10-Q 1 iliac2013q3report.htm 10-Q ILIAC 2013 Q3 Report

 
 
 
 
 

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 September 30, 2013

OR
o
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    o

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   o
 
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 o  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 November 8, 2013, 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 September 30, 2013



 
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 owned 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 I., Item 2. "Management's Narrative Analysis of the Results of Operations and Financial Condition," and Part II., Item 1A. "Risk Factors" of this Form 10-Q as well as those discussed in Part I., Item 1A. "Risk Factors" and Part II., Item 7. "Management's Narrative Analysis of the Results of Operations and Financial Condition" of the Company's 2012 Annual Report on Form 10-K.

The risks included here are not exhaustive. The Company's current reports on Form 8-K and other documents filed with the SEC include additional factors that could affect our businesses and financial performance. Moreover, we operate in a rapidly changing and competitive environment. New risk factors emerge from time to time, and it is not possible for management to predict all such risk factors.


 
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
September 30, 2013 (Unaudited) and December 31, 2012
(In millions, except share data)

 
September 30,
2013
 
December 31, 2012
Assets
 
 
 
Investments:
 
 
 
Fixed maturities, available-for-sale, at fair value (amortized cost of $19,018.1 at 2013 and $18,458.7 at 2012)
$
19,934.0

 
$
20,690.8

Fixed maturities, at fair value using the fair value option
604.7

 
544.7

Equity securities, available-for-sale, at fair value (cost of $111.2 at 2013 and $129.3 at 2012)
127.3

 
142.8

Short-term investments
232.5

 
679.8

Mortgage loans on real estate, net of valuation allowance of $1.4 at 2013 and $1.3 at 2012
3,282.8

 
2,872.7

Policy loans
242.1

 
240.9

Limited partnerships/corporations
184.5

 
179.6

Derivatives
410.7

 
512.7

Securities pledged (amortized cost of $178.0 at 2013 and $207.2 at 2012)
180.4

 
219.7

Total investments
25,199.0

 
26,083.7

Cash and cash equivalents
399.2

 
363.4

Short-term investments under securities loan agreement, including collateral delivered
173.0

 
186.1

Accrued investment income
292.3

 
273.0

Receivable for securities sold
8.0

 
3.9

Reinsurance recoverable
2,041.3

 
2,153.7

Deferred policy acquisition costs, Value of business acquired and Sales inducements to contract owners
1,168.8

 
695.0

Notes receivable from affiliate
175.0

 
175.0

Current income taxes recoverable
3.1

 
—

Due from affiliates
77.8

 
99.8

Property and equipment
79.3

 
81.8

Other assets
107.5

 
101.1

Assets held in separate accounts
58,504.9

 
53,655.3

Total assets
$
88,229.2

 
$
83,871.8



The accompanying notes are an integral part of these Condensed 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
September 30, 2013 (Unaudited) and December 31, 2012
(In millions, except share data)

 
September 30,
2013
 
December 31, 2012
Liabilities and Shareholder’s Equity
 
 
 
Future policy benefits and contract owner account balances
$
24,556.9

 
$
24,191.2

Payable for securities purchased
58.2

 
—

Payables under securities loan agreement, including collateral held
307.8

 
353.2

Long-term debt
4.9

 
4.9

Due to affiliates
105.1

 
95.1

Derivatives
200.4

 
346.8

Current income tax payable to Parent
—

 
32.1

Deferred income taxes
261.9

 
507.1

Other liabilities
455.9

 
424.7

Liabilities related to separate accounts
58,504.9

 
53,655.3

Total liabilities
84,456.0

 
79,610.4

 
 
 
 
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
4,043.3

 
4,217.2

Accumulated other comprehensive income (loss)
489.1

 
1,023.0

Retained earnings (deficit)
(762.0
)
 
(981.6
)
Total shareholder’s equity
3,773.2

 
4,261.4

Total liabilities and shareholder’s equity
$
88,229.2

 
$
83,871.8




The accompanying notes are an integral part of these Condensed 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
For the Three and Nine Months Ended September 30, 2013 and 2012 (Unaudited)
(In millions)

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
Revenues:
 
 
 
 
 
 
 
Net investment income
$
328.2

 
$
344.7

 
$
1,019.3

 
$
1,008.6

Fee income
189.9

 
167.0

 
547.9

 
478.8

Premiums
7.6

 
6.1

 
22.7

 
29.6

Broker-dealer commission revenue
61.5

 
54.8

 
180.3

 
167.0

Net realized capital gains (losses):
 
 
 
 
 
 
 
Total other-than-temporary impairments
(1.6
)
 
(4.7
)
 
(4.5
)
 
(8.7
)
Less: Portion of other-than-temporary impairments recognized in Other comprehensive income (loss)
(0.8
)
 
(0.1
)
 
(1.8
)
 
(1.1
)
Net other-than-temporary impairments recognized in earnings
(0.8
)
 
(4.6
)
 
(2.7
)
 
(7.6
)
Other net realized capital gains (losses)
(27.3
)
 
(21.1
)
 
(135.4
)
 
108.0

Total net realized capital gains (losses)
(28.1
)
 
(25.7
)
 
(138.1
)
 
100.4

Other revenue
2.9

 
1.0

 
(2.6
)
 
3.8

Total revenues
562.0

 
547.9

 
1,629.5

 
1,788.2

Benefits and expenses:
 
 
 
 
 
 
 
Interest credited and other benefits to contract owners/policyholders
204.2

 
189.3

 
536.3

 
577.0

Operating expenses
178.0

 
163.0

 
527.9

 
520.6

Broker-dealer commission expense
61.5

 
54.8

 
180.3

 
167.0

Net amortization of deferred policy acquisition costs and value of business acquired
(15.2
)
 
13.5

 
31.7

 
118.5

Interest expense
0.2

 
0.6

 
0.3

 
1.7

Total benefits and expenses
428.7

 
421.2

 
1,276.5

 
1,384.8

Income (loss) before income taxes
133.3

 
126.7

 
353.0

 
403.4

Income tax expense (benefit)
65.7

 
33.4

 
133.4

 
128.2

Net income (loss)
$
67.6

 
$
93.3

 
$
219.6

 
$
275.2



The accompanying notes are an integral part of these Condensed 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
For the Three and Nine Months Ended September 30, 2013 and 2012 (Unaudited)
(In millions)

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
Net income (loss)
$
67.6

 
$
93.3

 
$
219.6

 
$
275.2

Other comprehensive income (loss), before tax:
 
 
 
 
 
 
 
Unrealized gains/losses on securities
(52.9
)
 
253.9

 
(862.3
)
 
455.4

Other-than-temporary impairments
2.0

 
7.0

 
3.4

 
10.6

Pension and other postretirement benefits liability
(0.7
)
 
(0.6
)
 
(1.7
)
 
(1.7
)
Other comprehensive income (loss), before tax
(51.6
)
 
260.3

 
(860.6
)
 
464.3

Income tax expense (benefit) related to items of other comprehensive income (loss)
(45.7
)
 
98.2

 
(326.7
)
 
157.6

Other comprehensive income (loss), after tax
(5.9
)
 
162.1

 
(533.9
)
 
306.7

Comprehensive income (loss)
$
61.7

 
$
255.4

 
$
(314.3
)
 
$
581.9



The accompanying notes are an integral part of these Condensed 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
For the Nine Months Ended September 30, 2013 and 2012 (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, 2013
$
2.8

 
$
4,217.2

 
$
1,023.0

 
$
(981.6
)
 
$
4,261.4

Comprehensive income (loss):
 
 
 
 
 
 
 
 
 
Net income (loss)
—

 
—

 
—

 
219.6

 
219.6

Other comprehensive income (loss), after tax
—

 
—

 
(533.9
)
 
—

 
(533.9
)
Total comprehensive income (loss)
 
 
 
 
 
 
 
 
(314.3
)
Dividends paid and distribution of capital
—

 
(174.0
)
 
—

 
—

 
(174.0
)
Employee related benefits
—

 
0.1

 
—

 
—

 
0.1

Balance at September 30, 2013
$
2.8

 
$
4,043.3

 
$
489.1

 
$
(762.0
)
 
$
3,773.2

 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2012
$
2.8

 
$
4,533.0

 
$
747.5

 
$
(1,307.0
)
 
$
3,976.3

Comprehensive income (loss):
 
 
 
 
 
 
 
 
 
Net income (loss)
—

 
—

 
—

 
275.2

 
275.2

Other comprehensive income (loss), after tax
—

 
—

 
306.7

 
—

 
306.7

Total comprehensive income (loss)
 
 
 
 
 
 
 
 
581.9

Dividends paid and distribution of capital
—

 
(340.0
)
 
—

 
—

 
(340.0
)
Employee related benefits
—

 
23.9

 
—

 
—

 
23.9

Balance at September 30, 2012
$
2.8

 
$
4,216.9

 
$
1,054.2

 
$
(1,031.8
)
 
$
4,242.1




The accompanying notes are an integral part of these Condensed 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
For the Nine Months Ended September 30, 2013 and 2012 (Unaudited)
(In millions)

 
Nine Months Ended September 30,
 
2013
 
2012
Net cash provided by operating activities
$
975.6

 
$
792.4

Cash Flows from Investing Activities:
 
 
 
Proceeds from the sale, maturity, disposal or redemption of:
 
 
 
Fixed maturities
2,609.2

 
2,932.6

Equity securities, available-for-sale
0.7

 
2.4

Mortgage loans on real estate
177.6

 
303.5

Limited partnerships/corporations
22.6

 
136.6

Acquisition of:
 
 
 
Fixed maturities
(3,287.4
)
 
(3,890.2
)
Equity securities, available-for-sale
(0.8
)
 
(0.7
)
Mortgage loans on real estate
(587.8
)
 
(642.5
)
Limited partnerships/corporations
(16.5
)
 
(28.2
)
Derivatives, net
(222.0
)
 
4.6

Policy loans, net
(1.2
)
 
3.4

Short-term investments, net
447.3

 
(116.7
)
Loan-Dutch State obligation, net
—

 
63.1

Collateral (delivered) received, net
(32.3
)
 
51.8

Purchases of fixed assets, net
(0.2
)
 
(0.2
)
Net cash used in investing activities
(890.8
)
 
(1,180.5
)
Cash Flows from Financing Activities:
 
 
 
Deposits received for investment contracts
2,042.7

 
2,009.3

Maturities and withdrawals from investment contracts
(1,917.7
)
 
(1,763.9
)
Short-term loans to affiliates, net
—

 
648.0

Dividends paid and return of capital distribution
(174.0
)
 
(340.0
)
Net cash (used in) provided by financing activities
(49.0
)
 
553.4

Net increase in cash and cash equivalents
35.8

 
165.3

Cash and cash equivalents, beginning of period
363.4

 
217.1

Cash and cash equivalents, end of period
$
399.2

 
$
382.4



The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
 
 
 
 
9
 

ING Life Insurance and Annuity Company and Subsidiaries
(A wholly owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to the 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") provide financial products and services in the United States.  ILIAC is authorized to conduct its insurance business in all states and in the District of Columbia.

In 2009, ING Groep N.V. ("ING Group" or "ING"), a global financial services holding company based in The Netherlands, with American Depository Shares listed on the New York Stock Exchange, announced the anticipated separation of its global banking and insurance businesses, including the divestiture of ING U.S., Inc., which together with its subsidiaries, including the Company, constitutes ING's U.S.-based retirement, investment management and insurance operations. On April 11, 2013, ING U.S., Inc. announced plans to rebrand in the future as Voya Financial. On May 2, 2013, the common stock of ING U.S., Inc. began trading on the New York Stock Exchange under the symbol "VOYA." On May 7, 2013 and May 31, 2013, ING U.S., Inc. completed its initial public offering of common stock, including the issuance and sale by ING U.S., Inc. of 30,769,230 shares of common stock and the sale by ING Insurance International B.V. ("ING International"), an indirect wholly owned subsidiary of ING Group and previously the sole stockholder of ING U.S., Inc., of 44,201,773 shares of outstanding common stock of ING U.S., Inc. (collectively, the "IPO"). On September 30, 2013, ING International transferred all of its shares of ING U.S., Inc. common stock to ING Group.

On October 29, 2013, ING Group completed a sale of 37,950,000 shares of common stock of ING U.S., Inc. in a registered public offering ("Secondary Offering"), reducing ING Group's ownership of ING U.S., Inc. to 57%.

ILIAC is a direct, wholly owned subsidiary of Lion Connecticut Holdings Inc. ("Lion" or "Parent"), which is a direct, wholly owned subsidiary of ING U.S., Inc. ING U.S., Inc. is a majority owned subsidiary of ING Group.

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, 457 and 501, 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.

Certain immaterial reclassifications have been made to prior year financial information to conform to the current year classifications.

 
10
 

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


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 September 30, 2013, its results of operations and comprehensive income for the three and nine months ended September 30, 2013 and 2012 and its changes in shareholder's equity and statements of cash flows for the nine months ended September 30, 2013 and 2012, in conformity with U.S. GAAP. Interim results are not necessarily indicative of full year performance. The December 31, 2012 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, 2012, filed with the Securities and Exchange Commission ("SEC"), which included 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 2012 Annual Report on Form 10-K.

Adoption of New Pronouncements

Derivatives and Hedging
In July 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2013-10, "Derivatives and Hedging (Accounting Standards Codification ("ASC")Topic 815): Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes" ("ASU 2013-10"), which permits an entity to use the Fed Funds Effective Swap Rate ("OIS") to be used as a U.S. benchmark interest rate for hedge accounting purposes. In addition, the guidance removes the restriction on using different benchmark rates for similar hedges.

The provisions of ASU 2013-10 were adopted by the Company on July 17, 2013 for qualifying new or redesigned hedges entered into on or after that date. The adoption had no effect on the Company’s financial condition, results of operations or cash flows.

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.

In January 2013, the FASB issued ASU 2013-01, "Balance Sheet (ASC Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities" ("ASU 2013-01"), which clarifies that the scope of ASU 2011-11 applies to derivatives accounted for in accordance with ASU Topic 815, Derivatives and Hedging, including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are either offset in accordance with Section 210-20-45 or Section 815-10-45 or subject to an enforceable master netting arrangement or similar agreement.

The provisions of ASU 2013-01 and ASU 2011-11 were adopted retrospectively by the Company on January 1, 2013. The adoption had no effect on the Company's financial condition, results of operations or cash flows, as the pronouncement only pertains to additional disclosure. The disclosures required by ASU 2011-11 and ASU 2013-01 are included in the Derivative Financial Instruments Note to these Condensed Consolidated Financial Statements.

Disclosures about Amounts Reclassified out of Accumulated Other Comprehensive Income
In January 2013, the FASB issued ASU 2013-02, "Comprehensive Income (ASC Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income" ("ASU 2013-02"), which requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income, but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income, in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail about those amounts.

The provisions of ASU 2013-02 were adopted by the Company on January 1, 2013. The adoption had no effect on the Company's financial condition, results of operations or cash flows, as the pronouncement only pertains to additional disclosure. The disclosures

 
11
 

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

required by ASU 2013-02, including comparative period disclosures, are included in the Accumulated Other Comprehensive Income Note to these Condensed Consolidated Financial Statements.

Future Adoption of Accounting Pronouncements

Fees Paid to the Federal Government by Health Insurers
In July 2011, the FASB issued ASU 2011-06, "Other Expenses (Topic 720): Fees Paid to the Federal Government by Health Insurers" ("ASU 2011-06"), which specifies how health insurers should recognize and classify the annual fee imposed by the Patient Protection and Affordable Care Act as amended by the Health Care Education Reconciliation Act (the "Acts"). The liability for the fee should be estimated and recorded in full at the time the entity provides qualifying health insurance in the year in which the fee is payable, with a corresponding deferred cost that is amortized to expense.

The provisions of ASU 2011-06 are effective for calendar years beginning after December 31, 2013, when the fee initially becomes effective. The Company does not expect ASU 2011-06 to have an impact on its financial condition, results of operations or cash flows, as the amount of net premium written for qualifying health insurance by the Company is expected to be below the $25.0 threshold as defined by the Acts and, thus, not subject to the fee.

Joint and Several Liability Arrangements
In February 2013, the FASB issued ASU 2013-04, "Liabilities (ASC Topic 405): Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date" ("ASU 2013-04"), which requires an entity to measure obligations resulting from joint and several liable arrangements for which the total amount of the obligation within the scope of this guidance is fixed at the reporting date, as the sum of (1) the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and (2) any additional amount it expects to pay on behalf of its co-obligors. ASU 2013-04 also requires an entity to disclose the nature and amount of the obligation, as well as other information about those obligations.

The provisions of ASU 2013-04 are effective for years, and interim periods within those years, beginning after December 15, 2013. The amendments should be applied retrospectively for those obligations resulting from joint and several liability arrangements that exist at the beginning of an entity's year of adoption. The Company is currently in the process of determining the impact of adoption of the provisions of ASU 2013-04.

Income Taxes
In July 2013, the FASB issued ASU 2013-11, "Income Taxes (ASC Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists" ("ASU 2013-11"), which clarifies that:
•
An unrecognized tax benefit should be presented as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward, except,
•
An unrecognized tax benefit should be presented as a liability and not be combined with a deferred tax asset (i) to the extent a net operating loss carryforward, a similar tax loss or a tax credit carryforward is not available at the reporting date to settle any additional income taxes that would result from the disallowance of a tax position or (ii) the tax law does not require the entity to use, or the entity does not intend to use, the deferred tax asset for such a purpose.
•
The assessment of whether a deferred tax asset is available is based on the unrecognized tax benefit and deferred tax asset that exist at the reporting date and should be made presuming disallowance of the tax position at the reporting date.

The provisions of ASU 2013-11 are effective for years, and interim periods within those years, beginning after December 15, 2013, and should be applied prospectively to all unrecognized tax benefits that exist at the effective date. The Company does not expect ASU 2013-11 to have an impact on its financial condition, results of operations or cash flows, as the guidance is consistent with that currently applied.


 
12
 

ING Life Insurance and Annuity Company and Subsidiaries
(A wholly owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to the 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 ("FVO") fixed maturities and equity securities were as follows as of September 30, 2013:
 
Amortized
Cost
 
Gross
Unrealized
Capital
Gains
 
Gross
Unrealized
Capital
Losses
 
Embedded Derivatives(2)
 
Fair
Value
 
OTTI(3)
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasuries
$
745.0

 
$
58.1

 
$
2.4

 
$
—

 
$
800.7

 
$
—

U.S. Government agencies and authorities
242.9

 
7.4

 
—

 
—

 
250.3

 
—

State, municipalities and political subdivisions
77.2

 
6.8

 
0.1

 
—

 
83.9

 
—

U.S. corporate securities
10,210.0

 
584.6

 
225.8

 
—

 
10,568.8

 
1.9

 
 
 
 
 
 
 
 
 
 
 
 
Foreign securities:(1)


 


 
 
 
 
 


 


Government
426.8

 
27.0

 
16.2

 
—

 
437.6

 
—

Other
5,077.2

 
286.4

 
90.9

 
—

 
5,272.7

 
—

Total foreign securities
5,504.0

 
313.4

 
107.1

 
—

 
5,710.3

 
—

 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Agency
1,628.1

 
128.6

 
12.7

 
19.3

 
1,763.3

 
0.5

Non-Agency
302.9

 
55.8

 
8.6

 
13.6

 
363.7

 
14.1

Total Residential mortgage-backed securities
1,931.0

 
184.4

 
21.3

 
32.9

 
2,127.0

 
14.6

 
 
 
 
 
 
 
 
 
 
 
 
Commercial mortgage-backed securities
607.8

 
71.4

 
—

 
—

 
679.2

 
4.4

Other asset-backed securities
482.9

 
19.7

 
3.7

 
—

 
498.9

 
3.2

Total fixed maturities, including securities pledged
19,800.8

 
1,245.8

 
360.4

 
32.9

 
20,719.1

 
24.1

Less: Securities pledged
178.0

 
9.4

 
7.0

 
—

 
180.4

 
—

Total fixed maturities
19,622.8

 
1,236.4

 
353.4

 
32.9

 
20,538.7

 
24.1

Equity securities
111.2

 
16.1

 
—

 
—

 
127.3

 
—

Total fixed maturities and equity securities investments
$
19,734.0

 
$
1,252.5

 
$
353.4

 
$
32.9

 
$
20,666.0

 
$
24.1

(1) Primarily U.S. dollar denominated.
(2) 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.
(3) Represents Other-than Temporary-Impairments ("OTTI") reported as a component of Other comprehensive income.

 
13
 

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

Available-for-sale and FVO fixed maturities and equity securities were as follows as of December 31, 2012:
 
Amortized
Cost
 
Gross
Unrealized
Capital
Gains
 
Gross
Unrealized
Capital
Losses
 
Embedded Derivatives(2)
 
Fair
Value
 
OTTI(3)
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasuries
$
1,011.5

 
$
135.6

 
$
0.5

 
$
—

 
$
1,146.6

 
$
—

U.S. Government agencies and authorities
379.4

 
17.6

 
—

 
—

 
397.0

 
—

State, municipalities and political subdivisions
77.2

 
15.9

 
—

 
—

 
93.1

 
—

U.S. corporate securities
9,438.0

 
1,147.4

 
11.1

 
—

 
10,574.3

 
2.0

 
 
 
 
 
 
 
 
 
 
 
 
Foreign securities(1):


 
 
 
 
 
 
 
 
 


Government
439.7

 
57.4

 
1.1

 
—

 
496.0

 
—

Other
4,570.0

 
501.3

 
15.3

 
—

 
5,056.0

 
—

Total foreign securities
5,009.7

 
558.7

 
16.4

 
—

 
5,552.0

 
—

 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Agency
1,679.5

 
181.5

 
3.4

 
33.7

 
1,891.3

 
0.6

Non-Agency
390.9

 
70.0

 
14.7

 
20.0

 
466.2

 
17.4

Total Residential mortgage-backed securities
2,070.4

 
251.5

 
18.1

 
53.7

 
2,357.5

 
18.0

 
 
 
 
 
 
 
 
 
 
 
 
Commercial mortgage-backed securities
748.7

 
90.6

 
0.2

 
—

 
839.1

 
4.4

Other asset-backed securities
475.7

 
26.6

 
6.7

 
—

 
495.6

 
3.1

Total fixed maturities, including securities pledged
19,210.6

 
2,243.9

 
53.0

 
53.7

 
21,455.2

 
27.5

Less: Securities pledged
207.2

 
13.0

 
0.5

 
—

 
219.7

 
—

Total fixed maturities
19,003.4

 
2,230.9

 
52.5

 
53.7

 
21,235.5

 
27.5

Equity securities
129.3

 
13.6

 
0.1

 
—

 
142.8

 
—

Total fixed maturities and equity securities investments
$
19,132.7

 
$
2,244.5

 
$
52.6

 
$
53.7

 
$
21,378.3

 
$
27.5

(1) Primarily U.S. dollar denominated.
(2) 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.
(3) Represents OTTI reported as a component of Other comprehensive income.


 
14
 

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

The amortized cost and fair value of fixed maturities, including securities pledged, as of September 30, 2013, 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
$
570.1

 
$
591.4

After one year through five years
4,171.7

 
4,437.9

After five years through ten years
6,281.1

 
6,462.9

After ten years
5,756.2

 
5,921.8

Mortgage-backed securities
2,538.8

 
2,806.2

Other asset-backed securities
482.9

 
498.9

Fixed maturities, including securities pledged
$
19,800.8

 
$
20,719.1


The investment portfolio is monitored to maintain a diversified portfolio on an ongoing basis. Credit risk is mitigated by monitoring concentrations by issuer, sector and geographic stratification and limiting exposure to any one issuer. 

As of September 30, 2013 and December 31, 2012, the Company did not have any investments in a single issuer, other than obligations of the U.S. Government and government agencies, with a carrying value in excess of 10% of the Company’s consolidated Shareholder’s equity.

The following tables set forth the composition of the U.S. and foreign corporate securities within the fixed maturity portfolio by industry category as of the dates indicated:
 
Amortized
Cost
 
Gross Unrealized Capital Gains
 
Gross Unrealized Capital Losses
 
Fair Value
September 30, 2013
 
 
 
 
 
 
 
Communications
$
1,327.7

 
$
78.9

 
$
40.9

 
$
1,365.7

Financial
1,999.8

 
161.0

 
22.0

 
2,138.8

Industrial and other companies
8,896.5

 
440.0

 
206.6

 
9,129.9

Utilities
2,628.0

 
167.1

 
37.8

 
2,757.3

Transportation
435.2

 
24.0

 
9.4

 
449.8

Total
$
15,287.2

 
$
871.0

 
$
316.7

 
$
15,841.5

 
 
 
 
 
 
 
 
December 31, 2012
 
 
 
 
 
 
 
Communications
$
1,154.1

 
$
161.4

 
$
0.9

 
$
1,314.6

Financial
1,859.3

 
240.1

 
10.9

 
2,088.5

Industrial and other companies
7,883.1

 
850.9

 
6.9

 
8,727.1

Utilities
2,715.4

 
349.8

 
7.3

 
3,057.9

Transportation
396.1

 
46.5

 
0.4

 
442.2

Total
$
14,008.0

 
$
1,648.7

 
$
26.4

 
$
15,630.3


Fixed Maturities and Equity Securities:
The Company's fixed maturities and equity securities are currently designated as available-for-sale, except those accounted for using the fair value option ("FVO"). Available-for-sale securities are reported at fair value and unrealized capital gains (losses) on

 
15
 

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

these securities are recorded directly in Accumulated other comprehensive income (loss) ("AOCI"), and presented net of related changes in DAC, VOBA, and deferred income taxes. In addition, certain fixed maturities have embedded derivatives, which are reported with the host contract on the Condensed Consolidated Balance Sheets.
The Company has elected the FVO for certain of its fixed maturities to better match the measurement of assets and liabilities in the Condensed Consolidated Statements of Operations. Certain collateralized mortgage obligations ("CMOs"), primarily interest-only and principal-only strips, are accounted for as hybrid instruments and valued at fair value with changes in the fair value recorded in Other net realized capital gains (losses) in the Condensed Consolidated Statements of Operations.
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 significant decreases and increases in interest rates resulting in the prepayment of principal from the underlying mortgages, either earlier or later than originally anticipated. As of September 30, 2013 and December 31, 2012, approximately 46.2% and 41.8%, respectively, of the Company’s CMO holdings, such as interest-only or principal-only strips, were invested in those types of CMOs that are subject to more prepayment and extension risk than traditional CMOs.

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 meet the requirements to be accounted for as financing arrangements. As of September 30, 2013 and December 31, 2012, 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. As of September 30, 2013 and December 31, 2012, the Company did not have any securities pledged under reverse repurchase agreements.

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. For portions of the program, the lending agent retains the cash collateral. For other portions of the program, a lending agent, if used, may retain up to 5% of the collateral deposited by the borrower and the remaining cash collateral is received by the Company. 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 September 30, 2013 and December 31, 2012, the fair value of loaned securities was $159.9 and $180.2, respectively and is included in Securities pledged on the Condensed Consolidated Balance Sheets. As of September 30, 2013 and December 31, 2012, collateral retained by the lending agent and invested in liquid assets on the Company's behalf was $167.1 and $186.1, respectively, and recorded in Short-term investments under securities loan agreement, including collateral delivered on the Condensed Consolidated Balance Sheets. As of September 30, 2013 and December 31, 2012, liabilities to return collateral of $167.1 and $186.1, respectively, were 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 $1.1 as of September 30, 2013 and $1.3 as of December 31, 2012, respectively, is included in Limited partnerships/corporations on the Condensed Consolidated

 
16
 

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

Balance Sheets. Income and losses recognized on these investments are reported in Net investment income in 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. 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 are thinly capitalized by design and considered VIEs. 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 available-for-sale as described in the Fair Value Measurements note to these Condensed Consolidated Financial Statements and unrealized capital gains (losses) on these securities are recorded directly in AOCI, except for certain RMBS which are accounted for under the FVO whose change in fair value are reflected in Other net realized gains (losses) in the Condensed Consolidated Statements of Operations. The Company’s maximum exposure to loss on these structured investments is limited to the amount of its investment.

Unrealized Capital Losses

Unrealized capital losses (including noncredit impairments), along with the fair value of fixed maturity securities, including securities pledged, by market sector and duration were as follows as of September 30, 2013:
 
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 Losses
 
Fair
Value
 
Unrealized
Capital Losses
 
Fair
Value
 
Unrealized
Capital Losses
 
Fair
Value
 
Unrealized
Capital Losses
U.S. Treasuries
$
144.5

 
$
2.4

 
$
—

 
$
—

 
$
—

 
$
—

 
$
144.5

 
$
2.4

U.S. corporate, state and municipalities
3,116.0

 
183.4

 
294.7

 
35.6

 
40.9

 
6.9

 
3,451.6

 
225.9

Foreign
1,280.2

 
82.3

 
158.5

 
19.4

 
39.6

 
5.4

 
1,478.3

 
107.1

Residential mortgage-backed
299.3

 
8.8

 
19.7

 
1.0

 
108.1

 
11.5

 
427.1

 
21.3

Commercial mortgage-backed
3.8

 
—

 
0.1

 
—

 
—

 
—

 
3.9

 
—

Other asset-backed
56.2

 
0.2

 
6.1

 
—

 
26.5

 
3.5

 
88.8

 
3.7

Total
$
4,900.0

 
$
277.1

 
$
479.1

 
$
56.0

 
$
215.1

 
$
27.3

 
$
5,594.2

 
$
360.4



 
17
 

ING Life Insurance and Annuity Company and Subsidiaries
(A wholly owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to the 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 maturity securities, including securities pledged, by market sector and duration were as follows as of December 31, 2012:
 
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 Losses
 
Fair
Value
 
Unrealized
Capital Losses
 
Fair
Value
 
Unrealized
Capital Losses
 
Fair
Value
 
Unrealized
Capital Losses
U.S. Treasuries
$
300.0

 
$
0.5

 
$
—

 
$
—

 
$
—

 
$
—

 
$
300.0

 
$
0.5

U.S. corporate, state and municipalities
479.8

 
6.8

 
22.5

 
0.9

 
49.4

 
3.4

 
551.7

 
11.1

Foreign
166.8

 
4.7

 
7.8

 
0.5

 
87.7

 
11.2

 
262.3

 
16.4

Residential mortgage-backed
68.7

 
1.6

 
7.2

 
0.3

 
132.4

 
16.2

 
208.3

 
18.1

Commercial mortgage-backed
7.5

 
0.1

 
1.6

 
—

 
2.5

 
0.1

 
11.6

 
0.2

Other asset-backed
15.6

 
—

 
—

 
—

 
34.2

 
6.7

 
49.8

 
6.7

Total
$
1,038.4

 
$
13.7

 
$
39.1

 
$
1.7

 
$
306.2

 
$
37.6

 
$
1,383.7

 
$
53.0


Of the unrealized capital losses aged more than twelve months, the average market value of the related fixed maturities was 88.7% and 89.1% of the average book value as of September 30, 2013 and December 31, 2012, respectively.

Unrealized capital losses (including noncredit impairments) in fixed maturities, including securities pledged, for instances in which fair value declined below amortized cost by greater than or less than 20% for consecutive months as indicated in the tables below, were as follows as of the dates indicated:
 
Amortized Cost
 
Unrealized Capital Losses
 
Number of Securities
 
< 20%
 
> 20%
 
< 20%
 
> 20%
 
< 20%
 
> 20%
September 30, 2013
 
 
 
 
 
 
 
 
 
 
 
Six months or less below amortized cost
$
5,193.1

 
$
66.7

 
$
279.3

 
$
15.5

 
702

 
14

More than six months and twelve months or less below amortized cost
503.6

 
1.1

 
46.5

 
0.4

 
84

 
2

More than twelve months below amortized cost
166.7

 
23.4

 
12.8

 
5.9

 
102

 
9

Total
$
5,863.4

 
$
91.2

 
$
338.6

 
$
21.8

 
888

 
25

 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2012
 
 
 
 
 
 
 
 
 
 
 
Six months or less below amortized cost
$
1,110.8

 
$
15.2

 
$
19.3

 
$
3.9

 
141

 
10

More than six months and twelve months or less below amortized cost
49.5

 
1.5

 
2.6

 
0.4

 
31

 
2

More than twelve months below amortized cost
198.1

 
61.6

 
6.2

 
20.6

 
99

 
28

Total
$
1,358.4

 
$
78.3

 
$
28.1

 
$
24.9

 
271

 
40



 
18
 

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

Unrealized capital losses (including noncredit impairments) in fixed maturities, including securities pledged, by market sector for instances in which fair value declined below amortized cost by greater than or less than 20% were as follows as of the dates indicated:
 
Amortized Cost
 
Unrealized Capital Losses
 
Number of Securities
 
< 20%
 
> 20%
 
< 20%
 
> 20%
 
< 20%
 
> 20%
September 30, 2013
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasuries
$
146.9

 
$
—

 
$
2.4

 
$
—

 
3

 
—

U.S. corporate, state and municipalities
3,641.8

 
35.7

 
217.1

 
8.8

 
478

 
5

Foreign
1,546.0

 
39.4

 
98.5

 
8.6

 
220

 
6

Residential mortgage-backed
436.8

 
11.6

 
18.2

 
3.1

 
157

 
10

Commercial mortgage-backed
3.9

 
—

 
—

 
—

 
3

 
—

Other asset-backed
88.0

 
4.5

 
2.4

 
1.3

 
27

 
4

Total
$
5,863.4

 
$
91.2

 
$
338.6

 
$
21.8

 
888

 
25

 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2012
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasuries
$
300.5

 
$
—

 
$
0.5

 
$
—

 
2

 
—

U.S. corporate, state and municipalities
558.1

 
4.7

 
9.1

 
2.0

 
82

 
2

Foreign
242.7

 
36.0

 
5.7

 
10.7

 
38

 
8

Residential mortgage-backed
201.2

 
25.2

 
10.2

 
7.9

 
124

 
24

Commercial mortgage-backed
11.8

 
—

 
0.2

 
—

 
8

 
—

Other asset-backed
44.1

 
12.4

 
2.4

 
4.3

 
17

 
6

Total
$
1,358.4

 
$
78.3

 
$
28.1

 
$
24.9

 
271

 
40


All investments with fair values less than amortized cost are included in the Company's other-than-temporary impairments analysis, and impairments were recognized as disclosed in the "Evaluating Securities for Other-Than-Temporary Impairments" section below. The Company evaluates non-agency RMBS and ABS for "other-than-temporary impairments" each quarter based on actual and projected cash flows after considering the quality and updated loan-to-value ratios reflecting current home prices of underlying collateral, forecasted loss severity, the payment priority within the tranche structure of the security and amount of any credit enhancements. The Company's assessment of current levels of cash flows compared to estimated cash flows at the time the securities were acquired indicates the amount and the pace of projected cash flows from the underlying collateral has generally been lower and slower, respectively. However, since cash flows are typically projected at a trust level, the impairment review incorporates the security's position within the trust structure as well as credit enhancement remaining in the trust to determine whether an impairment is warranted. Therefore, while lower and slower cash flows will impact the trust, the effect on a particular security within the trust will be dependent upon the trust structure. Where the assessment continues to project full recovery of principal and interest on schedule, the Company has not recorded an impairment. Unrealized losses on below investment grade securities are principally related to RMBS (primarily Alt-A RMBS), and ABS (primarily subprime RMBS) largely due to economic and market uncertainties including concerns over unemployment levels, lower interest rate environment on floating rate securities requiring higher risk premiums since purchase and valuations on residential real estate supporting non-agency RMBS. Based on this analysis, 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.

Fixed Maturity Securities Credit Quality - Ratings

Information about certain of the Company's fixed maturity securities holdings, by the National Association of Insurance Commissioners ("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 Fitch Ratings, Inc. ("Fitch"), Moody's Investors Service, Inc. ("Moody's") and Standard & Poor's Ratings Services ("S&P"). If no rating is available from a rating agency, then an internally developed rating is used.

 
19
 

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


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 similar to that used by the rating agencies. Ratings are derived from three ARO ratings and are applied as follows based on the number of agency ratings received:

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

Subprime and Alt-A Mortgage Exposure

The Company does not originate or purchase subprime or Alt-A whole-loan mortgages. Subprime lending is the origination of loans to customers with weaker credit profiles. The Company defines Alt-A mortgages 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 mortgage backed securities is primarily in the form of ABS structures collateralized by subprime residential mortgages and the majority of these holdings are included in Other ABS in the "Fixed Maturities and Equity Securities" section above. As of September 30, 2013, the fair value, amortized cost and gross unrealized losses related to the Company's exposure to subprime mortgage backed securities were $59.1, $58.2 and $2.9, respectively, representing 0.3% of total fixed maturities, including securities pledged, based on fair value. As of December 31, 2012, the fair value, amortized cost and gross unrealized losses related to the Company's exposure to subprime mortgage backed securities were $61.2, $65.4 and $6.2, respectively, representing 0.3% of total fixed maturities, including securities pledged, based on fair value.

The following tables summarize the Company's exposure to subprime mortgage-backed securities by credit quality using NAIC designations, ARO ratings and vintage year as of the dates indicated:
 
% of Total Subprime Mortgage-backed Securities
 
NAIC Designation
 
ARO Ratings
 
Vintage
September 30, 2013
 
 
 
 
 
 
 
 
 
1
68.3
%
 
AAA
0.1
%
 
2007
7.0
%
 
2
2.7
%
 
AA
2.6
%
 
2006
7.0
%
 
3
19.1
%
 
A
13.0
%
 
2005 and prior
86.0
%
 
4
9.6
%
 
BBB
20.8
%
 
 
100.0
%
 
5
—
%
 
BB and below
63.5
%
 
 
 
 
6
0.3
%
 
 
100.0
%
 
 
 
 
 
100.0
%
 
 
 
 
 
 
December 31, 2012
 
 
 
 
 
 
 
 
 
1
67.8
%
 
AAA
3.2
%
 
2007
8.0
%
 
2
3.2
%
 
AA
—
%
 
2006
6.0
%
 
3
19.6
%
 
A
16.2
%
 
2005 and prior
86.0
%
 
4
8.7
%
 
BBB
21.5
%
 
 
100.0
%
 
5
0.5
%
 
BB and below
59.1
%
 
 
 
 
6
0.2
%
 
 
100.0
%
 
 
 
 
 
100.0
%
 
 
 
 
 
 


 
20
 

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

The Company's exposure to Alt-A mortgages is included in Residential mortgage-backed securities in the "Fixed Maturities and Equity Securities" section above. As of September 30, 2013, the fair value, amortized cost and gross unrealized losses related to the Company's exposure to Alt-A RMBS totaled $89.5, $73.9 and $4.2, respectively, representing 0.4% of total fixed maturities, including securities pledged, based on fair value. As of December 31, 2012, the fair value, amortized cost and gross unrealized losses related to the Company's exposure to Alt-A RMBS totaled $106.0, $89.5 and $9.5, respectively, representing 0.5% of total fixed maturities, including securities pledged, based on fair value.

The following tables summarize the Company's exposure to Alt-A residential mortgage-backed securities by credit quality using NAIC designations, ARO ratings and vintage year as of the dates indicated:
 
% of Total Alt-A Mortgage-backed Securities
 
NAIC Designation
 
ARO Ratings
 
Vintage
September 30, 2013
 
 
 
 
 
 
 
 
 
1
43.2
%
 
AAA
0.1
%
 
2007
14.3
%
 
2
12.8
%
 
AA
—
%
 
2006
29.8
%
 
3
30.6
%
 
A
2.9
%
 
2005 and prior
55.9
%
 
4
11.4
%
 
BBB
3.5
%
 
 
100.0
%
 
5
2.0
%
 
BB and below
93.5
%
 
 
 
 
6
—
%
 
 
100.0
%
 
 
 
 
 
100.0
%
 
 
 
 
 
 
December 31, 2012
 
 
 
 
 
 
 
 
 
1
33.4
%
 
AAA
0.2
%
 
2007
13.8
%
 
2
12.4
%
 
AA
1.4
%
 
2006
29.3
%
 
3
21.0
%
 
A
3.4
%
 
2005 and prior
56.9
%
 
4
30.3
%
 
BBB
5.6
%
 
 
100.0
%
 
5
2.3
%
 
BB and below
89.4
%
 
 
 
 
6
0.6
%
 
 
100.0
%
 
 
 
 
 
100.0
%
 
 
 
 
 
 


 
21
 

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

Commercial Mortgage-backed and Other Asset-backed Securities

The following tables summarize the Company's exposure to CMBS holdings by credit quality using NAIC designations, ARO ratings and vintage year as of the dates indicated:
 
% of Total CMBS
 
NAIC Designation
 
ARO Ratings
 
Vintage
September 30, 2013
 
 
 
 
 
 
 
 
 
1
99.4
%
 
AAA
48.6
%
 
2007
30.5
%
 
2
—
%
 
AA
14.6
%
 
2006
24.4
%
 
3
0.6
%
 
A
8.0
%
 
2005 and prior
45.1
%
 
4
—
%
 
BBB
7.1
%
 
 
100.0
%
 
5
—
%
 
BB and below
21.7
%
 
 
 
 
6
—
%
 
 
100.0
%
 
 
 
 
 
100.0
%
 
 
 
 
 
 
December 31, 2012
 
 
 
 
 
 
 
 
 
1
99.9
%
 
AAA
54.1
%
 
2007
28.7
%
 
2
—
%
 
AA
17.1
%
 
2006
20.4
%
 
3
0.1
%
 
A
8.4
%
 
2005 and prior
50.9
%
 
4
—
%
 
BBB
5.3
%
 
 
100.0
%
 
5
—
%
 
BB and below
15.1
%
 
 
 
 
6
—
%
 
 
100.0
%
 
 
 
 
 
100.0
%
 
 
 
 
 
 


 
22
 

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

As of September 30, 2013, the fair value, amortized cost and gross unrealized losses of the Company's Other ABS, excluding subprime exposure, totaled $441.0, $425.9 and $0.8, respectively. As of December 31, 2012, the fair value, amortized cost and gross unrealized losses of the Company's Other ABS, excluding subprime exposure, totaled $435.6, $411.7 and $0.6, respectively.

As of September 30, 2013, Other ABS was also broadly diversified both by type and issuer with credit card receivables, nonconsolidated collateralized loan obligations and automobile receivables, comprising 44.8%, 3.8% and 34.7%, respectively, of total Other ABS, excluding subprime exposure. As of December 31, 2012, Other ABS was also broadly diversified both by type and issuer with credit card receivables, nonconsolidated collateralized loan obligations and automobile receivables, comprising 47.0%, 5.6% and 26.9%, respectively, of total Other ABS, excluding subprime exposure.

The following tables summarize the Company's exposure to Other ABS holdings, excluding subprime exposure, by credit quality using NAIC designations, ARO ratings and vintage year as of the dates indicated:
 
% of Total Other ABS
 
NAIC Designation
 
ARO Ratings
 
Vintage
September 30, 2013
 
 
 
 
 
 
 
 
 
1
99.4
%
 
AAA
90.5
%
 
2013
9.0
%
 
2
0.5
%
 
AA
2.7
%
 
2012
21.0
%
 
3
0.1
%
 
A
6.2
%
 
2011
11.7
%
 
4
—
%
 
BBB
0.5
%
 
2010
5.0
%
 
5
—
%
 
BB and below
0.1
%
 
2009
0.3
%
 
6
—
%
 
 
100.0
%
 
2008
8.1
%
 
 
100.0
%
 
 
 
 
2007 and prior
44.9
%
 
 
 
 
 
 
 
 
100.0
%
December 31, 2012
 
 
 
 
 
 
 
 
 
1
98.3
%
 
AAA
88.4
%
 
2012
21.4
%
 
2
1.6
%
 
AA
1.9
%
 
2011
12.2
%
 
3
0.1
%
 
A
8.0
%
 
2010
5.7
%
 
4
—
%
 
BBB
1.6
%
 
2009
0.3
%
 
5
—
%
 
BB and below
0.1
%
 
2008
9.5
%
 
6
—
%
 
 
100.0
%
 
2007
22.9
%
 
 
100.0
%
 
 
 
 
2006 and prior
28.0
%
 
 
 
 
 
 
 
 
100.0
%

Troubled Debt Restructuring

The Company invests in high quality, well performing portfolios of commercial mortgage loans and private placements. Under certain circumstances, modifications are granted to these contracts. Each modification is evaluated as to whether a troubled debt restructuring has occurred. A modification is a troubled debt restructuring when the borrower is in financial difficulty and the creditor makes concessions. Generally, the types of concessions may include reducing the face amount or maturity amount of the debt as originally stated, reducing the contractual interest rate, extending the maturity date at an interest rate lower than current market interest rates and/or reducing 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. As of September 30, 2013, the Company did not have any new private placement troubled debt restructurings and had 20 new commercial mortgage loan troubled debt restructurings with pre-modification and post-modification carrying value of $39.4. The 20 commercial mortgage loans comprise a portfolio of cross-defaulted, cross-

 
23
 

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

collateralized individual loans, which are owned by the same sponsor. Between the date of the troubled debt restructurings and September 30, 2013, these loans have repaid $1.9 in principal. As of December 31, 2012, the Company did not have any new private placement or commercial mortgage loan troubled debt restructurings.

During the three and nine months ended September 30, 2013 and 2012, the Company did not have any commercial mortgage loans or private placements modified in a troubled debt restructuring with a subsequent payment default.

Mortgage Loans on Real Estate

The Company's mortgage loans on real estate are all commercial mortgage loans held for investment, which 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 a review 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 defines delinquent mortgage loans consistent with industry practice as 60 days past due. 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 the loan is brought current.

The following table summarizes the Company's investment in mortgage loans as of the dates indicated:
 
September 30, 2013
 
December 31, 2012
Commercial mortgage loans
$
3,284.2

 
$
2,874.0

Collective valuation allowance
(1.4
)
 
(1.3
)
Total net commercial mortgage loans
$
3,282.8

 
$
2,872.7


There were no impairment charges taken on the mortgage loan portfolio for the three and nine months ended September 30, 2013 and 2012.

The following table summarizes the activity in the allowance for losses for all commercial mortgage loans for the periods indicated:
 
September 30, 2013
 
December 31, 2012
Collective valuation allowance for losses, balance at January 1
$
1.3

 
$
1.3

Addition to (reduction of) allowance for losses
0.1

 
—

Collective valuation allowance for losses, end of period
$
1.4

 
$
1.3


The carrying values and unpaid principal balances of impaired mortgage loans were as follows as of the dates indicated:
 
September 30, 2013
 
December 31, 2012
Impaired loans with allowances for losses
$
—

 
$
—

Impaired loans without allowances for losses
42.9

 
5.6

Subtotal
42.9

 
5.6

Less: Allowances for losses on impaired loans
—

 
—

Impaired loans, net
$
42.9

 
$
5.6

Unpaid principal balance of impaired loans
$
44.4

 
$
7.1



 
24
 

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

The following table presents information on restructured loans as of the dates indicated:
 
September 30, 2013
 
December 31, 2012
Troubled debt restructured loans
$
37.5

 
$
—


There were no mortgage loans in the Company's portfolio in process of foreclosure as of September 30, 2013 and December 31, 2012. There were no other loans in arrears with respect to principal and interest as of September 30, 2013 and December 31, 2012.

The following table presents information on the average investment during the period in impaired loans and interest income recognized on impaired and troubled debt restructured loans for the periods indicated:
 
Three Months Ended September 30,
 
2013
 
2012
Impaired loans, average investment during the period (amortized cost)
$
24.2

 
$
5.7

Interest income recognized on impaired loans, on an accrual basis
0.5

 
0.1

Interest income recognized on impaired loans, on a cash basis
0.5

 
0.1

Interest income recognized on troubled debt restructured loans, on an accrual basis
0.4

 
—

 
 
 
 
 
 
 
 
 
Nine Months Ended September 30,
 
2013
 
2012
Impaired loans, average investment during the period (amortized cost)
$
24.3

 
$
5.8

Interest income recognized on impaired loans, on an accrual basis
0.7

 
0.3

Interest income recognized on impaired loans, on a cash basis
0.7

 
0.3

Interest income recognized on troubled debt restructured loans, on an accrual basis
0.4

 
—


Loan-to-value ("LTV") and debt service coverage ("DSC") ratios are measures commonly used to assess the risk and quality of 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. A LTV ratio in excess of 100% indicates the unpaid loan amount exceeds the underlying collateral. 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. A DSC ratio of less than 1.0 indicates that a property’s operations do not generate sufficient income to cover debt payments. These ratios are utilized as part of the review process described above.

The following table presents the LTV ratios as of the dates indicated:
 
September 30, 2013(1)
 
December 31, 2012(1)
Loan-to-Value Ratio:
 
 
 
0% - 50%
$
499.4

 
$
501.3

50% - 60%
859.2

 
768.9

60% - 70%
1,797.2

 
1,491.6

70% - 80%
115.4

 
96.4

80% and above
13.0

 
15.8

Total Commercial mortgage loans
$
3,284.2

 
$
2,874.0

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


 
25
 

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

The following table presents the DSC ratios as of the dates indicated:
 
September 30, 2013(1)
 
December 31, 2012(1)
Debt Service Coverage Ratio:
 
 
 
Greater than 1.5x
$
2,392.0

 
$
2,114.4

1.25x - 1.5x
512.9

 
390.5

1.0x - 1.25x
257.1

 
293.1

Less than 1.0x
122.2

 
76.0

Total Commercial mortgage loans
$
3,284.2

 
$
2,874.0

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

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 the dates indicated:
 
September 30, 2013(1)
 
December 31, 2012(1)
 
Gross
Carrying Value
 
% of
Total
 
Gross
Carrying Value
 
% of
Total
Commercial Mortgage Loans by U.S. Region:
 
 
 
 
 
 
 
Pacific
$
651.0

 
19.8
%
 
$
564.1

 
19.6
%
South Atlantic
679.9

 
20.7
%
 
561.0

 
19.5
%
West South Central
501.3

 
15.3
%
 
460.4

 
16.0
%
Middle Atlantic
407.6

 
12.4
%
 
332.7

 
11.6
%
East North Central
376.5

 
11.5
%
 
337.8

 
11.8
%
Mountain
250.1

 
7.6
%
 
214.5

 
7.5
%
West North Central
223.2

 
6.8
%
 
205.2

 
7.1
%
New England
116.2

 
3.5
%
 
119.1

 
4.1
%
East South Central
78.4

 
2.4
%
 
79.2

 
2.8
%
Total Commercial mortgage loans
$
3,284.2

 
100.0
%
 
$
2,874.0

 
100.0
%
(1) Balances do not include allowance for mortgage loan credit losses.
 
September 30, 2013(1)
 
December 31, 2012(1)
 
Gross
Carrying Value
 
% of
Total
 
Gross
Carrying Value
 
% of
Total
Commercial Mortgage Loans by Property Type:
 
 
 
 
 
 
 
Industrial
$
1,028.6

 
31.3
%
 
$
1,035.2

 
36.0
%
Retail
1,041.2

 
31.6
%
 
824.0

 
28.7
%
Office
448.9

 
13.7
%
 
427.0

 
14.8
%
Apartments
372.8

 
11.4
%
 
298.7

 
10.4
%
Hotel/Motel
139.7

 
4.3
%
 
92.1

 
3.2
%
Mixed Use
70.2

 
2.1
%
 
34.2

 
1.2
%
Other
182.8

 
5.6
%
 
162.8

 
5.7
%
Total Commercial mortgage loans
$
3,284.2

 
100.0
%
 
$
2,874.0

 
100.0
%
(1) Balances do not include allowance for mortgage loan credit losses.


 
26
 

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

The following table sets forth the breakdown of mortgages by year of origination as of the dates indicated:
 
September 30, 2013(1)
 
December 31, 2012(1)
Year of Origination:
 
 
 
2013
$
582.2

 
$
—

2012
916.7

 
939.0

2011
811.9

 
836.9

2010
121.7

 
124.0

2009
68.7

 
73.0

2008
94.7

 
119.0

2007 and prior
688.3

 
782.1

Total Commercial mortgage loans
$
3,284.2

 
$
2,874.0

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

Evaluating Securities for Other-Than-Temporary Impairments

The Company performs a regular evaluation, on a security-by-security basis, of its available-for-sale securities holdings, including fixed maturity securities and equity securities in accordance with its impairment policy in order to evaluate whether such investments are other-than-temporarily impaired.

The following tables identify the Company's credit-related and intent-related impairments included in the Condensed Consolidated Statements of Operations, excluding impairments included in Other comprehensive income (loss) by type for the periods indicated:
 
Three Months Ended September 30,
 
2013
 
2012
 
Impairment
 
No. of Securities
 
Impairment
 
No. of Securities
U.S. corporate
$
—

 
—

 
$
1.3

 
1

Foreign(1)
—

 
—

 
—

 
—

Residential mortgage-backed
0.4

 
14

 
2.9

 
23

Commercial mortgage-backed
0.1

 
1

 
—

 
—

Other asset-backed
0.2

 
1

 
0.4

 
3

Equity securities
0.1

 
1

 
—

 
—

Total
$
0.8

 
17

 
$
4.6

 
27

(1) Primarily U.S. dollar denominated.
 
Nine Months Ended September 30,
 
2013
 
2012
 
Impairment
 
No. of Securities
 
Impairment
 
No. of Securities
U.S. corporate
$
—

 
—

 
$
1.5

 
2

Foreign(1)
—

 
—

 
0.8

 
3

Residential mortgage-backed
2.2

 
32

 
4.5

 
30

Commercial mortgage-backed
0.2

 
3

 
—

 
—

Other asset-backed
0.2

 
1

 
0.8

 
4

Equity securities
0.1

 
1

 
—

 
—

Total
$
2.7

 
37

 
$
7.6

 
39

(1) Primarily U.S. dollar denominated.
 
 
 
 
 
 
 


 
27
 

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

The above tables include $0.7 and $2.5 of write-downs related to credit impairments for the three and nine months ended September 30, 2013, respectively, in Other-than-temporary impairments, which are recognized in the Condensed Consolidated Statements of Operations. The remaining $0.1 and $0.2 in write-downs for the three and nine months ended September 30, 2013, respectively, are related to intent impairments.

The above tables include $4.6 and $6.5 of write-downs related to credit impairments for the three and nine months ended September 30, 2012, respectively, in Other-than-temporary impairments, which are recognized in the Condensed Consolidated Statements of Operations. The Company did not have any write downs related to intent impairments for the three months ended September 30, 2012. For the nine months ended September 30, 2012, the remaining $1.1 in write-downs, are related to intent impairments.

The following tables summarize these intent impairments, which are also recognized in earnings, by type for the periods indicated:
 
Three Months Ended September 30,
 
2013
 
2012
 
Impairment
 
No. of Securities
 
Impairment
 
No. of Securities
U.S. corporate
$
—

 
—

 
$
—

 
—

Foreign(1)
—

 
—

 
—

 
—

Residential mortgage-backed
—

*
2

 
—

 
—

Commercial mortgage-backed
0.1

 
1

 
—

 
—

Other asset-backed
—

 
—

 
—

 
—

Total
$
0.1

 
3

 
$
—

 
—

(1) Primarily U.S. dollar denominated.
* Less than $0.1.
 
Nine Months Ended September 30,
 
2013
 
2012
 
Impairment
 
No. of Securities
 
Impairment
 
No. of Securities
U.S. corporate
$
—

 
—

 
$
0.2

 
1

Foreign(1)
—

 
—

 
0.8

 
3

Residential mortgage-backed
—

*
2

 
—

 
—

Commercial mortgage-backed
0.2

 
3

 
—

 
—

Other asset-backed
—

 
—

 
0.1

 
1

Total
$
0.2

 
5

 
$
1.1

 
5

(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. Accordingly, these factors may lead the Company to record additional intent related capital losses.

The fair value of fixed maturities with OTTI as of September 30, 2013 and December 31, 2012 was $1.8 billion and $1.2 billion, respectively.


 
28
 

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

The following tables identify the amount of credit impairments on fixed maturities for which a portion of the OTTI loss was recognized in Other comprehensive income (loss) and the corresponding changes in such amounts for the periods indicated:
 
Three Months Ended September 30,
 
2013
 
2012
Balance at July 1
$
20.2

 
$
20.0

Additional credit impairments:
 
 
 
On securities not previously impaired
0.3

 
—

On securities previously impaired
0.4

 
3.1

Reductions:
 
 
 
Securities intent impaired
—

 
—

Securities sold, matured, prepaid or paid down
(1.1
)
 
(2.5
)
Balance at September 30
$
19.8

 
$
20.6

 
 
Nine Months Ended September 30,
 
2013
 
2012
Balance at January 1
$
20.0

 
$
19.5

Additional credit impairments:
 
 
 
On securities not previously impaired
1.1

 
0.1

On securities previously impaired
1.4

 
4.8

Reductions:
 
 
 
Securities intent impaired
—

 
—

Securities sold, matured, prepaid or paid down
(2.7
)
 
(3.8
)
Balance at September 30
$
19.8

 
$
20.6


Net Investment Income

The following table summarizes Net investment income for the periods indicated:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
Fixed maturities
$
292.2

 
$
308.2

 
$
900.5

 
$
916.2

Equity securities, available-for-sale
1.7

 
2.6

 
1.6

 
6.7

Mortgage loans on real estate
39.0

 
35.0

 
116.5

 
106.1

Policy loans
3.2

 
3.3

 
9.6

 
9.9

Short-term investments and cash equivalents
0.2

 
0.3

 
0.7

 
0.8

Other
3.9

 
6.3

 
26.8

 
2.9

Gross investment income
340.2

 
355.7

 
1,055.7

 
1,042.6

Less: Investment expenses
12.0

 
11.0

 
36.4

 
34.0

Net investment income
$
328.2

 
$
344.7

 
$
1,019.3

 
$
1,008.6


As of September 30, 2013 and December 31, 2012, the Company did not have any investments in fixed maturities that produced no net investment income. Fixed maturities are moved to a non-accrual status when the investment defaults.


 
29
 

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

Interest income on fixed maturities is recorded when earned using an effective yield method, giving effect to amortization of premiums and accretion of discounts. Such interest income is recorded in Net investment income in the Condensed Consolidated Statements of Operations.
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 the credit-related and intent-related other-than-temporary impairment of investments. Realized investment gains and losses are also primarily generated from changes in fair value of embedded derivatives within product guarantees and fixed maturities, changes in fair value of fixed maturities recorded at FVO and changes in fair value including accruals on derivative instruments, except for effective cash flow hedges. The cost of the investments on disposal is generally determined based on first-in-first-out ("FIFO") methodology.

Net realized capital gains (losses) were as follows for the periods indicated:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
Fixed maturities, available-for-sale, including securities pledged
$
(6.5
)
 
$
1.5

 
$
(8.7
)
 
$
58.8

Fixed maturities, at fair value option
(26.0
)
 
(31.7
)
 
(131.1
)
 
(78.0
)
Equity securities, available-for-sale
0.1

 
(0.2
)
 
0.1

 
(0.2
)
Derivatives
(10.1
)
 
(12.7
)
 
(71.9
)
 
13.5

Embedded derivative - fixed maturities
(3.6
)
 
(4.1
)
 
(20.8
)
 
(4.3
)
Embedded derivative - product guarantees
17.9

 
21.3

 
94.4

 
110.8

Other investments
0.1

 
0.2

 
(0.1
)
 
(0.2
)
Net realized capital gains (losses)
$
(28.1
)
 
$
(25.7
)
 
$
(138.1
)
 
$
100.4

After-tax net realized capital gains (losses)
$
(46.9
)
 
$
(6.7
)
 
$
(120.3
)
 
$
65.3


Proceeds from the sale of fixed maturities and equity securities, available-for-sale and the related gross realized gains and losses, before tax were as follows for the periods indicated:
 
Nine Months Ended September 30,
 
2013
 
2012
Proceeds on sales
$
1,206.3

 
$
2,261.4

Gross gains
10.6

 
77.4

Gross losses
16.4

 
10.9


3.    Derivative Financial Instruments

The Company enters into the following types of derivatives:

Interest rate caps: The Company uses interest rate cap contracts to hedge the interest rate exposure arising from duration mismatches between assets and liabilities. Interest rate caps are also used to hedge interest rate exposure if rates rise above a specified level. Such increases in rates will require the Company to incur additional expenses. The future payout from the interest rate caps fund this increased exposure. The Company pays an upfront premium to purchase these caps. The Company utilizes these contracts in qualifying hedging relationships as well as non-qualifying hedging relationships.


 
30
 

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

Interest rate swaps: Interest rate swaps are used by the Company primarily to reduce market risks from changes in interest rates and to alter interest rate exposure arising from mismatches between assets and/or liabilities. Interest rate swaps are also used to hedge the interest rate risk associated with the value of assets it owns or in an anticipation of acquiring them. Using interest rate swaps, the Company agrees with another party to exchange, at specified intervals, the difference between fixed rate and floating rate interest payments, calculated by reference to an agreed upon notional principal amount. These transactions are entered into pursuant to master agreements that provide for a single net payment to be made to/from the counterparty at each due date. The Company utilizes these contracts in qualifying hedging relationships as well as non-qualifying hedging relationships.

Foreign exchange swaps: The Company uses foreign exchange or currency swaps to reduce the risk of change in the value, yield or cash flows associated with certain foreign denominated invested assets. Foreign exchange swaps represent contracts that require the exchange of foreign currency cash flows against U.S. dollar cash flows at regular periods, typically quarterly or semi-annually. The Company utilizes these contracts in qualifying hedging relationships as well as non-qualifying hedging relationships.

Credit default swaps: Credit default swaps are used to reduce 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. In the event of a default on the underlying credit exposure, the Company will either receive a payment (purchased credit protection) or will be required to make a payment (sold credit protection) equal to the par minus recovery value of the swap contract. The Company utilizes these contracts in non-qualifying hedging relationships.

Forwards: The Company uses forward contracts to hedge certain invested assets against movement in interest rates, particularly mortgage rates. The Company uses To Be Announced mortgage-backed securities as an economic hedge against rate movements. The Company utilizes forward contracts in non-qualifying hedging relationships.

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 Company also uses futures contracts as a hedge against an increase in certain equity indices. Such increases may result in increased payments to the holders of the fixed index annuity ("FIA") contracts. The Company enters into exchange traded futures with regulated futures commissions that are members of the exchange. The Company also posts initial and variation margin with the exchange on a daily basis. The Company utilizes exchange-traded futures in non-qualifying hedging relationships.

Swaptions: A swaption is an option to enter into a swap with a forward starting effective date. The Company uses swaptions to hedge the interest rate exposure associated with the minimum crediting rate and book value guarantees embedded in the retirement products that the Company offers. Increases in interest rates will generate losses on assets that are backing such liabilities. In certain instances, the Company locks in the economic impact of existing purchased swaptions by entering into offsetting written swaptions. Swaptions are also used to hedge against an increase in the interest rate benchmarked crediting strategies within FIA contracts. Such increases may result in increased payments to contract holders of FIA contracts and the interest rate swaptions offset this increased exposure. The Company pays a premium when it purchases the swaption. The Company utilizes these contracts in non-qualifying hedging relationships.

Managed custody guarantees ("MCG"): The Company issues 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.


 
31
 

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

Embedded derivatives: The Company also invests in certain fixed maturity instruments and has issued certain annuity products that contain embedded derivatives whose market 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. In addition, the Company has entered into a coinsurance with a funds withheld arrangement which contains an embedded derivative whose fair value is based on the change in the fair value of the underlying assets held in trust. The embedded derivatives for certain fixed maturity instruments, certain annuity products and coinsurance with funds withheld arrangements are reported with the host contract in investments, in Future policy benefits or Other liabilities, respectively, on the Condensed Consolidated Balance Sheets. Changes in the fair value of embedded derivatives within fixed maturity investments and within annuity products are recorded in Other net realized capital gains (losses) in the Condensed Consolidated Statements of Operations. Changes in fair value of embedded derivatives with reinsurance agreements are reported in Interest credited and other benefits to contract owners/policyholders in the Condensed Consolidated Statements of Operations.

The Company's use of derivatives is limited mainly to economic hedging 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 amounts recognized for derivative instruments and amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral arising from derivative instruments executed with the same counterparty under a master netting arrangement, which provides the Company with the legal right of offset.

The notional amounts and fair values of derivatives were as follows as of the dates indicated:
 
September 30, 2013
 
December 31, 2012
 
Notional
Amount
 
Asset
Fair Value
 
Liability
Fair Value
 
Notional
Amount
 
Asset
Fair Value
 
Liability
Fair Value
Derivatives: Qualifying for hedge accounting(1)
 
 
 
 
 
 
 
 
 
 
 
Cash flow hedges:
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
$
812.5

 
$
108.7

 
$
—

 
$
1,000.0

 
$
215.4

 
$
—

Foreign exchange contracts
42.0

 
0.6

 
0.1

 
—

 
—

 
—

Derivatives: Non-qualifying for hedge accounting(1)
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts(2)
16,630.4

 
291.5

 
185.3

 
18,131.1

 
292.9

 
328.5

Foreign exchange contracts
183.4

 
3.7

 
14.9

 
161.6

 
0.4

 
18.3

Equity contracts
11.5

 
—

 
0.1

 
14.5

 
0.4

 
—

Credit contracts
384.0

 
6.2

 
—

 
347.5

 
3.6

 
—

Managed custody guarantees
N/A

 
—

 
(1.0
)
 
N/A

 
—

 
—

Embedded derivatives:
 
 
 
 
 
 
 
 
 
 
 
Within fixed maturity investments
N/A

 
32.9

 
—

 
N/A

 
53.7

 
—

Within annuity products
N/A

 
—

 
33.7

 
N/A

 
—

 
122.4

Within reinsurance agreements
N/A

 
—

 
(51.1
)
 
N/A

 
—

 
—

Total
 
 
$
443.6

 
$
182.0

 
 
 
$
566.4

 
$
469.2

(1)
Open derivative contracts are reported as Derivatives assets or liabilities on the Condensed Consolidated Balance Sheets at fair value.
(2) 
As of September 30, 2013, includes a notional amount, asset fair value and liability fair value for interest rate caps of $6.5 billion, $66.0 and $8.6 respectively. As of December 31, 2012, includes a notional amount, asset fair value and liability fair value for interest rate caps of $4.5 billion, $17.7 and $0.6, respectively.
N/A - Not Applicable

The maximum length of time over which the Company is hedging its exposure to the variability in future cash flows for forecasted transactions is through the fourth quarter of 2016.


 
32
 

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

Although the Company has not elected to net its derivative exposures, the notional amounts and fair values of derivatives eligible for offset were as follows as of the dates indicated:
 
September 30, 2013
 
Notional Amount
 
Assets Fair Value
 
Liability Fair Value
Credit contracts
$
384.0

 
$
6.2

 
$
—

Equity contracts
—

 
—

 
—

Foreign exchange contracts
225.4

 
4.3

 
15.0

Interest rate contracts
17,006.4

 
386.6

 
185.3

 
 
 
$
397.1

 
$
200.3

 
 
 
 
 
 
Counterparty netting(1)
 
 
$
(187.9
)
 
$
(187.9
)
Cash collateral netting(2)
 
 
(131.4
)
 
—

Securities collateral netting(2)
 
 
(19.2
)
 
(7.4
)
Net receivables/payables
 
 
$
58.6

 
$
5.0

(1) Represents the netting of receivable balances with payable balances for the same counterparty under enforceable netting agreements.
(2) Represents the netting of collateral received and posted on a counterparty basis under credit support agreements.
 
December 31, 2012
 
Notional Amount
 
Assets Fair Value
 
Liability Fair Value
Credit contracts
$
347.5

 
$
3.6

 
$
—

Equity contracts
—

 
—

 
—

Foreign exchange contracts
161.6

 
0.4

 
18.3

Interest rate contracts
19,131.1

 
508.3

 
328.5

 
 
 
$
512.3

 
$
346.8

 
 
 
 
 
 
Counterparty netting(1)
 
 
$
(291.4
)
 
$
(291.4
)
Cash collateral netting(2)
 
 
(167.1
)
 
—

Securities collateral netting(2)
 
 
(3.1
)
 
(35.8
)
Net receivables/payables
 
 
$
50.7

 
$
19.6

(1) Represents the netting of receivable balances with payable balances for the same counterparty under enforceable netting agreements.
(2) Represents the netting of collateral received and posted on a counterparty basis under credit support agreements.

Collateral

Under the terms of the Company's Over-The-Counter ("OTC") Derivative International Swaps and Derivatives Association, Inc. ("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. To the extent cash collateral is received and delivered, it is included in Payables under securities loan agreements, including collateral held and Short term investments under securities loan agreements, including collateral delivered, respectively, on the Condensed Consolidated Balance Sheets and is reinvested in short-term investments. Collateral held is used in accordance with the 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. As of September 30, 2013, the Company held $120.9 and pledged $13.9 of net cash collateral related to OTC derivative contracts and cleared derivative contracts, respectively. As of December 31, 2012, the Company held $167.0 of net cash collateral related to OTC derivative contracts. In addition, as of September 30, 2013 and December 31, 2012, the Company delivered securities as collateral of $20.5 and $39.5, respectively.


 
33
 

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

Net realized gains (losses) on derivatives were as follows for the periods indicated:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
Derivatives: Qualifying for hedge accounting(1)
 
 
 
 
 
 
 
Cash flow hedges:
 
 
 
 
 
 
 
Interest rate contracts
$
—

 
$
—

 
$
0.1

 
$
—

Foreign exchange contracts
—

*
—

 
—

*
—

Derivatives: Non-qualifying for hedge accounting(2)
 
 
 
 
 
 
 
Interest rate contracts
(8.5
)
 
(5.3
)
 
(86.4
)
 
0.7

Foreign exchange contracts
(4.1
)
 
(11.7
)
 
7.9

 
1.2

Equity contracts
0.7

 
0.7

 
2.4

 
1.8

Credit contracts
1.8

 
3.6

 
4.1

 
9.8

Managed custody guarantees
1.0

 
—

 
1.1

 
1.1

Embedded derivatives:
 
 
 
 
 
 
 
Within fixed maturity investments(2)
(3.6
)
 
(4.1
)
 
(20.8
)
 
(4.3
)
Within annuity products(2)
16.9

 
21.3

 
93.3

 
109.7

Within reinsurance agreements(3)
5.3

 
—

 
51.1

 
—

Total
$
9.5

 
$
4.5

 
$
52.8

 
$
120.0

(1) Changes in value for effective fair value hedges are recorded in Other net realized capital gains (losses) in the Condensed Consolidated Statements of Operations. Changes in fair value upon disposal for effective cash flow hedges are amortized through Net investment income and the ineffective portion is recorded in the Other net realized capital gains (losses) in the Condensed Consolidated Statements of Operations. For the three and nine months ended September 30, 2013 and 2012, ineffective amounts were immaterial.
(2) Changes in value are included in Other net realized capital gains (losses) in the Condensed Consolidated Statements of Operations.
(3) Changes in value are included in Interest credited and other benefits to contract owners/policyholders in the Condensed Consolidated Statements of Operations.
* Amounts are less than $0.1.

Credit Default Swaps

As of September 30, 2013, the fair values of credit default swaps of $6.2 were included in Derivatives assets and there were no credit default swaps included in Derivatives liabilities, respectively, on the Condensed Consolidated Balance Sheets. As of December 31, 2012, the fair value of credit default swaps of $3.6 were included in Derivatives assets and there were no credit default swaps included in Derivatives liabilities, on the Condensed Consolidated Balance Sheets. As of September 30, 2013 and December 31, 2012, the maximum potential future exposure to the Company was $384.0 and $329.0 in credit default swaps. These instruments are typically written for a maturity period of five years and do not contain recourse provisions. 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.


4.    Fair Value Measurements

Fair Value Measurement

The Company categorizes its financial instruments into a three-level hierarchy based on the priority of the inputs to the valuation technique, pursuant to the Fair Value Measurements and disclosures of the FASB ASC Topic 820. 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), as described in the Fair Value Measurements Note in the Consolidated Financial Statements included in the Company's Form 10-K for the year ended December 31, 2012. 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.

 
34
 

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


When available, the estimated fair value of financial instruments 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.

The following table presents the Company’s hierarchy for its assets and liabilities measured at fair value on a recurring basis as of September 30, 2013:
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Fixed maturities, including securities pledged:
 
 
 
 
 
 
 
U.S. Treasuries
$
739.4

 
$
61.3

 
$
—

 
$
800.7

U.S. Government agencies and authorities
—

 
250.3

 
—

 
250.3

U.S. corporate, state and municipalities
—

 
10,513.8

 
138.9

 
10,652.7

Foreign(1)
—

 
5,689.9

 
20.4

 
5,710.3

Residential mortgage-backed securities
—

 
2,070.1

 
56.9

 
2,127.0

Commercial mortgage-backed securities
—

 
679.2

 
—

 
679.2

Other asset-backed securities
—

 
474.6

 
24.3

 
498.9

Total fixed maturities, including securities pledged
739.4

 
19,739.2

 
240.5

 
20,719.1

Equity securities, available-for-sale
90.6

 
—

 
36.7

 
127.3

Derivatives:


 


 


 
 
Interest rate contracts
13.6

 
386.6

 
—

 
400.2

Foreign exchange contracts
—

 
4.3

 
—

 
4.3

Equity contracts
—

 
—

 
—

 
—

Credit contracts
—

 
6.2

 
—

 
6.2

Cash and cash equivalents, short-term investments and short-term investments under securities loan agreements
804.7

 
—

 
—

 
804.7

Assets held in separate accounts
53,274.6

 
5,223.9

 
6.4

 
58,504.9

Total assets
$
54,922.9

 
$
25,360.2

 
$
283.6

 
$
80,566.7

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Derivatives:
 
 
 
 
 
 
 
Annuity product guarantees:
 
 
 
 
 
 
 
FIA
$
—

 
$
—

 
$
21.7

 
$
21.7

Stabilizer and MCGs
—

 
—

 
11.0

 
11.0

Other derivatives:
 
 
 
 
 
 
 
Interest rate contracts
—

 
185.3

 
—

 
185.3

Foreign exchange contracts
—

 
15.0

 
—

 
15.0

Equity contracts
0.1

 
—

 
—

 
0.1

Credit contracts
—

 
—

 
—

 
—

Embedded derivative on reinsurance
—

 
(51.1
)
 
—

 
(51.1
)
Total liabilities
$
0.1

 
$
149.2

 
$
32.7

 
$
182.0

(1) Primarily U.S. dollar denominated.


 
35
 

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

The following table presents the Company’s hierarchy for its assets and liabilities measured at fair value on a recurring basis as of December 31, 2012:
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Fixed maturities, including securities pledged:
 
 
 
 
 
 
 
U.S. Treasuries
$
1,093.4

 
$
53.2

 
$
—

 
$
1,146.6

U.S. Government agencies and authorities
—

 
397.0

 
—

 
397.0

U.S. corporate, state and municipalities
—

 
10,512.8

 
154.6

 
10,667.4

Foreign(1)
—

 
5,527.4

 
24.6

 
5,552.0

Residential mortgage-backed securities
—

 
2,348.4

 
9.1

 
2,357.5

Commercial mortgage-backed securities
—

 
839.1

 
—

 
839.1

Other asset-backed securities
—

 
462.4

 
33.2

 
495.6

Total fixed maturities, including securities pledged
1,093.4

 
20,140.3

 
221.5

 
21,455.2

Equity securities, available-for-sale
125.8

 
—

 
17.0

 
142.8

Derivatives:
 
 
 
 
 
 
 
Interest rate contracts
—

 
508.3

 
—

 
508.3

Foreign exchange contracts
—

 
0.4

 
—

 
0.4

Equity contracts
0.4

 
—

 
—

 
0.4

Credit contracts
—

 
3.6

 
—

 
3.6

Cash and cash equivalents, short-term investments and short-term investments under securities loan agreements
1,229.3

 
—

 
—

 
1,229.3

Assets held in separate accounts
47,916.5

 
5,722.5

 
16.3

 
53,655.3

Total assets
$
50,365.4

 
$
26,375.1

 
$
254.8

 
$
76,995.3

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Derivatives:
 
 
 
 
 
 
 
Annuity product guarantees:
 
 
 
 
 
 
 
FIA
$
—

 
$
—

 
$
20.4

 
$
20.4

Stabilizer and MCGs
—

 
—

 
102.0

 
102.0

Other derivatives:
 
 
 
 
 
 
 
Interest rate contracts
0.7

 
327.8

 
—

 
328.5

Foreign exchange contracts
—

 
18.3

 
—

 
18.3

Credit contracts
—

 
—

 
—

 
—

Embedded derivative on reinsurance
—

 
—

 
—

 
—

Total liabilities
$
0.7

 
$
346.1

 
$
122.4

 
$
469.2

(1) Primarily U.S. dollar denominated.


 
36
 

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

Valuation of Financial Assets and Liabilities at Fair Value

Certain assets and liabilities are measured at estimated fair value on the Company’s Condensed Consolidated Balance Sheets. 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 measurement that 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 valuations obtained from third-party commercial pricing services are non-binding. 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 third-party commercial pricing services are reviewed by the Company, including in-depth validation procedures confirming the observability of inputs. 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.

Transfers in and out of Level 1 and 2

There were no securities transferred between Level 1 and Level 2 for the three and nine months ended September 30, 2013 and 2012. The Company’s policy is to recognize transfers in and transfers out as of the beginning of the reporting period.

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.

 
37
 

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

The following tables summarizes the change in fair value of the Company’s Level 3 assets and liabilities and transfers in and out of Level 3 for the periods indicated:
 
Three Months Ended September 30, 2013
 
Fair Value
as of
July 1
 
Total
Realized/Unrealized
Gains (Losses) Included in:
 
Purchases
 
Issuances
 
Sales
 
Settlements
 
Transfers into Level 3(2)
 
Transfers out of Level 3(2)
 
Fair Value
as of
September 30
 
Change In Unrealized Gains (Losses) Included in Earnings(3)
 
 
Net Income
 
OCI
Fixed maturities, including securities pledged:


 


 


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. corporate, state and municipalities
$
139.9

 
$
(0.1
)
 
$
(0.1
)
 
$
—

 
$
—

 
$
—

 
$
(0.8
)
 
$
—

 
$
—

 
$
138.9

 
$
(0.1
)
Foreign
18.7

 
—

 
1.0

 
—

 
—

 
—

 
(4.0
)
 
4.7

 
—

 
20.4

 
—

Residential mortgage-backed securities
30.8

 
(0.3
)
 
0.2

 
27.0

 
—

 
—

 
—

 
—

 
(0.8
)
 
56.9

 
(0.3
)
Other asset-backed securities
24.7

 
0.3

 
(0.2
)
 
—

 
—

 
—

 
(0.5
)
 
—

 
—

 
24.3

 
0.3

Total fixed maturities, including securities pledged
214.1

 
(0.1
)
 
0.9

 
27.0

 
—

 
—

 
(5.3
)
 
4.7

 
(0.8
)
 
240.5

 
(0.1
)
Equity securities, available-for-sale
36.9

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(0.2
)
 
36.7

 
—

Derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Product guarantees:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Stabilizer and MCGs(1)
(28.0
)
 
18.5

 
—

 
(1.5
)
 
—

 
—

 
—

 
—

 
—

 
(11.0
)
 
—

FIA(1)
(21.1
)
 
(0.6
)
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(21.7
)
 
—

Other derivatives, net
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Assets held in separate accounts(4)
19.9

 
—

 
—

 
0.7

 
—

 
(0.2
)
 
—

 
—

 
(14.0
)
 
6.4

 
—

(1) All gains and losses on Level 3 liabilities 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 capital 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 September 30, amounts are included in Net investment income and Total 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 (loss) for separate account assets are offset by an equal amount for separate account liabilities, which result in a net zero impact on net income (loss) for the Company.

 
38
 

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

 
 
Nine Months Ended September 30, 2013
 
Fair Value
as of
January 1
 
Total
Realized/Unrealized
Gains (Losses) Included in:
 
Purchases
 
Issuances
 
Sales
 
Settlements
 
Transfers into Level 3(2)
 
Transfers out of Level 3(2)
 
Fair Value
as of
September 30
 
Change In Unrealized Gains (Losses) Included in Earnings(3)
 
 
Net Income
 
OCI
Fixed maturities, including securities pledged:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. corporate, state and municipalities
$
154.6

 
$
(0.3
)
 
$
(1.0
)
 
$
—

 
$
—

 
$
(6.0
)
 
$
(3.2
)
 
$
17.6

 
$
(22.8
)
 
$
138.9

 
$
(0.3
)
Foreign
24.6

 
—

 
1.0

 
—

 
—

 
(1.9
)
 
(10.6
)
 
7.3

 
—

 
20.4

 
—

Residential mortgage-backed securities
9.1

 
(1.0
)
 
0.1

 
49.4

 
—

 
—

 
—

 
—

 
(0.7
)
 
56.9

 
(1.0
)
Other asset-backed securities
33.2

 
1.9

 
(0.5
)
 
—

 
—

 
—

 
(10.3
)
 
—

 
—

 
24.3

 
0.7

Total fixed maturities, including securities pledged
221.5

 
0.6

 
(0.4
)
 
49.4

 
—

 
(7.9
)
 
(24.1
)
 
24.9

 
(23.5
)
 
240.5

 
(0.6
)
Equity securities, available-for-sale
17.0

 
(0.1
)
 
2.3

 
—

 
—

 
—

 
—

 
34.5

 
(17.0
)
 
36.7

 
—

Derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Product guarantees:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Stabilizer and MCGs(1)
(102.0
)
 
95.7

 
—

 
(4.7
)
 
—

 
—

 
—

 
—

 
—

 
(11.0
)
 
—

FIA(1)
(20.4
)
 
(1.3
)
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(21.7
)
 
—

Other derivatives, net
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Assets held in separate accounts(4)
16.3

 
—

 
—

 
8.0

 
—

 
(10.1
)
 
—

 
2.2

 
(10.0
)
 
6.4

 
0.1

(1) All gains and losses on Level 3 liabilities 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 capital 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 September 30, amounts are included in Net investment income and Total 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 (loss) for separate account assets are offset by an equal amount for separate account liabilities, which result in a net zero impact on net income (loss) for the Company.


 
39
 

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

The following tables summarizes the change in fair value of the Company’s Level 3 assets and liabilities and transfers in and out of Level 3 for the periods indicated:
 
Three Months Ended September 30, 2012
 
Fair Value
as of
July 1
 
Total
Realized/Unrealized
Gains (Losses) Included in:
 
Purchases
 
Issuances
 
Sales
 
Settlements
 
Transfers into Level 3(2)
 
Transfers out of Level 3(2)
 
Fair Value
as of
September 30
 
Change In Unrealized Gains (Losses) Included in Earnings(3)
 
 
Net Income
 
OCI
 
 
 
 
Fixed maturities, including securities pledged:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. corporate, state and municipalities
$
151.6

 
$
—

 
$
2.0

 
$
—

 
$
—

 
$
—

 
$
(0.9
)
 
$
4.1

 
$
—

 
$
156.8

 
$
—

Foreign
19.4

 
—

 
(3.6
)
 
—

 
—

 
—

 
(2.5
)
 
21.5

 
—

 
34.8

 
—

Residential mortgage-backed securities
6.0

 
(0.1
)
 
(0.5
)
 
—

 
—

 
—

 
(0.1
)
 
1.3

 
—

 
6.6

 
(0.1
)
Other asset-backed securities
30.1

 
0.4

 
1.3

 
10.0

 
—

 
—

 
(0.4
)
 
1.2

 
—

 
42.6

 
0.4

Total fixed maturities, including securities pledged
207.1

 
0.3

 
(0.8
)
 
10.0

 
—

 
—

 
(3.9
)
 
28.1

 
—

 
240.8

 
0.3

Equity securities, available-for-sale
18.5

 
(0.2
)
 
—

 
—

 
—

 
(1.3
)
 
—

 
—

 
—

 
17.0

 
—

Derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Product guarantees:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Stabilizer and MCGs(1)
(133.0
)
 
21.2

 
—

 
(1.2
)
 
—

 
—

 
—

 
—

 
—

 
(113.0
)
 
—

FIA(1)
(17.6
)
 
0.1

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(17.5
)
 
—

Other derivatives, net
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Assets held in separate accounts(4)
8.7

 
0.3

 
—

 
0.1

 
—

 
(2.0
)
 
—

 
1.4

 
—

 
8.5

 
0.2

(1) All gains and losses on Level 3 liabilities 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 capital 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 September 30, amounts are included in Net investment income and Total 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 (loss) for separate account assets are offset by an equal amount for separate account liabilities, which result in a net zero impact on net income (loss) for the Company.

 
40
 

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

 
 
Nine Months Ended September 30, 2012
 
Fair Value
as of
January 1
 
Total
Realized/Unrealized
Gains (Losses) Included in:
 
Purchases
 
Issuances
 
Sales
 
Settlements
 
Transfers into Level 3(2)
 
Transfers out of Level 3(2)
 
Fair Value
as of
September 30
 
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

 
$
(0.2
)
 
$
(1.2
)
 
$
7.2

 
$
—

 
$
—

 
$
(7.2
)
 
$
32.7

 
$
(3.6
)
 
$
156.8

 
$
(0.2
)
Foreign
51.1

 
0.9

 
(4.0
)
 
—

 
—

 
(5.7
)
 
(2.5
)
 
20.7

 
(25.7
)
 
34.8

 
—

Residential mortgage-backed securities
41.0

 
0.7

 
1.3

 
—

 
—

 
(6.0
)
 
(0.1
)
 
—

 
(30.3
)
 
6.6

 
(0.3
)
Other asset-backed securities
27.7

 
0.8

 
1.8

 
10.0

 
—

 
—

 
(1.6
)
 
3.9

 
—

 
42.6

 
0.8

Total fixed maturities, including securities pledged
248.9

 
2.2

 
(2.1
)
 
17.2

 
—

 
(11.7
)
 
(11.4
)
 
57.3

 
(59.6
)
 
240.8

 
0.3

Equity securities, available-for-sale
19.0

 
(0.2
)
 
(0.1
)
 
0.7

 
—

 
(2.4
)
 
—

 
—

 
—

 
17.0

 
—

Derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Product guarantees:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Stabilizer and MCGs(1)
(221.0
)
 
112.0

 
—

 
(4.0
)
 
—

 
—

 
—

 
—

 
—

 
(113.0
)
 
—

FIA(1)
(16.3
)
 
(1.2
)
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(17.5
)
 
—

Other derivatives, net
(12.7
)
 
(1.7
)
 
—

 
—

 
—

 
—

 
14.4

 
—

 
—

 
—

 
—

Assets held in separate accounts(4)
16.1

 
0.7

 
—

 
0.1

 
—

 
(10.0
)
 
—

 
1.6

 
—

 
8.5

 
0.9

(1) All gains and losses on Level 3 liabilities 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 capital 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 September 30, amounts are included in Net investment income and Total 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 (loss) for separate account assets are offset by an equal amount for separate account liabilities, which result in a net zero impact on net income (loss) for the Company.


 
41
 

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

For the three and nine months ended September 30, 2013 and 2012, the transfers in and out of Level 3 for fixed maturities including securities pledged and separate accounts, as well as equity securities for the three and nine months ended September 30, 2013 were 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. 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 Level 3 fair value measurements of its annuity product guarantees is presented in the following sections and table.

The Company's Level 3 fair value measurements of its fixed maturities, equity securities available-for-sale and equity and credit derivative contracts 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 Company performs a review of broker quotes by performing a monthly price variance comparison and back tests broker quotes to recent trade prices.

Significant unobservable inputs used in the fair value measurements of FIAs include nonperformance risk and lapses. Such inputs are monitored quarterly.

The significant unobservable inputs used in the fair value measurement of the Stabilizer embedded derivatives and MCG derivative are interest rate implied volatility, nonperformance risk, lapses and policyholder deposits. Such inputs are monitored quarterly.

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 fair value measurements. Where no implied volatility is readily available in the market, an alternative approach is applied based on historical volatility.

Nonperformance Risk: For the estimate of the fair value of embedded derivatives associated with the Company's product guarantees, the Company uses a blend of observable, similarly rated peer company credit default swap spreads, adjusted to reflect the credit quality of the Company as well as adjustment to reflect the priority of policyholder claims.

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


 
42
 

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

The following table presents the unobservable inputs for Level 3 fair value measurements as of September 30, 2013:
 
 
Range(1)
 
Unobservable Input
 
FIA
 
Stabilizer / MCG
 
Interest rate implied volatility
 
—

 
0.2% to 8.0%
 
Nonperformance risk
 
0.23% to 1.3%

 
0.23% to 1.3%
 
Actuarial Assumptions:
 
 
 
 
 
Lapses
 
0% to 10%

(2) 
0% to 55%
(3) 
Policyholder Deposits(4)
 
—

 
0% to 60%
(3) 
(1) Represents the range of reasonable assumptions that management has used in its fair value calculations.
(2) Lapse rates tend to be lower during the contractual surrender charge period and higher after the surrender charge period ends; the highest lapse rates occur in the year immediately after the end of the surrender charge period. The Company makes dynamic adjustments to lower the lapse rates for contracts that are more "in the money."
(3) Stabilizer contracts with recordkeeping agreements have different range of lapse and policyholder deposit assumptions from Stabilizer (Investment only) and MCG contracts as shown below:
 
Percentage of Plans
 
Overall Range of Lapse Rates
 
Range of Lapse Rates for 85% of Plans
 
Overall Range of Policyholder Deposits
 
Range of Policyholder Deposits for 85% of Plans
Stabilizer (Investment Only) and MCG Contracts
87
%
 
0-30%
 
0-15%
 
0-55%
 
0-15%
Stabilizer with Recordkeeping Agreements
13
%
 
0-55%
 
0-25%
 
0-60%
 
0-30%
Aggregate of all plans
100
%
 
0-55%
 
0-25%
 
0-60%
 
0-30%
(4) Measured as a percentage of assets under management or assets under administration.

The following table presents the unobservable inputs for Level 3 fair value measurements as of December 31, 2012:
 
 
Range(1)
 
Unobservable Input
 
FIA
 
Stabilizer / MCG
 
Interest rate implied volatility
 
—

 
0.1% to 7.6%
 
Nonperformance risk
 
0.1% to 1.3%

 
0.1% to 1.3%
 
Actuarial Assumptions:
 
 
 
 
 
Lapses
 
0% - 10%

(2) 
0% to 55%
(3) 
Policyholder Deposits(4)
 
—

 
0% to 60%
(3) 
(1) Represents the range of reasonable assumptions that management has used in its fair value calculations.
(2) Lapse rates tend to be lower during the contractual surrender charge period and higher after the surrender charge period ends; the highest lapse rates occur in the year immediately after the end of the surrender charge period. The Company makes dynamic adjustments to lower the lapse rates for contracts that are more "in the money."
(3) Stabilizer contracts with recordkeeping agreements have different range of lapse and policyholder deposit assumptions from Stabilizer (Investment only) and MCG contracts as shown below:
 
Percentage of Plans
 
Overall Range of Lapse Rates
 
Range of Lapse Rates for 85% of Plans
 
Overall Range of Policyholder Deposits
 
Range of Policyholder Deposits for 85% of Plans
Stabilizer (Investment Only) and MCG Contracts
87
%
 
0-30%
 
0-15%
 
0-55%
 
0-20%
Stabilizer with Recordkeeping Agreements
13
%
 
0-55%
 
0-25%
 
0-60%
 
0-30%
Aggregate of all plans
100
%
 
0-55%
 
0-25%
 
0-60%
 
0-30%
(4) Measured as a percentage of assets under management or assets under administration.

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

•
A decrease (increase) in nonperformance risk
•
A decrease (increase) in lapses


 
43
 

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

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

•
An increase (decrease) in interest rate implied volatility
•
A decrease (increase) in nonperformance risk
•
A decrease (increase) in lapses
•
A decrease (increase) in policyholder deposits

The Company notes the following interrelationships:

•
Generally, an increase (decrease) in interest rate volatility will increase (decrease) lapses of Stabilizer and MCG contracts due to dynamic participant behavior.

Other Financial Instruments

The carrying values and estimated fair values of the Company’s financial instruments as of the dates indicated:
 
September 30, 2013
 
December 31, 2012
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
Assets:
 
 
 
 
 
 
 
Fixed maturities, including securities pledged
$
20,719.1

 
$
20,719.1

 
$
21,455.2

 
$
21,455.2

Equity securities, available-for-sale
127.3

 
127.3

 
142.8

 
142.8

Mortgage loans on real estate
3,282.8

 
3,295.7

 
2,872.7

 
2,946.9

Policy loans
242.1

 
242.1

 
240.9

 
240.9

Limited partnerships/corporations
184.5

 
184.5

 
179.6

 
179.6

Cash, cash equivalents, short-term investments and short-term investments under securities loan agreements
804.7

 
804.7

 
1,229.3

 
1,229.3

Derivatives
410.7

 
410.7

 
512.7

 
512.7

Notes receivable from affiliates
175.0

 
185.1

 
175.0

 
194.3

Assets held in separate accounts
58,504.9

 
58,504.9

 
53,655.3

 
53,655.3

Liabilities:
 
 
 
 
 
 
 
Investment contract liabilities:
 
 
 
 
 
 
 
Funding agreements without fixed maturities and deferred annuities(1)
20,711.6

 
23,851.3

 
20,263.4

 
25,156.5

Supplementary contracts, immediate annuities and other
638.4

 
729.3

 
680.0

 
837.3

Annuity product guarantees:
 
 
 
 
 
 
 
FIA
21.7

 
21.7

 
20.4

 
20.4

Stabilizer and MCGs
11.0

 
11.0

 
102.0

 
102.0

Derivatives
200.4

 
200.4

 
346.8

 
346.8

Long-term debt
4.9

 
4.9

 
4.9

 
4.9

Embedded derivatives on reinsurance
(51.1
)
 
(51.1
)
 
—

 
—

(1) Certain amounts included in Funding agreements without fixed maturities and deferred annuities are also reflected within the Annuity product guarantees section of the table above.

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 at fair value on the Condensed Consolidated Balance Sheets, 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,

 
44
 

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

including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates, in many cases, could not be realized in immediate settlement of the instrument.

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:

Mortgage loans on real estate: The fair values for mortgage loans on real estate are estimated on a monthly basis 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.

Policy loans: The fair value of policy loans approximates the carrying value of the loans.  Policy loans are collateralized by the cash surrender value of the associated insurance contracts and are classified as Level 2.

Limited partnerships/corporations: The fair value for these investments, primarily private equity fund of funds and hedge funds, is based on actual or estimated Net Asset Value ("NAV") information as provided by the investee and are classified as Level 3.

Notes receivable from affiliates: Estimated fair value of the Company’s notes receivable from affiliates is determined primarily using a matrix-based pricing. The model considers the current level of risk-free interest rates, credit quality of the issuer and cash flow characteristics of the security model and is classified as Level 2.

Investment contract liabilities:

Funding agreements without a fixed maturity and deferred annuities: Fair value is estimated as the mean present value of stochastically modeled cash flows associated with the contract liabilities taking into account assumptions about contract holder behavior. The stochastic valuation scenario set is consistent with current market parameters and discount is taken using stochastically evolving risk-free rates in the scenarios plus an adjustment for nonperformance risk. Margins for non-financial risks associated with the contract liabilities are also included. These liabilities are classified as Level 3.

Supplementary contracts and immediate annuities: Fair value is estimated as the mean present value of the single deterministically modeled cash flows associated with the contract liabilities discounted using stochastically evolving short risk-free rates in the scenarios plus an adjustment for nonperformance risk. The valuation is consistent with current market parameters. Margins for non-financial risks associated with the contract liabilities are also included. These liabilities are classified as Level 3.

Long-term debt: Estimated fair value of the Company’s notes to affiliates is based upon discounted future cash flows using a discount rate approximating the current market rate, incorporating nonperformance risk and is 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.


 
45
 

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

5.    Deferred Policy Acquisition Costs and Value of Business Acquired

Activity within deferred policy acquisition costs ("DAC") and value of business acquired ("VOBA") was as follows for the periods indicated:
 
DAC
 
VOBA
 
Total
Balance at January 1, 2013
$
296.5

 
$
381.4

 
$
677.9

Deferrals of commissions and expenses
52.4

 
5.6

 
58.0

Amortization:
 
 
 
 
 
Amortization
(45.2
)
 
(57.2
)
 
(102.4
)
Interest accrued(1)
25.1

 
45.6

 
70.7

Net amortization included in the Condensed Consolidated Statements of Operations
(20.1
)
 
(11.6
)
 
(31.7
)
Change in unrealized capital gains/losses on available-for-sale securities
136.8

 
310.2

 
447.0

Balance at September 30, 2013
$
465.6

 
$
685.6

 
$
1,151.2

 
 
DAC
 
VOBA
 
Total
Balance at January 1, 2012
$
334.9

 
$
593.6

 
$
928.5

Deferrals of commissions and expenses
55.5

 
6.0

 
61.5

Amortization:
 
 
 
 
 
Amortization
(59.6
)
 
(128.4
)
 
(188.0
)
Interest accrued(1)
22.9

 
46.6

 
69.5

Net amortization included in the Condensed Consolidated Statements of Operations
(36.7
)
 
(81.8
)
 
(118.5
)
Change in unrealized capital gains/losses on available-for-sale securities
(76.7
)
 
(153.9
)
 
(230.6
)
Balance at September 30, 2012
277.0

 
$
363.9

 
$
640.9

(1) 
Interest accrued at the following rates for DAC: 0.0% to 7.0% during 2013 and 0.0% and 7.0% during 2012. Interest accrued at the following rates for VOBA: 1.0% to 7.0% during 2013 and 5.0% to 7.0% during 2012.

6.    Capital Contributions and Dividends

During the nine months ended September 30, 2013 and 2012, ILIAC did not receive any capital contributions from its Parent.

During the nine months ended September 30, 2013, following receipt of required approval from its domiciliary state insurance regulator and consummation of the IPO of ING U.S., Inc., ILIAC paid an extraordinary dividend of $174.0 to its Parent. During the nine months ended September 30, 2012, following receipt of required approval from its domiciliary state insurance regulator, ILIAC paid a cash distribution of $340.0 to its Parent.

 

 
46
 

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

7.    Accumulated Other Comprehensive Income

Shareholder’s equity included the following components of AOCI as of the dates indicated:
 
September 30,
 
2013
 
2012
Fixed maturities, net of OTTI
$
885.4

 
$
2,221.3

Equity securities, available-for-sale
16.1

 
12.3

Derivatives
148.8

 
221.0

DAC/VOBA and sales inducements adjustment on available-for-sale securities
(363.1
)
 
(834.6
)
Premium deficiency reserve adjustment
(89.7
)
 
(117.0
)
Unrealized capital gains (losses), before tax
597.5

 
1,503.0

Deferred income tax asset (liability)
(118.6
)
 
(460.4
)
Unrealized capital gains (losses), after tax
478.9

 
1,042.6

Pension and other postretirement benefits liability, net of tax
10.2

 
11.6

AOCI
$
489.1

 
$
1,054.2



 
47
 

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

Changes in AOCI, including the reclassification adjustments recognized in the Condensed Consolidated Statements of Operations were as follows for the periods indicated:
 
Nine Months Ended September 30, 2013
 
 
Before-Tax Amount
 
Income Tax
 
After-Tax Amount
 
Available-for-sale securities:
 
 
 
 
 
 
Fixed maturities
$
(1,317.3
)
 
$
486.5

(4) 
$
(830.8
)
 
Equity securities
2.6

 
(0.9
)
 
1.7

 
Other
—

* 
—

* 
—

* 
OTTI
3.4

 
(1.2
)
 
2.2

 
Adjustments for amounts recognized in Net realized capital gains (losses) in the Condensed Consolidated Statements of Operations
8.4

 
(2.9
)
 
5.5

 
DAC/VOBA and sales inducements
447.5

(1) 
(156.6
)
 
290.9

 
Premium deficiency reserve adjustment
62.9

 
(22.0
)
 
40.9

 
Change in unrealized gains/losses on available-for-sale securities
(792.5
)
 
302.9

 
(489.6
)
 
 
 
 
 
 
 
 
Derivatives:
 
 
 
 
 
 
Derivatives
(68.0
)
(2) 
23.8

 
(44.2
)
 
Adjustments related to effective cash flow hedges for amounts recognized in Net investment income in the Condensed Consolidated Statements of Operations
1.6

 
(0.6
)
 
1.0

 
Change in unrealized gains/losses on derivatives
(66.4
)
 
23.2

 
(43.2
)
 
 
 
 
 
 
 
 
Pension and other postretirement benefits liability:
 
 
 
 
 
 
Amortization of prior service cost recognized in Operating expenses in the Condensed Consolidated Statements of Operations
(1.7
)
(3) 
0.6

 
(1.1
)
 
Change in pension and other postretirement benefits liability
(1.7
)
 
0.6

 
(1.1
)
 
Change in Other comprehensive income (loss)
$
(860.6
)
 
$
326.7

 
$
(533.9
)
 
* Less than $0.1.
(1) See Deferred Policy Acquisition Costs and Value of Business Acquired Note to these Condensed Consolidated Financial Statements for additional information.
(2) See Derivative Financial Instruments Note to these Condensed Consolidated Financial Statements for additional information.
(3) Amount reported in Net periodic pension cost which is reported in Operating expenses.
See Benefit Plans Note in the Company's 2012 Annual Report on Form 10-K for additional information.
(4) Amount includes $30.5 valuation allowance. See Income Taxes Note to these Condensed Consolidated Financial Statements for additional information.


 
48
 

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

 
Nine Months Ended September 30, 2012
 
 
Before-Tax Amount
 
Income Tax
 
After-Tax Amount
 
Available-for-sale securities:
 
 
 
 
 
 
Fixed maturities
$
633.5

 
$
(222.0
)
 
$
411.5

 
Equity securities
(0.8
)
 
0.3

 
(0.5
)
 
Other
—

* 
—

* 
—

* 
OTTI
10.6

 
(3.7
)
 
6.9

 
Adjustments for amounts recognized in Net realized capital gains (losses) in the Condensed Consolidated Statements of Operations
58.6

 
(19.9
)
 
38.7

 
DAC/VOBA and sales inducements
(231.0
)
(1) 
85.5

 
(145.5
)
 
Premium deficiency reserve adjustment
(52.2
)
 
17.7

 
(34.5
)
 
Change in unrealized gains/losses on available-for-sale securities
418.7

 
(142.1
)
 
276.6

 
 
 
 
 
 
 
 
Derivatives:
 
 
 
 
 
 
Derivatives
47.3

(2) 
(16.1
)
 
31.2

 
Adjustments related to effective cash flow hedges for amounts recognized in Net investment income in the Condensed Consolidated Statements of Operations
—

 
—

 
—

 
Change in unrealized gains/losses on derivatives
47.3

 
(16.1
)
 
31.2

 
 
 
 
 
 
 
 
Pension and other postretirement benefits liability:
 
 
 
 
 
 
Amortization of prior service cost recognized in Operating expenses in the Condensed Consolidated Statements of Operations
(1.7
)
(3) 
0.6

 
(1.1
)
 
Change in pension and other postretirement benefits liability
(1.7
)
 
0.6

 
(1.1
)
 
Change in Other comprehensive income (loss)
$
464.3

 
$
(157.6
)
 
$
306.7

 
* Less than $0.1.
(1) See Deferred Policy Acquisition Costs and Value of Business Acquired Note to these Condensed Consolidated Financial Statements for additional information.
(2) See Derivative Financial Instruments Note to these Condensed Consolidated Financial Statements for additional information.
(3) Amount reported in Net periodic pension cost which is reported in Operating expenses.
See Benefit Plans Note in the Company's 2012 Annual Report on Form 10-K for additional information.


 
49
 

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

8.    Income Taxes

Income taxes were different from the amount computed by applying the federal income tax rate to income (loss) before income taxes for the following reasons for the periods indicated:
 
Three Months Ended September 30,
 
2013
 
2012
Income (loss) before income taxes
$
133.3

 
$
126.7

Tax rate
35.0
%
 
35.0
%
Income tax expense (benefit) at federal statutory rate
46.7

 
44.3

Tax effect of:
 
 
 
Dividends received deduction
(9.0
)
 
(1.2
)
Valuation allowance
28.6

 
(10.0
)
IRS audit adjustment
—

 
—

Other
(0.6
)
 
0.3

Income tax expense (benefit)
$
65.7

 
$
33.4


 
Nine Months Ended September 30,
 
2013
 
2012
Income (loss) before income taxes
$
353.0

 
$
403.4

Tax rate
35.0
%
 
35.0
%
Income tax expense (benefit) at federal statutory rate
123.6

 
141.2

Tax effect of:
 
 
 
Dividends received deduction
(20.6
)
 
(13.3
)
Valuation allowance
30.5

 
—

IRS audit adjustment
(0.3
)
 
(0.3
)
Other
0.2

 
0.6

Income tax expense (benefit)
$
133.4

 
$
128.2


Valuation allowances are provided when it is considered unlikely that deferred tax assets will be realized. As of September 30, 2013 and December 31, 2012, the Company had a tax valuation allowance of $93.3 and $62.8, respectively, that was allocated to continuing operations and $(82.2) and $(51.7), respectively, that was allocated to Other comprehensive income. As of September 30, 2013 and December 31, 2012, the Company had a full valuation allowance of $11.1, related to foreign tax credits, the benefit of which is uncertain.

For the three months ended September 30, 2013 and 2012, there were no total increases (decreases) in the valuation allowance. With respect to 2013, $28.6 was allocated to continuing operations and $(28.6) was allocated to Other comprehensive income. With respect to 2012, $(10.0) was allocated to continuing operations and $10.0 was allocated to Other comprehensive income. For the nine months ended September 30, 2013 and 2012, there were no total increases (decreases) in the valuation allowance. With respect to 2013, $30.5 was allocated to continuing operations and $(30.5) was allocated to Other comprehensive income. With respect to 2012, there were no changes to continuing operations or Other comprehensive income.

Tax Sharing Agreement

The results of the Company's operations are included in the consolidated tax return of ING U.S., Inc. Generally, the Company's consolidated financial statements recognize the current and deferred income tax consequences that result from the Company's activities during the current and preceding periods pursuant to the provisions of Income Taxes (ASC 740) as if the Company were

 
50
 

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

a separate taxpayer rather than a member of ING U.S., Inc.'s consolidated income tax return group with the exception of any net operating loss carryforwards and capital loss carryforwards, which are recorded pursuant to the tax sharing agreement. Effective January 1, 2013, the Company entered into a new tax sharing agreement with ING U.S., Inc. which provides that, for 2013 and subsequent years, ING U.S., Inc. will pay the Company for the tax benefits of ordinary and capital losses only in the event that the consolidated tax group actually uses the tax benefit of losses generated.

Tax Regulatory Matters

In March 2013, the Internal Revenue Service ("IRS") completed its examination of the Company's return for tax year 2011. The 2011 audit settlement did not have a material impact on the financial statements.

The Company is currently under audit by the IRS for tax years 2012 and 2013 and it is expected that the examination of tax year 2012 will be finalized within the next twelve months. The Company and the IRS have agreed to participate in the Compliance Assurance Program for the tax years 2012 and 2013.

9.    Financing Agreements

Reciprocal Loan Agreement

The Company maintains a reciprocal loan agreement with ING U.S., Inc., 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. 

Under this agreement, the Company did not incur interest expense for the three and nine months ended September 30, 2013 and 2012. The Company did not earn interest income for the three and nine months ended September 30, 2013. The Company did not earn any interest income for the three months ended September 30, 2012 and earned $0.5 for the nine months ended September 30, 2012.  As of September 30, 2013 and December 31, 2012, the Company did not have any outstanding receivable/payable from/to ING U.S., Inc. under the reciprocal loan agreement.

For information on the Company's additional financing agreements, see the Financing Agreements Note to the Consolidated Financial Statements included in the Company's 2012 Annual Report on Form 10-K.

10.    Commitments and Contingencies

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.

As of September 30, 2013 and December 31, 2012, the Company had off-balance sheet commitments to purchase investments equal to their fair value of $397.7 and $314.9, respectively.


 
51
 

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

Restricted Assets

The Company is required to maintain assets on deposit with various regulatory authorities to support its insurance operations. The Company may also post collateral in connection with certain securities lending, repurchase agreements, funding agreement, LOC and derivative transactions as described further in this note. The components of the fair value of the restricted assets were as follows as of the dates indicated:
 
September 30, 2013
 
December 31, 2012
Other fixed maturities-state deposits
$
13.1

 
$
13.4

Securities pledged(1)
180.4

 
219.7

Total restricted assets
$
193.5

 
$
233.1

(1) Includes the fair value of loaned securities of $159.9 and $180.2 as of September 30, 2013 and December 31, 2012, respectively, which is included in Securities pledged on the Condensed Consolidated Balance Sheets. In addition, as of September 30, 2013 and December 31, 2012, the Company delivered securities as collateral of $20.5 and $39.5, respectively, 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 requirements and past experience demonstrates that the monetary and other relief that may be requested in a lawsuit or claim often 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.

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. Regulatory 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, and additional escheatment of funds deemed abandoned under state laws. 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.

The outcome of a litigation or regulatory matter and the amount or range of potential loss is difficult to forecast and estimating potential losses requires significant management judgment. 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 the Company, however, believes a loss is reasonably possible, but not probable, no accrual is required. This paragraph contains an estimate of reasonably possible losses above any amounts accrued. 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 matters 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 September 30,

 
52
 

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

2013, 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 $30.0.

For other matters, the Company is currently not able to estimate the reasonably possible loss or range of loss. The Company 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, the Company reviews relevant information with respect to litigation and regulatory contingencies and updates the Company's 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), in which two sponsors of 401(k) Plans governed by the Employee Retirement Income Act ("ERISA") claim that ILIAC has entered into revenue sharing agreements with mutual funds and others in violation of the prohibited transaction rules of ERISA. Among other things, the plaintiffs seek disgorgement of all revenue sharing payments and profits earned in connection with such payments, an injunction barring the practice of revenue sharing and attorney fees. On September 26, 2012, the district court certified the case as a class action in which the named plaintiffs represent approximately 15,000 similarly situated plan sponsors. ILIAC denies the allegations and is vigorously defending this litigation. The Court conducted a bench trial of the liability issues, which concluded on October 3, 2013, and the Court has taken the matter under advisement.

 
53
 

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, "we" or "our") for each of the three and nine months ended September 30, 2013 and 2012 and financial condition as of September 30, 2013 and December 31, 2012. This item should be read in its entirety and in conjunction with the Condensed Consolidated Financial Statements and related notes and other supplemental data, which can be found under Part I, Item 1. contained herein, as well as "Management's Narrative Analysis of the Results of Operations and Financial Condition" section contained in our 2012 Annual Report on Form 10-K.

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 we filed with the SEC. Except as may be required by the federal securities laws, we disclaim 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 (collectively, the "Company") provide financial products and services in the United States. ILIAC is authorized to conduct its insurance business in all states and in the District of Columbia. The Condensed Consolidated Financial Statements include ILAC and its wholly owned subsidiaries, ING Financial Advisers, LLC ("IFA") and Directed Services, LLC ("DSL").

In 2009, ING Groep N.V. ("ING Group" or "ING"), a global financial services holding company based in The Netherlands, with American Depository Shares listed on the New York Stock Exchange, announced the anticipated separation of its global banking and insurance businesses, including the divestiture of ING U.S., Inc., which together with its subsidiaries, including the Company, constitutes ING's U.S.-based retirement, investment management and insurance operations. On April 11, 2013, ING U.S., Inc. announced plans to rebrand in the future as Voya Financial. On May 2, 2013, the common stock of ING U.S., Inc. began trading on the New York Stock Exchange under the symbol "VOYA." On May 7, 2013 and May 31, 2013, ING U.S., Inc. completed its initial public offering of common stock, including the issuance and sale by ING U.S., Inc. of 30,769,230 shares of common stock and the sale by ING Insurance International B.V. ("ING International"), an indirect wholly owned subsidiary of ING Group and previously the sole stockholder of ING U.S., Inc., of 44,201,773 shares of outstanding common stock of ING U.S., Inc. (collectively, the "IPO"). On September 30, 2013, ING International transferred all of its shares of ING U.S., Inc. common stock to ING Group.

On October 29, 2013, ING Group completed a sale of 37,950,000 shares of common stock of ING U.S., Inc. in a registered public offering ("Secondary Offering"), reducing ING Group's ownership of ING U.S., Inc. to 57%.

ILIAC is a direct, wholly owned subsidiary of Lion Connecticut Holdings Inc. ("Lion" or "Parent"), which is a direct, wholly owned subsidiary of ING U.S., Inc. ING U.S., Inc. is a majority owned subsidiary of ING Group.

We have one operating segment.

Critical Accounting Policies, Judgments and Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States ("U.S. GAAP") requires the application of accounting policies that often involve a significant degree of judgment. Management, on an
ongoing basis, reviews estimates and assumptions used in the preparation of the financial statements. There can be no assurance that actual results will conform to estimates and assumptions and that reported results of operations will not be materially affected by the need to make future accounting adjustments to reflect changes in these estimates and assumptions from time to time.

We have 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 deferred policy acquisition costs ("DAC") and value of business acquired ("VOBA"), valuation of investments and derivatives, impairments, income taxes and contingencies.

In developing these accounting estimates and policies, we make 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, we believe

 
54
 

the amounts provided are appropriate based upon the facts available upon preparation of the Condensed Consolidated Financial Statements.

The above critical accounting estimates are described in the Business, Basis of Presentation and Significant Accounting Policies Note to the Consolidated Financial Statements in the 2012 Annual Report on Form 10-K.

Assumptions and Periodic Review

Changes in assumptions can have a significant impact on DAC and VOBA, amortization rates and results of operations. Assumptions are management's best estimates of future outcome. We periodically review these assumptions against actual experience and, based on additional information that becomes available, update our assumptions.

During the third quarter of 2013, we conducted our annual review of assumptions, including projection model inputs. As a result of these reviews in the three months ended September 30, 2013, we made a number of changes, which resulted in net favorable unlocking of DAC and VOBA and other intangibles of $24.2.

Impact of New Accounting Pronouncements

For information regarding the impact of new accounting pronouncements, see the Business, Basis of Presentation and Significant Accounting Policies Note to the Condensed Consolidated Financial Statements, in Part I, Item 1. of this Form 10-Q.

Results of Operations

Overview

Our products 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, 457 and 501, as well as nonqualified deferred compensation plans and related services. Our 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. Our products are generally distributed through pension professionals, independent agents and brokers, third party administrators, banks, dedicated career agents and financial planners.

We derive our 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 investments, (c) realized capital gains (losses) on investments and product guarantees and (d) certain other fees. Our expenses primarily consist of (a) Interest credited and other benefits to contract owners/policyholders, (b) amortization of DAC and VOBA, (c) expenses related to the selling and servicing of the various products offered by us and (d) other general business expenses.  In addition, we collect broker-dealer commission revenues through our subsidiaries, DSL and IFA, which are, in turn, paid to broker-dealers and expensed.


 
55
 

Three Months Ended September 30, 2013 compared to Three Months Ended September 30, 2012

Our results of operations for the three months ended September 30, 2013 were primarily impacted by lower Net amortization of DAC/VOBA and higher Fee income. Partially offsetting these improvements were lower Net investment income, higher Interest credited and other benefits to contract owners/policyholders and higher Operating expenses.
 
Three Months Ended September 30,
 
$ Increase
 
% Increase
 
2013
 
2012
 
(Decrease)
 
(Decrease)
Revenues:
 
 
 
 
 
 
 
Net investment income
$
328.2

 
$
344.7

 
$
(16.5
)
 
(4.8
)%
Fee income
189.9

 
167.0

 
22.9

 
13.7
 %
Premiums
7.6

 
6.1

 
1.5

 
24.6
 %
Broker-dealer commission revenue
61.5

 
54.8

 
6.7

 
12.2
 %
Net realized capital gains (losses):
 
 
 
 
 
 
 
Total other-than-temporary impairments
(1.6
)
 
(4.7
)
 
3.1

 
66.0
 %
Less: Portion of other-than-temporary impairments recognized in Other comprehensive income (loss)
(0.8
)
 
(0.1
)
 
(0.7
)
 
NM

Net other-than-temporary impairments recognized in earnings
(0.8
)
 
(4.6
)
 
3.8

 
82.6
 %
Other net realized capital gains (losses)
(27.3
)
 
(21.1
)
 
(6.2
)
 
(29.4
)%
Total net realized capital gains (losses)
(28.1
)
 
(25.7
)
 
(2.4
)
 
(9.3
)%
Other revenue
2.9

 
1.0

 
1.9

 
NM

Total revenues
562.0

 
547.9

 
14.1

 
2.6
 %
Benefits and expenses:
 
 
 

 
 
 
 
Interest credited and other benefits to contract owners/policyholders
204.2

 
189.3

 
14.9

 
7.9
 %
Operating expenses
178.0

 
163.0

 
15.0

 
9.2
 %
Broker-dealer commission expense
61.5

 
54.8

 
6.7

 
12.2
 %
Net amortization of deferred policy acquisition costs and value of business acquired
(15.2
)
 
13.5

 
(28.7
)
 
NM

Interest expense
0.2

 
0.6

 
(0.4
)
 
(66.7
)%
Total benefits and expenses
428.7

 
421.2

 
7.5

 
1.8
 %
Income (loss) before income taxes
133.3

 
126.7

 
6.6

 
5.2
 %
Income tax expense (benefit)
65.7

 
33.4

 
32.3

 
96.7
 %
Net income (loss)
$
67.6

 
$
93.3

 
$
(25.7
)
 
(27.5
)%
NM - Not Meaningful

Revenues

Total revenues increased $14.1 for the three months ended September 30, 2013, primarily impacted by higher Fee income and Broker-dealer commission revenue partially offset by lower net investment income.

Net investment income decreased $16.5 from $344.7 to $328.2 primarily due to lower investment yields, coupled with lower reinvestment rates. These decreases were partially offset by increases to investment income due to growth of general account assets in the current period. General account assets increased in the current period compared to the prior period due to participants transferring funds from variable investment options into fixed investment options.

Fee income increased $22.9 from $167.0 to $189.9 primarily due to an increase in full service retirement plan fees. The increase in fees related to full service retirement plans was driven by net increases in separate accounts and institutional/mutual fund average Assets Under Management. In addition, advisory fees increased as a result of an increase in sub-advised assets.


 
56
 

Broker-dealer commission revenue increased $6.7 from $54.8 to $61.5 due to higher asset based commission reimbursements as a result of higher average assets.

Total benefits and expenses increased $7.5 from $421.2 to $428.7 primarily due to higher Interest credited and other benefits to contract owners/policyholders, higher Operating expenses and higher Broker-dealer commission expense partially offset by lower Net amortization of DAC/VOBA.

Interest credited and other benefits to contract owners/policyholders increased $14.9 from $189.3 to $204.2 partially due to higher benefit costs and an increase in general account liabilities partially offset by a decrease in the average credited rates due to actions taken in 2012 and January 2013 to reflect the continuing low interest rate environment.

Operating expenses increased $15.0 from $163.0 to $178.0 primarily due to higher commission expenses driven by an increase in AUM and higher general operating expenses in the current period.

Broker-dealer commission expense increased $6.7 from $54.8 to $61.5 due to higher asset based commissions expenses as a result of higher average assets.

Net amortization of DAC and VOBA decreased $28.7 from $13.5 to $(15.2) primarily as a result of higher favorable DAC/VOBA unlocking in the current period which was primarily driven by prospective assumption changes.  Excluding the impact of unlocking of DAC/VOBA, net amortization of DAC/VOBA increased due to higher gross profits in the current period.

Income Taxes

Income tax expense (benefit) changed $32.3 from $33.4 to $65.7 primarily due to an increase in the valuation allowance partially offset by a favorable increase in the dividends received deduction.

 
57
 

Nine Months Ended September 30, 2013 compared to Nine Months Ended September 30, 2012

Our results of operations for the nine months ended September 30, 2013 were primarily impacted by Net realized capital losses in the current year versus Net realized capital gains in the prior year and lower Premiums partially offset by lower Net amortization of DAC/VOBA, higher Fee income and lower Interest credited and other benefits to contract owners/policyholders.
 
Nine Months Ended September 30,
 
$ Increase
 
% Increase
 
2013
 
2012
 
(Decrease)
 
(Decrease)
Revenues:
 
 
 
 
 
 
 
Net investment income
$
1,019.3

 
$
1,008.6

 
$
10.7

 
1.1
 %
Fee income
547.9

 
478.8

 
69.1

 
14.4
 %
Premiums
22.7

 
29.6

 
(6.9
)
 
(23.3
)%
Broker-dealer commission revenue
180.3

 
167.0

 
13.3

 
8.0
 %
Net realized capital gains (losses):
 
 
 
 
 
 
 
Total other-than-temporary impairments
(4.5
)
 
(8.7
)
 
4.2

 
48.3
 %
Less: Portion of other-than-temporary impairments recognized in Other comprehensive income (loss)
(1.8
)
 
(1.1
)
 
(0.7
)
 
(63.6
)%
Net other-than-temporary impairments recognized in earnings
(2.7
)
 
(7.6
)
 
4.9

 
64.5
 %
Other net realized capital gains (losses)
(135.4
)
 
108.0

 
(243.4
)
 
NM

Total net realized capital gains (losses)
(138.1
)
 
100.4

 
(238.5
)
 
NM

Other revenue
(2.6
)
 
3.8

 
(6.4
)
 
NM

Total revenues
1,629.5

 
1,788.2

 
(158.7
)
 
(8.9
)%
Benefits and expenses:
 
 
 
 
 
 
 
Interest credited and other benefits to contract owners/policyholders
536.3

 
577.0

 
(40.7
)
 
(7.1
)%
Operating expenses
527.9

 
520.6

 
7.3

 
1.4
 %
Broker-dealer commission expense
180.3

 
167.0

 
13.3

 
8.0
 %
Net amortization of deferred policy acquisition costs and value of business acquired
31.7

 
118.5

 
(86.8
)
 
(73.2
)%
Interest expense
0.3

 
1.7

 
(1.4
)
 
(82.4
)%
Total benefits and expenses
1,276.5

 
1,384.8

 
(108.3
)
 
(7.8
)%
Income (loss) before income taxes
353.0

 
403.4

 
(50.4
)
 
(12.5
)%
Income tax expense (benefit)
133.4

 
128.2

 
5.2

 
4.1
 %
Net income (loss)
$
219.6

 
$
275.2

 
$
(55.6
)
 
(20.2
)%
NM - Not Meaningful

Revenues

Total revenues decreased $158.7 for the nine months ended September 30, 2013, primarily impacted by unfavorable changes in Total net realized capital gains (losses), partially offset by higher Fee income.

Net investment income increased $10.7 from $1,008.6 to $1,019.3 due to a loss on the sale of certain alternative investments in the second quarter of 2012. In addition, increases to investment income were due to growth of general account assets in the current period, which were offset by lower investment yields. General account assets increased in the current period compared to the prior period due to participant transfer from variable investment options into fixed investment options.

Fee income increased $69.1 from $478.8 to $547.9 primarily due to increases in full service retirement plan fees. The increase in fees related to full service retirement plans was driven by net increases in separate accounts and institutional/mutual fund average Assets Under Management. In addition, advisory fees increased as a result of an increase in sub-advised assets.

Premiums decreased $6.9 from $29.6 to $22.7 due to lower sales of immediate annuities with life contingencies.

 
58
 


Total net realized capital gains (losses) changed $(238.5) from $100.4 to $(138.1) primarily due to losses on derivatives and fixed maturities using fair value option and a decrease in net realized investment gains primarily due to trading gains on corporate securities in the prior period compared to losses in the current period. The losses on derivatives and fixed maturities using fair value option were primarily as a result of an increase in interest rates in the current period.

Benefits and Expenses

Total benefits and expenses decreased $108.3 from $1,384.8 to $1,276.5 primarily due to lower Net amortization of DAC/VOBA and lower Interest credited and other benefits to contract owners/policyholders.

Interest credited and other benefits to contract owners/policyholders decreased $40.7 from $577.0 to $536.3 primarily due to an increase in fair value of the embedded derivative on reinsurance driven by an increase in interest rates during the current period. Also contributing to the variance is a decrease in the average credited rates due to actions taken in 2012 and January 2013 to reflect the continuing low interest rate environment.

Net amortization of DAC and VOBA decreased $86.8 from $118.5 to $31.7 as a result of a decrease in amortization due to lower gross profits in the current period and higher favorable DAC/VOBA unlocking in the current period, which was primarily driven by prospective assumption changes.

Income Taxes

Income tax expense (benefit) increased $5.2 from $128.2 to $133.4 primarily due to an increase in the valuation allowance partially offset by a favorable increase in the dividends received deduction.

Financial Condition

Investments

Investment Strategy

Our 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.

Segmented portfolios are established for groups of products with similar liability characteristics. Our investment portfolio consists largely of high quality fixed maturities and short-term investments, investments in commercial mortgage loans, alternative investments and other instruments, including a small amount of equity holdings. Fixed maturities include publicly issued corporate bonds, government bonds, privately placed notes and bonds, Other asset-backed securities ("ABS"), and traditional Mortgage-backed securities ("MBS").

We use derivatives for hedging purposes to reduce our exposure to the cash flow variability of assets and liabilities, interest rate risk, credit risk and market risk. In addition, we use credit derivatives to replicate exposure to individual securities or pools of securities as a means of achieving credit exposure similar to bonds of the underlying issuer(s) more efficiently.

Since the height of the financial crisis in 2008, we have pursued a substantial repositioning of the investment portfolio aimed at reducing risk, increasing the stability and predictability of returns and pursuing intentional investment risks that are reliant on our core strengths. The repositioning has resulted in a significant decrease in exposure to structured assets, an improvement in the National Association of Insurance Commissioners ("NAIC") designation profile of our remaining structured assets and an increase in exposure to public and private investment grade corporate bonds and U.S. Treasury securities.



 
59
 

Portfolio Composition

The following table presents the investment portfolio as of the dates indicated:
 
September 30, 2013
 
December 31, 2012
 
Carrying
Value
 
% of
Total
 
Carrying
Value
 
% of
Total
Fixed maturities, available-for-sale, excluding securities pledged
$
19,934.0

 
79.2
%
 
$
20,690.8

 
79.4
%
Fixed maturities, at fair value using the fair value option
604.7

 
2.4
%
 
544.7

 
2.1
%
Equity securities, available-for-sale
127.3

 
0.5
%
 
142.8

 
0.5
%
Short-term investments(1)
232.5

 
0.9
%
 
679.8

 
2.6
%
Mortgage loans on real estate
3,282.8

 
13.0
%
 
2,872.7

 
11.0
%
Policy loans
242.1

 
1.0
%
 
240.9

 
0.9
%
Limited partnerships/corporations
184.5

 
0.7
%
 
179.6

 
0.7
%
Derivatives
410.7

 
1.6
%
 
512.7

 
2.0
%
Securities pledged(2)
180.4

 
0.7
%
 
219.7

 
0.8
%
Total investments
$
25,199.0

 
100.0
%
 
$
26,083.7

 
100.0
%
(1) Short-term investments include investments with remaining maturities of one year or less, but greater than 3 months, at the time of purchase.
(2) See "Management's Discussion and Analysis of Results of Operations and Financial Condition-Liquidity and Capital Resources" for information regarding securities pledged.

Fixed Maturities

Total fixed maturities by market sector, including securities pledged, were as presented below as of the dates indicated:
 
September 30, 2013
 
Amortized
Cost
 
% of
Total
 
Fair
Value
 
% of
Total
Fixed maturities:
 
 
 
 
 
 
 
U.S. Treasuries
$
745.0

 
3.8
%
 
$
800.7

 
3.9
%
U.S. Government agencies and authorities
242.9

 
1.2
%
 
250.3

 
1.2
%
State, municipalities, and political subdivisions
77.2

 
0.4
%
 
83.9

 
0.4
%
U.S. corporate securities
10,210.0

 
51.5
%
 
10,568.8

 
50.9
%
Foreign securities(1)
5,504.0

 
27.8
%
 
5,710.3

 
27.6
%
Residential mortgage-backed securities
1,931.0

 
9.8
%
 
2,127.0

 
10.3
%
Commercial mortgage-backed securities
607.8

 
3.1
%
 
679.2

 
3.3
%
Other asset-backed securities
482.9

 
2.4
%
 
498.9

 
2.4
%
Total fixed maturities, including securities pledged
$
19,800.8

 
100.0
%
 
$
20,719.1

 
100.0
%
(1) Primarily U.S. dollar denominated.

 
60
 

 
December 31, 2012
 
Amortized
Cost
 
% of
Total
 
Fair
Value
 
% of
Total
Fixed maturities:
 
 
 
 
 
 
 
U.S. Treasuries
$
1,011.5

 
5.3
%
 
$
1,146.6

 
5.3
%
U.S. Government agencies and authorities
379.4

 
2.0
%
 
397.0

 
1.9
%
State, municipalities, and political subdivisions
77.2

 
0.4
%
 
93.1

 
0.4
%
U.S. corporate securities
9,438.0

 
49.1
%
 
10,574.3

 
49.3
%
Foreign securities(1)
5,009.7

 
26.0
%
 
5,552.0

 
25.9
%
Residential mortgage-backed securities
2,070.4

 
10.8
%
 
2,357.5

 
11.0
%
Commercial mortgage-backed securities
748.7

 
3.9
%
 
839.1

 
3.9
%
Other asset-backed securities
475.7

 
2.5
%
 
495.6

 
2.3
%
Total fixed maturities, including securities pledged
$
19,210.6

 
100.0
%
 
$
21,455.2

 
100.0
%
(1) Primarily U.S. dollar denominated.

As of September 30, 2013, the average duration of our fixed maturities portfolio, including securities pledged, was between 6 and 7 years.

Fixed Maturities Credit Quality - Ratings

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

The fixed maturities in our portfolio are generally rated by external rating agencies and, if not externally rated, are rated by us on a basis similar to that used by the rating agencies. As of September 30, 2013 and December 31, 2012, the average quality rating of our fixed maturities portfolio was A- and A, respectively. Ratings are derived from three ARO ratings and are applied as follows based on the number of agency ratings received:

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


 
61
 

Total fixed maturities by NAIC designation category, including securities pledged, were as follows as of the dates indicated:

 
 
September 30, 2013
NAIC
Designation
 
Amortized
Cost
 
% of
Total
 
Fair
Value
 
% of
Total
1
 
$
10,032.8

 
50.7
%
 
$
10,498.0

 
50.7
%
2
 
8,751.0

 
44.2
%
 
9,131.9

 
44.1
%
3
 
842.0

 
4.3
%
 
878.6

 
4.2
%
4
 
126.2

 
0.6
%
 
130.0

 
0.6
%
5
 
4.6

 
—
%
 
13.2

 
0.1
%
6
 
44.2

 
0.2
%
 
67.4

 
0.3
%
Total
 
$
19,800.8

 
100.0
%
 
$
20,719.1

 
100.0
%
 
 
 
December 31, 2012
NAIC
Designation
 
Amortized
Cost
 
% of
Total
 
Fair
Value
 
% of
Total
1
 
$
9,717.0

 
50.6
%
 
$
10,801.8

 
50.3
%
2
 
8,489.2

 
44.2
%
 
9,539.0

 
44.5
%
3
 
737.7

 
3.8
%
 
797.0

 
3.7
%
4
 
181.0

 
0.9
%
 
189.8

 
0.9
%
5
 
37.2

 
0.2
%
 
49.3

 
0.2
%
6
 
48.5

 
0.3
%
 
78.3

 
0.4
%
Total
 
$
19,210.6

 
100.0
%
 
$
21,455.2

 
100.0
%

Total fixed maturities by ARO quality rating category, including securities pledged, were as follows as of the dates indicated:
 
 
September 30, 2013
ARO
Ratings
 
Amortized
Cost
 
% of
Total
 
Fair
Value
 
% of
Total
AAA
 
$
3,522.3

 
17.8
%
 
$
3,754.1

 
18.1
%
AA
 
1,084.0

 
5.5
%
 
1,120.9

 
5.4
%
A
 
5,347.0

 
27.0
%
 
5,504.5

 
26.6
%
BBB
 
8,666.2

 
43.8
%
 
9,040.3

 
43.6
%
BB
 
776.9

 
3.9
%
 
809.5

 
3.9
%
B and below
 
404.4

 
2.0
%
 
489.8

 
2.4
%
Total
 
$
19,800.8

 
100.0
%
 
$
20,719.1

 
100.0
%
 
 
 
December 31, 2012
ARO
Ratings
 
Amortized
Cost
 
% of
Total
 
Fair
Value
 
% of
Total
AAA
 
$
4,031.2

 
21.0
%
 
$
4,461.4

 
20.8
%
AA
 
871.5

 
4.5
%
 
972.4

 
4.5
%
A
 
4,765.7

 
24.8
%
 
5,286.5

 
24.6
%
BBB
 
8,329.5

 
43.4
%
 
9,369.3

 
43.7
%
BB
 
734.1

 
3.8
%
 
798.0

 
3.7
%
B and below
 
478.6

 
2.5
%
 
567.6

 
2.7
%
Total
 
$
19,210.6

 
100.0
%
 
$
21,455.2

 
100.0
%

Fixed maturities rated BB and below may have speculative characteristics and changes in economic conditions or other circumstances that 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.

 
62
 


The amortized cost and fair value of fixed maturities, including securities pledged, as of September 30, 2013 and December 31, 2012 are shown below by contractual maturity. Actual maturities may differ from contractual maturities as securities may be restructured, called, or prepaid. MBS and Other ABS are shown separately because they are not due at a single maturity date.
 
September 30, 2013
 
December 31, 2012
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
Due to mature:
 
 
 
 
 
 
 
One year or less
$
570.1

 
$
591.4

 
$
853.5

 
$
880.9

After one year through five years
4,171.7

 
4,437.9

 
3,953.8

 
4,249.9

After five years through ten years
6,281.1

 
6,462.9

 
5,700.3

 
6,339.8

After ten years
5,756.2

 
5,921.8

 
5,408.2

 
6,292.4

Mortgage-backed securities
2,538.8

 
2,806.2

 
2,819.1

 
3,196.6

Other asset-backed securities
482.9

 
498.9

 
475.7

 
495.6

Fixed maturities, including securities pledged
$
19,800.8

 
$
20,719.1

 
$
19,210.6

 
$
21,455.2


As of September 30, 2013 and December 31, 2012, we did not have any investments in a single issuer, other than obligations of the U.S. Government and government agencies, with a carrying value in excess of 10% of our consolidated Shareholder’s equity.

Unrealized Capital Losses

Unrealized capital losses (including noncredit impairments), along with the fair value of fixed maturities, including securities pledged, by market sector and duration were as follows as of September 30, 2013:
 
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 Losses
 
Fair
Value
 
Unrealized
Capital Losses
 
Fair
Value
 
Unrealized
Capital Losses
 
Fair
Value
 
Unrealized
Capital Losses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasuries
$
144.5

 
$
2.4

 
$
—

 
$
—

 
$
—

 
$
—

 
$
144.5

 
$
2.4

U.S. corporate, state and municipalities
3,116.0

 
183.4

 
294.7

 
35.6

 
40.9

 
6.9

 
3,451.6

 
225.9

Foreign
1,280.2

 
82.3

 
158.5

 
19.4

 
39.6

 
5.4

 
1,478.3

 
107.1

Residential mortgage-backed
299.3

 
8.8

 
19.7

 
1.0

 
108.1

 
11.5

 
427.1

 
21.3

Commercial mortgage-backed
3.8

 
—

 
0.1

 
—

 
—

 
—

 
3.9

 
—

Other asset-backed
56.2

 
0.2

 
6.1

 
—

 
26.5

 
3.5

 
88.8

 
3.7

Total
$
4,900.0

 
$
277.1

 
$
479.1

 
$
56.0

 
$
215.1

 
$
27.3

 
$
5,594.2

 
$
360.4


 
63
 

Unrealized capital losses (including noncredit impairments), along with the fair value of fixed maturities, including securities pledged, by market sector and duration were as follows as of December 31, 2012:
 
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 Losses
 
Fair
Value
 
Unrealized
Capital Losses
 
Fair
Value
 
Unrealized
Capital Losses
 
Fair
Value
 
Unrealized
Capital Losses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasuries
$
300.0

 
$
0.5

 
$
—

 
$
—

 
$
—

 
$
—

 
$
300.0

 
$
0.5

U.S. corporate, state and municipalities
479.8

 
6.8

 
22.5

 
0.9

 
49.4

 
3.4

 
551.7

 
11.1

Foreign
166.8

 
4.7

 
7.8

 
0.5

 
87.7

 
11.2

 
262.3

 
16.4

Residential mortgage-backed
68.7

 
1.6

 
7.2

 
0.3

 
132.4

 
16.2

 
208.3

 
18.1

Commercial mortgage-backed
7.5

 
0.1

 
1.6

 
—

 
2.5

 
0.1

 
11.6

 
0.2

Other asset-backed
15.6

 
—

 
—

 
—

 
34.2

 
6.7

 
49.8

 
6.7

Total
$
1,038.4

 
$
13.7

 
$
39.1

 
$
1.7

 
$
306.2

 
$
37.6

 
$
1,383.7

 
$
53.0


Of the unrealized capital losses aged more than twelve months, the average market value of the related fixed maturities was 88.7% and 89.1% of the average book value as of September 30, 2013 and December 31, 2012, respectively.

Gross unrealized losses on fixed maturities, including securities pledged, increased $307.4 from December 31, 2012 to September 30, 2013. The increase in gross unrealized losses was primarily due to increasing interest rates. Gross unrealized losses on fixed maturities, including securities pledged, decreased $100.4 million from December 31, 2011 to December 31, 2012. The decrease in gross unrealized losses is primarily due to improving market conditions within Other ABS in addition to tightening credit spreads.

As of September 30, 2013 and December 31, 2012, we did not have any fixed maturities with an unrealized capital loss in excess of $10.0.

Subprime and Alt-A Mortgage Exposure

The performance of pre-2008 vintage subprime and Alt-A mortgage collateral has exhibited sustained signs of recovery, after struggling through a multiyear correction in nationwide home values. While collateral losses continue to be realized, serious delinquencies are trending lower and other measures of performance, like prepayments and severities, have also shown signs of improvement. Reflecting these fundamental improvements, related bond prices and sector liquidity have increased substantially through most of 2012 and into this year.  In the third quarter, some of this momentum in bond prices and market liquidity was disrupted, at least in part, by the pick-up in interest rate volatility.  However, we continued to observe strength in the US housing market and a domestic employment picture that has exhibited steady improvement. This served to positively impact the fundamental performance of the portfolio.  In managing our risk exposure to subprime and Alt-A mortgages, we take into account collateral performance and structural characteristics associated with our various positions.

We do not originate or purchase subprime or Alt-A whole-loan mortgages. Subprime lending is the origination of loans to customers with weaker credit profiles. We define Alt-A mortgages 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.


 
64
 

We have exposure to Residential mortgage-backed securities ("RMBS"), Commercial mortgage-backed securities ("CMBS") and ABS. Our exposure to subprime mortgage-backed securities is primarily in the form of ABS structures collateralized by subprime residential mortgages and the majority of these holdings were included in Other ABS under "Fixed Maturities" above. As of September 30, 2013, the fair value, amortized cost, and gross unrealized losses related to our exposure to subprime mortgage-backed securities totaled $59.1, $58.2 and $2.9, respectively, representing 0.3% of total fixed maturities, including securities pledged, based on fair value. As of December 31, 2012, the fair value, amortized cost, and gross unrealized losses related to our exposure to subprime mortgage-backed securities totaled $61.2, $65.4 and $6.2, respectively, representing 0.3% of total fixed maturities, including securities pledged, based on fair value.

The NAIC designations for structured securities, including subprime and Alt-A RMBS, are based upon a comparison of the bond's amortized cost to the NAIC's loss expectation for each security. Securities where modeling results in no expected loss in all scenarios are considered to have the highest designation of NAIC 1. A large percentage of our RMBS securities carry a NAIC 1 designation while the ARO rating indicates below investment grade. This is primarily due to the credit and intent impairments recorded by us which reduced the amortized cost on these securities to a level resulting in no expected loss in all scenarios, which corresponds to a NAIC 1 designation. The revised methodology reduces regulatory reliance on rating agencies and allows for greater regulatory input into the assumptions used to estimate expected losses from such structured securities.

The following tables present our exposure to subprime mortgage-backed securities by credit quality using NAIC designations, ARO ratings and vintage year as of the dates indicated:
 
% of Total Subprime Mortgage-backed Securities
 
NAIC Designation
 
ARO Ratings
 
Vintage
September 30, 2013
 
 
 
 
 
 
 
 
 
1
68.3
%
 
AAA
0.1
%
 
2007
7.0
%
 
2
2.7
%
 
AA
2.6
%
 
2006
7.0
%
 
3
19.1
%
 
A
13.0
%
 
2005 and prior
86.0
%
 
4
9.6
%
 
BBB
20.8
%
 
 
100.0
%
 
5
—
%
 
BB and below
63.5
%
 
 
 
 
6
0.3
%
 
 
100.0
%
 
 
 
 
 
100.0
%
 
 
 
 
 
 
December 31, 2012
 
 
 
 
 
 
 
 
 
1
67.8
%
 
AAA
3.2
%
 
2007
8.0
%
 
2
3.2
%
 
AA
—
%
 
2006
6.0
%
 
3
19.6
%
 
A
16.2
%
 
2005 and prior
86.0
%
 
4
8.7
%
 
BBB
21.5
%
 
 
100.0
%
 
5
0.5
%
 
BB and below
59.1
%
 
 
 
 
6
0.2
%
 
 
100.0
%
 
 
 
 
 
100.0
%
 
 
 
 
 
 

Our exposure to Alt-A mortgages is included in the "RMBS" line item in the "Fixed Maturities" table under "Fixed Maturities" section above. As of September 30, 2013, the fair value, amortized cost and gross unrealized losses related to our exposure to Alt-A RMBS totaled $89.5, $73.9 and $4.2, respectively, representing 0.4% of total fixed maturities, including securities pledged, based on fair value. As of December 31, 2012, the fair value, amortized cost, and gross unrealized losses related to our exposure to Alt-A RMBS totaled $106.0, $89.5 and $9.5, respectively, representing 0.5% of total fixed maturities, including securities pledged, based on fair value.


 
65
 

The following tables summarize our exposure to Alt-A RMBS by credit quality using NAIC designations, ARO ratings and vintage year as of the dates indicated:
 
% of Total Alt-A Mortgage-backed Securities
 
NAIC Designation
 
ARO Ratings
 
Vintage
September 30, 2013
 
 
 
 
 
 
 
 
 
1
43.2
%
 
AAA
0.1
%
 
2007
14.3
%
 
2
12.8
%
 
AA
—
%
 
2006
29.8
%
 
3
30.6
%
 
A
2.9
%
 
2005 and prior
55.9
%
 
4
11.4
%
 
BBB
3.5
%
 
 
100.0
%
 
5
2.0
%
 
BB and below
93.5
%
 
 
 
 
6
—
%
 
 
100.0
%
 
 
 
 
 
100.0
%
 
 
 
 
 
 
December 31, 2012
 
 
 
 
 
 
 
 
 
1
33.4
%
 
AAA
0.2
%
 
2007
13.8
%
 
2
12.4
%
 
AA
1.4
%
 
2006
29.3
%
 
3
21.0
%
 
A
3.4
%
 
2005 and prior
56.9
%
 
4
30.3
%
 
BBB
5.6
%
 
 
100.0
%
 
5
2.3
%
 
BB and below
89.4
%
 
 
 
 
6
0.6
%
 
 
100.0
%
 
 
 
 
 
100.0
%
 
 
 
 
 
 

Commercial Mortgage-Backed and Other Asset-backed Securities

CMBS investments represent pools of commercial mortgages that are broadly diversified across property types and geographical areas. Delinquency rates on commercial mortgages increased over the course of 2009 through mid-2012. Since then, the steep pace of increases observed in the early years following the credit crisis has slowed, and, much of this year, we have observed sustained declines in delinquencies of underlying loans. In addition, other performance metrics like vacancies, property values and rent levels have shown improvements, although these metrics can differ widely by dimensions such as geographic location and property type. The new issue market for CMBS has continued its recovery from the credit crisis with higher total new issuances in 2013, the fifth straight year of higher new issuances. Total new issuance volume through Q3 is at its highest pace since 2007. Higher primary issuance has contributed to increased credit availability within the commercial real estate market, supportive of continued fundamental improvements for CMBS.

For consumer Other ABS, delinquency and loss rates have been maintained at levels considered low by historical standards and indicative of high credit quality. Relative strength in various credit metrics across multiple types of asset-backed loans have been observed on a sustained basis.



 
66
 

The following tables summarize our exposure to CMBS holdings by credit quality using NAIC designations, ARO ratings and vintage year as of the dates indicated:
 
% of Total CMBS
 
NAIC Designation
 
ARO Ratings
 
Vintage
September 30, 2013
 
 
 
 
 
 
 
 
 
1
99.4
%
 
AAA
48.6
%
 
2007
30.5
%
 
2
—
%
 
AA
14.6
%
 
2006
24.4
%
 
3
0.6
%
 
A
8.0
%
 
2005 and prior
45.1
%
 
4
—
%
 
BBB
7.1
%
 
 
100.0
%
 
5
—
%
 
BB and below
21.7
%
 
 
 
 
6
—
%
 
 
100.0
%
 
 
 
 
 
100.0
%
 
 
 
 
 
 
December 31, 2012
 
 
 
 
 
 
 
 
 
1
99.9
%
 
AAA
54.1
%
 
2007
28.7
%
 
2
—
%
 
AA
17.1
%
 
2006
20.4
%
 
3
0.1
%
 
A
8.4
%
 
2005 and prior
50.9
%
 
4
—
%
 
BBB
5.3
%
 
 
100.0
%
 
5
—
%
 
BB and below
15.1
%
 
 
 
 
6
—
%
 
 
100.0
%
 
 
 
 
 
100.0
%
 
 
 
 
 
 

As of September 30, 2013, the fair value, amortized cost, and gross unrealized losses of our Other ABS, excluding subprime exposure, totaled $441.0, $425.9 and $0.8, respectively. As of December 31, 2012, the fair value, amortized cost, and gross unrealized losses of our exposure to Other ABS, excluding subprime exposure, totaled $435.6, $411.7 and $0.6, respectively.

As of September 30, 2013, Other ABS was also broadly diversified both by type and issuer with credit card receivables, nonconsolidated collateralized loan obligations ("CLO") and automobile receivables, comprising 44.8%, 3.8% and 34.7%, respectively, of total Other ABS, excluding subprime exposure. As of December 31, 2012, Other ABS was also broadly diversified both by type and issuer with credit card receivables, nonconsolidated CLO and automobile receivables, comprising 47.0%, 5.6% and 26.9%, respectively, of total Other ABS, excluding subprime exposure.


 
67
 

The following tables summarize our exposure to Other ABS holdings, excluding subprime exposure, by credit quality using NAIC designations, ARO ratings and vintage year as of the dates indicated:
 
% of Total Other ABS
 
NAIC Designation
 
ARO Ratings
 
Vintage
September 30, 2013
 
 
 
 
 
 
 
 
 
1
99.4
%
 
AAA
90.5
%
 
2013
9.0
%
 
2
0.5
%
 
AA
2.7
%
 
2012
21.0
%
 
3
0.1
%
 
A
6.2
%
 
2011
11.7
%
 
4
—
%
 
BBB
0.5
%
 
2010
5.0
%
 
5
—
%
 
BB and below
0.1
%
 
2009
0.3
%
 
6
—
%
 
 
100.0
%
 
2008
8.1
%
 
 
100.0
%
 
 
 
 
2007 and prior
44.9
%
 
 
 
 
 
 
 
 
100.0
%
December 31, 2012
 
 
 
 
 
 
 
 
 
1
98.3
%
 
AAA
88.4
%
 
2012
21.4
%
 
2
1.6
%
 
AA
1.9
%
 
2011
12.2
%
 
3
0.1
%
 
A
8.0
%
 
2010
5.7
%
 
4
—
%
 
BBB
1.6
%
 
2009
0.3
%
 
5
—
%
 
BB and below
0.1
%
 
2008
9.5
%
 
6
—
%
 
 
100.0
%
 
2007
22.9
%
 
 
100.0
%
 
 
 
 
2006 and prior
28.0
%
 
 
 
 
 
 
 
 
100.0
%

Troubled Debt Restructuring

We invest in high quality, well performing portfolios of commercial mortgage loans and private placements. Under certain circumstances, modifications are granted to these contracts. Each modification is evaluated as to whether a troubled debt restructuring has occurred. A modification is a troubled debt restructuring when the borrower is in financial difficulty and the creditor makes concessions. Generally, the types of concessions may include reducing the face amount or maturity amount of the debt as originally stated, reducing the contractual interest rate, extending the maturity date at an interest rate lower than current market interest rates and/or reducing accrued interest. We consider 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. As of September 30, 2013, we did not have any new private placement troubled debt restructurings and had 20 new commercial mortgage loan troubled debt restructurings with pre-modification and post-modification carrying value of $39.4. The 20 commercial mortgage loans comprise a portfolio of cross-defaulted, cross-collateralized individual loans, which are owned by the same sponsor. Between the date of the troubled debt restructurings and September 30, 2013, these loans have repaid $1.9 in principal. As of December 31, 2012, we did not have any new private placement or commercial mortgage loan troubled debt restructurings.

During the three and nine months ended September 30, 2013 and 2012, we did not have any commercial mortgage loans or private placements modified in a troubled debt restructuring with a subsequent payment default.

Mortgage Loans on Real Estate

Our mortgage loans on real estate are all commercial mortgage loans held for investment which totaled $3.3 billion and $2.9 billion as of September 30, 2013 and December 31, 2012, respectively. The carrying value of these loans is reported at amortized cost, less impairment write-downs and allowance for losses.

We diversify our commercial mortgage loan portfolio by geographic region and property type to manage concentration risk. We manage risk when originating commercial mortgage loans by generally lending only up to 75% of the estimated fair value of the

 
68
 

underlying real estate. Subsequently, we continuously evaluate all mortgage loans based on relevant current information including a review of loan-specific credit, property characteristics and market trends. Loan performance is continuously monitored on a loan-specific basis throughout the year. Our review includes submitted appraisals, operating statements, rent revenues and annual inspection reports, among other items. This review evaluates whether the properties are performing at a consistent and acceptable level to secure the debt.

We rate all commercial mortgages to quantify the level of risk. We place those loans with higher risk on a watch list and closely monitor these loans for collateral deficiency or other credit events that may lead to a potential loss of principal and/or interest. If we determine the value of any mortgage loan to be other-than-temporary impairments ("OTTI") (i.e., when it is probable that we 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. 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. The carrying value of the impaired loans is reduced by establishing an other-than-temporary write-down recorded in Net realized capital gains (losses) in the Condensed Consolidated Statements of Operations.

The following table summarizes our investment in mortgage loans as of the dates indicated:
 
September 30, 2013
 
December 31, 2012
Commercial mortgage loans
$
3,284.2

 
$
2,874.0

Collective valuation allowance
(1.4
)
 
(1.3
)
Total net commercial mortgage loans
$
3,282.8

 
$
2,872.7


There were no impairment charges taken on the mortgage loan portfolio for the three and nine months ended September 30, 2013 and 2012.

The following table summarizes the activity in the allowance for losses for all commercial mortgage loans for the periods indicated:
 
September 30, 2013
 
December 31, 2012
Collective valuation allowance for losses, balance at January 1
$
1.3

 
$
1.3

Addition to / (reduction of) allowance for losses
0.1

 
—

Collective valuation allowance for losses, end of period
$
1.4

 
$
1.3


Our 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 the loan is brought current.

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. An LTV ratio in excess of 100% indicates the unpaid loan amount exceeds the value of the underlying collateral. 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 (loss) to its debt service payments. A DSC ratio of less than 1.0 indicates that a property's operations do not generate sufficient income to cover debt payments. These ratios are utilized as part of the review process described above. The LTV and DSC ratios as of the dates indicated are as presented below:
 
September 30, 2013(1)
 
December 31, 2012(1)
Loan-to-Value Ratio:
 
 
 
0% - 50%
$
499.4

 
$
501.3

50% - 60%
859.2

 
768.9

60% - 70%
1,797.2

 
1,491.6

70% - 80%
115.4

 
96.4

80% and above
13.0

 
15.8

Total Commercial mortgage loans
$
3,284.2

 
$
2,874.0

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


 
69
 

 
September 30, 2013(1)
 
December 31, 2012(1)
Debt Service Coverage Ratio:
 
 
 
Greater than 1.5x
$
2,392.0

 
$
2,114.4

1.25x - 1.5x
512.9

 
390.5

1.0x - 1.25x
257.1

 
293.1

Less than 1.0x
122.2

 
76.0

Total Commercial Mortgage Loans
$
3,284.2

 
$
2,874.0

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

Other-Than-Temporary Impairments

We evaluate available-for-sale fixed maturities and equity securities for impairment on a regular 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. See the Business, Basis of Presentation and Significant Accounting Policies Note to the Consolidated Financial Statements in our Annual Report on Form 10-K for a policy used to evaluate whether the investments are other-than-temporarily impaired.

The following tables present our credit-related and intent-related impairments included in the Condensed Consolidated Statements of Operations, excluding impairments included in Accumulated other comprehensive income (loss), by type for the periods indicated:
 
Three Months Ended September 30,
 
2013
 
2012
 
Impairment
 
No. of Securities
 
Impairment
 
No. of Securities
U.S. corporate
$
—

 
—

 
$
1.3

 
1

Foreign(1)
—

 
—

 
—

 
—

Residential mortgage-backed
0.4

 
14

 
2.9

 
23

Commercial mortgage-backed
0.1

 
1

 
—

 
—

Other asset-backed
0.2

 
1

 
0.4

 
3

Equity securities
0.1

 
1

 
—

 
—

Total
$
0.8

 
17

 
$
4.6

 
27

(1) Primarily U.S. dollar denominated.
 
 
 
 
 
 
 
* Less than $0.1.
 
 
 
 
 
 
 
 
Nine Months Ended September 30,
 
2013
 
2012
 
Impairment
 
No. of Securities
 
Impairment
 
No. of Securities
U.S. corporate
$
—

 
—

 
$
1.5

 
2

Foreign(1)
—

 
—

 
0.8

 
3

Residential mortgage-backed
2.2

 
32

 
4.5

 
30

Commercial mortgage-backed
0.2

 
3

 
—

 
—

Other asset-backed
0.2

 
1

 
0.8

 
4

Equity securities
0.1

 
1

 
—

 
—

Total
$
2.7

 
37

 
$
7.6

 
39

(1) Primarily U.S. dollar denominated.

The above tables include $0.7 and $2.5 and of write-downs related to credit impairments for the three and nine months ended September 30, 2013, respectively, in Other-than-temporary impairments, which are recognized in the Condensed Consolidated Statements of Operations. The remaining $0.1 and $0.2 in write-downs for the three and nine months ended September 30, 2013, respectively, are related to intent impairments.


 
70
 

The above tables include $4.6 and $6.5 of write-downs related to credit impairments for the three and nine months ended September 30, 2012, respectively, in Other-than-temporary impairments, which are recognized in the Condensed Consolidated Statements of Operations. We did not have any write downs for the three months ended September 30, 2012. For the nine months ended September 30, 2012, the remaining $1.1 in write-downs are related to intent impairments.

The following tables summarize these intent impairments, which are also recognized in earnings, by type for the periods indicated:
 
Three Months Ended September 30,
 
2013
 
2012
 
Impairment
 
No. of Securities
 
Impairment
 
No. of Securities
U.S. corporate
$
—

 
—

 
$
—

 
—

Foreign(1)
—

 
—

 
—

 
—

Residential mortgage-backed
—

*
2

 
—

 
—

Commercial mortgage-backed
0.1

 
1

 
—

 
—

Other asset-backed
—

 
—

 
—

 
—

Total
$
0.1

 
3

 
$
—

 
—

(1) Primarily U.S. dollar denominated.
* Less than $0.1.
 
Nine Months Ended September 30,
 
2013
 
2012
 
Impairment
 
No. of Securities
 
Impairment
 
No. of Securities
U.S. corporate
$
—

 
—

 
$
0.2

 
1

Foreign(1)
—

 
—

 
0.8

 
3

Residential mortgage-backed
—

*
2

 
—

 
—

Commercial mortgage-backed
0.2

 
3

 
—

 
—

Other asset-backed
—

 
—

 
0.1

 
1

Total
$
0.2

 
5

 
$
1.1

 
5

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

As part of our investment strategy, we 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 our previous intent to continue holding a security. Accordingly, these factors may lead us to record additional intent related capital losses.

The fair value of the fixed maturities with OTTI as of September 30, 2013 and December 31, 2012, was $1.8 billion and $1.2 billion, respectively.

During the three and nine months ended September 30, 2013, the primary source of credit-related OTTI was write-downs recorded in the RMBS sector on securities collateralized by Alt-A residential mortgages


 
71
 

Net Investment Income

Net investment income was as presented below for the periods indicated:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
Fixed maturities
$
292.2

 
$
308.2

 
$
900.5

 
$
916.2

Equity securities, available-for-sale
1.7

 
2.6

 
1.6

 
6.7

Mortgage loans on real estate
39.0

 
35.0

 
116.5

 
106.1

Policy loans
3.2

 
3.3

 
9.6

 
9.9

Short-term investments and cash equivalents
0.2

 
0.3

 
0.7

 
0.8

Other
3.9

 
6.3

 
26.8

 
2.9

Gross investment income
340.2

 
355.7

 
1,055.7

 
1,042.6

Less: investment expenses
12.0

 
11.0

 
36.4

 
34.0

Net investment income
$
328.2

 
$
344.7

 
$
1,019.3

 
$
1,008.6


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 the 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 embedded derivatives within product guarantees and fixed maturities, changes in fair value of fixed maturity securities recorded at FVO and changes in fair value including accruals on derivative instruments, except for effective cash flow hedges. The cost of the investments on disposal is generally determined based on first-in-first-out methodology. Net realized capital gains (losses) were as presented below for the periods indicated:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
Fixed maturities, available-for-sale, including securities pledged
$
(6.5
)
 
$
1.5

 
$
(8.7
)
 
$
58.8

Fixed maturities, at fair value option
(26.0
)
 
(31.7
)
 
(131.1
)
 
(78.0
)
Equity securities, available-for-sale
0.1

 
(0.2
)
 
0.1

 
(0.2
)
Derivatives
(10.1
)
 
(12.7
)
 
(71.9
)
 
13.5

Embedded derivatives - fixed maturities
(3.6
)
 
(4.1
)
 
(20.8
)
 
(4.3
)
Embedded derivatives - product guarantees
17.9

 
21.3

 
94.4

 
110.8

Other investments
0.1

 
0.2

 
(0.1
)
 
(0.2
)
Net realized capital gains (losses)
$
(28.1
)
 
$
(25.7
)
 
$
(138.1
)
 
$
100.4


Sale of Certain Alternative Investments

On June 4, 2012, we entered into an agreement to sell certain general account private equity limited partnership investment interest holdings with a carrying value of $331.9 as of March 31, 2012. These assets were sold to a group of private equity funds that are managed by Pomona Management LLC, our affiliate. The transaction resulted in a net pre-tax loss of $38.7 in the second quarter of 2012 reported in Net investment income on the Condensed Consolidated Statements of Operations. The transaction closed in two tranches with the first tranche closed on June 29, 2012 and the second tranche closed on October 29, 2012. In connection with these promissory notes, ING U.S., Inc. unconditionally guarantees payment of the notes in the event of any default of payments due. No additional loss was incurred on the second tranche since the fair value of the alternative investments was reduced to the agreed-upon sale price as of June 30, 2012.

We sold these assets in order to reduce our exposure to alternative investments as part of our ordinary course portfolio management. The transaction reduced certain rating agency required capital levels, in light of the high capital charge associated with the asset class and improved liquidity.


 
72
 

European Exposures

We closely monitor our exposures to European sovereign debt in general, with a primary focus on our exposure to the sovereign debt of Greece, Ireland, Italy, Portugal and Spain (which we refer to as "peripheral Europe"), as these countries have applied for support from the European Financial Stability Facility or received support from the European Central Bank via government bond purchases in the secondary market.

The financial turmoil in Europe continues to be a threat to global capital markets and remains a challenge to global financial stability. Additionally, the possibility of capital market volatility spreading through a highly integrated and interdependent banking system remains elevated. Furthermore, it is our view that the risk among European sovereigns and financial institutions warrants specific scrutiny, in addition to our customary surveillance and risk monitoring, given how highly correlated these sectors of the region have become.

We quantify and allocate our exposure to the region, as described in the table below, by attempting to identify all aspects of the region or country risk to which we are exposed. Among the factors we consider are the nationality of the issuer, the nationality 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, we believe that we develop 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 our ongoing risk and portfolio management process, we closely monitor 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 our portfolio.

As of September 30, 2013, we had $293.1 of exposure to peripheral Europe, which consists of a broadly diversified portfolio of credit-related investments solely in the industrial and utility sectors. We had no fixed maturity and equity securities exposure to peripheral European sovereigns or to financial institutions based in peripheral Europe. Peripheral European exposure included non-sovereign exposure in Ireland of $111.3, Italy of $113.1, and Spain of $68.7. We had no exposure to Greece or Portugal. As of September 30, 2013, there was $1.0 derivative assets exposure to financial institutions in peripheral Europe. For purposes of calculating the derivative assets exposure, we had aggregated exposure to single name and portfolio product CDS, as well as all non-CDS derivative exposure for which we either had counterparty or direct credit exposure to a company whose country of risk is in scope.

Among the remaining $2.7 billion of total non-peripheral European exposure, we had a portfolio of credit-related assets similarly diversified by country and sector across developed and developing Europe. As of September 30, 2013, our sovereign exposure was $148.7, which consisted of fixed maturities. We also had $371.1 in net exposure to non-peripheral financial institutions with a concentration in the United Kingdom of $145.9, Switzerland of $59.7, The Netherlands of $53.1 and France of $59.6. The balance of $2.2 billion was invested across non-peripheral, non-financial institutions.

In addition to aggregate concentration to the United Kingdom of $1,059.0 and The Netherlands of $437.8, we had significant non-peripheral European total country exposures in Switzerland of $275.2, Germany of $198.7, Belgium of $185.5 and France of $200.7. We place additional scrutiny on our financial exposure in the United Kingdom, France and Switzerland given our concern for the potential for volatility to spread through the European banking system. We believe the primary risk results from market value fluctuations resulting from spread volatility and the secondary risk is default risk, should the European crisis worsen or fail to be resolved.

 
73
 

The following table represents our European exposures at fair value and amortized cost as of September 30, 2013:

 
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)
 
Sovereign
 
Financial Institutions
 
Non-Financial Institutions
 
Less: Margin and Collateral
 
Total,
(Fair
Value)
 
Net Non-U.S. Funded at September 30, 2013(1)
Ireland
$
—

 
$
—

 
$
110.3

 
$
110.3

 
$
104.8

 
$
—

 
$
—

 
$
1.0

 
$
—

 
$
—

 
$
1.0

 
$
111.3

Italy
—

 
—

 
113.1

 
113.1

 
109.7

 
—

 
—

 
—

 
—

 
—

 
—

 
113.1

Spain
—

 
—

 
68.7

 
68.7

 
66.9

 
—

 
—

 
—

 
—

 
—

 
—

 
68.7

Total peripheral Europe
—

 
—

 
292.1

 
292.1

 
281.4

 
—

 
—

 
1.0

 
—

 
—

 
1.0

 
293.1

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Belgium
37.0

 
—

 
148.5

 
185.5

 
157.7

 
—

 
—

 
—

 
—

 
—

 
—

 
185.5

France
—

 
48.6

 
141.1

 
189.7

 
177.4

 
—

 
—

 
38.3

 
—

 
27.3

 
11.0

 
200.7

Germany
—

 
35.3

 
163.4

 
198.7

 
181.6

 
—

 
—

 
—

 
—

 
—

 
—

 
198.7

Netherlands
—

 
53.1

 
384.7

 
437.8

 
415.2

 
—

 
—

 
—

 
—

 
—

 
—

 
437.8

Switzerland
—

 
49.3

 
215.5

 
264.8

 
243.9

 
—

 
—

 
8.0

 
—

 
(2.4
)
 
10.4

 
275.2

United Kingdom
—

 
134.8

 
913.1

 
1,047.9

 
1,020.2

 
—

 
—

 
17.8

 
—

 
6.7

 
11.1

 
1,059.0

Other non-
peripheral(2)
111.7

 
17.5

 
256.7

 
385.9

 
372.4

 
—

 
—

 
—

 
—

 
—

 
—

 
385.9

Total non-peripheral Europe
148.7

 
338.6

 
2,223.0

 
2,710.3

 
2,568.4

 
—

 
—

 
64.1

 
—

 
31.6

 
32.5

 
2,742.8

Total
$
148.7

 
$
338.6

 
$
2,515.1

 
$
3,002.4

 
$
2,849.8

 
$
—

 
$
—

 
$
65.1

 
$
—

 
$
31.6

 
$
33.5

 
$
3,035.9

(1) Represents: (i) Fixed maturity and equity securities at fair value; and (ii) Derivative assets at fair value.
(2) Other non-peripheral countries include: Bulgaria, Croatia, Czech Republic, Denmark, Finland, Hungary, Iceland, Kazakhstan, Latvia, Lithuania, Luxembourg, Norway, Russian Federation, Slovakia, Sweden and Turkey.

 
74
 

Liquidity and Capital Resources

Liquidity is our ability to generate sufficient cash flows to meet the cash requirements of operating, investing and financing activities.

Liquidity Management

Our 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 and payment of dividends.

Our 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 us 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. Our asset/liability management discipline includes strategies to minimize exposure to loss as interest rates and economic and market conditions change. In executing this strategy, we use derivative instruments to manage these risks. Our 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. We maintain the following agreements:

•
A reciprocal loan agreement with ING U.S., Inc. 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 September 30, 2013, and December 31, 2012, we did not have any outstanding receivable/payable from/to ING U.S., Inc. under the reciprocal loan agreement. We and ING U.S., Inc. continue to maintain the reciprocal loan agreement and future borrowings by either party will be subject to the reciprocal loan terms summarized above.

•
We hold approximately 56.5% of our assets in marketable securities. These assets include cash, U.S. Treasuries, Agencies, 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 our Liquidity Plan, up to 12% of our 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 September 30, 2013, ILIAC had securities lending collateral assets of $145.6, which represents approximately 0.2% of its general account statutory admitted assets.

We believe that our sources of liquidity are adequate to meet our short-term cash obligations.

Capital Contributions and Dividends

During the nine months ended September 30, 2013 and 2012, ILIAC did not receive any capital contributions from its Parent.

During the nine months ended September 30, 2013, following receipt of required approval from its domiciliary state insurance regulator and consummation of the IPO of ING U.S., Inc., ILIAC paid an extraordinary dividend of $174.0 to its Parent. During the nine months ended September 30, 2012, following receipt of required approval from its domiciliary state insurance regulator, ILIAC paid a cash distribution of $340.0 to its Parent.


 
75
 

Ratings

Our access to funding and our related cost of borrowing, requirements for derivatives collateral posting and the attractiveness of certain of our products to customers are affected by our credit ratings and insurance financial strength ratings, which are periodically reviewed by the rating agencies. Financial strength ratings and credit ratings are important factors affecting public confidence in an insurer and its competitive position in marketing products. The credit ratings are also important for the ability to raise capital through the issuance of debt and for the cost of such financing.

A downgrade in our credit ratings or the credit or financial strength ratings of our parent or rated affiliates could potentially, among other things, limit our ability to market products, reduce our competitiveness, increase the number or value of policy surrenders and withdrawals, increase our borrowing costs and potentially make it more difficult to borrow funds, adversely affect the availability of financial guarantees or LOCs, cause additional collateral requirements or other required payments under certain agreements, allow counterparties to terminate derivative agreements and/or hurt our relationships with creditors, distributors or trading counterparties thereby potentially negatively affecting our profitability, liquidity and/or capital. In addition, we consider nonperformance risk in determining the fair value of our liabilities. Therefore, changes in our credit or financial strength ratings or the credit or financial strength ratings of our Parent or rated affiliates may affect the fair value of our liabilities.

The following table presents our financial strength and credit ratings. In parentheses is an indication of that rating's relative rank within the agency's rating categories. That ranking refers only to the generic or major rating category and not to the modifiers appended to the rating by the rating agencies to denote relative position within such generic or major category. For each rating, the relative position of the rating within the relevant rating agency's ratings scale is presented, with "1" representing the best rating in the scale.

Company
 
A.M. Best
 
Fitch
 
Moody's
 
S&P
ING Life Insurance and Annuity Company
 
 
 
 
 
 
 
 
Financial Strength Rating
 
A
(3 of 16)
 
A-
(3 of 9)
 
A3
(3 of 9)
 
A-
(3 of 9)

Rating Agency
 
Financial Strength Rating Scale
A.M. Best(1)
 
"A++" to "S"
Fitch(2)
 
"AAA" to "C"
Moody’s(3)
 
"Aaa" to "C"
S&P(4)
 
"AAA" to "R"
(1) A.M. Best’s financial strength rating is an independent opinion of an insurer's financial strength and ability to meet its ongoing insurance policy and contract obligations. It is based on a comprehensive quantitative and qualitative evaluation of a company's balance sheet strength, operating performance and business profile.
(2) Fitch’s financial strength ratings provide an assessment of the financial strength of an insurance organization. The IFS Rating is assigned to the insurance company's policyholder obligations, including assumed reinsurance obligations and contract holder obligations, such as guaranteed investment contracts.
(3) Moody’s financial strength ratings are opinions of the ability of insurance companies to repay punctually senior policyholder claims and obligations. Moody's appends numerical modifiers 1, 2, and 3 to each generic rating classification from Aa through Caa. The modifier 1 indicates that the obligation ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of that generic rating category.
(4) S&P’s insurer financial strength rating is a forward-looking opinion about the financial security characteristics of an insurance organization with respect to its ability to pay under its insurance policies and contracts in accordance with their terms. A "+" or "-" indicates relative strength within a category.

Our ratings by A.M. Best Company, Inc. ("A.M. Best"), Fitch, Moody's and S&P 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 our 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.

Rating agencies use an "outlook" statement for both industry sectors and individual companies. For an industry sector, a stable outlook generally implies that over the next 12 to 18 months the rating agency expects ratings to remain unchanged among companies in the sector. For a particular company, an outlook generally indicates a medium- or long-term trend in credit fundamentals, which if continued, may lead to a rating change.


 
76
 

Ratings actions affirmation and outlook changes by A.M. Best, Fitch, Moody's and S&P from January 1, 2013 through November 12, 2013 are as follows:

•
On July 8, 2013, Fitch affirmed the A- insurer financial strength ratings of ING U.S., Inc.'s operating subsidiaries, including us.
•
On June 14, 2013, A.M.Best affirmed the A financial strength ratings of ING U.S., Inc.'s operating subsidiaries, including us.
•
On May 14, 2013, S&P affirmed the A- financial strength ratings of ING U.S., Inc.'s operating subsidiaries, including us under its revised insurance criteria.
•
On May 14, 2013, Moody's affirmed the A3 insurance financial strength ratings of ING U.S., Inc.'s operating subsidiaries, including us.
•
On May 6, 2013, following the announcement by ING U.S., Inc. that it completed the recent IPO, Moody's commented that the completion of the IPO is credit positive for ING U.S., Inc.
•
On May 2, 2013, S&P said that ING U.S., Inc.'s announcement that it priced its IPO will not affect the ratings or outlook on ING U.S., Inc. or any of its rated insurance subsidiaries, including us.
•
On January 7, 2013, Fitch affirmed the A- insurer financial strength ratings of ING U.S., Inc.'s operating subsidiaries, including us. Furthermore, Fitch removed all ratings from Ratings Watch Evolving and assigned a stable outlook to the ratings.

Derivatives

Our use of derivatives is limited mainly to economic hedging to reduce our exposure to cash flow variability of assets and liabilities, interest rate risk, credit risk, exchange rate risk and market risk. It is our policy not to offset amounts recognized for derivative instruments and amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral arising from derivative instruments executed with the same counterparty under a master netting arrangement.

We enter into interest rate, equity market, credit default and currency contracts, including swaps, futures, forwards, caps, floors and options, to reduce and manage risks associated with changes in value, yield, price, cash flow, or exchange rates of assets or liabilities held or intended to be held, or to assume or reduce credit exposure associated with a referenced asset, index, or pool. We also utilize options and futures on equity indices to reduce and manage risks associated with our annuity products. Open derivative contracts are reported as Derivatives assets or liabilities on the Condensed Consolidated Balance Sheets at fair value. Changes in the fair value of derivatives are recorded in Net realized capital gains (losses) in the Condensed Consolidated Statements of Operations.

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

We also have investments in certain fixed maturities and have 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 of the embedded derivatives are recorded in Other net realized capital gains (losses) in the Condensed Consolidated Statements of Operations. Embedded derivatives within certain annuity products are included in Future policy benefits and contract owner account balances 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.

Impact of New Accounting Pronouncements

For information regarding the impact of new accounting pronouncements, see the Business, Basis of Presentation and Significant Accounting Policies Note to the Condensed Consolidated Financial Statements, in Part I, Item 1. of this Form 10-Q.

Contingencies

For information regarding other contingencies related to legal proceedings, regulatory matters and other contingencies involving us, see the Commitments and Contingencies Note to the Condensed Consolidated Financial Statements included in Part I, Item 1., herein.


 
77
 

Legislative and Regulatory Developments

Supreme Court Decision regarding Defense of Marriage Act

Before June 26, 2013, pursuant to Section 3 of the Defense of Marriage Act ("DOMA"), same-sex marriages were not recognized for purposes of federal law. On that date, the United States Supreme Court held in United States v. Windsor that Section 3 of DOMA is unconstitutional. The Windsor decision affects over 1,000 federal laws and regulations, many of which touch upon our services and procedures. While the IRS and DOL have issued guidance indicating that they will regard individuals to be married if they have entered into a same-sex marriage that is valid under the laws of the state where such marriage is celebrated, the appropriate legal and regulatory authorities need to provide further guidance regarding the open questions created by the Windsor decision. Although we recognize that certain changes will be required, we cannot predict with certainty how new regulations will impact our business, results of operations, cash flows or financial condition. The Windsor decision also creates potential inconsistencies in the application of federal and state tax laws, including how tax withholding is computed. Future guidance from the Internal Revenue Service and state tax authorities may resolve these inconsistencies, and it is possible that significant changes will be required to our tax reporting and withholding systems as a result.

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 amended ("Exchange Act")) 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.

 
78
 

PART II.    OTHER INFORMATION

Item 1.        Legal Proceedings

See the Commitments and Contingencies 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 our business or operations described under "Risk Factors" in Part I, Item 1A. of the 2012 Annual Report on Form 10-K.

Continued difficult conditions in the global capital markets and the economy generally have affected and may continue to affect our business and results of operations.

Our business and results of operations are materially affected by conditions in the global capital markets and the economy generally. Concerns over the slow economic recovery, the recent shutdown of the U.S. government, the level of U.S. national debt (including the ongoing debate in the U.S. Congress regarding the national debt ceiling), the European sovereign debt crisis, the ability of certain countries to remain in the euro zone, unemployment, the availability and cost of credit, the U.S. housing market, inflation levels, energy costs and geopolitical issues have contributed to increased volatility and diminished expectations for the economy and the markets. In 2011, Standard & Poor's Ratings Services (“S&P”) lowered its long term sovereign credit rating on the United States from AAA to AA+. In addition, significant concerns regarding the sovereign debt of Greece, Ireland, Italy, Portugal and Spain, as well as certain other countries, are ongoing and in some cases have required countries to obtain emergency financing. The financial turmoil in Europe continues to be a threat to global capital markets and remains a challenge to global financial stability. If these or other countries require additional financial support or if sovereign credit ratings continue to decline, yields on the sovereign debt of certain countries may continue to increase, the cost of borrowing may increase and credit may become more limited. Additionally, the possibility of capital market volatility spreading through a highly integrated and interdependent banking system remains elevated. In the event of any default or similar event with respect to a sovereign issuer, some financial institutions may suffer significant losses for which they would require additional capital, which may not be available. These factors, combined with volatile oil prices, reduced business and consumer confidence and continued high unemployment, have negatively impacted the U.S. economy. Furthermore, we anticipate that the Board of Governors of the Federal Reserve System (the "Federal Reserve") may scale back programs that have in recent years fostered a historically low interest rate environment, which could generate volatility in debt and equity markets. Our results of operations, investment portfolio and AUM are exposed to these risks and may be adversely affected as a result. In addition, in the event of extreme prolonged market events, such as the recent global credit crisis, we could incur significant losses.

Even in the absence of a market downturn, our annuity and retirement products, as well as our investment returns and our access to and cost of financing, are sensitive to equity, fixed income, real estate and other market fluctuations and general economic and political conditions. These fluctuations and conditions could materially and adversely affect our results of operations, financial condition and liquidity, including in the following respects:

•
We provide a number of annuity and retirement products that expose us to risks associated with fluctuations in interest rates, market indices, securities prices, default rates, the value of real estate assets, currency exchange rates and credit spreads. The profitability of many of our annuity and retirement products depends in part on the value of the general accounts and separate accounts supporting them, which may fluctuate substantially depending on the foregoing conditions.
•
Volatility or downturns in the equity markets can cause a reduction in fee income on variable annuity and retirement products. Because these products and services generate fees related primarily to the value of AUM, a decline in the equity markets could reduce our revenues.
•
A change in market conditions, including prolonged periods of high or low inflation or interest rates, could cause a change in consumer sentiment and adversely affect sales and could cause the actual persistency of these products to vary from their anticipated persistency (the probability that a product will remain in force from one period to the next) and adversely affect profitability. Changing economic conditions or adverse public perception of financial institutions can influence customer behavior, which can result in, among other things, an increase or decrease in claims, lapses, withdrawals, deposits or surrenders in certain products, any of which could adversely affect profitability.
•
An equity market decline, decreases in prevailing interest rates or a prolonged period of low interest rates could result in the value of guaranteed minimum benefits contained in certain of our annuity and retirement products being higher than current account values or higher than anticipated in our pricing assumptions, requiring us to materially increase reserves for such products, and may result in a decrease in customer lapses, thereby increasing the cost to us. In addition,

 
79
 

such a scenario could lead to increased amortization and/or unfavorable unlocking of our deferred acquisition cost (“DAC”) and value of business acquired (“VOBA”).
•
Reductions in employment levels of our existing employer customers may result in a reduction in underlying employee participation levels, contributions, deposits and premium income for certain of our retirement products. Participants within the retirement plans for which we provide certain services may elect to effect withdrawals from these plans, or reduce or stop their payroll deferrals to these plans, which would reduce assets under management or administration and our revenues.
•
We have significant investment and derivative portfolios that include, among other investments, corporate securities, asset-backed securities (“ABS”), equities and commercial mortgages. Economic conditions as well as adverse capital market and credit conditions, interest rate changes, changes in mortgage prepayment behavior or declines in the value of underlying collateral will impact the credit quality, liquidity and value of our investment and derivative portfolios, potentially resulting in higher capital charges and unrealized or realized losses and decreased investment income. The value of our investments and derivative portfolios may also be impacted by reductions in price transparency, changes in the assumptions or methodology we use to estimate fair value and changes in investor confidence or preferences, which could potentially result in higher realized or unrealized losses and have a material adverse effect on our results of operations or financial condition. Market volatility may also make it difficult to value certain of our securities if trading becomes less frequent.
•
Market conditions determine the availability and cost of the reinsurance protection we purchase and may result in additional expenses for reinsurance or an inability to obtain sufficient reinsurance on acceptable terms, which could adversely affect the profitability of future business and the availability of capital to support new sales.
•
Hedging instruments we use to manage product and other risks might not perform as intended or expected, which could result in higher realized losses and unanticipated cash needs to collateralize or settle such transactions. Adverse market conditions can limit the availability and increase the costs of hedging instruments, and such costs may not be recovered in the pricing of the underlying products being hedged. In addition, hedging counterparties may fail to perform their obligations resulting in unhedged exposures and losses on positions that are not collateralized.
•
Regardless of market conditions, certain investments we hold, including privately placed fixed income investments, investments in private equity funds and commercial mortgages, are relatively illiquid. If we need to sell these investments, we may have difficulty selling them in a timely manner or at a price equal to what we could otherwise realize by holding the investment to maturity.
•
We are exposed to interest rate and equity risk based upon the discount rate and expected long-term rate of return assumptions associated with our pension and other retirement benefit obligations. Sustained declines in long-term interest rates or equity returns could have a negative effect on the funded status of these plans and/or increase our future funding costs.
•
Fluctuations in our operating results and our investment portfolio may impact our tax profile, our ability to optimally utilize tax attributes and our deferred income tax assets.
•
A default by any financial institution or by a sovereign could lead to additional defaults by other market participants. The failure of a sufficiently large and influential institution could disrupt securities markets or clearance and settlement systems and lead to a chain of defaults, because the commercial and financial soundness of many financial institutions may be closely related as a result of credit, trading, clearing or other relationships. Even the perceived lack of creditworthiness of a counterparty may lead to market-wide liquidity problems and losses or defaults by us or by other institutions. This risk is sometimes referred to as “systemic risk” and may adversely affect financial intermediaries, such as clearing agencies, clearing houses, banks, securities firms and exchanges with which we interact on a daily basis. Systemic risk could have a material adverse effect on our ability to raise new funding and on our business, results of operations, financial condition, liquidity and/or business prospects. In addition, such a failure could impact future product sales as a potential result of reduced confidence in the financial services industry.
•
Widening credit spreads, if not offset by equal or greater declines in the risk-free interest rate, would also cause the total interest rate payable on newly issued securities to increase, and thus would have the same effect as an increase in underlying interest rates with respect to the valuation of our current portfolio.

Continuing market turmoil has resulted in, and may continue to raise the possibility of, legislative, regulatory and governmental actions. We cannot predict whether or when such actions may occur, or what impact, if any, such actions could have on our business, results of operations and financial condition.

Changes in U.S. federal income tax law and interpretations of existing tax law could affect our profitability and financial condition by making some products less attractive to customers and increasing our tax costs or tax costs of our customers.

Annuity products that we sell currently benefit from one or more forms of tax favored status under current federal tax law. However, it is likely that looming federal deficits will generate numerous revenue raising proposals, including those directed at the life insurance industry and its products. Such measures could include federal tax changes that reduce the amount an individual can

 
80
 

contribute on a pre-tax basis to a tax-deferred product (either directly by reducing current limits or indirectly by changing the tax treatment of such contributions from exclusions to deductions) or that limit an individual's aggregate amount of tax-deferred savings, which could make our retirement products less attractive to customers. Over the years, the life insurance industry has contended with proposals either to limit, or repeal, the continued tax deferral afforded to the "inside build-up" associated with life insurance and annuity products. While countering any such revenue proposal is a top industry priority, if such a proposal should be made, we cannot predict its scope, effect or likelihood of outcome.

One such recent measure is the American Taxpayer Relief Act of 2012 which was passed to avert the "fiscal cliff" and made permanent the marginal income tax rates for individuals, as well as the estate tax threshold and applicable rate. Although we do not consider it likely that Congress will revisit these rates in the short term, it is likely to pursue spending cuts (which may take the form of reducing or eliminating tax preferences associated with our industry and products) to offset mandatory spending cuts, as part of any negotiations to raise the federal borrowing limit, and as part of funding the federal government when the current continuing resolution expires. Congress may also consider the same types of spending cuts and revenue raising options on an even larger scale later in 2013 or 2014 if it pursues comprehensive tax reform premised on the notion of reducing corporate and personal rates by reducing tax preferences. We also believe that states that stand to lose tax revenue of their own will exert pressure on the federal government not to enact additional measures as part of comprehensive tax reform that would negatively impact them further. Such a situation may result in even more pressure on raising revenue from tax preferences associated with our Company and products.

Additionally, we are subject to federal corporation income tax and benefits from certain federal tax provisions, including but not limited to, dividends received deductions, various tax credits and insurance reserve deductions. Due in large part to the financial crisis, there continues to be an increased risk that changes to federal tax law could be enacted and could result in materially higher corporate taxes than would be incurred under existing tax law and adversely impact profitability. Also, interpretation and enforcement of existing tax law could change and could be applied to us as part of an IRS examination and adversely impact our capital position. Although the specific form of any such potential legislation is uncertain, it could include lessening or eliminating some or all of the tax advantages currently benefiting us or our policyholders, including but not limited to, those mentioned above or imposing new costs.

The level of interest rates may adversely affect our profitability, particularly in the event of a period of sustained low interest rate or a period of rapidly increasing interest rates.

Changes in prevailing interest rates may negatively affect our business including the level of net interest margin we earn. In a period of changing interest rates, interest expense may increase and interest credited to policyholders may change at different rates than the interest earned on assets. Accordingly, changes in interest rates could decrease net interest margin. Changes in interest rates may negatively affect the value of our assets and our ability to realize gains or avoid losses from sale of those assets, all of which also ultimately affect earnings. In addition, our annuity products and certain of our retirement and investment products are sensitive to inflation rate fluctuations. A sustained increase in the inflation rate in our principal markets may also negatively affect our business, financial condition and results of operation. For example, a sustained increase in the inflation rate may result in an increase in nominal market interest rates. A failure to accurately anticipate higher inflation and factor it into our product pricing assumptions may result in mispricing of our products, which could materially and adversely impact our results of operations. During periods of declining interest rates or a prolonged period of low interest rates, annuity products may be relatively more attractive to consumers due to minimum guarantees that are frequently mandated by regulators, resulting in increased premium payments on products with flexible premium features and a higher percentage of insurance and annuity contracts remaining in force from year-to-year than we anticipated in our pricing, potentially resulting in greater claims costs than we expected and asset liability cash flow mismatches. A decrease in interest rates or a prolonged period of low interest rates may also require additional provisions for guarantees included in annuity contracts, as the guarantees become more valuable to policyholders.

During a period of decreasing interest rates or a prolonged period of low interest rates, our investment earnings may decrease because the interest earnings on our recently purchased fixed income investments will likely have declined in parallel with market interest rates. In addition, a prolonged low interest rate period may result in higher costs for certain derivative instruments that may be used to hedge certain of our product risks. Residential mortgage-backed securities and callable fixed income securities in our investment portfolios will be more likely to be prepaid or redeemed as borrowers seek to borrow at lower interest rates. Consequently, we may be required to reinvest the proceeds in securities bearing lower interest rates. Accordingly, during periods of declining interest rates, our profitability may suffer as the result of a decrease in the spread between interest rates credited to policyholders and contract owners and returns on our investment portfolios. An extended period of declining interest rates or a prolonged period of low interest rates may also cause us to change our long-term view of the interest rates that we can earn on our investments. Such a change in our view would cause us to change the long-term interest rate that we assume in our calculation of insurance assets and liabilities under U.S. GAAP. This revision would result in increased reserves, accelerated amortization of deferred policy acquisition costs ("DAC") and other unfavorable consequences. In addition, certain statutory capital and reserve requirements are based on

 
81
 

formulas or models that consider interest rates, and an extended period of low interest rates may increase the statutory capital we are required to hold and the amount of assets we must maintain to support statutory reserves.

We believe a continuation of the current low interest rate environment would also negatively affect our financial performance as a result of (1) lower investment income, as we invest new deposits and premiums and reinvest proceeds from maturing investments at rates lower than the yield on our current investment portfolio, and (2) higher amortization of DAC and value of business acquired. We believe reduced crediting rates offset the lower investment income, but that such reductions would only be partially effective due to the presence of minimum credited rates on many of our products. Under this scenario, we do not currently expect that loss recognition testing will result in charges to net income. In addition, we expect that a continuation of the current low interest rate environment could reduce our Company's risk-based capital ratio in an amount that could be material.

Conversely, in periods of rapidly increasing interest rates, policy loans, withdrawals from, and/or surrenders of, annuity contracts and certain guaranteed investment contracts may increase as policyholders choose to seek higher investment returns. Obtaining cash to satisfy these obligations may require us to liquidate fixed income investments at a time when market prices for those assets are depressed because of increases in interest rates. This may result in realized investment losses. Regardless of whether we realize an investment loss, such cash payments would result in a decrease in total invested assets and may decrease our net income and capitalization levels. Premature withdrawals may also cause us to accelerate amortization of DAC, which would also reduce our net income. An increase in market interest rates could also have a material adverse effect on the value of our investment portfolio by, for example, decreasing the estimated fair values of the fixed income securities within our investment portfolio. An increase in market interest rates could also create a significant collateral posting requirement associated with our interest rate hedge programs, which could materially and adversely affect liquidity. In addition, an increase in market interest rates could require us to pay higher interest rates on debt securities we may issue in the financial markets from time to time to finance our operations, which would increase our interest expenses and reduce our results of operations. Lastly, an increase in interest rates could result in decreased fee income associated with a decline in the value of variable annuity account balances invested in fixed income funds.

Our businesses are heavily regulated, and changes in regulation in the United States, enforcement actions and regulatory investigations may reduce profitability.

Our operations are subject to comprehensive regulation and supervision throughout the United States. State insurance laws regulate most aspects of our insurance business and we are regulated by the insurance department of our state of domicile, Connecticut. The primary purpose of state regulation is to protect policyholders, and not necessarily to protect creditors and investors.

State insurance guaranty associations have the right to assess insurance companies doing business in their state in order to help pay the obligations of insolvent insurance companies to policyholders and claimants. Because the amount and timing of an assessment is beyond our control, liabilities we have currently established for these potential assessments may not be adequate.

State insurance regulators and the National Association of Insurance Commissioners ("NAIC") regularly reexamine existing laws and regulations applicable to insurance companies and their products. Changes in these laws and regulations, or in interpretations thereof, are often made for the benefit of the consumer at the expense of the insurer and could materially and adversely affect our business, results of operations or financial condition. For example, in October 2011, the NAIC established a subgroup to study insurers' use of captives and special purpose vehicles to transfer insurance risk in relation to existing state laws and regulations, and to establish appropriate regulatory requirements to address concerns identified in the study. Additionally, in June 2013, the New York State Department of Financial Services (the "NYDFS") released a report critical of certain captive reinsurance structures and calling, in part, for other state regulators to adopt a moratorium on approving such structures pending further review by state and federal regulators. We cannot predict what actions and regulatory changes will result from the NAIC study or the NYDFS report and what impact such changes will have on our financial condition and results of operations.

Insurance regulators have implemented, or begun to implement significant changes in the way in which insurers must determine statutory reserves and capital, particularly for products with contractual guarantees such as variable annuities and universal life policies, and are considering further potentially significant changes in these requirements.

In addition, state insurance regulators are becoming more active in adopting and enforcing suitability standards with respect to sales of fixed and indexed annuities. In particular, the NAIC has adopted a revised Suitability in Annuity Transactions Model Regulation ("SAT"), which will, if enacted by the states, place new responsibilities upon issuing insurance companies with respect to the suitability of annuity sales, including responsibilities for training agents. Several states have already enacted laws based on the SAT.


 
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In addition to the foregoing risks, the financial services industry is the focus of increased regulatory scrutiny as various state and federal governmental agencies and self-regulatory organizations conduct inquiries and investigations into the products and practices of the financial services industries. It is possible that future regulatory inquiries or investigations involving the insurance industry generally, or the Company specifically, could materially and adversely affect our business, results of operations or financial condition.

In some cases, this regulatory scrutiny has led to legislation and regulation, or proposed legislation and regulation that could significantly affect the financial services industry, or has resulted in regulatory penalties, settlements and litigation. New laws, regulations and other regulatory actions aimed at the business practices under scrutiny could materially and adversely affect our business, results of operations or financial condition. The adoption of new laws and regulations, enforcement actions, or litigation, whether or not involving us, could influence the manner in which we distribute our products, result in negative coverage of the industry by the media, cause significant harm to our reputation and materially and adversely affect our business, results of operations or financial condition.

Item 5.        Other Information

Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012, which was signed into law on August 10, 2012, added a new subsection (r) to Section 13 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), which requires us to disclose whether the Company or any of its affiliates, including ING Groep N.V. ("ING Group") or its affiliates has engaged during the quarter ended September 30, 2013 in certain Iran-related activities, including any transaction or dealing with the Government of Iran that is not conducted pursuant to a specific authorization of the U.S. Government.

Neither ING U.S., Inc. nor any of its subsidiaries, including the Company have knowingly engaged in any transaction or dealing reportable under Section 13(r) of the Exchange Act during the quarter ended September 30, 2013. The disclosure below relates solely to a limited legacy portfolio of guarantees, accounts, loans and relationships maintained by ING Bank N.V. ("ING Bank"), a subsidiary of ING Group and therefore an affiliate of ING U.S., Inc. and the Company and does not relate to any activities conducted by ING U.S., Inc. or its subsidiaries, including the Company, or involve the management of ING U.S., Inc. or its subsidiaries, including the Company.

Other than the transactions described below, at no time during the quarter ended September 30, 2013, did ING Group or any of its affiliates knowingly conduct or engage in any activities that would require disclosure to the U.S. Securities and Exchange Commission pursuant to Section 13(r) of the Exchange Act. ING Bank maintains a limited legacy portfolio of guarantees, accounts and loans that involve various entities owned by the Government of Iran. ING Bank also has limited legacy relationships with certain persons who are designated under Executive Orders 13224 and 13382. These positions remain on the books, but accounts related thereto may be 'frozen' under applicable laws and procedures. In such cases, any interest or other payments ING Bank is legally required to make in connection with said positions are made into 'frozen' accounts. Funds can only be withdrawn by relevant parties from these 'frozen' accounts after due regulatory consent from the relevant competent authorities. ING Bank has strict controls in place to ensure that no unauthorized account activity takes place while the account is 'frozen'. ING Bank may receive loan repayments, but all legacy loan repayments received by ING Bank have been duly authorized by relevant competent authorities. For the three months ended September 30, 2013, ING Bank had gross revenues of approximately $4.9 million related to these activities, which was principally related to legacy loan repayment. ING Bank estimates that it had net profit of approximately $120.7 thousand related to these activities. ING Bank intends to terminate each of the legacy positions as the nature thereof and applicable law permits.


Item 6.    Exhibits

See Exhibit Index on pages 85 - 87 hereof.

 
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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.


November 12, 2013
 
ING Life Insurance and Annuity Company
(Date)
 
(Registrant)
 
 
 
 
By:
/s/
Mark B. Kaye
 
 
Mark B. Kaye
 
 
Senior Vice President and
 
 
Chief Financial Officer
 
 
(Duly Authorized Officer and Principal Financial Officer)


 
84
 

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.
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.

 
85
 

Exhibit Index
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.
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.

 
86
 

Exhibit Index
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.
31.1+
 
Certificate of Mark B. Kaye 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 Mark B. Kaye 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

[1]
In accordance with Rule 406T of Regulation S-T, the interactive data files contained in Exhibit 101 to this Form 10-Q are furnished and shall not be deemed to be "filed" for purposes of Sections 11 and 12 of the Securities Act of 1933, as amended (the "Securities Act"), nor will they be deemed filed for purposes of Section 18 of the Securities Exchange Act, as amended (the "Exchange Act"), or otherwise subject to the liability of such sections, and shall not be part of any registration statement or other document filed under the Securities Act or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.

+Filed herewith.

 
87