-----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, HTORXpntaf7R/dQom1kaDyO7xqTjNlfpWgFw2sZjhjftMo5BEZSIdM8LyRbpS69q q1AVbrlaValv38ifpSh6fw== 0001047469-04-010823.txt : 20040405 0001047469-04-010823.hdr.sgml : 20040405 20040405155215 ACCESSION NUMBER: 0001047469-04-010823 CONFORMED SUBMISSION TYPE: POS AM PUBLIC DOCUMENT COUNT: 5 FILED AS OF DATE: 20040405 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: POS AM SEC ACT: 1933 Act SEC FILE NUMBER: 333-104456 FILM NUMBER: 04717516 BUSINESS ADDRESS: STREET 1: 151 FARMINGTON AVE CITY: HARTFORD STATE: CT ZIP: 06156 BUSINESS PHONE: 860-723-4646 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 POS AM 1 a2132875zposam.txt POS AM As filed with the Securities and Exchange Registration No. 333-104456 Commission on April 5, 2004 - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 POST-EFFECTIVE AMENDMENT NO. 1 TO 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) 723-2239 - -------------------------------------------------------------------------------- Michael A. Pignatella, Counsel ING Life Insurance and Annuity Company 151 Farmington Avenue, TS31, Hartford, Connecticut 06156 (860) 723-2239 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) - -------------------------------------------------------------------------------- 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. /X/ 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. [X] 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. / / GUARANTEED ACCUMULATION ACCOUNT PROSPECTUS - APRIL 30, 2004 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 1-800 262-3862 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 14 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
2 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. In addition, under certain contracts, we reserve the right to discontinue offering GAA, or to limit the availability of GAA guaranteed term classifications. 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: [SIDENOTE] 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 3 - - 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 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. 4 Amounts withdrawn may be subject to an early withdrawal charge, maintenance fee, tax withholding and, tax penalties. (See "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 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.") 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." 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. Generally, 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. However, under certain contracts we reserve the right to limit the guaranteed terms or guaranteed term classifications offered, as well as the right to discontinue offering GAA. 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. 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. 7 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 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. [SIDENOTE] BUSINESS DAY--any day on which the New York Stock Exchange is open. 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-year guaranteed term) to the open deposit period of a seven-year guaranteed term. 9 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 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). 10 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 If allowed by the contract, 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. 11 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. [SIDENOTE] 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 12 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 from a guaranteed term (the MVA will be negative). 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: (1 + i) x { ------- } (TO THE POWER OF ---) (1 + j) 365 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. 13 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. 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. 14 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. 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. 15 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 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, 2003, December 31, 2002, and December 31, 2001, and for the years then ended, which have been audited by Ernst & Young LLP, independent auditors, as set forth in their report 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, 2003, have been audited by Ernst & Young LLP, independent auditors, as set forth in their report 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 firm as experts in accounting and auditing. LEGAL MATTERS For information regarding legal matters affecting the Company or the distributor of the variable annuity contracts, please refer to the applicable contract 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, 2003 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. 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: ASSUMPTIONS: i, the deposit period yield, is 4% i, the deposit period yield, is 5% j, the current yield, is 6% j, the current yield, is 6% x, the number of days remaining (computed from x, the number of days remaining (computed from Wednesday of the week of withdrawal) in the Wednesday of the week of withdrawal) in the guaranteed term, is 927. guaranteed term, is 927. (1 + i) x MVA --> = --> { ------- } (TO THE POWER OF ---) (1 + i) x (1 + j) 365 MVA --> = --> { ------- } (TO THE POWER OF ---) (1 + j) 365 (1.04) 927 (1.05) 927 MVA --> = --> { ------ } (TO THE POWER OF ---) MVA --> = --> { ------ } (TO THE POWER OF ---) (1.06) 365 (1.06) 365 = .9528 = .9762 In this example, the deposit period yield of 4% is In this example, the deposit period yield of 5% is less than the current yield of 6%; therefore, the less than the current yield of 6%; therefore, the MVA is less than one. The amount withdrawn from the MVA is less than one. The amount withdrawn from the guaranteed term is multiplied by this MVA. guaranteed term is multiplied by this MVA. If a withdrawal or transfer request of a specific If a withdrawal or transfer request of a specific dollar amount is requested, the amount withdrawn dollar amount is requested, the amount withdrawn from a guaranteed term will be increased to from a guaranteed term will be increased to compensate for the negative MVA amount. For compensate for the negative MVA amount. For example, a withdrawal request to receive a check example, a withdrawal request to receive a check for $2,000 would result in a $2,099.08 withdrawal for $2,000 would result in a $2,048.76 withdrawal from the guaranteed term. from the guaranteed term.
18 EXAMPLE II
ASSUMPTIONS: ASSUMPTIONS: i, the deposit period yield, is 6% i, the deposit period yield, is 5% j, the current yield, is 4% j, the current yield, is 4% x, the number of days remaining (computed from x, the number of days remaining (computed from Wednesday of the week of withdrawal) in the Wednesday of the week of withdrawal) in the guaranteed term, is 927. guaranteed term, is 927. (1 + i) x MVA --> = --> { ------- } (TO THE POWER OF ---) (1 + i) x (1 + j) 365 MVA --> = --> { ------- } (TO THE POWER OF ---) (1 + j) 365 (1.06) 927 (1.05) 927 MVA --> = --> { ------ } (TO THE POWER OF ---) MVA --> = --> { ------ } (TO THE POWER OF ---) (1.04) 365 (1.04) 365 = 1.0496 = 1.0246 In this example, the deposit period yield of 6% is In this example, the deposit period yield of 5% is greater than the current yield of 4%; therefore, greater than the current yield of 4%; therefore, the MVA is greater than one. The amount withdrawn the MVA is greater than one. The amount withdrawn from the guaranteed term is multiplied by this MVA. from the guaranteed term is multiplied by this MVA. If a withdrawal or transfer request of a specific If a withdrawal or transfer request of a specific dollar amount is requested, the amount withdrawn dollar amount is requested, the amount withdrawn from a guaranteed term will be decreased to reflect from a guaranteed term will be decreased to reflect the positive MVA amount. For example, a withdrawal the positive MVA amount. For example, a withdrawal request to receive a check for $2,000 would result request to receive a check for $2,000 would result in a $1,905.49 withdrawal from the guaranteed term. in a $1,951.98 withdrawal from the guaranteed term.
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 TIME REMAINING TO DEPOSIT MATURITY OF GUARANTEED TERM CURRENT PERIOD ------------------------------------------------------------------------------ YIELD YIELD 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 TIME REMAINING TO DEPOSIT MATURITY OF GUARANTEED TERM CURRENT PERIOD ------------------------------------------------------------------------------ YIELD YIELD 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%
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. Exhibits (4) Instruments Defining the Rights of Security Holders(1) (a) Variable Annuity Contract (G-CDA-HF)(2) (b) Variable Annuity Contract Certificate (GTCC-HF)(3) (c) Variable Annuity Contract (GIT-CDA-HO)(4) (d) Variable Annuity Contract (G-CDA-IA(RP))(5) (e) Variable Annuity Contract Certificate (GTCC-IA(RP))(6) (f) Variable Annuity Contract (G-CDA(99))(7) (g) Variable Annuity Contract Certificate (CDACERT (99))(7) (h) Variable Annuity Contract (GLIT-CDA-HO)(4) (i) Variable Annuity Contract (GST-CDA-HO)(4) (j) Variable Annuity Contract (IP-CDA-IB)(8) (k) Variable Annuity Contract (I-CDA-IA(RP))(5) (l) Variable Annuity Contract (I-CDA-HD)(4) (m) Variable Annuity Contract (GIH-CDA-HB)(3) (n) Variable Annuity Contract (IMT-CDA-HO)(3) (o) Variable Annuity Contract (G-401-IB(X/M))(9) (p) Variable Annuity Contract (G-CDA-IB(XC/SM))(9) (q) Variable Annuity Contracts (G-CDA-IB(ATORP)) and (G-CDA-IB (AORP))(10) (r) Variable Annuity Contract (G-CDA-96(TORP))(11) (s) Group Combination Annuity Contract (Nonparticipating) (A001RP95)(12) (t) Group Combination Annuity Contract (Nonparticipating) (A007RC95)(12) (u) Group Combination Annuity Certificate (Nonparticipating) (A020RV95)(12) (v) Group Combination Annuity Certificate (Nonparticipating) (A027RV95)(12) (w) Variable Annuity Contract (GID-CDA-HO)(13) (x) Variable Annuity Contract (GSD-CDA-HO)(13) (y) Variable Annuity Contract (IST-CDA-HO)(14) (z) Variable Annuity Contract (I-CDA-HD(XC))(14) (aa) Variable Annuity Contract (HR1O-DUA-GIA)(15) (bb) Variable Annuity Contract (GA-UPA-GO)(15) (cc) Variable Annuity Contracts (G-TDA-HH(XC/M)) and (G-TDA-HH (XC/S))(16) (dd) Variable Annuity Certificate (GTCC-HH(XC/M))(17) (ee) Variable Annuity Certificate (GTCC-HH(XC/S))(17) (ff) Variable Annuity Contract (IA-CDA-IA)(2) (gg) Variable Annuity Contract (GLID-CDA-HO)(13) (hh) Variable Annuity Contract (G-CDA-HD)(18) (ii) Variable Annuity Contract Certificate (GTCC-HD)(6) (jj) Variable Annuity Contract (G-CDA-IA(RPM/XC))(4) (kk) Variable Annuity Contracts and Certificate (G-CDA-95(ORP)), (G-CDA-95(TORP)) and (GTCC-95 (ORP))(10) (ll) Variable Annuity Contracts and Certificate (G-CDA-ORP), (CDA-IB(TORP)) and (GTCC-95(TORP))(10) (mm) Variable Annuity Contract (IRA-CDA-IC)(5) (nn) Variable Annuity Contract (GIP-CDA-HB)(19) (oo) Variable Annuity Contract (I-CDA-98(ORP))(6) (pp) Variable Annuity Contract (G-CDA(12/99))(20) (qq) Variable Annuity Contract Certificate (C-CDA(12/99))(20) (rr) Variable Annuity Contract (G-CDA-99(NY))(20) (ss) Variable Annuity Contract Certificate (C-CDA-99(NY))(20) (tt) Variable Annuity Contract (G-CDA(99))(20) (uu) Variable Annuity Contract Certificate (C-CDA(99))(20) (vv) Variable Annuity Contract Certificate (GDCC-HF)(20) (ww) Variable Annuity Contract Certificate (GDCC-HD)(20) (xx) Variable Annuity Contract (G-CDA-HD(XC)(20) (yy) Variable Annuity Contract Certificate (GDCC-HO)(20) (zz) Variable Annuity Contract Certificate (GDCC-HD(XC))(20) (a1) Variable Annuity Contract Certificate (GTCC-HD(XC))(20) (b1) Variable Annuity Contract Certificate (GTCC-HO)(20) (c1) Variable Annuity Contract Certificate (GTCC-96(ORP))(20) (d1) Variable Annuity Contract G-CDA-96(ORP))(20) (e1) Variable Annuity Contract Certificate (GTCC-96(TORP))(20) (f1) Variable Annuity Contract Certificate (GTCC-IB(ATORP))(20) (g1) Variable Annuity Contract Certificate (GTCC-IB(AORP)(20) (h1) Variable Annuity Contract (ISE-CDA-HO)(21) (i1) Variable Annuity Contract (G-CDA-IB(ORP))(10) (j1) Variable Annuity Contract (G-CDA-IB(TORP))(10) (k1) Variable Annuity Contract (G-CDA-01(NY))(22) (l1) Variable Annuity Contract Certificate (C-CDA-01(NY))(22) (5) Opinion re 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, 2003 (File No. 33-23376), as filed with the Commission on March 29, 2004. 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, 2003 (23) (a) Consent of Independent Auditors (b) Consent of Legal Counsel (included in Exhibit (5) above) (24) (a) Powers of Attorney (b) Certificate of Resolution Authorizing Signature by Power of Attorney(5) Exhibits other than those listed above are omitted because they are not required or are not applicable. 1. Incorporated by reference to Post-Effective Amendment No. 1 to Registration Statement on Form S-1 (File No. 33-60477), as filed on April 15, 1996. 2. 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. 3. Incorporated by reference to Post-Effective Amendment No. 6 to Registration Statement on Form N-4 (File No. 33-75980), as filed on February 12, 1997. 4. Incorporated by reference to Post-Effective Amendment No. 12 to the Registration Statement on Form N-4 (File No. 33-75964), as filed on February 11, 1997. 5. Incorporated by reference to Post-Effective Amendment No. 5 to the Registration Statement on Form N-4 (File No. 33-75986), as filed on April 12, 1996. 6. Incorporated by reference to Post-Effective Amendment No. 11 to Registration Statement on Form N-4 (File No. 333-01107), as filed on February 4, 1999. 7. 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. 8. Incorporated by reference to Post-Effective Amendment No. 4 to Registration Statement on Form N-4 (File No. 33-75988), as filed on April 15, 1996. 9. Incorporated by reference to Post-Effective Amendment No. 3 to Registration Statement on Form N-4 (File No. 33-81216), as filed on April 7, 1996. 10. Incorporated by reference to Post-Effective Amendment No. 3 to Registration Statement on Form N-4 (File No. 33-91846), as filed on April 15, 1996. 11. Incorporated by reference to Post-Effective Amendment No. 6 to Registration Statement on Form N-4 (File No. 33-91846), as filed on August 6, 1996. 12. Incorporated by reference to Registration Statement on Form N-4 (File No. 333-01107), as filed on February 21, 1996. 13. Incorporated by reference to Post-Effective Amendment No. 12 to Registration Statement on Form N-4 (File No. 33-75982), as filed on February 20, 1997. 14. Incorporated by reference to Post-Effective Amendment No. 7 to Registration Statement on Form N-4 (File No. 33-75992), as filed on February 13, 1997. 15. Incorporated by reference to Post-Effective Amendment No. 6 to Registration Statement on Form N-4 (File No. 33-75974), as filed on February 28, 1997. 16. Incorporated by reference to Post-Effective Amendment No. 6 to Registration Statement on Form N-4 (File No. 33-75962), as filed on April 17, 1996. 17. Incorporated by reference to Post-Effective Amendment No. 14 to Registration Statement on Form N-4 (File No. 33-75962), as filed on April 17, 1998. 18. Incorporated by reference to Post-Effective Amendment No. 6 to Registration Statement on Form N-4 (File No. 33-75982), as filed on April 22, 1996. 19. Incorporated by reference to Post-Effective Amendment No. 8 to Registration Statement on Form N-4 (File No. 33-75980), as filed on August 19, 1997. 20. Incorporated by reference to Post-Effective Amendment No. 19 to Registration Statement on Form N-4 (File No. 333-01107), as filed on February 16, 2000. 21. 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. 22. Incorporated by reference to Post-Effective Amendment No. 1 to Registration Statement on Form S-2 (File No. 333-60016), as filed on April 5, 2002. 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 Post-Effective Amendment No. 1 to the Registration Statement on Form S-2 (File No. 333-104456) to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Hartford, State of Connecticut, on this 5th day of April, 2004. By: ING LIFE INSURANCE AND ANNUITY COMPANY (REGISTRANT) By: Keith Gubbay* ----------------------------------- Keith Gubbay President Pursuant to the requirements of the Securities Act of 1933, this Post-Effective Amendment No. 1 to Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE Keith Gubbay* Director and President ) - --------------------------------- (principal executive officer) ) Keith Gubbay ) Thomas J. McInerney* Director ) April 5, 2004 - --------------------------------- Thomas J. McInerney ) ) Kathleen A. Murphy* Director ) - --------------------------------- Kathleen A. Murphy ) ) Jacques de Vaucleroy* Director ) - --------------------------------- Jacques de Vaucleroy ) ) David Wheat* Director and Chief Financial Officer ) - --------------------------------- (principal accounting officer) ) David Wheat
By: /s/ Michael A. Pignatella ---------------------------------------------- Michael A. Pignatella Attorney-in-Fact ---------------------------------------------- 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, 2003 16(23)(a) Consent of Independent Auditors ------------ 16(23)(b) Consent of Legal Counsel * 16(24)(a) Powers of Attorney ------------
*Included in Exhibit 16(5) above **Filed by Module Name: ILIAC10K123103 EX-99.B-16(5) 5 a2132875zex-99_b165.txt EX-99.B-16(5) Exhibit 99.B-16(5) Opinion re: Legality ING LOGO AMERICAS US Legal Services MICHAEL A. PIGNATELLA COUNSEL (860) 723-2239 FAX: (860) 723-2216 Michael.Pignatella@us.ing.com April 5, 2004 Securities and Exchange Commission 450 Fifth Street, N.W. Washington, DC 20549 Attention: Filing Desk RE: ING LIFE INSURANCE AND ANNUITY COMPANY POST-EFFECTIVE AMENDMENT NO. 1 TO REGISTRATION STATEMENT ON FORM S-2 PROSPECTUS TITLE: GUARANTEED ACCUMULATION ACCOUNT FILE NOs.: 333-104456 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 Post-Effective Amendment No. 1 to the Registration Statement on Form S-2 relating to such Account, including the prospectus, and relevant proceedings of the Board of Directors. 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 Post-Effective Amendment No. 1 to the Registration Statement. Sincerely, /s/ Michael A. Pignatella Michael A. Pignatella Counsel EX-99.B-16(13) 6 a2132875zex-99_b1613.txt EX-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, 2003 Commission file number: 333-86276, 333-86278, 333-104456 ING LIFE INSURANCE AND ANNUITY COMPANY - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Connecticut 71-0294708 - -------------------------------------------------------------------------------- (State or other jurisdiction of (IRS employer incorporation or 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 / / Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes / / No /X/ APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 55,000 shares of Common Stock as of March 25, 2004, all of which were directly owned by Lion Connecticut Holdings Inc. NOTE: WHEREAS ING LIFE INSURANCE AND ANNUITY COMPANY MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION 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 Lion Connecticut Holdings Inc.) Annual Report on Form 10-K For the Year Ended December 31, 2003 TABLE OF CONTENTS
FORM 10-K ITEM NO. PAGE - ---------- ---- PART I Item 1. Business** 3 Item 2. Properties** 7 Item 3. Legal Proceedings 7 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 8 Item 6. Selected Financial Data* 8 Item 7. Management's Narrative Analysis of the Results of Operations and Financial Condition** 8 Item 7A. Quantitative and Qualitative Disclosures 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 57 Item 9A. Controls and Procedures 57 PART III Item 10. Directors and Executive Officers of the Registrant* 57 Item 11. Executive Compensation* 57 Item 12. Security Ownership of Certain Beneficial Owners and Management* 57 Item 13. Certain Relationships and Related Transactions* 57 Item 14. Principal Accountant Fees and Services* 57 PART IV Item 15. Exhibits, Consolidated Financial Statement Schedules, and Reports on Form 8-K 58 Index on Consolidated Financial Statement Schedules 63 Signatures 69
* Item omitted pursuant to General Instruction I(2) of Form 10-K, except as to Part III, Item 10 with respect to compliance with Sections 406 and 407 of the Sarbanes-Oxley Act of 2002 ** Item prepared in accordance with General Instruction I(2) of Form 10-K 2 PART I ITEM 1. BUSINESS ORGANIZATION OF BUSINESS ING Life Insurance and Annuity Company ("ILIAC"), and its wholly-owned subsidiaries (collectively, the "Company") are providers of financial products and services in the United States. These consolidated financial statements include ILIAC and its wholly-owned subsidiaries, ING Insurance Company of America ("IICA"), ING Financial Advisers, LLC ("IFA"), and, through February 28, 2002 ING Investment Adviser Holding, Inc. ("IA Holdco"). Until March 30, 2003, ILIAC was a wholly-owned subsidiary of ING Retirement Holdings, Inc. ("HOLDCO"), which was a wholly-owned subsidiary of ING Retirement Services, Inc. ("IRSI"). Until March 30, 2003, IRSI was a wholly-owned subsidiary of Lion Connecticut Holding Inc. ("Lion"), which in turn was ultimately owned by ING Groep N.V. ("ING"), a financial services company based in The Netherlands. On March 30, 2003, a series of mergers occurred in the following order: IRSI merged into Lion, HOLDCO merged into Lion and IA Holdco merged into Lion. As a result, ILIAC is now a direct wholly-owned subsidiary of Lion. HOLDCO contributed IFA to the Company on June 30, 2000. On February 28, 2002, ILIAC contributed 100% of the stock of IA Holdco and its subsidiaries to HOLDCO (former ILIAC parent) 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 segment 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. PRODUCTS AND SERVICES Management has determined that under Statement of Financial Accounting Standards No. 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 plan-owned assets not invested with the Company. The Company also offers investment advisory services and pension plan administrative services. 3 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 mutual funds advised and/or distributed by ILIAC or its affiliates, or advised and/or distributed by unaffiliated entities. 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 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. ILIAC and/or IFA may also receive administrative service, distribution (12b-1) and/or service plan fees in addition to the compensation from the fund's adviser, administrator or other affiliated entity for the performance of certain shareholder services. In the case of the variable option mutual funds advised by ILIAC, ILIAC receives an investment advisory fee, from which it pays a subadvisory fee to an affiliated or unaffiliated investment manager. 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 customers. The Company may also receive other fees or charges depending on the nature of the products. ASSETS UNDER MANAGEMENT AND ADMINISTRATION A 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 $51,751.5 million, $46,426.7 million and $50,781.4 million at December 31, 2003, 2002 and 2001, respectively. 4 Approximately 93% and 94% of assets under management at December 31, 2003 and 2002, respectively, allowed for policyholder withdrawal. Approximately 83% and 85% of assets under management at December 31, 2003 and 2002, 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 $21,102.5 million at December 31, 2003, $13,613.0 million at December 31, 2002 and $10,317.4 million at December 31, 2001. 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 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. For 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 5 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"). ECONOMIC GROWTH AND TAX RELIEF RECONCILIATION ACT OF 2001 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. 6 INSURANCE HOLDING COMPANY LAWS A number of states 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 2003 and no material charges during 2002 and 2001. 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 Narrative Analysis of the Results of Operations and Financial Condition--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 which certain affiliates provide either directly or through third party service providers. 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 2003. 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 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 7 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. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS All of the Company's outstanding shares are owned by Lion Connecticut Holdings Inc., a Connecticut holding and management company which is ultimately owned by 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's results for its operating segment, USFS, for the twelve month periods ended December 31, 2003 versus 2002. This review should be read in conjunction with the consolidated financial statements and other data presented. CHANGE IN ACCOUNTING PRINCIPLE During 2002, the Company adopted Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS ("FAS No. 142"). The adoption of this standard resulted in an impairment loss of $2,412.1 million. The Company, in accordance with FAS No. 142, recorded the impairment loss retroactive to the first quarter of 2002; prior quarters of 2002 were restated accordingly. This impairment loss represented the entire carrying amount of goodwill, net of accumulated amortization. This impairment charge was shown as a change in accounting principle on the December 31, 2002 Consolidated Income Statement. 8 RESULTS OF OPERATIONS USFS
(MILLIONS) 2003 2002 2001 - ----------------------------------------------------------------------------------------------------------------------------------- Premiums $ 95.8 $ 98.7 $ 114.2 Fee income 384.3 408.5 470.8 Net investment income 919.1 959.2 885.5 Net realized capital gains (losses) 64.5 (101.0) (21.1) - ----------------------------------------------------------------------------------------------------------------------------------- Total revenue 1,463.7 1,365.4 1,449.4 - ----------------------------------------------------------------------------------------------------------------------------------- Interest credited and other benefits to policyholders 757.6 746.4 729.6 Operating expenses 383.9 358.7 401.8 Amortization of goodwill -- -- 61.9 Amortization of deferred policy acquisition cost and value of business acquired 106.5 181.5 112.0 - ----------------------------------------------------------------------------------------------------------------------------------- Total benefits and expenses 1,248.0 1,286.6 1,305.3 - ----------------------------------------------------------------------------------------------------------------------------------- Income from operations before income taxes and cumulative effect of change in accounting principle 215.7 78.8 144.1 Income tax expense 61.1 16.0 71.7 - ----------------------------------------------------------------------------------------------------------------------------------- Income before cumulative effect of change in accounting principle 154.6 62.8 72.4 Cumulative effect of change in accounting principle -- (2,412.1) -- - ----------------------------------------------------------------------------------------------------------------------------------- Net income (loss) $ 154.6 $ (2,349.3) $ 72.4 =================================================================================================================================== Net realized capital gains (losses), net of tax (included above) $ 41.9 $ (58.3) $ (13.8) =================================================================================================================================== Deposits (not included in premiums above) Annuities--fixed options $ 1,704.8 $ 1,195.2 $ 1,440.5 Annuities--variable options 4,051.7 4,335.2 4,155.8 - ----------------------------------------------------------------------------------------------------------------------------------- Total deposits $ 5,756.5 $ 5,530.4 $ 5,596.3 =================================================================================================================================== Assets under management Annuities--fixed options (1) $ 16,044.4 $ 14,984.5 $ 13,291.9 Annuities--variable options (2) 28,657.3 23,148.0 28,495.8 - ----------------------------------------------------------------------------------------------------------------------------------- Subtotal--annuities 44,701.7 38,132.5 41,787.7 Plan sponsored and other 7,049.8 8,294.2 8,993.7 - ----------------------------------------------------------------------------------------------------------------------------------- Total assets under management 51,751.5 46,426.7 50,781.4 Assets under administration (3) 21,102.5 13,613.0 10,317.4 - ----------------------------------------------------------------------------------------------------------------------------------- Total assets under management and administration $ 72,854.0 $ 60,039.7 $ 61,098.8 ===================================================================================================================================
(1) Excludes net unrealized capital gains of $615.1 million, $725.9 million and $291.0 million at December 31, 2003, 2002 and 2001, respectively. (2) Includes $12,766.6 million $9,304.1 million and $11,272.2 million at December 31, 2003, 2002 and 2001, respectively, of assets invested through the Company's products in unaffiliated mutual funds. (3) Represents assets for which the Company provides administrative services only. Premiums for the year ended December 31, 2003 decreased by $2.9 million compared to the year ended December 31, 2002, primarily due to a decrease in immediate annuities with life contingencies. Fee income decreased $24.2 million between December 31, 2003 and December 31, 2002. A substantial portion of fee income is calculated based on variable assets under management. The decrease in fee income was primarily due to a decrease in the Company's average daily variable assets under management. The 9 Company' variable assets under management declined due to normal net cash outflows, partially offset by improved equity market returns. Net investment income decreased $40.1 million for the year ended December 31, 2003 compared to the same period in 2002. Net investment income decreased primarily due to the lower interest rate environment. Net realized capital gains for the year ended December 31, 2003 increased by $165.5 million compared to the year ended 2002. Net realized gains resulted from sales of fixed maturity investments having a fair value greater than book value primarily due to declining interest rates. Interest credited and other benefits to policyholders for the year ended December 31, 2003 compared to the same period in 2002, increased by $11.2 million. The increase in the balance in the year was primarily due to an increase in average assets under management with fixed options partially offset by a decrease in credited interest rates to policyholders resulting from a management decision to lower credited rates to policyholders as a result of the lower interest rate environment in 2003 compared to 2002. Underwriting, acquisition, and insurance expenses were higher by $25.2 million for the year ended December 31, 2003 as compared to the same period in 2002. An increase in general expenses was partially offset by an increase in policy acquisition costs deferred and by a decrease in commissions resulting in the overall increase in underwriting, acquisition, and insurance expenses. General expenses increased primarily due to an increase in staff costs. Commissions decreased during the period as a result of a decrease in new and renewal business generated during the year ended December 31, 2003 as compared to the same periods in 2002. Amortization of deferred policy acquisition costs and value of business acquired for the year ended December 31, 2003, decreased by $75.0 million compared to the same period in 2002. Decreased amortization during the year was primarily due to improved market and fund performance. Amortization of long-duration products is recorded in proportion to actual and estimated future gross profits. Estimated gross profits are computed based on assumptions related to the underlying contracts, including but not limited to interest margins, surrenders, withdraws, expenses, and asset growth. The decrease 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 change in accounting principle for the year ended December 31, 2002, was a loss of $2,412.1 million, related to the adoption of FAS No. 142, which addresses the value of goodwill and other intangible assets. Net income, excluding cumulative effect of change in accounting principle, increased by $91.8 million for the year ended December 31, 2003, as compared to the year ended December 31, 2002. Higher earnings are the result of increased net realized capital gains and lower amortization of deferred policy acquisition costs and value of business acquired, partially offset by a reduction in fee income, net investment income and an increase in underwriting, acquisition and insurance expenses. 10 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, 2003 and 2002, 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% of the total general account invested assets. For the same periods, $13,744.9 million, or 78% of total fixed maturities and $11,808.4 million, or 74% of total fixed maturities, respectively, supported experience-rated products. Total fixed maturities reflected net unrealized capital gains of $615.1 million and $725.9 million at December 31, 2003 and 2002, 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, 2003 and 2002. 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. The percentage of total fixed maturities by quality rating category is as follows:
DECEMBER 31, 2003 DECEMBER 31, 2002 - -------------------------------------------------------------------------------------------- AAA 51.1% 51.9% AA 4.3 5.0 A 19.1 20.2 BBB 21.3 19.2 BB 3.2 2.5 B and below 1.0 1.2 - -------------------------------------------------------------------------------------------- Total 100.0% 100.0% ============================================================================================
11 The percentage of total fixed maturities by market sector is as follows:
DECEMBER 31, 2003 DECEMBER 31, 2002 - ----------------------------------------------------------------------------------------------------------- U.S. Corporate 38.9% 40.7% Residential Mortgaged-backed 33.7 34.9 Foreign (1) 11.6 9.4 Commercial/Multifamily Mortgage-backed 7.8 8.7 Asset-backed 6.0 5.8 U.S. Treasuries/Agencies 2.0 0.5 - ----------------------------------------------------------------------------------------------------------- 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. 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 12 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 2003, the Company received $230.0 million in cash capital contributions from Lion. 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 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 2003, 2002 or 2001. On February 28, 2002, ILIAC contributed 100% of the stock of IA Holdco to HOLDCO in the form of a $60.1 million distribution. 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: investment impairment testing, amortization of deferred acquisition costs and value of business acquired and goodwill impairment testing. 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. 13 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. 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 and non-capitalized commissions. 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 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 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 variable deferred annuity products is the assumed return associated with future variable 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 variable 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 of 2002, the Company unlocked its long-term rate of return assumptions. The Company reset long-term assumptions for the separate account returns to 9.0% (gross before fund management fees and mortality and expense and other policy charges), as of December 31, 2002, reflecting a blended return of equity and other sub-accounts. The initial unlocking adjustment in 2002 was primarily driven by the sustained downturn in the equity markets and revised expectations for future returns. During 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. 14 The Company has remained unlocked during 2003, and reset long-term assumptions for the separate account returns from 9.0% to 8.5% (gross before fund management fees and mortality and expense and other policy charges), as of December 31, 2003, maintaining a blended return of equity and other sub-accounts. The 2003 unlocking adjustment from the previous year was primarily driven by improved market performance. For the year ended December 31, 2003, the Company recorded a deceleration of DAC/VOBA amortization totaling $3.7 million before tax, or $2.4 million, net of $1.3 million of federal income tax expense. 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. The adoption of FAS No. 142 resulted in the impairment of the Company's entire goodwill balance during 2002. 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 and Financial Condition for the impact these procedures had on the Company's income. OFF-BALANCE SHEET ARRANGEMENTS In January 2003, the FASB issued FASB Interpretation 46, CONSOLIDATION OF VARIABLE INTEREST ENTITIES, AN INTERPRETATION OF ARB NO.51 ("FIN 46"). In December 2003, the FASB modified FIN 46 to make certain technical revisions and address certain implementation issues that had arisen. FIN 46 provides a new framework for identifying variable interest entities ("VIE") and determining when a company should include the assets, liabilities, noncontrolling interests and results of activities of a VIE in its consolidated financial statements. In general, a VIE is a corporation, partnership, limited- liability corporation, trust, or any other legal structure used to conduct activities or hold assets that either (1) has an insufficient amount of equity to carry out its principal activities without additional subordinated financial support, (2) has a group of equity owners that are unable to make significant decisions about its activities, or (3) has a group of equity owners that do not have the obligation to absorb losses or the right to receive returns generated by its operations. FIN 46 requires a VIE to be consolidated if a party with an ownership, contractual or other financial interest in the VIE (a variable interest holder) is obligated to absorb a majority of the risk of loss from the VIE's activities, is entitled to receive a majority of the VIE's residual returns (if no party absorbs a majority of the VIE's losses), or both. A variable interest holder that consolidates the VIE is called the primary beneficiary. Upon consolidation, the primary beneficiary generally must initially record all of the VIE's assets, liabilities and noncontrolling interests at fair value and subsequently account for the VIE as if it were consolidated based on majority voting interest. FIN 46 also requires disclosures about VIEs that the variable interest holder is not required to consolidate, but in which it has a significant variable interest. 15 At December 31, 2003, the Company held the following investments that, for purposes of FIN 46, were evaluated and determined to not require consolidation in the Company's financial statements:
ASSET TYPE PURPOSE BOOK VALUE (1) MARKET VALUE - ------------------------------------------------------------------------------------------------------------------------ Private Corporate Securities--synthetic leases; project financings; credit tenant leases Investment Holdings $ 1,600.1 $ 1,697.6 Foreign Securities--US VIE subsidiaries of foreign companies Investment Holdings 583.1 615.2 Commercial Mortgage Obligations (CMO) Investment Holdings 6,038.8 6,109.4 Collateralized Debt Obligations (CDO) Investment Holdings and/or Collateral Manager 20.9 12.3 Asset-Backed Securities (ABS) Investment Holdings 949.6 975.8 Commercial Mortgage Backed Securities (CMBS) Investment Holdings 1,278.5 1,380.2
(1) Represents maximum exposure to loss except for those structures for which the Company also receives asset management fees. As of December 31, 2003, the Company had certain contractual obligations due over a period of time as summarized in the following table:
PAYMENTS DUE BY PERIOD (IN MILLIONS) ---------------------------------------------------------------------- LESS THAN MORE THAN CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR 1-3 YEARS 3-5 YEARS 5 YEARS - ------------------------------------------------------------------------------------------------------------------------- Operating Lease Obligations $ 61.8 $ 17.2 $ 30.7 $ 13.8 $ 0.1 Purchase Obligations 154.3 154.3 -- -- -- --------- -------- --------- -------- -------- Total $ 216.1 $ 171.5 $ 30.7 $ 13.8 $ 0.1 --------- -------- --------- -------- -------- --------- -------- --------- -------- --------
Operating lease obligations relate to the rental of office space under various non-cancelable operating lease agreements that expire through January 2009. Purchase obligations consist primarily of commitments to fund additional limited partnerships and commitments to enter into mortgage loan arrangements during 2004. LEGISLATIVE INITIATIVES The Jobs and Growth Tax Relief Reconciliation Act of 2003, which was enacted in the second quarter, may impact the Company. The Act's provisions, which reduce the tax rates on long-term capital gains and corporate dividends, impact the relative competitiveness of the Company's products especially variable annuities. Other legislative proposals under consideration include repealing the estate tax, changing the taxation of products, changing life insurance company taxation and making changes to nonqualified deferred compensation arrangements. Some of these proposals, if enacted, could have a material effect on life insurance, annuity and other retirement savings product sales. The impact on the Company's tax position and products cannot be predicted. 16 OTHER REGULATORY MATTERS Like many financial services companies, certain U.S. affiliates of ING Groep N.V. have received informal and formal requests for information since September 2003 from various governmental and self-regulatory agencies in connection with investigations related to mutual funds and variable insurance products. ING has cooperated fully with each request. In addition to responding to regulatory requests, ING management initiated an internal review of trading in ING insurance, retirement, and mutual fund products. The goal of this review has been to identify whether there have been any instances of inappropriate trading in those products by third parties or by ING investment professionals and other ING personnel. This internal review is being conducted by independent special counsel and auditors. Additionally, ING reviewed its controls and procedures in a continuing effort to deter improper frequent trading in ING products. ING's internal reviews related to mutual fund trading are continuing. The internal review has identified several arrangements allowing third parties to engage in frequent trading of mutual funds within our variable insurance and mutual fund products, and identified other circumstances where frequent trading occurred despite measures taken by ING intended to combat market timing. Most of the identified arrangements were initiated prior to ING's acquisition of the businesses in question. In each arrangement identified, ING has terminated the inappropriate trading, taken steps to discipline or terminate employees who were involved, and modified policies and procedures to deter inappropriate activity. While the review is not completed, management believes the activity identified does not represent a systemic problem in the businesses involved. These instances included agreements (initiated in 1998) that permitted one variable life insurance customer of Reliastar Life Insurance Company ("Reliastar") to engage in frequent trading, and to submit orders until 4pm Central Time, instead of 4pm Eastern Time. Reliastar was acquired by ING in 2000. The late trading arrangement was immediately terminated when current senior management became aware of it in 2002. ING believes that no profits were realized by the customer from the late trading aspect of the arrangement. In addition, the review has identified five arrangements that allowed frequent trading of funds within variable insurance products issued by Reliastar and by ING USA Annuity & Life Insurance Company; and in certain ING Funds. ING entities did not receive special benefits in return for any of these arrangements, which have all been terminated. The internal review also identified two investment professionals who engaged in improper frequent trading in ING Funds. ING will reimburse any ING Fund or its shareholders affected by inappropriate trading for any profits that accrued to any person who engaged in improper frequent trading for which ING is responsible. Management believes that the total amount of such reimbursements will not be material to ING or its U.S. business. FORWARD-LOOKING INFORMATION/RISK FACTORS In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, the Company cautions readers regarding certain forward-looking statements contained in this report and in any other statements made by, or on behalf of, the Company, whether or not in future filings with the SEC. Forward-looking statements are statements not based on historical information and which relate to future 17 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 policyholder 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. 18 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- Report of Independent Auditors 19 Consolidated Financial Statements: Consolidated Income Statements for the years ended December 31, 2003, 2002 and 2001 20 Consolidated Balance Sheets as of December 31, 2003 and 2002 21 Consolidated Statements of Changes in Shareholder's Equity for the years ended December 31, 2003, 2002 and 2001 22 Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002 and 2001 23 Notes to Consolidated Financial Statements 24
19 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, 2003 and 2002, and the related consolidated income statements, consolidated statements of changes in shareholder's equity, and consolidated statements of cash flows for each of the three years in the period ended December 31, 2003. 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 as of December 31, 2003 and 2002, and the results of its operations and its cash flows for each of the three years ended December 31, 2003, in conformity with accounting principles generally accepted in the United States. As discussed in Note 1 to the financial statements, the Company changed its accounting principle for goodwill and other intangible assets effective January 1, 2002. /s/ Ernst & Young LLP Atlanta, Georgia March 22, 2004 20 ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly-owned subsidiary of Lion Connecticut Holdings Inc.) CONSOLIDATED INCOME STATEMENTS (Millions)
YEARS ENDED DECEMBER 31, ---------------------------------------------------------- 2003 2002 2001 -------------- -------------- -------------- Revenues: Premiums $ 95.8 $ 98.7 $ 114.2 Fee income 384.3 418.2 553.4 Net investment income 919.1 959.5 888.4 Net realized capital gains (losses) 64.5 (101.0) (21.0) -------------- -------------- -------------- Total revenue 1,463.7 1,375.4 1,535.0 -------------- -------------- -------------- Benefits, losses and expenses: Benefits: Interest credited and other benefits to policyholders 757.6 746.4 729.6 Underwriting, acquisition, and insurance expenses: General expenses 421.2 392.5 559.9 Commissions 122.4 124.0 101.2 Policy acquisition costs deferred (159.7) (155.1) (216.9) Amortization: Deferred policy acquisition costs and value of business acquired 106.5 181.5 112.0 Goodwill -- -- 61.9 -------------- -------------- -------------- Total benefits, losses and expenses 1,248.0 1,289.3 1,347.7 -------------- -------------- -------------- Income before income taxes and cumulative effect of change in accounting principle 215.7 86.1 187.3 Income tax expense 61.1 18.6 87.4 -------------- -------------- -------------- Income before cumulative effect of change in accounting principle 154.6 67.5 99.9 Cumulative effect of change in accounting principle -- (2,412.1) -- -------------- -------------- -------------- Net income (loss) $ 154.6 $ (2,344.6) $ 99.9 ============== ============== ==============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. 21 ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly-owned subsidiary of Lion Connecticut Holdings Inc.) CONSOLIDATED BALANCE SHEETS (Millions, except share data)
AS OF DECEMBER 31, 2003 2002 -------------- -------------- ASSETS: Investments: Fixed maturities, available for sale, at fair value (amortized cost of $16,961.7 at 2003 and $15,041.2 at 2002) $ 17,574.3 $ 15,767.0 Equity securities at fair value: Nonredeemable preferred stock (cost of $34.1 at 2003 and $34.2 at 2002) 34.1 34.2 Investment in affiliated mutual funds (cost of $112.3 at 2003 and $203.9 at 2002) 121.7 201.0 Common stock (cost of $0.1 at 2003 and $0.2 at 2002) 0.1 0.2 Mortgage loans on real estate 754.5 576.6 Policy loans 270.3 296.3 Short-term investments 1.0 6.2 Other investments 52.6 52.2 Securities pledged to creditors (amortized cost of $117.7 at 2003 and $154.9 at 2002) 120.2 155.0 -------------- -------------- Total investments 18,928.8 17,088.7 Cash and cash equivalents 57.8 65.4 Short term investments under securities loan agreement 123.9 164.3 Accrued investment income 169.6 170.9 Reinsurance recoverable 2,953.2 2,986.5 Deferred policy acquisition costs 307.9 229.8 Value of business acquired 1,415.4 1,438.4 Property, plant and equipment (net of accumulated depreciation of $79.8 at 2003 and $56.0 at 2002) 31.7 49.8 Other assets 129.6 145.8 Assets held in separate accounts 33,014.7 28,071.1 -------------- -------------- Total assets $ 57,132.6 $ 50,410.7 ============== ============== LIABILITIES AND SHAREHOLDER'S EQUITY Policy liabilities and accruals: Future policy benefits and claims reserves $ 3,379.9 $ 3,305.2 Unpaid claims and claim expenses 25.4 30.0 Other policyholders' funds 15,871.3 14,756.0 -------------- -------------- Total policy liabilities and accruals 19,276.6 18,091.2 Payable under securities loan agreement 123.9 164.3 Current income taxes 85.6 84.5 Deferred income taxes 184.7 163.1 Other liabilities 1,801.2 1,573.7 Liabilities related to separate accounts 33,014.7 28,071.1 -------------- -------------- Total liabilities 54,486.7 48,147.9 -------------- -------------- Shareholder's equity: Common stock (100,000 shares authorized; 55,000 shares issued and outstanding, $50.00 per share per value) 2.8 2.8 Additional paid-in capital 4,646.5 4,416.5 Accumulated other comprehensive income 106.8 108.3 Retained deficit (2,110.2) (2,264.8) -------------- -------------- Total shareholder's equity 2,645.9 2,262.8 -------------- -------------- Total liabilities and shareholder's equity $ 57,132.6 $ 50,410.7 ============== ==============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. 22 ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly-owned subsidiary of Lion Connecticut Holdings Inc.) CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY (Millions)
ACCUMULATED ADDITIONAL OTHER RETAINED TOTAL COMMON PAID-IN COMPREHENSIVE EARNINGS SHAREHOLDER'S STOCK CAPITAL INCOME (LOSS) (DEFICIT) EQUITY ----------- ----------- -------------- ----------- -------------- 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 loss: 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 Comprehensive income: Net income -- -- -- 154.6 154.6 Other comprehensive income net of tax: Unrealized loss on securities (($2.4) pretax) -- -- (1.5) -- (1.5) ----------- Comprehensive income 153.1 Capital contributions -- 230.0 -- -- 230.0 ----------- ----------- ----------- ----------- ----------- Balance at December 31, 2003 $ 2.8 $ 4,646.5 $ 106.8 $ (2,110.2) $ 2,645.9 =========== =========== =========== =========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. 23 ING LIFE INSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES (A wholly-owned subsidiary of Lion Connecticut Holdings Inc.) CONSOLIDATED STATEMENTS OF CASH FLOWS (Millions)
YEARS ENDED DECEMBER 31, ------------------------------------------------ 2003 2002 2001 ------------ ------------ ------------ Cash Flows from Operating Activities: Net income (loss) $ 154.6 $ (2,344.6) $ 99.9 Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities: Net amortization (accretion) of (discounts) premiums on investments 198.9 115.5 (1.2) Net realized capital (gains) losses (64.5) 101.0 21.0 Amortization of deferred policy acquisition costs 15.5 12.2 112.0 Amortization of value of business acquired 91.0 146.3 -- Depreciation of property, plant and equipment 23.3 20.9 8.4 (Increase) decrease in accrued investment income 1.3 (10.0) (13.7) (Increase) decrease in receivables 33.3 172.7 (95.6) (Increase) decrease in value of business acquired -- (6.9) 13.9 Amortization of goodwill -- -- 61.9 Impairment of goodwill -- 2,412.1 -- Policy acquisition costs deferred (159.7) (120.7) (233.3) Interest credited and other changes in insurance reserve liabilities 705.9 953.7 (118.7) Change in current income taxes payable and other changes in assets and liabilities 233.1 51.9 (76.4) Provision for deferred income taxes 22.1 23.6 89.5 ------------ ------------ ------------ Net cash provided by (used for) operating activities 1,254.8 1,527.7 (132.3) ------------ ------------ ------------ Cash Flows from Investing Activities: Proceeds from the sale, maturity, or repayment of: Fixed maturities available for sale 29,977.9 26,315.3 15,338.5 Equity securities 130.2 57.2 4.4 Mortgages 16.3 2.0 5.2 Short-term investments 5.2 11,796.7 7,087.3 Acquisition of investments: Fixed maturities available for sale (31,951.6) (28,105.5) (16,489.8) Equity securities (34.8) (81.8) (50.0) Short-term investments -- (11,771.3) (6,991.1) Mortgages (194.2) (343.7) (242.0) Increase in policy loans 26.0 32.7 10.3 Purchase of property and equipment (5.2) (5.8) 7.4 Change in other investments (13.3) (47.8) (4.7) ------------ ------------ ------------ Net cash used for investing activities (2,043.5) (2,152.0) (1,324.5) ------------ ------------ ------------ Cash Flows from Financing Activities: Deposits and interest credited for investment contracts 2,040.5 1,332.5 1,941.5 Maturities and withdrawals from insurance contracts (1,745.5) (741.4) (1,082.7) Transfers to/from separate accounts 256.1 16.6 (105.0) Capital contributions 230.0 -- -- Return of capital -- -- (11.3) ------------ ------------ ------------ Net cash provided by financing activities 781.1 607.7 742.5 ------------ ------------ ------------ Net decrease in cash and cash equivalents (7.6) (16.6) (714.3) Cash and cash equivalents, beginning of period 65.4 82.0 796.3 ------------ ------------ ------------ Cash and cash equivalents, end of period $ 57.8 $ 65.4 $ 82.0 ============ ============ ============ Supplemental cash flow information: Income taxes (received) paid, net $ 29.8 $ 6.7 $ (12.3) ============ ============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS. 24 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION ING Life Insurance and Annuity Company ("ILIAC"), and its wholly-owned subsidiaries (collectively, the "Company") are providers of financial products and services in the United States. These consolidated financial statements include ILIAC and its wholly-owned subsidiaries, ING Insurance Company of America ("IICA"), ING Financial Advisers, LLC ("IFA") and, through February 28, 2002, ING Investment Adviser Holding, Inc. ("IA Holdco"). Until March 30, 2003, ILIAC was a wholly-owned subsidiary of ING Retirement Holdings, Inc. ("HOLDCO"), which was a wholly-owned subsidiary of ING Retirement Services, Inc. ("IRSI"). Until March 30, 2003, IRSI was a wholly-owned subsidiary of Lion Connecticut Holding, Inc. ("Lion"), which in turn was ultimately owned by ING Groep N.V. ("ING"), a financial services company based in The Netherlands. On March 30, 2003, a series of mergers occurred in the following order: IRSI merged into Lion, HOLDCO merged into Lion and IA Holdco merged into Lion. As a result, ILIAC is now a direct wholly-owned subsidiary of Lion. 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. 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"). 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 variety 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 25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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. DESCRIPTION OF BUSINESS The Company offers qualified and nonqualified 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 compensation plans. 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. RECENTLY ADOPTED ACCOUNTING STANDARDS ACCOUNTING FOR GOODWILL AND INTANGIBLE ASSETS During 2002, the Company adopted Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS ("FAS No. 142"). The adoption of this standard resulted in an impairment loss of $2,412.1 million. The Company, in accordance with FAS No. 142, recorded the impairment loss retroactive to the first quarter of 2002; prior quarters of 2002 were restated accordingly. This impairment loss represented the entire carrying amount of goodwill, net of accumulated amortization. This impairment charge was shown as a change in accounting principle on the December 31, 2002 Consolidated Income Statement. Application of the nonamortization provision (net of tax) of the standard resulted in an increase in net income of $61.9 million for the twelve months ended December 31, 2001. 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:
YEAR ENDED DECEMBER 31, (MILLIONS) 2001 ----------------------------------------------------------------------- Reported net income after tax $ 99.9 Add back goodwill amortization, net of tax 61.9 ----------------------------------------------------------------------- Adjusted net income after tax $ 161.8 =======================================================================
26 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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. 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 holdings 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, 2003 and 2002, 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 27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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. The Derivative Implementation Group ("DIG") responsible for issuing guidance on behalf of the FASB for implementation of FAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES recently issued Statement Implementation Issue No. B36, EMBEDDED DERIVATIVES: MODIFIED COINSURANCE ARRANGEMENTS AND DEBT INSTRUMENTS THAT INCORPORATE CREDIT RISK EXPOSURES THAT ARE UNRELATED OR ONLY PARTIALLY RELATED TO THE CREDIT WORTHINESS OF THE OBLIGOR UNDER THOSE INSTRUMENTS ("DIG B36"). Under this interpretation, modified coinsurance and coinsurance with funds withheld reinsurance agreements as well as other types of receivables and payables where interest is determined by reference to a pool of fixed maturity assets or total return debt index may be determined to contain embedded derivatives that are required to be bifurcated. The required date of adoption of DIG B36 for the Company was October 1, 2003. The Company completed its evaluation of DIG B36 and determined that the Company had modified coinsurance treaties that require implementation of the guidance. The applicable contracts, however, were determined to generate embedded derivatives with a fair value of zero. Therefore, the guidance, while implemented, did not impact the Company's financial position, results of operations or cash flows. 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, 2003. 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, 2003. The Company has performed an assessment of its guarantees and believes that all of its guarantees are excluded from the scope of this interpretation. VARIABLE INTEREST ENTITIES In January 2003, the FASB issued FASB Interpretation 46, CONSOLIDATION OF VARIABLE INTEREST ENTITIES, AN INTERPRETATION OF ARB NO.51 ("FIN 46"). In December 2003, the FASB modified FIN 46 to make certain technical revisions and address certain implementation issues that had arisen. FIN 46 provides a new framework for identifying variable interest entities ("VIE") and determining when a company should include the assets, liabilities, noncontrolling interests and results of activities of a VIE in its consolidated financial statements. 28 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) In general, a VIE is a corporation, partnership, limited- liability corporation, trust, or any other legal structure used to conduct activities or hold assets that either (1) has an insufficient amount of equity to carry out its principal activities without additional subordinated financial support, (2) has a group of equity owners that are unable to make significant decisions about its activities, or (3) has a group of equity owners that do not have the obligation to absorb losses or the right to receive returns generated by its operations. FIN 46 requires a VIE to be consolidated if a party with an ownership, contractual or other financial interest in the VIE (a variable interest holder) is obligated to absorb a majority of the risk of loss from the VIE's activities, is entitled to receive a majority of the VIE's residual returns (if no party absorbs a majority of the VIE's losses), or both. A variable interest holder that consolidates the VIE is called the primary beneficiary. Upon consolidation, the primary beneficiary generally must initially record all of the VIE's assets, liabilities and noncontrolling interests at fair value and subsequently account for the VIE as if it were consolidated based on majority voting interest. FIN 46 also requires disclosures about VIEs that the variable interest holder is required to consolidate and additions for those VIEs it is not required to consolidate but in which it has a significant variable interest. At December 31, 2003, the Company held the following investments that, for purposes of FIN 46, were evaluated and determined to not require consolidation in the Company's financial statements:
ASSET TYPE PURPOSE BOOK VALUE (1) MARKET VALUE ---------------------------------------------------------------------------------------------------------- Private Corporate Securities--synthetic leases; project financings; credit tenant leases Investment Holdings $ 1,600.1 $ 1,697.6 Foreign Securities--US VIE subsidiaries of foreign companies Investment Holdings 583.1 615.2 Commercial Mortgage Obligations (CMO) Investment Holdings 6,038.8 6,109.4 Collateralized Debt Obligations (CDO) Investment Holdings and/or Collateral Manager 20.9 12.3 Asset-Backed Securities (ABS) Investment Holdings 949.6 975.8 Commercial Mortgage Backed Securities (CMBS) Investment Holdings 1,278.5 1,380.2
(1) Represents maximum exposure to loss except for those structures for which the Company also receives asset management fees NEW ACCOUNTING PRONOUNCEMENTS In July 2003, the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position ("SOP") 03-1, ACCOUNTING AND REPORTING BY INSURANCE ENTERPRISES FOR CERTAIN NONTRADITIONAL LONG-DURATION CONTRACTS AND FOR SEPARATE ACCOUNTS, which the Company intends to adopt on January 1, 2004. The impact on the financial statements is not known at this time. 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 29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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. 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 included in other policyholders' funds on the Consolidated 30 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Balance Sheets. Realized capital gains and losses 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 maturities 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, general account securities on loan are reflected on the Consolidated Balance Sheet as "Securities pledged to creditors". Total securities pledged to creditors at December 31, 2003 and 2002 consisted entirely of fixed maturities. 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 maturities 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. 31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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. 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. Value of Business Acquired ("VOBA") is an asset, which represents the present value of estimated net cash flows embedded in the Company's contracts, which existed at the time the Company was acquired by ING. DAC and VOBA are evaluated for recoverability at each balance sheet date and these assets would be reduced to the extent that gross profits are inadequate to recover the asset. The amortization methodology varies by product type based upon two accounting standards: FAS No. 60, ACCOUNTING AND REPORTING BY INSURANCE ENTERPRISES ("FAS No. 60") and FAS No. 97, ACCOUNTING AND REPORTING BY INSURANCE ENTERPRISES FOR CERTAIN LONG-DURATION CONTRACTS AND REALIZED GAINS AND LOSSES FROM THE SALE OF INVESTMENTS ("FAS No. 97"). 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 fees, 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. 32 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Activity for the years-ended December 31, 2003, 2002 and 2001 within VOBA were as follows:
(MILLIONS) ---------------------------------------------------------------------- Balance at December 31, 2000 $ 1,780.9 Adjustment of allocation purchase price (165.3) Additions 90.0 Interest accrued at 7% 110.0 Amortization (213.8) -------- Balance at December 31, 2001 1,601.8 Adjustment for unrealized loss (21.9) Additions 25.0 Interest accrued at 7% 86.8 Amortization (253.3) -------- Balance at December 31, 2002 1,438.4 Adjustment for unrealized gain 6.2 Additions 59.1 Interest accrued at 7% 92.2 Amortization (180.5) ---------------------------------------------------------------------- Balance at December 31, 2003 $ 1,415.4 ======================================================================
The estimated amount of VOBA to be amortized, net of interest, over the next five years is $112.3 million, $106.4 million, $99.9 million, $94.7 million and $90.7 million for the years 2004, 2005, 2006, 2007 and 2008, 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 of 2002, the Company unlocked its long-term rate of return assumptions. The Company reset long-term assumptions for the separate account returns to 9.0% (gross before fund management fees and mortality and expense and other policy charges), as of December 31, 2002, reflecting a blended return of equity and other sub-accounts. The initial unlocking adjustment in 2002 was primarily driven by the sustained downturn in the equity markets and revised expectations for future returns. During 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. The Company has remained unlocked during 2003, and reset long-term assumptions for the separate account returns from 9.0% to 8.5% (gross before fund management fees and mortality and expense and other policy charges), as of December 31, 2003, maintaining a blended return of equity and other sub-accounts. The 2003 unlocking adjustment from the previous year was primarily driven by improved market performance. For the year ended December 31, 2003, the Company recorded a deceleration of DAC/VOBA amortization totaling $3.7 million before tax, or $2.4 million, net of $1.3 million of federal income tax expense 33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 (see Note 11). 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 3.0% to 10.1% 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. 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 assessed against policyholders are recorded as revenue in the fee income line on the Consolidated Income Statements. 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 Consolidated 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. 34 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 policyholder 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, 2003 and 2002, unrealized gains of $36.2 million and of $29.7 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 2.4% to 7.3% in 2003 and 3.0% to 10.0% in 2002. 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 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, 2003 and 2002 is related to the reinsurance recoverable from Lincoln National Corporation ("Lincoln") arising from the sale of the Company's domestic life insurance business. INCOME TAXES 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. 35 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Deferred corporate tax is stated at the face value and is calculated for temporary valuation differences between carrying amounts of assets and liabilities in the balance sheet and tax bases based on tax rates that are expected to apply in the period when the assets are realized or the liabilities are settled. Deferred tax assets are recognized to the extent that it is probable that taxable profits will be available against which the deductible temporary differences can be utilized. A deferred tax asset is recognized for the carryforward of unused tax losses to the extent that it is probable that future taxable profits will be available for compensation. 2. INVESTMENTS Fixed maturities available for sale as of December 31 were as follows:
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR 2003 (MILLIONS) COST GAINS LOSSES VALUE -------------------------------------------------------------------------------------------------------------- U.S. government and government agencies and authorities $ 350.0 $ 1.7 $ 0.3 $ 351.4 States, municipalities and political subdivisions 2.1 0.1 -- 2.2 U.S. corporate securities: Public utilities 970.7 48.9 11.4 1,008.2 Other corporate securities 6,846.6 432.9 32.4 7,247.1 -------------------------------------------------------------------------------------------------------------- Total U.S. corporate securities 7,817.3 481.8 43.8 8,255.3 -------------------------------------------------------------------------------------------------------------- Foreign securities: Government 605.2 33.7 2.8 636.1 Other 1,364.7 74.5 11.0 1,428.2 -------------------------------------------------------------------------------------------------------------- Total foreign securities 1,969.9 108.2 13.8 2,064.3 -------------------------------------------------------------------------------------------------------------- Mortgage-backed securities 5,903.7 91.8 35.1 5,960.4 Other assets-backed securities 1,036.4 34.0 9.5 1,060.9 -------------------------------------------------------------------------------------------------------------- Total fixed maturities, including fixed maturities pledged to creditors 17,079.4 717.6 102.5 17,694.5 Less: fixed maturities pledged to creditors 117.7 2.7 0.2 120.2 -------------------------------------------------------------------------------------------------------------- Fixed maturities $ 16,961.7 $ 714.9 $ 102.3 $ 17,574.3 ==============================================================================================================
36 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 0.4 -- -- 0.4 U.S. corporate securities: Public utilities 623.9 28.1 6.4 645.6 Other corporate securities 6,845.8 482.4 30.8 7,297.4 -------------------------------------------------------------------------------------------------------------- Total U.S. corporate securities 7,469.7 510.5 37.2 7,943.0 -------------------------------------------------------------------------------------------------------------- Foreign securities: Government 350.4 20.7 6.5 364.6 Other 1,044.8 69.5 3.6 1,110.8 -------------------------------------------------------------------------------------------------------------- Total foreign securities 1,395.2 90.2 10.1 1,475.8 -------------------------------------------------------------------------------------------------------------- Mortgage-backed securities 5,374.2 167.1 34.0 5,507.3 Other assets-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 ==============================================================================================================
At December 31, 2003 and 2002, net unrealized appreciation of $615.1 million and $725.9 million, respectively, on available-for-sale fixed maturities including fixed maturities pledged to creditors included $491.5 million and $563.1 million, respectively, related to experience-rated contracts, which were not reflected in shareholder's equity but in other policyholders' funds. 37 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The aggregate unrealized losses and related fair values of investments with unrealized losses as of December 31, 2003, are shown below by duration:
UNREALIZED FAIR (MILLIONS) LOSS VALUE --------------------------------------------------------------------------- Duration category: Less than six months below cost $ 27.1 $ 2,774.3 More than six months and less than twelve months below cost 65.5 1,772.1 More than twelve months below cost 9.9 82.5 --------------------------------------------------------------------------- Fixed maturities, including fixed maturities pledged to creditors $ 102.5 $ 4,628.9 ===========================================================================
Of the losses more than 6 months and less than 12 months in duration of $65.5 million, there were $20.4 million in unrealized losses that are primarily related to interest rate movement or spread widening for other than credit-related reasons. Business and operating fundamentals are performing as expected. The remaining losses of $45.1 million as of December 31, 2003 included the following items: - $21.5 million of unrealized losses related to securities reviewed for impairment under the guidance proscribed by EITF 99-20. This category includes U.S. government-backed securities, principal protected securities and structured securities which did not have an adverse change in cash flows for which the carrying amount was $594.2 million. - $15.0 million of unrealized losses relating to the energy/utility industry, for which the carrying amount was $202.8 million. During 2003, the energy sector recovered due to a gradually improving economic picture and the lack of any material accounting irregularities similar to those experienced in the prior two years. The Company's year-end analysis indicates that we can expect the debt to be serviced in accordance with the contractual terms. - $5.3 million of unrealized losses relating to non-domestic issues, with no unrealized loss exposure per country in excess of $3.0 million for which the carrying amount was $111.4 million. The Company's credit exposures are well diversified in these markets including banking and beverage companies. - $3.2 million of unrealized losses relating to the telecommunications/ cable/media industry, for which the carrying amount was $83.5 million. During 2003, the sector recovered somewhat due to a gradually improving economy and reduced investor concern with management decisions even though it remains challenged by over capacity. The Company's exposure is primarily focused in the largest and most financially secure companies in the sector. An analysis of the losses more than 12 months in duration of $9.9 million follows. There were $0.6 million in unrealized losses that are primarily related to interest rate movement or spread widening for other than credit-related reasons. Business and operating fundamentals are performing as expected. The remaining losses of $9.3 million as of December 31, 2003 included the following significant items: - $8.7 million of unrealized losses related to securities reviewed for impairment under the guidance proscribed by EITF 99-20. This category includes U.S. government-backed securities, principal protected securities and structured securities which did not have an adverse change in cash flows for which the carrying amount was $47.2 million. 38 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - The remaining unrealized losses totaling $0.6 million relate to a carrying amount of $9.0 million. The amortized cost and fair value of total fixed maturities for the year ended December 31, 2003 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 $ 370.7 $ 379.9 After one year through five years 3,073.7 3,204.9 After five years through ten years 3,385.5 3,533.7 After ten years 2,031.0 2,174.6 Mortgage-backed securities 7,225.1 7,389.9 Other asset-backed securities 993.4 1,011.5 Less: fixed maturities securities pledged to creditors 117.7 120.2 -------------------------------------------------------------------------------------------- Fixed maturities $ 16,961.7 $ 17,574.3 ============================================================================================
At December 31, 2003 and 2002, fixed maturities with carrying values of $11.2 million and $10.5 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, 2003 or 2002. 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, 2003 and 2002, approximately 2.8% and 5.5%, 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) 2003 2002 -------------------------------------------------------------------------- Amortized cost $ 146.5 $ 238.3 Gross unrealized gains 9.4 -- Gross unrealized losses -- 2.9 -------------------------------------------------------------------------- Fair value $ 155.9 $ 235.4 ==========================================================================
Beginning in April 2001, the Company entered into reverse dollar repurchase agreement ("dollar rolls") 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 substantially the same securities as 39 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 $1.5 billion and $1.3 billion at December 31, 2003 and 2002, respectively. 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, 2003. 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 2003, the Company determined that eighty-seven fixed maturities had other than temporary impairments. As a result, at December 31, 2003, the Company recognized a pre-tax loss of $94.4 million to reduce the carrying value of the fixed maturities to their combined fair value of $123.1 million. During 2002, the Company determined that fifty-six fixed maturities 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 maturities to their combined fair value of $124.7 million. During 2001, the Company determined that fourteen fixed maturities 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 fair 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 following 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 quality of the issuer and cash flow characteristics of 40 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 AND CASH EQUIVALENTS, 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 policyholder 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. The carrying values and estimated fair values of certain of the Company's financial instruments at December 31, 2003 and 2002 were as follows:
2003 2002 --------------------------- --------------------------- CARRYING FAIR CARRYING FAIR (MILLIONS) VALUE VALUE VALUE VALUE ---------------------------------------------------------------------------------------------------------------- Assets: Fixed maturity securities $ 17,574.3 $ 17,574.3 $ 15,767.0 $ 15,767.0 Equity securities 155.9 155.9 235.4 235.4 Mortgage loans 754.5 798.5 576.6 632.6 Policy loans 270.3 270.3 296.3 296.3 Short term investments 1.0 1.0 6.2 6.2 Cash and cash equivalents 57.8 57.8 65.4 65.4 Liabilities: Investment contract liabilities: With a fixed maturity 1,056.4 1,067.8 1,129.8 1,122.8 Without a fixed maturity 12,152.5 12,116.4 10,783.6 10,733.8 ----------------------------------------------------------------------------------------------------------------
41 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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, 2003 or 2002. 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, 2003 were $739.6 million, $8.2 million and $8.2 million, respectively. 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. 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, 2003 were $950.0 million, $(14.4) million and $(14.4) million, respectively. 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. 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, 2003 were $78.1 million, $(12.8) million and $(12.8) million, respectively. The notional amount, carrying value and estimated fair value of the Company's open foreign 42 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) exchange rate swaps as of December 31, 2002 were $49.4 million, $(0.5) million and $(0.5) 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, 2003 and 2002 was $(3.7) million and $(1.4) million, respectively. 4. NET INVESTMENT INCOME Sources of net investment income were as follows:
YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, (MILLIONS) 2003 2002 2001 ----------------------------------------------------------------------------------------------- Fixed maturities $ 946.2 $ 964.1 $ 887.2 Nonredeemable preferred stock 9.9 3.9 1.5 Investment in affiliated mutual funds -- -- 7.2 Mortgage loans 42.7 23.3 5.9 Policy loans 9.0 8.7 8.9 Cash equivalents 1.7 1.7 18.2 Other (1.0) 23.4 15.9 ----------------------------------------------------------------------------------------------- Gross investment income 1,008.5 1,025.1 944.8 Less: investment expenses 89.4 65.6 56.4 ----------------------------------------------------------------------------------------------- Net investment income $ 919.1 $ 959.5 $ 888.4 ===============================================================================================
Net investment income includes amounts allocable to experience rated contractholders of $783.3 million, $766.9 million and $704.2 million for the years-ended December 31, 2003, 2002 and 2001, 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 2003, 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 $67.5 million, $148.8 million, 43 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) and $(92.3) million for the years ended December 31, 2003, 2002 and 2001, respectively. Statutory capital and surplus was $1,230.7 million and $1,006.0 million as of December 31, 2003 and 2002, respectively. As of December 31, 2003, 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. 6. CAPITAL GAINS AND LOSSES 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:
YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, (MILLIONS) 2003 2002 2001 ----------------------------------------------------------------------------------------------- Fixed maturities $ 63.9 $ (97.5) $ (20.6) Equity securities 0.6 (3.5) (0.4) ----------------------------------------------------------------------------------------------- Pretax realized capital gains (losses) $ 64.5 $ (101.0) $ (21.0) =============================================================================================== After-tax realized capital gains (losses) $ 41.9 $ (58.3) $ (13.7) ===============================================================================================
Net realized capital gains of $43.9 million, $63.6 million and $117.0 million for the years ended December 31, 2003, 2002 and 2001, respectively, allocable to experience rated contracts, were deducted from net realized capital gains and an offsetting amount was reflected in Other policyholders' funds on the Consolidated Balance Sheets. Net unamortized gains allocable to experienced-rated contractholders were $213.7 million, $199.3 million and $172.7 million at December 31, 2003, 2002 and 2001, respectively. 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:
YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, (MILLIONS) 2003 2002 2001 ----------------------------------------------------------------------------------------------- Proceeds on sales $ 12,812.5 $ 13,265.2 $ 15,338.5 Gross gains 291.9 276.7 57.0 Gross losses 228.0 374.2 77.6 -----------------------------------------------------------------------------------------------
44 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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:
YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, (MILLIONS) 2003 2002 2001 ----------------------------------------------------------------------------------------------- Fixed maturities $ (54.3) $ 104.8 $ 24.0 Equity securities 17.9 (1.6) 2.0 Other investments 34.0 (8.3) 6.5 ----------------------------------------------------------------------------------------------- Subtotal (2.4) 94.9 32.5 Increase in deferred income taxes (0.9) 33.2 11.3 ----------------------------------------------------------------------------------------------- Net changes in accumulated other comprehensive income (loss) $ (1.5) $ 61.7 $ 21.2 ===============================================================================================
Net unrealized capital gains allocable to experience-rated contracts of $491.5 million and $563.1 million at December 31, 2003 and 2002, respectively, are reflected on the Consolidated Balance Sheets in Other policyholders' funds and are not included in shareholder's equity. Shareholder's equity included the following accumulated other comprehensive income, which is net of amounts allocable to experience-rated contractholders:
AS OF AS OF AS OF DECEMBER 31, DECEMBER 31, DECEMBER 31, (MILLIONS) 2003 2002 2001 ----------------------------------------------------------------------------------------------- Net unrealized capital gains (losses): Fixed maturities $ 108.5 $ 162.8 $ 58.0 Equity securities 14.4 (3.5) (1.9) Other investments 41.3 7.3 15.6 ----------------------------------------------------------------------------------------------- 164.2 166.6 71.7 ----------------------------------------------------------------------------------------------- Less: deferred income taxes 57.4 58.3 25.1 ----------------------------------------------------------------------------------------------- Net accumulated other comprehensive income $ 106.8 $ 108.3 $ 46.6 ===============================================================================================
45 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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:
YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, (MILLIONS) 2003 2002 2001 ----------------------------------------------------------------------------------------------- Unrealized holding gains (losses) arising during the year (1) $ (48.1) $ 127.4 $ 8.3 Less: reclassification adjustment for gains(losses) and other items included in net income (2) (46.6) 65.7 (12.9) ----------------------------------------------------------------------------------------------- Net unrealized gains (losses) on securities $ (1.5) $ 61.7 $ 21.2 ===============================================================================================
(1) Pretax unrealized holding gains (losses) arising during the year were $(74.0) million, $196.0 million and $12.7 million for the years ended December 31, 2003, 2002 and 2001, respectively. (2) Pretax reclassification adjustments for gains (losses) and other items included in net income were $(71.6) million, $101.1 million and $(19.8) million for the years ended December 31, 2003, 2002 and 2001, respectively. 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. During the first quarter of 2003, the Company performed a detailed analysis of its severance accrual. As part of this analysis, the Company corrected the initial planned number of people to eliminate from 580 to 515 (corrected from the 2002 Annual Report on Form 10-K) and extended the date of expected substantial completion for severance actions to June 30, 2003. Activity for the year ended December 31, 2003 within the severance liability and positions eliminated related to such actions were as follows:
SEVERANCE (MILLIONS) LIABILITY POSITIONS ---------------------------------------------------------------------------- Balance at December 31, 2002 $ 9.2 75 Actions taken 7.3 72 ---------------------------------------------------------------------------- Balance at December 31, 2003 $ 1.9 3 ============================================================================
8. INCOME TAXES The Company files a consolidated federal income tax return with its subsidiary, 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. 46 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Income taxes consist of the following:
YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, (MILLIONS) 2003 2002 2001 ----------------------------------------------------------------------------------------------- Current taxes (benefits): Federal $ (13.7) $ 28.9 $ 3.2 State 1.1 1.8 2.2 Net realized capital gains 51.6 11.5 16.1 ----------------------------------------------------------------------------------------------- Total current taxes 39.0 42.2 21.5 ----------------------------------------------------------------------------------------------- Deferred taxes (benefits): Federal 51.1 30.6 89.3 Net realized capital losses (29.0) (54.2) (23.4) ----------------------------------------------------------------------------------------------- Total deferred taxes (benefits) 22.1 (23.6) 65.9 ----------------------------------------------------------------------------------------------- Total income tax expense $ 61.1 $ 18.6 $ 87.4 ===============================================================================================
Income taxes were different from the amount computed by applying the federal income tax rate to income before income taxes for the following reasons:
YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, (MILLIONS) 2003 2002 2001 ----------------------------------------------------------------------------------------------- Income before income taxes and cumulative effect of change in accounting principle $ 215.7 $ 86.1 $ 187.3 Tax rate 35% 35% 35% ----------------------------------------------------------------------------------------------- Application of the tax rate 75.5 30.1 65.6 Tax effect of: State income tax, net of federal benefit 0.7 1.2 1.4 Excludable dividends (14.0) (5.3) (1.8) Goodwill amortization -- -- 21.6 Transfer of mutual fund shares -- (6.7) -- Other, net (1.1) (0.7) 0.6 ----------------------------------------------------------------------------------------------- Income taxes $ 61.1 $ 18.6 $ 87.4 ===============================================================================================
47 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (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) 2003 2002 ----------------------------------------------------------------------------------------------- Deferred tax assets: Insurance reserves $ 263.7 $ 234.5 Unrealized gains allocable to experience rated contracts 172.0 197.1 Investments 69.7 113.4 Postretirement benefits 30.2 29.5 Deferred compensation 56.0 58.6 Other 19.7 19.5 ----------------------------------------------------------------------------------------------- Total gross assets 611.3 652.6 ----------------------------------------------------------------------------------------------- Deferred tax liabilities: Value of business acquired 495.4 509.7 Market discount -- 4.1 Net unrealized capital gains 236.4 263.8 Depreciation 0.2 3.8 Deferred policy acquisition costs 59.2 29.2 Other 4.8 5.1 ----------------------------------------------------------------------------------------------- Total gross liabilities 796.0 815.7 ----------------------------------------------------------------------------------------------- Net deferred tax liability $ 184.7 $ 163.1 ===============================================================================================
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, 2003. 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. 48 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. BENEFIT PLANS DEFINED BENEFIT PLAN ING North America Insurance Corporation ("ING North America") sponsors the ING Americas Retirement Plan (the "Retirement Plan"), effective as of December 31, 2001. Substantially all employees of ING North America and its subsidiaries and affiliates (excluding certain employees) are eligible to participate, including the Company's employees other than Company agents. The Retirement Plan is a tax-qualified defined benefit plan, the benefits of which are guaranteed (within certain specified legal limits) by the Pension Benefit Guaranty Corporation ("PBGC"). As of January 1, 2002, each participant in the Retirement Plan (except for certain specified employees) earns a benefit under a final average compensation formula. Subsequent to December 31, 2001, ING North America is responsible for all Retirement Plan liabilities. The costs allocated to the Company for its employees' participation in the Retirement Plan were $15.1 million for 2003 and $6.4 million for 2002, respectively. DEFINED CONTRIBUTION PLANS ING North America sponsors the ING Savings Plan and ESOP (the "Savings Plan"). Substantially all employees of ING North America and its subsidiaries and affiliates (excluding certain employees, including but not limited to Career Agents (as defined below)) are eligible to participate, including the Company's employees other than Company agents. The Savings Plan is a tax-qualified profit sharing and stock bonus plan, which includes an employee stock ownership plan ("ESOP") component. Savings Plan benefits are not guaranteed by the PBGC. The Savings Plan allows eligible participants to defer into the Savings Plan a specified percentage of eligible compensation on a pre-tax basis. ING North America matches such pre-tax contributions, up to a maximum of 6% of eligible compensation. All matching contributions are subject to a 4-year graded vesting schedule (although certain specified participants are subject to a 5-year graded vesting schedule). All contributions made to the Savings Plan are subject to certain limits imposed by applicable law. Pre-tax charges of operations of the Company for the Savings Plan were $7.1 million in 2003 and 2002. The Company sponsors the ING 401(k) Plan for ILIAC Agents (formerly the ING 401(k) Plan for ALIAC Agents, and originally named the Agents of Aetna Life Insurance and Annuity Company Incentive Savings Plan) (the "Agents 401(k) Plan"), which is a tax-qualified profit sharing plan. The Agents 401(k) Plan covers Career Agents (defined below) who meet certain requirements. Benefits under the Agents 401(k) Plan are not guaranteed by the PBGC. The Agents 401(k) Plan allows eligible participants to defer into the Agents 401(k) Plan a specified percentage of eligible earnings on a pre-tax basis. The Company matches such pre-tax contribution, at the rate of 50%, up to a maximum of 6% of eligible earnings. Effective January 1, 2002, all matching contributions are subject to a 4-year vesting schedule, except Career Agents who were credited with vesting service earned prior to January 1, 2002, are subject to a 3-year vesting schedule. All contributions made to the Agents 401(k) Plan are subject to certain limits imposed by applicable law. Pre-tax charges of operations of the Company for the Agents 401(k) Plan were $1.0 million in 2003 and $1.0 in 2002, respectively. 49 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NON-QUALIFIED RETIREMENT PLANS As of December 31, 2001, the Company, in conjunction with ING, offers certain eligible employees (excluding, among others, Career Agents (as defined below)) the Supplemental ING Retirement Plan for Aetna Financial Services and Aetna International Employees ("SERP"). The SERP is a non-qualified defined benefit pension plan, which means all benefits are payable from the general assets of the Company and ING. SERP benefits are not guaranteed by the PBGC. Benefit accruals under the SERP ceased effective as of December 31, 2001. Benefits under the SERP are determined based on an eligible employees years of service and such employee's average annual compensation for the highest five years during the last ten years of employment. Effective January 1, 2002, the Company, in conjunction with ING, offers certain employees (other than Career Agents) supplemental retirement benefits under the ING Americas Supplemental Executive Retirement Plan (the "Americas Supplemental Plan"). The Americas Supplemental Plan is a non-qualified defined benefit pension plan, which means all benefits are payable from the general assets of the Company and ING. Americas Supplemental Plan benefits are not guaranteed by the PBGC. Benefits under the Americas Supplemental Plan are based on the benefits formula contained in the Retirement Plan, but without taking into account the compensation and benefit limits imposed by applicable law. Any benefits payable from the Americas Supplemental Plan are reduced by the benefits payable to the eligible participant under the Retirement Plan. The Company, in conjunction with ING, sponsors the Pension Plan for Certain Producers of ING Life Insurance and Annuity Company (formerly the Pension Plan for Certain Producers of Aetna Life Insurance and Annuity Company) (the "Agents Non-Qualified Plan"), a non-qualified defined benefit pension plan. This plan covers certain full-time insurance salesmen who have entered into a career agent agreement with the Company and certain other individuals who meet the eligibility criteria specified in the plan ("Career Agents"). The Agents Non-Qualified Plan was terminated effective January 1, 2002. In connection with the termination, all benefit accruals ceased and all accrued benefits were frozen. Benefits under this plan are payable from the general assets of the Company and ING and are not guaranteed by the PBGC. The Company also sponsors the Producers' Incentive Savings Plan ("PIP"), which is a non-qualified deferred compensation plan for eligible Career Agents and certain other individuals who meet the eligibility criteria specified in the PIP. The PIP is unfunded, which means benefit payments are made from the general assets of the Company. PIP benefits are not guaranteed by the PBGC. Eligible PIP participants can defer either 4% or 5% of eligible earnings, depending on their commission level, which is 100% matched by the Company. Matching contributions are fully vested when contributed to the PIP. In addition, eligible PIP participants can contribute up to an additional 10% of eligible earnings, with no Company match on such contributions. Pretax charges of operations of the Company for the PIP were $0.6 million for 2003 and $0.9 million for 2002. The Company also sponsors the Producers' Deferred Compensation Plan ("DCP"), which is a non-qualified deferred compensation plan for eligible Career Agents and certain other individuals who meet the eligibility criteria specified in the DCP. The DCP is unfunded, which means benefit payments are made from the general assets of the Company. DCP benefits are not guaranteed by the PBGC. Eligible 50 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) participants can defer up to 100% of eligible earnings, provided the election to defer is made within the applicable election period established by the Company. Amounts contributed to the DCP are not matched by the Company. DCP participants are 100% vested in amounts contributed to the DCP. The following tables summarize the benefit obligations and the funded status for the SERP and the Agents Non-Qualified Plan for the years ended December 31, 2003 and 2002:
(MILLIONS) 2003 2002 ---------------------------------------------------------------------------------------------- Change in Benefit Obligation: Defined Benefit Obligation, January 1 $ 106.8 $ 95.3 Service cost -- -- Interest cost 6.9 6.8 Benefits paid (9.7) (5.5) Plan adjustments -- 4.5 Actuarial (gain) loss on obligation (2.4) 5.7 ---------------------------------------------------------------------------------------------- Defined Benefit Obligation, December 31 $ 101.6 $ 106.8 ============================================================================================== Funded status: Funded status at December 31 $ (101.6) $ (106.8) Unrecognized past service cost 3.1 6.4 Unrecognized net loss 0.6 0.8 ---------------------------------------------------------------------------------------------- Net amount recognized $ (97.9) $ (99.6) ==============================================================================================
At December 31, 2003 and 2002, the accumulated benefit obligation was $97.2 million and $99.7 million, respectively. The weighted-average assumptions used in the measurement of the December 31, 2003 and 2002 benefit obligation for the Retirement Plan were as follows:
2003 2002 ---------------------------------------------------------------------------------------------- Discount rate 6.25% 6.75% Rate of compensation increase 3.75 3.75 ----------------------------------------------------------------------------------------------
Net periodic benefit costs for the years ended December31, 2003 and 2002 were as follows:
(MILLIONS) 2003 2002 ---------------------------------------------------------------------------------------------- Service cost $ -- $ -- Interest cost $ 6.9 6.8 Net actuarial (gain) loss recognized in the year 0.9 -- Unrecognized past service cost recognized in year 0.2 (0.3) The effect of any curtailment or settlement -- (2.6) ---------------------------------------------------------------------------------------------- Net periodic benefit cost $ 8.0 $ 3.9 ==============================================================================================
51 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) POST-RETIREMENT BENEFITS In addition to providing pension benefits, the Company, in conjunction with ING, provides certain health care and life insurance benefits for retired employees and certain agents, including certain Career Agents. Generally, retired employees and eligible Career Agents pay a portion of the cost of these post-retirement benefits, usually based on their years of service with the Company. The amount a retiree or eligible Career Agent pays for such coverage is subject to change in the future. The following tables summarize the benefit obligations and the funded status for retired employees' and retired agents' post-retirement health care benefits over the years ended December 31, 2003 and 2002:
(MILLIONS) 2003 2002 ---------------------------------------------------------------------------------------------- Change in Benefit Obligation: Defined Benefit Obligation, January 1 $ 23.7 $ 25.4 Service cost 0.8 0.5 Interest cost 1.7 1.5 Benefits paid (1.3) (1.2) Plan amendments -- (6.5) Actuarial loss on obligation 4.8 4.0 ---------------------------------------------------------------------------------------------- Defined Benefit Obligation, December 31 29.7 23.7 Funded status: Funded status at December 31 (29.7) (23.7) Unrecognized losses 9.9 5.4 Unrecognized past service cost (3.2) (3.6) ---------------------------------------------------------------------------------------------- Net amount recognized $ (23.0) $ (21.9) ==============================================================================================
The medical health care trend rate was 10% for 2004, gradually decreasing to 5.0% by 2009. Increasing the health care trend by 1% would increase the benefit obligation by $3.3 million as of December 31, 2003. Decreasing the health care trend rate by 1% would decrease the benefit obligation by $2.9 million as of December 31, 2003. Net periodic benefit costs were as follows:
(Millions) 2003 2002 ---------------------------------------------------------------------------------------------- Service cost $ 0.8 $ 0.5 Interest cost 1.7 1.5 Net actuarial loss recognized in the year 0.4 -- Past service cost--unrecognized psc recognized in year -- (2.9) Past service cost--recognized this year (0.5) -- ---------------------------------------------------------------------------------------------- Net periodic benefit cost $ 2.4 $ (0.9) ==============================================================================================
52 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 10. RELATED PARTY TRANSACTIONS INVESTMENT ADVISORY AND OTHER FEES ILIAC serves as investment advisor to certain variable funds used in Company products (collectively, the "Company Funds"). The Company Funds pay ILIAC, as investment advisor, a daily fee which, on an annual basis, ranged, depending on the Fund, from 0.5% to 1.0% of their average daily net assets. Each of the Company Funds managed by ILIAC are subadvised by investment advisors, in which case ILIAC pays a subadvisory fee to the investment advisors, which may include affiliates. The Company is also compensated by the separate accounts 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 affiliated mutual funds and separate accounts, amounted to $201.4 million (excludes fees paid to Aeltus), $391.8 million (includes fees paid to Aeltus through February 28, 2002 when IA Holdco, Aeltus' parent, ceased to be a subsidiary of ILIAC) and $421.7 million in 2003, 2002 and 2001, respectively. RECIPROCAL LOAN AGREEMENT ILIAC maintains a reciprocal loan agreement with ING AIH, an indirect wholly-owned subsidiary of ING and affiliate to ILIAC, 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, 2003, 2002 and 2001, respectively, and earned interest income of $0.9 million, $2.1 million and $3.3 million for the years ended December 31, 2003, 2002 and 2001, respectively. At December 31, 2003, ILIAC had a $41.4 million receivable from ING AIH under this agreement. At December 2002, the Company had no receivables under this agreement. CAPITAL TRANSACTIONS In 2003, the Company received $230.0 million in cash capital contributions from Lion. In 2002, the Company received capital contributions in the form of investments in affiliated mutual funds of $164.3 million from HOLDCO. OTHER Premiums due and other receivables include $0.1 million due from affiliates at December 31, 2003 and 2002. Other liabilities include $92.3 million and $3.5 million due to affiliates for the years ended December 31, 2003 and 2002, respectively. 53 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 11. REINSURANCE At December 31, 2003, 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 $63.8 million and $66.2 million as of December 31, 2003 and 2002, 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 $20.4 million and $19.6 million were maintained for this contract as of December 31, 2003 and 2002, respectively. The effect of reinsurance on premiums and recoveries was as follows:
YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, (MILLIONS) 2003 2002 2001 ------------------------------------------------------------------------------------------------------ Direct premiums $ 93.0 $ 97.3 $ 112.3 Reinsurance assumed 12.1 9.7 0.6 Reinsurance ceded 9.3 8.3 (1.3) ------------------------------------------------------------------------------------------------------ Net premiums 95.8 98.7 114.2 ------------------------------------------------------------------------------------------------------ Reinsurance recoveries $ 184.9 $ 317.6 $ 363.7 ======================================================================================================
54 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12. COMMITMENTS AND CONTINGENT LIABILITIES LEASES For the years ended December 31, 2003, 2002 and 2001, rent expense for leases was $20.8 million, $18.1 million and $17.6 million, respectively. The future net minimum payments under noncancelable leases for the years ended December 31, 2004 through 2008 are estimated to be $17.2 million, $16.1 million, $14.6 million, $13.1 million, and $0.7 million, respectively, and $0.1 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, 2003 and 2002, the Company had off-balance sheet commitments to purchase investments of $154.3 million with an estimated fair value of $154.3 million and $236.7 million with an estimated fair value of $236.7 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 the opinion of management that the disposition of such lawsuits will not have materially adverse effect on the Company's operations or financial position. OTHER REGULATORY MATTERS Like many financial services companies, certain U.S. affiliates of ING Groep N.V. have received informal and formal requests for information since September 2003 from various governmental and self-regulatory agencies in connection with investigations related to mutual funds and variable insurance products. ING has cooperated fully with each request. In addition to responding to regulatory requests, ING management initiated an internal review of trading in ING insurance, retirement, and mutual fund products. The goal of this review has been to identify whether there have been any instances of inappropriate trading in those products by third parties or by ING investment professionals and other ING personnel. This internal review is being conducted by independent special counsel and auditors. Additionally, ING reviewed its controls and procedures in a continuing effort to deter improper frequent trading in ING products. ING's internal reviews related to mutual fund trading are continuing. 55 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The internal review has identified several arrangements allowing third parties to engage in frequent trading of mutual funds within our variable insurance and mutual fund products, and identified other circumstances where frequent trading occurred despite measures taken by ING intended to combat market timing. Most of the identified arrangements were initiated prior to ING's acquisition of the businesses in question. In each arrangement identified, ING has terminated the inappropriate trading, taken steps to discipline or terminate employees who were involved, and modified policies and procedures to deter inappropriate activity. While the review is not completed, management believes the activity identified does not represent a systemic problem in the businesses involved. These instances included agreements (initiated in 1998) that permitted one variable life insurance customer of Reliastar Life Insurance Company ("Reliastar") to engage in frequent trading, and to submit orders until 4pm Central Time, instead of 4pm Eastern Time. Reliastar was acquired by ING in 2000. The late trading arrangement was immediately terminated when current senior management became aware of it in 2002. ING believes that no profits were realized by the customer from the late trading aspect of the arrangement. In addition, the review has identified five arrangements that allowed frequent trading of funds within variable insurance products issued by Reliastar and by ING USA Annuity & Life Insurance Company; and in certain ING Funds. ING entities did not receive special benefits in return for any of these arrangements, which have all been terminated. The internal review also identified two investment professionals who engaged in improper frequent trading in ING Funds. ING will reimburse any ING Fund or its shareholders affected by inappropriate trading for any profits that accrued to any person who engaged in improper frequent trading for which ING is responsible. Management believes that the total amount of such reimbursements will not be material to ING or its U.S. business. 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, 2003 and 2002 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 periods ending December 31, 2003 and 2002. 56 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 ---------------------------------------------------------------------------------------------------------------------- 2003 Revenues from external customers $ 480.1 $ -- $ -- $ 480.1 Net investment income 919.1 919.1 ---------------------------------------------------------------------------------------------------------------------- Total revenue excluding net realized capital gains $ 1,399.2 $ -- $ -- $ 1,399.2 ====================================================================================================================== Operating earnings (4) $ 112.7 $ -- $ -- $ 112.7 Net realized capital gains, net of tax 41.9 -- -- 41.9 ---------------------------------------------------------------------------------------------------------------------- Net income $ 154.6 $ -- $ -- $ 154.6 ====================================================================================================================== 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) ======================================================================================================================
(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 variety 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. 57 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) QUARTERLY DATA (UNAUDITED) Restatement of Financial Information: During the quarterly period ended June 30, 2003, the Company incorrectly recorded investment income and realized capital gains related to Separate Accounts. The Company noted the effect of this error during the compilation of the December 31, 2003 financial statements and made the appropriate changes to the quarterly periods ended June 30, 2003 and September 30, 2003. The following tables show the previously reported and restated amounts for each of the periods affected.
AS REPORTED 2003 (MILLIONS) FIRST SECOND THIRD FOURTH ---------------------------------------------------------------------------------------------------------------------- Total revenue $ 359.2 $ 383.6 $ 362.4 $ 358.5 ---------------------------------------------------------------------------------------------------------------------- Income from continuing operations before income taxes 17.5 111.5 33.2 53.5 Income tax expense 5.1 36.2 3.3 16.5 ---------------------------------------------------------------------------------------------------------------------- Income from continuing operations 12.4 75.3 29.9 37.0 ---------------------------------------------------------------------------------------------------------------------- Net income $ 12.4 $ 75.3 $ 29.9 $ 37.0 ====================================================================================================================== AS RESTATED 2003 (MILLIONS) FIRST SECOND* THIRD* FOURTH ---------------------------------------------------------------------------------------------------------------------- Total revenue $ 359.2 $ 381.3 $ 354.7 $ 368.5 ---------------------------------------------------------------------------------------------------------------------- Income from continuing operations before income taxes 17.5 109.2 25.5 63.5 Income tax expense 5.1 35.4 0.6 20.0 ---------------------------------------------------------------------------------------------------------------------- Income from continuing operations 12.4 73.8 24.9 43.5 ---------------------------------------------------------------------------------------------------------------------- Net income $ 12.4 $ 73.8 $ 24.9 $ 43.5 ====================================================================================================================== 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) $ (2,383.2) $ 26.4 $ (13.2) $ 25.4 ======================================================================================================================
* Restated 58 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 9A. 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 III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Omitted pursuant to General Instruction I(2) of Form 10-K, except with respect to compliance with Sections 406 and 407 of the Sarbanes-Oxley Act of 2002. (a) CODE OF ETHICS FOR FINANCIAL PROFESSIONALS The Company has approved and adopted a Code of Ethics for Financial Professions, pursuant to the requirements of Section 406 of the Sarbanes-Oxley Act of 2002 (attached). Any waiver of the Code of Ethics will be disclosed by the Company by way of a Form 8-K filing. (b) DESIGNATION OF BOARD FINANCIAL EXPERT The Company has designated David A. Wheat, Director, Senior Vice-President and Chief Financial Officer of the Company, as its Board Financial Expert , pursuant to the requirements of Section 407 of the Sarbanes-Oxley Act of 2002. Because the Company is a wholly-owned subsidiary of Lion, it does not have any outside directors sitting on its board. 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. PRINCIPAL ACCOUNTANT FEES AND SERVICES Omitted pursuant to General Instruction I(2) of Form 10-K. 59 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 22. 2. Financial statement schedules. See Index on Financial Statement Schedules on Page 72. EXHIBITS 1(a) Underwriting Agreement dated November 17, 2000 between Aetna Life Insurance and Annuity Company (now ING Life Insurance and Annuity Company ("ILIAC" or "Registrant")) and Aetna Investment Services, LLC (now ING Financial Advisers, LLC, incorporated by reference to Pre-Effective Amendment No. 1 to Registration Statement on Form N-4, as filed with the Securities and Exchange Commission ("SEC") on November 30, 2000 (File No. 333-49176). 3.(i) Certificate of Incorporation as amended and restated January 1, 2002. Incorporated by reference to the ILIAC on Form 10-K, as filed with the SEC on March 28, 2002 (File No. 33-23376). 3.(ii) By-Laws, as restated January 1, 2002. Incorporated by reference to the ILIAC on Form 10-K, as filed on March 28, 2002 (File No. 33-23376). 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. 60 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. 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. 61 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. 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. Incorporated by reference to Post-Effective Amendment No. 30 to Registration Statement on Form N-4 (File No. 33-75988), as filed on December 30, 2003 Incorporated by reference to Post-Effective Amendment No. 18 to Registration Statement on Form N-4 (File No. 33-75980), as filed on April 16, 2003. Incorporated by reference to Post-Effective Amendment No. 24 to Registration Statement on Form N-4 (File No. 33-81216), as filed on April 11, 2003. Incorporated by reference to Registration Statement on Form N-4 (File No. 333-109860), as filed on October 21, 2003. 62 10. Material Contracts 10.(a) Distribution Agreement, dated as of December 13, 2000, between Lion Connecticut Holdings Inc. ("Lion") and Aetna Inc., incorporated by reference to ILIAC's Form 10-K filed on March 30, 2001 (File No. 33-23376). 10.(b) Employee Benefits Agreement, dated as of December 13, 2000, between Lion and Aetna Inc., incorporated by reference to the Company's Form 10-K filed on March 30, 2001 (File No. 33-23376). 10.(c) Tax Sharing Agreement, dated as of December 13, 2000, among Lion, Aetna Inc. and ING America Insurance Holdings, Inc., incorporated by reference to the Company's Form 10-K filed on March 30, 2001 (File No. 33-23376). 10.(d) Transition Services Agreement, dated as of December 13, 2000, between Lion and Aetna Inc., incorporated by reference to the Company's Form 10-K filed on March 30, 2001 (File No. 33-23376). 10.(e) Lease Agreement, dated as of December 13, 2000, by and between ING Life Insurance Company and ILIAC, incorporated by reference to ILIAC's Form 10-K filed on March 30, 2001 (File No. 33-23376). 10.(f) Real Estate Services Agreement, dated as of December 13, 2000, between Aetna Inc. and ILIAC, incorporated by reference to the Company's Form 10-K filed on March 30, 2001 (File No. 33-23376). 10.(g) Tax Sharing Agreement between ILIAC and ING Insurance Company of America, effective January 1, 2001. 10.(h) Tax Sharing Agreement between ILIAC, ING America Insurance Holding, Inc. and affiliated companies, effective January 1, 2001. 10.(i) Services Agreement between ILIAC and the affiliated companies listed on Exhibit B to that Agreement, effective January 1, 2001. 10.(j) Services Agreement between ILIAC and ING North American Insurance Corporation, Inc., effective January 1, 2001. 10.(k) Investment Advisory Agreement between ILIAC and ING Investment Management LLC, effective March 31, 2001. 10.(l) Reciprocal Loan Agreement between ILIAC and ING America Insurance Holdings, Inc., effective June 1, 2001. 10.(m) Amendment to Services Agreement between ILIAC and the affiliated companies listed in Exhibit B to the Agreement, effective January 1, 2002. 10.(n) Amendment to Services Agreement between ILIAC and ING North American Insurance Corporation, Inc., effective January 1, 2002. 63 10.(o) Services Agreement between ILIAC and ING Financial Advisers, LLC., effective June 1, 2002. 10.(p) Amendment to Investment Advisory Agreement between ILIAC and ING Investment Management LLC, effective January 1, 2003. 10.(q) Administrative Services Agreement between ILIAC, ReliaStar Life Insurance Company of New York and the affiliated companies specified in Exhibit A to the Agreement, effective March 1, 2003. 10.(r) Amendment to Investment Advisory Agreement between ILIAC and ING Investment Management LLC, effective October 14, 2003. 14. ING Code of Ethics for Financial Professionals. 31.1 Certificate of David A. Wheat pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certificate of Keith Gubbay pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certificate of David A. Wheat pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certificate of Keith Gubbay pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on form 8-K. None. 64 INDEX TO CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
PAGE ---- Reports of Independent Auditors 65 I. Summary of Investments as of December 31, 2003 66 III. Supplementary Insurance Information as of and for the years ended December 31, 2003, 2002 and 2001 67 IV. Reinsurance Information as of and for the years ended December 31, 2003, 2002 and 2001 69
Schedules other than those listed above are omitted because they are not required or not applicable. 65 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, 2003 and 2002, and for each of the three years in the period ended December 31, 2003, and have issued our report thereon dated March 22, 2004. 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 22, 2004 66 SCHEDULE I Summary of Investments--As of December 31, 2003 (Millions)
AMOUNT SHOWN ON TYPE OF INVESTMENTS COST VALUE* BALANCE SHEET ------------------- ------------ ------------ --------------- Fixed maturities: U.S. government and government agencies and authorities $ 350.0 $ 351.4 $ 351.4 States, municipalities and political subdivisions 2.1 2.2 2.2 U.S. corporate securities 7,817.3 8,255.3 8,255.3 Foreign securities (1) 1,969.9 2,064.3 2,064.3 Mortgage-backed securities 5,903.7 5,960.4 5,960.4 Other asset-backed securities 1,036.4 1,060.9 1,060.9 Less: Fixed maturities pledged to creditors 117.7 120.2 120.2 ------------ ------------ --------------- Total fixed maturities securities 16,961.7 17,574.3 17,574.3 ------------ ------------ --------------- Equity securities: Non-redeemable preferred stock 34.1 34.1 34.1 Investment in affiliated mutual funds 112.3 121.7 121.7 Common stock 0.1 0.1 0.1 ------------ ------------ --------------- Total equity securities 146.5 155.9 155.9 ------------ ------------ --------------- Short term investments 1.0 1.0 1.0 Mortgage loans 754.5 798.5 754.5 Policy loans 270.3 270.3 270.3 Other investments 52.6 52.6 52.6 Securities pledged to creditors 117.7 120.2 120.2 ------------ ------------ --------------- Total investments $ 18,304.3 $ 18,972.8 $ 18,928.8 ============ ============ ===============
* 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. 67 SCHEDULE III Supplementary Insurance Information As of and for the years ended December 31, 2003, 2002 and 2001 (Millions)
DEFERRED FUTURE POLICY POLICY BENEFITS UNPAID CLAIMS OTHER ACQUISITIONS AND CLAIM'S AND CLAIM UNEARNED POLICYHOLDERS' SEGMENT COSTS RESERVES EXPENSES PREMIUMS FUNDS - --------------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, 2003 USFS (1) $ 307.9 $ 3,379.9 $ 25.4 $ -- $ 15,871.3 Investment Management Services (2) -- -- -- -- -- Other (3) -- -- -- -- -- - --------------------------------------------------------------------------------------------------------------------- Total $ 307.9 $ 3,379.9 $ 25.4 $ -- $ 15,871.3 ===================================================================================================================== YEAR ENDED DECEMBER31, 2002 USFS (1) $ 229.8 $ 3,305.2 $ 30.0 $ -- $ 14,756.0 Investment Management Services (2) -- -- -- -- -- Other (3) -- -- -- -- -- - --------------------------------------------------------------------------------------------------------------------- Total $ 229.8 $ 3,305.2 $ 30.0 $ -- $ 14,756.0 =====================================================================================================================
(1) USFS includes deferred annuity contracts that fund defined contribution and deferred compensation plans, immediate annuity contracts; mutual funds; distribution services for annuities 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 variety 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 service. 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 accounts; 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. 68
AMORTIZATION OF DEFERRED POLICY INTEREST ACQUISITION CREDITED AND COST AND NET OTHER VALUE OF INVESTMENT OTHER BENEFITS TO BUSINESS OPERATING SEGMENT PREMIUMS INCOME (4) INCOME (5) POLICYHOLDERS ACQUIRED EXPENSES - ------------------------------------------------------------------------------------------------------------------ YEAR ENDED DECEMBER 31, 2003 USFS (1) $ 95.8 $ 919.1 $ 448.8 $ 757.6 $ 106.5 $ 383.9 Investment Management Services (2) -- -- -- -- -- -- Other (3) -- -- -- -- -- -- - ------------------------------------------------------------------------------------------------------------------ Total $ 95.8 $ 919.1 $ 448.8 $ 757.6 $ 106.5 $ 383.9 ================================================================================================================== YEAR ENDED DECEMBER 31, 2002 USFS (1) $ 98.7 $ 959.2 $ 307.5 $ 746.4 $ 181.5 $ 358.7 Investment Management Services (2) -- 0.2 19.2 -- -- 12.0 Other (3) -- 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 (1) $ 114.2 $ 885.5 $ 449.7 $ 729.6 $ 112.0 $ 463.7 Investment Management Services (2) -- 1.7 119.7 -- -- 78.2 Other (3) -- 1.2 (37.0) -- -- (35.8) - ------------------------------------------------------------------------------------------------------------------ Total $ 114.2 $ 888.4 $ 532.4 $ 729.6 $ 112.0 $ 506.1 ==================================================================================================================
(1) USFS includes deferred annuity contracts that fund defined contribution and deferred compensation plans, immediate annuity contracts; mutual funds; distribution services for annuities 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 variety 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 service. 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 accounts; 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) The allocation of net investment income is based upon the investment year method or specific identification of certain portfolios within specific segments. (5) Includes net realized capital gains and losses and fee income. 69 SCHEDULE IV Reinsurance Information As of and for the years ended December 31, 2003, 2002 and 2001 (Millions)
PERCENTAGE OF (MILLIONS) GROSS CEDED ASSUMED NET ASSUMED TO NET - -------------------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, 2003 Life insurance in Force $ 28,254.7 $ 29,254.7 $ 778.9 $ -- Premiums: Discontinued operations 227.5 239.5 12.0 -- Accident and Health insurance 1.0 1.0 -- -- Annuities 93.0 9.3 12.1 95.8 12.6% - -------------------------------------------------------------------------------------------------------------------------- Total Premiums 321.5 249.8 24.1 95.8 ========================================================================================================================== YEAR ENDED DECEMBER 31, 2002 Life insurance in Force $ 31,068.3 $ 31,853.2 $ 995.7 $ 210.8 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 $ 33,761.9 $ 34,614.0 $ 883.7 $ 31.6 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 ==========================================================================================================================
70 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) Date March 25, 2004 By /s/ David A. Wheat -------------- ------------------ David A. Wheat Director, Senior Vice President and Chief Financial 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 25, 2004.
SIGNATURES TITLE /s/ David A. Wheat - ------------------------------------- Director, Senior Vice President and Chief Financial Officer /s/ Keith Gubbay - ------------------------------------- Keith Gubbay Director and President /s/ Thomas J. McInerney - ------------------------------------- Thomas J. McInerney Director and Chairman /s/ Jacques de Vaucleroy - ------------------------------------- Jacques de Vaucleroy Director /s/ Kathleen A. Murphy - ------------------------------------- Kathleen A. Murphy Director
71 EXHIBIT 14 ING CODE OF ETHICS FOR FINANCIAL PROFESSIONALS This ING Code of Ethics for Financial Professionals has been adopted by the boards of the U.S. domiciled insurance companies which are members of the ING family of companies ("ING Companies") and applies to the principal executive officer, chief financial officer and all other finance, accounting, treasury, tax and investor relations professionals ("ING Financial Professionals") serving one or more of the ING Companies, their subsidiaries or affiliates. This Code of Ethics is intended to supplement the ING Americas General Code of Conduct - together these set the standards of personal and professional integrity that we expect ING Financial Professionals to demonstrate in all their activities. Financial professionals hold an important and elevated role in corporate governance in that they are vested with the responsibility and authority to protect, balance and preserve the interests of all company stakeholders, including shareholders, customers and employees. ING Financial Professionals are expected to adhere to this Code of Ethics with respect to their individual conduct and advocate its tenets among their peers and colleagues. As an ING Financial Professional, you agree to: - - Engage in, promote and reward honest and ethical conduct, including avoidance of actual or apparent conflicts of interest in your personal and professional relationships; - - Disclose to the USFS Chief Compliance Officer any material transaction or relationship that could reasonably be expected to give rise to such a conflict; - - Take all reasonable measures to protect the confidentiality of non-public information obtained or created in connection with ING business activities, unless disclosure of such information is required by law or regulation, or legal or regulatory process; - - Use non-public information obtained or created in connection with ING business activities only for the benefit of the ING companies, not for personal advantage; - - Act as a responsible steward with respect to the use and control of ING assets and resources; - - Produce full, fair, complete, accurate, timely and understandable disclosure in reports and documents that the ING Companies file with or submit to the Securities and Exchange Commission, other regulators and in other public communications made by them; - - Take all reasonable measures to ensure that business and investment transactions are properly authorized and completely and accurately recorded in accordance with applicable GAAP and statutory accounting principles and established company financial policy; - - Comply with all applicable governmental laws, rules and regulations, as well as the rules and regulations of appropriate regulatory and self-regulatory agencies; - - Not attempt to unduly or fraudulently influence, coerce, manipulate, or mislead any authorized audit or interfere with any auditor engaged in the performance of an internal or independent audit of the ING Companies' financial statements or accounting books and records. 72 If you become aware of any suspected or known violation of this Code of Ethics or the ING Code of Conduct, you have a duty to report such concerns promptly to the USFS Chief Compliance Officer. You may also submit a concern confidentially and anonymously by accessing the ING Ethics Hotline/Voice Line at 800-555-1853 (detailed access instructions posted on ING Exchange). Your inquiry will be handled discretely and every effort will be made to maintain, within the limits allowed by law, the confidentiality of anyone requesting guidance or reporting suspect behavior or a compliance concern. As an ING Financial Professional, you understand that you will be held accountable for your adherence to this Code of Ethics. Your failure to observe its terms may result in disciplinary action, including termination of employment. Violations of this Code of Ethics may also constitute violations of law and may result in civil and criminal penalties for you, your manager and the ING companies. AS EVIDENCE THAT YOU HAVE READ AND AGREED TO ABIDE BY THIS CODE OF ETHICS, YOU MUST SIGN AND RETURN THE DECLARATION ACKNOWLEDGMENT FORM (DELIVERED ALONG WITH THIS CODE OF ETHICS) AS INSTRUCTED ON THE FORM. A request for a waiver of any provision of this Code of Ethics must be in writing and addressed to the USFS Chief Compliance Officer. No waiver of this Code of Ethics shall be granted without the approval of the board of directors for the relevant ING Company and any waiver shall be disclosed promptly on Form 8-K or any other means approved by the Securities and Exchange Commission. The ING Companies intend that this Code of Ethics serve as its written code of ethics under Section 406 of the Sarbanes-Oxley Act of 2002, complying with the standards set forth in the Securities and Exchange Commission Regulation S-K. ING CODE OF ETHICS FOR FINANCIAL PROFESSIONALS EMPLOYEE DECLARATION I, (print name) ____________________ , have read, reviewed carefully and understand the ING Code of Ethics for Financial Professionals. I understand that observing this Code of Ethics and the ING General Code of Conduct is an integral part of my job responsibilities. I understand that any deviation from or violation of this Code of Ethics could cause embarrassment and/or financial harm to ING's interests. I also understand that violation of this Code of Ethics can lead to disciplinary action, up to and including termination of my employment, and civil or criminal charges. I further understand that it is my responsibility to prevent and report any violations. I also acknowledge that ING may modify or amend this Code of Ethics from time to time and that, upon receiving written notice of such changes, adherence to them will constitute part of my ongoing job responsibilities. 73 CODE OF ETHICS I understand that this Code of Ethics does not constitute an employment contract or any guarantee of continued employment and that the employment relationship is at will. Position ------------------------------------------ Department -------------------------------------------- Company ------------------------------------------ Signature ----------------------------------------- Date ------------------------------------------- PLEASE SIGN AND RETURN THIS FORM TO THE USFS CHIEF COMPLIANCE OFFICER AT ING, 151 FARMINGTON AVENUE, TS31, HARTFORD, CT 06156 74 EXHIBIT 31.1 CERTIFICATION I, David A. Wheat, 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 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 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-15(e) and 15d-15(e)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 25, 2004 By /s/ David A. Wheat --------------------------------------------- David A. Wheat Director, Senior Vice President and Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer) 75 EXHIBIT 31.2 CERTIFICATION I, Keith Gubbay, certify that: 2. I have reviewed this annual report on Form 10-K of ING Life Insurance and Annuity Company; 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 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-15(e) and 15d-15(e)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) all fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date March 25, 2004 By /s/ Keith Gubbay -------------------------------------------- Keith Gubbay Director and President (Duly Authorized Officer and Principal Officer) 76 EXHIBIT 32.1 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, 2003 (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. Date March 25, 2004 By /s/ David A. Wheat -------------- ------------------ David A. Wheat Director, Senior Vice President and Chief Financial Officer 77 EXHIBIT 32.2 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, 2003 (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. Date March 25, 2004 By /s/ Keith Grubbay -------------- ------------------ Keith Grubbay Director and President 78 EX-99.B-23(A) 7 a2132875zex-99_b23a.txt EX-99.B-23(A) Exhibit 99.B-23(a) Exhibit 16(23)(a) Consent of Independent Auditors Exhibit 23(a) - Consent of Ernst and Young LLP, Independent Auditors We consent to the incorporation by reference in the Registration Statement (Form S-2 No. 333-104456) of our reports dated March 22, 2004, with respect to the consolidated financial statements and schedules of ING Life Insurance and Annuity Company as of December 31, 2003 and 2002 and for each of the three years in the period ended December 31, 2003, included in its Annual Report (Form 10-K) for the year ended December 31, 2003, filed with the Securities and Exchange Commission. /s/ Ernst & Young LLP Atlanta, Georgia April 2, 2004 EX-99.B-24(A) 8 a2132875zex-99_b24a.txt EX-99.B-24(A) Exhibit 99.B-24(a) Exhibit 16(24)(a) Powers of Attorney POWER OF ATTORNEY PURSUANT TO ITEM 601.(b)(24) OF REGULATION SK AND RULE 462(b) OF THE SECURITIES ACT OF 1933 The undersigned on behalf of the company set forth below hereby constitutes and appoints the individuals set forth below and each of them individually, my true and lawful attorneys, with full power to them and each of them to sign for me, and in my name and in the capacity indicated below, any and all amendments to the Registration Statements listed below filed with the Securities and Exchange Commission under the Securities Act of 1933 and the Investment Company Act of 1940. SOUTHLAND LIFE INSURANCE COMPANY: As Director of SOUTHLAND LIFE INSURANCE COMPANY I hereby appoint J. Neil McMurdie and Kimberly J. Smith. Registration Statements filed under the Securities Act of 1933: 333-46294 33-89574 33-97852 333-49880 Registration Statements filed under the Investment Company Act of 1940: 811-09106 811-08976 hereby ratifying and confirming on this 16th day of February, 2004, my signature as it may be signed by my said attorneys to any such Registration Statements and any and all amendments thereto. SIGNATURE /s/ Shaun P. Mathews - --------------------------------------------- Shaun P. Mathews POWER OF ATTORNEY PURSUANT TO ITEM 601.(b)(24) OF REGULATION SK AND RULE 462(b) OF THE SECURITIES ACT OF 1933 The undersigned on behalf of the company set forth below hereby constitutes and appoints the individuals set forth below and each of them individually, my true and lawful attorneys, with full power to them and each of them to sign for me, and in my name and in the capacity indicated below, any and all amendments to the Registration Statements listed below filed with the Securities and Exchange Commission under the Securities Act of 1933 and the Investment Company Act of 1940. RELIASTAR LIFE INSURANCE COMPANY OF NEW YORK: As Director of RELIASTAR LIFE INSURANCE COMPANY OF NEW YORK I hereby appoint J. Neil McMurdie, Linda Senker and Kimberly J. Smith. Registration Statements filed under the Securities Act of 1933: 2-76642 333-52358 333-85326 333-19123 333-61879 333-85618 333-47527 333-75938 333-104540 Registration Statements filed under the Investment Company Act of 1940: 811-03427 811-07935 hereby ratifying and confirming on this 16th day of February, 2004, my signature as it may be signed by my said attorneys to any such Registration Statements and any and all amendments thereto. SIGNATURE /s/ R. Michael Conley - --------------------------------------------- R. Michael Conley POWER OF ATTORNEY PURSUANT TO ITEM 601.(b)(24) OF REGULATION SK AND RULE 462(b) OF THE SECURITIES ACT OF 1933 The undersigned on behalf of the company set forth below hereby constitutes and appoints the individuals set forth below and each of them individually, my true and lawful attorneys, with full power to them and each of them to sign for me, and in my name and in the capacity indicated below, any and all amendments to the Registration Statements listed below filed with the Securities and Exchange Commission under the Securities Act of 1933 and the Investment Company Act of 1940. RELIASTAR LIFE INSURANCE COMPANY OF NEW YORK: As Director of RELIASTAR LIFE INSURANCE COMPANY OF NEW YORK I hereby appoint J. Neil McMurdie, Linda Senker and Kimberly J. Smith. Registration Statements filed under the Securities Act of 1933: 2-76642 333-52358 333-85326 333-19123 333-61879 333-85618 333-47527 333-75938 333-104540 Registration Statements filed under the Investment Company Act of 1940: 811-03427 811-07935 hereby ratifying and confirming on this 23rd day of February, 2004, my signature as it may be signed by my said attorneys to any such Registration Statements and any and all amendments thereto. SIGNATURE /s/ Gregory McGreevey - --------------------------------------------- Gregory McGreevey POWER OF ATTORNEY PURSUANT TO ITEM 601.(b)(24) OF REGULATION SK AND RULE 462(b) OF THE SECURITIES ACT OF 1933 The undersigned on behalf of the company set forth below hereby constitutes and appoints the individuals set forth below and each of them individually, my true and lawful attorneys, with full power to them and each of them to sign for me, and in my name and in the capacities indicated below, any and all amendments to the Registration Statements listed below filed with the Securities and Exchange Commission under the Securities Act of 1933 and the Investment Company Act of 1940. RELIASTAR LIFE INSURANCE COMPANY OF NEW YORK: As Director, President and Chief Executive Officer of RELIASTAR LIFE INSURANCE COMPANY OF NEW YORK I hereby appoint J. Neil McMurdie, Linda Senker and Kimberly J. Smith. Registration Statements filed under the Securities Act of 1933: 2-76642 333-52358 333-85326 333-19123 333-61879 333-85618 333-47527 333-75938 333-104540 Registration Statements filed under the Investment Company Act of 1940: 811-03427 811-07935 hereby ratifying and confirming on this 17th day of February, 2004, my signature as it may be signed by my said attorneys to any such Registration Statements and any and all amendments thereto. SIGNATURE /s/ James R. Gelder - --------------------------------------------- James R. Gelder POWER OF ATTORNEY PURSUANT TO ITEM 601.(b)(24) OF REGULATION SK AND RULE 462(b) OF THE SECURITIES ACT OF 1933 The undersigned on behalf of the company set forth below hereby constitutes and appoints the individuals set forth below and each of them individually, my true and lawful attorneys, with full power to them and each of them to sign for me, and in my name and in the capacities indicated below, any and all amendments to the Registration Statements listed below filed with the Securities and Exchange Commission under the Securities Act of 1933 and the Investment Company Act of 1940. RELIASTAR LIFE INSURANCE COMPANY OF NEW YORK: As Director of RELIASTAR LIFE INSURANCE COMPANY OF NEW YORK I hereby appoint J. Neil McMurdie, Linda Senker and Kimberly J. Smith. Registration Statements filed under the Securities Act of 1933: 2-76642 333-52358 333-85326 333-19123 333-61879 333-85618 333-47527 333-75938 333-104540 Registration Statements filed under the Investment Company Act of 1940: 811-03427 811-07935 hereby ratifying and confirming on this 23rd day of February, 2004, my signature as it may be signed by my said attorneys to any such Registration Statements and any and all amendments thereto. SIGNATURE /s/ Audrey R. Kavanagh - --------------------------------------------- Audrey R. Kavanagh POWER OF ATTORNEY PURSUANT TO ITEM 601.(b)(24) OF REGULATION SK AND RULE 462(b) OF THE SECURITIES ACT OF 1933 The undersigned on behalf of the company set forth below hereby constitutes and appoints the individuals set forth below and each of them individually, my true and lawful attorneys, with full power to them and each of them to sign for me, and in my name and in the capacity indicated below, any and all amendments to the Registration Statements listed below filed with the Securities and Exchange Commission under the Securities Act of 1933 and the Investment Company Act of 1940. RELIASTAR LIFE INSURANCE COMPANY OF NEW YORK: As Director of RELIASTAR LIFE INSURANCE COMPANY OF NEW YORK I hereby appoint J. Neil McMurdie, Linda Senker and Kimberly J. Smith. Registration Statements filed under the Securities Act of 1933: 2-76642 333-52358 333-85326 333-19123 333-61879 333-85618 333-47527 333-75938 333-104540 Registration Statements filed under the Investment Company Act of 1940: 811-03427 811-07935 hereby ratifying and confirming on this 13th day of February, 2004, my signature as it may be signed by my said attorneys to any such Registration Statements and any and all amendments thereto. SIGNATURE /s/ Ulric Haynes, Jr. - --------------------------------------------- Ulric Haynes, Jr. POWER OF ATTORNEY PURSUANT TO ITEM 601.(b)(24) OF REGULATION SK AND RULE 462(b) OF THE SECURITIES ACT OF 1933 The undersigned on behalf of the company set forth below hereby constitutes and appoints the individuals set forth below and each of them individually, my true and lawful attorneys, with full power to them and each of them to sign for me, and in my name and in the capacity indicated below, any and all amendments to the Registration Statements listed below filed with the Securities and Exchange Commission under the Securities Act of 1933 and the Investment Company Act of 1940. RELIASTAR LIFE INSURANCE COMPANY OF NEW YORK: As Director of RELIASTAR LIFE INSURANCE COMPANY OF NEW YORK I hereby appoint J. Neil McMurdie, Linda Senker and Kimberly J. Smith. Registration Statements filed under the Securities Act of 1933: 2-76642 333-52358 333-85326 333-19123 333-61879 333-85618 333-47527 333-75938 333-104540 Registration Statements filed under the Investment Company Act of 1940: 811-03427 811-07935 hereby ratifying and confirming on this 24th day of February, 2004, my signature as it may be signed by my said attorneys to any such Registration Statements and any and all amendments thereto. SIGNATURE /s/ James F. Lille - --------------------------------------------- James F. Lille POWER OF ATTORNEY PURSUANT TO ITEM 601.(b)(24) OF REGULATION SK AND RULE 462(b) OF THE SECURITIES ACT OF 1933 The undersigned on behalf of the company set forth below hereby constitutes and appoints the individuals set forth below and each of them individually, my true and lawful attorneys, with full power to them and each of them to sign for me, and in my name and in the capacity indicated below, any and all amendments to the Registration Statements listed below filed with the Securities and Exchange Commission under the Securities Act of 1933 and the Investment Company Act of 1940. RELIASTAR LIFE INSURANCE COMPANY OF NEW YORK: As Director of RELIASTAR LIFE INSURANCE COMPANY OF NEW YORK I hereby appoint J. Neil McMurdie, Linda Senker and Kimberly J. Smith. Registration Statements filed under the Securities Act of 1933: 2-76642 333-52358 333-85326 333-19123 333-61879 333-85618 333-47527 333-75938 333-104540 Registration Statements filed under the Investment Company Act of 1940: 811-03427 811-07935 hereby ratifying and confirming on this 13th day of February 2004, my signature as it may be signed by my said attorneys to any such Registration Statements and any and all amendments thereto. SIGNATURE /s/ Brian D. Comer - --------------------------------------------- Brian D. Comer POWER OF ATTORNEY PURSUANT TO ITEM 601.(b)(24) OF REGULATION SK AND RULE 462(b) OF THE SECURITIES ACT OF 1933 The undersigned on behalf of the companies set forth below hereby constitutes and appoints the individuals set forth below and each of them individually, my true and lawful attorneys, with full power to them and each of them to sign for me, and in my name and in the capacities indicated below, any and all amendments to the Registration Statements listed below filed with the Securities and Exchange Commission under the Securities Act of 1933 and the Investment Company Act of 1940. ING LIFE INSURANCE AND ANNUITY COMPANY: As Director and President of ING LIFE INSURANCE AND ANNUITY COMPANY I hereby appoint Megan Dunphy, J. Neil McMurdie, Michael Pignatella; Julie E. Rockmore, Linda Senker and Kimberly J. Smith. Registration Statements filed under the Securities Act of 1933: 2-52448 33-75972 33-76026 333-60016 2-52449 33-75974 33-79118 333-69574 33-02339 33-75976 33-79122 333-72079 33-34370 33-75978 33-81216 333-86276 33-42555 33-75980 33-87642 333-86278 33-60477 33-75982 33-87932 333-87305 33-61897 33-75984 33-88720 333-89953 33-62473 33-75986 33-88722 333-101761 33-64277 33-75988 33-88724 333-104456 33-75248 33-75990 33-89858 333-105479 33-75954 33-75992 33-91846 333-109622 33-75956 33-75994 333-01107 333-109860 33-75958 33-75996 333-09515 33-75960 33-75998 333-15817 33-75962 33-76000 333-27337 33-75964 33-76002 333-37448 33-75966 33-76004 333-49176 33-75968 33-76018 333-49495 33-75970 33-76024 333-56297 Registration Statements filed under the Investment Company Act of 1940: 811-02512 811-02513 811-04536 811-05906 811-09665 ING INSURANCE COMPANY OF AMERICA: As Director and President of ING INSURANCE COMPANY OF AMERICA I hereby appoint Megan Dunphy, J. Neil McMurdie, Michael Pignatella; Julie E. Rockmore, Linda Senker and Kimberly J. Smith. Registration Statements filed under the Securities Act of 1933: 33-59749 33-63657 333-49581 33-62481 33-80750 333-87131 Registration Statements filed under the Investment Company Act of 1940: 811-08582 ING USA ANNUITY AND LIFE INSURANCE COMPANY: As Director and President of ING USA ANNUITY AND LIFE INSURANCE COMPANY I hereby appoint Linda Senker, Michael A. Pignatella and Kimberly J. Smith. Registration Statements filed under the Securities Act of 1933: 33-34827 333-33914 333-66757 333-104547 33-59261 333-33924 333-70600 333-104548 333-23351 333-35592 333-70602 333-111686 333-28679 333-57212 333-90516 333-28755 333-57218 333-101481 333-28769 333-63692 333-104539 333-30180 333-63694 333-104546 Registration Statements filed under the Investment Company Act of 1940: 811-05626 811-8524 RELIASTAR LIFE INSURANCE COMPANY: As Director and President of RELIASTAR LIFE INSURANCE COMPANY I hereby appoint Megan Dunphy, J. Neil McMurdie, Michael A. Pignatella, Julie E. Rockmore and Kimberly J. Smith. Registration Statements filed under the Securities Act of 1933: 2-95392 333-47094 333-92000 33-57244 333-69431 333-105319 33-65870 333-100207 33-69892 333-100708 333-18517 333-100209 Registration Statements filed under the Investment Company Act of 1940: 811-04208 811-03341 811-9002 RELIASTAR LIFE INSURANCE COMPANY OF NEW YORK: As Director of RELIASTAR LIFE INSURANCE COMPANY OF NEW YORK I hereby appoint J. Neil McMurdie, Linda Senker and Kimberly J. Smith. Registration Statements filed under the Securities Act of 1933: 2-76642 333-52358 333-85326 333-19123 333-61879 333-85618 333-47527 333-75938 333-104540 Registration Statements filed under the Investment Company Act of 1940: 811-03427 811-07935 SECURITY LIFE OF DENVER INSURANCE COMPANY: As Director and President of SECURITY LIFE OF DENVER INSURANCE COMPANY I hereby appoint J. Neil McMurdie and Kimberly J. Smith. Registration Statements filed under the Securities Act of 1933: 33-74190 333-34404 333-90577 33-78444 333-50278 33-88148 333-72753 333-34402 333-73464 Registration Statements filed under the Investment Company Act of 1940: 811-08292 811-08196 SOUTHLAND LIFE INSURANCE COMPANY: As Director and President of SOUTHLAND LIFE INSURANCE COMPANY I hereby appoint J. Neil McMurdie and Kimberly J. Smith. Registration Statements filed under the Securities Act of 1933: 333-46294 33-89574 33-97852 333-49880 Registration Statements filed under the Investment Company Act of 1940: 811-09106 811-08976 hereby ratifying and confirming on this February 13th day of February, 2004, my signature as it may be signed by my said attorneys to any such Registration Statements and any and all amendments thereto. SIGNATURE /s/Keith Gubbay - --------------------------------------------- Keith Gubbay POWER OF ATTORNEY PURSUANT TO ITEM 601.(b)(24) OF REGULATION SK AND RULE 462(b) OF THE SECURITIES ACT OF 1933 The undersigned on behalf of the companies set forth below hereby constitutes and appoints the individuals set forth below and each of them individually, my true and lawful attorneys, with full power to them and each of them to sign for me, and in my name and in the capacities indicated below, any and all amendments to the Registration Statements listed below filed with the Securities and Exchange Commission under the Securities Act of 1933 and the Investment Company Act of 1940. ING LIFE INSURANCE AND ANNUITY COMPANY: As Director of ING LIFE INSURANCE AND ANNUITY COMPANY I hereby appoint Megan Dunphy, J. Neil McMurdie, Michael Pignatella; Julie E. Rockmore, Linda Senker and Kimberly J. Smith. Registration Statements filed under the Securities Act of 1933: 2-52448 33-75972 33-76026 333-60016 2-52449 33-75974 33-79118 333-69574 33-02339 33-75976 33-79122 333-72079 33-34370 33-75978 33-81216 333-86276 33-42555 33-75980 33-87642 333-86278 33-60477 33-75982 33-87932 333-87305 33-61897 33-75984 33-88720 333-89953 33-62473 33-75986 33-88722 333-101761 33-64277 33-75988 33-88724 333-104456 33-75248 33-75990 33-89858 333-105479 33-75954 33-75992 33-91846 333-109622 33-75956 33-75994 333-01107 333-109860 33-75958 33-75996 333-09515 33-75960 33-75998 333-15817 33-75962 33-76000 333-27337 33-75964 33-76002 333-37448 33-75966 33-76004 333-49176 33-75968 33-76018 333-49495 33-75970 33-76024 333-56297 Registration Statements filed under the Investment Company Act of 1940: 811-02512 811-02513 811-04536 811-05906 811-09665 ING INSURANCE COMPANY OF AMERICA: As Director of ING INSURANCE COMPANY OF AMERICA I hereby appoint Megan Dunphy, J. Neil McMurdie, Michael Pignatella; Julie E. Rockmore, Linda Senker and Kimberly J. Smith. Registration Statements filed under the Securities Act of 1933: 33-59749 33-63657 333-49581 33-62481 33-80750 333-87131 Registration Statements filed under the Investment Company Act of 1940: 811-08582 ING USA ANNUITY AND LIFE INSURANCE COMPANY: As Director of ING USA ANNUITY AND LIFE INSURANCE COMPANY I hereby appoint Linda Senker, Michael A. Pignatella and Kimberly J. Smith. Registration Statements filed under the Securities Act of 1933: 33-34827 333-33914 333-66757 333-104547 33-59261 333-33924 333-70600 333-104548 333-23351 333-35592 333-70602 333-111686 333-28679 333-57212 333-90516 333-28755 333-57218 333-101481 333-28769 333-63692 333-104539 333-30180 333-63694 333-104546 Registration Statements filed under the Investment Company Act of 1940: 811-05626 811-8524 RELIASTAR LIFE INSURANCE COMPANY: As Director of RELIASTAR LIFE INSURANCE COMPANY I hereby appoint Megan Dunphy, J. Neil McMurdie, Michael A. Pignatella, Julie E. Rockmore and Kimberly J. Smith. Registration Statements filed under the Securities Act of 1933: 2-95392 333-47094 333-92000 33-57244 333-69431 333-105319 33-65870 333-100207 33-69892 333-100708 333-18517 333-100209 Registration Statements filed under the Investment Company Act of 1940: 811-04208 811-03341 811-9002 SECURITY LIFE OF DENVER INSURANCE COMPANY: As Director of SECURITY LIFE OF DENVER INSURANCE COMPANY I hereby appoint J. Neil McMurdie and Kimberly J. Smith. Registration Statements filed under the Securities Act of 1933: 33-74190 333-34404 333-90577 33-78444 333-50278 33-88148 333-72753 333-34402 333-73464 Registration Statements filed under the Investment Company Act of 1940: 811-08292 811-08196 SOUTHLAND LIFE INSURANCE COMPANY: As Director of SOUTHLAND LIFE INSURANCE COMPANY I hereby appoint J. Neil McMurdie and Kimberly J. Smith. Registration Statements filed under the Securities Act of 1933: 333-46294 33-89574 33-97852 333-49880 Registration Statements filed under the Investment Company Act of 1940: 811-09106 811-08976 hereby ratifying and confirming on this 13th day of February, 2004, my signature as it may be signed by my said attorneys to any such Registration Statements and any and all amendments thereto. SIGNATURE /s/Jacques de Vaucleroy - --------------------------------------------- Jacques de Vaucleroy POWER OF ATTORNEY PURSUANT TO ITEM 601.(b)(24) OF REGULATION SK AND RULE 462(b) OF THE SECURITIES ACT OF 1933 The undersigned on behalf of the companies set forth below hereby constitutes and appoints the individuals set forth below and each of them individually, my true and lawful attorneys, with full power to them and each of them to sign for me, and in my name and in the capacities indicated below, any and all amendments to the Registration Statements listed below filed with the Securities and Exchange Commission under the Securities Act of 1933 and the Investment Company Act of 1940. ING LIFE INSURANCE AND ANNUITY COMPANY: As Director of ING LIFE INSURANCE AND ANNUITY COMPANY I hereby appoint Megan Dunphy, J. Neil McMurdie, Michael Pignatella; Julie E. Rockmore, Linda Senker and Kimberly J. Smith. Registration Statements filed under the Securities Act of 1933: 2-52448 33-75972 33-76026 333-60016 2-52449 33-75974 33-79118 333-69574 33-02339 33-75976 33-79122 333-72079 33-34370 33-75978 33-81216 333-86276 33-42555 33-75980 33-87642 333-86278 33-60477 33-75982 33-87932 333-87305 33-61897 33-75984 33-88720 333-89953 33-62473 33-75986 33-88722 333-101761 33-64277 33-75988 33-88724 333-104456 33-75248 33-75990 33-89858 333-105479 33-75954 33-75992 33-91846 333-109622 33-75956 33-75994 333-01107 333-109860 33-75958 33-75996 333-09515 33-75960 33-75998 333-15817 33-75962 33-76000 333-27337 33-75964 33-76002 333-37448 33-75966 33-76004 333-49176 33-75968 33-76018 333-49495 33-75970 33-76024 333-56297 Registration Statements filed under the Investment Company Act of 1940: 811-02512 811-02513 811-04536 811-05906 811-09665 ING INSURANCE COMPANY OF AMERICA: As Director of ING INSURANCE COMPANY OF AMERICA I hereby appoint Megan Dunphy, J. Neil McMurdie, Michael Pignatella; Julie E. Rockmore, Linda Senker and Kimberly J. Smith. Registration Statements filed under the Securities Act of 1933: 33-59749 33-63657 333-49581 33-62481 33-80750 333-87131 Registration Statements filed under the Investment Company Act of 1940: 811-08582 ING USA ANNUITY AND LIFE INSURANCE COMPANY: As Director of ING USA ANNUITY AND LIFE INSURANCE COMPANY I hereby appoint Linda Senker, Michael A. Pignatella and Kimberly J. Smith. Registration Statements filed under the Securities Act of 1933: 33-34827 333-33914 333-66757 333-104547 33-59261 333-33924 333-70600 333-104548 333-23351 333-35592 333-70602 333-111686 333-28679 333-57212 333-90516 333-28755 333-57218 333-101481 333-28769 333-63692 333-104539 333-30180 333-63694 333-104546 Registration Statements filed under the Investment Company Act of 1940: 811-05626 811-8524 RELIASTAR LIFE INSURANCE COMPANY: As Director of RELIASTAR LIFE INSURANCE COMPANY I hereby appoint Megan Dunphy, J. Neil McMurdie, Michael A. Pignatella, Julie E. Rockmore and Kimberly J. Smith. Registration Statements filed under the Securities Act of 1933: 2-95392 333-18517 333-100708 33-57244 333-47094 333-100209 33-65870 333-69431 333-92000 33-69892 333-100207 333-105319 Registration Statements filed under the Investment Company Act of 1940: 811-04208 811-03341 811-9002 SECURITY LIFE OF DENVER INSURANCE COMPANY: As Director of SECURITY LIFE OF DENVER INSURANCE COMPANY I hereby appoint J. Neil McMurdie and Kimberly J. Smith. Registration Statements filed under the Securities Act of 1933: 33-74190 333-34404 333-90577 33-78444 333-50278 33-88148 333-72753 333-34402 333-73464 Registration Statements filed under the Investment Company Act of 1940: 811-08292 811-08196 SOUTHLAND LIFE INSURANCE COMPANY: As Director of SOUTHLAND LIFE INSURANCE COMPANY I hereby appoint J. Neil McMurdie and Kimberly J. Smith. Registration Statements filed under the Securities Act of 1933: 333-46294 33-89574 33-97852 333-49880 Registration Statements filed under the Investment Company Act of 1940: 811-09106 811-08976 hereby ratifying and confirming on this 13th day of February, 2004, my signature as it may be signed by my said attorneys to any such Registration Statements and any and all amendments thereto. SIGNATURE /s/Thomas J. McInerney - --------------------------------------------- Thomas J. McInerney POWER OF ATTORNEY PURSUANT TO ITEM 601.(b)(24) OF REGULATION SK AND RULE 462(b) OF THE SECURITIES ACT OF 1933 The undersigned on behalf of the companies set forth below hereby constitutes and appoints the individuals set forth below and each of them individually, my true and lawful attorneys, with full power to them and each of them to sign for me, and in my name and in the capacities indicated below, any and all amendments to the Registration Statements listed below filed with the Securities and Exchange Commission under the Securities Act of 1933 and the Investment Company Act of 1940. ING LIFE INSURANCE AND ANNUITY COMPANY: As Director of ING LIFE INSURANCE AND ANNUITY COMPANY I hereby appoint Megan Dunphy, J. Neil McMurdie, Michael Pignatella; Julie E. Rockmore, Linda Senker and Kimberly J. Smith. Registration Statements filed under the Securities Act of 1933: 2-52448 33-75972 33-76026 333-60016 2-52449 33-75974 33-79118 333-69574 33-02339 33-75976 33-79122 333-72079 33-34370 33-75978 33-81216 333-86276 33-42555 33-75980 33-87642 333-86278 33-60477 33-75982 33-87932 333-87305 33-61897 33-75984 33-88720 333-89953 33-62473 33-75986 33-88722 333-101761 33-64277 33-75988 33-88724 333-104456 33-75248 33-75990 33-89858 333-105479 33-75954 33-75992 33-91846 333-109622 33-75956 33-75994 333-01107 333-109860 33-75958 33-75996 333-09515 33-75960 33-75998 333-15817 33-75962 33-76000 333-27337 33-75964 33-76002 333-37448 33-75966 33-76004 333-49176 33-75968 33-76018 333-49495 33-75970 33-76024 333-56297 Registration Statements filed under the Investment Company Act of 1940: 811-02512 811-02513 811-04536 811-05906 811-09665 ING INSURANCE COMPANY OF AMERICA: As Director of ING INSURANCE COMPANY OF AMERICA I hereby appoint Megan Dunphy, J. Neil McMurdie, Michael Pignatella; Julie E. Rockmore, Linda Senker and Kimberly J. Smith. Registration Statements filed under the Securities Act of 1933: 33-59749 33-63657 333-49581 33-62481 33-80750 333-87131 Registration Statements filed under the Investment Company Act of 1940: 811-08582 ING USA ANNUITY AND LIFE INSURANCE COMPANY: As Director of ING USA ANNUITY AND LIFE INSURANCE COMPANY I hereby appoint Linda Senker, Michael A. Pignatella and Kimberly J. Smith. Registration Statements filed under the Securities Act of 1933: 33-34827 333-33914 333-66757 333-104547 33-59261 333-33924 333-70600 333-104548 333-23351 333-35592 333-70602 333-111686 333-28679 333-57212 333-90516 333-28755 333-57218 333-101481 333-28769 333-63692 333-104539 333-30180 333-63694 333-104546 Registration Statements filed under the Investment Company Act of 1940: 811-05626 811-8524 RELIASTAR LIFE INSURANCE COMPANY: As Director of RELIASTAR LIFE INSURANCE COMPANY I hereby appoint Megan Dunphy, J. Neil McMurdie, Michael A. Pignatella, Julie E. Rockmore and Kimberly J. Smith. Registration Statements filed under the Securities Act of 1933: 2-95392 333-47094 333-92000 33-57244 333-69431 333-105319 33-65870 333-100207 33-69892 333-100708 333-18517 333-100209 Registration Statements filed under the Investment Company Act of 1940: 811-04208 811-03341 811-09002 RELIASTAR LIFE INSURANCE COMPANY OF NEW YORK: As Director of RELIASTAR LIFE INSURANCE COMPANY OF NEW YORK I hereby appoint J. Neil McMurdie, Linda Senker and Kimberly J. Smith. Registration Statements filed under the Securities Act of 1933: 2-76642 333-52358 333-85326 333-19123 333-61879 333-85618 333-47527 333-75938 333-104540 Registration Statements filed under the Investment Company Act of 1940: 811-03427 811-07935 SECURITY LIFE OF DENVER INSURANCE COMPANY: As Director of SECURITY LIFE OF DENVER INSURANCE COMPANY I hereby appoint J. Neil McMurdie and Kimberly J. Smith. Registration Statements filed under the Securities Act of 1933: 33-74190 333-34404 333-90577 33-78444 333-50278 33-88148 333-72753 333-34402 333-73464 Registration Statements filed under the Investment Company Act of 1940: 811-08292 811-08196 SOUTHLAND LIFE INSURANCE COMPANY: As Director of SOUTHLAND LIFE INSURANCE COMPANY I hereby appoint J. Neil McMurdie and Kimberly J. Smith. Registration Statements filed under the Securities Act of 1933: 333-46294 33-89574 33-97852 333-49880 Registration Statements filed under the Investment Company Act of 1940: 811-09106 811-08976 hereby ratifying and confirming on this 13th day of February, 2004, my signature as it may be signed by my said attorneys to any such Registration Statements and any and all amendments thereto. SIGNATURE /s/Kathleen A. Murphy - --------------------------------------------- Kathleen A. Murphy POWER OF ATTORNEY PURSUANT TO ITEM 601.(b)(24) OF REGULATION SK AND RULE 462(b) OF THE SECURITIES ACT OF 1933 The undersigned on behalf of the companies set forth below hereby constitutes and appoints the individuals set forth below and each of them individually, my true and lawful attorneys, with full power to them and each of them to sign for me, and in my name and in the capacities indicated below, any and all amendments to the Registration Statements listed below filed with the Securities and Exchange Commission under the Securities Act of 1933 and the Investment Company Act of 1940. ING LIFE INSURANCE AND ANNUITY COMPANY: As Director and Chief Financial Officer (principal accounting officer) of ING LIFE INSURANCE AND ANNUITY COMPANY I hereby appoint Megan Dunphy, J. Neil McMurdie, Michael Pignatella; Julie E. Rockmore, Linda Senker and Kimberly J. Smith. Registration Statements filed under the Securities Act of 1933: 2-52448 33-75972 33-76026 333-60016 2-52449 33-75974 33-79118 333-69574 33-02339 33-75976 33-79122 333-72079 33-34370 33-75978 33-81216 333-86276 33-42555 33-75980 33-87642 333-86278 33-60477 33-75982 33-87932 333-87305 33-61897 33-75984 33-88720 333-89953 33-62473 33-75986 33-88722 333-101761 33-64277 33-75988 33-88724 333-104456 33-75248 33-75990 33-89858 333-105479 33-75954 33-75992 33-91846 333-109622 33-75956 33-75994 333-01107 333-109860 33-75958 33-75996 333-09515 33-75960 33-75998 333-15817 33-75962 33-76000 333-27337 33-75964 33-76002 333-37448 33-75966 33-76004 333-49176 33-75968 33-76018 333-49495 33-75970 33-76024 333-56297 Registration Statements filed under the Investment Company Act of 1940: 811-02512 811-02513 811-04536 811-05906 811-09665 ING INSURANCE COMPANY OF AMERICA: As Director and Chief financial Officer (principal accounting officer) of ING INSURANCE COMPANY OF AMERICA I hereby appoint Megan Dunphy, J. Neil McMurdie, Michael Pignatella; Julie E. Rockmore, Linda Senker and Kimberly J. Smith. Registration Statements filed under the Securities Act of 1933: 33-59749 33-63657 333-49581 33-62481 33-80750 333-87131 Registration Statements filed under the Investment Company Act of 1940: 811-08582 ING USA ANNUITY AND LIFE INSURANCE COMPANY: As Director and Chief Financial Officer (principal accounting officer) of ING USA ANNUITY AND LIFE INSURANCE COMPANY I hereby appoint Linda Senker, Michael A. Pignatella and Kimberly J. Smith. Registration Statements filed under the Securities Act of 1933: 33-34827 333-33914 333-66757 333-104547 33-59261 333-33924 333-70600 333-104548 333-23351 333-35592 333-70602 333-111686 333-28679 333-57212 333-90516 333-28755 333-57218 333-101481 333-28769 333-63692 333-104539 333-30180 333-63694 333-104546 Registration Statements filed under the Investment Company Act of 1940: 811-05626 811-8524 RELIASTAR LIFE INSURANCE COMPANY: As Director and Chief Financial Officer (principal accounting officer) of RELIASTAR LIFE INSURANCE COMPANY I hereby appoint Megan Dunphy, J. Neil McMurdie, Michael A. Pignatella, Julie E. Rockmore and Kimberly J. Smith. Registration Statements filed under the Securities Act of 1933: 2-95392 333-47094 333-92000 33-57244 333-69431 333-105319 33-65870 333-100207 33-69892 333-100708 333-18517 333-100209 Registration Statements filed under the Investment Company Act of 1940: 811-04208 811-03341 811-9002 RELIASTAR LIFE INSURANCE COMPANY OF NEW YORK: As Director and Chief Financial Officer (principal accounting officer) of RELIASTAR LIFE INSURANCE COMPANY OF NEW YORK I hereby appoint J. Neil McMurdie, Linda Senker and Kimberly J. Smith. Registration Statements filed under the Securities Act of 1933: 2-76642 333-52358 333-85326 333-19123 333-61879 333-85618 333-47527 333-75938 333-104540 Registration Statements filed under the Investment Company Act of 1940: 811-03427 811-07935 SECURITY LIFE OF DENVER INSURANCE COMPANY: As Director and Chief Financial Officer (principal accounting officer) of SECURITY LIFE OF DENVER INSURANCE COMPANY I hereby appoint J. Neil McMurdie and Kimberly J. Smith. Registration Statements filed under the Securities Act of 1933: 33-74190 333-34404 333-90577 33-78444 333-50278 33-88148 333-72753 333-34402 333-73464 Registration Statements filed under the Investment Company Act of 1940: 811-08292 811-08196 SOUTHLAND LIFE INSURANCE COMPANY: As Director and Chief Financial Officer (principal accounting officer) of SOUTHLAND LIFE INSURANCE COMPANY I hereby appoint J. Neil McMurdie and Kimberly J. Smith. Registration Statements filed under the Securities Act of 1933: 333-46294 33-89574 33-97852 333-49880 Registration Statements filed under the Investment Company Act of 1940: 811-09106 811-08976 hereby ratifying and confirming on this 17th day of February 2004, my signature as it may be signed by my said attorneys to any such Registration Statements and any and all amendments thereto. SIGNATURE /s/David A. Wheat - --------------------------------------------- David A. Wheat POWER OF ATTORNEY PURSUANT TO ITEM 601.(b)(24) OF REGULATION SK AND RULE 462(b) OF THE SECURITIES ACT OF 1933 The undersigned on behalf of the companies set forth below hereby constitutes and appoints the individuals set forth below and each of them individually, my true and lawful attorneys, with full power to them and each of them to sign for me, and in my name and in the capacities indicated below, any and all amendments to the Registration Statements listed below filed with the Securities and Exchange Commission under the Securities Act of 1933 and the Investment Company Act of 1940. RELIASTAR LIFE INSURANCE COMPANY OF NEW YORK: As Director of RELIASTAR LIFE INSURANCE COMPANY OF NEW YORK I hereby appoint J. Neil McMurdie, Linda Senker and Kimberly J. Smith. Registration Statements filed under the Securities Act of 1933: 2-76642 333-52358 333-85326 333-19123 333-61879 333-85618 333-47527 333-75938 333-104540 Registration Statements filed under the Investment Company Act of 1940: 811-03427 811-07935 hereby ratifying and confirming on this 17th day of February, 2004, my signature as it may be signed by my said attorneys to any such Registration Statements and any and all amendments thereto. SIGNATURE /s/ Mark A. Tullis - --------------------------------------------- Mark A. Tullis POWER OF ATTORNEY PURSUANT TO ITEM 601.(b)(24) OF REGULATION SK AND RULE 462(b) OF THE SECURITIES ACT OF 1933 The undersigned on behalf of the company set forth below hereby constitutes and appoints the individuals set forth below and each of them individually, my true and lawful attorneys, with full power to them and each of them to sign for me, and in my name and in the capacity indicated below, any and all amendments to the Registration Statements listed below filed with the Securities and Exchange Commission under the Securities Act of 1933 and the Investment Company Act of 1940. RELIASTAR LIFE INSURANCE COMPANY OF NEW YORK: As Director of RELIASTAR LIFE INSURANCE COMPANY OF NEW YORK I hereby appoint J. Neil McMurdie, Linda Senker and Kimberly J. Smith. Registration Statements filed under the Securities Act of 1933: 2-76642 333-52358 333-85326 333-19123 333-61879 333-85618 333-47527 333-75938 333-104540 Registration Statements filed under the Investment Company Act of 1940: 811-03427 811-07935 hereby ratifying and confirming on this 13th day of February, 2004, my signature as it may be signed by my said attorneys to any such Registration Statements and any and all amendments thereto. SIGNATURE /s/Charles B. Updike - --------------------------------------------- Charles B. Updike POWER OF ATTORNEY PURSUANT TO ITEM 601.(b)(24) OF REGULATION SK AND RULE 462(b) OF THE SECURITIES ACT OF 1933 The undersigned on behalf of the company set forth below hereby constitutes and appoints the individuals set forth below and each of them individually, my true and lawful attorneys, with full power to them and each of them to sign for me, and in my name and in the capacity indicated below, any and all amendments to the Registration Statements listed below filed with the Securities and Exchange Commission under the Securities Act of 1933 and the Investment Company Act of 1940. RELIASTAR LIFE INSURANCE COMPANY OF NEW YORK: As Director of RELIASTAR LIFE INSURANCE COMPANY OF NEW YORK I hereby appoint J. Neil McMurdie, Linda Senker and Kimberly J. Smith. Registration Statements filed under the Securities Act of 1933: 2-76642 333-52358 333-85326 333-19123 333-61879 333-85618 333-47527 333-75938 333-104540 Registration Statements filed under the Investment Company Act of 1940: 811-03427 811-07935 hereby ratifying and confirming on this 16th day of February, 2004, my signature as it may be signed by my said attorneys to any such Registration Statements and any and all amendments thereto. SIGNATURE /s/Ross M. Weale - --------------------------------------------- Ross M. Weale POWER OF ATTORNEY PURSUANT TO ITEM 601.(b)(24) OF REGULATION SK AND RULE 462(b) OF THE SECURITIES ACT OF 1933 The undersigned on behalf of the companies set forth below hereby constitutes and appoints the individuals set forth below and each of them individually, my true and lawful attorneys, with full power to them and each of them to sign for me, and in my name and in the capacities indicated below, any and all amendments to the Registration Statements listed below filed with the Securities and Exchange Commission under the Securities Act of 1933 and the Investment Company Act of 1940. RELIASTAR LIFE INSURANCE COMPANY OF NEW YORK: As Director of RELIASTAR LIFE INSURANCE COMPANY OF NEW YORK I hereby appoint J. Neil McMurdie, Linda Senker, and Kimberly J. Smith. Registration Statements filed under the Securities Act of 1933: 2-76642 333-52358 333-85326 333-19123 333-61879 333-85618 333-47527 333-75938 333-104540 Registration Statements filed under the Investment Company Act of 1940: 811-04208 811-03341 811-9002 SOUTHLAND LIFE INSURANCE COMPANY: As Director of SOUTHLAND LIFE INSURANCE COMPANY I hereby appoint J. Neil McMurdie and Kimberly J. Smith. Registration Statements filed under the Securities Act of 1933: 333-46294 33-89574 33-97852 333-49880 Registration Statements filed under the Investment Company Act of 1940: 811-09106 811-08976 hereby ratifying and confirming on this 17th day of February, 2004, my signature as it may be signed by my said attorneys to any such Registration Statements and any and all amendments thereto. SIGNATURE /s/Stephen J. Preston - --------------------------------------------- Stephen J. Preston -----END PRIVACY-ENHANCED MESSAGE-----