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**UNITED STATES SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

** **

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** **

**FORM 10-Q**

** **

**(Mark One)**

 
| x | **QUARTERLY   REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|---|-----------------------------------------------------------------------------------------------|

** **

**For the quarterly period ended March 31, 2011**

** **

**OR**

 
| **o** | **TRANSITION   REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|------------------------------------------------------------------------------------------------|

** **

**For the transition period from                                        to                                       **

 

**Commission File Number:    333-133154, 333-133076, 333-133153, 333-133155, 333-158928, 333-133152**

** **

**ING USA ANNUITY AND LIFE INSURANCE COMPANY**

(Exact name of registrant as specified in its charter)

 

| **Iowa**                                                       | ** ** | **41-0991508**                    |
|----------------------------------------------------------------|------------|-----------------------------------|
| (State or other jurisdiction of incorporation or organization) |       | (IRS Employer Identification No.) |
|                                                           |       |                              |
| **1475 Dunwoody Drive**                                        |       |                              |
| **West Chester, Pennsylvania**                                 | ** ** | **19380-1478**                    |
| (Address of principal executive offices)                       |       | (Zip Code)                        |

 

**(610) 425-3400**

(Registrant’s telephone number, including area code)

** **

 

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes   x       No    ̈

 

Indicate by check mark whether the registrant (1) has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes    ̈         No    ̈

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

 

| Large accelerated filer    £ |   | Accelerated filer    £          |
|-------------------------------------------------------|--------|----------------------------------------------------------|
|                                                  |   |                                                     |
| Non-accelerated filer    x        |   | Smaller reporting company     £ |
| (Do not check if a smaller reporting company)         |   |                                                     |

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes    ̈     No   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: 250,000 shares of Common Stock, $10 par value, as of May 6, 2011, are authorized, issued, and outstanding, all of which were directly owned by Lion Connecticut Holdings Inc.

 

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

 

 

 

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** **

**ING USA Annuity and Life Insurance Company**

**(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)**

**Form 10-Q for the period ended March 31, 2011**

 

**INDEX**

 
| ** **      | ** **                                                                                  | **PAGE**   |
|-----------------|---------------------------------------------------------------------------------------------|------------|
| **PART I.**     | **FINANCIAL   INFORMATION (UNAUDITED)**                                                     |       |
|            |                                                                                        |       |
| Item 1.         | Financial   Statements:                                                                     | ** ** |
|            | Condensed   Statements of Operations                                                        | 4          |
|            | Condensed Balance   Sheets                                                                  | 5          |
|            | Condensed Statements of Changes in Shareholder’s   Equity                              | 7          |
|            | Condensed Statements of Cash Flows                                                          | 9          |
|            | Notes to Condensed Financial Statements                                                     | 10         |
|            |                                                                                        |       |
| Item 2.         | Management’s   Narrative Analysis of the Results of Operations and Financial Condition | 56         |
|            |                                                                                        |       |
| Item 4.         | Controls and   Procedures                                                                   | 97         |
|            |                                                                                        |       |
| **PART II.**    | **OTHER INFORMATION**                                                                       |       |
|            |                                                                                        |       |
| Item 1.         | Legal Proceedings                                                                           | 98         |
|            |                                                                                        |       |
| Item 1A.        | Risk Factors                                                                                | 98         |
|            |                                                                                        |       |
| Item 6.         | Exhibits                                                                                    | 99         |
|            |                                                                                        |       |
| Signature       |                                                                                        | 100        |
|            |                                                                                        |       |
| Exhibit   Index |                                                                                        | 101        |

 

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**NOTE CONCERNING FORWARD-LOOKING STATEMENTS**

 

This Quarterly Report on Form 10-Q, including “Management’s Narrative Analysis of the Results of Operations and Financial Condition,” contains statements which constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements relating to trends in operations and financial results and the business and products of the Company, as well as other statements including words such as “anticipate,” “believe,” “plan,” “estimate,” “expect,” “intend” and other similar expressions. Forward-looking statements are made based upon management’s current expectations and beliefs concerning future developments and their potential effects on us. Forward-looking statements are necessarily based on estimates and assumptions that are inherently subject to significant business, economic, and competitive uncertainties and contingencies, many of which are beyond the Company’s control and many of which are subject to change. These uncertainties and contingencies could cause actual results to differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Company. Factors that could cause such differences include, but are not limited to, those discussed in Part II, Item 1A. “Risk Factors” and in the “Forward-Looking Information/Risk Factors” in Part I, Item 2. of this Form 10-Q as well as those discussed in Part I, Item 1A. “Risk Factors” in the Company’s 2010 Annual Report on Form 10-K.

 

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** **

**ING USA Annuity and Life Insurance Company**

**(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)**

 

**PART I.****                                                   ****FINANCIAL INFORMATION (UNAUDITED)**

 

**Item 1.****                                                          ****Financial Statements**

 

**Condensed Statements of Operations**

(Unaudited)

(In millions)

 
| ** **                                                                                          | ** ** | **Three Months Ended March 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                                          | ** ** | **2011**                                             | ** ** | **2010** | ** ** |
| **Revenues:**                                                                                       |       |                                                 |       |   |   |
| Net investment income                                                                               |       | $                                                    | 357.4      |   | $ | 319.0 |   |
| Fee income                                                                                          |       | 279.0                                                |       | 268.2 |   |
| Premiums                                                                                            |       | 115.0                                                |       | 49.6 |   |
| Net realized capital losses:                                                                        |       |                                                 |       |   |   |
| Total other-than-temporary impairment losses                                                        |       | (64.9                                                | )          | (71.5 | ) |
| Portion of other-than-temporary impairment losses   recognized in Other comprehensive income (loss) |       | 2.9                                                  |       | 46.0 |   |
| Net other-than-temporary impairments recognized in   earnings                                       |       | (62.0                                                | )          | (25.5 | ) |
| Other net realized capital losses                                                                   |       | (338.0                                               | )          | (236.4 | ) |
| Total net realized capital losses                                                                   |       | (400.0                                               | )          | (261.9 | ) |
| Other income                                                                                        |       | 0.3                                                  |       | 0.1 |   |
| Total revenue                                                                                       |       | 351.7                                                |       | 375.0 |   |
| **Benefits and expenses:**                                                                          |       |                                                 |       |   |   |
| Interest credited and other benefits to contract   owners                                           |       | 118.5                                                |       | 184.9 |   |
| Operating expenses                                                                                  |       | 107.4                                                |       | 101.4 |   |
| Net amortization of deferred policy acquisition   costs and value of business acquired              |       | 70.8                                                 |       | 65.6 |   |
| Interest expense                                                                                    |       | 7.8                                                  |       | 8.0 |   |
| Other expense                                                                                       |       | 9.3                                                  |       | 9.7 |   |
| Total benefits and expenses                                                                         |       | 313.8                                                |       | 369.6 |   |
| Income before income taxes                                                                          |       | 37.9                                                 |       | 5.4 |   |
| Income tax expense (benefit)                                                                        |       | 16.7                                                 |       | (1.2 | ) |
| Net income                                                                                          |       | $                                                    | 21.2       |   | $ | 6.6 |   |

 

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

 

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**ING USA Annuity and Life Insurance Company**

**(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)**

** **

**Condensed Balance Sheets**

(In millions, except share data)

 
| ** **                                                                                                        | ** ** | **As of**     | ** ** | **As of**        | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                        | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
| ** **                                                                                                        | ** ** | **2011**           | ** ** | **2010**              | ** ** |
| ** **                                                                                                        | ** ** | **(Unaudited)**    | ** ** | ** **            | ** ** |
| **Assets**                                                                                                        |       |               |       |                  |       |
| Investments:                                                                                                      |       |               |       |                  |       |
| Fixed maturities, available-for-sale, at fair   value (amortized cost of $20,613.7 at 2011 and $20,235.3 at 2010) |       | $                  | 21,346.0   |                  | $          | 20,913.7 |   |
| Fixed maturities at fair value using the fair   value option                                                      |       | 250.0              |       | 237.7                 |       |
| Equity securities, available-for-sale, at fair   value (cost of $132.3 at 2011 and $142.1 at 2010)                |       | 139.4              |       | 150.2                 |       |
| Short-term investments                                                                                            |       | 970.8              |       | 939.2                 |       |
| Mortgage loans on real estate                                                                                     |       | 3,041.9            |       | 2,967.9               |       |
| Policy loans                                                                                                      |       | 119.5              |       | 122.1                 |       |
| Loan - Dutch State obligation                                                                                     |       | 780.3              |       | 843.9                 |       |
| Limited partnerships/corporations                                                                                 |       | 305.9              |       | 295.8                 |       |
| Derivatives                                                                                                       |       | 280.6              |       | 293.1                 |       |
| Other investments                                                                                                 |       | 1.9                |       | 1.8                   |       |
| Securities pledged (amortized cost of $745.2 at   2011 and $886.6 at 2010)                                        |       | 733.1              |       | 889.4                 |       |
| Total investments                                                                                                 |       | 27,969.4           |       | 27,654.8              |       |
| Cash and cash equivalents                                                                                         |       | 132.1              |       | 71.5                  |       |
| Short-term investments under securities loan   agreement, including collateral delivered                          |       | 97.9               |       | 145.1                 |       |
| Accrued investment income                                                                                         |       | 252.8              |       | 233.4                 |       |
| Receivable for securities sold                                                                                    |       | 43.4               |       | 16.9                  |       |
| Premium receivable                                                                                                |       | 36.1               |       | 38.0                  |       |
| Deposits and reinsurance recoverable                                                                              |       | 3,491.1            |       | 3,481.4               |       |
| Deferred policy acquisition costs                                                                                 |       | 3,143.7            |       | 3,155.0               |       |
| Value of business acquired                                                                                        |       | 65.3               |       | 68.1                  |       |
| Sales inducements to contract owners                                                                              |       | 662.5              |       | 665.9                 |       |
| Short-term loan to affiliate                                                                                      |       | 375.2              |       | 593.6                 |       |
| Due from affiliates                                                                                               |       | 29.5               |       | 92.8                  |       |
| Other assets                                                                                                      |       | 394.7              |       | 420.0                 |       |
| Assets held in separate accounts                                                                                  |       | 45,057.1           |       | 44,413.3              |       |
| Total assets                                                                                                      |       | $                  | 81,750.8   |                  | $          | 81,049.8 |   |

 

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

 

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**ING USA Annuity and Life Insurance Company**

**(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)**

** **

**Condensed Balance Sheets**

(In millions, except share data)

 
| ** **                                                                              | ** ** | **As of**     | ** ** | **As of**        | ** ** |
|-----------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                              | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
| ** **                                                                              | ** ** | **2011**           | ** ** | **2010**              | ** ** |
| ** **                                                                              | ** ** | **(Unaudited)**    | ** ** | ** **            | ** ** |
| **Liabilities and Shareholder’s   Equity**                                         |       |               |       |                  |       |
| Future policy benefits and claims reserves                                              |       | $                  | 27,532.7   |                  | $          | 27,137.3 |   |
| Payable for securities purchased                                                        |       | 17.7               |       | 3.1                   |       |
| Payables under securities loan agreement, including   collateral held                   |       | 159.7              |       | 203.0                 |       |
| Notes to affiliates                                                                     |       | 435.0              |       | 435.0                 |       |
| Due to affiliates                                                                       |       | 102.3              |       | 120.3                 |       |
| Current income taxes                                                                    |       | 22.0               |       | 79.2                  |       |
| Deferred income taxes                                                                   |       | 166.3              |       | 181.0                 |       |
| Other liabilities                                                                       |       | 3,919.9            |       | 4,242.4               |       |
| Liabilities related to separate accounts                                                |       | 45,057.1           |       | 44,413.3              |       |
| Total liabilities                                                                       |       | 77,412.7           |       | 76,814.6              |       |
|                                                                                    |       |               |       |                  |       |
| Shareholder’s equity:                                                              |       |               |       |                  |       |
| Common stock (250,000 shares authorized, issued   and outstanding; $10 per share value) |       | 2.5                |       | 2.5                   |       |
| Additional paid-in capital                                                              |       | 5,966.2            |       | 5,921.7               |       |
| Accumulated other comprehensive income (loss)                                           |       | 169.5              |       | 132.3                 |       |
| Retained earnings (deficit)                                                             |       | (1,800.1           | )          | (1,821.3              | )          |
| Total shareholder’s equity                                                         |       | 4,338.1            |       | 4,235.2               |       |
| Total liabilities and shareholder’s equity                                         |       | $                  | 81,750.8   |                  | $          | 81,049.8 |   |

 

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

 

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**ING USA Annuity and Life Insurance Company**

**(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)**

** **

**Condensed Statements of Changes in Shareholder’s Equity**

(Unaudited)

(In millions)

 
| ** **                                                                                                                           | ** ** | ** ** | ** ** | ** **     | ** ** | **Accumulated**        | ** ** | ** **    | ** ** | ** **             | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|----------------|------------|------------------------|------------|---------------|------------|------------------------|------------|
| ** **                                                                                                                           | ** ** | ** ** | ** ** | **Additional** | ** ** | **Other**              | ** ** | **Retained**  | ** ** | **Total**              | ** ** |
| ** **                                                                                                                           | ** ** | **Common** | ** ** | **Paid-In**    | ** ** | **Comprehensive**      | ** ** | **Earnings**  | ** ** | **Shareholder’s** | ** ** |
| ** **                                                                                                                           | ** ** | **Stock**  | ** ** | **Capital**    | ** ** | **Income (Loss)** | ** ** | **(Deficit)** | ** ** | **Equity**             | ** ** |
| Balance at January 1, 2010                                                                                                      |       | $          | 2.5        |           | $          | 5,172.7                |       | $             | (532.5     | )                      | $          | (1,902.6 | ) | $ | 2,740.1 |   |
| Comprehensive income:                                                                                                                |       |       |       |           |       |                   |       |          |       |                   |       |
| Net income                                                                                                                           |       | —     |       | —         |       | —                 |       | 6.6           |       | 6.6                    |       |
| Other comprehensive income (loss), net of tax:                                                                                       |       |       |       |           |       |                   |       |          |       |                   |       |
| Change in net unrealized capital gains (losses) on   securities ($338.5 pretax and net of DAC)                                       |       | —     |       | —         |       | 259.6                  |       | —        |       | 259.6                  |       |
| Change in other-than-temporary impairment losses   recognized in other comprehensive income (loss) (($36.4) pretax and net of   DAC) |       | —     |       | —         |       | (23.7                  | )          | —        |       | (23.7                  | )          |
| Total comprehensive income                                                                                                           |       |       |       |           |       |                   |       |          |       | 242.5                  |       |
| Contribution of capital                                                                                                              |       | —     |       | 239.0          |       | —                 |       | —        |       | 239.0                  |       |
| Employee share-based payments                                                                                                        |       | —     |       | 0.4            |       | —                 |       | —        |       | 0.4                    |       |
| Balance at March 31, 2010                                                                                                       |       | $          | 2.5        |           | $          | 5,412.1                |       | $             | (296.6     | )                      | $          | (1,896.0 | ) | $ | 3,222.0 |   |

 

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

 

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**ING USA Annuity and Life Insurance Company**

**(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)**

** **

**Condensed Statements of Changes in Shareholder’s Equity**

(Unaudited)

(In millions)

 
| ** **                                                                                                                       | ** ** | ** ** | ** ** | ** **     | ** ** | **Accumulated**        | ** ** | ** **    | ** ** | ** **             | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|----------------|------------|------------------------|------------|---------------|------------|------------------------|------------|
| ** **                                                                                                                       | ** ** | ** ** | ** ** | **Additional** | ** ** | **Other**              | ** ** | **Retained**  | ** ** | **Total**              | ** ** |
| ** **                                                                                                                       | ** ** | **Common** | ** ** | **Paid-In**    | ** ** | **Comprehensive**      | ** ** | **Earnings**  | ** ** | **Shareholder’s** | ** ** |
| ** **                                                                                                                       | ** ** | **Stock**  | ** ** | **Capital**    | ** ** | **Income (Loss)** | ** ** | **(Deficit)** | ** ** | **Equity**             | ** ** |
| Balance at January 1, 2011                                                                                                  |       | $          | 2.5        |           | $          | 5,921.7                |       | $             | 132.3      |                   | $          | (1,821.3 | ) | $ | 4,235.2 |   |
| Comprehensive income:                                                                                                            |       |       |       |           |       |                   |       |          |       |                   |       |
| Net income                                                                                                                       |       | —     |       | —         |       | —                 |       | 21.2          |       | 21.2                   |       |
| Other comprehensive income (loss), net of tax:                                                                                   |       |       |       |           |       |                   |       |          |       |                   |       |
| Change in net unrealized capital gains (losses) on   securities ($37.2 pretax and net of DAC)                                    |       | —     |       | —         |       | 19.2                   |       | —        |       | 19.2                   |       |
| Change in other-than-temporary impairment losses   recognized in other comprehensive income (loss) ($27.7 pretax and net of DAC) |       | —     |       | —         |       | 18.0                   |       | —        |       | 18.0                   |       |
| Total comprehensive income                                                                                                       |       |       |       |           |       |                   |       |          |       | 58.4                   |       |
| Contribution of capital                                                                                                          |       | —     |       | 44.0           |       | —                 |       | —        |       | 44.0                   |       |
| Employee share-based payments                                                                                                    |       | —     |       | 0.5            |       | —                 |       | —        |       | 0.5                    |       |
| Balance at March 31, 2011                                                                                                   |       | $          | 2.5        |           | $          | 5,966.2                |       | $             | 169.5      |                   | $          | (1,800.1 | ) | $ | 4,338.1 |   |

 

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

 

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**ING USA Annuity and Life Insurance Company**

**(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)**

 

**Condensed Statements of Cash Flows**

(Unaudited)

(In millions)

 
| ** **                                             | ** ** | **Three Months Ended March 31,** | ** ** |
|--------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                             | ** ** | **2011**                                             | ** ** | **2010** | ** ** |
| Net cash provided by operating activities              |       | $                                                    | 365.5      |   | $ | 1,347.5 |   |
| **Cash Flows from Investing Activities:**              |       |                                                 |       |   |   |
| Proceeds from the sale, maturity, or redemption   of:  |       |                                                 |       |   |   |
| Fixed maturities                                       |       | 1,141.7                                              |       | 2,149.5 |   |
| Equity securities, available-for-sale                  |       | 15.4                                                 |       | 2.3 |   |
| Mortgage loans on real estate                          |       | 162.5                                                |       | 204.1 |   |
| Limited partnerships/corporations                      |       | 5.5                                                  |       | 0.4 |   |
| Acquisition of:                                        |       |                                                 |       |   |   |
| Fixed maturities                                       |       | (1,475.9                                             | )          | (1,853.4 | ) |
| Equity securities, available-for-sale                  |       | (3.4                                                 | )          | (10.1 | ) |
| Mortgage loans on real estate                          |       | (238.5                                               | )          | (75.1 | ) |
| Limited partnerships/corporations                      |       | (7.3                                                 | )          | (12.7 | ) |
| Derivatives, net                                       |       | (441.2                                               | )          | (275.4 | ) |
| Short-term investments, net                            |       | (31.6                                                | )          | (1,095.8 | ) |
| Loan-Dutch State obligation, net                       |       | 63.6                                                 |       | 92.8 |   |
| Policy loans, net                                      |       | 2.6                                                  |       | 2.2 |   |
| Collateral held, net                                   |       | 3.9                                                  |       | 5.8 |   |
| Other investments, net                                 |       | —                                               |       | (0.3 | ) |
| Other, net                                             |       | —                                               |       | (163.7 | ) |
| Net cash used in investing activities                  |       | (802.7                                               | )          | (1,029.4 | ) |
| **Cash Flows from Financing   Activities:**            |       |                                                 |       |   |   |
| Deposits received for investment contracts             |       | 1,170.3                                              |       | 534.5 |   |
| Maturities and withdrawals from investment   contracts |       | (998.0                                               | )          | (668.4 | ) |
| Block of deposits coinsured to affiliate               |       | 63.2                                                 |       | 26.2 |   |
| Reinsurance recoverable on investment contracts        |       | (0.1                                                 | )          | 0.1 |   |
| Short-term repayments of repurchase agreements,   net  |       | —                                               |       | (311.1 | ) |
| Short-term loans to affiliates                         |       | 218.4                                                |       | (107.1 | ) |
| Capital contribution from parent                       |       | 44.0                                                 |       | 239.0 |   |
| Net cash provided by (used in) financing   activities  |       | 497.8                                                |       | (286.8 | ) |
| Net increase in cash and cash equivalents              |       | 60.6                                                 |       | 31.3 |   |
| Cash and cash equivalents, beginning of period         |       | 71.5                                                 |       | 37.8 |   |
| Cash and cash equivalents, end of period               |       | $                                                    | 132.1      |   | $ | 69.1 |   |

* *

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

 

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**ING USA Annuity and Life Insurance Company**

**(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)**

**Notes to  Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwise stated)

 

**1.****            ****Organization and Significant Accounting Policies**

 

***Basis of Presentation***

 

ING USA Annuity and Life Insurance Company (“ING USA” or the “Company,” as appropriate) is a stock life insurance company domiciled in the State of Iowa and provides financial products and services in the United States.  ING USA is authorized to conduct its insurance business in all states, except New York, and the District of Columbia.

 

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

 

As part of a restructuring plan approved by the European Commission (“EC”), ING has agreed to separate its banking and insurance businesses by 2013.  ING intends to achieve this separation by divestment of its insurance and investment management operations, including the Company. ING has announced that it will explore all options for implementing the separation including one or more initial public offerings, sales, or a combination thereof.  On November 10, 2010, ING announced that while the option of one global initial public offering (“IPO”) remains open, ING and its U.S. insurance affiliates, including the Company, are going to prepare for a base case of two IPOs: one Europe-led IPO and one separate U.S.-focused IPO.

 

The condensed financial statements and notes as of March 31, 2011, and for the three months ended March 31, 2011 and 2010, have been prepared in accordance with accounting principles generally accepted in the United States (“US GAAP”) and are unaudited.

 

The condensed financial statements reflect all adjustments (consisting only of normal, recurring adjustments) which are, in the opinion of management, necessary for the fair presentation of the financial position, results of operations, and cash flows, for the interim periods.  These condensed financial statements and notes should be read in conjunction with the financial statements and related notes as presented in the Company’s 2010 Annual Report on Form 10-K.  The results of operations for the interim periods may not be considered indicative of results to be expected for the full year.

 

***Description of Business***

 

The Company currently offers various insurance products, including immediate and deferred fixed annuities. The Company’s fixed annuity products are distributed by national and regional brokerage and securities firms, independent broker-dealers, banks, life insurance companies with captive agency sales forces, independent insurance agents,

 

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**ING USA Annuity and Life Insurance Company**

**(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)**

**Notes to  Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwise stated)

 

independent marketing organizations, and affiliated broker-dealers. The Company’s primary annuity customers are individual consumers. The Company ceased new sales of variable annuity products in March of 2010, as part of a global business strategy and risk reduction plan. Some new amounts will continue to be deposited on ING USA variable annuities as add-on premiums to existing contracts.

 

The Company also offers guaranteed investment contracts and funding agreements (collectively referred to as “GICs”), sold primarily to institutional investors and corporate benefit plans. These products are marketed by home office personnel or through specialty insurance brokers.

 

The Company has one operating segment.

 

***Recently Adopted Accounting Standards***

 

*Consolidation Analysis of Investments Held through Separate Accounts*

 

In April 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2010-15, “Financial Services - Insurance (Accounting Standards CodificationTM (“ASC”) Topic 944): How Investments Held through Separate Accounts Affect an Insurer’s Consolidation Analysis of Those Investments” (“ASU 2010-15”), which clarifies that an insurance entity generally should not consider any separate account interests in an investment held for the benefit of policy holders to be the insurer’s interests, and should not combine those separate account interests with its general account interest in the same investment when assessing the investment for consolidation.

 

The provisions of ASU 2010-15 were adopted by the Company on January 1, 2011.  The Company determined that there were no effects on its financial condition, results of operations, or cash flows upon adoption, as the guidance is consistent with that previously applied by the Company under ASC Topic 944.

 

*Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses*

 

In July 2010, the FASB issued ASU 2010-20, “Receivables (ASC Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses” (“ASU 2010-20”), which requires certain existing disclosures to be disaggregated by class of financing receivable, including the rollforward of the allowance for credit losses, with the ending balance further disaggregated on the basis of impairment method.  For each disaggregated ending balance, an entity is required also to disclose the related recorded investment in financing receivables, the nonaccrual status of financing receivables, and impaired financing receivables.

 

11

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**ING USA Annuity and Life Insurance Company**

**(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)**

**Notes to  Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwise stated)

 

ASU 2010-20 also requires new disclosures by class of financing receivable, including credit quality indicators, aging of past due amounts, the nature and extent of troubled debt restructurings and related defaults, and significant purchases and sales of financing receivables disaggregated by portfolio segment.

 

In January 2011, the FASB issued ASU 2011-01, which temporarily delays the effective date of the disclosures about troubled debt restructurings in ASU 2010-20.

 

The provisions of ASU 2010-20 were adopted by the Company on December 31, 2010, and are included in the Financial Instruments footnote to these Condensed Financial Statements, except for the disclosures about troubled debt restructurings.  The disclosures that include information for activity that occurs during a reporting period, which are effective for periods beginning after December 15, 2010, were adopted by the Company on, January 1, 2011 and are included in the Financial Instruments footnote to these Condensed Financial Statements. As this pronouncement only pertains to additional disclosure, the adoption had no effect on the Company’s financial condition, results of operations, or cash flows.

 

*Scope Exception Related to Embedded Credit Derivatives*

 

In March 2010, the FASB issued ASU 2010-11, “Derivatives and Hedging (ASC Topic 815): Scope Exception Related to Embedded Credit Derivatives” (“ASU 2010-11”), which clarifies that the only type of embedded credit derivatives that are exempt from bifurcation requirements are those that relate to the subordination of one financial instrument to another.

 

The provisions of ASU 2010-11 were adopted by the Company on July 1, 2010.  The Company determined, however, that there was no effect on the Company’s financial condition, results of operations, or cash flows upon adoption, as the guidance is consistent with that previously applied by the Company under ASC Topic 815.

 

*Improving Disclosures about Fair Value Measurements*

 

In January 2010, the FASB issued ASU 2010-06, “Fair Value Measurements and Disclosure (ASC Topic 820): Improving Disclosures about Fair Value Measurements,” (“ASU 2010-06”), which requires several new disclosures, as well as clarification to existing disclosures, as follows:

 

·          Significant transfers in and out of Level 1 and Level 2 fair value measurements and the reason for the transfers;

·          Purchases, sales, issuances, and settlement, in the Level 3 fair value measurements reconciliation on a gross basis;

·          Fair value measurement disclosures for each class of assets and liabilities (i.e., disaggregated); and

 

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**ING USA Annuity and Life Insurance Company**

**(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)**

**Notes to  Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwise stated)

 

·          Valuation techniques and inputs for both recurring and nonrecurring fair value measurements that fall in either Level 2 or Level 3 fair value measurements.

 

The provisions of ASU 2010-06 were adopted by the Company on January 1, 2010, except for the disclosures related to the Level 3 reconciliation, which were adopted by the Company on January 1, 2011.  The disclosures required by ASU 2010-06 are included in the Financial Instruments footnote to these Condensed Financial Statements.  As the pronouncement only pertains to additional disclosure, the adoption had no effect on the Company’s financial condition, results of operations, or cash flows.

 

*Improvements to Financial Reporting by Enterprises Involved in Variable Interest Entities*

 

In December 2009, the FASB issued ASU 2009-17, “Consolidations (ASC Topic 810): Improvements to Financial Reporting by Enterprises Involved in Variable Interest Entities,” (“ASU 2009-17”), which eliminates the exemption for qualifying special-purpose entities (“QSPEs”), as well as amends the consolidation guidance for variable interest entities (“VIEs”), as follows:

 

·          Removes the quantitative-based assessment for consolidation of VIEs and, instead, requires a qualitative assessment of whether an entity has the power to direct the VIE’s activities, and whether the entity has the obligation to absorb losses or the right to reserve benefits that could be significant to the VIE; and

·          Requires an ongoing reassessment of whether an entity is the primary beneficiary of a VIE.

 

In addition, in February 2010, the FASB issued ASU 2010-10, “Consolidation (ASC Topic 810): Amendments for Certain Investment Funds” (ASU 2010-10), which primarily defers to ASU 2009-17 for an investment in an entity that is accounted for as an investment company.

 

The provisions of ASU 2009-17 and ASU 2010-10 were adopted on January 1, 2010. The Company determined, however, that there was no effect on the Company’s financial condition, results of operations, or cash flows upon adoption, as the consolidation conclusions were consistent with those under previous US GAAP. The disclosure provisions required by ASU 2009-17 are presented in the Financial Instruments footnote to these Condensed Financial Statements.

 

*Accounting for Transfers of Financial Assets*

 

In December 2009, the FASB issued ASU 2009-16 “Transfers and Servicing (ASC Topic 860): Accounting for Transfers of Financial Assets” (“ASU 2009-16”), which eliminates the QSPE concept and requires a transferor of financial assets to:

 

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**ING USA Annuity and Life Insurance Company**

**(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)**

**Notes to  Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwise stated)

 

·          Consider the transferor’s continuing involvement in assets, limiting the circumstances in which a financial asset should be derecognized when the transferor has not transferred the entire asset to an entity that is not consolidated;

·          Account for the transfer as a sale only if an entity transfers an entire financial asset and surrenders control, unless the transfer meets the conditions for a participating interest; and

·          Recognize and initially measure at fair value all assets obtained and liabilities incurred as a result of a transfer of financial assets accounted for as a sale.

 

The provisions of ASU 2009-16 were adopted on January 1, 2010. The Company determined, however, that there was no effect on the Company’s financial condition, results of operations, or cash flows upon adoption, as the Company did not have any QSPEs under previous US GAAP, and the requirements for sale accounting treatment are consistent with those previously applied by the Company under US GAAP.

 

***New Accounting Pronouncements***

 

*A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring*

 

In April 2011, the FASB issued ASU 2011-02, “Receivables (ASC Topic 310): A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring” (“ASU 2011-02”), which clarifies the guidance on a creditor’s evaluation of whether it has granted a concession and whether the debtor is experiencing financial difficulties, as follows:

 

·      If a debtor does not have access to funds at a market rate for similar debt, the restructuring would be considered to be at a below-market rate;

·      An increase in the contractual interest rate does not preclude the restructuring from being considered a concession, as the new rate could still be below the market interest rate;

·      A restructuring that results in a delay in payment that is insignificant is not a concession;

·      A creditor should evaluate whether it is probable that the debtor would be in payment default on any of its debt without the modification to determine if the debtor is experiencing financial difficulties; and

·      A creditor is precluded from using the effective interest rate test.

 

Also, ASU 2011-02 requires disclosure of the information in ASU 2010-20, which was previously deferred by ASU 2011-01.

 

The provisions of ASU 2011-02 are effective for the first interim or annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption.  The Company is currently in the process of determining the impact of adoption of the provisions of ASU 2011-02.

 

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**ING USA Annuity and Life Insurance Company**

**(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)**

**Notes to  Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwise stated)

 

*Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts*

 

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

 

The provisions of ASU 2010-26 are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011, and should be applied prospectively. Retrospective application is permitted, and early adoption is permitted at the beginning of an entity’s annual reporting period.  The Company is currently in the process of determining the impact of adoption of the provisions of ASU 2010-26.

 

***Use of Estimates***

 

The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.  Actual results could differ from reported results using those estimates.

 

***Reclassifications***

 

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

 

***Significant Accounting Policies***

 

For a description of significant accounting policies, see the Organization and Significant Accounting Policies footnote to the Financial Statements included in the Company’s 2010 Annual Report on Form 10-K.  There have been no material changes to the Company’s significant accounting policies since the filing of the Company’s 2010 Annual Report on Form 10-K.

 

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**ING USA Annuity and Life Insurance Company**

**(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)**

**Notes to  Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwise stated)

 

**2.****            ****Investments**

 

***Fixed Maturities and Equity Securities***

 

Fixed maturities and equity securities were as follows as of March 31, 2011.

 
| ** **                                             | ** ** | ** **    | ** ** | **Gross**      | ** ** | **Gross**      | ** ** | ** ** | ** ** | ** **      | ** ** |
|--------------------------------------------------------|------------|---------------|------------|----------------|------------|----------------|------------|------------|------------|-----------------|------------|
| ** **                                             | ** ** | ** **    | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | ** ** | ** ** | ** **      | ** ** |
| ** **                                             | ** ** | **Amortized** | ** ** | **Capital**    | ** ** | **Capital**    | ** ** | **Fair**   | ** ** | ** **      | ** ** |
| ** **                                             | ** ** | **Cost**      | ** ** | **Gains**      | ** ** | **Losses**     | ** ** | **Value**  | ** ** | **OTTI****(2)** | ** ** |
| Fixed maturities:                                      | ** ** | ** **    | ** ** | ** **     | ** ** | ** **     | ** ** | ** ** | ** ** | ** **      | ** ** |
| U.S. Treasuries                                        |       | $             | 1,421.3    |           | $          | 13.6           |       | $          | 22.9       |            | $          | 1,412.0 |   | $ | — |   |
| U.S. government agencies and authorities               |       | 19.4          |       | 0.1            |       | 0.3            |       | 19.2       |       | —          |       |
| State, municipalities, and political subdivisions      |       | 104.7         |       | —         |       | 10.8           |       | 93.9       |       | —          |       |
|                                                   |       |          |       |           |       |           |       |       |       |            |       |
| U.S. corporate securities:                             |       |          |       |           |       |           |       |       |       |            |       |
| Public utilities                                       |       | 1,180.5       |       | 47.2           |       | 24.2           |       | 1,203.5    |       | —          |       |
| Other corporate securities                             |       | 8,082.7       |       | 364.3          |       | 74.6           |       | 8,372.4    |       | 0.3             |       |
| Total U.S. corporate securities                        |       | 9,263.2       |       | 411.5          |       | 98.8           |       | 9,575.9    |       | 0.3             |       |
|                                                   |       |          |       |           |       |           |       |       |       |            |       |
| Foreign securities(1):                                 |       |          |       |           |       |           |       |       |       |            |       |
| Government                                             |       | 357.9         |       | 21.7           |       | 2.1            |       | 377.5      |       | —          |       |
| Other                                                  |       | 5,331.8       |       | 228.9          |       | 74.3           |       | 5,486.4    |       | 0.1             |       |
| Total foreign securities                               |       | 5,689.7       |       | 250.6          |       | 76.4           |       | 5,863.9    |       | 0.1             |       |
|                                                   |       |          |       |           |       |           |       |       |       |            |       |
| Residential mortgage-backed securities                 |       | 1,949.0       |       | 237.3          |       | 81.2           |       | 2,105.1    |       | 68.1            |       |
| Commercial mortgage-backed securities                  |       | 2,084.2       |       | 151.1          |       | 15.5           |       | 2,219.8    |       | 6.1             |       |
| Other asset-backed securities                          |       | 1,077.4       |       | 19.7           |       | 57.8           |       | 1,039.3    |       | 4.7             |       |
|                                                   |       |          |       |           |       |           |       |       |       |            |       |
| Total fixed maturities, including securities   pledged |       | 21,608.9      |       | 1,083.9        |       | 363.7          |       | 22,329.1   |       | 79.3            |       |
| Less: securities pledged                               |       | 745.2         |       | 6.4            |       | 18.5           |       | 733.1      |       | —          |       |
| Total fixed maturities                                 |       | 20,863.7      |       | 1,077.5        |       | 345.2          |       | 21,596.0   |       | 79.3            |       |
| Equity securities                                      |       | 132.3         |       | 7.2            |       | 0.1            |       | 139.4      |       | —          |       |
| Total investments                                      |       | $             | 20,996.0   |           | $          | 1,084.7        |       | $          | 345.3      |            | $          | 21,735.4 |   | $ | 79.3 |   |

 

----

| (1) | Primarily U.S. dollar   denominated.                                                                                                       |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Represents   other-than-temporary impairments reported as a component of Other   comprehensive income (“noncredit impairments”). |

 

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**ING USA Annuity and Life Insurance Company**

**(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)**

**Notes to  Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwise stated)

 

Fixed maturities and equity securities were as follows as of December 31, 2010.

 
| ** **                                             | ** ** | ** **    | ** ** | **Gross**      | ** ** | **Gross**      | ** ** | ** ** | ** ** | ** **      | ** ** |
|--------------------------------------------------------|------------|---------------|------------|----------------|------------|----------------|------------|------------|------------|-----------------|------------|
| ** **                                             | ** ** | ** **    | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | ** ** | ** ** | ** **      | ** ** |
| ** **                                             | ** ** | **Amortized** | ** ** | **Capital**    | ** ** | **Capital**    | ** ** | **Fair**   | ** ** | ** **      | ** ** |
| ** **                                             | ** ** | **Cost**      | ** ** | **Gains**      | ** ** | **Losses**     | ** ** | **Value**  | ** ** | **OTTI****(2)** | ** ** |
| Fixed maturities:                                      | ** ** | ** **    | ** ** | ** **     | ** ** | ** **     | ** ** | ** ** | ** ** | ** **      | ** ** |
| U.S. Treasuries                                        |       | $             | 1,595.7    |           | $          | 19.4           |       | $          | 2.4        |            | $          | 1,612.7 |   | $ | — |   |
| U.S. government agencies and authorities               |       | 24.2          |       | 0.3            |       | 0.2            |       | 24.3       |       | —          |       |
| State, municipalities, and political subdivisions      |       | 126.5         |       | 3.6            |       | 11.6           |       | 118.5      |       | —          |       |
|                                                   |       |          |       |           |       |           |       |       |       |            |       |
| U.S. corporate securities:                             |       |          |       |           |       |           |       |       |       |            |       |
| Public utilities                                       |       | 1,526.4       |       | 83.2           |       | 18.4           |       | 1,591.2    |       | —          |       |
| Other corporate securities                             |       | 7,514.5       |       | 366.7          |       | 63.5           |       | 7,817.7    |       | 0.3             |       |
| Total U.S. corporate securities                        |       | 9,040.9       |       | 449.9          |       | 81.9           |       | 9,408.9    |       | 0.3             |       |
|                                                   |       |          |       |           |       |           |       |       |       |            |       |
| Foreign securities(1):                                 |       |          |       |           |       |           |       |       |       |            |       |
| Government                                             |       | 474.6         |       | 39.0           |       | 4.3            |       | 509.3      |       | —          |       |
| Other                                                  |       | 4,742.9       |       | 216.7          |       | 70.0           |       | 4,889.6    |       | 0.1             |       |
| Total foreign securities                               |       | 5,217.5       |       | 255.7          |       | 74.3           |       | 5,398.9    |       | 0.1             |       |
|                                                   |       |          |       |           |       |           |       |       |       |            |       |
| Residential mortgage-backed securities                 |       | 2,028.7       |       | 240.8          |       | 98.5           |       | 2,171.0    |       | 67.2            |       |
| Commercial mortgage-backed securities                  |       | 2,112.2       |       | 125.8          |       | 39.1           |       | 2,198.9    |       | 7.3             |       |
| Other asset-backed securities                          |       | 1,213.9       |       | 17.8           |       | 124.1          |       | 1,107.6    |       | 32.1            |       |
|                                                   |       |          |       |           |       |           |       |       |       |            |       |
| Total fixed maturities, including securities   pledged |       | 21,359.6      |       | 1,113.3        |       | 432.1          |       | 22,040.8   |       | 107.0           |       |
| Less: securities pledged                               |       | 886.6         |       | 17.5           |       | 14.7           |       | 889.4      |       | —          |       |
| Total fixed maturities                                 |       | 20,473.0      |       | 1,095.8        |       | 417.4          |       | 21,151.4   |       | 107.0           |       |
| Equity securities                                      |       | 142.1         |       | 8.1            |       | —         |       | 150.2      |       | —          |       |
| Total investments                                      |       | $             | 20,615.1   |           | $          | 1,103.9        |       | $          | 417.4      |            | $          | 21,301.6 |   | $ | 107.0 |   |

 

----

| (1) | Primarily U.S. dollar   denominated.                                                                                                       |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Represents   other-than-temporary impairments reported as a component of Other   comprehensive income (“noncredit impairments”). |

 

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** **

**ING USA Annuity and Life Insurance Company**

**(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)**

**Notes to  Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwise stated)

 

The amortized cost and fair value of total fixed maturities, including securities pledged, as of March 31, 2011, are shown below by contractual maturity.  Actual maturities may differ from contractual maturities as securities may be restructured, called, or prepaid.

 
| ** **                                     | ** ** | **Amortized** | ** ** | **Fair**  | ** ** |
|------------------------------------------------|------------|---------------|------------|-----------|------------|
| ** **                                     | ** ** | **Cost**      | ** ** | **Value** | ** ** |
| Due to mature:                                 |       |          |       |      |       |
| One year or less                               |       | $             | 982.3      |      | $          | 1,000.9 |   |
| After one year through five years              |       | 5,502.1       |       | 5,731.2   |       |
| After five years through ten years             |       | 5,799.9       |       | 5,966.3   |       |
| After ten years                                |       | 4,214.0       |       | 4,266.5   |       |
| Mortgage-backed securities                     |       | 4,033.2       |       | 4,324.9   |       |
| Other asset-backed securities                  |       | 1,077.4       |       | 1,039.3   |       |
| Fixed maturities, including securities pledged |       | $             | 21,608.9   |      | $          | 22,329.1 |   |

 

The Company did not have any investments in a single issuer, other than obligations of the U.S. government and government agencies and the State of the Netherlands (the “Dutch State”) loan obligation, with a carrying value in excess of 10.0% of the Company’s Shareholder’s equity at March 31, 2011 and December 31, 2010.

 

The Company invests in various categories of collateralized mortgage obligations (“CMOs”), including CMOs that are not agency-backed, that are subject to different degrees of risk from changes in interest rates and defaults. The principal risks inherent in holding CMOs are prepayment and extension risks related to dramatic decreases and increases in interest rates resulting in the prepayment of principal from the underlying mortgages, either earlier or later than originally anticipated. At March 31, 2011 and December 31, 2010, approximately 24.5% and 22.9%, respectively, of the Company’s CMO holdings were invested in those types of CMOs such as interest-only or principal-only strips, which are subject to more prepayment and extension risk than traditional CMOs,.

 

The Company is a member of the Federal Home Loan Bank of Des Moines (“FHLB”) and is required to maintain a collateral deposit that backs funding agreements issued to the FHLB. At March 31, 2011 and December 31, 2010, the Company had $1,579.6, in non-putable funding agreements, including accrued interest, issued to the FHLB. These non-putable funding agreements are included in Future policy benefits and claims reserves, in the Condensed Balance Sheets. At March 31, 2011 and December 31, 2010, assets with a market value of $1,868.5 and $1,930.1, respectively, collateralized the funding agreements to the FHLB. Assets pledged to the FHLB are included in Fixed maturities, available-for-sale, in the Condensed Balance Sheets.

 

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**ING USA Annuity and Life Insurance Company**

**(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)**

**Notes to  Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwise stated)

 

***Repurchase Agreements***

 

The Company engages in dollar repurchase agreements with mortgage-backed securities (“dollar rolls”) and repurchase agreements with other collateral types to increase its return on investments and improve liquidity.  Such arrangements typically meet the requirements to be accounted for as financing arrangements.  The Company enters into dollar roll transactions by selling existing mortgage-backed securities and concurrently entering into an agreement to repurchase similar securities within a short time frame in the future at a lower price. Under repurchase agreements, the Company borrows cash from a counterparty at an agreed upon interest rate for an agreed upon time frame and pledges collateral in the form of securities. At the end of the agreement, the counterparty returns the collateral to the Company and the Company, in turn, repays the loan amount along with the additional agreed upon interest.  Company policy requires that at all times during the term of the dollar roll and repurchase agreements that cash or other collateral types obtained is sufficient to allow the Company to fund substantially all of the cost of purchasing replacement assets. Cash collateral received is invested in short-term investments, with the offsetting collateral liability included as a liability on the Condensed Balance Sheets. At March 31, 2011 and December 31, 2010, the Company did not have securities pledged in dollar rolls and repurchase agreement transactions. The Company did not have a repurchase obligation related to dollar rolls and repurchase agreements at March 31, 2011 and December 31, 2010, respectively.  In addition, at March 31, 2011, the Company did not hold any collateral posted by the counterparty in connection with the increase in the value of pledged securities that will be released upon settlement.

 

The Company also enters into reverse repurchase agreements.  These transactions involve a purchase of securities and an agreement to sell substantially the same securities as those purchased.  Company policy requires that, at all times during the term of the reverse repurchase agreements, cash or other collateral types provided is sufficient to allow the counterparty to fund substantially all of the cost of purchasing replacement assets.  At March 31, 2011 and December 31, 2010, the Company did not have any securities pledged under reverse repurchase agreements.

 

The primary risk associated with short-term collateralized borrowings is that the counterparty will be unable to perform under the terms of the contract. The Company’s exposure is limited to the excess of the net replacement cost of the securities over the value of the short-term investments, an amount that was immaterial at March 31, 2011.  The Company believes the counterparties to the dollar rolls, repurchase, and reverse repurchase agreements are financially responsible and that the counterparty risk is minimal.

 

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**ING USA Annuity and Life Insurance Company**

**(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)**

**Notes to  Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwise stated)

 

***Securities Lending***

 

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. At March 31, 2011 and December 31, 2010, the fair value of loaned securities was $93.6 and $139.7, respectively, and is included in Securities pledged on the Condensed Balance Sheets.

 

***Variable Interest Entities***

 

The Company holds certain VIEs for investment purposes.  VIEs may be in the form of private placement securities, structured securities, securitization transactions, or limited partnerships. The Company has reviewed each of its holdings and determined that consolidation of these investments in the Company’s financial statements is not required, as the Company is not the primary beneficiary, because the Company does not have both the power to direct the activities that most significantly impact the entity’s economic performance and the obligation or right to potentially significant losses or benefits, for any of its investments in VIEs. Rather, the VIEs are accounted for using the cost or equity method of accounting. The Company provided no non-contractual financial support and its carrying value represents the Company’s exposure to loss. The carrying value of collateralized loan obligations of $3.8 and $2.7 at March 31, 2011 and December 31, 2010, respectively, is included in Limited partnerships/corporations on the Condensed Balance Sheets. Income and losses recognized on these investments are reported in Net investment income on the Condensed Statements of Operations.

 

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**ING USA Annuity and Life Insurance Company**

**(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)**

**Notes to  Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwise stated)

 

***Unrealized Capital Losses***

 

Unrealized capital losses (including non-credit impairments) in fixed maturities, including securities pledged to creditors, for Investment Grade (“IG”) and Below Investment Grade (“BIG”) securities by duration were as follows at March 31, 2011 and December 31, 2010.

 
| ** **                                                            | ** ** | **2011**   | ** ** | **2010**              | ** ** |
|-----------------------------------------------------------------------|------------|------------|------------|-----------------------|------------|
| ** **                                                            | ** ** | ** ** | ** ** | **% of IG** | ** ** | ** ** | ** ** | **% of IG** | ** ** | ** ** | ** ** | **% of IG** | ** ** | ** ** | ** ** | **% of IG** | ** ** |
| ** **                                                            | ** ** | **IG**     | ** ** | **and BIG**      | ** ** | **BIG** | ** ** | **and BIG** | ** ** | **IG** | ** ** | **and BIG** | ** ** | **BIG** | ** ** | **and BIG** | ** ** |
| Six months or less below amortized cost                               |       | $          | 157.7      |                  | 43.4       | % | $ | 14.9 |   | 4.1 | % | $ | 124.6 |   | 28.8 | % | $ | 12.4 |   | 2.9 | % |
| More than six months and twelve months or less below   amortized cost |       | 21.4       |       | 5.9                   | %          | 0.4 |   | 0.1 | % | 2.2 |   | 0.5 | % | 0.1 |   | 0.0 | % |
| More than twelve months below amortized cost                          |       | 90.6       |       | 24.9                  | %          | 78.7 |   | 21.6 | % | 124.9 |   | 28.9 | % | 167.9 |   | 38.9 | % |
| Total unrealized capital losses                                       |       | $          | 269.7      |                  | 74.2       | % | $ | 94.0 |   | 25.8 | % | $ | 251.7 |   | 58.2 | % | $ | 180.4 |   | 41.8 | % |

 

The following table summarizes the unrealized capital losses (including non-credit impairments) by duration and reason, along with the fair value of fixed maturities, including securities pledged to creditors, in unrealized capital loss positions at March 31, 2011 and December 31, 2010.

 
| ** **                                 | ** ** | **Six Months** | ** ** | **More than**           | ** ** | ** **              | ** ** | ** **     | ** ** |
|--------------------------------------------|------------|---------------------|------------|------------------------------|------------|-------------------------|------------|----------------|------------|
| ** **                                 | ** ** | **or Less**    | ** ** | **Six Months and** | ** ** | **More than**      | ** ** | **Total**      | ** ** |
| ** **                                 | ** ** | **Below**           | ** ** | **Twelve Months**       | ** ** | **Twelve Months**  | ** ** | **Unrealized** | ** ** |
| ** **                                 | ** ** | **Amortized**       | ** ** | **or Less Below**  | ** ** | **Below**               | ** ** | **Capital**    | ** ** |
| ** **                                 | ** ** | **Cost**            | ** ** | **Amortized Cost**      | ** ** | **Amortized Cost** | ** ** | **Losses**     | ** ** |
| **2011**                                   |       |                |       |                         |       |                    |       |           |       |
| Interest rate or spread widening           |       | $                   | 160.8      |                         | $          | 20.8                    |       | $              | 27.6       |   | $ | 209.2 |   |
| Mortgage and other asset-backed securities |       | 11.8                |       | 1.0                          |       | 141.7                   |       | 154.5          |       |
| Total unrealized capital losses            |       | $                   | 172.6      |                         | $          | 21.8                    |       | $              | 169.3      |   | $ | 363.7 |   |
| Fair value                                 |       | $                   | 5,829.2    |                         | $          | 323.6                   |       | $              | 1,181.3    |   | $ | 7,334.1 |   |
|                                       |       |                |       |                         |       |                    |       |           |       |
| **2010**                                   | ** ** | ** **          | ** ** | ** **                   | ** ** | ** **              | ** ** | ** **     | ** ** |
| Interest rate or spread widening           |       | $                   | 128.4      |                         | $          | 2.1                     |       | $              | 39.9       |   | $ | 170.4 |   |
| Mortgage and other asset-backed securities |       | 8.6                 |       | 0.2                          |       | 252.9                   |       | 261.7          |       |
| Total unrealized capital losses            |       | $                   | 137.0      |                         | $          | 2.3                     |       | $              | 292.8      |   | $ | 432.1 |   |
| Fair value                                 |       | $                   | 5,096.8    |                         | $          | 86.9                    |       | $              | 1,622.6    |   | $ | 6,806.3 |   |

 

21

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**ING USA Annuity and Life Insurance Company**

**(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)**

**Notes to  Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwise stated)

 

Unrealized capital losses (including non-credit impairments), along with the fair value of fixed maturities, including securities pledged to creditors, by market sector and duration were as follows at March 31, 2011 and December 31, 2010.

 
| ** **                                  | ** ** | ** **                            | ** ** | **More Than Six**        | ** ** | ** **                     | ** ** | ** **            | ** ** |
|---------------------------------------------|------------|---------------------------------------|------------|------------------------------------|------------|--------------------------------|------------|-----------------------|------------|
| ** **                                  | ** ** | ** **                            | ** ** | **Months and Twelve**    | ** ** | **More Than Twelve** | ** ** | ** **            | ** ** |
| ** **                                  | ** ** | **Six Months or Less** | ** ** | **Months or Less**       | ** ** | **Months Below**          | ** ** | ** **            | ** ** |
| ** **                                  | ** ** | **Below Amortized Cost**    | ** ** | **Below Amortized Cost** | ** ** | **Amortized Cost**        | ** ** | **Total**             | ** ** |
| ** **                                  | ** ** | ** **                            | ** ** | **Unrealized**                     | ** ** | ** **                     | ** ** | **Unrealized**        | ** ** | ** ** | ** ** | **Unrealized** | ** ** | ** ** | ** ** | **Unrealized** | ** ** |
| ** **                                  | ** ** | **Fair Value**                   | ** ** | **Capital Loss**              | ** ** | **Fair Value**            | ** ** | **Capital Loss** | ** ** | **Fair Value** | ** ** | **Capital Loss** | ** ** | **Fair Value** | ** ** | **Capital Loss** | ** ** |
| **2011**                                    | ** ** | ** **                            | ** ** | ** **                         | ** ** | ** **                     | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| U.S.   Treasuries                           |       | $                                     | 748.7      |                               | $          | 22.9                           |       | $                     | —     |   | $ | — |   | $ | — |   | $ | — |   | $ | 748.7 |   | $ | 22.9 |   |
| U.S.   government agencies and authorities  |       | 18.0                                  |       | 0.3                                |       | —                         |       | —                |       | — |   | — |   | 18.0 |   | 0.3 |   |
| U.S.   corporate, state, and municipalities |       | 2,793.3                               |       | 82.9                               |       | 182.6                          |       | 14.1                  |       | 198.7 |   | 12.6 |   | 3,174.6 |   | 109.6 |   |
| Foreign                                     |       | 1,526.4                               |       | 54.7                               |       | 57.9                           |       | 6.7                   |       | 151.0 |   | 15.0 |   | 1,735.3 |   | 76.4 |   |
| Residential   mortgage-backed               |       | 474.2                                 |       | 8.4                                |       | 82.2                           |       | 1.0                   |       | 307.4 |   | 71.8 |   | 863.8 |   | 81.2 |   |
| Commercial   mortgage-backed                |       | 101.8                                 |       | 2.1                                |       | —                         |       | —                |       | 205.8 |   | 13.4 |   | 307.6 |   | 15.5 |   |
| Other   asset-backed                        |       | 166.8                                 |       | 1.3                                |       | 0.9                            |       | —                |       | 318.4 |   | 56.5 |   | 486.1 |   | 57.8 |   |
| Total                                       |       | $                                     | 5,829.2    |                               | $          | 172.6                          |       | $                     | 323.6      |   | $ | 21.8 |   | $ | 1,181.3 |   | $ | 169.3 |   | $ | 7,334.1 |   | $ | 363.7 |   |
|                                        |       |                                  |       |                               |       |                           |       |                  |       |   |   |   |   |   |   |   |   |
| **2010**                                    | ** ** | ** **                            | ** ** | ** **                         | ** ** | ** **                     | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| U.S.   Treasuries                           |       | $                                     | 677.8      |                               | $          | 2.4                            |       | $                     | —     |   | $ | — |   | $ | — |   | $ | — |   | $ | 677.8 |   | $ | 2.4 |   |
| U.S.   government agencies and authorities  |       | 18.1                                  |       | 0.2                                |       | —                         |       | —                |       | — |   | — |   | 18.1 |   | 0.2 |   |
| U.S.   corporate, state, and municipalities |       | 2,494.7                               |       | 73.0                               |       | 37.1                           |       | 1.0                   |       | 258.9 |   | 19.5 |   | 2,790.7 |   | 93.5 |   |
| Foreign                                     |       | 1,277.5                               |       | 52.8                               |       | 35.8                           |       | 1.1                   |       | 195.4 |   | 20.4 |   | 1,508.7 |   | 74.3 |   |
| Residential   mortgage-backed               |       | 472.6                                 |       | 7.2                                |       | 1.0                            |       | 0.1                   |       | 336.5 |   | 91.2 |   | 810.1 |   | 98.5 |   |
| Commercial   mortgage-backed                |       | 22.6                                  |       | 0.4                                |       | 4.3                            |       | 0.1                   |       | 390.2 |   | 38.6 |   | 417.1 |   | 39.1 |   |
| Other   asset-backed                        |       | 133.5                                 |       | 1.0                                |       | 8.7                            |       | —                |       | 441.6 |   | 123.1 |   | 583.8 |   | 124.1 |   |
| Total                                       |       | $                                     | 5,096.8    |                               | $          | 137.0                          |       | $                     | 86.9       |   | $ | 2.3 |   | $ | 1,622.6 |   | $ | 292.8 |   | $ | 6,806.3 |   | $ | 432.1 |   |
|                                             |            |                                       |            |                                    |            |                                |            |                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Of the unrealized capital losses aged more than twelve months, the average market value of the related fixed maturities was 87.5% of the average book value as of March 31, 2011.

 

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**ING USA Annuity and Life Insurance Company**

**(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)**

**Notes to  Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwise stated)

 

Unrealized capital losses (including non-credit impairments) in fixed maturities, including securities pledged to creditors, for instances in which fair value declined below amortized cost by greater than or less than 20% for consecutive periods as indicated in the tables below, were as follows for March 31, 2011 and December 31, 2010.

 
| ** **                                                            | ** ** | **Amortized Cost** | ** ** | **Unrealized Capital Loss** | ** ** | **Number of Securities** | ** ** |
|-----------------------------------------------------------------------|------------|-------------------------|------------|---------------------------------------|------------|------------------------------------|------------|
| ** **                                                            | ** ** | **< 20%**       | ** ** | **> 20%**                     | ** ** | **< 20%**                  | ** ** | **> 20%** | ** ** | **< 20%** | ** ** | **> 20%** | ** ** |
| **2011**                                                              | ** ** | ** **              | ** ** | ** **                            | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Six months or less below amortized cost                               |       | $                       | 6,229.9    |                                  | $          | 75.2                               |       | $ | 190.6 |   | $ | 19.8 |   | 590 |   | 18 |   |
| More than six months and twelve months or less   below amortized cost |       | 483.6                   |       | 9.2                                   |       | 31.2                               |       | 3.0 |   | 91 |   | 3 |   |
| More than twelve months below amortized cost                          |       | 618.3                   |       | 281.6                                 |       | 31.9                               |       | 87.2 |   | 87 |   | 89 |   |
| Total                                                                 |       | $                       | 7,331.8    |                                  | $          | 366.0                              |       | $ | 253.7 |   | $ | 110.0 |   | 768 |   | 110 |   |
|                                                                  |       |                    |       |                                  |       |                               |       |   |   |   |   |   |   |
| **2010**                                                              | ** ** | ** **              | ** ** | ** **                            | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Six months or less below amortized cost                               |       | $                       | 5,650.7    |                                  | $          | 49.3                               |       | $ | 172.3 |   | $ | 13.2 |   | 585 |   | 14 |   |
| More than six months and twelve months or less   below amortized cost |       | 289.5                   |       | 18.9                                  |       | 15.9                               |       | 4.8 |   | 46 |   | 3 |   |
| More than twelve months below amortized cost                          |       | 688.7                   |       | 541.3                                 |       | 40.6                               |       | 185.3 |   | 95 |   | 137 |   |
| Total                                                                 |       | $                       | 6,628.9    |                                  | $          | 609.5                              |       | $ | 228.8 |   | $ | 203.3 |   | 726 |   | 154 |   |

 

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**ING USA Annuity and Life Insurance Company**

**(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)**

**Notes to  Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwise stated)

 

Unrealized capital losses (including non-credit impairments) in fixed maturities, including securities pledged to creditors, by market sector for instances in which fair value declined below amortized cost by greater than or less than 20% for consecutive periods as indicated in the tables below, were as follows for March 31, 2011 and December 31, 2010.

 
| ** **                               | ** ** | **Amortized Cost** | ** ** | **Unrealized Capital Loss** | ** ** | **Number of Securities** | ** ** |
|------------------------------------------|------------|-------------------------|------------|---------------------------------------|------------|------------------------------------|------------|
| ** **                               | ** ** | **< 20%**       | ** ** | **> 20%**                     | ** ** | **< 20%**                  | ** ** | **> 20%** | ** ** | **< 20%** | ** ** | **> 20%** | ** ** |
|                                     |       |                    |       |                                  |       |                               |       |   |   |   |   |   |   |
| **2011**                                 | ** ** | ** **              | ** ** | ** **                            |       |                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| U.S. Treasuries                          |       | $                       | 771.6      |                                  | $          | —                             |       | $ | 22.9 |   | $ | — |   | 5 |   | — |   |
| U.S. government agencies and authorities |       | 18.3                    |       | —                                |       | 0.3                                |       | — |   | 2 |   | — |   |
| U.S. corporate, state and municipalities |       | 3,240.1                 |       | 44.1                                  |       | 98.6                               |       | 11.0 |   | 313 |   | 5 |   |
| Foreign                                  |       | 1,784.4                 |       | 27.3                                  |       | 68.9                               |       | 7.5 |   | 152 |   | 5 |   |
| Residential mortgage-backed              |       | 769.1                   |       | 175.9                                 |       | 28.5                               |       | 52.7 |   | 132 |   | 69 |   |
| Commercial mortgage-backed               |       | 310.3                   |       | 12.8                                  |       | 11.9                               |       | 3.6 |   | 26 |   | 3 |   |
| Other asset-backed                       |       | 438.0                   |       | 105.9                                 |       | 22.6                               |       | 35.2 |   | 138 |   | 28 |   |
| Total                                    |       | $                       | 7,331.8    |                                  | $          | 366.0                              |       | $ | 253.7 |   | $ | 110.0 |   | 768 |   | 110 |   |
|                                     |       |                    |       |                                  |       |                               |       |   |   |   |   |   |   |
| **2010**                                 | ** ** | ** **              | ** ** | ** **                            |       |                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| U.S. Treasuries                          |       | $                       | 680.2      |                                  | $          | —                             |       | $ | 2.4 |   | $ | — |   | 2 |   | — |   |
| U.S. government agencies and authorities |       | 18.3                    |       | —                                |       | 0.2                                |       | — |   | 2 |   | — |   |
| U.S. corporate, state and municipalities |       | 2,850.0                 |       | 34.2                                  |       | 84.1                               |       | 9.4 |   | 279 |   | 6 |   |
| Foreign                                  |       | 1,563.7                 |       | 19.3                                  |       | 69.2                               |       | 5.1 |   | 142 |   | 7 |   |
| Residential mortgage-backed              |       | 636.6                   |       | 272.0                                 |       | 22.1                               |       | 76.4 |   | 121 |   | 77 |   |
| Commercial mortgage-backed               |       | 418.6                   |       | 37.6                                  |       | 22.1                               |       | 17.0 |   | 27 |   | 9 |   |
| Other asset-backed                       |       | 461.5                   |       | 246.4                                 |       | 28.7                               |       | 95.4 |   | 153 |   | 55 |   |
| Total                                    |       | $                       | 6,628.9    |                                  | $          | 609.5                              |       | $ | 228.8 |   | $ | 203.3 |   | 726 |   | 154 |   |

 

At March 31, 2011, the Company held no fixed maturities with an unrealized capital loss in excess of $10.0.  At December 31, 2010, the Company had 1 fixed maturity with an unrealized capital loss in excess of $10.0. The unrealized capital loss on this fixed maturity equaled $17.8, or 4.1% of the total unrealized capital losses, as of December 31, 2010.

 

All investments with fair values less than amortized cost are included in the Company’s other-than-temporary impairment analysis, and impairments were recognized as disclosed in Other-Than-Temporary Impairments (“OTTI”), which follows this section. After detailed impairment analysis was completed, management determined that the remaining investments in an unrealized loss position were not other-than-temporarily impaired, and therefore no further other-than-temporary impairment was necessary.

 

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**ING USA Annuity and Life Insurance Company**

**(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)**

**Notes to  Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwise stated)

 

***Other-Than-Temporary Impairments***

 

The Company analyzes its general account investments to determine whether there has been an other-than-temporary decline in fair value below the amortized cost basis. Factors considered in this analysis include, but are not limited to, the length of time and the extent to which the fair value has been less than amortized cost, the issuer’s financial condition and near-term prospects, future economic conditions and market forecasts, interest rate changes, and changes in ratings of the security.

 

When assessing the Company’s intent to sell a security or if it is more likely than not it will be required to sell a security before recovery of its amortized cost basis, management evaluates facts and circumstances such as, but not limited to, decisions to rebalance the investment portfolio and sales of investments to meet cash flow needs.

 

When the Company has determined it has the intent to sell or if it is more likely than not that it will be required to sell a security before recovery of its amortized cost basis and the fair value has declined below amortized cost (“intent impairment”) the individual security is written down from amortized cost to fair value and a corresponding charge is recorded in Net realized capital gains (losses) on the Condensed Statements of Operations as an OTTI.  If the Company does not intend to sell the security nor is it more likely than not it will be required to sell the security before recovery of its amortized cost basis, but the Company has determined that there has been an other-than-temporary decline in fair value below the amortized cost basis, the OTTI is bifurcated into the amount representing the present value of the decrease in cash flows expected to be collected (“credit impairment”) and the amount related to other factors (“noncredit impairment”).  The credit impairment is recorded in Net realized capital gains (losses) on the Condensed Statements of Operations. The noncredit impairment is recorded in Other comprehensive income (loss) on the Condensed Balance Sheets.

 

In order to determine the amount of the OTTI that is considered a credit impairment, the Company utilizes the following methodology and significant inputs:

 

·          Recovery value is estimated by performing a discounted cash flow analysis based upon the best estimate of expected future cash flows, discounted at the effective interest rate implicit in the underlying debt security.  The effective interest rate is the current yield prior to impairment for a fixed rate security or current coupon yield for a floating rate security.

·          Collectability and recoverability are estimated using the same considerations as the Company uses in its overall impairment analysis which includes, but is not limited to, the length of time and the extent to which the fair value has been less than amortized cost, the issuer’s financial condition and near-term prospects, future economic conditions and market forecasts, interest rate changes, and changes in ratings of the security.

 

25

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Table of Contents

 

**ING USA Annuity and Life Insurance Company**

**(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)**

**Notes to  Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwise stated)

 

·          Additional factors considered for structured securities such as Residential Mortgage-backed Securities (“RMBS”), Commercial Mortgage-backed Securities (“CMBS”) and other Asset-backed Securities (“ABS”) include, but are not limited to, quality of underlying collateral, anticipated loss severities, collateral default rates, and other collateral characteristics such as vintage, repayment terms, and the geographical makeup of the collateral.

 

The following tables identify the Company’s credit-related and intent-related impairments included in the Condensed Statements of Operations, excluding noncredit impairments included in Accumulated other comprehensive income (loss), by type for the three months ended March 31, 2011 and 2010.

 
| ** **                    | ** ** | **Three Months Ended March 31,** | ** ** |
|-------------------------------|------------|------------------------------------------------------|------------|
| ** **                    | ** ** | **2011**                                             | ** ** | **2010** | ** ** |
| ** **                    | ** ** | ** **                                           | ** ** | **No. of** | ** ** | ** ** | ** ** | **No. of** | ** ** |
| ** **                    | ** ** | **Impairment**                                       | ** ** | **Securities** | ** ** | **Impairment** | ** ** | **Securities** | ** ** |
| U.S. corporate                |       | $                                                    | 1.9        |   | 3 |   | $ | 1.3 |   | 5 |   |
| Foreign(1)                    |       | 2.8                                                  |       | 8 |   | 11.9 |   | 6 |   |
| Residential mortgage-backed   |       | 0.4                                                  |       | 9 |   | 6.5 |   | 43 |   |
| Commercial mortgage-backed    |       | 1.2                                                  |       | 1 |   | 2.1 |   | 1 |   |
| Other asset-backed            |       | 53.7                                                 |       | 46 |   | 3.3 |   | 14 |   |
| Public utilities              |       | —                                               |       | — |   | 0.2 |   | 3 |   |
| Mortgage loans on real estate |       | 2.0                                                  |       | 3 |   | 0.2 |   | 1 |   |
| Total                         |       | $                                                    | 62.0       |   | 70 |   | $ | 25.5 |   | 73 |   |

 

----

(1)    Primarily U.S. dollar denominated.

 

The above tables include $6.6 and $22.3 for the three months ended March 31, 2011 and 2010, respectively, in other-than-temporary write-downs related to credit impairments, which are recognized in earnings. The remaining $55.4 and $3.2 in write-downs for the three months ended March 31, 2011 and 2010, respectively, are related to intent impairments.

 

26

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** **

**ING USA Annuity and Life Insurance Company**

**(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)**

**Notes to  Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwise stated)

 

The following tables summarize these intent impairments, which are also recognized in earnings, by type for the three months ended March 31, 2011 and 2010.

 
| ** **                  | ** ** | **Three Months Ended March 31,** | ** ** |
|-----------------------------|------------|------------------------------------------------------|------------|
| ** **                  | ** ** | **2011**                                             | ** ** | **2010** | ** ** |
| ** **                  | ** ** | ** **                                           | ** ** | **No. of** | ** ** | ** ** | ** ** | **No. of** | ** ** |
| ** **                  | ** ** | **Impairment**                                       | ** ** | **Securities** | ** ** | **Impairment** | ** ** | **Securities** | ** ** |
| U.S. corporate              |       | $                                                    | 1.9        |   | 3 |   | $ | 1.3 |   | 5 |   |
| Foreign(1)                  |       | 1.3                                                  |       | 6 |   | 1.7 |   | 3 |   |
| Residential mortgage-backed |       | —                                               | *          | 1 |   | — |   | — |   |
| Other asset-backed          |       | 52.2                                                 |       | 46 |   | — |   | — |   |
| Public utilities            |       | —                                               |       | — |   | 0.2 |   | 3 |   |
| Total                       |       | $                                                    | 55.4       |   | 56 |   | $ | 3.2 |   | 11 |   |

 

----

*    Less than $0.1.

(1)   Primarily U.S. dollar denominated.

 

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

 

The following tables identify the noncredit impairments recognized in Accumulated other comprehensive income (loss) by type for the three months ended March 31, 2011 and 2010.

 
| ** **                  | ** ** | **Three Months Ended March 31,** | ** ** |
|-----------------------------|------------|------------------------------------------------------|------------|
| ** **                  | ** ** | **2011**                                             | ** ** | **2010** | ** ** |
| ** **                  | ** ** | ** **                                           | ** ** | **No. of** | ** ** | ** ** | ** ** | **No. of** | ** ** |
| ** **                  | ** ** | **Impairment**                                       | ** ** | **Securities** | ** ** | **Impairment** | ** ** | **Securities** | ** ** |
| Commercial mortgage-backed  |       | $                                                    | —     |   | — |   | $ | 8.7 |   | 1 |   |
| Residential mortgage-backed |       | 2.9                                                  |       | 8 |   | 11.4 |   | 19 |   |
| Other asset-backed          |       | —                                               |       | — |   | 25.9 |   | 6 |   |
| Total                       |       | $                                                    | 2.9        |   | 8 |   | $ | 46.0 |   | 26 |   |

 

----

(1)   Primarily U.S. dollar denominated.

 

The fair value of fixed maturities with other-than-temporary impairments as of March 31, 2011 and 2010 was $2.2 billion and $2.4 billion, respectively.

 

27

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**ING USA Annuity and Life Insurance Company**

**(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)**

**Notes to  Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwise stated)

 

The following tables identify the amount of credit impairments on fixed maturities for the three months ended March 31, 2011 and 2010, for which a portion of the OTTI was recognized in Accumulated other comprehensive income (loss), and the corresponding changes in such amounts.

 
| ** **                                     | ** ** | **2011** | ** ** | **2010** | ** ** |
|------------------------------------------------|------------|----------|------------|----------|------------|
| Balance at January 1                      |       | $        | 136.5      |     | $          | 123.3 |   |
| Additional credit impairments:                 |       |     |       |     |       |
| On securities not previously impaired          |       | 0.4      |       | 4.4      |       |
| On securities previously impaired              |       | 1.8      |       | (4.7     | )          |
| Reductions:                                    |       |     |       |     |       |
| Intent impairments                             |       | (16.3    | )          | —   |       |
| Securities sold, matured, prepaid or paid down |       | (9.6     | )          | (5.5     | )          |
| Balance at March 31                       |       | $        | 112.8      |     | $          | 117.5 |   |

 

***Net Realized Capital Gains (Losses)***

 

Net realized capital gains (losses) are comprised of the difference between the amortized cost of investments and proceeds from sale, and redemption, as well as losses incurred due to credit-related and intent-related other-than-temporary impairment of investments and changes in fair value of fixed maturities accounted for using the fair value option and derivatives. The cost of the investments on disposal is determined based on specific identification of securities. Net realized capital gains (losses) on investments were as follows for the three months ended March 31, 2011 and 2010.

 
| ** **                                                    | ** ** | **Three Months Ended March 31,** | ** ** |
|---------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                    | ** ** | **2011**                                             | ** ** | **2010** | ** ** |
| Fixed maturities, available-for-sale                          |       | $                                                    | (46.7      | ) | $ | 19.4 |   |
| Fixed maturities, at fair value using the fair   value option |       | (4.5                                                 | )          | (0.2 | ) |
| Equity securities, available-for-sale                         |       | 1.4                                                  |       | 0.1 |   |
| Derivatives                                                   |       | (348.0                                               | )          | (283.5 | ) |
| Other investments                                             |       | (2.2                                                 | )          | 2.3 |   |
| Net realized capital losses                                   |       | $                                                    | (400.0     | ) | $ | (261.9 | ) |
| After-tax net realized capital losses                         |       | $                                                    | (275.0     | ) | $ | (177.9 | ) |

 

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**ING USA Annuity and Life Insurance Company**

**(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)**

**Notes to  Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwise stated)

 

Proceeds from the sale of fixed maturities and equity securities and the related gross realized gains and losses were as follows for the three months ended March 31, 2011 and 2010.

 
| ** **        | ** ** | **Three Months Ended March 31,** | ** ** |
|-------------------|------------|------------------------------------------------------|------------|
| ** **        | ** ** | **2011**                                             | ** ** | **2010** | ** ** |
| Proceeds on sales |       | $                                                    | 793.2      |   | $ | 1,786.4 |   |
| Gross gains       |       | 23.5                                                 |       | 53.4 |   |
| Gross losses      |       | 8.3                                                  |       | 7.4 |   |
|                   |            |                                                      |            |  |  |  |  |

 

**3.****            ****Financial Instruments**

 

*Fair Value Measurements*

 

ASC Topic 820, “Fair Value Measurements and Disclosures,” defines fair value, establishes a framework for measuring fair value, establishes a fair value hierarchy based on the quality of inputs used to measure fair value, and enhances disclosure requirements for fair value measurements.

 

*Fair Value Hierarchy*

 

The Company has categorized its financial instruments into a three-level hierarchy based on the priority of the inputs to the valuation technique.

 

The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure fair value fall within different levels of the hierarchy, the category level is based on the lowest priority level input that is significant to the fair value measurement of the instrument.

 

Financial assets and liabilities recorded at fair value on the Condensed Balance Sheets are categorized as follows:

 

·          Level 1 - Unadjusted quoted prices for identical assets or liabilities in an active market.

·          Level 2 - Quoted prices in markets that are not active or inputs that are observable either directly or indirectly for substantially the full term of the asset or liability.  Level 2 inputs include the following:

a)         Quoted prices for similar assets or liabilities in active markets;

b)        Quoted prices for identical or similar assets or liabilities in non-active markets;

c)         Inputs other than quoted market prices that are observable; and

d)        Inputs that are derived principally from or corroborated by observable market data through correlation or other means.

 

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**ING USA Annuity and Life Insurance Company**

**(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)**

**Notes to  Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwise stated)

 

·          Level 3 - Prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement.  These valuations, whether derived internally or obtained from a third party, use critical assumptions that are not widely available to estimate market participant expectations in valuing the asset or liability.

 

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**ING USA Annuity and Life Insurance Company**

**(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)**

**Notes to  Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwise stated)

 

The following tables present the Company’s hierarchy for its assets and liabilities measured at fair value on a recurring basis as of March 31, 2011 and December 31, 2010.

 
| ** **                                                                                                      | ** ** | **2011**         | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|------------------|------------|
| ** **                                                                                                      | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3****(1)** | ** ** | **Total** | ** ** |
| Assets:                                                                                                         | ** ** | ** **       | ** ** | ** ** |   |   |   |   |   |
| Fixed maturities, available-for-sale, including   securities pledged:                                           |       |             |       |   |   |   |   |   |   |
| U.S. Treasuries                                                                                                 |       | $                | 1,352.1    |   | $ | 59.9 |   | $ | — |   | $ | 1,412.0 |   |
| U.S government agencies and authorities                                                                         |       | —           |       | 19.2 |   | — |   | 19.2 |   |
| U.S. corporate, state and municipalities                                                                        |       | —           |       | 9,637.8 |   | 32.0 |   | 9,669.8 |   |
| Foreign                                                                                                         |       | —           |       | 5,855.9 |   | 8.0 |   | 5,863.9 |   |
| Residential mortgage-backed securities                                                                          |       | —           |       | 2,014.5 |   | 90.6 |   | 2,105.1 |   |
| Commercial mortgage-backed securities                                                                           |       | —           |       | 2,219.8 |   | — |   | 2,219.8 |   |
| Other asset-backed securities                                                                                   |       | —           |       | 851.0 |   | 188.3 |   | 1,039.3 |   |
| Equity securities, available-for-sale                                                                           |       | 123.4            |       | — |   | 16.0 |   | 139.4 |   |
| Derivatives:                                                                                                    |       |             |       |   |   |   |   |   |   |
| Interest rate contracts                                                                                         |       | 1.6              |       | 129.8 |   | — |   | 131.4 |   |
| Foreign exchange contracts                                                                                      |       | —           |       | 4.9 |   | — |   | 4.9 |   |
| Equity contracts                                                                                                |       | 7.8              |       | — |   | 132.9 |   | 140.7 |   |
| Credit contracts                                                                                                |       | —           |       | 3.6 |   | — |   | 3.6 |   |
| Cash and cash equivalents, short-term investments,   and short-term investments under securities loan agreement |       | 1,200.8          |       | — |   | — |   | 1,200.8 |   |
| Assets held in separate accounts                                                                                |       | 45,057.1         |       | — |   | — |   | 45,057.1 |   |
| Total                                                                                                           |       | $                | 47,742.8   |   | $ | 20,796.4 |   | $ | 467.8 |   | $ | 69,007.0 |   |
|                                                                                                            |       |             |       |   |   |   |   |   |   |
| Liabilities:                                                                                                    |       |             |       |   |   |   |   |   |   |
| Investment contract guarantees:                                                                                 |       |             |       |   |   |   |   |   |   |
| Fixed Indexed Annuities (“FIA”)                                                                       |       | $                | —     |   | $ | — |   | $ | 1,266.2 |   | $ | 1,266.2 |   |
| Guaranteed Minimum Withdrawal and Accumulation   Benefits (“GMWB” and “GMAB”)               |       | —           |       | — |   | 66.8 |   | 66.8 |   |
| Embedded derivative on reinsurance                                                                              |       | —           |       | — |   | 0.8 |   | 0.8 |   |
| Derivatives:                                                                                                    |       |             |       |   |   |   |   |   |   |
| Interest rate contracts                                                                                         |       | —           |       | 306.0 |   | — |   | 306.0 |   |
| Foreign exchange contracts                                                                                      |       | —           |       | 49.5 |   | — |   | 49.5 |   |
| Equity contracts                                                                                                |       | 1.4              |       | — |   | 19.4 |   | 20.8 |   |
| Credit contracts                                                                                                |       | —           |       | 0.1 |   | 12.1 |   | 12.2 |   |
| Total                                                                                                           |       | $                | 1.4        |   | $ | 355.6 |   | $ | 1,365.3 |   | $ | 1,722.3 |   |

 

----

(1)   Level 3 net assets and liabilities accounted for (1.3)% of total net assets and liabilities measured at fair value on a recurring basis. Excluding separate accounts assets for which the policyholder bears the risk, the Level 3 net assets and liabilities in relation to total net assets and liabilities measured at fair value on a recurring basis totaled (4.0)%.

 

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**ING USA Annuity and Life Insurance Company**

**(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)**

**Notes to  Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwise stated)

 
| ** **                                                                                                      | ** ** | **2010**         | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|------------------|------------|
| ** **                                                                                                      | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3****(1)** | ** ** | **Total** | ** ** |
| Assets:                                                                                                         | ** ** | ** **       | ** ** | ** ** |   |   |   |   |   |
| Fixed maturities, available-for-sale, including   securities pledged:                                           |       |             |       |   |   |   |   |   |   |
| U.S. Treasuries                                                                                                 |       | $                | 1,552.3    |   | $ | 60.4 |   | $ | — |   | $ | 1,612.7 |   |
| U.S government agencies and authorities                                                                         |       | —           |       | 24.3 |   | — |   | 24.3 |   |
| U.S. corporate, state and municipalities                                                                        |       | —           |       | 9,487.3 |   | 40.1 |   | 9,527.4 |   |
| Foreign                                                                                                         |       | —           |       | 5,389.1 |   | 9.8 |   | 5,398.9 |   |
| Residential mortgage-backed securities                                                                          |       | —           |       | 1,979.5 |   | 191.5 |   | 2,171.0 |   |
| Commercial mortgage-backed securities                                                                           |       | —           |       | 2,198.9 |   | — |   | 2,198.9 |   |
| Other asset-backed securities                                                                                   |       | —           |       | 458.2 |   | 649.4 |   | 1,107.6 |   |
| Equity securities, available-for-sale                                                                           |       | 136.7            |       | — |   | 13.5 |   | 150.2 |   |
| Derivatives:                                                                                                    |       |             |       |   |   |   |   |   |   |
| Interest rate contracts                                                                                         |       | 2.6              |       | 162.5 |   | 12.0 |   | 177.1 |   |
| Foreign exchange contracts                                                                                      |       | —           |       | 5.1 |   | — |   | 5.1 |   |
| Equity contracts                                                                                                |       | 12.4             |       | — |   | 95.3 |   | 107.7 |   |
| Credit contracts                                                                                                |       | —           |       | 3.2 |   | — |   | 3.2 |   |
| Embedded derivative on reinsurance                                                                              |       | —           |       | 20.9 |   | — |   | 20.9 |   |
| Cash and cash equivalents, short-term investments,   and short-term investments under securities loan agreement |       | 1,155.8          |       | — |   | — |   | 1,155.8 |   |
| Assets held in separate accounts                                                                                |       | 44,413.3         |       | — |   | — |   | 44,413.3 |   |
| Total                                                                                                           |       | $                | 47,273.1   |   | $ | 19,789.4 |   | $ | 1,011.6 |   | $ | 68,074.1 |   |
|                                                                                                            |       |             |       |   |   |   |   |   |   |
| Liabilities:                                                                                                    |       |             |       |   |   |   |   |   |   |
| Investment contract guarantees:                                                                                 |       |             |       |   |   |   |   |   |   |
| Fixed Indexed Annuities (“FIA”)                                                                       |       | $                | —     |   | $ | — |   | $ | 1,165.5 |   | $ | 1,165.5 |   |
| Guaranteed Minimum Withdrawal and Accumulation   Benefits (“GMWB” and “GMAB”)               |       | —           |       | — |   | 77.0 |   | 77.0 |   |
| Embedded derivative on reinsurance                                                                              |       |             |       |   |   |   |   |   |   |
| Derivatives:                                                                                                    |       |             |       |   |   |   |   |   |   |
| Interest rate contracts                                                                                         |       | —           |       | 419.2 |   | 0.3 |   | 419.5 |   |
| Foreign exchange contracts                                                                                      |       | —           |       | 42.1 |   | — |   | 42.1 |   |
| Equity contracts                                                                                                |       | 0.8              |       | — |   | 16.0 |   | 16.8 |   |
| Credit contracts                                                                                                |       | —           |       | 0.1 |   | 14.4 |   | 14.5 |   |
| Total                                                                                                           |       | $                | 0.8        |   | $ | 461.4 |   | $ | 1,273.2 |   | $ | 1,735.4 |   |

 

----

(1)   Level 3 net assets and liabilities accounted for (0.4)% of total net assets and liabilities measured at fair value on a recurring basis. Excluding separate accounts assets for which the policyholder bears the risk, the Level 3 net assets and liabilities in relation to total net assets and liabilities measured at fair value on a recurring basis totaled (1.2)%.

 

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**ING USA Annuity and Life Insurance Company**

**(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)**

**Notes to  Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwise stated)

 

***Transfers in and out of Level 1 and 2***

 

There were no transfers between Level 1 and Level 2 during the three months ended March 31, 2011.  The Company’s policy is to recognize transfers in and transfers out as of the beginning of the reporting period.

 

***Valuation of Financial Assets and Liabilities***

 

As described below, certain assets and liabilities are measured at estimated fair value on the Company’s Condensed Balance Sheets. In addition, further disclosure of estimated fair values is included in this Financial Instruments footnote. The Company defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The exit price and the transaction (or entry) price will be the same at initial recognition in many circumstances. However, in certain cases, the transaction price may not represent fair value. The fair value of a liability is based on the amount that would be paid to transfer a liability to a third-party with an equal credit standing. Fair value is required to be a market-based measurement which is determined based on a hypothetical transaction at the measurement date, from a market participant’s perspective. The Company considers three broad valuation techniques when a quoted price is unavailable: (i) the market approach, (ii) the income approach and (iii) the cost approach. The Company determines the most appropriate valuation technique to use, given the instrument being measured and the availability of sufficient inputs. The Company prioritizes the inputs to fair valuation techniques and allows for the use of unobservable inputs to the extent that observable inputs are not available.

 

The Company utilizes a number of valuation methodologies to determine the fair values of its financial assets and liabilities in conformity with the concepts of “exit price” and the fair value hierarchy as prescribed in ASC Topic 820. Valuations are obtained from third party commercial pricing services, brokers, and industry-standard, vendor-provided software that models the value based on market observable inputs. The valuations obtained from brokers and third-party commercial pricing services are non-binding. The valuations are reviewed and validated monthly through the internal valuation committee price variance review, comparisons to internal pricing models, back testing to recent trades, or monitoring of trading volumes.

 

All valuation methods and assumptions are validated at least quarterly to ensure the accuracy and relevance of the fair values. There were no material changes to the valuation methods or assumptions used to determine fair values during 2011.

 

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**ING USA Annuity and Life Insurance Company**

**(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)**

**Notes to  Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwise stated)

 

The following valuation methods and assumptions were used by the Company in estimating the reported values for the investments and derivatives described below:

* *

*Fixed maturities*: The fair values for the actively traded marketable bonds are determined based upon the quoted market prices and are classified as Level 1 assets.  Assets in this category would primarily include certain U.S. Treasury securities.  The fair values for marketable bonds without an active market are obtained through several commercial pricing services, which provide the estimated fair values.  These services incorporate a variety of market observable information in their valuation techniques, including benchmark yields, broker-dealer quotes, credit quality, issuer spreads, bids, offers and other reference data and are classified as Level 2 assets.  This category includes U.S. and foreign corporate bonds, ABS, U.S. agency and government guaranteed securities, CMBS, and all RMBS, including certain CMO assets and subprime RMBS.  The market for subprime RMBS has been determined to be active, and as such, these securities are now included in Level 2 of the valuation hierarchy.

 

Generally, the Company does not obtain more than one vendor price from pricing services per instrument.  The Company uses a hierarchy process in which prices are obtained from a primary vendor, and, if that vendor is unable to provide the price, the next vendor in the hierarchy is contacted until a price is obtained or it is determined that a price cannot be obtained from a commercial pricing service.  When a price cannot be obtained from a commercial pricing service, independent broker quotes are solicited.  Securities priced using independent broker quotes are classified as Level 3.

 

Broker quotes and prices obtained from pricing services are reviewed and validated monthly through an internal valuation committee price variance review, comparisons to internal pricing models, back testing to recent trades, or monitoring of trading volumes.  At March 31, 2011, $240.9 and $17.3 billion of a total of $22.3 billion in fixed maturities were valued using unadjusted broker quotes and unadjusted prices obtained from pricing services, respectively, and verified through the review process.  The remaining balance in fixed maturities consisted primarily of privately placed bonds valued using a matrix-based pricing model.

 

All prices and broker quotes obtained go through the review process described above including valuations for which only one broker quote is obtained.  After review, for those instruments where the price is determined to be appropriate, the unadjusted price provided is used for financial statement valuation.  If it is determined that the price is questionable, another price may be requested from a different vendor.  For certain CMO assets, the average of several broker quotes may be used when multiple quotes are available. The internal valuation committee then reviews all prices for the instrument again, along with information from the review, to determine which price best represents “exit price” for the instrument.

 

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**ING USA Annuity and Life Insurance Company**

**(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)**

**Notes to  Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwise stated)

 

Fair values of privately placed bonds are determined using a matrix-based pricing model and are classified as Level 2 assets.  The model considers the current level of risk-free interest rates, current corporate spreads, the credit quality of the issuer, and cash flow characteristics of the security.  Also considered are factors such as the net worth of the borrower, the value of collateral, the capital structure of the borrower, the presence of guarantees, and the Company’s evaluation of the borrower’s ability to compete in its relevant market.  Using this data, the model generates estimated market values which the Company considers reflective of the fair value of each privately placed bond.

 

*Equity securities, available-for-sale*: Fair values of publicly traded equity securities are based upon quoted market price and are classified as Level 1 assets. Other equity securities, typically private equities or equity securities not traded on an exchange, are valued by other methods such as analytics or brokers and are classified as Level 3 assets.

 

*Cash and cash equivalents, Short-term investments, and Short-term investments under securities loan agreement*: The fair values for cash equivalents and short-term investments are determined based on quoted market prices.  These assets are classified as Level 1. Other short-term investments are valued and classified in the fair value hierarchy consistent with the policies described herein, depending on investment type.

 

*Derivatives*: The carrying amounts for these financial instruments, which can be assets or liabilities, reflect the fair value of the assets and liabilities.  Derivatives are carried at fair value (on the Condensed Balance Sheets), which is determined using the Company’s derivative accounting system in conjunction with observable key financial data from third party sources, such as yield curves, exchange rates, Standard & Poor’s 500 Index prices, and London Interbank Offered Rates, or through values established by third party brokers. Counterparty credit risk is considered and incorporated in the Company’s valuation process through counterparty credit rating requirements and monitoring of overall exposure. It is the Company’s policy to transact only with investment grade counterparties with a credit rating of A- or better. The Company’s own credit risk is also considered and incorporated in the Company’s valuation process. Valuations for the Company’s futures contracts are based on unadjusted quoted prices from an active exchange and, therefore, are classified as Level 1. The Company also has certain credit default swaps and options that are priced using models that primarily use market observable inputs, but contain inputs that are not observable to market participants, which have been classified as Level 3. All other derivative instruments are valued based on market observable inputs and are classified as Level 2.

 

*Embedded derivatives - Investment contract guarantees*: The Company records guarantees, which can be either assets or liabilities, for annuity contracts containing guaranteed riders for Guaranteed Minimum Accumulated Benefits (“GMABs”) and Guaranteed Minimum Withdrawal Benefits (“GMWBs”) without life contingencies in accordance with US GAAP for derivative instruments and hedging activities.  The guarantee is treated as an embedded derivative and is required to be reported separately

 

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**ING USA Annuity and Life Insurance Company**

**(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)**

**Notes to  Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwise stated)

 

from the host variable annuity contract.  The fair value of the obligation is calculated based on actuarial and capital market assumptions related to the projected cash flows, including benefits and related contract charges, over the anticipated life of the related contracts.  The cash flow estimates are produced by using stochastic techniques under a variety of market return scenarios and other best estimate assumptions. These derivatives are classified as Level 3 assets in the fair value hierarchy.

 

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

 

Nonperformance risk for investment contract guarantees contains adjustments to the fair values of these contract liabilities related to the current credit standing of ING and the Company based on credit default swaps with similar term to maturity and priority of payment.  The ING credit default swap spread is applied to the discount factors for FIAs and the risk-free rates for GMABs and GMWBs in the Company’s valuation models in order to incorporate credit risk into the fair values of these investment contract guarantees.  As of March 31, 2011, the credit spreads of ING and the Company decreased by approximately 29 basis points from December 31, 2010, which contributed to changes in the valuation of the reserves for all investment contract guarantees.

 

*Embedded derivative on reinsurance*: The carrying value of the embedded derivative is estimated based upon the change in the fair value of the assets supporting the funds withheld payable under the combined coinsurance and coinsurance funds withheld reinsurance agreement between the Company and Security Life of Denver International Limited (“SLDI”). As the fair value of the assets held in trust is based on a quoted market price (Level 1), the fair value of the embedded derivative is based on market observable inputs and is classified as Level 2.

 

*Assets held in separate accounts*: Assets held in separate accounts are reported at the quoted fair values of the underlying investments in the separate accounts.

 

***Level 3 Financial Instruments***

 

The fair values of certain assets and liabilities are determined using prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement (i.e., Level 3 as defined by ASC Topic 820), including but not limited to liquidity spreads for investments within markets deemed not currently active. These

 

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**ING USA Annuity and Life Insurance Company**

**(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)**

**Notes to  Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwise stated)

 

valuations, whether derived internally or obtained from a third party, use critical assumptions that are not widely available to estimate market participant expectations in valuing the asset or liability. In addition, the Company has determined, for certain financial instruments, an active market is such a significant input to determine fair value that the presence of an inactive market may lead to classification in Level 3. In light of the methodologies employed to obtain the fair values of financial assets and liabilities classified as Level 3, additional information is presented below, with particular attention addressed to changes in derivatives, FIAs, and GMWBs and GMABs due to their impacts on the Company’s results of operations.

 

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**ING USA Annuity and Life Insurance Company**

**(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)**

**Notes to  Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwise stated)

 

The following table summarizes the changes in fair value of the Company’s Level 3 assets and liabilities for the three months ended March 31, 2011.

 
| ** **                                                                  | ** ** | **Three Months Ended March 31, 2011** | ** ** |
|-----------------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                                                  | ** ** | ** **                                                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Change in** | ** ** |
| ** **                                                                  | ** ** | **Fair Value**                                            | ** ** | **Total realized/unrealized** | ** ** | ** ** | ** ** | ** ** | ** ** | **Transfers** | ** ** | **Transfers** | ** ** | **Fair Value** | ** ** | **unrealized gains** | ** ** |
| ** **                                                                  | ** ** | **as of**                                                 | ** ** | **gains (losses) included in:** | ** ** | **Purchases** | ** ** | ** ** | ** ** | **in to** | ** ** | **out of** | ** ** | **as of** | ** ** | **(losses) included** | ** ** |
| ** **                                                                  | ** ** | **January 1**                                             | ** ** | **Net income** | ** ** | **OCI** | ** ** | **and issuances** | ** ** | **Settlements** | ** ** | **Level 3****(2)** | ** ** | **Level 3****(2)** | ** ** | **March 31** | ** ** | **in earnings****(3)** | ** ** |
| Fixed maturities, available for sale, including   securities pledged:       |       |                                                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| U.S. corporate, state and municipalities                                    |       | $                                                              | 40.1       |   | $ | — |   | $ | (0.3 | ) | $ | — |   | $ | (0.2 | ) | $ | 8.7 |   | $ | (16.3 | ) | $ | 32.0 |   | $ | — |   |
| Foreign                                                                     |       | 9.8                                                            |       | — |   | 0.1 |   | 3.6 |   | — |   | 1.9 |   | (7.4 | ) | 8.0 |   | — |   |
| Residential mortgage-backed securities                                      |       | 191.5                                                          |       | (2.1 | ) | 0.6 |   | 11.5 |   | (2.4 | ) | 48.4 |   | (156.9 | ) | 90.6 |   | (2.1 | ) |
| Other asset-backed securities                                               |       | 649.4                                                          |       | (1.9 | ) | 5.5 |   | — |   | (3.8 | ) | 1.3 |   | (462.2 | ) | 188.3 |   | (1.9 | ) |
| Total Fixed maturities, available for sale,   including securities pledged: |       | 890.8                                                          |       | (4.0 | ) | 5.9 |   | 15.1 |   | (6.4 | ) | 60.3 |   | (642.8 | ) | 318.9 |   | (4.0 | ) |
| Equity securities, available for sale                                       |       | 13.5                                                           |       | — |   | (0.1 | ) | 2.6 |   | — |   | — |   | — |   | 16.0 |   | — |   |
| Derivatives, net                                                            |       | 76.6                                                           |       | 27.2 |   | — |   | — |   | (2.4 | ) | — |   | — |   | 101.4 |   | 36.9 |   |
| Investment contract guarantees:                                             |       |                                                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| FIA                                                                         |       | (1,165.5                                                       | )          | (105.8 | ) | — |   | (31.9 | ) | 37.0 |   | — |   | — |   | (1,266.2 | ) | — |   |
| GMWB/GMAB                                                                   |       | (77.0                                                          | )          | 11.2 |   | — |   | (1.8 | ) | 0.8 |   | — |   | — |   | (66.8 | ) | — |   |
| Total Investment contract guarantees                                        |       | (1,242.5                                                       | )          | (94.6 | )(1) | — |   | (33.7 | ) | 37.8 |   | — |   | — |   | (1,333.0 | ) | — |   |
|                                                                             |            |                                                                |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

| (1) | This amount is   included in Interest credited and other benefits to contract owners on the   Condensed Statements of Operations. All gains and losses on Level 3   liabilities are classified as realized gains (losses) for the purpose of this   disclosure because it is impracticable to track realized and unrealized gains   (losses) separately on a contract-by-contract basis. |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | The Company’s   policy is to recognize transfers in and transfers out as of the beginning of   the reporting period.                                                                                                                                                                                                                                                                |
| (3) | For financial   instruments still held as of March 31. Amounts are included in Net   investment income and Net realized capital losses on the Condensed Statements   of Operations.                                                                                                                                                                                                 |

 

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**ING USA Annuity and Life Insurance Company**

**(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)**

**Notes to  Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwise stated)

 

The following table summarizes the changes in fair value of the Company’s Level 3 assets and liabilities for the three months ended March 31, 2010.

 
| ** **                                                                  | ** ** | **Three Months Ended March 31, 2010** | ** ** |
|-----------------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                                                  | ** ** | ** **                                                     | ** ** | ** ** | ** ** | ** ** | ** ** | **Purchases,** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Change in** | ** ** |
| ** **                                                                  | ** ** | **Fair Value**                                            | ** ** | **Total realized/unrealized** | ** ** | **issuances** | ** ** | **Transfers** | ** ** | **Transfers** | ** ** | **Fair Value** | ** ** | **unrealized gains** | ** ** |
| ** **                                                                  | ** ** | **as of**                                                 | ** ** | **gains (losses) included in:** | ** ** | **and** | ** ** | **in to** | ** ** | **out of** | ** ** | **as of** | ** ** | **(losses) included** | ** ** |
| ** **                                                                  | ** ** | **January 1**                                             | ** ** | **Net income** | ** ** | **OCI** | ** ** | **settlements** | ** ** | **Level 3****(2)** | ** ** | **Level 3****(2)** | ** ** | **March 31** | ** ** | **in earnings****(3)** | ** ** |
| Fixed maturities, available for sale, including   securities pledged:       |       |                                                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| U.S. corporate, state and municipalities                                    |       | $                                                              | —     |   | $ | — |   | $ | 0.1 |   | $ | 27.6 |   | $ | 13.4 |   | $ | — |   | $ | 41.1 |   | $ | — |   |
| Foreign                                                                     |       | —                                                         |       | (0.5 | ) | 0.4 |   | 29.6 |   | 41.8 |   | — |   | 71.3 |   | (0.5 | ) |
| Residential mortgage-backed securities                                      |       | 1,042.4                                                        |       | (1.5 | ) | 0.8 |   | (4.8 | ) | 13.2 |   | (1,005.6 | ) | 44.5 |   | (0.1 | ) |
| Commercial mortgage-backed securities                                       |       | —                                                         |       | — |   | — |   | — |   | 7.9 |   | — |   | 7.9 |   | — |   |
| Other asset-backed securities                                               |       | 423.9                                                          |       | (3.5 | ) | 42.8 |   | (35.5 | ) | 222.1 |   | — |   | 649.8 |   | (3.6 | ) |
| Total Fixed maturities, available for sale,   including securities pledged: |       | 1,466.3                                                        |       | (5.5 | ) | 44.1 |   | 16.9 |   | 298.4 |   | (1,005.6 | ) | 814.6 |   | (4.2 | ) |
| Equity securities, available for sale                                       |       | 4.5                                                            |       | — |   | (0.6 | ) | 7.9 |   | — |   | — |   | 11.8 |   | — |   |
| Derivatives, net                                                            |       | 111.9                                                          |       | (0.4 | ) | — |   | (35.9 | ) | — |   | — |   | 75.6 |   | — |   |
| Investment contract guarantees:                                             |       |                                                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| FIA                                                                         |       | (927.2                                                         | )          | (27.1 | ) | — |   | (24.5 | ) | — |   | — |   | (978.8 | ) | — |   |
| GMWB/GMAB                                                                   |       | (73.9                                                          | )          | 20.3 |   | — |   | (1.5 | ) | — |   | — |   | (55.1 | ) | — |   |
| Total Investment contract guarantees                                        |       | (1,001.1                                                       | )          | (6.8 | )(1) | — |   | (26.0 | ) | — |   | — |   | (1,033.9 | ) | — |   |
|                                                                             |            |                                                                |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

| (1) | This amount is   included in Interest credited and other benefits to contract owners on the   Condensed Statements of Operations. All gains and losses on Level 3   liabilities are classified as realized gains (losses) for the purpose of this   disclosure because it is impracticable to track realized and unrealized gains   (losses) separately on a contract-by-contract basis. |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | The Company’s   policy is to recognize transfers in and transfers out as of the beginning of   the reporting period.                                                                                                                                                                                                                                                                |
| (3) | For financial   instruments still held as of March 31. Amounts are included in Net   investment income and Net realized capital losses on the Condensed Statements   of Operations.                                                                                                                                                                                                 |

 

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**ING USA Annuity and Life Insurance Company**

**(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)**

**Notes to  Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwise stated)

 

The transfers out of Level 3 during the three months ended March 31, 2011 in fixed maturities, including securities pledged, are primarily due to the Company’s determination that the market for subprime RMBS securities has become active.  While the valuation methodology has not changed, the Company has concluded that the frequency of transactions in the market for subprime RMBS securities represent regularly occurring market transactions and therefore are now classified as Level 2.

 

The remaining transfers in and out of Level 3 for fixed maturities during the three months ended March 31, 2011, are due to the variation in inputs relied upon for valuation each quarter. Securities that are primarily valued using independent broker quotes when prices are not available from one of the commercial pricing services are reflected as transfers into Level 3, as these securities are generally less liquid with very limited trading activity or where less transparency exists corroborating the inputs to the valuation methodologies. When securities are valued using more widely available information, the securities are transferred out of Level 3 and into Level 1 or 2, as appropriate.

 

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**ING USA Annuity and Life Insurance Company**

**(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)**

**Notes to  Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwise stated)

 

The carrying values and estimated fair values of certain of the Company’s financial instruments were as follows at March 31, 2011 and December 31, 2010.

 
| ** **                                                                                                   | ** ** | **2011**     | ** ** | **2010**  | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|--------------|------------|-----------|------------|
| ** **                                                                                                   | ** ** | **Carrying** | ** ** | **Fair**  | ** ** | **Carrying** | ** ** | **Fair** | ** ** |
| ** **                                                                                                   | ** ** | **Value**    | ** ** | **Value** | ** ** | **Value** | ** ** | **Value** | ** ** |
| Assets:                                                                                                      |       |         |       |      |       |   |   |   |   |
| Fixed maturities, available-for-sale, including   securities pledged                                         |       | $            | 22,079.1   |      | $          | 22,079.1 |   | $ | 21,803.1 |   | $ | 21,803.1 |   |
| Fixed maturities at fair value using the fair   value option                                                 |       | 250.0        |       | 250.0     |       | 237.7 |   | 237.7 |   |
| Equity securities, available-for-sale                                                                        |       | 139.4        |       | 139.4     |       | 150.2 |   | 150.2 |   |
| Mortgage loans on real estate                                                                                |       | 3,041.9      |       | 3,116.3   |       | 2,967.9 |   | 3,036.0 |   |
| Loan - Dutch State obligation                                                                                |       | 780.3        |       | 725.8     |       | 843.9 |   | 795.7 |   |
| Limited partnerships/corporations                                                                            |       | 305.9        |       | 310.4     |       | 295.8 |   | 297.9 |   |
| Policy loans                                                                                                 |       | 119.5        |       | 119.5     |       | 122.1 |   | 122.1 |   |
| Cash, cash equivalents, Short-term investments,   and Short-term investments under securities loan agreement |       | 1,200.8      |       | 1,200.8   |       | 1,155.8 |   | 1,155.8 |   |
| Derivatives                                                                                                  |       | 280.6        |       | 280.6     |       | 293.1 |   | 293.1 |   |
| Other investments                                                                                            |       | 1.9          |       | 1.9       |       | 1.8 |   | 1.8 |   |
| Deposits from affiliates                                                                                     |       | 1,537.3      |       | 1,605.5   |       | 1,600.4 |   | 1,577.3 |   |
| Embedded derivative on reinsurance                                                                           |       | —       |       | —    |       | 20.9 |   | 20.9 |   |
| Assets held in separate accounts                                                                             |       | 45,057.1     |       | 45,057.1  |       | 44,413.3 |   | 44,413.3 |   |
| Liabilities:                                                                                                 |       |         |       |      |       |   |   |   |   |
| Investment contract liabilities:                                                                             |       |         |       |      |       |   |   |   |   |
| Deferred annuities                                                                                           |       | 20,793.2     |       | 20,466.6  |       | 20,819.6 |   | 20,272.4 |   |
| Guaranteed investment contracts and funding   agreements                                                     |       | 2,609.0      |       | 2,342.7   |       | 2,218.3 |   | 1,909.5 |   |
| Supplementary contracts and immediate annuities                                                              |       | 804.0        |       | 726.1     |       | 803.3 |   | 716.8 |   |
| Embedded derivative on reinsurance                                                                           |       | 0.8          |       | 0.8       |       | — |   | — |   |
| Derivatives                                                                                                  |       | 388.5        |       | 388.5     |       | 492.9 |   | 492.9 |   |
| Investment contract guarantees:                                                                              |       |         |       |      |       |   |   |   |   |
| Fixed indexed annuities                                                                                      |       | 1,266.2      |       | 1,266.2   |       | 1,165.5 |   | 1,165.5 |   |
| Guaranteed minimum withdrawal and accumulation   benefits                                                    |       | 66.8         |       | 66.8      |       | 77.0 |   | 77.0 |   |
| Notes to affiliates                                                                                          |       | 435.0        |       | 454.8     |       | 435.0 |   | 447.2 |   |
|                                                                                                              |            |              |            |           |            |  |  |  |  |  |  |  |  |

 

The following disclosures are made in accordance with the requirements of ASC Topic 825 which requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates 

 

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**ING USA Annuity and Life Insurance Company**

**(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)**

**Notes to  Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwise stated)

 

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

 

ASC Topic 825 excludes certain financial instruments, including insurance contracts, and all nonfinancial instruments from its disclosure requirements.  Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.

 

The following valuation methods and assumptions were used by the Company in estimating the fair value of the following financial instruments, which are not carried at fair value on the Condensed Balance Sheets, and therefore not categorized in the fair value hierarchy:

 

*Limited partnerships/corporations*: The fair value for these investments, primarily private equities and hedge funds, is estimated based on the Net Asset Value as provided by the investee.

 

*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.

 

*Loan - Dutch State obligation*: The fair value of the Dutch State loan obligation is estimated utilizing discounted cash flows from the Dutch Strip Yield Curve.

 

*Policy loans*: The fair value of policy loans is equal to the carrying, or cash surrender, value of the loans. Policy loans are fully collateralized by the account value of the associated insurance contracts.

 

*Other investments*: The fair value of other investments is estimated based on the Company’s percentage of ownership of third party appraised value for joint ventures and third party appraised value for real estate.

 

*Deposits from affiliates*: Fair value is estimated based on the fair value of the liabilities for the account values of the underlying contracts, plus the fair value of the unamortized ceding allowance based on the present value of the projected release of the ceding allowance, discounted at risk-free rates, plus a credit spread.

 

*Investment contract liabilities (included in Future policy benefits and claims reserves)*:

 

*With a fixed maturity*: Fair value is estimated by discounting cash flows, including associated expenses for maintaining the contracts, at rates, which are market risk-free rates augmented by credit spreads on current Company credit default swaps. The augmentation is present to account for non-performance risk. A margin for non-financial risks associated with the contracts is also included.

 

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**ING USA Annuity and Life Insurance Company**

**(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)**

**Notes to  Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwise stated)

 

*Without a fixed maturity*: Fair value is estimated as the mean present value of stochastically modeled cash flows associated with the contract liabilities relevant to both the contractholder and to the Company. Here, the stochastic valuation scenario set is consistent with current market parameters, and discount is taken using stochastically evolving short risk-free rates in the scenarios augmented by credit spreads on current Company debt. The augmentation in the discount is present to account for non-performance risk. Margins for non-financial risks associated with the contract liabilities are also included.

 

*Notes to affiliates*: Estimated fair value of the Company’s notes to affiliates is based upon discounted future cash flows using a discount rate approximating the current market rate.

 

Fair value estimates are made at a specific point in time, based on available market information and judgments about various financial instruments, such as estimates of timing and amounts of future cash flows. Such estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument, nor do they consider the tax impact of the realization of unrealized capital gains (losses). In many cases, the fair value estimates cannot be substantiated by comparison to independent markets, nor can the disclosed value be realized in immediate settlement of the instruments. In evaluating the Company’s management of interest rate, price, and liquidity risks, the fair values of all assets and liabilities should be taken into consideration, not only those presented above.

 

***Mortgage Loans on Real Estate***

 

The Company’s mortgage loans on real estate are summarized as follows at March 31, 2011 and December 31, 2010.

 
| ** **                          | ** ** | **2011**   | ** ** | **2010**   | ** ** |
|-------------------------------------|------------|------------|------------|------------|------------|
| ** **                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total commercial mortgage loans     |       | $          | 3,044.7    |       | $          | 2,970.9 |   |
| Collective valuation allowance      |       | (2.8       | )          | (3.0       | )          |
| Total net commercial mortgage loans |       | $          | 3,041.9    |       | $          | 2,967.9 |   |

 

As of March 31, 2011, all commercial mortgage loans are held-for-investment. The Company diversifies its commercial mortgage loan portfolio by geographic region and property type to reduce concentration risk.  The Company manages risk when originating commercial mortgage loans by generally lending only up to 75% of the estimated fair value of the underlying real estate.  Subsequently, the Company continuously evaluates all mortgage loans based on relevant current information including an appraisal of loan-specific credit quality, property characteristics and market trends, and assigns a quality rating using the Company’s internally developed quality rating system. This quality rating is based on the Company’s assessment of the level of concern over future payment according to contract terms. Loan performance is continuously monitored on a loan-

 

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**ING USA Annuity and Life Insurance Company**

**(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)**

**Notes to  Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwise stated)

 

specific basis through the review of borrower submitted appraisals, operating statements, rent revenues and annual inspection reports, among other items. This review ensures properties are performing at a consistent and acceptable level to secure the debt.

 

The Company has established a collective valuation allowance for probable incurred, but not specifically identified, losses related to factors inherent in the lending process. The collective valuation allowance is determined based on historical loss rates as adjusted by current economic information for all loans that are not determined to have an individually-assessed loss.  The changes in the collective valuation allowance were as follows at March 31, 2011 and December 31, 2010.

 
| ** **                                                       | ** ** | **2011**   | ** ** | **2010**   | ** ** |
|------------------------------------------------------------------|------------|------------|------------|------------|------------|
|                                                             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Collective valuation allowance for losses,   beginning of period |       | $          | 3.0        |       | $          | 4.1 |   |
| Addition to / (release of) allowance for losses                  |       | (0.2       | )          | (1.1       | )          |
| Collective valuation allowance for losses, end of   period       |       | $          | 2.8        |       | $          | 3.0 |   |

 

The commercial mortgage loan portfolio is the recorded investment, prior to collective valuation allowances, by the indicated loan-to-value ratio and debt service coverage ratio, as reflected in the following tables at March 31, 2011 and December 31, 2010.

 
| ** **                      | ** ** | **2011****(1)** | ** ** | **2010****(1)** | ** ** |
|---------------------------------|------------|-----------------|------------|-----------------|------------|
| Loan-to-Value Ratio:            |       |            |       |            |       |
| 0% - 50%                        |       | $               | 1,147.6    |            | $          | 1,140.4 |   |
| 50% - 60%                       |       | 743.3           |       | 707.7           |       |
| 60% - 70%                       |       | 926.0           |       | 903.4           |       |
| 70% - 80%                       |       | 206.6           |       | 197.6           |       |
| 80% - 90%                       |       | 21.2            |       | 21.8            |       |
| Total Commercial Mortgage Loans |       | $               | 3,044.7    |            | $          | 2,970.9 |   |

 

----

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

 
| ** **                                                 | ** ** | **2011****(1)** | ** ** | **2010****(1)** | ** ** |
|------------------------------------------------------------|------------|-----------------|------------|-----------------|------------|
| Debt Service Coverage Ratio:                               |       |            |       |            |       |
| Greater than 1.5x                                          |       | $               | 2,117.8    |            | $          | 2,038.3 |   |
| 1.25x - 1.5x                                               |       | 412.1           |       | 387.9           |       |
| 1.0x - 1.25x                                               |       | 238.0           |       | 255.2           |       |
| Less than 1.0x                                             |       | 140.9           |       | 144.0           |       |
| Mortgages secured by loans on land or construction   loans |       | 135.9           |       | 145.5           |       |
| Total Commercial Mortgage Loans                            |       | $               | 3,044.7    |            | $          | 2,970.9 |   |

 

----

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

 

The Company believes it has a high quality mortgage loan portfolio with substantially all of commercial mortgages classified as performing. The Company defines delinquent commercial mortgage loans consistent with industry practice as 60 days past due. As of March 31, 2011, there were no commercial loans classified as delinquent. The 

 

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**ING USA Annuity and Life Insurance Company**

**(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)**

**Notes to  Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwise stated)

 

Company’s policy is to recognize interest income until a loan becomes 90 days delinquent or foreclosure proceedings are commenced, at which point interest accrual is discontinued. Interest accrual is not resumed until past due payments are brought current. At March 31, 2011, there were no commercial mortgage loans on nonaccrual status.

 

All commercial mortgages are rated for the purpose of quantifying the level of risk.  Those loans with higher risk are placed on a watch list and are closely monitored for collateral deficiency or other credit events that may lead to a potential loss of principal or interest.  If the value of any mortgage loan is determined to be impaired (i.e., when it is probable that the Company will be unable to collect on all amounts due according to the contractual terms of the loan agreement), the carrying value of the mortgage loan is reduced to either the present value of expected cash flows from the loan, discounted at the loan’s effective interest rate, or fair value of the collateral.

 

The carrying values and unpaid principal balances (prior to any charge-off) of impaired commercial mortgage loans were as follows as of March 31, 2011 and December 31, 2010.

 
| ** **                                  | ** ** | **2011**   | ** ** | **2010**   | ** ** |
|---------------------------------------------|------------|------------|------------|------------|------------|
| ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Impaired loans without valuation allowances |       | $          | 7.1        |       | $          | 16.5 |   |
|                                        |       |       |       |       |       |
| Unpaid principal balance of impaired loans  |       | $          | 8.6        |       | $          | 18.7 |   |

 

The following is information regarding impaired loans, restructured loans, loans 90 days or more past due and loans in the process of foreclosure at March 31, 2011 and December 31, 2010.

 
| ** **                                                          | ** ** | **2011** | ** ** | **2010** | ** ** |
|---------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                |       |     |       |     |       |
| Impaired loans, average investment during the   period              |       | $        | 11.8       |     | $          | 32.4 |   |
| Interest income recognized on impaired loans, on   an accrual basis |       | —   |       | 1.3      |       |
| Interest income recognized on impaired loans, on a   cash basis     |       | —   |       | 1.4      |       |
|                                                                     |            |          |            |          |            |  |  |

 

As of March 31, 2011 and December 31, 2010, there were no Restructured loans, Interest income recognized on restructured loans, Loans 90 days or more past due, interest no longer accruing, at amortized cost, Loans in foreclosure, at amortized cost, and Unpaid principal balance of loans 90 days or more past due, interest no longer accruing.

 

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**ING USA Annuity and Life Insurance Company**

**(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)**

**Notes to  Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwise stated)

 

***Derivative Financial Instruments***

 

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

 

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

 

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

 

The Company also has investments in certain fixed maturity instruments, and has issued certain retail annuity products, that contain embedded derivatives whose market value is at least partially determined by, among other things, levels of or changes in domestic and/or foreign interest rates (short-term or long-term), exchange rates, prepayment rates, equity markets, or credit ratings/spreads.

 

Embedded derivatives within retail annuity products are included in Future policy benefits and claims reserves on the Condensed Balance Sheets, and changes in the fair value are recorded in Interest credited and other benefits to contract owners in the Condensed Statements of Operations.

 

In addition, the Company has entered into a coinsurance with funds withheld arrangement which contains an embedded derivative whose fair value is based on the change in the fair value of the underlying assets held in trust.  The embedded derivative within the coinsurance funds withheld arrangement is included in Future policy benefits and claims reserves on the Condensed Balance Sheets, and changes in the fair value are 

 

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**ING USA Annuity and Life Insurance Company**

**(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)**

**Notes to  Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwise stated)

 

recorded in Interest credited and other benefits to contract owners in the Condensed Statement of Operations.

 

The Company enters into the following derivatives:

 

*Interest rate caps*: Interest rate caps are used to manage the interest rate risk in the Company’s fixed maturity portfolio.  Interest rate caps are purchased contracts that are used by the Company to hedge annuity products against rising interest rates.

 

*Interest rate swaps*: Interest rate swaps are used to manage the interest rate risk in the Company’s fixed maturity portfolio, as well as the Company’s liabilities.  Interest rate swaps represent contracts that require the exchange of cash flows at regular interim periods, typically monthly or quarterly.

 

*Foreign exchange swaps*: Foreign exchange swaps are used to reduce the risk of a change in the value, yield, or cash flow with respect to invested assets.  Foreign exchange swaps represent contracts that require the exchange of foreign currency cash flows for U.S. dollar cash flows at regular interim periods, typically quarterly or semi-annually.

 

*Credit default swaps*: Credit default swaps are used to reduce the credit loss exposure with respect to certain assets that the Company owns, or to assume credit exposure on certain assets that the Company does not own.  Payments are made to or received from the counterparty at specified intervals and amounts for the purchase or sale of credit protection.  In the event of a default on the underlying credit exposure, the Company will either receive an additional payment (purchased credit protection) or will be required to make an additional payment (sold credit protection) equal to par minus recovery value of the swap contract.

 

*Total return swaps*: Total return swaps are used to hedge against a decrease in variable annuity account values, which are invested in certain funds. The difference between floating-rate interest amounts calculated by reference to an agreed upon notional principal amount is exchanged with other parties at specified intervals.

 

*Forwards*: Certain forwards are acquired to hedge certain CMO assets that are held by the Company against movements in interest rates, particularly mortgage rates.  On the settlement date, the Company will either receive a payment (interest rate drops on purchased forwards or interest rate rises on sold forwards) or will be required to make a payment (interest rate rises on purchased forwards or interest rate drops on sold forwards). The Company also uses currency forward contracts to hedge policyholder liabilities in variable annuity contracts which are linked to foreign indexes. The currency fluctuations may result in a decrease in variable annuity account values, which would increase the possibility of the Company incurring an expense for guaranteed benefits in excess of account values.

 

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**ING USA Annuity and Life Insurance Company**

**(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)**

**Notes to  Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwise stated)

 

*Futures*: Futures contracts are used to hedge against a decrease in certain equity indices. Such decreases may result in a decrease in variable annuity account values, which would increase the possibility of the Company incurring an expense for guaranteed benefits in excess of account values.  Futures contracts are also used to hedge against an increase in certain equity indices.  Such increases may result in increased payments to contract holders of fixed indexed annuity contracts, and the futures income would serve to offset this increased expense.

 

*Options*: Call options are used to hedge against an increase in the various equity indices. Such increase may result in increased payments to contract holders of FIA contracts, and the options offset this increased expense.

 

*Embedded derivatives*: The Company also has issued certain retail annuity products, that contain embedded derivatives whose market value is at least partially determined by, among other things, levels of or changes in domestic and/or foreign interest rates (short-term or long-term), exchange rates, prepayment rates, equity rates, or credit ratings/spreads. In addition, the Company has entered into a coinsurance with funds withheld arrangement which contains an embedded derivative whose fair value is based on the change in the fair value of the underlying assets held in trust.

 

The notional amounts and fair values of derivatives were as follows as of March 31, 2011 and December 31, 2010.

 
| ** **                                          | ** ** | **2011**     | ** ** | **2010**            | ** ** |
|-----------------------------------------------------|------------|--------------|------------|---------------------|------------|
| ** **                                          | ** ** | **Notional** | ** ** | **Asset**           | ** ** | **Liability** | ** ** | **Notional** | ** ** | **Asset** | ** ** | **Liability** | ** ** |
| ** **                                          | ** ** | **Amount**   | ** ** | **Fair Value** | ** ** | **Fair Value** | ** ** | **Amount** | ** ** | **Fair Value** | ** ** | **Fair Value** | ** ** |
| Derivatives: Qualifying for hedge accounting(1)     |       |         |       |                |       |   |   |   |   |   |   |   |   |
| Interest rate contracts                             |       | —       |       | $                   | —     |   | $ | — |   | 79.5 |   | $ | 0.5 |   | $ | 7.2 |   |
| Foreign exchange contracts                          |       | —       |       | —              |       | — |   | 25.4 |   | — |   | 0.2 |   |
| Derivatives: Non-Qualifying for hedge accounting(1) |       |         |       |                |       |   |   |   |   |   |   |   |   |
| Interest rate contracts                             |       | 13,764.1     |       | 131.4               |       | 306.0 |   | 17,450.9 |   | 176.6 |   | 412.3 |   |
| Foreign exchange contracts                          |       | 1,036.5      |       | 4.9                 |       | 49.5 |   | 908.4 |   | 5.1 |   | 41.9 |   |
| Equity contracts                                    |       | 9,150.9      |       | 140.7               |       | 20.8 |   | 9,269.8 |   | 107.7 |   | 16.8 |   |
| Credit contracts                                    |       | 340.5        |       | 3.6                 |       | 12.2 |   | 333.8 |   | 3.2 |   | 14.5 |   |
|                                                |       |         |       |                |       |   |   |   |   |   |   |   |   |
| Embedded derivatives:                               |       |         |       |                |       |   |   |   |   |   |   |   |   |
| Within retail annuity products(2)                   |       | N/A          |       | —              |       | 1,333.0 |   | N/A |   | — |   | 1,242.5 |   |
| Within reinsurance agreement (2)                    |       | N/A          |       | —              |       | 0.8 |   | N/A |   | 20.9 |   | — |   |
| Total                                               |       |         |       | $                   | 280.6      |   | $ | 1,722.3 |   |   |   | $ | 314.0 |   | $ | 1,735.4 |   |

 

----

| N/A -   Not applicable. |
|-------------------------|
| (1)                     | The fair values   of these derivatives are reported in Derivatives or Other liabilities on the   Condensed Balance Sheets. |
| (2)                     | The fair values   of embedded derivatives within retail annuity products and reinsurance   agreements are reported in Future policy benefits and claim reserves on the   Condensed Balance Sheets. |

 

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**ING USA Annuity and Life Insurance Company**

**(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)**

**Notes to  Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwise stated)

 

Net realized gains (losses) on derivatives were as follows for the three months ended March 31, 2011 and 2010.

 
| ** **                                           | ** ** | **For the Three Months Ended March 31,** | ** ** |
|------------------------------------------------------|------------|------------------------------------------------------------------------|------------|
| ** **                                           | ** ** | **2011**                                                               | ** ** | **2010** | ** ** |
| Derivatives: Qualifying for hedge accounting(1):     |       | $                                                                      |       |   | $ | ** ** |   |
| Interest rate contracts                              |       | —                                                                 |       | (1.2 | ) |
| Derivatives: Non-Qualifying for hedge accounting(1): |       |                                                                   |       |   |   |
| Interest rate contracts                              |       | (55.2                                                                  | )          | (13.7 | ) |
| Foreign exchange contracts                           |       | (32.0                                                                  | )          | 41.5 |   |
| Equity contracts                                     |       | (264.1                                                                 | )          | (310.4 | ) |
| Credit contracts                                     |       | 3.3                                                                    |       | 0.3 |   |
| Embedded derivatives:                                |       |                                                                   |       |   |   |
| Within retail annuity products(2)                    |       | (90.5                                                                  | )          | (27.1 | ) |
| Within reinsurance agreement (2)                     |       | (21.7                                                                  | )          | 20.3 |   |
| Total                                                |       | $                                                                      | (460.2     | ) | $ | (290.3 | ) |

 

----

| *   | Less than $0.1.                                                                                                                         |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------|
| (1) | Changes in value   are included in Net realized capital losses on the Condensed Statements of   Operations.                             |
| (2) | Changes in value   are included in Interest credited and other benefits to contract owners on   the Condensed Statements of Operations. |

 

*Credit Default Swaps*

 

The Company has entered into various credit default swaps. When credit default swaps are sold, the Company assumes credit exposure to certain assets that it does not own.  Credit default swaps may also be purchased to reduce credit exposure in the Company’s portfolio. Credit default swaps involve a transfer of credit risk from one party to another in exchange for periodic payments.  These instruments are typically written for a maturity period of five years and do not contain recourse provisions, which would enable the seller to recover from third parties.  The Company has International Swaps and Derivatives Association, Inc. (“ISDA”) agreements with each counterparty with which it conducts business and tracks the collateral positions for each counterparty.  To the extent cash collateral is received, it is included in Payables under securities loan agreement, including collateral held, on the Condensed Balance Sheets and is reinvested in short-term investments.  Collateral held is used in accordance with the Credit Support Annex (“CSA”) to satisfy any obligations.  Investment grade bonds owned by the Company are the source of noncash collateral posted, which is reported in Securities pledged on the Condensed Balance Sheets.  In the event of a default on the underlying credit exposure, the Company will either receive an additional payment (purchased credit protection) or will be required to make an additional payment (sold credit protection) equal to par minus recovery value of the swap contract. At March 31, 2011, the fair value of credit default swaps of $3.6 and $12.2 was included in Derivatives and Other liabilities, respectively, on the Condensed Balance Sheets.  At December 31, 2010, the fair value of credit default swaps of $3.2 and $14.5 was included in Derivatives and Other liabilities, respectively, on the Condensed Balance Sheets.  As of March 31, 2011 and December 31, 2010, the 

 

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**ING USA Annuity and Life Insurance Company**

**(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)**

**Notes to  Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwise stated)

 

maximum potential future exposure to the Company on the sale of credit protection under credit default swaps was $315.6 and $308.1, respectively.

 

**4.****            ****Deferred Policy Acquisition Costs (“DAC”) and Value of Business Acquired (“VOBA”)**

 

Beginning in the first quarter of 2011, the Company implemented a reversion to the mean technique of estimating its short-term equity market return assumptions. This change in estimate was applied prospectively in first quarter 2011. The reversion to the mean technique is a common industry practice in which DAC and VOBA unlocking for short-term equity returns only occurs if equity market performance falls outside established parameters.

 

Activity within DAC was as follows for the three months ended March 31, 2011 and 2010.

 
| ** **                                                                   | ** ** | **2011** | ** ** | **2010** | ** ** |
|------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Balance at January 1                                                    |       | $        | 3,155.0    |     | $          | 3,718.0 |   |
| Deferrals of commissions and expenses                                        |       | 37.1     |       | 63.4     |       |
| Amortization:                                                                |       |     |       |     |       |
| Amortization                                                                 |       | (125.0   | )          | (115.1   | )          |
| Interest accrued at 5% to 6%                                                 |       | 55.2     |       | 57.3     |       |
| Net amortization included in the Condensed   Statements of Operations        |       | (69.8    | )          | (57.8    | )          |
| Change in unrealized capital gains/losses on   available-for-sale securities |       | 21.4     |       | (131.6   | )          |
| Balance at March 31                                                     |       | $        | 3,143.7    |     | $          | 3,592.0 |   |

 

Activity within VOBA was as follows for the three months ended March 31, 2011 and 2010.

 
| ** **                                                                   | ** ** | **2011** | ** ** | **2010** | ** ** |
|------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Balance at January 1                                                    |       | $        | 68.1       |     | $          | 113.4 |   |
| Amortization:                                                                |       |     |       |     |       |
| Amortization                                                                 |       | (2.0     | )          | (9.1     | )          |
| Interest accrued at 5% to 6%                                                 |       | 1.0      |       | 1.3      |       |
| Net amortization included in the Condensed   Statements of Operations        |       | (1.0     | )          | (7.8     | )          |
| Change in unrealized capital gains/losses on   available-for-sale securities |       | (1.8     | )          | (6.8     | )          |
| Balance at March 31                                                     |       | $        | 65.3       |     | $          | 98.8 |   |

 

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**ING USA Annuity and Life Insurance Company**

**(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)**

**Notes to  Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwise stated)

 

**5.****            ****Capital Contributions and Dividends**

 

During the three months ended March 31, 2011 and 2010, the Company received $44.0 and $239.0, respectively, in capital contributions from its Parent.

 

During the three months ended March 31, 2011 and 2010, the Company did not pay any dividends or return of capital distributions on its capital stock to its Parent.

 

**6.****            ****Income Taxes**

 

The Company’s effective tax rates for the three months ended March 31, 2011 and 2010 were 44.1% and (22.2)%, respectively. The effective rates differ from the statutory rate due to the following items:

 
| ** **                      | ** ** | **Three Months Ended March 31,** | ** ** |
|---------------------------------|------------|------------------------------------------------------|------------|
| ** **                      | ** ** | **2011**                                             | ** ** | **2010** | ** ** |
| Statutory rate                  |       | 35.0                                                 | %          | 35.0 | % |
|                            |       |                                                 |       |   |   |
| Dividends received deduction    |       | (38.1                                                | )%         | (188.5 | )% |
| Valuation allowance             |       | 39.6                                                 | %          | 136.6 | % |
| Audit settlements               |       | 8.8                                                  | %          | 0 | % |
| Tax Credits                     |       | (1.3                                                 | )%         | (6.3 | )% |
| Other                           |       | 0.1                                                  | %          | 1.0 | % |
| Effective rate at March 31 |       | 44.1                                                 | %          | (22.2 | )% |

 

Valuation allowances are provided when it is considered unlikely that deferred tax assets will be realized. At March 31, 2011 and December 31, 2010, the Company had a tax valuation allowance of $207.5 and $187.5, respectively, related to realized and unrealized capital losses.  As of March 31, 2011 and December 31, 2010, the Company had a full tax valuation allowance of $12.1 related to foreign tax credits, the benefit of which is uncertain.

 

***Unrecognized Tax Benefits***

 

Reconciliations of the change in the unrecognized income tax benefits for the three months ended March 31, 2011 and December 31, 2010 are as follows:

 
| ** **                                            | ** ** | **2011** | ** ** | **2010** | ** ** |
|-------------------------------------------------------|------------|----------|------------|----------|------------|
| Balance at beginning of period                        |       | $        | 28.0       |     | $          | 60.3 |   |
| Additions for tax positions related to prior years    |       | 6.1      |       | 28.0     |       |
| Reductions for tax positions related to prior   years |       | —   |       | (60.2    | )          |
| Reductions for settlements with taxing authorities    |       | (25.3    | )          | (0.1     | )          |
| Balance at end of period                              |       | $        | 8.8        |     | $          | 28.0 |   |

 

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**ING USA Annuity and Life Insurance Company**

**(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)**

**Notes to  Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwise stated)

 

The Company had $2.7 of unrecognized tax benefits as of March 31, 2011 and December 31, 2010, respectively, that would affect the Company’s effective tax rate if recognized.

 

***Tax Regulatory Matters***

 

In March 2011, the IRS completed its examination of the Company’s returns for tax year 2009.  The 2009 settlement did not have a material impact on the Company’s financial position.

 

The Company is currently under audit by the IRS for tax year 2010 and it is expected that the examination of tax year 2010 will be finalized within the next twelve months.  Upon finalization of the IRS examination it is reasonably possible that the unrecognized tax benefits will decrease by up to $6.1.  The timing of the payment of the remaining allowance of $2.7 cannot be reliably estimated.  The Company and the IRS have agreed to participate in the Compliance Assurance Program (“CAP”) for tax years 2010 and 2011.

 

**7.****            ****Financing Agreements**

 

***Reciprocal Loan Agreement***

 

The Company maintains a reciprocal loan agreement with ING America Insurance Holdings, Inc. (“ING AIH”), an affiliate, to facilitate the handling of unanticipated short-term cash requirements that arise in the ordinary course of business.  Under this agreement, which became effective in January 2004 and expires on January 14, 2014, either party can borrow from the other up to 3.0% of the Company’s statutory admitted assets as of the preceding December 31.  Interest on any Company borrowing is charged at the rate of ING AIH’s cost of funds for the interest period, plus 0.15%.  Interest on any ING AIH borrowing is charged at a rate based on the prevailing interest rate of U.S. commercial paper available for purchase with a similar duration.

 

Under this agreement, the Company did not incur any interest expense for the three months ended March 31, 2011 and 2010.  The Company earned interest income of $0.3 for the three months ended March 31, 2011 and 2010.  Interest expense and income are included in Interest expense and Net investment income, respectively, on the Condensed Statements of Operations.  As of March 31, 2011 and December 31, 2010, the Company had an outstanding receivable of $375.2 and $593.6, respectively, with ING AIH under the reciprocal loan agreement.

 

For information on the Company’s additional financing agreements, see the Financing Agreements footnote to the Financial Statements included in the Company’s 2010 Annual Report on Form 10-K.

 

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**ING USA Annuity and Life Insurance Company**

**(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)**

**Notes to  Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwise stated)

 

**8.****            ****Commitments and Contingent Liabilities**

 

***Commitments***

 

Through the normal course of investment operations, the Company commits to either purchase or sell securities, commercial mortgage loans, or money market instruments, at a specified future date and at a specified price or yield.  The inability of counterparties to honor these commitments may result in either a higher or lower replacement cost. Also, there is likely to be a change in the value of the securities underlying the commitments.

 

As of March 31, 2011, the Company had off-balance sheet commitments to purchase investments equal to their fair value of $334.5, of which $150.5 was with related parties. As of December 31, 2010, the Company had off-balance sheet commitments to purchase investments equal to their fair value of $529.2, of which $153.0 was with related parties. During the three months ended March 31, 2011, $5.0 was funded to related parties under these commitments.

 

***Collateral***

 

Under the terms of the Company’s Over-The-Counter Derivative ISDA Agreements (“ISDA Agreements”), the Company may receive from, or deliver to, counterparties, collateral to assure that all terms of the ISDA Agreements will be met with regard to the CSA. The terms of the CSA call for the Company to pay interest on any cash received equal to the Federal Funds rate. As of March 31, 2011 and December 31, 2010, the Company held $61.7 and $57.9, respectively, of cash collateral, related to derivative contracts, which was included in Payables under securities loan agreement, including collateral held, on the Condensed Balance Sheets. In addition, as of March 31, 2011 and December 31, 2010, the Company delivered collateral of $639.5 and $749.7, respectively, in fixed maturities pledged under derivatives contracts, which was included in Securities pledged on the Condensed Balance Sheets.

 

***Litigation***

 

The Company is involved in threatened or pending lawsuits/arbitrations arising from the normal conduct of business. Due to the climate in insurance and business litigation/arbitrations, 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/arbitrations, in light of existing insurance, reinsurance, and established reserves, it is the opinion of management that the disposition of such lawsuits/arbitrations will not have a materially adverse effect on the Company’s operations or financial position.

 

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**ING USA Annuity and Life Insurance Company**

**(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)**

**Notes to  Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwise stated)

 

***Regulatory Matters***

 

As with many financial services companies, the Company and its affiliates periodically receive informal and formal requests for information from various state and federal governmental agencies and self-regulatory organizations in connection with inquiries and investigations of the products and practices of the Company or the financial services industry.  Some of these investigations and inquiries could result in regulatory action against the Company.  The potential outcome of such action is difficult to predict but could subject the Company or its affiliates to adverse consequences, including, but not limited to, settlement payments, penalties, fines, and other financial liability.  It is not currently anticipated that the outcome of any such action will have a material adverse effect on ING or ING’s U.S.-based operations, including the Company.  It is the practice of the Company and its affiliates to cooperate fully in these matters.

 

**9.****            ****Accumulated Other Comprehensive Income (Loss)**

 

Shareholder’s equity included the following components of Accumulated other comprehensive loss as of March 31, 2011 and 2010.

 
| ** **                                                      | ** ** | **2011** | ** ** | **2010** | ** ** |
|-----------------------------------------------------------------|------------|----------|------------|----------|------------|
| Net unrealized capital gains (losses):                          |       |     |       |     |       |
| Fixed maturities                                                |       | $        | 720.2      |     | $          | (92.4 | ) |
| Equity securities, available-for-sale                           |       | 7.2      |       | 7.0      |       |
| Derivatives                                                     |       | (1.0     | )          | —   |       |
| DAC/VOBA adjustment on available-for-sale   securities          |       | (438.7   | )          | (202.7   | )          |
| Sales inducements adjustment on available-for-sale   securities |       | (72.0    | )          | (25.4    | )          |
| Other investments                                               |       | (35.6    | )          | (25.0    | )          |
| Unrealized capital gains (losses), before tax                   |       | 180.1    |       | (338.5   | )          |
| Net deferred income tax (liability) asset                       |       | (69.9    | )          | 111.6    |       |
| Deferred tax asset valuation allowance                          |       | 61.9     |       | (66.5    | )          |
| Net unrealized capital gains (losses):                          |       | 172.1    |       | (293.4   | )          |
| Pension liability, net of tax                                   |       | (2.6     | )          | (3.2     | )          |
| Accumulated other comprehensive income (loss)                   |       | $        | 169.5      |     | $          | (296.6 | ) |

 

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**ING USA Annuity and Life Insurance Company**

**(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)**

**Notes to  Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwise stated)

 

Changes in Accumulated other comprehensive income (loss), net of DAC, VOBA, and tax, related to changes in unrealized capital gains (losses) on securities, including securities pledged, were as follows for the three months ended March 31, 2011 and 2010.

 
| ** **                                                      | ** ** | **2011** | ** ** | **2010** | ** ** |
|-----------------------------------------------------------------|------------|----------|------------|----------|------------|
| Fixed maturities                                                |       | $        | 39.0       |     | $          | 462.3 |   |
| Equity securities, available-for-sale                           |       | (0.9     | )          | 3.5      |       |
| Derivatives                                                     |       | (1.3     | )          | —   |       |
| DAC/VOBA adjustment on available-for-sale   securities          |       | 19.6     |       | (138.4   | )          |
| Sales inducements adjustment on available-for-sale   securities |       | 8.4      |       | (25.3    | )          |
| Other investments                                               |       | 0.1      |       | —   |       |
| Unrealized capital gains (losses), before tax                   |       | 64.9     |       | 302.1    |       |
| Deferred income tax (liability) asset                           |       | (22.7    | )          | (105.7   | )          |
| Deferred tax asset valuation allowance                          |       | (5.0     | )          | 39.5     |       |
| Net change in unrealized capital gains (losses)                 |       | $        | 37.2       |     | $          | 235.9 |   |

 

Changes in unrealized capital gains on securities, including securities pledged and noncredit impairments, as recognized in Accumulated other comprehensive income (loss), reported net of DAC, VOBA, and income taxes, were as follows for the three months ended March 31, 2011 and 2010.

 
| ** **                                                                               | ** ** | **2011** | ** ** | **2010** | ** ** |
|------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Net unrealized capital holding gains arising   during the period(1)                      |       | $        | 13.5       |     | $          | 208.9 |   |
| Reclassification adjustment for gains and other   items included in Net income (loss)(2) |       | 28.7     |       | (12.5    | )          |
| Change in deferred tax valuation allowance                                               |       | (5.0     | )          | 39.5     |       |
| Net change in unrealized capital gains on   securities                                   |       | $        | 37.2       |     | $          | 235.9 |   |

 

----

| (1) | Pretax net   unrealized capital holding gains (losses) arising during the period were   $20.8 and $321.4 for the three months ended March 31, 2011 and 2010,   respectively. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Pretax   reclassification adjustments for gains (losses) and other items included in   Net income (loss) were $(44.2) and $19.3                                                   |

 

The reclassification adjustments for gains (losses) and other items included in Net income (loss) in the above table are determined by specific identification of each security sold during the period.

 

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**Item 2.****          ****Management’s Narrative Analysis of the Results of Operations and Financial Condition**

(Dollar amounts in millions, unless otherwise stated)

 

**Overview**

 

The following narrative analysis presents a review of the results of operations of ING USA Annuity and Life Insurance Company (“ING USA” or the “Company”, as appropriate) for each of the three months ended March 31, 2011 and 2010, and financial condition as of March 31, 2011 and December 31, 2010. This item should be read in its entirety and in conjunction with the condensed financial statements and related notes, which can be found under Part I, Item 1. contained herein, as well as the “Management’s Narrative Analysis of the Results of Operations and Financial Condition” section contained in the Company’s 2010 Annual Report on Form 10-K.

 

**Forward-Looking Information/Risk Factors**

 

In connection with the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, the Company cautions readers regarding certain forward-looking statements contained in this report and in any other statements made by, or on behalf of, the Company, whether or not in future filings with the Securities and Exchange Commission (“SEC”). Forward-looking statements are statements not based on historical information and which relate to future operations, strategies, financial results, or other developments.  Statements using verbs such as “expect,” “anticipate,” “believe,” or words of similar import, generally involve forward-looking statements.  Without limiting the foregoing, forward-looking statements include statements that represent the Company’s beliefs concerning future levels of sales and redemptions of the Company’s products, investment spreads and yields, or the earnings and profitability of the Company’s activities.

 

Forward-looking statements are necessarily based on estimates and assumptions that are inherently subject to significant business, economic, and competitive uncertainties and contingencies, many of which are beyond the Company’s control and many of which are subject to change. These uncertainties and contingencies could cause actual results to differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Company. Whether or not actual results differ materially from forward-looking statements may depend on numerous foreseeable and unforeseeable developments, including, but not limited to the following:

 
| 1. | While the global economy continues to recover from the financial crisis   and subsequent recession, risks remain for the United States and other world   economies. The uncertainty concerning current global market conditions, and   the impact it has on the U.S. economy, has affected and may continue to   affect the Company’s results of operations. |
|----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2. | Adverse financial market conditions,   changes in rating agency standards and practices and/or actions taken by   ratings agencies may significantly affect the Company’s ability to meet   liquidity needs, access to capital and cost of capital.                                                                                                          |
| 3. | Circumstances associated with   implementation of ING Groep’s recently announced global business strategy and   the final restructuring plan submitted to the European Commission (“EC”) in   connection with its review of ING Groep’s                                                                                                       |

 

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|   | receipt of state aid from the State of the   Netherlands (the “Dutch State”) could adversely affect the Company’s results   of operations and financial condition.                                                                                                                                                                                                                                                                                                                                                        |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.     | The amount of statutory capital that the   Company holds and its risk-based capital (“RBC”) ratio can vary significantly from time to time and is   sensitive to a number of factors, many of which are outside of the Company’s   control, and influences its financial strength and credit ratings.                                                                                                                                                                                                                     |
| 5.     | The Company experienced ratings downgrades in 2009 and 2010 and may   experience additional future downgrades in the Company’s ratings, which may   negatively affect profitability, financial condition, and access to   liquidity.                                                                                                                                                                                                                                                                                                |
| 6.     | The new federal financial regulatory   reform law, its implementing regulations and other financial regulatory   reform initiatives, could have adverse consequences for the financial   services industry, including the Company and/or materially affect the   Company’s results of operations, financial condition and liquidity.                                                                                                                                                                                                |
| 7.     | The valuation of   many of the Company’s financial instruments includes methodologies,   estimations and assumptions that are subject to differing interpretations and   could result in changes to investment valuations that may materially   adversely affect results of operations and financial condition.                                                                                                                                                                                                                     |
| 8.     | The   determination of the amount of impairments taken on the Company’s investments   is subjective and could materially impact results of operations.                                                                                                                                                                                                                                                                                                                                                                              |
| 9.     | If assumptions   used in estimating future gross profits differ from actual experience or if   an estimation technique used to estimate future gross profits is modified,   the Company may be required to accelerate the amortization of Deferred   Acquisition Costs (“DAC”), which could have a material adverse effect on   results of operations and financial condition.                                                                                                                                                 |
| 10.    | Changes in underwriting and actual   experience could materially affect profitability.                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 11.    | The Company may be required to establish   an additional valuation allowance against the deferred income tax asset if   the Company’s business does not generate sufficient taxable income or if the   Company’s tax planning strategies are modified based on new or revised accounting   principles generally accepted in the United States (“US GAAP”) requirements.   Increases in the deferred tax valuation allowance could have a material   adverse effect on results of operations and financial condition. |
| 12.    | Reinsurance subjects the Company to the credit risk of reinsurers and   may not be adequate to protect against losses arising from ceded reinsurance.                                                                                                                                                                                                                                                                                                                                                                                    |
| 13.    | Offshore reinsurance subjects the Company   to the risk that the reinsurer is unable to provide acceptable credit for   reinsurance.                                                                                                                                                                                                                                                                                                                                                                                                     |
| 14.    | The Company’s   risk management program attempts to balance a number of   important factors including regulatory capital, risk based capital,   liquidity, earnings, and other factors. Certain actions taken as part of our   risk management strategy could result in materially lower or more volatile US GAAP earnings in   periods of changes in equity markets.                                                                                                                                                               |
| 15.    | The inability of counterparties to meet   their financial obligations could have an adverse effect on the Company’s   results of operations.                                                                                                                                                                                                                                                                                                                                                                                        |
| 16.    | Changes in reserve estimates may reduce   profitability.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 17.    | A loss of or significant change in key product distribution   relationships could materially affect sales.                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 18.    | Competition could negatively affect the ability to maintain or   increase profitability.                                                                                                                                                                                                                                                                                                                                                                                                                                                 |

 

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| 19. | Changes in federal income tax law or interpretations of existing tax   law could affect profitability and financial condition by making some   products less attractive to contract owners and increasing tax costs of   contract owners or the Company.                                                                                                                                                                                                      |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 20. | The Company may   be adversely affected by increased governmental and regulatory scrutiny or   negative publicity.                                                                                                                                                                                                                                                                                                                                            |
| 21. | A loss of key employees could increase the Company’s operational   risks and could adversely affect the effectiveness of internal controls.                                                                                                                                                                                                                                                                                                              |
| 22. | Litigation may adversely affect profitability and financial   condition.                                                                                                                                                                                                                                                                                                                                                                                      |
| 23. | The Company’s businesses are heavily regulated, and changes in   regulation in the United States and regulatory investigations may reduce   profitability.                                                                                                                                                                                                                                                                                               |
| 24. | The Company’s products are subject to   extensive regulation and failure to meet any of the complex product   requirements may reduce profitability.                                                                                                                                                                                                                                                                                                     |
| 25. | Failure of a Company operating or   information system or a compromise of security with respect to an operating   or information system or portable electronic device or a failure to implement   system modifications or a new accounting, actuarial or other operating system   effectively could adversely affect the Company’s results of operations and   financial condition or the effectiveness of internal controls over financial   reporting. |
| 26. | Requirements to post collateral or make payments due to declines in   market value on assets posted as collateral may adversely affect liquidity.                                                                                                                                                                                                                                                                                                             |
| 27. | Defaults or   delinquencies in the commercial mortgage loan portfolio may adversely affect   the Company’s profitability                                                                                                                                                                                                                                                                                                                                 |
| 28. | The occurrence of unidentified or   unanticipated risks within the Company’s risk management programs could   negatively affect the Company’s business or result in losses.                                                                                                                                                                                                                                                                         |
| 29. | The occurrence of natural or man-made   disasters may adversely affect the Company’s results of operations and   financial condition.                                                                                                                                                                                                                                                                                                                    |

 

Investors are also directed to consider the risks and uncertainties discussed in this Item 2. and in Item 1A. of Part II contained herein, as well as in other documents filed by the Company with the SEC. Except as may be required by the federal securities laws, the Company disclaims any obligation to update forward-looking information.

 

**Basis of Presentation**

 

ING USA Annuity and Life Insurance Company (“ING USA” or the “Company,” as appropriate) is a stock life insurance company domiciled in the State of Iowa and provides financial products and services in the United States.  ING USA is authorized to conduct its insurance business in all states, except New York, and the District of Columbia.

 

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

 

As part of a restructuring plan approved by the EC, ING has agreed to separate its banking and insurance businesses by 2013.  ING intends to achieve this separation by divestment of its insurance and investment management operations, including the Company.  ING has announced that it will explore all options for implementing the separation including one or more initial public offerings, sales, or a combination thereof.  On November 10, 2010, ING announced that while the option of one global initial public offering (“IPO”) remains open, ING and its U.S. insurance affiliates, including the Company, are going to prepare for a base case of two IPOs: one Europe-led IPO and one separate U.S.-focused IPO.  On November 10, 2010, ING also announced that management of ING’s U.S. insurance operations is implementing a program to sharpen the strategic focus of the U.S. insurance business on life insurance and retirement services while reducing annual expenses for overall U.S. Insurance operations by approximately $125.0 per year.  The objective of these initiatives is to create a stronger and more profitable U.S. insurance business in preparation for a potential IPO.  See the “Recent Initiatives” section included in Liquidity and Capital Resources for a description of the key components of the ING restructuring plan.

 

The Company has one operating segment.

 

**Critical Accounting Policies**

 

There have been no material changes to the Company’s critical accounting policies since the filing of the Company’s 2010 Annual Report on Form 10-K.

 

**Results of Operations**

 

*Overview*

 

Products currently offered by the Company include immediate and deferred fixed annuities, designed to address individual customer needs for tax-advantaged savings, retirement needs, and wealth-protection concerns, and guaranteed investment contracts and funding agreements (collectively referred to as “GICs”), sold primarily to institutional investors and corporate benefit plans.

 

On April 9, 2009, ING USA’s ultimate parent, ING, announced a global business strategy which identified certain core and non-core businesses and geographies, stated ING’s intention to explore divestiture of non-core businesses over time, withdraw from certain non-core geographies, limit future acquisitions and implement enterprise-wide expense reductions. In particular, with respect to ING’s U.S. insurance operations, ING is seeking to further reduce its risk by focusing on individual life products, retirement services and a new suite of simpler, lower risk annuity products to be sold by ING USA’s affiliate, ING Life Insurance and Annuity Company. As part of this strategy, ING USA ceased new sales of variable annuity

 

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products in March of 2010. Some new amounts will continue to be deposited on ING USA variable annuities as add-on premiums to existing contracts.

 

The Company derives its revenue mainly from (a) fee income generated on variable assets under management (“AUM”), (b) investment income earned on fixed AUM, and (c) certain other management fees.  Fee income is primarily generated from separate account assets supporting variable options under variable annuity contract investments, as designated by contract owners.  Investment income from fixed AUM is mainly generated from annuity products with fixed investment options and GIC deposits.  The Company’s expenses primarily consist of (a) interest credited and other benefits to contract owners, (b) amortization of DAC and value of business acquired (“VOBA”), (c) expenses related to the selling and servicing of the various products offered by the Company, and (d) other general business expenses.

 

*Economic Analysis*

 

The U.S. economic environment has shown some improvement from the extreme volatility and disruption experienced throughout 2009, after substantial government intervention. Recent macroeconomic data suggest that the U.S. economy is growing at a moderate pace. In the final quarter of 2010, economic growth accelerated due to improvements in net exports, consumer spending, and residential housing, but imports declined. Global industrial production and global trade are expanding but at a less rapid pace than at the beginning of the recovery from the recent financial crisis. Underlying core inflation is low, but headline inflation has been rising due to higher energy and food prices.  The pace of expansion is moderate and on somewhat firmer footing than last year, but it is still constrained by high unemployment, modest income growth, lower housing wealth, and tepid expansion of credit. The sustainability of the ongoing recovery still depends on supportive fiscal and monetary policies. The Federal Open Market Committee is committed to keeping the federal funds target rate low for an extended period until economic growth proves to be sustainable; however, the Federal Reserve is likely to complete its purchases of long-term Treasury securities by the end of second quarter of 2011.

 

Significant downside risks still remain for the U.S. and other advanced and emerging economies, such as certain sovereign credit risks and spike in oil prices due to upheaval in the Middle East. These economic conditions and risks are not unique to the Company, but present challenges to the entire insurance industry.

 

Short-term London Interbank Offered Rates and U.S. Treasury rates continued to show signs of recovery during 2011. Long-term U.S. Treasury rates decreased in the first quarter of 2011 as compared to the same period in 2010, which had a positive effect on the fixed maturities portfolio and resulted in unrealized and realized capital gains. The decline in U.S. Treasury rates is mainly due to anticipation in the market that the Federal Reserve will maintain its existing policy of reinvesting principal payments from its securities holdings and that it will complete the planned $600 billion purchase of longer-term Treasury securities by the end of second quarter of 2011.

 

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*Results of Operations*

 

The Company’s results of operations for the three months ended March 31, 2011, and changes therein, primarily reflect higher Premiums, lower Interest credited and other benefits to contract owners, higher Net investment income, and higher Fee income partially offset by higher Net realized capital losses, an increase in Net amortization of DAC and VOBA, higher operating expenses and a higher Income tax expense.

 
| ** **                                                                                          | ** ** | **Three Months Ended** | ** ** | ** **          | ** ** | ** **          | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------|------------|---------------------|------------|
| ** **                                                                                          | ** ** | **March 31,**               | ** ** | **$ Increase** | ** ** | **% Increase** | ** ** |
| ** **                                                                                          | ** ** | **2011**                         | ** ** | **2010**            | ** ** | **(Decrease)**      | ** ** | **(Decrease)** | ** ** |
| **Revenues:**                                                                                       |       |                             |       |                |       |                |       |   |   |
| Net investment income                                                                               |       | $                                | 357.4      |                | $          | 319.0               |       | $ | 38.4 |   | 12.0 | % |
| Fee income                                                                                          |       | 279.0                            |       | 268.2               |       | 10.8                |       | 4.0 | % |
| Premiums                                                                                            |       | 115.0                            |       | 49.6                |       | 65.4                |       | 131.9 | % |
| Net realized capital losses:                                                                        |       |                             |       |                |       |                |       |   |   |
| Total other-than-temporary impairment losses                                                        |       | (64.9                            | )          | (71.5               | )          | 6.6                 |       | 9.2 | % |
| Portion of other-than-temporary impairment losses   recognized in Other comprehensive income (loss) |       | 2.9                              |       | 46.0                |       | (43.1               | )          | (93.7 | )% |
| Net other-than-temporary impairments recognized in   earnings                                       |       | (62.0                            | )          | (25.5               | )          | (36.5               | )          | (143.1 | )% |
| Other net realized capital losses                                                                   |       | (338.0                           | )          | (236.4              | )          | (101.6              | )          | (43.0 | )% |
| Total net realized capital losses                                                                   |       | (400.0                           | )          | (261.9              | )          | (138.1              | )          | (52.7 | )% |
| Other expense                                                                                       |       | 0.3                              |       | 0.1                 |       | 0.2                 |       | 200.0 | % |
| Total revenue                                                                                       |       | 351.7                            |       | 375.0               |       | (23.3               | )          | (6.2 | )% |
| **Benefits and expenses:**                                                                          |       |                             |       |                |       |                |       |   |   |
| Interest credited and other benefits to   contractowners                                            |       | 118.5                            |       | 184.9               |       | (66.4               | )          | (35.9 | )% |
| Operating expenses                                                                                  |       | 107.4                            |       | 101.4               |       | 6.0                 |       | 5.9 | % |
| Net amortization of deferred policy acquisition   costs and value of business acquired              |       | 70.8                             |       | 65.6                |       | 5.2                 |       | 7.9 | % |
| Interest expense                                                                                    |       | 7.8                              |       | 8.0                 |       | (0.2                | )          | (2.5 | )% |
| Other expense                                                                                       |       | 9.3                              |       | 9.7                 |       | (0.4                | )          | (4.1 | )% |
| Total benefits and expenses                                                                         |       | 313.8                            |       | 369.6               |       | (55.8               | )          | (15.1 | )% |
| Income before income taxes                                                                          |       | 37.9                             |       | 5.4                 |       | 32.5                |       | 601.9 | % |
| Income tax expense (benefit)                                                                        |       | 16.7                             |       | (1.2                | )          | 17.9                |       | NM |   |
| Net income                                                                                          |       | $                                | 21.2       |                | $          | 6.6                 |       | $ | 14.6 |   | NM |   |
| Effective tax rate                                                                                  |       | 44.1                             | %          | (22.2               | )%         |                |       |   |   |

 

NM - Not meaningful.

 

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*Revenues*

 

*Total revenue* decreased for the three months ended March 31, 2011, primarily reflecting higher Net realized capital losses partially offset by higher Premiums, higher Net investment income, and higher Fee income.

 

The increase in *Total net realized capital losses* for the three months ended March 31, 2011 is primarily due to an unfavorable change in derivatives related to (a) hedging of variable annuity guaranteed death benefits, (b) higher losses related to a hedging program designed to mitigate the impact of potential declines in equity markets and their impact on regulatory capital, and (c) hedging of variable annuity guaranteed living benefits (“VAGLB”) ceded to SLDI under the combined coinsurance and coinsurance funds withheld agreement.  However, the losses on the VAGLB are ceded to SLDI and reported as a corresponding favorable change in Interest credited and other benefits to policyholders.  Higher credit and intent related impairments on fixed maturities also contributed to this unfavorable variance.  The unfavorable changes were partially offset by favorable changes in derivatives used to hedge FIA products.

 

The increase in *Net investment income*for the three months ended March 31, 2011 is mainly due to higher income on fixed maturities.

 

*Fee income* increased for the three months ended March 31, 2011 as overall average variable AUM increased, driven by a favorable equity market starting in 2010 and continuing in 2011.

 

*Premiums* for the three months ended March 31, 2011 increased primarily due to the timing of recording reinsurance activity for the three months ended March 31, 2011 and 2010.

 

*Benefits and Expenses*

 

*Total benefits and expenses* decreased for the three months ended March 31, 2011 primarily due to a decrease in Interest credited and other benefits to contract owners partially offset by higher Net amortization of DAC and VOBA and higher Operating expenses.

 

The decrease in *Interest credited and other benefits to**contract owners* for the three months ended March 31, 2011 reflects the transfer of gains (losses) on futures and investment income under the combined coinsurance and coinsurance funds withheld agreement with SLDI. The corresponding losses and investment income are reported in Total net realized capital gains (losses) and Net investment income. In addition, Interest credited and other benefits to contract owners reflects a favorable change due to lower reserves as a result of  the Company entering into a new reinsurance agreement in the fourth quarter of 2010 which ceded a block of employee benefits business to SLDI, lower interest crediting rates, and lower amortization of sales inducements due to lower current period gross profits.

 

The *Net amortization of DAC and VOBA* increased for the three months ended March 31, 2011 due to an unfavorable variance in equity DAC unlocking, which was partially offset by lower amortization on lower gross profits.

 

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*Operating expenses* for the three months ended March 31, 2011 increased mainly due to lower capitalizable commissions due to lower sales in the current year partially offset by lower general expenses.

 

*Income Taxes*

 

*Income tax expense* increased for the three months ended March 31, 2011 primarily due to an increase in income before taxes, unfavorable audit settlements, and an unfavorable change in tax valuation allowance, partially offset by an increase in the dividends received deduction.

 

**Financial Condition**

 

***Investments***

 

*Investment Strategy*

 

The Company’s investment strategy focuses on diversification by asset class. The Company seeks to achieve economic diversification, while reducing overall credit risk and liquidity risks.  In addition, the Company seeks to mitigate the impact of cash flow variability from embedded options within certain investment products, such as prepayment options and interest rate options embedded in collateralized mortgage obligations and call options embedded in corporate bonds. The investment management function is centralized under ING Investment Management LLC, an affiliate, pursuant to an investment advisory agreement. Separate portfolios are established for groups of products with similar liability characteristics within the Company.

 

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*Portfolio Composition*

 

The following tables present the investment portfolio at March 31, 2011 and December 31, 2010.

 
| ** **                                                           | ** ** | **2011**     | ** ** | **2010**      | ** ** |
|----------------------------------------------------------------------|------------|--------------|------------|---------------|------------|
| ** **                                                           | ** ** | **Carrying** | ** ** | **% of** | ** ** | **Carrying** | ** ** | **% of** | ** ** |
| ** **                                                           | ** ** | **Value**    | ** ** | **Total**     | ** ** | **Value** | ** ** | **Total** | ** ** |
| Fixed maturities, available-for-sale, including   securities pledged |       | $            | 22,079.1   |          | 78.9       | % | $ | 21,803.1 |   | 78.8 | % |
| Fixed maturities, at fair value using the fair   value option        |       | 250.0        |       | 0.9           | %          | 237.7 |   | 0.9 | % |
| Equity securities, available-for-sale                                |       | 139.4        |       | 0.5           | %          | 150.2 |   | 0.5 | % |
| Short-term investments                                               |       | 970.8        |       | 3.5           | %          | 939.2 |   | 3.4 | % |
| Mortgage loans on real estate                                        |       | 3,041.9      |       | 10.9          | %          | 2,967.9 |   | 10.7 | % |
| Policy loans                                                         |       | 119.5        |       | 0.4           | %          | 122.1 |   | 0.4 | % |
| Loan - Dutch State obligation                                        |       | 780.3        |       | 2.8           | %          | 843.9 |   | 3.1 | % |
| Limited partnerships/corporations                                    |       | 305.9        |       | 1.1           | %          | 295.8 |   | 1.1 | % |
| Derivatives                                                          |       | 280.6        |       | 1.0           | %          | 293.1 |   | 1.1 | % |
| Other investments                                                    |       | 1.9          |       | 0.0           | %          | 1.8 |   | 0.0 | % |
| Total investments                                                    |       | $            | 27,969.4   |          | 100.0      | % | $ | 27,654.8 |   | 100.0 | % |

 

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*Fixed Maturities and Equity Securities*

 

Fixed maturities and equity securities were as follows as of March 31, 2011.

 
| ** **                                             | ** ** | ** **    | ** ** | **Gross**      | ** ** | **Gross**      | ** ** | ** ** | ** ** | ** **      | ** ** |
|--------------------------------------------------------|------------|---------------|------------|----------------|------------|----------------|------------|------------|------------|-----------------|------------|
| ** **                                             | ** ** | ** **    | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | ** ** | ** ** | ** **      | ** ** |
| ** **                                             | ** ** | **Amortized** | ** ** | **Capital**    | ** ** | **Capital**    | ** ** | **Fair**   | ** ** | ** **      | ** ** |
| ** **                                             | ** ** | **Cost**      | ** ** | **Gains**      | ** ** | **Losses**     | ** ** | **Value**  | ** ** | **OTTI****(2)** | ** ** |
| Fixed maturities:                                      | ** ** | ** **    | ** ** | ** **     | ** ** | ** **     | ** ** | ** ** | ** ** | ** **      | ** ** |
| U.S. Treasuries                                        |       | $             | 1,421.3    |           | $          | 13.6           |       | $          | 22.9       |            | $          | 1,412.0 |   | $ | — |   |
| U.S. government agencies and authorities               |       | 19.4          |       | 0.1            |       | 0.3            |       | 19.2       |       | —          |       |
| State, municipalities, and political subdivisions      |       | 104.7         |       | —         |       | 10.8           |       | 93.9       |       | —          |       |
|                                                   |       |          |       |           |       |           |       |       |       |            |       |
| U.S. corporate securities:                             |       |          |       |           |       |           |       |       |       |            |       |
| Public utilities                                       |       | 1,180.5       |       | 47.2           |       | 24.2           |       | 1,203.5    |       | —          |       |
| Other corporate securities                             |       | 8,082.7       |       | 364.3          |       | 74.6           |       | 8,372.4    |       | 0.3             |       |
| Total U.S. corporate securities                        |       | 9,263.2       |       | 411.5          |       | 98.8           |       | 9,575.9    |       | 0.3             |       |
|                                                   |       |          |       |           |       |           |       |       |       |            |       |
| Foreign securities(1):                                 |       |          |       |           |       |           |       |       |       |            |       |
| Government                                             |       | 357.9         |       | 21.7           |       | 2.1            |       | 377.5      |       | —          |       |
| Other                                                  |       | 5,331.8       |       | 228.9          |       | 74.3           |       | 5,486.4    |       | 0.1             |       |
| Total foreign securities                               |       | 5,689.7       |       | 250.6          |       | 76.4           |       | 5,863.9    |       | 0.1             |       |
|                                                   |       |          |       |           |       |           |       |       |       |            |       |
| Residential mortgage-backed securities                 |       | 1,949.0       |       | 237.3          |       | 81.2           |       | 2,105.1    |       | 68.1            |       |
| Commercial mortgage-backed securities                  |       | 2,084.2       |       | 151.1          |       | 15.5           |       | 2,219.8    |       | 6.1             |       |
| Other asset-backed securities                          |       | 1,077.4       |       | 19.7           |       | 57.8           |       | 1,039.3    |       | 4.7             |       |
|                                                   |       |          |       |           |       |           |       |       |       |            |       |
| Total fixed maturities, including securities   pledged |       | 21,608.9      |       | 1,083.9        |       | 363.7          |       | 22,329.1   |       | 79.3            |       |
| Less: securities pledged                               |       | 745.2         |       | 6.4            |       | 18.5           |       | 733.1      |       | —          |       |
| Total fixed maturities                                 |       | 20,863.7      |       | 1,077.5        |       | 345.2          |       | 21,596.0   |       | 79.3            |       |
| Equity securities                                      |       | 132.3         |       | 7.2            |       | 0.1            |       | 139.4      |       | —          |       |
| Total investments                                      |       | $             | 20,996.0   |           | $          | 1,084.7        |       | $          | 345.3      |            | $          | 21,735.4 |   | $ | 79.3 |   |

 

----

| (1) | Primarily U.S. dollar   denominated.                                                                                                       |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Represents   other-than-temporary impairments reported as a component of Other   comprehensive income (“noncredit impairments”). |

 

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Fixed maturities and equity securities were as follows as of December 31, 2010.

 
| ** **                                             | ** ** | ** **    | ** ** | **Gross**      | ** ** | **Gross**      | ** ** | ** ** | ** ** | ** **      | ** ** |
|--------------------------------------------------------|------------|---------------|------------|----------------|------------|----------------|------------|------------|------------|-----------------|------------|
| ** **                                             | ** ** | ** **    | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | ** ** | ** ** | ** **      | ** ** |
| ** **                                             | ** ** | **Amortized** | ** ** | **Capital**    | ** ** | **Capital**    | ** ** | **Fair**   | ** ** | ** **      | ** ** |
| ** **                                             | ** ** | **Cost**      | ** ** | **Gains**      | ** ** | **Losses**     | ** ** | **Value**  | ** ** | **OTTI****(2)** | ** ** |
| Fixed maturities:                                      | ** ** | ** **    | ** ** | ** **     | ** ** | ** **     | ** ** | ** ** | ** ** | ** **      | ** ** |
| U.S. Treasuries                                        |       | $             | 1,595.7    |           | $          | 19.4           |       | $          | 2.4        |            | $          | 1,612.7 |   | $ | — |   |
| U.S. government agencies and authorities               |       | 24.2          |       | 0.3            |       | 0.2            |       | 24.3       |       | —          |       |
| State, municipalities, and political subdivisions      |       | 126.5         |       | 3.6            |       | 11.6           |       | 118.5      |       | —          |       |
|                                                   |       |          |       |           |       |           |       |       |       |            |       |
| U.S. corporate securities:                             |       |          |       |           |       |           |       |       |       |            |       |
| Public utilities                                       |       | 1,526.4       |       | 83.2           |       | 18.4           |       | 1,591.2    |       | —          |       |
| Other corporate securities                             |       | 7,514.5       |       | 366.7          |       | 63.5           |       | 7,817.7    |       | 0.3             |       |
| Total U.S. corporate securities                        |       | 9,040.9       |       | 449.9          |       | 81.9           |       | 9,408.9    |       | 0.3             |       |
|                                                   |       |          |       |           |       |           |       |       |       |            |       |
| Foreign securities(1):                                 |       |          |       |           |       |           |       |       |       |            |       |
| Government                                             |       | 474.6         |       | 39.0           |       | 4.3            |       | 509.3      |       | —          |       |
| Other                                                  |       | 4,742.9       |       | 216.7          |       | 70.0           |       | 4,889.6    |       | 0.1             |       |
| Total foreign securities                               |       | 5,217.5       |       | 255.7          |       | 74.3           |       | 5,398.9    |       | 0.1             |       |
|                                                   |       |          |       |           |       |           |       |       |       |            |       |
| Residential mortgage-backed securities                 |       | 2,028.7       |       | 240.8          |       | 98.5           |       | 2,171.0    |       | 67.2            |       |
| Commercial mortgage-backed securities                  |       | 2,112.2       |       | 125.8          |       | 39.1           |       | 2,198.9    |       | 7.3             |       |
| Other asset-backed securities                          |       | 1,213.9       |       | 17.8           |       | 124.1          |       | 1,107.6    |       | 32.1            |       |
|                                                   |       |          |       |           |       |           |       |       |       |            |       |
| Total fixed maturities, including securities   pledged |       | 21,359.6      |       | 1,113.3        |       | 432.1          |       | 22,040.8   |       | 107.0           |       |
| Less: securities pledged                               |       | 886.6         |       | 17.5           |       | 14.7           |       | 889.4      |       | —          |       |
| Total fixed maturities                                 |       | 20,473.0      |       | 1,095.8        |       | 417.4          |       | 21,151.4   |       | 107.0           |       |
| Equity securities                                      |       | 142.1         |       | 8.1            |       | —         |       | 150.2      |       | —          |       |
| Total investments                                      |       | $             | 20,615.1   |           | $          | 1,103.9        |       | $          | 417.4      |            | $          | 21,301.6 |   | $ | 107.0 |   |

 

----

| (1) | Primarily U.S. dollar   denominated.                                                                                                       |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Represents   other-than-temporary impairments reported as a component of Other   comprehensive income (“noncredit impairments”). |

 

It is management’s objective that the portfolio of fixed maturities be of high quality and be well diversified by market sector. The fixed maturities in the Company’s portfolio are generally rated by external rating agencies and, if not externally rated, are rated by the Company on a basis believed to be similar to that used by the rating agencies. At March 31, 2011 and December 31, 2010, the average quality rating of the Company’s fixed maturities portfolio was A.  Ratings are calculated using a rating hierarchy that considers Standard & Poor’s (“S&P”), Moody’s Investors Service, Inc. (“Moody’s”), and internal ratings.

 

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Total fixed maturities by quality rating category, including securities pledged to creditors, were as follows at March 31, 2011 and December 31, 2010.

 
| ** **  | ** ** | **2011**  | ** ** |
|-------------|------------|-----------|------------|
| ** **  | ** ** | **Fair**  | ** ** | **% of** | ** ** | **Amortized** | ** ** | **% of** | ** ** |
| ** **  | ** ** | **Value** | ** ** | **Total** | ** ** | **Cost** | ** ** | **Total** | ** ** |
| AAA         |       | $         | 4,972.9    |   | 22.3 | % | $ | 4,765.6 |   | 22.0 | % |
| AA          |       | 1,943.5   |       | 8.7 | % | 1,959.0 |   | 9.1 | % |
| A           |       | 6,055.0   |       | 27.1 | % | 5,874.8 |   | 27.2 | % |
| BBB         |       | 7,686.3   |       | 34.4 | % | 7,382.7 |   | 34.2 | % |
| BB          |       | 859.8     |       | 3.9 | % | 822.4 |   | 3.8 | % |
| B and below |       | 811.6     |       | 3.6 | % | 804.4 |   | 3.7 | % |
| Total       |       | $         | 22,329.1   |   | 100.0 | % | $ | 21,608.9 |   | 100.0 | % |

 
| ** **  | ** ** | **2010**  | ** ** |
|-------------|------------|-----------|------------|
| ** **  | ** ** | **Fair**  | ** ** | **% of** | ** ** | **Amortized** | ** ** | **% of** | ** ** |
| ** **  | ** ** | **Value** | ** ** | **Total** | ** ** | **Cost** | ** ** | **Total** | ** ** |
| AAA         |       | $         | 5,188.9    |   | 23.5 | % | $ | 4,945.4 |   | 23.2 | % |
| AA          |       | 2,038.3   |       | 9.3 | % | 2,049.8 |   | 9.6 | % |
| A           |       | 5,961.5   |       | 27.0 | % | 5,749.0 |   | 26.9 | % |
| BBB         |       | 7,236.8   |       | 32.8 | % | 6,938.3 |   | 32.5 | % |
| BB          |       | 787.1     |       | 3.6 | % | 768.0 |   | 3.6 | % |
| B and below |       | 828.2     |       | 3.8 | % | 909.1 |   | 4.2 | % |
| Total       |       | $         | 22,040.8   |   | 100.0 | % | $ | 21,359.6 |   | 100.0 | % |

 

92.5% and 92.6% of the fixed maturities were invested in securities rated BBB and above (Investment Grade) at March 31, 2011 and December 31, 2010, respectively.

 

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

 

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Total fixed maturities, by market sector, including securities pledged to creditors, were as follows at March 31, 2011 and December 31, 2010.

 
| ** **                                | ** ** | **2011**  | ** ** |
|-------------------------------------------|------------|-----------|------------|
| ** **                                | ** ** | **Fair**  | ** ** | **% of** | ** ** | **Amortized** | ** ** | **% of** | ** ** |
| ** **                                | ** ** | **Value** | ** ** | **Total** | ** ** | **Cost** | ** ** | **Total** | ** ** |
| U.S. Treasuries                           |       | $         | 1,412.0    |   | 6.3 | % | $ | 1,421.3 |   | 6.6 | % |
| U.S. government agencies and authorities  |       | 19.2      |       | 0.1 | % | 19.4 |   | 0.1 | % |
| U.S. corporate, state, and municipalities |       | 9,669.8   |       | 43.3 | % | 9,367.9 |   | 43.3 | % |
| Foreign                                   |       | 5,863.9   |       | 26.3 | % | 5,689.7 |   | 26.3 | % |
| Residential mortgage-backed               |       | 2,105.1   |       | 9.4 | % | 1,949.0 |   | 9.0 | % |
| Commercial mortgage-backed                |       | 2,219.8   |       | 9.9 | % | 2,084.2 |   | 9.7 | % |
| Other asset-backed                        |       | 1,039.3   |       | 4.7 | % | 1,077.4 |   | 5.0 | % |
| Total                                     |       | $         | 22,329.1   |   | 100.0 | % | $ | 21,608.9 |   | 100.0 | % |

 
| ** **                                | ** ** | **2010**  | ** ** |
|-------------------------------------------|------------|-----------|------------|
| ** **                                | ** ** | **Fair**  | ** ** | **% of** | ** ** | **Amortized** | ** ** | **% of** | ** ** |
| ** **                                | ** ** | **Value** | ** ** | **Total** | ** ** | **Cost** | ** ** | **Total** | ** ** |
| U.S. Treasuries                           |       | $         | 1,612.7    |   | 7.3 | % | $ | 1,595.7 |   | 7.5 | % |
| U.S. government agencies and authorities  |       | 24.3      |       | 0.1 | % | 24.2 |   | 0.1 | % |
| U.S. corporate, state, and municipalities |       | 9,527.4   |       | 43.2 | % | 9,167.4 |   | 42.9 | % |
| Foreign                                   |       | 5,398.9   |       | 24.5 | % | 5,217.5 |   | 24.4 | % |
| Residential mortgage-backed               |       | 2,171.0   |       | 9.9 | % | 2,028.7 |   | 9.5 | % |
| Commercial mortgage-backed                |       | 2,198.9   |       | 10.0 | % | 2,112.2 |   | 9.9 | % |
| Other asset-backed                        |       | 1,107.6   |       | 5.0 | % | 1,213.9 |   | 5.7 | % |
| Total                                     |       | $         | 22,040.8   |   | 100.0 | % | $ | 21,359.6 |   | 100.0 | % |

 

The amortized cost and fair value of fixed maturities, including securities pledged, as of March 31, 2011, are shown below by contractual maturity. Actual maturities may differ from contractual maturities as securities may be restructured, called, or prepaid.

 
| ** **                                     | ** ** | **Amortized** | ** ** | **Fair**  | ** ** |
|------------------------------------------------|------------|---------------|------------|-----------|------------|
| ** **                                     | ** ** | **Cost**      | ** ** | **Value** | ** ** |
| Due to mature:                                 |       |          |       |      |       |
| One year or less                               |       | $             | 982.3      |      | $          | 1,000.9 |   |
| After one year through five years              |       | 5,502.1       |       | 5,731.2   |       |
| After five years through ten years             |       | 5,799.9       |       | 5,966.3   |       |
| After ten years                                |       | 4,214.0       |       | 4,266.5   |       |
| Mortgage-backed securities                     |       | 4,033.2       |       | 4,324.9   |       |
| Other asset-backed securities                  |       | 1,077.4       |       | 1,039.3   |       |
| Fixed maturities, including securities pledged |       | $             | 21,608.9   |      | $          | 22,329.1 |   |

 

The Company did not have any investments in a single issuer, other than obligations of the U.S. government and government agencies and the Dutch State loan obligation, with a carrying value in excess of 10.0% of the Company’s Shareholder’s equity at March 31, 2011 and December 31, 2010.

 

The Company invests in various categories of collateralized mortgage obligations (“CMOs”), including CMOs that are not agency-backed, that are subject to different degrees of risk from changes in interest rates and defaults. The principal risks inherent in holding CMOs are prepayment and extension risks related to dramatic decreases and increases in interest rates resulting in the prepayment of principal from the underlying mortgages, either earlier or later than originally anticipated. At

 

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March 31, 2011 and December 31, 2010, approximately 24.5% and 22.9%, respectively, of the Company’s CMO holdings were invested in those types of CMOs which are subject to more prepayment and extension risk than traditional CMOs, such as interest-only or principal-only strips.

 

The Company is a member of the Federal Home Loan Bank of Des Moines (“FHLB”) and is required to maintain a collateral deposit that backs funding agreements issued to the FHLB. At March 31, 2011 and December 31, 2010, the Company had $1,579.6, in non-putable funding agreements, including accrued interest, issued to the FHLB. At March 31, 2011 and December 31, 2010, assets with a market value of $1,868.5 and $1,930.1, respectively, collateralized the funding agreements issued to the FHLB. Assets pledged to the FHLB are included in Fixed maturities, available-for-sale, on the Condensed Balance Sheets.

 

*Subprime and Alt-A Mortgage Exposure*

 

The market for securities collateralized by subprime mortgages has been in a period of extended distress and uncertainty with regards to credit performance. Underlying collateral has continued to reflect the problems associated with a housing market that has seen substantial price declines and an employment market that has declined significantly and remains under stress.  Credit spreads have widened meaningfully from issuance and rating agency downgrades have been widespread and severe within the sector.  Over the course of 2010 and continuing in 2011, price transparency and liquidity for bonds backed by subprime mortgages have improved with the reduced volatility across broader risk markets and apparent increase in overall risk appetite.  In managing its risk exposure to subprime mortgages, the Company takes into account collateral performance and structural characteristics associated with its various positions.

 

The Company does not originate or purchase subprime or Alt-A whole-loan mortgages. The Company does have exposure to Residential Mortgage-backed Securities (“RMBS”) and Asset-backed Securities (“ABS”).  Subprime lending is the origination of loans to customers with weaker credit profiles. The Company defines Alt-A Loans to include the following: residential mortgage loans to customers who have strong credit profiles but lack some element(s), such as documentation to substantiate income; residential mortgage loans to borrowers that would otherwise be classified as prime but whose loan structure provides repayment options to the borrower that increase the risk of default; and any securities backed by residential mortgage collateral not clearly identifiable as prime or subprime.

 

The Company’s exposure to subprime mortgages was primarily in the form of ABS structures collateralized by subprime residential mortgages, and the majority of these holdings were included in other asset-backed securities in the fixed maturities by market sector table previously referred to. As of March 31, 2011, the fair value and gross unrealized losses related to the Company’s exposure to subprime mortgages were $428.7 and $47.4, respectively, representing 1.9% of total fixed maturities. As of December 31, 2010, the fair value and gross unrealized losses related to the Company’s exposure to subprime mortgages were $456.3 and $109.9, respectively, representing 2.1% of total fixed maturities.

 

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The following tables summarize the Company’s exposure to subprime mortgage-backed holdings by credit quality and vintage year as of March 31, 2011 and December 31, 2010:

 
| **2011**                 | ** ** | **2010**    | ** ** |
|--------------------------|------------|-------------|------------|
| **% of Total** | ** ** | ** **  | ** ** | ** ** | ** ** | **% of Total** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Subprime**             | ** ** | ** **  | ** ** | ** ** | ** ** | **Subprime** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Mortgage-backed**      | ** ** | ** **  | ** ** | ** ** | ** ** | **Mortgage-backed** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Securities**           | ** ** | **Vintage** | ** ** | **Securities** | ** ** | **Vintage** | ** ** |
| AAA                      |       | 22.2        | %          | 2007 |   | 38.6 | % | AAA |   | 23.0 | % | 2007 |   | 39.7 | % |
| AA                       |       | 21.0        | %          | 2006 |   | 6.4 | % | AA |   | 20.3 | % | 2006 |   | 6.9 | % |
| A                        |       | 7.0         | %          | 2005   and prior |   | 55.0 | % | A |   | 8.2 | % | 2005   and prior |   | 53.4 | % |
| BBB                      |       | 9.8         | %          |   |   | 100.0 | % | BBB |   | 9.0 | % |   |   | 100.0 | % |
| BB and below             |       | 40.0        | %          |   |   |   |   | BB   and below |   | 39.5 | % |   |   |   |   |
|                     |       | 100.0       | %          |   |   |   |   |   |   | 100.0 | % |   |   |   |   |

 

The Company’s exposure to Alt-A mortgages was included in residential mortgage-backed securities in the fixed maturities by market sector table above. As of March 31, 2011, the fair value and gross unrealized losses aggregated to $157.6 and $44.3, respectively, representing 0.7% of total fixed maturities. As of December 31, 2010, the fair value and gross unrealized losses aggregated to $158.3 and $51.1, respectively, representing 0.7% of total fixed maturities.

 

The following tables summarize the Company’s exposure to Alt-A mortgage-backed holdings by credit quality and vintage year as of March 31, 2011 and December 31, 2010:

 
| **2011**                 | ** ** | **2010**    | ** ** |
|--------------------------|------------|-------------|------------|
| **% of Total** | ** ** | ** **  | ** ** | ** ** | ** ** | **% of Total** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Alt-A**                | ** ** | ** **  | ** ** | ** ** | ** ** | **Alt-A** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Mortgage-backed**      | ** ** | ** **  | ** ** | ** ** | ** ** | **Mortgage-backed** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Securities**           | ** ** | **Vintage** | ** ** | **Securities** | ** ** | **Vintage** | ** ** |
| AAA                      |       | 18.8        | %          | 2007 |   | 30.5 | % | AAA |   | 19.7 | % | 2007 |   | 29.7 | % |
| AA                       |       | 2.2         | %          | 2006 |   | 19.3 | % | AA |   | 1.6 | % | 2006 |   | 19.8 | % |
| A                        |       | 0.5         | %          | 2005   and prior |   | 50.2 | % | A |   | 0.1 | % | 2005   and prior |   | 50.5 | % |
| BBB                      |       | 1.4         | %          |   |   | 100.0 | % | BBB |   | 1.0 | % |   |   | 100.0 | % |
| BB   and below           |       | 77.1        | %          |   |   |   |   | BB   and below |   | 77.6 | % |   |   |   |   |
|                     |       | 100.0       | %          |   |   |   |   |   |   | 100.0 | % |   |   |   |   |

 

*Commercial Mortgage-backed and Other Asset-backed Securities*

 

After a long period of stability, delinquency rates on commercial mortgages have increased, as rent levels, vacancies and property values have exhibited weakness.  For consumer asset backed securities, delinquency rates have recently shown signs of improvement.  However, there are renewed concerns with consumer loans as a result of the current economic environment, as unemployment has remained at elevated levels and headwinds from slower global growth appear more likely.

 

As of March 31, 2011 and December 31, 2010, the fair value of the Company’s Commercial Mortgage-backed Securities (“CMBS”) totaled $2.2 billion, and other ABS, excluding subprime exposure, totaled $615.8 and $656.7, respectively. CMBS

 

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investments represent pools of commercial mortgages that are broadly diversified across property types and geographical areas.

 

As of March 31, 2011, the other ABS was also broadly diversified both by type and issuer with credit card receivables, collateralized loan obligations and automobile receivables, comprising 28.3%, 26.7%, and 25.6%, respectively, of total other ABS, excluding subprime exposure. As of December 31, 2010, the other ABS was also broadly diversified both by type and issuer with credit card receivables, collateralized loan obligations and automobile receivables, comprising 31.2%, 25.6%, and 28.5%, respectively, of total other ABS, excluding subprime exposure.

 

The following tables summarize the Company’s exposure to CMBS holdings by credit quality and vintage year as of March 31, 2011 and December 31, 2010:

 
| **2011**                           | ** ** | **2010**    | ** ** |
|------------------------------------|------------|-------------|------------|
| **% of Total CMBS** | ** ** | **Vintage** | ** ** | **% of Total CMBS** | ** ** | **Vintage** | ** ** |
| AAA                                |       | 57.7        | %          | 2008 |   | 0.7 | % | AAA |   | 58.8 | % | 2008 |   | 0.9 | % |
| AA                                 |       | 4.7         | %          | 2007 |   | 20.1 | % | AA |   | 5.6 | % | 2007 |   | 23.6 | % |
| A                                  |       | 11.4        | %          | 2006 |   | 25.5 | % | A |   | 11.5 | % | 2006 |   | 24.6 | % |
| BBB                                |       | 12.1        | %          | 2005   and prior |   | 53.7 | % | BBB |   | 11.1 | % | 2005   and prior |   | 50.9 | % |
| BB and below                       |       | 14.1        | %          |   |   | 100.0 | % | BB   and below |   | 13.0 | % |   |   | 100.0 | % |
|                               |       | 100.0       | %          |   |   |   |   |   |   | 100.0 | % |   |   |   |   |

 

The following tables summarize the Company’s exposure to other ABS holdings, excluding subprime exposure, by credit quality and vintage year as of March 31, 2011 and December 31, 2010:

 
| **2011**                                     | ** ** | **2010**    | ** ** |
|----------------------------------------------|------------|-------------|------------|
| **% of Total other ABS** | ** ** | **Vintage** | ** ** | **% of Total other ABS** | ** ** | **Vintage** | ** ** |
| AAA                                          |       | 80.1        | %          | 2011 |   | 1.7 | % | AAA |   | 76.3 | % | 2010 |   | 13.1 | % |
| AA                                           |       | 3.5         | %          | 2010 |   | 15.2 | % | AA |   | 5.3 | % | 2009 |   | 16.2 | % |
| A                                            |       | 5.6         | %          | 2009 |   | 16.9 | % | A |   | 5.3 | % | 2008 |   | 10.9 | % |
| BBB                                          |       | 6.1         | %          | 2008 |   | 11.3 | % | BBB |   | 8.6 | % | 2007 |   | 18.1 | % |
| BB and below                                 |       | 4.7         | %          | 2007 |   | 18.6 | % | BB   and below |   | 4.5 | % | 2006 |   | 16.2 | % |
|                                         |       | 100.0       | %          | 2006   and prior |   | 36.3 | % |   |   | 100.0 | % | 2005   and prior |   | 25.5 | % |
|                                         |       |        |       |   |   | 100.0 | % |   |   |   |   |   |   | 100.0 | % |

 

*Mortgage Loans on Real Estate*

 

The Company’s mortgage loans on real estate are all commercial mortgage loans, which totaled $3.0 billion as of March 31, 2011 and December 31, 2010. These loans are reported at amortized cost, less impairment write-downs and allowance for losses.

 

The Company diversifies its commercial mortgage loan portfolio by geographic region and property type to reduce concentration risk.  The Company manages risk when originating commercial mortgage loans by generally lending only up to 75% of the estimated fair value of the underlying real estate.  Subsequently, the Company continuously evaluates all mortgage loans based on relevant current information including an appraisal of loan-specific credit quality, property characteristics and market trends, and assigns a quality rating using the Company’s internally developed quality rating system. This quality rating is based on the Company’s assessment of 

 

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the level of concern over future payment according to contract terms. Loan performance is continuously monitored on a loan-specific basis through the review of borrower submitted appraisals, operating statements, rent revenues and annual inspection reports, among other items. This review ensures properties are performing at a consistent and acceptable level to secure the debt.

 

All commercial mortgages are rated for the purpose of quantifying the level of risk.  Those loans with higher risk are placed on a watch list and are closely monitored for collateral deficiency or other credit events that may lead to a potential loss of principal or interest. If the value of any mortgage loan is determined to be impaired (i.e., when it is probable that the Company will be unable to collect on all amounts due according to the contractual terms of the loan agreement), the carrying value of the mortgage loan is reduced to the lower of the present value of expected cash flows from the loan, discounted at the loan’s effective interest rate, or fair value of the collateral. Impairments taken on the mortgage loan portfolio were $2.0 and $0.2 for the three months ended March 31, 2011 and 2010, respectively. For those mortgages that are determined to require foreclosure, the carrying value is reduced to the fair value of the underlying collateral, net of estimated costs to obtain and sell at the point of foreclosure. There were no mortgage loans in the Company’s portfolio in arrears with respect to principal and interest at March 31, 2011 and December 31, 2010. Due to challenges that the economy presents to the commercial mortgage market, effective with the third quarter of 2009, the Company recorded an allowance for probable incurred, but not specifically identified, losses related to factors inherent in the lending process. At March 31, 2011 and December 31, 2010, the Company had a $2.8 and $3.0 allowance for mortgage loan credit losses, respectively.

 

Loan-to-value (“LTV”) and debt service coverage (“DSC”) ratios are measures commonly used to assess the risk and quality of commercial mortgage loans. The LTV ratio, calculated at time of origination, is expressed as a percentage of the amount of the loan relative to the value of the underlying property. The DSC ratio, based upon the most recently received financial statements, is expressed as a percentage of the amount of a property’s net income to its debt service payments. These ratios are utilized as part of the review process described above. LTV and DSC ratios as of March 31, 2011 and December 31, 2010, are as follows:

 
| ** **                      | ** ** | **2011****(1)** | ** ** | **2010****(1)** | ** ** |
|---------------------------------|------------|-----------------|------------|-----------------|------------|
| Loan-to-Value Ratio:            |       |            |       |            |       |
| 0% - 50%                        |       | $               | 1,147.6    |            | $          | 1,140.4 |   |
| 50% - 60%                       |       | 743.3           |       | 707.7           |       |
| 60% - 70%                       |       | 926.0           |       | 903.4           |       |
| 70% - 80%                       |       | 206.6           |       | 197.6           |       |
| 80% - 90%                       |       | 21.2            |       | 21.8            |       |
| Total Commercial Mortgage Loans |       | $               | 3,044.7    |            | $          | 2,970.9 |   |

 

----

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

 

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| ** **                                                 | ** ** | **2011****(1)** | ** ** | **2010****(1)** | ** ** |
|------------------------------------------------------------|------------|-----------------|------------|-----------------|------------|
| Debt Service Coverage Ratio:                               |       |            |       |            |       |
| Greater than 1.5x                                          |       | $               | 2,117.8    |            | $          | 2,038.3 |   |
| 1.25x - 1.5x                                               |       | 412.1           |       | 387.9           |       |
| 1.0x - 1.25x                                               |       | 238.0           |       | 255.2           |       |
| Less than 1.0x                                             |       | 140.9           |       | 144.0           |       |
| Mortgages secured by loans on land or construction   loans |       | 135.9           |       | 145.5           |       |
| Total Commercial Mortgage Loans                            |       | $               | 3,044.7    |            | $          | 2,970.9 |   |

 

----

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

 

 

Properties collateralizing mortgage loans are geographically dispersed throughout the United States, as well as diversified by property type, as reflected in the following tables as of March 31, 2011 and December 31, 2010.

 
| ** **                                | ** ** | **2011****(1)**         | ** ** | **2010****(1)**          | ** ** |
|-------------------------------------------|------------|-------------------------|------------|--------------------------|------------|
| ** **                                | ** ** | **Gross**               | ** ** | ** **               | ** ** | **Gross** | ** ** | ** ** | ** ** |
| ** **                                | ** ** | **Carrying Value** | ** ** | **% of Total** | ** ** | **Carrying Value** | ** ** | **% of Total** | ** ** |
| Commercial Mortgage Loans by U.S. Region: |       |                    |       |                     |       |   |   |   |   |
| Pacific                                   |       | $                       | 737.6      |                     | 24.2       | % | $ | 741.0 |   | 24.9 | % |
| South Atlantic                            |       | 579.4                   |       | 19.0                     | %          | 546.8 |   | 18.4 | % |
| Middle Atlantic                           |       | 370.9                   |       | 12.2                     | %          | 385.0 |   | 13.0 | % |
| East North Central                        |       | 327.2                   |       | 10.8                     | %          | 289.1 |   | 9.7 | % |
| West South Central                        |       | 400.9                   |       | 13.2                     | %          | 388.6 |   | 13.1 | % |
| Mountain                                  |       | 362.1                   |       | 11.9                     | %          | 361.9 |   | 12.2 | % |
| New England                               |       | 76.8                    |       | 2.5                      | %          | 81.1 |   | 2.7 | % |
| West North Central                        |       | 123.0                   |       | 4.0                      | %          | 113.3 |   | 3.8 | % |
| East South Central                        |       | 66.8                    |       | 2.2                      | %          | 64.1 |   | 2.2 | % |
| Total Commercial Mortgage Loans           |       | $                       | 3,044.7    |                     | 100.0      | % | $ | 2,970.9 |   | 100.0 | % |

 

----

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

 
| ** **                                  | ** ** | **2011****(1)**         | ** ** | **2010****(1)**          | ** ** |
|---------------------------------------------|------------|-------------------------|------------|--------------------------|------------|
| ** **                                  | ** ** | **Gross**               | ** ** | ** **               | ** ** | **Gross** | ** ** | ** ** | ** ** |
| ** **                                  | ** ** | **Carrying Value** | ** ** | **% of Total** | ** ** | **Carrying Value** | ** ** | **% of Total** | ** ** |
| Commercial Mortgage Loans by Property Type: |       |                    |       |                     |       |   |   |   |   |
| Apartments                                  |       | $                       | 446.9      |                     | 14.7       | % | $ | 451.0 |   | 15.2 | % |
| Hotel/Motel                                 |       | 176.9                   |       | 5.8                      | %          | 177.4 |   | 6.0 | % |
| Industrial                                  |       | 1,043.3                 |       | 34.3                     | %          | 1,003.5 |   | 33.7 | % |
| Office                                      |       | 538.5                   |       | 17.7                     | %          | 542.4 |   | 18.3 | % |
| Other                                       |       | 98.6                    |       | 3.2                      | %          | 102.7 |   | 3.5 | % |
| Retail                                      |       | 740.5                   |       | 24.3                     | %          | 693.9 |   | 23.3 | % |
| Total Commercial Mortgage Loans             |       | $                       | 3,044.7    |                     | 100.0      | % | $ | 2,970.9 |   | 100.0 | % |

 

----

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

 

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The following tables set forth the breakdown of commercial mortgages by year of origination as of March 31, 2011 and December 31, 2010.

 
| ** **                      | ** ** | **2011****(1)** | ** ** | **2010****(1)** | ** ** |
|---------------------------------|------------|-----------------|------------|-----------------|------------|
| Year of Origination:            |       |            |       |            |       |
| 2011                            |       | $               | 185.0      |            | $          | — |   |
| 2010                            |       | 229.5           |       | 230.6           |       |
| 2009                            |       | 84.2            |       | 85.3            |       |
| 2008                            |       | 411.7           |       | 446.9           |       |
| 2007                            |       | 560.6           |       | 572.9           |       |
| 2006 and prior                  |       | 1,573.7         |       | 1,635.2         |       |
| Total Commercial Mortgage Loans |       | $               | 3,044.7    |            | $          | 2,970.9 |   |

 

----

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

 

*Unrealized Capital Losses*

 

Unrealized capital losses (including non-credit impairments) in fixed maturities, including securities pledged to creditors, for Investment Grade (“IG”) and Below Investment Grade (“BIG”) securities by duration were as follows at March 31, 2011 and December 31, 2010.

 
| ** **                                                            | ** ** | **2011**   | ** ** | **2010**              | ** ** |
|-----------------------------------------------------------------------|------------|------------|------------|-----------------------|------------|
| ** **                                                            | ** ** | ** ** | ** ** | **% of IG** | ** ** | ** ** | ** ** | **% of IG** | ** ** | ** ** | ** ** | **% of IG** | ** ** | ** ** | ** ** | **% of IG** | ** ** |
| ** **                                                            | ** ** | **IG**     | ** ** | **and BIG**      | ** ** | **BIG** | ** ** | **and BIG** | ** ** | **IG** | ** ** | **and BIG** | ** ** | **BIG** | ** ** | **and BIG** | ** ** |
| Six   months or less below amortized cost                             |       | $          | 157.7      |                  | 43.4       | % | $ | 14.9 |   | 4.1 | % | $ | 124.6 |   | 28.8 | % | $ | 12.4 |   | 2.9 | % |
| More   than six months and twelve months or less below amortized cost |       | 21.4       |       | 5.9                   | %          | 0.4 |   | 0.1 | % | 2.2 |   | 0.5 | % | 0.1 |   | 0.0 | % |
| More   than twelve months below amortized cost                        |       | 90.6       |       | 24.9                  | %          | 78.7 |   | 21.6 | % | 124.9 |   | 28.9 | % | 167.9 |   | 38.9 | % |
| Total   unrealized capital losses                                     |       | $          | 269.7      |                  | 74.2       | % | $ | 94.0 |   | 25.8 | % | $ | 251.7 |   | 58.2 | % | $ | 180.4 |   | 41.8 | % |

 

The following table summarizes the unrealized capital losses (including non-credit impairments) by duration and reason, along with the fair value of fixed maturities, including securities pledged to creditors, in unrealized capital loss positions at March 31, 2011 and December 31, 2010.

 
| ** **                                 | ** ** | **Six Months** | ** ** | **More than**           | ** ** | ** **              | ** ** | ** **     | ** ** |
|--------------------------------------------|------------|---------------------|------------|------------------------------|------------|-------------------------|------------|----------------|------------|
| ** **                                 | ** ** | **or Less**    | ** ** | **Six Months and** | ** ** | **More than**      | ** ** | **Total**      | ** ** |
| ** **                                 | ** ** | **Below**           | ** ** | **Twelve Months**       | ** ** | **Twelve Months**  | ** ** | **Unrealized** | ** ** |
| ** **                                 | ** ** | **Amortized**       | ** ** | **or Less Below**  | ** ** | **Below**               | ** ** | **Capital**    | ** ** |
| ** **                                 | ** ** | **Cost**            | ** ** | **Amortized Cost**      | ** ** | **Amortized Cost** | ** ** | **Losses**     | ** ** |
| **2011**                                   |       |                |       |                         |       |                    |       |           |       |
| Interest rate or spread widening           |       | $                   | 160.8      |                         | $          | 20.8                    |       | $              | 27.6       |   | $ | 209.2 |   |
| Mortgage and other asset-backed securities |       | 11.8                |       | 1.0                          |       | 141.7                   |       | 154.5          |       |
| Total unrealized capital losses            |       | $                   | 172.6      |                         | $          | 21.8                    |       | $              | 169.3      |   | $ | 363.7 |   |
| Fair value                                 |       | $                   | 5,829.2    |                         | $          | 323.6                   |       | $              | 1,181.3    |   | $ | 7,334.1 |   |
|                                       |       |                |       |                         |       |                    |       |           |       |
| **2010**                                   | ** ** | ** **          | ** ** | ** **                   | ** ** | ** **              | ** ** | ** **     | ** ** |
| Interest rate or spread widening           |       | $                   | 128.4      |                         | $          | 2.1                     |       | $              | 39.9       |   | $ | 170.4 |   |
| Mortgage and other asset-backed securities |       | 8.6                 |       | 0.2                          |       | 252.9                   |       | 261.7          |       |
| Total unrealized capital losses            |       | $                   | 137.0      |                         | $          | 2.3                     |       | $              | 292.8      |   | $ | 432.1 |   |
| Fair value                                 |       | $                   | 5,096.8    |                         | $          | 86.9                    |       | $              | 1,622.6    |   | $ | 6,806.3 |   |

 

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Unrealized capital losses (including non-credit impairments), along with the fair value of fixed maturities, including securities pledged to creditors, by market sector and duration were as follows at March 31, 2011 and December 31, 2010.

 
| ** **                                  | ** ** | ** **                            | ** ** | ** **                         | ** ** | **More Than Six**     | ** ** | ** **                     | ** ** | ** **          | ** ** | ** **            | ** ** | ** **          | ** ** |
|---------------------------------------------|------------|---------------------------------------|------------|------------------------------------|------------|---------------------------------|------------|--------------------------------|------------|---------------------|------------|-----------------------|------------|---------------------|------------|
| ** **                                  | ** ** | ** **                            | ** ** | ** **                         | ** ** | **Months and Twelve** | ** ** | **More Than Twelve** | ** ** | ** **          | ** ** | ** **            | ** ** |
| ** **                                  | ** ** | **Six Months or Less** | ** ** | **Months or Less**       | ** ** | **Months Below**           | ** ** | ** **                     | ** ** | ** **          | ** ** |
| ** **                                  | ** ** | **Below Amortized Cost**    | ** ** | **Below Amortized Cost** | ** ** | **Amortized Cost**         | ** ** | **Total**                      | ** ** |
| ** **                                  | ** ** | ** **                            | ** ** | **Unrealized**                     | ** ** | ** **                      | ** ** | **Unrealized**                 | ** ** | ** **          | ** ** | **Unrealized**        | ** ** | ** **          | ** ** | **Unrealized** | ** ** |
| ** **                                  | ** ** | **Fair Value**                   | ** ** | **Capital Loss**              | ** ** | **Fair Value**             | ** ** | **Capital Loss**          | ** ** | **Fair Value** | ** ** | **Capital Loss** | ** ** | **Fair Value** | ** ** | **Capital Loss** | ** ** |
| **2011**                                    | ** ** | ** **                            | ** ** | ** **                         | ** ** | ** **                      | ** ** | ** **                     | ** ** | ** **          | ** ** | ** **            | ** ** | ** **          | ** ** | ** ** | ** ** |
| U.S.   Treasuries                           |       | $                                     | 748.7      |                               | $          | 22.9                            |       | $                              | —     |                | $          | —                |       | $                   | —     |   | $ | — |   | $ | 748.7 |   | $ | 22.9 |   |
| U.S.   government agencies and authorities  |       | 18.0                                  |       | 0.3                                |       | —                          |       | —                         |       | —              |       | —                |       | 18.0                |       | 0.3 |   |
| U.S.   corporate, state, and municipalities |       | 2,793.3                               |       | 82.9                               |       | 182.6                           |       | 14.1                           |       | 198.7               |       | 12.6                  |       | 3,174.6             |       | 109.6 |   |
| Foreign                                     |       | 1,526.4                               |       | 54.7                               |       | 57.9                            |       | 6.7                            |       | 151.0               |       | 15.0                  |       | 1,735.3             |       | 76.4 |   |
| Residential   mortgage-backed               |       | 474.2                                 |       | 8.4                                |       | 82.2                            |       | 1.0                            |       | 307.4               |       | 71.8                  |       | 863.8               |       | 81.2 |   |
| Commercial   mortgage-backed                |       | 101.8                                 |       | 2.1                                |       | —                          |       | —                         |       | 205.8               |       | 13.4                  |       | 307.6               |       | 15.5 |   |
| Other   asset-backed                        |       | 166.8                                 |       | 1.3                                |       | 0.9                             |       | —                         |       | 318.4               |       | 56.5                  |       | 486.1               |       | 57.8 |   |
| Total                                       |       | $                                     | 5,829.2    |                               | $          | 172.6                           |       | $                              | 323.6      |                | $          | 21.8                  |       | $                   | 1,181.3    |   | $ | 169.3 |   | $ | 7,334.1 |   | $ | 363.7 |   |
|                                        |       |                                  |       |                               |       |                            |       |                           |       |                |       |                  |       |                |       |   |   |
| **2010**                                    | ** ** | ** **                            | ** ** | ** **                         | ** ** | ** **                      | ** ** | ** **                     | ** ** | ** **          | ** ** | ** **            | ** ** | ** **          | ** ** | ** ** | ** ** |
| U.S.   Treasuries                           |       | $                                     | 677.8      |                               | $          | 2.4                             |       | $                              | —     |                | $          | —                |       | $                   | —     |   | $ | — |   | $ | 677.8 |   | $ | 2.4 |   |
| U.S.   government agencies and authorities  |       | 18.1                                  |       | 0.2                                |       | —                          |       | —                         |       | —              |       | —                |       | 18.1                |       | 0.2 |   |
| U.S.   corporate, state, and municipalities |       | 2,494.7                               |       | 73.0                               |       | 37.1                            |       | 1.0                            |       | 258.9               |       | 19.5                  |       | 2,790.7             |       | 93.5 |   |
| Foreign                                     |       | 1,277.5                               |       | 52.8                               |       | 35.8                            |       | 1.1                            |       | 195.4               |       | 20.4                  |       | 1,508.7             |       | 74.3 |   |
| Residential   mortgage-backed               |       | 472.6                                 |       | 7.2                                |       | 1.0                             |       | 0.1                            |       | 336.5               |       | 91.2                  |       | 810.1               |       | 98.5 |   |
| Commercial   mortgage-backed                |       | 22.6                                  |       | 0.4                                |       | 4.3                             |       | 0.1                            |       | 390.2               |       | 38.6                  |       | 417.1               |       | 39.1 |   |
| Other   asset-backed                        |       | 133.5                                 |       | 1.0                                |       | 8.7                             |       | —                         |       | 441.6               |       | 123.1                 |       | 583.8               |       | 124.1 |   |
| Total                                       |       | $                                     | 5,096.8    |                               | $          | 137.0                           |       | $                              | 86.9       |                | $          | 2.3                   |       | $                   | 1,622.6    |   | $ | 292.8 |   | $ | 6,806.3 |   | $ | 432.1 |   |

 

Of the unrealized capital losses aged more than twelve months, the average market value of the related fixed maturities was 87.5% of the average book value as of March 31, 2011.

 

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Unrealized capital losses (including non-credit impairments) in fixed maturities, including securities pledged to creditors, for instances in which fair value declined below amortized cost by greater than or less than 20% for consecutive periods as indicated in the tables below, were as follows for March 31, 2011 and December 31, 2010.

 
| ** **                                                            | ** ** | **Amortized Cost** | ** ** | **Unrealized Capital Loss** | ** ** | **Number of Securities** | ** ** |
|-----------------------------------------------------------------------|------------|-------------------------|------------|---------------------------------------|------------|------------------------------------|------------|
| ** **                                                            | ** ** | **< 20%**       | ** ** | **> 20%**                     | ** ** | **< 20%**                  | ** ** | **> 20%** | ** ** | **< 20%** | ** ** | **> 20%** | ** ** |
| **2011**                                                              | ** ** | ** **              | ** ** | ** **                            | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Six months or less below amortized cost                               |       | $                       | 6,229.9    |                                  | $          | 75.2                               |       | $ | 190.6 |   | $ | 19.8 |   | 590 |   | 18 |   |
| More than six months and twelve months or less   below amortized cost |       | 483.6                   |       | 9.2                                   |       | 31.2                               |       | 3.0 |   | 91 |   | 3 |   |
| More than twelve months below amortized cost                          |       | 618.3                   |       | 281.6                                 |       | 31.9                               |       | 87.2 |   | 87 |   | 89 |   |
| Total                                                                 |       | $                       | 7,331.8    |                                  | $          | 366.0                              |       | $ | 253.7 |   | $ | 110.0 |   | 768 |   | 110 |   |
|                                                                  |       |                    |       |                                  |       |                               |       |   |   |   |   |   |   |
| **2010**                                                              | ** ** | ** **              | ** ** | ** **                            | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Six months or less below amortized cost                               |       | $                       | 5,650.7    |                                  | $          | 49.3                               |       | $ | 172.3 |   | $ | 13.2 |   | 585 |   | 14 |   |
| More than six months and twelve months or less   below amortized cost |       | 289.5                   |       | 18.9                                  |       | 15.9                               |       | 4.8 |   | 46 |   | 3 |   |
| More than twelve months below amortized cost                          |       | 688.7                   |       | 541.3                                 |       | 40.6                               |       | 185.3 |   | 95 |   | 137 |   |
| Total                                                                 |       | $                       | 6,628.9    |                                  | $          | 609.5                              |       | $ | 228.8 |   | $ | 203.3 |   | 726 |   | 154 |   |

 

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Unrealized capital losses (including non-credit impairments) in fixed maturities, including securities pledged to creditors, by market sector for instances in which fair value declined below amortized cost by greater than or less than 20% for consecutive periods as indicated in the tables below, were as follows for March 31, 2011 and December 31, 2010.

 
| ** **                               | ** ** | **Amortized Cost** | ** ** | **Unrealized Capital Loss** | ** ** | **Number of Securities** | ** ** |
|------------------------------------------|------------|-------------------------|------------|---------------------------------------|------------|------------------------------------|------------|
| ** **                               | ** ** | **< 20%**       | ** ** | **> 20%**                     | ** ** | **< 20%**                  | ** ** | **> 20%** | ** ** | **< 20%** | ** ** | **> 20%** | ** ** |
|                                     |       |                    |       |                                  |       |                               |       |   |   |   |   |   |   |
| **2011**                                 | ** ** | ** **              | ** ** | ** **                            |       |                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| U.S. Treasuries                          |       | $                       | 771.6      |                                  | $          | —                             |       | $ | 22.9 |   | $ | — |   | 5 |   | — |   |
| U.S. government agencies and authorities |       | 18.3                    |       | —                                |       | 0.3                                |       | — |   | 2 |   | — |   |
| U.S. corporate, state and municipalities |       | 3,240.1                 |       | 44.1                                  |       | 98.6                               |       | 11.0 |   | 313 |   | 5 |   |
| Foreign                                  |       | 1,784.4                 |       | 27.3                                  |       | 68.9                               |       | 7.5 |   | 152 |   | 5 |   |
| Residential mortgage-backed              |       | 769.1                   |       | 175.9                                 |       | 28.5                               |       | 52.7 |   | 132 |   | 69 |   |
| Commercial mortgage-backed               |       | 310.3                   |       | 12.8                                  |       | 11.9                               |       | 3.6 |   | 26 |   | 3 |   |
| Other asset-backed                       |       | 438.0                   |       | 105.9                                 |       | 22.6                               |       | 35.2 |   | 138 |   | 28 |   |
| Total                                    |       | $                       | 7,331.8    |                                  | $          | 366.0                              |       | $ | 253.7 |   | $ | 110.0 |   | 768 |   | 110 |   |
|                                     |       |                    |       |                                  |       |                               |       |   |   |   |   |   |   |
| **2010**                                 | ** ** | ** **              | ** ** | ** **                            |       |                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| U.S. Treasuries                          |       | $                       | 680.2      |                                  | $          | —                             |       | $ | 2.4 |   | $ | — |   | 2 |   | — |   |
| U.S. government agencies and authorities |       | 18.3                    |       | —                                |       | 0.2                                |       | — |   | 2 |   | — |   |
| U.S. corporate, state and municipalities |       | 2,850.0                 |       | 34.2                                  |       | 84.1                               |       | 9.4 |   | 279 |   | 6 |   |
| Foreign                                  |       | 1,563.7                 |       | 19.3                                  |       | 69.2                               |       | 5.1 |   | 142 |   | 7 |   |
| Residential mortgage-backed              |       | 636.6                   |       | 272.0                                 |       | 22.1                               |       | 76.4 |   | 121 |   | 77 |   |
| Commercial mortgage-backed               |       | 418.6                   |       | 37.6                                  |       | 22.1                               |       | 17.0 |   | 27 |   | 9 |   |
| Other asset-backed                       |       | 461.5                   |       | 246.4                                 |       | 28.7                               |       | 95.4 |   | 153 |   | 55 |   |
| Total                                    |       | $                       | 6,628.9    |                                  | $          | 609.5                              |       | $ | 228.8 |   | $ | 203.3 |   | 726 |   | 154 |   |

 

For the three months ended March 31, 2011, unrealized capital losses on fixed maturities decreased by $68.4.  Lower unrealized losses are primarily due to increased valuation in mortgage and other asset-backed securities, offset by increased long-term yields.

 

At March 31, 2011, the Company held no fixed maturities with an unrealized capital loss in excess of $10.0.  At December 31, 2010, the Company held 1 fixed maturity with an unrealized capital loss in excess of $10.0. The unrealized capital loss on this fixed maturity equaled $17.8, or 4.1% of the total unrealized capital losses, as of December 31, 2010.

 

All investments with fair values less than amortized cost are included in the Company’s other-than-temporary impairment analysis, and impairments were recognized as disclosed in Other-Than-Temporary Impairments (“OTTI”), which follows this section. After detailed impairment analysis was completed, management determined that the remaining investments in an unrealized loss position were not other-than-temporarily impaired, and therefore no further other-than-temporary impairment was necessary.

 

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*Other-Than-Temporary Impairments*

 

The Company analyzes its general account investments to determine whether there has been an other-than-temporary decline in fair value below the amortized cost basis. Factors considered in this analysis include, but are not limited to, the length of time and the extent to which the fair value has been less than amortized cost, the issuer’s financial condition and near-term prospects, future economic conditions and market forecasts, interest rate changes, and changes in ratings of the security.

 

When assessing the Company’s intent to sell a security or if it is more likely than not it will be required to sell a security before recovery of its amortized cost basis, management evaluates facts and circumstances such as, but not limited to, decisions to rebalance the investment portfolio and sales of investments to meet cash flow needs.

 

When the Company has determined it has the intent to sell or if it is more likely than not that it will be required to sell a security before recovery of its amortized cost basis and the fair value has declined below amortized cost (“intent impairment”) the individual security is written down from amortized cost to fair value and a corresponding charge is recorded in Net realized capital gains (losses) on the Condensed Statements of Operations as an OTTI. If the Company does not intend to sell the security nor is it more likely than not it will be required to sell the security before recovery of its amortized cost basis, but the Company has determined that there has been an other-than-temporary decline in fair value below the amortized cost basis, the OTTI is bifurcated into the amount representing the present value of the decrease in cash flows expected to be collected (“credit impairment”) and the amount related to other factors (“noncredit impairment”). The credit impairment is recorded in Net realized capital gains (losses) on the Condensed Statements of Operations. The noncredit impairment is recorded in Other comprehensive income (loss) on the Condensed Balance Sheets in accordance with the requirements of Accounting Standards Codification (“ASC”) Topic 320, “Investments - Debt and Equity Securities”.

 

In order to determine the amount of the OTTI that is considered a credit impairment, the Company utilizes the following methodology and significant inputs:

 

·          Recovery value is estimated by performing a discounted cash flow analysis based upon the best estimate of expected future cash flows, discounted at the effective interest rate implicit in the underlying debt security. The effective interest rate is the current yield prior to impairment for a fixed rate security or current coupon yield for a floating rate security.

·          Collectability and recoverability are estimated using the same considerations as the Company uses in its overall impairment analysis which includes, but is not limited to, the length of time and the extent to which the fair value has been less than amortized cost, the issuer’s financial condition and near-term prospects, future economic conditions and market forecasts, interest rate changes, and changes in ratings of the security.

·          Additional factors considered for structured securities such as RMBS, CMBS and other ABS include, but are not limited to, quality of underlying collateral, anticipated loss severities, collateral default rates, and other collateral

 

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characteristics such as vintage, repayment terms, and the geographical makeup of the collateral.

 

The following tables identify the Company’s credit-related and intent-related other-than-temporary impairments included in the Condensed Statements of Operations, excluding impairments included in Other comprehensive income (loss), by type for the three months ended March 31, 2011 and 2010.

 
| ** **                    | ** ** | **Three Months Ended March 31,** | ** ** |
|-------------------------------|------------|------------------------------------------------------|------------|
| ** **                    | ** ** | **2011**                                             | ** ** | **2010** | ** ** |
| ** **                    | ** ** | ** **                                           | ** ** | **No. of** | ** ** | ** ** | ** ** | **No. of** | ** ** |
| ** **                    | ** ** | **Impairment**                                       | ** ** | **Securities** | ** ** | **Impairment** | ** ** | **Securities** | ** ** |
| U.S. corporate                |       | $                                                    | 1.9        |   | 3 |   | $ | 1.3 |   | 5 |   |
| Foreign(1)                    |       | 2.8                                                  |       | 8 |   | 11.9 |   | 6 |   |
| Residential mortgage-backed   |       | 0.4                                                  |       | 9 |   | 6.5 |   | 43 |   |
| Commercial mortgage-backed    |       | 1.2                                                  |       | 1 |   | 2.1 |   | 1 |   |
| Other asset-backed            |       | 53.7                                                 |       | 46 |   | 3.3 |   | 14 |   |
| Public utilities              |       | —                                               |       | — |   | 0.2 |   | 3 |   |
| Mortgage loans on real estate |       | 2.0                                                  |       | 3 |   | 0.2 |   | 1 |   |
| Total                         |       | $                                                    | 62.0       |   | 70 |   | $ | 25.5 |   | 73 |   |

 

----

(1)   Primarily U.S. dollar denominated.

 

The above tables include $6.6 and $22.3 for the three months ended March 31, 2011 and 2010, respectively, in other-than-temporary write-downs related to credit impairments, which are recognized in earnings. The remaining $55.4 and $3.2 in write-downs for the three months ended March 31, 2011 and 2010, respectively, are related to intent impairments.

 

The following tables summarize these intent impairments, which are also recognized in earnings, by type for the three months ended March 31, 2011 and 2010.

 
| ** **                  | ** ** | **Three Months Ended March 31,** | ** ** |
|-----------------------------|------------|------------------------------------------------------|------------|
| ** **                  | ** ** | **2011**                                             | ** ** | **2010** | ** ** |
| ** **                  | ** ** | ** **                                           | ** ** | **No. of** | ** ** | ** ** | ** ** | **No. of** | ** ** |
| ** **                  | ** ** | **Impairment**                                       | ** ** | **Securities** | ** ** | **Impairment** | ** ** | **Securities** | ** ** |
| U.S. corporate              |       | $                                                    | 1.9        |   | 3 |   | $ | 1.3 |   | 5 |   |
| Foreign(1)                  |       | 1.3                                                  |       | 6 |   | 1.7 |   | 3 |   |
| Residential mortgage-backed |       | —                                               | *          | 1 |   | — |   | — |   |
| Other asset-backed          |       | 52.2                                                 |       | 46 |   | — |   | — |   |
| Public utilities            |       | —                                               |       | — |   | 0.2 |   | 3 |   |
| Total                       |       | $                                                    | 55.4       |   | 56 |   | $ | 3.2 |   | 11 |   |

 

----

*    Less than $0.1.

(1)   Primarily U.S. dollar denominated.

 

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

 

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The following tables identify the noncredit impairments recognized in Accumulated other comprehensive income (loss) by type for the three months ended March 31, 2011 and 2010.

 
| ** **                  | ** ** | **Three Months Ended March 31,** | ** ** |
|-----------------------------|------------|------------------------------------------------------|------------|
| ** **                  | ** ** | **2011**                                             | ** ** | **2010** | ** ** |
| ** **                  | ** ** | ** **                                           | ** ** | **No. of** | ** ** | ** ** | ** ** | **No. of** | ** ** |
| ** **                  | ** ** | **Impairment**                                       | ** ** | **Securities** | ** ** | **Impairment** | ** ** | **Securities** | ** ** |
| Commercial mortgage-backed  |       | $                                                    | —     |   | — |   | $ | 8.7 |   | 1 |   |
| Residential mortgage-backed |       | 2.9                                                  |       | 8 |   | 11.4 |   | 19 |   |
| Other asset-backed          |       | —                                               |       | — |   | 25.9 |   | 6 |   |
| Total                       |       | $                                                    | 2.9        |   | 8 |   | $ | 46.0 |   | 26 |   |

----

(1)   Primarily U.S. dollar denominated.

 

*Net Realized Capital Gains (Losses)*

 

Net realized capital gains (losses) are comprised of the difference between the amortized cost of investments and proceeds from sale, and redemption, as well as losses incurred due to the credit-related and intent-related other-than-temporary impairment of investments and changes in fair value of fixed maturities accounted for using the fair value option and derivatives. The cost of the investments on disposal is determined based on specific identification of securities. Net realized capital gains (losses) on investments were as follows for the three months ended March 31, 2011 and 2010.

 
| ** **                                                    | ** ** | **Three Months Ended March 31,** | ** ** |
|---------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                    | ** ** | **2011**                                             | ** ** | **2010** | ** ** |
| Fixed maturities, available-for-sale                          |       | $                                                    | (46.7      | ) | $ | 19.4 |   |
| Fixed maturities, at fair value using the fair   value option |       | (4.5                                                 | )          | (0.2 | ) |
| Equity securities, available-for-sale                         |       | 1.4                                                  |       | 0.1 |   |
| Derivatives                                                   |       | (348.0                                               | )          | (283.5 | ) |
| Other investments                                             |       | (2.2                                                 | )          | 2.3 |   |
| Net realized capital losses                                   |       | $                                                    | (400.0     | ) | $ | (261.9 | ) |
| After-tax net realized capital losses                         |       | $                                                    | (275.0     | ) | $ | (177.9 | ) |

 

The increase in *Total net realized capital losses* for the three months ended March 31, 2011 is primarily due to an unfavorable change in derivatives related to (a) hedging of variable annuity guaranteed death benefits, (b) higher losses related to a hedging program designed to mitigate the impact of potential declines in equity markets and their impact on regulatory capital, and (c) hedging of variable annuity guaranteed living benefits (“VAGLB”) ceded to SLDI under the combined coinsurance and coinsurance funds withheld agreement.  However, the losses on the VAGLB are ceded to SLDI and reported as a corresponding favorable change in Interest credited and other benefits to policyholders.  Higher credit and intent related impairments on fixed maturities also contributed to this unfavorable variance.  The unfavorable changes were partially offset by favorable changes in derivatives used to hedge FIA products.

 

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* *

*Fair Value Hierarchy*

 

The following tables present the Company’s hierarchy for its assets and liabilities measured at fair value on a recurring basis as of March 31, 2011 and December 31, 2010.

 
| ** **                                                                                                      | ** ** | **2011**         | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|------------------|------------|
| ** **                                                                                                      | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3****(1)** | ** ** | **Total** | ** ** |
| Assets:                                                                                                         | ** ** | ** **       | ** ** | ** ** |   |   |   |   |   |
| Fixed maturities, available-for-sale, including   securities pledged:                                           |       |             |       |   |   |   |   |   |   |
| U.S. Treasuries                                                                                                 |       | $                | 1,352.1    |   | $ | 59.9 |   | $ | — |   | $ | 1,412.0 |   |
| U.S government agencies and authorities                                                                         |       | —           |       | 19.2 |   | — |   | 19.2 |   |
| U.S. corporate, state and municipalities                                                                        |       | —           |       | 9,637.8 |   | 32.0 |   | 9,669.8 |   |
| Foreign                                                                                                         |       | —           |       | 5,855.9 |   | 8.0 |   | 5,863.9 |   |
| Residential mortgage-backed securities                                                                          |       | —           |       | 2,014.5 |   | 90.6 |   | 2,105.1 |   |
| Commercial mortgage-backed securities                                                                           |       | —           |       | 2,219.8 |   | — |   | 2,219.8 |   |
| Other asset-backed securities                                                                                   |       | —           |       | 851.0 |   | 188.3 |   | 1,039.3 |   |
| Equity securities, available-for-sale                                                                           |       | 123.4            |       | — |   | 16.0 |   | 139.4 |   |
| Derivatives:                                                                                                    |       |             |       |   |   |   |   |   |   |
| Interest rate contracts                                                                                         |       | 1.6              |       | 129.8 |   | — |   | 131.4 |   |
| Foreign exchange contracts                                                                                      |       | —           |       | 4.9 |   | — |   | 4.9 |   |
| Equity contracts                                                                                                |       | 7.8              |       | — |   | 132.9 |   | 140.7 |   |
| Credit contracts                                                                                                |       | —           |       | 3.6 |   | — |   | 3.6 |   |
| Cash and cash equivalents, short-term investments,   and short-term investments under securities loan agreement |       | 1,200.8          |       | — |   | — |   | 1,200.8 |   |
| Assets held in separate accounts                                                                                |       | 45,057.1         |       | — |   | — |   | 45,057.1 |   |
| Total                                                                                                           |       | $                | 47,742.8   |   | $ | 20,796.4 |   | $ | 467.8 |   | $ | 69,007.0 |   |
|                                                                                                            |       |             |       |   |   |   |   |   |   |
| Liabilities:                                                                                                    |       |             |       |   |   |   |   |   |   |
| Investment contract guarantees:                                                                                 |       |             |       |   |   |   |   |   |   |
| Fixed Indexed Annuities (“FIA”)                                                                       |       | $                | —     |   | $ | — |   | $ | 1,266.2 |   | $ | 1,266.2 |   |
| Guaranteed Minimum Withdrawal and Accumulation   Benefits (“GMWB” and “GMAB”)               |       | —           |       | — |   | 66.8 |   | 66.8 |   |
| Embedded derivative on reinsurance                                                                              |       | —           |       | — |   | 0.8 |   | 0.8 |   |
| Derivatives:                                                                                                    |       |             |       |   |   |   |   |   |   |
| Interest rate contracts                                                                                         |       | —           |       | 306.0 |   | — |   | 306.0 |   |
| Foreign exchange contracts                                                                                      |       | —           |       | 49.5 |   | — |   | 49.5 |   |
| Equity contracts                                                                                                |       | 1.4              |       | — |   | 19.4 |   | 20.8 |   |
| Credit contracts                                                                                                |       | —           |       | 0.1 |   | 12.1 |   | 12.2 |   |
| Total                                                                                                           |       | $                | 1.4        |   | $ | 355.6 |   | $ | 1,365.3 |   | $ | 1,722.3 |   |

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(1)    Level 3 net assets and liabilities accounted for (1.3)% of total net assets and liabilities measured at fair value on a recurring basis. Excluding separate accounts assets for which the policyholder bears the risk, the Level 3 net assets and liabilities in relation to total net assets and liabilities measured at fair value on a recurring basis totaled (4.0)%.

 

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| ** **                                                                                                      | ** ** | **2010**         | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|------------------|------------|
| ** **                                                                                                      | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3****(1)** | ** ** | **Total** | ** ** |
| Assets:                                                                                                         | ** ** | ** **       | ** ** | ** ** |   |   |   |   |   |
| Fixed maturities, available-for-sale, including   securities pledged:                                           |       |             |       |   |   |   |   |   |   |
| U.S. Treasuries                                                                                                 |       | $                | 1,552.3    |   | $ | 60.4 |   | $ | — |   | $ | 1,612.7 |   |
| U.S government agencies and authorities                                                                         |       | —           |       | 24.3 |   | — |   | 24.3 |   |
| U.S. corporate, state and municipalities                                                                        |       | —           |       | 9,487.3 |   | 40.1 |   | 9,527.4 |   |
| Foreign                                                                                                         |       | —           |       | 5,389.1 |   | 9.8 |   | 5,398.9 |   |
| Residential mortgage-backed securities                                                                          |       | —           |       | 1,979.5 |   | 191.5 |   | 2,171.0 |   |
| Commercial mortgage-backed securities                                                                           |       | —           |       | 2,198.9 |   | — |   | 2,198.9 |   |
| Other asset-backed securities                                                                                   |       | —           |       | 458.2 |   | 649.4 |   | 1,107.6 |   |
| Equity securities, available-for-sale                                                                           |       | 136.7            |       | — |   | 13.5 |   | 150.2 |   |
| Derivatives:                                                                                                    |       |             |       |   |   |   |   |   |   |
| Interest rate contracts                                                                                         |       | 2.6              |       | 162.5 |   | 12.0 |   | 177.1 |   |
| Foreign exchange contracts                                                                                      |       | —           |       | 5.1 |   | — |   | 5.1 |   |
| Equity contracts                                                                                                |       | 12.4             |       | — |   | 95.3 |   | 107.7 |   |
| Credit contracts                                                                                                |       | —           |       | 3.2 |   | — |   | 3.2 |   |
| Embedded derivative on reinsurance                                                                              |       | —           |       | 20.9 |   | — |   | 20.9 |   |
| Cash and cash equivalents, short-term investments,   and short-term investments under securities loan agreement |       | 1,155.8          |       | — |   | — |   | 1,155.8 |   |
| Assets held in separate accounts                                                                                |       | 44,413.3         |       | — |   | — |   | 44,413.3 |   |
| Total                                                                                                           |       | $                | 47,273.1   |   | $ | 19,789.4 |   | $ | 1,011.6 |   | $ | 68,074.1 |   |
|                                                                                                            |       |             |       |   |   |   |   |   |   |
| Liabilities:                                                                                                    |       |             |       |   |   |   |   |   |   |
| Investment contract guarantees:                                                                                 |       |             |       |   |   |   |   |   |   |
| Fixed Indexed Annuities (“FIA”)                                                                       |       | $                | —     |   | $ | — |   | $ | 1,165.5 |   | $ | 1,165.5 |   |
| Guaranteed Minimum Withdrawal and Accumulation   Benefits (“GMWB” and “GMAB”)               |       | —           |       | — |   | 77.0 |   | 77.0 |   |
| Embedded derivative on reinsurance                                                                              |       |             |       |   |   |   |   |   |   |
| Derivatives:                                                                                                    |       |             |       |   |   |   |   |   |   |
| Interest rate contracts                                                                                         |       | —           |       | 419.2 |   | 0.3 |   | 419.5 |   |
| Foreign exchange contracts                                                                                      |       | —           |       | 42.1 |   | — |   | 42.1 |   |
| Equity contracts                                                                                                |       | 0.8              |       | — |   | 16.0 |   | 16.8 |   |
| Credit contracts                                                                                                |       | —           |       | 0.1 |   | 14.4 |   | 14.5 |   |
| Total                                                                                                           |       | $                | 0.8        |   | $ | 461.4 |   | $ | 1,273.2 |   | $ | 1,735.4 |   |

 

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(1)    Level 3 net assets and liabilities accounted for (0.4)% of total net assets and liabilities measured at fair value on a recurring basis. Excluding separate accounts assets for which the policyholder bears the risk, the Level 3 net assets and liabilities in relation to total net assets and liabilities measured at fair value on a recurring basis totaled (1.2)%.

 

**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.

 

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*Liquidity Management*

 

The Company’s principal available sources of liquidity are annuity product charges, GIC and fixed annuity deposits, investment income, proceeds from the maturing and sale of investments, proceeds from debt issuance and borrowing facilities, repurchase agreements, securities lending, reinsurance, and capital contributions.  Primary uses of these funds are payments of commissions and operating expenses, interest and premium credits, payments under guaranteed death and living benefits, investment purchases, repayment of debt, and contract maturities, withdrawals, and surrenders.

 

The Company’s liquidity position is managed by maintaining adequate levels of liquid assets, such as cash, cash equivalents, and short-term investments. As part of the liquidity management process, different scenarios are modeled to determine whether existing assets are adequate to meet projected cash flows. Key variables in the modeling process include interest rates, equity market movements, quantity and type of interest and equity market hedges, anticipated contract owner behavior, market value of the general account assets, variable separate account performance, and implications of rating agency actions.

 

The fixed account liabilities are supported by a general account portfolio, principally composed of fixed rate investments with matching duration characteristics that can generate predictable, steady rates of return. The portfolio management strategy for the fixed account considers the assets available-for-sale. This strategy enables the Company to respond to changes in market interest rates, prepayment risk, relative values of asset sectors and individual securities and loans, credit quality outlook, and other relevant factors. The objective of portfolio management is to maximize returns, taking into account interest rate and credit risk, as well as other risks. The Company’s asset/liability management discipline includes strategies to minimize exposure to loss as interest rates and economic and market conditions change. In executing this strategy, the Company uses derivative instruments to manage these risks. The Company’s derivative counterparties are of high credit quality.

 

*Liquidity and Capital Resources*

 

Additional sources of liquidity include borrowing facilities to meet short-term cash requirements that arise in the ordinary course of business.  The Company maintains the following agreements:

 

·          A reciprocal loan agreement with ING America Insurance Holdings, Inc. (“ING AIH”), an affiliate, whereby either party can borrow from the other up to 3.0% of the Company’s statutory net admitted assets, excluding Separate Accounts, as of the prior December 31. At March 31, 2011 and December 31, 2010, the Company had an outstanding receivable of $375.2 and $593.6, respectively, with ING AIH under the reciprocal loan agreement.

·          A $50.0 uncommitted, perpetual revolving note facility with the Bank of New York. At March 31, 2011 and December 31, 2010, the Company had no amounts outstanding under the revolving note facility.

·          The Company holds approximately 64% of its assets in marketable securities.  These assets include cash, U.S. Treasuries, Agencies and Public, Corporate Bonds, ABS, CMBS and CMO.  In the event of a temporary liquidity need, cash may be raised by entering into reverse repurchase, dollar rolls, and/or security

 

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lending agreements by temporarily lending securities and receiving cash collateral.  Under the Company’s Liquidity Plan, up to 12% of the Company’s general account statutory admitted assets may be allocated to reverse repurchase, securities lending and dollar roll programs.  At the time a temporary cash need arises, the actual percentage of admitted assets available for reverse repurchase transactions will depend upon outstanding allocations to the three programs. As of March 31, 2011, the Company had securities lending obligations of $97.9, which represents less than 0.1% of the Company’s general account statutory admitted assets.

 

The Company is a member of the FHLB and is required to maintain a collateral deposit that backs funding agreements issued to the FHLB.  As of March 31, 2011 and December 31, 2010, the Company had $1,579.6, in non-putable funding agreements, including accrued interest, issued to FHLB. As of March 31, 2011 and December 31, 2010, assets with a market value of approximately $1,868.5 and $1,930.1, respectively, collateralized the funding agreements issued to the FHLB.  Assets pledged to the FHLB are included in Fixed maturities, available-for-sale, on the Condensed Balance Sheets.

 

Management believes that its sources of liquidity are adequate to meet the Company’s short-term cash obligations.

 

*Capital Contributions and Dividends*

 

During the three months ended March 31, 2011 and 2010, the Company received $44.0 and $239.0, respectively, in capital contributions from its Parent.

 

During the three months ended March 31, 2011 and 2010, the Company did not pay any dividends or return of capital distributions on its capital stock to its Parent.

 

*Collateral*

 

Under the terms of the Company’s Over-The-Counter Derivative International Swaps and Derivatives Association, Inc. Agreements (“ISDA Agreements”), the Company may receive from, or deliver to, counterparties, collateral to assure that all terms of the ISDA Agreements will be met with regard to the Credit Support Annex (“CSA”).  The terms of the CSA call for the Company to pay interest on any cash received equal to the Federal Funds rate.  As of March 31, 2011 and December 31, 2010, the Company held $61.7 and $57.9, respectively, of cash collateral, which was included in Payables under securities loan agreement, including collateral held, on the Condensed Balance Sheets. In addition, as of March 31, 2011 and December 31, 2010, the Company delivered collateral of $639.5 and $749.7, respectively, in fixed maturities pledged under derivatives contracts, which was included in Securities pledged on the Condensed Balance Sheets.

 

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*Reinsurance Agreements*

 

*Waiver of Premium — Coinsurance Funds Withheld*

 

Effective October 1, 2010, the Company entered into a coinsurance funds withheld agreement with its affiliate, Security Life of Denver International Limited (“SLDI”).  Under the terms of the agreement, the Company ceded to SLDI 100% of the group life waiver of premium liability (except for groups covered under rate credit agreements) assumed from ReliaStar Life Insurance Company (“RLI”), an affiliate, related to the Group Annual Term Coinsurance Funds Withheld agreement between the Company and RLI described under “Reinsurance Assumed” below.

 

Upon inception of the agreement, the Company paid SLDI a premium of $245.6.  At the same time, the Company established a funds withheld liability for $188.5 to SLDI and SLDI purchased a $65.0 letter of credit to support the ceded Statutory reserves of $245.6.  In addition, the Company recognized a gain of $17.9 based on the difference between the premium paid and the ceded US GAAP reserves of $227.7, which offsets the $57.1 ceding allowance paid by SLDI.  The ceding allowance will be amortized over the life of the business.

 

As of March 31, 2011, the value of the funds withheld liability under this agreement was $192.4, which is included in Other liabilities on the Condensed Balance Sheets.

 

*Guaranteed Investment Contract — Coinsurance*

 

Effective August 20, 1999, the Company entered into a Facultative Coinsurance Agreement with its affiliate, SLD.  Under the terms of the agreement, the Company facultatively cedes to SLD, from time to time, certain GICs on a 100% coinsurance basis.  The Company utilizes this reinsurance facility primarily for diversification and asset-liability management purposes in connection with this business, which is facilitated by the fact that SLD is also a major GIC issuer.  Senior management of the Company has established a current maximum of $4.0 billion for GIC reserves ceded under this agreement.

 

The value of GIC reserves ceded by the Company under this agreement was $90.1 and $40.0 at March 31, 2011 and December 31, 2010, respectively.

 

*Guaranteed Living Benefit — Coinsurance and Coinsurance Funds Withheld*

 

Effective June 30, 2008, the Company entered into an automatic reinsurance agreement with its affiliate, SLDI, covering 100% of the benefits guaranteed under specific variable annuity guaranteed living benefit riders attached to certain variable annuity contracts issued by the Company on or after January 1, 2000.

 

Also effective June 30, 2008, the Company entered into a services agreement with SLDI, under which the Company provides certain actuarial risk modeling consulting services to SLDI with respect to hedge positions undertaken by SLDI in connection with the reinsurance agreement.  For the three months ended March 31, 2011 and 2010, revenue related to the agreement was $3.2 and $3.0, respectively.

 

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Effective July 1, 2009, the reinsurance agreement was amended to change the reinsurance basis from coinsurance to a combined coinsurance and coinsurance funds withheld basis. On July 31, 2009, SLDI transferred assets with a market value of $3.2 billion to the Company, and the Company deposited those assets into a funds withheld trust account.  As of March 31, 2011, assets totaling $3.3 billion remain on deposit in the trust account.  The Company also established a corresponding funds withheld liability to SLDI, which is included in Other liabilities on the Condensed Balance Sheets.

 

Also effective July 1, 2009, the Company and SLDI entered into an asset management services agreement, under which SLDI serves as asset manager for the funds withheld account.  SLDI has retained its affiliate, ING Investment Management LLC, as subadviser for the funds withheld account.

 

At March 31, 2011 and December 31, 2010, the value of reserves ceded by the Company under this agreement was $833.0 and $955.4, respectively.  In addition, a deferred loss in the amount of $349.8 and $355.9 at March 31, 2011 and December 31, 2010, respectively, is included in Other assets on the Condensed Balance Sheets and is amortized over the period of benefit.

 

*Ratings*

 

The Company’s access to funding and its related cost of borrowing, requirements for derivatives collateral posting and the attractiveness of certain of its products to customers are affected by Company credit ratings and insurance financial strength ratings, which are periodically reviewed by the rating agencies.

 

On December 13, 2010, Moody’s affirmed the “A2” insurance financial strength rating of the Company and changed the outlook to negative from developing.  On October 27, 2009, Moody’s downgraded the Company to “A2” from “A1” and assigned a developing outlook.

 

On December 7, 2010, S&P affirmed the counterparty credit and insurer financial strength ratings of the Company at “A” and at the same time removed the ratings from CreditWatch with negative implications and assigned, instead, a negative outlook.  On November 10, 2010, S&P placed the counterparty credit and insurer financial strength ratings on CreditWatch with negative implications. On September 16, 2010, S&P lowered the counterparty credit and insurer financial strength ratings of the Company to “A” from “A+”.

 

On September 21, 2010, Fitch Ratings Ltd. (“Fitch”) maintained the Company on a “Ratings Watch Negative” with a financial strength rating of “A-”.

 

On June 11, 2010, A.M. Best affirmed the Company’s financial strength ratings of “A” and issuer credit ratings of “a+”.  The outlook was improved to “stable” from “negative”.

 

The ratings of the Company by S&P, Fitch, A.M. Best and Moody’s reflect a broader view of how the financial services industry is being challenged by the current economic environment, but also are based on the rating agencies’ specific views of the Company’s financial strength.  In making their ratings decisions, the agencies

 

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consider past and expected future capital and earnings, asset quality and risk, profitability and risk of existing liabilities and current products, market share and product distribution capabilities, and direct or implied support from parent companies, including implications of the ING restructuring plan, among other factors.  The ratings affirmations and outlook changes by both S&P and Moody’s in December 2010 followed the third quarter 2010 announcements by ING regarding its insurance operations, including its preparation for a base case of two IPOs: one Europe-led IPO and one separate U.S.-focused IPO.

 

*Minimum Guarantees*

 

Variable annuity contracts containing minimum guaranteed death and living benefits expose the Company to equity risk.  A decrease in the equity markets may cause a decrease in the account values, thereby increasing the possibility that the Company may be required to pay amounts to contract owners due to guaranteed death and living benefits.  An increase in the value of the equity markets may increase account values for these contracts, thereby decreasing the Company’s risk associated with guaranteed death and living benefits.

 

The Company ceased new sales of variable annuity products in March 2010.  However, the Company’s existing variable annuity block of business contains certain guaranteed death and living benefits made available to contract owners as described below:

 

*Guaranteed Minimum Death Benefits (“GMDBs”)*:

 

·          Standard - Guarantees that, upon death, the death benefit will be no less than the premiums paid by the contract owner, adjusted for any contract withdrawals.

·          Ratchet - Guarantees that, upon death, the death benefit will be no less than the greater of (1) Standard or (2) the maximum contract anniversary (or quarterly) value of the variable annuity, adjusted for contract withdrawals.

·          Combo (Max 7) - Guarantees that, upon death, the death benefit will be no less than the greater of (1) Ratchet or (2) Rollup (Rollup guarantees that, upon death, the death benefit will be no less than the aggregate premiums paid by the contract owner accruing interest at the contractual rate per annum, adjusted for contract withdrawals, which may be subject to a maximum cap on the rolled up amount.)

 

A number of other versions of death benefits were offered previously but sales were discontinued. For contracts issued prior to January 1, 2000, most contracts with enhanced death benefit guarantees were reinsured to third party reinsurers to mitigate the risk produced by such guaranteed death benefits.  For contracts issued after December 31, 1999, the Company instituted a variable annuity guarantee hedging program in lieu of reinsurance.  The variable annuity guarantee hedging program is based on the Company entering into derivative positions to offset exposures to guaranteed minimum death benefits due to adverse changes in the equity markets.

 

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As of March 31, 2011 and December 31, 2010, the guaranteed value of these death benefits in excess of account values was estimated to be $7.0 billion and $7.9 billion, respectively, before reinsurance. The decrease was primarily driven by favorable equity market performance in 2011.

 

As of March 31, 2011 and December 31, 2010, the guaranteed value of minimum guaranteed death benefits in excess of account values, net of reinsurance, was estimated to be $6.2 billion and $6.9 billion, respectively, all of which was projected to be covered by the Company’s variable annuity guarantee hedging program. As of March 31, 2011 and December 31, 2010, the Company recorded a liability of $356.0 and $373.8, respectively, net of reinsurance, representing the estimated net present value of the Company’s future obligation for guaranteed minimum death benefits in excess of account values. The liability decreased mainly due to the decrease in expected future claims and the increase to expected future fees attributable to the improvement in equity market performance in 2011.

 

*Guaranteed Living Benefits*:

 

·          Guaranteed Minimum Income Benefit (“GMIB”) - Guarantees a minimum income payout, exercisable each contract anniversary on or after a specified date, in most cases the 10th rider anniversary.

·          Guaranteed Minimum Withdrawal Benefit (“GMWB”) - Guarantees an annual withdrawal amount for life that is calculated as a percentage of the notional amount that equals premium at the time of contract issue and may increase by annual ratchets.  The percentage used to determine the guaranteed annual withdrawal amount may vary by age and contract year of first withdrawal. Earlier versions of the withdrawal benefit included a rollup (7%, 6%, 5% or 0%, depending on versions of the benefit) in combination with a ratchet (primarily annual or quarterly, depending on versions). A joint life-time withdrawal benefit option was available to include coverage for spouses.  Most versions of the withdrawal benefit included reset and/or step-up features that may increase the guaranteed withdrawal amount in certain conditions.  Earlier versions of the withdrawal benefit guarantee that annual withdrawals of up to 7.0% of eligible premiums may be made until eligible premiums previously paid by the contract owner are returned, regardless of account value performance.  Asset allocation requirements apply at all times where withdrawals are guaranteed for life.

·          Guaranteed Minimum Accumulation Benefit (“GMAB”) - Guarantees that the account value will be at least 100% of the eligible premiums paid by the contract owner after 10 years, net of any contract withdrawals (GMAB 10).  In the past, the Company offered an alternative design that guaranteed the account value to be at least 200% of the eligible premiums paid by contract owners after 20 years (GMAB 20).

 

The Company reinsures most of its living benefit guarantee riders to SLDI, an affiliated reinsurer, to mitigate the risk produced by such benefits.  This reinsurance agreement covers all of the GMIBs, as well as the GMWBs with lifetime guarantees (“the “Reinsured living benefits”).  The GMABs and the GMWBs without lifetime guarantees (the “Non-reinsured living benefits”) are not covered by this reinsurance. The Non-reinsured living benefits are still covered by the Company’s variable annuity guarantee hedging program.

 

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For the Reinsured living benefits, as of March 31, 2011 and December 31, 2010, the guaranteed value of these benefits in excess of account values was estimated to be $7.2 billion and $7.7 billion, respectively, before reinsurance.

 

For the Non-reinsured living benefits, as of March 31, 2011 and December 31, 2010, the guaranteed value of these benefits in excess of account values was $42.0 and $52.4, respectively. The Company recorded a liability representing the estimated net present value of its future obligations for these benefits of $66.8 and $77.0 as of March 31, 2011 and December 31, 2010, respectively.

 

*Variable Annuity Guarantee Hedging Program*: In order to hedge equity risk associated with non-reinsured GMDBs and non-reinsured guaranteed living benefits, the Company enters into futures positions and total return swaps on various public market equity indices chosen to closely replicate contract owner variable fund returns.  The Company also hedges most of the foreign currency risk arising from its international fund exposure using forward contracts. The Company uses market consistent valuation techniques to establish its derivative positions and to rebalance the derivative positions in response to market fluctuations.  One aspect of the hedging program is designed to offset changes related to equity experience in the liability and to pay excess claims not covered by the contract owner account value.  The Company also administers a hedging program that mitigates not only equity risk, but also the interest rate risk associated with its Principal Guard GMWB and GMAB products.  This hedge strategy primarily involves entering into interest rate swaps.

 

The Variable Annuity Funding Capital Hedging Program, which was approved during 2010, is an overlay to the Variable Annuity Guarantee Hedging Program that mitigates the impact of potential declines in equity markets and their impact on statutory capital.  The notional balance executed in accordance with the Variable Annuity Capital Hedging Program was $165.0 as of March 31, 2011.  The program’s hedge strategy primarily involves using equity futures contracts. The derivatives under the variable annuity guarantee hedging programs do not qualify for hedge accounting under US GAAP.

 

In 2009, ING USA took certain actions to reduce its exposure to interest rate and market risks.  These actions included revisions to variable annuity guaranteed benefits for new business, reducing the minimum guaranteed interest rate on new fixed indexed annuities business, changes to certain products, reassessment of the investment strategy, hedging certain funds which previously were not hedged, hedging certain guaranteed death benefits which were previously not hedged, hedging interest rate risk on new variable annuity business and hedging the majority of the Company’s foreign currency risk.  ING USA continues to monitor these initiatives and their financial impacts, and will determine whether further actions are necessary.

 

Other risks posed by market conditions, such as the majority of the Company’s equity volatility and interest rate risk, and risks posed by contract owner experience, such as surrender and mortality experience deviations, are not explicitly mitigated by this program.  In addition, certain funds, where there is no replicating market index or where hedging is not appropriate, are excluded from the program.  The Company continues to review its hedging strategies, and may from time to time make revisions to the hedging program.

 

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During December 2010, the Company entered into a series of interest rate swaps with external counterparties.  The Company also entered into a short-term mirror total return swap (“TRS”) transaction with ING V, its indirect parent company.  The outstanding market value of the TRS was $11.6 at December 31, 2010.  The TRS matured January 3, 2011.

 

For those risks addressed by the variable annuity guarantee hedging program, the Company is exposed to the risk that the market indices will not adequately replicate actual contract owner variable fund growth.  Any differences between actual results and the market indices result in income volatility.

 

*Repurchase Agreements*

 

The Company engages in dollar repurchase agreements with mortgage-backed securities (“dollar rolls”) and repurchase agreements with other collateral types to increase its return on investments and improve liquidity.  Such arrangements typically meet the requirements to be accounted for as financing arrangements.  The Company enters into dollar roll transactions by selling existing mortgage-backed securities and concurrently entering into an agreement to repurchase similar securities within a short time frame in the future at a lower price. Under repurchase agreements, the Company borrows cash from a counterparty at an agreed upon interest rate for an agreed upon time frame and pledges collateral in the form of securities. At the end of the agreement, the counterparty returns the collateral to the Company and the Company, in turn, repays the loan amount along with the additional agreed upon interest.  Company policy requires that at all times during the term of the dollar roll and repurchase agreements that cash or other collateral types obtained is sufficient to allow the Company to fund substantially all of the cost of purchasing replacement assets. Cash collateral received is invested in short-term investments, with the offsetting collateral liability included as a liability on the Condensed Balance Sheets. At March 31, 2011 and December 31, 2010, the Company did not have securities pledged in dollar rolls and repurchase agreement transactions. The Company did not have a repurchase obligation related to dollar rolls and repurchase agreements at March 31, 2011 and December 31, 2010, respectively.  In addition, at March 31, 2011, the Company did not hold any collateral posted by the counterparty in connection with the increase in the value of pledged securities that will be released upon settlement.

 

The Company also enters into reverse repurchase agreements.  These transactions involve a purchase of securities and an agreement to sell substantially the same securities as those purchased.  Company policy requires that, at all times during the term of the reverse repurchase agreements, cash or other collateral types provided is sufficient to allow the counterparty to fund substantially all of the cost of purchasing replacement assets.  At March 31, 2011 and December 31, 2010, the Company did not have any securities pledged under reverse repurchase agreements.

 

The primary risk associated with short-term collateralized borrowings is that the counterparty will be unable to perform under the terms of the contract. The Company’s exposure is limited to the excess of the net replacement cost of the securities over the value of the short-term investments, an amount that was immaterial at March 31, 2011.  The Company believes the counterparties to the dollar

 

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rolls, repurchase, and reverse repurchase agreements are financially responsible and that the counterparty risk is minimal.

 

*Securities Lending*

 

The Company engages in securities lending whereby certain 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. At March 31, 2011 and December 31, 2010, the fair value of loaned securities was $93.6 and $139.7, respectively, and is included in Securities pledged on the Condensed Balance Sheets.

 

*Income Taxes*

 

Income tax obligations include the allowance on uncertain tax benefits related to IRS tax audits and state tax exams that have not been completed.  The current liability of $6.1 may be paid in less than one year, upon completion of such audits and exams.  The timing of the payment of the remaining allowance of $2.7 cannot be reliably estimated.

 

*Recent Initiatives*

 

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

 

On January 28, 2010, ING announced the filing of its appeal with the General Court of the European Union against specific elements of the EC’s decision regarding the ING Restructuring Plan.  Despite the appeal, ING is committed to executing the formal separation of banking and insurance and the divestment of the latter.  In its appeal, ING contests the state aid calculation the EC applied to the reduction in repayment premium agreed upon by ING and the Dutch State in connection with ING’s December 2009 repayment of the first EUR 5 billion of Core Tier 1 securities.  ING is also appealing the disproportionality of the price leadership restrictions imposed on ING with respect to the European financial sector.

 

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On November 10, 2010, ING announced that while the option of implementing the separation through one global IPO remains open, ING and its U.S. insurance affiliates, including the Company, are going to prepare for a base case of two IPOs: one Europe-led IPO and one separate U.S.-focused IPO.  As part of its preparation for a potential U.S.-focused IPO, management of ING’s U.S. insurance operations is implementing a program to sharpen the strategic focus of the U.S. insurance business on life insurance and retirement services while reducing annual expenses for overall U.S. Insurance operations by approximately $125.0 per year. The objective of these initiatives is to create a stronger and more profitable U.S. insurance business in preparation for a potential IPO.  Preparation for a potential U.S.-focused IPO will also require its management to prepare consolidated US GAAP financial statements which would likely include the Company and other affiliates.  As part of this initiative, management has been assessing and will continue to assess. its US GAAP accounting policies, including consideration of a fair value accounting model for GMWB contracts with lifetime guarantees. Upon conclusion of assessment, management may make modifications to the existing accounting policies of the Company and its affiliates.

 

Beginning in the first quarter of 2011, the Company implemented a reversion to the mean technique of estimating its short-term equity market return assumptions. This change in estimate was applied prospectively in first quarter 2011. The revision to the mean technique is a common industry practice in which DAC and VOBA unlocking for short-term equity returns only occurs if equity market performance falls outside established parameters.

 

In 2009, the Company took certain actions to reduce its exposure to interest rate and market risks.  These actions included revisions to variable annuity guaranteed benefits for new business, reducing the minimum guaranteed interest rate on new fixed indexed annuities business, changes to certain products, reassessment of the investment strategy, hedging certain funds which previously were not hedged, hedging certain guaranteed death benefits which were previously not hedged, hedging interest rate risk on new variable annuity business and hedging the majority of the Company’s foreign currency risk.  ING USA continues to monitor these initiatives and their financial impacts. In addition, during 2010, the Company approved a funding capital hedging program.

 

During December 2010, the Company entered into a series of interest rate swaps with external counterparties.  The Company also entered into a short-term mirror total return swap (“TRS”) transaction with ING V, its indirect parent company.  The outstanding market value of the TRS was $11.6 at December 31, 2010.  The TRS matured January 3, 2011.

 

On April 9, 2009, ING USA’s ultimate parent, ING, announced a global business strategy which identified certain core and non-core businesses and geographies, stated ING’s intention to explore divestiture of non-core businesses over time, withdraw from certain non-core geographies, limit future acquisitions and implement enterprise-wide expense reductions.  In particular, with respect to ING’s U.S. insurance operations, ING is seeking to further reduce its risk by focusing on individual life products, retirement services and a new suite of simpler, lower risk annuity products to be sold by ING USA’s affiliate, ING Life Insurance and Annuity Company.  As part of this strategy, ING USA ceased new sales of variable annuity

 

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products in March of 2010. Some new amounts will continue to be deposited on ING USA variable annuities as add-on premiums to existing contracts.

 

Volatile capital market conditions commencing in the fourth quarter of 2008 and continuing into 2009, coupled with numerous changes in regulatory and accounting requirements and changes in policyholder behavior as a result of the recent changed economic environment, presented extraordinary challenges to actuarial reserve valuation methodologies and controls. Since the second quarter of 2009, ING USA has undertaken a review and strengthening of its systems, processes and internal controls, including those with respect to actuarial calculations on fixed and variable annuity products. As part of its internal controls review, ING USA has from time to time identified control issues that require corrective action and has taken, and will continue to undertake appropriate corrective action to address identified control issues.

 

**Recently Adopted Accounting Standards**

 

(See the Organization and Significant Accounting Policies footnote to the Condensed Financial Statements.)

 

**Recently Enacted Legislation**

 

In March 2010, President Obama signed the Patient Protection and Affordable Care Act (“PPACA”) into law, as well as signed the Health Care and Education Reconciliation Act of 2010, which amends certain aspects of the PPACA (collectively, the “Act”).  The Act will require employers to make certain conforming changes to retiree health benefits provided in order to comply with the new legislation.  Significant provisions of the Act include expanded benefit mandates, an excise tax on health insurance coverage exceeding a threshold amount, and a temporary reinsurance program for eligible employment-based plans.  The effect of the Act on the Company’s projected benefit obligation and cost depends on finalization of related regulatory requirements; however, the impact is not expected to be material.  The Company will continue to monitor and assess the effect of the Act as the regulatory requirements are finalized.

 

On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). The Dodd-Frank Act is landmark legislation that represents the most profound restructuring of U.S. financial regulation since the New Deal. Precipitated by the financial crisis that began in 2007, the legislation includes 15 major parts with 14 stand-alone statutes and numerous amendments to the current array of banking, securities, derivatives, and consumer finance laws. U.S. financial regulators have commenced an intense period of studies and rulemaking mandated by the legislation that will continue for a period of time. Until such studies and rulemaking are completed, the precise impact of the Dodd-Frank Act on ING and its affiliates, including the Company cannot be determined. However, there are major elements of the legislation that we have identified to date that are of particular significance to ING and/or its affiliates, including the Company, as described below.

 

The Dodd-Frank Act creates a new agency, the Financial Stability Oversight Council (“FSOC”), an inter-agency body that is responsible for monitoring the activities of the

 

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U.S. financial system and recommending a framework for substantially increased regulation of significant financial services firms, including large, interconnected bank holding companies and systemically important nonbank financial companies that could consist of securities firms, insurance companies and other providers of financial services, including non-U.S. companies. A company determined to be systemically significant (a “Systemically Significant Company”) will be supervised by the Federal Reserve Board and will be subject to unspecified heightened prudential standards, including minimum capital requirements, liquidity standards, short-term debt limits, credit exposure requirements, management interlock prohibitions, maintenance of resolution plans, stress testing, and restrictions on proprietary trading. In January 2011, the FSOC released a proposed rule designed to clarify FSOC’s approach to designating nonbank financial companies as systemically significant.  However, the proposed rule provides little insight into the designation of a nonbank financial company as a Systemically Significant Company because it substantially repeats the statutory language of the Dodd-Frank Act on the criteria for such designation.  The comment period for the proposed rule expired in February 2011, and the final rule is expected to be issued in the second or third quarter of 2011. We cannot predict whether ING or the Company will be designated as a Systemically Significant Company. If, however, ING or the Company were so designated, failure to meet the requisite measures of financial condition could result in requirements for a capital restoration plan or capital raising; management changes; asset sales; and limitations and restrictions on capital distributions, acquisitions, affiliate transactions and/or product offerings.

 

The legislation also creates a Federal Insurance Office to be housed within the Treasury Department, which will be charged with monitoring (but not regulating) the insurance industry, including gathering information to identify issues or gaps in the regulation of insurers that could contribute to systemic crisis in the insurance industry or U.S. financial system; preparing annual reports to Congress on the insurance industry; conducting studies on modernization of U.S. insurance regulation and the global reinsurance market; and entering into/implementing agreements with foreign governments relating to the recognition of prudential measures with respect to insurance and reinsurance (“International Agreements”), including the authority to preempt U.S. state law if it is found to be inconsistent with an International Agreement and treats a non-U.S. insurer less favorably than a U.S. insurer.

 

The legislation creates a new framework for regulating derivatives, which may increase the costs of hedging generally. It includes requirements for centralized clearing of OTC derivatives (except those where one of the counterparties is a “non-financial end user” to be defined by regulation); and establishes new regulatory authority for the SEC and the Commodity Futures Trading Commission (“CFTC”) over derivatives, and “swap dealers” and “major swap participants”, as to be defined by SEC and CFTC regulation, each of whom will be subject to as yet unspecified capital and margin requirements.  Based on proposed rules jointly developed by the CFTC and the SEC and published on December 1, 2010, which further define the terms “swap dealer,” “security-based swap dealer,” “major swap participant,” and “major security-based swap participant,” we do not believe the Company should be considered a “swap dealer,” “security-based swap dealer,” “major swap participant,” or “major security-based swap participant”.  However, the final regulations could provide otherwise, which could substantially increase the cost of hedging and related activities undertaken by the Company.

 

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The legislation provides that fixed indexed annuities meeting certain requirements shall be exempt from SEC supervision, thereby superseding SEC Regulation 151A, which would have required SEC registration of certain fixed index annuity products.

 

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

 

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

 

**Legislative and Regulatory Initiatives**

 

Legislative proposals, which have been or may again be considered by Congress, include changing the taxation of annuity benefits, changing the tax treatment of insurance products relative to other financial products, and changing life insurance company taxation.  Some of these proposals, if enacted, could have a material adverse effect on life insurance, annuity, and other retirement savings product sales, while others could have a material beneficial effect.  Administrative budget proposals to disallow insurance companies a portion of the dividends received deduction in connection with variable product separate accounts could increase the cost of such products to policyholders.  In addition to the assessments imposed on certain financial companies by the Dodd-Frank Act, it is possible that Congress may adopt a form of “financial crisis responsibility” fee or tax on banks and other financial firms to mitigate costs to taxpayers of various government programs established to address the financial crisis and to offset costs of potential future crises.

 

The SEC is proposing to rescind Rule 12b-1 under the Investment Company Act of 1940 and to adopt a new Rule 12b-2.  If adopted, the proposal would impose new limitations on the levels of distribution-related charges that could be paid by mutual funds, including funds available under the Company’s variable annuity products.

 

In connection with the March 31, 2009 transfer by ING of an economic interest in 80% of its Alt-A RMBS portfolio to the Dutch State, the EC had a six month period to review and assess the competitive impact of the transaction.  On October 26, 2009, ING announced the key components of the final Restructuring Plan ING submitted to the EC as part of the process to receive EC approval for the state aid granted to ING by the Dutch State in the form of EUR 10 billion Core Tier 1 securities issued on November 12, 2008 and the ING-Dutch State Transaction. As part of the Restructuring Plan, ING has agreed to separate its banking and insurance businesses by 2013. ING intends to achieve this separation by the divestment of all insurance and investment management operations, including the Company. In November 2009, the Restructuring Plan received formal EC approval and the separation of insurance and banking operations and other components of the Restructuring Plan were approved by ING shareholders.  On January 28, 2010, ING announced the filing of its appeal with the General Court of the European Union against specific elements of the

 

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EC’s decision regarding the ING Restructuring Plan.  Despite the appeal, ING is committed to executing the formal separation of banking and insurance and the divestment of the latter.  In its appeal, ING contests the state aid calculation the EC applied to the reduction in repayment premium agreed upon by ING and the Dutch State in connection with ING’s December 2009 repayment of the first EUR 5 billion of Core Tier securities.  ING is also appealing the disproportionality of the price leadership restrictions imposed on ING with respect to the European financial sector.

 

**Other Regulatory Matters**

 

As with many financial services companies, the Company and its affiliates periodically receive informal and formal requests for information from various state and federal governmental agencies and self-regulatory organizations in connection with inquiries and investigations of the products and practices of the Company or the financial services industry.  Some of these investigations and inquiries could result in regulatory action against the Company.  The potential outcome of such action is difficult to predict but could subject the Company or its affiliates to adverse consequences, including, but not limited to, settlement payments, penalties, fines, and other financial liability.  It is not currently anticipated that the outcome of any such action will have a material adverse effect on ING or ING’s U.S.-based operations, including the Company.  It is the practice of the Company and its affiliates to cooperate fully in these matters.

 

For further discussion of the risks to the Company as a result of recent regulatory inquiries and possible changes in U.S. regulation, see Part I, Item 1A. Risk Factors of the 2010 Annual Report on Form 10-K.

 

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**Item 4.****          ****Controls and Procedures**

 

a)         The Company carried out an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that the Company’s current disclosure controls and procedures are effective in ensuring that material information relating to the Company required to be disclosed in the Company’s periodic SEC filings is made known to them in a timely manner.

 

b)        There has not been any change in the internal controls over financial reporting of the Company that occurred during the period covered by this report that has materially affected or is reasonably likely to materially affect these internal controls.

 

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**PART II.****      ****OTHER INFORMATION**

 

**Item 1.****          ****Legal Proceedings**

 

ING USA Annuity and Life Insurance Company (“the Company”) is involved in threatened or pending lawsuits/arbitrations arising from the normal conduct of business. Due to the climate in insurance and business litigation/arbitrations, 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/arbitrations, in light of existing insurance, reinsurance, and established reserves, it is the opinion of management that the disposition of such lawsuits/arbitrations will not have a materially adverse effect on the Company’s operations or financial position.

 

As with many financial services companies, the Company and its affiliates periodically receive informal and formal requests for information from various state and federal governmental agencies and self-regulatory organizations in connection with inquiries and investigations of the products and practices of the Company or the financial services industry.  Some of these investigations and inquiries could result in regulatory action against the Company.  The potential outcome of such action is difficult to predict but could subject the Company or its affiliates to adverse consequences, including, but not limited to, settlement payments, penalties, fines, and other financial liability.  It is not currently anticipated that the outcome of any such action will have a material adverse effect on ING or ING’s U.S.-based operations, including the Company.  It is the practice of the Company and its affiliates to cooperate fully in these matters.

 

**Item 1A.****       ****Risk Factors**

 

The following should be read in conjunction with and supplements and amends the risk factors that may affect the Company’s business or operations described under “Risk Factors” in Part I, Item 1A. of the 2010 Annual Report on Form 10-K.

 

*The amount of statutory capital that the Company holds and its**risk-based capital**(“RBC”) ratio can vary significantly from time to time and is sensitive to a number of factors, many of which are outside of the Company’s control, and influences its financial strength and credit ratings.*

 

The National Association of Insurance Commissioners (“NAIC”) has established regulations that provide minimum capitalization requirements based on RBC formulas for insurance companies. The RBC formula for life insurance companies establishes capital requirements relating to insurance, business, asset and interest rate risks, including equity, interest rate and expense recovery risks associated with variable annuities and group annuities that contain death benefits or certain living benefits.

 

In any particular year, statutory surplus amounts and RBC ratios may increase or decrease depending on a variety of factors — the amount of statutory income or losses

 

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generated by the Company (which itself is sensitive to equity market and credit market conditions), the amount of additional capital the Company must hold to support business growth, changes in equity market levels, the value and credit ratings of certain fixed-income and equity securities in its investment portfolio, the value of certain derivative instruments that do not receive hedge accounting, changes in interest rates, as well as changes to the NAIC RBC formulas and the interpretation of NAIC RBC instructions applicable to RBC calculation methodologies. Many of these factors are outside of the Company’s control. The Company’s financial strength and credit ratings are significantly influenced by its statutory surplus amounts and RBC ratios. In addition, rating agencies may implement changes to their own internal models, which differ from the RBC capital model, that have the effect of increasing or decreasing the amount of statutory capital the Company should hold relative to the rating agencies expectations. In addition, in extreme scenarios of equity market declines or sustained periods of low interest rates, the amount of additional statutory reserves that the Company is required to hold for variable annuity guarantees increases at a greater than linear rate. This reduces the statutory surplus available for use in calculating the Company’s RBC ratios. To the extent that the Company’s RBC ratios are deemed to be insufficient, the Company may seek to take actions to either increase the capitalization of the Company or reduce the capitalization requirements. If the Company were unable to accomplish such actions, the rating agencies may view this as a reason for ratings downgrades.

 

**Item 6.****         ****Exhibits**

 

See Exhibit Index on pages 101-102 hereof.

 

 

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**SIGNATURE**

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 
| May 6,   2011                   |   | ING USA Annuity and Life Insurance Company                                                                                                                   |
|--------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|      (Date) |   |                              (Registrant) |
|                                 |   |                                                                                                                                                                                       |   |
|                                 |   |                                                                                                                                                                                       |   |
|                                 |   | By:                                                                                                                                                                                        | /s/ | Ewout L. Steenbergen |
|                                 |   |                                                                                                                                                                                       |   | Ewout L. Steenbergen |
|                                 |   |                                                                                                                                                                                       | Executive Vice President and |
|                                 |   |                                                                                                                                                                                       | Chief Financial Officer |
|                                 |   |                                                                                                                                                                                       | (Duly Authorized Officer and Principal Financial Officer) |

 

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**ING USA ANNUITY AND LIFE INSURANCE COMPANY (the “Company”)**

**Exhibit Index**

 
| **Exhibit** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|-------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Number**  | ** ** | **Description of Exhibit**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 2.1         |       | Agreement and Plan of Merger dated June 25, 2003, by and between   USG Annuity & Life Company, United Life & Annuity Insurance   Company, Equitable Life Insurance Company of Iowa and Golden American Life   Insurance Company, incorporated by reference in Exhibit 99-8 in the   Company’s Form 8K filed with the SEC on January 2, 2004 (File   No. 333-87270).                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 3.1         |       | Restated Articles of Incorporation Providing for the Redomestication   of Golden American Life Insurance Company dated July 2 and 3, 2003,   effective January 1, 2004, incorporated by reference to Company’s 10-K,   as filed with the SEC on March 29, 2004 (File No. 033-87270).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 3.2         |       | Amendment to Articles of Incorporation Providing for the Name Change   of Golden American Life Insurance Company dated November 20, 2003,   effective January 1, 2004, incorporated by reference to the Company’s   10-K, as filed with the SEC on March 29, 2004 (File No. 033-87270).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 3.3         |       | Amendment to Articles of Incorporation Providing for the Change in   Purpose and Powers of ING USA Annuity and Life Insurance Company dated   March 3 and 4, 2004, effective March 11, 2004, incorporated by   reference to the Company’s 10-Q, as filed with the SEC on May 17, 2004   (File No. 033-87270).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 3.4         |       | Amended and Restated By-Laws of ING USA Annuity and Life Insurance   Company effective January 1, 2005, incorporated by reference to the   Company’s Form 10-Q, as filed with the SEC on May 13, 2005 (File   No. 033-87270).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 4.1         |       | Single Premium Deferred Modified Guaranteed Annuity Contract, Single   Premium Deferred modified Guaranteed Annuity Master Contract, and Single   Premium Deferred Modified Guaranteed Annuity Certificate - Incorporated   herein by reference to Pre-Effective Amendment No. 1 to Registration   Statement on Form S-1 for Golden American Life Insurance Company as   filed with the SEC on February 8, 2002 (File No. 333-67660).                                                                                                                                                                                                                                                                                                                                                                                             |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 4.2         |       | Single Premium Deferred Modified Guaranteed Annuity Master Contract   and Single Premium Deferred Modified guaranteed Annuity Certificate —   Incorporated by reference to Post-Effective Amendment No. 1 to   Registration Statement on Form S-1 for Golden American Life Insurance   Company, as filed with the SEC on September 13, 2000 (File   No. 333-40596).                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 4.3         |       | Individual Retirement Annuity Rider; Roth Individual Retirement   Annuity Rider; Simple Retirement Account Rider; and 403(b) Rider -   Incorporated herein by reference to Post-Effective Amendment No. 34 to   Registration Statement on Form N-4 for Golden American Life Insurance   Company Separate Account B, as filed with the SEC on April 15, 2003   (File No. 033-23351).                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 4.4         |       | 403(b) Rider - Incorporated herein by reference to Initial   Registration Statement on Form S-2 for Golden American Life Insurance   Company, as filed with the SEC on April 15, 2003 (File   No. 333-104547).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 4.5         |       | Single Premium Deferred Equity Indexed Modified Guaranteed Annuity   Contract; Single Premium Deferred Modified Guaranteed Annuity Group Master   Contract; and Single Premium Deferred Equity Indexed Modified Guaranteed   Annuity Certificate, - Incorporated herein by reference to Pre-Effective   Amendment No. 1 to Registration Statement on Form S-2 for ING USA   Annuity and Life Insurance Company, as filed with the SEC on August 13,   2004 (File No. 333-116137).                                                                                                                                                                                                                                                                                                                                                 |
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| 4.6         |       | Interest in Fixed Account I under Variable Annuity Contracts -   Incorporated herein by reference to: Post-Effective Amendment No. 12 to   Registration Statement on Form N-4 for Golden American Life Insurance   Company Separate Account B, as filed with the SEC on April 23, 1999   (File Nos. 033-59261, 811-5626); Incorporated by reference to Post-Effective   Amendment No. 3 to Registration Statement on Form N-4 for Golden   American life Insurance Company, as filed with the SEC on April 23, 1999   (File Nos. 333-28769, 811-5626); and Incorporated by reference to   Pre-Effective Amendment No. 1 to Registration statement on Form N-4   for Golden American Life Insurance Company Separate Account B, as filed with   the SEC on June 24, 2000 (File Nos. 333-33914, 811-5626). |

 

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| 4.7    |   | Interests in Fixed Account II under Variable Annuity Contracts -   Incorporated herein by reference to Post-Effective Amendment No. 7 to   Registration Statement on Form N-4 for Separate Account B of Golden   American Life Insurance Company as filed with the SEC on October 2, 2000   (File No. 333-28679, 811-5626), Incorporated herein by reference to   Post- Effective Amendment No. 2 to Registration Statement on   Form N-4 for Separate Account B of Golden American Life Insurance   Company as filed with the SEC on February 26, 2001 (File Nos. 333-30180,   811-5626), Incorporated herein by reference to Post-Effective Amendment   No. 5 to Registration Statement on Form N-4 for Separate Account B   of Golden American Life Insurance Company as filed with the SEC on   April 23, 1999 (File Nos. 333-28755, 811-5626), Incorporated herein   by reference to Post-Effective Amendment No. 1 to Registration Statement   on Form N-4 for Separate Account B of Golden American Life Insurance Company   as filed with the SEC on April 23, 1999 (File Nos. 333-66757,   811-5626), Incorporated herein by reference to Pre-Effective Amendment   No. 1 to Registration Statement on Form N-4 for Separate Account B   of Golden American Life Insurance Company as filed with the SEC on October 26,   2001 (File Nos. 333-63692, 811-5626), Incorporated herein by reference   to Pre- Effective Amendment No. 1 to Registration Statement on   Form N-4 for Separate Account B of Golden American Life Insurance   Company as filed with the SEC on December 11, 2001 (File Nos. 333-70600,   811-5626), Incorporated by reference to Post-Effective Amendment   No. 1 to Registration Statement on Form N-4 for Golden American   Life Insurance Company Separate Account B, as filed with the SEC on   April 16, 2003 (File Nos. 333-90516, 811-5626) and Incorporated by   reference to Pre-Effective Amendment No. 1 to Registration Statement on   Form N-4 for Golden American Life Insurance Company Separate Account B,   as filed with the SEC on July 3, 2003 (File Nos. 333-101487, 811-5626). |
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| 4.8    |   | Interest in the Guaranteed Account under Variable Annuity Contracts -   Incorporated herein by reference to Pre-Effective Amendment No. 1 to   Registration Statement on Form S-2 for Golden American Life Insurance   Company, as filed with the SEC on June 29, 2001 (File   No. 333-57212).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
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| 31.1+  |   | Certificate of Ewout L. Steenbergen pursuant to Section 302 of   the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
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| 31.2+  |   | Certificate of Michael S. Smith pursuant to Section 302 of the   Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
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| 32.1+  |   | Certificate of Ewout L. Steenbergen pursuant to Section 906 of   the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
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| 32.2+  |   | Certificate of Michael S. Smith pursuant to Section 906 of the   Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |

 

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+ Filed herewith.

 

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