**UNITEDSTATES SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C.  20549**

** **

----

** **

**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 September 30, 2010**                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| **OR** |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|  ̈ | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**                                                                                                                                                                                                                                                                                                                                                                                                         |
|   | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|   | **For the  transition period from                                         to                                      ** |

 

**CommissionFile Number:   333-133154, 333-133076,333-133153, 333-133155, 333-158928**

** **
| **ING USA ANNUITY AND LIFE INSURANCE COMPANY**          |
|---------------------------------------------------------|
| (Exact name of  registrant as specified in its charter) |

 

 

| **Iowa**

(State or other  jurisdiction of incorporation or organization)                            | ** ** | **41-0991508**

(IRS Employer  Identification No.) |
|------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------|
| ** **                                                                                           | ** ** | ** **                                         |
| **1475  Dunwoody Drive**

**West  Chester, Pennsylvania**

(Address of  principal executive offices) | ** ** | **19380-1478**

(Zip Code)                         |

 

**(610) 425-3400**

 (Registrant’stelephone number, including area code)

** **

(Former name, former address and former fiscal year, ifchanged 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

(Do not check if a  smaller

reporting company) | 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 November 5, 2010, 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).                                                                                                                                                                                                                                                                                                    |

 

----

 

**INGUSA Annuity and Life Insurance Company**

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

**Form 10-Qfor the period ended September 30, 2010**

 

 

**INDEX**

 
| **PART I.**   | **FINANCIAL  INFORMATION (UNAUDITED)**                                                     | **PAGE**   |
|--------------------|--------------------------------------------------------------------------------------------|------------|
|               |                                                                                       |       |
| Item 1.            | Financial  Statements:                                                                     | ** ** |
|               | Condensed Statements of Operations                                                         | 3          |
|               | Condensed  Balance Sheets                                                                  | 4          |
|               | Condensed Statements of Changes in Shareholder’s  Equity                              | 6          |
|               | Condensed Statements of Cash Flows                                                         | 8          |
|               | Notes to Condensed Financial Statements                                                    | 9          |
|               |                                                                                       |       |
| Item 2.            | Management’s  Narrative Analysis of the Results of Operations and Financial Condition | 60         |
|               |                                                                                       |       |
| Item 4.            | Controls and  Procedures                                                                   | 105        |
|               |                                                                                       |       |
| **PART II.**  | **OTHER INFORMATION**                                                                      |       |
|               |                                                                                       |       |
| Item 1.            | Legal Proceedings                                                                          | 106        |
|               |                                                                                       |       |
| Item 1A.           | Risk Factors                                                                               | 106        |
|               |                                                                                       |       |
| Item 6.            | Exhibits                                                                                   | 115        |
|               |                                                                                       |       |
| Signature          |                                                                                       | 116        |
|               |                                                                                       |       |
| Exhibit Index |                                                                                       | 117        |

 

2

----

 

**ING USA Annuity and Life InsuranceCompany**

** **

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

 

 

**PART I.****                                        FINANCIALINFORMATION (UNAUDITED)**

 

**Item 1.****                                                 FinancialStatements**

 

 

**Condensed Statements of Operations**

(Unaudited)

(In millions)

 

 
| ** **                                                                                          | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** |
|-----------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|
| ** **                                                                                          | ** ** | **2010**                                                 | ** ** | ** **                                              | **2009** | ** ** | ** ** | **2010** | ** ** | ** ** | **2009** | ** ** |
| **Revenues:**                                                                                       |       |                                                     |       |                                                    |   |   |   |   |   |   |   |   |
| Net  investment income                                                                              |       | $                                                        | 336.4      |                                                    |   | $ | 379.5 |   |   | $ | 1,002.5 |   |   | $ | 1,086.9 |   |
| Fee  income                                                                                         |       | 263.4                                                    |       |                                                    | 253.7 |   |   | 805.7 |   |   | 680.6 |   |
| Premiums                                                                                            |       | 139.9                                                    |       |                                                    | 370.2 |   |   | 416.3 |   |   | 626.5 |   |
| Net  realized capital losses:                                                                       |       |                                                     |       |                                                    |   |   |   |   |   |   |   |   |
| Total  other-than-temporary impairment losses                                                       |       | (53.8                                                    | )          |                                                    | (46.9 | ) |   | (173.5 | ) |   | (552.9 | ) |
| Portion  of other-than-temporary impairment losses recognized in Other comprehensive  income (loss) |       | 27.8                                                     |       |                                                    | 6.5 |   |   | 84.3 |   |   | 91.4 |   |
| Net  other-than-temporary impairments recognized in earnings                                        |       | (26.0                                                    | )          |                                                    | (40.4 | ) |   | (89.2 | ) |   | (461.5 | ) |
| Other  net realized capital losses                                                                  |       | (512.3                                                   | )          |                                                    | (1,103.4 | ) |   | (89.5 | ) |   | (1,736.8 | ) |
| Total  net realized capital losses                                                                  |       | (538.3                                                   | )          |                                                    | (1,143.8 | ) |   | (178.7 | ) |   | (2,198.3 | ) |
| Other  (expense) income                                                                             |       | —                                                   |       |                                                    | (0.6 | ) |   | — |   |   | 0.7 |   |
| Total  revenue                                                                                      |       |                                                     | 201.4      |                                                    |   |   | (141.0 | ) |   |   | 2,045.8 |   |   |   | 196.4 |   |
| **Benefits and expenses:**                                                                          |       |                                                     |       |                                                    |   |   |   |   |   |   |   |   |
| Interest  credited and other benefits to contractowners                                             |       | 30.8                                                     |       |                                                    | (127.6 | ) |   | 1,512.0 |   |   | 487.1 |   |
| Operating  expenses                                                                                 |       | 109.7                                                    |       |                                                    | 101.1 |   |   | 315.5 |   |   | 281.1 |   |
| Net  amortization of deferred policy acquisition costs and value of business  acquired              |       | (88.7                                                    | )          |                                                    | (175.8 | ) |   | 132.9 |   |   | (345.4 | ) |
| Interest  expense                                                                                   |       | 8.0                                                      |       |                                                    | 8.2 |   |   | 24.0 |   |   | 24.6 |   |
| Other  expense                                                                                      |       | 10.7                                                     |       |                                                    | 10.8 |   |   | 31.6 |   |   | 35.1 |   |
| Total  benefits and expenses                                                                        |       | 70.5                                                     |       |                                                    | (183.3 | ) |   | 2,016.0 |   |   | 482.5 |   |
| Income  (loss) before income taxes                                                                  |       | 130.9                                                    |       |                                                    | 42.3 |   |   | 29.8 |   |   | (286.1 | ) |
| Income  tax benefit                                                                                 |       | (6.7                                                     | )          |                                                    | (35.4 | ) |   | (62.8 | ) |   | (126.3 | ) |
| Net  income (loss)                                                                                  |       | $                                                        | 137.6      |                                                    |   | $ | 77.7 |   |   | $ | 92.6 |   |   | $ | (159.8 | ) |
|                                                                                                     |            |                                                          |            |                                                         |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

*The accompanying notes are anintegral part of these financial statements.*

 

3

----

 

**INGUSA Annuity and Life Insurance Company**

** **

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

** **

**Condensed Balance Sheets**

(In millions,except share data)

 

 
| ** **                                                                                                         | ** ** | ** ** | **As of**         | ** ** | ** ** | ** ** | **As of**        | ** ** |
|--------------------------------------------------------------------------------------------------------------------|------------|------------|------------------------|------------|------------|------------|-----------------------|------------|
| ** **                                                                                                         | ** ** | ** ** | **September 30,** | ** ** | ** ** | ** ** | **December 31,** | ** ** |
| ** **                                                                                                         | ** ** | ** ** | **2010**               | ** ** | ** ** | ** ** | **2009**              | ** ** |
| ** **                                                                                                         | ** ** | ** ** | **(Unaudited)**        | ** ** | ** ** | ** ** | ** **            | ** ** |
| **Assets**                                                                                                         |       |       |                   |       |       |       |                  |       |
| Investments:                                                                                                       |       |       |                   |       |       |       |                  |       |
| Fixed maturities, available-for-sale, at fair  value   (amortized cost of $20,932.9 at 2010 and $17,724.3 at 2009) |       | $          | 21,889.9               |       |       | $          | 17,156.5              |       |
| Equity securities, available-for-sale, at fair  value   (cost of $139.9 at 2010 and $150.8 at 2009)                |       |       | 148.3                  |       |       |       | 154.3                 |       |
| Short-term investments                                                                                             |       |       | 1,503.9                |       |       |       | 2,044.0               |       |
| Mortgage loans on real estate                                                                                      |       |       | 3,006.1                |       |       |       | 3,413.2               |       |
| Policy loans                                                                                                       |       |       | 124.0                  |       |       |       | 131.6                 |       |
| Loan - Dutch State obligation                                                                                      |       |       | 882.0                  |       |       |       | 1,026.0               |       |
| Limited partnerships/corporations                                                                                  |       |       | 272.0                  |       |       |       | 252.6                 |       |
| Derivatives                                                                                                        |       |       | 257.3                  |       |       |       | 317.4                 |       |
| Other investments                                                                                                  |       |       | 1.6                    |       |       |       | 3.5                   |       |
| Securities pledged (amortized cost of $696.0 at  2010 and $1,079.4 at 2009)                                        |       |       | 762.3                  |       |       |       | 1,092.5               |       |
| Total investments                                                                                                  |       |       | 28,847.4               |       |       |       | 25,591.6              |       |
| Cash and cash equivalents                                                                                          |       |       | 91.3                   |       |       |       | 40.1                  |       |
| Short-term investments under securities loan  agreement, including collateral delivered                            |       |       | 103.0                  |       |       |       | 169.0                 |       |
| Accrued investment income                                                                                          |       |       | 242.6                  |       |       |       | 187.3                 |       |
| Receivable for securities sold                                                                                     |       |       | 55.8                   |       |       |       | 7.6                   |       |
| Premium receivable                                                                                                 |       |       | 53.5                   |       |       |       | 86.9                  |       |
| Deposits and reinsurance recoverable                                                                               |       |       | 3,333.6                |       |       |       | 3,350.0               |       |
| Deferred policy acquisition costs                                                                                  |       |       | 3,137.2                |       |       |       | 3,718.0               |       |
| Value of business acquired                                                                                         |       |       | 62.0                   |       |       |       | 113.4                 |       |
| Sales inducements to contractowners                                                                                |       |       | 635.5                  |       |       |       | 810.2                 |       |
| Short-term loan to affiliate                                                                                       |       |       | 739.7                  |       |       |       | 545.5                 |       |
| Due from affiliates                                                                                                |       |       | 195.1                  |       |       |       | 816.3                 |       |
| Other assets                                                                                                       |       |       | 399.3                  |       |       |       | 414.9                 |       |
| Assets held in separate accounts                                                                                   |       |       | 42,641.5               |       |       |       | 42,996.1              |       |
| Total assets                                                                                                       |       | $          | 80,537.5               |       |       | $          | 78,846.9              |       |

* *

*Theaccompanying notes are an integral part of these financial statements.*

 

4

----

 

**INGUSA Annuity and Life Insurance Company**

** **

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

** **

**CondensedBalance Sheets**

(In millions,except share data)

 

 
| ** **                                                                             | ** ** | ** ** | **As of**         | ** ** | ** ** | ** ** | **As of**        | ** ** |
|----------------------------------------------------------------------------------------|------------|------------|------------------------|------------|------------|------------|-----------------------|------------|
| ** **                                                                             | ** ** | ** ** | **September 30,** | ** ** | ** ** | ** ** | **December 31,** | ** ** |
| ** **                                                                             | ** ** | ** ** | **2010**               | ** ** | ** ** | ** ** | **2009**              | ** ** |
| ** **                                                                             | ** ** | ** ** | **(Unaudited)**        | ** ** | ** ** | ** ** | ** **            | ** ** |
| **Liabilities and Shareholder’s  Equity**                                         |       |       |                   |       |       |       |                  |       |
| Future policy benefits and claims reserves                                             |       | $          | 27,654.4               |       |       | $          | 27,044.7              |       |
| Payable for securities purchased                                                       |       |       | 143.5                  |       |       |       | 115.7                 |       |
| Payables under securities loan agreement, including  collateral held                   |       |       | 133.7                  |       |       |       | 201.1                 |       |
| Borrowed money                                                                         |       |       | -            |       |       |       | 311.1                 |       |
| Notes to affiliates                                                                    |       |       | 435.0                  |       |       |       | 435.0                 |       |
| Due to affiliates                                                                      |       |       | 93.2                   |       |       |       | 122.5                 |       |
| Current income taxes                                                                   |       |       | 774.8                  |       |       |       | 69.0                  |       |
| Deferred income taxes                                                                  |       |       | 256.6                  |       |       |       | 767.5                 |       |
| Other liabilities                                                                      |       |       | 4,612.9                |       |       |       | 4,046.5               |       |
| Liabilities related to separate accounts                                               |       |       | 42,641.5               |       |       |       | 42,996.1              |       |
| Total liabilities                                                                      |       |       | 76,745.6               |       |       |       | 76,109.2              |       |
|                                                                                   |       |       |                   |       |       |       |                  |       |
| Shareholder’s equity:                                                             |       |       |                   |       |       |       |                  |       |
| Common stock (250,000 shares authorized, issued and  outstanding; $10 per share value) |       |       | 2.5                    |       |       |       | 2.5                   |       |
| Additional paid-in capital                                                             |       |       | 5,411.7                |       |       |       | 5,172.7               |       |
| Accumulated other comprehensive income (loss)                                          |       |       | 190.1                  |       |       |       | (532.5                | )          |
| Retained earnings (deficit)                                                            |       |       | (1,812.4               | )          |       |       | (1,905.0              | )          |
| Total shareholder’s equity                                                        |       |       | 3,791.9                |       |       |       | 2,737.7               |       |
| Total liabilities and shareholder’s equity                                        |       | $          | 80,537.5               |       |       | $          | 78,846.9              |       |

 

*The accompanying notes are anintegral part of these financial statements.*

 

5

----

 

**INGUSA Annuity and Life Insurance Company**

** **

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

** **

**Condensed Statements of Changes inShareholder’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, 2009                                                                                                           |       |          |       |       |       |           |       |       |       |                   |       |       |       |          |       |       |       |                   |       |
| Excluding  impact of merger                                                                                                                |       | $             | 2.5        |       |       |           | $          | 4,335.4    |       |                   |       | $          | (1,333.7   | )             |       |       | $          | (2,236.7               | )          |   |   | $ | 767.5 |   |
| Impact  of merger with affiliate                                                                                                           |       | -   |       |       |       | -    |       |       |       | (19.7                  | )          |       |       | 16.9          |       |       |       | (2.8                   | )          |
| Balance  at January 1, 2009                                                                                                           |       | 2.5           |       |       |       | 4,335.4        |       |       |       | (1,353.4               | )          |       |       | (2,219.8      | )          |       |       | 764.7                  |       |
| Cumulative  effect of change in accounting principle, net of DAC and tax                                                                   |       | -   |       |       |       | -    |       |       |       | (312.0                 | )          |       |       | 312.0         |       |       |       | -            |       |
| Comprehensive  income:                                                                                                                     |       |          |       |       |       |           |       |       |       |                   |       |       |       |          |       |       |       |                   |       |
| Net  income                                                                                                                                |       | -   |       |       |       | -    |       |       |       | -            |       |       |       | (159.8        | )          |       |       | (159.8                 | )          |
| Other  comprehensive income (loss), net of tax:                                                                                            |       |          |       |       |       |           |       |       |       |                   |       |       |       |          |       |       |       |                   |       |
| Change  in net unrealized capital gains (losses) on securities ($1,593.6 pretax),  including change in tax valuation allowance of $(115.6) |       | -   |       |       |       | -    |       |       |       | 1,177.6                |       |       |       | -   |       |       |       | 1,177.6                |       |
| Portion  of other-than-temporary impairment losses recognized in other comprehensive  income (loss)                                        |       | -   |       |       |       | -    |       |       |       | (91.4                  | )          |       |       | -   |       |       |       | (91.4                  | )          |
| Change  in other-than-temporary impairment losses recognized in other comprehensive  income (loss)                                         |       | -   |       |       |       | -    |       |       |       | 16.4                   |       |       |       | -   |       |       |       | 16.4                   |       |
| Pension  liability ($0.2 pretax)                                                                                                           |       | -   |       |       |       | -    |       |       |       | 0.1                    |       |       |       | -   |       |       |       | 0.1                    |       |
| Total  comprehensive income                                                                                                                |       |          |       |       |       |           |       |       |       |                   |       |       |       |          |       |       |       | 942.9                  |       |
| Contribution  of capital                                                                                                                   |       | -   |       |       |       | 835.0          |       |       |       | -            |       |       |       | -   |       |       |       | 835.0                  |       |
| Employee  share-based payments                                                                                                             |       | -   |       |       |       | 1.9            |       |       |       | -            |       |       |       | -   |       |       |       | 1.9                    |       |
| Balance  at September 30, 2009                                                                                                        |       | $             | 2.5        |       |       |           | $          | 5,172.3    |       |                   |       | $          | (562.7     | )             |       |       | $          | 2,067.6                |       |   |   | $ | 2,544.5 |   |
|                                                                                                                                            |            |               |            |            |            |                |            |            |            |                        |            |            |            |               |            |            |            |                        |            |  |  |  |  |  |  |

 

*The accompanying notes are anintegral part of these financial statements.*

 

6

----

 

**INGUSA Annuity and Life Insurance Company**

** **

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

** **

**CondensedStatements 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                                                                                                       |       |          |       |       |       |           |       |       |       |                   |       |       |       |          |       |       |       |                   |       |
| Excluding  impact of merger                                                                                                            |       | $             | 2.5        |       |       |           | $          | 5,172.7    |       |                   |       | $          | (512.8     | )             |       |       | $          | (1,921.5               | )          |   |   | $ | 2,740.9 |   |
| Impact  of merger with affiliate                                                                                                       |       | -   |       |       |       | -    |       |       |       | (19.7                  | )          |       |       | 16.5          |       |       |       | (3.2                   | )          |
| Balance  at January 1, 2010                                                                                                       |       | 2.5           |       |       |       | 5,172.7        |       |       |       | (532.5                 | )          |       |       | (1,905.0      | )          |       |       | 2,737.7                |       |
| Comprehensive  income:                                                                                                                 |       |          |       |       |       |           |       |       |       |                   |       |       |       |          |       |       |       |                   |       |
| Net  income                                                                                                                            |       | -   |       |       |       | -    |       |       |       | -            |       |       |       | 92.6          |       |       |       | 92.6                   |       |
| Other  comprehensive income (loss), net of tax:                                                                                        |       |          |       |       |       |           |       |       |       |                   |       |       |       |          |       |       |       |                   |       |
| Change  in net unrealized capital gains (losses) on securities ($839.9 pretax),  including decrease in valuation allowance of $(212.0) |       | -   |       |       |       | -    |       |       |       | 776.9                  |       |       |       | -   |       |       |       | 776.9                  |       |
| Portion  of other-than-temporary impairment losses recognized in other comprehensive income  (loss)                                    |       | -   |       |       |       | -    |       |       |       | (84.3                  | )          |       |       | -   |       |       |       | (84.3                  | )          |
| Change  in other-than-temporary impairment losses recognized in other comprehensive income  (loss)                                     |       | -   |       |       |       | -    |       |       |       | 30.2                   |       |       |       | -   |       |       |       | 30.2                   |       |
| Pension  liability ($(0.3) pretax)                                                                                                     |       | -   |       |       |       | -    |       |       |       | (0.2                   | )          |       |       | -   |       |       |       | (0.2                   | )          |
| Total  comprehensive income                                                                                                            |       |          |       |       |       |           |       |       |       |                   |       |       |       |          |       |       |       | 815.2                  |       |
| Contribution  of capital                                                                                                               |       | -   |       |       |       | 239.0          |       |       |       | -            |       |       |       | -   |       |       |       | 239.0                  |       |
| Balance  at September 30, 2010                                                                                                    |       | $             | 2.5        |       |       |           | $          | 5,411.7    |       |                   |       | $          | 190.1      |          |       |       | $          | (1,812.4               | )          |   |   | $ | 3,791.9 |   |

 

*The accompanying notes are anintegral part of these financial statements.*

 

7

----

 

**INGUSA Annuity and Life Insurance Company**

** **

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

 

**Condensed Statements of Cash Flows**

(Unaudited)

(In millions)

 

 

 
| ** **                                            | ** ** | ** ** | **Nine Months Ended September 30,** | ** ** |
|-------------------------------------------------------|------------|------------|---------------------------------------------------------|------------|
| ** **                                            | ** ** | ** ** | **2010**                                                | ** ** | ** ** | ** ** | **2009** | ** ** |
| Net  cash provided by operating activities            |       |       | $                                                       | 1,573.0    |   |   |   | $ | 2,108.7 |   |
|                                                  |       |       |                                                    |       |   |   |   |   |
| Cash  Flows from Investing Activities:                |       |       |                                                    |       |   |   |   |   |
| Proceeds  from the sale, maturity, or redemption of:  |       |       |                                                    |       |   |   |   |   |
| Fixed  maturities, available-for-sale                 |       |       | 6,280.4                                                 |       |   |   | 5,980.1 |   |
| Equity  securities, available-for-sale                |       |       | 65.7                                                    |       |   |   | 73.6 |   |
| Mortgage  loans on real estate                        |       |       | 523.5                                                   |       |   |   | 337.5 |   |
| Limited  partnerships/corporations                    |       |       | 16.8                                                    |       |   |   | 42.3 |   |
| Derivatives                                           |       |       | 569.7                                                   |       |   |   | 185.7 |   |
| Acquisition  of:                                      |       |       |                                                    |       |   |   |   |   |
| Fixed  maturities, available-for-sale                 |       |       | (9,054.9                                                | )          |   |   | (2,263.6 | ) |
| Equity  securities, available-for-sale                |       |       | (57.2                                                   | )          |   |   | (10.1 | ) |
| Mortgage  loans on real estate                        |       |       | (127.9                                                  | )          |   |   | (30.1 | ) |
| Limited  partnerships/corporations                    |       |       | (30.4                                                   | )          |   |   | (23.4 | ) |
| Derivatives                                           |       |       | (48.4                                                   | )          |   |   | (2,119.7 | ) |
| Short-term  investments, net                          |       |       | 539.7                                                   |       |   |   | (923.7 | ) |
| Loan-Dutch  State obligation                          |       |       | 144.0                                                   |       |   |   | 142.3 |   |
| Collateral  held                                      |       |       | 1.4                                                     |       |   |   | 6.3 |   |
| Other  investments, net                               |       |       | (0.7                                                    | )          |   |   | 0.6 |   |
| Policy  loans, net                                    |       |       | 7.6                                                     |       |   |   | 1.9 |   |
| Net  cash (used in) provided by investing activities  |       |       | (1,170.7                                                | )          |   |   | 1,399.7 |   |
|                                                  |       |       |                                                    |       |   |   |   |   |
| Cash  Flows from Financing Activities:                |       |       |                                                    |       |   |   |   |   |
| Deposits  received for investment contracts           |       |       | 1,603.8                                                 |       |   |   | 3,298.7 |   |
| Maturities  and withdrawals from investment contracts |       |       | (1,803.1                                                | )          |   |   | (7,500.9 | ) |
| Block  of deposits coinsured to affiliate             |       |       | 106.6                                                   |       |   |   | 170.9 |   |
| Reinsurance  recoverable on investment contracts      |       |       | 7.9                                                     |       |   |   | 1,067.7 |   |
| Short-term  repayments of repurchase agreements, net  |       |       | (311.1                                                  | )          |   |   | (174.8 | ) |
| Short-term  loans to affiliates                       |       |       | (194.2                                                  | )          |   |   | (719.3 | ) |
| Contribution  of capital                              |       |       | 239.0                                                   |       |   |   | 835.0 |   |
| Net  cash used in financing activities                |       |       | (351.1                                                  | )          |   |   | (3,022.7 | ) |
| Net  increase in cash and cash equivalents            |       |       | 51.2                                                    |       |   |   | 485.7 |   |
| Cash  and cash equivalents, beginning of period       |       |       | 40.1                                                    |       |   |   | 612.9 |   |
| Cash  and cash equivalents, end of period             |       |       | $                                                       | 91.3       |   |   |   | $ | 1,098.6 |   |

 

*The accompanying notes are anintegral part of these financial statements.*

 

8

----

 

**ING USAAnnuity and Life Insurance Company**

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

**Notesto Condensed Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwise stated)

 

**1.****                                    Organizationand Significant Accounting Policies**

 

***Basis of Presentation***

 

ING USA Annuity and Life Insurance Company (“ING USA” orthe “Company,” as appropriate) is a stock life insurance company domiciled inthe State of Iowa and provides financial products and services in the UnitedStates.  ING USA is authorized to conductits insurance business in all states, except New York, and the District ofColumbia.

 

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

 

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

 

On September 30, 2010, ING USA purchased theremaining 30% interest in PFP Holdings LP (“PFP”), an affiliate, from INGClarion, an affiliate, for $11.0.  TheCompany previously held a 70% equity interest in PFP. Immediately uponacquisition, PFP was dissolved as ING USA owned 100% of the limited partnership. This dissolution is treated as a combination of entities under commoncontrol (i.e. the comparative financial statements should be restated andpresented as if the transaction had occurred on the opening balance sheetdate).  This resulted in a reduction intotal Shareholder’s equity of $3.2  and$2.8 at January 1, 2010 and 2009, respectively.

 

Thecondensed financial statements and notes as of September 30, 2010, and forthe three and nine months ended September 30, 2010 and 2009, have beenprepared in accordance with accounting principles generally accepted in theUnited States (“US GAAP”) and are unaudited.

 

The condensed financial statements reflect alladjustments (consisting only of normal, recurring adjustments) which are, inthe opinion of management, necessary for the fair presentation of the financialposition, results of operations, and cash flows, for the interim periods.  These condensed financial statements andnotes should be read in conjunction with the financial statements and relatednotes as presented in the Company’s 2009 

 

9

----

 

**ING USAAnnuity and Life Insurance Company**

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

**Notes toCondensed Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwise stated)

 

Annual Report on Form 10-K.  The results of operations for the interimperiods may not be considered indicative of results to be expected for the fullyear.

 

***Description ofBusiness***

 

The Company currently offers various insurance products,including immediate and deferred fixed annuities.  The Company’s annuity products aredistributed by national wirehouses, regional securities firms, independentbroker-dealers, banks, life insurance companies with captive agency salesforces, independent insurance agents, independent marketing organizations, andaffiliated broker-dealers.  The Company’sprimary annuity customers are individual consumers.  The Company ceased new sales of variableannuity products in March of 2010, as part of a global business strategyand risk reduction plan. Some new amounts will continue to be deposited on INGUSA variable annuities either as transfers related to applications that were inprocess prior to the product closures or as add-on premiums to existingcontracts.

 

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

 

***Use of Estimates***

 

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

 

***Reclassifications***

 

Certain reclassifications have been made to prior yearfinancial information to conform to the current year classifications.  In the Condensed Statements of Operations forthe three months ended September 30, 2010, Net amortization of deferredpolicy acquisition costs and value of business acquired was decreased by $64.7and Interest credited and other benefits to contractowners was increased by$64.7 related to second quarter 2010 activity, which had no effect on Totalexpenses or Net income.

 

***Subsequent Events***

 

The Company has evaluated subsequent events forrecognition and disclosure through the date the condensed financial statementswere issued.

 

10

----

 

**ING USAAnnuity and Life Insurance Company**

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

**Notes toCondensed Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwise stated)

 

***SignificantAccounting Policies***

 

For a description of significant accounting policies,see the Organization and Significant Accounting Policies footnote to theFinancial Statements included in the Company’s 2009 Annual Report on Form 10-K.  There have been no material changes to theCompany’s significant accounting policies since the filing of the Company’s2009 Annual Report on Form 10-K, except as noted in the Recently AdoptedAccounting Standards footnote.

 

 

**2.****                                    RecentlyAdopted Accounting Standards**

 

*Scope Exception Related to Embedded Credit Derivatives*

 

In March 2010, the Financial Accounting StandardsBoard (“FASB”) issued Accounting Standards Update (“ASU”) 2010-11, “Derivativesand Hedging (ASC Topic 815): Scope Exception Related to Embedded CreditDerivatives” (“ASU 2010-11”), which clarifies that the only type of embeddedcredit derivatives that are exempt from bifurcation requirements are those thatrelate to the subordination of one financial instrument to another.

 

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

 

*Improving Disclosures about Fair Value Measurements*

 

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

 

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

§                  Purchases, sales, issuances, and settlement, inthe Level 3 fair value measurements reconciliation on a gross basis;

§                  Fair value measurement disclosures for each classof assets and liabilities (i.e., disaggregated); and

§                  Valuation techniques and inputs for bothrecurring and nonrecurring fair value measurements that fall in either Level 2or Level 3 fair value measurements.

 

The provisions of ASU 2010-06 were adopted by theCompany on January 1, 2010, and are included in the Financial Instrumentsfootnote, except for the disclosures related to the Level 3 reconciliation,which are effective for fiscal years beginning after 

 

11

----

 

**ING USAAnnuity and Life Insurance Company**

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

**Notes toCondensed Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwise stated)

 

December 15, 2010, and for interim periods withinthose fiscal years.  As the pronouncementonly pertains to additional disclosure, the adoption had no effect on the Company’sfinancial condition, results of operations, or cash flows.

 

*Improvements to Financial Reporting by Enterprises Involved in VariableInterest Entities*

 

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

 

§                  Removes the quantitative-based assessment forconsolidation of VIEs and, instead, requires a qualitative assessment ofwhether an entity has the power to direct the VIE’s activities, and whether theentity has the obligation to absorb losses or the right to reserve benefitsthat could be significant to the VIE; and

§                  Requires an ongoing reassessment of whether anentity is the primary beneficiary of a VIE.

 

In addition, in February 2010, the FASB issued ASU2010-10, “Consolidation (ASC Topic 810): Amendments for Certain InvestmentFunds” (“ASU 2010-10”), which primarily defers to ASU 2009-17 for an investmentin an entity that is accounted for as an investment company.

 

The provisions of ASU 2009-17 and ASU 2010-10 wereadopted on January 1, 2010. The Company determined, however, that therewas no effect on the Company’s financial condition, results of operations, orcash flows upon adoption, as the consolidation conclusions were consistent withthose under previous US GAAP. The disclosure provisions required by ASU 2009-17are presented in the Financial Instruments footnote to these financialstatements.

 

*Accounting for Transfers of Financial Assets*

 

In December 2009, the FASB issued ASU 2009-16 “Transfers &Servicing (ASC Topic 860): Accounting for Transfers of Financial Assets” (“ASU2009-16”), which eliminates the QSPE concept and requires a transferor offinancial assets to:

 

§                  Consider the transferor’s continuing involvementin assets, limiting the circumstances in which a financial asset should bederecognized when the transferor has not transferred the entire asset to anentity that is not consolidated;

§                  Account for the transfer as a sale only if anentity transfers an entire financial asset and surrenders controls, unless thetransfer meets the conditions for a participating interest; and

 

12

----

 

**ING USAAnnuity and Life Insurance Company**

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

**Notes toCondensed Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwise stated)

 

§                  Recognize and initially measure at fair value allassets obtained and liabilities incurred as a result of a transfer of financialassets 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’sfinancial condition, results of operations, or cash flows upon adoption, as theCompany did not have any QSPEs under previous US GAAP, and the requirements forsale accounting treatment are consistent with those previously applied by theCompany under US GAAP.

 

*Measuring the Fair Value of Certain Alternative Investments*

 

In September 2009, the FASB issued ASU 2009-12, “FairValue Measurements and Disclosures (ASC Topic 820): Investments in CertainEntities That Calculate Net Asset Value per Share (or Its Equivalent)” (“ASU2009-12”), which allows the use of net asset value to estimate the fair valueof certain alternative investments, such as interests in hedge funds, privateequity funds, real estate funds, venture capital funds, offshore fund vehicles,and funds of funds.  In addition, ASU2009-12 requires disclosures about the attributes of such investments.

 

The provisions of ASU 2009-12 were adopted by theCompany on December 31, 2009.  TheCompany determined, however, that there was no effect on the Company’sfinancial condition, results of operations, or cash flows upon adoption, as itsguidance is consistent with that previously applied by the Company under USGAAP.  The disclosure provisions requiredby ASU 2009-12 are presented in the Investments footnote to these financialstatements.

 

*FASB Accounting Standards Codification*

 

In June 2009, the FASB issued ASU 2009-01, “Topic105 — Generally Accepted Accounting Principles: amendments based on Statementof Financial Accounting Standards No. 168, The FASB Accounting StandardsCodificationTM and theHierarchy of Generally Accepted Accounting Principles” (“ASU 2009-01”), whichconfirms that as of July 1, 2009, the “FASB Accounting StandardsCodificationTM” (“the Codification” or “ASC”) is the singleofficial source of authoritative, nongovernmental US GAAP.  All existing accounting standard documentsare superseded, and all other accounting literature not included in theCodification is considered nonauthoritative.

 

The Company adopted the Codification as of July 1,2009.  There was no effect on the Company’sfinancial condition, results of operations, or cash flows.  The Company has revised its disclosures toincorporate references to the Codification topics.

 

13

----

 

**ING USAAnnuity and Life Insurance Company**

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

**Notes toCondensed Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwise stated)

 

*Subsequent Events*

 

In May 2009, the FASB issued new guidance onsubsequent events, included in ASC Topic 855, “Subsequent Events,” whichestablishes:

 

§                  The period after the balance sheet date duringwhich an entity should evaluate events or transactions for potentialrecognition or disclosure in the financial statements;

§                  The circumstances under which an entity shouldrecognize such events or transactions in its financial statements; and

§                  Disclosures regarding such events or transactionsand the date through which an entity has evaluated subsequent events.

 

These provisions, as included in ASC Topic 855, wereadopted by the Company on June 30, 2009. In addition, in February 2010,the FASB issued ASU 2010-09, “Subsequent Events (Topic 855): Amendments toCertain Recognition and Disclosure Requirements”, which clarifies that an SECfiler should evaluate subsequent events through the date the financialstatements are issued and eliminates the requirement for an SEC filer todisclose that date, effective upon issuance. The Company determined that therewas no effect on the Company’s financial condition, results of operations, orcash flows upon adoption, as the guidance is consistent with that previouslyapplied by the Company under U.S. auditing standards. The disclosure provisionsincluded in ASC Topic 855, as amended, are presented in the Organization andSignificant Accounting Policies footnote to these financial statements.

 

*Recognition and Presentation of Other-Than-Temporary Impairments*

 

In April 2009, the FASB issued new guidance onrecognition and presentation of other-than-temporary impairments, included inASC Topic 320, “Investments-Debt and Equity Securities,” which requires:

 

§                  Noncredit related impairments to be recognized inother comprehensive income (loss), if management asserts that it does not havethe intent to sell the security and that it is more likely than not that theentity will not have to sell the security before recovery of the amortized costbasis;

§                  Total other-than-temporary impairments (“OTTI”)to be presented in the Statement of Operations with an offset recognized inAccumulated other comprehensive income (loss) for the noncredit relatedimpairments;

§                  A cumulative effect adjustment as of thebeginning of the period of adoption to reclassify the noncredit component of apreviously recognized other-than-temporary impairment from Retained earnings(deficit) to Accumulated other comprehensive income (loss); and

§                  Additional interim disclosures for debt andequity securities regarding types of securities held, unrealized losses, andother-than-temporary impairments.

 

14

----

 

**ING USAAnnuity and Life Insurance Company**

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

**Notes toCondensed Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwise stated)

 

These provisions, as included in ASC Topic 320, wereadopted by the Company on April 1, 2009. As a result of implementation, the Company recognized a cumulativeeffect of change in accounting principle of $312.0 after considering theeffects of deferred policy acquisition costs (“DAC”) and income taxes of$(139.1) and $48.6, respectively, as an increase to April 1, 2009 Retainedearnings (deficit) with a corresponding decrease to Accumulated othercomprehensive income (loss).

 

In addition, the Company recognized an increase inamortized cost for previously impaired securities due to the recognition of thecumulative effect of change in accounting principle as of April 1, 2009,as follows:

 
| ** **                                | ** ** | ** ** | **Change in**      | ** ** |
|-------------------------------------------|------------|------------|-------------------------|------------|
| ** **                                | ** ** | ** ** | **Amortized Cost** | ** ** |
| Fixed  maturities:                        |       |       |                    |       |
| U.S.  corporate, state and municipalities |       |       | $                       | 53.3       |   |
| Foreign                                   |       |       | 69.2                    |       |
| Residential  mortgage-backed              |       |       | 64.3                    |       |
| Commercial  mortgage-backed               |       |       | 92.6                    |       |
| Other  asset-backed                       |       |       | 123.1                   |       |
| Total  investments, available-for-sale    |       |       | $                       | 402.5      |   |

 

The disclosure provisions, as included in ASC Topic 320,are presented in the Investments footnote to these financial statements.

 

*Interim Disclosures about Fair Value of Financial Instruments*

 

In April 2009, the FASB issued new guidance oninterim disclosures about fair value of financial instruments, included in ASCTopic 825, “Financial Instruments,” which requires that the fair value offinancial instruments be disclosed in an entity’s interim financial statements,as well as in annual financial statements. The provisions included in ASC Topic825 also require that fair value information be presented with the relatedcarrying value and that the method and significant assumptions used to estimatefair value, as well as changes in method and significant assumptions, bedisclosed.

 

These provisions, as included in ASC Topic 825, wereadopted by the Company on April 1, 2009 and are presented in the FinancialInstruments footnote to these financial statements.  As the pronouncement only pertains toadditional disclosure, the adoption had no effect on the Company’s financialcondition, results of operations, or cash flows.

 

*Disclosures about Derivative Instruments and Hedging Activities*

 

In March 2008, the FASB issued new guidance ondisclosures about derivative instruments and hedging activities, included inASC Topic 815, “Derivatives and Hedging,” which requires enhanced disclosuresabout objectives and strategies for using 

 

15

----

 

**ING USAAnnuity and Life Insurance Company**

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

**Notes toCondensed Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwise stated)

 

derivatives, fair value amounts of, and gains and losseson, derivative instruments, and credit-risk-related contingent features inderivative agreements, including:

 

§                  How and why derivative instruments are used;

§                  How derivative instruments and related hedgeditems are accounted for under US GAAP for derivative and hedging activities;and

§                  How derivative instruments and related hedgeditems affect an entity’s financial statements.

 

These provisions, as included in ASC Topic 815, wereadopted by the Company on January 1, 2009 and are included in theFinancial Instruments footnote to these financial statements.  As the pronouncement only pertains toadditional disclosure, the adoption had no effect on the Company’s financialcondition, results of operations, or cash flows. In addition, the Company’sderivatives are generally not accounted for using hedge accounting treatmentunder ASC Topic 815, as the Company has not historically sought hedgeaccounting treatment.

 

 

**3.****                                    NewAccounting Pronouncements**

 

*Accounting for Costs Associated with Acquiring or Renewing InsuranceContracts*

 

In October 2010, the FASB issued ASU 2010-26, “FinancialServices - Insurance (ASC Topic 944): Accounting for Costs Associated withAcquiring or Renewing Insurance Contracts” (“ASU 2010-26”), which clarifieswhat costs relating to the acquisition of new or renewal insurance contractsqualify for deferral.  Costs that shouldbe capitalized include (1) incremental direct costs of successful contractacquisition and (2) certain costs related directly to successfulacquisition activities (underwriting, policy issuance and processing, medicaland inspection, and sales force contract selling) performed by the insurer forthe contract.   Advertising costs shouldbe included in deferred acquisition costs only if the capitalization criteriain the US GAAP direct-response advertising guidance are met.  All other acquisition-related costs should becharged to expense as incurred.

 

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

 

*Disclosures about the Credit Qualityof 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 Receivablesand the Allowance for 

 

16

----

 

**ING USAAnnuity and Life Insurance Company**

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

**Notes toCondensed Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwise stated)

 

Credit Losses” (“ASU 2010-20”), which requires certainexisting disclosures to be disaggregated by class of financing receivable,including the rollforward of the allowance for credit losses, with the endingbalance further disaggregated on the basis of impairment method.  For each disaggregated ending balance, an entityis required to also disclose the related recorded investment in financingreceivables, the nonaccrual status of financing receivables, and impairedfinancing receivables.

 

ASU 2010-20 also requires new disclosures by class offinancing receivable, including credit quality indicators, aging of past dueamounts, the nature and extent of troubled debt restructurings and relateddefaults, and significant purchases and sales of financing receivablesdisaggregated by portfolio segment.

 

The provisions of ASU 2010-20 related to information asof the end of a reporting period are effective for fiscal years and interimperiods ending after December 15, 2010. The disclosures that includeinformation for activity that occurs during a reporting period are effectivefor periods beginning after December 15, 2010.  Comparative disclosures for periods thatended before initial adoption are encouraged, but not required.  The Company is currently in the process ofdetermining the impact of adoption of the provisions of ASU 2010-20 on itsdisclosures.

 

*Consolidation Analysis of Investments Held through Separate Accounts*

 

In April 2010, the FASB issued ASU 2010-15, “FinancialServices-Insurance (ASC Topic 944): How Investments Held through SeparateAccounts Affect an Insurer’s Consolidation Analysis of Those Investments” (“ASU2010-15”), which clarifies that an insurance entity generally should notconsider any separate account interests held for the benefit of policy holdersin an investment to be the insurer’s interests, and should not combine thoseinterests with its general account interest in the same investment whenassessing the investment for consolidation.

 

The provisions of ASU 2010-15 are effective for fiscalyears and interim periods beginning after December 15, 2010. Theamendments are to be applied retrospectively to all prior periods as of thedate of adoption.  The Company does notexpect any effect on its financial condition, results of operations, or cashflows upon adoption, as the guidance is consistent with that previously appliedby the Company under ASC Topic 944.

 

**4.         Financial Instruments**

 

***Fair ValueMeasurements***

 

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

 

17

----

 

**ING USAAnnuity and Life Insurance Company**

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

**Notes toCondensed Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwise stated)

 

***Fair Value Hierarchy***

 

TheCompany has categorized its financial instruments into a three level hierarchybased on the priority of the inputs to the valuation technique.

 

Thefair value hierarchy gives the highest priority to quoted prices in activemarkets for identical assets or liabilities (Level 1) and the lowest priorityto unobservable inputs (Level 3). If the inputs used to measure fair value fallwithin different levels of the hierarchy, the category level is based on thelowest priority level input that is significant to the fair value measurementof the instrument.

 

Financialassets and liabilities recorded at fair value on the Condensed Balance Sheetsare categorized as follows:

 

§                  Level 1 - Unadjusted quoted prices for identical assets or liabilitiesin an active market.

§                  Level 2 - Quoted prices in markets that are not active or inputs thatare observable either directly or indirectly for substantially the full term ofthe asset or liability.

Level2 inputs include the following:

a)            Quoted prices for similarassets or liabilities in active markets;

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

c)           Inputs other than quotedmarket prices that are observable; and

d)           Inputs that are derivedprincipally from or corroborated by observable market data through correlationor other means.

§                  Level 3 - Prices or valuation techniques that require inputs that areboth unobservable and significant to the overall fair value measurement.  These valuations, whether derived internallyor obtained from a third party, use critical assumptions that are not widelyavailable to estimate market participant expectations in valuing the asset orliability.

 

18

----

 

**ING USAAnnuity and Life Insurance Company**

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

**Notes toCondensed Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwise stated)

 

Thefollowing tables present the Company’s hierarchy for its assets and liabilitiesmeasured at fair value on a recurring basis as of September 30, 2010 and December 31,2009.

 
| ** **                                                                                                      | ** ** | **2010**   |
|-----------------------------------------------------------------------------------------------------------------|------------|------------|
| ** **                                                                                                      | ** ** | ** ** | **Level 1** | ** ** | ** ** | ** ** | **Level 2** | ** ** | ** ** | ** ** | **Level 3****(1)** | ** ** | ** ** | ** ** | **Total** | ** ** |
| Assets:                                                                                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   |   |   |   |   |   |   |   |   |
| Fixed  maturities, available-for-sale, including securities pledged:                                            |       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| U.S.  Treasuries                                                                                                |       |       | $ | 1,690.3 |   |   |   | $ | 68.5 |   |   |   | $ | -   |   |   |   | $ | 1,758.8 |   |
| U.S  government agencies and authorities                                                                        |       |       | -   |   |   |   | 48.5 |   |   |   | -   |   |   |   | 48.5 |   |
| U.S.  corporate, state and municipalities                                                                       |       |       | -   |   |   |   | 9,795.1 |   |   |   | 8.6 |   |   |   | 9,803.7 |   |
| Foreign                                                                                                         |       |       | -   |   |   |   | 4,893.9 |   |   |   | 12.5 |   |   |   | 4,906.4 |   |
| Residential  mortgage-backed securities                                                                         |       |       | -   |   |   |   | 1,819.5 |   |   |   | 315.7 |   |   |   | 2,135.2 |   |
| Commercial  mortgage-backed securities                                                                          |       |       | -   |   |   |   | 2,518.7 |   |   |   | -   |   |   |   | 2,518.7 |   |
| Other  asset-backed securities                                                                                  |       |       | -   |   |   |   | 794.7 |   |   |   | 686.2 |   |   |   | 1,480.9 |   |
| Equity  securities, available-for-sale                                                                          |       |       | 132.5 |   |   |   | -   |   |   |   | 15.8 |   |   |   | 148.3 |   |
| Derivatives:                                                                                                    |       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest  rate contracts                                                                                        |       |       | -   |   |   |   | 120.3 |   |   |   | -   |   |   |   | 120.3 |   |
| Foreign  exchange contracts                                                                                     |       |       | -   |   |   |   | 2.3 |   |   |   | -   |   |   |   | 2.3 |   |
| Equity  contracts                                                                                               |       |       | 20.4 |   |   |   | -   |   |   |   | 113.1 |   |   |   | 133.5 |   |
| Credit  contracts                                                                                               |       |       | -   |   |   |   | 1.2 |   |   |   | -   |   |   |   | 1.2 |   |
| Cash  and cash equivalents, short-term investments, and short-term investments under  securities loan agreement |       |       | 1,698.2 |   |   |   | -   |   |   |   | -   |   |   |   | 1,698.2 |   |
| Assets  held in separate accounts                                                                               |       |       | 42,641.5 |   |   |   | -   |   |   |   | -   |   |   |   | 42,641.5 |   |
| Total                                                                                                           |       |       | $ | 46,182.9 |   |   |   | $ | 20,062.7 |   |   |   | $ | 1,151.9 |   |   |   | $ | 67,397.5 |   |
|                                                                                                            |       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Liabilities:                                                                                                    |       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Investment  contract guarantees:                                                                                |       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Fixed  Indexed Annuities (“FIA”)                                                                      |       |       | $ | -   |   |   |   | $ | -   |   |   |   | $ | 1,105.4 |   |   |   | $ | 1,105.4 |   |
| Guaranteed  Minimum Withdrawal and Accumulation Benefits (“GMWB” and “GMAB”)                |       |       | -   |   |   |   | -   |   |   |   | 132.7 |   |   |   | 132.7 |   |
| Embedded  derivative on reinsurance                                                                             |       |       | -   |   |   |   | 129.5 |   |   |   | -   |   |   |   | 129.5 |   |
| Derivatives:                                                                                                    |       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest  rate contracts                                                                                        |       |       | -   |   |   |   | 395.5 |   |   |   | -   |   |   |   | 395.5 |   |
| Foreign  exchange contracts                                                                                     |       |       | -   |   |   |   | 60.7 |   |   |   | -   |   |   |   | 60.7 |   |
| Equity  contracts                                                                                               |       |       | 3.0 |   |   |   | -   |   |   |   | 24.2 |   |   |   | 27.2 |   |
| Credit  contracts                                                                                               |       |       | -   |   |   |   | 4.2 |   |   |   | 43.5 |   |   |   | 47.7 |   |
| Total                                                                                                           |       |       | $ | 3.0 |   |   |   | $ | 589.9 |   |   |   | $ | 1,305.8 |   |   |   | $ | 1,898.7 |   |

 

(1)     Level 3 net assets and liabilities accounted for (0.2)%of total net assets and liabilities measured at fair value on a recurringbasis. Excluding separate accounts assets for which the policyholder bears therisk, the Level 3 net assets and liabilities in relation to total net assetsand liabilities measured at fair value on a recurring basis totaled (0.7)%.

 

19

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**ING USAAnnuity and Life Insurance Company**

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

**Notes toCondensed Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwise stated)

 
| ** **                                                                                                      | ** ** | ** ** | **2009**         | ** **    |
|-----------------------------------------------------------------------------------------------------------------|------------|------------|------------------|---------------|
| ** **                                                                                                      | ** ** | ** ** | **Level 1** | ** **    | ** ** | ** ** | **Level 2** | ** ** | ** ** | ** ** | **Level 3****(1)** | ** ** | ** ** | ** ** | **Total** | ** ** |
| Assets:                                                                                                         | ** ** | ** ** | ** **       | ** **    | ** ** | ** ** | ** ** |   |   |   |   |   |   |   |   |   |
| Fixed  maturities, available-for-sale, including securities pledged:                                            |       |       |             |          |   |   |   |   |   |   |   |   |   |   |   |   |
| U.S.  Treasuries                                                                                                |       |       | $                | 4,123.5       |   |   |   | $ | -   |   |   |   | $ | -   |   |   |   | $ | 4,123.5 |   |
| U.S  government agencies and authorities                                                                        |       |       | -      |          |   |   | 24.6 |   |   |   | -   |   |   |   | 24.6 |   |
| U.S.  corporate, state and municipalities                                                                       |       |       | -      |          |   |   | 5,559.2 |   |   |   | -   |   |   |   | 5,559.2 |   |
| Foreign                                                                                                         |       |       | -      |          |   |   | 3,318.9 |   |   |   | -   |   |   |   | 3,318.9 |   |
| Residential  mortgage-backed securities                                                                         |       |       | -      |          |   |   | 659.8 |   |   |   | 1,088.2 |   |   |   | 1,748.0 |   |
| Commercial  mortgage-backed securities                                                                          |       |       | -      |          |   |   | 2,589.6 |   |   |   | -   |   |   |   | 2,589.6 |   |
| Other  asset-backed securities                                                                                  |       |       | -      |          |   |   | 461.3 |   |   |   | 423.9 |   |   |   | 885.2 |   |
| Equity  securities, available-for-sale                                                                          |       |       | 149.8            |          |   |   | -   |   |   |   | 4.5 |   |   |   | 154.3 |   |
| Derivatives:                                                                                                    |       |       |             |          |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest  rate contracts                                                                                        |       |       | -      |          |   |   | 44.6 |   |   |   | -   |   |   |   | 44.6 |   |
| Foreign  exchange contracts                                                                                     |       |       | -      |          |   |   | 14.2 |   |   |   | -   |   |   |   | 14.2 |   |
| Equity  contracts                                                                                               |       |       | 42.8             |          |   |   | -   |   |   |   | 215.5 |   |   |   | 258.3 |   |
| Credit  contracts                                                                                               |       |       | -      |          |   |   | 0.3 |   |   |   | -   |   |   |   | 0.3 |   |
| Embedded  derivative on reinsurance                                                                             |       |       | -      |          |   |   | 38.7 |   |   |   | -   |   |   |   | 38.7 |   |
| Cash  and cash equivalents, short-term investments, and short-term investments under  securities loan agreement |       |       | 2,245.1          |          |   |   | 8.0 |   |   |   | -   |   |   |   | 2,253.1 |   |
| Assets  held in separate accounts                                                                               |       |       | 42,996.1         |          |   |   | -   |   |   |   | -   |   |   |   | 42,996.1 |   |
| Total                                                                                                           |       |       | $                | 49,557.3      |   |   |   | $ | 12,719.2 |   |   |   | $ | 1,732.1 |   |   |   | $ | 64,008.6 |   |
|                                                                                                            |       |       |             |          |   |   |   |   |   |   |   |   |   |   |   |   |
| Liabilities:                                                                                                    |       |       |             |          |   |   |   |   |   |   |   |   |   |   |   |   |
| Investment  contract guarantees:                                                                                |       |       |             |          |   |   |   |   |   |   |   |   |   |   |   |   |
| Fixed  Indexed Annuities (“FIA”)                                                                      |       |       | $                | -   |   |   |   | $ | -   |   |   |   | $ | 927.2 |   |   |   | $ | 927.2 |   |
| Guaranteed  Minimum Withdrawal and Accumulation Benefits (“GMWB” and “GMAB”)                |       |       | -      |          |   |   | -   |   |   |   | 73.9 |   |   |   | 73.9 |   |
| Embedded  derivative on reinsurance                                                                             |       |       | -      |          |   |   | -   |   |   |   | -   |   |   |   | -   |   |
| Derivatives:                                                                                                    |       |       |             |          |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest  rate contracts                                                                                        |       |       | -      |          |   |   | 325.2 |   |   |   | -   |   |   |   | 325.2 |   |
| Foreign  exchange contracts                                                                                     |       |       | -      |          |   |   | 53.0 |   |   |   | -   |   |   |   | 53.0 |   |
| Equity  contracts                                                                                               |       |       | 3.2              |          |   |   | -   |   |   |   | 13.1 |   |   |   | 16.3 |   |
| Credit  contracts                                                                                               |       |       | -      |          |   |   | 15.4 |   |   |   | 90.5 |   |   |   | 105.9 |   |
| Total                                                                                                           |       |       | $                | 3.2           |   |   |   | $ | 393.6 |   |   |   | $ | 1,104.7 |   |   |   | $ | 1,501.5 |   |

 

(1)     Level 3 net assets and liabilities accounted for 1.0%of total net assets and liabilities measured at fair value on a recurringbasis. Excluding separate accounts assets for which the policyholder bears therisk, the Level 3 net assets and liabilities in relation to total net assetsand liabilities measured at fair value on a recurring basis totaled 3.2%.

 

***Transfers in and outof Level 1 and 2***

 

Certain US Treasury securities valued by commercialpricing services where prices are derived using market observable inputs havebeen transferred from Level 1 to Level 2. These securities for the nine months ended September 30, 2010,include US Treasury 

 

20

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**ING USAAnnuity and Life Insurance Company**

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

**Notes toCondensed Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwise stated)

 

strips of $83.5 in which prices are modeledincorporating a variety of market observable information in their valuation techniques,including benchmark yields, broker-dealer quotes, credit quality, issuerspreads, bids, offers and other reference data. The Company’s policy is torecognize transfers in and transfers out as of the beginning of the reportingperiod.

 

***Valuation ofFinancial Assets and Liabilities***

 

As described below, certain assets and liabilities aremeasured at estimated fair value on the Company’s Condensed Balance Sheets. Inaddition, further disclosure of estimated fair values is included in thisFinancial Instruments footnote. The Company defines fair value as the pricethat would be received to sell an asset or paid to transfer a liability (anexit price) in the principal or most advantageous market for the asset orliability in an orderly transaction between market participants on themeasurement date.  The exit price and thetransaction (or entry) price will be the same at initial recognition in manycircumstances. However, in certain cases, the transaction price may notrepresent fair value. The fair value of a liability is based on the amount thatwould be paid to transfer a liability to a third-party with an equal creditstanding. Fair value is required to be a market-based measurement which isdetermined based on a hypothetical transaction at the measurement date, from amarket participant’s perspective. The Company considers three broad valuationtechniques when a quoted price is unavailable: (i) the market approach, (ii) theincome approach and (iii) the cost approach. The Company determines themost appropriate valuation technique to use, given the instrument beingmeasured and the availability of sufficient inputs. The Company prioritizes theinputs to fair valuation techniques and allows for the use of unobservableinputs to the extent that observable inputs are not available.

 

The Company utilizes a number of valuation methodologiesto determine the fair values of its financial assets and liabilities inconformity with the concepts of “exit price” and the fair value hierarchy asprescribed in ASC Topic 820.  Valuationsare obtained from third party commercial pricing services, brokers, andindustry-standard, vendor-provided software that models the value based onmarket observable inputs.  The valuationsobtained from brokers and third-party commercial pricing services arenon-binding.  The valuations are reviewedand validated monthly through the internal valuation committee price variancereview, comparisons to internal pricing models, back testing to recent trades,or monitoring of trading volumes.

 

All valuation methods and assumptions are validated atleast quarterly to ensure the accuracy and relevance of the fair values.  There were no material changes to thevaluation methods or assumptions used to determine fair values sinceDecember 31, 2009, except for the Company’s use of commercial pricingservices to value certain collateralized mortgage obligations (“CMO-Bs”) whichcommenced in the first quarter of 2010. CMO-Bs were previously valued using anaverage of broker quotes when more than one broker quote is provided.

 

21

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**ING USAAnnuity and Life Insurance Company**

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

**Notes toCondensed Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwise stated)

 

The following valuation methods and assumptions wereused by the Company in estimating the fair value of the following financialinstruments:

 

*Fixed maturities, available-for-sale*: The fair values for the actively traded marketablebonds are determined based upon the quoted market prices and are classified asLevel 1 assets.  Assets in this categorywould primarily include certain US Treasury securities.  The fair values for marketable bonds withoutan active market, excluding subprime residential mortgage-backed securities,are obtained through several commercial pricing services, which provide theestimated fair values, and are classified as Level 2 assets.** **These servicesincorporate a variety of market observable information in their valuationtechniques, including benchmark yields, broker-dealer quotes, credit quality,issuer spreads, bids, offers and other reference data.  This category includes US & foreigncorporate bonds, Asset-backed Securities (“ABS”), US agency and governmentguaranteed securities, Commercial Mortgage-backed Securities (“CMBS”), andResidential Mortgage-backed Securities (“RMBS”), including certain CMO-Bs.

 

Generally, the Company does not obtain more than onevendor price from pricing services per instrument.  The Company uses a hierarchy process in whichprices are obtained from a primary vendor, and, if that vendor is unable toprovide the price, the next vendor in the hierarchy is contacted until a priceis obtained or it is determined that a price cannot be obtained from acommercial pricing service.  When a pricecannot be obtained from a commercial pricing service, independent broker quotesare solicited.  Securities priced usingindependent broker quotes are classified as Level 3.

 

Brokerquotes and prices obtained from pricing services are reviewed and validatedmonthly through an internal valuation committee price variance review,comparisons to internal pricing models, back testing to recent trades, ormonitoring of trading volumes.  At September 30,2010, $561.6 and $18.1 billion of a total of $22.7 billion in fixed maturitieswere valued using unadjusted broker quotes and unadjusted prices obtained frompricing services, respectively, and verified through the review process.  The remaining balance in fixed maturitiesconsisted primarily of privately placed bonds valued using a matrix-basedpricing.

 

All prices and broker quotes obtained go through thereview process described above including valuations for which only one brokerquote is obtained.  After review, forthose instruments where the price is determined to be appropriate, theunadjusted price provided is used for financial statement valuation.  If it is determined that the price isquestionable, another price may be requested from a different vendor.  The internal valuation committee then reviewsall prices for the instrument again, along with information from the review, todetermine which price best represents “exit price” for the instrument.

 

22

----

 

**ING USAAnnuity and Life Insurance Company**

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

**Notes toCondensed Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwise stated)

 

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

 

Tradingactivity for the Company’s RMBS, particularly subprime and Alt-A RMBS, declinedduring 2008 as a result of the dislocation of the credit markets.  The Company continued to obtain pricinginformation from commercial pricing services and brokers. However, the pricingfor subprime and Alt-A RMBS did not represent regularly occurring markettransactions since the trading activity declined significantly in the secondhalf of 2008.  As a result, the Companyconcluded in the second half of 2008 that the market for subprime and Alt-ARMBS was inactive and classified these securities as Level 3 assets.  The Company did not change its valuationprocedures, which are consistent with those used for Level 2 marketable bondswithout an active market, as a result of determining that the market wasinactive. Due to increased trade activity of Alt-A RMBS during the second halfof 2009, the Company determined that the Alt-A RMBS should be transferred toLevel 2 of the valuation hierarchy as its overall assessment of the market wasthat it was active. The market for subprime RMBS remains largely inactive, andas such these securities will remain in Level 3 of the valuation hierarchy. TheCompany will continue to monitor market activity for RMBS to determine properclassification in the valuation hierarchy.

 

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

 

*Cash and cash equivalents, Short-terminvestments, and Short-term investments under securities loan agreement*: The carrying amounts for cash reflect theassets’ fair values.  The fair values forcash equivalents and short-term investments are determined based on quotedmarket prices.  These assets areclassified as Level 1. Other short-term investments are valued and classifiedin the fair value hierarchy consistent with the policies described herein,depending on investment type.

 

*Assets held in separate accounts*: Assets held in separate accounts are reportedat the quoted fair values of the underlying investments in the separateaccounts.  The underlying investmentsinclude mutual funds, valued based upon a quoted market price and areclassified as Level 1.

 

23

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**ING USAAnnuity and Life Insurance Company**

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

**Notes toCondensed Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwise stated)

 

*Derivatives*: Thecarrying amounts for these financial instruments, which can be assets orliabilities, reflect the fair value of the assets and liabilities.  Derivatives are carried at fair value (on theCondensed Balance Sheets), which is determined using the Company’s derivativeaccounting system in conjunction with observable key financial data from thirdparty sources, such as yield curves, exchange rates, Standard & Poor’s(“S&P”) 500 Index prices, and London Inter Bank Offered Rates (“LIBOR”), orthrough values established by third party brokers.  Counterparty credit risk is considered andincorporated in the Company’s valuation process through counterparty creditrating requirements and monitoring of overall exposure.  It is the Company’s policy to transact onlywith investment grade counterparties with a credit rating of A- or better.  Valuations for the Company’s futurescontracts 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 arepriced using models that primarily use market observable inputs, but containinputs that are not observable to market participants, which have been classifiedas Level 3.  However, all otherderivative instruments are valued based on market observable inputs and areclassified as Level 2.

 

*Investment contract guarantees*: TheCompany records guarantees, which can be either assets or liabilities, for annuitycontracts containing guaranteed riders for GMABs and GMWBs without lifecontingencies in accordance with US GAAP for derivative instruments and hedgingactivities.  The guarantee is treated asan embedded derivative and is required to be reported separately from the hostvariable annuity contract.  The fairvalue of the obligation is calculated based on actuarial and capital marketassumptions related to the projected cash flows, including benefits and relatedcontract charges, over the anticipated life of the related contracts.  The cash flow estimates are produced by usingstochastic techniques under a variety of market return scenarios and other bestestimate assumptions. These derivatives are classified as Level 3 assets in thefair value hierarchy.

 

The Company also records forits FIA contracts an embedded derivative liability for interest payments tocontractholders above the minimum guaranteed interest rate, in accordance withUS GAAP for derivative instruments and hedging activities.  The guarantee is treated as an embeddedderivative and is required to be reported separately from the hostcontract.  The fair value of theobligation is calculated based on actuarial and capital market assumptionsrelated to the projected cash flows, including benefits and related contractcharges, over the anticipated life of the related contracts.  The cash flow estimates are produced by bestestimate assumptions. These derivatives are classified as Level 3 assets in thefair value hierarchy.

 

Nonperformance risk for investment contract guaranteescontains adjustments to the fair values of these contract liabilities relatedto the current credit standing of ING and the Company based on credit defaultswaps with similar term to maturity and priority of payment.  The ING credit default swap spread is appliedto the discount factors for FIAs and the risk-free rates for GMABs and GMWBs inthe Company’s valuation models in 

 

24

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**ING USAAnnuity and Life Insurance Company**

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

**Notes toCondensed Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwise stated)

 

order to incorporate credit risk into the fair values ofthese investment contract guarantees.  Asof September 30, 2010, the credit spreads of ING and the Company increasedby approximately 133 basis points from December 31, 2009, whichcontributed to changes in the valuation of the reserves for all investmentcontract guarantees.

 

*Embedded derivative onreinsurance*: The carrying value of the embedded derivative is estimated based uponthe change in the fair value of the assets supporting the funds withheldpayable under the combined coinsurance and coinsurance funds withheldreinsurance agreement between the Company and Security Life of DenverInternational Limited (“SLDI”). As the fair value of the assets held in trustis based on a quoted market price (Level 1), the fair value of theembedded derivative is based on market observable inputs and is classified asLevel 2.

 

The following disclosures aremade in accordance with the requirements of ASC Topic 825 which requiresdisclosure of fair value information about financial instruments, whether ornot recognized in the balance sheet, for which it is practicable to estimatethat value.  In cases where quoted marketprices are not available, fair values are based on estimates using presentvalue or other valuation techniques.  Those techniques are significantly affected bythe assumptions used, including the discount rate and estimates of future cashflows.  In that regard, the derived fairvalue estimates, in many cases, could not be realized in immediate settlementof the instrument.

 

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

 

The following valuation methods and assumptions were usedby the Company in estimating the fair value of the following financialinstruments, which are not carried at fair value on the Condensed BalanceSheets, and therefore not categorized in the fair value hierarchy:

 

*Limitedpartnerships/corporations*: The fair value forthese investments, primarily private equities and hedge funds, is estimatedbased on the Net Asset Value (“NAV”) as provided by the investee.

 

*Mortgage loans on real estate*: The fair values for mortgage loans on realestate are estimated using discounted cash flow analyses and rates currentlybeing offered in the marketplace for similar loans to borrowers with similarcredit ratings.  Loans with similarcharacteristics are aggregated for purposes of the calculations.

 

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

 

25

----

 

**ING USAAnnuity and Life Insurance Company**

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

**Notes toCondensed Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwise stated)

 

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

 

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

 

*Deposits from affiliates*: Fair value is estimated based on the fair value of the liabilities forthe account values of the underlying contracts, plus the fair value of theunamortized ceding allowance based on the present value of the projectedrelease of the ceding allowance, discounted at risk-free rates, plus a creditspread.

 

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

 

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

 

*Without a fixed maturity*: Fair value is estimated as the mean present value of stochasticallymodeled cash flows associated with the contract liabilities relevant to boththe contractholder and to the Company. Here, the stochastic valuation scenarioset is consistent with current market parameters, and discount is taken usingstochastically evolving short risk-free rates in the scenarios augmented by creditspreads on current Company debt. The augmentation in the discount is present toaccount for non-performance risk. Margins for non-financial risks associatedwith the contract liabilities are also included.

 

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

 

26

----

 

**ING USAAnnuity and Life Insurance Company**

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

**Notes toCondensed Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwise stated)

 

The carrying values and estimated fair values of certainof the Company’s financial instruments were as follows at September 30,2010 and December 31, 2009.

 
| ** **                                                                                                   | ** ** | ** ** | **2010**      | ** ** | ** ** | ** ** | **2009**      | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|------------|---------------|------------|------------|------------|---------------|------------|
| ** **                                                                                                   | ** ** | ** ** | **Carrying**  | ** ** | ** ** | ** ** | **Fair**      | ** ** | ** ** | ** ** | **Carrying** | ** ** | ** ** | ** ** | **Fair** | ** ** |
| ** **                                                                                                   | ** ** | ** ** | **Value**     | ** ** | ** ** | ** ** | **Value**     | ** ** | ** ** | ** ** | **Value** | ** ** | ** ** | ** ** | **Value** | ** ** |
| Assets:                                                                                                      |       |       |          |       |       |       |          |       |   |   |   |   |   |   |   |   |
| Fixed  maturities, available-for-sale, including securities pledged                                          |       |       | $             | 22,652.2   |       |       |          | $          | 22,652.2 |   |   |   | $ | 18,249.0 |   |   |   | $ | 18,249.0 |   |
| Equity  securities, available-for-sale                                                                       |       |       | 148.3         |       |       |       | 148.3         |       |   |   | 154.3 |   |   |   | 154.3 |   |
| Mortgage  loans on real estate                                                                               |       |       | 3,006.1       |       |       |       | 3,075.6       |       |   |   | 3,413.2 |   |   |   | 3,417.3 |   |
| Loan  - Dutch State obligation                                                                               |       |       | 882.0         |       |       |       | 857.4         |       |   |   | 1,026.0 |   |   |   | 971.4 |   |
| Policy  loans                                                                                                |       |       | 124.0         |       |       |       | 124.0         |       |   |   | 131.6 |   |   |   | 131.6 |   |
| Cash,  cash equivalents, Short-term investments, and Short-term investments under  securities loan agreement |       |       | 1,698.2       |       |       |       | 1,698.2       |       |   |   | 2,253.1 |   |   |   | 2,253.1 |   |
| Derivatives                                                                                                  |       |       | 257.3         |       |       |       | 257.3         |       |   |   | 317.4 |   |   |   | 317.4 |   |
| Other  investments                                                                                           |       |       | 1.6           |       |       |       | 1.6           |       |   |   | 3.5 |   |   |   | 3.5 |   |
| Deposits  from affiliates                                                                                    |       |       | 1,630.6       |       |       |       | 1,761.9       |       |   |   | 1,752.0 |   |   |   | 1,873.6 |   |
| Embedded  derivative on reinsurance                                                                          |       |       | -   |       |       |       | -   |       |   |   | 38.7 |   |   |   | 38.7 |   |
| Assets  held in separate accounts                                                                            |       |       | 42,641.5      |       |       |       | 42,641.5      |       |   |   | 42,996.1 |   |   |   | 42,996.1 |   |
| Liabilities:                                                                                                 |       |       |          |       |       |       |          |       |   |   |   |   |   |   |   |   |
| Investment  contract liabilities:                                                                            |       |       |          |       |       |       |          |       |   |   |   |   |   |   |   |   |
| Deferred  annuities                                                                                          |       |       | 21,285.2      |       |       |       | 21,171.3      |       |   |   | 20,665.8 |   |   |   | 20,766.5 |   |
| Guaranteed  investment contracts and funding agreements                                                      |       |       | 2,802.9       |       |       |       | 2,528.8       |       |   |   | 2,646.5 |   |   |   | 2,718.3 |   |
| Supplementary  contracts and immediate annuities                                                             |       |       | 803.9         |       |       |       | 751.4         |       |   |   | 823.6 |   |   |   | 782.7 |   |
| Derivatives                                                                                                  |       |       | 531.1         |       |       |       | 531.1         |       |   |   | 500.4 |   |   |   | 500.4 |   |
| Investment  contract guarantees:                                                                             |       |       |          |       |       |       |          |       |   |   |   |   |   |   |   |   |
| Fixed  indexed annuities                                                                                     |       |       | 1,105.4       |       |       |       | 1,105.4       |       |   |   | 927.2 |   |   |   | 927.2 |   |
| Guaranteed  minimum withdrawal and accumulation benefits                                                     |       |       | 132.7         |       |       |       | 132.7         |       |   |   | 73.9 |   |   |   | 73.9 |   |
| Embedded  derivative on reinsurance                                                                          |       |       | 129.5         |       |       |       | 129.5         |       |   |   | -   |   |   |   | -   |   |
| Notes  to affiliates                                                                                         |       |       | 435.0         |       |       |       | 478.1         |       |   |   | 435.0 |   |   |   | 426.9 |   |
|                                                                                                              |            |            |               |            |            |            |               |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

Fair value estimates are made at a specific point intime, based on available market information and judgments about variousfinancial instruments, such as estimates of timing and amounts of future cashflows.  Such estimates do not reflect anypremium or discount that could result from offering for sale at one time theCompany’s entire holdings of a particular financial instrument, nor do theyconsider the tax impact of the realization of unrealized capital gains(losses).  In many cases, the fair valueestimates cannot be substantiated by comparison to independent markets, nor canthe disclosed value be realized in immediate settlement of theinstruments.  In evaluating the Company’smanagement of interest rate, price, and liquidity risks, the fair values of allassets and liabilities should be taken into consideration, not only thosepresented above.

 

27

----

 

**ING USAAnnuity and Life Insurance Company**

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

**Notes toCondensed Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwise stated)

 

***Level 3 Financial Instruments***

 

The fair values of certain assets and liabilities aredetermined using prices or valuation techniques that require inputs that areboth unobservable and significant to the overall fair value measurement (i.e.,Level 3 as defined by ASC 820), including but not limited to liquidity spreadsfor investments within markets deemed not currently active.  These valuations, whether derived internallyor obtained from a third party, use critical assumptions that are not widelyavailable to estimate market participant expectations in valuing the asset orliability.  In addition, the Company hasdetermined, for certain financial instruments, an active market is such asignificant input to determine fair value that the presence of an inactivemarket may lead to classification in Level 3. In light of the methodologies employed to obtain the fair values offinancial assets and liabilities classified as Level 3, additional informationis presented below, with particular attention addressed to changes inderivatives, FIAs, and GMWBs and GMABs due to their impacts on the Company’sresults of operations.

 

28

----

 

**ING USAAnnuity and Life Insurance Company**

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

**Notes toCondensed Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwise stated)

 
|       | The following tables summarize the changes in fair  value of the Company’s Level 3 assets and liabilities for the three and nine  months ended September 30, 2010. |
|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |                                                                                                                                                                         |
| ** ** | ** **                                                                                                                                                                   | ** ** | **Three Months Ended September 30, 2010** |
| ** ** | ** **                                                                                                                                                                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Change in** |
| ** ** | ** **                                                                                                                                                                   | ** ** | **Fair Value** | ** ** | **Total realized/unrealized** | ** ** | **Purchases,** | ** ** | **Transfers** | ** ** | **Transfers** | ** ** | **Fair Value** | ** ** | **unrealized gains** |
| ** ** | ** **                                                                                                                                                                   | ** ** | **as of** | ** ** | **gains (losses) included in:** | ** ** | **issuances, and** | ** ** | **in to** | ** ** | **out of** | ** ** | **as of** | ** ** | **(losses) included** |
| ** ** | ** **                                                                                                                                                                   | ** ** | **July 1** | ** ** | **Net income** | ** ** | **OCI** | ** ** | **settlements** | ** ** | **Level 3****(2)** | ** ** | **Level 3****(2)** | ** ** | **September 30** | ** ** | **in earnings****(3)** |
|       | Fixed  maturities, available for sale, including securities pledged:                                                                                                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|       | U.S.  corporate, state and municipalities                                                                                                                                    |   | $ | 67.0 |   |   | $ | - |   |   | $ | 0.4 |   |   | $ | (0.2 | ) |   | $ | - |   |   | $ | (58.6 | ) |   | $ | 8.6 |   |   | $ | - |   |
|       | Foreign                                                                                                                                                                      |   | 55.3 |   |   | 0.2 |   |   | 0.3 |   |   | - |   |   | 8.6 |   |   | (51.9 | ) |   | 12.5 |   |   | - |   |
|       | Residential  mortgage-backed securities                                                                                                                                      |   | 148.3 |   |   | (2.1 | ) |   | (1.6 | ) |   | 45.6 |   |   | 197.3 |   |   | (71.8 | ) |   | 315.7 |   |   | (3.6 | ) |
|       | Commercial  mortgage-backed securities                                                                                                                                       |   | - |   |   | - |   |   | - |   |   | - |   |   | - |   |   | - |   |   | - |   |   | - |   |
|       | Other  asset-backed securities                                                                                                                                               |   | 679.4 |   |   | - |   |   | 29.8 |   |   | (19.1 | ) |   | - |   |   | (3.9 | ) |   | 686.2 |   |   | (1.2 | ) |
|       | Total  Fixed maturities, available for sale, including securities pledged:                                                                                                   |   | 950.0 |   |   | (1.9 | ) |   | 28.9 |   |   | 26.3 |   |   | 205.9 |   |   | (186.2 | ) |   | 1,023.0 |   |   | (4.8 | ) |
|       |                                                                                                                                                                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|       | Equity  securities, available for sale                                                                                                                                       |   | 13.0 |   |   | (1.4 | ) |   | 1.7 |   |   | 0.6 |   |   | 1.9 |   |   | - |   |   | 15.8 |   |   | - |   |
|       |                                                                                                                                                                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|       | Derivatives,  net                                                                                                                                                            |   | 66.7 |   |   | 2.2 |   |   | - |   |   | (23.5 | ) |   | - |   |   | - |   |   | 45.4 |   |   | (20.1 | ) |
|       |                                                                                                                                                                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|       | Investment  contract guarantees:                                                                                                                                             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|       | FIA                                                                                                                                                                          |   | (977.3 | ) |   | (145.5 | ) |   | - |   |   | 17.4 |   |   | - |   |   | - |   |   | (1,105.4 | ) |   | - |   |
|       | GMWB/GMAB                                                                                                                                                                    |   | (97.1 | ) |   | (42.2 | ) |   | - |   |   | 6.6 |   |   | - |   |   | - |   |   | (132.7 | ) |   | - |   |
|       | Total  Investment contract guarantees                                                                                                                                        |   | (1,074.4 | ) |   | (187.7 | ) | (1) | - |   |   | 24.0 |   |   | - |   |   | - |   |   | (1,238.1 | ) |   | - |   |
|       |                                                                                                                                                                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|       | (1)                                                                                                                                                                          | This amount is included  in Interest credited and other benefits to contractowners 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 September 30. Amounts are included in Net  investment income and Net realized capital losses on the Condensed Statements  of Operations. |
|            |                                                                                                                                                                              |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

29

----

 

**ING USAAnnuity and Life Insurance Company**

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

**Notes toCondensed Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwise stated)

 
|       |                                                                       | ** **                                                                                                                                                                                                                                                                                                                                                                         | **Nine Months Ended September 30,  2010** |
|------------|----------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------|
| ** ** | ** **                                                                 | ** **                                                                                                                                                                                                                                                                                                                                                                         | ** **                                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Change in** |
| ** ** | ** **                                                                 | ** **                                                                                                                                                                                                                                                                                                                                                                         | **Fair Value**                            | ** ** | **Total realized/unrealized** | ** ** | **Purchases,** | ** ** | **Transfers** | ** ** | **Transfers** | ** ** | **Fair Value** | ** ** | **unrealized gains** |
| ** ** | ** **                                                                 | ** **                                                                                                                                                                                                                                                                                                                                                                         | **as of**                                 | ** ** | **gains (losses) included in:** | ** ** | **issuances, and** | ** ** | **in to** | ** ** | **out of** | ** ** | **as of** | ** ** | **(losses) included** |
| ** ** | ** **                                                                 | ** **                                                                                                                                                                                                                                                                                                                                                                         | **January 1**                             | ** ** | **Net income** | ** ** | **OCI** | ** ** | **settlements** | ** ** | **Level 3****(2)** | ** ** | **Level 3****(2)** | ** ** | **September 30** | ** ** | **in earnings****(3)** |
|       | Fixed  maturities, available for sale, including securities pledged:       |                                                                                                                                                                                                                                                                                                                                                                               |                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|       | U.S.  corporate, state and municipalities                                  |                                                                                                                                                                                                                                                                                                                                                                               | $                                              | - |   |   | $ | - |   |   | $ | 0.5  |   | $ | (0.3 | ) |   | $ | 8.4 |   |   | $ | - |   |   | $ | 8.6 |   |   | $ | - |   |
|       | Foreign                                                                    |                                                                                                                                                                                                                                                                                                                                                                               | -                                              |   |   | 0.3 |   |   | 0.8  |   | 4.3 |   |   | 7.1 |   |   | - |   |   | 12.5 |   |   | - |   |
|       | Residential  mortgage-backed securities                                    |                                                                                                                                                                                                                                                                                                                                                                               | 1,088.2                                        |   |   | (4.1 | ) |   | 8.1  |   | 28.5 |   |   | 13.1 |   |   | (818.1 | ) |   | 315.7 |   |   | (4.1 | ) |
|       | Commercial  mortgage-backed securities                                     |                                                                                                                                                                                                                                                                                                                                                                               | -                                              |   |   | - |   |   | - |   | - |   |   | - |   |   | - |   |   | - |   |   | - |   |
|       | Other  asset-backed securities                                             |                                                                                                                                                                                                                                                                                                                                                                               | 423.9                                          |   |   | (16.0 | ) |   | 104.2  |   | (62.3 | ) |   | 236.4 |   |   | - |   |   | 686.2 |   |   | (17.0 | ) |
|       | Total  Fixed maturities, available for sale, including securities pledged: |                                                                                                                                                                                                                                                                                                                                                                               | 1,512.1                                        |   |   | (19.8 | ) |   | 113.6  |   | (29.8 | ) |   | 265.0 |   |   | (818.1 | ) |   | 1,023.0 |   |   | (21.1 | ) |
|       |                                                                       |                                                                                                                                                                                                                                                                                                                                                                               |                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|       | Equity  securities, available for sale                                     |                                                                                                                                                                                                                                                                                                                                                                               | 4.5                                            |   |   | (0.7 | ) |   | 1.4  |   | 9.1 |   |   | 1.5 |   |   | - |   |   | 15.8 |   |   | - |   |
|       |                                                                       |                                                                                                                                                                                                                                                                                                                                                                               |                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|       | Derivatives,  net                                                          |                                                                                                                                                                                                                                                                                                                                                                               | 111.9                                          |   |   | (56.6 | ) |   | - |   | (9.9 | ) |   | - |   |   | - |   |   | 45.4 |   |   | 17.7 |   |
|       |                                                                       |                                                                                                                                                                                                                                                                                                                                                                               |                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|       | Investment  contract guarantees:                                           |                                                                                                                                                                                                                                                                                                                                                                               |                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|       | FIA                                                                        |                                                                                                                                                                                                                                                                                                                                                                               | (927.2                                         | ) |   | (149.1 | ) |   | - |   | (29.1 | ) |   | - |   |   | - |   |   | (1,105.4 | ) |   | - |   |
|       | GMWB/GMAB                                                                  |                                                                                                                                                                                                                                                                                                                                                                               | (73.9                                          | ) |   | (62.3 | ) |   | - |   | 3.5 |   |   | - |   |   | - |   |   | (132.7 | ) |   | - |   |
|       | Total  Investment contract guarantees                                      |                                                                                                                                                                                                                                                                                                                                                                               | (1,001.1                                       | ) |   | (211.4 | ) | (1) | - |   | (25.6 | ) |   | - |   |   | - |   |   | (1,238.1 | ) |   | - |   |
|       |                                                                       |                                                                                                                                                                                                                                                                                                                                                                               |                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|       | (1)                                                                        | This amount is included  in Interest credited and other benefits to contractowners 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 September 30. Amounts are included in Net  investment income and Net realized capital losses on the Condensed Statements  of Operations.                                                                                                                                                                                          |
|            |                                                                            |                                                                                                                                                                                                                                                                                                                                                                                    |                                                |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

30

----

 

**ING USAAnnuity and Life Insurance Company**

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

**Notes toCondensed Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwise stated)

 
|       | The following tables summarize the changes  in fair value of the Company’s Level 3 assets and liabilities for the three  and nine months ended September 30, 2009. |
|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |                                                                                                                                                                         | ** ** | ** ** |
|       |                                                                                                                                                                         | ** ** | **Three  Months Ended September 30, 2009** |
| ** ** | ** **                                                                                                                                                                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Change in** |
| ** ** | ** **                                                                                                                                                                   | ** ** | **Fair Value** | ** ** | **Total realized/unrealized** | ** ** | **Purchases,** | ** ** | **Transfers** | ** ** | **Transfers** | ** ** | **Fair Value** | ** ** | **unrealized gains** |
| ** ** | ** **                                                                                                                                                                   | ** ** | **as of** | ** ** | **gains (losses) included in:** | ** ** | **issuances, and** | ** ** | **in to** | ** ** | **out of** | ** ** | **as of** | ** ** | **(losses) included** |
| ** ** | ** **                                                                                                                                                                   | ** ** | **July 1** | ** ** | **Net income** | ** ** | **OCI** | ** ** | **settlements** | ** ** | **Level 3****(2)** | ** ** | **Level 3****(2)** | ** ** | **September 30** | ** ** | **in earnings****(3)** |
|       | Fixed  maturities, available for sale, including securities pledged:                                                                                                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|       | Residential  mortgage-backed securities                                                                                                                                      |   | $ | 1,607.6 |   |   | $ | 29.9 |   |   | $ | 125.4  |   | $ | (213.5 | ) |   | $ | 14.0 |   |   | $ | - |   |   | $ | 1,563.4 |   |   | $ | (15.8 | ) |
|       | Other  asset-backed securities                                                                                                                                               |   | 405.0 |   |   | (17.6 | ) |   | 43.6  |   | (19.2 | ) |   | - |   |   | - |   |   | 411.8 |   |   | (54.9 | ) |
|       | Total  Fixed maturities, available for sale, including securities pledged:                                                                                                   |   | 2,012.6 |   |   | 12.3 |   |   | 169.0  |   | (232.7 | ) |   | 14.0 |   |   | - |   |   | 1,975.2 |   |   | (70.7 | ) |
|       |                                                                                                                                                                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|       | Derivatives,  net                                                                                                                                                            |   | 13.1 |   |   | (1,744.6 | ) |   | -  |   | 1,827.6 |   |   | - |   |   | - |   |   | 96.1 |   |   | 29.0 |   |
|       |                                                                                                                                                                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|       | Investment  contract guarantees:                                                                                                                                             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|       | FIA                                                                                                                                                                          |   | (662.2 | ) |   | (180.6 | ) |   | -  |   | (58.2 | ) |   | - |   |   | - |   |   | (901.0 | ) |   | - |   |
|       | GMWB/GMAB                                                                                                                                                                    |   | (113.1 | ) |   | 29.6 |   |   | -  |   | (1.5 | ) |   | - |   |   | - |   |   | (85.0 | ) |   | - |   |
|       | Total  Investment contract guarantees                                                                                                                                        |   | (775.3 | ) |   | (151.0 | ) | (1) | -  |   | (59.7 | ) |   | - |   |   | - |   |   | (986.0 | ) |   | - |   |
|       |                                                                                                                                                                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|       | (1)                                                                                                                                                                          | This amount is included  in Interest credited and other benefits to contractowners 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 September 30. Amounts are included in Net  investment income and Net realized capital losses on the Condensed Statements  of Operations. |
|            |                                                                                                                                                                              |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

31

----

 

**ING USAAnnuity and Life Insurance Company**

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

**Notes toCondensed Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwise stated)

 
|       |                                                                       | ** **                                                                                                                                                                                                                                                                                                                                                                         | **Nine Months Ended September 30,  2009** |
|------------|----------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------|
| ** ** | ** **                                                                 | ** **                                                                                                                                                                                                                                                                                                                                                                         | ** **                                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Change in** |
| ** ** | ** **                                                                 | ** **                                                                                                                                                                                                                                                                                                                                                                         | **Fair Value**                            | ** ** | **Total realized/unrealized** | ** ** | **Purchases,** | ** ** | **Transfers** | ** ** | **Transfers** | ** ** | **Fair Value** | ** ** | **unrealized gains** |
| ** ** | ** **                                                                 | ** **                                                                                                                                                                                                                                                                                                                                                                         | **as of**                                 | ** ** | **gains (losses) included in:** | ** ** | **issuances, and** | ** ** | **in to** | ** ** | **out of** | ** ** | **as of** | ** ** | **(losses) included** |
| ** ** | ** **                                                                 | ** **                                                                                                                                                                                                                                                                                                                                                                         | **January 1**                             | ** ** | **Net income** | ** ** | **OCI** | ** ** | **settlements** | ** ** | **Level 3****(2)** | ** ** | **Level 3****(2)** | ** ** | **September 30** | ** ** | **in earnings****(3)** |
|       | Fixed  maturities, available for sale, including securities pledged:       |                                                                                                                                                                                                                                                                                                                                                                               |                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|       | Residential  mortgage-backed securities                                    |                                                                                                                                                                                                                                                                                                                                                                               | $                                              | 2,082.2 |   |   | $ | 125.1 |   |   | $ | 586.2   |   | $ | (1,607.9 | ) |   | $ | 377.8 |   |   | $ | - |   |   | $ | 1,563.4 |   |   | $ | (38.4 | ) |
|       | Other  asset-backed securities                                             |                                                                                                                                                                                                                                                                                                                                                                               | 507.4                                          |   |   | 2.3 |   |   | (31.3)  |   | (66.6 | ) |   | - |   |   | - |   |   | 411.8 |   |   | (37.5 | ) |
|       | Total  Fixed maturities, available for sale, including securities pledged: |                                                                                                                                                                                                                                                                                                                                                                               | 2,589.6                                        |   |   | 127.4 |   |   | 554.9   |   | (1,674.5 | ) |   | 377.8 |   |   | - |   |   | 1,975.2 |   |   | (75.9 | ) |
|       |                                                                       |                                                                                                                                                                                                                                                                                                                                                                               |                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|       | Derivatives,  net                                                          |                                                                                                                                                                                                                                                                                                                                                                               | 10.0                                           |   |   | (1,764.9 | ) |   | -   |   | 1,851.0 |   |   | - |   |   | - |   |   | 96.1 |   |   | (14.8 | ) |
|       |                                                                       |                                                                                                                                                                                                                                                                                                                                                                               |                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|       | Investment  contract guarantees:                                           |                                                                                                                                                                                                                                                                                                                                                                               |                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|       | FIA                                                                        |                                                                                                                                                                                                                                                                                                                                                                               | (638.9                                         | ) |   | (168.9 | ) |   | -   |   | (93.2 | ) |   | - |   |   | - |   |   | (901.0 | ) |   | - |   |
|       | GMWB/GMAB                                                                  |                                                                                                                                                                                                                                                                                                                                                                               | (153.0                                         | ) |   | 72.7 |   |   | -   |   | (4.7 | ) |   | - |   |   | - |   |   | (85.0 | ) |   | - |   |
|       | Total  Investment contract guarantees                                      |                                                                                                                                                                                                                                                                                                                                                                               | (791.9                                         | ) |   | (96.2 | ) | (1) | -   |   | (97.9 | ) |   | - |   |   | - |   |   | (986.0 | ) |   | - |   |
|       |                                                                       |                                                                                                                                                                                                                                                                                                                                                                               |                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|       | (1)                                                                        | This amount is included  in Interest credited and other benefits to contractowners 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 September 30. Amounts are included in Net  investment income and Net realized capital losses on the Condensed Statements  of Operations.                                                                                                                                                                                          |
|            |                                                                            |                                                                                                                                                                                                                                                                                                                                                                                    |                                                |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

32

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**ING USAAnnuity and Life Insurance Company**

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

**Notesto Condensed Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwise stated)

 

Thetransfers out of Level 3 during the nine months ended September 30,2010 in Fixed Maturities, available-for-sale, including securities pledged, areprimarily due to the Company’s use of commercial pricing services to value CMO-Bs. These services incorporatea variety of market observable information in their valuation techniques,including benchmark yields, broker-dealer quotes, credit quality, issuerspreads, bids, offers and other reference data and have been classified asLevel 2. TheCMO-Bs had previously been valued by using the average of broker quoteswhen more than one broker quote was provided.

 

The remaining transfers in and out of Level 3 for fixedmaturities during the three and nine months ended September 30, 2010, aredue to the variation in inputs relied upon for valuation each quarter.Securities that are primarily valued using independent broker quotes whenprices are not available from one of the commercial pricing services arereflected as transfers into Level 3, as these securities are generally lessliquid with very limited trading activity or where less transparency existscorroborating the inputs to the valuation methodologies. When securitiesare valued using more widely available information, the securities aretransferred out of Level 3 and into Level 1 or 2, as appropriate.

 

***Derivative FinancialInstruments***

 

See the Organization &Significant Accounting Policies footnote to the Financial Statements includedin the Company’s 2009 Annual Report on Form 10-K for disclosure regardingthe Company’s purpose for entering into derivatives and the policies onvaluation and classification of derivatives. In addition, the Company’s derivatives are generally not accounted forusing hedge accounting treatment under US GAAP, as the Company has nothistorically sought hedge accounting treatment. The Company enters into the following derivatives:

 

*Interest rate caps*: Interest rate capsare used to manage the interest rate risk in the Company’s fixed maturityportfolio.  Interest rate caps arepurchased contracts that are used by the Company to hedge annuity productsagainst rising interest rates.

 

*Interest rate swaps*: Interest rate swapsare used to manage the interest rate risk in the Company’s fixed maturityportfolio, as well as the Company’s liabilities.  Interest rate swaps represent contracts thatrequire the exchange of cash flows at regular interim periods, typicallymonthly or quarterly.

 

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

 

33

----

 

**INGUSA Annuity and Life Insurance Company**

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

**Notesto Condensed Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwise stated)

 

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

 

*Total return swaps*: Total return swapsare used to hedge against a decrease in variable annuity account values, whichare invested in certain funds.  Thedifference between floating-rate interest amounts calculated by reference to anagreed upon notional principal amount is exchanged with other parties atspecified intervals.

 

*Forwards*: Certain forwards areacquired to hedge the Company’s CMO-B portfolio against movements in interestrates, particularly mortgage rates.  Onthe settlement date, the Company will either receive a payment (interest ratedrops on purchased forwards or interest rate rises on sold forwards) or will berequired to make a payment (interest rate rises on purchased forwards orinterest rate drops on sold forwards). The Company also uses currency forwardcontracts to hedge policyholder liabilities in variable annuity contracts whichare linked to foreign indexes. The currency fluctuations may result in a decreasein variable annuity account values, which would increase the possibility of theCompany incurring an expense for guaranteed benefits in excess of accountvalues.

 

*Futures*: Futures contracts areused to hedge against a decrease in certain equity indices. Such decreases mayresult in a decrease in variable annuity account values, which would increasethe possibility of the Company incurring an expense for guaranteed benefits inexcess of account values.  Futurescontracts are also used to hedge against an increase in certain equityindices.  Such increases may result inincreased payments to contract holders of fixed indexed annuity contracts, andthe futures income would serve to offset this increased expense.  The underlying reserve liabilities are valuedunder ASC Topic 820, ASC Topic 815 andASC Topic 944, “Financial Services - Insurance.”  The change in reserve liabilities is recordedin Interest credited and other benefits to contractowners in the CondensedStatements of Operations.

 

*Options*: Call options are usedto hedge against an increase in the various equity indices. Such increase mayresult in increased payments to contract holders of fixed indexed annuitycontracts, and the options offset this increased expense.  Put options are used to hedge the liabilityassociated with embedded derivatives in certain variable annuity contracts andas part of a hedging program designed to mitigate the impact of potentialdeclines in equity markets and their impact on regulatory capital.  Both the options and the embedded derivativereserves are carried at fair value.

 

34

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**INGUSA Annuity and Life Insurance Company**

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

**Notesto Condensed Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwise stated)

 

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

 

The notional amounts and fairvalues of derivatives were as follows as of September 30, 2010 and December 31,2009.

 
| ** **                         | ** ** | **2010**      | ** ** | **2009**            | ** **    |
|------------------------------------|------------|---------------|------------|---------------------|---------------|
| ** **                         | ** ** | **Notional**  | ** ** | **Asset**           | ** **    | **Liability** | ** ** | **Notional** | ** ** | **Asset** | ** ** | **Liability** | ** ** |
| ** **                         | ** ** | **Amount**    | ** ** | **Fair Value** | ** **    | **Fair Value** | ** ** | **Amount** | ** ** | **Fair Value** | ** ** | **Fair Value** | ** ** |
| Interest  rate caps(1)             |       | -   |       |                | $             | -   |   |   | $ | -   |   |   | 122.0 |   |   | $ | 0.4 |   |   | $ | 0.1 |   |   |
| Interest  rate swaps(1)            |       | 7,473.8       |       |                | 120.3         |   |   | 395.4 |   |   | 6,765.3 |   |   | 44.2 |   |   | 325.1 |   |   |
| Foreign  exchange swaps(1)         |       | 274.1         |       |                | 1.5           |   |   | 33.2 |   |   | 287.3 |   |   | -   |   |   | 52.9 |   |   |
| Credit  default swaps(1)           |       | 454.1         |       |                | 1.2           |   |   | 47.7 |   |   | 358.9 |   |   | 0.3 |   |   | 106.0 |   |   |
| Total  return swaps(1)             |       | 224.9         |       |                | -   |   |   | 13.6 |   |   | 124.3 |   |   | -   |   |   | 2.9 |   |   |
| Forwards(1)                        |       | 751.5         |       |                | 0.8           |   |   | 27.6 |   |   | 528.5 |   |   | 14.2 |   |   | -   |   | * |
| Futures(1)                         |       | 6,293.2       |       |                | 20.4          |   |   | 3.0 |   |   | 5,121.8 |   |   | 42.8 |   |   | 3.2 |   |   |
| Options(1)                         |       | 3,242.9       |       |                | 113.1         |   |   | 10.6 |   |   | 5,097.8 |   |   | 215.5 |   |   | 10.2 |   |   |
| Embedded  derivatives:             |       |          |       |                |          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Within  securities(2)              |       | N/A           |       |                | 72.9          |   |   | 6.0 |   |   | N/A |   |   | 47.8 |   |   | 9.4 |   |   |
| Within  retail annuity products(3) |       | N/A           |       |                | -   |   |   | 1,238.1 |   |   | N/A |   |   | -   |   |   | 1,001.1 |   |   |
| Within  reinsurance agreement(3)   |       | N/A           |       |                | -   |   |   | 129.5 |   |   | N/A |   |   | 38.7 |   |   | -   |   |   |
| Total                              |       |          |       |                | $             | 330.2 |   |   | $ | 1,904.7 |   |   |   |   |   | $ | 403.9 |   |   | $ | 1,510.9 |   |   |

 
| N/A -  Not applicable. |
|------------------------|
| *  Less than $0.1.     |
| (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 securities are reported in Fixed maturities,  available-for-sale, on the Condensed Balance Sheets with the underlying  instrument. |
| (3)                    | 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. |

 

35

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**ING USAAnnuity and Life Insurance Company**

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

**Notes toCondensed Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwise stated)

 

Net realized gains (losses)on derivatives were as follows for the three and nine months ended September 30,2010 and 2009.

 
| ** **                         | ** ** | **For the Three Months**                        | ** **    | **For the Nine Months**                                     | ** ** |
|------------------------------------|------------|----------------------------------------------------------------|---------------|----------------------------------------------------------------------------|------------|
| ** **                         | ** ** | **Ended September 30,**                              | ** **    | **Ended September 30,**                                          | ** ** |
| ** **                         | ** ** | **2010         ** | ** **    | **2009           ** | ** ** | **2010           ** | ** ** | **2009           ** | ** ** |
| Interest  rate caps(1)             |       | $                                                              | -   |                                                                       |       | $ | -   |   |   | $ | (0.3 | ) |   | $ | 0.3 |   |
| Interest  rate swaps(1)            |       | 47.9                                                           |          |                                                                       | (57.5      | ) |   | 85.9 |   |   | (85.6 | ) |
| Foreign  exchange swaps(1)         |       | (19.2                                                          | )             |                                                                       | (17.0      | ) |   | 25.5 |   |   | (37.0 | ) |
| Credit  default swaps(1)           |       | 2.9                                                            |          |                                                                       | (7.9       | ) |   | (0.4 | ) |   | (13.6 | ) |
| Total  return swaps(1)             |       | (30.9                                                          | )             |                                                                       | (20.1      | ) |   | (23.6 | ) |   | (42.5 | ) |
| Forwards(1)                        |       | (68.8                                                          | )             |                                                                       | (9.8       | ) |   | 6.2 |   |   | (7.0 | ) |
| Swaptions(1)                       |       | (0.1                                                           | )             |                                                                       | (0.2       | ) |   | (0.1 | ) |   | (2.3 | ) |
| Futures(1)                         |       | (539.3                                                         | )             |                                                                       | (984.0     | ) |   | (330.4 | ) |   | (1,689.7 | ) |
| Options(1)                         |       | (0.6                                                           | )             |                                                                       | (63.4      | ) |   | (32.1 | ) |   | (76.1 | ) |
| Embedded  derivatives:             |       |                                                           |          |                                                                       |       |   |   |   |   |   |   |   |
| Within  securities(1)              |       | 10.3                                                           |          |                                                                       | 4.8        |   |   | 28.5 |   |   | (31.0 | ) |
| Within  retail annuity products(2) |       | (187.7                                                         | )             |                                                                       | (151.0     | ) |   | (211.4 | ) |   | (96.2 | ) |
| Within  reinsurance agreements(2)  |       | (21.0                                                          | )             |                                                                       | (51.6      | ) |   | (129.5 | ) |   | (51.6 | ) |
| Total                              |       | $                                                              | (806.5        | )                                                                          |       | $ | (1,357.7 | ) |   | $ | (581.7 | ) |   | $ | (2,132.3 | ) |

 
| (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 contractowners on the  Condensed Statements of Operations. |

 

***Credit DefaultSwaps***

 

The Company has entered into various credit defaultswaps. When credit default swaps are sold, the Company assumes credit exposureto certain assets that it does not own. Credit default swaps may also be purchased to reduce credit exposure inthe Company’s portfolio. Credit default swaps involve a transfer of credit riskfrom one party to another in exchange for periodic payments.  These instruments are typically written for amaturity period of five years and do not contain recourse provisions, whichwould enable the seller to recover from third parties.  The Company has International Swaps andDerivatives Association, Inc. (“ISDA”) agreements with each counterpartywith which it conducts business and tracks the collateral positions for eachcounterparty.  To the extent cashcollateral is received, it is included in Payables under securities loanagreement, including collateral held, on the Condensed Balance Sheets and isreinvested in short-term investments. Collateral held is used in accordance with the Credit Support Annex (“CSA”)to satisfy any obligations.  Investmentgrade 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 underlyingcredit 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 swapcontract. At September 30, 2010, the fair value of credit default swaps of$1.2 and $47.7 was included in Derivatives and Other liabilities, respectively,on the Condensed Balance Sheets.  AtDecember 31, 2009, the fair value of 

 

36

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**INGUSA Annuity and Life Insurance Company**

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

**Notesto Condensed Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwise stated)

 

credit default swaps of $0.3 and $106.0 was included inDerivatives and Other liabilities, respectively, on the Balance Sheets.  As of September 30, 2010 and December 31,2009, the maximum potential future exposure to the Company on the sale ofcredit protection under credit default swaps was $338.5 and $122.9,respectively.

 

**5.****                                    Investments**

 

***Fixed Maturities and Equity Securities***

 

Fixed maturities and equity securities,available-for-sale, were as follows as of September 30, 2010.

 
| ** **                                            | ** ** | ** **    | ** ** | **Gross**      | ** ** | **Gross**      | ** ** | ** **      | ** ** | ** ** | ** **    |
|-------------------------------------------------------|------------|---------------|------------|----------------|------------|----------------|------------|-----------------|------------|------------|---------------|
| ** **                                            | ** ** | ** **    | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | ** **      | ** ** | ** ** | ** **    |
| ** **                                            | ** ** | **Amortized** | ** ** | **Capital**    | ** ** | **Capital**    | ** ** | ** **      | ** ** | **Fair**   | ** **    |
| ** **                                            | ** ** | **Cost**      | ** ** | **Gains**      | ** ** | **Losses**     | ** ** | **OTTI****(2)** | ** ** | **Value**  | ** **    |
| Fixed  maturities:                                    | ** ** | ** **    | ** ** | ** **     | ** ** | ** **     | ** ** | ** **      | ** ** | ** ** | ** **    |
| U.S.  Treasuries                                      |       | $             | 1,620.5    | ** **     |       | $              | 138.3      |            |       | $          | -   | ** ** |   | $ | -   | ** ** |   | $ | 1,758.8 |   |
| U.S.  government agencies and authorities             |       | 44.3          |       |           | 4.2        |           |       | -     |       |       | -   |   |   | 48.5 |   |
| State,  municipalities, and political subdivisions    |       | 126.5         |       |           | 7.8        |           |       | 5.4             |       |       | -   |   |   | 128.9 |   |
|                                                  |       |          |       |           |       |           |       |            |       |       |          |   |   |   |   |
| U.S.  corporate securities:                           |       |          |       |           |       |           |       |            |       |       |          |   |   |   |   |
| Public  utilities                                     |       | 1,489.5       |       |           | 125.7      |           |       | 1.7             |       |       | -   |   |   | 1,613.5 |   |
| Other  corporate securities                           |       | 7,558.7       |       |           | 526.0      |           |       | 23.1            |       |       | 0.3           |   |   | 8,061.3 |   |
| Total  U.S. corporate securities                      |       | 9,048.2       |       |           | 651.7      |           |       | 24.8            |       |       | 0.3           |   |   | 9,674.8 |   |
|                                                  |       |          |       |           |       |           |       |            |       |       |          |   |   |   |   |
| Foreign  securities(1):                               |       |          |       |           |       |           |       |            |       |       |          |   |   |   |   |
| Government                                            |       | 432.5         |       |           | 56.6       |           |       | 2.2             |       |       | -   |   |   | 486.9 |   |
| Other                                                 |       | 4,158.7       |       |           | 295.0      |           |       | 34.1            |       |       | 0.1           |   |   | 4,419.5 |   |
| Total  foreign securities                             |       | 4,591.2       |       |           | 351.6      |           |       | 36.3            |       |       | 0.1           |   |   | 4,906.4 |   |
|                                                  |       |          |       |           |       |           |       |            |       |       |          |   |   |   |   |
| Residential  mortgage-backed securities               |       | 2,008.0       |       |           | 257.0      |           |       | 53.4            |       |       | 76.4          |   |   | 2,135.2 |   |
| Commercial  mortgage-backed securities                |       | 2,490.0       |       |           | 146.0      |           |       | 106.9           |       |       | 10.4          |   |   | 2,518.7 |   |
| Other  asset-backed securities                        |       | 1,700.2       |       |           | 21.1       |           |       | 173.4           |       |       | 67.0          |   |   | 1,480.9 |   |
|                                                  |       |          |       |           |       |           |       |            |       |       |          |   |   |   |   |
| Total  fixed maturities, including securities pledged |       | 21,628.9      |       |           | 1,577.7    |           |       | 400.2           |       |       | 154.2         |   |   | 22,652.2 |   |
| Less:  securities pledged                             |       | 696.0         |       |           | 66.7       |           |       | 0.4             |       |       | -   |   |   | 762.3 |   |
| Total  fixed maturities                               |       | 20,932.9      |       |           | 1,511.0    |           |       | 399.8           |       |       | 154.2         |   |   | 21,889.9 |   |
| Equity  securities                                    |       | 139.9         |       |           | 8.5        |           |       | 0.1             |       |       | -   |   |   | 148.3 |   |
| Total  investments, available-for-sale                |       | $             | 21,072.8   |           |       | $              | 1,519.5    |            |       | $          | 399.9         |   |   | $ | 154.2 |   |   | $ | 22,038.2 |   |

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

 

37

----

 

 

 

**ING USAAnnuity and Life Insurance Company**

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

**Notes toCondensed Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwise stated)

 

Fixed maturities and equity securities, available-for-sale,were as follows as of December 31, 2009.

 
| ** **                                            | ** ** | ** **    | ** ** | **Gross**      | ** ** | **Gross**      | ** ** | ** **      | ** ** | ** ** | ** **    |
|-------------------------------------------------------|------------|---------------|------------|----------------|------------|----------------|------------|-----------------|------------|------------|---------------|
| ** **                                            | ** ** | ** **    | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | ** **      | ** ** | ** ** | ** **    |
| ** **                                            | ** ** | **Amortized** | ** ** | **Capital**    | ** ** | **Capital**    | ** ** | ** **      | ** ** | **Fair**   | ** **    |
| ** **                                            | ** ** | **Cost**      | ** ** | **Gains**      | ** ** | **Losses**     | ** ** | **OTTI****(2)** | ** ** | **Value**  | ** **    |
| Fixed  maturities:                                    | ** ** | ** **    | ** ** | ** **     | ** ** | ** **     | ** ** | ** **      | ** ** | ** ** | ** **    |
| U.S.  Treasuries                                      |       | $             | 4,201.0    | ** **     |       | $              | 2.5        | ** **      |       | $          | 80.0          | ** ** |   | $ | -   | ** ** |   | $ | 4,123.5 |   |
| U.S.  government agencies and authorities             |       | 26.1          |       |           | 0.1        |           |       | 1.6             |       |       | -   |   |   | 24.6 |   |
| State,  municipalities, and political subdivisions    |       | 47.8          |       |           | 2.2        |           |       | 5.2             |       |       | -   |   |   | 44.8 |   |
|                                                  |       |          |       |           |       |           |       |            |       |       |          |   |   |   |   |
| U.S.  corporate securities:                           |       |          |       |           |       |           |       |            |       |       |          |   |   |   |   |
| Public  utilities                                     |       | 997.4         |       |           | 57.5       |           |       | 6.9             |       |       | -   |   |   | 1,048.0 |   |
| Other  corporate securities                           |       | 4,290.8       |       |           | 247.8      |           |       | 71.8            |       |       | 0.4           |   |   | 4,466.4 |   |
| Total  U.S. corporate securities                      |       | 5,288.2       |       |           | 305.3      |           |       | 78.7            |       |       | 0.4           |   |   | 5,514.4 |   |
|                                                  |       |          |       |           |       |           |       |            |       |       |          |   |   |   |   |
| Foreign  securities(1):                               |       |          |       |           |       |           |       |            |       |       |          |   |   |   |   |
| Government                                            |       | 369.8         |       |           | 23.8       |           |       | 8.3             |       |       | -   |   |   | 385.3 |   |
| Other                                                 |       | 2,880.8       |       |           | 131.7      |           |       | 78.5            |       |       | 0.4           |   |   | 2,933.6 |   |
| Total  foreign securities                             |       | 3,250.6       |       |           | 155.5      |           |       | 86.8            |       |       | 0.4           |   |   | 3,318.9 |   |
|                                                  |       |          |       |           |       |           |       |            |       |       |          |   |   |   |   |
| Residential  mortgage-backed securities               |       | 1,758.9       |       |           | 210.7      |           |       | 150.7           |       |       | 70.9          |   |   | 1,748.0 |   |
| Commercial  mortgage-backed securities                |       | 3,012.5       |       |           | 25.3       |           |       | 448.2           |       |       | -   |   |   | 2,589.6 |   |
| Other  asset-backed securities                        |       | 1,218.6       |       |           | 11.8       |           |       | 316.8           |       |       | 28.4          |   |   | 885.2 |   |
|                                                  |       |          |       |           |       |           |       |            |       |       |          |   |   |   |   |
| Total  fixed maturities, including securities pledged |       | 18,803.7      |       |           | 713.4      |           |       | 1,168.0         |       |       | 100.1         |   |   | 18,249.0 |   |
| Less:  securities pledged                             |       | 1,079.4       |       |           | 35.3       |           |       | 22.2            |       |       | -   |   |   | 1,092.5 |   |
| Total  fixed maturities                               |       | 17,724.3      |       |           | 678.1      |           |       | 1,145.8         |       |       | 100.1         |   |   | 17,156.5 |   |
| Equity  securities                                    |       | 150.8         |       |           | 4.3        |           |       | 0.8             |       |       | -   |   |   | 154.3 |   |
| Total  investments, available-for-sale                |       | $             | 17,875.1   |           |       | $              | 682.4      |            |       | $          | 1,146.6       |   |   | $ | 100.1 |   |   | $ | 17,310.8 |   |

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

 

At September 30, 2010 and December 31, 2009,net unrealized gains (losses) were $1,031.7 and $(551.2), respectively, ontotal fixed maturities, including securities pledged to creditors, and equitysecurities.

 

38

----

 

**ING USAAnnuity and Life Insurance Company**

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

**Notes toCondensed Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwise stated)

 

The amortized cost and fair value of total fixedmaturities, excluding securities pledged, as of September 30, 2010, areshown below by contractual maturity. Actual maturities may differ from contractual maturities as securitiesmay be restructured, called, or prepaid.

 
| ** **                                      | ** ** | **Amortized** | ** ** | **Fair**  | ** ** |
|-------------------------------------------------|------------|---------------|------------|-----------|------------|
| ** **                                      | ** ** | **Cost**      | ** ** | **Value** | ** ** |
| Due  to mature:                                 |       |          |       |      |       |
| One  year or less                               |       | $             | 560.1      |      |       | $ | 573.9 |   |
| After  one year through five years              |       | 6,006.7       |       |      | 6,304.9    |   |
| After  five years through ten years             |       | 4,571.1       |       |      | 4,947.7    |   |
| After  ten years                                |       | 4,292.8       |       |      | 4,690.9    |   |
| Mortgage-backed  securities                     |       | 4,498.0       |       |      | 4,653.9    |   |
| Other  asset-backed securities                  |       | 1,700.2       |       |      | 1,480.9    |   |
| Less:  securities pledged                       |       | 696.0         |       |      | 762.3      |   |
| Fixed  maturities, excluding securities pledged |       | $             | 20,932.9   |      |       | $ | 21,889.9 |   |

 

The Company did not have any investments in a singleissuer, other than obligations of the U.S. government and government agenciesand the Dutch State loan obligation, with a carrying value in excess of 10.0%of the Company’s Shareholder’s equity at September 30, 2010 and December 31,2009.

 

The Company invests in various categories ofcollateralized mortgage obligations (“CMOs”), including CMOs that are notagency-backed, that are subject to different degrees of risk from changes ininterest rates and defaults.  Theprincipal risks inherent in holding CMOs are prepayment and extension risksrelated to dramatic decreases and increases in interest rates resulting in theprepayment of principal from the underlying mortgages, either earlier or laterthan originally anticipated.  At September 30,2010 and December 31, 2009, approximately 23.8% and 26.1%, respectively,of the Company’s CMO holdings were invested in those types of CMOs which aresubject to more prepayment and extension risk than traditional CMOs, such asinterest-only or principal-only strips.

 

Certain CMOs, primarily interest-only and principal-onlystrips, are accounted for as hybrid instruments and valued at fair value.  The fair value of these instruments at September 30,2010 and December 31, 2009 was $229.0 and $192.6, respectively, and isincluded in Fixed maturities, available for sale, on the Condensed BalanceSheets.  The impact to Other net realizedcapital gains (losses) on the Condensed Statements of Operations related tothese hybrid instruments was $3.8 and $12.0 for the three and nine months endedSeptember 30, 2010, respectively, and $42.8 and $89.1 for the three andnine months ended September 30, 2009, respectively.

 

The Company is a member of the Federal Home Loan Bank ofDes Moines (“FHLB”) and is required to maintain a collateral deposit that backsfunding agreements issued to the FHLB. At September 30, 2010 and December 31, 2009, the Company had$1,579.6 

 

39

----

 

**ING USAAnnuity and Life Insurance Company**

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

**Notes toCondensed Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwise stated)

 

and $1,304.5, respectively, in non-putable fundingagreements, including accrued interest, issued to the FHLB. These non-putablefunding agreements are included in Future policy benefits and claims reserves,in the Condensed Balance Sheets. At September 30, 2010 andDecember 31, 2009, assets with a market value of approximately $1,828.3and $1,657.9, respectively, collateralized the funding agreements to theFHLB.  Assets pledged to the FHLB areincluded in Fixed maturities, available-for-sale, in the Condensed BalanceSheets.

 

*Securities Lending*

 

The Company engages in securities lending wherebycertain securities from its portfolio are loaned to other institutions forshort periods of time.  Initialcollateral, primarily cash, is required at a rate of 102% of the market valueof the loaned domestic securities. The collateral is deposited by the borrowerwith a lending agent, and retained and invested by the lending agent accordingto the Company’s guidelines to generate additional income. The market value ofthe loaned securities is monitored on a daily basis with additional collateralobtained or refunded as the market value of the loaned securities fluctuates.At September 30, 2010 and December 31, 2009, the fair value of loanedsecurities was $95.2 and $163.7, respectively, and is included in Securitiespledged on the Condensed Balance Sheets.

 

*Variable Interest Entities*

 

The Company holds certain VIEs for investment purposes.  VIEs may be in the form of private placementsecurities, structured securities, securitization transactions, or limitedpartnerships. The Company has reviewed each of its holdings and determined thatconsolidation of these investments in the Company’s financial statements is notrequired, as the Company is not the primary beneficiary, because the Companydoes not have both the power to direct the activities that most significantlyimpact the entity’s economic performance and the obligation or right to potentiallysignificant losses or benefits, for any of its investments in VIEs. Rather, theVIEs are accounted for using the cost or equity method of accounting. TheCompany provided no non-contractual financial support and its carrying valuerepresents the Company’s exposure to loss. The carrying value of collateralizedloan obligations (“CLOs”) of $2.3 at September 30, 2010 is included inLimited partnerships/corporations on the Condensed Balance Sheets. Income andlosses recognized on these investments are reported in Net investment income onthe Condensed Statements of Operations.

 

*RepurchaseAgreements*

 

The Company engages in dollar repurchase agreements withmortgage-backed securities (“dollar rolls”) and repurchase agreements withother collateral types to increase its return on investments and improveliquidity.  Such arrangements typicallymeet the requirements to be accounted for as financing arrangements.  The Company enters into 

 

40

----

 

**ING USAAnnuity and Life Insurance Company**

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

**Notes toCondensed Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwise stated)

 

dollar roll transactions by selling existingmortgage-backed securities and concurrently entering into an agreement torepurchase similar securities within a short time frame in the future at alower price. Under repurchase agreements, the Company borrows cash from acounterparty at an agreed upon interest rate for an agreed upon time frame andpledges collateral in the form of securities. At the end of the agreement, thecounterparty 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 timesduring the term of the dollar roll and repurchase agreements that cash or othercollateral types obtained is sufficient to allow the Company to fundsubstantially all of the cost of purchasing replacement assets. Cash collateralreceived is invested in short term investments, with the offsetting collateralliability included in Borrowed money on the Balance Sheets. At September 30,2010, the Company did not have any securities pledged in dollar rolls andrepurchase agreement transactions. At December 31, 2009, the carryingvalue of the securities pledged in dollar rolls and repurchase agreementtransactions was $354.1 and is included in Securities pledged on the CondensedBalance Sheets.  The repurchaseobligation related to dollar rolls and repurchase agreements, including accruedinterest, totaled $311.1 at December 31, 2009 and is included in Borrowedmoney on the Condensed Balance Sheets. In addition to the repurchase obligation, at December 31, 2009, theCompany held $28.9 in collateral posted by the counterparty in connection withthe increase in the value of pledged securities that will be released uponsettlement.

 

The Company also enters into reverse repurchaseagreements.  These transactions involve apurchase of securities and an agreement to sell substantially the samesecurities as those purchased.  Companypolicy requires that, at all times during the term of the reverse repurchaseagreements, cash or other collateral types provided is sufficient to allow thecounterparty to fund substantially all of the cost of purchasing replacementassets.  At September 30, 2010 andDecember 31, 2009, the Company did not have any securities pledged underreverse repurchase agreements.

 

The primary risk associated with short-termcollateralized borrowings is that the counterparty will be unable to performunder the terms of the contract.  TheCompany’s exposure is limited to the excess of the net replacement cost of thesecurities over the value of the short-term investments, an amount that wasimmaterial at September 30, 2010. The Company believes the counterparties to the dollar rolls, repurchase,and reverse repurchase agreements are financially responsible and that thecounterparty risk is minimal.

 

41

----

 

**ING USAAnnuity and Life Insurance Company**

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

**Notes toCondensed Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwise stated)

 

*Unrealized Capital Losses*

 

Unrealized capital losses (including non-creditimpairments) in fixed maturities, including securities pledged to creditors,for Investment Grade (“IG”) and Below Investment Grade (“BIG”) securities byduration were as follows at September 30, 2010 and December 31, 2009.

 
| ** **                                                           | ** ** | **2010**   | ** ** | **2009**              | ** ** |
|----------------------------------------------------------------------|------------|------------|------------|-----------------------|------------|
| ** **                                                           | ** ** | ** ** | ** ** | **% 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                             |       | $          | 17.0       |                  |       | 3.0% |   |   | $ | 3.8 |   |   | 0.7% |   |   | $ | 170.1 |   |   | 13.5% |   |   | $ | 21.2 |   |   | 1.7% |   |
| More  than six months and twelve months or less below amortized cost |       | 1.1        |       |                  | 0.2%       |   |   | -   |   |   | 0.0% |   |   | 259.3 |   |   | 20.4% |   |   | 200.8 |   |   | 15.8% |   |
| More  than twelve months below amortized cost                        |       | 212.3      |       |                  | 38.3%      |   |   | 320.2 |   |   | 57.8% |   |   | 419.0 |   |   | 33.0% |   |   | 197.7 |   |   | 15.6% |   |
| Total  unrealized capital losses                                     |       | $          | 230.4      |                  |       | 41.5% |   |   | $ | 324.0 |   |   | 58.5% |   |   | $ | 848.4 |   |   | 66.9% |   |   | $ | 419.7 |   |   | 33.1% |   |

 

The following table summarizes the unrealized capitallosses (including non-credit impairments) by duration and reason, along withthe fair value of fixed maturities, including securities pledged to creditors,in unrealized capital loss positions at September 30, 2010 andDecember 31, 2009.

 
| ** **                                  | ** ** | **Six Months** | ** ** | **More than**           | ** ** | ** **              | ** ** | ** **     | ** ** |
|---------------------------------------------|------------|---------------------|------------|------------------------------|------------|-------------------------|------------|----------------|------------|
| ** **                                  | ** ** | **or Less**    | ** ** | **Six Months and** | ** ** | **More than**      | ** ** | **Total**      | ** ** |
| ** **                                  | ** ** | **Below**           | ** ** | **Twelve Months**       | ** ** | **Twelve Months**  | ** ** | **Unrealized** | ** ** |
| ** **                                  | ** ** | **Amortized**       | ** ** | **or Less Below**  | ** ** | **Below**               | ** ** | **Capital**    | ** ** |
| **2010**                                    | ** ** | **Cost**            | ** ** | **Amortized Cost**      | ** ** | **Amortized Cost** | ** ** | **Losses**     | ** ** |
| Interest  rate or spread widening           |       | $                   | 16.1       |                         |       | $                       | 0.5        |           |       | $ | 50.3 |   |   | $ | 66.9 |   |   |
| Mortgage  and other asset-backed securities |       | 4.7                 |       |                         | 0.6        |                    |       | 482.2          |       |   | 487.5 |   |   |
| Total  unrealized capital losses            |       | $                   | 20.8       |                         |       | $                       | 1.1        |           |       | $ | 532.5 |   |   | $ | 554.4 |   |   |
| Fair  value                                 |       | $                   | 850.7      |                         |       | $                       | 25.6       |           |       | $ | 2,091.1 |   |   | $ | 2,967.4 |   |   |
|                                        |       |                |       |                         |       |                    |       |           |       |   |   |   |   |
| **2009**                                    | ** ** | ** **          | ** ** | ** **                   | ** ** | ** **              | ** ** | ** **     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest  rate or spread widening           |       | $                   | 99.3       |                         |       | $                       | 31.6       |           |       | $ | 122.2 |   |   | $ | 253.1 |   |   |
| Mortgage  and other asset-backed securities |       | 92.0                |       |                         | 428.5      |                    |       | 494.5          |       |   | 1,015.0 |   |   |
| Total  unrealized capital losses            |       | $                   | 191.3      |                         |       | $                       | 460.1      |           |       | $ | 616.7 |   |   | $ | 1,268.1 |   |   |
| Fair  value                                 |       | $                   | 5,275.9    |                         |       | $                       | 1,058.2    |           |       | $ | 2,714.5 |   |   | $ | 9,048.6 |   |   |

 

42

----

 

 

**ING USAAnnuity and Life Insurance Company**

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

**Notes toCondensed Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwise stated)

 

Unrealized capital losses (including non-creditimpairments), along with the fair value of fixed maturities, includingsecurities pledged to creditors, by market sector and duration were as followsat September 30, 2010 and December 31, 2009.

 
| ** **                                 | ** ** | ** **                            | ** ** | ** **                         | ** ** | **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** | ** ** |
| **2010**                                   | ** ** | ** **                            | ** ** | ** **                         | ** ** | ** **                      | ** ** | ** **                     | ** **    | ** **          | ** ** | ** **            | ** ** | ** **          | ** **    | ** ** | ** ** |
| U.S.  corporate, state, and municipalities |       | $                                     | 308.6      |                               | $          | 3.3                             |       | $                              | -   |                | $          | -           |       | $                   | 337.5         |   | $ | 27.2 |   | $ | 646.1 |   | $ | 30.5 |   |
| Foreign                                    |       | 159.7                                 |       | 12.8                               |       | 18.4                            |       | 0.5                            |          | 193.9               |       | 23.1                  |       | 372.0               |          | 36.4 |   |
| Residential  mortgage-backed               |       | 242.9                                 |       | 4.5                                |       | 1.2                             |       | 0.4                            |          | 421.9               |       | 124.9                 |       | 666.0               |          | 129.8 |   |
| Commercial  mortgage-backed                |       | 1.3                                   |       | -                        |       | 4.5                             |       | -                    |          | 568.4               |       | 117.3                 |       | 574.2               |          | 117.3 |   |
| Other  asset-backed                        |       | 138.2                                 |       | 0.2                                |       | 1.5                             |       | 0.2                            |          | 569.4               |       | 240.0                 |       | 709.1               |          | 240.4 |   |
| Total                                      |       | $                                     | 850.7      |                               | $          | 20.8                            |       | $                              | 25.6          |                | $          | 1.1                   |       | $                   | 2,091.1       |   | $ | 532.5 |   | $ | 2,967.4 |   | $ | 554.4 |   |
|                                       |       |                                  |       |                               |       |                            |       |                           |          |                |       |                  |       |                |          |   |   |
| **2009**                                   | ** ** | ** **                            | ** ** | ** **                         | ** ** | ** **                      | ** ** | ** **                     | ** **    | ** **          | ** ** | ** **            | ** ** | ** **          | ** **    | ** ** | ** ** |
| U.S.  Treasuries                           |       | $                                     | 3,761.2    |                               | $          | 80.0                            |       | $                              | -   |                | $          | -           |       | $                   | -   |   | $ | -   |   | $ | 3,761.2 |   | $ | 80.0 |   |
| U.S.  government agencies and authorities  |       | 15.2                                  |       | 0.8                                |       | 8.2                             |       | 0.8                            |          | -         |       | -           |       | 23.4                |          | 1.6 |   |
| U.S.  corporate, state, and municipalities |       | 273.8                                 |       | 6.7                                |       | 108.1                           |       | 13.5                           |          | 737.7               |       | 64.1                  |       | 1,119.6             |          | 84.3 |   |
| Foreign                                    |       | 228.1                                 |       | 11.8                               |       | 107.8                           |       | 17.3                           |          | 472.6               |       | 58.1                  |       | 808.5               |          | 87.2 |   |
| Residential  mortgage-backed               |       | 139.1                                 |       | 46.5                               |       | 183.5                           |       | 92.3                           |          | 260.7               |       | 82.8                  |       | 583.3               |          | 221.6 |   |
| Commercial  mortgage-backed                |       | 795.5                                 |       | 44.1                               |       | 534.6                           |       | 243.1                          |          | 682.7               |       | 161.0                 |       | 2,012.8             |          | 448.2 |   |
| Other  asset-backed                        |       | 63.0                                  |       | 1.4                                |       | 116.0                           |       | 93.1                           |          | 560.8               |       | 250.7                 |       | 739.8               |          | 345.2 |   |
| Total                                      |       | $                                     | 5,275.9    |                               | $          | 191.3                           |       | $                              | 1,058.2       |                | $          | 460.1                 |       | $                   | 2,714.5       |   | $ | 616.7 |   | $ | 9,048.6 |   | $ | 1,268.1 |   |

 

Of the unrealized capital losses aged more than twelvemonths, the average market value of the related fixed maturities was 79.7% ofthe average book value as of September 30, 2010.  In addition, this category includes 412securities, which have an average quality rating of BBB.

 

43

----

 

**ING USAAnnuity and Life Insurance Company**

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

**Notes toCondensed Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwise stated)

 

Unrealized capital losses (including non-creditimpairments) in fixed maturities, including securities pledged to creditors,for instances in which fair value declined below amortized cost by greater thanor less than 20% for consecutive periods as indicated in the tables below, wereas follows for September 30, 2010 and December 31, 2009.

 
| ** **                                                           | ** ** | **Amortized Cost** | ** ** | **Unrealized Capital Loss** | ** ** | **Number of Securities** | ** ** |
|----------------------------------------------------------------------|------------|-------------------------|------------|---------------------------------------|------------|------------------------------------|------------|
| ** **                                                           | ** ** | **< 20%**       | ** ** | **> 20%**                     | ** ** | **< 20%**                  | ** ** | **> 20%** | ** ** | **< 20%** | ** ** | **> 20%** | ** ** |
| **2010**                                                             | ** ** | ** **              | ** ** | ** **                            | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Six  months or less below amortized cost                             | ** ** | $                       | 1,296.1    | ** **                            | $          | 111.4                              | ** ** | $ | 70.0 | ** ** | $ | 26.9 | ** ** | 198 | ** ** | 22 | ** ** |
| More  than six months and twelve months or less below amortized cost |       | 506.2                   |       | 7.7                                   |       | 38.0                               |       | 2.2 |   | 53 |   | 7 |   |
| More  than twelve months below amortized cost                        |       | 604.5                   |       | 995.9                                 |       | 31.5                               |       | 385.8 |   | 94 |   | 197 |   |
| Total                                                                |       | $                       | 2,406.8    |                                  | $          | 1,115.0                            |       | $ | 139.5 |   | $ | 414.9 |   | 345 |   | 226 |   |
|                                                                 |       |                    |       |                                  |       |                               |       |   |   |   |   |   |   |
| **2009**                                                             | ** ** | ** **              | ** ** | ** **                            | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Six  months or less below amortized cost                             | ** ** | $                       | 6,184.5    | ** **                            | $          | 396.8                              | ** ** | $ | 265.1 | ** ** | $ | 111.8 | ** ** | 282 | ** ** | 96 | ** ** |
| More  than six months and twelve months or less below amortized cost |       | 1,248.5                 |       | 982.3                                 |       | 68.8                               |       | 433.2 |   | 191 |   | 115 |   |
| More  than twelve months below amortized cost                        |       | 619.0                   |       | 885.6                                 |       | 27.8                               |       | 361.4 |   | 113 |   | 158 |   |
| Total                                                                |       | $                       | 8,052.0    |                                  | $          | 2,264.7                            |       | $ | 361.7 |   | $ | 906.4 |   | 586 |   | 369 |   |

 

44

----

 

**ING USAAnnuity and Life Insurance Company**

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

**Notes toCondensed Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwise stated)

 

Unrealized capital losses (including non-creditimpairments) in fixed maturities, including securities pledged to creditors, bymarket sector for instances in which fair value declined below amortized costby greater than or less than 20% for consecutive periods as indicated in thetables below, were as follows for September 30, 2010 and December 31,2009.

 
| ** **                                | ** ** | **Amortized Cost** | ** ** | **Unrealized Capital Loss** | ** ** | **Number of Securities** | ** ** |
|-------------------------------------------|------------|-------------------------|------------|---------------------------------------|------------|------------------------------------|------------|
| ** **                                | ** ** | **< 20%**       | ** ** | **> 20%**                     | ** ** | **< 20%**                  | ** ** | **> 20%** | ** ** | **< 20%** | ** ** | **> 20%** | ** ** |
| **2010**                                  | ** ** | ** **              | ** ** | ** **                            | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| U.S.  corporate, state and municipalities |       | $                       | 652.3      |                                  | $          | 24.3                               |       | $ | 24.8 |   | $ | 5.7 |   | 82 |   | 5 |   |
| Foreign                                   |       | 327.5                   |       | 80.9                                  |       | 16.6                               |       | 19.8 |   | 38 |   | 10 |   |
| Residential  mortgage-backed              |       | 487.0                   |       | 308.8                                 |       | 25.2                               |       | 104.6 |   | 94 |   | 90 |   |
| Commercial  mortgage-backed               |       | 499.1                   |       | 192.4                                 |       | 46.3                               |       | 71.0 |   | 36 |   | 21 |   |
| Other  asset-backed                       |       | 440.9                   |       | 508.6                                 |       | 26.6                               |       | 213.8 |   | 95 |   | 100 |   |
| Total                                     |       | $                       | 2,406.8    |                                  | $          | 1,115.0                            |       | $ | 139.5 |   | $ | 414.9 |   | 345 |   | 226 |   |
|                                      |       |                    |       |                                  |       |                               |       |   |   |   |   |   |   |
| **2009**                                  | ** ** | ** **              | ** ** | ** **                            | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| U.S.  Treasuries                          |       | $                       | 3,841.2    |                                  | $          | -                        |       | $ | 80.0 |   | $ | -   |   | 21 |   | - |   |
| U.S.  government agencies and authorities |       | 25.0                    |       | -                           |       | 1.6                                |       | -   |   | 4 |   | - |   |
| U.S.  corporate, state and municipalities |       | 1,139.0                 |       | 64.9                                  |       | 67.8                               |       | 16.5 |   | 220 |   | 32 |   |
| Foreign                                   |       | 712.7                   |       | 183.0                                 |       | 33.1                               |       | 54.1 |   | 93 |   | 30 |   |
| Residential  mortgage-backed              |       | 336.0                   |       | 468.9                                 |       | 35.9                               |       | 185.7 |   | 83 |   | 119 |   |
| Commercial  mortgage-backed               |       | 1,534.5                 |       | 926.5                                 |       | 104.2                              |       | 344.0 |   | 96 |   | 60 |   |
| Other  asset-backed                       |       | 463.6                   |       | 621.4                                 |       | 39.1                               |       | 306.1 |   | 69 |   | 128 |   |
| Total                                     |       | $                       | 8,052.0    |                                  | $          | 2,264.7                            |       | $ | 361.7 |   | $ | 906.4 |   | 586 |   | 369 |   |

 

During the nine months ended September 30, 2010,unrealized capital losses on fixed maturities decreased by $713.7.  Lower unrealized losses are due to loweryields and the overall tightening of credit spreads since the end of 2009,leading to lower noncredit impairments and the increased value of fixedmaturities.

 

At September 30, 2010, the Company had 7 fixedmaturities with unrealized capital losses in excess of $10.0.  The unrealized capital losses on these fixedmaturities equaled $112.2, or 20.2% of the total unrealized losses, as of September 30,2010.  At December 31, 2009, theCompany had 19 fixed maturities with unrealized capital losses in excess of$10.0.  The unrealized capital losses onthese fixed maturities equaled $353.9, or 27.9% of the total unrealized losses,as of December 31, 2009.

 

All investments with fair values less than amortizedcost are included in the Company’s other-than-temporary impairment analysis,and impairments were recognized as disclosed in “Other-Than-TemporaryImpairments,” which follows this section. After detailed impairment analysiswas completed, management determined that the remaining

 

45

----

 

**ING USAAnnuity and Life Insurance Company**

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

**Notes toCondensed Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwise stated)

 

investmentsin an unrealized loss position were not other-than-temporarily impaired, andtherefore no further other-than-temporary impairment was necessary.

 

*Other-Than-Temporary Impairments*

 

The Company analyzes its general account investments todetermine whether there has been an other-than-temporary decline in fair valuebelow 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 fairvalue has been less than amortized cost, the issuer’s financial condition andnear-term prospects, future economic conditions and market forecasts, interestrate changes, and changes in ratings of the security.

 

When assessing the Company’s intent to sell a securityor if it is more likely than not it will be required to sell a security beforerecovery of its cost basis, management evaluates facts and circumstances suchas, but not limited to, decisions to rebalance the investment portfolio andsales of investments to meet cash flow needs.

 

When the Company has determined it has the intent tosell or if it is more likely than not that it will be required to sell asecurity before recovery of its amortized cost basis and the fairvalue has declined below amortized cost (“intent impairment”) the individualsecurity is written down from amortized cost to fair value and a correspondingcharge is recorded in Net realized capital gains (losses) on the CondensedStatements of Operations as an other-than-temporary impairment (“OTTI”).  If the Company does not intend to sell thesecurity nor is it more likely than not it will be required to sell thesecurity before recovery of its amortized cost basis, but the Company hasdetermined that there has been an other-than-temporary decline in fair valuebelow the amortized cost basis, the OTTI is bifurcated into the amountrepresenting the present value of the decrease in cash flows expected to becollected (“credit impairment”) and the amount related to other factors (“noncreditimpairment”). The credit impairment is recorded in Net realized capitalgains (losses) on the Condensed Statements of Operations. The noncreditimpairment is recorded in Other comprehensive income (loss) on theCondensed Balance Sheets in accordance with the requirements of ASC Topic 320.

 

In order to determine the amount of the OTTI that isconsidered a credit impairment, the Company utilizes the following methodologyand significant inputs:

 

§                  Recovery value is estimated by performing adiscounted cash flow analysis based upon the best estimate of expected futurecash flows, discounted at the effective interest rate implicit in theunderlying debt security.  The effective interestrate is the current yield prior to impairment for a fixed rate security orcurrent coupon yield for a floating rate security.

§                  Collectability and recoverability are estimatedusing the same considerations as the Company uses in its overall impairmentanalysis which includes, but is not limited to, the length of time and theextent to which the fair value has been less than 

 

46

----

 

**ING USAAnnuity and Life Insurance Company**

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

**Notes toCondensed Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwise stated)

 

amortized cost, the issuer’sfinancial condition and near-term prospects, future economic conditions andmarket forecasts, interest rate changes, and changes in ratings of thesecurity.

§                  Additional factors considered for structuredsecurities such as RMBS, CMBS and other ABS include, but are not limited to,quality of underlying collateral, anticipated loss severities, collateraldefault rates, and other collateral characteristics such as vintage, re-paymentterms, and the geographical makeup of the collateral.

 

The following tables identify the Company’scredit-related and intent-related impairments included in the CondensedStatement of Operations, excluding noncredit impairments included inAccumulated other comprehensive income (loss), by type for the three and  nine months ended September 30, 2010 and2009.

 
| ** **                     | ** ** | ** ** | **Three Months Ended September 30,** | ** ** |
|--------------------------------|------------|------------|----------------------------------------------------------|------------|
| ** **                     | ** ** | ** ** | **2010**                                                 | ** ** | ** ** | **2009** | ** ** |
| ** **                     | ** ** | ** ** | ** **                                               | ** ** | **No. of** | ** ** | ** ** | ** ** | ** ** | **No. of** | ** ** |
| ** **                     | ** ** | ** ** | **Impairment**                                           | ** ** | **Securities** | ** ** | ** ** | **Impairment** | ** ** | **Securities** | ** ** |
| U.S.  corporate                |       | $          | 1.1                                                      |       | 2 |   | $ | 0.9 |   | 1 |   |
| Foreign(1)                     |       |       | 7.8                                                      |       | 3 |   |   | 3.1 |   | 10 |   |
| Residential  mortgage-backed   |       |       | 1.7                                                      |       | 23 |   |   | 5.9 |   | 33 |   |
| Commercial  mortgage-backed    |       |       | 8.2                                                      |       | 5 |   |   | -   |   | - |   |
| Other  asset-backed            |       |       | 1.6                                                      |       | 6 |   |   | 16.7 |   | 13 |   |
| Mortgage  loans on real estate |       |       | 5.6                                                      |       | 5 |   |   | 13.8 |   | 3 |   |
| Total                          |       | $          | 26.0                                                     |       | 44 |   | $ | 40.4 |   | 60 |   |

 

(1) Primarily U.S. dollar denominated.

 
|                           |   |   | **Nine Months Ended September 30,** |   |
|--------------------------------|--------|--------|---------------------------------------------------------|--------|
|                           |   |   | **2010**                                                |   |   | **2009** |   |
|                           |   |   | ** **                                              |   | **No. of** |   |   | ** ** | ** ** | **No. of** |   |
|                           |   |   | **Impairment**                                          |   | **Securities** |   |   | **Impairment** | ** ** | **Securities** |   |
| U.S.  Treasuries               |   | $      | -                                             |   | - |   | $ | 114.7 |   | 13 |   |
| U.S.  corporate                |   |   | 4.8                                                     |   | 19 |   |   | 51.3 |   | 50 |   |
| Foreign(1)                     |   |   | 30.6                                                    |   | 21 |   |   | 27.3 |   | 41 |   |
| Residential  mortgage-backed   |   |   | 14.2                                                    |   | 59 |   |   | 106.8 |   | 118 |   |
| Commercial  mortgage-backed    |   |   | 16.5                                                    |   | 5 |   |   | -   |   | - |   |
| Other  asset-backed            |   |   | 16.7                                                    |   | 26 |   |   | 143.4 |   | 52 |   |
| Equity  securities             |   |   | -                                             |   | - |   |   | 3.3 |   | 5 |   |
| Public  utilities              |   |   | 0.3                                                     |   | 5 |   |   | -   |   | - |   |
| Mortgage  loans on real estate |   |   | 6.1                                                     |   | 5 |   |   | 14.3 |   | 4 |   |
| Limited  Partnerships          |   |   | -                                             |   | - |   |   | 0.4 |   | 1 |   |
| Total                          |   | $      | 89.2                                                    |   | 140 |   | $ | 461.5 |   | 284 |   |

 

(1) Primarily U.S. dollar denominated.

 

Theabove schedules include $25.9 and $72.3 for the three and nine months endedSeptember 30, 2010, respectively, and $38.6 and $148.4 for the three and nine months

 

47

----

 

**ING USAAnnuity and Life Insurance Company**

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

**Notes toCondensed Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwise stated)

 

ended September 30, 2009, respectively, inother-than-temporary write-downs related to credit impairments, which arerecognized in earnings.  The remainingwrite-downs reflected in the schedules above are related to intent impairments.

 

The following tables summarize these intent impairments,which are also recognized in earnings, by type for the three and nine monthsended September 30, 2010 and 2009.

 
|            |   |   | **Three Months Ended September 30,** |   |
|-----------------|--------|--------|----------------------------------------------------------|--------|
|            |   |   | **2010**                                                 |   |   | **2009** |   |
|            |   |   | ** **                                               |   | **No. of** |   |   |   |   | **No. of** |   |
|            |   |   | **Impairment**                                           |   | **Securities** |   |   | **Impairment** |   | **Securities** |   |
| U.S.  corporate |   | $      | 0.1                                                      |   | 1 |   | $ | 0.9 |   | 1 |   |
| Foreign(1)      |   |   | -                                              |   | - |   |   | 0.9 |   | 5 |   |
| Total           |   | $      | 0.1                                                      |   | 1 |   | $ | 1.8 |   | 6 |   |

 

(1) Primarily U.S. dollar denominated.

 
|                         |   |   | **Nine Months Ended September 30,** |   |
|------------------------------|--------|--------|---------------------------------------------------------|--------|
|                         |   |   | **2010**                                                |   |   | **2009** |   |
|                         |   |   | ** **                                              |   | **No. of** |   |   |   |   | **No. of** |   |
|                         |   |   | **Impairment**                                          |   | **Securities** |   |   | **Impairment** |   | **Securities** |   |
| U.S.  Treasuries             |   | $      | -                                             |   | - |   | $ | 114.7 |   | 13 |   |
| U.S.  corporate              |   |   | 3.8                                                     |   | 18 |   |   | 43.6 |   | 35 |   |
| Foreign(1)                   |   |   | 12.5                                                    |   | 16 |   |   | 22.5 |   | 35 |   |
| Residential  mortgage-backed |   |   | -                                             |   | - |   |   | 23.2 |   | 8 |   |
| Other  asset-backed          |   |   | 0.3                                                     |   | 1 |   |   | 109.1 |   | 11 |   |
| Public  utilities            |   |   | 0.3                                                     |   | 5 |   |   | -   |   | - |   |
| Total                        |   | $      | 16.9                                                    |   | 40 |   | $ | 313.1 |   | 102 |   |

 

(1) Primarily U.S. dollar denominated.

 

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

 

48

----

 

 

**ING USAAnnuity and Life Insurance Company**

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

**Notes toCondensed Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwise stated)

 

The following tables identify the noncredit impairmentsrecognized in Accumulated other comprehensive income (loss) by type for thethree and nine months ended September 30, 2010 and 2009.

 
|                         |   |   | **Three Months Ended  September 30,** |   |
|------------------------------|--------|--------|--------------------------------------------|--------|
|                         |   |   | **2010**                                   |   |   | **2009** |   |
|                         |   |   |                                       |   |   | **No  of** |   |   |   |   | **No  of** |   |
|                         |   |   | **Impairment**                             |   |   | **Securities** |   |   | **Impairment** |   | **Securities** |   |
| U.S.  corporate              |   | $      | -                                |   | * | 1 |   | $ | -    |   |   | - |   |
| Foreign(1)                   |   |   | -                                |   |   | - |   |   | -    |   | * | 3 |   |
| Commercial  mortgage-backed  |   |   | 7.0                                        |   |   | 3 |   |   | -    |   |   | - |   |
| Residential  mortgage-backed |   |   | 5.0                                        |   |   | 5 |   |   | (1.8) |   |   | 20 |   |
| Other  asset-backed          |   |   | 15.8                                       |   |   | 2 |   |   | 8.3  |   |   | 12 |   |
| Total                        |   | $      | 27.8                                       |   |   | 11 |   | $ | 6.5  |   |   | 35 |   |

 

(1) Primarily U.S. dollar denominated.

*  Less than $0.1.

 
|                         |   |   | **Nine Months Ended September 30,** |   |
|------------------------------|--------|--------|------------------------------------------|--------|
|                         |   |   | **2010**                                 |   |   | **2009** |   |
|                         |   |   | ** **                               |   |   | **No of** |   |   |   |   | **No of** |   |
|                         |   |   | **Impairment**                           |   |   | **Securities** |   |   | **Impairment** |   | **Securities** |   |
| U.S.  corporate              |   | $      | -                         |   | * | 2 |   | $ | 2.0 |   | 1 |   |
| Foreign(1)                   |   |   | -                         |   |   | - |   |   | 0.4 |   | 3 |   |
| Commercial  mortgage-backed  |   |   | 17.5                                |   |   | 5 |   |   | -   |   | - |   |
| Residential  mortgage-backed |   |   | 21.2                                |   |   | 31 |   |   | 73.2 |   | 8 |   |
| Other  asset-backed          |   |   | 45.6                                |   |   | 13 |   |   | 15.8 |   | 17 |   |
| Total                        |   | $      | 84.3                                |   |   | 51 |   | $ | 91.4 |   | 29 |   |

 

(1) Primarily U.S. dollar denominated.

*  Less than $0.1.

 

The fair value of fixed maturities withother-than-temporary impairments as of September 30, 2010 and 2009 was$2,313.6 and $2,465.9, respectively.

 

49

----

 

**ING USAAnnuity and Life Insurance Company**

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

**Notes toCondensed Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwise stated)

 

The following tables identify the amount of creditimpairments on fixed maturities for the three and nine months ended September 30,2010 and 2009, for which a portion of the OTTI was recognized in Accumulatedother comprehensive income (loss), and the corresponding changes in suchamounts.

 
| ** **                                                    | ** ** | **Three Months Ended September 30,** | ** ** |
|---------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                                    | ** ** | **2010**                                                 | ** ** | ** ** | ** ** | **2009** | ** ** |
| Balance  at July 1                                       |  $    | 124.0                                                    |       |   |  $ | 102.2 |   |
| Additional  credit impairments:                               |       |                                                     |       |   |   |   |   |
| On  securities not previously impaired                        |       | 6.6                                                      |       |   |   | 11.8 |   |
| On  securities previously impaired                            |       | 0.9                                                      |       |   |   | 1.1 |   |
| Reductions:                                                   |       |                                                     |       |   |   |   |   |
| Securities  sold, matured, prepaid or paid down               |       | (5.0                                                     | )          |   |   | (3.4 | ) |
| Balance  at September 30                                 |  $    | 126.5                                                    |       |   |  $ | 111.7 |   |
|                                                          |       |                                                     |       |   |   |   |   |
| ** **                                                    | ** ** | **Nine Months Ended September 30,**  | ** ** |
| ** **                                                    | ** ** | **2010**                                                 | ** ** | ** ** | ** ** | **2009** | ** ** |
| Balance  at January 1                                    |  $    | 123.3                                                    |       |   |  $ | -   |   |
| Implementation  of OTTI guidance included in ASC Topic 320(1) |       |                                                     |       |   |   | 92.7 |   |
| Additional  credit impairments:                               |       |                                                     |       |   |   |   |   |
| On  securities not previously impaired                        |       | 14.8                                                     |       |   |   | 14.7 |   |
| On  securities previously impaired                            |       | 5.9                                                      |       |   |   | 8.1 |   |
| Reductions:                                                   |       |                                                     |       |   |   |   |   |
| Securities  sold, matured, prepaid or paid down               |       | (17.5                                                    | )          |   |   | (3.8 | ) |
| Balance  at September 30                                 |  $    | 126.5                                                    |       |   |  $ | 111.7 |   |

 

(1)    Represents credit losses remaining inRetained earnings related to the adoption of new guidance on OTTI, included inASC Topic 320, on April 1, 2009.

 

50

----

 

**ING USAAnnuity and Life Insurance Company**

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

**Notes toCondensed Financial Statements (Unaudited)**

(Dollaramounts in millions, unless otherwise stated)

* *

*Net Realized Capital Gains (Losses)*

 

Net realized capital gains (losses) are comprised of thedifference between the amortized cost of investments and proceeds from sale,and redemption, as well as losses incurred due to credit-related andintent-related other-than-temporary impairment of investments and changes infair value of derivatives.  The cost ofthe investments on disposal is determined based on specific identification ofsecurities.  Net realized capital gains(losses) on investments were as follows for the three and nine months ended September 30,2010 and 2009.

 

| ** **                                                                                                          | ** ** | **Three Months Ended September 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                                                                                          | ** ** | **2010**                                                 | ** ** | ** ** | **2009** | ** ** |
| Fixed maturities, available-for-sale, including  net OTTI of $(20.4) and $(26.6) in 2010 and 2009, respectively     | ** ** |  $                                                  | 82.8       | ** ** | ** ** |  $ | 25.4 | ** ** |
| Equity securities, available-for-sale, including net  OTTI of $0.0 in 2010 and 2009                                 |       | (1.4                                                     | )          |   | 4.7 |   |
| Derivatives                                                                                                         |       | (608.1                                                   | )          |   | (1,159.9 | ) |
| Other investments, including net OTTI of $(5.6)  and $(13.8) in 2010 and 2009, respectively                         |       | (11.6                                                    | )          |   | (14.0 | ) |
| Net realized capital losses                                                                                         |       |  $                                                  | (538.3     | ) |   |  $ | (1,143.8 | ) |
| After-tax net realized capital losses, including  tax valuation allowance of $(30.0) for 2010 and of $22.1 for 2009 |       |  $                                                  | (379.9     | ) |   |  $ | (721.4 | ) |

 

| ** **                                                                                                            | ** ** | **Nine Months Ended September 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                                                            | ** ** | **2010**                                                | ** ** | ** ** | **2009** | ** ** |
| Fixed maturities, available-for-sale, including  net OTTI of $(83.1) and $(443.5) in 2010 and 2009, respectively      | ** ** |  $                                                 | 98.6       | ** ** | ** ** |  $ | (232.6 | ) |
| Equity securities, available-for-sale, including  net OTTI of $0.0 and $(3.3) in 2010 and 2009, respectively          |       | 0.9                                                     |       |   | 4.9 |   |
| Derivatives                                                                                                           |       | (269.3                                                  | )          |   | (1,953.5 | ) |
| Other investments, including net OTTI of $(6.1)  and $(14.7) in 2010 and 2009, respectively                           |       | (8.9                                                    | )          |   | (17.1 | ) |
| Net realized capital losses                                                                                           |       |  $                                                 | (178.7     | ) |   |  $ | (2,198.3 | ) |
| After-tax net realized capital losses, including  tax valuation allowance of $(30.0) for 2010 and of $(18.3) for 2009 |       |  $                                                 | (146.2     | ) |   |  $ | (1,447.2 | ) |

 

The decrease in *Total net realized capitallosses* for the three and nine months ended September 30, 2010is primarily due to a favorable change on derivatives related to 1) hedging ofvariable annuity guaranteed death benefits, 2) a loss in the first nine monthsof 2009 related to a hedging program designed to mitigate the impact ofpotential declines in equity markets and their impact on regulatory capital,and 3) hedging of variable annuity guaranteed living benefits (“VAGLB”) cededto SLDI, under the combined coinsurance and coinsurance funds withheldagreement, which commenced in the third quarter of 2009. However, the hedgelosses on the VAGLB for the three and nine months ended September 30, 2010are ceded to SLDI and reported as a corresponding increase in Interest creditedand other benefits to policyholders. Lower credit and intent related 

 

51

----

 

**ING USAAnnuity and Life Insurance Company**

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

**Notes toCondensed Financial Statements (Unaudited)**

(Dollaramounts in millions, unless otherwise stated)

 

impairments on fixed maturities, primarily due to theimproved economic and interest rate environment, also contributed to the risein Net realized capital gains. In addition, the Company experienced gains oncurrency swaps and forwards related to the strengthening of the US Dollar in2010, and gains on options in a long position, which are used to hedge risksassociated with fixed indexed annuities. These favorable items were partiallyoffset by futures in a short position as their fair value decreased in thethird quarter of 2010 due to improved equity markets.

 

Proceeds from the sale of fixed maturities and equitysecurities, available-for-sale, and the related gross realized gains and losseswere as follows for the periods ended September 30, 2010 and 2009.

 

| ** **         | ** ** | **2010** | ** ** | ** ** | **2009** | ** ** |
|--------------------|------------|----------|------------|------------|----------|------------|
| Proceeds  on sales |       |  $  | 4,967.5    |       |     |  $    | 4,783.1 |   |
| Gross  gains       |       | 179.0    |       |       | 194.1    |       |
| Gross  losses      |       | 10.4     |       |       | 97.3     |       |
|                    |            |          |            |            |          |            |  |  |

 

**6.****                                    DeferredPolicy Acquisition Costs and Value of Business Acquired**

 

Activitywithin DAC was as follows for the nine months ended September 30, 2010 and2009.

 

| ** **                                                                  | ** ** | **2010** | ** ** | ** ** | **2009** | ** ** |
|-----------------------------------------------------------------------------|------------|----------|------------|------------|----------|------------|
| Balance at January 1                                                   |       |  $  | 3,718.0    |       |     |  $    | 4,205.5 |   |
| Deferrals of commissions and expenses                                       |       | 157.2    |       |       | 329.4    |       |
| Amortization:                                                               |       |     |       |       |     |       |
| Amortization                                                                |       | (287.7   | )          |       | 213.5    |       |
| Interest accrued at 5% to 6%                                                |       | 173.3    |       |       | 134.9    |       |
| Net amortization included in the Condensed Statements  of Operations        |       | (114.4   | )          |       | 348.4    |       |
| Change in unrealized capital gains/losses on available-for-sale  securities |       | (623.6   | )          |       | (1,284.2 | )          |
| Balance at September 30                                                |       |  $  | 3,137.2    |       |     |  $    | 3,599.1 |   |

 

52

----

 

**ING USAAnnuity and Life Insurance Company**

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

**Notes toCondensed Financial Statements (Unaudited)**

(Dollaramounts in millions, unless otherwise stated)

 

Activity within value of business acquired (“VOBA”) wasas follows for the nine months ended September 30, 2010 and 2009.

 

| ** **                                                                  | ** ** | **2010** | ** ** | ** ** | **2009** | ** ** |
|-----------------------------------------------------------------------------|------------|----------|------------|------------|----------|------------|
| Balance at January 1                                                   |       |  $  | 113.4      |       |     |  $    | 195.1 |   |
| Amortization:                                                               |       |     |       |       |     |       |
| Amortization                                                                |       | (22.4    | )          |       | (8.1     | )          |
| Interest accrued at 5% to 6%                                                |       | 3.9      |       |       | 5.1      |       |
| Net amortization included in the Condensed Statements  of Operations        |       | (18.5    | )          |       | (3.0     | )          |
| Change in unrealized capital gains/losses on  available-for-sale securities |       | (32.9    | )          |       | (80.2    | )          |
| Balance at September 30                                                |       |  $  | 62.0       |       |     |  $    | 111.9 |   |

 

During the nine months ended September 30, 2010,the Company revised its gross profit projections, mainly related to theemergence of separate account performance and projected hedge and claim costs,resulting in a $107.9 decrease in amortization of DAC and VOBA.

 

During the nine months ended September 30, 2009,the Company revised its gross profit projections, mainly related to theemergence of separate account performance and projected hedge and claim costs,resulting in a $152.2 decrease in amortization of DAC and VOBA.

 

| ** **                                                                                          | ** ** | **2010** | ** ** | ** ** | **2009** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|----------|------------|------------|----------|------------|
| Impact of separate account growth and  contractowner withdrawal behavior different from assumptions |       |  $  | 196.9      |       |     |  $    | (262.7 | ) |
| Impact of current year gross profit variances                                                       |       | (72.3    | )          |       | 386.3    |       |
| Impact of refinements of gross profit projections                                                   |       | (16.7    | )          |       | 28.6     |       |
| Total unlocking effect on Amortization of DAC and  VOBA                                             |       |  $  | 107.9      |       |     |  $    | 152.2 |   |

 

**7.****                                    CapitalContributions and Dividends**

 

During the nine months ended September 30, 2010 and2009, the Company received $239.0 and $835.0, respectively, in capitalcontributions from its Parent.  OnNovember 10, 2010, the Company received a $510.0 capital contribution fromits Parent.

 

During the nine months ended September 30, 2010 and2009, the Company did not pay any dividends or return of capital distributionson its capital stock to its Parent.

 

53

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**ING USAAnnuity and Life Insurance Company**

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

**Notes toCondensed Financial Statements (Unaudited)**

(Dollaramounts in millions, unless otherwise stated)

 

**8.****                                    IncomeTaxes**

 

The Company’s effective tax rates for the three monthsended September 30, 2010 and 2009 were (5.1)% and (83.7)%,respectively.  The Company’s effectivetax rates for the nine months ended September 30, 2010 and 2009 were(210.7)% and 44.1%, respectively.  Theeffective rates differ from the statutory rate due to the following items:

 

| ** **                           | ** ** | **Three Months Ended September 30,** |
|--------------------------------------|------------|----------------------------------------------------------|
| ** **                           | ** ** | **2010**                                                 | ** ** | **2009** |
| Statutory  rate                      |       | 35.0%                                                    |   | 35.0% |
|                                 |       |                                                     |   |   |
| Dividends  received deduction        |       | (31.4)%                                                  |   | (64.9)% |
| Valuation  allowance                 |       | 28.2%                                                    |   | (52.2)% |
| Audit  settlements                   |       | (36.7)%                                                  |   | (0.2)% |
| Other                                |       | (0.2)%                                                   |   | (1.4)% |
| Effective  rate at September 30 |       | (5.1)%                                                   |   | (83.7)% |
|                                 |       |                                                     |   |   |
| ** **                           | ** ** | **Nine Months Ended September 30,**  |
| ** **                           | ** ** | **2010**                                                 | ** ** | **2009** |
| Statutory rate                       |       | 35.0%                                                    |   | 35.0% |
|                                 |       |                                                     |   |   |
| Dividends received  deduction        |       | (206.1)%                                                 |   | 15.2% |
| Valuation allowance                  |       | 124.2%                                                   |   | (6.4)% |
| Audit settlements                    |       | (161.7)%                                                 |   | 0.0% |
| Other                                |       | (2.1)%                                                   |   | 0.3% |
| Effective rate at  September 30 |       | (210.7)%                                                 |   | 44.1% |

 

Valuation allowances are provided when it is consideredunlikely that deferred tax assets will be realized.  At September 30, 2010 and December 31,2009, the Company had a tax valuation allowance of $133.6 and $308.6,respectively.

 

***Unrecognized Tax Benefits***

 

Reconciliations of the change in the unrecognized incometax benefits for the periods ended September 30, 2010 and December 31,2009 are as follows:

 

| ** **                                               | ** ** | **2010**      | ** ** | **2009**      |
|----------------------------------------------------------|------------|---------------|------------|---------------|
| Balance  at beginning of period                          |       |  $       |  60.3 |          |  $ |  64.9 |
| Additions  for tax positions related to the current year |       | -   |       | 9.1           |
| Additions  for tax positions related to prior years      |       | 21.8          |       | 3.2           |
| Reductions  for tax positions related to prior years     |       | (56.4)        |       | (16.9)        |
| Reductions  for settlements with taxing authorities      |       | (0.1)         |       | -   |
| Balance  at end of period                                |       |  $       |  25.6 |          |  $ |  60.3 |

 

54

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**INGUSA Annuity and Life Insurance Company**

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

**Notesto Condensed Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwise stated)

 

The Company had $3.8 and $53.4 of unrecognized taxbenefits as of September 30, 2010 and December 31, 2009,respectively, that would affect the Company’s effective tax rate if recognized.

 

***Interest and Penalties***

 

The Company recognizes accrued interest and penaltiesrelated to unrecognized tax benefits in Current income taxes and Income taxbenefit on the Balance Sheets and Statement of Operations, respectively. TheCompany had accrued interest of $0.0 and $4.4 as of September 30, 2010 andDecember 31, 2009, respectively. The decrease during the tax period ended September 30, 2010 isprimarily related to the settlement of the 2004-2008 federal audits.

 

***Tax Regulatory Matters***

 

In September 2010, the IRS completed itsexamination of the Company’s returns through tax year 2008. The provision forthe quarter ended September 30, 2010 reflected non-recurring favorableadjustments, resulting from a reduction in the tax liability that was no longerdeemed necessary based on the results of the IRS examination, monitoring theactivities of the IRS with respect to certain issues with other taxpayers andthe merits of the Company’s position.

 

The Company is currently under audit by the IRS for taxyears 2009 and 2010 and it is expected that the examination of tax year 2009will be finalized within the next twelve months.  Upon finalization of the IRS examination itis reasonably possible that the unrecognized tax benefits will decrease by upto $21.8. The timing of the payment of the remaining allowance of $3.8 cannotbe reliably estimated. The Company and the IRS have agreed to participate inthe Compliance Assurance Program (“CAP”) for the tax years 2009 and 2010.

 

 

**9.****                                    FinancingAgreements**

 

***Reciprocal LoanAgreement***

 

The Company maintains a reciprocal loan agreement withING America Insurance Holdings, Inc. (“ING AIH”), an affiliate, tofacilitate the handling of unanticipated short-term cash requirements thatarise in the ordinary course of business. Under this agreement, which became effective in January 2004 andexpires on January 14, 2014, either party can borrow from the other up to3.0% of the Company’s statutory admitted assets as of the preceding December 31.  Interest on any Company borrowing is chargedat the rate of ING AIH’s cost of funds for the interest period, plus0.15%.  Interest on any ING AIH borrowingis charged at a rate based on the prevailing interest rate of U.S. commercialpaper available for purchase with a similar duration.

 

55

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**INGUSA Annuity and Life Insurance Company**

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

**Notesto Condensed Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwise stated)

 

Under this agreement, the Company did not incur anyinterest expense for the three and nine months ended September 30,2010.  The Company incurred no interestexpense for the three months ended September 30, 2009 and $0.4 interestexpense for the nine months ended September 30, 2009.  The Company earned interest income of $0.3and $1.0 for the three and nine months ended September 30, 2010,respectively, and $0.5 and $1.4 for the three and nine months ended September 30,2009, respectively.  Interest expense andincome are included in Interest expense and Net investment income,respectively, on the Condensed Statements of Operations.  As of September 30, 2010 and December 31,2009, the Company had an outstanding receivable of $739.7 and $545.5,respectively, with ING AIH under the reciprocal loan agreement.

 

For information on the Company’s additional financingagreements, see the Financing Agreements footnote to the Financial Statementsincluded in the Company’s 2009 Annual Report on Form 10-K.

 

 

**10.****                            Commitmentsand Contingent Liabilities**

 

***Commitments***

 

Through the normal course of investment operations, theCompany commits to either purchase or sell securities, commercial mortgageloans, or money market instruments, at a specified future date and at aspecified price or yield.  The inabilityof counterparties to honor these commitments may result in either a higher orlower replacement cost.  Also, there islikely to be a change in the value of the securities underlying thecommitments.

 

As of September 30, 2010, the Company hadoff-balance sheet commitments to purchase investments equal to their fair valueof $581.9, of which $171.9 was with related parties. At December 31, 2009,the Company had off-balance sheet commitments to purchase investments equal totheir fair value of $354.6, of which $193.0 was with related parties.  During the three and nine months ended September 30,2010, $5.9 and $18.4, respectively,  wasfunded to related parties under these commitments.

 

***Collateral***

 

Under the terms of the Company’s Over-The-CounterDerivative ISDA Agreements (“ISDA Agreements”), the Company may receive from,or deliver to, counterparties, collateral to assure that all terms of the ISDAAgreements will be met with regard to the CSA. The terms of the CSA call for the Company to pay interest on any cashreceived equal to the Federal Funds rate. As of September 30, 2010 and December 31, 2009, the Companyheld $30.7 and $32.1, respectively, of cash collateral, related to derivativecontracts, which was included in Payables under securities loan agreement,including collateral held, on the Condensed Balance Sheets.  In addition, as of September 30, 2010and December 31, 2009, the Company delivered collateral of $667.2 and$574.6, 

 

56

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**INGUSA Annuity and Life Insurance Company**

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

**Notesto Condensed Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwise stated)

 

respectively, in fixed maturities pledged underderivatives contracts, which was included in Securities pledged on theCondensed Balance Sheets.

 

***Litigation***

 

The Company is involved in threatened or pendinglawsuits/arbitrations arising from the normal conduct of business.  Due to the climate in insurance and businesslitigation/arbitrations, suits against the Company sometimes include claims forsubstantial compensatory, consequential, or punitive damages, and other typesof relief.  Moreover, certain claims areasserted as class actions, purporting to represent a group of similarlysituated individuals.  While it is notpossible to forecast the outcome of such lawsuits/arbitrations, in light ofexisting insurance, reinsurance, and established reserves, it is the opinion ofmanagement that the disposition of such lawsuits/arbitrations will not have amaterially adverse effect on the Company’s operations or financial position.

 

***Regulatory Matters***

 

As with many financial services companies, the Companyand its affiliates have received informal and formal requests for informationfrom various state and federal governmental agencies and self-regulatoryorganizations in connection with inquiries and investigations of the productsand practices of the Company and of the financial services industry.  In each case, the Company and its affiliateshave been and are providing full cooperation. For information on the focus of such regulatory inquiries and theactions undertaken by ING in connection therewith, see the Other RegulatoryMatters section of the Commitments and Contingent Liabilities footnote to theFinancial Statements included in the Company’s 2009 Annual Report on Form 10-K.

 

57

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**INGUSA Annuity and Life Insurance Company**

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

**Notesto Condensed Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwise stated)

 

**11.****                            AccumulatedOther Comprehensive Income (Loss)**

 

Shareholder’s equity included the following componentsof Accumulated other comprehensive income (loss) as of September 30, 2010and 2009.

 
| ** **                                                                                                                                                                         | ** ** | **2010** | ** **    | **2009**            |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|---------------|---------------------|
| Net unrealized capital  gains (losses):                                                                                                                                            |       |     |          |                |
| Fixed  maturities, available-for-sale, including OTTI, of $(154.2) and $(75.0) in  2010 and 2009, respectively, and $(402.5) of cumulative change in accounting  principle in 2009 |       |  $  |  1,023.0 |                |  $ |  (659.9) |
| Equity  securities, available-for-sale                                                                                                                                             |       | 8.4      |          | 4.2                 |
| DAC/VOBA  adjustment on available-for-sale securities, including $139.1 of cumulative effect  of change in accounting principle in 2009                                            |       | (720.8)  |          | (85.6)              |
| Sales  inducements adjustment on available-for-sale securities                                                                                                                     |       | (129.2)  |          | -    |
| Other  investments                                                                                                                                                                 |       | (36.2)   |          | (25.2)              |
| Unrealized  capital gains (losses), before tax                                                                                                                                     |       | 145.2    |          | (766.5)             |
| Deferred  income tax asset (includes $(48.6) cumulative effect of change of accounting  principle in 2009)                                                                         |       | 48.3     |          | 206.3               |
| Net  unrealized capital gains (losses):                                                                                                                                            |       | 193.5    |          | (560.2)             |
| Pension  liability, net of tax                                                                                                                                                     |       | (3.4)    |          | (2.5)               |
| Accumulated  other comprehensive income (loss)                                                                                                                                     |       |  $  |  190.1   |                |  $ |  (562.7) |

 

On April 1, 2009, the Company adopted new US GAAPguidance on impairments, included in ASC Topic 320.  As prescribed by this accounting guidance,noncredit impairments, reflecting the portion of the impairment between thepresent value of future cash flows and fair value, were recognized in Othercomprehensive income (loss).  Inaddition, a cumulative transfer of noncredit impairments of $(312.0), afterconsidering the effects of DAC of $139.1 and income taxes of $(48.6), was madefrom beginning retained earnings to Accumulated other comprehensive income(loss) as of April 1, 2009.

 

Changes in unrealized capital gains on securities,including securities pledged and noncredit impairments, as recognized inAccumulated other comprehensive income (loss), reported net of DAC, VOBA, andincome taxes, were as follows for the nine months ended September 30, 2010and 2009.

 
| ** **                                                                                     | ** ** | **2010** | ** ** | **2009**    |
|------------------------------------------------------------------------------------------------|------------|----------|------------|-------------|
| Net  unrealized capital holding gains arising during the period(1)                             |       |     |  $    |  564.4 |   |  $ |  636.8 |
| Less:  reclassification adjustment for gains and other items included in Net income  (loss)(2) |       |     | 53.6       |        | (179.1) |
| Net  change in unrealized capital gains on securities                                          |       |     |  $    |  510.8 |   |  $ |  815.9 |

 

(1)           Pretax net unrealized capital holding gains (losses)arising during the period were $868.2 and $979.6 for the nine months endedSeptember 30, 2010 and 2009, respectively.

(2)           Pretax reclassification adjustments for gains (losses)and other items included in Net income (loss) were $82.4 and $(275.6) for thenine months ended September 30, 2010 and 2009, respectively.

 

58

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**INGUSA Annuity and Life Insurance Company**

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

**Notesto Condensed Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwise stated)

 

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

 

The following table identifies the amount of noncreditimpairments on fixed maturities recognized in Other comprehensive income (loss)as of September 30, 2010 and December 31, 2009.

 
|                                               |    | **2010** | ** ** | ** ** | ** ** | **2009** | ** ** | ** ** |
|----------------------------------------------------|---------|----------|------------|------------|------------|----------|------------|------------|
| Balance  at January 1                         |  $ | 100.1    |       |       |  $    | -   |       | (2)        |
| Additional  noncredit impairments:                 |    |     |       |       |       |     |       |       |
| On  securities not previously impaired             |    | 82.8     |       |       |       | 133.7    |       |       |
| On  securities previously impaired                 |    | 1.5      |       |       |       | 0.5      |       |       |
| Reductions:                                        |    |     |       |       |       |     |       |       |
| Securities  sold, matured, prepaid or paid down(1) |    | (8.4     | )          |       |       | (17.9    | )          |       |
| Securities  with additional credit impairments(1)  |    | (21.8    | )          |       |       | (16.2    | )          |       |
| Total  noncredit impairments                       |  $ | 154.2    |       |       |  $    | 100.1    |       |       |

 

(1)           Represents realization of noncredit impairments to Netincome (loss).

(2)           New guidance on recognition and presentation of OTTI,as included in ASC Topic 320, was adopted on April 1, 2009.

 

59

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

(Dollar amounts in millions, unless otherwise stated)

 

**Overview**

 

The following narrative analysispresents a review of the results of operations of ING USA Annuity and LifeInsurance Company (“ING USA” or the “Company”, as appropriate) for each of thethree and nine months ended September 30, 2010 and 2009, and financialcondition as of September 30, 2010 and December 31, 2009.  This item should be read in its entirety andin conjunction with the condensed financial statements and related notes, whichcan be found under Part I, Item 1. contained herein, as well as the “Management’sNarrative Analysis of the Results of Operations and Financial Condition”section contained in the Company’s 2009 Annual Report on Form 10-K.

 

**Forward-Looking Information/Risk Factors**

 

In connection with the “safe harbor” provisions of thePrivate Securities Litigation Reform Act of 1995, the Company cautions readersregarding certain forward-looking statements contained in this report and inany other statements made by, or on behalf of, the Company, whether or not infuture filings with the Securities and Exchange Commission (“SEC”).Forward-looking statements are statements not based on historical informationand which relate to future operations, strategies, financial results, or otherdevelopments.  Statements using verbssuch 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’sbeliefs concerning future levels of sales and redemptions of the Company’sproducts, investment spreads and yields, or the earnings and profitability ofthe Company’s activities.

 

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

 
| (1) | While the United  States is slowly emerging from the recent financial crisis after substantial  governmental intervention, significant risks still remain for the United  States and other world economies. Recent concerns regarding certain sovereign  credit risks and the threat of contagion could increase U.S. market  uncertainty and volatility. These global market conditions have affected and  may continue to affect the Company’s results of operations; |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

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| (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 in connection with its review of ING Groep’s receipt of state aid  from 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 can vary significantly from time to  time and is sensitive to a number of factors 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)  | Federal actions taken since 2008 to alleviate the financial crisis  may not achieve their intended results. 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 include 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) | 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 US GAAP requirements.  Increases in the deferred tax valuation allowance could have a material  adverse effect on results of operations and financial condition; |
| (11) | Reinsurance  subjects the Company to the credit risk of reinsurers and may not be adequate  to protect against losses arising from ceded reinsurance;                                                                                                                                                                                                                                                                                                 |
| (12) | Offshore reinsurance  subjects the Company to the risk that the reinsurer is unable to provide  acceptable credit for reinsurance;                                                                                                                                                                                                                                                                                                                    |
| (13) | 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 U.S. GAAP earnings in periods of changes in equity markets;                                                                                |
| (14) | The inability of counterparties to meet their financial obligations  could have an adverse effect on the Company’s results of operations;                                                                                                                                                                                                                                                                                                        |

 

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| (15) | Changes in  underwriting and actual experience could materially affect profitability;                                                                                                                                                                                                                                                                                                                                                                   |
|------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (16) | Changes in  reserve estimates may reduce profitability;                                                                                                                                                                                                                                                                                                                                                                                                 |
| (17) | A loss of key  product distribution relationships could materially affect sales;                                                                                                                                                                                                                                                                                                                                                                        |
| (18) | Competition  could negatively affect the ability to maintain or increase profitability;                                                                                                                                                                                                                                                                                                                                                                 |
| (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 contractowners and increasing tax costs of contractowners 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 over financial reporting;                                                                                                                                                                                                                                                                               |
| (22) | Litigation may  adversely affect profitability and financial condition;                                                                                                                                                                                                                                                                                                                                                                                 |
| (23) | Changes in  regulation in the United States and recent 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) | The occurrence of natural or man-made disasters may adversely affect  the Company’s results of operations and financial condition; and                                                                                                                                                                                                                                                                                                             |
| (27) | The occurrence  of unidentified or unanticipated risks could negatively affect the Company’s  business or result in losses.                                                                                                                                                                                                                                                                                                                        |

 

Investors are also directed to consider the risks anduncertainties discussed in this Item 2. and in Item 1A. of Part IIcontained herein, as well as in other documents filed by the Company with theSEC.  Except as may be required by thefederal securities laws, the Company disclaims any obligation to updateforward-looking information.

 

**Basis ofPresentation**

 

ING USA is a stock life insurance company domiciled inthe State of Iowa and provides financial products and services in the United States.  ING USA is authorized to conduct itsinsurance business in all states, except New York, and the District ofColumbia.

 

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

 

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Aspart of a restructuring plan approved by the European Commission (“EC”), INGhas agreed to separate its banking and insurance businesses by 2013.  ING intends to achieve this separation bydivestment of its insurance and investment management operations, including theCompany.  ING has announced that it willexplore all options for implementing the separation including one or moreinitial public offerings, sales, or a combination thereof.  On November 10, 2010, ING announcedthat while the option of one global initial public offering (“IPO”) remainsopen, ING and its U.S. insurance affiliates, including the Company, aregoing to prepare for a base case of two IPOs: one Europe-led IPO and oneseparate U.S.-focused IPO. ING also announced that Thomas J. McInerney willstep down from his positions as Chief Operating Officer Insurance of ING andmember of the ING Management Board Insurance and as Chairman of the Board ofDirectors of the Company, effective January 1, 2011.

 

On September 30,2010, ING USA purchased the remaining 30% interest in PFP Holdings LP (“PFP”),an affiliate, from ING Clarion, an affiliate, for $11.0.  The Company previously held a 70% equityinterest in PFP. Immediately upon acquisition, PFP was dissolved as ING USAowned  100% of the limitedpartnership.  This dissolution is treatedas a combination of entities under common conrol (i.e. the comparativefinancial statements should be restated and presented as if the transaction hadoccurred on the opening balance sheet date). This resulted in a reduction in total Shareholder’s equity of $3.2  and $2.8 at January 1, 2010 and 2009,respectively.

 

The Company has one operating segment.

 

**Critical Accounting Policies**

 

There have been nomaterial changes to the Company’s critical accounting policies since the filingof the Company’s 2009 Annual Report on Form 10-K, except as noted in theRecently Adopted Accounting Standards footnote.

 

**Results of Operations**

 

*Overview*

 

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

 

On April 9, 2009, ING USA’s ultimate parent, ING,announced a global business strategy which identified certain core and non-corebusinesses and geographies, stated ING’s intention to explore divestiture ofnon-core businesses over time, withdraw from certain non-core geographies,limit future acquisitions and implement enterprise-wide expensereductions.  In particular, with respectto ING’s U.S. insurance operations, ING is seeking to further reduce itsrisk by focusing on 

 

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individual life products, retirement services and anew suite of simpler, lower risk annuity products to be sold by ING USA’saffiliate, ING Life Insurance and Annuity Company.  As part of this strategy, ING USA ceasednew sales of variable annuity products in March of 2010. Some new amountswill continue to be deposited on ING USA variable annuities either as transfersrelated to applications that were in process prior to the product closures oras add-on premiums to existing contracts. On November 10, 2010, INGannounced that management of ING’s U.S. insurance operations is implementing aprogram to sharpen the strategic focus of the U.S. insurance business on lifeinsurance and retirement services while reducing annual expenses for overallU.S. Insurance operations by approximately $125.0 per year.  The objective of these initiatives is tocreate a stronger and more profitable U.S. insurance business in preparationfor a potential IPO.

 

The Company derives its revenue mainly from (a) feeincome generated on variable assets under management (“AUM”), (b) investmentincome earned on fixed AUM, and (c) certain other management fees.  Fee income is primarily generated from separateaccount assets supporting variable options under variable annuity contractinvestments, as designated by contractowners. Investment income from fixed AUM is mainly generated from annuityproducts with fixed investment options and GIC deposits.  The Company’s expenses primarily consist of (a) interestcredited and other benefits to contractowners, (b) amortization of DAC andvalue of business acquired (“VOBA”), (c) expenses related to the sellingand servicing of the various products offered by the Company, and (d) othergeneral business expenses.

 

*Economic Analysis*

 

The U.S. economic environment has shown someimprovement from the extreme volatility and disruption experienced throughout2009, after substantial government intervention.  However, a mostly sluggish economy haspersisted into 2010 and significant risks still remain for the United Statesand other world economies, such as certain sovereign credit risks and thethreat of contagion to the U.S. economy. These economic conditions are notunique to the Company, but present challenges to the entire insurance industry.

 

Equity markets improved for the nine months ended September 30,2010, which favorably impacted variable AUM and corresponding fee revenuerelated to variable annuity products.

 

Short-term London InterBank Offered Rates (“LIBOR”)and U.S. Treasury rates continued to show signs of recovery during the firstnine-months of 2010.  The long-term U.S.Treasury rates in the first three-quarters of 2010 decreased from the year-endof 2009, which had a positive effect on the fixed maturities portfolio andresulted in unrealized and realized capital gains.  The decline in U.S. Treasury rates is mainlydue to anticipation in the market that additional quantitative easing is likelyin the near future .

 

64

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*Resultsof Operations*

 

TheCompany’s results of operations for the three months ended September 30,2010, and changes therein, is primarily impacted by a favorable change in Netrealized capital gains (losses) partially offset by higher Interest credited andother benefits to contractowners, lower Premium income, an increase in Netamortization of DAC and VOBA, lower Net investment income and an unfavorablechange in Income tax benefit.

 
| ** **                                                                                         | ** ** | **Three Months Ended** | ** **    | ** ** | ** **          | ** ** | ** ** | ** **          |
|----------------------------------------------------------------------------------------------------|------------|----------------------------------|---------------|------------|---------------------|------------|------------|---------------------|
| ** **                                                                                         | ** ** | **September 30,**           | ** **    | ** ** | **$ Increase** | ** ** | ** ** | **% Increase** | ** ** |
| ** **                                                                                         | ** ** | **2010**                         | ** **    | ** ** | **2009**            | ** ** | ** ** | **(Decrease)**      | ** ** | ** ** | **(Decrease)** | ** ** |
| **Revenues:**                                                                                      |       |                             |          |       |                |       |       |                |   |   |   |   |
| Net investment income                                                                              |       |  $                          | 336.4         |       |                |  $    | 379.5      |                |   |  $ | (43.1 | ) |   | (11.4)% |   |
| Fee income                                                                                         |       | 263.4                            |          |       | 253.7               |       |       | 9.7                 |   |   | 3.8% |   |
| Premiums                                                                                           |       | 139.9                            |          |       | 370.2               |       |       | (230.3              | ) |   | (62.2)% |   |
| Net realized capital losses:                                                                       |       |                             |          |       |                |       |       |                |   |   |   |   |
| Total other-than-temporary impairment losses                                                       |       | (53.8                            | )             |       | (46.9               | )          |       | (6.9                | ) |   | (14.7)% |   |
| Portion of other-than-temporary impairment losses  recognized in Other comprehensive income (loss) |       | 27.8                             |          |       | 6.5                 |       |       | 21.3                |   |   | NM |   |
| Net other-than-temporary impairments recognized in  earnings                                       |       | (26.0                            | )             |       | (40.4               | )          |       | 14.4                |   |   | 35.6% |   |
| Other net realized capital losses                                                                  |       | (512.3                           | )             |       | (1,103.4            | )          |       | 591.1               |   |   | 53.6% |   |
| Total net realized capital losses                                                                  |       | (538.3                           | )             |       | (1,143.8            | )          |       | 605.5               |   |   | 52.9% |   |
| Other expense                                                                                      |       |                             | -   |       |                |       | (0.6       | )                   |   | 0.6 |   |   | 100.0% |   |
| Total revenue                                                                                      |       |                             | 201.4         |       |                |       | (141.0     | )                   |   |   | 342.4 |   |   | NM |   |
| **Benefits and expenses:**                                                                         |       |                             |          |       |                |       |       |                |   |   |   |   |
| Interest credited and other benefits to  contractowners                                            |       | 30.8                             |          |       | (127.6              | )          |       | 158.4               |   |   | 124.1% |   |
| Operating expenses                                                                                 |       | 109.7                            |          |       | 101.1               |       |       | 8.6                 |   |   | 8.5% |   |
| Net amortization of deferred policy acquisition costs  and value of business acquired              |       | (88.7                            | )             |       | (175.8              | )          |       | 87.1                |   |   | 49.5% |   |
| Interest expense                                                                                   |       | 8.0                              |          |       | 8.2                 |       |       | (0.2                | ) |   | (2.4)% |   |
| Other expense                                                                                      |       | 10.7                             |          |       | 10.8                |       |       | (0.1                | ) |   | (0.9)% |   |
| Total benefits and expenses                                                                        |       | 70.5                             |          |       | (183.3              | )          |       | 253.8               |   |   | NM |   |
| Income before income taxes                                                                         |       | 130.9                            |          |       | 42.3                |       |       | 88.6                |   |   | NM |   |
| Income tax benefit                                                                                 |       | (6.7                             | )             |       | (35.4               | )          |       | 28.7                |   |   | 81.1% |   |
| Net income                                                                                         |       |  $                          | 137.6         |       |                |  $    | 77.7       |                |   |  $ | 59.9 |   |   | 77.1% |   |
| Effective tax rate                                                                                 |       | (5.1)%                           |          |       | (83.7)%             |       |       |                |   |   |   |   |
|                                                                                                    |            |                                  |               |            |                     |            |            |                     |  |  |  |  |  |  |  |  |  |  |

NM - Not meaningful.

 

65

----

 

TheCompany’s results of operations for the nine months ended September 30,2010, and changes therein, is primarily impacted by a favorable change in Netrealized capital gains (losses) and higher Fee income partially offset byhigher Interest credited and other benefits to contractowners, an increase inNet amortization of DAC and VOBA, lower Premium income, higher Operatingexpenses, lower Net investment income and an unfavorable change in Income taxbenefit.

 
| ** **                                                                                         | ** ** | **Nine Months Ended** | ** **    | ** ** | ** **          | ** ** | ** ** | ** **          | ** ** |
|----------------------------------------------------------------------------------------------------|------------|---------------------------------|---------------|------------|---------------------|------------|------------|---------------------|------------|
| ** **                                                                                         | ** ** | **September 30,**          | ** **    | ** ** | **$ Increase** | ** ** | ** ** | **% Increase** | ** ** |
| ** **                                                                                         | ** ** | **2010**                        | ** **    | ** ** | **2009**            | ** ** | ** ** | **(Decrease)**      | ** ** | ** ** | **(Decrease)** | ** ** |
| **Revenues:**                                                                                      |       |                            |          |       |                |       |       |                |       |   |   |   |
| Net investment income                                                                              |       |  $                         | 1,002.5       |       |                |  $    | 1,086.9    |                |       |  $ | (84.4 | ) |   | (7.8)% |   |
| Fee income                                                                                         |       | 805.7                           |          |       | 680.6               |       |       | 125.1               |       |   | 18.4% |   |
| Premiums                                                                                           |       | 416.3                           |          |       | 626.5               |       |       | (210.2              | )          |   | (33.6)% |   |
| Net realized capital losses:                                                                       |       |                            |          |       |                |       |       |                |       |   |   |   |
| Total other-than-temporary impairment losses                                                       |       | (173.5                          | )             |       | (552.9              | )          |       | 379.4               |       |   | 68.6% |   |
| Portion of other-than-temporary impairment losses  recognized in Other comprehensive income (loss) |       | 84.3                            |          |       | 91.4                |       |       | (7.1                | )          |   | (7.8)% |   |
| Net other-than-temporary impairments recognized in  earnings                                       |       | (89.2                           | )             |       | (461.5              | )          |       | 372.3               |       |   | 80.7% |   |
| Other net realized capital losses                                                                  |       | (89.5                           | )             |       | (1,736.8            | )          |       | 1,647.3             |       |   | 94.8% |   |
| Total net realized capital losses                                                                  |       | (178.7                          | )             |       | (2,198.3            | )          |       | 2,019.6             |       |   | 91.9% |   |
| Other income                                                                                       |       |                            | -   |       |                |       | 0.7        |                |       | (0.7 | ) |   | (100.0)% |   |
| Total revenue                                                                                      |       |                            | 2,045.8       |       |                |       | 196.4      |                |       |   | 1,849.4 |   |   | 941.6% |   |
| **Benefits and expenses:**                                                                         |       |                            |          |       |                |       |       |                |       |   |   |   |
| Interest credited and other benefits to  contractowners                                            |       | 1,512.0                         |          |       | 487.1               |       |       | 1,024.9             |       |   | 210.4% |   |
| Operating expenses                                                                                 |       | 315.5                           |          |       | 281.1               |       |       | 34.4                |       |   | 12.2% |   |
| Net amortization of deferred policy acquisition costs  and value of business acquired              |       | 132.9                           |          |       | (345.4              | )          |       | 478.3               |       |   | 138.5% |   |
| Interest expense                                                                                   |       | 24.0                            |          |       | 24.6                |       |       | (0.6                | )          |   | (2.4)% |   |
| Other expense                                                                                      |       | 31.6                            |          |       | 35.1                |       |       | (3.5                | )          |   | (10.0)% |   |
| Total benefits and expenses                                                                        |       | 2,016.0                         |          |       | 482.5               |       |       | 1,533.5             |       |   | 317.8% |   |
| Income (loss) before income taxes                                                                  |       | 29.8                            |          |       | (286.1              | )          |       | 315.9               |       |   | 110.4% |   |
| Income tax benefit                                                                                 |       | (62.8                           | )             |       | (126.3              | )          |       | 63.5                |       |   | 50.3% |   |
| Net income (loss)                                                                                  |       |  $                         | 92.6          |       |                |  $    | (159.8     | )                   |       |  $ | 252.4 |   |   | 157.9% |   |
| Effective tax rate                                                                                 |       | (210.7)%                        |          |       | 44.1%               |       |       |                |       |   |   |   |
|                                                                                                    |            |                                 |               |            |                     |            |            |                     |            |  |  |  |  |  |  |  |  |  |

NM - Not meaningful.

 

*Revenues*

 

*Total revenue*increased for the three and nine months ended September 30, 2010,primarily reflecting a favorable change in Net realized capital losses andhigher Fee income partially offset by lower Net investment income and lowerPremium income.

 

The decrease in *Total net realized capital losses* for the three and ninemonths ended September 30, 2010 is primarily due to a favorable change onderivatives related to 1) hedging of variable annuity guaranteed death benefits,2) a loss in the first nine months of 2009 related to a hedging programdesigned to mitigate the impact of 

 

66

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potential declines inequity markets and their impact on regulatory capital, and 3) hedging ofvariable annuity guaranteed living benefits (“VAGLB”) ceded to SLDI under thecombined coinsurance and coinsurance funds withheld agreement which commencedin the third quarter of 2009. However, the hedge losses on the VAGLB for thethree and nine months ended September 30, 2010 are ceded to SLDI andreported as a corresponding increase in Interest credited and other benefits topolicyholders. Lower credit and intent related impairments on fixed maturities,primarily due to the improved economic and interest rate environment, alsocontributed to the rise in Net realized capital gains. In addition, the Companyexperienced gains on currency swaps and forwards related to the strengtheningof the US Dollar in 2010, and gains on options in a long position, which areused to hedge risks associated with fixed indexed annuities. These favorableitems were partially offset by futures in a short position as their fair valuedecreased in the third quarter of 2010 due to improved equity markets.

 

Thedecrease in *Net investment income*forthe three and nine months ended September 30, 2010 is mainly due to theCompany’s higher average level of investments in U.S. Treasuries in the currentyear compared to higher yielding assets. These lower returns were partiallyoffset by favorable returns on equity investments in limited partnerships andlower investment management fees charged by the Company’s affiliate, INGInvestment Management, LLC, for management of the Company’s general accountassets.

 

The increase in *Fee income* for the three and nine months ended September 30,2010 reflects an increase in average variable AUM, primarily driven by the risein average equity market levels.

 

*Premiums* forthe three and nine months ended September 30, 2010 decreased due to asmaller block of group annual term business assumed by the Company fromReliaStar Life Insurance Company (“RLI”), an affiliate, under the bulkreinsurance agreements in 2009 and the termination of the U.S. GroupReinsurance agreement due to the sale of the business via reinsurance agreementto Reinsurance Group of America, effective January 1, 2010.

 

*Benefitsand Expenses*

 

*Total benefits and expenses*increased for the three and nine months ended September 30, 2010 primarilydue to an increase in Interest credited and other benefits to contractowners,higher Net amortization of DAC and VOBA and higher Operating expenses.

 

The increase in *Interest credited and other benefits to**contractowners*for the three and nine months ended September 30, 2010 reflects thetransfer of gains (losses) on futures and investment income under the combinedcoinsurance and coinsurance funds withheld agreement with SLDI. Thecorresponding losses and investment income are reported in Total net realizedcapital gains and Net investment income. In addition, interest credited andother benefits to contractowners reflects a unfavorable change in variableannuity guaranteed benefit reserves which was primarily driven by 

 

67

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the variance in equity marketsduring 2010.  Furthermore, declining U.S.Treasury rates increased the value of assets held in trust under the combinedcoinsurance and coinsurance funds withheld agreement with SLDI, which in turn,increased the value of the embedded derivative liability and contributed to theincrease in interest credited and other benefits to contractowners.

 

The*Net amortization of DAC and VOBA*increased for the three and nine months ended September 30, 2010 driven byhigher actual gross profits mainly resulting from realized capital gains.

 

*Operatingexpenses* for thethree and nine months ended September 30, 2010 increased reflecting highercommission expense in the current year. These commissions were deferred at alower percentage due to the decrease in sales of variable annuityproducts.  Operating expenses for thethree and nine months ended September 30, 2010 also include $4.7 relatedto employee severance and termination benefits incurred in connection with itsexpense reduction initiative.

 

*IncomeTaxes*

 

Theunfavorable change in *income tax benefit*for the three and nine months ended September 30, 2010 is primarily due toan increase in income before tax and an increase in the tax valuation allowancerelated to realized capital loses, partially offset by a favorable auditsettlement and a higher level of dividends received deduction.

 

**Financial Condition**

 

***Investments***

 

*Investment Strategy*

 

The Company’s investment strategy focuses ondiversification by asset class.  TheCompany seeks to achieve economic diversification, while reducing overallcredit risk and liquidity risks.  Inaddition, the Company seeks to mitigate the impact of cash flow variabilityfrom embedded options within certain investment products, such as prepaymentoptions and interest rate options embedded in collateralized mortgageobligations and call options embedded in corporate bonds. The investmentmanagement function is centralized under ING Investment Management LLC, anaffiliate, pursuant to an investment advisory agreement.  Separate portfolios are established forgroups of products with similar liability characteristics within the Company.

 

68

----

 

*Portfolio Composition*

 

The following tables present the investment portfolioat September 30, 2010 and December 31, 2009.

 
| ** **                                                          | ** ** | **2010**     | ** ** | **2009**  | ** ** |
|---------------------------------------------------------------------|------------|--------------|------------|-----------|------------|
| ** **                                                          | ** ** | **Carrying** | ** ** | **%  of** | ** ** | **Carrying** | ** ** | **%  of** | ** ** |
| ** **                                                          | ** ** | **Value**    | ** ** | **Total** | ** ** | **Value** | ** ** | **Total** | ** ** |
| Fixed maturities, available-for-sale, including  securities pledged |       |  $      | 22,652.2   |      | 78.5%      |   |  $ | 18,249.0 |   | 71.3% |   |
| Equity securities, available-for-sale                               |       | 148.3        |       | 0.5%      |       | 154.3 |   | 0.6% |   |
| Short-term investments                                              |       | 1,503.9      |       | 5.2%      |       | 2,044.0 |   | 8.0% |   |
| Mortgage loans on real estate                                       |       | 3,006.1      |       | 10.4%     |       | 3,413.2 |   | 13.4% |   |
| Policy loans                                                        |       | 124.0        |       | 0.4%      |       | 131.6 |   | 0.5% |   |
| Loan - Dutch State obligation                                       |       | 882.0        |       | 3.1%      |       | 1,026.0 |   | 4.0% |   |
| Limited partnerships/corporations                                   |       | 272.0        |       | 1.0%      |       | 252.6 |   | 1.0% |   |
| Derivatives                                                         |       | 257.3        |       | 0.9%      |       | 317.4 |   | 1.2% |   |
| Other investments                                                   |       | 1.6          |       | 0.0%      |       | 3.5 |   | 0.0% |   |
| Total investments                                                   |       |  $      | 28,847.4   |      | 100.0%     |   |  $ | 25,591.6 |   | 100.0% |   |

 

69

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*Fixed Maturities*

 

Fixed maturities, available-for-sale, were as followsas of September 30, 2010.

 
| ** **                                            | ** ** | ** **    | ** ** | **Gross**      | ** ** | **Gross**      | ** ** | ** **      |          |       |       |
|-------------------------------------------------------|------------|---------------|------------|----------------|------------|----------------|------------|-----------------|---------------|------------|------------|
| ** **                                            | ** ** | ** **    | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | ** **      | ** **    | ** ** | ** ** |
| ** **                                            | ** ** | **Amortized** | ** ** | **Capital**    | ** ** | **Capital**    | ** ** | ** **      | ** **    | **Fair**   | ** ** |
| ** **                                            | ** ** | **Cost**      | ** ** | **Gains**      | ** ** | **Losses**     | ** ** | **OTTI****(2)** | ** **    | **Value**  | ** ** |
| Fixed  maturities:                                    | ** ** | ** **    | ** ** | ** **     | ** ** | ** **     | ** ** | ** **      | ** **    | ** ** | ** ** |
| U.S.  Treasuries                                      |       |  $       | 1,620.5    |           |  $    | 138.3          |       |  $         | -   |       |  $    | -   |   |  $ | 1,758.8 |   |
| U.S.  government agencies and authorities             |       | 44.3          |       | 4.2            |       | -    |       | -     |          | 48.5       |       |
| State,  municipalities, and political subdivisions    |       | 126.5         |       | 7.8            |       | 5.4            |       | -     |          | 128.9      |       |
|                                                  |       |          |       |           |       |           |       |            |          |       |       |
| U.S.  corporate securities:                           |       |          |       |           |       |           |       |            |          |       |       |
| Public  utilities                                     |       | 1,489.5       |       | 125.7          |       | 1.7            |       | -     |          | 1,613.5    |       |
| Other  corporate securities                           |       | 7,558.7       |       | 526.0          |       | 23.1           |       | 0.3             |          | 8,061.3    |       |
| Total  U.S. corporate securities                      |       | 9,048.2       |       | 651.7          |       | 24.8           |       | 0.3             |          | 9,674.8    |       |
|                                                  |       |          |       |           |       |           |       |            |          |       |       |
| Foreign  securities(1):                               |       |          |       |           |       |           |       |            |          |       |       |
| Government                                            |       | 432.5         |       | 56.6           |       | 2.2            |       | -     |          | 486.9      |       |
| Other                                                 |       | 4,158.7       |       | 295.0          |       | 34.1           |       | 0.1             |          | 4,419.5    |       |
| Total  foreign securities                             |       | 4,591.2       |       | 351.6          |       | 36.3           |       | 0.1             |          | 4,906.4    |       |
|                                                  |       |          |       |           |       |           |       |            |          |       |       |
| Residential  mortgage-backed securities               |       | 2,008.0       |       | 257.0          |       | 53.4           |       | 76.4            |          | 2,135.2    |       |
| Commercial  mortgage-backed securities                |       | 2,490.0       |       | 146.0          |       | 106.9          |       | 10.4            |          | 2,518.7    |       |
| Other  asset-backed securities                        |       | 1,700.2       |       | 21.1           |       | 173.4          |       | 67.0            |          | 1,480.9    |       |
|                                                  |       |          |       |           |       |           |       |            |          |       |       |
| Total  fixed maturities, including securities pledged |       | 21,628.9      |       | 1,577.7        |       | 400.2          |       | 154.2           |          | 22,652.2   |       |
| Less:  securities pledged                             |       | 696.0         |       | 66.7           |       | 0.4            |       | -     |          | 762.3      |       |
| Total  fixed maturities                               |       |  $       | 20,932.9   |           |  $    | 1,511.0        |       |  $         | 399.8         |       |  $    | 154.2 |   |  $ | 21,889.9 |   |

(1) Primarily U.S. dollar denominated.

(2) Represents other-than-temporary impairmentsreported as a component of Other comprehensive income (“noncreditimpairments”).

 

70

----

 

Fixed maturities, available-for-sale, were as followsas of December 31, 2009.

 
| ** **                                            | ** ** | ** **    | ** ** | **Gross**      | ** ** | **Gross**      | ** ** | ** **      |       |       |       |
|-------------------------------------------------------|------------|---------------|------------|----------------|------------|----------------|------------|-----------------|------------|------------|------------|
| ** **                                            | ** ** | ** **    | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | ** **      | ** ** | ** ** | ** ** |
| ** **                                            | ** ** | **Amortized** | ** ** | **Capital**    | ** ** | **Capital**    | ** ** | ** **      | ** ** | **Fair**   | ** ** |
| ** **                                            | ** ** | **Cost**      | ** ** | **Gains**      | ** ** | **Losses**     | ** ** | **OTTI****(2)** | ** ** | **Value**  | ** ** |
| Fixed  maturities:                                    | ** ** | ** **    | ** ** | ** **     | ** ** | ** **     | ** ** | ** **      | ** ** | ** ** | ** ** |
| U.S.  Treasuries                                      |       |  $       | 4,201.0    |           |  $    | 2.5            |       |  $         | 80.0       |       |  $    | -   |   |  $ | 4,123.5 |   |
| U.S.  government agencies and authorities             |       | 26.1          |       | 0.1            |       | 1.6            |       | -     |       | 24.6       |       |
| State,  municipalities, and political subdivisions    |       | 47.8          |       | 2.2            |       | 5.2            |       | -     |       | 44.8       |       |
|                                                  |       |          |       |           |       |           |       |            |       |       |       |
| U.S.  corporate securities:                           |       |          |       |           |       |           |       |            |       |       |       |
| Public  utilities                                     |       | 997.4         |       | 57.5           |       | 6.9            |       | -     |       | 1,048.0    |       |
| Other  corporate securities                           |       | 4,290.8       |       | 247.8          |       | 71.8           |       | 0.4             |       | 4,466.4    |       |
| Total  U.S. corporate securities                      |       | 5,288.2       |       | 305.3          |       | 78.7           |       | 0.4             |       | 5,514.4    |       |
|                                                  |       |          |       |           |       |           |       |            |       |       |       |
| Foreign  securities(1):                               |       |          |       |           |       |           |       |            |       |       |       |
| Government                                            |       | 369.8         |       | 23.8           |       | 8.3            |       | -     |       | 385.3      |       |
| Other                                                 |       | 2,880.8       |       | 131.7          |       | 78.5           |       | 0.4             |       | 2,933.6    |       |
| Total  foreign securities                             |       | 3,250.6       |       | 155.5          |       | 86.8           |       | 0.4             |       | 3,318.9    |       |
|                                                  |       |          |       |           |       |           |       |            |       |       |       |
| Residential  mortgage-backed securities               |       | 1,758.9       |       | 210.7          |       | 150.7          |       | 70.9            |       | 1,748.0    |       |
| Commercial  mortgage-backed securities                |       | 3,012.5       |       | 25.3           |       | 448.2          |       | -     |       | 2,589.6    |       |
| Other  asset-backed securities                        |       | 1,218.6       |       | 11.8           |       | 316.8          |       | 28.4            |       | 885.2      |       |
|                                                  |       |          |       |           |       |           |       |            |       |       |       |
| Total  fixed maturities, including securities pledged |       | 18,803.7      |       | 713.4          |       | 1,168.0        |       | 100.1           |       | 18,249.0   |       |
| Less:  securities pledged                             |       | 1,079.4       |       | 35.3           |       | 22.2           |       | -     |       | 1,092.5    |       |
| Total  fixed maturities                               |       |  $       | 17,724.3   |           |  $    | 678.1          |       |  $         | 1,145.8    |       |  $    | 100.1 |   |  $ | 17,156.5 |   |

 

(1) Primarily U.S. dollar denominated.

(2) Represents other-than-temporaryimpairments reported as a component of Other comprehensive income (“noncreditimpairments”).

 

It is management’s objective that the portfolio offixed maturities be of high quality and be well diversified by marketsector.  The fixed maturities in theCompany’s portfolio are generally rated by external rating agencies and, if notexternally rated, are rated by the Company on a basis believed to be similar tothat used by the rating agencies.  At September 30,2010 and December 31, 2009, the average quality rating of the Company’sfixed maturities portfolio was A and AA-, respectively.  Ratings are calculated using a ratinghierarchy that considers Standard and Poor’s (“S&P”), Moody’s InvestorsService, Inc. (“Moody’s”), and internal ratings.

 

71

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Total fixed maturities by quality rating category,including securities pledged to creditors, were as follows at September 30,2010 and December 31, 2009.

 
| ** **   | ** ** | **2010**  | ** ** |
|--------------|------------|-----------|------------|
| ** **   | ** ** | **Fair**  | ** ** | **%  of** | ** ** | **Amortized** | ** ** | **%  of** | ** ** |
| ** **   | ** ** | **Value** | ** ** | **Total** | ** ** | **Cost** | ** ** | **Total** | ** ** |
| AAA          |       |  $   | 5,931.0    |   | 26.2% |   |  $ | 5,499.9 |   | 25.4% |   |
| AA           |       | 2,087.0   |       | 9.2% |   | 2,055.9 |   | 9.5% |   |
| A            |       | 6,034.4   |       | 26.6% |   | 5,667.5 |   | 26.2% |   |
| BBB          |       | 6,970.3   |       | 30.8% |   | 6,566.5 |   | 30.4% |   |
| BB           |       | 851.3     |       | 3.8% |   | 868.8 |   | 4.0% |   |
| B and  below |       | 778.2     |       | 3.4% |   | 970.3 |   | 4.5% |   |
| Total        |       |  $   | 22,652.2   |   | 100.0% |   |  $ | 21,628.9 |   | 100.0% |   |

 
| ** **   | ** ** | **2009**  | ** ** |
|--------------|------------|-----------|------------|
| ** **   | ** ** | **Fair**  | ** ** | **%  of** | ** ** | **Amortized** | ** ** | **%  of** | ** ** |
| ** **   | ** ** | **Value** | ** ** | **Total** | ** ** | **Cost** | ** ** | **Total** | ** ** |
| AAA          |       |  $   | 7,577.0    |   | 41.5% |   |  $ | 7,658.8 |   | 40.7% |   |
| AA           |       | 896.7     |       | 4.9% |   | 1,028.9 |   | 5.5% |   |
| A            |       | 3,440.2   |       | 18.9% |   | 3,465.0 |   | 18.4% |   |
| BBB          |       | 5,029.9   |       | 27.6% |   | 4,992.4 |   | 26.6% |   |
| BB           |       | 720.8     |       | 3.9% |   | 861.4 |   | 4.6% |   |
| B and  below |       | 584.4     |       | 3.2% |   | 797.2 |   | 4.2% |   |
| Total        |       |  $   | 18,249.0   |   | 100.0% |   |  $ | 18,803.7 |   | 100.0% |   |

 

92.8% and 92.9% of the fixed maturities were investedin securities rated BBB and above (Investment Grade) at September 30, 2010 andDecember 31, 2009, respectively.

 

Fixed maturities rated BB and below (Below InvestmentGrade) may have speculative characteristics, and changes in economic conditionsor other circumstances are more likely to lead to a weakened capacity of theissuer to make principal and interest payments than is the case with higherrated fixed maturities.

 

Total fixed maturities, by market sector, includingsecurities pledged to creditors, were as follows at September 30, 2010 andDecember 31, 2009.

 
| ** **                                 | ** ** | **2010**  | ** **     |
|--------------------------------------------|------------|-----------|----------------|
| ** **                                 | ** ** | **Fair**  | ** **     | **%  of** | ** ** | **Amortized** | ** ** | **%  of** | ** ** |
| ** **                                 | ** ** | **Value** | ** **     | **Total** | ** ** | **Cost** | ** ** | **Total** | ** ** |
| U.S. Treasuries                            |       |  $   |  1,758.8  |   | 7.8% |   |  $ |  1,620.5 |   | 7.5% |   |
| U.S. government agencies  and authorities  |       | 48.5      |           | 0.2% |   | 44.3 |   | 0.2% |   |
| U.S. corporate, state,  and municipalities |       | 9,803.7   |           | 43.3% |   | 9,174.7 |   | 42.4% |   |
| Foreign                                    |       | 4,906.4   |           | 21.7% |   | 4,591.2 |   | 21.2% |   |
| Residential  mortgage-backed               |       | 2,135.2   |           | 9.4% |   | 2,008.0 |   | 9.3% |   |
| Commercial  mortgage-backed                |       | 2,518.7   |           | 11.1% |   | 2,490.0 |   | 11.5% |   |
| Other asset-backed                         |       | 1,480.9   |           | 6.5% |   | 1,700.2 |   | 7.9% |   |
| Total                                      |       |  $   |  22,652.2 |   | 100.0% |   |  $ |  21,628.9 |   | 100.0% |   |

 

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| ** **                                 | ** ** | **2009**  | ** ** |
|--------------------------------------------|------------|-----------|------------|
| ** **                                 | ** ** | **Fair**  | ** ** | **%  of** | ** ** | **Amortized** | ** ** | **%  of** | ** ** |
| ** **                                 | ** ** | **Value** | ** ** | **Total** | ** ** | **Cost** | ** ** | **Total** | ** ** |
| U.S. Treasuries                            |       |  $   | 4,123.5    |   | 22.6% |   |  $ | 4,201.0 |   | 22.3% |   |
| U.S. government  agencies and authorities  |       | 24.6      |       | 0.1% |   | 26.1 |   | 0.1% |   |
| U.S. corporate, state,  and municipalities |       | 5,559.2   |       | 30.5% |   | 5,336.0 |   | 28.4% |   |
| Foreign                                    |       | 3,318.9   |       | 18.2% |   | 3,250.6 |   | 17.3% |   |
| Residential  mortgage-backed               |       | 1,748.0   |       | 9.6% |   | 1,758.9 |   | 9.4% |   |
| Commercial  mortgage-backed                |       | 2,589.6   |       | 14.2% |   | 3,012.5 |   | 16.0% |   |
| Other asset-backed                         |       | 885.2     |       | 4.8% |   | 1,218.6 |   | 6.5% |   |
| Total                                      |       |  $   | 18,249.0   |   | 100.0% |   |  $ | 18,803.7 |   | 100.0% |   |
|                                            |            |           |            |  |  |  |  |  |  |  |  |  |

 

The amortized cost and fair value of fixed maturities,excluding securities pledged, as of September 30, 2010, are shown below bycontractual maturity.  Actual maturitiesmay differ from contractual maturities as securities may be restructured,called, or prepaid.

 
| ** **                                      | ** ** | **Amortized** | ** **  | **Fair**  | ** ** |
|-------------------------------------------------|------------|---------------|-------------|-----------|------------|
| ** **                                      | ** ** | **Cost**      | ** **  | **Value** | ** ** |
| Due to mature:                                  |       |          |        |      |       |
| One  year or less                               |       |  $       |  560.1 |      |  $    |  573.9 |   |
| After  one year through five years              |       | 6,006.7       |        | 6,304.9   |       |
| After  five years through ten years             |       | 4,571.1       |        | 4,947.7   |       |
| After  ten years                                |       | 4,292.8       |        | 4,690.9   |       |
| Mortgage-backed  securities                     |       | 4,498.0       |        | 4,653.9   |       |
| Other  asset-backed securities                  |       | 1,700.2       |        | 1,480.9   |       |
| Less:  securities pledged                       |       | 696.0         |        | 762.3     |       |
| Fixed maturities,  excluding securities pledged |       |  $       | 20,932.9    |      |  $    |  21,889.9 |   |

 

*Subprime and Alt-A Mortgage Exposure*

 

Creditmarkets have experienced extreme volatility and disruption since concerns aboutsubprime and Alt-A mortgages and collateralized debt obligations (“CDOs”)surfaced in late 2007.  This resulted ina general widening of credit spreads, reduced price transparency, reducedliquidity, increased rating agency downgrades and increased volatility acrosscertain markets. Although these asset classes experienced a rebound in 2009 andmarket activity increased for non-agency mortgage-backed securities,challenging conditions largely remain in 2010 for subprime mortgage-backedsecurities.

 

TheCompany does not originate or purchase subprime or Alt-A whole-loanmortgages.  The Company does haveexposure to Residential Mortgage-backed Securities (“RMBS”) and Asset-backedSecurities (“ABS”).  Subprime lending isthe origination of loans to customers with weaker credit profiles.  The Company defines Alt-A Loans to includethe following: residential mortgage loans to customers who have strong creditprofiles but lack some element(s), such as documentation to substantiateincome; residential mortgage loans to borrowers that would otherwise be 

 

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classifiedas prime but whose loan structure provides repayment options to the borrowerthat increase the risk of default; and any securities backed by residentialmortgage collateral not clearly identifiable as prime or subprime.

 

Asmarket activity increased for Alt-A mortgaged-backed securities, the Companyconcluded that pricing information received from commercial pricing servicesand brokers, represented regularly occurring market transactions during thesecond half of 2009. The Company continues to maintain that the market forsubprime mortgage-backed securities remains largely inactive and that pricinginformation does not represent regularly occurring market transactions.

 

Thefollowing summarizes the Company’s exposure to subprime and Alt-A mortgages asof September 30, 2010 and December 31, 2009.

 

TheCompany’s exposure to subprime mortgages was primarily in the form of ABSstructures collateralized by subprime residential mortgages, and the majorityof these holdings were included in other asset-backed securities in the fixedmaturities by market sector table above. As of September 30, 2010, the fair value and gross unrealized lossesrelated to the Company’s exposure to subprime mortgages were $457.1 and $214.6,respectively, representing 2.1% of total fixed maturities.  As of December 31, 2009, the fair valueand gross unrealized losses related to the Company’s exposure to subprimemortgages were $429.2 and $304.3, respectively, representing 2.7% of totalfixed maturities.

 

Thefollowing tables summarize the Company’s exposure to subprime mortgage-backedholdings by credit quality and vintage year as of September 30, 2010 andDecember 31, 2009:

 
| **2010**            | ** ** | **2009**    | ** ** |
|---------------------|------------|-------------|------------|
| **%  of Total**     | ** ** | ** **  | ** ** | **% of Total** | ** ** | ** ** | ** ** |
| **Subprime**        | ** ** | ** **  | ** ** | **Subprime** | ** ** | ** ** | ** ** |
| **Mortgage-backed** | ** ** | ** **  | ** ** | **Mortgage-backed** | ** ** | ** ** | ** ** |
| **Securities**      | ** ** | **Vintage** | ** ** | **Securities** | ** ** | **Vintage** | ** ** |
| AAA                 |       | 26.0%       |       | 2007 |   | 39.3% |   | AAA |   | 33.7% |   | 2007 |   | 38.7% |   |
| AA                  |       | 20.1%       |       | 2006 |   | 6.9% |   | AA |   | 20.7% |   | 2006 |   | 7.2% |   |
| A                   |       | 8.1%        |       | 2005 and prior |   | 53.8% |   | A |   | 6.9% |   | 2005 and prior |   | 54.1% |   |
| BBB                 |       | 8.8%        |       |   |   | 100.0% |   | BBB |   | 8.3% |   |   |   | 100.0% |   |
| BB  and below       |       | 37.0%       |       |   |   |   |   | BB and below |   | 30.4% |   |   |   |   |   |
|                |       | 100.0%      |       |   |   |   |   |   |   | 100.0% |   |   |   |   |   |

 

TheCompany’s exposure to Alt-A mortgages was included in residentialmortgage-backed securities in the fixed maturities by market sector tableabove.  As of September 30, 2010, thefair value and gross unrealized losses aggregated to $163.0 and $61.1,respectively, representing 0.8% of total fixed maturities. As ofDecember 31, 2009, the fair value and gross unrealized losses related tothe Company’s exposure to Alt-A mortgages were $156.5 and $94.0, respectively,representing 1.0% of total fixed maturities.

 

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Thefollowing tables summarize the Company’s exposure to Alt-A mortgage-backedholdings by credit quality and vintage year as of September 30, 2010 andDecember 31, 2009:

 
| **2010**            | ** ** | **2009**    | ** ** |
|---------------------|------------|-------------|------------|
| **%  of Total**     | ** ** | ** **  | ** ** | **%  of Total** | ** ** | ** ** | ** ** |
| **Alt-A**           | ** ** | ** **  | ** ** | **Alt-A** | ** ** | ** ** | ** ** |
| **Mortgage-backed** | ** ** | ** **  | ** ** | **Mortgage-backed** | ** ** | ** ** | ** ** |
| **Securities**      | ** ** | **Vintage** | ** ** | **Securities** | ** ** | **Vintage** | ** ** |
| AAA                 |       | 19.9%       |       | 2007 |   | 30.4% |   | AAA |   | 27.9% |   | 2007 |   | 30.4% |   |
| AA                  |       | 1.5%        |       | 2006 |   | 19.8% |   | AA |   | 1.8% |   | 2006 |   | 20.1% |   |
| A                   |       | 0.0%        |       | 2005 and prior |   | 49.8% |   | A |   | 0.8% |   | 2005 and prior |   | 49.5% |   |
| BBB                 |       | 1.0%        |       |   |   | 100.0% |   | BBB |   | 6.9% |   |   |   | 100.0% |   |
| BB and below        |       | 77.6%       |       |   |   |   |   | BB and below |   | 62.6% |   |   |   |   |   |
|                |       | 100.0%      |       |   |   |   |   |   |   | 100.0% |   |   |   |   |   |

 

*Commercial Mortgage-backed and OtherAsset-backed Securities*

 

After a long period of stability, delinquency rates oncommercial mortgages have increased sharply in recent months, as rent levels,vacancies and property values have exhibited weakness.  For consumer asset backed securities, delinquencyrates in recent months have shown signs of improvement.  However, there are renewed concerns withconsumer loans as a result of the current economic environment, as unemploymenthas remained at elevated levels and headwinds from slower global growth appearmore likely.

 

As of September 30, 2010 and December 31, 2009, thefair value of the Company’s commercial mortgage-backed securities (“CMBS”)totaled $2.5 billion and $2.6 billion, respectively, and other ABS, excludingsubprime exposure, totaled $1.0 billion and $461.3, respectively. CMBSinvestments represent pools of commercial mortgages that are broadlydiversified across property types and geographical areas.

 

As of September 30, 2010, the other ABS was alsobroadly diversified both by type and issuer with credit card receivables, collateralizedloan obligations and automobile receivables, comprising 47.2%, 16.8%, and22.0%, respectively, of total other ABS, excluding subprime exposure.  As of December 31, 2009, the other ABS wasalso broadly diversified both by type and issuer with credit card receivables,collateralized loan obligations and automobile receivables comprising 35.0%,44.7%, and 5.9%, respectively, of total other ABS, excluding subprime exposure.

 

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The following tables summarize the Company’s exposure toCMBS holdings by credit quality and vintage year as of September 30, 2010 andDecember 31, 2009:

 
| **2010**            | ** ** | **2009**    | ** ** |
|---------------------|------------|-------------|------------|
| **% of Total CMBS** | ** ** | **Vintage** | ** ** | **%  of Total CMBS** | ** ** | **Vintage** | ** ** |
| AAA                 |       | 49.0%       |       | 2008 |   | 0.4% |   | AAA |   | 66.8% |   | 2008 |   | 0.5% |   |
| AA                  |       | 14.8%       |       | 2007 |   | 27.9% |   | AA |   | 9.6% |   | 2007 |   | 26.2% |   |
| A                   |       | 18.5%       |       | 2006 |   | 31.0% |   | A |   | 14.2% |   | 2006 |   | 29.9% |   |
| BBB                 |       | 12.4%       |       | 2005 and prior |   | 40.7% |   | BBB |   | 6.4% |   | 2005 and prior |   | 43.4% |   |
| BB and below        |       | 5.3%        |       |   |   | 100.0% |   | BB and below |   | 3.0% |   |   |   | 100.0% |   |
|                |       | 100.0%      |       |   |   |   |   |   |   | 100.0% |   |   |   |   |   |

 

Thefollowing tables summarize the Company’s exposure to other ABS holdings,excluding subprime exposure, by credit quality and vintage year as of September30, 2010 and December 31, 2009:

 
| **2010**                 | ** ** | **2009**    | ** ** |
|--------------------------|------------|-------------|------------|
| **% of Total other ABS** | ** ** | **Vintage** | ** ** | **%  of Total other ABS** | ** ** | **Vintage** | ** ** |
| AAA                      |       | 74.7%       |       | 2010 |   | 10.2% |   | AAA |   | 32.9% |   | 2008 |   | 0.0% |   |
| AA                       |       | 11.9%       |       | 2009 |   | 16.9% |   | AA |   | 21.3% |   | 2007 |   | 9.7% |   |
| A                        |       | 2.2%        |       | 2008 |   | 7.5% |   | A |   | 16.6% |   | 2006 |   | 36.5% |   |
| BBB                      |       | 7.3%        |       | 2007 |   | 19.1% |   | BBB |   | 24.7% |   | 2005 and prior |   | 53.8% |   |
| BB and below             |       | 3.9%        |       | 2006 |   | 18.3% |   | BB and below |   | 4.5% |   |   |   | 100.0% |   |
|                     |       | 100.0%      |       | 2005 and prior |   | 28.0% |   |   |   | 100.0% |   |   |   |   |   |
|                     |       |        |       |   |   | 100.0% |   |   |   |   |   |   |   |   |   |

 

*Mortgage Loans on Real Estate*

 

The Company’s mortgage loans on real estate are allcommercial mortgage loans, which totaled $3.0 billion and $3.4 billion as ofSeptember 30, 2010 and December 31, 2009, respectively.  These loans are reported at amortized cost,less impairment write-downs and allowance for losses.

 

All mortgage loans are evaluated by seasonedunderwriters, including an appraisal of loan-specific credit quality, propertycharacteristics, and market trends, and assigned a quality rating using theCompany’s internally developed quality rating system. Loan performance iscontinuously monitored on a loan-specific basis through the review of borrowersubmitted appraisals, operating statements, rent revenues and annual inspectionreports, among other items.  This reviewensures properties are performing at a consistent and acceptable level tosecure the debt.

 

All commercial mortgages are rated for the purpose ofquantifying the level of risk.  Thoseloans with higher risk are placed on a watch list and are closely monitored forcollateral deficiency or other credit events that may lead to a potential lossof principal or interest.  If the valueof any mortgage loan is determined to be impaired (i.e., when it is probablethat the Company will be unable to collect on all amounts due according to thecontractual terms of the loan agreement), the carrying value of the mortgageloan is reduced to either the present value of expected cash flows from 

 

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the loan, discounted at the loan’s effective interestrate, or fair value of the collateral. Impairments taken on the mortgage loan portfolio were $5.6 and $6.1 forthe three and nine months ended September 30, 2010, respectively.  Impairments taken on the mortgage portfoliowere $13.8 and $14.3 for the three and nine months ended September 30, 2009,respectively.  For those mortgages thatare determined to require foreclosure, the carrying value is reduced to thefair value of the underlying collateral, net of estimated costs to obtain andsell at the point of foreclosure.  Onemortgage loan in the Company’s portfolio was in arrears with respect toprincipal and interest at September 30, 2010 and none on September 30,2009.  Due to challenges that the economypresents to the commercial mortgage market, effective with the third quarter of2009, the Company recorded an allowance for probable incurred, but notspecifically identified, losses related to factors inherent in the lendingprocess.  At September 30, 2010 andDecember 31, 2009, the Company had a $3.3 and $4.1 allowance for mortgage loancredit losses, respectively.

 

Loan-to-value (“LTV”) and debt service coverage (“DSC”)ratios are measures commonly used to assess the risk and quality of commercialmortgage loans.  The LTV ratio,calculated at time of origination, is expressed as a percentage of the amountof the loan relative to the value of the underlying property.  The DSC ratio, based upon the most recentlyreceived financial statements, is expressed as a percentage of the amount of aproperty’s net income to its debt service payments.  These ratios are utilized as part of thereview process described above.  LTV andDSC ratios as of September 30, 2010 and December 31, 2009, are as follows:

 
| ** **                       | ** ** | **2010****(1)** | ** ** | **2009****(1)** | ** ** |
|----------------------------------|------------|-----------------|------------|-----------------|------------|
| Loan  to Value Ratio:            |       |            |       |            |       |
| 0% -  50%                        |       |  $         | 1,173.8    |            |  $    | 1,541.0 |   |
| 50%  - 60%                       |       | 775.6           |       | 742.5           |       |
| 60%  - 70%                       |       | 827.7           |       | 845.0           |       |
| 70%  - 80%                       |       | 209.9           |       | 264.9           |       |
| 80%  - 90%                       |       | 22.4            |       | 23.9            |       |
| Total  Commercial Mortgage Loans |       |  $         | 3,009.4    |            |  $    | 3,417.3 |   |

 

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

 
|                             | ** ** | **2010****(1)(2)** | ** ** | **2009****(1)(2)** | ** ** |
|----------------------------------|------------|--------------------|------------|--------------------|------------|
| Debt  Service Coverage Ratio:    |       |               |       |               |       |
| Greater  than 1.5x               |       |  $            | 2,072.2    |               |  $    | 2,356.1 |   |
| 1.25x  - 1.5x                    |       | 325.2              |       | 371.5              |       |
| 1.0x  - 1.25x                    |       | 319.2              |       | 284.1              |       |
| Less  than 1.0x                  |       | 147.9              |       | 219.5              |       |
| Total  Commercial Mortgage Loans |       |  $            | 2,864.5    |               |  $    | 3,231.2 |   |

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

(2)  Excludesmortgages that are secured by loans on land or construction deals.

 

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Propertiescollateralizing mortgage loans are geographically dispersed throughout theUnited States, as well as diversified by property type, as reflected in thefollowing tables as of September 30, 2010 and December 31, 2009.

 
| ** **                              | ** ** | **2010****(1)**         | ** ** | **2009****(1)**          | ** ** |
|-----------------------------------------|------------|-------------------------|------------|--------------------------|------------|
| ** **                              | ** ** | **Gross**               | ** ** | ** **               | ** ** | **Gross** | ** ** | ** ** | ** ** |
| ** **                              | ** ** | **Carrying Value** | ** ** | **% of Total** | ** ** | **Carrying Value** | ** ** | **% of Total** | ** ** |
| Commercial Mortgage Loans by US Region: |       |                    |       |                     |       |   |   |   |   |
| Pacific                                 |       | $                       | 755.2      |                     | 25.2%      |   | $ | 894.6 |   | 26.2% |   |
| South Atlantic                          |       | 559.9                   |       | 18.7%                    |       | 649.7 |   | 19.0% |   |
| Middle Atlantic                         |       | 401.1                   |       | 13.3%                    |       | 465.7 |   | 13.6% |   |
| East North Central                      |       | 319.9                   |       | 10.6%                    |       | 401.6 |   | 11.8% |   |
| West South Central                      |       | 365.4                   |       | 12.1%                    |       | 371.0 |   | 10.9% |   |
| Mountain                                |       | 368.5                   |       | 12.2%                    |       | 375.8 |   | 11.0% |   |
| New England                             |       | 81.8                    |       | 2.7%                     |       | 90.6 |   | 2.6% |   |
| West North Central                      |       | 92.9                    |       | 3.1%                     |       | 100.8 |   | 2.9% |   |
| East South Central                      |       | 64.7                    |       | 2.1%                     |       | 67.5 |   | 2.0% |   |
| Total Commercial Mortgage Loans         |       | $                       | 3,009.4    |                     | 100.0%     |   | $ | 3,417.3 |   | 100.0% |   |

 

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

 
| ** **                                  | ** ** | **2010****(1)**         | ** ** | **2009****(1)**          | ** ** |
|---------------------------------------------|------------|-------------------------|------------|--------------------------|------------|
| ** **                                  | ** ** | **Gross**               | ** ** | ** **               | ** ** | **Gross** | ** ** | ** ** | ** ** |
| ** **                                  | ** ** | **Carrying Value** | ** ** | **% of Total** | ** ** | **Carrying Value** | ** ** | **% of Total** | ** ** |
| Commercial Mortgage Loans by Property Type: |       |                    |       |                     |       |   |   |   |   |
| Apartments                                  |       | $                       | 520.3      |                     | 17.3%      |   | $ | 547.7 |   | 16.0% |   |
| Hotel/Motel                                 |       | 177.9                   |       | 5.9%                     |       | 180.5 |   | 5.3% |   |
| Industrial                                  |       | 987.3                   |       | 32.7%                    |       | 1,105.7 |   | 32.3% |   |
| Mixed Use                                   |       | 10.6                    |       | 0.4%                     |       | 16.2 |   | 0.5% |   |
| Office                                      |       | 545.2                   |       | 18.1%                    |       | 703.5 |   | 20.6% |   |
| Other                                       |       | 92.1                    |       | 3.1%                     |       | 136.0 |   | 4.0% |   |
| Retail                                      |       | 676.0                   |       | 22.5%                    |       | 727.7 |   | 21.3% |   |
| Total Commercial Mortgage Loans             |       | $                       | 3,009.4    |                     | 100.0%     |   | $ | 3,417.3 |   | 100.0% |   |

 

(1)    Balances donot include allowance for mortgage loan credit losses.

 

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Thefollowing table sets forth the breakdown of commercial mortgages by year oforigination as of September 30, 2010 and December 31, 2009.

 
| ** **                      | ** ** | **2010****(1)** | ** ** | **2009****(1)** | ** ** |
|---------------------------------|------------|-----------------|------------|-----------------|------------|
| Year of Origination:            |       |            |       |            |       |
| 2010                            |       | $               | 86.4       |            | $          | -   |   |
| 2009                            |       | 34.8            |       | 36.7            |       |
| 2008                            |       | 438.8           |       | 477.6           |       |
| 2007                            |       | 536.6           |       | 601.8           |       |
| 2006                            |       | 341.9           |       | 385.1           |       |
| 2005 and prior                  |       | 1,570.9         |       | 1,916.1         |       |
| Total Commercial Mortgage Loans |       | $               | 3,009.4    |            | $          | 3,417.3 |   |

 

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

 

*Unrealized Capital Losses*

 

Unrealized capital losses (including non-creditimpairments) in fixed maturities, including securities pledged to creditors,for Investment Grade (“IG”) and Below Investment Grade (“BIG”) securities byduration were as follows at September 30, 2010 and December 31, 2009.

 
| ** **                                                           | ** ** | **2010**   | ** ** | **2009**              | ** ** |
|----------------------------------------------------------------------|------------|------------|------------|-----------------------|------------|
| ** **                                                           | ** ** | ** ** | ** ** | **% 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                             |       | $          | 17.0       |                  | 3.0%       |   | $ | 3.8 |   | 0.7% |   | $ | 170.1 |   | 13.5% |   | $ | 21.2 |   | 1.7% |   |
| More  than six months and twelve months or less below amortized cost |       | 1.1        |       | 0.2%                  |       | -  |   | 0.0% |   | 259.3 |   | 20.4% |   | 200.8 |   | 15.8% |   |
| More  than twelve months below amortized cost                        |       | 212.3      |       | 38.3%                 |       | 320.2 |   | 57.8% |   | 419.0 |   | 33.0% |   | 197.7 |   | 15.6% |   |
| Total  unrealized capital loss                                       |       | $          | 230.4      |                  | 41.5%      |   | $ | 324.0 |   | 58.5% |   | $ | 848.4 |   | 66.9% |   | $ | 419.7 |   | 33.1% |   |

 

79

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The following table summarizes the unrealized capitallosses (including non-credit impairments) by duration and reason, along withthe fair value of fixed maturities, including securities pledged to creditors,in unrealized capital loss positions at September 30, 2010 andDecember 31, 2009.

 
| ** **                                  | ** ** | ** **          | ** ** | **More Than**           | ** ** | ** **             | ** ** | ** **     | ** ** |
|---------------------------------------------|------------|---------------------|------------|------------------------------|------------|------------------------|------------|----------------|------------|
| ** **                                  | ** ** | **Six Months** | ** ** | **Six Months**          | ** ** | **More Than**     | ** ** | ** **     | ** ** |
| ** **                                  | ** ** | **or Less**    | ** ** | **and Twelve**          | ** ** | **Twelve Months** | ** ** | **Total**      | ** ** |
| ** **                                  | ** ** | **Below**           | ** ** | **Months or Less** | ** ** | **Below**              | ** ** | **Unrealized** | ** ** |
| ** **                                  | ** ** | **Amortized**       | ** ** | **Below**                    | ** ** | **Amortized**          | ** ** | **Capital**    | ** ** |
| **2010**                                    | ** ** | **Cost**            | ** ** | **Amortized Cost**      | ** ** | **Cost**               | ** ** | **Losses**     | ** ** |
| Interest  rate or spread widening           |       | $                   | 16.1       |                         | $          | 0.5                    |       | $              | 50.3       |   | $ | 66.9 |   |
| Mortgage  and other asset-backed securities |       | 4.7                 |       | 0.6                          |       | 482.2                  |       | 487.5          |       |
| Total  unrealized capital loss              |       | $                   | 20.8       |                         | $          | 1.1                    |       | $              | 532.5      |   | $ | 554.4 |   |
| Fair  value                                 |       | $                   | 850.7      |                         | $          | 25.6                   |       | $              | 2,091.1    |   | $ | 2,967.4 |   |
|                                        |       |                |       |                         |       |                   |       |           |       |
| **2009**                                    | ** ** | ** **          | ** ** | ** **                   | ** ** | ** **             | ** ** | ** **     | ** ** |
| Interest  rate or spread widening           |       | $                   | 99.3       |                         | $          | 31.6                   |       | $              | 122.2      |   | $ | 253.1 |   |
| Mortgage  and other asset-backed securities |       | 92.0                |       | 428.5                        |       | 494.5                  |       | 1,015.0        |       |
| Total  unrealized capital loss              |       | $                   | 191.3      |                         | $          | 460.1                  |       | $              | 616.7      |   | $ | 1,268.1 |   |
| Fair  value                                 |       | $                   | 5,275.9    |                         | $          | 1,058.2                |       | $              | 2,714.5    |   | $ | 9,048.6 |   |

 

80

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Unrealized capital losses (including non-creditimpairments), along with the fair value of fixed maturities, includingsecurities pledged to creditors, by market sector and duration were as followsat September 30, 2010 and December 31, 2009.

 
| ** **                                 | ** ** | **Six  Months or Less  Below Amortized Cost** | ** ** | **More  Than Six  Months and Twelve   Months or Less  Below Amortized Cost** | ** ** | **More  Than Twelve  Months Below  Amortized Cost** | ** ** | **Total**             | ** **    |
|--------------------------------------------|------------|-----------------------------------------------|------------|------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|-----------------------|---------------|
| ** **                                 | ** ** | ** **                                    | ** ** | **Unrealized**                                                               | ** ** | ** **                                          | ** ** | **Unrealized**        | ** **    | ** ** | ** ** | **Unrealized** | ** ** | ** ** | ** ** | **Unrealized** | ** ** |
| ** **                                 | ** ** | **Fair Value**                           | ** ** | **Capital Loss**                                                        | ** ** | **Fair Value**                                 | ** ** | **Capital Loss** | ** **    | **Fair Value** | ** ** | **Capital Loss** | ** ** | **Fair Value** | ** ** | **Capital Loss** | ** ** |
| **2010**                                   | ** ** | ** **                                    | ** ** | ** **                                                                   | ** ** | ** **                                          | ** ** | ** **            | ** **    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| U.S.  corporate, state, and municipalities | ** ** |  $                                       | 308.6      | ** **                                                                   |  $    | 3.3                                                 | ** ** |  $               | -   | ** ** |  $ | -   | ** ** |  $ | 337.5 | ** ** |  $ | 27.2 | ** ** |  $ | 646.1 | ** ** |  $ | 30.5 | ** ** |
| Foreign                                    |       | 159.7                                         |       | 12.8                                                                         |       | 18.4                                                |       | 0.5                   |          | 193.9 |   | 23.1 |   | 372.0 |   | 36.4 |   |
| Residential  mortgage-backed               |       | 242.9                                         |       | 4.5                                                                          |       | 1.2                                                 |       | 0.4                   |          | 421.9 |   | 124.9 |   | 666.0 |   | 129.8 |   |
| Commercial  mortgage-backed                |       | 1.3                                           |       | -                                                                  |       | 4.5                                                 |       | -           |          | 568.4 |   | 117.3 |   | 574.2 |   | 117.3 |   |
| Other  asset-backed                        |       | 138.2                                         |       | 0.2                                                                          |       | 1.5                                                 |       | 0.2                   |          | 569.4 |   | 240.0 |   | 709.1 |   | 240.4 |   |
| Total                                      |       |  $                                       | 850.7      |                                                                         |  $    | 20.8                                                |       |  $               | 25.6          |   |  $ | 1.1 |   |  $ | 2,091.1 |   |  $ | 532.5 |   |  $ | 2,967.4 |   |  $ | 554.4 |   |
|                                       |       |                                          |       |                                                                         |       |                                                |       |                  |          |   |   |   |   |   |   |   |   |
| **2009**                                   | ** ** | ** **                                    | ** ** | ** **                                                                   | ** ** | ** **                                          | ** ** | ** **            | ** **    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| U.S.  Treasuries                           |       |  $                                       | 3,761.2    |                                                                         |  $    | 80.0                                                |       |  $               | -   |   |  $ | -   |   |  $ | -   |   |  $ | -   |   |  $ | 3,761.2 |   |  $ | 80.0 |   |
| U.S.  government agencies and authorities  |       | 15.2                                          |       | 0.8                                                                          |       | 8.2                                                 |       | 0.8                   |          | -   |   | -   |   | 23.4 |   | 1.6 |   |
| U.S.  corporate, state, and municipalities |       | 273.8                                         |       | 6.7                                                                          |       | 108.1                                               |       | 13.5                  |          | 737.7 |   | 64.1 |   | 1,119.6 |   | 84.3 |   |
| Foreign                                    |       | 228.1                                         |       | 11.8                                                                         |       | 107.8                                               |       | 17.3                  |          | 472.6 |   | 58.1 |   | 808.5 |   | 87.2 |   |
| Residential  mortgage-backed               |       | 139.1                                         |       | 46.5                                                                         |       | 183.5                                               |       | 92.3                  |          | 260.7 |   | 82.8 |   | 583.3 |   | 221.6 |   |
| Commercial  mortgage-backed                |       | 795.5                                         |       | 44.1                                                                         |       | 534.6                                               |       | 243.1                 |          | 682.7 |   | 161.0 |   | 2,012.8 |   | 448.2 |   |
| Other  asset-backed                        |       | 63.0                                          |       | 1.4                                                                          |       | 116.0                                               |       | 93.1                  |          | 560.8 |   | 250.7 |   | 739.8 |   | 345.2 |   |
| Total                                      |       |  $                                       | 5,275.9    |                                                                         |  $    | 191.3                                               |       |  $               | 1,058.2       |   |  $ | 460.1 |   |  $ | 2,714.5 |   |  $ | 616.7 |   |  $ | 9,048.6 |   |  $ | 1,268.1 |   |

 

Of the unrealized capital losses aged more than twelvemonths, the average market value of the related fixed maturities was 79.7% ofthe average book value as of September 30, 2010.  In addition, this category includes 412securities, which have an average quality rating of BBB.

 

81

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Unrealized capital losses (including non-creditimpairments) in fixed maturities, including securities pledged to creditors,for instances in which fair value declined below amortized cost by greater thanor less than 20% for consecutive periods as indicated in the tables below, wereas follows for September 30, 2010 and December 31, 2009.

 
| ** **                                                           | ** ** | **Amortized  Cost** | ** ** | **Unrealized  Capital Loss** | ** ** | **Number  of Securities** | ** ** |
|----------------------------------------------------------------------|------------|---------------------|------------|------------------------------|------------|---------------------------|------------|
| ** **                                                           | ** ** | **< 20%**   | ** ** | **> 20%**            | ** ** | **< 20%**         | ** ** | **> 20%** | ** ** | **< 20%** | ** ** | **> 20%** | ** ** |
| **2010**                                                             | ** ** | ** **          | ** ** | ** **                   | ** ** | ** **                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Six  months or less below amortized cost                             | ** ** | $                   | 1,296.1    | ** **                   | $          | 111.4                     | ** ** | $ | 70.0 | ** ** | $ | 26.9 | ** ** | 198 | ** ** | 22 | ** ** |
| More  than six months and twelve months or less below amortized cost |       | 506.2               |       | 7.7                          |       | 38.0                      |       | 2.2 |   | 53 |   | 7 |   |
| More  than twelve months below amortized cost                        |       | 604.5               |       | 995.9                        |       | 31.5                      |       | 385.8 |   | 94 |   | 197 |   |
| Total                                                                |       | $                   | 2,406.8    |                         | $          | 1,115.0                   |       | $ | 139.5 |   | $ | 414.9 |   | 345 |   | 226 |   |
|                                                                 |       |                |       |                         |       |                      |       |   |   |   |   |   |   |
| **2009**                                                             | ** ** | ** **          | ** ** | ** **                   | ** ** | ** **                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Six  months or less below amortized cost                             | ** ** | $                   | 6,184.5    | ** **                   | $          | 396.8                     | ** ** | $ | 265.1 | ** ** | $ | 111.8 | ** ** | 282 | ** ** | 96 | ** ** |
| More  than six months and twelve months or less below amortized cost |       | 1,248.5             |       | 982.3                        |       | 68.8                      |       | 433.2 |   | 191 |   | 115 |   |
| More  than twelve months below amortized cost                        |       | 619.0               |       | 885.6                        |       | 27.8                      |       | 361.4 |   | 113 |   | 158 |   |
| Total                                                                |       | $                   | 8,052.0    |                         | $          | 2,264.7                   |       | $ | 361.7 |   | $ | 906.4 |   | 586 |   | 369 |   |

 

82

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Unrealized capital losses (including non-creditimpairments) in fixed maturities, including securities pledged to creditors, bymarket sector for instances in which fair value declined below amortized costby greater than or less than 20% for consecutive periods as indicated in thetables below, were as follows for September 30, 2010 and December 31,2009.

 
| ** **                                | ** ** | **Amortized Cost** | ** ** | **Unrealized Capital Loss** | ** ** | **Number of Securities** | ** ** |
|-------------------------------------------|------------|-------------------------|------------|---------------------------------------|------------|------------------------------------|------------|
| ** **                                | ** ** | **< 20%**       | ** ** | **> 20%**                     | ** ** | **< 20%**                  | ** ** | **> 20%** | ** ** | **< 20%** | ** ** | **> 20%** | ** ** |
| **2010**                                  | ** ** | ** **              | ** ** | ** **                            | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| U.S.  corporate, state and municipalities |       | $                       | 652.3      |                                  | $          | 24.3                               |       | $ | 24.8 |   | $ | 5.7 |   | 82 |   | 5 |   |
| Foreign                                   |       | 327.5                   |       | 80.9                                  |       | 16.6                               |       | 19.8 |   | 38 |   | 10 |   |
| Residential  mortgage-  backed  |       | 487.0                   |       | 308.8                                 |       | 25.2                               |       | 104.6 |   | 94 |   | 90 |   |
| Commercial  mortgage-  backed   |       | 499.1                   |       | 192.4                                 |       | 46.3                               |       | 71.0 |   | 36 |   | 21 |   |
| Other  asset-  backed           |       | 440.9                   |       | 508.6                                 |       | 26.6                               |       | 213.8 |   | 95 |   | 100 |   |
| Total                                     |       | $                       | 2,406.8    |                                  | $          | 1,115.0                            |       | $ | 139.5 |   | $ | 414.9 |   | 345 |   | 226 |   |
|                                      |       |                    |       |                                  |       |                               |       |   |   |   |   |   |   |
| **2009**                                  | ** ** | ** **              | ** ** | ** **                            | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| U.S.  Treasuries                          |       | $                       | 3,841.2    |                                  | $          | -                        |       | $ | 80.0 |   | $ | -   |   | 21 |   | -   |   |
| U.S.  government agencies and authorities |       | 25.0                    |       | -                           |       | 1.6                                |       | -   |   | 4 |   | -   |   |
| U.S.  corporate, state and municipalities |       | 1,139.0                 |       | 64.9                                  |       | 67.8                               |       | 16.5 |   | 220 |   | 32 |   |
| Foreign                                   |       | 712.7                   |       | 183.0                                 |       | 33.1                               |       | 54.1 |   | 93 |   | 30 |   |
| Residential  mortgage-  backed  |       | 336.0                   |       | 468.9                                 |       | 35.9                               |       | 185.7 |   | 83 |   | 119 |   |
| Commercial  mortgage-  backed   |       | 1,534.5                 |       | 926.5                                 |       | 104.2                              |       | 344.0 |   | 96 |   | 60 |   |
| Other  asset-  backed           |       | 463.6                   |       | 621.4                                 |       | 39.1                               |       | 306.1 |   | 69 |   | 128 |   |
| Total                                     |       | $                       | 8,052.0    |                                  | $          | 2,264.7                            |       | $ | 361.7 |   | $ | 906.4 |   | 586 |   | 369 |   |

 

During the nine months ended September 30, 2010,unrealized capital losses on fixed maturities decreased by $713.7. Lowerunrealized losses are due to improved economic conditions and the overalltightening of credit spreads since the end of 2009, leading to lower noncreditimpairments and the increased value of fixed maturities.

 

At September 30, 2010, the Company held 7 fixedmaturities with unrealized capital losses in excess of $10.0.  The unrealized capital losses on these fixedmaturities equaled $112.2, or 20.2% of the total unrealized capital losses, asof September 30, 2010.  At December 31,2009, the Company held 19 fixed maturities with unrealized capital losses in excessof $10.0.  The unrealized capital losseson these fixed maturities equaled $353.9, or 27.9% of the total unrealizedcapital losses, as of December 31, 2009.

 

All investments with fair values less than amortizedcost are included in the Company’s other-than-temporary impairment analysis,and impairments were recognized as disclosed in “Other-Than-TemporaryImpairments,” which follows this section. After detailed impairment analysiswas completed, management determined that the remaining investments in anunrealized loss position were not other-than-

 

83

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temporarily impaired, and therefore no furtherother-than-temporary impairment was necessary.

 

*Other-Than-TemporaryImpairments*

 

The Company analyzes its general account investmentsto determine whether there has been an other-than-temporary decline in fairvalue below the amortized cost basis. Factors considered in this analysisinclude, but are not limited to, the length of time and the extent to which thefair value has been less than amortized cost, the issuer’s financial conditionand 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 securityor if it is more likely than not it will be required to sell a security beforerecovery of its cost basis, management evaluates facts and circumstances suchas, but not limited to, decisions to rebalance the investment portfolio andsales of investments to meet cash flow needs.

 

When the Company has determined it has the intent tosell or if it is more likely than not that it will be required to sell asecurity before recovery of its amortized cost basis and the fairvalue has declined below amortized cost (“intent impairment”) the individualsecurity is written down from amortized cost to fair value and acorresponding charge is recorded in Net realized capital gains (losses) on theCondensed Statements of Operations as an other-than-temporary impairment (“OTTI”).  If the Company does not intend to sell thesecurity nor is it more likely than not it will be required to sell thesecurity before recovery of its amortized cost basis, but the Company hasdetermined that there has been an other-than-temporary decline in fair valuebelow the amortized cost basis, the OTTI is bifurcated into the amountrepresenting the present value of the decrease in cash flows expected to becollected (“credit impairment”) and the amount related to other factors (“noncreditimpairment”).  The creditimpairment is recorded in Net realized capital gains (losses) on theCondensed Statements of Operations. The noncredit impairment is recorded inOther comprehensive income (loss) on the Condensed Balance Sheets in accordancewith the requirements of Accounting Standards Codification (“ASC”) Topic 320, “Investment- Debt and Equity Securities”.

 

In order to determine the amount of the OTTI that isconsidered a credit impairment, the Company utilizes the following methodologyand significant inputs:

 

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

§                  Collectability and recoverability are estimatedusing the same considerations as the Company uses in its overall impairmentanalysis which includes, but is not limited to, the length of time and theextent to which the fair value has been less than amortized cost, the issuer’sfinancial condition and near-term prospects,

 

84

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future economic conditions andmarket forecasts, interest rate changes, and changes in ratings of thesecurity.

§                  Additional factors considered for structuredsecurities such as RMBS, CMBS and other ABS include, but are not limited to,quality of underlying collateral, anticipated loss severities, collateraldefault rates, and other collateral characteristics such as vintage, re-paymentterms, and the geographical makeup of the collateral.

 

The following tables identify the Company’scredit-related and intent-related other-than-temporary impairments included inthe Condensed Statement of Operations, excluding impairments included in Othercomprehensive income (loss), by type for the three and nine months endedSeptember 30, 2010 and 2009.

 
| ** **                     | ** ** | **Three Months Ended September 30,** | ** ** |
|--------------------------------|------------|----------------------------------------------------------|------------|
| ** **                     | ** ** | **2010**                                                 | ** ** | **2009** | ** ** |
| ** **                     | ** ** | ** **                                               | ** ** | **No. of** | ** ** | ** ** | ** ** | **No. of** | ** ** |
| ** **                     | ** ** | **Impairment**                                           | ** ** | **Securities** | ** ** | **Impairment** | ** ** | **Securities** | ** ** |
| U.S.  corporate                |       | $                                                        | 1.1        |   | 2 |   | $ | 0.9 |   | 1 |   |
| Foreign(1)                     |       | 7.8                                                      |       | 3 |   | 3.1 |   | 10 |   |
| Residential  mortgage-backed   |       | 1.7                                                      |       | 23 |   | 5.9 |   | 33 |   |
| Other  asset-backed            |       | 1.6                                                      |       | 6 |   | 16.7 |   | 13 |   |
| Commercial  mortgage-backed    |       | 8.2                                                      |       | 5 |   | -   |   | -   |   |
| Mortgage  loans on real estate |       | 5.6                                                      |       | 5 |   | 13.8 |   | 3 |   |
| Total                          |       | $                                                        | 26.0       |   | 44 |   | $ | 40.4 |   | 60 |   |

 

(1) Primarily U.S. dollar denominated.

 
| ** **                     | ** ** | **Nine Months Ended September 30,** | ** **    |
|--------------------------------|------------|---------------------------------------------------------|---------------|
| ** **                     | ** ** | **2010**                                                | ** **    | **2009** | ** ** |
| ** **                     | ** ** | ** **                                              | ** **    | **No. of** | ** ** | ** ** | ** ** | **No. of** | ** ** |
| ** **                     | ** ** | **Impairment**                                          | ** **    | **Securities** | ** ** | **Impairment** | ** ** | **Securities** | ** ** |
| U.S.  Treasuries               |       | $                                                       | -   |   | -   |   | $ | 114.7 |   | 13 |   |
| U.S.  corporate                |       | 4.8                                                     |          | 19 |   | 51.3 |   | 50 |   |
| Foreign(1)                     |       | 30.6                                                    |          | 21 |   | 27.3 |   | 41 |   |
| Residential  mortgage-backed   |       | 14.2                                                    |          | 59 |   | 106.8 |   | 118 |   |
| Other  asset-backed            |       | 16.7                                                    |          | 26 |   | 143.4 |   | 52 |   |
| Commercial  mortgage-backed    |       | 16.5                                                    |          | 5 |   | -   |   | -   |   |
| Equity  securities             |       | -                                             |          | -   |   | 3.3 |   | 5 |   |
| Public  utilities              |       | 0.3                                                     |          | 5 |   | -   |   | -   |   |
| Mortgage  loans on real estate |       | 6.1                                                     |          | 5 |   | 14.3 |   | 4 |   |
| Limited  Partnerships          |       | -                                             |          | -   |   | 0.4 |   | 1 |   |
| Total                          |       | $                                                       | 89.2          |   | 140 |   | $ | 461.5 |   | 284 |   |

 

(1) Primarily U.S. dollar denominated.

 

85

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The above schedules include $25.9 and $72.3 for thethree and nine months ended September 30, 2010, respectively, and $38.6 and$148.4 for the three and nine months ended September 30, 2009, respectively, inother-than-temporary write-downs related to credit impairments, which arerecognized in earnings.  The remainingwrite-downs reflected in the schedules above are related to intent impairments.

 

The following tables summarize these intentimpairments, which are also recognized in earnings, by type for the three andnine months ended September 30, 2010 and 2009.

 
| ** **      | ** ** | **Three Months Ended September 30,** | ** ** |
|-----------------|------------|----------------------------------------------------------|------------|
| ** **      | ** ** | **2010**                                                 | ** ** | **2009** | ** ** |
| ** **      | ** ** | ** **                                               | ** ** | **No. of** | ** ** | ** ** | ** ** | **No. of** | ** ** |
| ** **      | ** ** | **Impairment**                                           | ** ** | **Securities** | ** ** | **Impairment** | ** ** | **Securities** | ** ** |
| U.S.  corporate |       | $                                                        | 0.1        |   | 1 |   | $ | 0.9 |   | 1 |   |
| Foreign(1)      |       | -                                              |       | -   |   | 0.9 |   | 5 |   |
| Total           |       | $                                                        | 0.1        |   | 1 |   | $ | 1.8 |   | 6 |   |

 

(1) Primarily U.S. dollar denominated.

 
| ** **                   | ** ** | **Nine Months Ended September 30,** | ** **    |
|------------------------------|------------|---------------------------------------------------------|---------------|
| ** **                   | ** ** | **2010**                                                | ** **    | **2009** | ** ** |
| ** **                   | ** ** | ** **                                              | ** **    | **No. of** | ** ** | ** ** | ** ** | **No. of** | ** ** |
| ** **                   | ** ** | **Impairment**                                          | ** **    | **Securities** | ** ** | **Impairment** | ** ** | **Securities** | ** ** |
| U.S.  Treasuries             |       | $                                                       | -   |   | -   |   | $ | 114.7 |   | 13 |   |
| U.S.  corporate              |       | 3.8                                                     |          | 18 |   | 43.6 |   | 35 |   |
| Foreign(1)                   |       | 12.5                                                    |          | 16 |   | 22.5 |   | 35 |   |
| Residential  mortgage-backed |       | -                                                       |          | -   |   | 23.2 |   | 8 |   |
| Other  asset-backed          |       | 0.3                                                     |          | 1 |   | 109.1 |   | 11 |   |
| Public  utilities            |       | 0.3                                                     |          | 5 |   | -   |   | -   |   |
| Total                        |       | $                                                       | 16.9          |   | 40 |   | $ | 313.1 |   | 102 |   |

 

(1) Primarily U.S. dollar denominated.

 

TheCompany may sell securities during the period in which fair value has declinedbelow amortized cost for fixed maturities or cost for equity securities.  In certain situations, new factors, includingchanges in the business environment, can change the Company’s previous intentto continue holding a security.

 

86

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Thefollowing tables identify the noncredit impairments recognized in Othercomprehensive income (loss) by type for the three and nine months endedSeptember 30, 2010 and 2009.

 
| ** **                   | ** ** | **Three Months Ended September 30,** | ** ** |
|------------------------------|------------|----------------------------------------------------------|------------|
| ** **                   | ** ** | **2010**                                                 | ** ** | **2009** | ** ** |
| ** **                   | ** ** | ** **                                               | ** ** | **No. of** | ** ** | ** ** | ** ** | **No. of** | ** ** |
| ** **                   | ** ** | **Impairment**                                           | ** ** | **Securities** | ** ** | **Impairment** | ** ** | **Securities** | ** ** |
| U.S.  corporate              |       | $                                                        | -     | * | 1 |   | $ | -  |   | - |   |
| Foreign(1)                   |       | -                                                   |       | - |   | -  | * | 3 |   |
| Commercial  mortgage-backed  |       | 7.0                                                      |       | 3 |   | -  |   | - |   |
| Residential  mortgage-backed |       | 5.0                                                      |       | 5 |   | (1.8) |   | 20 |   |
| Other  asset-backed          |       | 15.8                                                     |       | 2 |   | 8.3 |   | 12 |   |
| Total                        |       | $                                                        | 27.8       |   | 11 |   | $ | 6.5 |   | 35 |   |

 

(1)     PrimarilyU.S. dollar denominated.

 

*      Less than $0.1.

 
| ** **                   | ** ** | **Nine Months Ended September 30,** | ** ** |
|------------------------------|------------|-------------------------------------|------------|
| ** **                   | ** ** | **2010**                            | ** ** | **2009** | ** ** |
| ** **                   | ** ** | ** **                          | ** ** | **No. of** | ** ** | ** ** | ** ** | **No. of** | ** ** |
| ** **                   | ** ** | **Impairment**                      | ** ** | **Securities** | ** ** | **Impairment** | ** ** | **Securities** | ** ** |
| U.S.  corporate              |       | $                                   | -     | * | 2 |   | $ | 2.0 |   | 1 |   |
| Foreign(1)                   |       | -                              |       | - |   | 0.4 |   | 3 |   |
| Commercial  mortgage-backed  |       | 17.5                                |       | 5 |   | -  |   | - |   |
| Residential  mortgage-backed |       | 21.2                                |       | 31 |   | 73.2 |   | 8 |   |
| Other  asset-backed          |       | 45.6                                |       | 13 |   | 15.8 |   | 17 |   |
| Total                        |       | $                                   | 84.3       |   | 51 |   | $ | 91.4 |   | 29 |   |

 

(1)    PrimarilyU.S. dollar denominated.

 

*      Less than $0.1.

 

87

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*NetRealized Capital Gains (Losses)*

 

Net realized capital gains (losses) are comprised ofthe difference between the amortized cost of investments and proceeds fromsale, and redemption, as well as losses incurred due to the credit-related andintent-related other-than-temporary impairment of investments and changes infair value of derivatives.  The cost ofthe investments on disposal is determined based on specific identification ofsecurities.  Net realized capital gains(losses) on investments were as follows for the three and nine months ended September 30,2010 and 2009.

 
| ** **                                                                                                           | ** ** | **Three Months Ended September 30,** |
|----------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------|
| ** **                                                                                                           | ** ** | **2010**                                                 | ** ** | **2009** |
| Fixed  maturities, available-for-sale, including net OTTI of $(20.4) and $(26.6) in  2010 and 2009, respectively     | ** ** | $                                                        | 82.8 | ** ** | ** ** | $ | 25.4 | ** ** |
| Equity  securities, available-for-sale, including net OTTI of $0.0 in 2010 and 2009                                  |       | (1.4                                                     | ) |   | 4.7 |   |
| Derivatives                                                                                                          |       | (608.1                                                   | ) |   | (1,159.9 | ) |
| Other  investments, including net OTTI of $(5.6) and $(13.8) in 2010 and 2009,  respectively                         |       | (11.6                                                    | ) |   | (14.0 | ) |
| Net  realized capital losses                                                                                         |       | $                                                        | (538.3 | ) |   | $ | (1,143.8 | ) |
| After-tax  net realized capital losses, including tax valuation allowance of $(30.0) for  2010 and of $22.1 for 2009 |       | $                                                        | (379.9 | ) |   | $ | (721.4 | ) |

 
| ** **                                                                                                                   | ** ** | **Nine Months Ended September 30,** |
|------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------|
| ** **                                                                                                                   | ** ** | **2010**                                                | ** ** | **2009** |
| Fixed  maturities, available-for-sale, including net OTTI of $(83.1) and $(443.5) in  2010 and 2009, respectively            | ** ** | $                                                       | 98.6 | ** ** | ** ** | $ | (232.6 | ) |
| Equity  securities, available-for-sale, including net OTTI of $(3.3) in 2009                                                 |       | 0.9                                                     |   |   | 4.9 |   |
| Derivatives                                                                                                                  |       | (269.3                                                  | ) |   | (1,953.5 | ) |
| Other  investments, including net OTTI of $(6.1) and $(14.7) in 2010 and 2009,  respectively                                 |       | (8.9                                                    | ) |   | (17.1 | ) |
| Net  realized capital losses                                                                                                 |       | $                                                       | (178.7 | ) |   | $ | (2,198.3 | ) |
| After-tax  net realized capital losses, including tax valuation allowance of $(30.0) for  2010 and of $ (18.3) for 2009 |       | $                                                       | (146.2 | ) |   | $ | (1,447.2 | ) |

 

Total *Net realized capital losses* decreased for the three and ninemonths ended September 30, 2010, primarily due to a favorable change onderivatives related to 1) hedging of variable annuity guaranteed deathbenefits, 2) a loss in the first nine months of 2009 related to a hedgingprogram designed to mitigate the impact of potential declines in equity marketsand their impact on regulatory capital, and 3) hedging of variable annuityguaranteed living benefits (“VAGLB”) ceded to SLDI, under the combinedcoinsurance and coinsurance funds withheld agreement, which commenced in thethird quarter of 2009. However, the hedge losses on the VAGLB for the three andnine months ended September 30, 2010 are ceded to SLDI and reported as acorresponding increase in Interest credited and other benefits topolicyholders. Lower credit and intent related impairments on fixed maturities,primarily due to the improved economic and interest rate environment, alsocontributed to the rise in Net realized capital gains. In addition, the Company

 

88

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experiencedgains on currency swaps and forwards related to the strengthening of the USDollar in 2010, and gains on options in a long position, which are used tohedge risks associated with fixed indexed annuities. These favorable items werepartially offset by futures in a short position as their fair value decreasedin the third quarter of 2010 due to improved equity markets.

 

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*FairValue Hierarchy*

 

The following tablespresent the Company’s hierarchy for its assets and liabilities measured at fairvalue on a recurring basis as of September 30, 2010 and December 31,2009.

 
| ** **                                                                                                      | ** ** | **2010**         | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|------------------|------------|
| ** **                                                                                                      | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3****(1)** | ** ** | **Total** | ** ** |
| Assets:                                                                                                         | ** ** | ** **       | ** ** | ** ** |   |   |   |   |   |
| Fixed  maturities, available-for-sale, including securities pledged:                                            |       |             |       |   |   |   |   |   |   |
| U.S.  Treasuries                                                                                                |       | $                | 1,690.3    |   | $ | 68.5 |   | $ | -  |   | $ | 1,758.8 |   |
| U.S  government agencies and authorities                                                                        |       | -           |       | 48.5 |   | -  |   | 48.5 |   |
| U.S.  corporate, state and municipalities                                                                       |       | -           |       | 9,795.1 |   | 8.6 |   | 9,803.7 |   |
| Foreign                                                                                                         |       | -           |       | 4,893.9 |   | 12.5 |   | 4,906.4 |   |
| Residential  mortgage-backed securities                                                                         |       | -           |       | 1,819.5 |   | 315.7 |   | 2,135.2 |   |
| Commercial  mortgage-backed securities                                                                          |       | -           |       | 2,518.7 |   | -  |   | 2,518.7 |   |
| Other  asset-backed securities                                                                                  |       | -           |       | 794.7 |   | 686.2 |   | 1,480.9 |   |
| Equity  securities, available-for-sale                                                                          |       | 132.5            |       | -  |   | 15.8 |   | 148.3 |   |
| Derivatives:                                                                                                    |       |             |       |   |   |   |   |   |   |
| Interest  rate contracts                                                                                        |       | -           |       | 120.3 |   | -  |   | 120.3 |   |
| Foreign  exchange contracts                                                                                     |       | -           |       | 2.3 |   | -  |   | 2.3 |   |
| Equity  contracts                                                                                               |       | 20.4             |       | -  |   | 113.1 |   | 133.5 |   |
| Credit  contracts                                                                                               |       | -           |       | 1.2 |   | -  |   | 1.2 |   |
| Cash  and cash equivalents, short-term investments, and short-term investments under  securities loan agreement |       | 1,698.2          |       | -  |   | -  |   | 1,698.2 |   |
| Assets  held in separate accounts                                                                               |       | 42,641.5         |       | -  |   | -  |   | 42,641.5 |   |
| Total                                                                                                           |       | $                | 46,182.9   |   | $ | 20,062.7 |   | $ | 1,151.9 |   | $ | 67,397.5 |   |
|                                                                                                            |       |             |       |   |   |   |   |   |   |
| Liabilities:                                                                                                    |       |             |       |   |   |   |   |   |   |
| Investment  contract guarantees:                                                                                |       |             |       |   |   |   |   |   |   |
| Fixed  Indexed Annuities (“FIA”)                                                                      |       | $                | -     |   | $ | -  |   | $ | 1,105.4 |   | $ | 1,105.4 |   |
| Guaranteed  Minimum Withdrawal and Accumulation Benefits (“GMWB” and “GMAB”)                |       | -           |       | -  |   | 132.7 |   | 132.7 |   |
| Embedded  derivative on reinsurance                                                                             |       |             |       | 129.5 |   |   |   | 129.5 |   |
| Derivatives:                                                                                                    |       |             |       |   |   |   |   |   |   |
| Interest  rate contracts                                                                                        |       | -           |       | 395.5 |   | -  |   | 395.5 |   |
| Foreign  exchange contracts                                                                                     |       | -           |       | 60.7 |   | -  |   | 60.7 |   |
| Equity  contracts                                                                                               |       | 3.0              |       | -  |   | 24.2 |   | 27.2 |   |
| Credit  contracts                                                                                               |       | -           |       | 4.2 |   | 43.5 |   | 47.7 |   |
| Total                                                                                                           |       | $                | 3.0        |   | $ | 589.9 |   | $ | 1,305.8 |   | $ | 1,898.7 |   |

 

(1)      Level 3 net assets and liabilities accounted for (0.2)%of total net assets and liabilities measured at fair value on a recurringbasis. Excluding separate accounts assets for which the policyholder bears therisk, the Level 3 assets and liabilities in relation to total net assets andliabilities measured at fair value on a recurring basis totaled (0.7)%.

 

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| ** **                                                                                                      | ** ** | **2009**         | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|------------------|------------|
| ** **                                                                                                      | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3****(1)** | ** ** | **Total** | ** ** |
| Assets:                                                                                                         | ** ** | ** **       | ** ** | ** ** |   |   |   |   |   |
| Fixed  maturities, available-for-sale, including securities pledged:                                            |       |             |       |   |   |   |   |   |   |
| U.S.  Treasuries                                                                                                |       | $                | 4,123.5    |   | $ | -  |   | $ | -  |   | $ | 4,123.5 |   |
| U.S  government agencies and authorities                                                                        |       | -           |       | 24.6 |   | -  |   | 24.6 |   |
| U.S.  corporate, state and municipalities                                                                       |       | -           |       | 5,559.2 |   | -  |   | 5,559.2 |   |
| Foreign                                                                                                         |       | -           |       | 3,318.9 |   | -  |   | 3,318.9 |   |
| Residential  mortgage-backed securities                                                                         |       | -           |       | 659.8 |   | 1,088.2 |   | 1,748.0 |   |
| Commercial  mortgage-backed securities                                                                          |       | -           |       | 2,589.6 |   | -  |   | 2,589.6 |   |
| Other  asset-backed securities                                                                                  |       | -           |       | 461.3 |   | 423.9 |   | 885.2 |   |
| Equity  securities, available-for-sale                                                                          |       | 149.8            |       | -  |   | 4.5 |   | 154.3 |   |
| Derivatives:                                                                                                    |       |             |       |   |   |   |   |   |   |
| Interest  rate contracts                                                                                        |       | -           |       | 44.6 |   | -  |   | 44.6 |   |
| Foreign  exchange contracts                                                                                     |       | -           |       | 14.2 |   | -  |   | 14.2 |   |
| Equity  contracts                                                                                               |       | 42.8             |       | -  |   | 215.5 |   | 258.3 |   |
| Credit  contracts                                                                                               |       | -           |       | 0.3 |   | -  |   | 0.3 |   |
| Embedded  derivative on reinsurance                                                                             |       | -           |       | 38.7 |   | -  |   | 38.7 |   |
| Cash  and cash equivalents, short-term investments, and short-term investments under  securities loan agreement |       | 2,245.1          |       | 8.0 |   | -  |   | 2,253.1 |   |
| Assets  held in separate accounts                                                                               |       | 42,996.1         |       | -  |   | -  |   | 42,996.1 |   |
| Total                                                                                                           |       | $                | 49,557.3   |   | $ | 12,719.2 |   | $ | 1,732.1 |   | $ | 64,008.6 |   |
|                                                                                                            |       |             |       |   |   |   |   |   |   |
| Liabilities:                                                                                                    |       |             |       |   |   |   |   |   |   |
| Investment  contract guarantees:                                                                                |       |             |       |   |   |   |   |   |   |
| Fixed  Indexed Annuities (“FIA”)                                                                      |       | $                | -     |   | $ | -  |   | $ | 927.2 |   | $ | 927.2 |   |
| Guaranteed  Minimum Withdrawal and Accumulation Benefits (“GMWB” and “GMAB”)                |       | -           |       | -  |   | 73.9 |   | 73.9 |   |
| Embedded  derivative on reinsurance                                                                             |       | -           |       | -  |   | -  |   | -  |   |
| Derivatives:                                                                                                    |       |             |       |   |   |   |   |   |   |
| Interest  rate contracts                                                                                        |       | -           |       | 325.2 |   | -  |   | 325.2 |   |
| Foreign  exchange contracts                                                                                     |       | -           |       | 53.0 |   | -  |   | 53.0 |   |
| Equity  contracts                                                                                               |       | 3.2              |       | -  |   | 13.1 |   | 16.3 |   |
| Credit  contracts                                                                                               |       | -           |       | 15.4 |   | 90.5 |   | 105.9 |   |
| Total                                                                                                           |       | $                | 3.2        |   | $ | 393.6 |   | $ | 1,104.7 |   | $ | 1,501.5 |   |

 

(1)      Level 3 net assets and liabilities accounted for 1.0%of total net assets and liabilities measured at fair value on a recurringbasis. Excluding separate accounts assets for which the policyholder bears therisk, the Level 3 net assets and liabilities in relation to total net assetsand liabilities measured at fair value on a recurring basis totaled 3.2%.

 

**Liquidityand Capital Resources**

 

Liquidityis the ability of the Company to generate sufficient cash flows to meet thecash requirements of operating, investing, and financing activities.

 

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*LiquidityManagement*

 

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

 

The Company’s liquidity position is managed bymaintaining adequate levels of liquid assets, such as cash, cash equivalents,and short-term investments.  As part ofthe liquidity management process, different scenarios are modeled to determinethat existing assets are adequate to meet projected cash flows.  Key variables in the modeling process includeinterest rates, equity market movements, quantity and type of interest andequity market hedges, anticipated contractowner behavior, market value of thegeneral account assets, variable separate account performance, and implicationsof rating agency actions.

 

The fixed account liabilities are supported by ageneral account portfolio, principally composed of fixed rate investments withmatching duration characteristics that can generate predictable, steady ratesof return.  The portfolio managementstrategy for the fixed account considers the assets available-for-sale.  This strategy enables the Company to respondto changes in market interest rates, prepayment risk, relative values of assetsectors and individual securities and loans, credit quality outlook, and otherrelevant factors.  The objective ofportfolio management is to maximize returns, taking into account interest rate andcredit risk, as well as other risks.  TheCompany’s asset/liability management discipline includes strategies to minimizeexposure to loss as interest rates and economic and market conditions change.In executing this strategy, the Company uses derivative instruments to managethese risks.  The Company’s derivativecounterparties are of high credit quality. As of September 30, 2010, the Company had net derivativeliabilities with a fair value of $273.8.

 

*Liquidity and Capital Resources*

 

Additional sources of liquidity include borrowingfacilities to meet short-term cash requirements that arise in the ordinarycourse of business.  The Companymaintains the following agreements:

 

§                  Areciprocal loan agreement with ING America Insurance Holdings, Inc. (“INGAIH”), 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, asof the prior December 31.  At September 30,2010 and December 31, 2009, the Company had an outstanding receivable of$739.7 and $545.5, respectively, with ING AIH under the reciprocal loanagreement.

 

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§                  A$50.0 uncommitted, perpetual revolving note facility with the Bank of NewYork.  At September 30, 2010 andDecember 31, 2009, the Company had no amounts outstanding under therevolving note facility.

§                  TheCompany holds approximately 64% of its assets in marketable securities.  These assets include cash, US 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/orsecurity lending agreements by temporarily lending securities and receivingcash collateral.  Under the Company’sLiquidity Plan, up to 12% of the Company’s general account statutory assets maybe allocated to reverse repurchase, securities lending and dollar rollprograms.  At the time a temporary cashneed arises, the actual percentage of admitted assets available for reverserepurchase transactions will depend upon outstanding allocations to the threeprograms.  As of September 30, 2010,the Company had securities lending obligations of $92.0, which represents lessthan 1% of the Company’s general account statutory assets.

 

The Company is a member of the Federal Home Loan Bankof Des Moines (“FHLB”) and is required to maintain a collateral deposit thatbacks funding agreements issued to the FHLB. As of September 30, 2010 and December 31, 2009, the Companyhad $1,579.6 and $1,304.5, respectively, in non-putable funding agreements,including accrued interest, issued to FHLB. As of September 30, 2010 and December 31, 2009, assets with amarket value of approximately $1,828.3 and $1,657.9, respectively,collateralized the funding agreements issued to the FHLB.  Assets pledged to the FHLB are included inFixed maturities, available-for-sale, on the Condensed Balance Sheets.

 

Managementbelieves that its sources of liquidity are adequate to meet the Company’sshort-term cash obligations.

 

*Capital Contributions and Distributions*

 

During the nine months ended September 30, 2010and 2009, the Company received $239.0 and $835.0, respectively, in capitalcontributions from its Parent. During the nine months ended September 30,2010 and 2009, the Company did not pay any dividends or return of capitaldistributions to its Parent.  OnNovember 10, 2010, the Company received a $510.0 capital contribution fromits Parent.

 

*Collateral*

 

Under the terms of the Company’s Over-The-CounterDerivative 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 willbe met with regard to the Credit Support Annex (“CSA”).  The terms of the CSA call for the Company topay interest on any cash received equal to the Federal Funds rate.  As of September 30, 2010 and December 31,2009, the Company held $30.7 and $32.1, respectively, of cash collateral, whichwas included in Payables under securities loan agreement, including collateralheld, on the

 

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Condensed Balance Sheets. In addition, as of September 30,2010 and December 31, 2009, the Company delivered collateral of $667.2 and$574.6, respectively, in fixed maturities pledged under derivatives contracts,which was included in Securities pledged on the Condensed Balance Sheets.

 

*Reinsurance Agreements*

 

The Company is a party to a Facultative CoinsuranceAgreement with its affiliate, Security Life of Denver Insurance Company (“SLD”),effective August 20, 1999.  Underthe terms of this agreement, the Company facultatively cedes to SLD, from timeto time, certain GICs on a 100% coinsurance basis.  The value of GIC reserves ceded by theCompany under this agreement at September 30, 2010 and December 31,2009 was $40.0 and $47.5, respectively. The Company utilizes this reinsurance facility primarily fordiversification and asset-liability management purposes in connection with thisbusiness, which is facilitated by the fact that SLD is also a major GICissuer.  Senior management of the Companyhas established a current maximum of $4.0 billion for GIC reserves ceded underthis agreement.

 

The Company entered into an automatic reinsuranceagreement with SLDI, an affiliate, dated June 30, 2008, covering 100% ofthe benefits guaranteed under specific variable annuity guaranteed livingbenefit riders attached to certain variable annuity contracts, which had beenissued and in force as of, as well as any such policies issued after, theeffective date of the agreement.  Thevalue of reserves ceded by the Company under this agreement was $1,062.9 and$878.6 at September 30, 2010 and December 31, 2009,respectively.  In addition, a deferredloss on the transaction in the amount of $358.2 is presented in Other assets onthe Condensed Balance Sheets and is amortized over the period of benefit.  Effective July 1, 2009, the Company andSLDI entered into an amended and restated reinsurance agreement to change thereinsurance basis of the existing automatic reinsurance agreement dated June 30,2008 between the Company and SLDI from coinsurance to a combined coinsuranceand coinsurance funds withheld basis.  Toeffectuate this transaction, assets with a market value of $3.2 billion  were transferred on July 31, 2009 fromSLDI to the Company, and the Company deposited those assets into a trustaccount. The Company also established a corresponding funds withheld liabilityto SLDI, which is included in Other liabilities on the Condensed BalanceSheets.

 

*Ratings*

 

The Company’s access to funding and its related costof borrowing, requirements for derivatives collateral posting and theattractiveness of certain of its products to customers are affected by Companycredit ratings and insurance financial strength ratings, which are periodicallyreviewed by the ratings agencies.

 

On October 27, 2009, Moody’s downgraded theCompany to “A2” from “A1” and assigned a developing outlook.

 

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

 

On September 16,2010, Standard & Poor’s Ratings Services (“S&P”) lowered thecounterparty credit and insurer financial strength ratings of the Company to “A”from “A+”.  On November 10, 2010,S&P placed the Company’s counterparty credit and insurer financial strengthratings on CreditWatch with negative implications.

 

On September 21, 2010, Fitch maintained theCompany on a “Ratings Watch Negative” with a financial strength rating of “A-”.  The outlook remains “negative”.

 

In response to weakening global markets, the ratingagencies have been continuously reevaluating their ratings of banks andinsurance companies around the world. Over the past several quarters, therating agencies have maintained a negative outlook of the financial servicesindustry, while reviewing the individual ratings they give to specificentities.  The downgrades of the Companyby S&P, Fitch, A.M. Best and Moody’s reflect a broader view of how thefinancial services industry is being challenged by the current economicenvironment, but also are based on the rating agencies’ specific views of theCompany’s financial strength.  In makingtheir ratings decisions the agencies consider past and expected future capital andearnings, asset quality and risk, profitability and risk of existingliabilities and current products, market share and product distributioncapabilities, and direct or implied support from parent companies, includingthe implications of the ING restructuring plan, among other factors.

 

*MinimumGuarantees*

 

Variable annuity contracts containing minimumguaranteed death and living benefits expose the Company to equity risk.  A decrease in the equity markets may cause adecrease in the account values, thereby increasing the possibility that theCompany may be required to pay amounts to contractowners due to guaranteeddeath and living benefits.  An increasein the value of the equity markets may increase account values for thesecontracts, thereby decreasing the Company’s risk associated with guaranteeddeath and living benefits.

 

The Company ceased new sales of variable annuityproducts in March 2010.  However,the Company’s existing variable annuity block of business contains certainguaranteed death and living benefits made available to contractowners asdescribed below:

 

*GuaranteedMinimum Death Benefits (“GMDBs”)*:

 

§                  Standard- Guarantees that, upon death, the death benefit will be no less than thepremiums paid by the contractowner, adjusted for any contract withdrawals.

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

 

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

 

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

 

As of September 30, 2010 and December 31,2009, the guaranteed value of these death benefits in excess of account valueswas estimated to be $9.5 billion and $10.3 billion, respectively, beforereinsurance.  The increase was primarilydriven by favorable equity market performance in 2010.

 

As of September 30, 2010, the guaranteed value ofminimum guaranteed death benefits in excess of account values, net ofreinsurance, was estimated to be $8.4 billion, of which $8.4 billion wasprojected to be covered by the Company’s variable annuity guarantee hedgingprogram.  As of December 31, 2009,the guaranteed value of guaranteed minimum death benefits in excess of accountvalues, net of reinsurance, was estimated to be $9.1 billion, of which $9.1billion was projected to be covered by the Company’s variable annuity guaranteehedging program.  As of September 30,2010 and December 31, 2009, the Company recorded a liability of $424.8 and$477.6, respectively, net of reinsurance, representing the estimated netpresent value of the Company’s future obligation for guaranteed minimum deathbenefits in excess of account values.

 

*GuaranteedLiving Benefits*:

 

§                  GuaranteedMinimum Income Benefit (“GMIB”) - Guarantees a minimum income payout,exercisable each contract anniversary on or after a specified date, in mostcases the 10th rider anniversary.

§                  GuaranteedMinimum Withdrawal Benefit (“GMWB”) - Guarantees an annual withdrawal amountfor life that is calculated as a percentage of the notional amount that equalspremium at the time of contract issue and may increase by annual ratchets.  The percentage used to determine theguaranteed annual withdrawal amount may vary by age and contract year of firstwithdrawal. Earlier versions of the withdrawal benefit included a rollup (7%,6%, 5% or 0%, depending on versions of the benefit) in combination with aratchet (primarily annual or quarterly, depending on versions). A jointlife-time withdrawal benefit option was available to include coverage forspouses.  Most versions of the withdrawalbenefit included reset and/or step-up features that may increase the

 

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guaranteed withdrawal amount in certain conditions.  Earlier versions of the withdrawal benefitguarantee that annual withdrawals of up to 7.0% of eligible premiums may bemade until eligible premiums previously paid by the contractowner are returned,regardless of account value performance. Asset allocation requirements apply at all times where withdrawals areguaranteed for life.

§                  GuaranteedMinimum Accumulation Benefit (“GMAB”) - Guarantees that the account value willbe at least 100% of the eligible premiums paid by the contractowner after 10 years,net of any contract withdrawals (GMAB 10). In the past, the Company offered an alternative design that guaranteedthe account value to be at least 200% of the eligible premiums paid bycontractowners after 20 years (GMAB 20).

 

Effective June 30, 2008, the Company reinsuredmost of its living benefit guarantees to SLDI, an affiliated reinsurer, tomitigate the risk produced by such benefits. This reinsurance agreement covers all of the GMIBs, as well as the GMWBswith lifetime guarantees (“the “Reinsured living benefits”).  The GMABs and the GMWBs without lifetimeguarantees (the “Non-reinsured living benefits”) are not covered by thisreinsurance.

 

Prior to June 30, 2008, the Company utilized avariable annuity guarantee hedging program to mitigate risks associated withall living benefits.  The Non-reinsuredliving benefits are still covered by the Company’s variable annuity guaranteehedging program.

 

For the Reinsured living benefits, as of September 30,2010 and December 31, 2009, the guaranteed value of these benefits inexcess of account values was estimated to be $8.8 billion before reinsurance.

 

For the Non-reinsured living benefits, as of September 30,2010 and December 31, 2009, the guaranteed value of these benefits inexcess of account values was $80.0 and $104.9, respectively.  The Company recorded a liability representingthe estimated net present value of its future obligations for these benefits of$132.7 and $73.9 as of September 30, 2010 and December 31, 2009,respectively.

 

*Variable Annuity Guarantee Hedging Program*:In order to hedge equity risk associated with non-reinsured GMDBs andguaranteed living benefits, the Company enters into futures positions, totalreturn swaps and put options on various public market equity indices chosen toclosely replicate contractowner variable fund returns.  The Company also hedges most of the foreigncurrency risk arising from its international fund exposure using forwardcontracts.  The Company uses marketconsistent valuation techniques to establish its derivative positions and torebalance the derivative positions in response to market fluctuations. Oneaspect of the hedging program is designed to offset changes related to equityexperience in the liability and to pay excess claims not covered by thecontractowner account value. The Company also administers a hedging programthat mitigates not only the equity risk, but also the interest rate and equityvolatility risk associated with its Principal Guard GMWB product issued in 2005and beyond. This hedge strategy primarily involves entering

 

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into put options and interest rate swaps. The VariableAnnuity Funding Capital Hedging Program, which was approved during 2010, is anoverlay to the Variable Annuity Guarantee Hedging Program that mitigates theimpact of potential declines in equity markets and their impact on statutorycapital. While there is currently no position active and to date no hedging hascommenced due to equity market levels, the program’s hedge strategy involvesusing equity futures contracts.  Thederivatives under the variable annuity guarantee hedging programs do notqualify for hedge accounting under accounting principles generally accepted inthe United States (“US GAAP”).

 

In 2009, ING USA took certain actions to reduceits exposure to interest rate and market risks. These actions included revisions to variable annuity guaranteed benefitsfor new business, reducing the minimum guaranteed interest rate on new fixedindexed annuities business, changes to certain products, reassessment of theinvestment 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 themajority of the Company’s foreign currency risk.  Furthermore, the Company is reviewing itshedging strategies and is considering increasing its hedging of interest ratesand changes in its other hedging strategies. ING USA continues to monitor these initiatives and their financialimpacts, and will determine whether further actions are necessary.

 

Other risks posed by market conditions, such as themajority of the Company’s equity volatility and interest rate risk, and risksposed by contractowner experience, such as surrender and mortality experiencedeviations, are not explicitly mitigated by this program.  In addition, certain funds, where there is noreplicating market index or where hedging is not appropriate, are excluded fromthe program.

 

For those risks addressed by the variable annuityguarantee hedging program, the Company is exposed to the risk that the marketindices will not adequately replicate actual contractowner variable fundgrowth.  Any differences between actualresults and the market indices result in income volatility.

 

*Repurchase Agreements*

 

The Company engages in dollar repurchase agreements withmortgage-backed securities (“dollar rolls”) and repurchase agreements withother collateral types to increase its return on investments and improveliquidity.  Such arrangements typicallymeet the requirements to be accounted for as financing arrangements.  The Company enters into dollar rolltransactions by selling existing mortgage-backed securities and concurrentlyentering into an agreement to repurchase similar securities within a short timeframe in the future at a lower price. Under repurchase agreements, the Companyborrows cash from a counterparty at an agreed upon interest rate for an agreedupon time frame and pledges collateral in the form of securities. At the end ofthe agreement, the counterparty returns the collateral to the Company and theCompany, in turn, repays the loan amount along with the additional agreed uponinterest.  Company policy requires thatat all times during the term of the dollar roll and

 

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repurchase agreements that cash or other collateraltypes obtained is sufficient to allow the Company to fund substantially all ofthe cost of purchasing replacement assets. Cash collateral received is investedin short term investments, with the offsetting collateral liability included inBorrowed money on the Balance Sheets. At September 30, 2010, the Companydid not have securities pledged in dollar rolls and repurchase agreementtransactions. At December 31, 2009, the carrying value of the securitiespledged in dollar rolls and repurchase agreement transactions was $354.1 and isincluded in Securities pledged on the Condensed Balance Sheets.  The repurchase obligation related to dollarrolls and repurchase agreements, including accrued interest, totaled $311.1 atDecember 31, 2009 and is included in Borrowed money on the CondensedBalance Sheets.  In addition to therepurchase obligation, the Company holds $28.9 in collateral posted by thecounterparty in connection with the increase in the value of pledged securitiesthat will be released upon settlement.

 

TheCompany also enters into reverse repurchase agreements.  These transactions involve a purchase ofsecurities and an agreement to sell substantially the same securities as thosepurchased.  Company policy requires that,at all times during the term of the reverse repurchase agreements, cash or othercollateral types provided is sufficient to allow the counterparty to fundsubstantially all of the cost of purchasing replacement assets.  At September 30, 2010 andDecember 31, 2009, the Company did not have any securities pledged underreverse repurchase agreements.

 

The primary risk associated with short-termcollateralized borrowings is that the counterparty will be unable to performunder the terms of the contract.  TheCompany’s exposure is limited to the excess of the net replacement cost of thesecurities over the value of the short-term investments, an amount that wasimmaterial at September 30, 2010. The Company believes the counterparties to the dollar rolls, repurchase,and reverse repurchase agreements are financially responsible and that thecounterparty risk is minimal.

 

*Securities Lending*

 

The Company engages in securities lending wherebycertain securities from its portfolio are loaned to other institutions forshort periods of time.  Initialcollateral, primarily cash, is required at a rate of 102% of the market valueof the loaned domestic securities.  Thecollateral is deposited by the borrower with a lending agent, and retained andinvested by the lending agent according to the Company’s guidelines to generateadditional income.  The market value ofthe loaned securities is monitored on a daily basis with additional collateralobtained or refunded as the market value of the loaned securities fluctuates.At September 30, 2010 and December 31, 2009, the fair value of loanedsecurities was $95.2 and $163.7, respectively, and is included in Securitiespledged on the Condensed Balance Sheets.

 

*Income Taxes*

 

Estimated liabilities have been provided for uncertaintax benefits related to Internal Revenue Service (“IRS”) tax audits and statetax exams that have not been completed. The current payable of $21.8 may bepaid in less than one year, upon completion of

 

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such audits and exams. The timing of the payment ofthe remaining allowance of $3.8 cannot be reliably estimated.

 

*Recent Initiatives*

 

On October 26, 2009, ING announced the keycomponents of the final Restructuring Plan ING submitted to the EC as part ofthe process to receive EC approval for the state aid granted to ING by theState of the Netherlands (the “Dutch State”) in the form of EUR 10 billion CoreTier 1 securities issued on November 12, 2008 and the full credit risktransfer 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, INGhas agreed to separate its banking and insurance businesses by 2013. INGintends to achieve this separation by divestment of its insurance andinvestment management operations, including the Company. ING has announced thatit will explore all options for implementing the separation including one ormore initial public offerings, sales or combinations thereof.

 

On January 28, 2010, ING announced thefiling of its appeal with the General Court of the European Union againstspecific elements of the EC’s decision regarding the ING RestructuringPlan.  Despite the appeal, ING iscommitted to executing the formal separation of banking and insurance and thedivestment of the latter.  In its appeal, INGcontests the state aid calculation the EC applied to the reduction in repaymentpremium agreed upon by ING and the Dutch State in connection with ING’s December 2009repayment of the first EUR 5 billion of Core Tier 1 securities.  ING is also appealing the disproportionalityof the price leadership restrictions imposed on ING with respect to theEuropean financial sector.

 

On November 10, 2010, ING announced thatwhile the option of implementing the separation through one global initialpublic offering (“IPO”) remains open, ING and its U.S. insuranceaffiliates, including the Company, are going to prepare for a base case of twoIPOs: one Europe-led IPO and one separate U.S.-focused IPO.  As part of its preparation for a potentialU.S.-focused IPO, management of ING’s U.S. insurance operations is implementinga program to sharpen the strategic focus of the U.S. insurance business on lifeinsurance and retirement services while reducing annual expenses for overallU.S. Insurance operations by approximately $125.0 per year. The objective ofthese initiatives is to create a stronger and more profitable U.S. insurancebusiness in preparation for a potential IPO. Preparation for a potential U.S.-focused IPO will also require itsmanagement to prepare consolidated U.S. GAAP financial statements which wouldlikely include the Company and other affiliates.  As part of this initiative, management willbe assessing its U.S. GAAP accounting policies. Upon conclusion of assessment,management may make modifications to the existing accounting policies of theCompany and its affiliates to ensure consistency across all affiliated entitiesincluded in the potential U.S.-focused IPO and taking into account the policiesof industry peers.

 

The Company is also evaluating its assumptions andestimation techniques for determining estimated gross profits in itsamortization of DAC and VOBA. As part of this evaluation, the Company isassessing whether to implement a reversion to the

 

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mean technique of estimating its short-term equitymarket return assumptions. The reversion to the mean technique is a commonindustry practice in which DAC and VOBA unlocking for short-term equity returnsonly occurs if equity market performance falls outside established parameters.

 

In 2009, the Company took certain actions to reduceits exposure to interest rate and market risks. These actions included revisions to variable annuity guaranteed benefitsfor new business, reducing the minimum guaranteed interest rate on new fixed indexedannuities business, changes to certain products, reassessment of the investmentstrategy, hedging certain funds which previously were not hedged, hedgingcertain guaranteed death benefits which were previously not hedged, hedginginterest rate risk on new variable annuity business and hedging the majority ofthe Company’s foreign currency risk.  INGUSA continues to monitor these initiatives and their financial impacts. Inaddition, during 2010, the Company approved a funding capital hedging program;to date, no hedging has commenced under this program due to current equitymarket levels.  Furthermore, the Companyis reviewing its hedging strategies and is considering increasing its hedgingof interest rates and changes in its other hedging strategies.

 

On April 9, 2009, ING USA’s ultimate parent, ING,announced a global business strategy which identified certain core and non-corebusinesses and geographies, stated ING’s intention to explore divestiture ofnon-core businesses over time, withdraw from certain non-core geographies,limit future acquisitions and implement enterprise-wide expensereductions.  In particular, with respectto ING’s U.S. insurance operations, ING is seeking to further reduce itsrisk by focusing on individual life products, retirement services and a newsuite of simpler, lower risk annuity products to be sold by ING USA’s affiliate, INGLife Insurance and Annuity Company.  Aspart of this strategy, ING USA ceased new sales of variable annuityproducts in March of 2010. Some new amounts will continue to be depositedon ING USA variable annuities either as transfers related to applications thatwere in process prior to the product closures or as add-on premiums to existingcontracts.

 

Volatile capital market conditions commencing in thefourth quarter of 2008 and continuing into 2009, coupled with numerous changesin regulatory and accounting requirements and changes in policyholder behavioras a result of the recent changed economic environment, presented extraordinarychallenges to actuarial reserve valuation methodologies and controls. Since thesecond quarter of 2009, ING USA has been undertaking a review andstrengthening of its systems, processes and internal controls, including thosewith respect to actuarial calculations on fixed and variable annuity productsunder statutory and other bases of accounting. As part of its internal controlsreview, ING USA has from time to time identified control issues thatrequire corrective action and has taken, and will continue to undertakeappropriate corrective action to address identified control issues. During thefourth quarter of 2009, ING USA implemented proprietary cash flowprojection software as part of its systems-strengthening initiative. During2010, ING USA is continuing its controls review, system strengthening andcorrective actions, including initiatives to ensure sustainability in controlsin business owned applications used in actuarial and financial reportingprocesses, and to improve change controls and management of

 

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actuarial models and key assumptions. In addition, theCompany is assessing its IT system modification backlog and is continuing toenhance its controls with respect to prioritizing, monitoring, and implementingfuture system modifications.

 

**Recently Adopted Accounting Standards**

 

(See the Recently Adopted Accounting Standards and NewAccounting Pronouncements footnotes to the condensed financial statements.)

 

**Recently Enacted Legislation**

 

In March 2010, President Obama signed the PatientProtection and Affordable Care Act (“PPACA”) into law, as well as signed theHealth Care and Education Reconciliation Act of 2010 (“HCERA”), which amendscertain aspects of the PPACA (collectively, the “Act”).  The Act will require employers to makecertain conforming changes to retiree health benefits provided in order tocomply with the new legislation. Significant provisions of the Act include expanded benefit mandates, anexcise tax on health insurance coverage exceeding a threshold amount, and atemporary reinsurance program for eligible employment-based plans.  The effect of the Act on the Company’sprojected benefit obligation and cost depends on finalization of relatedregulatory requirements; however, the impact is not expected to bematerial.  The Company will continue tomonitor and assess the effect of the Act as the regulatory requirements arefinalized.

 

On July 21, 2010, President Obama signed theDodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”).The Dodd-Frank Act is landmark legislation that represents the most profoundrestructuring of U.S. financial regulation since the New Deal. Precipitated bythe financial crisis that began in 2007, the legislation includes 15 majorparts with 14 stand-alone statutes and numerous amendments to the current arrayof banking, securities, derivatives, and consumer finance laws. U.S. financialregulators have commenced an intense period of rulemaking and studies mandatedby the legislation that will continue over the next six to eighteen months.Until such rulemaking and studies are completed, the precise impact of theDodd-Frank Act on ING and its affiliates, including the Company cannot bedetermined. However, there are major elements of the legislation that we haveidentified to date that are of particular significance to ING and/or itsaffiliates, including the Company, as described below.

 

The Dodd-Frank Act creates a new agency, the FinancialStability Oversight Council, an inter-agency body that is responsible formonitoring the activities of the U.S. financial system and recommending aframework for substantially increased regulation of significant financialservices firms, including large, interconnected bank holding companies andsystemically important nonbank financial companies that could consist ofsecurities firms, insurance companies and other providers of financialservices, including non-U.S. companies. A company determined to be systemicallysignificant (a “Systemically Significant Company”) will be supervised by theFederal Reserve Board and will be subject to unspecified heightened prudentialstandards, including minimum capital requirements, liquidity standards,short-term debt limits,

 

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credit exposure requirements, management interlockprohibitions, maintenance of resolution plans, stress testing, and restrictionson proprietary trading. We cannot predict whether ING or the Company will bedesignated as a Systemically Significant Company. If, however, ING or theCompany were so designated, failure to meet the requisite measures of financialcondition could result in requirements for a capital restoration plan orcapital raising; management changes; asset sales; and limitations andrestrictions on capital distributions, acquisitions, affiliate transactionsand/or product offerings.

 

The legislation also creates a Federal InsuranceOffice to be housed within the Treasury Department, which will be charged withmonitoring (but not regulating) the insurance industry, including gatheringinformation to identify issues or gaps in the regulation of insurers that couldcontribute to systemic crisis in the insurance industry or U.S. financialsystem; preparing annual reports to Congress on the insurance industry;conducting studies on modernization of U.S. insurance regulation and the globalreinsurance market; and entering into/implementing agreements with foreigngovernments relating to the recognition of prudential measures with respect toinsurance and reinsurance (“International Agreements”), including the authorityto preempt U.S. state law if it is found to be inconsistent with anInternational Agreement and treats a non-U.S. insurer less favorably than aU.S. insurer.

 

The legislation creates a new framework for regulatingderivatives, which may increase the costs of hedging generally. It includesrequirements for centralized clearing of OTC derivatives (except those whereone of the counterparties is a “non-financial end user” to be defined byregulation); and establishes new regulatory authority for the SEC and theCommodity Futures Trading Commission (“CFTC”) over derivatives, and “swapdealers” and “major swap participants”, as to be defined by SEC and CFTCregulation, each of whom will be subject to as yet unspecified capital andmargin requirements.

 

The legislation provides that fixed indexed annuitiesmeeting certain requirements shall be exempt from SEC supervision, therebysuperseding SEC Regulation 151A, which would have required SEC registration ofcertain fixed index annuity products.

 

The Dodd-Frank Act imposes various ex-post assessmentson certain financial companies, which may include the Company, to provide fundsnecessary to repay any borrowings and to cover the costs of any specialresolution of a financial company under the new resolution authorityestablished under the legislation (although assessments already imposed understate insurance guaranty funds will be taken into account in calculating suchassessments).

 

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

 

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**Legislativeand Regulatory Initiatives**

 

Legislative proposals, which have been or may again beconsidered by Congress, include changing the taxation of annuity benefits,changing the tax treatment of insurance products relative to other financialproducts, and changing life insurance company taxation.  Some of these proposals, if enacted, couldhave a material adverse effect on life insurance, annuity, and other retirementsavings product sales, while others could have a material beneficialeffect.  Proposals to disallow insurancecompanies a portion of the dividends received deduction in connection withvariable product separate accounts could increase the cost of such products topolicyholders.  In addition to the assessmentsimposed on certain financial companies by the Dodd-Frank Act, it is possiblethat Congress may adopt a form of “financial crisis responsibility” fee or taxon banks and other financial firms to mitigate costs to taxpayers of variousgovernment programs established to address the financial crisis and offsetcosts of potential future crises.

 

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

 

Inconnection with the March 31, 2009 transfer by ING of an economic interestin 80% of its Alt-A RMBS portfolio to the Dutch State, the EC had a six monthperiod to review and assess the competitive impact of the transaction.  On October 26, 2009, ING announced the keycomponents of the final Restructuring Plan ING submitted to the EC as part ofthe process to receive EC approval for the state aid granted to ING by theDutch State in the form of EUR 10 billion Core Tier 1 securities issued onNovember 12, 2008 and the ING-Dutch State Transaction. As part of theRestructuring Plan, ING has agreed to separate its banking and insurancebusinesses by 2013. ING intends to achieve this separation by the divestment ofall insurance and investment management operations, including the Company. InNovember 2009, the Restructuring Plan received formal EC approval and theseparation of insurance and banking operations and other components of theRestructuring Plan were approved by ING shareholders.  On January 28, 2010, ING announced the filingof its appeal with the General Court of the European Union against specificelements of the EC’s decision regarding the ING Restructuring Plan.  Despite the appeal, ING is committed toexecuting the formal separation of banking and insurance and the divestment ofthe latter.  In its appeal, ING conteststhe state aid calculation the EC applied to the reduction in repayment premiumagreed upon by ING and the Dutch State in connection with ING’s December 2009repayment of the first EUR 5 billion of Core Tier securities.  ING is also appealing the disproportionalityof the price leadership restrictions imposed on ING with respect to theEuropean financial sector.

 

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**Item 4.****                         Controlsand Procedures**

 

a)                        TheCompany carried out an evaluation, under the supervision and with theparticipation of its management, including its Chief Executive Officer andChief Financial Officer, of the effectiveness of the design and operation ofthe 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 theperiod covered by this report.  Based onthat evaluation, the Chief Executive Officer and the Chief Financial Officerhave concluded that the Company’s current disclosure controls and proceduresare effective in ensuring that material information relating to the Companyrequired to be disclosed in the Company’s periodic SEC filings is made known tothem in a timely manner.

 

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

 

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**PART II.   OTHERINFORMATION**

 

**Item 1.****                         LegalProceedings**

 

INGUSA Annuity and Life Insurance Company (“the Company”) is involved inthreatened or pending lawsuits/arbitrations arising from the normal conduct ofbusiness.  Due to the climate ininsurance and business litigation/arbitrations, suits against the Companysometimes include claims for substantial compensatory, consequential, orpunitive damages, and other types of relief. Moreover, certain claims are asserted as class actions, purporting torepresent a group of similarly situated individuals.  While it is not possible to forecast theoutcome of such lawsuits/arbitrations, in light of existing insurance,reinsurance, and established reserves, it is the opinion of management that thedisposition of such lawsuits/arbitrations will not have a materially adverseeffect on the Company’s operations or financial position.

 

Aswith many financial services companies, the Company and its affiliates havereceived informal and formal requests for information from various state andfederal governmental agencies and self-regulatory organizations in connectionwith inquiries and investigations of the products and practices of the Companyand of the financial services industry. In each case, the Company and its affiliates have been and are providingfull cooperation.  For information on thefocus of such regulatory inquiries and the actions undertaken by ING inconnection therewith, see the “Other Regulatory Matters” section of “Management’sNarrative Analysis of the Results of Operations and Financial Condition”included in the Company’s 2009 Annual Report on Form 10-K filed on March 31,2010 (SEC File No. 001-32625).

 

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

 

Thefollowing should be read in conjunction with and supplements and amends therisk factors that may affect the Company’s business or operations describedunder “Risk Factors” in Part I, Item 1A. of the 2009 Annual Report on Form10-K.

 

*Circumstancesassociated with implementation of ING Groep’s recently announced globalbusiness strategy and the final restructuring plan submitted to the European Commissionin connection with its review of ING Groep’s receipt of state aid from theDutch State could adversely affect the Company’s results of operations andfinancial condition*

 

OnApril 9, 2009, the Company’s ultimate parent, ING Groep N.V. (“ING”) announceda global business strategy which identified certain core and non-corebusinesses and geographies, stated ING’s intention to explore divestiture ofnon-core businesses over time, withdraw from certain non-core geographies,limit future acquisitions and implement enterprise-wide expense reductions. Inaddition, ING’s issuance of EUR 10 billion Core Tier 1 securities to the DutchState and the transfer by ING of an economic interest in 80% of its Alt-A RMBSportfolio to the Dutch

 

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Statein the first quarter of 2009 were subject to review by the European Commission(the “EC”), under its state aid rules.

 

OnOctober 26, 2009, ING announced the key components of the final restructuringplan (the “Restructuring Plan”) ING submitted to the EC as part of the EC stateaid review and approval process. As part of the Restructuring Plan, ING hasagreed to separate its banking and insurance businesses by 2013. Thisseparation will be achieved by ING’s divestment of its insurance and investmentmanagement operations, including the Company. ING has announced that it willexplore all options for implementing the separation, including one or moreinitial public offerings, sales or combinations thereof. In November 2009, theRestructuring Plan received formal EC approval and the separation of insuranceand banking operations and other components of the Restructuring Plan wereapproved by ING shareholders. ING also reached an agreement with the DutchState to alter the repayment terms of the Core Tier 1 securities in order tofacilitate early repayment and ING repurchased in December 2009 EUR 5 billionof the total EUR 10 billion issued to the Dutch State. On January 28, 2010, INGannounced the filing of an appeal with the General Court of the European Unionagainst specific elements of the EC’s decision regarding the RestructuringPlan. Despite the appeal, ING is committed to executing the formal separationof banking and insurance and the divestment of the latter.  On November 10, 2010, ING announced thatwhile the option of implementing the separation through one global initialpublic 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: oneEurope-led IPO and one separate U.S.-focused IPO. As part of its preparationfor a potential U.S.-focused IPO, management of ING’s U.S. insurance operationsis implementing a program to sharpen the strategic focus of the U.S. insurancebusiness on life insurance and retirement services while reducing annualexpenses for overall U.S. Insurance operations by approximately $125.0 peryear. The objective of these initiatives is to create a stronger and moreprofitable U.S. insurance business in preparation for a potential IPO.  Preparation for a potential U.S.-focused IPOwill also require its management to prepare consolidated U.S. GAAP financialstatements which would likely include the Company and other affiliates.  As part of this initiative, management willbe assessing its U.S. GAAP accounting policies. Upon conclusion of assessment,management may make modifications to the existing accounting policies of theCompany and its affiliates to ensure consistency across all affiliated entitiesincluded in the potential U.S.-focused IPO and taking into account the policiesof industry peers.

 

Variousuncertainties and risks are associated with the implementation of variousaspects of ING’s global business strategy, and with the implementation of theRestructuring Plan’s commitment to separate its insurance and bankingbusinesses, any of which could have an adverse impact on the Company’s businessopportunities, results of operations and financial condition. Thoseuncertainties and risks include, but are not limited to: diversion ofmanagement’s attention; difficulty in retaining or attracting employees;negative impact on relationships with distributors and customers; policyholderretention; rating agency downgrades; unforeseen difficulties in transitioning ordivesting non-core businesses and geographies; uncertainties regarding thestructure, timing and composition of Restructuring Plan separation

 

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strategies;potential changes in accounting policies by ING and its affiliates as part ofimplementing the Restructuring Plan separation strategies; and potentialimplementation challenges or execution risks, and possible increased operatingcosts related to the Restructuring Plan separation strategies includingdevelopment of corporate center and other functions previously provided by ING;potential rebranding initiatives; limitations on access to credit and potentialincreases in the cost of credit for the insurance businesses undergoing suchseparation from ING’s banking businesses.

 

The capital infusion of EUR 10 billion by the DutchState resulted in a cumulative change of ownership of ING of approximately 42%.Future increases in capital or other changes of ownership under theRestructuring Plan may trigger Section 382 of the United States InternalRevenue Code which is a loss limitation rule the general purpose of which is toprevent trafficking in tax losses.  Ifapplicable, this limitation rule would restrict ING’s ability to use itslosses.  The rule is triggered when theownership of a company changes by more than 50% (measured by value) on acumulative basis in any three year period. If triggered, restrictions may beimposed on the future use of net operating losses as well as certain lossesthat are built into the assets of the impacted company at the time of theownership change and that are realized within the next five years. If thisshould occur, it may adversely affect the net results or equity of ING.

 

*Federalactions taken since 2008 to alleviate the financial crisis may not achievetheir intended results. The new  federalfinancial regulatory reform law, its implementing regulations and otherfinancial regulatory reform initiatives, could have adverse consequences forthe financial services industry, including the Company and/or materially affectthe Company’s results of operations, financial condition and liquidity*

 

In response to the financial crisis affecting thebanking system and financial markets, the U.S. federal government passed newlegislation in an effort to stabilize the financial markets, including theAmerican Recovery and Reinvestment Act of 2009 and the Emergency EconomicStabilization Act of 2008. The Company cannot predict with any certainty theeffect these actions or any other legislative initiatives will have on thefinancial markets or on the Company’s business, results of operations,financial condition, and liquidity. This legislation and other proposals oractions may also have other consequences, including material effects oninterest rates, which could materially affect the Company’s investments,results of operations and liquidity in ways that are not predictable. Thefailure to effectively implement this legislation and related proposals oractions could also result in material adverse effects, notably increasedconstraints on the liquidity available in the banking system and financialmarkets and increased pressure on stock prices, any of which could materiallyand adversely affect the Company’s results of operations, financial conditionand liquidity. In the event of future material deterioration in businessconditions, the Company may need to raise additional capital or consider othertransactions to manage its capital position or liquidity.

 

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Recently, significant shifts in regulatory supervisionand enforcement policies by financial services industry regulators haveresulted in more aggressive and intense scrutiny and the application andenforcement of more stringent standards.

 

On July 21, 2010, President Obama signed theDodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”),landmark legislation that is likely to effect the most profound restructuringof U.S. financial regulation since the New Deal. U.S. financial regulators havecommenced an intense period of rulemaking and studies mandated by thelegislation that will continue over the next six to eighteen months. Until suchrulemaking and studies occur, the full impact of the Dodd-Frank Act on ING andits affiliates, including the Company cannot be determined. However, there areseveral aspects of the legislation that we have identified to date that arelikely to be significant to ING and/or its affiliates, including the Company,as described below.

 

The Dodd-Frank Act creates a new agency, the FinancialStability Oversight Council, an inter-agency body that is responsible formonitoring the activities of the U.S. financial system and recommending aframework for substantially increased regulation of systemically significantfinancial services firms (a “Systemically Significant Company”), includinglarge, interconnected bank holding companies and systemically important nonbankfinancial companies that could consist of securities firms, insurance companiesand other providers of financial services, including non U.S. companies. If INGor its U.S. operations were designated as systemically significant, then INGand its subsidiaries would be supervised by the Federal Reserve Board andsubject to heightened prudential standards, including minimum capitalrequirements, liquidity standards, short-term debt limits, credit exposurerequirements, management interlock prohibitions, maintenance of resolutionplans, stress testing and restrictions on proprietary trading. If ING or theCompany were designated as a Systemically Significant Company, failure to meetthe requisite measures of financial condition applicable to a SystemicallySignificant Company could result in requirements for a capital restoration planor capital raising; management changes; asset sales; and limitations andrestrictions on capital distributions, acquisitions, affiliate transactionsand/or product offerings. We cannot predict whether ING or the Company will bedesignated as a Systemically Significant Company.

 

Although existing state insurance regulators willremain the primary regulators of the Company and its U.S. insurance affiliates,the legislation also creates a Federal Insurance Office to be housed within theTreasury Department, which will be charged with monitoring the insuranceindustry, including gathering information to identify issues or gaps in theregulation of insurers that could contribute to systemic crisis in theinsurance industry or U.S. financial system; preparing annual reports toCongress on the insurance industry; conducting studies on modernization of U.S.insurance regulation and the global reinsurance market, which may includelegislative, administrative or regulatory recommendations; and entering into agreementswith foreign governments relating to the recognition of prudential measureswith respect to insurance and reinsurance (“International Agreements”),including certain limited authority to preempt U.S. state law in relation tosuch International Agreements.  We

 

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cannot predict whether any resulting recommendations,if any, will affect our business or financial condition.

 

The Dodd-Frank Act restricts the ability of federallyinsured depository institutions and their affiliates to:  (i) engage in proprietary trading (the “proprietarytrading prohibition”) and (ii) sponsor or invest in funds (referred to in thelegislation as hedge funds and private equity funds) that rely on certainexemptions from the Investment Company Act of 1940, as amended (the “fundinvestment prohibition”).  The Dodd-FrankAct provides an exemption for investments by a regulated insurance company orits affiliate solely for the general account of such insurance company ifcertain conditions to the exemption are met (the “general account exemption”).  While we believe the general accountexemption exempts the Company from both the proprietary trading prohibition andthe fund investment prohibition, the statutory language on the general accountexemption could be read to result in a different interpretation.  The Dodd-Frank Act provides for a period ofstudy and rulemaking during which the scope and effects of the statutorylanguage on the general account exemption may be clarified. Until the relatedstudy and rulemaking are complete, it is unclear whether the Company may needto alter any of its investment activities to comply.

 

In addition, the legislation creates a new frameworkfor regulating derivatives, which may increase the costs of hedging generally.It includes requirements for centralized clearing of OTC derivatives (exceptthose where one of the counterparties is a “non-financial end user,” to bedefined by regulations); and establishes new regulatory authority for the Securitiesand Exchange Commission (“SEC”) and the Commodity Futures Trading Commission (“CFTC”)over derivatives, and “swap dealers” and “major swap participants,” as to bedefined by the SEC and CFTC, each of whom will be subject to as yet unspecifiedcapital and margin requirements. Although we do not believe the Company should be considered a “swapdealer” or a “major swap participant”, the final regulations adopted couldprovide otherwise, which could substantially increase the cost of hedging andrelated activities undertaken by the Company. The cost of hedging and related activities could also be adverselyaffected if it is determined by the Secretary of Treasury that foreign currencyswaps and forwards are not excluded from the foregoing requirements.  As depository banks may be restricted in theirability to conduct OTC derivatives business, the legislation may require theCompany to use more non-bank counterparties for its hedging activities orotherwise have the effect of limiting the availability to the Company ofderivatives counterparties that meet minimum insurance regulatory requirements.In addition, restrictions imposed by the legislation on netting of derivativestransactions with non-banks and the possible lower credit quality and/or capitalizationof non-bank derivatives counterparties may increase the counterparty creditrisk to the Company.  We cannot predictthe specific impacts and costs of the Dodd-Frank Act or the pending regulationson our hedging activities and strategies until the rulemaking process issubstantially complete.

 

The Dodd-Frank Act imposes various ex-post assessmentson certain financial companies, which may include the Company, to provide fundsnecessary to repay any borrowings and to cover the cost of any special resolutionof a financial company

 

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under the new resolution authority established underthe legislation (although assessments already imposed under state insuranceguaranty funds will be taken into account in calculating such assessments). Inaddition to the assessments imposed on certain financial companies by theDodd-Frank Act, it is possible that Congress may adopt a form of “financialcrisis responsibility” fee or tax on banks and other financial firms tomitigate costs to taxpayers of various government programs established toaddress the financial crisis and to offset the costs of potential futurecrises.

 

Although the full impact of the Dodd-Frank Act cannotbe determined until the various mandated studies are conducted and implementingregulations are enacted, many of the legislation’s requirements could haveprofound and/or adverse consequences for the financial services industry,including the Company. The Act could make it more expensive for the Company toconduct its business; require the Company to make changes to its business modelor satisfy increased capital requirements; subject the Company to greaterregulatory scrutiny; subject the Company to potential increases inwhistleblower claims in light of the increased awards available towhistleblowers under the Act; and have a material effect on the Company’sresults of operations or financial condition.

 

In addition, the Company is subject to extensive lawsand regulations that are administered and/or enforced by a number of differentgovernmental authorities and non-governmental self-regulatory bodies, includingstate insurance regulators, state securities administrators, the NationalAssociation of Insurance Commissioners, the SEC, FINRA, Financial AccountingStandards Board, and state attorneys general. In light of the financial crisis,some of these authorities are considering, or may in the future consider,enhanced or new requirements intended to prevent future crises or otherwiseassure the stability of institutions under their supervision. These authoritiesmay also seek to exercise their supervisory or enforcement authority in new ormore robust ways. In addition, regulators and lawmakers in non-U.S.jurisdictions are engaged in addressing the causes of the financial crisis andmeans of avoiding such crises in the future. For example, the G20 and theFinancial Stability Board have issued a series of papers intended to producesignificant changes in how financial companies, and in particular large andcomplex global financial companies, such as ING, should be regulated. Suchpapers and proposals address financial group supervision, capital and solvencymeasures, corporate governance and systemic financial risk, among other things.Governments in jurisdictions in which ING does business are considering, or mayin the future consider, introducing legislation or regulations to implementcertain recommendations of the G20 and Financial Stability Board. All of thesepossibilities, if they occurred, could affect the way the Company conducts itsbusiness and manages capital, and may require the Company to satisfy increasedcapital requirements, any of which in turn could materially affect the Company’sresults of operations, financial condition and liquidity.

 

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*TheCompany may be required to establish an additional valuation allowance againstthe deferred income tax asset if the Company’s business does not generatesufficient taxable income or if the Company’s tax planning strategies aremodified based on new or revised US GAAP requirements.  Increases in the deferred tax valuationallowance could have a material adverse effect on results of operations andfinancial condition*

 

Deferred income tax represents the tax effect of thedifferences between the book and tax basis of assets and liabilities.  Deferred tax assets are evaluatedperiodically by management to determine if they are realizable.  Factors in management’s determination includethe performance of the business, including the ability to generate operatingincome and capital gains from a variety of sources and tax planningstrategies.  If based on availableinformation, it is more likely than not that the deferred income tax asset willnot be realized, then a valuation allowance must be established with acorresponding charge to net income.

 

Additionally, the Company has recognized deferred taxassets on certain available-for-sale securities in loss positions that itbelieves it can hold until recovery or maturity.  The FASB is currently evaluating the abilityfor companies to recognize deferred tax assets on certain available for salesecurities in loss positions based on a strategy to hold to recovery or maturity.  If the FASB determines this is not a validtax strategy to recognize deferred tax assets on unrealized losses, the Companymay be required to write-off related deferred tax asset amounts.

 

As of September 30, 2010, the Company’s valuationallowance was $133.6.  However, based onfuture facts, circumstances and FASB developments, the valuation allowance maynot be sufficient.  Charges to increasethe valuation allowance could have a material adverse effect on the Company’sresults of operations and financial position.

 

*TheCompany experienced ratings downgrades in 2009 and 2010 and may experienceadditional future downgrades in the Company’s ratings, which may negativelyaffect profitability, financial condition, and access to liquidity*

 

Ratings are an important factor in establishing the competitiveposition of insurance companies as well as access to liquidity. On October 27,2009, Moody’s downgraded the Company to “A2” from “A1” and assigned adeveloping outlook.  On June 11, 2010,A.M. Best affirmed the Company’s financial strength ratings of “A” and issuercredit ratings of “a+”.  The outlook wasimproved to “stable” from “negative”.  OnSeptember 16, 2010, Standard & Poor’s Ratings Services (“S&P”) loweredthe counterparty credit and insurer financial strength ratings of the Companyto “A” from “A+”.  On November 10, 2010,S&P placed the Company’s counterparty credit and insurer financial strengthratings on CreditWatch with negative implications.  On September 21, 2010, Fitch maintained theCompany on a “Ratings Watch Negative” with a financial strength rating of “A-”.  The outlook remains “negative”.  See “Ratings” in Item 1. Business.

 

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A downgrade, or the potential for a downgrade, of anyof the Company’s or affiliated companies’ ratings may lead to lower margins,increased liquidity needs, more limited access to liquidity, increased capitalneeds and reduced fee income as follows:

 

§                  Increasein contract surrenders and withdrawals;

§                  Terminationof relationships with broker-dealers, banks, agents, wholesalers, and other distributorsof products and services;

§                  Decreasein deposits to existing annuity contracts, sales of new annuity contracts andGIC products and/or decrease in renewals of existing GIC business;

§                  Ratingstriggers under Collateral Support Annexes of derivatives contracts, which wouldrequire the Company to post additional collateral; and

§                  Decreasein loans available from parent company and/or affiliates due to the parent’sand/or affiliates’ reduced access to the commercial paper market and/or lettersof credit.

 

The Company cannot predict what actions ratingorganizations may take, or what actions it may be required to take in responseto the actions of rating organizations, which could adversely affect theCompany.  Rating organizations assignratings based upon several factors, including the following:

 

§                  Statutorycapital;

§                  Riskof investment portfolio;

§                  Economictrends affecting the financial services industry;

§                  Changesin models and formulas used by rating organizations to assess the financialstrength of a rated company;

§                  Strengthof the Company’s management team;

§                  Enterpriserisk management;

§                  Parentcompany business strategies (including implications of restructuring plans);

§                  Accessto production distribution channels;

§                  Expectedfuture profitability;

§                  Marketshare and brand recognition; and

§                  Othercircumstances outside the rated company’s control.

 

In response to weakening global markets, ratingagencies have been continuously reevaluating their ratings of banks andinsurance companies around the world. Over the past several quarters, the rating agencies have maintained anegative outlook of the financial services industry, while reviewing theindividual ratings of specific entities. The downgrades of the Company by S&P, Fitch, A.M. Best and Moody’sreflect a broader view of how the financial services industry is beingchallenged by the current economic environment, but also are based on therating agencies’ specific views of the Company’s financial strength.  As ratings agencies continue to evaluate thefinancial services industry, it is possible that rating organizations willheighten the level of scrutiny that they apply to such institutions, willincrease the frequency and scope of their credit reviews, will requestadditional information from the companies that they rate, and may adjust upwardthe capital and other requirements employed in the rating organization modelsfor maintenance of certain ratings levels. It is possible that the outcome ofsuch reviews of the Company will have additional adverse ratings

 

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consequences, which could have a material adverseeffect on results of operations and financial condition.

 

*A loss ofkey product distribution relationships could materially affect sales*

 

The Company distributes certain products underagreements with other members of the financial services industry that are notaffiliated with the Company. An interruption in certain key relationships couldmaterially affect the Company’s ability to market its products and could have amaterial adverse effect on its business, operating results and financial condition.Distributors may elect to reduce or terminate their distribution relationshipswith the Company, including for such reasons as changes in the Company’sdistribution strategy, adverse developments in the Company’s business, adverserating agency actions or concerns about market-related risks. The Company isalso at risk that key distribution partners may merge, change their businessmodels in ways that affect how Company products are sold, or terminate theirdistribution contracts with the Company. Alternatively, the Company mayterminate one or more distribution agreements due to, for example, a loss ofconfidence in, or a change in control of, one of the distributors, which couldreduce sales.

 

*Changesin federal income tax law or interpretations of existing tax law could affectprofitability and financial condition by making some products less attractiveto contractowners and increasing tax costs of contractowners or the Company*

 

Annuity**products**that**the**Company**sells**currently**benefit**from**one**or**more**forms**of**tax**favored**status**under**current**federal**tax**law.* *The**Economic**Growth**and**Tax**Relief**Reconciliation**Act**of**2001**and**the**Jobs**and**Growth**Tax**Relief**Reconciliation**Act**of**2003**significantly**lowered**individual**tax**rates and**reduced**the**benefits**of**deferral**on**the**build-up**of**value**of**annuities.* *Many**of**these**provisions**arescheduled to expire**in**2010.* *It is likely that looming federal deficitswill spawn numerous revenue raising proposals, including those directed at thelife insurance industry and its products. Over the years, the life insurance industry has contended with proposalseither to limit, or repeal, the continued tax deferral afforded to the “insidebuild-up” associated with life insurance and annuity products.  While countering any such revenue proposal isa top industry priority, if such a proposal should be made, the Company cannotpredict its scope, effect or likelihood of outcome.

 

Additionally, the Company is subject to federalcorporation income tax, and benefits from certain federal tax provisions,including but not limited to, dividends received deductions, various taxcredits, and insurance reserve deductions. Due in large part to the recent financial crisis, there is an increasingrisk that changes to federal tax law could be enacted, and could result inmaterially higher corporate taxes than would be incurred under existing tax lawand adversely impact profitability.**Also, interpretation and enforcement ofexisting tax law could change and could be applied to the Company as part of anIRS examination and adversely impact the capital position of the Company.  Although the specific form of any suchpotential legislation is

 

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uncertain, it could includelessening or eliminating some or all of the tax advantages currently benefitingthe Company or its policyholders, including but not limited to, those mentionedabove or imposing new costs.

 

**Item 6.      Exhibits**

 

See Exhibit Index onpages 117-118 hereof.

 

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**SIGNATURE**

 

 

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

 

 
| November 5, 2010 |   | 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 INSURANCECOMPANY (the “Company”)**

**ExhibitIndex**

 
| **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).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|-------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 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. 333-101481,  811-5626). |
|                    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 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).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|                    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 12+                     |   | Computation of Ratio of Earnings to Fixed Charges, filed herewith.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|                    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 31.1+                   |   | Certificate of Ewout L. Steenbergen pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|                    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 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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