could reduce the levels of revenue the Company derives from fund-related distribution.

In connection with the March 31, 2009 transfer by ING of an economic interest in 80% of its Alt-A RMBS portfolio to the Dutch State, the EC had a nine month period to review and assess the competitive impact of the transaction. On October 26, 2009, ING announced the key components of the final Restructuring Plan ING submitted to the EC as part of the process to receive EC approval for the state aid granted to ING by the Dutch State in the form of EUR 10 billion Core Tier 1 securities issued on November 12, 2008 and the ING-Dutch State Transaction. As part of the Restructuring Plan, ING has agreed to separate its banking and insurance businesses by 2013. ING intends to achieve this separation by the divestment of all insurance and investment management operations, including the Company. In November 2009, the Restructuring Plan received formal EC approval and the separation of insurance and banking operations and other components of the Restructuring Plan were approved by ING shareholders. In January 2010, ING lodged an appeal with the General Court of the European Union against specific elements of the EC's decision

 
78
 

regarding ING's restructuring plan. In its appeal, ING contests the way the EC has calculated the amount of state aid ING received and the disproportionality of the price leadership restrictions specifically and the disporportionality of restructuring requirements in general. In July 2011, the appeal case was heard orally by the General Court of the European Union. By judgment of March 2, 2012, the Court partially annulled the EC's decision of November 18, 2009, as a result of which a new decision has to be taken by the EC. Interested parties can file an appeal against the General Court's judgment before the Court of Justice of the European Union within two months and ten days after the date of the General Court's judgment.

Contingencies

For information regarding other contingencies related to legal proceedings, regulatory matters and other contingencies involving the Company, see the Commitments and Contingent Liabilities note to the Condensed Consolidated Financial Statements included in Part I, Item 1.

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 design and operation 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.


 
79
 

PART II.    OTHER INFORMATION
 
Item 1.    Legal Proceedings
 
See the Commitments and Contingent Liabilities note to the Condensed Consolidated Financial Statements included in Part I, Item 1.

Item 1A.    Risk Factors
 
The following should be read in conjunction with and supplements and amends the risk factors that may affect the Company’s business or operations described under “Risk Factors” in Part I, Item 1A. of the 2011 Annual Report on Form 10-K.
 
The new federal financial regulatory reform law, its implementing regulations and other financial regulatory reform initiatives, could have adverse consequences for the financial services industry, including the Company and/or materially affect the Company's results of operations, financial condition and liquidity.
In response to the financial crisis affecting the banking system and financial markets, the U.S. Congress, the Federal Reserve, the U.S. Treasury and other agencies of the U.S. federal government took a number of actions intended to provide liquidity to financial institutions and markets, to avert a loss of investor confidence in particular troubled institutions, to prevent or contain the spread of the financial crisis and to spur economic growth. Most of these programs have largely run their course or been discontinued. However, U.S. and overseas regulatory authorities are considering enhanced or new regulatory requirements intended to prevent future crises or otherwise stabilize the institutions under their supervision.

Recently, significant shifts in regulatory supervision and enforcement policies by financial services industry regulators have resulted in more aggressive and intense scrutiny and the application and enforcement of more stringent standards.

On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). It effects comprehensive changes to the regulation of financial services in the U.S. U.S. financial regulators have commenced an intense period of studies and rulemaking mandated by the legislation that will continue for a period of time. While some studies have already been completed and the rulemaking process has begun, there continues to be significant uncertainty regarding the results. Until such rulemaking and studies are complete, the full impact of the Dodd-Frank Act on ING and its affiliates, including the Company cannot be determined. However, there are several aspects of the legislation that the Company has identified to date that are likely to be significant to ING and/or its affiliates, including the Company, as described below.

The Dodd-Frank Act created the Financial Stability Oversight Council (“FSOC”), an inter-agency body that is responsible, among other things, for designating systemically significant non-bank financial companies for regulation by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”). Companies that receive this designation will be subject to a comprehensive system of prudential regulation similar in many respects to that which currently applies to US bank holding companies, including minimum capital requirements, liquidity standards, short-term debt limits, credit exposure requirements, management interlock prohibitions, maintenance of resolution plans, stress testing, and restrictions on proprietary trading. The designation of ING Group or its US operations, or any part thereof (including the Company) as a nonbank financial company subject to regulation by the Federal Reserve Board could have a significant impact on the capital structure and permitted business activities, among other matters, of the operations so designated. Failure to meet the requisite measures of financial condition applicable to a nonbank financial company subject to regulation by the Federal Reserve could result in requirements for a capital restoration plan or capital raising; management changes; asset sales; and limitations and restrictions on capital distributions, acquisitions, affiliate transactions and/or product offerings. On April 3, 2012, the FSOC published final rules and interpretive guidance setting forth the process and standards by which it will designate non-bank financial companies for regulation by the Federal Reserve Board. In order to designate a non-bank financial company as subject to regulation by the Federal Reserve Board, the FSOC would need to affirmatively determine that a subject company could pose a threat to the financial stability of the United States. Nevertheless, given the high standard for ultimate designation - posing a risk to the financial stability of the United States - as well as the nature of its businesses and role in the U.S. financial system, we believe it is unlikely that the Company, or ING U.S. on a standalone basis, would ultimately receive this designation. This conclusion is based in part on the anticipated separation and independence of ING U.S. If the FSOC were, prior to the separation and independence of ING U.S., to consider ING U.S. together with ING's banking operations in the United States, we believe the likelihood of designation may be increased. It is impossible to predict with certainty whether all or any portion of ING's U.S. operations will ultimately receive this designation.

Although existing state insurance regulators will remain the primary regulators of the Company and its U.S. insurance affiliates, the legislation also creates a Federal Insurance Office housed within the Treasury Department, which is charged with monitoring

 
80
 

the insurance industry, including gathering information to identify issues or gaps in the regulation of insurers that could contribute to systemic crisis in the insurance industry or U.S. financial system; preparing annual reports to Congress on the insurance industry; conducting studies on modernization of U.S. insurance regulation and the global reinsurance market, which may include legislative, administrative or regulatory recommendations; and entering into agreements with foreign governments relating to the recognition of prudential measures with respect to insurance and reinsurance (“International Agreements”), including certain limited authority to preempt U.S. state law in relation to such International Agreements. The Company cannot predict whether resulting recommendations, if any, will affect its business or financial condition.

In addition, the legislation creates a new framework for regulating derivatives, which may increase the costs of hedging generally. It includes requirements for centralized clearing of OTC derivatives (except those where one of the counterparties is a “non-financial end user,” to be defined by regulations); and establishes new regulatory authority for the SEC and the Commodity Futures Trading Commission (“CFTC”) over derivatives, and “swap dealers” and “major swap participants,” as to be defined by the SEC and CFTC, each of whom will be subject to as yet unspecified capital and margin requirements. Although the Company does not believe it should be considered a “swap dealer” or a “major swap participant”, based on draft final rules jointly developed by the CFTC and the SEC and adopted on April 18, 2012, the final regulations have not yet been published and could provide otherwise.
In addition, whether the Company will meet the criteria and possibly be subject to regulation under one of these definitions depends on the separate pronouncements by the CFTC and SEC on the final definitions of "swap" and "security-based swap" expected later in 2012. Once rulemaking is complete, if there is a determination that the Company meets one of these definitions, it could substantially increase the cost of hedging and related activities undertaken by the Company. The cost of hedging and related activities could also be adversely affected if it is determined by the Secretary of Treasury that foreign currency swaps and forwards are not excluded from the foregoing requirements. The legislation requires the SEC and CFTC to conduct a study to determine whether stable value contracts fall within the definition of swap contract, and if so, to determine whether an exemption to their regulation is appropriate. Stable value contracts are exempt from the legislation's swap provisions, pending the effective date of such regulatory action. If it is determined to regulate such products as swaps, the Company cannot predict how such regulations would be applied or the effect such regulation might have on the profitability or attractiveness of such products to its clients. As depository banks may be restricted in their ability to conduct OTC derivatives business, the legislation may require the Company to use more non-bank counterparties for its hedging activities or otherwise have the effect of limiting the availability to the Company of derivatives counterparties that meet minimum insurance regulatory requirements. In addition, restrictions imposed by the legislation on netting of derivatives transactions with non-banks and the possible lower credit quality and/or capitalization of non-bank derivatives counterparties may increase the counterparty credit risk to the Company. The Company cannot predict the specific impacts and costs of the Dodd-Frank Act or the pending regulations on its hedging activities and strategies until the rulemaking process is substantially complete.

The Dodd-Frank Act imposes various ex-post assessments on certain financial companies, which may include the Company, to provide funds necessary to repay any borrowings and to cover the cost of any special resolution of a financial company under the new resolution authority established under the legislation (although assessments already imposed under state insurance guaranty funds will be taken into account in calculating such assessments). In addition to the assessments imposed on certain financial companies by the Dodd-Frank Act, it is possible that Congress may adopt a form of “financial crisis responsibility” fee or tax on banks and other financial firms to mitigate costs to taxpayers of various government programs established to address the financial crisis and to offset the costs of potential future crises.

Other provisions of the Dodd-Frank Act that may impact the Company or its affiliates include discretionary authority for the SEC to impose a harmonized standard of care for investment advisers and broker-dealers who provide personalized advice about securities to retail customers; additional regulation of compensation in the financial services industry; and enhancements to corporate governance.

Although the full impact of the Dodd-Frank Act cannot be determined until the various mandated studies are conducted and implementing regulations are enacted, many of the legislation's requirements could have profound and/or adverse consequences for the financial services industry, including the Company. The Act could make it more expensive for the Company to conduct its business; require the Company to make changes to its business model or satisfy increased capital requirements; subject the Company to greater regulatory scrutiny; subject the Company to potential increases in whistleblower claims in light of the increased awards available to whistleblowers under the Act; and have a material effect on the Company's results of operations or financial condition.

In addition, the Company is subject to extensive laws and regulations that are administered and/or enforced by a number of different governmental authorities and non-governmental self-regulatory bodies, including state insurance regulators, state securities administrators, the NAIC, the SEC, FINRA, Financial Accounting Standards Board (“FASB”), and state attorneys general. In light of the financial crisis, some of these authorities are considering, or may in the future consider, enhanced or new requirements intended to prevent future crises or otherwise assure the stability of institutions under their supervision. These authorities may

 
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also seek to exercise their supervisory or enforcement authority in new or more robust ways. In addition, regulators and lawmakers in non-U.S. jurisdictions are engaged in addressing the causes of the financial crisis and means of avoiding such crises in the future. For example, the G20 and the Financial Stability Board have issued a series of papers intended to produce significant changes in how financial companies, and in particular large and complex global financial companies, such as ING, should be regulated. Such papers and proposals address financial group supervision, capital and solvency measures, corporate governance and systemic financial risk, among other things. Government in jurisdictions in which ING does business are considering, or may in the future consider, introducing legislation or regulations to implement certain recommendations of the G20 and Financial Stability Board. In addition, the prudential regulation of insurance and reinsurance companies across the European Economic Area is due for significant change under the Solvency II Directive, which was adopted in November 2009. Formally, each member state of the European Economic Area is currently required to begin implementing Solvency II by October 31, 2012. Discussions to postpone the implementation date are ongoing, but uncertainty remains. The Solvency II Directive, if implemented, will effect a full revision of the insurance industry's solvency framework and prudential regime and will impose group level supervision mechanisms. All of these possibilities, if they occurred, could affect the way the Company conducts its business and manages capital, and may require the Company to satisfy increased capital requirements, any of which in turn could materially affect the Company's results of operations, financial condition and liquidity.

Item 6.    Exhibits
 
See Exhibit Index on pages 84 - 87 hereof.


 
82
 

SIGNATURE 

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.
 
 
May 4, 2012
 
ING Life Insurance and Annuity Company
(Date)
 
(Registrant)
 
 
 
 
By:
/s/
Ewout L. Steenbergen
 
 
Ewout L. Steenbergen
 
 
Executive Vice President and
 
 
Chief Financial Officer
 
 
(Duly Authorized Officer and Principal Financial Officer)




ING LIFE INSURANCE AND ANNUITY COMPANY (“ILIAC”)

 
 
Exhibit Index
Exhibit
Number
 
Description of Exhibit
 
 
 
3.1
 
Certificate of Incorporation as amended and restated October 1, 2007, incorporated by reference to the ILIAC Form 10-K, as filed with the SEC on March 31, 2008 (File No. 33-23376).
 
 
 
3.2
 
Amended and Restated ING Life Insurance and Annuity Company By-Laws, effective October 1, 2007, incorporated by reference to the ILIAC Form 10-K, as filed with the SEC on March 31, 2008 (File No. 33-23376).
 
 
 
4.1
 
Single Premium Deferred Modified Guaranteed Annuity Contract (IU-IA-3096) - Incorporated herein by reference to Initial Registration Statement on Form S-1 for ING Life Insurance and Annuity Company as filed with the SEC on September 25, 2009 (File No. 333-162140).
 
 
 
4.2
 
IRA Endorsement (IU-RA-4021) and Roth IRA Endorsement (IU-RA-4022) - Incorporated herein by reference to Pre-Effective Amendment No. 1 to Registration Statement on Form S-1 for ING Life Insurance and Annuity Company, as filed with the SEC on December 31, 2009 (333-162140).
 
 
 
4.3
 
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.
 
 
 
4.4
 
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.
 
 
 
4.5
 
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.
 
 
 
4.6
 
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.
 
 
 
4.7
 
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.
 
 
 
4.8
 
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.
 
 
 
4.9
 
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.
 
 
 
4.10
 
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.
 
 
 
4.11
 
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.
 
 
 
4.12
 
Incorporated by reference to Registration Statement on Form N-4 (File No. 333-01107), as filed on February 21, 1996.
 
 
 
4.13
 
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.
 
 
 
4.14
 
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.
 
 
 
4.15
 
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.
 
 
 
4.16
 
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.
 
 
 
4.17
 
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.
 
 
 
4.18
 
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.
 
 
 
4.19
 
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.

 
84
 

 
 
 
4.20
 
Incorporated by reference to Registration Statement on Form N-4 (File No. 333-56297), as filed on June 8, 1998.
 
 
 
4.21
 
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.
 
 
 
4.22
 
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.
 
 
 
4.23
 
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.
 
 
 
4.24
 
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.
 
 
 
4.25
 
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.
 
 
 
4.26
 
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.
 
 
 
4.27
 
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.
 
 
 
4.28
 
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.
 
 
 
4.29
 
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.
 
 
 
4.30
 
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.
 
 
 
4.31
 
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.
 
 
 
4.32
 
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.
 
 
 
4.33
 
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.
 
 
 
4.34
 
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.
 
 
 
4.35
 
Incorporated by reference to Post-Effective Amendment No. 19 to Registration Statement on Form N-4 (File No. 333-01107), as filed on February 16, 2000.
 
 
 
4.36
 
Incorporated by reference to the Registration Statement on Form S-2 (File No. 33- 64331), as filed on November 16, 1995.
 
 
 
4.37
 
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.
 
 
 
4.38
 
Incorporated by reference to Post-Effective Amendment No. 30 to Registration Statement on Form N-4 (File No. 33-75988), as filed on December 30, 2003.
 
 
 
4.39
 
Incorporated by reference to Post-Effective Amendment No. 18 to Registration Statement on Form N-4 (File No. 33-75980), as filed on April 16, 2003.
 
 
 
4.40
 
Incorporated by reference to Post-Effective Amendment No. 30 to Registration Statement on Form N-4 (File No. 333-01107), as filed on April 10, 2002.
 
 
 
4.41
 
Incorporated by reference to Post-Effective Amendment No. 24 to Registration Statement on Form N-4 (File No. 33-81216), as filed on April 11, 2003.
 
 
 
4.42
 
Incorporated by reference to Registration Statement on Form N-4 (File No. 333-109860), as filed on October 21, 2003.
 
 
 
4.43
 
Incorporated by reference to Post-Effective Amendment No. 39 to Registration Statement on Form N-4 (File No. 33-75962), as filed on December 17, 2004.
 
 
 

 
85
 

4.44
 
Incorporated by reference to Initial Registration Statement on Form N-4 (File No. 333-130822), as filed on January 3, 2006.
 
 
 
4.45
 
Incorporated by reference to Post-Effective Amendment No. 1 to Registration Statement on Form N-4 (File No. 333-87131), as filed on December 15, 1999.
 
 
 
4.46
 
Incorporated by reference to Registration Statement on Form N-4 (File No. 33-59749), as filed on June 1, 1995.
 
 
 
4.47
 
Incorporated by reference to Post-Effective Amendment No. 4 to Registration Statement on Form N-4 (File No. 33-59749), as filed on April 16, 1997.
 
 
 
4.48
 
Incorporated by reference to Post-Effective Amendment No. 9 to Registration Statement on Form N-4 (File No. 33-80750), as filed on April 17, 1998.
 
 
 
4.49
 
Incorporated by reference to Post-Effective Amendment No. 8 to Registration Statement on Form N-4 (File No. 33-80750), as filed on April 23, 1997.
 
 
 
4.50
 
Incorporated by reference to Post-Effective Amendment No. 6 to Registration Statement on Form N-4 (File No. 33-59749), as filed on November 26, 1997.
 
 
 
4.51
 
Incorporated by reference to Registration Statement on Form S-2 (File No. 33-63657), as filed on October 25, 1995.
 
 
 
4.52
 
Incorporated by reference to Pre-Effective Amendment No. 3 to Registration Statement on Form S-2 (File No. 33-63657), as filed on January 17, 1996.
 
 
 
4.53
 
Incorporated by reference to Post-Effective Amendment No. 3 to Registration Statement on Form S-2 (File No. 33-63657), as filed on November 24, 1997.
 
 
 
4.54
 
Incorporated by reference to Post-Effective Amendment No. 3 to Registration Statement on Form S-2 (File No. 33-64331), as filed on November 24, 1997.
 
 
 
4.55
 
Incorporated by reference to Post-Effective Amendment No. 6 to Registration Statement on Form N-4 (File No. 33-59749), as filed on November 26, 1997.
 
 
 
4.56
 
Incorporated by reference to Registration Statement on Form N-4 (File No. 33-59749), as filed on June 1, 1995.
 
 
 
4.57
 
Incorporated by reference to Post-Effective Amendment No. 4 to Registration Statement on Form N-4 (File No. 33-59749), as filed on April 16, 1997.
 
 
 
4.58
 
Incorporated by reference to Post-Effective Amendment No. 34 to Registration Statement on Form N-4 (File No. 333-109860) as filed with the SEC on June 11, 2010.
 
 
 
18.1+
 
Letter of Independent Registered Public Accounting Firm concerning change in accounting principle.
 
 
 
31.1+
 
Certificate of Ewout L. Steenbergen pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
31.2+
 
Certificate of Mary E. Beams pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
32.1+
 
Certificate of Ewout L. Steenbergen pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
32.2+
 
Certificate of Mary E. Beams pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
101.INS+
 
XBRL Instance Document [1]
 
 
 
101.SCH+
 
XBRL Taxonomy Extension Schema
 
 
 
101.CAL+
 
XBRL Taxonomy Extension Calculation Linkbase
 
 
 
101.DEF+
 
XBRL Taxonomy Extension Definition Linkbase

 
 
 
101.LAB+
 
XBRL Taxonomy Extension Label Linkbase

 
 
 
101.PRE+
 
XBRL Taxonomy Extension Presentation Linkbase


 
86
 

[1] Attached as Exhibit 101 to this report are the following Interactive Data Files formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets as of March 31, 2012 and December 31, 2011; (ii) Condensed Consolidated Statements of Operations for the three months ended March 31, 2012 and 2011; (iii) Consolidated Statements of Comprehensive Income for the three months ended March 31, 2012 and 2011; (iv) Condensed Consolidated Statements of Changes in Shareholder's Equity for the three months ended March 31, 2012 and 2011; (v) Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2012 and 2011; and (vi) Notes to the Condensed Consolidated Financial Statements.

Users of this data are advised pursuant to Rule 401 of Regulation S-T that the information contained in the XBRL documents is unaudited and these are not the official publicly filed financial statements of ING Life Insurance and Annuity Company.

+Filed herewith.

 
87