10-Q 1 iliac2014q110-qreport.htm 10-Q ILIAC 2014 Q1 10-Q 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 March 31, 2014

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:

At May 8, 2014, 55,000 shares of Common Stock, $50 par value were outstanding, all of which were directly owned by Lion Connecticut Holdings Inc.

NOTE:  WHEREAS ING LIFE INSURANCE AND ANNUITY COMPANY MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(a) AND (b) OF FORM 10-Q, THIS FORM IS BEING FILED WITH THE REDUCED DISCLOSURE FORMAT PURSUANT TO GENERAL INSTRUCTION H(2).
 
 
 
 
 

 
 
 

ING Life Insurance and Annuity Company and Subsidiaries
(A wholly owned subsidiary of Lion Connecticut Holdings Inc.)
Form 10-Q for the period ended March 31, 2014

INDEX

 
 
PAGE
PART I.
FINANCIAL INFORMATION (UNAUDITED)
 
 
 
 
 
 
 
Item 1.
Financial Statements:
 
 
 
 
 
Condensed Consolidated Statements of Changes in Shareholder's Equity
 
 
 
 
 
Item 2.
Management's Narrative Analysis of the Results of Operations and Financial Condition
 
 
 
Item 4.
 
 
 
 
 
 
PART II.
OTHER INFORMATION
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
 
 
 
 
 


 
2
 

As used in this Quarterly Report on Form 10-Q, "ILIAC" refers to ING Life Insurance and Annuity Company and the "Company," "we," "our" and "us" refer to ILIAC and its wholly owned subsidiaries.

NOTE CONCERNING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q, including "Risk Factors" and "Management's Narrative Analysis of the Results of Operations and Financial Condition" contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements relating to future developments in our business or expectations for our future financial performance and any statement not involving a historical fact. Forward-looking statements use words such as "anticipate," "believe," "estimate," "expect," "intend," "plan," and other words and terms of similar meaning in connection with a discussion of future operating or financial performance. Actual results, performance or events may differ materially from those projected in any forward-looking statement due to, among other things, (i) general economic conditions, particularly economic conditions in our core markets, (ii) performance of financial markets, including emerging markets, (iii) the frequency and severity of insured loss events, (iv) mortality and morbidity levels, (v) persistency and lapse levels, (vi) interest rates, (vii) currency exchange rates, (viii) general competitive factors, (ix) changes in laws and regulations and (x) changes in the policies of governments and/or regulatory authorities.

The risks included here are not exhaustive. Current reports on Form 8-K and other documents filed with the Securities and Exchange Commission ("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
March 31, 2014 (Unaudited) and December 31, 2013
(In millions, except share data)

 
March 31,
2014
 
December 31, 2013
Assets
 
 
 
Investments:
 
 
 
Fixed maturities, available-for-sale, at fair value (amortized cost of $19,012.7 at 2014 and $19,096.7 at 2013)
$
20,311.3

 
$
19,944.4

Fixed maturities, at fair value using the fair value option
686.8

 
621.3

Equity securities, available-for-sale, at fair value (cost of $111.1 at 2014 and $119.4 at 2013)
127.0

 
134.9

Short-term investments
110.0

 
15.0

Mortgage loans on real estate, net of valuation allowance of $1.2 at 2014 and at 2013
3,377.0

 
3,396.1

Policy loans
240.7

 
242.0

Limited partnerships/corporations
172.4

 
180.9

Derivatives
412.9

 
464.4

Securities pledged (amortized cost of $204.6 at 2014 and $137.9 at 2013)
211.8

 
140.1

Total investments
25,649.9

 
25,139.1

Cash and cash equivalents
465.4

 
378.9

Short-term investments under securities loan agreement, including collateral delivered
186.6

 
135.8

Accrued investment income
298.9

 
285.0

Receivable for securities sold
2.6

 
5.5

Reinsurance recoverable
2,002.8

 
2,016.6

Deferred policy acquisition costs, Value of business acquired and Sales inducements to contract owners
1,053.9

 
1,189.7

Notes receivable from affiliate
175.0

 
175.0

Short-term loan to affiliate
72.0

 
—

Due from affiliates
70.8

 
62.9

Property and equipment
77.5

 
78.4

Other assets
186.4

 
108.5

Assets held in separate accounts
61,857.7

 
60,104.9

Total assets
$
92,099.5

 
$
89,680.3



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
March 31, 2014 (Unaudited) and December 31, 2013
(In millions, except share data)

 
March 31,
2014
 
December 31, 2013
Liabilities and Shareholder's Equity
 
 
 
Future policy benefits and contract owner account balances
$
24,640.7

 
$
24,589.6

Payable for securities purchased
20.2

 
13.7

Payables under securities loan agreement, including collateral held
384.7

 
264.4

Long-term debt
4.9

 
4.9

Due to affiliates
111.9

 
121.6

Derivatives
179.0

 
216.6

Current income tax payable to Parent
33.7

 
74.1

Deferred income taxes
284.6

 
190.1

Other liabilities
573.5

 
347.0

Liabilities related to separate accounts
61,857.7

 
60,104.9

Total liabilities
88,090.9

 
85,926.9

 
 
 
 
Shareholder's equity:
 
 
 
Common stock (100,000 shares authorized, 55,000 issued and outstanding;
$50 par value per share)
2.8

 
2.8

Additional paid-in capital
3,953.3

 
3,953.3

Accumulated other comprehensive income (loss)
704.9

 
495.4

Retained earnings (deficit)
(652.4
)
 
(698.1
)
Total shareholder's equity
4,008.6

 
3,753.4

Total liabilities and shareholder's equity
$
92,099.5

 
$
89,680.3




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 Months Ended March 31, 2014 and 2013 (Unaudited)
(In millions)


Three Months Ended March 31,

2014

2013
Revenues:




Net investment income
$
343.6


$
348.2

Fee income
193.7


174.9

Premiums
14.0


7.9

Broker-dealer commission revenue
62.1


57.8

Net realized capital gains (losses):





Total other-than-temporary impairments
(0.9
)

(1.1
)
Less: Portion of other-than-temporary impairments recognized in Other comprehensive income (loss)
—


(0.5
)
Net other-than-temporary impairments recognized in earnings
(0.9
)

(0.6
)
Other net realized capital gains (losses)
(43.0
)

(39.5
)
Total net realized capital gains (losses)
(43.9
)

(40.1
)
Other revenue
1.5


(4.9
)
Total revenues
571.0


543.8

Benefits and expenses:





Interest credited and other benefits to contract owners/policyholders
234.1


186.8

Operating expenses
193.3


173.6

Broker-dealer commission expense
62.1


57.8

Net amortization of deferred policy acquisition costs and value of business acquired
19.8


18.6

Interest expense
—


0.1

Total benefits and expenses
509.3


436.9

Income (loss) before income taxes
61.7


106.9

Income tax expense (benefit)
16.0


31.8

Net income (loss)
$
45.7


$
75.1



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 Months Ended March 31, 2014 and 2013 (Unaudited)
(In millions)

 
Three Months Ended March 31,
 
2014
 
2013
Net income (loss)
$
45.7

 
$
75.1

Other comprehensive income (loss), before tax:
 
 
 
Unrealized gains/losses on securities
315.9

 
(169.5
)
Other-than-temporary impairments
6.6

 
0.9

Pension and other postretirement benefits liability
(0.6
)
 
(0.6
)
Other comprehensive income (loss), before tax
321.9

 
(169.2
)
Income tax expense (benefit) related to items of other comprehensive income (loss)
112.4

 
(58.2
)
Other comprehensive income (loss), after tax
209.5

 
(111.0
)
Comprehensive income (loss)
$
255.2

 
$
(35.9
)


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 Three Months Ended March 31, 2014 and 2013 (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, 2014
$
2.8

 
$
3,953.3

 
$
495.4

 
$
(698.1
)
 
$
3,753.4

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

 
—

 
—

 
45.7

 
45.7

 
Other comprehensive income (loss), after tax
—

 
—

 
209.5

 
—

 
209.5

 
Total comprehensive income (loss)
 
 
 
 
 
 
 
 
255.2

 
Employee related benefits
—

 
—

 
—

 
—

 
—

 
Balance at March 31, 2014
$
2.8

 
$
3,953.3

 
$
704.9

 
$
(652.4
)
 
$
4,008.6

 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2013
$
2.8

 
$
4,217.2

 
$
1,023.0

 
$
(981.6
)
 
$
4,261.4

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

 
—

 
—

 
75.1

 
75.1

 
Other comprehensive income (loss), after tax
—

 
—

 
(111.0
)
 
—

 
(111.0
)
 
Total comprehensive income (loss)
 
 
 
 
 
 
 
 
(35.9
)
 
Employee related benefits
—

 
—

*
—

 
—

 
—

*
Balance at March 31, 2013
$
2.8

 
$
4,217.2

 
$
912.0

 
$
(906.5
)
 
$
4,225.5

 
*Less than $0.1.



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 Three Months Ended March 31, 2014 and 2013 (Unaudited)
(In millions)

 
Three Months Ended March 31,
 
2014
 
2013
Net cash provided by operating activities
$
209.7

 
$
282.8

Cash Flows from Investing Activities:
 
 
 
Proceeds from the sale, maturity, disposal or redemption of:
 
 
 
Fixed maturities
724.4

 
1,193.7

Equity securities, available-for-sale
9.5

 
0.4

Mortgage loans on real estate
91.5

 
30.8

Limited partnerships/corporations
14.0

 
6.0

Acquisition of:
 
 
 
Fixed maturities
(756.8
)
 
(1,497.7
)
Equity securities, available-for-sale
—

 
(0.2
)
Mortgage loans on real estate
(72.4
)
 
(218.8
)
Limited partnerships/corporations
(2.6
)
 
(2.2
)
Derivatives, net
2.1

 
(55.8
)
Policy loans, net
1.3

 
3.3

Short-term investments, net
(95.0
)
 
493.8

Collateral received (delivered), net
69.5

 
(25.2
)
Purchases of fixed assets, net
—

 
(0.2
)
Net cash used in investing activities
(14.5
)
 
(72.1
)
Cash Flows from Financing Activities:
 
 
 
Deposits received for investment contracts
861.6

 
561.4

Maturities and withdrawals from investment contracts
(898.3
)
 
(660.8
)
Short-term loans to affiliates, net
(72.0
)
 
—

Net cash used in financing activities
(108.7
)
 
(99.4
)
Net increase in cash and cash equivalents
86.5

 
111.3

Cash and cash equivalents, beginning of period
378.9

 
363.4

Cash and cash equivalents, end of period
$
465.4

 
$
474.7



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 Voya Financial, Inc. (which changed its name from ING U.S., Inc. on April 7, 2014), together with its subsidiaries, including the Company. On April 11, 2013, Voya Financial, Inc. announced plans to rebrand in the future as Voya Financial. On May 2, 2013, the common stock of Voya Financial, Inc. began trading on the New York Stock Exchange under the symbol "VOYA." On May 7, 2013 and May 31, 2013, Voya Financial, Inc. completed its initial public offering of common stock, including the issuance and sale by Voya Financial, 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 Voya Financial, Inc., of 44,201,773 shares of outstanding common stock of Voya Financial, Inc. (collectively, the "IPO"). On September 30, 2013, ING International transferred all of its shares of Voya Financial, Inc. common stock to ING Group.

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

On March 25, 2014, ING Group completed a sale of 30,475,000 shares of common stock of Voya Financial, Inc. in a registered public offering. On March 25, 2014, pursuant to the terms of a share repurchase agreement between ING Group and Voya Financial, Inc., Voya Financial, Inc. acquired 7,255,853 shares of its common stock from ING Group (the "Direct Share Buyback") (the offering and the Direct Share Buyback collectively, the "Transactions"). Upon completion of the Transactions, ING Group's ownership of Voya Financial, Inc. was reduced to approximately 43%.

ILIAC is a direct, wholly owned subsidiary of Lion Connecticut Holdings Inc. ("Lion" or "Parent"), which is a direct, wholly owned subsidiary of Voya Financial, Inc.

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 "tax exempt markets") 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

 
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)
 
 
 

Statements and the reported amounts of revenues and expenses during the reporting period. Those estimates are inherently subject to change and actual results could differ from those estimates.

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

The accompanying Condensed Consolidated Financial Statements reflect all adjustments (including normal, recurring adjustments) necessary to present fairly the financial position of the Company as of March 31, 2014, and its results of operations, comprehensive income, changes in shareholder's equity and statements of cash flows for the three months ended March 31, 2014 and 2013, in conformity with U.S. GAAP. Interim results are not necessarily indicative of full year performance. The December 31, 2013 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, 2013, filed with the Securities and Exchange Commission ("SEC"), which included all disclosures required by U.S. GAAP. Therefore, these unaudited Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements of the Company included in the 2013 Annual Report on Form 10-K.

Adoption of New Pronouncements

Presentation of Unrecognized Tax Benefits
In July 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2013-11, "Income Taxes (Accounting Standards Codification ("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 were adopted prospectively by the Company on January 1, 2014, to all unrecognized tax benefits existing on that date. The adoption had no effect on the Company's financial condition, results of operations or cash flows, as the guidance is consistent with that previously applied.

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 adoption had no effect on the Company's financial condition, results of operations or cash flows, as the Company did not have any fixed obligations under joint and several liable arrangements as of January 1, 2014.

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.


 
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)
 
 
 

The provisions of ASU 2011-06 were adopted by the Company on January 1, 2014, when the fee initially became effective. The
adoption of ASU 2011-06 had no effect on the Company's financial condition, results of operations or cash flows, as the amount of net premium written for qualifying health insurance by the Company in 2014 is expected to be below the $25.0 threshold as defined by the Acts and, thus, not subject to the fee.

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 March 31, 2014:
 
Amortized
Cost
 
Gross
Unrealized
Capital
Gains
 
Gross
Unrealized
Capital
Losses
 
Embedded Derivatives(2)
 
Fair
Value
 
OTTI(3)
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasuries
$
622.4

 
$
60.6

 
$
1.9

 
$
—

 
$
681.1

 
$
—

U.S. Government agencies and authorities
237.0

 
2.7

 
—

 
—

 
239.7

 
—

State, municipalities and political subdivisions
77.2

 
9.3

 
—

 
—

 
86.5

 
—

U.S. corporate securities
10,381.3

 
756.9

 
107.3

 
—

 
11,030.9

 
1.8

 
 
 
 
 
 
 
 
 
 
 
 
Foreign securities:(1)


 


 
 
 
 
 


 


Government
363.0

 
23.6

 
9.4

 
—

 
377.2

 
—

Other
5,217.9

 
340.6

 
45.7

 
—

 
5,512.8

 
—

Total foreign securities
5,580.9

 
364.2

 
55.1

 
—

 
5,890.0

 
—

 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Agency
1,635.9

 
123.3

 
11.9

 
16.3

 
1,763.6

 
0.2

Non-Agency
265.6

 
57.5

 
2.6

 
12.2

 
332.7

 
13.1

Total Residential mortgage-backed securities
1,901.5

 
180.8

 
14.5

 
28.5

 
2,096.3

 
13.3

 
 
 
 
 
 
 
 
 
 
 
 
Commercial mortgage-backed securities
655.4

 
68.2

 
0.1

 
—

 
723.5

 
—

Other asset-backed securities
448.4

 
16.4

 
2.9

 
—

 
461.9

 
3.1

Total fixed maturities, including securities pledged
19,904.1

 
1,459.1

 
181.8

 
28.5

 
21,209.9

 
18.2

Less: Securities pledged
204.6

 
9.8

 
2.6

 
—

 
211.8

 
—

Total fixed maturities
19,699.5

 
1,449.3

 
179.2

 
28.5

 
20,998.1

 
18.2

Equity securities
111.1

 
15.9

 
—

 
—

 
127.0

 
—

Total fixed maturities and equity securities investments
$
19,810.6

 
$
1,465.2

 
$
179.2

 
$
28.5

 
$
21,125.1

 
$
18.2

(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.

 
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)
 
 
 

Available-for-sale and FVO fixed maturities and equity securities were as follows as of December 31, 2013:
 
Amortized
Cost
 
Gross
Unrealized
Capital
Gains
 
Gross
Unrealized
Capital
Losses
 
Embedded Derivatives(2)
 
Fair
Value
 
OTTI(3)
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasuries
$
636.5

 
$
36.5

 
$
2.9

 
$
—

 
$
670.1

 
$
—

U.S. Government agencies and authorities
237.1

 
5.0

 
—

 
—

 
242.1

 
—

State, municipalities and political subdivisions
77.2

 
5.9

 
0.1

 
—

 
83.0

 
—

U.S. corporate securities
10,326.0

 
581.0

 
238.8

 
—

 
10,668.2

 
1.9

 
 
 
 
 
 
 
 
 
 
 
 
Foreign securities(1):


 
 
 
 
 
 
 
 
 


Government
422.9

 
25.2

 
16.5

 
—

 
431.6

 
—

Other
5,149.6

 
272.9

 
83.5

 
—

 
5,339.0

 
—

Total foreign securities
5,572.5

 
298.1

 
100.0

 
—

 
5,770.6

 
—

 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Agency
1,638.2

 
121.9

 
17.9

 
16.9

 
1,759.1

 
0.2

Non-Agency
278.1

 
55.2

 
4.8

 
12.1

 
340.6

 
15.1

Total Residential mortgage-backed securities
1,916.3

 
177.1

 
22.7

 
29.0

 
2,099.7

 
15.3

 
 
 
 
 
 
 
 
 
 
 
 
Commercial mortgage-backed securities
624.5

 
68.1

 
0.9

 
—

 
691.7

 
4.4

Other asset-backed securities
465.8

 
18.0

 
3.4

 
—

 
480.4

 
3.2

Total fixed maturities, including securities pledged
19,855.9

 
1,189.7

 
368.8

 
29.0

 
20,705.8

 
24.8

Less: Securities pledged
137.9

 
5.9

 
3.7

 
—

 
140.1

 
—

Total fixed maturities
19,718.0

 
1,183.8

 
365.1

 
29.0

 
20,565.7

 
24.8

Equity securities
119.4

 
15.8

 
0.3

 
—

 
134.9

 
—

Total fixed maturities and equity securities investments
$
19,837.4

 
$
1,199.6

 
$
365.4

 
$
29.0

 
$
20,700.6

 
$
24.8

(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.


 
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)
 
 
 

The amortized cost and fair value of fixed maturities, including securities pledged, as of March 31, 2014, 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
$
756.1

 
$
770.2

After one year through five years
3,922.9

 
4,205.4

After five years through ten years
6,371.6

 
6,651.7

After ten years
5,848.2

 
6,300.9

Mortgage-backed securities
2,556.9

 
2,819.8

Other asset-backed securities
448.4

 
461.9

Fixed maturities, including securities pledged
$
19,904.1

 
$
21,209.9


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 March 31, 2014 and December 31, 2013, 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
March 31, 2014
 
 
 
 
 
 
 
Communications
$
1,278.4

 
$
107.9

 
$
13.9

 
$
1,372.4

Financial
2,235.6

 
202.8

 
10.5

 
2,427.9

Industrial and other companies
8,989.1

 
541.6

 
108.0

 
9,422.7

Transportation
420.2

 
30.2

 
3.4

 
447.0

Utilities
2,675.9

 
215.0

 
17.2

 
2,873.7

Total
$
15,599.2

 
$
1,097.5

 
$
153.0

 
$
16,543.7

 
 
 
 
 
 
 
 
December 31, 2013
 
 
 
 
 
 
 
Communications
$
1,315.9

 
$
81.5

 
$
36.8

 
$
1,360.6

Financial
2,114.7

 
166.9

 
20.2

 
2,261.4

Industrial and other companies
8,878.5

 
423.5

 
213.1

 
9,088.9

Transportation
440.0

 
22.5

 
9.9

 
452.6

Utilities
2,726.5

 
159.5

 
42.3

 
2,843.7

Total
$
15,475.6

 
$
853.9

 
$
322.3

 
$
16,007.2


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 FVO. Available-for-sale securities are reported at fair value and unrealized capital gains (losses) on these securities are

 
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)
 
 
 

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 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 March 31, 2014 and December 31, 2013, approximately 54.2% and 50.4%, 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. 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 March 31, 2014 and December 31, 2013, the Company did not have any securities pledged in dollar rolls, repurchase agreement transactions or 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 certain transactions, a lending agent may be used and the agent may retain some or all of the collateral deposited by the borrower and transfer the remaining collateral to 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 March 31, 2014 and December 31, 2013, the fair value of loaned securities was $158.1 and $97.6, respectively and is included in Securities pledged on the Condensed Consolidated Balance Sheets. As of March 31, 2014 and December 31, 2013, collateral retained by the lending agent and invested in liquid assets on the Company's behalf was $164.2 and $102.7, respectively, and recorded in Short-term investments under securities loan agreements, including collateral delivered on the Condensed Consolidated Balance Sheets. As of March 31, 2014 and December 31, 2013, liabilities to return collateral of $164.2 and $102.7, respectively, were included in Payables under securities loan agreements, 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 $0.9 as of March 31, 2014 and $1.0 as of December 31, 2013, respectively, is included in Limited partnerships/corporations on the Condensed Consolidated Balance Sheets. Income and losses recognized on these investments are reported in Net investment income in the Condensed Consolidated Statements of Operations.


 
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)
 
 
 

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 that 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 March 31, 2014:
 
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
$
125.4

 
$
1.2

 
$
34.3

 
$
0.7

 
$
—

 
$
—

 
$
159.7

 
$
1.9

 
U.S. government, agencies and authorities
2.4

 
—

*
—

 
—

 
—

 
—

 
2.4

 
—

*
U.S. corporate, state and municipalities
319.5

 
3.5

 
1,969.3

 
81.1

 
281.8

 
22.7

 
2,570.6

 
107.3

 
Foreign
115.0

 
1.2

 
780.1

 
39.6

 
157.5

 
14.3

 
1,052.6

 
55.1

 
Residential mortgage-backed
157.6

 
0.9

 
197.0

 
8.6

 
98.8

 
5.0

 
453.4

 
14.5

 
Commercial mortgage-backed
4.8

 
0.1

 
—

 
—

 
—

 
—

 
4.8

 
0.1

 
Other asset-backed
36.8

 
0.2

 
30.4

 
0.1

 
25.1

 
2.6

 
92.3

 
2.9

 
Total
$
761.5

 
$
7.1

 
$
3,011.1

 
$
130.1

 
$
563.2

 
$
44.6

 
$
4,335.8

 
$
181.8

 
*Less than $0.1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


 
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)
 
 
 

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, 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
$
124.4

 
$
2.1

 
$
34.2

 
$
0.8

 
$
—

 
$
—

 
$
158.6

 
$
2.9

U.S. corporate, state and municipalities
1,002.8

 
22.9

 
2,413.2

 
183.8

 
236.9

 
32.2

 
3,652.9

 
238.9

Foreign
448.8

 
5.7

 
1,063.9

 
86.4

 
76.2

 
7.9

 
1,588.9

 
100.0

Residential mortgage-backed
262.3

 
2.9

 
212.9

 
12.0

 
105.8

 
7.8

 
581.0

 
22.7

Commercial mortgage-backed
77.9

 
0.9

 
—

 
—

 
—

 
—

 
77.9

 
0.9

Other asset-backed
38.9

 
0.2

 
30.3

 
0.2

 
26.0

 
3.0

 
95.2

 
3.4

Total
$
1,955.1

 
$
34.7

 
$
3,754.5

 
$
283.2

 
$
444.9

 
$
50.9

 
$
6,154.5

 
$
368.8


Of the unrealized capital losses aged more than twelve months, the average market value of the related fixed maturities was 92.7% and 89.7% of the average book value as of March 31, 2014 and December 31, 2013, 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%
March 31, 2014
 
 
 
 
 
 
 
 
 
 
 
Six months or less below amortized cost
$
853.5

 
$
4.1

 
$
18.8

 
$
1.0

 
151

 
2

More than six months and twelve months or less below amortized cost
3,134.7

 
—

 
128.0

 
—

 
398

 
—

More than twelve months below amortized cost
521.1

 
4.2

 
32.9

 
1.1

 
147

 
4

Total
$
4,509.3

 
$
8.3

 
$
179.7

 
$
2.1

 
696

 
6

 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2013
 
 
 
 
 
 
 
 
 
 
 
Six months or less below amortized cost
$
2,054.4

 
$
24.1

 
$
45.3

 
$
5.3

 
322

 
7

More than six months and twelve months or less below amortized cost
3,991.4

 
23.5

 
272.6

 
5.8

 
502

 
3

More than twelve months below amortized cost
420.4

 
9.5

 
37.3

 
2.5

 
137

 
8

Total
$
6,466.2

 
$
57.1

 
$
355.2

 
$
13.6

 
961

 
18



 
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) 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%
March 31, 2014
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasuries
$
161.6

 
$
—

 
$
1.9

 
$
—

 
4

 
—

U.S. government, agencies and authorities
2.4

 
—

 
—

*
—

 
1

 
—

U.S. corporate, state and municipalities
2,673.9

 
4.0

 
106.3

 
1.0

 
349

 
2

Foreign
1,107.7

 
—

 
55.1

 
—

 
162

 
—

Residential mortgage-backed
467.2

 
0.7

 
14.3

 
0.2

 
154

 
1

Commercial mortgage-backed
4.9

 
—

 
0.1

 
—

 
3

 
—

Other asset-backed
91.6

 
3.6

 
2.0

 
0.9

 
23

 
3

Total
$
4,509.3

 
$
8.3

 
$
179.7

 
$
2.1

 
696

 
6

*Less than $0.1.
 
 
 
 
 
 
 
 
 
 
 
December 31, 2013
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasuries
$
161.5

 
$
—

 
$
2.9

 
$
—

 
4

 
—

U.S. corporate, state and municipalities
3,869.0

 
22.8

 
233.2

 
5.7

 
519

 
2

Foreign
1,665.8

 
23.1

 
95.0

 
5.0

 
239

 
5

Residential mortgage-backed
596.9

 
6.8

 
21.0

 
1.7

 
162

 
7

Commercial mortgage-backed
78.8

 
—

 
0.9

 
—

 
12

 
—

Other asset-backed
94.2

 
4.4

 
2.2

 
1.2

 
25

 
4

Total
$
6,466.2

 
$
57.1

 
$
355.2

 
$
13.6

 
961

 
18


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.

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

 
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)
 
 
 

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 March 31, 2014, the Company had no new troubled debt restructurings for private placement or commercial mortgage loans. As of December 31, 2013, the Company had no new private placement troubled debt restructurings and had 20 new commercial mortgage loan troubled debt restructurings with a 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 March 31, 2014, these loans have repaid $1.9 in principal.

As of March 31, 2014 and December 31, 2013, 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 components to evaluate debt service coverage are received and reviewed at least annually to determine the level of risk.

The following table summarizes the Company's investment in mortgage loans as of the dates indicated:
 
March 31, 2014
 
December 31, 2013
Commercial mortgage loans
$
3,378.2

 
$
3,397.3

Collective valuation allowance
(1.2
)
 
(1.2
)
Total net commercial mortgage loans
$
3,377.0

 
$
3,396.1


The following table summarizes the activity in the allowance for losses for all commercial mortgage loans for the periods indicated:
 
March 31, 2014
 
December 31, 2013
Collective valuation allowance for losses, balance at January 1
$
1.2

 
$
1.3

Addition to (reduction of) allowance for losses
—

 
(0.1
)
Collective valuation allowance for losses, end of period
$
1.2

 
$
1.2


There were no impairments taken on the mortgage loan portfolio for the three months ended March 31, 2014 and 2013.


 
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 carrying values and unpaid principal balances of impaired mortgage loans were as follows as of the dates indicated:
 
March 31, 2014
 
December 31, 2013
Impaired loans with allowances for losses
$
—

 
$
—

Impaired loans without allowances for losses
42.8

 
42.9

Subtotal
42.8

 
42.9

Less: Allowances for losses on impaired loans
—

 
—

Impaired loans, net
$
42.8

 
$
42.9

Unpaid principal balance of impaired loans
$
44.3

 
$
44.4


The following table presents information on restructured loans as of the dates indicated:
 
March 31, 2014
 
December 31, 2013
Troubled debt restructured loans
$
37.5

 
$
37.5


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.

There were no mortgage loans in the Company's portfolio in process of foreclosure as of March 31, 2014 and December 31, 2013. There were no loans 90 days or more past due or loans in arrears with respect to principal and interest as of March 31, 2014 and December 31, 2013.

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 March 31,
 
2014
 
2013
Impaired loans, average investment during the period (amortized cost)
$
42.8

 
$
5.7

Interest income recognized on impaired loans, on an accrual basis
0.6

 
0.1

Interest income recognized on impaired loans, on a cash basis
0.4

 
0.1

Interest income recognized on troubled debt restructured loans, on an accrual basis
0.5

 
—


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.


 
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 following table presents the LTV ratios as of the dates indicated:
 
March 31, 2014(1)
 
December 31, 2013(1)
Loan-to-Value Ratio:
 
 
 
0% - 50%
$
440.6

 
$
495.7

50% - 60%
920.9

 
894.5

60% - 70%
1,891.2

 
1,879.5

70% - 80%
113.1

 
114.9

80% and above
12.4

 
12.7

Total Commercial mortgage loans
$
3,378.2

 
$
3,397.3

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

The following table presents the DSC ratios as of the dates indicated:
 
March 31, 2014(1)
 
December 31, 2013(1)
Debt Service Coverage Ratio:
 
 
 
Greater than 1.5x
$
2,377.1

 
$
2,388.5

1.25x - 1.5x
541.2

 
542.4

1.0x - 1.25x
274.9

 
275.8

Less than 1.0x
184.9

 
190.5

Commercial mortgage loans secured by land or construction loans
0.1

 
0.1

Total Commercial mortgage loans
$
3,378.2

 
$
3,397.3

(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:
 
March 31, 2014(1)
 
December 31, 2013(1)
 
Gross
Carrying Value
 
% of
Total
 
Gross
Carrying Value
 
% of
Total
Commercial Mortgage Loans by U.S. Region:
 
 
 
 
 
 
 
Pacific
$
774.1

 
22.9
%
 
$
752.8

 
22.3
%
South Atlantic
718.1

 
21.3
%
 
707.8

 
20.8
%
West South Central
464.2

 
13.7
%
 
467.1

 
13.7
%
Middle Atlantic
412.0

 
12.2
%
 
411.4

 
12.1
%
East North Central
386.8

 
11.5
%
 
383.1

 
11.3
%
Mountain
259.9

 
7.7
%
 
263.9

 
7.8
%
West North Central
231.0

 
6.8
%
 
224.9

 
6.6
%
East South Central
69.0

 
2.0
%
 
69.6

 
2.0
%
New England
63.1

 
1.9
%
 
116.7

 
3.4
%
Total Commercial mortgage loans
$
3,378.2

 
100.0
%
 
$
3,397.3

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

 
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)
 
 
 

 
March 31, 2014(1)
 
December 31, 2013(1)
 
Gross
Carrying Value
 
% of
Total
 
Gross
Carrying Value
 
% of
Total
Commercial Mortgage Loans by Property Type:
 
 
 
 
 
 
 
Retail
$
1,084.2

 
32.1
%
 
$
1,082.1

 
31.9
%
Industrial
966.1

 
28.6
%
 
972.6

 
28.6
%
Apartments
458.1

 
13.5
%
 
445.2

 
13.1
%
Office
416.9

 
12.3
%
 
462.1

 
13.6
%
Hotel/Motel
147.5

 
4.4
%
 
182.8

 
5.4
%
Mixed Use
133.8

 
4.0
%
 
70.9

 
2.1
%
Other
171.6

 
5.1
%
 
181.6

 
5.3
%
Total Commercial mortgage loans
$
3,378.2

 
100.0
%
 
$
3,397.3

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

The following table sets forth the breakdown of mortgages by year of origination as of the dates indicated:
 
March 31, 2014(1)
 
December 31, 2013(1)
Year of Origination:
 
 
 
2014
$
72.4

 
$
—

2013
780.5

 
785.2

2012
903.2

 
908.1

2011
780.0

 
792.8

2010
116.8

 
121.1

2009
68.1

 
68.4

2008 and prior
657.2

 
721.7

Total Commercial mortgage loans
$
3,378.2

 
$
3,397.3

(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 March 31,
 
2014
 
2013
 
Impairment
 
No. of Securities
 
Impairment
 
No. of Securities
U.S. corporate
$
0.1

 
1

 
$
—

 
—

Residential mortgage-backed
0.7

 
11

 
0.5

 
20

Commercial mortgage-backed
0.1

 
2

 
0.1

 
2

Other asset-backed
—

*
1

 
—

 
—

Total
$
0.9

 
15

 
$
0.6

 
22

*Less than $0.1.
 
 
 
 
 
 
 


 
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)
 
 
 

The above tables include $0.8 and $0.5 of write-downs related to credit impairments for the three months ended March 31, 2014 and 2013, respectively, in Other-than-temporary impairments, which are recognized in the Condensed Consolidated Statements of Operations. The remaining $0.1 and $0.1 in write-downs for the three months ended March 31, 2014 and 2013, respectively, 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 March 31,
 
2014
 
2013
 
Impairment
 
No. of Securities
 
Impairment
 
No. of Securities
U.S. corporate
$
—

 
—

 
$
—

 
—

Residential mortgage-backed
—

 
—

 
—

 
—

Commercial mortgage-backed
0.1

 
2

 
0.1

 
2

Other asset-backed
—

 
—

 
—

 
—

Total
$
0.1

 
2

 
$
0.1

 
2


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 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 March 31,
 
2014
 
2013
Balance at January 1
$
19.6

 
$
20.0

Additional credit impairments:
 
 
 
On securities not previously impaired
0.7

 
0.2

On securities previously impaired
0.1

 
0.4

Reductions:
 
 
 
Securities sold, matured, prepaid or paid down
0.8

 
0.8

Balance at March 31
$
19.6

 
$
19.8



 
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)
 
 
 

Net Investment Income

The following table summarizes Net investment income for the periods indicated:
 
Three Months Ended March 31,
 
2014
 
2013
Fixed maturities
$
300.8

 
$
307.6

Equity securities, available-for-sale
2.1

 
0.9

Mortgage loans on real estate
40.1

 
36.6

Policy loans
3.3

 
3.2

Short-term investments and cash equivalents
0.1

 
0.2

Other
9.9

 
11.7

Gross investment income
356.3

 
360.2

Less: Investment expenses
12.7

 
12.0

Net investment income
$
343.6

 
$
348.2


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 March 31,
 
2014
 
2013
Fixed maturities, available-for-sale, including securities pledged
$
3.5

 
$
(0.2
)
Fixed maturities, at fair value option
(12.6
)
 
(38.9
)
Equity securities, available-for-sale
1.0

 
—

Derivatives
(17.5
)
 
(19.9
)
Embedded derivative - fixed maturities
(0.5
)
 
(5.4
)
Embedded derivative - product guarantees
(17.8
)
 
24.3

Net realized capital gains (losses)
$
(43.9
)
 
$
(40.1
)
After-tax net realized capital gains (losses)
$
(28.5
)
 
$
(26.1
)


 
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)
 
 
 

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:
 
Three Months Ended March 31,
 
2014
 
2013
Proceeds on sales
$
471.0

 
$
836.2

Gross gains
12.3

 
7.3

Gross losses
9.9

 
5.8


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 non-qualifying hedging relationships.

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: The Company 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. The Company pays a premium when it purchases the swaption. The Company utilizes these contracts in non-qualifying hedging relationships.

 
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)
 
 
 


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.

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 reinsurance agreement, accounted for under the deposit method, 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 and contract owner account balances and 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:

 
March 31, 2014
 
December 31, 2013
 
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
$
700.8

 
$
94.9

 
$
—

 
$
763.3

 
$
81.0

 
$
0.2

Foreign exchange contracts
51.2

 
1.9

 
0.8

 
51.2

 
2.2

 
0.6

Derivatives: Non-qualifying for hedge accounting(1)
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts(2)
22,374.7

 
303.3

 
172.4

 
21,442.7

 
367.6

 
206.2

Foreign exchange contracts
130.1

 
5.3

 
5.8

 
145.9

 
5.5

 
9.6

Equity contracts
11.5

 
0.1

 
—

 
9.1

 
—

*
—

Credit contracts
384.0

 
7.4

 
—

 
384.0

 
8.1

 
—

Embedded derivatives:
 
 
 
 
 
 
 
 
 
 
 
Within fixed maturity investments
N/A

 
28.5

 
—

 
N/A

 
29.0

 
—

Within annuity products
N/A

 
—

 
42.3

 
N/A

 
—

 
23.1

Within reinsurance agreements
N/A

 
—

 
(30.7
)
 
N/A

 
—

 
(54.0
)
Total
 
 
$
441.4

 
$
190.6

 
 
 
$
493.4

 
$
185.7

* Less than $0.1.
(1)
Open derivative contracts are reported as Derivatives assets or liabilities on the Condensed Consolidated Balance Sheets at fair value.
(2) 
As of March 31, 2014, includes a notional amount, asset fair value and liability fair value for interest rate caps of $11.8 billion, $101.1 and $17.7 respectively. As of December 31, 2013, includes a notional amount, asset fair value and liability fair value for interest rate caps of $11.8 billion, $162.5 and $29.7, respectively.
N/A - Not Applicable

 
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 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.

Based on the notional amounts, a substantial portion of the Company’s derivative positions was not designated or did not qualify for hedge accounting as part of a hedging relationship as of March 31, 2014 and December 31, 2013. The Company utilizes derivative contracts mainly to hedge exposure to variability in cash flows, interest rate risk, credit risk, foreign exchange risk and equity market risk. The majority of derivatives used by the Company are designated as product hedges, which hedge the exposure arising from insurance liabilities or guarantees embedded in the contracts the Company offers through various product lines. These derivatives do not qualify for hedge accounting as they do not meet the criteria of being “highly effective” as outlined in ASC Topic 815, but do provide an economic hedge, which is in line with the Company’s risk management objectives. The Company also uses derivatives contracts to hedge its exposure to various risks associated with the investment portfolio. The Company does not seek hedge accounting treatment for certain of these derivatives as they generally do not qualify for hedge accounting due to the criteria required under the portfolio hedging rules outlined in ASC Topic 815. The Company also uses credit default swaps coupled with other investments in order to produce the investment characteristics of otherwise permissible investments which do not qualify as effective accounting hedges under ASC Topic 815.

Although the Company has not elected to net its derivative exposures, the notional amounts and fair values of OTC and cleared derivatives excluding exchange traded contracts and forward contracts (To Be Announced mortgage-backed securities) are presented in the tables below as of the dates indicated:
 
March 31, 2014
 
Notional Amount
 
Assets Fair Value
 
Liability Fair Value
Credit contracts
$
384.0

 
$
7.4

 
$
—

Foreign exchange contracts
181.3

 
7.2

 
6.6

Interest rate contracts
23,075.5

 
398.2

 
172.4

 
 
 
412.8

 
179.0

 
 
 
 
 
 
Counterparty netting(1)
 
 
(161.8
)
 
(161.8
)
Cash collateral netting(1)
 
 
(198.0
)
 
—

Securities collateral netting(1)
 
 
(16.3
)
 
(11.9
)
Net receivables/payables
 
 
$
36.7

 
$
5.3

(1) Represents the netting of receivable balances with payable balances, net of collateral, for the same counterparty under eligible netting rules.

 
December 31, 2013
 
Notional Amount
 
Assets Fair Value
 
Liability Fair Value
Credit contracts
$
384.0

 
$
8.1

 
$
—

Foreign exchange contracts
197.1

 
7.7

 
10.2

Interest rate contracts
22,206.0

 
448.6

 
206.4

 
 
 
464.4

 
216.6

 
 
 
 
 
 
Counterparty netting(1)
 
 
(201.3
)
 
(201.3
)
Cash collateral netting(1)
 
 
(134.0
)
 
(5.4
)
Securities collateral netting(1)
 
 
(15.9
)
 
(4.8
)
Net receivables/payables
 
 
$
113.2

 
$
5.1

(1) Represents the netting of receivable balances with payable balances, net of collateral, for the same counterparty under eligible netting rules.


 
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)
 
 
 

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 March 31, 2014, the Company held $166.4 and $31.7 of net cash collateral related to OTC derivative contracts and cleared derivative contracts, respectively. As of December 31, 2013, the Company held $127.4 and $1.2 of net cash collateral related to OTC derivative contracts and cleared derivative contracts, respectively. In addition, as of March 31, 2014 and December 31, 2013, the Company delivered securities as collateral of $53.8 and $42.5, respectively.

Net realized gains (losses) on derivatives were as follows for the periods indicated:
 
Three Months Ended March 31,
 
2014
 
2013
Derivatives: Qualifying for hedge accounting(1)
 
 
 
Cash flow hedges:
 
 
 
Interest rate contracts
$
0.1

 
$
0.1

Foreign exchange contracts
0.1

 
—

Derivatives: Non-qualifying for hedge accounting(2)
 
 
 
Interest rate contracts
(18.6
)
 
(32.5
)
Foreign exchange contracts
0.2

 
9.4

Equity contracts
0.4

 
1.3

Credit contracts
0.3

 
1.8

Embedded derivatives:
 
 
 
Within fixed maturity investments(2)
(0.5
)
 
(5.4
)
Within annuity products(2)
(17.8
)
 
24.3

Within reinsurance agreements(3)
(23.3
)
 
0.8

Total
$
(59.1
)
 
$
(0.2
)
(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 months ended March 31, 2014 and 2013, 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.

Credit Default Swaps

The Company has entered into various credit default swaps. When credit default swaps are sold, the Company assumes credit exposure to certain assets that it does not own. Credit default swaps may also be purchased to reduce credit exposure in the Company's portfolio. Credit default swaps involve a transfer of credit risk from one party to another in exchange for periodic payments. The Company has ISDA agreements with each counterparty with which it conducts business and tracks the collateral positions for each counterparty. To the extent cash collateral is received, it is included in Payables under securities loan agreements, including collateral held, 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

 
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)
 
 
 

March 31, 2014, the fair values of credit default swaps of $7.4 were included in Derivatives assets and there were no credit default swaps included in Derivatives liabilities on the Condensed Consolidated Balance Sheets. As of December 31, 2013, the fair values of credit default swaps of $8.1 were included in Derivatives assets and there were no credit default swaps included in Derivatives liabilities, on the Condensed Consolidated Balance Sheets. As of March 31, 2014 and December 31, 2013, the maximum potential future exposure to the Company was $384.0 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 "Item 8. Note 4. Fair Value Measurements" in the Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2013. 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.

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.


 
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)
 
 
 

The following table presents the Company’s hierarchy for its assets and liabilities measured at fair value on a recurring basis as of March 31, 2014:
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Fixed maturities, including securities pledged:
 
 
 
 
 
 
 
U.S. Treasuries
$
626.9

 
$
54.2

 
$
—

 
$
681.1

U.S. Government agencies and authorities
—

 
237.2

 
2.5

 
239.7

U.S. corporate, state and municipalities
—

 
10,934.0

 
183.4

 
11,117.4

Foreign(1)
—

 
5,855.2

 
34.8

 
5,890.0

Residential mortgage-backed securities
—

 
2,073.2

 
23.1

 
2,096.3

Commercial mortgage-backed securities
—

 
709.5

 
14.0

 
723.5

Other asset-backed securities
—

 
450.8

 
11.1

 
461.9

Total fixed maturities, including securities pledged
626.9

 
20,314.1

 
268.9

 
21,209.9

Equity securities, available-for-sale
89.8

 
—

 
37.2

 
127.0

Derivatives:


 


 


 
 
Interest rate contracts
—

 
398.2

 
—

 
398.2

Foreign exchange contracts
—

 
7.2

 
—

 
7.2

Equity contracts
0.1

 
—

 
—

 
0.1

Credit contracts
—

 
7.4

 
—

 
7.4

Cash and cash equivalents, short-term investments and short-term investments under securities loan agreements
727.0

 
35.0

 
—

 
762.0

Assets held in separate accounts
56,618.1

 
5,221.7

 
17.9

 
61,857.7

Total assets
$
58,061.9

 
$
25,983.6

 
$
324.0

 
$
84,369.5

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Derivatives:
 
 
 
 
 
 
 
Annuity product guarantees:
 
 
 
 
 
 
 
FIA
$
—

 
$
—

 
$
24.3

 
$
24.3

Stabilizer and MCGs
—

 
—

 
18.0

 
18.0

Other derivatives:
 
 
 
 
 
 
 
Interest rate contracts
—

 
172.4

 
—

 
172.4

Foreign exchange contracts
—

 
6.6

 
—

 
6.6

Embedded derivative on reinsurance
—

 
(30.7
)
 
—

 
(30.7
)
Total liabilities
$
—

 
$
148.3

 
$
42.3

 
$
190.6

(1) Primarily U.S. dollar denominated.


 
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)
 
 
 

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, 2013:
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Fixed maturities, including securities pledged:
 
 
 
 
 
 
 
U.S. Treasuries
$
618.8

 
$
51.3

 
$
—

 
$
670.1

U.S. Government agencies and authorities
—

 
237.0

 
5.1

 
242.1

U.S. corporate, state and municipalities
—

 
10,605.9

 
145.3

 
10,751.2

Foreign(1)
—

 
5,727.8

 
42.8

 
5,770.6

Residential mortgage-backed securities
—

 
2,076.0

 
23.7

 
2,099.7

Commercial mortgage-backed securities
—

 
691.7

 
—

 
691.7

Other asset-backed securities
—

 
462.7

 
17.7

 
480.4

Total fixed maturities, including securities pledged
618.8

 
19,852.4

 
234.6

 
20,705.8

Equity securities, available-for-sale
99.0

 
—

 
35.9

 
134.9

Derivatives:
 
 
 
 
 
 
 
Interest rate contracts
—

 
448.6

 
—

 
448.6

Foreign exchange contracts
—

 
7.7

 
—

 
7.7

Equity contracts
—

 
—

 
—

 
—

Credit contracts
—

 
8.1

 
—

 
8.1

Cash and cash equivalents, short-term investments and short-term investments under securities loan agreements
529.7

 
—

 
—

 
529.7

Assets held in separate accounts
54,715.3

 
5,376.5

 
13.1

 
60,104.9

Total assets
$
55,962.8

 
$
25,693.3

 
$
283.6

 
$
81,939.7

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Derivatives:
 
 
 
 
 
 
 
Annuity product guarantees:
 
 
 
 
 
 
 
FIA
$
—

 
$
—

 
$
23.1

 
$
23.1

Stabilizer and MCGs
—

 
—

 
—

 
—

Other derivatives:
 
 
 
 
 
 
 
Interest rate contracts
—

 
206.4

 
—

 
206.4

Foreign exchange contracts
—

 
10.2

 
—

 
10.2

Embedded derivative on reinsurance
—

 
(54.0
)
 
—

 
(54.0
)
Total liabilities
$
—

 
$
162.6

 
$
23.1

 
$
185.7

(1) Primarily U.S. dollar denominated.


 
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)
 
 
 

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 months ended March 31, 2014 and 2013. 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.

 
32
 

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 table 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 period indicated:
 
 
Three Months Ended March 31, 2014
 
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 March 31
 
Change In Unrealized Gains (Losses) Included in Earnings(3)
 
 
Net Income
 
OCI
Fixed maturities, including securities pledged:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Government agencies and authorities
$
5.1

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
(0.1
)
 
$
—

 
$
(2.5
)
 
$
2.5

 
$
—

U.S. corporate, state and municipalities
145.3

 
—

 
1.9

 
38.2

 
—

 
—

 
(2.0
)
 
—

 
—

 
183.4

 
—

Foreign
42.8

 
—

 
0.9

 
—

 
—

 
—

 
—

 
—

 
(8.9
)
 
34.8

 
—

Residential mortgage-backed securities
23.7

 
(0.4
)
 
(0.1
)
 
—

 
—

 
—

 
—

 
—

 
(0.1
)
 
23.1

 
(0.4
)
Commercial mortgage-backed securities
—

 
—

 
—

 
14.0

 
—

 
—

 
—

 
—

 
—

 
14.0

 
—

Other asset-backed securities
17.7

 
0.8

 
(0.5
)
 
—

 
—

 
—

 
(6.9
)
 
—

 
—

 
11.1

 
0.2

Total fixed maturities, including securities pledged
234.6

 
0.4

 
2.2

 
52.2

 
—

 
—

 
(9.0
)
 
—

 
(11.5
)
 
268.9

 
(0.2
)
Equity securities, available-for-sale
35.9

 
—

 
1.3

 
—

 
—

 
—

 
—

 
—

 
—

 
37.2

 
—

Derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Product guarantees:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Stabilizer and MCGs(1)
—

 
(16.8
)
 
—

 
(1.2
)
 
—

 
—

 
—

 
—

 
—

 
(18.0
)
 
—

FIA(1)
(23.1
)
 
(1.0
)
 
—

 
—

 
(0.2
)
 
—

 
—

 
—

 
—

 
(24.3
)
 
—

Assets held in separate accounts(4)
13.1

 
—

 
—

 
5.8

 
—

 
(1.0
)
 
—

 
—

 
—

 
17.9

 
—

(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 March 31, 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.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


 
33
 

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 table 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 period indicated:
 
 
Three Months Ended March 31, 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 March 31
 
Change In Unrealized Gains (Losses) Included in Earnings(3)
 
 
Net Income
 
OCI
 
 
 
 
Fixed maturities, including securities pledged:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. corporate, state and municipalities
$
154.6

 
$
(0.1
)
 
$
0.9

 
$
19.0

 
$
—

 
$
—

 
$
(1.6
)
 
$
17.6

 
$
(22.8
)
 
$
167.6

 
$
(0.1
)
Foreign
24.6

 
—

 
1.1

 
—

 
—

 
—

 
—

 
—

 
—

 
25.7

 
—

Residential mortgage-backed securities
9.1

 
(0.3
)
 
(0.2
)
 
9.8

 
—

 
—

 
—

 
—

 
—

 
18.4

 
(0.2
)
Other asset-backed securities
33.2

 
1.0

 
(0.1
)
 
—

 
—

 
—

 
(6.7
)
 
—

 
—

 
27.4

 
1.0

Total fixed maturities, including securities pledged
221.5

 
0.6

 
1.7

 
28.8

 
—

 
—

 
(8.3
)
 
17.6

 
(22.8
)
 
239.1

 
0.7

Equity securities, available-for-sale
17.0

 
(0.1
)
 
1.0

 
—

 
—

 
—

 
—

 
34.6

 
(16.7
)
 
35.8

 
—

Derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Product guarantees:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Stabilizer and MCGs(1)
(102.0
)
 
25.5

 
—

 
(1.5
)
 
—

 
—

 
—

 
—

 
—

 
(78.0
)
 
—

FIA(1)
(20.4
)
 
(1.2
)
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(21.6
)
 
—

Assets held in separate accounts(4)
16.3

 
—

 
—

 
0.2

 
—

 
(6.6
)
 
—

 
2.2

 
(9.9
)
 
2.2

 
—

(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 March 31, 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.


 
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)
 
 
 

For the three months ended March 31, 2014 and 2013, 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 months ended March 31, 2014 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 and 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.


 
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 unobservable inputs for Level 3 fair value measurements as of March 31, 2014:
 
 
Range(1)
 
Unobservable Input
 
FIA
 
Stabilizer / MCG
 
Interest rate implied volatility
 
—

 
0.2% to 7.6%
 
Nonperformance risk
 
-0.1% to 0.79%

 
-0.1% to 0.79%
 
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
88
%
 
0-30%
 
0-15%
 
0-55%
 
0-15%
Stabilizer with Recordkeeping Agreements
12
%
 
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, 2013:
 
 
Range(1)
 
Unobservable Input
 
FIA
 
Stabilizer / MCG
 
Interest rate implied volatility
 
—

 
0.2% to 8.0%
 
Nonperformance risk
 
-0.1% to 0.79%

 
-0.1% to 0.79%
 
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
88
%
 
0-30%
 
0-15%
 
0-55%
 
0-15%
Stabilizer with Recordkeeping Agreements
12
%
 
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


 
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)
 
 
 

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:
 
March 31, 2014
 
December 31, 2013
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
Assets:
 
 
 
 
 
 
 
Fixed maturities, including securities pledged
$
21,209.9

 
$
21,209.9

 
$
20,705.8

 
$
20,705.8

Equity securities, available-for-sale
127.0

 
127.0

 
134.9

 
134.9

Mortgage loans on real estate
3,377.0

 
3,383.2

 
3,396.1

 
3,403.9

Policy loans
240.7

 
240.7

 
242.0

 
242.0

Limited partnerships/corporations
172.4

 
172.4

 
180.9

 
180.9

Cash, cash equivalents, short-term investments and short-term investments under securities loan agreements
762.0

 
762.0

 
529.7

 
529.7

Derivatives
412.9

 
412.9

 
464.4

 
464.4

Notes receivable from affiliates
175.0

 
199.5

 
175.0

 
186.4

Assets held in separate accounts
61,857.7

 
61,857.7

 
60,104.9

 
60,104.9

Liabilities:
 
 
 
 
 
 
 
Investment contract liabilities:
 
 
 
 
 
 
 
Funding agreements without fixed maturities and deferred annuities(1)
21,024.3

 
24,833.1

 
21,010.8

 
24,379.6

Supplementary contracts, immediate annuities and other
614.1

 
716.0

 
624.3

 
727.1

Derivatives:
 
 
 
 
 
 
 
Annuity product guarantees:
 
 
 
 
 
 
 
FIA
24.3

 
24.3

 
23.1

 
23.1

Stabilizer and MCGs
18.0

 
18.0

 
—

 
—

Other derivatives
179.0

 
179.0

 
216.6

 
216.6

Long-term debt
4.9

 
4.9

 
4.9

 
4.9

Embedded derivatives on reinsurance
(30.7
)
 
(30.7
)
 
(54.0
)
 
(54.0
)
(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

 
37
 

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)
 
 
 

estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates, in many cases, could not be realized in immediate settlement of the instrument.

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.


 
38
 

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, 2014
$
476.2

 
$
696.6

 
$
1,172.8

Deferrals of commissions and expenses
16.3

 
1.9

 
18.2

Amortization:
 
 
 
 
 
Amortization
(17.2
)
 
(26.7
)
 
(43.9
)
Interest accrued(1)
8.9

 
15.2

 
24.1

Net amortization included in the Condensed Consolidated Statements of Operations
(8.3
)
 
(11.5
)
 
(19.8
)
Change in unrealized capital gains/losses on available-for-sale securities
(54.8
)
 
(79.2
)
 
(134.0
)
Balance at March 31, 2014
$
429.4

 
$
607.8

 
$
1,037.2

 
DAC
 
VOBA
 
Total
Balance at January 1, 2013
$
296.5

 
$
381.4

 
$
677.9

Deferrals of commissions and expenses
19.2

 
1.8

 
21.0

Amortization:
 
 
 
 
 
Amortization
(18.5
)
 
(23.5
)
 
(42.0
)
Interest accrued(1)
8.2

 
15.2

 
23.4

Net amortization included in the Condensed Consolidated Statements of Operations
(10.3
)
 
(8.3
)
 
(18.6
)
Change in unrealized capital gains/losses on available-for-sale securities
30.0

 
68.1

 
98.1

Balance at March 31, 2013
$
335.4

 
$
443.0

 
$
778.4

(1) Interest accrued at the following rates for VOBA: 5.5% to 7.0% during 2014 and 1.0% to 7.0% during 2013.

6.    Capital Contributions and Dividends

During the three months ended March 31, 2014 and 2013, ILIAC did not receive any capital contributions from its Parent.

During the three months ended March 31, 2014 and 2013, ILIAC did not pay a dividend or distribution on its common stock of to its Parent.

On May 2, 2104, the Company declared an ordinary dividend in the amount of $281.0, payable on or after May 15, 2014.
 

 
39
 

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:
 
March 31,
 
2014
 
2013
Fixed maturities, net of OTTI
$
1,277.3

 
$
1,925.4

Equity securities, available-for-sale
15.9

 
14.9

Derivatives
156.5

 
202.2

DAC/VOBA and sales inducements adjustment on available-for-sale securities
(469.4
)
 
(712.5
)
Premium deficiency reserve adjustment
(106.3
)
 
(142.3
)
Other
0.1

 
0.1

Unrealized capital gains (losses), before tax
874.1

 
1,287.8

Deferred income tax asset (liability)
(178.6
)
 
(386.7
)
Unrealized capital gains (losses), after tax
695.5

 
901.1

Pension and other postretirement benefits liability, net of tax
9.4

 
10.9

AOCI
$
704.9

 
$
912.0



 
40
 

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:
 
Three Months Ended March 31, 2014
 
 
Before-Tax Amount
 
Income Tax
 
After-Tax Amount
 
Available-for-sale securities:
 
 
 
 
 
 
Fixed maturities
$
452.8

 
$
(158.3
)
 
$
294.5

 
Equity securities
0.4

 
(0.1
)
 
0.3

 
Other
0.1

 
—

 
0.1

 
OTTI
6.6

 
(2.3
)
 
4.3

 
Adjustments for amounts recognized in Net realized capital gains (losses) in the Condensed Consolidated Statements of Operations
(2.9
)
 
1.0

 
(1.9
)
 
DAC/VOBA and sales inducements
(134.1
)
(1) 
46.9

 
(87.2
)
 
Premium deficiency reserve adjustment
(23.9
)
 
8.4

 
(15.5
)
 
Change in unrealized gains/losses on available-for-sale securities
299.0

 
(104.4
)
 
194.6

 
 
 
 
 
 
 
 
Derivatives:
 
 
 
 
 
 
Derivatives
24.9

(2) 
(8.7
)
 
16.2

 
Adjustments related to effective cash flow hedges for amounts recognized in Net investment income in the Condensed Consolidated Statements of Operations
(1.4
)
 
0.5

 
(0.9
)
 
Change in unrealized gains/losses on derivatives
23.5

 
(8.2
)
 
15.3

 
 
 
 
 
 
 
 
Pension and other postretirement benefits liability:
 
 
 
 
 
 
Amortization of prior service cost recognized in Operating expenses in the Condensed Consolidated Statements of Operations
(0.6
)
 
0.2

 
(0.4
)
 
Change in pension and other postretirement benefits liability
(0.6
)
 
0.2

 
(0.4
)
 
Change in Other comprehensive income (loss)
$
321.9

 
$
(112.4
)
 
$
209.5

 
(1) See "Note 5. Deferred Policy Acquisition Costs and Value of Business Acquired" for additional information.
(2) See "Note 3. Derivative Financial Instruments" for additional information.


 
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)
 
 
 

 
Three Months Ended March 31, 2013
 
 
Before-Tax Amount
 
Income Tax
 
After-Tax Amount
 
Available-for-sale securities:
 
 
 
 
 
 
Fixed maturities
$
(266.6
)
 
$
92.1

 
$
(174.5
)
 
Equity securities
1.4

 
(0.5
)
 
0.9

 
Other
0.1

 
—

 
0.1

 
OTTI
0.9

 
(0.3
)
 
0.6

 
Adjustments for amounts recognized in Net realized capital gains (losses) in the Condensed Consolidated Statements of Operations
0.2

 
(0.1
)
 
0.1

 
DAC/VOBA and sales inducements
98.1

(1) 
(34.3
)
 
63.8

 
Premium deficiency reserve adjustment
10.3

 
(3.6
)
 
6.7

 
Change in unrealized gains/losses on available-for-sale securities
(155.6
)
 
53.3

 
(102.3
)
 
 
 
 
 
 
 
 
Derivatives:
 
 
 
 
 
 
Derivatives
(12.8
)
(2) 
4.5

 
(8.3
)
 
Adjustments related to effective cash flow hedges for amounts recognized in Net investment income in the Condensed Consolidated Statements of Operations
(0.2
)
 
0.1

 
(0.1
)
 
Change in unrealized gains/losses on derivatives
(13.0
)
 
4.6

 
(8.4
)
 
 
 
 
 
 
 
 
Pension and other postretirement benefits liability:
 
 
 
 
 
 
Amortization of prior service cost recognized in Operating expenses in the Condensed Consolidated Statements of Operations
(0.6
)
 
0.3

 
(0.3
)
 
Change in pension and other postretirement benefits liability
(0.6
)
 
0.3

 
(0.3
)
 
Change in Other comprehensive income (loss)
$
(169.2
)
 
$
58.2

 
$
(111.0
)
 
(1) See "Note 5. Deferred Policy Acquisition Costs and Value of Business Acquired" for additional information.
(2) See "Note 3. Derivative Financial Instruments" for additional information.


 
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)
 
 
 

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 March 31,
 
 
2014
 
2013
 
Income (loss) before income taxes
$
61.7

 
$
106.9

 
Tax rate
35.0
%
 
35.0
%
 
Income tax expense (benefit) at federal statutory rate
21.6

 
37.4

 
Tax effect of:
 
 
 
 
Dividends received deduction
(6.0
)
 
(5.3
)
 
IRS audit adjustment
(0.1
)
 
(0.3
)
 
Other
0.5

 
—

*
Income tax expense (benefit)
$
16.0

 
$
31.8

 
* Less than $0.1.

Valuation allowances are provided when it is considered unlikely that deferred tax assets will be realized. As of March 31, 2014 and December 31, 2013 the Company had total valuation allowances of approximately $11.1. As of March 31, 2014 and December 31, 2013, $130.4 of these valuation allowances were allocated to continuing operations, and $(119.3) as of the end of each period were allocated to Other comprehensive income related to realized and unrealized capital losses.

For the three months ended March 31, 2014 and 2013, there were no total changes in the valuation allowance. For the three months ended March 31, 2014 and 2013, there were no changes in the valuation allowance that were allocated 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 Voya Financial, Inc. Generally, the Company's 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 a separate taxpayer rather than a member of Voya Financial, 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. Under the tax sharing agreement, Voya Financial, 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

During April 2014, the IRS completed its examination of the Company's returns through tax year 2012. The 2012 audit settlement did not have a material impact on the financial statements. The Company is currently under audit by the IRS, and it is expected that the examination of tax year 2013 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 2013 and 2014.

9.    Financing Agreements

Reciprocal Loan Agreement

The Company maintains a reciprocal loan agreement with Voya Financial, 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 3.0% of the Company’s statutory admitted assets as of the preceding December 31. Effective January 2014, interest on any borrowing by

 
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)
 
 
 

either the Company or Voya Financial, Inc. is charged at a rate based on the prevailing market rate for similar third-party borrowings or securities.

Under this agreement, the Company did not incur interest expense for the three months ended March 31, 2014 and 2013. The Company incurred minimal interest income for the three months ended March 31, 2014 and did not incur any interest income for the three months ended March 31, 2013. As of March 31, 2014, the Company had an outstanding receivable of $72.0 from Voya Financial, Inc. under the reciprocal loan agreement. As of December 31, 2013, the Company did not have any outstanding receivable/payable from/to Voya Financial, Inc. under the reciprocal loan agreement.

For information on the Company's additional financing agreements, see "Item 8. Note 12. Financing Agreements" in the Company's 2013 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 March 31, 2014 and December 31, 2013, the Company had off-balance sheet commitments to purchase investments equal to their fair value of $379.5 and $466.8, respectively.

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:
 
March 31, 2014
 
December 31, 2013
Other fixed maturities-state deposits
$
13.2

 
$
13.1

Securities pledged(1)
211.8

 
140.1

Total restricted assets
$
225.0

 
$
153.2

(1) Includes the fair value of loaned securities of $158.0 and $97.6 as of March 31, 2014 and December 31, 2013, respectively, which is included in Securities pledged on the Condensed Consolidated Balance Sheets. In addition, as of March 31, 2014 and December 31, 2013, the Company delivered securities as collateral of $53.8 and $42.5, 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.


 
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)
 
 
 

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 March 31, 2014, 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. On April 11, 2014, the parties submitted to the court a motion for preliminary approval of a settlement agreement under which ILIAC, without admitting liability, would make a payment to the class of approximately $15.0 and adopt certain changes in its disclosure practices. Final court approval will be required before the settlement becomes effective.

 
45
 

Item 2.    Management’s Narrative Analysis of the Results of Operations and Financial Condition
(Dollar amounts in millions, unless otherwise stated)

For the purposes of this discussion, "ILIAC" refers to ING Life Insurance and Annuity Company, and the "Company," "we," "our," "us" refer to ING Life Insurance and Annuity Company and its subsidiaries. We are a direct, wholly owned subsidiary of Lion Connecticut Holdings Inc. ("Lion" or "Parent"), which is a direct, wholly owned subsidiary of Voya Financial, Inc. As of the date of this Quarterly Report on Form 10-Q, ING Groep N.V. ("ING Group" or "ING") is the largest shareholder of Voya Financial, Inc.

The following discussion and analysis of our results of operations and financial condition should be read in conjunction with the Condensed Consolidated Financial Statements and related notes contained in Part I. Item 1. of this Quarterly Report on Form 10-Q. In addition to historical data, this discussion contains forward-looking statements about our business, operations and financial performance based on current expectations that involve risks, uncertainties and assumptions. Actual results may differ materially from those discussed in the forward-looking statements as a result of various factors. See "Note Concerning Forward-Looking Statements."

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 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.

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 "tax exempt markets") 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 have one operating segment.

Critical Accounting Judgments and Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States ("U.S. GAAP") requires us 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 financial statements and the reported amounts of revenues and expenses during the reporting period. Critical estimates and assumptions are evaluated on an on-going basis based on historical developments, market conditions, industry trends and other information that is reasonable under the circumstances. There can be no assurance that actual results will conform to estimates and assumptions and that reported results of operations will not be materially 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 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, deferred policy acquisition costs ("DAC"), value of business acquired ("VOBA"), valuation of investments and derivatives, impairments, income taxes and contingencies.

In developing these accounting estimates, 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 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"Item 8. Note 1. Business, Basis of Presentation and Significant Accounting Policies" in the 2013 Annual Report on Form 10-K.


 
46
 

Assumptions and Periodic Review

Changes in assumptions can have a significant impact on DAC, 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.

Impact of New Accounting Pronouncements

For information regarding the impact of new accounting pronouncements, see "Part I. Item1. Note 1. Business, Basis of Presentation and Significant Accounting Policies" to the Condensed Consolidated Financial Statements to this Form 10-Q.

 
47
 

Results of Operations

Three Months Ended March 31, 2014 compared to Three Months Ended March 31, 2013

Our results of operations for the three months ended March 31, 2014 were primarily impacted by higher Interest credited and other benefits to contract owners/policyholders, higher Operating expenses partially offset by lower Income tax expense and higher Fee Income, Premiums and Other revenue.


Three Months Ended March 31,

2014

2013
Revenues:




Net investment income
$
343.6


$
348.2

Fee income
193.7


174.9

Premiums
14.0


7.9

Broker-dealer commission revenue
62.1


57.8

Net realized capital gains (losses):





Total other-than-temporary impairments
(0.9
)

(1.1
)
Less: Portion of other-than-temporary impairments recognized in Other comprehensive income (loss)
—


(0.5
)
Net other-than-temporary impairments recognized in earnings
(0.9
)

(0.6
)
Other net realized capital gains (losses)
(43.0
)

(39.5
)
Total net realized capital gains (losses)
(43.9
)

(40.1
)
Other revenue
1.5


(4.9
)
Total revenues
571.0


543.8

Benefits and expenses:





Interest credited and other benefits to contract owners/policyholders
234.1


186.8

Operating expenses
193.3


173.6

Broker-dealer commission expense
62.1


57.8

Net amortization of deferred policy acquisition costs and value of business acquired
19.8


18.6

Interest expense
—


0.1

Total benefits and expenses
509.3


436.9

Income (loss) before income taxes
61.7


106.9

Income tax expense (benefit)
16.0


31.8

Net income (loss)
$
45.7


$
75.1


Revenues

Total revenues increased $27.2 from $543.8 to $571.0 for the three months ended March 31, 2014, primarily impacted by higher Fee income, Premiums and Other revenue.

Fee income increased $18.8 from $174.9 to $193.7 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 ("AUM").

Premiums increased $6.1 from $7.9 to $14.0 primarily due to higher sales of immediate annuities with life contingencies.

Other revenue changed $6.4 from $(4.9) to $1.5 primarily due to changes in market value adjustments related to retirement plans upon surrender.


 
48
 

Total benefits and expenses increased $72.4 from $436.9 to $509.3 primarily due to higher Interest credited and other benefits to contract owners/policyholders and higher Operating expenses.

Interest credited and other benefits to contract owners/policyholders increased $47.3 from $186.8 to $234.1 partially due to a decrease in the fair value of the embedded derivative on reinsurance driven by a decrease in interest rates during the current period. Also contributing to the increase was higher credited interest due to higher general account liabilities, which corresponds to the increase in general account assets. These increases were partially offset by a decrease in the average credited rates due to actions taken in January 2014 to reflect the continuing low interest rate environment.

Operating expenses increased $19.7 from $173.6 to $193.3 primarily due to investments in the business in the current period; and a reduction in estimated variable compensation accruals in the prior period that did not repeat. In addition, commission expense was higher due to an increase in AUM.

Income Taxes

Income tax expense decreased $15.8 from $31.8 to $16.0 primarily due to a decrease in income before income taxes.

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.



 
49
 

Portfolio Composition

The following table presents the investment portfolio as of the dates indicated:
 
March 31, 2014
 
December 31, 2013
 
Carrying
Value
 
% of
Total
 
Carrying
Value
 
% of
Total
Fixed maturities, available-for-sale, excluding securities pledged
$
20,311.3

 
79.2
%
 
$
19,944.4

 
79.3
%
Fixed maturities, at fair value using the fair value option
686.8

 
2.7
%
 
621.3

 
2.5
%
Equity securities, available-for-sale
127.0

 
0.5
%
 
134.9

 
0.5
%
Short-term investments(1)
110.0

 
0.4
%
 
15.0

 
0.1
%
Mortgage loans on real estate
3,377.0

 
13.2
%
 
3,396.1

 
13.5
%
Policy loans
240.7

 
0.9
%
 
242.0

 
1.0
%
Limited partnerships/corporations
172.4

 
0.7
%
 
180.9

 
0.7
%
Derivatives
412.9

 
1.6
%
 
464.4

 
1.8
%
Securities pledged(2)
211.8

 
0.8
%
 
140.1

 
0.6
%
Total investments
$
25,649.9

 
100.0
%
 
$
25,139.1

 
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 Narrative Analysis of the 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:
 
March 31, 2014
 
Amortized
Cost
 
% of
Total
 
Fair
Value
 
% of
Total
Fixed maturities:
 
 
 
 
 
 
 
U.S. Treasuries
$
622.4

 
3.1
%
 
$
681.1

 
3.2
%
U.S. Government agencies and authorities
237.0

 
1.2
%
 
239.7

 
1.1
%
State, municipalities, and political subdivisions
77.2

 
0.4
%
 
86.5

 
0.4
%
U.S. corporate securities
10,381.3

 
52.2
%
 
11,030.9

 
52.0
%
Foreign securities(1)
5,580.9

 
28.0
%
 
5,890.0

 
27.8
%
Residential mortgage-backed securities
1,901.5

 
9.5
%
 
2,096.3

 
9.9
%
Commercial mortgage-backed securities
655.4

 
3.3
%
 
723.5

 
3.4
%
Other asset-backed securities
448.4

 
2.3
%
 
461.9

 
2.2
%
Total fixed maturities, including securities pledged
$
19,904.1

 
100.0
%
 
$
21,209.9

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

 
50
 

 
December 31, 2013
 
Amortized
Cost
 
% of
Total
 
Fair
Value
 
% of
Total
Fixed maturities:
 
 
 
 
 
 
 
U.S. Treasuries
$
636.5

 
3.2
%
 
$
670.1

 
3.2
%
U.S. Government agencies and authorities
237.1

 
1.2
%
 
242.1

 
1.2
%
State, municipalities, and political subdivisions
77.2

 
0.4
%
 
83.0

 
0.4
%
U.S. corporate securities
10,326.0

 
52.0
%
 
10,668.2

 
51.6
%
Foreign securities(1)
5,572.5

 
28.1
%
 
5,770.6

 
27.9
%
Residential mortgage-backed securities
1,916.3

 
9.7
%
 
2,099.7

 
10.1
%
Commercial mortgage-backed securities
624.5

 
3.1
%
 
691.7

 
3.3
%
Other asset-backed securities
465.8

 
2.3
%
 
480.4

 
2.3
%
Total fixed maturities, including securities pledged
$
19,855.9

 
100.0
%
 
$
20,705.8

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

As of March 31, 2014, the average duration of our fixed maturities portfolio, including securities pledged, was between 6 and 7 years.

Fixed Maturities Credit Quality - Ratings

The Securities Valuation Office ("SVO") of the NAIC evaluates the fixed maturity security investments of insurers for regulatory reporting and capital assessment purposes and assigns securities to one of six credit quality categories called "NAIC designations." An internally developed rating is used as permitted by the NAIC if no rating is available. These designations are generally similar to the credit quality designations of the NAIC acceptable rating organizations ("ARO") for marketable fixed maturity securities, called rating agency designations except for certain structured securities as described below. NAIC designations of "1," highest quality and "2," high quality, include fixed maturity securities generally considered investment grade by such rating organizations. NAIC designations 3 through 6 include fixed maturity securities generally considered below investment grade by such rating organizations.

The NAIC adopted revised designation methodologies for non-agency RMBS, including RMBS backed by subprime mortgage loans reported within ABS and for CMBS. The NAIC's objective with the revised designation methodologies for these structured securities was to increase the accuracy in assessing expected losses and to use the improved assessment to determine a more appropriate capital requirement for such structured securities. The 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 that 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. In the tables below, we present the rating of structured securities based on ratings from the revised NAIC rating methodologies described above (which may not correspond to rating agency designations). All NAIC designations (e.g., NAIC 1-6) are based on the revised NAIC methodologies.

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

Information about 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 March 31, 2014 and December 31, 2013, the average quality rating of our

 
51
 

fixed maturities portfolio was A-. 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, then the middle rating is applied;
▪
when two ratings are received, then the lower rating is applied;
▪
when a single rating is received, then the ARO rating is applied; and
▪
when ratings are unavailable, then an internal rating is applied.

Total fixed maturities by NAIC designation category, including securities pledged, were as follows as of the dates indicated:
 
 
March 31, 2014
NAIC Quality Designation
 
1
 
2
 
3
 
4
 
5
 
6
 
Total Fair Value
U.S. Treasuries
 
$
681.1

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
681.1

U.S. Government agencies and authorities
 
239.7

 
—

 
—

 
—

 
—

 
—

 
239.7

State, municipalities and political subdivisions
 
85.5

 
1.0

 
—

 
—

 
—

 
—

 
86.5

U.S. corporate securities
 
4,796.3

 
5,592.0

 
545.4

 
93.9

 
—

 
3.3

 
11,030.9

Foreign securities (1)
 
1,678.8

 
3,877.3

 
300.2

 
30.5

 
—

 
3.2

 
5,890.0

Residential mortgage-backed securities
 
1,971.5

 
20.9

 
31.8

 
5.0

 
10.0

 
57.1

 
2,096.3

Commercial mortgage-backed securities
 
719.2

 
—

 
0.4

 
3.9

 
—

 
—

 
723.5

Other asset-backed securities
 
444.1

 
12.6

 
3.7

 
—

 
1.3

 
0.2

 
461.9

Total fixed maturities
 
$
10,616.2

 
$
9,503.8

 
$
881.5

 
$
133.3

 
$
11.3

 
$
63.8

 
$
21,209.9

% of Fair Value
 
50.0
%
 
44.8
%
 
4.2
%
 
0.6
%
 
0.1
%
 
0.3
%
 
100.0
%
(1) Primarily U.S. dollar denominated.
 
 
 
 
 
December 31, 2013
NAIC Quality Designation
 
1
 
2
 
3
 
4
 
5
 
6
 
Total Fair Value
U.S. Treasuries
 
$
670.1

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
670.1

U.S. Government agencies and authorities
 
242.1

 
—

 
—

 
—

 
—

 
—

 
242.1

State, municipalities and political subdivisions
 
82.0

 
1.0

 
—

 
—

 
—

 
—

 
83.0

U.S. corporate securities
 
4,668.0

 
5,461.7

 
451.3

 
83.7

 
—

 
3.5

 
10,668.2

Foreign securities (1)
 
1,708.0

 
3,747.5

 
299.2

 
12.7

 
—

 
3.2

 
5,770.6

Residential mortgage-backed securities
 
1,974.1

 
24.2

 
30.7

 
4.8

 
10.0

 
55.9

 
2,099.7

Commercial mortgage-backed securities
 
687.4

 
—

 
0.4

 
3.9

 
—

 
—

 
691.7

Other asset-backed securities
 
462.8

 
13.1

 
3.6

 
—

 
0.7

 
0.2

 
480.4

Total fixed maturities
 
$
10,494.5

 
$
9,247.5

 
$
785.2

 
$
105.1

 
$
10.7

 
$
62.8

 
$
20,705.8

% of Fair Value
 
50.7
%
 
44.6
%
 
3.8
%
 
0.5
%
 
0.1
%
 
0.3
%
 
100.0
%
(1) Primarily U.S. dollar denominated.


 
52
 

Total fixed maturities by ARO quality rating category, including securities pledged, were as follows as of the dates indicated:
 
 
March 31, 2014
ARO Quality Ratings
 
AAA
 
AA
 
A
 
BBB
 
BB
 
B and Below
 
Total Fair Value
U.S. Treasuries
 
$
681.1

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
681.1

U.S. Government agencies and authorities
 
239.7

 
—

 
—

 
—

 
—

 
—

 
239.7

State, municipalities and political subdivisions
 
20.2

 
65.2

 
0.1

 
1.0

 
—

 
—

 
86.5

U.S. corporate securities
 
159.5

 
468.1

 
4,212.2

 
5,558.8

 
535.1

 
97.2

 
11,030.9

Foreign securities (1)
 
31.9

 
418.9

 
1,393.1

 
3,806.3

 
220.5

 
19.3

 
5,890.0

Residential mortgage-backed securities
 
1,760.0

 
8.6

 
10.7

 
45.3

 
27.9

 
243.8

 
2,096.3

Commercial mortgage-backed securities
 
451.8

 
19.0

 
52.2

 
48.7

 
41.4

 
110.4

 
723.5

Other asset-backed securities
 
376.1

 
4.4

 
31.8

 
13.1

 
4.5

 
32.0

 
461.9

Total fixed maturities
 
$
3,720.3

 
$
984.2

 
$
5,700.1

 
$
9,473.2

 
$
829.4

 
$
502.7

 
$
21,209.9

% of Fair Value
 
17.5
%
 
4.6
%
 
26.9
%
 
44.7
%
 
3.9
%
 
2.4
%
 
100.0
%
(1) Primarily U.S. dollar denominated.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2013
ARO Quality Ratings
 
AAA
 
AA
 
A
 
BBB
 
BB
 
B and Below
 
Total Fair Value
U.S. Treasuries
 
$
670.1

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
670.1

U.S. Government agencies and authorities
 
242.1

 
—

 
—

 
—

 
—

 
—

 
242.1

State, municipalities and political subdivisions
 
19.5

 
62.5

 
0.1

 
0.9

 
—

 
—

 
83.0

U.S. corporate securities
 
164.4

 
435.3

 
4,110.6

 
5,393.0

 
477.7

 
87.2

 
10,668.2

Foreign securities (1)
 
30.8

 
424.1

 
1,415.1

 
3,660.6

 
224.1

 
15.9

 
5,770.6

Residential mortgage-backed securities
 
1,755.9

 
9.4

 
11.0

 
48.3

 
29.2

 
245.9

 
2,099.7

Commercial mortgage-backed securities
 
342.3

 
98.6

 
53.1

 
48.4

 
41.5

 
107.8

 
691.7

Other asset-backed securities
 
385.8

 
11.1

 
32.3

 
14.3

 
7.3

 
29.6

 
480.4

Total fixed maturities
 
$
3,610.9

 
$
1,041.0

 
$
5,622.2

 
$
9,165.5

 
$
779.8

 
$
486.4

 
$
20,705.8

% of Fair Value
 
17.4
%
 
5.0
%
 
27.2
%
 
44.3
%
 
3.8
%
 
2.3
%
 
100.0
%
(1) Primarily U.S. dollar denominated.
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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.

Unrealized Capital Losses

Gross unrealized losses on fixed maturities, including securities pledged, decreased $187.0 from $368.8 to $181.8 for the three months ended March 31, 2014. The decrease in gross unrealized losses was primarily due to declining interest rates. Gross unrealized losses on fixed maturities, including securities pledged, increased by $16.0 from $53.0 to $69.0 for the three months ended March 31, 2013. The increase in gross unrealized losses was primarily driven by an increase in unrealized losses in Public-Investment Grade Corporate bonds.

As of March 31, 2014 and December 31, 2013, we did not have any fixed maturities with an unrealized capital loss in excess of $10.0. See "Item 1. Note 2. Investments" for further information on unrealized capital losses.


 
53
 

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 and other measures of performance, like prepayments and severities, have displayed sustained periods of improvement. Reflecting these fundamental improvements, related bond prices and sector liquidity increased substantially since the credit crisis. Despite these improvements, the sector remains susceptible to various market risks. For example, in the third quarter of 2013, the upward momentum in bond prices and market liquidity was disrupted, at least in part, by the pick-up in interest rate volatility. As this volatility dissipated, prices and liquidity recovered into the end of the year, supported by strength in the US economy and, more specifically, the housing market. The first quarter of 2014 has been characterized by continued stability in underlying fundamentals, despite the adverse seasonal related impacts observed in certain housing activity related measures.  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.

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 March 31, 2014, the fair value, amortized cost, and gross unrealized losses related to our exposure to subprime mortgage-backed securities totaled $59.7, $57.4 and $2.2, respectively, representing 0.3% of total fixed maturities, including securities pledged, based on fair value. As of December 31, 2013, the fair value, amortized cost, and gross unrealized losses related to our exposure to subprime mortgage-backed securities totaled $58.1, $56.1 and $2.5, respectively, representing 0.3% of total fixed maturities, including securities pledged, based on fair value.

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
March 31, 2014
 
 
 
 
 
 
 
 
 
1
73.8
%
 
AAA
0.1
%
 
2007
5.5
%
 
2
17.8
%
 
AA
1.6
%
 
2006
13.6
%
 
3
5.8
%
 
A
11.1
%
 
2005 and prior
80.9
%
 
4
—
%
 
BBB
18.6
%
 
 
100.0
%
 
5
2.3
%
 
BB and below
68.6
%
 
 
 
 
6
0.3
%
 
 
100.0
%
 
 
 
 
 
100.0%

 
 
 
 
 
 
December 31, 2013
 
 
 
 
 
 
 
 
 
1
74.0
%
 
AAA
0.1
%
 
2007
6.5
%
 
2
18.7
%
 
AA
2.1
%
 
2006
7.8
%
 
3
5.9
%
 
A
11.9
%
 
2005 and prior
85.7
%
 
4
—
%
 
BBB
20.7
%
 
 
100.0
%
 
5
1.1
%
 
BB and below
65.2
%
 
 
 
 
6
0.3
%
 
 
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 March 31, 2014, the fair value, amortized cost and gross unrealized losses related to our exposure to Alt-A RMBS totaled $86.4, $67.4 and $1.4, respectively, representing 0.4% of total fixed maturities, including securities pledged, based

 
54
 

on fair value. As of December 31, 2013, the fair value, amortized cost and gross unrealized losses related to our exposure to Alt-A RMBS totaled $87.3, $70.1 and $2.5, respectively, representing 0.4% of total fixed maturities, including securities pledged, based on fair value.

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
March 31, 2014
 
 
 
 
 
 
 
 
 
1
68.4
%
 
AAA
0.1
%
 
2007
14.5
%
 
2
18.2
%
 
AA
—
%
 
2006
30.5
%
 
3
7.8
%
 
A
2.4
%
 
2005 and prior
55.0
%
 
4
5.6
%
 
BBB
3.3
%
 
 
100.0
%
 
5
—
%
 
BB and below
94.2
%
 
 
 
 
6
—
%
 
 
100.0
%
 
 
 
 
 
100.0
%
 
 
 
 
 
 
December 31, 2013
 
 
 
 
 
 
 
 
 
1
65.4
%
 
AAA
0.1
%
 
2007
14.6
%
 
2
22.9
%
 
AA
—
%
 
2006
30.0
%
 
3
6.1
%
 
A
2.7
%
 
2005 and prior
55.4
%
 
4
5.6
%
 
BBB
3.4
%
 
 
100.0
%
 
5
—
%
 
BB and below
93.8
%
 
 
 
 
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 ceased, and the percentage of delinquent loans has declined through 2013 and the first quarter of 2014. Other performance metrics like vacancies, property values and rent levels have also shown improvements, although these metrics are not observed uniformly, differing by dimensions such as geographic location and property type. These improvements have been buoyed by some of the same macro-economic tailwinds alluded to in regards to our subprime and Alt-A mortgage exposure. In addition, a robust environment for property refinancing has continued to be supportive of improving credit performance metrics into 2014.  The new issue market for CMBS has been a major contributor to the refinance environment. It has continued its recovery from the credit crisis with meaningful new issuance in 2014, following 5 straight years of increasing new issuance volumes. First quarter 2014 volume, while slightly lower on a year-over-year basis, remains robust, reflective of the active and competitive refinancing market. 

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.



 
55
 

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
March 31, 2014
 
 
 
 
 
 
 
 
 
1
99.4
%
 
AAA
62.5
%
 
2014
2.4
%
 
2
—
%
 
AA
2.6
%
 
2013
17.3
%
 
3
0.1
%
 
A
7.2
%
 
2012
—
%
 
4
0.5
%
 
BBB
6.7
%
 
2011
—
%
 
5
—
%
 
BB and below
21.0
%
 
2010
0.3
%
 
6
—
%
 
 
100.0
%
 
2009
—
%
 
 
100.0
%
 
 
 
 
2008
—
%
 
 
 
 
 
 
 
2007 and prior
80.0
%
 
 
 
 
 
 
 
 
100.0
%
December 31, 2013
 
 
 
 
 
 
 
 
 
1
99.3
%
 
AAA
49.5
%
 
2013
8.3
%
 
2
—
%
 
AA
14.3
%
 
2012
—
%
 
3
0.1
%
 
A
7.6
%
 
2011
—
%
 
4
0.6
%
 
BBB
7.0
%
 
2010
—
%
 
5
—
%
 
BB and below
21.6
%
 
2009
—
%
 
6
—
%
 
 
100.0
%
 
2008
—
%
 
 
100.0
%
 
 
 
 
2007 and prior
91.7
%
 
 
 
 
 
 
 
 
100.0
%

As of March 31, 2014, the fair value, amortized cost and gross unrealized losses of our Other ABS, excluding subprime exposure, totaled $407.0, $395.8 and $0.8, respectively. As of December 31, 2013, the fair value, amortized cost and gross unrealized losses of our exposure to Other ABS, excluding subprime exposure, totaled $423.4, $410.9 and $0.9, respectively.

As of March 31, 2014, Other ABS was also broadly diversified both by type and issuer with credit card receivables, nonconsolidated collateralized loan obligations ("CLO") and automobile receivables, comprising 52.5%, 1.9% and 29.2%, respectively, of total Other ABS, excluding subprime exposure. As of December 31, 2013, Other ABS was also broadly diversified both by type and issuer with credit card receivables, nonconsolidated CLOs and automobile receivables, comprising 47.1%, 3.3% and 32.7%, respectively, of total Other ABS, excluding subprime exposure.


 
56
 

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
March 31, 2014
 
 
 
 
 
 
 
 
 
1
99.4
%
 
AAA
92.4
%
 
2014
3.7
%
 
2
0.5
%
 
AA
0.8
%
 
2013
16.1
%
 
3
0.1
%
 
A
6.2
%
 
2012
12.7
%
 
4
—
%
 
BBB
0.5
%
 
2011
8.5
%
 
5
—
%
 
BB and below
0.1
%
 
2010
4.1
%
 
6
—
%
 
 
100.0
%
 
2009
0.3
%
 
 
100.0
%
 
 
 
 
2008
11.4
%
 
 
 
 
 
 
 
2007 and prior
43.2
%
 
 
 
 
 
 
 
 
100.0
%
December 31, 2013
 
 
 
 
 
 
 
 
 
1
99.4
%
 
AAA
91.1
%
 
2013
15.4
%
 
2
0.5
%
 
AA
2.3
%
 
2012
12.3
%
 
3
0.1
%
 
A
6.0
%
 
2011
12.1
%
 
4
—
%
 
BBB
0.5
%
 
2010
4.5
%
 
5
—
%
 
BB and below
0.1
%
 
2009
0.3
%
 
6
—
%
 
 
100.0
%
 
2008
11.4
%
 
 
100.0
%
 
 
 
 
2007 and prior
44.0
%
 
 
 
 
 
 
 
 
100.0
%
 
 
 
 
 
 
 
 
 

Troubled Debt Restructuring

Although our portfolio of commercial mortgage loans and private placements is high quality, a small number of these contracts have been granted modifications, certain of which are considered to be troubled debt restructurings. See "Item 1. Note 2. Investments" for further information on troubled debt restructuring.

Mortgage Loans on Real Estate

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.


 
57
 

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.

As of March 31, 2014 and December 31, 2013, our mortgage loans on real estate portfolio had a weighted average DSC of 2.0 times and a weighted average LTV ratio of 60.1% and 59.8%, respectively. See "Item 8. Note 2. Investments" for further information on mortgage loans on real estate.

 
Recorded Investment
 
Debt Service Coverage Ratios
 
> 1.5x
 
1.25x - 1.5x
 
1.0x - 1.25x
 
< 1.0x
 
Commercial mortgage loans secured by land or construction loans
 
Total
 
% of Total
March 31, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
Loan to Value Ratios:
 
 
 
 
 
 
 
 
 
 
 
 
 
0% - 50%
$
341.1

 
$
39.9

 
$
19.7

 
$
39.9

 
$
—

 
$
440.6

 
13.0
%
50% - 60%
683.6

 
92.4

 
92.2

 
52.7

 
—

 
920.9

 
27.3
%
60% - 70%
1,338.6

 
323.3

 
149.2

 
80.0

 
0.1


1,891.2

 
56.0
%
70% - 80%
13.8

 
85.6

 
5.8

 
7.9

 
—

 
113.1

 
3.3
%
80% and above
—

 
—

 
8.0

 
4.4

 
—

 
12.4

 
0.4
%
Total
$
2,377.1

 
$
541.2

 
$
274.9

 
$
184.9

 
$
0.1

 
$
3,378.2

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Recorded Investment
 
Debt Service Coverage Ratios
 
> 1.5x
 
1.25x - 1.5x
 
1.0x - 1.25x
 
< 1.0x
 
Commercial mortgage loans secured by land or construction loans
 
Total
 
% of Total
December 31, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
Loan to Value Ratios:
 
 
 
 
 
 
 
 
 
 
 
 
 
0% - 50%
$
390.9

 
$
40.3

 
$
20.3

 
$
44.2

 
$
—

 
$
495.7

 
14.6
%
50% - 60%
653.6

 
93.3

 
94.7

 
52.9

 
—

 
894.5

 
26.3
%
60% - 70%
1,330.1

 
322.0

 
146.5

 
80.8

 
0.1

 
1,879.5

 
55.3
%
70% - 80%
13.9

 
86.8

 
6.2

 
8.0

 
—

 
114.9

 
3.4
%
80% and above
—

 
—

 
8.1

 
4.6

 
—

 
12.7

 
0.4
%
Total
$
2,388.5

 
$
542.4

 
$
275.8

 
$
190.5


$
0.1

 
$
3,397.3

 
100.0
%


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.

 
58
 

See "Item 8. Note 1. Business, Basis of Presentation and Significant Accounting Policies" in our 2013 Annual Report on Form 10-K for the policy used to evaluate whether the investments are other-than-temporarily impaired.

During the three months ended March 31, 2014 ,we recorded $0.8 of credit related OTTI of which the primary contributor being $0.7 of write-downs recorded in the RMBS sector on securities collateralized by Alt-A residential mortgages. See “Item 1. Note 2. Investments ” for further information on OTTI.
 

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 March 31, 2014, we had $299.4 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 $109.2, Italy of $119.2, and Spain of $71.0. We had no exposure to Greece or Portugal. As of March 31, 2014, we did not have any derivative assets within the 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 $2.9 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 March 31, 2014, our sovereign exposure was $138.1, which consisted of fixed maturities. We also had $376.3 in net exposure to non-peripheral financial institutions with a concentration in France of $57.8, The Netherlands of $52.3, Switzerland of $57.0 and the United Kingdom of $145.8. The balance of $2.4 billion was invested across non-peripheral, non-financial institutions.

In addition to aggregate concentration to The Netherlands of $429.3 and the United Kingdom of $1,087.1, we had significant non-peripheral European total country exposures in Belgium of $186.9, France of $212.0, Germany of $268.2 and Switzerland of $292.6. 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.

 
59
 

The following table represents our European exposures at fair value and amortized cost as of March 31, 2014:
 
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 March 31,
 2014(1)
Ireland
$
—

 
$
—

 
$
108.6

 
$
108.6

 
$
101.8

 
$
—

 
$
—

 
$
—

 
$
0.6

 
$
—

 
$
0.6

 
$
109.2

Italy
—

 
—

 
119.2

 
119.2

 
109.7

 
—

 
—

 
—

 
—

 
—

 
—

 
119.2

Spain
—

 
—

 
71.0

 
71.0

 
66.9

 
—

 
—

 
—

 
—

 
—

 
—

 
71.0

Total peripheral Europe
—

 
—

 
298.8

 
298.8

 
278.4

 
—

 
—

 
—

 
0.6

 
—

 
0.6

 
299.4

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Belgium
37.0

 
—

 
149.9

 
186.9

 
157.4

 
—

 
—

 
—

 
—

 
—

 
—

 
186.9

France
—

 
47.6

 
154.2

 
201.8

 
189.1

 
—

 
—

 
28.2

 
—

 
18.0

 
10.2

 
212.0

Germany
—

 
35.5

 
232.7

 
268.2

 
249.9

 
—

 
—

 
—

 
—

 
—

 
—

 
268.2

Netherlands
—

 
52.3

 
377.0

 
429.3

 
402.3

 
—

 
—

 
—

 
—

 
—

 
—

 
429.3

Switzerland
—

 
49.5

 
235.0

 
284.5

 
262.2

 
—

 
—

 
7.5

 
0.6

 
—

 
8.1

 
292.6

United Kingdom
—

 
143.4

 
941.3

 
1,084.7

 
1,037.3

 
—

 
—

 
94.3

 
—

 
91.9

 
2.4

 
1,087.1

Other non-
peripheral(2)
101.1

 
27.9

 
276.9

 
405.9

 
391.4

 
—

 
—

 
—

 
—

 
—

 
—

 
405.9

Total non-peripheral Europe
138.1

 
356.2

 
2,367.0

 
2,861.3

 
2,689.6

 
—

 
—

 
130.0

 
0.6

 
109.9

 
20.7

 
2,882.0

Total
$
138.1

 
$
356.2

 
$
2,665.8

 
$
3,160.1

 
$
2,968.0

 
$
—

 
$
—

 
$
130.0

 
$
1.2

 
$
109.9

 
$
21.3

 
$
3,181.4

(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.

 
60
 

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.

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 Voya Financial, 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 March 31, 2014, we had an outstanding receivable of $72.0 from Voya Financial, Inc. under the reciprocal loan agreement. As of December 31, 2013, we did not have any outstanding receivable/payable from/to Voya Financial, Inc. under the reciprocal loan agreement. We and Voya Financial, Inc. continue to maintain the reciprocal loan agreement and future borrowings by either party will be subject to the reciprocal loan terms summarized above. Effective January 2014, interest on any borrowing by either the Company or Voya Financial, Inc. is charged at a rate based on the prevailing market rate for similar third-party borrowings or securities.

•
We hold approximately 55.4% 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 repurchase agreements, 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 repurchase, securities lending and dollar roll programs. At the time a temporary cash need arises, the actual percentage of admitted assets available for repurchase transactions will depend upon outstanding allocations to the three programs. As of March 31, 2014, ILIAC had securities lending collateral assets of $163.0, 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.


 
61
 

Capital Contributions and Dividends

During the three months ended March 31, 2014 and 2013, ILIAC did not receive any capital contributions from its Parent.

During the three months ended March 31, 2014 and 2013, ILIAC did not pay a dividend or distribution on its common stock to its Parent.

On May 2, 2014, we declared an ordinary dividend in the amount of $281.0, payable on or after May 15,2014.

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

 
62
 

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.

Ratings actions affirmation and outlook changes by S&P, Fitch, Moody's and A.M. Best Company, Inc. ("A.M. Best") from January 1, 2014 through May 13, 2014 are as follows:

•
On March 14, 2014, S&P affirmed the ratings of Voya Financial, Inc. and its operating subsidiaries, including us, and revised the rating outlook to Positive from Stable.
•
On March 6, 2014, Fitch affirmed the ratings of Voya Financial, Inc. and its operating subsidiaries, including us, and revised the rating outlook to Positive from Stable.

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 various risks associated with changes in value, yield, price, cash flow, or exchange rates of assets or liabilities held or intended to be held, or to assume or reduce credit exposure associated with a referenced asset, index, or pool. 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.

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.

In addition, we have entered a reinsurance agreement, accounted for under the deposit method, that contains an embedded derivative, the fair value of which is based on the change in the fair value of the underlying assets held in trust. The embedded derivative is included in Other liabilities on the Condensed Consolidated Balance Sheets, and changes in the fair value of the embedded derivative are recorded in Interest credited and other benefits to contract owners/policyholders in the Condensed Consolidated Statements of Operations.

Reinsurance

Effective January 1, 2014, ILIAC entered into a coinsurance agreement with Langhorne I, LLC, a newly formed affiliated captive reinsurance company to manage reserve and capital requirements in connection with a portion of our Stabilizer and Managed Custody Guarantee business. This agreement is accounted for under the deposit method. As such, a $124.7 deposit liability and $57.5 reinsurance asset was established in Other Liabilities and Other Assets, respectively, on the Balance Sheets.

Contingencies

For information regarding other contingencies related to legal proceedings, regulatory matters and other contingencies involving us, see "Item 1. Note 10. Commitments and Contingencies."

 
63
 


Legislative and Regulatory Developments

Regulatory Proposals

State insurance regulators, the National Association of Insurance Commissioners (“NAIC”) and other regulatory agencies are investigating the life insurance industry’s use of affiliated captive reinsurers and offshore entities to reinsure insurance risks. 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 Department of Financial Services (“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. Also, in December 2013, the United States Treasury Department’s Federal Insurance Office (“FIO”) issued a report on how to modernize and improve the system of insurance regulation in the United States, recommending, in part, that states develop a uniform and transparent solvency oversight regime for the transfer of risk to reinsurance captives and adopt a uniform capital requirement for reinsurance captives, including a prohibition on transactions that do not constitute legitimate risk transfer. In March 2014, the Missouri Department of Insurance, Division of Insurance Company Regulation (the “Missouri Division”) notified Voya Financial, Inc. that it is performing a review of special purpose life reinsurance captive insurance company transactions that have occurred in Missouri’s captive program and, as part of that review, the Missouri Division has requested information from Voya Financial, Inc. regarding our captive reinsurance affiliates. The NAIC is currently considering several captive proposals. The Principle-Based Reserving Implementation Task Force of the NAIC is considering the February 17, 2014 report of Rector and Associates which proposes a new regulatory framework for captives assuming term life insurance (“XXX”) or universal life insurance with secondary guarantees (“AXXX”) business that are created on or after July 1, 2014 or that were created prior to July 1, 2014 but reinsure direct business written on or after January 1, 2015. The Financial Regulation Standards and Accreditation Committee of the NAIC is considering a proposal to require states to apply NAIC accreditation standards applicable to traditional insurers to captives that enter into reinsurance agreements on or after July 1, 2014 or with respect to reinsurance agreements entered into prior to July 1, 2014 on direct business written on or after January 1, 2015. We cannot predict what actions and regulatory changes will result from the NAIC study, the NYDFS report, the FIO report, the Missouri Division review or current or future NAIC captives proposals, or what impact such changes will have on our financial condition and results of operation. We utilize captive reinsurers to satisfy certain reserve requirements related to certain of our stabilizer and variable annuities policies. If state insurance regulators determine to restrict our use of captive reinsurers, either retroactively or prospectively, it could require us to increase statutory reserves, incur higher operating and/or tax costs or reduce sales.

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.

 
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PART II.    OTHER INFORMATION

Item 1.        Legal Proceedings

See "Item 1. Note 10. Commitments and Contingencies."

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 2013 Annual Report on Form 10-K.

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, the NAIC and other regulatory agencies regularly reexamine existing laws and regulations applicable to insurance companies and their products and their affiliated transactions. 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. We currently use affiliated captive reinsurance companies primarily to reinsure certain of our variable annuities and to fund statutory stable value reserves in excess of the economic reserve level. 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 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. Also, in December 2013, the FIO issued a report on how to modernize and improve the system of insurance regulation in the United States, recommending, in part, that states develop a uniform and transparent solvency oversight regime for the transfer of risk to reinsurance captives and adopt a uniform capital requirement for reinsurance captives, including a prohibition on transactions that do not constitute legitimate risk transfer. In March 2014, the Missouri Division notified Voya Financial, Inc. that it is performing a review of special purpose life reinsurance captive insurance company transactions that have occurred in Missouri's captive program and, as part of that review, the Missouri Division has requested information from Voya Financial, Inc. regarding our captive reinsurance affiliates. The NAIC is currently considering several captive proposals. The Principle-Based Reserving Implementation Task Force of the NAIC is considering the February 17, 2014 report of Rector and Associates which proposes a new regulatory framework for captives assuming term life insurance (“XXX”) and universal life insurance with secondary guarantees (“AXXX”) business that are created on or after July 1, 2014 or that were created prior to July 1, 2014 but reinsure direct business written on or after January 1, 2015. The Financial Regulation Standards and Accreditation Committee of the NAIC is considering a proposal to require states to apply NAIC accreditation standards applicable to traditional insurers to captives that enter into reinsurance agreements on or after July 1, 2014 or with respect to reinsurance agreements entered into prior to July 1, 2014 on direct business written on or after January 1, 2015. We cannot predict what actions and regulatory changes will result from the NAIC study, the NYDFS report, the FIO report, the Missouri Division review or current or future NAIC captives proposals, or what impact such actions and changes will have on our financial condition and results of operations. Any regulatory action that prohibits or limits our use of or materially increases our cost of using captive reinsurance companies, either retroactively or prospectively, could have a material adverse impact on our financial condition or 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

 
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to the suitability of annuity sales, including responsibilities for training agents. Several states have already enacted laws based on the SAT.

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. See "Item 1. Note 10. Commitments and Contingencies" for the quarter ended March 31, 2014 for a description of certain regulatory inquiries affecting the Company. 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 March 31, 2014 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 Voya Financial, 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 March 31, 2014. 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 Voya Financial, Inc. and the Company and does not relate to any activities conducted by Voya Financial, Inc. or its subsidiaries, including the Company, or involve the management of Voya Financial, Inc. or its subsidiaries, including the Company.

Other than the transactions described below, at no time during the quarter ended March 31, 2014, 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 March 31, 2014, ING Bank had gross revenues of approximately $3.4 million related to these activities, which was principally related to legacy loan repayment. ING Bank estimates that it had net profit of approximately $62.5 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 68 - 70 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.


May 13, 2014
 
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)


 
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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.

 
68
 

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.

 
69
 

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.
10+
 
Amendment 2013-1, dated as of January 1, 2014, to Reciprocal Loan Agreement, effective April 1, 2011, between ILIAC and ING America Holdings, Inc. (nka Voya Financial, Inc.)
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.

 
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