-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TvmXodW/KP3adhUXr0qDb0DV8eKbkbApPCpnGJY47BY5YuPwuYscC5cKbpMcrchx QrHpU6Gpq6TaDFahrcKeLw== 0001047469-03-013044.txt : 20030411 0001047469-03-013044.hdr.sgml : 20030411 20030411120024 ACCESSION NUMBER: 0001047469-03-013044 CONFORMED SUBMISSION TYPE: S-2 PUBLIC DOCUMENT COUNT: 4 REFERENCES 429: 333-101761 FILED AS OF DATE: 20030411 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ING LIFE INSURANCE & ANNUITY CO CENTRAL INDEX KEY: 0000837010 STANDARD INDUSTRIAL CLASSIFICATION: LIFE INSURANCE [6311] IRS NUMBER: 710294708 STATE OF INCORPORATION: CT FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-2 SEC ACT: 1933 Act SEC FILE NUMBER: 333-104456 FILM NUMBER: 03646564 BUSINESS ADDRESS: STREET 1: 151 FARMINGTON AVE CITY: HARTFORD STATE: CT ZIP: 06156 BUSINESS PHONE: 2032737834 MAIL ADDRESS: STREET 1: 151 FARMINGTON AVENUE CITY: HARTFORD STATE: CT ZIP: 06156 FORMER COMPANY: FORMER CONFORMED NAME: AETNA LIFE INSURANCE & ANNUITY CO /CT DATE OF NAME CHANGE: 19920703 S-2 1 a2107535zs-2.txt S-2 As filed with the Securities and Exchange Registration No. Commission on April 11, 2003 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM S-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ING Life Insurance and Annuity Company Connecticut 71-0294708 151 Farmington Avenue, Hartford, Connecticut 06156, (860) 723-2260 Julie E. Rockmore, Counsel ING Life Insurance and Annuity Company 151 Farmington Avenue, TS31, Hartford, Connecticut 06156 (860) 723-2260 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) - -------------------------------------------------------------------------------- Approximate date of commencement of proposed sale to the public _______________ The annuities covered by this registration statement are to be issued from time to time after the effective date of this registration statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box. [XX] If the registrant elects to deliver its latest annual report to security holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1) of this Form, check the following box. [XX] If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] ______________ If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. [ ] ______________ If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] ______________ If the delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] Calculation of Registration Fee
- ------------------------- ---------------------- ----------------------- ---------------------- ----------------------- Title of Each Class of Proposed Maximum Proposed Maximum Securities to be Amount to be Offering Price Per Aggregate Offering Amount of Registered Registered Unit Price Registration Fee - ------------------------- ---------------------- ----------------------- ---------------------- ----------------------- - ------------------------- ---------------------- ----------------------- ---------------------- ----------------------- * * $100,000,000 $8,090 - ------------------------- ---------------------- ----------------------- ---------------------- -----------------------
*The proposed maximum aggregate offering price is estimated solely for the purpose of determining the registration fee. The amount to be registered and the proposed maximum offering price per unit are not applicable since these securities are not issued in predetermined amounts or units. Pursuant to Rule 429(b) of the 1933 Act, unsold securities previously registered under Registration Statement No. 333-101761 are being carried forward to this Registration Statement. As of February 28, 2003, the amount of such unsold securities was $20,417,000. GUARANTEED ACCUMULATION ACCOUNT PROSPECTUS - MAY 1, 2003 - -------------------------------------------------------------------------------- INTRODUCTION The Guaranteed Accumulation Account (GAA) is a fixed interest option available during the accumulation phase of certain variable annuity contracts issued by ING Life Insurance and Annuity Company (the Company, we, us, our). Read this prospectus carefully before investing in GAA and save it for future reference. GENERAL DESCRIPTION GAA offers investors the opportunity to earn specified guaranteed rates of interest for specified periods of time, called guaranteed terms. We generally offer several guaranteed terms at any one time for those considering investing in GAA. Each guaranteed term offers a guaranteed interest rate for investments that remain in GAA for the duration of the specific guaranteed term. The guaranteed term establishes both the length of time for which we agree to credit a guaranteed interest rate and how long your investment must remain in GAA in order to receive the guaranteed interest rate. We guarantee both principal and interest if, and only if, your investment remains invested for the full guaranteed term. Charges related to the contract, such as a maintenance fee or early withdrawal charge, may still apply even if you do not withdraw until the end of a guaranteed term. INVESTMENTS TAKEN OUT OF GAA PRIOR TO THE END OF A GUARANTEED TERM MAY BE SUBJECT TO A MARKET VALUE ADJUSTMENT WHICH MAY RESULT IN AN INVESTMENT GAIN OR LOSS. SEE "MARKET VALUE ADJUSTMENT," PAGE 12. This prospectus will explain: - -- Guaranteed interest rates and guaranteed terms; - -- Contributions to GAA; - -- Types of investments available, and how they are classified; - -- How rates are offered; - -- How there can be an investment risk, and how we calculate gain or loss; - -- Contract charges that can affect your account value in GAA; - -- Taking investments out of GAA; and - -- How to reinvest or withdraw at maturity. ADDITIONAL DISCLOSURE INFORMATION Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed on the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense. We do not intend for this prospectus to be an offer to sell or a solicitation of an offer to buy these securities in any state or jurisdiction that does not permit their sale. We have not authorized anyone to provide you with information that is different than that contained in this prospectus. Our Home Office: ING Life Insurance and Annuity Company 151 Farmington Avenue Hartford, Connecticut 06156 (800)-262-3862 TABLE OF CONTENTS SUMMARY..................................................... 3 DESCRIPTION OF THE GUARANTEED ACCUMULATION ACCOUNT.......... 6 General, Contributions to GAA, Deposit Period, Guaranteed Terms, Guaranteed Term Classifications, Guaranteed Interest Rates, Maturity of a Guaranteed Term, Maturity Value Transfer Provision TRANSFERS................................................... 9 Transfers from GAA, Transfers Between Guaranteed Term Classifications WITHDRAWALS................................................. 10 Deferral of Payments, Reinvestment Privilege MARKET VALUE ADJUSTMENT (MVA)............................... 12 Calculation of the MVA, Deposit Period Yield, Current Yield, MVA Formula CONTRACT CHARGES............................................ 13 OTHER TOPICS................................................ 14 The Company--Income Phase--Contract Loans--Investments--Distribution of Contracts--Taxation--Experts--Legal Matters--Further Information--Incorporation of Certain Documents by Reference--Inquiries APPENDIX I--EXAMPLES OF MARKET VALUE ADJUSTMENT CALCULATIONS................................................ 18 APPENDIX II--EXAMPLES OF MARKET VALUE ADJUSTMENT AT VARIOUS YIELDS...................................................... 20
GAA PROSPECTUS 2 [SIDE NOTE] QUESTIONS: CONTACTING THE COMPANY. To answer your questions, contact your sales representative or write or call our Home Office at: ING USFS Customer Service Defined Contribution Administration, TS21 151 Farmington Avenue Hartford, CT 06156-1277 1-800-262-3862 [END SIDE NOTE] SUMMARY - ---------------------------------------------- GAA is a fixed interest option that may be available during the accumulation phase of your annuity contract. The following is a summary of certain facts about GAA. IN GENERAL. Amounts that you invest in GAA will earn a guaranteed interest rate if left in GAA for a specified period of time (the guaranteed term). You must invest amounts in GAA for the full guaranteed term in order to receive the quoted guaranteed interest rate. If you withdraw or transfer those amounts before the end of the guaranteed term, we may apply a "market value adjustment," which may be positive or negative. DEPOSIT PERIODS. A deposit period is the time during which we offer a specific guaranteed interest rate if you deposit dollars for a specific guaranteed term. For a particular guaranteed interest rate and guaranteed term to apply to your account dollars, you must invest them during the deposit period in which that rate and term are offered. GUARANTEED TERMS. A guaranteed term is the period of time account dollars must be left in GAA in order to earn the guaranteed interest rate specified for that guaranteed term. We offer different guaranteed terms at different times. Check with your representative or the Company to learn the details about the guaranteed term(s) currently offered. We reserve the right to limit the number of guaranteed terms or the availability of certain guaranteed terms. Some annuity contracts that offer GAA distinguish between short- and long-term classifications of GAA. Under those contracts, we make the following distinction: - -- Short-term classification--three years or less. - -- Long-term classification--between three and ten years. GUARANTEED INTEREST RATES. We guarantee different interest rates, depending upon when account dollars are invested in GAA. The interest rate we guarantee is an annual effective yield; that means that the rate reflects a full year's interest. We credit interest at a rate that will provide the guaranteed annual effective yield over one year. The guaranteed interest rate(s) is guaranteed for that deposit period and for the length of the guaranteed term. The guaranteed interest rates we offer will always meet or exceed the minimum interest rates agreed to in the contract. Apart from meeting the contractual minimum interest rates, we can in no way guarantee any aspect of future offerings. FEES AND OTHER DEDUCTIONS. We do not make deductions from amounts in GAA to cover mortality and expense risks. Rather, we consider these risks when determining the credited rate. The following other types of charges may be deducted from amounts held in, withdrawn or transferred from GAA: - -- Market Value Adjustment (MVA). An MVA may be applied to amounts transferred or withdrawn prior to the end of a guaranteed term, which reflects changes in interest rates since the deposit period. The MVA may be positive or negative, and therefore may increase or decrease the amount withdrawn to satisfy a transfer or withdrawal request. See "Market Value Adjustment." - -- Tax Penalties and/or Tax Withholding. Amounts withdrawn may be subject to withholding for federal income taxes, as well as a 10% penalty tax for amounts withdrawn prior to your having attained age 59 1/2. See "Taxation"; see also the "Taxation" section of the contract prospectus. - -- Early Withdrawal Charge. An early withdrawal charge, which is a deferred sales charge, may apply to amounts withdrawn from the contract, in order to GAA PROSPECTUS 3 reimburse us for some of the sales and administrative expenses associated with the contract. See "Contract Charges"; see also the "Fees" section of the contract prospectus. - -- Maintenance Fee. A maintenance fee of up to $30 may be deducted, on an annual basis, pro rata from all funding options including GAA. See "Contract Charges"; see also the "Fees" section of the contract prospectus. - -- Transfer Fees. Under some contracts, during the accumulation phase, transfer fees of up to $10 per transfer may be deducted from amounts held in or transferred from GAA. See "Contract Charges"; see also the "Fees" section of the contract prospectus. - -- Premium Taxes. We may deduct a charge for premium taxes of up to 4% from amounts in GAA. See "Contract Charges"; see also the "Fees" section of the contract prospectus. - -- Front End Sales Charges. Under some contracts, we may deduct front end sales charges of up to 6%. See "Contract Charges"; see also the "Fees" section of the contract prospectus. MARKET VALUE ADJUSTMENT (MVA). If you withdraw or transfer all or part of your account value from GAA before the guaranteed term is complete, an MVA may apply. The MVA reflects the change in the value of the investment due to changes in interest rates since the date of deposit. The MVA may be positive or negative depending upon interest rate activity at the time of withdrawal or transfer. Any MVA applied to a withdrawal or transfer from GAA will be calculated as an "aggregate MVA," which is the sum of all MVAs applicable due to the withdrawal (see sidebar on page 12 for an example of the calculation of the aggregate MVA). The following withdrawals will be subject to an aggregate MVA only if it is positive: - -- Withdrawals due to the election of a lifetime income option; and - -- Withdrawals due to the death of the participant (if paid within the first six months following death). All other withdrawals will be subject to an aggregate MVA, regardless of whether it is positive or negative, including: - -- Withdrawals due to the election of a nonlifetime income option; - -- Payments due to the death of the participant, if paid more than six months following death; and - -- Full or partial withdrawals during the accumulation phase (except for withdrawals at the end of a guaranteed term or pursuant to the maturity value transfer provision, see "Maturity of a Guaranteed Term" and "Maturity Value Transfer Provision"). See "Description of the Guaranteed Accumulation Account" and "Market Value Adjustment." MATURITY OF A GUARANTEED TERM. On or before the end of a guaranteed term, the contract holder or you, if applicable, may instruct us to: - -- Transfer the matured amount to one or more new guaranteed terms available under the current deposit period; - -- Transfer the matured amount to other available investment options; or - -- Withdraw the matured amount. Amounts withdrawn may be subject to an early withdrawal charge, maintenance fee, tax withholding and, if you are under age 59 1/2, tax penalties. (See GAA PROSPECTUS 4 "Contract Charges"; see also the "Fees" and "Taxation" sections of the contract prospectus.) When a guaranteed term ends, if we have not received instructions, we will automatically reinvest the maturing investment into a guaranteed term available in the current deposit period. (See "Maturity of a Guaranteed Term" and "Maturity Value Transfer Provision.") For contracts that distinguish between short-term and long-term classifications, we will generally transfer the maturing investment to the available deposit period for the guaranteed term having the shortest maturity within the same classification. For other contracts, we will generally transfer the maturing investment in the following manner based upon availability: - -- To a guaranteed term of the same duration, if available; or - -- To a guaranteed term with the next shortest duration, if available; or - -- To a guaranteed term with the next longest duration. If you do not provide instructions concerning the maturing amount on or before the end of a guaranteed term, and this amount is automatically reinvested as noted above, the maturity value transfer provision will apply. MATURITY VALUE TRANSFER PROVISION. If we automatically transfer the matured investment into the current deposit period, the contract holder or you, if applicable, may, for a limited time, transfer or withdraw all or a portion of the matured investment that was transferred without the application of an MVA. As described in "Fees and Other Deductions" above, other fees, including an early withdrawal charge and a maintenance fee, may be assessed on amounts withdrawn. See "Maturity Value Transfer Provision." TRANSFER OF ACCOUNT DOLLARS. Generally, account dollars invested in GAA may be transferred among guaranteed terms offered through GAA, and/or to other investment options offered through the contract. However: - -- Transfers may not be made during the deposit period in which your account dollars are invested in GAA or for 90 days after the close of that deposit period; and - -- We may apply an MVA to transfers made before the end of a guaranteed term. INVESTMENTS. Guaranteed interest rates credited during any guaranteed term do not necessarily relate to investment performance. Deposits received into GAA, regardless of the length of the guaranteed term or, where applicable, guaranteed term classification, will generally be invested in federal, state and municipal obligations, corporate bonds, preferred stocks, real estate mortgages, real estate, certain other fixed income investments, and cash or cash equivalents. All of our general assets are available to meet guarantees under GAA. Amounts allocated to GAA are held in a nonunitized separate account established by the Company under Connecticut law. To the extent provided for in the contract, assets of the separate account are not chargeable with liabilities arising out of any other business that we conduct. See "Investments." NOTIFICATION OF MATURITY. We will notify the contract holder or you, if applicable, at least 18 calendar days prior to the maturity of a guaranteed term. We will include information relating to the current deposit period's guaranteed interest rates and the available guaranteed terms. You may obtain information concerning available deposit periods, guaranteed interest rates, and guaranteed terms by telephone five business days prior to the maturity date (1-800-GAA-FUND or 1-800-422-3863). (See "Description of the Guaranteed Accumulation Account--General" and "Maturity of a Guaranteed Term.") GAA PROSPECTUS 5 DESCRIPTION OF THE GUARANTEED ACCUMULATION ACCOUNT - ---------------------------------------------- GENERAL GAA offers guaranteed interest rates for specific guaranteed terms. For a particular guaranteed interest rate and guaranteed term to apply to your account dollars, you must invest them during the deposit period during which that rate and term are offered. Each deposit period may offer more than one guaranteed term. Guaranteed terms may be classified according to length of time to maturity, and each deposit period may offer various guaranteed terms within these classifications. Any MVA applied to a withdrawal or transfer from GAA will be calculated as an "aggregate MVA," which is the sum of all MVAs applicable due to the withdrawal (see sidebar on page 12 for an example of the calculation of the aggregate MVA). The following withdrawals will be subject to an aggregate MVA only if it is positive: - -- Withdrawals due to the election of a lifetime income option; and - -- Withdrawals due to the death of the participant (if paid within the first six months following death). All other withdrawals will be subject to an aggregate MVA, regardless of whether it is positive or negative, including: - -- Withdrawals due to the election of a nonlifetime income option; - -- Payments due to the death of the participant, if paid more than six months following death; and - -- Full or partial withdrawals during the accumulation phase (except for withdrawals at the end of a guaranteed term or pursuant to the maturity value transfer provision, see "Maturity of a Guaranteed Term" and "Maturity Value Transfer Provision"). We maintain a toll-free telephone number for those wishing to obtain information concerning available deposit periods, guaranteed interest rates, and guaranteed terms. The telephone number is 1-800-GAA-FUND (1-800-422-3863). At least 18 calendar days before a guaranteed term matures, we will notify the contract holder or you, if applicable, of the upcoming deposit period dates and the current guaranteed interest rates, guaranteed terms and projected matured guaranteed term values. CONTRIBUTIONS TO GAA The contract holder or you, if applicable, may invest in the guaranteed terms available in the current deposit period by allocating new purchase payments to GAA or by transferring a sum from other funding options available under the contract or from other guaranteed terms. Though we may require a minimum payment(s) to a contract, we do not require a minimum investment for a guaranteed term. Refer to the contract prospectus. We reserve the right to establish a minimum amount for transfers from other funding options. Investments may not be transferred from a guaranteed term during the deposit period in which the investment is applied nor during the first 90 days after the close of the deposit period. This restriction does not apply to amounts transferred or withdrawn under the maturity value transfer provision. See "Maturity Value Transfer Provision." GAA PROSPECTUS 6 DEPOSIT PERIOD The deposit period is the period of time during which the contract holder or you, if applicable, may direct investments to a particular guaranteed term(s) and receive a stipulated guaranteed interest rate(s). Each deposit period may be a month, a calendar quarter, or any other period of time we specify. GUARANTEED TERMS A guaranteed term is the time we specify during which we credit the guaranteed interest rate. We will offer at least one guaranteed term of three years or less and one guaranteed term of more than three years in any deposit period. We offer guaranteed terms at our discretion for various periods ranging from one to ten years. GUARANTEED TERM CLASSIFICATIONS Some contracts distinguish between long-term and short-term guaranteed term classifications. The following are the guaranteed term classifications: - -- Short-term--All guaranteed terms of three years or less. - -- Long-term--All guaranteed terms of between three and ten years. During each deposit period, we may offer more than one guaranteed term within each guaranteed term classification. The contract holder or you, if applicable, may allocate investments to guaranteed terms within one or both guaranteed term classifications during a deposit period. GUARANTEED INTEREST RATES Guaranteed interest rates are the rates that we guarantee will be credited on amounts applied during a deposit period for a specific guaranteed term. Guaranteed interest rates are annual effective yields, reflecting a full year's interest. We credit interest at a rate that will provide the guaranteed annual effective yield over one year. Guaranteed interest rates are credited according to the length of the guaranteed term as follows: GUARANTEED TERMS OF ONE YEAR OR LESS: The guaranteed interest rate is credited from the date of deposit to the last day of the guaranteed term. GUARANTEED TERMS OF GREATER THAN ONE YEAR: Except for certain contracts issued in the state of New York, several different guaranteed interest rates may be applicable during a guaranteed term of more than one year. The initial guaranteed interest rate is credited from the date of deposit to the end of a specified period within the guaranteed term. We may credit several different guaranteed interest rates for subsequent specific periods of time within the guaranteed term. For example, for a five-year guaranteed term we may guarantee 5% for the first year, 4.75% for the next two years, and 4.5% for the remaining two years. We will not guarantee or credit a guaranteed interest rate below the minimum rate specified in the contract, nor will we credit interest at a rate above the guaranteed interest rate we announce prior to the start of a deposit period. GAA PROSPECTUS 7 [SIDE NOTE] BUSINESS DAY--any day on which the New York Stock Exchange is open. [END SIDE NOTE] Our guaranteed interest rates are influenced by, but do not necessarily correspond to, interest rates available on fixed income investments we may buy using deposits directed to GAA (see "Investments"). We consider other factors when determining guaranteed interest rates including regulatory and tax requirements, sales commissions and administrative expenses borne by the Company, general economic trends, and competitive factors. WE MAKE THE FINAL DETERMINATION REGARDING GUARANTEED INTEREST RATES. WE CANNOT PREDICT THE LEVEL OF FUTURE GUARANTEED INTEREST RATES. MATURITY OF A GUARANTEED TERM At least 18 calendar days prior to the maturity of a guaranteed term, we will notify the contract holder or you, if applicable, of the upcoming deposit period, the projected value of the amount maturing at the end of the guaranteed term, and the guaranteed interest rate(s) and guaranteed term(s) available for the current deposit period. When a guaranteed term matures, the amounts in any maturing guaranteed term may be: - -- Transferred to one or more new guaranteed terms available under the current deposit period; or - -- Transferred to other available investment options; or - -- Withdrawn from the contract. We do not apply an MVA to amounts transferred or surrendered from a guaranteed term on the date the guaranteed term matures. Amounts withdrawn, however, may be subject to an early withdrawal charge, a maintenance fee, taxation, and if you are under age 59 1/2, tax penalties. If we have not received direction from the contract holder or you, if applicable, by the maturity date of a guaranteed term, we will automatically transfer the matured value to one of the following: - -- For contracts distinguishing between short- and long-term classifications, we will generally transfer the amount maturing to the available deposit period for the guaranteed term having the shortest maturity within the same classification, though it may be different than the maturing term; or - -- For contracts that do not distinguish between short- and long-term classifications, we will generally transfer the maturing amount as follows: -- To a guaranteed term of the same duration, if available; or -- To a guaranteed term with the next shortest duration, if available; or -- To a guaranteed term with the next longest duration. The contract holder or you, if applicable, will receive a confirmation statement, plus information on the new guaranteed interest rate(s) and guaranteed terms. MATURITY VALUE TRANSFER PROVISION If we automatically reinvest the proceeds from a matured guaranteed term, the contract holder or you, if applicable, may transfer or withdraw from GAA the amount that was reinvested without an MVA. An early withdrawal charge and maintenance fee may apply to withdrawals. If the full amount reinvested is transferred or withdrawn, we will include interest credited to the date of the transfer or withdrawal. This provision is only available until the last business day of the month following the maturity date of the prior guaranteed term. This provision only applies to the first transfer or withdrawal request received from the contract holder or you, if applicable, with respect to a particular matured guaranteed term value, regardless of the amount involved in the transaction. GAA PROSPECTUS 8 TRANSFERS - ---------------------------------------------- We allow the contract holder or you, if applicable, to transfer all or a portion of your account value to GAA or to other investment options under the contract. We do not allow transfers from any guaranteed term to any other guaranteed term or investment option during the deposit period for that guaranteed term or for 90 days following the close of that deposit period, except for amounts transferred under the maturity value transfer provision. We do not apply an MVA to the value transferred upon maturity of a guaranteed term nor for values transferred under the maturity value transfer provision. We do not count either of these types of transfers as one of the 12 free transfers allowed per calendar year by those contracts allowing only 12 free transfers. When the contract holder or you, if applicable, request the transfer of a specific dollar amount, we account for any applicable MVA in determining the amount to be withdrawn from a guaranteed term(s) to fulfill the request. Therefore, the amount we actually withdraw from the guaranteed term(s) may be more or less than the requested dollar amount. (See "Appendix I" for an example.) For more information on transfers, see the contract prospectus. TRANSFERS FROM GAA For contracts that do not distinguish between short- and long-term classifications, the contract holder or you, if applicable, may choose the guaranteed term from which funds will be first withdrawn. If there is more than one guaranteed term of the same duration, we will withdraw funds starting from the oldest guaranteed term that has not reached maturity. If we do not receive directions, we will withdraw funds pro rata from each guaranteed term in which you are invested. If there is more than one guaranteed term of the same duration, we will withdraw funds starting from the oldest guaranteed term that has not reached maturity. For contracts that distinguish between short- and long-term classifications, the contract holder or you, if applicable, may choose the guaranteed term classification from which funds will be first withdrawn. We will withdraw funds starting from the oldest guaranteed term that has not reached maturity within the classification chosen. If we do not receive directions, we will withdraw funds pro rata from the guaranteed term classifications, starting with the oldest guaranteed term that has not reached maturity, and any other investment options. We will apply an MVA to transfers made before the end of a guaranteed term. (See "Market Value Adjustment.") TRANSFERS BETWEEN GUARANTEED TERM CLASSIFICATIONS (For contracts that distinguish between short-term and long-term classifications only) The contract holder or you, if applicable, may transfer amounts from short-term guaranteed terms to available long-term guaranteed terms of the current deposit period, or from long-term guaranteed terms to available short-term guaranteed terms of the current deposit period. For example, funds may be transferred from a three-year guaranteed term (any time after 90 days from the close of the deposit period applicable to that three- GAA PROSPECTUS 9 year guaranteed term) to the open deposit period of a seven-year guaranteed term. Funds will be first transferred from the oldest deposit period for which the guaranteed term has not reached maturity and we will assess an MVA on the transferred amount. These transfers are counted toward the 12 free transfers allowed per calendar year by those contracts allowing only 12 free transfers. We do not permit the transfer of value from one guaranteed term prior to its maturity to another guaranteed term within the same classification. For example, we do not permit transfers from one-year to three-year, one-year to one-year, five-year to seven-year, or ten-year to seven-year guaranteed terms. WITHDRAWALS - ---------------------------------------------- The contract allows for full or partial withdrawals from GAA at any time during the accumulation phase. To make a full or partial withdrawal, a request form (available from us) must be properly completed and submitted to our Home Office (or other designated office as provided in the contract). Partial withdrawals are made pro rata from funding options unless the contract holder or you, if applicable, request otherwise. For contracts that do not distinguish between short- and long-term classifications, each guaranteed term is considered a separate funding option for the purpose of a partial withdrawal. The contract holder or you, if applicable, may choose the guaranteed term from which funds will be withdrawn. If there is more than one guaranteed term of the same duration, we will withdraw funds starting from the oldest guaranteed term that has not reached maturity. If no guaranteed term is elected, we will withdraw funds pro rata from each guaranteed term in which you are invested. If there is more than one guaranteed term of the same duration, we will withdraw funds starting from the oldest guaranteed term that has not reached maturity. For contracts distinguishing between short- and long-term classifications, each guaranteed term classification is considered a separate funding option for the purpose of a partial withdrawal. The contract holder or you, if applicable, may elect to take a partial withdrawal from either guaranteed term classification. We will first withdraw funds from the oldest guaranteed term that has not reached maturity within the chosen classification. If no guaranteed term classification is elected, we will withdraw funds pro rata from each classification (starting with the oldest guaranteed term which has not reached maturity) and other funding options. We may apply an MVA to withdrawals made prior to the end of a guaranteed term, except for withdrawals made under the maturity value transfer provision. (See "Market Value Adjustment.") We may deduct an early withdrawal charge and a maintenance fee depending upon the terms of the contract. The early withdrawal charge is a deferred sales charge which may be deducted upon withdrawal to reimburse us for some of the sales and administrative expenses associated with the contract. A maintenance fee, up to $30, may be deducted pro rata from each of the funding options, including GAA. Refer to the contract prospectus for a description of these fees. When a request for a partial withdrawal of a specific dollar amount is made, we will include the MVA in determining the amount to be withdrawn from the guaranteed term(s) to fulfill GAA PROSPECTUS 10 the request. Therefore, the amount we actually take from the guaranteed term(s) may be more or less than the dollar amount requested. (See "Appendix I" for an example). DEFERRAL OF PAYMENTS Under certain emergency conditions, we may defer payment of a GAA withdrawal for up to six months. Refer to the contract prospectus for more details. REINVESTMENT PRIVILEGE The contract holder or you, if applicable, may elect to reinvest all or a portion of a full withdrawal during the 30 days following such a withdrawal. We must receive amounts for reinvestment within 60 days of the withdrawal. We will apply reinvested amounts to the current deposit period. This means that the guaranteed annual interest rate and guaranteed terms available on the date of reinvestment will apply. Amounts are reinvested in the guaranteed term classifications, where applicable, in the same proportion as prior to the full withdrawal. Any negative MVA we applied to a withdrawal will not be refunded, and any taxes that were withheld may also not be refunded. Refer to the contract prospectus for further details. GAA PROSPECTUS 11 [SIDE NOTE] AGGREGATE MVA is the total of all MVAs applied due to a transfer or withdrawal. CALCULATION OF THE AGGREGATE MVA--In order to satisfy a transfer or withdrawal, amounts may be withdrawn from more than one guaranteed term, with more than one guaranteed interest rate. In order to determine the MVA applicable to such a transfer or withdrawal, the MVAs applicable to EACH GUARANTEED TERM will be added together, in order to determine the "aggregate MVA." Example: $1,000 withdrawal, two guaranteed terms, MVA1 = $10, MVA2 = -$30 $10 + -$30 = -$20. Aggregate MVA = -$20. Example: $1,000 withdrawal, two guaranteed terms, MVA1 = $30, MVA2 = -$10 30 + -$10 = $20. Aggregate MVA = $20. [END SIDE NOTE] MARKET VALUE ADJUSTMENT (MVA) - ---------------------------------------------- We apply an MVA to amounts transferred or withdrawn from GAA prior to the end of a guaranteed term. To accommodate early withdrawals or transfers, we may need to liquidate certain assets or use cash that could otherwise be invested at current interest rates. When we sell assets prematurely we could realize a profit or loss depending upon market conditions. The MVA reflects changes in interest rates since the deposit period. When interest rates increase after the deposit period, the value of the investment decreases and the market value adjustment amount may be negative. Conversely, when interest rates decrease after the deposit period, the value of the investment increases and the market value adjustment amount may be positive. Therefore, the application of an MVA may increase or decrease the amount withdrawn from a guaranteed term to satisfy a withdrawal or transfer request. An MVA applied to a withdrawal or transfer from GAA will be calculated as an "aggregate MVA," which is the sum of all MVAs applicable due to the withdrawal (see sidebar on this page for an example of the calculation of the aggregate MVA). The following withdrawals will be subject to an aggregate MVA only if it is positive: - -- Withdrawals due to the election of a lifetime income option; and - -- Withdrawals due to the death of the participant (if paid within the first six months following death). All other withdrawals will be subject to an aggregate MVA, regardless of whether it is positive or negative, including: - -- Withdrawals due to the election of a nonlifetime income option; - -- Payments due to the death of the participant, if paid more than six months following death; and - -- Full or partial withdrawals during the accumulation phase (except for withdrawals at the end of a guaranteed term or pursuant to the maturity value transfer provision, see "Maturity of a Guaranteed Term" and "Maturity Value Transfer Provision"). Should two or more consecutive guaranteed terms have the same guaranteed interest rate and mature on the same date, we will calculate an MVA applicable to each. We will apply the MVA that is more favorable to you to any withdrawal or transfer from either guaranteed term prior to their maturity. Under some contracts, election of a Systematic Distribution Option, as described in the contract prospectus, will not result in an MVA being applied to amounts withdrawn from GAA. CALCULATION OF THE MVA The amount of the MVA depends on the relationship between: - -- The deposit period yield of U.S. Treasury Notes that will mature in the last quarter of the guaranteed term; and - -- The current yield of such U. S. Treasury Notes at the time of withdrawal. If the current yield is less than the deposit period yield, the MVA will decrease the amount withdrawn from a guaranteed term to satisfy a transfer or withdrawal request (the MVA will be positive). If the current yield is greater than the deposit period yield, the MVA will increase the amount withdrawn GAA PROSPECTUS 12 from a guaranteed term (the MVA will be negative or detrimental to the investor). DEPOSIT PERIOD YIELD We determine the deposit period yield used in the MVA calculation by considering interest rates prevailing during the deposit period of the guaranteed term from which the transfer or withdrawal will be made. First, we identify the Treasury Notes that mature in the last three months of the guaranteed term. Then, we determine their yield-to-maturity percentages for the last business day of each week in the deposit period. We then average the resulting percentages to determine the deposit period yield. Treasury Note information may be found each business day in publications such as the Wall Street Journal which publishes the yield-to-maturity percentages for all Treasury Notes as of the preceding business day. CURRENT YIELD We use the same Treasury Notes identified for the deposit period yield to determine the current yield--Treasury Notes that mature in the last three months of the guaranteed term. However, we use the yield-to-maturity percentages for the last business day of the week preceding the withdrawal and average those percentages to get the current yield. MVA FORMULA The mathematical formula used to determine the MVA is: x ---- 365 { (1+i) } { } ------ { (1+j) }
where i is the deposit period yield; j is the current yield; and x is the number of days remaining (computed from Wednesday of the week of withdrawal) in the guaranteed term. (For examples of how we calculate MVA, refer to Appendix I.) We make an adjustment in the formula of the MVA to reflect the period of time remaining in the guaranteed term from the Wednesday of the week of a withdrawal. CONTRACT CHARGES - ---------------------------------------------- Certain charges may be deducted directly or indirectly from the funding options available under the contract, including GAA. The contract may have a maintenance fee of up to $30 that we will deduct, on an annual basis, pro rata from all funding options including GAA. We may also deduct a maintenance fee upon full withdrawal of a contract. The contract may have an early withdrawal charge that we will deduct, if applicable, upon a full or partial withdrawal from the contract. If the withdrawal occurs prior to the maturity of a guaranteed term, both the early withdrawal charge and an MVA may be assessed. GAA PROSPECTUS 13 We do not deduct mortality and expense risk charges and other asset-based charges that may apply to variable funding options from GAA. These charges are only applicable to the variable funding options. We may deduct a charge for premium taxes of up to 4% from amounts in GAA, and, under some contracts, front end sales charges of up to 6%. Under certain contracts, we reserve the right to charge $10 for each transfer of accumulated value between available investment options over 12. Refer to the contract prospectus for further details on contract deductions. OTHER TOPICS - ---------------------------------------------- THE COMPANY We are a stock life insurance company organized under the insurance laws of the State of Connecticut in 1976 and an indirect wholly-owned subsidiary of ING Groep N.V., a global financial institution active in the fields of insurance, banking and asset management. Through a merger, our operations include the business of Aetna Variable Annuity Life Insurance Company (formerly known as Participating Annuity Life Insurance Company, an Arkansas life insurance company organized in 1954). Prior to May 1, 2002, the Company was known as Aetna Life Insurance and Annuity Company. Our principal executive offices are located at: 151 Farmington Avenue Hartford, Connecticut 06156 INCOME PHASE GAA may not be used as a funding option during the income phase. Amounts invested in guaranteed terms must be transferred to one or more of the options available to fund income payments before income payments can begin. An aggregate MVA, as previously described, may be applied to amounts transferred to fund income payments before the end of a guaranteed term. Amounts used to fund lifetime income payments will only receive an aggregate MVA to the extent it is positive; however amounts transferred to fund a nonlifetime income payment option may receive either a positive or negative aggregate MVA. Refer to the contract prospectus for a further discussion of the income phase. CONTRACT LOANS (403(b) and some 457 and 401(a) Plans Only) The contract holder or you, if applicable, may not take a loan from amounts held in GAA, but we include amounts invested in GAA when calculating the account value which determines the amount available for a loan. Amounts held in GAA must be transferred to a funding option available for loans in order to be received as a loan. (Refer to the contract prospectus for more information on contract loans.) We will apply an MVA to amounts transferred from guaranteed terms due to a loan request. GAA PROSPECTUS 14 INVESTMENTS Amounts applied to GAA will be deposited in a nonunitized separate account established under Connecticut law. A nonunitized separate account is a separate account in which neither the contract holder nor you participate in the performance of the assets through unit values or any other interest. Contract holders and participants allocating funds to the nonunitized separate account do not receive a unit value of ownership of assets accounted for in this separate account. The risk of investment gain or loss is borne entirely by the Company. All Company obligations due to allocations to the nonunitized separate account are contractual guarantees of the Company and are accounted for in the separate account. All of the general assets of the Company are available to meet our contractual guarantees. To the extent provided for in the applicable contract, the assets of the nonunitized separate account are not chargeable with liabilities resulting from any other business of the Company. Income, gains and losses of the separate account are credited to or charged against the separate account without regard to other income, gains or losses of the Company. TYPES OF INVESTMENTS. We intend to invest primarily in investment-grade fixed income securities including: - -- Securities issued by the United States Government; - -- Issues of U.S. Government agencies or instrumentalities (these issues may or may not be guaranteed by the United States Government); - -- Debt securities which have an investment grade, at the time of purchase, within the four highest grades assigned by Moody's Investors Services, Inc. (Aaa, Aa, A or Baa), Standard & Poor's Corporation (AAA, AA, A or BBB) or any other nationally recognized rating service; - -- Other debt instruments, including those issued or guaranteed by banks or bank holding companies, and of corporations, which although not rated by Moody's, Standard & Poor's, or other nationally recognized rating services, are deemed by the Company's management to have an investment quality comparable to securities which may be purchased as stated above; or - -- Commercial paper, cash or cash equivalents, and other short-term investments having a maturity of less than one year which are considered by the Company's management to have investment quality comparable to securities which may be purchased as stated above. We may invest in futures and options. We purchase financial futures, related options and options on securities solely for non-speculative hedging purposes. Should securities prices be expected to decline, we may sell a futures contract or purchase a put option on futures or securities to protect the value of securities held in or to be sold for the nonunitized separate account. Similarly, if securities prices are expected to rise, we may purchase a futures contract or a call option against anticipated positive cash flow or may purchase options on securities. WE ARE NOT OBLIGATED TO INVEST THE ASSETS ATTRIBUTABLE TO THE CONTRACTS ACCORDING TO ANY PARTICULAR STRATEGY, EXCEPT AS REQUIRED BY CONNECTICUT AND OTHER STATE INSURANCE LAWS. THE GUARANTEED INTEREST RATES ESTABLISHED BY THE COMPANY MAY NOT NECESSARILY RELATE TO THE PERFORMANCE OF THE NONUNITIZED SEPARATE ACCOUNT. DISTRIBUTION OF CONTRACTS The Company's subsidiary, ING Financial Advisers, LLC serves as the principal underwriter for the variable annuity contracts which include the Guaranteed Accumulation Account as an investment option. ING Financial Advisers, LLC, a GAA PROSPECTUS 15 Delaware limited liability company, is registered as a broker-dealer with the Securities and Exchange Commission. ING Financial Advisers, LLC is also a member of the National Association of Securities Dealers, Inc. and the Securities Investor Protection Corporation. ING Financial Advisers, LLC's principal office is located at 151 Farmington Avenue, Hartford, Connecticut 06156. As principal underwriter, ING Financial Advisers, LLC may enter into arrangements with one or more registered broker-dealers to offer and sell the contracts. We and our affiliate(s) may also sell the contracts directly. All individuals offering and selling the contracts must be registered representatives of a broker-dealer and must be licensed as insurance agents to sell variable annuity contracts. For additional information, see the contract prospectus. TAXATION You should seek advice from your tax adviser as to the application of federal (and where applicable, state and local) tax laws to amounts paid to or distributed under the contracts. Refer to the applicable contract prospectus for a further discussion of tax considerations. TAXATION OF THE COMPANY. We are taxed as a life insurance company under Part I of Subchapter L of the Internal Revenue Code. The Company owns all assets supporting the contract obligations of GAA. Any income earned on such assets is considered income to the Company. We do not intend to make any provision or impose a charge under the contracts with respect to any tax liability of the Company. TAXATION OF PAYMENTS AND DISTRIBUTIONS. For information concerning the tax treatment of payments to and distributions from the contracts, please refer to the applicable contract prospectus. EXPERTS We have included and/or incorporated by reference into the Registration Statement of which this prospectus is a part and/or into this prospectus: The consolidated financial statements of ING Life Insurance and Annuity Company and Subsidiaries (the Company), at December 31, 2002 and December 31, 2001, and for the years then ended, which have been audited by Ernst & Young LLP, independent auditors, and for the period from December 1, 2000 to December 31, 2000 ("Successor Company"), and for the period from January 1, 2000 to November 30, 2000 ("Preacquisition Company"), which have been audited by KPMG LLP, independent auditors, as set forth in their respective reports thereon incorporated herein by reference. The consolidated financial statements of the Company appearing in the Company's Annual Report on Form 10-K for the year ended December 31, 2002, have been audited by Ernst & Young LLP and KPMG LLP (as described in the preceding paragraph), independent auditors, as set forth in their reports thereon and incorporated herein by reference. Such consolidated financial statements are incorporated herein by reference in reliance upon such report given on the authority of such firms as experts in accounting and auditing. LEGAL MATTERS The validity of the securities offered by this prospectus has been passed upon by Counsel to the Company. GAA PROSPECTUS 16 FURTHER INFORMATION This prospectus does not contain all of the information contained in the registration statement of which this prospectus is a part. Portions of the registration statement have been omitted from this prospectus as allowed by the Securities and Exchange Commission (SEC.) You may obtain the omitted information from the offices of the SEC, as described below. We are required by the Securities Exchange Act of 1934 to file periodic reports and other information with the SEC. You may inspect or copy information concerning the Company at the Public Reference Room of the SEC at: SEC Public Reference Room 450 Fifth Street, N.W. Washington, D.C. 20549 You may also obtain copies of these materials at prescribed rates from the Public Reference Room of the above office. You may obtain information on the operation of the Public Reference Room by calling the SEC at either 1-800-SEC-0330 or 1-202-942-8090 or by e-mailing publicinfo@sec.gov. You may also find more information about the Company by visiting the Company's homepage on the internet at www.ingretirementplans.com. A copy of the Company's annual report on Form 10-K for the year ended December 31, 2002 accompanies this prospectus. We refer to Form 10-K for a description of the Company and its business, including financial statements. We intend to send contract holders annual account statements and other such legally required reports. We do not anticipate such reports will include periodic financial statements or information concerning the Company. You can find this prospectus and other information the Company files electronically with the SEC on the SEC's web site at www.sec.gov. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE We have incorporated by reference the Company's latest Annual Report on Form 10-K, as filed with the SEC and in accordance with the Securities and Exchange Act of 1934. The Annual Report must accompany this prospectus. Form 10-K contains additional information about the Company including certified financial statements for the latest fiscal year. We were not required to file any other reports pursuant to Sections 13(a) or 15(d) of the Securities and Exchange Act since the end of the fiscal year covered by that Form 10-K. The registration statement for this prospectus incorporates some documents by reference. We will provide a free copy of any such documents upon the written or oral request of anyone who has received this prospectus. We will not include exhibits to those documents unless they are specifically incorporated by reference into the document. Direct requests to: ING Life Insurance and Annuity Company 151 Farmington Avenue Hartford, CT 06156-1277 1-800-262-3862 INQUIRIES You may contact us directly by writing or calling to us at the address or phone number shown above. GAA PROSPECTUS 17 APPENDIX I EXAMPLES OF MARKET VALUE ADJUSTMENT CALCULATIONS - ------------------------------------------------------------------ The following are examples of market value adjustment ("MVA") calculations using several hypothetical deposit period yields and current yields. These examples do not include the effect of any early withdrawal charge or other fees that may be assessed under the contract upon withdrawal. EXAMPLE I Assumptions: i, the deposit period yield, is 4% j, the current yield, is 6% x, the number of days remaining (computed from Wednesday of the week of withdrawal) in the guaranteed term, is 927. x ---- 365 { (1+i) } MVA = { } ------ { (1+j) }
927 ---- 365 { (1.04) } MVA = { } ----- { (1.06) }
=.9528 In this example, the deposit period yield of 4% is less than the current yield of 6%; therefore, the MVA is less than one. The amount withdrawn from the guaranteed term is multiplied by this MVA. If a withdrawal or transfer request of a specific dollar amount is requested, the amount withdrawn from a guaranteed term will be increased to compensate for the negative MVA amount. For example, a withdrawal request to receive a check for $2,000 would result in a $2,099.08 withdrawal from the guaranteed term. Assumptions: i, the deposit period yield, is 5% j, the current yield, is 6% x, the number of days remaining (computed from Wednesday of the week of withdrawal) in the guaranteed term, is 927. x ---- 365 { (1+i) } MVA = { } ------ { (1+j) }
927 ---- 365 { (1.05) } MVA = { } ----- { (1.06) }
=.9762 In this example, the deposit period yield of 5% is less than the current yield of 6%; therefore, the MVA is less than one. The amount withdrawn from the guaranteed term is multiplied by this MVA. If a withdrawal or transfer request of a specific dollar amount is requested, the amount withdrawn from a guaranteed term will be increased to compensate for the negative MVA amount. For example, a withdrawal request to receive a check for $2,000 would result in a $2,048.76 withdrawal from the guaranteed term. GAA PROSPECTUS 18 EXAMPLE II Assumptions: i, the deposit period yield, is 6% j, the current yield, is 4% x, the number of days remaining (computed from Wednesday of the week of withdrawal) in the guaranteed term, is 927. x ---- 365 { (1+i) } MVA = { } ------ { (1+j) }
927 ---- 365 { (1.06) } MVA = { } ----- { (1.04) }
=1.0496 In this example, the deposit period yield of 6% is greater than the current yield of 4%; therefore, the MVA is greater than one. The amount withdrawn from the guaranteed term is multiplied by this MVA. If a withdrawal or transfer request of a specific dollar amount is requested, the amount withdrawn from a guaranteed term will be decreased to reflect the positive MVA amount. For example, a withdrawal request to receive a check for $2,000 would result in a $1,905.49 withdrawal from the guaranteed term. Assumptions: i, the deposit period yield, is 5% j, the current yield, is 4% x, the number of days remaining (computed from Wednesday of the week of withdrawal) in the guaranteed term, is 927. x ---- 365 { (1+i) } MVA = { } ------ { (1+j) }
927 ---- 365 { (1.05) } MVA = { } ----- { (1.04) }
=1.0246 In this example, the deposit period yield of 5% is greater than the current yield of 4%; therefore, the MVA is greater than one. The amount withdrawn from the guaranteed term is multiplied by this MVA. If a withdrawal or transfer request of a specific dollar amount is requested, the amount withdrawn from a guaranteed term will be decreased to reflect the positive MVA amount. For example, a withdrawal request to receive a check for $2,000 would result in a $1,951.98 withdrawal from the guaranteed term. GAA PROSPECTUS 19 APPENDIX II - ------------------------------------------------------------------ EXAMPLES OF MARKET VALUE ADJUSTMENT AT VARIOUS YIELDS The following hypothetical examples show the market value adjustment based on a given current yield at various times remaining in the guaranteed term. Table A illustrates the application of the market value adjustment based on a deposit period yield of 6%; Table B illustrates the application of the market value adjustment based on a deposit period yield of 5%. The market value adjustment will have either a positive or negative influence on the amount withdrawn from or remaining in a guaranteed term. Also, the amount of the market value adjustment generally decreases as the end of the guaranteed term approaches. TABLE A: DEPOSIT PERIOD YIELD OF 6%
CHANGE IN DEPOSIT CURRENT PERIOD TIME REMAINING TO YIELD YIELD MATURITY OF GUARANTEED TERM - ------- --------- --------------------------------------------------------------- 8 YEARS 6 YEARS 4 YEARS 2 YEARS 1 YEAR 3 MONTHS -------- -------- -------- -------- -------- -------- 9% +3% -20.0% -15.4% -10.6% -5.4% -2.8% -0.7% 8% +2% -13.9 -10.6 -7.2 -3.7 -1.9 -0.5 7% +1% -7.2 -5.5 -3.7 -1.9 -0.9 -0.2 6% 0% 0.0 0.0 0.0 0.0 0.0 0.0 4% -2% 16.5 12.1 7.9 3.9 1.9 0.5 3% -3% 25.8 18.8 12.2 5.9 2.9 0.7 2% -4% 36.0 26.0 16.6 8.0 3.9 1.0 1% -5% 47.2 33.6 21.3 10.1 5.0 1.2
TABLE B: DEPOSIT PERIOD YIELD OF 5%
CHANGE IN DEPOSIT CURRENT PERIOD TIME REMAINING TO YIELD YIELD MATURITY OF GUARANTEED TERM - ------- --------- --------------------------------------------------------------- 8 YEARS 6 YEARS 4 YEARS 2 YEARS 1 YEAR 3 MONTHS -------- -------- -------- -------- -------- -------- 9% +4% -25.9% -20.1% -13.9% -7.2% -3.7% -0.9% 8% +3% -20.2 -15.6 -10.7 -5.5 -2.8 -0.7 7% +2% -14.0 -10.7 -7.3 -3.7 -1.9 -0.5 6% +1% -7.3 -5.5 -3.7 -1.9 -0.9 -0.2 4% -1% 8.0 5.9 3.9 1.9 1.0 0.2 3% -2% 16.6 12.2 8.0 3.9 1.9 0.5 2% -3% 26.1 19.0 12.3 6.0 2.9 0.7 1% -4% 36.4 26.2 16.8 8.1 4.0 1.0
GAA PROSPECTUS 20 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION Not Applicable ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 33-779 of the Connecticut General Statutes ("CGS") provides that a corporation may provide indemnification of or advance expenses to a director, officer, employee or agent only as permitted by Sections 33-770 to 33-778, inclusive, of the CGS. Reference is hereby made to Section 33-771(e) of the CGS regarding indemnification of directors and Section 33-776(d) of CGS regarding indemnification of officers, employees and agents of Connecticut corporations. These statutes provide in general that Connecticut corporations incorporated prior to January 1, 1997 shall, except to the extent that their certificate of incorporation expressly provides otherwise, indemnify their directors, officers, employees and agents against "liability" (defined as the obligation to pay a judgment, settlement, penalty, fine, including an excise tax assessed with respect to an employee benefit plan, or reasonable expenses incurred with respect to a proceeding) when (1) a determination is made pursuant to Section 33-775 that the party seeking indemnification has met the standard of conduct set forth in Section 33-771 or (2) a court has determined that indemnification is appropriate pursuant to Section 33-774. Under Section 33-775, the determination of and the authorization for indemnification are made (a) by the disinterested directors, as defined in Section 33-770(3); (b) by special counsel; (c) by the shareholders; or (d) in the case of indemnification of an officer, agent or employee of the corporation, by the general counsel of the corporation or such other officer(s) as the board of directors may specify. Also, Section 33-772 with Section 33-776 provide that a corporation shall indemnify an individual who was wholly successful on the merits or otherwise against reasonable expenses incurred by him in connection with a proceeding to which he was a party because he is or was a director, officer, employee, or agent of the corporation. Pursuant to Section 33-771(d), in the case of a proceeding by or in the right of the corporation or with respect to conduct for which the director, officer, agent or employee was adjudged liable on the basis that he received a financial benefit to which he was not entitled, indemnification is limited to reasonable expenses incurred in connection with the proceeding against the corporation to which the individual was named a party. The statute does specifically authorize a corporation to procure indemnification insurance on behalf of an individual who was a director, officer, employee or agent of the corporation. Consistent with the statute, ING Groep N.V. maintains an umbrella insurance policy with an international insurer. The policy covers ING Groep N.V. and any company in which ING Groep N.V. has an ownership control of over 50%. This would encompass the principal underwriter as well as the depositor. The policy provides for the following types of coverage: errors and omissions, directors and officers, employment practices, fiduciary and fidelity. Section 20 of the ING Financial Advisers, LLC Limited Liability Company Agreement provides that ING Financial Advisers, LLC will indemnify certain persons against any loss, damage, claim or expenses (including legal fees) incurred by such person if he is made a party or is threatened to be made a party to a suit or proceeding because he was a member, officer, director, employee or agent of ING Financial Advisers, LLC, as long as he acted in good faith on behalf of ING Financial Advisers, LLC and in a manner reasonably believed to be within the scope of his authority. An additional condition requires that no person shall be entitled to indemnity if his loss, damage, claim or expense was incurred by reason of his gross negligence or willful misconduct. This indemnity provision is authorized by and is consistent with Title 8, Section 145 of the General Corporation Law of the State of Delaware. Item 16. EXHIBITS Exhibits: (1) Underwriting Agreement dated November 17, 2000 between Aetna Life Insurance and Annuity Company and Aetna Investment Services, LLC(1) (4)(a) Group Annuity Contract (Form No. G1-MGA-95)(2) (4)(b) Individual Annuity Contract (Form No. I1-MGA-95)(3) (4)(c) Certificate (G1CC-MGA-95) to Group Annuity Contract Form No. G1-MGA-95(4) (4)(d) Endorsement (E1-MGAIRA-95-2) to Group Annuity Contract Form No. G1-MGA-95 and Certificate No. G1CC-MGA-95(4) (4)(e) Endorsement (E1-MGAROTH-97) to Group Annuity Contract Form No. G1-MGA-95 and Certificate No. G1CC-MGA-95(4) (4)(f) Endorsement ENMCHGI(5/02) (Name Change)(5) (5) Opinion as to Legality (10) Material contracts are listed under Item 14(a)10 in the Company's Form 10-K for the fiscal year ended December 31, 2002 (File No. 33-23376), as filed with the commission on March __, 2003. Each of the Exhibits so listed is incorporated by reference as indicated in the Form 10-K (13) ING Life Insurance and Annuity Company Form 10-K for the fiscal year ended December 31, 2002 (23)(a) Consents of Independent Auditors (23)(b) Consent of Legal Counsel (included in Exhibit (5) above) (24)(a) Powers of Attorney (24)(b) Certificate of Resolution Authorizing Signature by Power of Attorney(6) Exhibits other than these listed are omitted because they are not required or are not applicable. 1. Incorporated by reference to Pre-Effective Amendment No. 1 to Registration Statement on Form N-4 (File No. 33-49176), as filed on November 30, 2000. 2. Incorporated by reference to the Registration Statement on Form S-2 (File No. 33-64331), as filed on November 16, 1995. 3. Incorporated by reference to Pre-Effective Amendment No. 2 to Registration Statement on Form S-2 (File No. 33-64331), as filed on January 17, 1996. 4. 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. 5. Incorporated by reference to the Registration Statement on Form S-2 (File No. 333-86276), as filed on April 15, 2002. 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. Item 17. UNDERTAKINGS The undersigned registrant hereby undertakes as follows, pursuant to Item 512 of Regulation S-K: (a) Rule 415 offerings: (1) To file, during any period in which offers or sales of the registered securities are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement; and (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material changes to such information in the registration statement. (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (h) Request for Acceleration of Effective Date: Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. Item 18. FINANCIAL STATEMENTS AND SCHEDULES Not Applicable SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-2 and has duly caused this Registration Statement on Form S-2 to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Hartford, State of Connecticut, on this 11th day of April, 2003. By: ING LIFE INSURANCE AND ANNUITY COMPANY (REGISTRANT) By: --------------------------------------- Keith Gubbay President Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated. Each person whose signature appears below hereby constitutes and appoints Julie E. Rockmore and Michael A Pignatella and each of them individually, such person's true and lawful attorneys and agents with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign for such person and in such person's name and capacity indicated below, any and all amendments to this Registration Statement, hereby ratifying and confirming such person's signatures as it may be signed by said attorneys to any and all amendments (pre-effective and post-effective amendments).
SIGNATURE TITLE DATE /s/ Keith Gubbay Director and President ) - ------------------------- (principal executive officer) ) Keith Gubbay(1) ) ) /s/ P. Randall Lowery Director ) April - ------------------------- ) P. Randall Lowery(1) ) 11, 2003 /s/ Thomas J. McInerney Director ) - ------------------------- ) Thomas J. McInerney(1) ) ) /s/ Mark A. Tullis Director ) - ------------------------- ) Mark A. Tullis(1) ) ) ------ Director ) - ------------------------- ) David Wheat ) ) /s/ Cheryl L. Price Chief Financial Officer and Chief Accounting Officer ) - ------------------------- (principal accounting officer) ) Cheryl L. Price
(1)Constitutes a majority of directors EXHIBIT INDEX EXHIBIT NO. EXHIBIT 16(5) Opinion re: Legality ------- ------- 16(13) ING Life Insurance and Annuity Company Form 10-K for the fiscal year ended December 31, 2002 16(23)(a) Consents of Independent Auditors ------- 16(23)(b) Consent of Legal Counsel * *Included in Exhibit 16(5) above EX-99.B-16(5) 5 a2107535zex-99_b165.txt EXHIBIT 99.B-16(5) EXHIBIT 16 (5) [ING LOGO] AMERICAS US Legal Services MICHAEL A. PIGNATELLA COUNSEL (860) 723-2239 FAX: (860) 723-2216 PignatellaM@ING-AFS.com April 11, 2003 Securities and Exchange Commission 450 Fifth Street, N.W. Washington, DC 20549 Attention: Filing Desk RE: ING Life Insurance and Annuity Company Registration Statement on Form S-2 Prospectus Title: Guaranteed Accumulation Account File Nos.: _______________ Dear Sir or Madam: As Counsel to ING Life Insurance and Annuity Company, a Connecticut life insurance company (the "Company"), I have represented the Company in connection with the Guaranteed Accumulation Account (the "Account") available under certain variable annuity contracts and the S-2 Registration Statement relating to such Account. In connection with this opinion, I have reviewed the Registration Statement on Form S-2 relating to such Account, including the prospectus, and relevant proceedings of the Board of Directors, and other documents I have deemed necessary or appropriate for the rendering of this opinion. For purposes of such examination, I have assumed the genuineness of all signatures on original documents and the conformity to the original of all copies. I am admitted to practice law in Connecticut, and do not purport to be an expert on the laws of any other state. My opinion herein as to any other law is based upon a limited inquiry thereof which I have deemed appropriate under the circumstances. Based upon this review, and assuming the securities represented by the Company are issued in accordance with the provisions of the prospectus, I am of the opinion that the securities, when sold, will have been legally issued, and will constitute a legal and binding obligation of the Company. Hartford Site ING North America Insurance Corporation 151 Farmington Avenue, TS31 Hartford, CT 06156-8975 I further consent to the use of this opinion as an exhibit to the Registration Statement. Very truly yours, /s/ Michael A. Pignatella Michael A. Pignatella Counsel EX-99.B-16(13) 6 a2107535zex-99_b1613.txt EXHIBIT 99.B-16(13) UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 2002 Commission file number: 333-86276, 333-86278, 333-60016 ING Life Insurance and Annuity Company - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Connecticut 71-0294708 - ------------------------------------------------------------------------------------------------------ (State or other jurisdiction of incorporation or (IRS employer organization identification no.) 151 Farmington Avenue, Hartford, Connecticut 06156 - ------------------------------------------------------------------------------------------------------ (Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (866) 723-4646 - -------------------------------------------------------------------------------- Former name, former address and former fiscal year, if changed since last report Securities registered pursuant to Section 12(b) of Act: None Securities registered pursuant to Section 12(g) of Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes __X__ No ______ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this form 10-K or any amendment to this Form 10-K. Yes __X__ No ______ APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 55,000 shares of Common Stock as of March 25, 2003, all of which were directly owned by ING Retirement Holdings, Inc. NOTE: WHEREAS ING LIFE INSURANCE AND ANNUITY COMPANY MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION I(1)(a) AND (b) OF FORM 10-K, THIS FORM IS BEING FILED WITH THE REDUCED DISCLOSURE FORMAT PURSUANT TO GENERAL INSTRUCTION I(2). ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly-owned subsidiary of ING Retirement Holdings, Inc.) Annual Report on Form 10-K For the year ended December 31, 2002 TABLE OF CONTENTS
Form 10-K Item No. Page - --------- ---- PART I Item 1. Business**.............................. 3 Item 2. Properties**............................ 8 Item 3. Legal Proceedings....................... 8 Item 4. Submission of Matters to a Vote of Security Holders*....................... 8 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters......... 9 Item 6. Selected Financial Data*................ 9 Item 7. Management's Narrative Analysis of the Results of Operations and Financial Condition**........................... 9 Item 7A. Quantitative and Qualitative Disclosure About Market Risk....................... 17 Item 8. Financial Statements and Supplementary Data.................................... 18 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................. 63 PART III Item 10. Directors and Executive Officers of the Registrant*............................. 63 Item 11. Executive Compensation*................. 63 Item 12. Security Ownership of Certain Beneficial Owners and Management*.................. 63 Item 13. Certain Relationships and Related Transactions* .......................... 63 Item 14. Controls and Procedures................. 63 PART IV Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K................. 63 Index on Financial Statement Schedules............................... 68 Signatures.............................. 75
* Item omitted pursuant to General Instruction I(2) of Form 10-K ** Item prepared in accordance with General Instruction I(2) of Form 10-K 2 PART 1 ITEM 1. BUSINESS. ORGANIZATION OF BUSINESS ING Life Insurance and Annuity Company ("ILIAC" or the "Company"), formerly known as Aetna Life Insurance and Annuity Company ("ALIAC"), is a Connecticut stock life insurance company, which was originally organized in 1976. ILIAC, together with its wholly-owned subsidiaries, ING Insurance Company of America ("IICA"), ING Financial Advisers, LLC ("IFA"), and, through February 28, 2002, ING Investment Adviser Holding Company, Inc. ("IA Holdco") is herein called the "Company." ILIAC is a wholly-owned subsidiary of ING Retirement Holdings, Inc. ("HOLDCO"), which is a wholly-owned subsidiary of ING Retirement Services, Inc. ("IRSI"). IRSI is ultimately owned by ING Groep N.V. ("ING"), a financial services company based in The Netherlands. On December 13, 2000, ING America Insurance Holdings, Inc. ("ING AIH"), an indirect wholly-owned subsidiary of ING, acquired Aetna Inc., comprised of the Aetna Financial Services business, of which the Company is a part, and Aetna International businesses, for approximately $7,700.0 million. The purchase price was comprised of approximately $5,000.0 million in cash and the assumption of $2,700.0 million of outstanding debt and other net liabilities. In connection with the acquisition, Aetna Inc. was renamed Lion Connecticut Holdings Inc. ("Lion"). At the time of the sale, Lion entered into certain transition services agreements with a former related party, Aetna U.S. Healthcare, which was renamed Aetna Inc. ("former Aetna"). HOLDCO contributed IFA to the Company on June 30, 2000. On February 28, 2002, ILIAC distributed 100% of the stock of IA Holdco to HOLDCO in the form of a $60.1 million dividend distribution. The primary operating subsidiary of IA Holdco is Aeltus Investment Management, Inc. ("Aeltus"). Accordingly, fees earned by Aeltus were not included in Company results subsequent to the dividend date. As a result of this transaction, the Investment Management Services is no longer reflected as an operating segment of the Company. PRODUCTS AND SERVICES Management has determined that under Statements of Financial Accounting Standards Number 131 "Disclosure about Segments of an Enterprise and Related Information," the Company has one operating segment, ING U.S. Financial Services ("USFS"). The Company's USFS segment offers qualified and nonqualified annuity contracts that include a variety of funding and payout options for individuals and employer sponsored retirement plans qualified under Internal Revenue Code Sections 401, 403 and 457, as well as nonqualified deferred compensation plans. Annuity contracts may be deferred or immediate (payout annuities). These products also include programs offered to qualified plans and nonqualified deferred compensation plans that package administrative and record-keeping services along with a variety of investment options, including affiliated and nonaffiliated mutual funds and variable and fixed investment options. In addition, the Company also offers wrapper agreements entered into with retirement plans which contain certain benefit responsive guarantees (i.e. liquidity guarantees of principal and previously accrued interest for benefits paid under the terms of the plan) with respect to portfolios of 3 ITEM 1. BUSINESS. (continued) plan-owned assets not invested with the Company. The Company also offers investment advisory services and pension plan administrative services. INVESTMENT OPTIONS Annuity contracts offered by the Company contain variable and/or fixed investment options. Variable options generally provide for full assumption (and, in limited cases, provide for partial assumption) by the customer of investment risks. Assets supporting variable annuity options are held in separate accounts that invest in affiliated and/or unaffiliated mutual funds. Affiliated mutual funds include funds managed by Aeltus, a subsidiary of HOLDCO, funds managed by ING Investment Management, LLC ("IIM"), an affiliate, and funds managed by ILIAC and subadvised by outside investment advisers. Variable separate account investment income and realized capital gains and losses are not reflected in the Company's consolidated statements of income. Fixed options are either "fully-guaranteed" or "experience-rated". Fully-guaranteed fixed options provide guarantees on investment return, maturity values and, if applicable, benefit payments. Experience-rated fixed options require the customer to assume investment risks (including realized capital gains and losses on the sale of invested assets) and other risks subject to, among other things, principal and interest guarantees. FEES AND MARGINS Insurance and expense charges, investment management fees and other fees earned by the Company vary by product and depend on, among other factors, the funding option selected by the customer under the product. For annuity products where assets are allocated to variable funding options, the Company may charge the separate account asset-based insurance and expense fees. In addition, where the customer selects an affiliated mutual fund as a variable funding option, ILIAC may receive compensation from the fund's adviser, administrator or other affiliated entity for the performance of certain shareholder services, which is reflected in the USFS segment's results. In the case of funds advised by Aeltus, these fees are equal to one-half the investment advisory fee Aeltus receives. Aeltus, whose operating results were reported in the Investment Management Services' segment, through February 28, 2002, records the advisory fees net of the amount it pays to ILIAC. In the case of the variable option mutual funds advised by ILIAC and subadvised by outside managers, ILIAC receives an investment advisory fee from which it pays a subadvisory fee to the outside manager. Additionally, ILIAC may receive administrative service, distribution (12b-1) and service plan fees. If the customer selects an unaffiliated mutual fund as a variable funding option, ILIAC and/or IFA may receive 12b-1 and service plan fees, as well as, compensation from the fund's adviser, administrator or other affiliated entity for the performance of certain shareholder services. In connection with programs offered to qualified plans and nonqualified deferred compensation plans that package administrative and recordkeeping services along with a menu of investment options, ILIAC and/or IFA may receive 12b-1 and service plan fees, as well as, compensation from the affiliated or unaffiliated fund's adviser, administrator or other affiliated entity for the performance of certain shareholder services. For fixed funding options, ILIAC earns a margin, which is based on the difference between income earned on the investments supporting the liability and interest credited to 4 ITEM 1. BUSINESS. (continued) customers. The Company may also receive other fees or charges depending on the nature of the products. ASSETS UNDER MANAGEMENT AND ADMINISTRATION The substantial portion of the Company's fees or other charges and margins are based on assets under management. Assets under management are principally affected by net deposits (i.e., deposits less surrenders), investment performance (i.e., interest credited to customer accounts for fixed options or market performance for variable options) and customer retention. The Company's assets under management, excluding net unrealized capital gains and losses on debt securities that support fixed annuities, were $46,426.7 million, $50,781.4 million and $53,262.4 million at December 31, 2002, 2001, and 2000, respectively. Approximately 94% and 93% of assets under management at December 31, 2002 and 2001, respectively, allowed for contractholder withdrawal. Approximately 85% and 82% of assets under management at December 31, 2002 and 2001, respectively, are subject to market value adjustments and/or deferred surrender charges. To encourage customer retention and recover acquisition expenses, contracts typically impose a surrender charge on policyholder balances withdrawn within a period of time after the contract's inception. The period of time and level of the charge vary by product. In addition, an approach incorporated into certain recent variable annuity contracts with fixed funding options allows contractholders to receive an incremental interest rate if withdrawals from the fixed account are spread over a period of five years. Further, more favorable credited rates may be offered after policies have been in force for a period of time. Existing tax penalties on annuity and certain custodial account distributions prior to age 59 1/2 provide further disincentive to customers for premature surrenders of account balances, but generally do not impede transfers of those balances to products of competitors. Assets under management are summarized in the Results of Operations section of Management's Narrative Analysis of the Results of Operations and Financial Condition. A portion of the Company's fee revenue is also based on assets under administration. Assets under administration are assets for which the Company provides administrative services only. Assets under administration were $13,613.0 million at December 31, 2002, $10,317.4 million at December 31, 2001 and $8,293.7 million at December 31, 2000. PRINCIPAL MARKETS AND METHOD OF DISTRIBUTION The Company's products are offered primarily to individuals, pension plans, small businesses and employer-sponsored groups in the health care, government, education (collectively "not-for-profit" organizations) and corporate markets. The Company's products generally are sold through pension professionals, independent agents and brokers, third party administrators, banks, dedicated career agents and financial planners. COMPETITION Competition arises from an array of financial services companies including other insurance companies, banks, mutual funds and other investment managers. Principal competitive factors are 5 ITEM 1. BUSINESS. (continued) reputation for investment performance, product features, service, cost and the perceived financial strength of the investment manager or sponsor. Competition may affect, among other matters, both business growth and the pricing of the Company's products and services. RESERVES Reserves for limited payment contracts (i.e. annuities with life contingent payout) are computed on the basis of assumed investment yield and mortality, including a margin for adverse deviation, which is assumed to provide for expenses. The assumptions vary by plan, year of issue and policy duration. Reserves for investment contracts (i.e. deferred annuities and immediate annuities without life contingent payouts) are equal to cumulative deposits plus credited interest for fixed options less withdrawals and charges thereon. Of those investment contracts which are "experience-rated", the reserves also reflect net realized capital gains/losses on the sale of invested assets, which the Company reflects through credited rates on an amortized basis, and unrealized capital gains/losses related to FAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Reserves, as described above, are computed amounts that, with additions from premiums and deposits to be received and with interest on such reserves compounded annually at assumed rates, are expected to be sufficient to meet the Company's policy obligations at their maturities or to pay expected death or retirement benefits or other withdrawal requests. OTHER MATTERS REGULATION The Company's operations are subject to comprehensive regulation throughout the United States. The laws of the various jurisdictions establish supervisory agencies, including the state insurance departments, with broad authority to grant licenses to transact business and regulate many aspects of the products and services offered by the Company, as well as solvency and reserve adequacy. Many agencies also regulate investment activities on the basis of quality, diversification, and other quantitative criteria. The Company's operations and accounts are subject to examination at regular intervals by certain of these regulators. Operations conducted by the Company are subject to regulation by various state insurance departments in the states where the Company conducts business, in particular the insurance departments of Connecticut, Florida and New York. Among other matters, these agencies may regulate premium rates, trade practices, agent licensing, policy forms, underwriting and claims practices and the maximum interest rates that can be charged on policy loans. The Securities and Exchange Commission ("SEC"), the National Association of Securities Dealers ("NASD") and, to a lesser extent, the states regulate the sales and investment management activities and operations of the Company. Regulations of the SEC, Department of Labor ("DOL") and Internal Revenue Service also impact certain of the Company's annuity, life insurance and other investment and retirement products. These products involve Separate Accounts and mutual funds registered under the Investment Company Act of 1940. The Company also provides a variety of products and services to employee benefit plans that are covered by the Employee Retirement Income Security Act of 1974 ("ERISA"). 6 ITEM 1. BUSINESS. (continued) OTHER MATTERS (continued) On June 7, 2001 the Economic Growth and Tax Relief Reconciliation Act of 2001 ("EGTRRA") was signed into law. EGTRRA contains important changes to many of the Internal Revenue Code provisions governing qualified defined contribution and defined benefit plans, Section 457 deferred compensation plans, Section 403(b) tax sheltered annuity arrangements and individual retirement accounts and annuities ("IRAs"). These changes include significant increases in the contribution limits under retirement plans and IRAs and new rollover provisions that increase the portability of retirement account assets. Insurance Holding Company Laws A number of states, including Connecticut and Florida, regulate affiliated groups of insurers such as the Company under holding company statutes. These laws, among other things, place certain restrictions on transactions between affiliates such as dividends and other distributions that may be paid to the Company's parent corporation. Insurance Company Guaranty Fund Assessments Under insurance guaranty fund laws existing in all states, insurers doing business in those states can be assessed (up to prescribed limits) for certain obligations of insolvent insurance companies to policyholders and claimants. There were no charges to earnings for guaranty fund obligations during 2002 and no material charges during 2001 and 2000. While the Company has historically recovered more than half of its guaranty fund assessments through statutorily permitted premium tax offsets, significant increases in assessments could jeopardize future efforts to recover such assessments. For information regarding certain other potential regulatory changes relating to the Company's businesses, see Management's Analysis of the Results of Operations--Forward-Looking Information/ Risk Factors. MISCELLANEOUS In addition to its own employees and computer facilities and systems, the Company also uses the services of employees, computer facilities and systems of certain affiliates. Management believes that the Company's computer facilities, systems and related procedures are adequate to meet its business needs. The Company's data processing systems and backup and security policies, practices and procedures are regularly evaluated by the Company's management and internal auditors and are modified as considered necessary. The Company is not dependent upon any single customer and no single customer accounted for more than 10% of consolidated revenue in 2002. In addition, the loss of business from any one, or a few, independent brokers or agents would not have a material adverse effect on the earnings of the Company. ITEM 2. PROPERTIES The Company's home office is located at 151 Farmington Avenue, Hartford, Connecticut, 06156. All Company office space is leased or subleased by the Company or its other affiliates. The Company 7 ITEM 2. PROPERTIES (continued) pays substantially all expenses associated with its leased and subleased office properties. Expenses not paid directly by the Company are paid for by an affiliate and allocated back to the Company. ITEM 3. LEGAL PROCEEDINGS The Company is a party to threatened or pending lawsuits arising, from the normal conduct of business. Due to the climate in insurance and business litigation, suits against the Company sometimes include claims for substantial compensatory, consequential or punitive damages and other types of relief. Moreover, certain claims are asserted as class actions, purporting to represent a group of similarly situated individuals. While it is not possible to forecast the outcome of such lawsuits, in light of existing insurance, reinsurance and established reserves, it is the opinion of management that the disposition of such lawsuits will not have a materially adverse effect on the Company's operations or financial position. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Omitted pursuant to General Instruction I(2)(c) of Form 10-K. 8 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS All of the Company's outstanding shares are owned by HOLDCO which is a wholly-owned subsidiary of IRSI whose ultimate parent is ING. ITEM 6. SELECTED FINANCIAL DATA Omitted pursuant to General Instruction I(2)(a) of Form 10-K. ITEM 7. MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION OVERVIEW The following narrative analysis of the results of operations and financial condition presents a review of the Company for the twelve month periods ended December 31, 2002 versus 2001. CHANGE IN ACCOUNTING PRINCIPLE In June 2001, the Financial Accounting Standards Board ("FASB") issued FAS No. 142, "Goodwill and Other Intangible Assets," effective for fiscal years beginning after December 15, 2001. Under FAS No. 142, goodwill and intangible assets deemed to have indefinite lives are no longer amortized but are subject to annual impairment tests. Other intangible assets are still amortized over their estimated useful lives. The Company adopted the new standard effective January 1, 2002. As required under FAS No. 142, the Company completed the first of the required impairment tests as of January 1, 2002. Step one of the impairment test was a screen for potential impairment, while step two measured the amount of the impairment. All of the Company's operations fall under one reporting unit, USFS, due to the consolidated nature of the Company's operations. Step one of the impairment test required the Company to estimate the fair value of the reporting unit and compare the estimated fair value to its carrying value. The Company determined the estimated fair value utilizing a discounted cash flow approach and applying a discount rate equivalent to the Company's weighted average cost of capital. Fair value was determined to be less than carrying value which required the Company to complete step two of the test. In step two, the Company allocated the fair value of the reporting unit determined in step one to the assets and liabilities of the reporting unit resulting in an implied fair value of goodwill of zero. The comparison of the fair value amount allocated to goodwill and the carrying value of goodwill resulted in an impairment loss upon adoption of $2,412.1 million, which represents the entire carrying amount of goodwill, net of accumulated amortization. This impairment charge is shown as a change in accounting principle on the Consolidated Income Statement. 9 ITEM 7. MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued) RESULTS OF OPERATIONS USFS
(Millions) 2002 2001 2000 (1) - ---------------------------------------------------------------------- Premiums (2) $ 98.7 $ 114.2 $ 154.2 Fee income 408.5 470.8 537.9 Net investment income 959.2 885.5 905.8 Net realized capital (losses) (101.0) (21.1) (35.6) - ---------------------------------------------------------------------- Total revenue 1,365.4 1,449.4 1,562.3 - ---------------------------------------------------------------------- Interest credited and other benefits to policyholders 746.4 729.6 795.6 Operating expenses 358.7 401.8 390.5 Amortization of goodwill -- 61.9 -- Amortization of deferred policy acquisition costs and value of business acquired 181.5 112.0 126.9 - ---------------------------------------------------------------------- Total benefits and expenses 1,286.6 1,305.3 1,313.0 - ---------------------------------------------------------------------- Income from operations before income taxes 78.8 144.1 249.3 Income tax expense 16.0 71.7 75.0 - ---------------------------------------------------------------------- Income before cumulative effect of change 62.8 72.4 174.3 Cumulative effect of change in accounting principle (2412.1) -- -- - ---------------------------------------------------------------------- Net income (loss) $(2,349.3) $ 72.4 $ 174.3 ====================================================================== Net realized capital (losses), net of tax (included above) $ (58.3) $ (13.8) $ (23.1) ====================================================================== Deposits (not included in premiums above) Annuities--fixed options $ 1,195.2 $ 1,440.5 $ 1,479.1 Annuities--variable options 4,335.2 4,155.8 4,678.7 - ---------------------------------------------------------------------- Total--deposits $ 5,530.4 $ 5,596.3 $ 6,157.8 ====================================================================== Assets under management Annuities--fixed options (3) $14,984.5 $13,291.9 $12,450.3 Annuities--variable options (4) 23,148.0 28,495.8 33,084.0 - ---------------------------------------------------------------------- Subtotal--annuities 38,132.5 41,787.7 45,534.3 Plan Sponsored and Other 8,294.2 8,993.7 7,728.1 - ---------------------------------------------------------------------- Total--assets under management 46,426.7 50,781.4 53,262.4 Assets under administration (5) 13,613.0 10,317.4 8,293.7 - ---------------------------------------------------------------------- Total assets under management and administration $60,039.7 $61,098.8 $61,556.1 ======================================================================
(1) Year ended 2000 reflects an aggregation of the pre-acquisition period of the eleven months ended November 30, 2000 and the post acquisition period of one month ended December 31, 2000. (2) Includes $64.8 million in 2002, $75.0 million in 2001 and $107.8 million in 2000 for annuity premiums on contracts converting from the accumulation phase to payout options with life contingencies. (3) Excludes net unrealized capital gains of $725.9, $291.0 and $126.9 at December 31, 2002, 2001 and 2000, respectively. (4) Includes $9,304.1 million, $11,272.2 million and $13,492.1 million at December 31, 2002, 2001 and 2000, respectively, of assets invested through the Company's products in unaffiliated mutual funds. (5) Represents assets for which the Company provides administrative services only. Premiums for the year ended December 31, 2002 decreased by $15.5 million compared to the same period in 2001, reflecting a decrease in immediate annuities with life contingencies. Fee income for the year ended December 31, 2002 decreased by $62.3 million compared to the same period in 2001, primarily due to the decrease in average variable assets under management by the 10 ITEM 7. MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued) RESULTS OF OPERATIONS (continued) Company. Substantially all of the fee income on variable assets is calculated based on assets under management and administration, which decreased due to the continued decline in the equity markets, and customer transfers to fixed options. Net investment income for the year ended December 31, 2002 increased by $73.7 million compared to the same period in 2001. This increase in net investment income is primarily due to an increase in assets under management with fixed options partially offset by lower investments yields. Net realized capital losses for the year ended in December 31, 2002 increased by $79.9 million compared to the same period in 2001. The increase in capital losses are primarily due to impairments of certain fixed maturities (referred to in Note 2 of the Notes to Financial Statements). Interest credited and other benefits to the policyholders for the year ended December 31, 2002 increased by $16.8 million compared to the same period in 2001, primarily due to an increase in assets under management with fixed options partially offset by a decrease in credited rates to policyholders. Operating expenses for the year ended December 31, 2002 decreased by $43.1 million compared to the same period in 2001. The Company incurred a $29.2 million restructuring charge in 2001, there were no restructuring charges in 2002. Operating expenses, excluding the restructuring charge, decreased $13.9 million primarily due to lower employee related costs due to the Company's 2002 restructuring efforts, the reduced employee related costs were partially offset by higher expense allocations from the Company's parent and affiliates. Goodwill amortization for the year ended December 31, 2002 decreased by $61.9 million compared to the same period in 2001. This reduction is based on the change in accounting principle FAS No. 142 that eliminates amortization of goodwill. Amortization of deferred policy acquisition costs and value of business acquired for the year ended December 31, 2002, increased by $69.5 million compared to the same period in 2001. Amortization of long-duration products is reflected in proportion to actual and estimated future gross profits. Estimated future gross profits are computed based on underlying assumptions related to the underlying contracts, including but not limited to interest margins, mortality lapse, premium persistency, expenses, and asset growth. The increase in the amortization of deferred policy acquisition costs and value of insurance acquired reflects the impact of these variables on the overall book of business. The cumulative effect of the change in accounting principle for the year ended December 31, 2002 of $2,412.1 million is an impairment charge related to the implementation of FAS No. 142, which addresses accounting for goodwill and other intangible assets. Earnings, excluding goodwill amortization, change in accounting principle and net realized capital gains and losses (net of tax), decreased by $27.0 million for the year ended December 31, 2002, as compared to the year ended December 31, 2001. Lower earnings are primarily the result of increases 11 ITEM 7. MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued) RESULTS OF OPERATIONS (continued) to the amortization of deferred policy acquisition costs and value of business acquired, and lower fee income partially offset by higher investment income and lower expenses. NON-OPERATING SEGMENT The non-operating segment of the Company relates to Investment Management Services, which is comprised of IA Holdco and its subsidiaries, which were distributed to HOLDCO on February 28, 2002. Investment Management Services' net income for the year ended December 31, 2002, was $4.7 million. The 2002 results reflect operating results through February 28, 2002 only. FINANCIAL CONDITION INVESTMENTS FIXED MATURITIES At December 31, 2002 and 2001, respectively, the Company's carrying value of available for sale fixed maturities including fixed maturities pledged to creditors (hereinafter referred to as "total fixed maturities") represented 94% and 96% of the total general account invested assets, respectively. For the same periods, $11,808.4 million, or 74% of total fixed maturities including securities pledged to creditors, and $11,404.0 million, or 81% of total fixed maturities, respectively, supported experience-rated products. Total fixed maturities including securities pledged to creditors reflected net unrealized capital gains of $725.9 million and $291.0 million at December 31, 2002 and 2001, respectively. It is management's objective that the portfolio of fixed maturities is of high quality and be well diversified by market sector. The fixed maturities in the Company's portfolio are generally rated by external rating agencies and, if not externally rated, are rated by the Company on a basis believed to be similar to that used by the rating agencies. The average quality rating of the Company's fixed maturities portfolio was AA- at December 31, 2002 and 2001. Fixed maturities rated BBB and below may have speculative characteristics and changes in economic conditions or other circumstances are more likely to lead to a weakened capacity of the issuer to make principal and interest payments than is the case with higher rated fixed maturities. 12 ITEM 7. MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued) INVESTMENTS (continued) The percentage of total fixed maturities by quality rating category is as follows:
December 31, 2002 December 31, 2001 - ------------------------------------------------------------------------------------ AAA 51.9% 54.0% AA 5.0 6.6 A 20.2 18.0 BBB 19.2 16.1 BB 2.5 2.8 B and Below 1.2 2.5 - ------------------------------------------------------------------------------------ Total 100.0% 100.0% ====================================================================================
The percentage of total fixed maturities by market sector is as follows:
December 31, 2002 December 31, 2001 - ------------------------------------------------------------------------------------ U.S. Corporate 47.4% 41.5% Residential Mortgage-backed 34.6 32.7 Commercial/Multifamily Mortgage-backed 8.6 9.5 Foreign (1) 3.1 8.5 U.S. Treasuries/Agencies 0.5 2.0 Asset-backed 5.8 5.8 - ------------------------------------------------------------------------------------ Total 100.0% 100.0% ====================================================================================
(1) Primarily U.S. dollar denominated The Company analyzes the general account investments to determine whether there has been an other than temporary decline in fair value below the amortized cost basis in accordance with FAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Management considers the length of time and the extent to which the fair value has been less than amortized cost; the financial condition and near-term prospects of the issuer; future economic conditions and market forecasts; and the Company's intent and ability to retain the investment in the issuer for a period of time sufficient to allow for recovery in fair value. If it is probable that all amounts due according to the contractual terms of a debt security will not be collected, an other than temporary impairment is considered to have occurred. In addition, the Company invests in structured securities that meet the criteria of Emerging Issues Task Force ("EITF") Issue No. 99-20 "Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets." Under EITF Issue No. 99-20, a determination of the required impairment is based on credit risk and the possibility of significant prepayment risk that restricts the Company's ability to recover the investment. An impairment is recognized if the fair value of the security is less than book value and there has been an adverse change in cash flow since the last remeasurement date. When a decline in fair value is determined to be other than temporary, the individual security is written down to fair value and the loss is accounted for as a realized loss. 13 ITEM 7. MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued) LIQUIDITY AND CAPITAL RESOURCES Liquidity is the ability of the Company to generate sufficient cash flows to meet the cash requirements of operating, investing, and financing activities. The Company's principal sources of liquidity are deposits on contracts, product charges, investment income, maturing investments, and capital contributions. Primary uses of liquidity are payments of commissions and operating expenses, interest and premium credits, investment purchases, as well as withdrawals and surrenders. The Company's liquidity position is managed by maintaining adequate levels of liquid assets, such as cash or cash equivalents and short-term investments. Additional sources of liquidity include a borrowing facility to meet short-term cash requirements. The Company maintains a reciprocal loan agreement with ING AIH, a Delaware corporation and affiliate. Under this agreement, which became effective in June 2001 and expires in April, 2011, the Company and ING AIH can borrow up to 3% of the Company's statutory admitted assets as of the preceding December 31 from one another. Management believes that its sources of liquidity are adequate to meet the Company's short-term cash obligations. The National Association of Insurance Commissioners' ("NAIC") risk-based capital requirements require insurance companies to calculate and report information under a risk-based capital formula. These requirements are intended to allow insurance regulators to monitor the capitalization of insurance companies based upon the type and mixture of risks inherent in a Company's operations. The formula includes components for asset risk, liability risk, interest rate exposure, and other factors. The Company has complied with the NAIC's risk-based capital reporting requirements. Amounts reported indicate that the Company has total adjusted capital above all required capital levels. In 2002, the Company received capital contributions in the form of investments in affiliated mutual funds of $164.3 million from HOLDCO. The Company did not receive capital contributions in 2001. In 2000, the Company received capital contributions of $73.5 million in cash and $56.0 million in assets from HOLDCO. In conjunction with the sale of Aetna, Inc. to ING AIH, the Company was restricted from paying any dividends to its parent for a two year period from the date of sale without prior approval by the Insurance Commissioner of the State of Connecticut. This restriction expired on December 13, 2002. The Company did not pay dividends to its parent in 2002 or 2001. The Company paid $10.1 million in cash dividends to HOLDCO in 2000. On February 28, 2002, ILIAC distributed 100% of the stock of IA Holdco to HOLDCO in the form of a $60.1 million distribution. During 2002, liabilities totaling $15.1 million were allocated to the Company related to a Supplemental Excess Retirement Plan ("SERP") that covers certain employees of ING Life Insurance Company of America and Aeltus, affiliates of the Company. 14 ITEM 7. MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued) CRITICAL ACCOUNTING POLICIES GENERAL The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires the use of estimates and assumptions in certain circumstances. These estimates and assumptions are evaluated on an on-going basis based on historical developments, market conditions, industry trends and other information that is reasonable under the circumstances. There can be no assurance that actual results will conform to estimates and assumptions, and that reported results of operations will not be affected in a materially adverse manner by the need to make future accounting adjustments to reflect changes in these estimates and assumptions from time to time. The Company has identified the following estimates as critical in that they involve a higher degree of judgment and are subject to a significant degree of variability; goodwill impairment testing, investment impairment testing and amortization of deferred acquisition costs and value of business acquired. In developing these estimates management makes subjective and complex judgments that are inherently uncertain and subject to material change as facts and circumstances develop. Although variability is inherent in these estimates, management believes the amounts provided are appropriate based upon the facts available upon compilation of the consolidated financial statements. GOODWILL IMPAIRMENT TESTING The Company tested goodwill as of January 1, 2002, for impairment using fair value calculations based on the present value of estimated future cash flows from business currently in force and business that we estimate we will add in the future. These calculations require management to make estimates on the amount of future revenues and the appropriate discount rate. The calculated fair value of goodwill and the resulting impairment loss recorded is based on these estimates, which require a significant amount of management judgment. Refer to Note 1 of the Consolidated Financial Statements for a discussion of the results of the Company's goodwill testing procedures and to Management's Narrative Analysis of the Results of Operations for the impact these procedures had on the Company's income. INVESTMENT IMPAIRMENT TESTING The Company reviews the general account investments for impairments by analyzing the amount and length of time amortized cost has exceeded fair value, and by making certain estimates and assumptions regarding the issuing companies' business prospects, future economic conditions and market forecasts. Based on the facts and circumstances of each case, management uses judgment in deciding whether any calculated impairments are temporary or other than temporary. For those impairments judged to be other than temporary, the Company reduces the carrying value of those investments to the current fair value and record impairment losses for the difference. 15 ITEM 7. MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued) CRITICAL ACCOUNTING POLICIES (continued) AMORTIZATION OF DEFERRED ACQUISITION COSTS AND VALUE OF BUSINESS ACQUIRED Deferred policy acquisition costs ("DAC") and value of business acquired ("VOBA") are amortized with interest over the life of the contracts (usually 25 years) in relation to the present value of estimated gross profits from projected interest margins, asset-based fees, policy administration and surrender charges less policy maintenance fees. Changes in assumptions can have a significant impact on the calculation of DAC/VOBA and its related amortization patterns. Due to the relative size of the DAC/VOBA balance and the sensitivity of the calculation to minor changes in the underlying assumptions and the related volatility that could result in the reported DAC/VOBA balance, the Company performs a quarterly analysis of DAC/ VOBA. At each balance sheet date, actual historical gross profits are reflected and expected future gross profits and related assumptions are evaluated for continued reasonableness. Any adjustment in estimated profit requires that the amortization rate be revised retroactively to the date of policy or contract issuance ("unlocking"), which could be significant. The cumulative difference related to prior periods is recognized as a component of the current period's amortization, along with amortization associated with the actual gross profits of the period. In general, increases in estimated returns result in increased expected future profitability and may lower the rate of amortization, while increases in lapse/surrender and mortality assumptions or decreases in returns reduce the expected future profitability of the underlying business and may increase the rate of amortization. One of the most significant assumptions involved in the estimation of future gross profits for variable universal life and deferred annuity products is the assumed return associated with future separate account performance. To reflect the near-term and long-term volatility in the equity markets this assumption involves a combination of near-term expectations and a long-term assumption about market performance. The overall return generated by the separate account is dependent on several factors, including the relative mix of the underlying sub-accounts among bond funds and equity funds as well as equity sector weightings. As part of the regular analysis of DAC/VOBA, at the end of third quarter 2002, the Company unlocked its assumptions by resetting its near-term and long-term assumptions for the separate account returns to 9% (gross before fund management fees and mortality and expense and other policy charges), reflecting a blended return of equity and other sub-accounts. This unlocking adjustment was primarily driven by the sustained downturn in the equity markets and revised expectations for future returns. For the year ended December 31, 2002, the Company recorded an acceleration of DAC/VOBA amortization totaling $45.6 million before tax, or $29.7 million, net of $15.9 million of federal income tax benefit. FORWARD-LOOKING INFORMATION/RISK FACTORS In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, the Company cautions readers regarding certain forward-looking statements contained in this 16 ITEM 7. MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued) FORWARD-LOOKING INFORMATION/RISK FACTORS (continued) report and in any other statements made by, or on behalf of, the Company, whether or not in future filings with the SEC. Forward-looking statements are statements not based on historical information and which relate to future operations, strategies, financial results, or other developments. Statements using verbs such as "expect," "anticipate," "believe" or words of similar import generally involve forward-looking statements. Without limiting the foregoing, forward-looking statements include statements which represent the Company's beliefs concerning future levels of sales and redemptions of the Company's products, investment spreads and yields, or the earnings and profitability of the Company's activities. Forward-looking statements are necessarily based on estimates and assumptions that are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond the Company's control and many of which are subject to change. These uncertainties and contingencies could cause actual results to differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Company. Whether or not actual results differ materially from forward-looking statements may depend on numerous foreseeable and unforeseeable developments. Some may be national in scope, such as general economic conditions, changes in tax law and changes in interest rates. Some may be related to the insurance industry generally, such as pricing competition, regulatory developments and industry consolidation. Others may relate to the Company specifically, such as credit, volatility and other risks associated with the Company's investment portfolio. Investors are also directed to consider other risks and uncertainties discussed in documents filed by the Company with the SEC. The Company disclaims any obligation to update forward-looking information. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Asset/liability management is integrated into many aspects of the Company's operations, including investment decisions, product development, and determination of crediting rates. As part of the risk management process, different economic scenarios are modeled, including cash flow testing required for insurance regulatory purposes, to determine that existing assets are adequate to meet projected liability cash flows. Key variables in the modeling process include interest rates, anticipated contractholder behavior and variable separate account performance. Contractholders bear the majority of the investment risk related to variable insurance products. The fixed account liabilities are supported by a portfolio principally composed of fixed rate investments that can generate predictable, steady rates of return. The portfolio management strategy for the fixed account considers the assets available for sale. This enables the Company to respond to changes in market interest rates, changes in prepayment risk, changes in relative values of asset sectors and individual securities and loans, changes in credit quality outlook, and other relevant factors. The objective of portfolio management is to maximize returns, taking in to account interest rate and credit risk, as well as other risks. The Company's asset/liability management discipline includes strategies to minimize exposure to loss as interest rates and economic and market conditions change. On the basis of these analyses, management believes there is currently no material solvency risk to the Company. 17 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page ---- Reports of Independent Auditors................... 19 Consolidated Financial Statements: Consolidated Income Statements for the years ended December 31, 2002 and 2001, one month ended December 31, 2000 and eleven months ended November 30, 2000.................... 21 Consolidated Balance Sheets as of December 31, 2002 and 2001................. 22 Consolidated Statements of Changes in Shareholder's Equity for the years ended December 31, 2002 and 2001, one month ended December 31, 2000 and eleven months ended November 30, 2000.......................... 23 Consolidated Statements of Cash Flows for the years ended December 31, 2002 and 2001, one month ended December 31, 2000 and eleven months ended November 30, 2000............. 24 Notes to Consolidated Financial Statements.... 25
18 REPORT OF INDEPENDENT AUDITORS The Board of Directors ING Life Insurance and Annuity Company We have audited the accompanying consolidated balance sheets of ING Life Insurance and Annuity Company as of December 31, 2002 and 2001, and the related income statements, statements of changes in shareholder's equity, and statements of cash flows for each of the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of ING Life Insurance and Annuity Company at December 31, 2002 and 2001, and the results of its operations and its cash flows for each of the years then ended, in conformity with accounting principles generally accepted in the United States. As discussed in Note 1 to the financial statements, the Company changed the accounting principle for goodwill and other intangible assets effective January 1, 2002. /s/ Ernst & Young LLP Atlanta, Georgia March 25, 2003 19 INDEPENDENT AUDITORS' REPORT The Shareholders and Board of Directors ING Life Insurance and Annuity Company We have audited the accompanying consolidated statements of income, changes in shareholder's equity and cash flows of ING Life Insurance and Annuity Company and Subsidiaries, formerly known as Aetna Life Insurance and Annuity Company and Subsidiaries, for the period from December 1, 2000 to December 31, 2000 ("Successor Company"), and for the period from January 1, 2000 to November 30, 2000 ("Preacquisition Company"). These consolidated financial statements are the responsibility of the Companies' management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the Successor Company's consolidated financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of ING Life Insurance and Annuity Company and Subsidiaries for the period from December 1, 2000 to December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. Further, in our opinion, the Preacquisition Company's consolidated financial statements referred to above present fairly, in all material respects, the results of their operations and their cash flows for the period from January 1, 2000 to November 30, 2000, in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 1 to the consolidated financial statements, effective November 30, 2000, ING America Insurance Holdings Inc. acquired all of the outstanding stock of Aetna Inc., Aetna Life Insurance and Annuity Company's indirect parent and sole shareholder in a business combination accounted for as a purchase. As a result of the acquisition, the consolidated financial information for the periods after the acquisition is presented on a different cost basis than that for the periods before the acquisition and, therefore, is not comparable. /s/ KPMG LLP Hartford, Connecticut March 27, 2001 20 ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly-owned subsidiary of ING Retirement Holdings, Inc.) CONSOLIDATED INCOME STATEMENTS (Millions)
Preacquisition One month Eleven months Year ended Year ended ended ended December 31, December 31, December 31, November 30, 2002 2001 2000 2000 ------------- ------------- ------------- -------------- Revenues: Premiums $ 98.7 $ 114.2 $ 16.5 $ 137.7 Fee income 418.2 553.4 49.8 573.3 Net investment income 959.5 888.4 78.6 833.8 Net realized capital gains (losses) (101.0) (21.0) 1.8 (37.2) --------- -------- ------ -------- Total revenue 1,375.4 1,535.0 146.7 1,507.6 --------- -------- ------ -------- Benefits, losses and expenses: Benefits: Interest credited and other benefits to policyholders 746.4 729.6 68.9 726.7 Underwriting, acquisition, and insurance expenses: Operating expenses 361.4 444.2 49.1 414.6 Amortization: Deferred policy acquisition costs and value of business acquired 181.5 112.0 10.2 116.7 Goodwill -- 61.9 -- -- --------- -------- ------ -------- Total benefits, losses and expenses 1,289.3 1,347.7 128.2 1,258.0 --------- -------- ------ -------- Income before income taxes, discontinued operations and cumulative effect of change in accounting principle 86.1 187.3 18.5 249.6 Income tax expense 18.6 87.4 5.9 78.1 --------- -------- ------ -------- Income before discontinued operations and cumulative effect of change in accounting principle 67.5 99.9 12.6 171.5 Discontinued operations, net of tax -- -- -- 5.7 Cumulative effect of change in accounting principle (2,412.1) -- -- -- --------- -------- ------ -------- Net income (loss) $(2,344.6) $ 99.9 $ 12.6 $ 177.2 ========= ======== ====== ========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 21 ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly-owned subsidiary of ING Retirement Holdings, Inc.) CONSOLIDATED BALANCE SHEETS (Millions, except share data)
As of December 31, -------------------- 2002 2001 --------- --------- ASSETS Investments: Fixed maturities, available for sale, at fair value (amortized cost of $15,041.2 at 2002 and $13,249.2 at 2001) $15,767.0 $13,539.9 Equity securities at fair value: Nonredeemable preferred stock (cost of $34.2 at 2002 and $27.0 at 2001) 34.2 24.6 Investment in affiliated mutual funds (cost of $203.9 at 2002 and $22.9 at 2001) 201.0 25.0 Common stock (cost of $0.2 at 2002 and $2.3 at 2001) 0.2 0.7 Mortgage loans on real estate 576.6 241.3 Policy loans 296.3 329.0 Short-term investments 6.2 31.7 Other investments 52.2 18.2 Securities pledged to creditors (amortized cost of $154.9 at 2002 and $466.9 at 2001) 155.0 467.2 --------- --------- Total investments 17,088.7 14,677.6 Cash and cash equivalents 65.4 82.0 Short term investments under securities loan agreement 164.3 488.8 Accrued investment income 170.9 160.9 Reciprocal loan with affiliate -- 191.1 Reinsurance recoverable 2,986.5 2,990.7 Deferred policy acquisition costs 229.8 121.3 Value of business acquired 1,438.4 1,601.8 Goodwill (net of accumulated amortization of $61.9 at 2001) -- 2,412.1 Property, plant and equipment (net of accumulated depreciation of $56.0 at 2002 and $33.9 at 2001) 49.8 66.1 Other assets 145.8 149.7 Assets held in separate accounts 28,071.1 32,663.1 --------- --------- Total assets $50,410.7 $55,605.2 ========= ========= LIABILITIES AND SHAREHOLDER'S EQUITY Policy liabilities and accruals: Future policy benefits and claims' reserves $ 3,305.2 $ 3,996.8 Unpaid claims and claim expenses 30.0 28.8 Other policyholder's funds 14,756.0 12,135.8 --------- --------- Total policy liabilities and accruals 18,091.2 16,161.4 Payables under securities loan agreement 164.3 488.8 Current income taxes 84.5 59.2 Deferred income taxes 163.1 153.7 Other liabilities 1,573.7 1,624.7 Liabilities related to separate accounts 28,071.1 32,663.1 --------- --------- Total liabilities 48,147.9 51,150.9 --------- --------- Shareholder's equity: Common stock (100,000 shares authorized; 55,000 shares issued and outstanding, $50.00 per share par value) 2.8 2.8 Additional paid-in capital 4,416.5 4,292.4 Accumulated other comprehensive income 108.3 46.6 Retained earnings (deficit) (2,264.8) 112.5 --------- --------- Total shareholder's equity 2,262.8 4,454.3 --------- --------- Total liabilities and shareholder's equity $50,410.7 $55,605.2 ========= =========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 22 ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly-owned subsidiary of ING Retirement Holdings, Inc.) CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY (Millions)
Accumulated Other Additional Comprehensive Retained Total Common Paid-in- Income Earnings Shareholder's Stock Capital (Loss) (Deficit) Equity ------ ---------- ------------- --------- ------------- Balance at December 31, 1999 $2.8 $ 431.9 $(44.8) $ 995.8 $ 1,385.7 Comprehensive income: Net income -- -- -- 177.2 177.2 Other comprehensive income net of tax: Unrealized gain on securities ($79.4 pretax) -- -- 51.6 -- 51.6 --------- Comprehensive income 228.8 Adjustment for purchase accounting -- 3,751.7 -- (1,173.0) 2,578.7 Capital contributions -- 129.5 -- -- 129.5 Common stock dividends -- (10.1) -- -- (10.1) Other changes -- 0.8 -- -- 0.8 ---- -------- ------ --------- --------- Balance at November 30, 2000 2.8 4,303.8 6.8 -- 4,313.4 Comprehensive income: Net income -- -- -- 12.6 12.6 Other comprehensive income net of tax: Unrealized gain on securities ($28.7 pretax) -- -- 18.6 -- 18.6 --------- Comprehensive income 31.2 ---- -------- ------ --------- --------- Balance at December 31, 2000 2.8 4,303.8 25.4 12.6 4,344.6 Comprehensive income: Net income -- -- -- 99.9 99.9 Other comprehensive income net of tax: Unrealized gain on securities ($32.5 pretax) -- -- 21.2 -- 21.2 --------- Comprehensive income 121.1 Return of capital -- (11.3) -- -- (11.3) Other changes -- (0.1) -- -- (0.1) ---- -------- ------ --------- --------- Balance at December 31, 2001 2.8 4,292.4 46.6 112.5 4,454.3 Comprehensive income: Net (loss) -- -- -- (2,344.6) (2,344.6) Other comprehensive income net of tax: Unrealized gain on securities ($94.9 pretax) -- -- 61.7 -- 61.7 --------- Comprehensive (loss) (2,282.9) Distribution of IA Holdco -- (27.4) -- (32.7) (60.1) Capital contributions -- 164.3 -- -- 164.3 SERP -- transfer -- (15.1) -- -- (15.1) Other changes -- 2.3 -- -- 2.3 ---- -------- ------ --------- --------- Balance at December 31, 2002 $2.8 $4,416.5 $108.3 $(2,264.8) $ 2,262.8 ---- -------- ------ --------- ---------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 23 ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly-owned subsidiary of ING Retirement Holdings, Inc.) CONSOLIDATED STATEMENTS OF CASH FLOWS (Millions)
Preacquisition -------------- One month Eleven months Year ended Year ended ended ended December 31, December 31, December 31, November 30, 2002 2001 2000 2000 ----------------------- --------------- --------------- -------------- Cash Flows from Operating Activities: Net income (loss) $ (2,344.6) $ 99.9 $ 12.6 $ 177.2 Adjustments to reconcile net income to net cash provided by operating activities: Net amortization or (accretion) of discount on investments 115.5 (1.2) (2.7) (32.6) Amortization of deferred gain on sale -- -- -- (5.7) Net realized capital (gains) losses 101.0 21.0 (1.8) 37.2 (Increase) decrease in accrued investment income (10.0) (13.7) 6.6 (3.1) (Increase) decrease in premiums due and other receivables 172.7 (95.6) 31.1 (23.7) (Increase) decrease in policy loans -- 10.3 0.1 (25.4) (Increase) decrease in deferred policy acquisition costs (108.5) (121.3) (12.2) (136.6) (Increase) decrease in value of business acquired 139.4 13.9 -- -- Amortization of goodwill -- 61.9 -- -- Impairment of goodwill 2,412.1 -- -- -- Increase (decrease) in universal life account balances -- 17.6 (3.8) 23.8 Change in other insurance reserve liabilities 953.7 (136.3) (5.3) 85.6 Change in other assets and liabilities 72.8 (68.0) 103.9 (75.2) Provision for deferred income taxes 23.6 89.5 (14.3) 23.1 ---------- ---------- ------- ---------- Net cash provided by (used for) operating activities 1,527.7 (122.0) 114.2 44.6 ---------- ---------- ------- ---------- Cash Flows from Investing Activities: Proceeds from the sale of: Fixed maturities available for sale 24,980.4 14,216.7 233.0 10,083.2 Equity securities 57.2 4.4 1.5 118.4 Mortgages 2.0 5.2 0.1 2.1 Investment maturities and collections of: Fixed maturities available for sale 1,334.9 1,121.8 53.7 573.1 Short-term investments 11,796.7 7,087.3 0.4 59.9 Acquisition of investments: Fixed maturities available for sale (28,105.5) (16,489.8) (230.7) (10,505.5) Equity securities (81.8) (50.0) (27.8) (17.6) Short-term investments (11,771.3) (6,991.1) (10.0) (113.1) Mortgages (343.7) (242.0) -- -- (Increase) decrease in policy loans 32.7 -- -- -- (Increase) decrease in property and equipment (5.8) 7.4 1.9 5.4 Other, net (47.8) (4.7) 0.3 (4.0) ---------- ---------- ------- ---------- Net cash provided by (used for) investing activities (2,152.0) (1,334.8) 22.4 201.9 ---------- ---------- ------- ---------- Cash Flows from Financing Activities: Deposits and interest credited for investment contracts 1,332.5 1,941.5 164.2 1,529.7 Maturities and withdrawals from insurance contracts (741.4) (1,082.7) (156.3) (1,832.6) Capital contribution from HOLDCO -- -- -- 73.5 Return of capital -- (11.3) -- -- Dividends paid to shareholder -- -- -- (10.1) Other, net 16.6 (105.0) (73.6) 22.0 ---------- ---------- ------- ---------- Net cash provided by (used for) financing activities 607.7 742.5 (65.7) (217.5) ---------- ---------- ------- ---------- Net increase (decrease) in cash and cash equivalents (16.6) (714.3) 70.9 29.0 Effect of exchange rate changes on cash and cash equivalents -- -- -- 2.0 Cash and cash equivalents, beginning of period 82.0 796.3 725.4 694.4 ---------- ---------- ------- ---------- Cash and cash equivalents, end of period $ 65.4 $ 82.0 $ 796.3 $ 725.4 ========== ========== ======= ========== Supplemental cash flow information: Income taxes (received) paid, net $ 6.7 $ (12.3) $ 20.3 $ 39.9 ========== ========== ======= ==========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 24 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include ING Life Insurance and Annuity Company ("ILAIC" or the "Company") and its wholly-owned subsidiaries, ING Insurance Company of America ("IICA"), ING Financial Advisors, LLC ("IFA"), and through February 28, 2002, Aetna Investment Adviser Holding Company, Inc. ("IA Holdco"). The Company is a wholly-owned subsidiary of ING Retirement Holdings, Inc. ("HOLDCO"), which is a wholly-owned subsidiary of ING Retirement Services, Inc. ("IRSI"). IRSI is ultimately owned by ING Groep N.V. ("ING"), a financial services company based in the Netherlands. HOLDCO contributed IFA to the Company on June 30, 2000 and contributed IA Holdco to the Company on July 1, 1999. On February 28, 2002, ILIAC distributed 100% of the stock of IA Holdco to HOLDCO in the form of a $60.1 million dividend distribution. The primary operating subsidiary of IA Holdco is Aeltus Investment Management, Inc. ("Aeltus"). Accordingly, fees earned by Aeltus were not included in Company results subsequent to the dividend date. As a result of this transaction, the Investment Management Services is no longer reflected as an operating segment of the Company. On December 13, 2000, ING America Insurance Holdings, Inc. ("ING AIH"), an indirect wholly-owned subsidiary of ING, acquired Aetna Inc., comprised of the Aetna Financial Services business, of which the Company is a part, and Aetna International businesses, for approximately $7,700.0 million. The purchase price was comprised of approximately $5,000.0 million in cash and the assumption of $2,700.0 million of outstanding debt and other net liabilities. In connection with the acquisition, Aetna Inc. was renamed Lion Connecticut Holdings Inc. ("Lion"). At the time of the sale, Lion entered into certain transition services agreements with a former related party, Aetna U.S. Healthcare, which was renamed Aetna Inc. ("former Aetna"). For accounting purposes, the acquisition was recorded as of November 30, 2000 using the purchase method. The effects of this transaction, including the recognition of goodwill, were pushed down and reflected on the financial statements of certain IRSI (a subsidiary of Lion) subsidiaries, including the Company. The Balance Sheet changes related to accounting for this purchase were entirely non-cash in nature and accordingly were excluded from the pre-acquisition Consolidated Statement of Cash Flows for the eleven months ended November 30, 2000. The purchase price was allocated to assets and liabilities based on their respective fair values. This revaluation resulted in a net increase to assets, excluding the effects of goodwill, of $592.0 million and a net increase to liabilities of $310.6 million. Additionally, the Company established goodwill of $2,297.4 million. Goodwill was amortized over a period of 40 years prior to January 1, 2002. The allocation of the purchase price to assets and liabilities was subjected to further refinement throughout 2001 as additional information became available to more precisely estimate the fair 25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 1. SIGNIFICANT ACCOUNTING POLICIES (continued) values of the Company's respective assets and liabilities at the purchase date. The refinements to the Company's purchase price allocations were as follows: The Company completed a full review relative to the assumptions and profit streams utilized in the development of value of business acquired ("VOBA") and determined that certain refinements were necessary. Such refinements resulted in a reduction of VOBA; The Company completed the review of the fixed assets that existed at or prior to the acquisition and determined that an additional write down was necessary; The Company completed the review of severance actions related to individuals who were employed before or at the acquisition date and determined that an additional severance accrual was necessary; The Company completed its valuation of certain benefit plan liabilities and, as a result, reduced those benefit plan liabilities; The Company adjusted its reserve for other policyholders' funds in order to conform its accounting policies with those of ING; The Company, after giving further consideration to certain exposures in the general market place, determined that a reduction of its investment portfolio carrying value was warranted; The Company determined that the establishment of a liability for certain noncancellable operating leases that existed prior to or at the acquisition date but were no longer providing a benefit to the Company's operations, was warranted; and The Company determined that the contractual lease payment of one of its operating leases was more than the current market rate, and established a corresponding unfavorable lease liability. The net impact of the refinements in purchase price allocations, as described above, resulted in a net decrease to assets, excluding the effects of goodwill, of $236.4 million, a net decrease to liabilities of $59.8 million and a net increase to the Company's goodwill of $176.6 million. Unaudited proforma consolidated income from continuing operations and net income of the Company for the period from January 1, 2000 to November 30, 2000, assuming that the acquisition of the Company occurred at the beginning of each period, would have been approximately $118.1 million. The pro forma adjustments, which did not affect revenues, reflect primarily goodwill amortization, amortization of the favorable lease asset and the elimination of amortization of the deferred gain on sale associated with the life business. In the fourth quarter of 2001, ING announced its decision to pursue a move to a fully integrated U.S. structure that would separate manufacturing from distribution in its retail and worksite operations to support a more customer-focused business strategy. As a result of the integration, the Company's Worksite Products and Individual Products operating segments were realigned into one reporting segment, U.S. Financial Services ("USFS"). 26 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 1. SIGNIFICANT ACCOUNTING POLICIES (continued) USFS offers qualified and nonqualified annuity contracts that include a variety of funding and payout options for individuals and employer sponsored retirement plans qualified under Internal Revenue Code Sections 401, 403 and 457, as well as nonqualified deferred compensation plans. Annuity contracts may be deferred or immediate (payout annuities). These products also include programs offered to qualified plans and nonqualified deferred compensation plans that package administrative and record-keeping services along with a menu of investment options, including affiliated and nonaffiliated mutual funds and variable and fixed investment options. In addition, USFS offers wrapper agreements entered into with retirement plans which contain certain benefit responsive guarantees (i.e. liquidity guarantees of principal and previously accrued interest for benefits paid under the terms of the plan) with respect to portfolios of plan-owned assets not invested with the Company. USFS also offers investment advisory services and pension plan administrative services. Investment Management Services, through February 28, 2002, provided: investment advisory services to affiliated and unaffiliated institutional and retail clients on a fee-for-service basis; underwriting services to the ING Series Fund, Inc. (formerly known as the Aetna Series Fund, Inc.), and the ING Variable Portfolios, Inc. (formerly known as the Aetna Variable Portfolios, Inc.); distribution services for other company products; and trustee, administrative, and other fiduciary services to retirement plans requiring or otherwise utilizing a trustee or custodian. Discontinued Operations included universal life, variable universal life, traditional whole life and term insurance. DESCRIPTION OF BUSINESS The Company offers annuity contracts that include a variety of funding and payout options for employer-sponsored retirement plans qualified under Internal Revenue Code Sections 401, 403, 408 and 457, as well as nonqualified deferred. The Company's products are offered primarily to individuals, pension plans, small businesses and employer-sponsored groups in the health care, government, educations (collectively "not-for-profit" organizations) and corporate markets. The Company's products generally are sold through pension professionals, independent agents and brokers, third party administrators, banks, dedicated career agents and financial planners. NEW ACCOUNTING STANDARDS ACCOUNTING FOR GOODWILL AND INTANGIBLE ASSETS In June 2001, the Financial Accounting Standards Board ("FASB") issued FAS No. 142, "Goodwill and Other Intangible Assets," ("FAS No.142"), effective for fiscal years beginning after December 15, 2001. Under FAS No. 142, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests. Other intangible assets are still amortized over their estimated useful lives. The Company adopted the new standard effective January 1, 2002. 27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 1. SIGNIFICANT ACCOUNTING POLICIES (continued) As required under FAS No. 142, the Company completed the first of the required impairment tests as of January 1, 2002. Step one of the impairment test was a screen for potential impairment, while step two measured the amount of the impairment. All of the Company's operations fall under one reporting unit, USFS, due to the consolidated nature of the Company's operations. Step one of the impairment test required the Company to estimate the fair value of the reporting unit and compare the estimated fair value to its carrying value. The Company determined the estimated fair value utilizing a discounted cash flow approach and applying a discount rate equivalent to the Company's weighted average cost of capital. Fair value was determined to be less than carrying value which required the Company to complete step two of the test. In step two, the Company allocated the fair value of the reporting unit determined in step one to the assets and liabilities of the reporting unit resulting in an implied fair value of goodwill of zero. The comparison of the fair value amount allocated to goodwill and the carrying value of goodwill resulted in an impairment loss of $2,412.1 million, which represents the entire carrying amount of goodwill, net of accumulated amortization. This impairment charge is shown as a change in accounting principle on the Consolidated Income Statement. Application of the nonamortization provision (net of tax) of the new standard resulted in an increase in net income of $61.9 million for the twelve months ended December 31, 2002. Had the Company been accounting for goodwill under FAS No. 142 for all periods presented, the Company's net income would have been as follows:
Preacquisition -------------- One month Eleven months Year ended ended ended December 31, December 31, November 30, (Millions) 2001 2000 2000 Reported net income after tax $ 99.9 $12.6 $177.2 Add back goodwill amortization, net of tax 61.9 -- -- ------------------------------------------------------------------------------------- Adjusted net income after tax $161.8 $12.6 $177.2 =====================================================================================
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES In June 1998, the FASB issued FAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended and interpreted by FAS No. 137, Accounting for Derivative Instruments and Hedging Activities -- Deferral of the Effective Date of FASB Statement 133, FAS No.138, Accounting for Certain Derivative Instruments and Certain Hedging Activities -- an Amendment of FAS No. 133, and certain FAS No. 133 implementation issues. This standard, as amended, requires companies to record all derivatives on the balance sheet as either assets or liabilities and measure those instruments at fair value. The manner in which companies are to record gains or losses resulting from changes in the fair values of those derivatives depends on the use of the derivative and whether it qualifies for hedge accounting. FAS No. 133 was effective for the Company's financial statements beginning January 1, 2001. 28 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 1. SIGNIFICANT ACCOUNTING POLICIES (continued) Adoption of FAS No.133 did not have a material effect on the Company's financial position or results of operations given the Company's limited derivative and embedded derivative holdings. The Company utilizes, interest rate swaps, caps and floors, foreign exchange swaps and warrants in order to manage interest rate and price risk (collectively, market risk). These financial exposures are monitored and managed by the Company as an integral part of the overall risk management program. Derivatives are recognized on the balance sheet at their fair value. The Company chose not to designate its derivative instruments as part of hedge transactions. Therefore, changes in the fair value of the Company's derivative instruments are recorded immediately in the consolidated statements of income as part of realized capital gains and losses. Warrants are carried at fair value and are recorded as either derivative instruments or FAS No. 115 available for sale securities. Warrants that are considered derivatives are carried at fair value if they are readily convertible to cash. The values of these warrants can fluctuate given that the companies that underlie the warrants are non-public companies. At December 31, 2002 and 2001, the estimated value of these warrants, including the value of their effectiveness, in managing market risk, was immaterial. These warrants will be revalued each quarter and the change in the value of the warrants will be included in the consolidated statements of income. The Company, at times, may own warrants on common stock which are not readily convertible to cash as they contain certain conditions which preclude their convertibility and therefore, will not be included in assets or liabilities as derivatives. If conditions are satisfied and the underlying stocks become marketable, the warrants would be reclassified as derivatives and recorded at fair value as an adjustment through current period results of operations. The Company occasionally purchases a financial instrument that contains a derivative that is "embedded" in the instrument. In addition, the Company's insurance products are reviewed to determine whether they contain an embedded derivative. The Company assesses whether the economic characteristics of the embedded derivative are clearly and closely related to the economic characteristics of the remaining component of the financial instrument or insurance product (i.e., the host contract) and whether a separate instrument with the same terms as the embedded instrument would meet the definition of a derivative instrument. When it is determined that the embedded derivative possesses economic characteristics that are not clearly and closely related to the economic characteristics of the host contract and that a separate instrument with the same terms would qualify as a derivative instrument, the embedded derivative is separated from the host contract and carried at fair value. However, in cases where the host contract is measured at fair value, with changes in fair value reported in current period earnings or the Company is unable to reliably identify and measure the embedded derivative for separation from its host contracts, the entire contract is carried on the balance sheet at fair value and is not designated as a hedging instrument. 29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 1. SIGNIFICANT ACCOUNTING POLICIES (continued) GUARANTEES In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others," to clarify accounting and disclosure requirements relating to a guarantor's issuance of certain types of guarantees. FIN 45 requires entities to disclose additional information of certain guarantees, or groups of similar guarantees, even if the likelihood of the guarantor's having to make any payments under the guarantee is remote. The disclosure provisions are effective for financial statements for fiscal years ended after December 15, 2002. For certain guarantees, the interpretation also requires that guarantors recognize a liability equal to the fair value of the guarantee upon its issuance. This initial recognition and measurement provision is to be applied only on a prospective basis to guarantees issued or modified after December 31, 2002. The Company has performed an assessment of its guarantees and believes that all of its guarantees are excluded from the scope of this interpretation. FUTURE ACCOUNTING STANDARDS EMBEDDED DERIVATIVES The FASB issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS No.133") in 1998 and continues to issue guidance for implementation through its Derivative Implementation Group ("DIG"). DIG recently released a draft of FASB Statement 133 Implementation Issue B36, "Embedded Derivatives: Bifurcation of a Debt Instrument That Incorporates Both Interest Rate Risk and Credit Risk Exposures That are Unrelated or Only Partially Related to the Creditworthiness of the Issuer of That Instrument" ("DIG B36"). Under this interpretation, modified coinsurance and coinsurance with funds withheld reinsurance agreements as well as other types of receivables and payables where interest is determined by reference to a pool of fixed maturity assets or total return debt index may be determined to contain bifurcatable embedded derivatives. The required date of adoption of DIG B36 has not been determined. If the guidance is finalized in its current form, the Company has determined that certain of its existing reinsurance receivables (payables), investments or insurance products contain embedded derivatives that may require bifurcation. The Company has not yet completed its evaluation of the potential impact, if any, on its consolidated financial positions, results of operations, or cash flows. FASB INTERPRETATION NO. 46 CONSOLIDATION OF VARIABLE INTEREST ENTITIES In January 2003, FASB issued Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities" ("VIE"), an interpretation of Accounting Research Bulletin ("ARB") No. 51. This Interpretation addresses consolidation by business enterprises of variable interest entities, which have one or both of the following characteristics: a) insufficient equity investment at risk, or b) insufficient control by equity investors. This guidance is effective for VIEs created after January 31, 2003 and for existing VIEs as of July 1, 2003. An entity with variable interest in VIEs created before February 1, 2003 shall apply the guidance no later than the beginning of the first interim or annual reporting period beginning after June 15, 2003. 30 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 1. SIGNIFICANT ACCOUNTING POLICIES (continued) In conjunction with the issuance of this guidance, the Company conducted a review of its involvement with the VIEs and does not believe it has any significant investments or ownership in VIEs. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from reported results using those estimates. RECLASSIFICATIONS Certain reclassifications have been made to prior year financial information to conform to the current year classifications. CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash on hand, money market instruments and other debt issues with a maturity of 90 days or less when purchased. INVESTMENTS All of the Company's fixed maturity and equity securities are currently designated as available-for-sale. Available-for-sale securities are reported at fair value and unrealized gains and losses on these securities are included directly in shareholder's equity, after adjustment for related charges in deferred policy acquisition costs, value of business acquired, and deferred income taxes. The Company analyzes the general account investments to determine whether there has been an other than temporary decline in fair value below the amortized cost basis in accordance with FAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Management considers the length of time and the extent to which the fair value has been less than amortized cost; the financial condition and near-term prospects of the issuer; future economic conditions and market forecasts; and the Company's intent and ability to retain the investment in the issuer for a period of time sufficient to allow for recovery in fair value. If it is probable that all amounts due according to the contractual terms of a debt security will not be collected, an other than temporary impairment is considered to have occurred. In addition, the Company invests in structured securities that meet the criteria of Emerging Issues Task Force ("EITF") Issue No. 99-20 "Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets." Under Issue No. EITF 99-20, a determination of the required impairment is based on credit risk and the possibility of significant prepayment risk that restricts the Company's ability to recover the investment. An impairment is recognized if the fair value of the security is less than amortized cost and there has been an adverse change in cash flow since the last remeasurement date. 31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 1. SIGNIFICANT ACCOUNTING POLICIES (continued) When a decline in fair value is determined to be other than temporary, the individual security is written down to fair value and the loss is accounted for as a realized loss. Included in available-for-sale securities are investments that support experience-rated products. Experience-rated products are products where the customer, not the Company, assumes investment (including realized capital gains and losses) and other risks, subject to, among other things, minimum guarantees. Realized gains and losses on the sale of, as well as unrealized capital gains and losses on, investments supporting these products are reflected in other policyholders' funds. Realized capital gains and losses on all other investments are reflected on all other investments are reflected in the Company's results of operations. Unrealized capital gains and losses on all other investments are reflected in shareholder's equity, net of related income taxes. Purchases and sales of fixed maturities and equity securities (excluding private placements) are recorded on the trade date. Purchases and sales of private placements and mortgage loans are recorded on the closing date. Fair values for fixed maturity securities are obtained from independent pricing services or broker/ dealer quotations. Fair values for privately placed bonds are determined using a matrix-based model. The matrix-based model considers the level of risk-free interest rates, current corporate spreads, the credit quality of the issuer and cash flow characteristics of the security. The fair values for equity securities are based on quoted market prices. For equity securities not actively traded, estimated fair values are based upon values of issues of comparable yield and quality or conversion value where applicable. The Company engages in securities lending whereby certain securities from its portfolio are loaned to other institutions for short periods of time. Initial collateral, primarily cash, is required at a rate of 102% of the market value of the loaned domestic securities. The collateral is deposited by the borrower with a lending agent, and retained and invested by the lending agent according to the Company's guidelines to generate additional income. The market value of the loaned securities is monitored on a daily basis with additional collateral obtained or refunded as the market value of the loaned securities fluctuates. In September 2000, the FASB issued FAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." In accordance with this new standard, 32 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 1. SIGNIFICANT ACCOUNTING POLICIES (continued) general account securities on loan are reflected on the Consolidated Balance Sheet as "Securities pledged to creditors", which includes the following:
Gross Gross December 31, 2002 Amortized Unrealized Unrealized Fair (Millions) Cost Gains Losses Value Total securities pledged to creditors $154.9 $0.1 $ -- $155.0 ===========================================================================
Gross Gross December 31, 2001 Amortized Unrealized Unrealized Fair (Millions) Cost Gains Losses Value Total securities pledged to creditors $466.9 $1.1 $0.8 $467.2 ===========================================================================
Total securities pledged to creditors at December 31, 2002 and 2001 consisted entirely of fixed maturity securities. The investment in affiliated mutual funds represents an investment in mutual funds managed by the Company and its affiliates, and is carried at fair value. Mortgage loans on real estate are reported at amortized cost less impairment writedowns. If the value of any mortgage loan is determined to be impaired (i.e., when it is probable the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement), the carrying value of the mortgage loan is reduced to the present value of expected cash flows from the loan, discounted at the loan's effective interest rate, or to the loan's observable market price, or the fair value of the underlying collateral. The carrying value of the impaired loans is reduced by establishing a permanent writedown charged to realized loss. Policy loans are carried at unpaid principal balances, net of impairment reserves. Short-term investments, consisting primarily of money market instruments and other fixed maturity securities issues purchased with an original maturity of 91 days to one year, are considered available for sale and are carried at fair value, which approximates amortized cost. Reverse dollar repurchase agreement and reverse repurchase agreement transactions are accounted for as collateralized borrowings, where the amount borrowed is equal to the sales price of the underlying securities. These transactions are reported in "Other Liabilities." The Company's use of derivatives is limited to economic hedging purposes. The Company enters into interest rate and currency contracts, including swaps, caps, and floors to reduce and manage risks associated with changes in value, yield, price, cash flow or exchange rates of assets or liabilities held or intended to be held. Changes in the fair value of open derivative contracts are recorded in net realized capital gains and losses. 33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 1. SIGNIFICANT ACCOUNTING POLICIES (continued) On occasion, the Company sells call options written on underlying securities that are carried at fair value. Changes in the fair value of these options are recorded in net realized capital gains or losses. DEFERRED POLICY ACQUISITION COSTS AND VALUE OF BUSINESS ACQUIRED Deferred Policy Acquisition Costs ("DAC") is an asset, which represents certain costs of acquiring certain insurance business, which are deferred and amortized. These costs, all of which vary with and are primarily related to the production of new and renewal business, consist principally of commissions, certain underwriting and contract issuance expenses, and certain agency expenses. VOBA is an asset, which represents the present value of estimated net cash flows embedded in the Company's contracts, which existed at the time the Company was acquired by ING. DAC and VOBA are evaluated for recoverability at each balance sheet date and these assets would be reduced to the extent that gross profits are inadequate to recover the asset. The amortization methodology varies by product type based upon two accounting standards: FAS No. 60, "Accounting and Reporting by Insurance Enterprises" ("FAS No. 60") and FAS No. 97, "Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and Realized Gains and Losses from the Sale of Investments" ("FAS No. 97"). Under FAS No. 60, acquisition costs for traditional life insurance products, which primarily include whole life and term life insurance contracts, are amortized over the premium payment period in proportion to the premium revenue recognition. Under FAS No. 97, acquisition costs for universal life and investment-type products, which include universal life policies and fixed and variable deferred annuities, are amortized over the life of the blocks of policies (usually 25 years) in relation to the emergence of estimated gross profits from surrender charges, investment margins, mortality and expense margins, asset-based fee income, and actual realized gains (losses) on investments. Amortization is adjusted retrospectively when estimates of current or future gross profits to be realized from a group of products are revised. DAC and VOBA are written off to the extent that it is determined that future policy premiums and investment income or gross profits are not adequate to cover related expenses. Activity for the year-ended December 31, 2002 within VOBA was as follows:
(Millions) Balance at December 31, 2001 $1,601.8 Adjustment for unrealized gain (loss) (21.9) Additions 25.0 Interest accrued at 7% 86.8 Amortization (253.3) ------------------------------------------------------------ Balance at December 31, 2002 $1,438.4 ============================================================
34 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 1. SIGNIFICANT ACCOUNTING POLICIES (continued) The estimated amount of VOBA to be amortized, net of interest, over the next five years is $105.6 million, $102.1 million, $101.9 million, $91.5 million and $88.3 million for the years 2003, 2004, 2005, 2006 and 2007, respectively. Actual amortization incurred during these years may vary as assumptions are modified to incorporate actual results. As part of the regular analysis of DAC/VOBA, at the end of third quarter 2002, the Company unlocked its assumptions by resetting its near-term and long-term assumptions for the separate account returns to 9% (gross before fund management fees and mortality and expense and other policy charges), reflecting a blended return of equity and other sub-accounts. This unlocking adjustment was primarily driven by the sustained downturn in the equity markets and revised expectations for future returns. In 2002, the Company recorded an acceleration of DAC/VOBA amortization totaling $45.6 million before tax, or $29.7 million, net $15.9 million of federal income tax benefit. POLICY LIABILITIES AND ACCRUALS Future policy benefits and claims reserves include reserves for universal life, immediate annuities with life contingent payouts and traditional life insurance contracts. Reserves for universal life products are equal to cumulative deposits less withdrawals and charges plus credited interest thereon. Reserves for traditional life insurance contracts represent the present value of future benefits to be paid to or on behalf of policyholders and related expenses less the present value of future net premiums. Reserves for immediate annuities with life contingent payout contracts are computed on the basis of assumed investment yield, mortality, and expenses, including a margin for adverse deviations. Such assumptions generally vary by plan, year of issue and policy duration. Reserve interest rates range from 2.0% to 9.5% for all years presented. Investment yield is based on the Company's experience. Mortality and withdrawal rate assumptions are based on relevant Company experience and are periodically reviewed against both industry standards and experience. Because the sale of the domestic individual life insurance business was substantially in the form of an indemnity reinsurance agreement, the Company reported an addition to its reinsurance recoverable approximating the Company's total individual life reserves at the sale date. Other policyholders' funds include reserves for deferred annuity investment contracts and immediate annuities without life contingent payouts. Reserves on such contracts are equal to cumulative deposits less charges and withdrawals plus credited interest thereon (rates range from 2.0% to 12.3% for all years presented) net of adjustments for investment experience that the Company is entitled to reflect in future credited interest. These reserves also include unrealized gains/losses related to FAS No.115 for experience-rated contracts. Reserves on contracts subject to experience rating reflect the rights of contractholders, plan participants and the Company. 35 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 1. SIGNIFICANT ACCOUNTING POLICIES (continued) Unpaid claims and claim expenses for all lines of insurance include benefits for reported losses and estimates of benefits for losses incurred but not reported. REVENUE RECOGNITION For certain annuity contracts, fee income for the cost of insurance, expenses, and other fees are recorded as revenue in and are included in the fee income line on the Income Statements assessed against policyholders. Other amounts received for these contracts are reflected as deposits and are not recorded as revenue but are included in the other policyholders' funds line on the Balance Sheets. Related policy benefits are recorded in relation to the associated premiums or gross profit so that profits are recognized over the expected lives of the contracts. When annuity payments with life contingencies begin under contracts that were initially investment contracts, the accumulated balance in the account is treated as a single premium for the purchase of an annuity and reflected as an offsetting amount in both premiums and current and future benefits in the Consolidated Income Statements. SEPARATE ACCOUNTS Separate Account assets and liabilities generally represent funds maintained to meet specific investment objectives of contractholders who bear the investment risk, subject, in some cases, to minimum guaranteed rates. Investment income and investment gains and losses generally accrue directly to such contractholders. The assets of each account are legally segregated and are not subject to claims that arise out of any other business of the Company. Separate Account assets supporting variable options under universal life and annuity contracts are invested, as designated by the contractholder or participant under a contract (who bears the investment risk subject, in limited cases, to minimum guaranteed rates) in shares of mutual funds which are managed by the Company, or other selected mutual funds not managed by the Company. Separate Account assets are carried at fair value. At December 31, 2002 and 2001, unrealized gains of $29.7 million and of $10.8 million, respectively, after taxes, on assets supporting a guaranteed interest option are reflected in shareholder's equity. Separate Account liabilities are carried at fair value, except for those relating to the guaranteed interest option. Reserves relating to the guaranteed interest option are maintained at fund value and reflect interest credited at rates ranging from 3.0% to 10.0% in 2002 and 3.0% to 14.0% in 2001. Separate Account assets and liabilities are shown as separate captions in the Consolidated Balance Sheets. Deposits, investment income and net realized and unrealized capital gains and losses of the Separate Accounts are not reflected in the Consolidated Financial Statements (with the exception of realized and unrealized capital gains and losses on the assets supporting the 36 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 1. SIGNIFICANT ACCOUNTING POLICIES (continued) guaranteed interest option). The Consolidated Statements of Cash Flows do not reflect investment activity of the Separate Accounts. REINSURANCE The Company utilizes indemnity reinsurance agreements to reduce its exposure to large losses in all aspects of its insurance business. Such reinsurance permits recovery of a portion of losses from reinsurers, although it does not discharge the primary liability of the Company as direct insurer of the risks reinsured. The Company evaluates the financial strength of potential reinsurers and continually monitors the financial condition of reinsurers. Only those reinsurance recoverable balances deemed probable of recovery are reflected as assets on the Company's Balance Sheets. Of the reinsurance recoverable on the Balance Sheets, $3.0 billion at both December 31, 2002 and 2001 is related to the reinsurance recoverable from Lincoln arising from the sale of the Company's domestic life insurance business. INCOME TAXES The Company files a consolidated federal income tax return with its subsidiary IICA. The Company is taxed at regular corporate rates after adjusting income reported for financial statement purposes for certain items. Deferred income tax expenses/benefits result from changes during the year in cumulative temporary differences between the tax basis and book basis of assets and liabilities. 37 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 2. INVESTMENTS Fixed maturities available for sale as of December 31 were as follows:
Gross Gross Amortized Unrealized Unrealized Fair 2002 (Millions) Cost Gains Losses Value U.S. government and government agencies and authorities $ 74.2 $ 2.9 $ -- $ 77.1 States, municipalities and political subdivisions 10.2 2.5 -- 12.7 U.S. corporate securities: Public utilities 627.6 28.1 6.4 649.3 Other corporate securities 7,742.6 543.5 33.1 8,253.0 ------------------------------------------------------------------------------ Total U.S. corporate securities 8,370.2 571.6 39.5 8,902.3 ------------------------------------------------------------------------------ Foreign securities: Government 336.9 18.2 6.6 348.5 Other 148.0 8.4 1.2 155.2 ------------------------------------------------------------------------------ Total foreign securities 484.9 26.6 7.8 503.7 ------------------------------------------------------------------------------ Mortgage-backed securities 5,374.2 167.1 34.0 5,507.3 Other asset-backed securities 882.4 47.0 10.5 918.9 ------------------------------------------------------------------------------ Total fixed maturities, including fixed maturities pledged to creditors 15,196.1 817.7 91.8 15,922.0 Less: Fixed maturities pledged to creditors 154.9 0.1 -- 155.0 ------------------------------------------------------------------------------ Fixed maturities $15,041.2 $817.6 $91.8 $15,767.0 ==============================================================================
38 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 2. INVESTMENTS (continued)
Gross Gross Amortized Unrealized Unrealized Fair 2001 (Millions) Cost Gains Losses Value U.S. government and government agencies and authorities $ 391.0 $ 11.0 $ 4.2 $ 397.8 States, municipalities and political subdivisions 173.7 7.7 -- 181.4 U.S. corporate securities: Public utilities 268.5 6.5 7.9 267.1 Other corporate securities 6,138.8 203.0 62.6 6,279.2 ------------------------------------------------------------------------------ Total U.S. corporate securities 6,407.3 209.5 70.5 6,546.3 ------------------------------------------------------------------------------ Foreign securities: Government 153.2 5.2 0.9 157.5 ------------------------------------------------------------------------------ Total foreign securities 153.2 5.2 0.9 157.5 ------------------------------------------------------------------------------ Mortgage-backed securities 4,513.3 90.1 15.9 4,587.5 Other asset-backed securities 2,077.6 67.1 8.1 2,136.6 ------------------------------------------------------------------------------ Total fixed maturities, including fixed maturities pledged to creditors 13,716.1 390.6 99.6 14,007.1 Less: Fixed maturities pledged to creditors 466.9 1.1 0.8 467.2 ------------------------------------------------------------------------------ Fixed maturities $13,249.2 $389.5 $98.8 $13,539.9 ==============================================================================
At December 31, 2002 and 2001, net unrealized appreciation of $725.9 million and $291.0 million, respectively, on available-for-sale fixed maturities including fixed maturities pledged to creditors included $563.1 million and $233.0 million, respectively, related to experience-rated contracts, which were not reflected in shareholder's equity but in other policyholders' funds. 39 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 2. INVESTMENTS (continued) The amortized cost and fair value of total fixed maturities for the year-ended December 31, 2002 are shown below by contractual maturity. Actual maturities may differ from contractual maturities because securities may be restructured, called, or prepaid.
Amortized Fair (Millions) Cost Value Due to mature: One year or less $ -- $ -- After one year through five years 1,826.6 1,907.8 After five years through ten years 3,455.2 3,673.3 After ten years 3,657.7 3,914.7 Mortgage-backed securities 5,374.2 5,507.3 Other asset-backed securities 882.4 918.9 Less: Fixed maturities securities pledged to creditor 154.9 155.0 -------------------------------------------------------------- Fixed maturities $15,041.2 $15,767.0 ==============================================================
At December 31, 2002 and 2001, fixed maturities with carrying values of $10.5 million and $9.0 million, respectively, were on deposit as required by regulatory authorities. The Company did not have any investments in a single issuer, other than obligations of the U.S. government, with a carrying value in excess of 10% of the Company's shareholder's equity at December 31, 2002 or 2001. The Company has various categories of CMOs that are subject to different degrees of risk from changes in interest rates and, for CMOs that are not agency-backed, defaults. The principal risks inherent in holding CMOs are prepayment and extension risks related to dramatic decreases and increases in interest rates resulting in the repayment of principal from the underlying mortgages either earlier or later than originally anticipated. At December 31, 2002 and 2001, approximately 5.5% and 3.0%, respectively, of the Company's CMO holdings were invested in types of CMOs which are subject to more prepayment and extension risk than traditional CMOs (such as interest-only or principal-only strips). Investments in equity securities as of December 31 were as follows:
(Millions) 2002 2001 Amortized Cost $238.3 $52.2 Gross unrealized gains -- 4.5 Gross unrealized losses 2.9 6.4 ------------------------------------------------------- Fair Value $235.4 $50.3 =======================================================
Beginning in April 2001, the Company entered into reverse dollar repurchase agreement and reverse repurchase agreement transactions to increase its return on investments and improve liquidity. These transactions involve a sale of securities and an agreement to repurchase 40 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 2. INVESTMENTS (continued) substantially the same securities as those sold. The dollar rolls and reverse repurchase agreements are accounted for as short-term collateralized financings and the repurchase obligation is reported as borrowed money in "Other Liabilities" on the Consolidated Balance Sheets. The repurchase obligation totaled $1.3 billion at December 31, 2002. The primary risk associated with short-term collateralized borrowings is that the counterparty will be unable to perform under the terms of the contract. The Company's exposure is limited to the excess of the net replacement cost of the securities over the value of the short-term investments, an amount that was not material at December 31, 2002. The Company believes the counterparties to the dollar roll and reverse repurchase agreements are financially responsible and that the counterparty risk is immaterial. IMPAIRMENTS During 2002, the Company determined that fifty-six fixed maturity securities had other than temporary impairments. As a result, at December 31, 2002, the Company recognized a pre-tax loss of $106.4 million to reduce the carrying value of the fixed maturity securities to their combined fair value of $124.7 million. During 2001, the Company determined that fourteen fixed maturity securities had other than temporary impairments. As a result, at December 31, 2001, the Company recognized a pre-tax loss of $51.8 million to reduce the carrying value of the fixed maturities to their value of $10.5 million. 3. FINANCIAL INSTRUMENTS ESTIMATED FAIR VALUE The following disclosures are made in accordance with the requirements of FAS No. 107, "Disclosures about Fair Value of Financial Instruments." FAS No. 107 requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates, in many cases, could not be realized in immediate settlement of the instrument. FAS No. 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. The following valuation methods and assumptions were used by the Company in estimating the fair value of the above financial instruments: FIXED MATURITIES: The fair values for the actively traded marketable bonds are determined based upon the quoted market prices. The fair values for marketable bonds without an active market are obtained through several commercial pricing services which provide the estimated fair values. Fair values of privately placed bonds are determined using a matrix-based pricing model. The model considers the current level of risk-free interest rates, current corporate spreads, the credit 41 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 3. FINANCIAL INSTRUMENTS (continued) quality of the issuer and cash flow characteristics of the security. Using this data, the model generates estimated market values which the Company considers reflective of the fair value of each privately placed bond. Fair values for privately placed bonds are determined through consideration of factors such as the net worth of the borrower, the value of collateral, the capital structure of the borrower, the presence of guarantees and the Company's evaluation of the borrower's ability to compete in their relevant market. EQUITY SECURITIES: Fair values of these securities are based upon quoted market value. MORTGAGE LOANS ON REAL ESTATE: The fair values for mortgage loans on real estate are estimated using discounted cash flow analyses and rates currently being offered in the marketplace for similar loans to borrowers with similar credit ratings. Loans with similar characteristics are aggregated for purposes of the calculations. CASH, SHORT-TERM INVESTMENTS AND POLICY LOANS: The carrying amounts for these assets approximate the assets' fair values. OTHER FINANCIAL INSTRUMENTS REPORTED AS ASSETS: The carrying amounts for these financial instruments (primarily premiums and other accounts receivable and accrued investment income) approximate those assets' fair values. INVESTMENT CONTRACT LIABILITIES (INCLUDED IN OTHER POLICYHOLDERS' FUNDS): WITH A FIXED MATURITY: Fair value is estimated by discounting cash flows at interest rates currently being offered by, or available to, the Company for similar contracts. WITHOUT A FIXED MATURITY: Fair value is estimated as the amount payable to the contractholder upon demand. However, the Company has the right under such contracts to delay payment of withdrawals which may ultimately result in paying an amount different than that determined to be payable on demand. 42 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 3. FINANCIAL INSTRUMENTS (continued) The carrying values and estimated fair values of certain of the Company's financial instruments at December 31, 2002 and 2001 were as follows:
2002 2001 ---------------------- ---------------------- Carrying Fair Carrying Fair (Millions) Value Value Value Value Assets: Fixed maturity securities $ 15,767.0 $ 15,767.0 $ 13,539.9 $ 13,539.9 Equity securities 235.4 235.4 50.3 50.3 Mortgage loans 576.6 632.6 241.3 247.7 Policy loans 296.3 296.3 329.0 329.0 Short term investments 6.2 6.2 31.7 31.7 Cash and cash equivalents 65.4 65.4 82.0 82.0 Liabilities: Investment contract liabilities: With a fixed maturity (1,129.8) (1,121.4) (1,021.7) (846.5) Without a fixed maturity (10,783.6) (10,733.8) (11,114.1) (10,624.3) ------------------------------------------------------------------------------
Fair value estimates are made at a specific point in time, based on available market information and judgments about various financial instruments, such as estimates of timing and amounts of future cash flows. Such estimates do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument, nor do they consider the tax impact of the realization of unrealized gains or losses. In many cases, the fair value estimates cannot be substantiated by comparison to independent markets, nor can the disclosed value be realized in immediate settlement of the instruments. In evaluating the Company's management of interest rate, price and liquidity risks, the fair values of all assets and liabilities should be taken into consideration, not only those presented above. DERIVATIVE FINANCIAL INSTRUMENTS INTEREST RATE FLOORS Interest rate floors are used to manage the interest rate risk in the Company's bond portfolio. Interest rate floors are purchased contracts that provide the Company with an annuity in a declining interest rate environment. The Company had no open interest rate floors at December 31, 2002 or 2001. INTEREST RATE CAPS Interest rate caps are used to manage the interest rate risk in the Company's bond portfolio. Interest rate caps are purchased contracts that provide the Company with an annuity in an increasing interest rate environment. The notional amount, carrying value and estimated fair value of the Company's open interest rate caps as of December 31, 2002 were $256.4 million, $0.7 million and $0.7 million, respectively. The Company did not have interest rate caps at December 31, 2001. 43 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 3. FINANCIAL INSTRUMENTS (continued) INTEREST RATE SWAPS Interest rate swaps are used to manage the interest rate risk in the Company's bond portfolio and well as the Company's liabilities. Interest rate swaps represent contracts that require the exchange of cash flows at regular interim periods, typically monthly or quarterly. The notional amount, carrying value and estimated fair value of the Company's open interest rate swaps as of December 31, 2002 were $400.0 million, $(6.8) million and $(6.8) million, respectively. The Company did not have interest rate swaps at December 31, 2001. FOREIGN EXCHANGE SWAPS Foreign exchange swaps are used to reduce the risk of a change in the value, yield or cash flow with respect to invested assets. Foreign exchange swaps represent contracts that require the exchange of foreign currency cash flows for US dollar cash flows at regular interim periods, typically quarterly or semi-annually. The notional amount, carrying value and estimated fair value of the Company's open foreign exchange rate swaps as of December 31, 2002 were $49.4 million, $(0.5) million and $(0.5) million, respectively. The notional amount, carrying value and estimated fair value of the Company's open foreign exchange rate swaps as of December 31, 2001 were 25.0 million, $0.7 million and $0.7 million, respectively. EMBEDDED DERIVATIVES The Company also had investments in certain fixed maturity instruments that contain embedded derivatives, including those whose market value is at least partially determined by, among other things, levels of or changes in domestic and/or foreign interest rates (short- or long-term), exchange rates, prepayment rates, equity markets or credit ratings/spreads. The estimated fair value of the embedded derivatives within such securities as of December 31, 2002 and 2001 was $(1.4) and $(15.5) million, respectively. 44 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 4. NET INVESTMENT INCOME Sources of net investment income were as follows:
Preacquisition -------------- One Eleven Year ended Year ended month ended months ended December 31, December 31, December 31, November 30, (Millions) 2002 2001 2000 2000 Fixed maturities $ 964.1 $887.2 $70.3 $768.9 Nonredeemable preferred stock 3.9 1.5 1.8 9.5 Investment in affiliated mutual funds -- 7.2 0.5 2.1 Mortgage loans 23.3 5.9 0.1 0.5 Policy loans 8.7 8.9 0.7 7.9 Cash equivalents 1.7 18.2 4.4 50.3 Other 23.4 15.9 2.6 13.1 ------------------------------------------------------------------------------------------------- Gross investment income 1,025.1 944.8 80.4 852.3 Less: investment expenses 65.6 56.4 1.8 18.5 ------------------------------------------------------------------------------------------------- Net investment income $ 959.5 $888.4 $78.6 $833.8 =================================================================================================
Net investment income includes amounts allocable to experience rated contractholders of $766.9 million for the year-ended December 31, 2002, $704.2 million for the year-ended December 31, 2001, and $55.9 million and $622.2 million for the one and eleven month periods ended December 31, 2000 and November 30, 2000, respectively. Interest credited to contractholders is included in future policy benefits and claims reserves. 5. DIVIDEND RESTRICTIONS AND SHAREHOLDER'S EQUITY In conjunction with the sale of Aetna, Inc. to ING AIH, the Company was restricted from paying any dividends to its parent for a two year period from the date of sale without prior approval by the Insurance Commissioner of the State of Connecticut. This restriction expired on December 13, 2002. The Company did not pay dividends to its parent in 2002 or 2001. The Insurance Department of the State of Connecticut (the "Department") recognizes as net income and capital and surplus those amounts determined in conformity with statutory accounting practices prescribed or permitted by the Department, which differ in certain respects from accounting principles generally accepted in the United States of America. Statutory net income (loss) was $148.8 million, $(92.3) million and $100.6 million for the years-ended December 31, 2002, 2001, and 2000, respectively. Statutory capital and surplus was $1,006.0 million and $826.2 million as of December 31, 2002 and 2001, respectively. 45 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 5. DIVIDEND RESTRICTIONS AND SHAREHOLDER'S EQUITY (continued) As of December 31, 2002, the Company does not utilize any statutory accounting practices, which are not prescribed by state regulatory authorities that, individually or in the aggregate, materially affect statutory capital and surplus. For 2001, the Company was required to implement statutory accounting changes ("Codification") ratified by the National Association of Insurance Commissioners ("NAIC") and state insurance departments. The cumulative effect of Codification to the Company's statutory surplus as of January 1, 2001 was a decrease of $12.5 million. 6. CAPITAL GAINS AND LOSSES ON INVESTMENT OPERATIONS Realized capital gains or losses are the difference between the carrying value and sale proceeds of specific investments sold. Net realized capital gains (losses) on investments were as follows:
Preacquisition -------------- One Eleven Year ended Year ended month ended months ended December 31, December 31, December 31, November 30, (Millions) 2002 2001 2000 2000 Fixed maturities $ (97.5) $(20.6) $1.2 $(36.3) Equity securities (3.5) (0.4) 0.6 (0.9) ------------------------------------------------------------------------------------------------- Pretax realized capital gains (losses) $(101.0) $(21.0) $1.8 $(37.2) ================================================================================================= After-tax realized capital gains (losses) $ (58.3) $(13.7) $1.3 $(24.3) =================================================================================================
Net realized capital gains (losses) of $63.6 million, $117.0 million, $0.9 million and $(17.7) million for the years ended December 31, 2002 and 2001, the one month period ended December 31, 2000 and the eleven month period ended November 30, 2000, respectively, allocable to experience rated contracts, were deducted from net realized capital gains and an offsetting amount was reflected in other policyholders' funds. Net unamortized gains (losses) allocable to experienced-rated contractholders were $199.3 million, $172.7 million, $(2.5) million and $47.6 million at December 31, 2002 and 2001, the one month ended December 31, 2000 and the eleven months ended November 30, 2000, respectively. 46 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 6. CAPITAL GAINS AND LOSSES ON INVESTMENT OPERATIONS (continued) Proceeds from the sale of total fixed maturities and the related gross gains and losses (excluding those related to experience-related contractholders) were as follows:
Preacquisition -------------- One Eleven Year ended Year ended month ended months ended December 31, December 31, December 31, November 30, (Millions) 2002 2001 2000 2000 Proceeds on sales $24,980.4 $14,216.7 $233.0 $10,083.2 Gross gains 276.7 57.0 1.2 2.5 Gross losses 374.2 77.6 -- 38.8 -------------------------------------------------------------------------------------------------
Changes in shareholder's equity related to changes in accumulated other comprehensive income (unrealized capital gains and losses on securities including securities pledged to creditors and excluding those related to experience-rated contractholders) were as follows:
Preacquisition -------------- One Eleven Year ended Year ended month ended months ended December 31, December 31, December 31, November 30, (Millions) 2002 2001 2000 2000 Fixed maturities $104.8 $24.0 $24.5 $ 67.6 Equity securities (1.6) 2.0 (1.5) (4.0) Other investments (8.3) 6.5 5.7 (15.8) ------------------------------------------------------------------------------------------------- Subtotal 94.9 32.5 28.7 79.4 Increase in deferred income taxes 33.2 11.3 10.1 27.8 ------------------------------------------------------------------------------------------------- Net changes in accumulated other comprehensive income (loss) $ 61.7 $21.2 $18.6 $ 51.6 =================================================================================================
Net unrealized capital gains (losses) allocable to experience-rated contracts of $563.1 million and $233.0 million at December 31, 2002 and 2001, respectively, are reflected on the Consolidated Balance Sheets in other policyholders' funds and are not included in shareholder's equity. 47 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 6. CAPITAL GAINS AND LOSSES ON INVESTMENT OPERATIONS (continued) Shareholder's equity included the following accumulated other comprehensive income (loss), which is net of amounts allocable to experience-rated contractholders:
Preacquisition -------------- As of As of As of As of December 31, December 31, December 31, November 30, (Millions) 2002 2001 2000 2000 Net unrealized capital gains (losses): Fixed maturities $162.8 $58.0 $34.0 $ 9.5 Equity securities (3.5) (1.9) (3.9) (2.4) Other investments 7.3 15.6 9.1 3.4 ------------------------------------------------------------------------------------------------- 166.6 71.7 39.2 10.5 Deferred income taxes 58.3 25.1 13.8 3.7 ------------------------------------------------------------------------------------------------- Net accumulated other comprehensive income $108.3 $46.6 $25.4 $ 6.8 =================================================================================================
Changes in accumulated other comprehensive income related to changes in unrealized gains (losses) on securities, including securities pledged to creditors (excluding those related to experience-rated contractholders) were as follows:
Preacquisition -------------- One Eleven Year ended Year ended month ended months ended December 31, December 31, December 31, November 30, (Millions) 2002 2001 2000 2000 Unrealized holding gains (losses) arising the year (1) $(127.4) $ 8.3 $18.6 $51.4 Less: reclassification adjustment for gains (losses) and other items included in net income (2) 65.7 (12.9) -- (0.2) ------------------------------------------------------------------------------------------------- Net unrealized gains (losses) on securities $ 61.7 $ 21.2 $18.6 $51.6 =================================================================================================
(1) Pretax unrealized holding gains (losses) arising during the year were $196.0 million, $12.7 million, $28.6 million and $79.4 million for the years ended December 31, 2002 and 2001, the one month ended December 31, 2000 and the eleven months ended November 31, 2000, respectively. (2) Pretax reclassification adjustments for gains (losses) and other items included in net income were $101.0 million, $(19.8) million and $(0.1) million for the years ended December 31, 2002 and 2001, and the eleven months ended November 30, 2000, respectively. There were no pretax reclassification adjustments for gains (losses) and other items included in net income for the one month ended December 31, 2000. 48 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 7. SEVERANCE In December 2001, ING announced its intentions to further integrate and streamline the U.S.-based operations of ING Americas (a business division of ING which includes the Company) in order to build a more customer-focused organization. In connection with these actions, the Company recorded a charge of $29.2 million pretax. The severance portion of this charge ($28.4 million pretax) is based on a plan to eliminate 580 positions (primarily operations, information technology and other administrative/staff support personnel). Severance actions are expected to be substantially complete by March 31, 2003. The facilities portion ($0.8 million pretax) of the charge represents the amount to be incurred by the Company to terminate a contractual lease obligation. Activity for the year ended December 31, 2002 within the severance liability and positions eliminated related to such actions were as follows:
(Millions) Severance Liability Positions Balance at December 31, 2001 $ 28.4 580 Actions taken (19.2) (440) ------------------------------------------------------------------------ Balance at December 31, 2002 $ 9.2 140 ========================================================================
8. INCOME TAXES The Company files a consolidated federal income tax return with IICA. The Company has a tax allocation agreement with IICA whereby the Company charges its subsidiary for taxes it would have incurred were it not a member of the consolidated group and credits the member for losses at the statutory tax rate. Income taxes from continuing operations consist of the following:
Preacquisition -------------- One month Eleven months Year ended Year ended ended ended December 31, December 31, December 31, November 30, (Millions) 2002 2001 2000 2000 Current taxes (benefits): Federal $ 28.9 $ 3.2 $ 9.4 $ 5.3 State 1.8 2.2 0.2 2.6 Net realized capital gains (losses) 11.5 16.1 0.3 (11.5) - ------------------------------------------------------------------------------------------------- Total current taxes (benefits) 42.2 21.5 9.9 (3.6) - ------------------------------------------------------------------------------------------------- Deferred taxes (benefits): Federal 30.6 89.3 (4.3) 83.2 Net realized capital gains (losses) (54.2) (23.4) 0.3 (1.5) - ------------------------------------------------------------------------------------------------- Total deferred taxes (benefits) (23.6) 65.9 (4.0) 81.7 - ------------------------------------------------------------------------------------------------- Total income tax expense $ 18.6 $ 87.4 $ 5.9 $ 78.1 =================================================================================================
49 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 8. INCOME TAXES (continued) Income taxes were different from the amount computed by applying the federal income tax rate to income from continuing operations before income taxes for the following reasons:
Preacquisition -------------- One month Eleven months Year ended Year ended ended ended December 31, December 31, December 31, November 30, (Millions) 2002 2001 2000 2000 Income from continuing operations before income taxes and cumulative effect of change in accounting principle $86.1 $187.3 $18.5 $249.6 Tax rate 35% 35% 35% 35% - ------------------------------------------------------------------------------------------------- Application of the tax rate 30.1 65.6 6.4 87.4 Tax effect of: State income tax, net of federal benefit 1.2 1.4 0.1 1.7 Excludable dividends (5.3) (1.8) (0.9) (12.6) Goodwill amortization -- 21.6 -- -- Transfer of mutual fund shares (6.7) -- -- -- Other, net (0.7) 0.6 0.3 1.6 - ------------------------------------------------------------------------------------------------- Income taxes $18.6 $ 87.4 $ 5.9 $ 78.1 =================================================================================================
50 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 8. INCOME TAXES (continued) The tax effects of temporary differences that give rise to deferred tax assets and deferred tax liabilities at December 31 are presented below:
(Millions) 2002 2001 Deferred tax assets: Deferred policy acquisition costs $ -- $ 11.7 Insurance reserves 269.8 286.9 Unrealized gains allocable to experience rated contracts 197.1 81.5 Investment losses 69.7 36.7 Postretirement benefits 29.5 26.3 Deferred compensation 58.6 52.0 Other 19.5 27.7 ---------------------------------------------------------- Total gross assets 644.2 522.8 ---------------------------------------------------------- Deferred tax liabilities: Value of business acquired 509.7 558.5 Market discount 4.1 4.6 Net unrealized capital gains 255.4 106.6 Depreciation 3.8 5.1 Deferred policy acquisition costs 29.2 -- Other 5.1 1.7 ---------------------------------------------------------- Total gross liabilities 807.3 676.5 ---------------------------------------------------------- Net deferred tax liability $(163.1) $(153.7) ==========================================================
Net unrealized capital gains and losses are presented in shareholder's equity net of deferred taxes. The "Policyholders' Surplus Account," which arose under prior tax law, is generally that portion of a life insurance company's statutory income that has not been subject to taxation. As of December 31, 1983, no further additions could be made to the Policyholders' Surplus Account for tax return purposes under the Deficit Reduction Act of 1984. The balance in such account was approximately $17.2 million at December 31, 2002. This amount would be taxed only under certain conditions. No income taxes have been provided on this amount since management believes under current tax law the conditions under which such taxes would become payable are remote. The Internal Revenue Service (the "Service") has completed examinations of the federal income tax returns of the Company through 1997. Discussions are being held with the Service with respect to proposed adjustments. Management believes there are adequate defenses against, or sufficient reserves to provide for, any such adjustments. The Service has commenced its examinations for the years 1998 through 2000. 51 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 9. BENEFIT PLANS Prior to December 31, 2001, ILIAC, in conjunction with ING, had a qualified defined benefit pension plan covering substantially all employees ("Transition Pension Plan"). The Transition Pension Plan provided pension benefits based on a cash balance formula, which credited employees annually with an amount equal to a percentage of eligible pay based on age and years of service as well as an interest credit based on individual account balances. Contributions were determined using the Projected Unit Credit Method and were limited to the amounts that are tax-deductible. The accumulated benefit obligation and plan assets were recorded by ILIAC. As of December 31, 2001, the Transition Pension Plan merged into the ING Americas Retirement Plan ("ING Pension Plan"), which is sponsored by ING North America Insurance Corporation ("ING North America"), an affiliate of ILIAC. The ING Pension Plan covers substantially all U.S. employees. Accordingly, the Company transferred $17.4 million of net assets ($11.3 million after tax) related to the movement of the Transition Pension Plan to ING North America. The Company reported this transfer of net assets as a $11.3 million reduction in paid in capital. The new plan's benefits are based on years of service and the employee's average annual compensation during the last five years of employment. Contributions are determined using the Projected Unit Credit Method and are limited to the amounts that are tax-deductible. The costs allocated to the Company for its members' participation in the ING Pension Plan were $6.0 million for 2002. The benefit obligations and the funded status for the Company's qualified pension plan over the period ended December 31 are presented below:
(Millions) 2001 Change in benefit obligation: Benefit obligation at January 1 $ 135.1 Service cost 9.4 Interest cost 10.3 Actuarial loss (0.7) Plan amendments 4.0 Curtailments/settlements 0.4 Benefits paid (3.0) Effect of transfer of assets (155.5) ----------------------------------------------------------- Benefit obligation at December 31 $ -- =========================================================== Funded status: Funded status at December 31 $ (4.3) Unrecognized past service cost 3.4 Unrecognized net loss 20.4 Transfer of funded status to the parent (19.5) ----------------------------------------------------------- Net amount recognized $ -- ===========================================================
52 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 9. BENEFIT PLANS (continued) The reconciliation of the plan assets for the year ended December 31 is presented below:
(Millions) 2001 Fair value of plan assets at January 1 $ 160.7 Actual return on plan assets (6.4) Benefits paid (3.0) Effect of transfer of assets (151.3) ----------------------------------------------------------- Fair value of plan assets at December 31 $ -- ===========================================================
The net periodic benefit cost for the year ended December 31 is presented below:
(Millions) 2001 Service cost $ 9.4 Interest cost 10.2 Expected return on assets (14.6) ---------------------------------------------------------- Net periodic benefit cost $ 5.0 ==========================================================
The weighted average discount rate, expected rate of return on plan assets, and rate of compensation increase was 7.5%, 9.3%, and 4.5% for 2001. POSTRETIREMENT BENEFIT PLANS In addition to providing pension benefits, ILIAC, in conjunction with ING, provides certain health care and life insurance benefits for retired employees and certain agents. Retired employees are generally required to contribute to the plans based on their years of service with the Company. The following tables summarize the benefit obligations and the funded status for 53 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 9. BENEFIT PLANS (continued) retired agents' and retired employees' postretirement benefits over the periods ended December 31:
(Millions) 2002 2001 Change in benefit obligation: Benefit obligation at January 1 $ 25.4 $ 19.1 Service cost 0.5 0.7 Interest cost 1.5 1.7 Actuarial (gain) loss 4.0 1.4 Acquisitions -- 3.7 Plan amendments (6.5) -- Benefits paid (1.2) (1.2) -------------------------------------------------------- Benefit obligation at December 31 $ 23.7 $ 25.4 ======================================================== Funded status: Funded status at December 31 $(23.7) $(25.4) Unrecognized past service cost (3.6) -- Unrecognized net loss 5.4 1.4 -------------------------------------------------------- Net amount recognized $(21.9) $(24.0) ========================================================
The weighted-average discount rate assumption for retired agents' and retired employees postretirement benefits was 6.8% for 2002 and 7.5% for 2001. The medical health care cost trend rates were 10.0%, decreasing to 5.0% by 2008 for 2002; and 8.5%, gradually decreasing to 5.5% by 2007 for 2001. Increasing the health care trend rate by 1% would increase the benefit obligation by $1.6 million. Decreasing the health care trend rate by 1% would decrease the benefit obligation by $1.4 million as of December 31, 2002. Net periodic benefit costs were as follows:
Preacquisition -------------- One month Eleven months Year ended Year ended ended ended December 31, December 31, December 31, November 30, (Millions) 2002 2001 2000 2000 Service cost $ 0.5 $0.7 $ -- $0.2 Interest cost 1.5 1.7 0.1 1.2 Actuarial (gain) loss -- -- -- 0.2 Unrecognized past service cost (2.9) -- -- -- - ------------------------------------------------------------------------------------------------- Net periodic benefit cost $(0.9) $2.4 $0.1 $1.2 =================================================================================================
54 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 9. BENEFIT PLANS (continued) There were no gains or losses resulting from curtailments or settlements of the postretirement benefit plans during 2002, 2001 or 2000. NON-QUALIFIED DEFINED BENEFIT PENSION PLANS Prior to December 31, 2001, ILIAC, in conjunction with ING, had a non-qualified defined benefit pension plan covering certain eligible employees. The plan provided pension benefits based on a cash balance formula, which credited employees annually with an amount equal to a percentage of eligible pay based on age and years of service as well as an interest credit based on individual account balances. As of December 31, 2001, ILIAC, in conjunction with ING, has a non-qualified defined benefit pension plan providing benefits to certain eligible employees based on years of service and the employee's average annual compensation during the last five years of employment, which was assumed at December 31, 2002 to increase at an annual rate of 3.8%. Contributions are determined using the Projected Unit Credit Method. ILIAC, in conjunction with ING, also has a non-qualified pension plan covering certain agents. The plan provides pension benefits based on annual commission earnings. During 2002, liabilities, net of tax, totaling $15.1 million were allocated to the Company related to a Supplemental Excess Retirement Plan ("SERP") that covers certain employees of ING Life Insurance Company of America and Aeltus, affiliates of the Company. The following tables summarize the benefit obligations and the funded status for the Company's non-qualified pension plans for the periods ended December 31, 2002 and 2001. These tables have been presented, for comparison purposes, as though the SERP transfer had occurred as of January 1, 2001. The accompanying consolidated balance sheet and income statement do not reflect the SERP transfer until 12/31/02:
(Millions) 2002 2001 Change in benefit obligation: Benefit obligation at January 1 $ 95.3 $ 88.7 Service cost -- 4.4 Interest cost 6.8 7.1 Actuarial (gain) loss 5.7 0.7 Plan amendments 4.5 (4.1) Benefits paid (5.5) (1.5) ---------------------------------------------------------- Benefit obligation at December 31 $ 106.8 $ 95.3 ========================================================== Funded status: Funded status at December 31 $(106.8) $ (95.3) Unrecognized past service cost 0.8 1.2 Unrecognized net loss (gain) 6.4 (7.1) ---------------------------------------------------------- Net amount recognized $ (99.6) $(101.2) ==========================================================
At December 31, 2002 and 2001, the accumulated benefit obligation was $43.8 million and $27.3 million, respectively. 55 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 9. BENEFIT PLANS (continued) The weighted-average discount rate assumption for Agents' and employees' non-qualified pension plans was 6.8%, and 3.8% for 2002 and 7.5% and 5.3% for 2001. Net periodic benefit costs were as follows:
Preacquisition -------------- One month Eleven months Year ended Year ended ended ended December 31, December 31, December 31, November 30, (Millions) 2002 2001 2000 2000 Service cost $ 6.8 $ 4.4 $ 0.3 $ 2.1 Interest cost -- 7.1 0.3 3.8 Actuarial (gain) loss -- -- -- 0.2 Return on plan assets -- -- (0.3) (3.2) Unrecognized past service cost (0.3) -- -- (0.1) ------------------------------------------------------------------------------------------------- Net periodic benefit cost $ 6.5 $11.5 $ 0.3 $ 2.8 =================================================================================================
There was a curtailment of $2.6 million in 2002. There were no gains or losses resulting from curtailments or settlements of the non-qualified pension plans during 2000. ING SAVINGS AND INVESTMENT PLANS ILIAC, in conjunction with ING, also has a Savings Plan. Substantially all employees are eligible to participate in a savings plan under which designated contributions, which may be invested in a variety of financial instruments, are matched up to 6.0% of compensation by ING. Pretax charges to operations for the incentive savings plan were $6.8 million, $11.0 million, and $9.0 million in 2002, 2001, and 2000, respectively. ILIAC, in conjunction with former Aetna, had a stock incentive plan that provided for stock options, deferred contingent common stock or equivalent cash awards or restricted stock to employees. Certain executive, middle management and non-management employees were granted options to purchase common stock of former Aetna at or above the market price on the date of grant. Options generally became 100% vested three years after the grant was made, with one-third of the options vesting each year. The former Aetna did not recognize compensation expense for stock options granted at or above the market price on the date of grant under its stock incentive plans. In addition, executives were, from time to time, granted incentive units which were rights to receive common stock or an equivalent value in cash. The sale of the Company to ING AIH by former Aetna caused all outstanding stock options to vest immediately. The costs to the Company associated with the former Aetna stock plans for 2001 and 2000 were $1.8 million and $2.7 million, respectively. 56 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 10. RELATED PARTY TRANSACTIONS INVESTMENT ADVISORY AND OTHER FEES ILIAC and Aeltus serve as investment advisors and administrators to the Company's mutual funds and variable funds (collectively, the Funds). Company mutual funds pay Aeltus or ILIAC, as investment advisor or administrator, a daily fee which, on an annual basis, ranged, depending on the fund, from 0.1% to 0.5% of their average daily net assets. All of the funds managed by ILIAC and certain of the funds managed by Aeltus are subadvised by investment advisors, in which case, Aeltus or ILIAC pays a subadvisory fee to the investment advisors. The Company is also compensated by the separate accounts (variable funds) for bearing mortality and expense risks pertaining to variable life and annuity contracts. Under the insurance and annuity contracts, the separate accounts pay the Company a daily fee, which, on an annual basis is, depending on the product, up to 3.4% of their average daily net assets. The amount of compensation and fees received from the Company mutual funds and separate accounts, included in fee income amounted to $391.8 million, $421.7 million and $506.3 million in 2002, 2001 and 2000, respectively. RECIPROCAL LOAN AGREEMENT ILIAC maintains a reciprocal loan agreement with ING AIH, a Delaware corporation and affiliate, to facilitate the handling of unusual and/or unanticipated short-term cash requirements. Under this agreement, which became effective in June 2001 and expires on April 1, 2011, ILIAC and ING AIH can borrow up to 3% of ILIAC's statutory admitted assets as of the preceding December 31 from one another. Interest on any ILIAC borrowings is charged at the rate of ING AIH's cost of funds for the interest period plus 0.15%. Interest on any ING AIH borrowings is charged at a rate based on the prevailing interest rate of U.S. commercial paper available for purchase with a similar duration. Under this agreement, ILIAC incurred interest expense of $0.1 million for the years ended December 31, 2002 and 2001, and earned interest income of $2.1 million and $3.3 million for the years ended December 31, 2002 and 2001, respectively. At December 31, 2002, ILIAC had no receivables and no outstanding borrowings from ING AIH under this agreement. CAPITAL TRANSACTIONS In 2002, the company received capital contributions in the form of investments in affiliated mutual funds of $164.3 million from HOLDCO. The Company did not receive capital contributions in 2001. OTHER Premiums due and other receivables include $0.1 million and $1.0 million due from affiliates at December 31, 2002 and 2001, respectively. Other liabilities include $1.3 million and $0.6 million due to affiliates for the years ended December 31, 2002 and 2001, respectively. 57 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 11. REINSURANCE At December 31, 2002, the Company had reinsurance treaties with six unaffiliated reinsurers and one affiliated reinsurer covering a significant portion of the mortality risks and guaranteed death and living benefits under its variable contracts. The Company remains liable to the extent its reinsurers do not meet their obligations under the reinsurance agreements. On October 1, 1998, the Company sold its domestic individual life insurance business to Lincoln for $1 billion in cash. The transaction is generally in the form of an indemnity reinsurance arrangement, under which Lincoln contractually assumed from the Company certain policyholder liabilities and obligations, although the Company remains directly obligated to policyholders. Effective January 1, 1998, 90% of the mortality risk on substantially all individual universal life product business written from June 1, 1991 through October 31, 1997 was reinsured externally. Beginning November 1, 1997, 90% of new business written on these products was reinsured externally. Effective October 1, 1998 this agreement was assigned from the third party reinsurer to Lincoln. Effective December 31, 1988, the Company entered into a modified coinsurance reinsurance agreement ("MODCO") with Aetna Life Insurance Company ("Aetna Life"), (formerly an affiliate of the Company), in which substantially all of the nonparticipating individual life and annuity business written by Aetna Life prior to 1981 was assumed by the Company. Effective January 1, 1997, this agreement was amended to transition (based on underlying investment rollover in Aetna Life) from a modified coinsurance arrangement to a coinsurance agreement. As a result of this change, reserves were ceded to the Company from Aetna Life as investment rollover occurred. Effective October 1, 1998, this agreement was fully transitioned to a coinsurance arrangement and this business along with the Company's direct individual life insurance business, with the exception of certain supplemental contracts with reserves of $66.2 million and $69.9 million as of December 31, 2002 and 2001, respectively, was sold to Lincoln. On December 16, 1988, the Company assumed $25.0 million of premium revenue from Aetna Life, for the purchase and administration of a life contingent single premium variable payout annuity contract. In addition, the Company is also responsible for administering fixed annuity payments that are made to annuitants receiving variable payments. Reserves of $19.6 million and $24.1 million were maintained for this contract as of December 31, 2002 and 2001, respectively. 58 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 11. REINSURANCE (continued) The effect of reinsurance on premiums and recoveries was as follows:
Preacquisition -------------- One month Eleven months Year ended Year ended ended ended December 31, December 31, December 31, November 30, (Millions) 2002 2001 2000 2000 Direct Premiums Federal $ 97.3 $112.3 $17.2 $143.2 Reinsurance assumed 9.7 0.6 0.1 0.8 Reinsurance ceded 8.3 (1.3) 0.8 6.3 ------------------------------------------------------------------------------------------------- Net Premiums 98.7 114.2 16.5 137.7 ------------------------------------------------------------------------------------------------- Reinsurance Recoveries $317.6 $363.7 $44.5 $371.6 =================================================================================================
12. COMMITMENTS AND CONTINGENT LIABILITIES LEASES For the year ended December 31, 2002 rent expense for leases was $18.1 million. The future net minimum payments under noncancelable leases for the years ended December 31, 2003 through 2007 are estimated to be $17.5 million, $15.7 million, $14.9 million, $13.6 million and $12.1 million, respectively, and $0.2 million, thereafter. The Company pays substantially all expenses associated with its leased and subleased office properties. Expenses not paid directly by the Company are paid for by an affiliate and allocated back to the Company. COMMITMENTS Through the normal course of investment operations, the Company commits to either purchase or sell securities, commercial mortgage loans or money market instruments at a specified future date and at a specified price or yield. The inability of counterparties to honor these commitments may result in either higher or lower replacement cost. Also, there is likely to be a change in the value of the securities underlying the commitments. At December 31, 2002 and 2001, the Company had off-balance sheet commitments to purchase investments of $236.7 million with an estimated fair value of $236.7 million and $92.7 million with an estimated fair value of $92.7 million, respectively. LITIGATION The Company is a party to threatened or pending lawsuits arising, from the normal conduct of business. Due to the climate in insurance and business litigation, suits against the Company sometimes include claims for substantial compensatory, consequential or punitive damages and other types of relief. Moreover, certain claims are asserted as class actions, purporting to represent a group of similarly situated individuals. While it is not possible to forecast the outcome of such lawsuits, in light of existing insurance, reinsurance and established reserves, it is 59 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 12. COMMITMENTS AND CONTINGENT LIABILITIES (continued) the opinion of management that the disposition of such lawsuits will not have materially adverse effect on the Company's operations or financial position. 13. SEGMENT INFORMATION The Company's realignment of Worksite Products and Individual Products operating segments into one reporting segment (USFS) is reflected in the restated summarized financial information for December 31, 2001 and 2000 in the table below. Effective with the third quarter of 2002, items that were previously not allocated back to USFS but reported in Other are now allocated to USFS and reported in the restated financial information for the period ending December 31, 2001 and 2000. Summarized financial information for the Company's principal operations for December 31, were as follows:
Non-Operating Segments ----------------------- Investment Management (Millions) USFS (1) Services (2) Other (3) Total 2002 ------------------------------ Revenues from external customers $ 507.2 $ 19.2 $ (9.5) $ 516.9 Net investment income 959.2 0.2 0.1 959.5 ------------------------------------------------------------------------------ Total revenue excluding net realized capital gains (losses) $1,466.4 $ 19.4 $ (9.4) $ 1,476.4 ============================================================================== Operating earnings (4) $ 121.1 $ 4.7 $ -- $ 125.8 Cumulative effect of accounting change (2,412.1) -- -- (2,412.1) Net realized capital losses, net of tax (58.3) -- -- (58.3) ------------------------------------------------------------------------------ Net income (loss) $(2,349.3) $ 4.7 -- $(2,344.6) ============================================================================== 2001 ------------------------------ Revenues from external customers $ 585.0 $119.6 $(37.0) $ 667.6 Net investment income 885.5 1.7 1.2 888.4 ------------------------------------------------------------------------------ Total revenue excluding net realized capital gains (losses) $1,470.5 $121.3 $(35.8) $ 1,556.0 ============================================================================== Operating earnings (4) $ 86.2 $ 27.4 $ -- $ 113.6 Net realized capital gains, net of tax (13.8) 0.1 -- (13.7) ------------------------------------------------------------------------------ Net income $ 72.4 $ 27.5 $ -- $ 99.9 ==============================================================================
60 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 13. SEGMENT INFORMATION (continued)
Non-Operating Segments ----------------------- Investment Management (Millions) USFS (1) Services (2) Other (3) Total 2000 ------------------------------ Revenues from external customers $ 692.1 $138.2 $(53.0) $ 777.3 Net investment income 905.8 2.8 3.8 912.4 ------------------------------------------------------------------------------ Total revenue excluding net realized capital gains (losses) $1,597.9 $141.0 $(49.2) $ 1,689.7 ============================================================================== Operating earnings (4) $ 197.4 $ 9.7 $ -- $ 207.1 Net realized capital gains, net of tax (23.1) 0.1 -- (23.0) ------------------------------------------------------------------------------ Net income from continuing operations $ 174.3 $ 9.8 $ -- $ 184.1 ==============================================================================
(1) USFS includes deferred annuity contracts that fund defined contribution and deferred compensation plans, immediate annuity contracts; mutual funds; distribution services for annuities and mutual funds; programs offered to qualified plans and nonqualified deferred compensation plans that package administrative and record- keeping services along with a menu of investment options; wrapper agreements containing certain benefit responsive guarantees that are entered into with retirement plans, whose assets are not invested with the Company; investment advisory services and pension plan administrative services. USFS also includes deferred and immediate annuity contracts, both qualified and nonqualified, that are sold to individuals and provide variable or fixed investment options or a combination of both. (2) Investment Management Services include: investment advisory services to affiliated and unaffiliated institutional and retail clients; underwriting; distribution for Company mutual funds and a former affiliate's separate ccounts; and trustee, administrative and other services to retirement plans. On February 28, 2002, IA Holdco and its subsidiaries, which comprised this segment, were distributed to HOLDCO (refer to Note 1). (3) Other includes consolidating adjustments between USFS and Investment Management Services. (4) Operating earnings is comprised of net income (loss) excluding net realized capital gains and losses. While operating earnings is the measure of profit or loss used by the Company's management when assessing performance or making operating decisions, it does not replace net income as a measure of profitability. 14. DISCONTINUED OPERATIONS--INDIVIDUAL LIFE INSURANCE On October 1, 1998, the Company sold its domestic individual life insurance business to Lincoln for $1,000.0 million in cash. The transaction was generally in the form of an indemnity reinsurance arrangement, under which Lincoln contractually assumed from the Company certain policyholder liabilities and obligations, although the Company remains directly obligated to policyholders. Assets related to and supporting the life policies were transferred to Lincoln and the Company recorded a reinsurance recoverable from Lincoln. The transaction resulted in an after-tax gain on the sale of approximately $117.0 million, of which $57.7 million was deferred and was being recognized over approximately 15 years. The remaining portion of the gain was recognized immediately in net income and was largely attributed to access to the agency sales force and brokerage distribution channel. Approximately $5.7 million (after tax) of amortization related to the deferred gain was recognized in both 2000 and 1999. During the fourth quarter of 1999, the Company refined certain accrual and tax estimates which had been established in 61 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 14. DISCONTINUED OPERATIONS--INDIVIDUAL LIFE INSURANCE (continued) connection with the recording of the deferred gain. As a result, the deferred gain was increased by $12.9 million (after tax) to $65.4 million at December 31, 1999. In conjunction with the accounting for the 2000 acquisition of the Aetna Financial Services business, of which the Company is a part, the deferred gain, which was previously part of other liabilities, was written off (Refer to Note 1). QUARTERLY DATA (UNAUDITED)
2002 (Millions) First Second Third Fourth Total Revenue $363.5 $351.3 $349.8 $ 310.8 ----------------------------------------------------------------- Income (loss) from continuing operations before income taxes 44.1 39.3 (23.1) 25.8 Income tax expense (benefit) 15.2 12.9 (9.9) 0.4 Income (loss) from continuing operations 28.9 26.4 (13.2) 25.4 ----------------------------------------------------------------- Cumulative effect of change in accounting principle -- -- -- (2,412.1) ----------------------------------------------------------------- Net income (loss) $ 28.9 $26.4 $(13.2) $(2,386.7) ----------------------------------------------------------------- 2001 (Millions) First Second Third Fourth Total Revenue $395.5 $411.9 $387.2 $ 340.4 ----------------------------------------------------------------- Income (loss) from continuing operations before income taxes 64.3 95.0 68.9 (40.9) Income tax expense (benefit) 28.2 39.1 27.1 (7.0) ----------------------------------------------------------------- Income from continuing operations 36.1 55.9 41.8 (33.9) ----------------------------------------------------------------- Net (loss) $ 36.1 $55.9 $ 41.8 $ (33.9) -----------------------------------------------------------------
62 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Omitted pursuant to General Instruction I(2) of Form 10-K. ITEM 11. EXECUTIVE COMPENSATION Omitted pursuant to General Instruction I(2) of Form 10-K. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Omitted pursuant to General Instruction I(2) of Form 10-K. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Omitted pursuant to General Instruction I(2) of Form 10-K. ITEM 14. CONTROLS AND PROCEDURES (a) Within the 90-day period prior to the filing of this report, the Company carried out an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rule 13a-14 of the Securities Exchange Act of 1934). Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that the Company's current disclosure controls and procedures are effective in ensuring that material information relating to the Company required to be disclosed in the Company's periodic SEC filings is made known to them in a timely manner. (b) There have not been any significant changes in the internal controls of the Company or other factors that could significantly affect these internal controls subsequent to the date the Company carried out its evaluation. PART IV ITEM 15. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K The following documents are filed as part of this report: 1. Financial statements. See Item 8 on Page 17. 2. Financial statement schedules. See Index on Financial Statement Schedules on Page 62. EXHIBITS 3.(i) Certificate of Incorporation as amended and restated January 1, 2002. Incorporated by reference to the ING Life Insurance and Annuity Company Annual Report on Form 10-K for the year ending December 31, 2002 (File No. 33-23376), as filed on March 28, 2002. 63 ITEM 15. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (continued) 3.(ii) By-Laws, as restated January 1, 2002. Incorporated by reference to the ING Life Insurance and Annuity Company Annual Report on Form 10-K for the year ending December 31, 2002 (File No. 33-23376), as filed on March 28, 2002. 4.(a) Instruments Defining the Rights of Security Holders, Including Indentures (Annuity Contracts) Incorporated by reference to Post-Effective Amendment No. 14 to Registration Statement on Form N-4 (File No. 33-75964), as filed on July 29, 1997. Incorporated by reference to Post-Effective Amendment No. 6 to Registration Statement on Form N-4 (File No. 33-75980), as filed on February 12, 1997. Incorporated by reference to Post-Effective Amendment No. 12 to Registration Statement on Form N-4 (File No. 33-75964), as filed on February 11, 1997. Incorporated by reference to Post-Effective Amendment No. 5 to Registration Statement on Form N-4 (File No. 33-75986), as filed on April 12, 1996. Incorporated by reference to Post-Effective Amendment No. 12 to Registration Statement on Form N-4 (File No. 333-01107), as filed on February 4, 1999. Incorporated by reference to Post-Effective Amendment No. 4 to Registration Statement on Form N-4 (File No. 33-75988), as filed on April 15, 1996. Incorporated by reference to Post-Effective Amendment No. 3 to Registration Statement on Form N-4 (File No. 33-81216), as filed on April 17, 1996. Incorporated by reference to Post-Effective Amendment No. 3 to Registration Statement on Form N-4 (File No. 33-91846), as filed on April 15, 1996. Incorporated by reference to Post-Effective Amendment No. 6 to Registration Statement on Form N-4 (File No. 33-91846), as filed on August 6, 1996. Incorporated by reference to Registration Statement on Form N-4 (File No. 333-01107), as filed on February 21, 1996. Incorporated by reference to Post-Effective Amendment No. 12 to Registration Statement on Form N-4 (File No. 33-75982), as filed on February 20, 1997. Incorporated by reference to Post-Effective Amendment No. 7 to Registration Statement on Form N-4 (File No. 33-75992), as filed on February 13, 1997. 64 ITEM 15. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (continued) Incorporated by reference to Post-Effective Amendment No. 6 to Registration Statement on Form N-4 (File No. 33-75974), as filed on February 28, 1997. Incorporated by reference to Post-Effective Amendment No. 6 to Registration Statement on Form N-4 (File No. 33-75962), as filed on April 17, 1996. Incorporated by reference to Post-Effective Amendment No. 14 to Registration Statement on Form N-4 (File No. 33-75962), as filed on April 17, 1998. Incorporated by reference to Post-Effective Amendment No. 6 to Registration Statement on Form N-4 (File No. 33-75982), as filed on April 22, 1996. Incorporated by reference to Post-Effective Amendment No. 8 to Registration Statement on Form N-4 (File No. 33-75980), as filed on August 19, 1997. Incorporated by reference to Registration Statement on Form N-4 (File No. 333-56297), as filed on June 8, 1998. Incorporated by reference to Post-Effective Amendment No. 3 to Registration Statement on Form N-4 (File No. 33-79122), as filed on August 16, 1995. Incorporated by reference to Post-Effective Amendment No. 32 to Registration Statement on Form N-4 (File No. 33-34370), as filed on December 16, 1997. Incorporated by reference to Post-Effective Amendment No. 30 to Registration Statement on Form N-4 (File No. 33-34370), as filed on September 29, 1997. Incorporated by reference to Post-Effective Amendment No. 26 to Registration Statement on Form N-4 (File No. 33-34370), as filed on February 21, 1997. Incorporated by reference to Post-Effective Amendment No. 35 to Registration Statement on Form N-4 (File No. 33-34370), as filed on April 17, 1998. Incorporated by reference to Post-Effective Amendment No. 1 to Registration Statement on Form N-4 (File No. 33-87932), as filed on September 19, 1995. Incorporated by reference to Post-Effective Amendment No. 8 to Registration Statement on Form N-4 (File No. 33-79122), as filed on April 17, 1998. Incorporated by reference to Post-Effective Amendment No. 7 to Registration Statement on Form N-4 (File No. 33-79122), as filed on April 22, 1997. Incorporated by reference to Post-Effective Amendment No. 21 to Registration Statement on Form N-4 (File No. 33-75996), as filed on February 16, 2000. 65 ITEM 15. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (continued) Incorporated by reference to Post-Effective Amendment No. 13 to Registration Statement on Form N-4 (File No. 333-01107), as filed on April 7, 1999. Incorporated by reference to Post-Effective Amendment No. 37 to Registration Statement on Form N-4 (File No. 33-34370), as filed on April 9, 1999. Incorporated by reference to Post-Effective Amendment No. 1 to Registration Statement on Form N-4 (File No. 333-87305), as filed on December 13, 1999. Incorporated by reference to Post-Effective Amendment No. 18 to Registration Statement on Form N-4 (File No. 33-56297), as filed on August 30, 2000. Incorporated by reference to Post-Effective Amendment No. 17 to Registration Statement on Form N-4 (File No. 33-75996), as filed on April 7, 1999. Incorporated by reference to Post-Effective Amendment No. 19 to Registration Statement on From N-4 (File No. 333-01107), as filed on February 16, 2000. Incorporated by reference to the Registration Statement on Form S-2 (File No. 33-64331), as filed on November 16, 1995. Incorporated by reference to Pre-Effective Amendment No. 2 to the Registration Statement on Form S-2 (File No. 33-64331), as filed on January 17,1996. 10. Material Contracts 10.(a) Amended and Restated Asset Purchase Agreement by and among Aetna Life Insurance Company, ING Life Insurance and Annuity Company, The Lincoln National Life Insurance Company and Lincoln Life & Annuity Company of New York, dated May 21, 1998, incorporated herein by reference to the Company's Form 10-Q filed on August 8, 1998. (The Company will provide to the Securities and Exchange Commission a copy of omitted schedules or similar attachments upon request.) 10.(b) Distribution Agreement, dated as of December 13, 2000, between Lion Connecticut Holdings Inc. and Aetna Inc., incorporated by reference to the Company's Form 10-K filed on March 30, 2001. 10.(c) Employee Benefits Agreement, dated as of December 13, 2000, between Lion Connecticut Holdings Inc. and Aetna Inc., incorporated by reference to the Company's Form 10-K filed on March 30, 2001. 66 ITEM 15. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (continued) 10.(d) Tax Sharing Agreement, dated as of December 13, 2000, among Lion Connecticut Holdings Inc., Aetna Inc. and ING America Insurance Holdings, Inc., incorporated by reference to the Company's Form 10-K filed on March 30, 2001. 10.(e) Transition Services Agreement, dated as of December 13, 2000, between Lion Connecticut Holdings Inc. and Aetna Inc., incorporated by reference to the Company's Form 10-K filed on March 30, 2001. 10.(f) Lease Agreement, dated as of December 13, 2000, by and between ING Life Insurance Company and ING Life Insurance and Annuity Company, incorporated by reference to the Company's Form 10-K filed on March 30, 2001. 10.(g) Real Estate Services Agreement, dated as of December 13, 2000, between Aetna Inc. and ING Life Insurance and Annuity Company, incorporated by reference to the Company's Form 10-K filed on March 30, 2001. 10.(h) 10 State House Square Services Agreement, dated as of December 13, 2000, between Aetna Inc. and Lion Connecticut Holdings Inc., incorporated by reference to the Company's Form 10-K filed on March 30, 2001. (b) Reports on form 8-K. None. 67 INDEX TO CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
Page ---- Reports of Independent Auditors................... 69 I. Summary of Investments December 31, 2002.................................. 71 III. Supplementary Insurance Information as of and for the years ended December 31, 2002, 2001 and one month ended December 31, 2000 and eleven months ended November 30, 2000........ 72 IV. Reinsurance as of and for the years ended December 31, 2002, 2001 and one month ended December 31, 2000 and eleven months ended November 30, 2000........ 74
Schedules other than those listed above are omitted because they are not required or not applicable. 68 REPORT OF INDEPENDENT AUDITORS The Board of Directors ING Life Insurance and Annuity Company We have audited the consolidated financial statements of ING Life Insurance and Annuity Company and Subsidiaries as of December 31, 2002 and 2001, and for each of the years then ended, and have issued our report thereon dated March 25, 2003. Our audits also included the financial statement schedules listed in Item 15. These schedules are the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. /s/ Ernst & Young LLP Atlanta, Georgia March 25, 2003 69 INDEPENDENT AUDITORS' REPORT The Shareholder and Board of Directors ING Life Insurance and Annuity Company Under date of March 27, 2001, we reported on the consolidated statements of income, changes in shareholder's equity and cash flows of ING Life Insurance Company of America and Subsidiaries, formerly known as Aetna Life Insurance and Annuity Company and Subsidiaries, for the period from December 1, 2000 to December 31, 2000 ("Successor Company"), and for the period from January 1, 2000 to November 30, 2000 ("Preacquisition Company"), as included herein. In connection with our audit of the aforementioned financial statements, we audited the related financial statement schedules as listed in the accompanying index. These financial statement schedules are the responsibility of the Companies' management. Our responsibility is to express an opinion on these financial statement schedules based on our audit. In our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. As discussed in Note 1 to the consolidated financial statements, effective November 30, 2000, ING America Insurance Holdings Inc. acquired all of the outstanding stock of Aetna Inc., Aetna Life Insurance and Annuity Company's indirect parent and sole shareholder in a business combination accounted for as a purchase. As a result of the acquisition, the consolidated financial information for the periods after the acquisition is presented on a different cost basis than that for the periods before the acquisition and, therefore, is not comparable. /s/ KPMG LLP Hartford, Connecticut March 27, 2001 70 SCHEDULE I Summary of Investments As of December 31, 2002 (Millions)
Amount shown on Type of Investment Cost Value* Balance Sheet ------------------ --------- --------- --------------- Fixed maturities: U.S. government and government agencies and authorities $ 74.2 $ 77.1 $ 77.1 States, municipalities and political subdivisions 10.2 12.7 12.7 U.S. corporate securities 8,370.2 8,902.3 8,902.3 Foreign securities (1) 484.9 503.7 503.7 Mortgage-backed securities 5,374.2 5,507.3 5,507.3 Other asset-backed securities 882.4 918.9 918.9 Less: Fixed maturities pledged to creditors 154.9 155.0 155.0 --------- --------- --------- Total fixed maturities securities 15,041.2 15,767.0 15,767.0 --------- --------- --------- Equity securities: Non-redeemable preferred stock 34.2 34.2 34.2 Investment in affiliated mutual funds 203.9 201.0 201.0 Common stock 0.2 0.2 0.2 --------- --------- --------- Total equity securities 238.3 235.4 235.4 --------- --------- --------- Short term investments 6.2 6.2 6.2 Mortgage loans 576.6 632.6 576.6 Policy loans 296.3 296.3 296.3 Other investments 52.2 52.2 52.2 Securities pledged to creditors 154.9 155.0 155.0 --------- --------- --------- Total investments $16,365.7 $17,144.7 $17,088.7 ========= ========= =========
* See Notes 2 and 3 of Notes to Consolidated Financial Statements. (1) The term "foreign" includes foreign governments, foreign political subdivisions, foreign public utilities and all other bonds of foreign issuers. Substantially all of the Company's foreign securities are denominated in U.S. dollars. 71 SCHEDULE III Supplementary Insurance Information As of and for the years ended December 31, 2002 and 2001 and one month ended December 31, 2000 and eleven months ended November 30, 2000 (Millions)
Future Deferred policy Unpaid policy benefits claims Other acquisition and claims' and claim Unearned policyholders' Segment costs reserves expenses premiums funds ======================================================================================== YEAR ENDED DECEMBER 31, 2002 USFS $229.8 $3,305.2 $30.0 $ -- $14,756.0 Investment Management Services -- -- -- -- -- Other -- -- -- -- -- - ---------------------------------------------------------------------------------------- Total $229.8 $3,305.2 $30.0 $ -- $14,756.0 ======================================================================================== YEAR ENDED DECEMBER 31, 2001 USFS $121.3 $1,044.8 $ 4.2 $0.8 $12,129.1 Investment Management Services -- -- -- -- -- Other -- -- -- -- -- Discontinued operations (1) -- 2,952.0 24.6 -- 6.7 - ---------------------------------------------------------------------------------------- Total $121.3 $3,996.8 $28.8 $0.8 $12,135.8 ========================================================================================
(1) Domestic individual life insurance business. 72 SCHEDULE III (continued) Supplementary Insurance Information As of and for the years ended December 31, 2002 and 2001 and one month ended December 31, 2000 and eleven months ended November 30, 2000 (Millions)
Amortization of Interest credited deferred policy Net and other acquisition costs investment Other benefits to and value of Segment Premiums income (2) Income (3) policyholders business acquired Operating expenses ===================================================================================================================== YEAR ENDED DECEMBER 31, 2002 USFS $ 98.7 $959.2 $307.5 $746.4 $181.5 $358.7 Investment Management Services -- 0.2 19.2 -- -- 12.0 Other -- 0.1 (9.5) -- -- (9.3) - --------------------------------------------------------------------------------------------------------------------- Total $ 98.7 $959.5 $317.2 $746.4 $181.5 $361.4 ===================================================================================================================== YEAR ENDED DECEMBER 31, 2001 USFS $114.2 $885.5 $449.7 $729.6 $112.0 $463.7 Investment Management Services -- 1.7 119.7 -- -- 78.2 Other -- 1.2 (37.0) -- -- (35.8) - --------------------------------------------------------------------------------------------------------------------- Total $114.2 $888.4 $532.4 $729.6 $112.0 $506.1 ===================================================================================================================== ONE MONTH ENDED DECEMBER 31, 2000 USFS $ 16.5 $ 78.3 $ 44.5 $ 68.9 $ 10.2 $ 43.0 Investment Management Services -- -- 11.5 -- -- 10.2 Other -- 0.3 (4.4) -- -- (4.1) - --------------------------------------------------------------------------------------------------------------------- Total from continuing operations $ 16.5 $ 78.6 $ 51.6 $ 68.9 $ 10.2 $ 49.1 ===================================================================================================================== Discontinued operations $ -- $ -- $ 0.8 $ -- $ -- $ -- ===================================================================================================================== ELEVEN MONTHS ENDED NOVEMBER 30, 2000 USFS $137.7 $827.5 $457.8 $726.7 $116.7 $347.5 Investment Management Services -- 2.8 126.9 -- -- 112.1 Other -- 3.5 (48.6) -- -- (45.0) - --------------------------------------------------------------------------------------------------------------------- Total from continuing operations $137.7 $833.8 $536.1 $726.7 $116.7 $414.6 ===================================================================================================================== Discontinued operations $ -- $ -- $ 8.2 $ -- $ -- $ -- =====================================================================================================================
(2) The allocation of net investment income is based upon the investment year method or specific identification of certain portfolios within specific segments. (3) Includes net realized capital gains and losses and fee income. 73 SCHEDULE IV Reinsurance Information As of and for the years ended December 31, 2002 and 2001 and one month ended December 31, 2000 and eleven months ended November 30, 2000 (Millions)
Percentage of (Millions) Gross Ceded Assumed Net assumed to net ================================================================================== YEAR ENDED DECEMBER 31, 2002 Life insurance in Force $32,064.0 $31,853.2 $995.7 $1,206.5 Premiums: Discontinued operations 255.7 272.7 17.0 -- Accident and Health Insurance 2.0 2.0 -- -- Annuities 97.3 8.3 9.7 98.7 9.8% - ---------------------------------------------------------------------------------- Total Premiums $ 355.0 $ 283.0 $ 26.7 $ 98.7 ================================================================================== YEAR ENDED DECEMBER 31, 2001 Life insurance in Force $34,645.5 $34,614.0 $883.7 $ 915.2 Premiums: Discontinued operations 301.2 315.0 13.8 -- Accident and Health Insurance 4.5 4.5 -- -- Annuities 112.3 (1.3) 0.6 114.2 0.5% - ---------------------------------------------------------------------------------- Total Premiums $ 418.0 $ 318.2 $ 14.4 $ 114.2 ================================================================================== ONE MONTH ENDED DECEMBER 31, 2000 Life insurance in Force $ 4,027.1 $ 4,024.4 $103.1 $ 105.8 Premiums: Discontinued operations 39.2 40.9 1.7 -- Accident and Health Insurance 1.6 1.6 -- -- Annuities 17.2 0.8 0.1 16.5 0.6% - ---------------------------------------------------------------------------------- Total Premiums $ 58.0 $ 43.3 $ 1.8 $ 16.5 ================================================================================== ELEVEN MONTHS ENDED NOVEMBER 30, 2000 Life insurance in Force $33,607.6 $33,585.7 $860.3 $ 882.2 Premiums: Discontinued operations 327.4 341.5 14.1 -- Accident and Health Insurance 13.6 13.6 -- -- Annuities 143.2 6.3 0.8 137.7 0.6% - ---------------------------------------------------------------------------------- Total Premiums $ 484.2 $ 361.4 $ 14.9 $ 137.7 ==================================================================================
74 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ING LIFE INSURANCE AND ANNUITY COMPANY (Registrant) March 25, 2003 By /s/ Cheryl L. Price - ------------------- ----------------------- (Date) Cheryl L. Price Vice President, Chief Financial Officer and Chief Accounting Officer (Duly Authorized Officer and Principal Financial Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on or before March 27, 2003.
SIGNATURES TITLE /s/ Cheryl L. Price - ---------------------------------------------- Cheryl L. Price Vice President, Chief Financial Officer and Chief Accounting Officer /s/ Keith Gubbay - ---------------------------------------------- Keith Gubbay Director and President /s/ Thomas J. McInerney - ---------------------------------------------- Thomas J. McInerney Director /s/ P. Randall Lowery - ---------------------------------------------- P. Randall Lowery Director /s/ Mark A. Tullis - ---------------------------------------------- Mark A. Tullis Director
75 CERTIFICATION I, Cheryl L. Price, certify that: 1. I have reviewed this annual report on Form 10-K of ING Life Insurance and Annuity Company; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and (c) presented in this annual report our conclusion about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies, defenses and material weaknesses. Date: March 25, 2003 By /s/ Cheryl L. Price - -------------------------------------------------- Cheryl L. Price Vice President, Chief Financial Officer and Chief Accounting Officer (Duly Authorized Officer and Principal Financial Officer)
76 CERTIFICATION I, Keith Gubbay, certify that: 1. I have reviewed this annual report on Form 10-K of ING Life Insurance and Annuity Company; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and (c) presented in this annual report our conclusion about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies, defenses and material weaknesses. Date March 25, 2003 By /s/ Keith Gubbay - -------------------------------------------------- Keith Gubbay President (Duly Authorized Officer and Principal Officer)
77 CERTIFICATION Pursuant to 18 U.S.C. Section 1350, the undersigned officer of ING Life Insurance and Annuity Company (the "Company") hereby certifies that, to the officer's knowledge, the Company's Annual Report on Form 10-K for the year ended December 31, 2002 (the "Report") fully complies with the requirements of Section 13 or 15(d), as applicable, of the Securities Exchange Act of 1934 and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. March 25, 2003 By /s/ Cheryl L. Price - ---------------------------------------- ------------------------------------------------- (Date) Cheryl L. Price Vice President, Chief Financial Officer and Chief Accounting Officer
The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of the Report or as a separate disclosure document. 78 CERTIFICATION Pursuant to 18 U.S.C. Section 1350, the undersigned officer of ING Life Insurance and Annuity Company (the "Company") hereby certifies that, to the officer's knowledge, the Company's Annual Report on Form 10-K for the year ended December 31, 2002 (the "Report") fully complies with the requirements of Section 13 or 15(d), as applicable, of the Securities Exchange Act of 1934 and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. March 25, 2003 By /s/ Keith Gubbay - ---------------------------------------- ------------------------------------------------- (Date) Keith Gubbay President
The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of the Report or as a separate disclosure document. 79 EX-99.B-16(23)(A) 7 a2107535zex-99_b1623a.txt EXHIBIT 99.B-16(23)(A) EX. 16(23)(a) INDEPENDENT AUDITORS' CONSENT The Shareholder and Board of Directors of ING Life Insurance and Annuity Company: We consent to incorporation by reference in the Registration Statement on Form S-2 of ING Life Insurance and Annuity Company and Subsidiaries, formerly known as Aetna Life Insurance and Annuity Company and Subsidiaries (the "Company") of our reports dated March 27, 2001, relating to the consolidated statements of income, changes in shareholder's equity and cash flows for the period from December 1, 2000 to December 31, 2000 ("Successor Company"), and for the period from January 1, 2000 to November 30, 2000 ("Preacquisition Company"), and all related schedules, which reports appear in the December 31, 2002, annual report on Form 10-K of the Company and to the reference to our firm under the heading "Experts" in the prospectus. Our reports refer to the acquisition, effective November 30, 2000, by ING America Insurance Holdings Inc. of all of the outstanding stock of Aetna Inc., Aetna Life Insurance and Annuity Company's indirect parent and sole shareholder in a business combination accounted for as a purchase. As a result of the acquisition, the financial information for the periods after the acquisition is presented on a different cost basis than that for the periods before the acquisition and, therefore, is not comparable. /s/ KPMG LLP Hartford, Connecticut April 11, 2003 Exhibit 16 23(a) Consent of Ernst and Young LLP, Independent Auditors We consent to the reference to our firm under the caption "Experts" and to the use of our reports dated March 25, 2003, with respect to the consolidated financial statements and financial statement schedules of ING Life Insurance and Annuity Company, included and/or incorporated by reference into this Registration Statement under the Securities Act of 1933 (Form S-2) and the related Prospectus of ING Life Insurance and Annuity Company for the registration of securities related to annuity contracts with a proposed maximum offering price of $100,000,000. /s/ Ernst & Young LLP Atlanta, Georgia April 10, 2003 -----END PRIVACY-ENHANCED MESSAGE-----