** **

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

 

**CommissionFile Number:  333-133157, 333-133158, 333-130833, 333-130827,333-158492, 333-162420, 333-166370**

 

 

**ING LIFE INSURANCE AND ANNUITY COMPANY**

(Exact name of registrant as specified in its charter)

 

| **Connecticut**

(State or other  jurisdiction of incorporation or organization)

 

**One  Orange Way**

**Windsor,  Connecticut**

(Address of  principal executive offices) | ** ** | **71-0294708**

(IRS Employer  Identification No.)

** **

**06095-4774**

(Zip Code) |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------|

 

**(860) 580-4646**

(Registrant’s telephone number, including area code)

 

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

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90days.       Yes     x       No    o

 

Indicate by check markwhether the registrant (1) has submitted electronically and posted on itscorporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 ofthis chapter) during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post suchfiles).       Yes     o       No    o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company.  See definition of “large accelerated filer”,“accelerated filer”, and “smaller reporting company” in Rule 12b-2 of theExchange Act. (Check one):

 

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

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).       Yes    o       No    x

 

**APPLICABLEONLY TO CORPORATE ISSUERS:**

 

Indicate the number ofshares outstanding of each of the issuer’s classes of common stock, as of thelatest practicable date: 55,000 shares of Common Stock, $50 par value, as ofNovember 5, 2010, are issued and outstanding, all of which were directlyowned by Lion Connecticut Holdings Inc.

 

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

 

----

 

**ING LifeInsurance and Annuity Company and Subsidiaries**

**(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  Consolidated Statements of Operations                                           | 3          |
|               | Condensed  Consolidated Balance Sheets                                                     | 4          |
|               | Condensed Consolidated Statements of Changes in  Shareholder’s Equity                 | 6          |
|               | Condensed Consolidated Statements of Cash Flows                                            | 8          |
|               | Notes to Condensed Consolidated Financial Statements                                       | 9          |
|               |                                                                                       |       |
| Item 2.            | Management’s  Narrative Analysis of the Results of Operations and Financial Condition | 59         |
|               |                                                                                       |       |
| Item 4.            | Controls and  Procedures                                                                   | 97         |
|               |                                                                                       |       |
|               |                                                                                       |       |
| **PART II.**  | **OTHER INFORMATION**                                                                      |       |
|               |                                                                                       |       |
| Item 1.            | Legal Proceedings                                                                          | 98         |
|               |                                                                                       |       |
| Item 1A.           | Risk Factors                                                                               | 98         |
|               |                                                                                       |       |
| Item 6.            | Exhibits                                                                                   | 107        |
|               |                                                                                       |       |
| Signature          |                                                                                       | 108        |
|               |                                                                                       |       |
| Exhibit Index |                                                                                       | 109        |

 

2

----

 

**ING Life Insurance and AnnuityCompany and Subsidiaries**

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

 

 

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

 

**Item 1.      Financial Statements**

 

 

**Condensed Consolidated Statements ofOperations**

(Unaudited)

(In millions)

 

 
| ** **                                                                                          | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** |
|-----------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|
| ** **                                                                                          | ** ** | **2010**                                                 | ** ** | **2009**                                                | ** ** | **2010** | ** ** | **2009** |
| **Revenues:**                                                                                       |       |                                                     |       |                                                    |   |   |   |   |   |   |   |   |
| Net  investment income                                                                              |       | $                                                        | 327.4      |                                                    |   | $ | 322.2 |   |   | $ | 986.3 |   |   | $ | 935.7 |   |
| Fee  income                                                                                         |       | 134.8                                                    |       |                                                    | 141.9 |   |   | 417.0 |   |   | 381.7 |   |
| Premiums                                                                                            |       | 22.0                                                     |       |                                                    | 9.6 |   |   | 43.4 |   |   | 23.2 |   |
| Broker-dealer  commission revenue                                                                   |       | 51.8                                                     |       |                                                    | 56.0 |   |   | 162.8 |   |   | 215.3 |   |
| Net  realized capital gains (losses):                                                               |       |                                                     |       |                                                    |   |   |   |   |   |   |   |   |
| Total  other-than-temporary impairment losses                                                       |       | (24.3                                                    | )          |                                                    | (21.5 | ) |   | (118.2 | ) |   | (366.4 | ) |
| Portion  of other-than-temporary impairment losses recognized in Other comprehensive income  (loss) |       | 13.1                                                     |       |                                                    | 6.9 |   |   | 41.6 |   |   | 21.2 |   |
| Net  other-than-temporary impairments recognized in earnings                                        |       | (11.2                                                    | )          |                                                    | (14.6 | ) |   | (76.6 | ) |   | (345.2 | ) |
| Other  net realized capital gains (losses)                                                          |       | 14.4                                                     |       |                                                    | (0.4 | ) |   | 53.8 |   |   | 145.9 |   |
| Total  net realized capital gains (losses)                                                          |       | 3.2                                                      |       |                                                    | (15.0 | ) |   | (22.8 | ) |   | (199.3 | ) |
| Other  income                                                                                       |       | 10.3                                                     |       |                                                    | 3.8 |   |   | 25.8 |   |   | 11.9 |   |
| Total  revenue                                                                                      |       | 549.5                                                    |       |                                                    | 518.5 |   |   | 1,612.5 |   |   | 1,368.5 |   |
| **Benefits and expenses:**                                                                          |       |                                                     |       |                                                    |   |   |   |   |   |   |   |   |
| Interest  credited and other benefits to contractowners                                             |       | 187.5                                                    |       |                                                    | 116.1 |   |   | 570.5 |   |   | 414.6 |   |
| Operating  expenses                                                                                 |       | 184.4                                                    |       |                                                    | 147.3 |   |   | 518.7 |   |   | 432.7 |   |
| Broker-dealer  commission expense                                                                   |       | 51.8                                                     |       |                                                    | 56.0 |   |   | 162.8 |   |   | 215.3 |   |
| Net  amortization of deferred policy acquisition costs and value of business  acquired              |       | (2.1                                                     | )          |                                                    | (19.2 | ) |   | 47.8 |   |   | 42.2 |   |
| Interest  expense                                                                                   |       | 0.7                                                      |       |                                                    | 0.9 |   |   | 2.2 |   |   | 2.6 |   |
| Total  benefits and expenses                                                                        |       | 422.3                                                    |       |                                                    | 301.1 |   |   | 1,302.0 |   |   | 1,107.4 |   |
| Income  before income taxes                                                                         |       | 127.2                                                    |       |                                                    | 217.4 |   |   | 310.5 |   |   | 261.1 |   |
| Income  tax (benefit) expense                                                                       |       | (8.8                                                     | )          |                                                    | 72.8 |   |   | 39.9 |   |   | (20.8 | ) |
| Net  income                                                                                         |       | $                                                        | 136.0      |                                                    |   | $ | 144.6 |   |   | $ | 270.6 |   |   | $ | 281.9 |   |

 

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

 

3

----

 

**ING Life Insurance and AnnuityCompany and Subsidiaries**

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

 

**Condensed Consolidated 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 $15,711.7 at 2010 and $15,038.2 at 2009) |       | $                      | 16,945.6   |                  |       | $ | 15,185.5 |   |   |
| Equity securities, available-for-sale, at fair  value  (cost of $188.1 at 2010 and $175.1 at 2009)                |       | 216.3                  |       |                  | 187.9      |   |   |
| Short-term investments                                                                                            |       | 67.0                   |       |                  | 535.5      |   |   |
| Mortgage loans on real estate                                                                                     |       | 1,818.3                |       |                  | 1,874.5    |   |   |
| Loan - Dutch State obligation                                                                                     |       | 577.3                  |       |                  | 674.1      |   |   |
| Policy loans                                                                                                      |       | 252.9                  |       |                  | 254.7      |   |   |
| Limited partnerships/corporations                                                                                 |       | 442.4                  |       |                  | 426.2      |   |   |
| Derivatives                                                                                                       |       | 216.0                  |       |                  | 129.0      |   |   |
| Securities pledged (amortized cost of $788.5 at  2010 and $483.7 at 2009)                                         |       | 856.4                  |       |                  | 469.8      |   |   |
| Total investments                                                                                                 |       | 21,392.2               |       |                  | 19,737.2   |   |   |
| Cash and cash equivalents                                                                                         |       | 313.6                  |       |                  | 243.3      |   |   |
| Short-term investments under securities loan  agreement, including collateral delivered                           |       | 751.2                  |       |                  | 351.0      |   |   |
| Accrued investment income                                                                                         |       | 250.0                  |       |                  | 217.2      |   |   |
| Receivable for securities sold                                                                                    |       | 43.9                   |       |                  | 3.1        |   |   |
| Reinsurance recoverable                                                                                           |       | 2,402.5                |       |                  | 2,426.3    |   |   |
| Deferred policy acquisition costs                                                                                 |       | 955.5                  |       |                  | 901.8      |   |   |
| Value of business acquired                                                                                        |       | 931.4                  |       |                  | 991.5      |   |   |
| Notes receivable from affiliate                                                                                   |       | 175.0                  |       |                  | 175.0      |   |   |
| Short-term loan to affiliate                                                                                      |       | 308.4                  |       |                  | 287.2      |   |   |
| Due from affiliates                                                                                               |       | 40.2                   |       |                  | 49.1       |   |   |
| Current income tax recoverable                                                                                    |       | -            |       |                  | 23.9       |   |   |
| Property and equipment                                                                                            |       | 88.2                   |       |                  | 90.8       |   |   |
| Other assets                                                                                                      |       | 106.9                  |       |                  | 100.8      |   |   |
| Assets held in separate accounts                                                                                  |       | 42,688.9               |       |                  | 41,369.8   |   |   |
| Total assets                                                                                                      |       | $                      | 70,447.9   |                  |       | $ | 66,968.0 |   |   |

 

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

 

4

----

 

**ING Life Insurance and AnnuityCompany and Subsidiaries**

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

 

**Condensed Consolidated Balance 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                                                     |       | $                      | 22,477.3   |                  |   | $ | 21,115.0 |   |
| Payable for securities purchased                                                               |       | 135.4                  |       |                  | 18.4 |   |
| Payables under securities loan agreement,  including collateral held                           |       | 780.8                  |       |                  | 351.0 |   |
| Notes payable                                                                                  |       | 4.9                    |       |                  | 4.9 |   |
| Due to affiliates                                                                              |       | 127.3                  |       |                  | 159.9 |   |
| Current income taxes                                                                           |       | 133.4                  |       |                  | -   |   |
| Deferred income taxes                                                                          |       | 244.6                  |       |                  | 351.2 |   |
| Other liabilities                                                                              |       | 664.7                  |       |                  | 693.7 |   |
| Liabilities related to separate accounts                                                       |       | 42,688.9               |       |                  | 41,369.8 |   |
| Total liabilities                                                                              |       | 67,257.3               |       |                  | 64,063.9 |   |
|                                                                                           |       |                   |       |                  |   |   |
| Shareholder’s equity:                                                                     |       |                   |       |                  |   |   |
| Common stock (100,000 shares authorized, 55,000 issued  and  outstanding; $50 per share value) |       | 2.8                    |       |                  | 2.8 |   |
| Additional paid-in capital                                                                     |       | 4,325.8                |       |                  | 4,528.2 |   |
| Accumulated other comprehensive income (loss)                                                  |       | 203.3                  |       |                  | (15.0 | ) |
| Retained earnings (deficit)                                                                    |       | (1,341.3               | )          |                  | (1,611.9 | ) |
| Total shareholder’s equity                                                                |       | 3,190.6                |       |                  | 2,904.1 |   |
| Total liabilities and shareholder’s equity                                                |       | $                      | 70,447.9   |                  |   | $ | 66,968.0 |   |

 

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

 

5

----

 

**ING Life Insurance and AnnuityCompany and Subsidiaries**

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

 

**Condensed Consolidated Statements ofChanges 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, 2009                                                                                                        |       | $             | 2.8        |           |          | $                  | 4,161.3    |          |       | $                      | (482.1 | ) |   | $ | (2,117.5 | ) |   | $ | 1,564.5 |   |
| Cumulative  effect of change in accounting principle, net of DAC and tax                                                                |       | -   |       |           | -   |               |       | (151.7        | )          |                   | 151.7 |   |   | -   |   |
| Comprehensive  income:                                                                                                                  |       |          |       |           |          |               |       |          |       |                   |   |   |   |   |   |
| Net  income                                                                                                                             |       | -   |       |           | -   |               |       | -   |       |                   | 281.9 |   |   | 281.9 |   |
| Other comprehensive income, net of tax:                                                                        |       |          |       |           |          |               |       |          |       |                   |   |   |   |   |   |
| Change  in net unrealized capital gains (losses) on securities ($804.0 pretax),  including change in tax valuation allowance of $(66.0) |       | -   |       |           | -   |               |       | 648.9         |       |                   | -   |   |   | 648.9 |   |
| Portion  of other-than-temporary impairment losses recognized in other comprehensive  income (loss)                                     |       | -   |       |           | -   |               |       | (21.2         | )          |                   | -   |   |   | (21.2 | ) |
| Change  in other-than-temporary impairment losses recognized in other comprehensive  income (loss)                                      |       | -   |       |           | -   |               |       | 0.4           |       |                   | -   |   |   | 0.4 |   |
| Pension  liability ($8.4 pretax)                                                                                                        |       | -   |       |           | -   |               |       | 5.5           |       |                   | -   |   |   | 5.5 |   |
| Total  comprehensive income                                                                                                             |       |          |       |           |          |               |       |          |       |                   |   |   |   | 915.5 |   |
| Contribution  of capital                                                                                                                |       | -   |       |           | 365.0         |               |       | -   |       |                   | -   |   |   | 365.0 |   |
| Employee  share-based payments                                                                                                          |       | -   |       |           | 1.5           |               |       | -   |       |                   | -   |   |   | 1.5 |   |
| Balance  at September 30, 2009                                                                                                     |       | $             | 2.8        |           |          | $                  | 4,527.8    |          |       | $                      | (0.2 | ) |   | $ | (1,683.9 | ) |   | $ | 2,846.5 |   |

 

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

 

6

----

 

**ING Life Insurance and AnnuityCompany and Subsidiaries**

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

 

**Condensed Consolidated Statements ofChanges in Shareholder’s Equity**

(Unaudited)

(In millions)

 

 
|                                                                                                                                     | ** ** | ** **    | ** ** | ** **     | ** **    | **Accumulated**    | ** ** | ** **    | ** ** | ** **             |
|------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------|------------|----------------|---------------|--------------------|------------|---------------|------------|------------------------|
|                                                                                                                                     | ** ** | ** **    | ** ** | **Additional** | ** **    | **Other**          | ** ** | **Retained**  | ** ** | **Total**              |
|                                                                                                                                     | ** ** | **Common**    | ** ** | **Paid-In**    | ** **    | **Comprehensive**  | ** ** | **Earnings**  | ** ** | **Shareholder’s** |
|                                                                                                                                     | ** ** | **Stock**     | ** ** | **Capital**    | ** **    | **Income  (Loss)** | ** ** | **(Deficit)** | ** ** | **Equity**             |
| Balance  at January 1, 2010                                                                                                         |       | $             | 2.8        |           |          | $                  | 4,528.2    |          |       | $                      | (15.0 | ) |   | $ | (1,611.9 | ) |   | $ | 2,904.1 |   |
| Comprehensive  income:                                                                                                                   |       |          |       |           |          |               |       |          |       |                   |   |   |   |   |   |
| Net  income                                                                                                                              |       | -   |       |           | -   |               |       | -   |       |                   | 270.6 |   |   | 270.6 |   |
| Other  comprehensive income, net of tax:                                                                                                 |       |          |       |           |          |               |       |          |       |                   |   |   |   |   |   |
| Change  in net unrealized capital gains (losses) on securities ($175.0 pretax),  including change in tax valuation allowance of $(111.0) |       | -   |       |           | -   |               |       | 247.0         |       |                   | -   |   |   | 247.0 |   |
| Portion  of other-than-temporary impairment losses recognized in other comprehensive  income (loss)                                      |       | -   |       |           | -   |               |       | (41.6         | )          |                   | -   |   |   | (41.6 | ) |
| Change  in other-than-temporary impairment losses recognized in other comprehensive  income (loss)                                       |       | -   |       |           | -   |               |       | 12.9          |       |                   | -   |   |   | 12.9 |   |
| Total  comprehensive income                                                                                                              |       |          |       |           |          |               |       |          |       |                   |   |   |   | 488.9 |   |
| Dividends  paid                                                                                                                          |       | -   |       |           | (203.0        | )                  |       | -   |       |                   | -   |   |   | (203.0 | ) |
| Employee  share-based payments                                                                                                           |       | -   |       |           | 0.6           |               |       | -   |       |                   | -   |   |   | 0.6 |   |
| Balance  at September 30, 2010                                                                                                      |       | $             | 2.8        |           |          | $                  | 4,325.8    |          |       | $                      | 203.3 |   |   | $ | (1,341.3 | ) |   | $ | 3,190.6 |   |

 

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

 

7

----

 

**ING Life Insurance and AnnuityCompany and Subsidiaries**

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

 

**Condensed Consolidated Statements ofCash Flows**

(Unaudited)

(In millions)

 

 
| ** **                                                    | ** ** | **Nine Months Ended September 30,** | ** ** |
|---------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                    | ** ** | **2010**                                                | ** ** | **2009** |
| Net cash provided by operating activities                     |       | $                                                       | 803.3      |   |   | $ | 938.2 |   |
|                                                          |       |                                                    |       |   |   |   |
| Cash Flows from Investing Activities:                         |       |                                                    |       |   |   |   |
| Proceeds from the sale, maturity, disposal or  redemption of: |       |                                                    |       |   |   |   |
| Fixed maturities, available-for-sale                          |       | 4,757.3                                                 |       |   | 4,939.8 |   |
| Equity securities, available-for-sale                         |       | 11.2                                                    |       |   | 86.3 |   |
| Mortgage loans on real estate                                 |       | 106.1                                                   |       |   | 162.0 |   |
| Limited partnerships/corporations                             |       | 18.6                                                    |       |   | 80.4 |   |
| Derivatives                                                   |       | (96.9                                                   | )          |   | 19.1 |   |
| Acquisition of:                                               |       |                                                    |       |   |   |   |
| Fixed maturities, available-for-sale                          |       | (5,636.6                                                | )          |   | (4,673.5 | ) |
| Equity securities, available-for-sale                         |       | (16.0                                                   | )          |   | (24.9 | ) |
| Mortgage loans on real estate                                 |       | (50.2                                                   | )          |   | (56.1 | ) |
| Limited partnerships/corporations                             |       | (48.4                                                   | )          |   | (28.9 | ) |
| Derivatives                                                   |       | (24.7                                                   | )          |   | (155.3 | ) |
| Policy loans, net                                             |       | 1.8                                                     |       |   | 13.3 |   |
| Short-term investments, net                                   |       | 468.3                                                   |       |   | (865.4 | ) |
| Loan-Dutch State obligation                                   |       | 96.8                                                    |       |   | 92.0 |   |
| Collateral received (delivered)                               |       | 29.6                                                    |       |   | (0.1 | ) |
| Purchases of fixed assets, net                                |       | -                                             |       |   | 13.5 |   |
| Net cash used in investing activities                         |       | (383.1                                                  | )          |   | (397.8 | ) |
|                                                          |       |                                                    |       |   |   |   |
| Cash Flows from Financing Activities:                         |       |                                                    |       |   |   |   |
| Deposits received for investment contracts                    |       | 1,480.6                                                 |       |   | 1,620.1 |   |
| Maturities and withdrawals from investment  contracts         |       | (1,606.3                                                | )          |   | (1,578.0 | ) |
| Short-term loans to affiliates                                |       | (21.2                                                   | )          |   | (270.2 | ) |
| Short-term repayments of repurchase agreements,  net          |       | -                                             |       |   | (615.2 | ) |
| Dividends to parent                                           |       | (203.0                                                  | )          |   | -   |   |
| Contribution of capital                                       |       | -                                             |       |   | 365.0 |   |
| Net cash used in financing activities                         |       | (349.9                                                  | )          |   | (478.3 | ) |
| Net increase in cash and cash equivalents                     |       | 70.3                                                    |       |   | 62.1 |   |
| Cash and cash equivalents, beginning of period                |       | 243.3                                                   |       |   | 203.5 |   |
| Cash and cash equivalents, end of period                      |       | $                                                       | 313.6      |   |   | $ | 265.6 |   |

 

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

 

8

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| **ING  Life Insurance and Annuity Company and Subsidiaries**           |
|------------------------------------------------------------------------|
| **(A  wholly-owned subsidiary of Lion Connecticut Holdings Inc.)**     |
| **Notes  to Condensed Consolidated  Financial Statements (Unaudited)** |
| (Dollar amounts in millions, unless otherwise stated)                  |

 

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

 

***Basis of Presentation***

 

INGLife Insurance and Annuity Company (“ILIAC”) is a stock life insurance companydomiciled in the state of Connecticut. ILIAC and its wholly-owned subsidiaries (collectively, the “Company”) areproviders of financial products and services in the United States.  ILIAC is authorized to conduct its insurancebusiness in all states and the District of Columbia.

 

Thecondensed consolidated financial statements for the nine months ended September 30,2010, include ILIAC and its wholly-owned subsidiaries, ING FinancialAdvisers, LLC (“IFA”) and Directed Services LLC (“DSL”).  ILIAC is a direct, wholly-owned subsidiary ofLion Connecticut Holdings Inc. (“Lion” or “Parent”), which is an indirect,wholly-owned subsidiary of ING Groep N.V. (“ING”).  ING is a global financial services holdingcompany based in the Netherlands, with American Depository Shares listed on theNew York Stock Exchange under the symbol “ING.”

 

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 will explore all options for implementingthe separation 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.

 

Thecondensed consolidated financial statements and notes as of September 30,2010, and for the three and nine months ended September 30, 2010, havebeen prepared in accordance with accounting principles generally accepted inthe United States (“US GAAP”) and are unaudited.

 

Thecondensed consolidated financial statements reflect all adjustments (consistingonly of normal, recurring adjustments) which are, in the opinion of management,necessary for the fair presentation of the consolidated financial position,results of operations, and cash flows, for the interim periods.  These condensed consolidated financialstatements and notes should be read in conjunction with the consolidatedfinancial statements and related notes as presented in the Company’s 2009Annual Report on Form 10-K/A.  Theresults of operations for the interim periods may not be considered indicativeof results to be expected for the full year.

 

9

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| **ING  Life Insurance and Annuity Company and Subsidiaries**          |
|-----------------------------------------------------------------------|
| **(A  wholly-owned subsidiary of Lion Connecticut Holdings Inc.)**    |
| **Notes  to Condensed Consolidated Financial Statements (Unaudited)** |
| (Dollar amounts in millions, unless otherwise stated)                 |

 

***Description of Business***

 

TheCompany offers qualified and nonqualified annuity contracts that include avariety of funding and payout options for individuals and employer-sponsoredretirement plans qualified under Internal Revenue Code Sections 401, 403, 408,and 457, as well as nonqualified deferred compensation plans.  The Company’s products are offered primarilyto individuals, pension plans, small businesses, and employer-sponsored groupsin the health care, government, and education markets (collectively “not-for-profit”organizations) and corporate markets. The Company’s products are generally distributed through pension professionals,independent agents and brokers, third party administrators, banks, dedicatedcareer agents, and financial planners.

 

***Useof Estimates***

 

Thepreparation of financial statements in conformity with US GAAP requiresmanagement to make estimates and assumptions that affect the amounts reportedin the financial statements and accompanying notes.  Actual results could differ from reportedresults using those estimates.

 

***Reclassifications***

 

Certainreclassifications have been made to prior year financial information to conformto the current year classifications.

 

***SubsequentEvents***

 

TheCompany has evaluated subsequent events for recognition and disclosure throughthe date the condensed consolidated financial statements were issued.

 

***Significant Accounting Policies***

 

For adescription of significant accounting policies, see the Organization andSignificant Accounting Policies footnote to the Consolidated FinancialStatements included in the Company’s 2009 Annual Report on Form 10-K/A.  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/A, except as noted in the Recently AdoptedAccounting Standards footnote.

 

 

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

 

*ScopeException Related to Embedded Credit Derivatives*

 

In March 2010,the Financial Accounting Standards Board (“FASB”) issued Accounting StandardsUpdate (“ASU”) 2010-11, “Derivatives and Hedging (ASC Topic 815): Scope

 

10

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| **ING  Life Insurance and Annuity Company and Subsidiaries**          |
|-----------------------------------------------------------------------|
| **(A  wholly-owned subsidiary of Lion Connecticut Holdings Inc.)**    |
| **Notes  to Condensed Consolidated Financial Statements (Unaudited)** |
| (Dollar amounts in millions, unless otherwise stated)                 |

 

ExceptionRelated to Embedded Credit Derivatives” (“ASU 2010-11”), which clarifies thatthe only type of embedded credit derivatives that are exempt from bifurcationrequirements are those that relate to the subordination of one financialinstrument to another.

 

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

 

*ImprovingDisclosures about Fair Value Measurements*

 

In January 2010,the FASB issued ASU 2010-06, “Fair Value Measurements and Disclosure (ASC Topic820): Improving Disclosures about Fair Value Measurements,” (“ASU 2010-06”),which requires several new disclosures, as well as clarification to existingdisclosures, 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.

 

Theprovisions of ASU 2010-06 were adopted by the Company on January 1, 2010,and are included in the Financial Instruments footnote, except for thedisclosures related to the Level 3 reconciliation, which are effective forfiscal years beginning after December 15, 2010, and for interim periodswithin those fiscal years.  As thepronouncement only pertains to additional disclosure, the adoption had noeffect on the Company’s financial condition, results of operations, or cashflows.

 

*Accountingand Reporting Decreases in Ownership of a Subsidiary*

 

In January 2010,the FASB issued ASU 2010-02 “Consolidations (ASC Topic 810): Accounting andReporting for Decreases in Ownership of a Subsidiary – a Scope Clarification,”(“ASU 2010-02”), which clarifies that the scope of the decrease in ownershipprovisions applies to the following:

 

§      A subsidiary or group of assets that is abusiness or nonprofit activity;

§      A subsidiary that is a business or nonprofitactivity that is transferred to an equity method investee or joint venture; and

 

11

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| **ING  Life Insurance and Annuity Company and Subsidiaries**          |
|-----------------------------------------------------------------------|
| **(A wholly-owned  subsidiary of Lion Connecticut Holdings Inc.)**    |
| **Notes  to Condensed Consolidated Financial Statements (Unaudited)** |
| (Dollar amounts in millions, unless otherwise stated)                 |

 

§      An exchange of a group of assets that constitutesa business or nonprofit activity for a noncontrolling interest in an entity(including an equity method investee or joint venture).

 

ASU2010-02 also notes that the decrease in ownership guidance does not apply tosales of in substance real estate and expands disclosure requirements.

 

Theprovisions of ASU 2010-02 were adopted by the Company on January 1, 2010,and were required to be applied retrospectively to January 1, 2009.  The Company determined, however, that therewas no effect on the Company’s financial condition, results of operations, orcash flows for the three and nine months ended September 30, 2010, or theyear ended December 31, 2009, as there were no decreases in ownership of asubsidiary during those periods.

 

*Improvementsto Financial Reporting by Enterprises Involved in Variable Interest Entities*

 

In December 2009,the FASB issued ASU 2009-17, “Consolidations (ASC Topic 810): Improvements toFinancial Reporting by Enterprises Involved in Variable Interest Entities,” (“ASU2009-17”), which eliminates the exemption for qualifying special-purposeentities (“QSPEs”), as well as amends the consolidation guidance for variableinterest 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.

 

Inaddition, in February 2010, the FASB issued ASU 2010-10, “Consolidation(ASC Topic 810): Amendments for Certain Investment Funds” (ASU 2010-10), whichprimarily defers to ASU 2009-17 for an investment in an entity that isaccounted for as an investment company.

 

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

 

12

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| **ING  Life Insurance and Annuity Company and Subsidiaries**          |
|-----------------------------------------------------------------------|
| **(A  wholly-owned subsidiary of Lion Connecticut Holdings Inc.)**    |
| **Notes  to Condensed Consolidated Financial Statements (Unaudited)** |
| (Dollar amounts in millions, unless otherwise stated)                 |

 

*Accountingfor Transfers of Financial Assets*

 

In December 2009,the FASB issued ASU 2009-16 “Transfers & Servicing (ASC Topic 860):Accounting for Transfers of Financial Assets” (“ASU 2009-16”), which eliminatesthe QSPE concept and requires a transferor of financial 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 control, unless thetransfer meets the conditions for a participating interest; and

§      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.

 

Theprovisions of ASU 2009-16 were adopted on January 1, 2010. The Companydetermined, however, that there was no effect on the Company’s financialcondition, results of operations, or cash flows upon adoption, as the Companydid not have any QSPEs under previous US GAAP, and the requirements for saleaccounting treatment are consistent with those previously applied by theCompany under US GAAP.

 

*Measuringthe Fair Value of Certain Alternative Investments*

 

In September 2009,the FASB issued ASU 2009-12, “Fair Value Measurements and Disclosures (ASCTopic 820): Investments in Certain Entities That Calculate Net Asset Value perShare (or Its Equivalent)” (“ASU 2009-12”), which allows the use of net assetvalue to estimate the fair value of certain alternative investments, such asinterests in hedge funds, private equity funds, real estate funds, venturecapital funds, offshore fund vehicles, and funds of funds.  In addition, ASU 2009-12 requires disclosuresabout the attributes of such investments.

 

Theprovisions of ASU 2009-12 were adopted by the Company on December 31,2009.  The Company determined, however,that there was no effect on the Company’s financial condition, results ofoperations, or cash flows upon adoption, as its guidance is consistent withthat previously applied by the Company under US GAAP.  The disclosure provisions required by ASU2009-12 are presented in the Investments footnote to these financialstatements.

 

*FASBAccounting Standards Codification*

 

In June 2009,the FASB issued ASU 2009-01, “Topic 105 – Generally Accepted AccountingPrinciples: amendments based on Statement of Financial Accounting Standards No. 168,The FASB Accounting Standards CodificationTM and the Hierarchy of Generally AcceptedAccounting Principles” (“ASU 2009-01”), which confirms that as of July 1,2009, the “FASB Accounting Standards CodificationTM”(“the Codification” or

 

13

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| **ING  Life Insurance and Annuity Company and Subsidiaries**          |
|-----------------------------------------------------------------------|
| **(A  wholly-owned subsidiary of Lion Connecticut Holdings Inc.)**    |
| **Notes  to Condensed Consolidated Financial Statements (Unaudited)** |
| (Dollar amounts in millions, unless otherwise stated)                 |

 

“ASC”)is the single official source of authoritative, nongovernmental US GAAP.  All existing accounting standard documentsare superseded, and all other accounting literature not included in theCodification is considered nonauthoritative.

 

TheCompany 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.

 

*SubsequentEvents*

 

In May 2009,the FASB issued new guidance on subsequent events, included in ASC Topic 855, “SubsequentEvents,” which establishes:

 

§      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.

 

Theseprovisions, as included in ASC Topic 855, were adopted by the Company onJune 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.

 

*Recognitionand Presentation of Other-Than-Temporary Impairments*

 

In April 2009,the FASB issued new guidance on recognition and presentation ofother-than-temporary impairments, included in ASC Topic 320, “Investments-Debtand 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;

 

14

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| **ING  Life Insurance and Annuity Company and Subsidiaries**          |
|-----------------------------------------------------------------------|
| **(A  wholly-owned subsidiary of Lion Connecticut Holdings Inc.)**    |
| **Notes  to Condensed Consolidated Financial Statements (Unaudited)** |
| (Dollar amounts in millions, unless otherwise stated)                 |

 

§      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.

 

Theseprovisions, as included in ASC Topic 320, were adopted by the Company onApril 1, 2009.  As a result ofimplementation, the Company recognized a cumulative effect of change inaccounting principle of $151.7 after considering the effects of deferred policyacquisition costs (“DAC”) and income taxes of $(134.0) and $46.9, respectively,as an increase to April 1, 2009 Retained earnings (deficit) with acorresponding decrease to Accumulated other comprehensive income (loss).

 

Inaddition, the Company recognized an increase in amortized cost for previouslyimpaired securities due to the recognition of the cumulative effect of changein accounting principle as of April 1, 2009, as follows:

 
|                                     | ** ** | **Change in  Amortized Cost** |
|------------------------------------------|------------|-------------------------------|
| Fixed maturities:                        |       |                          |   |
| U.S. corporate, state and municipalities |       | $                             | 47.0 |   |
| Foreign                                  |       | 45.0                          |   |
| Residential mortgage-backed              |       | 14.3                          |   |
| Commercial mortgage-backed               |       | 88.5                          |   |
| Other asset-backed                       |       | 44.0                          |   |
| Total investments, available-for-sale    |       | $                             | 238.8 |   |

 

Thedisclosure provisions, as included in ASC Topic 320, are presented in theInvestments footnote to these financial statements.

 

*InterimDisclosures about Fair Value of Financial Instruments*

 

In April 2009,the FASB issued new guidance on interim disclosures about fair value offinancial instruments, included in ASC Topic 825, “Financial Instruments,”which requires that the fair value of financial instruments be disclosed in anentity’s interim financial statements, as well as in annual financialstatements. The provisions included in ASC Topic 825 also require that fairvalue information be presented with the related carrying value and that themethod and significant assumptions used to estimate fair value, as well aschanges in method and significant assumptions, be disclosed.

 

15

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| **ING  Life Insurance and Annuity Company and Subsidiaries**          |
|-----------------------------------------------------------------------|
| **(A  wholly-owned subsidiary of Lion Connecticut Holdings Inc.)**    |
| **Notes  to Condensed Consolidated Financial Statements (Unaudited)** |
| (Dollar amounts in millions, unless otherwise stated)                 |

 

Theseprovisions, as included in ASC Topic 825, were adopted by the Company onApril 1, 2009 and are presented in the Financial Instruments footnote tothese financial statements.  As thepronouncement only pertains to additional disclosure, the adoption had noeffect on the Company’s financial condition, results of operations, or cashflows.

 

*Disclosuresabout Derivative Instruments and Hedging Activities*

 

In March 2008,the FASB issued new guidance on disclosures about derivative instruments andhedging activities, included in ASC Topic 815, “Derivatives and Hedging,” whichrequires enhanced disclosures about objectives and strategies for usingderivatives, fair value amounts of, and gains and losses on, derivativeinstruments, and credit-risk-related contingent features in derivativeagreements, 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.

 

Theseprovisions, as included in ASC Topic 815, were adopted by the Company on January 1,2009 and are included in the Financial Instruments footnote to these financialstatements.  As the pronouncement onlypertains to additional disclosure, the adoption had no effect on the Company’sfinancial condition, results of operations, or cash flows. In addition, theCompany’s derivatives are generally not accounted for using hedge accountingtreatment under ASC Topic 815, as the Company has not historically sought hedgeaccounting treatment.

 

 

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

 

*Accounting for Costs Associatedwith Acquiring or Renewing Insurance Contracts*

 

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

 

16

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| **ING  Life Insurance and Annuity Company and Subsidiaries**          |
|-----------------------------------------------------------------------|
| **(A  wholly-owned subsidiary of Lion Connecticut Holdings Inc.)**    |
| **Notes  to Condensed Consolidated Financial Statements (Unaudited)** |
| (Dollar amounts in millions, unless otherwise stated)                 |

 

The provisions of ASU2010-26 are effective for fiscal years, and interim periods within those fiscalyears, beginning after December 15, 2011, and should be appliedprospectively. Retrospective application is permitted, and early adoption ispermitted at the beginning of an entity’s annual reporting period.  The Company is currently in the process ofdetermining the impact of adoption of the provisions of ASU 2010-26.

 

*ReportingLoans to Participants by Defined Contribution Pension Plans*

 

In September 2010,the FASB issued ASU 2010-25, “Plan Accounting - Defined Contribution PensionPlans (ASC Topic 962): Reporting Loans to Participants by Defined ContributionPension Plans” (“ASU 2010-25”), which requires participant loans be classifiedas notes receivable from participants, segregated from plan investments, andmeasured at their unpaid principal balance plus accrued but unpaid interest.

 

Theprovisions of ASU 2010-25 are effective for fiscal years ending after December 15,2010, and should be applied retrospectively. Early adoption is permitted.  TheCompany is currently in the process of determining the impact of adoption ofthe provisions of ASU 2010-25.

 

*Disclosures about the Credit Quality of FinancingReceivables and the Allowance for Credit Losses*

 

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

 

ASU2010-20 also requires new disclosures by class of financing receivable,including credit quality indicators, aging of past due amounts, the nature andextent of troubled debt restructurings and related defaults, and significantpurchases and sales of financing receivables disaggregated by portfoliosegment.

 

Theprovisions of ASU 2010-20 related to information as of the end of a reportingperiod are effective for fiscal years and interim periods ending after December 15,2010. The disclosures that include information for activity that occurs duringa reporting period are effective for periods beginning after December 15,2010.  Comparative disclosures forperiods that ended before initial adoption are encouraged, but notrequired.  The Company is currently inthe process of determining the impact of adoption of the provisions of ASU2010-20 on its disclosures.

 

17

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| **ING  Life Insurance and Annuity Company and Subsidiaries**          |
|-----------------------------------------------------------------------|
| **(A  wholly-owned subsidiary of Lion Connecticut Holdings Inc.)**    |
| **Notes  to Condensed Consolidated Financial Statements (Unaudited)** |
| (Dollar amounts in millions, unless otherwise stated)                 |

 

*ConsolidationAnalysis of Investments Held through Separate Accounts*

 

In April 2010,the FASB issued ASU 2010-15, “Financial Services—Insurance (ASC Topic 944): HowInvestments Held through Separate Accounts Affect an Insurer’s ConsolidationAnalysis of Those Investments” (“ASU 2010-15”), which clarifies that aninsurance entity generally should not consider any separate account interestsheld for the benefit of policy holders in an investment to be the insurer’sinterests, and should not combine those interests with its general accountinterest in the same investment when assessing the investment forconsolidation.

 

Theprovisions of ASU 2010-15 are effective for fiscal years and interim periodsbeginning after December 15, 2010. The amendments are to be appliedretrospectively to all prior periods as of the date of adoption.  The Company does not expect any effect on itsfinancial condition, results of operations, or cash flows upon adoption, as theguidance is consistent with that previously applied by the Company under ASCTopic 944.

 

 

**4.****                                    FinancialInstruments**

 

***Fair Value Measurements***

 

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 disclosurerequirements for fair value measurements.

 

***Fair Value Hierarchy***

 

The Company hascategorized its financial instruments into a three level hierarchy based on thepriority of the inputs to the valuation technique.

 

The fair value hierarchygives the highest priority to quoted prices in active markets for identicalassets or liabilities (Level 1) and the lowest priority to unobservable inputs(Level 3). If the inputs used to measure fair value fall within differentlevels of the hierarchy, the category level is based on the lowest prioritylevel input that is significant to the fair value measurement of theinstrument.

 

Financial assets andliabilities recorded at fair value on the Condensed Consolidated Balance Sheetsare categorized as follows:

 

§      Level 1 - Unadjusted quoted prices for identicalassets or liabilities in an active market.

§      Level 2 - Quoted prices in markets that are notactive or inputs that are observable either directly or indirectly forsubstantially the full term of the asset or liability.  Level 2 inputs include the following:

 

18

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| **ING  Life Insurance and Annuity Company and Subsidiaries**          |
|-----------------------------------------------------------------------|
| **(A  wholly-owned subsidiary of Lion Connecticut Holdings Inc.)**    |
| **Notes  to Condensed Consolidated Financial Statements (Unaudited)** |
| (Dollar amounts in millions, unless otherwise stated)                 |

 

a)            Quoted prices forsimilar assets or liabilities in active markets;

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

c)            Inputs other thanquoted market prices that are observable; and

d)          Inputs that arederived principally from or corroborated by observable market data throughcorrelation or other means.

§      Level 3 - Prices or valuation techniques thatrequire inputs that are both unobservable and significant to the overall fairvalue measurement.  These valuations,whether derived internally or obtained from a third party, use criticalassumptions that are not widely available to estimate market participantexpectations in valuing the asset or liability.

 

19

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| **ING  Life Insurance and Annuity Company and Subsidiaries**          |
|-----------------------------------------------------------------------|
| **(A  wholly-owned subsidiary of Lion Connecticut Holdings Inc.)**    |
| **Notes  to Condensed Consolidated Financial Statements (Unaudited)** |
| (Dollar amounts in millions, unless otherwise stated)                 |

 

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                                                                                                |       |  $       | 630.7 |   |   |  $ | 77.1 |   |   |  $ | -   |   |   |  $ | 707.8 |   |
| U.S. government agencies and authorities                                                                       |       | -   |   |   | 695.9 |   |   | -   |   |   | 695.9 |   |
| U.S. corporate, state and municipalities                                                                       |       | -   |   |   | 7,604.7 |   |   | 6.2 |   |   | 7,610.9 |   |
| Foreign                                                                                                        |       | -   |   |   | 4,534.1 |   |   | 15.7 |   |   | 4,549.8 |   |
| Residential mortgage-backed securities                                                                         |       | -   |   |   | 2,140.9 |   |   | 423.5 |   |   | 2,564.4 |   |
| Commercial mortgage-backed securities                                                                          |       | -   |   |   | 1,005.1 |   |   | -   |   |   | 1,005.1 |   |
| Other asset-backed securities                                                                                  |       | -   |   |   | 399.9 |   |   | 268.2 |   |   | 668.1 |   |
| Equity securities, available-for-sale                                                                          |       | 185.0         |   |   | -   |   |   | 31.3 |   |   | 216.3 |   |
| Derivatives:                                                                                                   |       |          |   |   |   |   |   |   |   |   |   |   |
| Interest rate contracts                                                                                        |       | -   |   |   | 212.5 |   |   | -   |   |   | 212.5 |   |
| Foreign exchange contracts                                                                                     |       | -   |   |   | 1.0 |   |   | -   |   |   | 1.0 |   |
| Credit contracts                                                                                               |       | -   |   |   | 2.5 |   |   | -   |   |   | 2.5 |   |
| Cash and cash equivalents, short-term investments,  and short-term investments under securities loan agreement |       | 1,131.8       |   |   | -   |   |   | -   |   |   | 1,131.8 |   |
| Assets held in separate accounts                                                                               |       | 39,024.4      |   |   | 3,644.3 |   |   | 20.2 |   |   | 42,688.9 |   |
| Total                                                                                                          |       |  $       | 40,971.9 |   |   |  $ | 20,318.0 |   |   |  $ | 765.1 |   |   |  $ | 62,055.0 |   |
|                                                                                                           |       |          |   |   |   |   |   |   |   |   |   |   |
| Liabilities:                                                                                                   |       |          |   |   |   |   |   |   |   |   |   |   |
| Product guarantees                                                                                             |       |  $       | -   |   |   |  $ | -   |   |   |  $ | 62.7 |   |   |  $ | 62.7 |   |
| Derivatives:                                                                                                   |       |          |   |   |   |   |   |   |   |   |   |   |
| Interest rate contracts                                                                                        |       | -   |   |   | 278.4 |   |   | -   |   |   | 278.4 |   |
| Foreign exchange contracts                                                                                     |       | -   |   |   | 37.1 |   |   | -   |   |   | 37.1 |   |
| Credit contracts                                                                                               |       | -   |   |   | 2.9 |   |   | 26.6 |   |   | 29.5 |   |
| Total                                                                                                          |       |  $       | -   |   |   |  $ | 318.4 |   |   |  $ | 89.3 |   |   |  $ | 407.7 |   |

 
| (1)     Level 3 net assets and liabilities accounted for 1.1%  of total net assets and liabilities measured at fair value on a recurring  basis.  Excluding separate accounts  assets for which the policyholder bears the risk, the Level 3 net assets and  liabilities in relation to total net assets and liabilities measured at fair  value on a recurring basis totaled 3.6%. |   |   |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|

 

20

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| **ING  Life Insurance and Annuity Company and Subsidiaries**          |
|-----------------------------------------------------------------------|
| **(A  wholly-owned subsidiary of Lion Connecticut Holdings Inc.)**    |
| **Notes  to Condensed Consolidated 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                                                                                                |       |  $       | 1,861.9 |   |   |  $ | -   |   |   |  $ | -   |   |   |  $ | 1,861.9 |   |
| U.S. government agencies and authorities                                                                       |       | -   |   |   | 673.6 |   |   | -   |   |   | 673.6 |   |
| U.S. corporate, state and municipalities                                                                       |       | -   |   |   | 5,842.5 |   |   | -   |   |   | 5,842.5 |   |
| Foreign                                                                                                        |       | -   |   |   | 3,358.3 |   |   | -   |   |   | 3,358.3 |   |
| Residential mortgage-backed securities                                                                         |       | -   |   |   | 772.1 |   |   | 1,284.1 |   |   | 2,056.2 |   |
| Commercial mortgage-backed securities                                                                          |       | -   |   |   | 1,331.1 |   |   | -   |   |   | 1,331.1 |   |
| Other asset-backed securities                                                                                  |       | -   |   |   | 342.9 |   |   | 188.8 |   |   | 531.7 |   |
| Equity securities, available-for-sale                                                                          |       | 148.1         |   |   | -   |   |   | 39.8 |   |   | 187.9 |   |
| Derivatives:                                                                                                   |       |          |   |   |   |   |   |   |   |   |   |   |
| Interest rate contracts                                                                                        |       | -   |   |   | 128.8 |   |   | -   |   |   | 128.8 |   |
| Credit contracts                                                                                               |       | -   |   |   | 0.2 |   |   | -   |   |   | 0.2 |   |
| Cash and cash equivalents, short-term investments,  and short-term investments under securities loan agreement |       | 1,128.0       |   |   | 1.8 |   |   | -   |   |   | 1,129.8 |   |
| Assets held in separate accounts                                                                               |       | 34,936.7      |   |   | 6,433.1 |   |   | -   |   |   | 41,369.8 |   |
| Total                                                                                                          |       |  $       | 38,074.7 |   |   |  $ | 18,884.4 |   |   |  $ | 1,512.7 |   |   |  $ | 58,471.8 |   |
|                                                                                                           |       |          |   |   |   |   |   |   |   |   |   |   |
| Liabilities:                                                                                                   |       |          |   |   |   |   |   |   |   |   |   |   |
| Product guarantees                                                                                             |       |  $       | -   |   |   |  $ | -   |   |   |  $ | 6.0 |   |   |  $ | 6.0 |   |
| Derivatives:                                                                                                   |       |          |   |   |   |   |   |   |   |   |   |   |
| Interest rate contracts                                                                                        |       | -   |   |   | 234.9 |   |   | -   |   |   | 234.9 |   |
| Foreign exchange contracts                                                                                     |       | -   |   |   | 43.3 |   |   | -   |   |   | 43.3 |   |
| Credit contracts                                                                                               |       | -   |   |   | 5.2 |   |   | 48.3 |   |   | 53.5 |   |
| Total                                                                                                          |       |  $       | -   |   |   |  $ | 283.4 |   |   |  $ | 54.3 |   |   |  $ | 337.7 |   |

 
| (1)     Level 3 net assets and liabilities accounted for 2.5%  of total net assets and liabilities measured at fair value on a recurring  basis.  Excluding separate accounts  assets for which the policyholder bears the risk, the Level 3 net assets and  liabilities in relation to total net assets and liabilities measured at fair  value on a recurring basis totaled 8.7%. |   |   |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|

 

***Transfersin and out of Level 1 and 2***

 

CertainUS Treasury securities valued by commercial pricing services where prices arederived using market observable inputs have been transferred from Level 1 toLevel 2.  These securities for the ninemonths ended September 30, 2010, include US Treasury strips of $52.8 inwhich prices are modeled incorporating a variety of market observableinformation in their valuation techniques, including benchmark yields,broker-dealer quotes, credit quality, issuer spreads, bids, offers and otherreference data. The Company’s policy is to recognize transfers in and transfersout as of the beginning of the reporting period.

 

21

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| **ING  Life Insurance and Annuity Company and Subsidiaries**          |
|-----------------------------------------------------------------------|
| **(A  wholly-owned subsidiary of Lion Connecticut Holdings Inc.)**    |
| **Notes  to Condensed Consolidated Financial Statements (Unaudited)** |
| (Dollar amounts in millions, unless otherwise stated)                 |

 

***Valuationof Financial Assets and Liabilities***

 

Asdescribed below, certain assets and liabilities are measured at estimated fairvalue on the Company’s Condensed Consolidated Balance Sheets. In addition,further disclosure of estimated fair values is included in this FinancialInstruments footnote. The Company defines fair value as the price that would bereceived to sell an asset or paid to transfer a liability (an exit price) inthe principal or most advantageous market for the asset or liability in anorderly transaction between market participants on the measurement date. Theexit price and the transaction (or entry) price will be the same at initialrecognition in many circumstances. However, in certain cases, the transactionprice may not represent fair value. The fair value of a liability is based onthe amount that would be paid to transfer a liability to a third-party with anequal credit standing. Fair value is required to be a market-based measurementwhich is determined based on a hypothetical transaction at the measurementdate, from a market participant’s perspective. The Company considers threebroad valuation techniques when a quoted price is unavailable: (i) themarket approach, (ii) the income approach and (iii) the costapproach. The Company determines the most appropriate valuation technique touse, given the instrument being measured and the availability of sufficientinputs. The Company prioritizes the inputs to fair valuation techniques andallows for the use of unobservable inputs to the extent that observable inputsare not available.

 

TheCompany utilizes a number of valuation methodologies to determine the fairvalues of its financial assets and liabilities in conformity with the conceptsof “exit price” and the fair value hierarchy as prescribed in ASC Topic820.  Valuations are obtained from thirdparty commercial pricing services, brokers, and industry-standard,vendor-provided software that models the value based on market observableinputs.  The valuations obtained frombrokers and third party commercial pricing services are non-binding.  The valuations are reviewed and validatedmonthly through the internal valuation committee price variance review,comparisons to internal pricing models, back testing to recent trades, ormonitoring of trading volumes.

 

Allvaluation methods and assumptions are validated at least quarterly to ensurethe accuracy and relevance of the fair values. There were no material changes to the valuation methods or assumptionsused to determine fair values since December 31, 2009, except for theCompany’s use of commercial pricing services to value certain collateralizedmortgage obligations (“CMO-Bs”) which commenced in the first quarter of 2010.CMO-Bs were previously valued using an average of broker quotes when more thanone broker quote is provided.

 

Thefollowing valuation methods and assumptions were used by the Company inestimating the fair value of the following financial instruments:

 

*Fixed maturities, available-for-sale*: Thefair values for the actively traded marketable bonds are determined based uponthe quoted market prices and are classified as Level 1

 

22

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| **ING  Life Insurance and Annuity Company and Subsidiaries**          |
|-----------------------------------------------------------------------|
| **(A  wholly-owned subsidiary of Lion Connecticut Holdings Inc.)**    |
| **Notes  to Condensed Consolidated Financial Statements (Unaudited)** |
| (Dollar amounts in millions, unless otherwise stated)                 |

 

assets.  Assets in this category would primarilyinclude certain US Treasury securities. The fair values for marketable bonds without an active market, excludingsubprime residential mortgage-backed securities, are obtained through severalcommercial pricing services, which provide the estimated fair values, and areclassified as Level 2 assets.** **These services incorporate avariety of market observable information in their valuation techniques,including benchmark yields, broker-dealer quotes, credit quality, issuer spreads,bids, offers and other reference data. This category includes US & foreign corporate bonds,Asset-backed Securities (“ABS”), US agency and government guaranteedsecurities, Commercial Mortgage-backed Securities (“CMBS”), and ResidentialMortgage-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, $488.2 and $13.4 billion of a total of $17.8 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.

 

Fairvalues of privately placed bonds are determined using a matrix-based pricingmodel and are classified as Level 2 assets. The model considers the current level of risk-free interest rates,current corporate spreads, the credit quality of the issuer, and cash flowcharacteristics of the security.  Alsoconsidered are factors such as the net worth of the borrower, the value ofcollateral, the capital structure of the borrower, the presence of guarantees,and the Company’s evaluation of the borrower’s ability to compete in its

 

23

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| **ING  Life Insurance and Annuity Company and Subsidiaries**          |
|-----------------------------------------------------------------------|
| **(A  wholly-owned subsidiary of Lion Connecticut Holdings Inc.)**    |
| **Notes  to Condensed Consolidated Financial Statements (Unaudited)** |
| (Dollar amounts in millions, unless otherwise stated)                 |

 

relevantmarket.  Using this data, the modelgenerates estimated market values which the Company considers reflective of thefair value 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 remain in Level 3 of the valuation hierarchy.  The Company continues to monitor marketactivity for RMBS to determine proper classification in the valuationhierarchy.

 

*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 sources such as analyticsor brokers and are classified as Level 3 assets.

 

*Cash and cash equivalents, Short-term investments, andShort-term investments under securities loan agreement*: Thecarrying amounts for cash reflect the assets’ fair values.  The fair values for cash equivalents andshort-term investments are determined based on quoted market prices.  These assets are classified as Level 1. Othershort-term investments are valued and classified in the fair value hierarchyconsistent with the policies described herein, depending on investment type.

 

*Assets held in separate accounts*: Assetsheld in separate accounts are reported at the quoted fair values of theunderlying investments in the separate accounts.  The underlying investments include mutualfunds, short-term investments and cash, the valuations of which are based upona quoted market price and are included in Level 1.  Bond valuations are obtained from third partycommercial pricing services and brokers and are classified in the fair valuehierarchy consistent with the policies described above for Fixed maturities.

 

*Derivatives*:The carrying 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 Consolidated Balance Sheets), which is determined using the Company’sderivative accounting system in conjunction with observable key financial

 

24

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| **ING  Life Insurance and Annuity Company and Subsidiaries**          |
|-----------------------------------------------------------------------|
| **(A  wholly-owned subsidiary of Lion Connecticut Holdings Inc.)**    |
| **Notes  to Condensed Consolidated Financial Statements (Unaudited)** |
| (Dollar amounts in millions, unless otherwise stated)                 |

 

datafrom third party sources, such as yield curves, exchange rates, Standard &Poor’s (“S&P”) 500 Index prices, and London Inter Bank Offered Rates (“LIBOR”),or through values established by third party brokers. Counterparty credit riskis considered and incorporated in the Company’s valuation process throughcounterparty credit rating requirements and monitoring of overallexposure.  It is the Company’s policy totransact only with investment grade counterparties with a credit rating of A-or better. Valuations for the Company’s futures contracts are based onunadjusted quoted prices from an active exchange and, therefore, are classifiedas Level 1. The Company also has certain credit default swaps that are pricedusing models that primarily use market observable inputs, but contain inputsthat are not observable to market participants, which have been classified asLevel 3. However, all other derivative instruments are valued based on marketobservable inputs and are classified as Level 2.

* *

*Product guarantees*: The Companyrecords product guarantees, which can be either assets or liabilities, forannuity contracts containing guaranteed credited rates in accordance with ASC815.  The guarantee is treated as an embeddedderivative or a stand-alone derivative (depending on the underlying product)and is required to be reported at fair value. The fair value of the obligation is calculated based on the incomeapproach as described in ASC 820.  Theincome associated with the contracts is projected using actuarial and capitalmarket assumptions, including benefits and related contract charges, over theanticipated life of the related contracts. The cash flow estimates are produced by using stochastic techniquesunder a variety of risk neutral scenarios and other best estimateassumptions.  These derivatives areclassified as Level 3 liabilities or assets. Explicit risk margins in the actuarialassumptions underlying valuations are included, as well as an explicitrecognition of all nonperformance risks as required by US GAAP.  Nonperformance risk for productguarantees contains adjustments to the fair values of these contractliabilities related to the current credit standing of ING and the Company basedon credit default swaps with similar term to maturity and priority ofpayment.  The ING credit default spreadis applied to the discount factors for product guarantees in the Company’svaluation model in order to incorporate credit risk into the fair values ofthese product guarantees.  As of September 30,2010, the overall value of the derivative liability increased.  This increase was mainly due to low interestrate levels, and was partially offset by the change in credit spread of ING inrelation to prior periods which decreased the derivative liability.

 

The following disclosures are made in accordancewith the requirements of ASC Topic 825 which requires disclosure of fair valueinformation about financial instruments, whether or not recognized in thebalance sheet, for which it is practicable to estimate that value.  In cases where quoted market prices are notavailable, fair values are based on estimates using present value or other valuationtechniques.  Those techniques aresignificantly affected by the assumptions used, including the discount rate andestimates of future cash flows.  In thatregard, the derived fair value estimates, in many cases, could not be realizedin immediate settlement of the instrument.

 

25

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| **ING  Life Insurance and Annuity Company and Subsidiaries**          |
|-----------------------------------------------------------------------|
| **(A  wholly-owned subsidiary of Lion Connecticut Holdings Inc.)**    |
| **Notes  to Condensed Consolidated Financial Statements (Unaudited)** |
| (Dollar amounts in millions, unless otherwise stated)                 |

 

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

 

Thefollowing valuation methods and assumptions were used by the Company inestimating the fair value of the following financial instruments which are notcarried at fair value on the Condensed Consolidated Balance Sheets, andtherefore not categorized in the fair value hierarchy:

 

*Limited partnerships/corporations*: The fair valuefor these 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 loanson real estate are estimated using discounted cash flow analyses and ratescurrently being offered in the marketplace for similar loans to borrowers withsimilar credit ratings. Loans with similar characteristics are aggregated forpurposes of the calculations.

 

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

 

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

 

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

 

*With afixed maturity*: Fairvalue is estimated by discounting cash flows at interest rates currently beingoffered by, or available to, the Company for similar contracts.

 

*Without afixed maturity*: Fairvalue is estimated as the amount payable to the contractowner upon demand.  However, the Company has the right under suchcontracts to delay payment of withdrawals, which may ultimately result inpaying an amount different than that determined to be payable on demand.

 

*Notesreceivable from affiliates*: Estimated fair value of theCompany’s notes receivable from affiliates is based upon discounted future cashflows using a discount rate approximating the current market rate.

 

26

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| **ING  Life Insurance and Annuity Company and Subsidiaries**          |
|-----------------------------------------------------------------------|
| **(A  wholly-owned subsidiary of Lion Connecticut Holdings Inc.)**    |
| **Notes  to Condensed Consolidated Financial Statements (Unaudited)** |
| (Dollar amounts in millions, unless otherwise stated)                 |

 

Thecarrying values and estimated fair values of certain of the Company’s financialinstruments 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                                              |       | $            | 17,802.0   |      |       | $ | 17,802.0 |   |   | $ | 15,655.3 |   |   | $ | 15,655.3 |   |
| Equity  securities, available-for-sale                                                                            |       | 216.3        |       |      | 216.3      |   |   | 187.9 |   |   | 187.9 |   |
| Mortgage  loans on real estate                                                                                    |       | 1,818.3      |       |      | 1,872.4    |   |   | 1,874.5 |   |   | 1,792.8 |   |
| Loan-Dutch  State obligation                                                                                      |       | 577.3        |       |      | 569.0      |   |   | 674.1 |   |   | 645.5 |   |
| Policy  loans                                                                                                     |       | 252.9        |       |      | 252.9      |   |   | 254.7 |   |   | 254.7 |   |
| Cash,  cash equivalents, short-term   investments, and short-term   investments under securities   loan agreement |       | 1,131.8      |       |      | 1,131.8    |   |   | 1,129.8 |   |   | 1,129.8 |   |
| Derivatives                                                                                                       |       | 216.0        |       |      | 216.0      |   |   | 129.0 |   |   | 129.0 |   |
| Notes  receivable from affiliates                                                                                 |       | 175.0        |       |      | 189.6      |   |   | 175.0 |   |   | 169.6 |   |
| Assets  held in separate accounts                                                                                 |       | 42,688.9     |       |      | 42,688.9   |   |   | 41,369.8 |   |   | 41,369.8 |   |
| Liabilities:                                                                                                      |       |         |       |      |       |   |   |   |   |   |   |   |
| Investment  contract liabilities:                                                                                 |       |         |       |      |       |   |   |   |   |   |   |   |
| With  a fixed maturity                                                                                            |       | 1,310.5      |       |      | 1,394.5    |   |   | 1,359.0 |   |   | 1,450.4 |   |
| Without  a fixed maturity                                                                                         |       | 16,885.5     |       |      | 17,819.2   |   |   | 16,441.2 |   |   | 17,688.4 |   |
| Product  guarantees                                                                                               |       | 62.7         |       |      | 62.7       |   |   | 6.0 |   |   | 6.0 |   |
| Derivatives                                                                                                       |       | 345.0        |       |      | 345.0      |   |   | 331.7 |   |   | 331.7 |   |
|                                                                                                                   |            |              |            |           |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

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

 

***Level 3 Financial Instruments***

 

Thefair values of certain assets and liabilities are determined using prices orvaluation techniques that require inputs that are both unobservable andsignificant to the overall fair value measurement (i.e., Level 3 as defined by ASC 820),including but not limited to liquidity spreads for investments within marketsdeemed not currently active.  Thesevaluations, whether derived internally or obtained from a third party, usecritical assumptions that are not widely available to estimate marketparticipant expectations in

 

27

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| **ING  Life Insurance and Annuity Company and Subsidiaries**          |
|-----------------------------------------------------------------------|
| **(A  wholly-owned subsidiary of Lion Connecticut Holdings Inc.)**    |
| **Notes  to Condensed Consolidated Financial Statements (Unaudited)** |
| (Dollar amounts in millions, unless otherwise stated)                 |

 

valuingthe asset or liability. In addition, the Company has determined, for certainfinancial instruments, an active market is such a significant input todetermine fair value that the presence of an inactive market may lead toclassification in Level 3. In light of the methodologies employed to obtain thefair value of financial assets and liabilities classified as Level 3,additional information is presented below, with particular attention addressedto the reserves for product guarantees due to the impact on the Company’sresults of operations.

 

28

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| **ING  Life Insurance and Annuity Company and Subsidiaries**          |
|-----------------------------------------------------------------------|
| **(A  wholly-owned subsidiary of Lion Connecticut Holdings Inc.)**    |
| **Notes  to Condensed Consolidated 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** |
| ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | ** ** | **Fair Value** | ** ** | **Total realized/unrealized** | ** ** | **Purchases,** | ** ** | **Transfers** | ** ** | **Transfers** | ** ** | **Fair Value** | ** ** | **Change in   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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   | $ | 44.5 |   |   | $ | -   |   |   | $ | 0.3 |   |   | $ | (0.1 | ) |   | $ | -   |   |   | $ | (38.5 | ) |   | $ | 6.2 |   |   | $ | -   |   |
|       | Foreign                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   | 38.4 |   |   | 0.4 |   |   | 0.3 |   |   | (0.6 | ) |   | 10.8 |   |   | (33.6 | ) |   | 15.7 |   |   | -   |   |
|       | Residential  mortgage-backed securities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   | 192.6 |   |   | (1.5 | ) |   | (1.9 | ) |   | 21.2 |   |   | 302.7 |   |   | (89.6 | ) |   | 423.5 |   |   | (6.7 | ) |
|       | Other  asset-backed securities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   | 245.7 |   |   | (2.8 | ) |   | 14.5 |   |   | 12.0 |   |   | -   |   |   | (1.2 | ) |   | 268.2 |   |   | (2.7 | ) |
|       | Total  Fixed maturities, available for sale, including securities pledged                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   | 521.2 |   |   | (3.9 | ) |   | 13.2 |   |   | 32.5 |   |   | 313.5 |   |   | (162.9 | ) |   | 713.6 |   |   | (9.4 | ) |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|       | Equity  securities, available for sale                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   | 26.8 |   |   | (0.9 | ) |   | 2.2 |   |   | 0.4 |   |   | 2.8 |   |   | -   |   |   | 31.3 |   |   | -   |   |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|       | Derivatives,  net                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   | (29.1 | ) |   | 2.5 |   |   | -   |   |   | -   |   |   | -   |   |   | -   |   |   | (26.6 | ) |   | 2.5 |   |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|       | Product  guarantees                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   | (38.5 | ) |   | (22.6 | ) |  (1) |   |   |   | (1.6 | ) |   | -   |   |   | -   |   |   | (62.7 | ) |   | -   |   |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|       | Separate  Accounts                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   | 49.2 |   |   | 0.3 |   |   | -   |   |   | (29.3 | ) |   | -   |   |   | -   |   |   | 20.2 |   |   | 0.1 |   |
|       | (1)           This amount is included in Interest credited and  other benefits to contractowners on the Condensed Consolidated 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 Consolidated Statements of Operations. |   |   |   |   |
|            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

 

29

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| **ING  Life Insurance and Annuity Company and Subsidiaries**          |
|-----------------------------------------------------------------------|
| **(A  wholly-owned subsidiary of Lion Connecticut Holdings Inc.)**    |
| **Notes  to Condensed Consolidated 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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |       | $                                                                 | -   |   |   | $ | -   |   |   | $ | 0.4 |   |   | $ | (0.3 | ) |   | $ | 6.1 |   |   | $ | -   |   |   | $ | 6.2 |   |   | $ | -   |   |
|       | Foreign                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |       | -                                                       |   |   | 0.4 |   |   | 1.2 |   |   | 2.3 |   |   | 11.8 |   |   | -   |   |   | 15.7 |   |   | -   |   |
|       | Residential  mortgage-backed securities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |       | 1,284.1                                                           |   |   | (5.6 | ) |   | 4.4 |   |   | 41.5 |   |   | -   |   |   | (900.9 | ) |   | 423.5 |   |   | (5.6 | ) |
|       | Other  asset-backed securities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |       | 188.8                                                             |   |   | (15.3 | ) |   | 44.7 |   |   | 1.9 |   |   | 48.1 |   |   | -   |   |   | 268.2 |   |   | (15.3 | ) |
|       | Total  Fixed maturities, available for sale,  including securities pledged                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |       | 1,472.9                                                           |   |   | (20.5 | ) |   | 50.7 |   |   | 45.4 |   |   | 66.0 |   |   | (900.9 | ) |   | 713.6 |   |   | (20.9 | ) |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |       |                                                              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|       | Equity  securities, available for sale                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |       | 39.8                                                              |   |   | (0.4 | ) |   | 2.3 |   |   | 13.5 |   |   | 2.2 |   |   | (26.1 | ) |   | 31.3 |   |   | -   |   |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |       |                                                              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|       | Derivatives,  net                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |       | (48.3                                                             | ) |   | (0.7 | ) |   | -   |   |   | 22.4 |   |   | -   |   |   | -   |   |   | (26.6 | ) |   | 16.7 |   |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |       |                                                              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|       | Product  guarantees                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |       | (6.0                                                              | ) |   | (52.0 | ) | ** (1)** | -   |   |   | (4.7 | ) |   | -   |   |   | -   |   |   | (62.7 | ) |   | -   |   |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |       |                                                              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|       | Separate  Accounts                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |       | -                                                       |   |   | 6.1 |   |   | -   |   |   | (60.1 | ) |   | 74.2 |   |   | -   |   |   | 20.2 |   |   | 1.5 |   |
|       | (1)           This amount is included in Interest credited and  other benefits to contractowners on the Condensed Consolidated 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 Consolidated Statements of  Operations. |       |                                                              |   |
|            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |            |                                                                   |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

 

30

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| **ING  Life Insurance and Annuity Company and Subsidiaries**          |
|-----------------------------------------------------------------------|
| **(A  wholly-owned subsidiary of Lion Connecticut Holdings Inc.)**    |
| **Notes  to Condensed Consolidated 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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   | $ | 1,652.8 |   |   | $ | 3.2 |   |   | $ | 114.9 |   |   | $ | (159.4 | ) |   | $ | 11.3 |   |   | $ | -   |   |   | $ | 1,622.8 |   |   | $ | (4.9 | ) |
|       | Other asset-backed securities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   | 171.8 |   |   | (2.5 | ) |   | 20.3 |   |   | (4.7 | ) |   | -   |   |   | -   |   |   | 184.9 |   |   | (11.7 | ) |
|       | Total Fixed maturities, available for sale,  including securities pledged                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   | 1,824.6 |   |   | 0.7 |   |   | 135.2 |   |   | (164.1 | ) |   | 11.3 |   |   | -   |   |   | 1,807.7 |   |   | (16.6 | ) |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|       | Derivatives, net                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   | (65.8 | ) |   | (0.9 | ) |   | -   |   |   | -   |   |   | -   |   |   | -   |   |   | (66.7 | ) |   | 4.6 |   |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|       | Product guarantees                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   | (82.0 | ) |   | 0.5 |   |   (1) | -   |   |   | (1.5 | ) |   | -   |   |   | -   |   |   | (83.0 | ) |   | -   |   |
|       | (1)           This amount is included in Interest credited and  other benefits to contractowners on the Condensed Consolidated 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 Consolidated Statements of  Operations. |   |   |   |
|            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

 

31

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| **ING  Life Insurance and Annuity Company and Subsidiaries**          |
|-----------------------------------------------------------------------|
| **(A  wholly-owned subsidiary of Lion Connecticut Holdings Inc.)**    |
| **Notes  to Condensed Consolidated 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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |       | $                                                                 | 2,066.3 |   |   | $ | 189.2 |   |   | $ | 169.7 |   |   | $ | (1,142.8 | ) |   | $ | 340.4 |   |   | $ | -   |   |   | $ | 1,622.8 |   |   | $ | (35.6 | ) |
|       | Other  asset-backed securities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |       | 225.3                                                             |   |   | 8.2 |   |   | (29.9 | ) |   | (18.7 | ) |   | -   |   |   | -   |   |   | 184.9 |   |   | (1.3 | ) |
|       | Total  Fixed maturities, available for sale, including securities pledged                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |       | 2,291.6                                                           |   |   | 197.4 |   |   | 139.8 |   |   | (1,161.5 | ) |   | 340.4 |   |   | -   |   |   | 1,807.7 |   |   | (36.9 | ) |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |       |                                                              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|       | Derivatives,  net                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |       | (73.6                                                             | ) |   | (0.9 | ) |   | -   |   |   | 7.8 |   |   | -   |   |   | -   |   |   | (66.7 | ) |   | 8.7 |   |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |       |                                                              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|       | Product guarantees                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |       | (220.0                                                            | ) |   | 140.9 | ** ** | **  (1)** | -   |   |   | (3.9 | ) |   | -   |   |   | -   |   |   | (83.0 | ) |   | -   |   |
|       | (1)    This  amount is included in Interest credited and other benefits to contractowners  on the Condensed Consolidated 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 Consolidated Statements of Operations. |       |                                                              |   |
|            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |            |                                                                   |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

32

 

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**ING LifeInsurance and Annuity Company and Subsidiaries**

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

**Notesto Condensed Consolidated Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwisestated)

 

Thetransfers out of Level 3 during the nine months ended September 30, 2010in FixedMaturities, available-for-sale, including securities pledged, areprimarily due to the Company’s use of commercial pricing services to valueCMO-Bs. Theseservices incorporate a variety of market observable information in theirvaluation techniques, including benchmark yields, broker-dealer quotes, creditquality, issuer spreads, bids, offers and other reference data and have beenclassified as Level 2. The CMO-Bs had previously been valued by using the average ofbroker quotes when more than one broker quote is provided.

 

Theremaining transfers in and out of Level 3 for fixed maturities, equitysecurities and separate accounts during the three and nine months ended September 30,2010 are due 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 Financial Instruments***

 

See the Organization & SignificantAccounting Policies footnote to the Consolidated Financial Statements includedin the Company’s 2009 Annual Report on Form 10-K/A for disclosureregarding the Company’s purpose for entering into derivatives and the policieson valuation and classification of derivatives. In addition, the Company’sderivatives are generally not accounted for using hedge accounting treatmentunder US GAAP, as the Company has not historically sought hedge accountingtreatment.  The Company enters into thefollowing derivatives:

 

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

 

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

 

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

 

33

----

 

**ING LifeInsurance and Annuity Company and Subsidiaries**

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

**Notesto Condensed Consolidated Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwisestated)

 

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

* *

*Forwards*:Certain forwards are acquired to hedge the Company’s CMO-B portfolio againstmovements in interest rates, particularly mortgage rates.  On the settlement date, the Company willeither receive a payment (interest rate drops on owned forwards or interestrate rises on purchased forwards) or will be required to make a payment(interest rate rises on owned forwards or interest rate drops on purchasedforwards).

 

*Swaptions*:Swaptions are used to manage interest rate risk in the Company’s collateralizedmortgage obligations portfolio. Swaptions are contracts that give the Company the option to enter intoan interest rate swap at a specific future date.

 

*Managed Custody Guarantees*: The Company issued certain credited rate guarantees on externallymanaged variable bond funds that represent stand alone derivatives.  The market value is partially determined by,among other things, levels of or changes in interest rates, prepayment rates,and credit ratings/spreads.

 

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

 

34

----

 

**ING LifeInsurance and Annuity Company and Subsidiaries**

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

**Notesto Condensed Consolidated Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwisestated)

 

The notional amounts and fair values of derivativeswere 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)             |       | 8,018.6      |       |            | $ | 18.4 |   |   | $ | 1.8 |   |   | 3,750.0 |   |   | $ | 41.5 |   |   | $ | 6.0 |   |
| Interest  rate swaps(1)            |       | 5,716.2      |       |            | 194.0 |   |   | 276.6 |   |   | 5,909.4 |   |   | 86.8 |   |   | 228.8 |   |
| Foreign  exchange swaps(1)         |       | 240.2        |       |            | 1.0 |   |   | 37.1 |   |   | 199.5 |   |   | -   |   |   | 43.3 |   |
| Credit  default swaps(1)           |       | 682.8        |       |            | 2.5 |   |   | 29.5 |   |   | 243.9 |   |   | 0.2 |   |   | 53.6 |   |
| Futures(1)                         |       | 2.5          |       |            | -   |   |   | -   |   |   | -   |   |   | -   |   |   | -   |   |
| Swaptions(1)                       |       | 86.2         |       |            | 0.1 |   |   | -   |   |   | 90.7 |   |   | 0.5 |   |   | -   |   |
| Managed  custody guarantees(3)     |       | N/A          |       |            | -   |   |   | 0.7 |   |   | N/A |   |   | -   |   |   | 6.0 |   |
| Embedded  derivatives:             |       |         |       |            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Within  securities(2)              |       | N/A          |       |            | 69.9 |   |   | -   |   |   | N/A |   |   | 46.4 |   |   | 0.1 |   |
| Within  retail annuity products(3) |       | N/A          |       |            | -   |   |   | 62.0 |   |   | N/A |   |   | -   |   |   | -   |   |
| Total                              |       |         |       |            | $ | 285.9 |   |   | $ | 407.7 |   |   |   |   |   | $ | 175.4 |   |   | $ | 337.8 |   |

 

N/A - Notapplicable.
| (1)  The fair  values of these derivatives are reported in Derivatives or Other liabilities  on the Condensed Consolidated Balance Sheets.                                                                           |   |   |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|
| (2)  The fair  values of embedded derivatives within securities are reported in Fixed  maturities, available-for-sale, on the Condensed Consolidated Balance Sheets  with the underlying instrument.                 |   |   |   |
| (3)  The fair values of embedded derivatives within retail annuity  products and managed custody guarantees are reported in Future policy  benefits and claim reserves on the Condensed Consolidated Balance Sheets. |   |   |   |

 

35

----

 

**ING LifeInsurance and Annuity Company and Subsidiaries**

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

**Notesto Condensed Consolidated Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwisestated)

 

Net realized gains (losses) on derivatives were asfollows 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 swaps(1)            |       |  $                       | (0.5                          | ) |   |  $ | (21.3 | ) |   |  $ | (16.9 | ) |   |  $ | (88.6 | ) |
| Foreign  exchange swaps(1)         |       | (14.9                         | )                             |   | (11.8 | ) |   | 9.8 |   |   | (25.1 | ) |
| Credit  default swaps(1)           |       | 9.2                           |                          |   | (7.3 | ) |   | 0.8 |   |   | (17.1 | ) |
| Forwards(1)                        |       | -                   |                          |   | 5.8 |   |   | 6.5 |   |   | 11.9 |   |
| Futures(1)                         |       | 0.1                           |                          |   | -   |   |   | 0.1 |   |   | (49.0 | ) |
| Swaptions(1)                       |       | (0.2                          | )                             |   | (0.3 | ) |   | (0.5 | ) |   | (2.8 | ) |
| Interest  rate caps(1)             |       | (7.0                          | )                             |   | (3.6 | ) |   | (48.2 | ) |   | (5.9 | ) |
| Managed  custody guarantees(2)     |       | 0.3                           |                          |   | 9.0 |   |   | 5.3 |   |   | 22.1 |   |
| Embedded  derivatives:             |       |                          |                          |   |   |   |   |   |   |   |   |   |
| Within  securities(1)              |       | 11.2                          |                          |   | 6.3 |   |   | 23.7 |   |   | (49.0 | ) |
| Within  retail annuity products(2) |       | (22.9                         | )                             |   | (8.5 | ) |   | (57.3 | ) |   | 118.8 |   |
| Total                              |       |  $                       | (24.7                         | ) |   |  $ | (31.7 | ) |   |  $ | (76.7 | ) |   |  $ | (84.7 | ) |

 

(1)           Changes in value are included in Net realized capitallosses on the Condensed Consolidated Statements of Operations.

(2)           Changes in value are included in Interest credited andother benefits to contractowners on the Condensed Consolidated Statements ofOperations.

 

***Credit Default Swaps***

 

TheCompany has entered into various credit default swaps. When credit defaultswaps are sold, the Company assumes credit exposure to certain assets that itdoes not own.  Credit default swaps mayalso be purchased to reduce credit exposure in the Company’s portfolio. Creditdefault swaps involve a transfer of credit risk from one party to another inexchange for periodic payments.  Theseinstruments are typically written for a maturity period of five years and donot contain recourse provisions, which would enable the seller to recover fromthird parties.  The Company hasInternational Swaps and Derivatives Associations, Inc. (“ISDA”) agreementswith each counterparty with which it conducts business and tracks thecollateral positions for each counterparty. To the extent cash collateral is received, it is included in Payablesunder securities loan agreement, including collateral held, on the CondensedConsolidated Balance Sheets and is reinvested in short-term investments.  Collateral held is used in accordance withthe Credit Support Annex (“CSA”) to satisfy any obligations. Investment gradebonds owned by the Company are the source of noncash collateral posted, whichis reported in Securities pledged on the Condensed Consolidated Balance Sheets.In the event of a default on the underlying credit exposure, the Company willeither receive an additional payment (purchased credit protection) or will berequired to make an additional payment (sold credit protection) equal to parminus recovery value of the swap contract. At September 30, 2010, the fairvalue of credit default swaps of $2.5 and $29.5 was included in Derivatives andOther liabilities, respectively, on the Condensed Consolidated Balance Sheets.At December 31, 2009, the fair value of credit default swaps of $0.2 and $53.6was included in Derivatives and Other liabilities, respectively, on theConsolidated Balance Sheets.  As of September 

 

36

----

 

**ING LifeInsurance and Annuity Company and Subsidiaries**

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

**Notesto Condensed Consolidated Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwisestated)

 

30, 2010 and December 31, 2009, the maximumpotential future exposure to the Company on the sale of credit protection undercredit default swaps was $637.8 and $84.4, respectively.

 

 

**5.****                                    Investments**

 

***FixedMaturities and Equity Securities***

 

Fixed maturities andequity 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                                      |       |  $       | 633.5      |           |       |  $        | 74.3       |            |       |  $    | -   |   |   |  $ | -   |   |   |  $ | 707.8 |   |
| U.S.  government agencies and authorities             |       | 633.2         |       |           | 62.7       |           |       | -     |       |       | -   |   |   | 695.9 |   |
| State,  municipalities, and political subdivisions    |       | 121.2         |       |           | 10.5       |           |       | 7.3             |       |       | -   |   |   | 124.4 |   |
|                                                  |       |          |       |           |       |           |       |            |       |       |   |   |   |   |   |
| U.S.  corporate securities:                           |       |          |       |           |       |           |       |            |       |       |   |   |   |   |   |
| Public  utilities                                     |       | 1,298.8       |       |           | 116.1      |           |       | 2.3             |       |       | -   |   |   | 1,412.6 |   |
| Other  corporate securities                           |       | 5,544.0       |       |           | 547.7      |           |       | 17.5            |       |       | 0.3 |   |   | 6,073.9 |   |
| Total  U.S. corporate securities                      |       | 6,842.8       |       |           | 663.8      |           |       | 19.8            |       |       | 0.3 |   |   | 7,486.5 |   |
|                                                  |       |          |       |           |       |           |       |            |       |       |   |   |   |   |   |
| Foreign  securities(1):                               |       |          |       |           |       |           |       |            |       |       |   |   |   |   |   |
| Government                                            |       | 437.1         |       |           | 59.7       |           |       | 2.4             |       |       | -   |   |   | 494.4 |   |
| Other                                                 |       | 3,750.9       |       |           | 321.1      |           |       | 16.5            |       |       | 0.1 |   |   | 4,055.4 |   |
| Total  foreign securities                             |       | 4,188.0       |       |           | 380.8      |           |       | 18.9            |       |       | 0.1 |   |   | 4,549.8 |   |
|                                                  |       |          |       |           |       |           |       |            |       |       |   |   |   |   |   |
| Residential  mortgage-backed securities               |       | 2,314.5       |       |           | 315.0      |           |       | 43.1            |       |       | 22.0 |   |   | 2,564.4 |   |
| Commercial  mortgage-backed securities                |       | 1,031.6       |       |           | 52.8       |           |       | 64.8            |       |       | 14.5 |   |   | 1,005.1 |   |
| Other  asset-backed securities                        |       | 735.4         |       |           | 23.5       |           |       | 52.3            |       |       | 38.5 |   |   | 668.1 |   |
|                                                  |       |          |       |           |       |           |       |            |       |       |   |   |   |   |   |
| Total  fixed maturities, including securities pledged |       | 16,500.2      |       |           | 1,583.4    |           |       | 206.2           |       |       | 75.4 |   |   | 17,802.0 |   |
| Less:  securities pledged                             |       | 788.5         |       |           | 69.1       |           |       | 1.2             |       |       | -   |   |   | 856.4 |   |
| Total  fixed maturities                               |       | 15,711.7      |       |           | 1,514.3    |           |       | 205.0           |       |       | 75.4 |   |   | 16,945.6 |   |
| Equity  securities                                    |       | 188.1         |       |           | 28.2       |           |       | -     |       |       | -   |   |   | 216.3 |   |
| Total  investments, available-for-sale                |       |  $       | 15,899.8   |           |       |  $        | 1,542.5    |            |       |  $    | 205.0 |   |   |  $ | 75.4 |   |   |  $ | 17,161.9 |   |

 

(1)           Primarily U.S. dollar denominated.

(2)           Represents other-than-temporary impairments reported asa component of Other comprehensive income (“noncredit impairments”).

 

37

----

 

**ING LifeInsurance and Annuity Company and Subsidiaries**

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

**Notesto Condensed Consolidated Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwisestated)

 

Fixedmaturities and equity securities, available-for-sale, were as follows as ofDecember 31, 2009.

 
|                                                  |       | ** **    | ** ** | **Gross**      | ** ** | **Gross**      |       |            |       |       |          |
|-------------------------------------------------------|------------|---------------|------------|----------------|------------|----------------|------------|-----------------|------------|------------|---------------|
| ** **                                            | ** ** | ** **    | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** |            |       |       |          |
| ** **                                            | ** ** | **Amortized** | ** ** | **Capital**    | ** ** | **Capital**    | ** ** | ** **      | ** ** | **Fair**   | ** **    |
| ** **                                            | ** ** | **Cost**      | ** ** | **Gains**      | ** ** | **Losses**     | ** ** | **OTTI****(2)** | ** ** | **Value**  | ** **    |
| Fixed  maturities:                                    | ** ** | ** **    | ** ** | ** **     | ** ** | ** **     | ** ** | ** **      | ** ** | ** ** | ** **    | ** ** | ** ** | ** ** | ** ** |
| U.S.  Treasuries                                      |       |  $       | 1,897.2    |           |       |  $        | 3.0        |            |       |  $    | 38.3          |   |   |  $ | -   |   |   |  $ | 1,861.9 |   |
| U.S.  government agencies and authorities             |       | 632.5         |       |           | 41.1       |           |       | -     |       |       | -   |   |   | 673.6 |   |
| State,  municipalities, and political subdivisions    |       | 112.5         |       |           | 2.5        |           |       | 7.8             |       |       | -   |   |   | 107.2 |   |
|                                                  |       |          |       |           |       |           |       |            |       |       |          |   |   |   |   |
| U.S.  corporate securities:                           |       |          |       |           |       |           |       |            |       |       |          |   |   |   |   |
| Public  utilities                                     |       | 1,138.7       |       |           | 40.8       |           |       | 14.3            |       |       | -   |   |   | 1,165.2 |   |
| Other  corporate securities                           |       | 4,366.5       |       |           | 267.4      |           |       | 63.2            |       |       | 0.6           |   |   | 4,570.1 |   |
| Total  U.S. corporate securities                      |       | 5,505.2       |       |           | 308.2      |           |       | 77.5            |       |       | 0.6           |   |   | 5,735.3 |   |
|                                                  |       |          |       |           |       |           |       |            |       |       |          |   |   |   |   |
| Foreign  securities(1):                               |       |          |       |           |       |           |       |            |       |       |          |   |   |   |   |
| Government                                            |       | 343.0         |       |           | 29.2       |           |       | 8.7             |       |       | -   |   |   | 363.5 |   |
| Other                                                 |       | 2,922.5       |       |           | 129.0      |           |       | 56.6            |       |       | 0.1           |   |   | 2,994.8 |   |
| Total  foreign securities                             |       | 3,265.5       |       |           | 158.2      |           |       | 65.3            |       |       | 0.1           |   |   | 3,358.3 |   |
|                                                  |       |          |       |           |       |           |       |            |       |       |          |   |   |   |   |
| Residential  mortgage-backed securities               |       | 1,916.6       |       |           | 268.3      |           |       | 111.9           |       |       | 16.8          |   |   | 2,056.2 |   |
| Commercial  mortgage-backed securities                |       | 1,535.0       |       |           | 10.4       |           |       | 214.3           |       |       | -   |   |   | 1,331.1 |   |
| Other  asset-backed securities                        |       | 657.4         |       |           | 9.8        |           |       | 106.3           |       |       | 29.2          |   |   | 531.7 |   |
|                                                  |       |          |       |           |       |           |       |            |       |       |          |   |   |   |   |
| Total  fixed maturities, including securities pledged |       | 15,521.9      |       |           | 801.5      |           |       | 621.4           |       |       | 46.7          |   |   | 15,655.3 |   |
| Less:  securities pledged                             |       | 483.7         |       |           | 4.3        |           |       | 18.2            |       |       | -   |   |   | 469.8 |   |
| Total  fixed maturities                               |       | 15,038.2      |       |           | 797.2      |           |       | 603.2           |       |       | 46.7          |   |   | 15,185.5 |   |
| Equity  securities                                    |       | 175.1         |       |           | 13.4       |           |       | 0.6             |       |       | -   |   |   | 187.9 |   |
| Total  investments, available-for-sale                |       |  $       | 15,213.3   |           |       |  $        | 810.6      |            |       |  $    | 603.8         |   |   |  $ | 46.7 |   |   |  $ | 15,373.4 |   |

 

(1)           Primarily U.S. dollar denominated.

(2)           Represents other-than-temporary impairments reported asa component of Other comprehensive income (“noncredit impairments”).

 

At September 30,2010 and December 31, 2009, net unrealized gains were $1,330.0 and $146.2,respectively, on total fixed maturities, including securities pledged tocreditors, and equity securities.  During2009, as a result of the economic environment, which resulted in significant losseson investments supporting experience-rated contracts, the Company reflected allunrealized losses in Shareholder’s equity rather than Future policy benefitsand claims reserves. At September 30, 2010, net unrealized capital gainsallocated to experience-rated contracts were $882.0, as reflected in Futurepolicy benefits and claims reserves on the Condensed Consolidated BalanceSheets.

 

38

----

 

**ING LifeInsurance and Annuity Company and Subsidiaries**

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

**Notesto Condensed Consolidated Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwisestated)

 

Theamortized cost and fair value of total fixed maturities, excluding securitiespledged, as of September 30, 2010, are shown below by contractualmaturity.  Actual maturities may differfrom contractual maturities as securities may be restructured, called, orprepaid.

 
| ** **                                     | ** ** | **Amortized** | ** ** | **Fair**  |
|------------------------------------------------|------------|---------------|------------|-----------|
|                                           | ** ** | **Cost**      | ** ** | **Value** |
| Due to mature:                                 |       |          |       |      |   |   |
| One year or less                               |       |  $       | 366.9      |      |   |  $ | 373.8 |   |
| After one year through five years              |       | 4,683.2       |       |      | 5,055.5 |   |
| After five years through ten years             |       | 4,164.8       |       |      | 4,587.2 |   |
| After ten years                                |       | 3,203.8       |       |      | 3,547.9 |   |
| Mortgage-backed securities                     |       | 3,346.1       |       |      | 3,569.5 |   |
| Other asset-backed securities                  |       | 735.4         |       |      | 668.1 |   |
| Less: securities pledged                       |       | 788.5         |       |      | 856.4 |   |
| Fixed maturities, excluding securities pledged |       |  $       | 15,711.7   |      |   |  $ | 16,945.6 |   |

 

TheCompany did not have any investments in a single issuer, other than obligationsof the U.S. government and government agencies and the Dutch State loan obligation,with a carrying value in excess of 10% of the Company’s Shareholder’s equity atSeptember 30, 2010 and December 31, 2009.

 

TheCompany invests in various categories of collateralized mortgage obligations (“CMOs”),including CMOs that are not agency-backed, that are subject to differentdegrees of risk from changes in interest rates and defaults.  The principal risks inherent in holding CMOsare prepayment and extension risks related to dramatic decreases and increasesin interest rates resulting in the prepayment of principal from the underlyingmortgages, either earlier or later than originally anticipated.  At September 30, 2010 andDecember 31, 2009, approximately 34.6% and 29.4%, respectively, of theCompany’s CMO holdings were invested in those types of CMOs which are subjectto more prepayment and extension risk than traditional CMOs, such asinterest-only or principal-only strips.

 

CertainCMOs, primarily interest-only and principal-only strips, are accounted for ashybrid instruments and valued at fair value. The fair value of these instruments at September 30, 2010 and December 31,2009 was $463.6 and $233.5, respectively, and is included in Fixed maturities,available for sale, on the Condensed Consolidated Balance Sheets.  The impact to Other net realized capitalgains (losses) on the Condensed Consolidated Statements of Operations relatedto these hybrid instruments was $0.1 and $(21.9) for the three and nine monthsended September 30, 2010, respectively, and $19.6 and $41.3 for the threeand nine months ended September 30, 2009, respectively.

 

39

----

 

**ING LifeInsurance and Annuity Company and Subsidiaries**

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

**Notesto Condensed Consolidated Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwisestated)

 

*Securities Lending*

 

TheCompany engages in securities lending whereby certain securities from itsportfolio are loaned to other institutions for short periods of time.  Initial collateral, primarily cash, isrequired at a rate of 102% of the market value of the loaned domesticsecurities.  The collateral is depositedby the borrower with a lending agent, and retained and invested by the lendingagent according to the Company’s guidelines to generate additional income.  The market value of the loaned securities ismonitored on a daily basis with additional collateral obtained or refunded asthe market value of the loaned securities fluctuates. At September 30,2010 and December 31, 2009, the fair value of loaned securities was $714.3and $339.5, respectively, and is included in Securities pledged on theCondensed Consolidated Balance Sheets.

 

*VariableInterest Entities*

 

TheCompany 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 $0.6 at September 30, 2010 is included inLimited partnerships/corporations on the Condensed Consolidated Balance Sheets.Income and losses recognized on these investments are reported in Netinvestment income on the Condensed Consolidated Statements of Operations.

 

40

----

 

**ING LifeInsurance and Annuity Company and Subsidiaries**

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

**Notesto Condensed Consolidated Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwisestated)

 

*UnrealizedCapital Losses*

 

Unrealizedcapital losses (including non-credit impairments) in fixed maturities, including securitiespledged to creditors, for Investment Grade (“IG”) and Below Investment Grade (“BIG”)securities by duration were as follows as of 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                             |       |  $    | 9.9        |                  |   | 3.5 | % |   |  $ | 2.0 |   |   | 0.7 | % |   |  $ | 105.5 |   |   | 15.7 | % |   |  $ | 18.5 |   |   | 2.8 | % |
| More  than six months and twelve months or less below amortized cost |       | 3.0        |       |                  | 1.1 | % |   | -   |   |   | 0.0 | % |   | 44.0 |   |   | 6.6 | % |   | 37.9 |   |   | 5.7 | % |
| More  than twelve months below amortized cost                        |       | 108.9      |       |                  | 38.7 | % |   | 157.8 |   |   | 56.0 | % |   | 300.8 |   |   | 45.0 | % |   | 161.4 |   |   | 24.2 | % |
| Total  unrealized capital loss                                       |       |  $    | 121.8      |                  |   | 43.3 | % |   |  $ | 159.8 |   |   | 56.7 | % |   |  $ | 450.3 |   |   | 67.3 | % |   |  $ | 217.8 |   |   | 32.7 | % |

 

Thefollowing table summarizes the unrealized capital losses (including non-creditimpairments) by duration and reason, along with the fair value of fixedmaturities, including securities pledged to creditors, in unrealized capitalloss positions as of September 30, 2010 and December 31, 2009.

 
| ** **                                  | ** ** | ** **          | ** ** | **More than**           | ** ** | ** **             | ** ** | ** **     |
|---------------------------------------------|------------|---------------------|------------|------------------------------|------------|------------------------|------------|----------------|
| ** **                                  | ** ** | **Six Months** | ** ** | **Six Months and** | ** ** | ** **             | ** ** | ** **     |
| ** **                                  | ** ** | **or Less**    | ** ** | **Twelve Months**       | ** ** | **More than**     | ** ** | **Total**      |
| ** **                                  | ** ** | **Below**           | ** ** | **or Less Below**  | ** ** | **Twelve Months** | ** ** | **Unrealized** |
| ** **                                  | ** ** | **Amortized**       | ** ** | **Amortized**                | ** ** | **Below**              | ** ** | **Capital**    |
| **2010**                                    | ** ** | **Cost**            | ** ** | **Cost**                     | ** ** | **Cost**               | ** ** | **Losses**     |
| Interest  rate or spread widening           |       |  $             | 8.5        |                         |  $    | 2.6                    |       |  $        | 35.3 |   |  $ | 46.4 |
| Mortgage  and other asset-backed securities |       | 3.4                 |       | 0.4                          |       | 231.4                  |       | 235.2          |
| Total  unrealized capital losses            |       |  $             | 11.9       |                         |  $    | 3.0                    |       |  $        | 266.7 |   |  $ | 281.6 |
| Fair  value                                 |       |  $             | 523.8      |                         |  $    | 55.5                   |       |  $        | 1,090.0 |   |  $ | 1,669.3 |
|                                        |       |                |       |                         |       |                   |       |           |
| **2009**                                    | ** ** | ** **          | ** ** | ** **                   | ** ** | ** **             | ** ** | ** **     |
| Interest  rate or spread widening           |       |  $             | 75.9       |                         |  $    | 35.2                   |       |  $        | 78.5 |   |  $ | 189.6 |
| Mortgage  and other asset-backed securities |       | 48.1                |       | 46.7                         |       | 383.7                  |       | 478.5          |
| Total  unrealized capital losses            |       |  $             | 124.0      |                         |  $    | 81.9                   |       |  $        | 462.2 |   |  $ | 668.1 |
| Fair  value                                 |       |  $             | 2,901.8    |                         |  $    | 212.6                  |       |  $        | 2,127.2 |   |  $ | 5,241.6 |

 

41

----

 

**ING LifeInsurance and Annuity Company and Subsidiaries**

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

**Notesto Condensed Consolidated Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwisestated)

 

Unrealizedcapital losses (including non-credit impairments), along with the fair value of fixedmaturities, including securities pledged to creditors, by market sector andduration were as follows as of 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 |       |  $                               | 124.4      |                               |          | 1.7                            |       |                  | 13.8 |   |   | 0.2 |   |   | 194.4 |   |   | 25.5 |   |   |  $ | 332.6 |   |   |  $ | 27.4 |   |
| Foreign                                    |       | 54.8                                  |       |                               | 6.8           |                           |       | 37.9                  |   |   | 2.4 |   |   | 110.8 |   |   | 9.8 |   |   | 203.5 |   |   | 19.0 |   |
| Residential  mortgage-backed               |       | 320.6                                 |       |                               | 3.3           |                           |       | 1.3                   |   |   | 0.1 |   |   | 293.5 |   |   | 61.7 |   |   | 615.4 |   |   | 65.1 |   |
| Commercial  mortgage-backed                |       | 1.2                                   |       |                               | -   |                           |       | -           |   |   | -   |   |   | 265.8 |   |   | 79.2 |   |   | 267.0 |   |   | 79.2 |   |
| Other  asset-backed                        |       | 22.8                                  |       |                               | 0.1           |                           |       | 2.5                   |   |   | 0.3 |   |   | 225.5 |   |   | 90.5 |   |   | 250.8 |   |   | 90.9 |   |
| Total                                      |       |  $                               | 523.8      |                               |          |  $                        | 11.9       |                  |   |  $ | 55.5 |   |   |  $ | 3.0 |   |   |  $ | 1,090.0 |   |   |  $ | 266.7 |   |   |  $ | 1,669.3 |   |   |  $ | 281.6 |   |
|                                       |       |                                  |       |                               |          |                           |       |                  |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **2009**                                   | ** ** | ** **                            | ** ** | ** **                         | ** **    | ** **                     | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| U.S.  Treasuries                           |       |  $                               | 1,002.1    |                               |          |  $                        | 38.3       |                  |   |  $ | -   |   |   |  $ | -   |   |   |  $ | -   |   |   |  $ | -   |   |   |  $ | 1,002.1 |   |   |  $ | 38.3 |   |
| U.S.  corporate, state, and municipalities |       | 1,097.0                               |       |                               | 22.7          |                           |       | 86.1                  |   |   | 14.9 |   |   | 381.2 |   |   | 48.3 |   |   | 1,564.3 |   |   | 85.9 |   |
| Foreign                                    |       | 528.6                                 |       |                               | 14.8          |                           |       | 40.0                  |   |   | 20.4 |   |   | 301.8 |   |   | 30.2 |   |   | 870.4 |   |   | 65.4 |   |
| Residential  mortgage-backed               |       | 141.1                                 |       |                               | 45.4          |                           |       | 47.7                  |   |   | 4.2 |   |   | 425.3 |   |   | 79.1 |   |   | 614.1 |   |   | 128.7 |   |
| Commercial  mortgage-backed                |       | 105.8                                 |       |                               | 1.2           |                           |       | 27.2                  |   |   | 35.7 |   |   | 757.1 |   |   | 177.4 |   |   | 890.1 |   |   | 214.3 |   |
| Other  asset-backed                        |       | 27.2                                  |       |                               | 1.6           |                           |       | 11.6                  |   |   | 6.7 |   |   | 261.8 |   |   | 127.2 |   |   | 300.6 |   |   | 135.5 |   |
| Total                                      |       |  $                               | 2,901.8    |                               |          |  $                        | 124.0      |                  |   |  $ | 212.6 |   |   |  $ | 81.9 |   |   |  $ | 2,127.2 |   |   |  $ | 462.2 |   |   |  $ | 5,241.6 |   |   |  $ | 668.1 |   |

 

Of theunrealized capital losses aged more than twelve months, the average marketvalue of the related fixed maturities was 80.3% of the average book value as ofSeptember 30, 2010.  In addition,this category includes 327 securities, which have an average quality rating ofBBB.

 

42

----

 

**ING LifeInsurance and Annuity Company and Subsidiaries**

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

**Notesto Condensed Consolidated Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwisestated)

 

Unrealizedcapital losses (including non-credit impairments) in fixed maturities, including securitiespledged to creditors, for instances in which fair value declined belowamortized cost by greater than or less than 20% for consecutive periods asindicated in the tables 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**                                                             | ** ** | ** **              | ** ** | ** **                            | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Six  months or less below amortized cost                             |       |  $                 | 767.1      |                                  |  $    | 104.4                              |   |  $ | 36.7 |   |  $ | 25.1 |   | 175 |   | 16 |
| More  than six months and twelve months or less below amortized cost |       | 234.2                   |       | 9.0                                   |       | 14.8                               |   | 2.5 |   | 59 |   | 3 |
| More  than twelve months below amortized cost                        |       | 378.4                   |       | 457.8                                 |       | 17.8                               |   | 184.7 |   | 82 |   | 123 |
| Total                                                                |       |  $                 | 1,379.7    |                                  |  $    | 571.2                              |   |  $ | 69.3 |   |  $ | 212.3 |   | 316 |   | 142 |
|                                                                 |       |                    |       |                                  |       |                               |   |   |   |   |   |   |
| **2009**                                                             | ** ** | ** **              | ** ** | ** **                            | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Six  months or less below amortized cost                             |       |  $                 | 3,652.0    |                                  |  $    | 185.0                              |   |  $ | 168.0 |   |  $ | 60.7 |   | 377 |   | 98 |
| More  than six months and twelve months or less below amortized cost |       | 734.5                   |       | 247.0                                 |       | 40.2                               |   | 124.3 |   | 120 |   | 48 |
| More  than twelve months below amortized cost                        |       | 431.1                   |       | 660.1                                 |       | 28.2                               |   | 246.7 |   | 90 |   | 129 |
| Total                                                                |       |  $                 | 4,817.6    |                                  |  $    | 1,092.1                            |   |  $ | 236.4 |   |  $ | 431.7 |   | 587 |   | 275 |

 

43

----

 

**ING LifeInsurance and Annuity Company and Subsidiaries**

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

**Notesto Condensed Consolidated Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwisestated)

 

Unrealizedcapital losses (including non-credit impairments) in fixed maturities, including securitiespledged to creditors, by market sector for instances in which fair valuedeclined below amortized cost by greater than or less than 20% for consecutiveperiods as indicated in the tables 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 |       |  $                 | 311.1      |                                  |  $    | 48.9                               |   |  $ | 13.9 |   |  $ | 13.5 |   | 56 |   | 6 |
| Foreign                                   |       | 183.1                   |       | 39.4                                  |       | 9.6                                |   | 9.4 |   | 32 |   | 6 |
| Residential  mortgage-backed              |       | 545.2                   |       | 135.3                                 |       | 23.3                               |   | 41.8 |   | 142 |   | 50 |
| Commercial  mortgage-backed               |       | 219.0                   |       | 127.3                                 |       | 16.7                               |   | 62.6 |   | 22 |   | 16 |
| Other  asset-backed                       |       | 121.3                   |       | 220.3                                 |       | 5.8                                |   | 85.0 |   | 64 |   | 64 |
| Total                                     |       |  $                 | 1,379.7    |                                  |  $    | 571.2                              |   |  $ | 69.3 |   |  $ | 212.3 |   | 316 |   | 142 |
|                                      |       |                    |       |                                  |       |                               |   |   |   |   |   |   |
| **2009**                                  | ** ** | ** **              | ** ** | ** **                            | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| U.S.  Treasuries                          |       |  $                 | 1,040.5    |                                  |  $    | -                        |   |  $ | 38.3 |   |  $ | -   |   | 9 |   | -   |
| U.S.  corporate, state and municipalities |       | 1,532.2                 |       | 118.0                                 |       | 53.5                               |   | 32.4 |   | 256 |   | 23 |
| Foreign                                   |       | 830.0                   |       | 105.8                                 |       | 31.7                               |   | 33.7 |   | 111 |   | 22 |
| Residential  mortgage-backed              |       | 522.0                   |       | 220.8                                 |       | 55.1                               |   | 73.6 |   | 115 |   | 109 |
| Commercial  mortgage-backed               |       | 732.4                   |       | 372.0                                 |       | 49.3                               |   | 165.0 |   | 59 |   | 39 |
| Other  asset-backed                       |       | 160.5                   |       | 275.5                                 |       | 8.5                                |   | 127.0 |   | 37 |   | 82 |
| Total                                     |       |  $                 | 4,817.6    |                                  |  $    | 1,092.1                            |   |  $ | 236.4 |   |  $ | 431.7 |   | 587 |   | 275 |

 

Duringthe nine months ended September 30, 2010, unrealized capital losses onfixed maturities decreased by $386.5. 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 held 2 fixed maturities with unrealized capital losses inexcess of $10.0.  The unrealized capitallosses on these fixed maturities equaled $30.3, or 10.8% of the totalunrealized capital losses, as of September 30, 2010.  At December 31, 2009, the Company held 8fixed maturities with unrealized capital losses in excess of $10.0.  The unrealized capital losses on these fixedmaturities equaled $118.2, or 17.7% of the total unrealized capital losses, asof December 31, 2009.

 

Allinvestments with fair values less than amortized cost are included in theCompany’s other-than-temporary impairment analysis, and impairments wererecognized as disclosed in “Other-Than-Temporary Impairments,” which followsthis section. After detailed impairment analysis was completed, managementdetermined that the remaining investments in an unrealized loss position werenot other-than-temporarily impaired, and therefore no furtherother-than-temporary impairment was necessary.

 

44

----

 

**ING LifeInsurance and Annuity Company and Subsidiaries**

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

**Notesto Condensed Consolidated Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwisestated)

 

*Other-Than-TemporaryImpairments*

 

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

 

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

 

Whenthe Company has determined it has the intent to sell or if it is more likelythan not that it will be required to sell a security before recovery of itsamortized cost basis and the fair value has declined below amortized cost(“intent impairment”) the individual security is written down from amortizedcost to fair value and a corresponding charge is recorded in Net realizedcapital gains (losses) on the Condensed Consolidated Statements of Operationsas an other-than-temporary impairment (“OTTI”). If the Company does not intend to sell the security nor is it morelikely than not it will be required to sell the security before recovery of itsamortized cost basis, but the Company has determined that there has been another-than-temporary decline in fair value below the amortized cost basis, theOTTI is bifurcated into the amount representing the present value of thedecrease in cash flows expected to be collected (“credit impairment”) and theamount related to other factors (“noncredit impairment”). The credit impairmentis recorded in Net realized capital gains (losses) on the CondensedConsolidated Statements of Operations. The noncredit impairment is recorded in Other comprehensive income(loss) on the Condensed Consolidated Balance Sheets in accordance with therequirements of ASC Topic 320.

 

Inorder to determine the amount of the OTTI that is considered a creditimpairment, the Company utilizes the following methodology and significantinputs:

 

§      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, future 

 

45

----

 

**ING LifeInsurance and Annuity Company and Subsidiaries**

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

**Notesto Condensed Consolidated Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwisestated)

 

economicconditions and market forecasts, interest rate changes, and changes in ratingsof the security.

§      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.

 

Thefollowing tables identify the Company’s credit-related and intent-relatedimpairments included in the Condensed Consolidated Statements of Operations,excluding noncredit impairments included in Accumulated other comprehensiveincome (loss), by type for the three and nine months ended September 30,2010 and 2009.

 
| ** **                     | ** ** | **Three Months Ended September 30,** |
|--------------------------------|------------|----------------------------------------------------------|
| ** **                     | ** ** | **2010**                                                 | ** ** | **2009** |
| ** **                     | ** ** | ** **                                               | ** ** | **No. of** | ** ** | ** ** | ** ** | **No. of** |
| ** **                     | ** ** | **Impairment**                                           | ** ** | **Securities** | ** ** | **Impairment** | ** ** | **Securities** |
| Other  U.S. corporate          |       |  $                                                  | 0.1 |   |   | 1 |   |   |  $ | 3.0 |   |   | 1 |   |
| Foreign(1)                     |       | 6.9                                                      |   |   | 3 |   |   | 1.8 |   |   | 7 |   |
| Residential  mortgage-backed   |       | 0.8                                                      |   |   | 12 |   |   | 3.3 |   |   | 31 |   |
| Commercial  mortgage-backed    |       | 0.6                                                      |   |   | 1 |   |   | -     |   |   | - |   |
| Other  asset-backed            |       | 2.5                                                      |   |   | 9 |   |   | 2.2 |   |   | 9 |   |
| Limited  partnerships          |       | 0.2                                                      |   |   | 1 |   |   | -     |   |   | - |   |
| Equity  securities             |       | 0.1                                                      |   |   | 1 |   |   | -     |   |   | - |   |
| Mortgage  loans on real estate |       | -                                    |   |   | -    |   |   | 4.3 |   |   | 1 |   |
| Total                          |       |  $                                                  | 11.2 |   |   | 28 |   |   |  $ | 14.6 |   |   | 49 |   |

 

(1) Primarily U.S. dollar denominated.

 
| ** **                     | ** ** | **Nine Months Ended September 30,** |
|--------------------------------|------------|---------------------------------------------------------|
| ** **                     | ** ** | **2010**                                                | ** ** | **2009** |
| ** **                     | ** ** | ** **                                              | ** ** | **No. of** | ** ** | ** ** | ** ** | **No. of** |
| ** **                     | ** ** | **Impairment**                                          | ** ** | **Securities** | ** ** | **Impairment** | ** ** | **Securities** |
| U.S.  Treasuries               |       |  $                                                 | 1.7 |   |   | 1 |   |   |  $ | 152.0 |   |   | 18 |   |
| Public  utilities              |       | 1.3                                                     |   |   | 5 |   |   | -    |   |   | - |   |
| Other  U.S. corporate          |       | 5.2                                                     |   |   | 19 |   |   | 37.0 |   |   | 52 |   |
| Foreign(1)                     |       | 41.6                                                    |   |   | 17 |   |   | 46.6 |   |   | 36 |   |
| Residential  mortgage-backed   |       | 5.6                                                     |   |   | 41 |   |   | 47.6 |   |   | 85 |   |
| Commercial  mortgage-backed    |       | 4.2                                                     |   |   | 2 |   |   | -    |   |   | - |   |
| Other  asset-backed            |       | 14.7                                                    |   |   | 25 |   |   | 24.2 |   |   | 31 |   |
| Limited  partnerships          |       | 1.2                                                     |   |   | 3 |   |   | 15.0 |   |   | 16 |   |
| Equity  securities             |       | 0.1                                                     |   |   | 1 |   |   | 18.5 |   |   | 8 |   |
| Mortgage  loans on real estate |       | 1.0                                                     |   |   | 1 |   |   | 4.3 |   |   | 1 |   |
| Total                          |       |  $                                                 | 76.6 |   |   | 115 |   |   |  $ | 345.2 |   |   | 247 |   |

 

(1) Primarily U.S. dollar denominated.

 

46

----

 

**ING LifeInsurance and Annuity Company and Subsidiaries**

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

**Notesto Condensed Consolidated Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwisestated)

 

Theabove schedules include $11.1 and $39.2 for the three and nine months ended September 30,2010, respectively, and $10.3 and $84.1 for the three and nine months endedSeptember 30, 2009, respectively, in other-than-temporary write-downsrelated to credit impairments, which are recognized in earnings. The remainingwrite-downs reflected in the schedules above are related to intent impairments.

 

Thefollowing tables summarize these intent impairments, which are also recognizedin earnings, by type for the three 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                             |       |  $                                    | 0.1 |   |   | 1 |   |   |  $ | 3.0 |   |   | 1 |   |
| Foreign(1)                                  |       | -                                          |   |   | - |   |   | 1.3 |   |   | 5 |   |
| Total                                       |       |  $                                    | 0.1 |   |   | 1 |   |   |  $ | 4.3 |   |   | 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                             |       |  $                                    | 1.7 |   |   | 1 |   |   |  $ | 152.0 |   |   | 18 |   |
| Public utilities                            |       | 1.4                                        |   |   | 5 |   |   | - |   |   | - |   |
| Other U.S. corporate                        |       | 5.3                                        |   |   | 19 |   |   | 28.2 |   |   | 36 |   |
| Foreign(1)                                  |       | 27.6                                       |   |   | 12 |   |   | 44.6 |   |   | 33 |   |
| Residential mortgage-backed                 |       | -                                          |   |   | - |   |   | 22.5 |   |   | 8 |   |
| Other asset-backed                          |       | 1.4                                        |   |   | 1 |   |   | 13.8 |   |   | 6 |   |
| Total                                       |       |  $                                    | 37.4 |   |   | 38 |   |   |  $ | 261.1 |   |   | 101 |   |
|                                             |            |                                            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

(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.

 

47

----

 

**ING LifeInsurance and Annuity Company and Subsidiaries**

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

**Notesto Condensed Consolidated Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwisestated)

 

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

 
|                         | ** ** | **Three  Months Ended September 30,** |
|------------------------------|------------|--------------------------------------------|
|                         | ** ** | **2010**                                   | ** ** | **2009** |
|                         |       |                                       | ** ** | ** ** | **No. of** |   |   |   | ** ** | ** ** | **No. of** | ** ** |
|                         | ** ** | **Impairment**                             | ** ** | ** ** | **Securities** | ** ** | ** ** | **Impairment** | ** ** | ** ** | **Securities** | ** ** |
| Residential  mortgage-backed |       |  $                                    | 3.9 |   |   | 4 |   |   |  $ | 5.2 |   |   | 18 |   |
| Other  asset-backed          |       | 9.2                                        |   |   | 5 |   |   | 1.7 |   |   | 7 |   |
| Total                        |       |  $                                    | 13.1 |   |   | 9 |   |   |  $ | 6.9 |   |   | 25 |   |
|                         |       |                                       |   |   |   |   |   |   |   |   |   |   |   |   |
|                         | ** ** | **Nine Months Ended September 30,**   |
|                         | ** ** | **2010**                                   | ** ** | **2009** |
|                         |       |                                       | ** ** | ** ** | **No. of** |   |   |   | ** ** | ** ** | **No. of** | ** ** |
|                         | ** ** | **Impairment**                             | ** ** | ** ** | **Securities** | ** ** | ** ** | **Impairment** | ** ** | ** ** | **Securities** | ** ** |
| U.S. corporate               |       |  $                                    | - |   |   | - |   |   |  $ | 3.6 |   |   | 1 |   |
| Foreign(1)                   |       | -                                          |   |   | - |   |   | 0.1 |   |   | 3 |   |
| Commercial mortgage-backed   |       | 14.9                                       |   |   | 2 |   |   | - |   |   | - |   |
| Residential mortgage-backed  |       | 9.5                                        |   |   | 17 |   |   | 15.4 |   |   | 11 |   |
| Other asset-backed           |       | 17.2                                       |   |   | 14 |   |   | 2.1 |   |   | 11 |   |
| Total                        |       |  $                                    | 41.6 |   |   | 33 |   |   |  $ | 21.2 |   |   | 26 |   |
|                              |            |                                            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

(1) Primarily U.S. dollar denominated.

 

The fairvalue of fixed maturities with other-than-temporary impairments as of September 30,2010 and 2009 was $2,098.4 and $2,658.1, respectively.

 

48

----

 

**ING LifeInsurance and Annuity Company and Subsidiaries**

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

**Notesto Condensed Consolidated Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwisestated)

 

Thefollowing tables identify the amount of credit impairments on fixed maturitiesfor the three and nine months ended September 30, 2010 and 2009, for whicha portion of the OTTI was recognized in Accumulated other comprehensive income(loss), and the corresponding changes in such amounts.

 
|                                                          | ** ** | **Three Months Ended September 30,** |
|---------------------------------------------------------------|------------|-------------------------------------------|
|                                                          | ** ** | **2010**                                  | ** ** | ** ** | **2009** | ** ** |
| Balance at July 1                                        |       |  $                                   | 53.5 |   |   |  $ | 29.7 |   |
| Additional credit impairments:                                |       |                                      |   |   |   |   |
| On securities not previously impaired                         |       | 1.7                                       |   |   | 2.5 |   |
| On securities previously impaired                             |       | 1.1                                       |   |   | 2.2 |   |
| Reductions:                                                   |       |                                      |   |   |   |   |
| Securities sold, matured, prepaid or paid down                |       | (2.3                                      | ) |   | (0.6 | ) |
| Balance at September 30                                  |       |  $                                   | 54.0 |   |   |  $ | 33.8 |   |
|                                                          |       |                                      |   |   |   |   |
|                                                          | ** ** | **Nine Months Ended September 30,**  |
|                                                          | ** ** | **2010**                                  | ** ** | ** ** | **2009** | ** ** |
| Balance at January 1                                     |       |  $                                   | 46.0 |   |   |  $ | - |   |
| Implementation of OTTI guidance included in ASC  Topic 320(1) |       | -                                         |   |   | 25.1 |   |
| Additional credit impairments:                                |       |                                      |   |   |   |   |
| On securities not previously impaired                         |       | 9.4                                       |   |   | 3.4 |   |
| On securities previously impaired                             |       | 5.2                                       |   |   | 6.2 |   |
| Reductions:                                                   |       |                                      |   |   |   |   |
| Securities sold, matured, prepaid or paid down                |       | (6.6                                      | ) |   | (0.9 | ) |
| Balance at September 30                                  |       |  $                                   | 54.0 |   |   |  $ | 33.8 |   |

 

(1)      Represents credit losses remaining in Retained earningsrelated to the adoption of new guidance on OTTI, included in ASC Topic 320, onApril 1, 2009.

 

*NetRealized Capital Gains (Losses)*

 

Netrealized capital gains (losses) are comprised of the difference between the amortizedcost of investments and proceeds from sale and redemption, as well as lossesincurred due to credit-related and intent-related other-than-temporaryimpairment of investments and changes in fair 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 endedSeptember 30, 2010 and 2009.

 

49

----

 

**ING LifeInsurance and Annuity Company and Subsidiaries**

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

**Notesto Condensed Consolidated Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwisestated)

 
| ** **                                                                                                                            | ** ** | **Three Months Ended September 30,** |
|---------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------|
| ** **                                                                                                                            | ** ** | **2010**                                  | ** ** | ** ** | **2009** | ** ** |
| Fixed maturities, available-for-sale, including  net OTTI of $(10.9) and $(10.3) in 2010 and 2009, respectively                       |       |  $                                   | 47.5 |   |   |  $ | 84.2 |   |
| Equity securities, available-for-sale, including  net OTTI of $(0.1) and $0.0 in 2010 and 2009, respectively                          |       | (0.9                                      | ) |   | 10.4 |   |
| Derivatives                                                                                                                           |       | (13.3                                     | ) |   | (38.5 | ) |
| Other investments, including net OTTI of $(0.2)  and $(4.3) in 2010 and 2009, respectively                                            |       | (0.1                                      | ) |   | (2.1 | ) |
| Less: allocation to experience-rated contracts,  including net OTTI of $(0.1) and $3.6 in 2010 and 2009, respectively                 |       | 30.0                                      |   |   | 69.0 |   |
| Net realized capital gains                                                                                                            |       |  $                                   | 3.2 |   |   |  $ | (15.0 | ) |
| After-tax net realized capital gains (losses)  including tax valuation allowance of $21.0 and $11.7 for 2010 and 2009,  respectively  |       |  $                                   | 23.1 |   |   |  $ | 1.9 |   |
|                                                                                                                                  |       |                                      |   |   |   |   |
| ** **                                                                                                                            | ** ** | **Nine Months Ended September 30,**  |
| ** **                                                                                                                            | ** ** | **2010**                                  | ** ** | ** ** | **2009** | ** ** |
| Fixed maturities, available-for-sale, including  net OTTI of $(74.3) and $(307.4) in 2010 and 2009, respectively                      |       |  $                                   | 55.6 |   |   |  $ | (15.5 | ) |
| Equity securities, available-for-sale, including  net OTTI of $(0.1) and $(18.5) in 2010 and 2009, respectively                       |       | 2.8                                       |   |   | (3.2 | ) |
| Derivatives                                                                                                                           |       | (48.4                                     | ) |   | (176.6 | ) |
| Other investments, including net OTTI of $(2.2)  and $(19.3) in 2010 and 2009, respectively                                           |       | 2.5                                       |   |   | (13.2 | ) |
| Less: allocation to experience-rated contracts,  including net OTTI of $(31.0) and $(166.2) in 2010 and 2009, respectively            |       | 35.3                                      |   |   | (9.2 | ) |
| Net realized capital gains                                                                                                            |       |  $                                   | (22.8 | ) |   |  $ | (199.3 | ) |
| After-tax net realized capital gains (losses)  including tax valuation allowance of $33.0 and $113.2 for 2010 and 2009,  respectively |       |  $                                   | 18.2 |   |   |  $ | (16.3 | ) |

 

Thedecrease in *Total net realized capitallosses*for the three and nine months ended September 30, 2010,was primarily due to lower credit and intent related impairments on fixedmaturities in the first nine months of 2010 driven by the improved economic andinterest rate environment. In addition, the Company experienced lower losses onderivatives, driven by the unwinding of futures at the end of 2009 which wereused to hedge fee income from variable annuity products. For the three and ninemonths ended September 30, 2009, the Company recognized losses on thesefutures.

 

Netrealized capital gains (losses) allocated to experience-rated contracts arededucted from Net realized capital gains (losses), with an offsetting amount reflectedin Future policy benefits and claims reserves on the Condensed ConsolidatedBalance Sheets.  During 2009 andcontinuing in 2010, as a result of the economic environment, which resulted insignificant realized losses associated with experience-rated contracts, theCompany accelerated the amortization of realized losses rather than reflectingthese losses in Future policy benefits and claims reserves.  For the nine months ended 

 

50

----

 

**ING LifeInsurance and Annuity Company and Subsidiaries**

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

**Notesto Condensed Consolidated Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwisestated)

 

September 30,2010 and 2009, the Company fully amortized $35.3 and $9.2, respectively, of netunamortized realized capital gains (losses) allocated to experience-ratedcontractowners, which are reflected in Interest credited and other benefits tocontractowners in the Condensed Consolidated Statements of Operations.

 

Proceedsfrom the sale of fixed maturities and equity securities, available-for-sale,and the related gross realized gains and losses, including those related toexperience-rated contracts, were as follows for the periods ended September 30,2010 and 2009.

 
| ** **        | ** ** | **2010** | ** ** | **2009** |
|-------------------|------------|----------|------------|----------|
| Proceeds on sales |       |  $  | 4,055.3    |     |   |  $ | 4,025.7 |   |
| Gross gains       |       | 154.0    |       |     | 200.3 |   |
| Gross losses      |       | 24.8     |       |     | 82.1 |   |

 

 

**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                                                     |       |  $  | 901.8      |     |   |  $ | 865.5 |   |
| Deferrals of commissions and expenses                                         |       | 104.7    |       |     | 83.8 |   |
| Amortization:                                                                 |       |     |       |     |   |   |
| Amortization                                                                  |       | (90.0    | )          |     | (15.4 | ) |
| Interest accrued at 5% to 7%                                                  |       | 48.1     |       |     | 42.8 |   |
| Net amortization included in Condensed  Consolidated Statements of Operations |       | (41.9    | )          |     | 27.4 |   |
| Change in unrealized capital gains/losses on available-for-sale  securities   |       | (9.1     | )          |     | (89.4 | ) |
| Balance at September 30                                                  |       |  $  | 955.5      |     |   |  $ | 887.3 |   |

 

51

----

 

**ING LifeInsurance and Annuity Company and Subsidiaries**

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

**Notesto Condensed Consolidated Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwisestated)

 

Activitywithin value of business acquired (“VOBA”) was as follows for the nine monthsended September 30, 2010 and 2009.

 
|                                                                          | ** ** | **2010** | ** ** | **2009** |
|-------------------------------------------------------------------------------|------------|----------|------------|----------|
| Balance at January 1                                                     |       |  $  | 991.5      |     |   |  $ | 1,832.5 |   |
| Deferrals of commissions and expenses                                         |       | 16.2     |       |     | 26.6 |   |
| Amortization:                                                                 |       |     |       |     |   |   |
| Amortization                                                                  |       | (61.6    | )          |     | (123.5 | ) |
| Interest accrued at 5% to 7%                                                  |       | 55.7     |       |     | 53.9 |   |
| Net amortization included in Condensed  Consolidated Statements of Operations |       | (5.9     | )          |     | (69.6 | ) |
| Change in unrealized capital gains/losses on available-for-sale  securities   |       | (70.4    | )          |     | (756.6 | ) |
| Balance at September 30                                                  |       |  $  | 931.4      |     |   |  $ | 1,032.9 |   |

 

Duringthe nine months ended September 30, 2010, the Company revised and unlockedthe assumptions related to lapse rates, maintenance expenses and portfolioyields, leading to higher estimated future gross profits.  These revisions resulted in a $73.4 decreasein amortization of DAC and VOBA.

 

Duringthe nine months ended September 30, 2009, the Company revised and unlockedthe assumptions related to future mortality and expense charges and mutual fundrevenue, leading to higher estimated future gross profits.  These revisions resulted in a $43.5 decreasein amortization of DAC and VOBA.

 

 

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

 

Duringthe nine months ended September 30, 2010, ILIAC did not receive anycapital contributions from its Parent. During the nine months endedSeptember 30, 2009, ILIAC received a $365.0 capital contribution fromits Parent.

 

Duringthe nine months ended September 30, 2010, ILIAC paid a $203.0dividend on its common stock to its Parent. During the nine months ended September 30, 2009, ILIAC did notpay any dividends on its common stock to its Parent.  On October 30, 2010, ING FinancialAdvisers, LLC paid a $60.0 dividend to ILIAC, its parent.

 

52

----

** **

**INGLife Insurance and Annuity Company and Subsidiaries**

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

**Notesto Condensed Consolidated Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwisestated)

 

**8.         Income Taxes**

 

TheCompany’s effective tax rates for the three months ended September 30,2010 and 2009 were (6.9)% and 33.5%, respectively.  The Company’s effective tax rates for thenine months ended September 30, 2010 and 2009 were 12.9% and (8.0)%,respectively.  The effective tax ratesdiffer from the expected rate primarily due to the following items:

 
| ** **                           | ** ** | **Three Months Ended September 30,** | ** ** |
|--------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                           | ** ** | **2010**                                                 | ** ** | **2009** | ** ** |
| Statutory  rate                      |       | 35.0%                                                    |       | 35.0% |   |
|                                 |       |                                                     |       |   |   |
| Dividend  received deduction         |       | (12.9)%                                                  |       | 3.2% |   |
| Valuation  allowance                 |       | (11.7)%                                                  |       | (5.4)% |   |
| Audit  settlement                    |       | (18.2)%                                                  |       | -     |   |
| Other                                |       | 0.9%                                                     |       | 0.7% |   |
| Effective  rate at September 30 |       | (6.9)%                                                   |       | 33.5% |   |

 
| ** **                           | ** ** | **Nine Months Ended September 30,** | ** ** |
|--------------------------------------|------------|---------------------------------------------------------|------------|
|                                 | ** ** | **2010**                                                | ** ** | **2009** | ** ** |
| Statutory  rate                      |       | 35.0%                                                   |       | 35.0% |   |
|                                 |       |                                                    |       |   |   |
| Dividend  received deduction         |       | (6.6)%                                                  |       | (0.3)% |   |
| Valuation  allowance                 |       | (8.7)%                                                  |       | (43.4)% |   |
| Audit  settlement                    |       | (7.4)%                                                  |       | -     |   |
| Other                                |       | 0.6%                                                    |       | 0.7% |   |
| Effective  rate at September 30 |       | 12.9%                                                   |       | (8.0)% |   |

 

Valuationallowances are provided when it is considered unlikely that deferred tax assetswill be realized.  At September 30,2010 and December 31, 2009, the Company had a tax valuation allowance of$64.7 and $202.5, respectively.

 

***Unrecognized Tax Benefits***

 

Reconciliationsof the change in the unrecognized income tax benefits for the periods ended September 30,2010 and December 31, 2009 are as follows:

 
|                                                 | ** ** | **2010**                  | ** ** | ** ** | **2009** |
|------------------------------------------------------|------------|---------------------------|------------|------------|----------|
| Balance at beginning of period                       |       |   $             | 12.8       |       |     |   $ | 22.1 |   |
| Additions for tax positions related to current  year |       | -     |       |       | 0.9      |   |
| Additions for tax positions related to prior years   |       | 36.7                      |       |       | 3.5      |   |
| Reductions for tax positions related to prior  years |       | (21.7                     | )          |       | (13.3    | ) |
| Reductions for settlements with taxing authorities   |       | (0.2                      | )          |       | (0.4     | ) |
| Balance at end of period                             |       |   $             | 27.6       |       |     |   $ | 12.8 |   |

 

53

----

 

**INGLife Insurance and Annuity Company and Subsidiaries**

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

**Notesto Condensed Consolidated Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwisestated)

 

TheCompany had $2.9 and $24.8 of unrecognized tax benefits as of September 30,2010 and December 31, 2009, respectively, which would affect the Company’seffective tax rate if recognized.

 

***Interest and Penalties***

 

TheCompany recognizes accrued interest and penalties related to unrecognized taxbenefits in current income taxes and income tax expense (benefit) on theBalance Sheet and the Statement of Operations, respectively. The Company hadaccrued interest of $0.0 and $3.3 as of September 30, 2010 and December 31,2009, respectively.  The decrease inaccrued interest during the period ended September 30, 2010 is primarilyrelated to the settlement of the 2004 through 2008 federal audits.

 

***Tax Regulatory Matters***

 

In September 2010,the IRS completed its examination of the Company’s returns through tax year2008.  The provision for the quarterended September 30, 2010 reflected non-recurring favorable adjustments,resulting from a reduction in the tax liability that was no longer deemednecessary based on the results of the IRS examination, monitoring the activitiesof the IRS with respect to certain issues with other taxpayers and the meritsof the Company’s positions.

 

TheCompany is currently under audit by the Internal Revenue Service (IRS) for taxyears 2009 and 2010.  It is anticipatedthat the IRS audit of the 2009 tax year will be finalized within the nexttwelve months.  Upon finalization of theIRS examination, it is reasonably possible that the unrecognized tax benefitswill decrease by up to $24.7.  The timingof the payment of the remaining allowance of $2.9 cannot be reliablyestimated.  The Company and the IRS haveagreed to participate in the Compliance Assurance Program (“CAP”) for tax years2009 and 2010.

 

 

**9.         Financing Agreements**

 

***Reciprocal Loan Agreement***

 

TheCompany maintains a reciprocal loan agreement with ING America InsuranceHoldings, Inc. (“ING AIH”), an affiliate, to facilitate the handling ofunanticipated short-term cash requirements that arise in the ordinary course ofbusiness.  Under this agreement, whichbecame effective in June 2001 and expires on April 1, 2011, eitherparty can borrow from the other up to 3% of the Company’s statutory admittedassets as of the preceding December 31. Interest on any Company borrowing is charged at the rate of ING AIH’scost of funds for the interest period, plus 0.15%.  Interest on any ING AIH borrowing is chargedat a rate based on the prevailing interest rate of U.S. commercial paperavailable for purchase with a similar duration.

 

54

----

 

**INGLife Insurance and Annuity Company and Subsidiaries**

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

**Notesto Condensed Consolidated Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwisestated)

 

Underthis agreement, the Company incurred an immaterial amount of interest expensefor the three and nine months ended September 30, 2010 and 2009,respectively.  The Company earnedinterest income of $0.2 and $0.7 for the three and nine months endedSeptember 30, 2010, respectively, and $0.3 and $0.9 for the three and ninemonths ended September 30, 2009. Interest expense and income are included in Interest expense and Netinvestment income, respectively, on the Condensed Consolidated Statements ofOperations.  As of September 30,2010 and December 31, 2009, the Company had an outstanding receivable of$308.3 and $287.2, respectively, from ING AIH under the reciprocal loanagreement.

 

Forinformation on the Company’s additional financing agreements, see the FinancingAgreements footnote to the Consolidated Financial Statements included in theCompany’s 2009 Annual Report on Form 10-K/A.

 

 

**10.       Commitments and Contingent Liabilities**

 

***Commitments***

 

Throughthe normal course of investment operations, the Company commits to eitherpurchase or sell securities, commercial mortgage loans, or money marketinstruments, at a specified future date and at a specified price or yield.  The inability of counterparties to honorthese commitments may result in either a higher or lower replacement cost.  Also, there is likely to be a change in thevalue of the securities underlying the commitments.

 

At September 30,2010, the Company had off-balance sheet commitments to purchase investmentsequal to their fair value of $530.0, of which $178.8 was with relatedparties.  At December 31, 2009, theCompany had off-balance sheet commitments to purchase investments equal totheir fair value of $305.1, of which $218.5 was with related parties.  During the three and nine months ended September 30,2010, $14.4 and $37.5, respectively, was funded to related parties under thesecommitments.

 

***Collateral***

 

Underthe terms of the Company’s Over-The-Counter Derivative ISDA Agreements (“ISDAAgreements”), the Company may receive from, or deliver to, counterparties,collateral to assure that all terms of the ISDA Agreements will be met withregard to the CSA.  The terms of the CSAcall for the Company to pay interest on any cash received equal to the FederalFunds rate.  As of September 30,2010, the Company held $29.6, of cash collateral, which was included inPayables under securities loan agreement, including collateral held, on theCondensed Consolidated Balance Sheets. As of December 31, 2009, theCompany did not hold any cash collateral. In addition, as of September 30, 2010 and December 31, 2009,the Company delivered collateral of $142.1 and $130.3, respectively, in fixedmaturities pledged under derivatives contracts, which was included inSecurities pledged on the Condensed Consolidated Balance Sheets.

 

55

----

 

**INGLife Insurance and Annuity Company and Subsidiaries**

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

**Notesto Condensed Consolidated Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwisestated)

 

***Litigation***

 

TheCompany is involved in threatened or pending lawsuits/arbitrations arising fromthe normal conduct of business.  Due tothe climate in insurance and business litigation/arbitrations, suits againstthe Company sometimes include claims for substantial compensatory,consequential, or punitive damages, and other types of relief.  Moreover, certain claims are asserted asclass actions, purporting to represent 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.

 

***Regulatory Matters***

 

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 theCommitments and Contingent Liabilities footnote to the Consolidated FinancialStatements included in the Company’s 2009 Annual Report on Form 10-K/A.

 

56

----

 

**INGLife Insurance and Annuity Company and Subsidiaries**

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

**Notesto Condensed Consolidated Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwisestated)

 

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

 

Shareholder’sequity included the following components of Accumulated other comprehensiveincome (loss) as of September 30, 2010 and 2009.

 
| ** **                                                                                                                                                                               | ** ** | **2010**      | ** ** | ** ** | **2009**      |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------|------------|------------|---------------|
| Net unrealized capital gains (losses):                                                                                                                                                   |       |          |       |       |          |   |
| Fixed maturities, available-for-sale; including  OTTI of $(75.4) and $(20.8) in 2010 and 2009, respectively and $(238.8) of  cumulative effect of change in accounting principle in 2009 |       |   $ | 1,301.8    |       |          |   $ | 95.6 |   |
| Equity securities, available-for-sale                                                                                                                                                    |       | 28.2          |       |       | 12.0          |   |
| DAC/VOBA adjustment on available-for-sale  securities, including $134.0 of cumulative effect of change in accounting principle  in 2009                                                  |       | (168.3        | )          |       | (61.1         | ) |
| Sales inducements adjustment on available-for-sale  securities                                                                                                                           |       | (0.3          | )          |       | 0.3           |   |
| Policy loans                                                                                                                                                                             |       | (75.4         | )          |       | -   |   |
| Derivatives                                                                                                                                                                              |       | 0.1           |       |       | -   |   |
| Other investments                                                                                                                                                                        |       | (0.2          | )          |       | -   |   |
| Less: allocation to experience-rated contracts                                                                                                                                           |       |          | 882.0      |       |          |   | -   |   |
| Unrealized capital gains, before tax                                                                                                                                                     |       | 203.9         |       |       | 46.8          |   |
| Deferred income tax asset (liability) (including  $(46.9) of cumulative effect of change in accounting principle in 2009)                                                                |       | 8.1           |       |       | (34.5         | ) |
| Net unrealized capital gains                                                                                                                                                             |       | 212.0         |       |       | 12.3          |   |
| Pension liability, net of tax                                                                                                                                                            |       | (8.7          | )          |       | (12.5         | ) |
| Accumulated other comprehensive income (loss)                                                                                                                                            |       |   $ | 203.3      |       |          |   $ | (0.2 | ) |

 

On April 1, 2009, the Company adopted new US GAAPguidance on impairments, included in ASC Topic 320. As prescribed by thisaccounting guidance, noncredit impairments, reflecting the portion of theimpairment between the present value of future cash flows and fair value, wererecognized in Other comprehensive income (loss).

 

As of September 30, 2010, the Company had $882.0in net unrealized gains allocated to experience-rated contracts, which arereflected in Future policy benefits and claims reserves on the CondensedConsolidated Balance Sheets.  In 2009, asa result of the unfavorable market conditions, net unrealized capital gains(losses) were not allocated to experience-rated contracts.  Rather, the Company reflected net unrealizedcapital losses in Shareholder’s equity on the Condensed Consolidated BalanceSheets.

 

57

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**INGLife Insurance and Annuity Company and Subsidiaries**

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

**Notesto Condensed Consolidated Financial Statements (Unaudited)**

(Dollar amounts in millions, unless otherwisestated)

 

Changesin unrealized capital gains on securities, including securities pledged andnoncredit impairments, as recognized in Accumulated other comprehensive income(loss), reported net of DAC, VOBA, and income taxes, were as follows for thenine months ended September 30, 2010 and 2009.

 
| ** **                                                                                    | ** ** | **2010**      | ** ** | **2009** | ** **    |
|-----------------------------------------------------------------------------------------------|------------|---------------|------------|----------|---------------|
| Net unrealized capital holding gains arising during  the period(1)                            |       |   $ | 148.7      |     |   $ | 652.6 |   |
| Less: reclassification adjustment for gains and  other items included in Net income (loss)(2) |       | 41.5          |       | 164.9    |          |
| Net change in unrealized capital gains on  securities                                         |       |   $ | 107.2      |     |   $ | 487.7 |   |

 
| (1)     Pretax net unrealized capital holding gains arising  during the period were $202.9 and $959.0 for the nine months ended  September 30, 2010 and 2009, respectively.                      |   |   |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|
| (2)     Pretax reclassification adjustments for gains and  other items included in Net income (loss) were $56.6 and $242.3 for the nine  months ended September 30, 2010 and 2009, respectively. |   |   |   |

 

Thereclassification adjustments for gains (losses) and other items included in Netincome (loss) in the above table are determined by specific identification ofeach security sold during the period.

 

Thefollowing table identifies the amount of noncredit impairments on fixedmaturities recognized in Other comprehensive income (loss) as of September 30,2010 and December 31, 2009.

 
|                                              | ** ** | **2010**      | ** ** | ** ** | **2009** | ** **    | ** **    |
|---------------------------------------------------|------------|---------------|------------|------------|----------|---------------|---------------|
| Balance at January 1                         |       |   $ | 46.7       |       |     |   $ | -   |   | (2) |
| Additional noncredit impairments:                 |       |          |       |       |     |          |          |
| On securities not previously impaired             |       | 41.2          |       |       | 53.0     |          |          |
| On securities previously impaired                 |       | 0.4           |       |       | 0.3      |          |          |
| Reductions:                                       |       |          |       |       |     |          |          |
| Securities sold, matured, prepaid or paid down(1) |       | (2.7          | )          |       | (0.8     | )             |          |
| Securities with additional credit impairments(1)  |       | (10.2         | )          |       | (5.8     | )             |          |
| Total noncredit impairments                       |       |   $ | 75.4       |       |     |   $ | 46.7          |   |   |

 
| (1)     Represents realization of noncredit impairments to  Net income (loss).                                                  |   |   |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|
| (2)     New guidance on recognition and presentation of OTTI,  as included in ASC Topic 320, was adopted on April 1, 2009. |   |   |   |

 

58

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

(Dollar amounts in millions, unless otherwise stated)

 

**Overview**

 

The following narrative analysis presents a review ofthe consolidated results of operations of ING Life Insurance and AnnuityCompany (“ILIAC”) and its wholly-owned subsidiaries (collectively, the “Company”)for each of the three and nine months ended September 30, 2010 and 2009,and financial condition as of September 30, 2010 and December 31,2009.  This item should be read in itsentirety and in conjunction with the condensed consolidated financialstatements and related notes, which can be found under Part I, Item1. contained herein, as well as the “Management’s Narrative Analysis of theResults of Operations and Financial Condition” section contained in the Company’s2009 Annual Report on Form 10-K/A.

 

**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 notbased on historical information and which relate to future operations,strategies, financial results, or other developments. Statements using verbssuch as “expect,” “anticipate,” “believe,” or words of similar import,generally involve forward-looking statements. Without limiting the foregoing, forward-looking statements includestatements that represent the Company’s beliefs concerning future levels ofsales and redemptions of the Company’s products, investment spreads and yields,or the earnings and profitability of the Company’s activities.

 

Forward-looking statements are necessarily based 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 |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

59

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|   | uncertainty and volatility. These global market conditions have  affected and may continue to affect the Company’s results of operations;                                                                                                                                                                                                                                                                                                          |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2)    | Adverse financial market conditions, changes in rating agency standards  and practices and/or actions taken by ratings agencies may significantly  affect the Company’s ability to meet liquidity needs, access to capital and  cost of capital;                                                                                                                                                                                                   |
| (3)    | Circumstances  associated with implementation of ING Groep’s recently announced global  business strategy and the final restructuring plan submitted to the European  Commission 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)   | The inability of counterparties to meet their financial obligations  could have an adverse effect on the Company’s results of operations;                                                                                                                                                                                                                                                                                                          |
| (13)   | Changes in underwriting and actual experience could materially affect  profitability;                                                                                                                                                                                                                                                                                                                                                                   |
| (14)   | A loss of key  product distribution relationships could materially affect sales;                                                                                                                                                                                                                                                                                                                                                                        |
| (15)   | Competition  could negatively affect the ability to maintain or increase profitability;                                                                                                                                                                                                                                                                                                                                                                 |

 

60

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| (16) | 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;                                                                                                                                                                                                    |
|------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (17) | The Company may be adversely affected by  increased governmental and regulatory scrutiny or negative publicity;                                                                                                                                                                                                                                                                                                                                        |
| (18) | A loss of key  employees could increase the Company’s operational risks and could adversely  affect the effectiveness of internal controls over financial reporting;                                                                                                                                                                                                                                                                              |
| (19) | Litigation may  adversely affect profitability and financial condition;                                                                                                                                                                                                                                                                                                                                                                                |
| (20) | Changes in  regulation in the United States and recent regulatory investigations may  reduce profitability;                                                                                                                                                                                                                                                                                                                                            |
| (21) | The Company’s products are subject to extensive regulation and  failure to meet any of the complex product requirements may reduce  profitability;                                                                                                                                                                                                                                                                                                |
| (22) | 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; |
| (23) | The occurrence  of natural or man-made disasters may adversely affect the Company’s results  of operations and financial condition; and                                                                                                                                                                                                                                                                                                           |
| (24) | 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 of Presentation**

 

ILIAC is a stock life insurance company domiciled inthe state of Connecticut.  ILIAC and itswholly-owned subsidiaries are providers of financial products and services inthe United States.  ILIAC is authorizedto conduct its insurance business in all states and the District of Columbia.

 

ILIAC 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”.

 

61

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As part of a restructuring plan approved by theEuropean Commission (“EC”), ING has agreed to separate its banking andinsurance 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 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.

 

TheCompany has one operating segment.

 

**Critical Accounting Policies**

 

There have been no material changes to the Company’scritical accounting policies since the filing of the Company’s 2009 AnnualReport on Form 10-K/A, except as noted in the Recently Adopted AccountingStandards footnote.

 

**Results of Operations**

 

*Overview*

 

Products currently offered by the Company includequalified and nonqualified annuity contracts that include a variety of fundingand payout options for individuals and employer-sponsored retirement plansqualified under Internal Revenue Code Sections 401, 403, 408, and 457, as wellas nonqualified deferred compensation plans.

 

On April 9, 2009, the Company’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 expense reduction.  In particular, with respect to ING’s U.S.insurance operations, ING is seeking to further reduce its risk byfocusing on individual life products, retirement services and a new suite ofsimpler, lower risk annuity products which the Company commenced selling duringthe first quarter of 2010. On November 10, 2010, ING announced thatmanagement of ING’s U.S. insurance operations is implementing a program tosharpen the strategic focus of the U.S. insurance business on life insuranceand retirement services while reducing annual expenses for overall U.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.

 

62

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The Company derives its revenue mainly from (a) feeincome generated from separate account assets supporting variable options undervariable annuity contract investments, as designated by contractowners, (b) investmentincome earned on assets supporting fixed assets under management (“AUM”),mainly generated from annuity products with fixed investment options, and (c) certainother fees.  The Company’s expensesprimarily consist of (a) interest credited and other benefits tocontractowners, (b) amortization of DAC and value of business acquired (“VOBA”),(c) expenses related to the selling and servicing of the various productsoffered by the Company, and (d) other general business expenses.  In addition, the Company collectsbroker-dealer commissions through its subsidiaries, Directed Services LLC (“DSL”)and ING Financial Advisers, LLC (“IFA”), which are, in turn, paid tobroker-dealers and expensed.

 

*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 and resultedin unrealized and realized capital gains. The decline in U.S. Treasury rates is mainly due to anticipation in themarket that additional quantitative easing is likely in the near future.

 

63

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*Results of 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), higher Premium income and a favorable changein Income tax expense (benefit) more than offset by higher Interest creditedand other benefits to contractowners, higher Operating expenses, unfavorablechange in Net amortization of DAC and VOBA and lower Fee income.

 
| ** **                                                                                          | ** ** | **Three Months Ended September 30,** | ** ** | ** ** | **$ Increase** |       |       | **% Increase**  |       |
|-----------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|------------|---------------------|------------|------------|----------------------|------------|
| ** **                                                                                          | ** ** | **2010**                                                 | ** ** | ** ** | **2009**            | ** ** | ** ** | ** (Decrease)** | ** ** |   | **(Decrease)** |   |
| **Revenues:**                                                                                       |       |                                                     |       |       |                |       |       |                 |       |   |   |   |
| Net  investment income                                                                              |       |  $                                                  | 327.4      |       |                |  $    | 322.2      |                 |       |  $ | 5.2 |   |   | 1.6% |   |
| Fee  income                                                                                         |       | 134.8                                                    |       |       | 141.9               |       |       | (7.1                 | )          |   | (5.0)% |   |
| Premiums                                                                                            |       | 22.0                                                     |       |       | 9.6                 |       |       | 12.4                 |       |   | 129.2% |   |
| Broker-dealer  commission revenue                                                                   |       | 51.8                                                     |       |       | 56.0                |       |       | (4.2                 | )          |   | (7.5)% |   |
| Net  realized capital losses:                                                                       |       |                                                     |       |       |                |       |       |                 |       |   |   |   |
| Total  other-than-temporary impairment losses                                                       |       | (24.3                                                    | )          |       | (21.5               | )          |       | (2.8                 | )          |   | (13.0)% |   |
| Portion  of other-than-temporary impairment losses recognized in Other comprehensive  income (loss) |       | 13.1                                                     |       |       | 6.9                 |       |       | 6.2                  |       |   | 89.9% |   |
| Net  other-than-temporary impairments recognized in earnings                                        |       | (11.2                                                    | )          |       | (14.6               | )          |       | 3.4                  |       |   | 23.3% |   |
| Other  net realized capital gains (losses)                                                          |       | 14.4                                                     |       |       | (0.4                | )          |       | 14.8                 |       |   | NM  |   |
| Total  net realized capital gains (losses)                                                          |       | 3.2                                                      |       |       | (15.0               | )          |       | 18.2                 |       |   | NM  |   |
| Other  income                                                                                       |       | 10.3                                                     |       |       | 3.8                 |       |       | 6.5                  |       |   | 171.1% |   |
| Total  revenue                                                                                      |       | 549.5                                                    |       |       | 518.5               |       |       | 31.0                 |       |   | 6.0% |   |
| **Benefits and expenses:**                                                                          |       |                                                     |       |       |                |       |       |                 |       |   |   |   |
| Interest  credited and other benefits to contractowners                                             |       | 187.5                                                    |       |       | 116.1               |       |       | 71.4                 |       |   | 61.5% |   |
| Operating  expenses                                                                                 |       | 184.4                                                    |       |       | 147.3               |       |       | 37.1                 |       |   | 25.2% |   |
| Broker-dealer  commission expense                                                                   |       | 51.8                                                     |       |       | 56.0                |       |       | (4.2                 | )          |   | (7.5)% |   |
| Net  amortization of deferred policy acquisition costs and value of business  acquired              |       | (2.1                                                     | )          |       | (19.2               | )          |       | 17.1                 |       |   | 89.1% |   |
| Interest  expense                                                                                   |       | 0.7                                                      |       |       | 0.9                 |       |       | (0.2                 | )          |   | (22.2)% |   |
| Total  benefits and expenses                                                                        |       | 422.3                                                    |       |       | 301.1               |       |       | 121.2                |       |   | 40.3% |   |
| Income  before income taxes                                                                         |       | 127.2                                                    |       |       | 217.4               |       |       | (90.2                | )          |   | (41.5)% |   |
| Income  tax (benefit) expense                                                                       |       | (8.8                                                     | )          |       | 72.8                |       |       | (81.6                | )          |   | NM  |   |
| Net  income                                                                                         |       |  $                                                  | 136.0      |       |                |  $    | 144.6      |                 |       |  $ | (8.6 | ) |   | (5.9)% |   |
| Effective  tax rate                                                                                 |       | (6.9)%                                                   |       |       | 33.5%               |       |       |                 |       |   |   |   |

NM - Notmeaningful.

 

64

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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), higher Net investment income, higher Feeincome and higher Premium income partially offset by higher Interest creditedand other benefits to contractowners, higher Operating expenses, and anunfavorable change in Income tax expense (benefit).

 
| ** **                                                                                          | ** ** | **Nine  Months Ended September 30,** | ** ** | **$ Increase** | ** ** | **%  Increase** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|---------------------|------------|-----------------|------------|
| ** **                                                                                          | ** ** | **2010**                             | ** ** | ** **          | **2009**   | ** **      | ** ** | **(Decrease)** | ** ** | ** ** | **(Decrease)** | ** ** |
| **Revenues:**                                                                                       |       |                                 |       |                |       |            |       |   |   |   |   |   |
| Net  investment income                                                                              |       |  $                              | 986.3      |                |       |  $         | 935.7      |   |   |  $ | 50.6 |   |   | 5.4% |   |
| Fee  income                                                                                         |       | 417.0                                |       |                | 381.7      |            |       | 35.3 |   |   | 9.2% |   |
| Premiums                                                                                            |       | 43.4                                 |       |                | 23.2       |            |       | 20.2 |   |   | 87.1% |   |
| Broker-dealer  commission revenue                                                                   |       | 162.8                                |       |                | 215.3      |            |       | (52.5 | ) |   | (24.4)% |   |
| Net  realized capital losses:                                                                       |       |                                 |       |                |       |            |       |   |   |   |   |   |
| Total  other-than-temporary impairment losses                                                       |       | (118.2                               | )          |                | (366.4     | )               |       | 248.2 |   |   | 67.7% |   |
| Portion  of other-than-temporary impairment losses recognized in Other comprehensive  income (loss) |       | 41.6                                 |       |                | 21.2       |            |       | 20.4 |   |   | 96.2% |   |
| Net  other-than-temporary impairments recognized in earnings                                        |       | (76.6                                | )          |                | (345.2     | )               |       | 268.6 |   |   | 77.8% |   |
| Other  net realized capital gains                                                                   |       | 53.8                                 |       |                | 145.9      |            |       | (92.1 | ) |   | (63.1)% |   |
| Total  net realized capital losses                                                                  |       | (22.8                                | )          |                | (199.3     | )               |       | 176.5 |   |   | 88.6% |   |
| Other  income                                                                                       |       | 25.8                                 |       |                | 11.9       |            |       | 13.9 |   |   | 116.8% |   |
| Total  revenue                                                                                      |       | 1,612.5                              |       |                | 1,368.5    |            |       | 244.0 |   |   | 17.8% |   |
| **Benefits and expenses:**                                                                          |       |                                 |       |                |       |            |       |   |   |   |   |   |
| Interest  credited and other benefits to contractowners                                             |       | 570.5                                |       |                | 414.6      |            |       | 155.9 |   |   | 37.6% |   |
| Operating  expenses                                                                                 |       | 518.7                                |       |                | 432.7      |            |       | 86.0 |   |   | 19.9% |   |
| Broker-dealer  commission expense                                                                   |       | 162.8                                |       |                | 215.3      |            |       | (52.5 | ) |   | (24.4)% |   |
| Net  amortization of deferred policy acquisition costs and value of business  acquired              |       | 47.8                                 |       |                | 42.2       |            |       | 5.6 |   |   | 13.3% |   |
| Interest  expense                                                                                   |       | 2.2                                  |       |                | 2.6        |            |       | (0.4 | ) |   | (15.4)% |   |
| Total  benefits and expenses                                                                        |       | 1,302.0                              |       |                | 1,107.4    |            |       | 194.6 |   |   | 17.6% |   |
| Income  before income taxes                                                                         |       | 310.5                                |       |                | 261.1      |            |       | 49.4 |   |   | 18.9% |   |
| Income  tax expense (benefit)                                                                       |       | 39.9                                 |       |                | (20.8      | )               |       | 60.7 |   |   | NM  |   |
| Net  income                                                                                         |       |  $                              | 270.6      |                |       |  $         | 281.9      |   |   |  $ | (11.3 | ) |   | (4.0)% |   |
| Effective  tax rate                                                                                 |       | 12.9%                                |       |                | (8.0)%     |            |       |   |   |   |   |   |

NM - Notmeaningful.

 

*Revenues*

 

*Total revenue*increasedfor the three and nine months ended September 30, 2010, primarilyreflecting a favorable change in Net realized capital losses, higher Netinvestment income, and higher Premium income partially offset by lowerBroker-dealer commission revenue.  Feeincome is higher for the nine months ended September 30, 2010, but lowerfor the three months ended September 30 2010.

 

65

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The decrease in *Totalnet realized capital losses*for the three and nine months ended September 30,2010 is primarily due to lower credit and intent related impairments on fixedmaturities in the first nine months of 2010 driven by the improved economic andinterest rate environment.  In addition,the Company experienced lower losses on derivatives, driven by the unwinding offutures at the end of 2009 which were used to hedge fee income from variableannuity products. For the three and nine months ended September 30, 2009,the Company recognized losses on these futures.

 

The increase in *Netinvestment income*for the nine months ended September 30, 2010was mainly due to favorable returns on equity investments in limitedpartnerships and lower investment management fees charged by the Company’saffiliate, ING Investment Management, LLC, for management of the Company’sgeneral account assets.  *Net investment income*for the three monthsended September 30, 2010 was slightly higher than the same period in theprior year.

 

The increase in *Premiums*for the three and ninemonths ended September 30, 2010 is primarily due to higher sales ofannuity products with life contingencies.

 

*Fee income*decreasedfor the three months ended September 30, 2010, as overall average variableAUM was lower than the comparable period in prior year.  *Fee income* was higher for the nine months endedSeptember 30, 2010, as overall average variable AUM was higher than thecomparable  period in the prior year.

 

*Broker-dealer commission revenue*decreasedfor the three and nine months ended September 30, 2010 due to lower salesof variable annuity products. The decrease in commission revenue is offset bythe corresponding decrease in Broker-dealer commission expense.

 

*Benefits and 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 Operating expenses and higher Net amortization of DAC and VOBA partiallyoffset by lower Broker-dealer commission expense.

 

*Interest credited and other benefits tocontractowners* increased for the three and nine months ended September 30,2010 due to the increase in reserves for product guarantees driven by thedecline in interest rates.

 

The unfavorable change in *Netamortization of DAC and VOBA* for the three months ended September 30,2010 is primarily due to lower current period favorable unlocking due tochanges in projected future profits.  Thenet amortization for the nine months ended September 30, 2010 is slightlyhigher than the prior year.

 

*Operating expenses* increased forthe three and nine months ended September 30, 2010, reflecting highercommission expenses due to the increase in average variable annuity AUM, aswell as development costs related to the Company’s new products. Operating expenses for the three and ninemonths ended September 30, 2010 also 

 

66

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include $16.2 related toemployee severance and termination benefits incurred in connection with itsexpense reduction initiative.

 

*Broker-dealer commission expense*decreased for the three and nine months ended September 30, 2010 due tolower sales of variable annuity products. The decrease in commission expense isoffset by the corresponding decrease in Broker-dealer commission revenue.

 

*Income Taxes*

 

The favorable change in *Income taxexpense* for the three months ended September 30, 2010 isprimarily due to lower income before tax, an increase in the dividends receiveddeduction, and a favorable IRS audit settlement.  The unfavorable change for the nine monthsended September 30, 2010 is primarily due to higher income before tax anda lower release of tax valuation allowances related to realized capital losses,and is partially offset by a favorable audit settlement.

 

**FinancialCondition**

 

***Investments***

 

*Investment Strategy*

 

TheCompany’s investment strategy focuses on diversification by asset class.  The Company seeks to achieve economicdiversification, while reducing overall credit risk and liquidity risks.  In addition, the Company seeks to mitigatethe impact of cash flow variability from embedded options within certaininvestment products, such as prepayment options and interest rate optionsembedded in collateralized mortgage obligations and call options embedded incorporate bonds. The investment management function is centralized under INGInvestment Management LLC, an affiliate, pursuant to an investment advisoryagreement.  Separate portfolios areestablished for groups of products with similar liability characteristicswithin the Company.

 

67

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*Portfolio Composition*

 

The followingtables present the investment portfolio at September 30, 2010 andDecember 31, 2009.

 
| ** **                                                          | ** ** | **2010**            | ** **     | **2009** | ** ** |
|---------------------------------------------------------------------|------------|---------------------|----------------|----------|------------|
| ** **                                                          | ** ** | **Carrying  Value** | ** **     | **%**    | ** ** | **Carrying  Value** | ** ** | **%** | ** ** |
| Fixed  maturities, available-for-sale, including securities pledged |       |  $             |  17,802.0 |     | 83.2%      |   |  $ |  15,655.3 |   | 79.2% | ** ** |
| Equity  securities, available-for-sale                              |       | 216.3               |           | 1.0%     |       | 187.9 |   | 1.0% |   |
| Short-term  investments                                             |       | 67.0                |           | 0.3%     |       | 535.5 |   | 2.7% |   |
| Mortgage  loans on real estate                                      |       | 1,818.3             |           | 8.5%     |       | 1,874.5 |   | 9.5% |   |
| Policy  loans                                                       |       | 252.9               |           | 1.2%     |       | 254.7 |   | 1.3% |   |
| Loan-Dutch  State obligation                                        |       | 577.3               |           | 2.7%     |       | 674.1 |   | 3.4% |   |
| Limited  partnerships/corporations                                  |       | 442.4               |           | 2.1%     |       | 426.2 |   | 2.2% |   |
| Derivatives                                                         |       | 216.0               |           | 1.0%     |       | 129.0 |   | 0.7% |   |
| Total  investments                                                  |       |  $             |  21,392.2 |     | 100.0%     |   |  $ |  19,737.2 |   | 100.0% |   |

 

68

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*FixedMaturities*

 

Fixed maturities,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                                      |       |   $ | 633.5      |           |       |   $  | 74.3       |            |       |   $ | -   |   |   |   $ | -   |   |   |   $ | 707.8 |   |   |
| U.S.  government agencies and authorities             |       | 633.2         |       |           | 62.7       |           |       | -     |       |          | -   |   |   | 695.9 |   |   |
| State,  municipalities, and political subdivisions    |       | 121.2         |       |           | 10.5       |           |       | 7.3             |       |          | -   |   |   | 124.4 |   |   |
|                                                  |       |          |       |           |       |           |       |            |       |          |          |   |   |   |   |   |
| U.S.  corporate securities:                           |       |          |       |           |       |           |       |            |       |          |          |   |   |   |   |   |
| Public  utilities                                     |       | 1,298.8       |       |           | 116.1      |           |       | 2.3             |       |          | -   |   |   | 1,412.6 |   |   |
| Other  corporate securities                           |       | 5,544.0       |       |           | 547.7      |           |       | 17.5            |       |          | 0.3           |   |   | 6,073.9 |   |   |
| Total  U.S. corporate securities                      |       | 6,842.8       |       |           | 663.8      |           |       | 19.8            |       |          | 0.3           |   |   | 7,486.5 |   |   |
|                                                  |       |          |       |           |       |           |       |            |       |          |          |   |   |   |   |   |
| Foreign  securities(1):                               |       |          |       |           |       |           |       |            |       |          |          |   |   |   |   |   |
| Government                                            |       | 437.1         |       |           | 59.7       |           |       | 2.4             |       |          | -   |   |   | 494.4 |   |   |
| Other                                                 |       | 3,750.9       |       |           | 321.1      |           |       | 16.5            |       |          | 0.1           |   |   | 4,055.4 |   |   |
| Total  foreign securities                             |       | 4,188.0       |       |           | 380.8      |           |       | 18.9            |       |          | 0.1           |   |   | 4,549.8 |   |   |
|                                                  |       |          |       |           |       |           |       |            |       |          |          |   |   |   |   |   |
| Residential  mortgage-backed securities               |       | 2,314.5       |       |           | 315.0      |           |       | 43.1            |       |          | 22.0          |   |   | 2,564.4 |   |   |
| Commercial  mortgage-backed securities                |       | 1,031.6       |       |           | 52.8       |           |       | 64.8            |       |          | 14.5          |   |   | 1,005.1 |   |   |
| Other  asset-backed securities                        |       | 735.4         |       |           | 23.5       |           |       | 52.3            |       |          | 38.5          |   |   | 668.1 |   |   |
|                                                  |       |          |       |           |       |           |       |            |       |          |          |   |   |   |   |   |
| Total  fixed maturities, including securities pledged |       | 16,500.2      |       |           | 1,583.4    |           |       | 206.2           |       |          | 75.4          |   |   | 17,802.0 |   |   |
| Less:  securities pledged                             |       | 788.5         |       |           | 69.1       |           |       | 1.2             |       |          | -   |   |   | 856.4 |   |   |
| Total  fixed maturities                               |       |   $ | 15,711.7   |           |       |   $  | 1,514.3    |            |       |   $ | 205.0         |   |   |   $ | 75.4 |   |   |   $ | 16,945.6 |   |   |

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

 

69

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Fixed maturities,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                                      |       |   $ | 1,897.2    |           |       |   $  | 3.0        |            |       |   $ | 38.3 |   |   |   $ | -   |   |   |   $ | 1,861.9 |   |
| U.S.  government agencies and authorities             |       | 632.5         |       |           | 41.1       |           |       | -     |       |          | -   |   |   | 673.6 |   |
| State,  municipalities, and political subdivisions    |       | 112.5         |       |           | 2.5        |           |       | 7.8             |       |          | -   |   |   | 107.2 |   |
|                                                  |       |          |       |           |       |           |       |            |       |          |   |   |   |   |   |
| U.S.  corporate securities:                           |       |          |       |           |       |           |       |            |       |          |   |   |   |   |   |
| Public  utilities                                     |       | 1,138.7       |       |           | 40.8       |           |       | 14.3            |       |          | -   |   |   | 1,165.2 |   |
| Other  corporate securities                           |       | 4,366.5       |       |           | 267.4      |           |       | 63.2            |       |          | 0.6 |   |   | 4,570.1 |   |
| Total  U.S. corporate securities                      |       | 5,505.2       |       |           | 308.2      |           |       | 77.5            |       |          | 0.6 |   |   | 5,735.3 |   |
|                                                  |       |          |       |           |       |           |       |            |       |          |   |   |   |   |   |
| Foreign  securities(1):                               |       |          |       |           |       |           |       |            |       |          |   |   |   |   |   |
| Government                                            |       | 343.0         |       |           | 29.2       |           |       | 8.7             |       |          | -   |   |   | 363.5 |   |
| Other                                                 |       | 2,922.5       |       |           | 129.0      |           |       | 56.6            |       |          | 0.1 |   |   | 2,994.8 |   |
| Total  foreign securities                             |       | 3,265.5       |       |           | 158.2      |           |       | 65.3            |       |          | 0.1 |   |   | 3,358.3 |   |
|                                                  |       |          |       |           |       |           |       |            |       |          |   |   |   |   |   |
| Residential  mortgage-backed securities               |       | 1,916.6       |       |           | 268.3      |           |       | 111.9           |       |          | 16.8 |   |   | 2,056.2 |   |
| Commercial  mortgage-backed securities                |       | 1,535.0       |       |           | 10.4       |           |       | 214.3           |       |          | -   |   |   | 1,331.1 |   |
| Other  asset-backed securities                        |       | 657.4         |       |           | 9.8        |           |       | 106.3           |       |          | 29.2 |   |   | 531.7 |   |
|                                                  |       |          |       |           |       |           |       |            |       |          |   |   |   |   |   |
| Total  fixed maturities, including securities pledged |       | 15,521.9      |       |           | 801.5      |           |       | 621.4           |       |          | 46.7 |   |   | 15,655.3 |   |
| Less:  securities pledged                             |       | 483.7         |       |           | 4.3        |           |       | 18.2            |       |          | -   |   |   | 469.8 |   |
| Total  fixed maturities                               |       |   $ | 15,038.2   |           |       |   $  | 797.2      |            |       |   $ | 603.2 |   |   |   $ | 46.7 |   |   |   $ | 15,185.5 |   |

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

 

It is management’s objective that the portfolio 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 A+, respectively.  Ratings are calculated using a ratinghierarchy that considers Standard & Poor’s (“S&P”), Moody’sInvestors Service, Inc. (“Moody’s”), and internal ratings.

 

70

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

 
| ** **   | ** ** | **2010**      | ** ** |
|--------------|------------|---------------|------------|
| ** **   | ** ** | **Fair**      | ** ** | **% of** | ** ** | **Amortized** | ** ** | **% of** | ** ** |
| ** **   | ** ** | **Value**     | ** ** | **Total** | ** ** | **Cost** | ** ** | **Total** | ** ** |
| AAA          |       |   $ | 4,841.8    |   |   | 27.2 | % |   |   $ | 4,387.1 |   |   | 26.6 | % |   |
| AA           |       | 1,210.4       |       |   | 6.8 | % |   | 1,124.5 |   |   | 6.8 | % |   |
| A            |       | 4,351.4       |       |   | 24.4 | % |   | 4,003.2 |   |   | 24.3 | % |   |
| BBB          |       | 6,225.0       |       |   | 35.0 | % |   | 5,761.9 |   |   | 34.9 | % |   |
| BB           |       | 652.4         |       |   | 3.7 | % |   | 648.1 |   |   | 3.9 | % |   |
| B  and below |       | 521.0         |       |   | 2.9 | % |   | 575.4 |   |   | 3.5 | % |   |
| Total        |       |   $ | 17,802.0   |   |   | 100.0 | % |   |   $ | 16,500.2 |   |   | 100.0 | % |   |

 
| ** **   | ** ** | **2009**      | ** ** |
|--------------|------------|---------------|------------|
| ** **   | ** ** | **Fair**      | ** ** | **% of** | ** ** | **Amortized** | ** ** | **% of** | ** ** |
| ** **   | ** ** | **Value**     | ** ** | **Total** | ** ** | **Cost** | ** ** | **Total** | ** ** |
| AAA          |       |   $ | 5,626.6    |   |   | 35.9 | % |   |   $ | 5,488.6 |   |   | 35.3 | % |   |
| AA           |       | 961.9         |       |   | 6.1 | % |   | 987.2 |   |   | 6.4 | % |   |
| A            |       | 3,514.8       |       |   | 22.5 | % |   | 3,458.7 |   |   | 22.3 | % |   |
| BBB          |       | 4,606.1       |       |   | 29.4 | % |   | 4,493.6 |   |   | 29.0 | % |   |
| BB           |       | 558.6         |       |   | 3.6 | % |   | 613.5 |   |   | 4.0 | % |   |
| B  and below |       | 387.3         |       |   | 2.5 | % |   | 480.3 |   |   | 3.0 | % |   |
| Total        |       |   $ | 15,655.3   |   |   | 100.0 | % |   |   $ | 15,521.9 |   |   | 100.0 | % |   |

 

93.4% and 93.9% of the fixed maturities were investedin securities rated BBB and above (Investment Grade) at September 30, 2010and December 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                           |       |   $ | 707.8      |   |   | 4.0 | % |   |   $ | 633.5 |   |   | 3.8 | % |   |
| U.S.  government agencies and authorities  |       | 695.9         |       |   | 3.9 | % |   | 633.2 |   |   | 3.8 | % |   |
| U.S.  corporate, state, and municipalities |       | 7,610.9       |       |   | 42.7 | % |   | 6,964.0 |   |   | 42.2 | % |   |
| Foreign                                    |       | 4,549.8       |       |   | 25.6 | % |   | 4,188.0 |   |   | 25.4 | % |   |
| Residential  mortgage-backed               |       | 2,564.4       |       |   | 14.4 | % |   | 2,314.5 |   |   | 14.0 | % |   |
| Commercial  mortgage-backed                |       | 1,005.1       |       |   | 5.6 | % |   | 1,031.6 |   |   | 6.3 | % |   |
| Other  asset-backed                        |       | 668.1         |       |   | 3.8 | % |   | 735.4 |   |   | 4.5 | % |   |
| Total                                      |       |   $ | 17,802.0   |   |   | 100.0 | % |   |   $ | 16,500.2 |   |   | 100.0 | % |   |

 

71

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| ** **                                 | ** ** | **2009**      | ** ** |
|--------------------------------------------|------------|---------------|------------|
| ** **                                 | ** ** | **Fair**      | ** ** | **% of** | ** ** | **Amortized** | ** ** | **% of** | ** ** |
| ** **                                 | ** ** | **Value**     | ** ** | **Total** | ** ** | **Cost** | ** ** | **Total** | ** ** |
| U.S.  Treasuries                           |       |   $ | 1,861.9    |   |   | 11.9 | % |   |   $ | 1,897.2 |   |   | 12.2 | % |   |
| U.S.  government agencies and authorities  |       | 673.6         |       |   | 4.3 | % |   | 632.5 |   |   | 4.1 | % |   |
| U.S.  corporate, state, and municipalities |       | 5,842.5       |       |   | 37.3 | % |   | 5,617.7 |   |   | 36.3 | % |   |
| Foreign                                    |       | 3,358.3       |       |   | 21.5 | % |   | 3,265.5 |   |   | 21.0 | % |   |
| Residential  mortgage-backed               |       | 2,056.2       |       |   | 13.1 | % |   | 1,916.6 |   |   | 12.3 | % |   |
| Commercial  mortgage-backed                |       | 1,331.1       |       |   | 8.5 | % |   | 1,535.0 |   |   | 9.9 | % |   |
| Other  asset-backed                        |       | 531.7         |       |   | 3.4 | % |   | 657.4 |   |   | 4.2 | % |   |
| Total                                      |       |   $ | 15,655.3   |   |   | 100.0 | % |   |   $ | 15,521.9 |   |   | 100.0 | % |   |

 

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

 
| ** **                                      | ** ** | **Amortized** | ** ** | **Fair**  |
|-------------------------------------------------|------------|---------------|------------|-----------|
| ** **                                      | ** ** | **Cost**      | ** ** | **Value** |
| One  year or less                               |       |   $ | 366.9      |      |   |   $ | 373.8 |   |
| After  one year through five years              |       | 4,683.2       |       |      | 5,055.5 |   |
| After  five years through ten years             |       | 4,164.8       |       |      | 4,587.2 |   |
| After  ten years                                |       | 3,203.8       |       |      | 3,547.9 |   |
| Mortgage-backed  securities                     |       | 3,346.1       |       |      | 3,569.5 |   |
| Other  asset-backed securities                  |       | 735.4         |       |      | 668.1 |   |
| Less:  securities pledged                       |       | 788.5         |       |      | 856.4 |   |
| Fixed  maturities, excluding securities pledged |       |   $ | 15,711.7   |      |   |   $ | 16,945.6 |   |

 

*Subprimeand 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 beclassified as prime but whose loan structure provides repayment options to the 

 

72

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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.

 

The followingsummarizes the Company’s exposure to subprime and Alt-A mortgages as of 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 unrealizedlosses related to the Company’s exposure to subprime mortgages were $218.0 and$85.3, respectively, representing 1.2% of total fixed maturities.  As of December 31, 2009, the fair valueand gross unrealized losses related to the Company’s exposure to subprimemortgages were $205.2 and $125.4, respectively, representing 1.3% 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 Subprime** | ** ** | ** **  | ** ** | **% of Total Subprime** | ** ** | ** ** | ** ** | ** ** |
| **Mortgage-backed**                    | ** ** | ** **  | ** ** | **Mortgage-backed**                    | ** ** | ** ** | ** ** | ** ** |
| **Securities**                         | ** ** | **Vintage** | ** ** | **Securities**                         | ** ** | **Vintage** | ** ** | ** ** |
| AAA                                    |       | 37.2%       |       | 2007                                   |   | 27.8% |   | AAA |   | 42.2% |   | 2007 |   | 28.3% |   |   |
| AA                                     |       | 15.4%       |       | 2006                                   |   | 23.7% |   | AA |   | 16.0% |   | 2006 |   | 24.4% |   |   |
| A                                      |       | 2.0%        |       | 2005 and prior                         |   | 48.5% |   | A |   | 4.6% |   | 2005 and prior |   | 47.3% |   |   |
| BBB                                    |       | 4.3%        |       |                                   |   | 100.0% |   | BBB |   | 1.7% |   |   |   | 100.0% |   |   |
| BB  and below                          |       | 41.1%       |       |                                   |   |   |   | BB and below |   | 35.5% |   |   |   |   |   |   |
|                                   |       | 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,the fair value and gross unrealized losses aggregated to $139.4 and $27.5,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 $138.8 and $41.2, respectively,representing 0.9% of total fixed maturities.

 

73

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The following tablessummarize the Company’s exposure to Alt-A mortgage-backed holdings by creditquality and vintage year as of September 30, 2010 and December 31,2009:

 
| **2010**                            |   | **2009**    |
|-------------------------------------|--------|-------------|
| **% of Total Alt-A** |   |        |   | **% of Total Alt-A** |   |   |
| **Mortgage-backed**                 |   |        |   | **Mortgage-backed** |   |   |
| **Securities**                      |   | **Vintage** |   | **Securities** |   | **Vintage** |
| AAA                                 |   | 29.3%       |   | 2007 |   | 11.5% |   | AAA |   | 37.5% |   | 2007 |   | 11.3% |
| AA                                  |   | 2.9%        |   | 2006 |   | 28.9% |   | AA |   | 1.4% |   | 2006 |   | 29.1% |
| A                                   |   | 0.4%        |   | 2005 and prior |   | 59.6% |   | A |   | 1.7% |   | 2005 and prior |   | 59.6% |
| BBB                                 |   | 5.4%        |   |   |   | 100.0% |   | BBB |   | 8.0% |   |   |   | 100.0% |
| BB  and below                       |   | 62.0%       |   |   |   |   |   | BB and below |   | 51.4% |   |   |   |   |
|                                |   | 100.0%      |   |   |   |   |   |   |   | 100.0% |   |   |   |   |

 

*Commercial Mortgage-backed and Other Asset-backedSecurities*

 

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,delinquency rates 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, the fair value of the Company’s commercial mortgage-backed securities (“CMBS”)totaled $1.0 billion and $1.3 billion, respectively, and other ABS, excludingsubprime exposure, totaled $466.7 and $343.0, respectively. CMBS investmentsrepresent pools of commercial mortgages that are broadly diversified acrossproperty types and geographical areas.

 

As of September 30, 2010, the other ABS was alsobroadly diversified both by type and issuer with credit card receivables,collateralized loan obligations and automobile receivables, comprising 60.4%,8.5%, and 7.5%, respectively, of total other ABS, excluding subprime exposure.  As of December 31, 2009, the other ABSwas also broadly diversified both by type and issuer with credit cardreceivables, collateralized loan obligations and automobile receivablescomprising 39.9%, 13.0%, and 11.4%, respectively, of total other ABS, excludingsubprime exposure.

 

74

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

 
| **2010**                           | ** ** | **2009**    |
|------------------------------------|------------|-------------|
| **% of Total CMBS** | ** ** | **Vintage** | ** ** | **% of Total CMBS** | ** ** | **Vintage** |
| AAA                                |       | 65.1%       |   | 2007 |   | 21.2% |   | AAA |   | 73.6% |   | 2008 |   | 0.4% |
| AA                                 |       | 1.3%        |   | 2006 |   | 18.7% |   | AA |   | 2.3% |   | 2007 |   | 21.9% |
| A                                  |       | 20.1%       |   | 2005 and prior |   | 60.1% |   | A |   | 16.6% |   | 2006 |   | 16.5% |
| BBB                                |       | 8.3%        |   |   |   | 100.0% |   | BBB |   | 3.8% |   | 2005 and prior |   | 61.2% |
| BB  and below                      |       | 5.2%        |   |   |   |   |   |   |   | 3.7% |   |   |   | 100.0% |
|                               |       | 100.0%      |   |   |   |   |   |   |   | 100.0% |   |   |   |   |

 

The following tables summarize the Company’s exposureto other ABS holdings by credit quality and vintage year as of September 30,2010 and December 31, 2009:

 
| **2010**                                     | ** ** | **2009**    |
|----------------------------------------------|------------|-------------|
| **% of Total other ABS** | ** ** | **Vintage** | ** ** | **% of Total other ABS** | ** ** | **Vintage** |
| AAA                                          |       | 71.0%       |   | 2010 |   | 7.4% |   | AAA |   | 56.3% |   | 2008 |   | 5.9% |
| AA                                           |       | 1.4%        |   | 2009 |   | 0.1% |   | AA |   | 7.2% |   | 2007 |   | 13.9% |
| A                                            |       | 7.6%        |   | 2008 |   | 14.4% |   | A |   | 18.0% |   | 2006 |   | 29.8% |
| BBB                                          |       | 15.5%       |   | 2007 |   | 27.2% |   | BBB |   | 17.0% |   | 2005 and prior |   | 50.4% |
| BB  and below                                |       | 4.5%        |   | 2006 |   | 16.7% |   | BB and below |   | 1.5% |   |   |   | 100.0% |
|                                         |       | 100.0%      |   | 2005 and prior |   | 34.2% |   |   |   | 100.0% |   |   |   |   |
|                                         |       |        |   |   |   | 100.0% |   |   |   |   |   |   |   |   |

 

*Mortgage Loans on Real Estate*

 

The Company’s mortgage loans on real estate are allcommercial mortgage loans, which totaled $1.8 billion and $1.9 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 theloan, discounted at the loan’s effective interest rate, or fair value of thecollateral.  

 

75

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Impairments taken on the mortgage loan portfolio were $0.0and $1.0 for the three and nine months ended September 30, 2010,respectively. Impairments taken on the mortgage loan portfolio were $4.3 forboth the three and nine months ended September 30, 2009. For thosemortgages that are determined to require foreclosure, the carrying value isreduced to the fair value of the underlying collateral, net of estimated coststo obtain and sell at the point of foreclosure. All mortgage loans in the Company’s portfolio were current with respectto principal and interest at September 30, 2010 and December 31,2009.  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 and December 31,2009, the Company had a $1.3 and $2.0 allowance for mortgage loan creditlosses, 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 asfollows:

 
| ** **                       | ** ** | **2010****(1)** | ** ** | **2009****(1)** | ** ** |
|----------------------------------|------------|-----------------|------------|-----------------|------------|
| Loan  to Value Ratio:            |       |            |       |            |       |   |
| 0% -  50%                        |       |   $   | 531.7      |            |       |   $ | 569.0 |   |
| 50%  - 60%                       |       | 589.4           |       |            | 562.9      |   |
| 60%  - 70%                       |       | 563.8           |       |            | 593.6      |   |
| 70%  - 80%                       |       | 115.3           |       |            | 130.4      |   |
| 80%  - 90%                       |       | 19.4            |       |            | 20.6       |   |
| Total  Commercial Mortgage Loans |       |   $   | 1,819.6    |            |       |   $ | 1,876.5 |   |

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

 
| ** **                       | ** ** | **2010****(1)(2)** | ** ** | **2009****(1)(2)** | ** ** |
|----------------------------------|------------|--------------------|------------|--------------------|------------|
| Debt  Service Coverage Ratio:    |       |               |       |               |       |   |
| Greater  than 1.5x               |       |   $      | 1,170.6    |               |       |   $ | 1,233.9 |   |
| 1.25x  - 1.5x                    |       | 197.1              |       |               | 229.6      |   |
| 1.0x  - 1.25x                    |       | 243.7              |       |               | 152.6      |   |
| Less  than 1.0x                  |       | 145.3              |       |               | 195.4      |   |
| Total  Commercial Mortgage Loans |       |   $      | 1,756.7    |               |       |   $ | 1,811.5 |   |

 
| (1) | Balances do not include allowance for mortgage loan  credit losses.          |
|-----|------------------------------------------------------------------------------|
| (2) | Excludes mortgages that are secured by loans on land  or construction deals. |

 

76

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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**               | ** ** | ** ** | ** **      | **% of** | ** ** | ** ** | ** ** | **Gross** | ** ** | ** ** | ** ** | **% of** | ** ** |
| ** **                               | ** ** | **Carrying Value** | ** ** | ** ** | ** **      | **Total**     | ** ** | ** ** | ** ** | **Carrying Value** | ** ** | ** ** | ** ** | **Total** | ** ** |
| Commercial  Mortgage Loans by US Region: |       |                    |       |       |            |          |   |   |   |   |   |   |   |   |   |
| Pacific                                  |       | $                       | 375.9      |       |            |          | 20.7 | % |   |   | $ | 372.2 |   |   |   | 19.8 | % |
| South  Atlantic                          |       | 297.3                   |       |       |            | 16.3          | % |   |   | 308.3 |   |   |   | 16.5 | % |
| Middle  Atlantic                         |       | 362.8                   |       |       |            | 20.0          | % |   |   | 394.1 |   |   |   | 21.0 | % |
| East  North Central                      |       | 142.9                   |       |       |            | 7.9           | % |   |   | 143.0 |   |   |   | 7.6 | % |
| West  South Central                      |       | 280.1                   |       |       |            | 15.4          | % |   |   | 283.5 |   |   |   | 15.1 | % |
| Mountain                                 |       | 155.4                   |       |       |            | 8.5           | % |   |   | 158.0 |   |   |   | 8.4 | % |
| New  England                             |       | 88.0                    |       |       |            | 4.8           | % |   |   | 96.3 |   |   |   | 5.1 | % |
| West  North Central                      |       | 51.1                    |       |       |            | 2.8           | % |   |   | 52.6 |   |   |   | 2.8 | % |
| East  South Central                      |       | 66.1                    |       |       |            | 3.6           | % |   |   | 68.5 |   |   |   | 3.7 | % |
| Total  Commercial Mortgage Loans         |       | $                       | 1,819.6    |       |            |          | 100.0 | % |   |   | $ | 1,876.5 |   |   |   | 100.0 | % |

 

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

 
| ** **                                   | ** ** | **2010****(1)**         | ** ** | ** ** | ** ** | **2009****(1)** | ** ** |
|----------------------------------------------|------------|-------------------------|------------|------------|------------|-----------------|------------|
| ** **                                   | ** ** | **Gross**               | ** ** | ** ** | ** ** | **% of**   | ** ** | ** ** | ** ** | **Gross** | ** ** | ** ** | ** ** | **% of** | ** ** |
| ** **                                   | ** ** | **Carrying Value** | ** ** | ** ** | ** ** | **Total**       | ** ** | ** ** | ** ** | **Carrying Value** | ** ** | ** ** | ** ** | **Total** | ** ** |
|                                         |       |                    |       |       |       |            |       |   |   |   |   |   |   | ** ** | ** ** |
| Commercial  Mortgage Loans by Property Type: |       |                    |       |       |       |            |       |   |   |   |   |   |   |   |   |
| Industrial                                   |       | $                       | 635.3      |       |       |            | 34.9       | % |   |   | $ | 628.1 |   |   |   | 33.5 | % |
| Retail                                       |       | 367.2                   |       |       |       | 20.2            | %          |   |   | 378.1 |   |   |   | 20.1 | % |
| Office                                       |       | 307.3                   |       |       |       | 16.9            | %          |   |   | 325.0 |   |   |   | 17.3 | % |
| Apartments                                   |       | 249.4                   |       |       |       | 13.7            | %          |   |   | 261.2 |   |   |   | 13.9 | % |
| Hotel/Motel                                  |       | 153.1                   |       |       |       | 8.4             | %          |   |   | 156.1 |   |   |   | 8.3 | % |
| Other                                        |       | 107.3                   |       |       |       | 5.9             | %          |   |   | 128.0 |   |   |   | 6.9 | % |
| Total  Commercial Mortgage Loans             |       | $                       | 1,819.6    |       |       |            | 100.0      | % |   |   | $ | 1,876.5 |   |   |   | 100.0 | % |

 

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

 

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                            |       |       | $               | 44.7       |       |       |       |            | $          | -   |   |
| 2009                            |       |       | 66.3            |       |       |       |       | 69.2            |       |
| 2008                            |       |       | 152.4           |       |       |       |       | 155.3           |       |
| 2007                            |       |       | 223.0           |       |       |       |       | 241.3           |       |
| 2006                            |       |       | 590.4           |       |       |       |       | 639.8           |       |
| 2005 and prior                  |       |       | 742.8           |       |       |       |       | 770.9           |       |
| Total Commercial Mortgage Loans |       |       | $               | 1,819.6    |       |       |       |            | $          | 1,876.5 |   |

 

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

 

77

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*UnrealizedCapital Losses*

 

Unrealizedcapital losses (including non-credit impairments) in fixed maturities,including securities pledged to creditors, for Investment Grade (“IG”) andBelow Investment Grade (“BIG”) securities by duration 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                             |       | $          | 9.9        |       |       |                  | 3.5        | %          |       |          | $          | 2.0        |       |                  |       | 0.7        | %          |       |       | $          | 105.5      |                  |       |       | 15.7       | %          |       |       | $          | 18.5                  |       |   |   | 2.8    | %      |
| More  than six months and twelve months or less below amortized cost |       | 3.0        |       |       |       | 1.1                   | %          |       |       | -   |       |       |       | 0.0                   | %          |       |       | 44.0       |       |       |       | 6.6                   | %          |       |       | 37.9       |       |       |       | 5.7                   | %          |
| More  than twelve months below amortized cost                        |       | 108.9      |       |       |       | 38.7                  | %          |       |       | 157.8         |       |       |       | 56.0                  | %          |       |       | 300.8      |       |       |       | 45.0                  | %          |       |       | 161.4      |       |       |       | 24.2                  | %          |
| Total  unrealized capital loss                                       |       | $          | 121.8      |       |       |                  | 43.3       | %          |       |          | $          | 159.8      |       |                  |       | 56.7       | %          |       |       | $          | 450.3      |                  |       |       | 67.3       | %          |       |       | $          | 217.8                 |       |   |   | 32.7   | %      |
|                                                                 |       |       |       |       |       |                  |       |       |       |          |       |       |       |                  |       |       |       |       |       |       |       |                  |       |       |       |       |       |       |       |                  |       |   |   |   |   |

 

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 and** | ** ** | ** ** | ** ** | ** **             | ** ** | ** ** | ** ** | ** **     | ** ** |
| ** **                                  | ** ** | ** ** | **or Less**    | ** ** | ** ** | ** ** | **Twelve Months**       | ** ** | ** ** | ** ** | **More than**     | ** ** | ** ** | ** ** | **Total**      | ** ** |
| ** **                                  | ** ** | ** ** | **Below**           | ** ** | ** ** | ** ** | **or Less Below**  | ** ** | ** ** | ** ** | **Twelve Months** | ** ** | ** ** | ** ** | **Unrealized** | ** ** |
| ** **                                  | ** ** | ** ** | **Amortized**       | ** ** | ** ** | ** ** | **Amortized**                | ** ** | ** ** | ** ** | **Below**              | ** ** | ** ** | ** ** | **Capital**    | ** ** |
| **2010**                                    | ** ** | ** ** | **Cost**            | ** ** | ** ** | ** ** | **Cost**                     | ** ** | ** ** | ** ** | **Cost**               | ** ** | ** ** | ** ** | **Losses**     | ** ** |
| Interest  rate or spread widening           |       |       | $                   | 8.5        |       |       |                         | $          | 2.6        |       |                   |       | $          | 35.3       |           |       |   | $ | 46.4 |   |
| Mortgage  and other asset-backed            |       |       |                |       |       |       |                         |       |       |       |                   |       |       |       |           |       |
| securities                                  |       |       | 3.4                 |       |       |       | 0.4                          |       |       |       | 231.4                  |       |       |       | 235.2          |       |
| Total  unrealized capital losses            |       |       | $                   | 11.9       |       |       |                         | $          | 3.0        |       |                   |       | $          | 266.7      |           |       |   | $ | 281.6 |   |
| Fair  value                                 |       |       | $                   | 523.8      |       |       |                         | $          | 55.5       |       |                   |       | $          | 1,090.0    |           |       |   | $ | 1,669.3 |   |
|                                        |       |       |                |       |       |       |                         |       |       |       |                   |       |       |       |           |       |
| **2009**                                    | ** ** | ** ** | ** **          | ** ** | ** ** | ** ** | ** **                   | ** ** | ** ** | ** ** | ** **             | ** ** | ** ** | ** ** | ** **     | ** ** |
| Interest  rate or spread widening           |       |       | $                   | 75.9       |       |       |                         | $          | 35.2       |       |                   |       | $          | 78.5       |           |       |   | $ | 189.6 |   |
| Mortgage  and other asset-backed securities |       |       | 48.1                |       |       |       | 46.7                         |       |       |       | 383.7                  |       |       |       | 478.5          |       |
| Total  unrealized capital losses            |       |       | $                   | 124.0      |       |       |                         | $          | 81.9       |       |                   |       | $          | 462.2      |           |       |   | $ | 668.1 |   |
| Fair  value                                 |       |       | $                   | 2,901.8    |       |       |                         | $          | 212.6      |       |                   |       | $          | 2,127.2    |           |       |   | $ | 5,241.6 |   |

 

78

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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.

 
| ** **                                 | ** ** | ** **                            | ** ** | ** **                         | ** ** | **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 |       | $                                     | 124.4      |                               | 1.7        |                            | 13.8       |                           | 0.2           |                | 194.4      |                  | 25.5       |                | $ | 332.6 |   | $ | 27.4 |
| Foreign                                    |       | 54.8                                  |       | 6.8                                |       | 37.9                            |       | 2.4                            |          | 110.8               |       | 9.8                   |       | 203.5               |   | 19.0 |
| Residential  mortgage-backed               |       | 320.6                                 |       | 3.3                                |       | 1.3                             |       | 0.1                            |          | 293.5               |       | 61.7                  |       | 615.4               |   | 65.1 |
| Commercial  mortgage-backed                |       | 1.2                                   |       | -                        |       | -                     |       | -                    |          | 265.8               |       | 79.2                  |       | 267.0               |   | 79.2 |
| Other  asset-backed                        |       | 22.8                                  |       | 0.1                                |       | 2.5                             |       | 0.3                            |          | 225.5               |       | 90.5                  |       | 250.8               |   | 90.9 |
| Total                                      |       | $                                     | 523.8      |                               | $          | 11.9                            |       | $                              | 55.5          |                | $          | 3.0                   |       | $                   | 1,090.0 |   | $ | 266.7 |   | $ | 1,669.3 |   | $ | 281.6 |
|                                       |       |                                  |       |                               |       |                            |       |                           |          |                |       |                  |       |                |   |   |
| **2009**                                   | ** ** | ** **                            | ** ** | ** **                         | ** ** | ** **                      | ** ** | ** **                     | ** **    | ** **          | ** ** | ** **            | ** ** | ** **          | ** ** | ** ** |
| U.S.  Treasuries                           |       | $                                     | 1,002.1    |                               | $          | 38.3                            |       | $                              | -   |                | $          | -           |       | $                   | -   |   | $ | -   |   | $ | 1,002.1 |   | $ | 38.3 |
| U.S.  corporate, state, and municipalities |       | 1,097.0                               |       | 22.7                               |       | 86.1                            |       | 14.9                           |          | 381.2               |       | 48.3                  |       | 1,564.3             |   | 85.9 |
| Foreign                                    |       | 528.6                                 |       | 14.8                               |       | 40.0                            |       | 20.4                           |          | 301.8               |       | 30.2                  |       | 870.4               |   | 65.4 |
| Residential  mortgage-backed               |       | 141.1                                 |       | 45.4                               |       | 47.7                            |       | 4.2                            |          | 425.3               |       | 79.1                  |       | 614.1               |   | 128.7 |
| Commercial  mortgage-backed                |       | 105.8                                 |       | 1.2                                |       | 27.2                            |       | 35.7                           |          | 757.1               |       | 177.4                 |       | 890.1               |   | 214.3 |
| Other  asset-backed                        |       | 27.2                                  |       | 1.6                                |       | 11.6                            |       | 6.7                            |          | 261.8               |       | 127.2                 |       | 300.6               |   | 135.5 |
| Total                                      |       | $                                     | 2,901.8    |                               | $          | 124.0                           |       | $                              | 212.6         |                | $          | 81.9                  |       | $                   | 2,127.2 |   | $ | 462.2 |   | $ | 5,241.6 |   | $ | 668.1 |

 

Of the unrealized capital losses aged more than twelvemonths, the average market value of the related fixed maturities was 80.3% ofthe average book value as of September 30, 2010.  In addition, this category includes 327securities, which have an average quality rating of BBB.

 

79

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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                             | ** ** | $                       | 767.1      | ** **                            | $          | 104.4                              | ** ** | $ | 36.7 | ** ** | $ | 25.1 | ** ** | 175 | ** ** | 16 | ** ** |
| More  than six months and twelve months or less below amortized cost |       | 234.2                   |       | 9.0                                   |       | 14.8                               |       | 2.5 |   | 59 |   | 3 |   |
| More  than twelve months below amortized cost                        |       | 378.4                   |       | 457.8                                 |       | 17.8                               |       | 184.7 |   | 82 |   | 123 |   |
| Total                                                                |       | $                       | 1,379.7    |                                  | $          | 571.2                              |       | $ | 69.3 |   | $ | 212.3 |   | 316 |   | 142 |   |
|                                                                 |       |                    |       |                                  |       |                               |       |   |   |   |   |   |   |
| **2009**                                                             | ** ** | ** **              | ** ** | ** **                            | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Six  months or less below amortized cost                             | ** ** | $                       | 3,652.0    | ** **                            | $          | 185.0                              | ** ** | $ | 168.0 | ** ** | $ | 60.7 | ** ** | 377 | ** ** | 98 | ** ** |
| More  than six months and twelve months or less below amortized cost |       | 734.5                   |       | 247.0                                 |       | 40.2                               |       | 124.3 |   | 120 |   | 48 |   |
| More  than twelve months below amortized cost                        |       | 431.1                   |       | 660.1                                 |       | 28.2                               |       | 246.7 |   | 90 |   | 129 |   |
| Total                                                                |       | $                       | 4,817.6    |                                  | $          | 1,092.1                            |       | $ | 236.4 |   | $ | 431.7 |   | 587 |   | 275 |   |

 

80

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Unrealized capital losses (including non-credit impairments)in fixed maturities, including securities pledged to creditors, by marketsector for instances in which fair value declined below amortized cost bygreater 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 |       |  $                 | 311.1      |                                  | 48.9       |                               | 13.9 |   | 13.5 |   | 56 |   | 6 |
| Foreign                                   |       | 183.1                   |       | 39.4                                  |       | 9.6                                |   | 9.4 |   | 32 |   | 6 |
| Residential  mortgage-backed              |       | 545.2                   |       | 135.3                                 |       | 23.3                               |   | 41.8 |   | 142 |   | 50 |
| Commercial  mortgage-backed               |       | 219.0                   |       | 127.3                                 |       | 16.7                               |   | 62.6 |   | 22 |   | 16 |
| Other  asset-backed                       |       | 121.3                   |       | 220.3                                 |       | 5.8                                |   | 85.0 |   | 64 |   | 64 |
| Total                                     |       |  $                 | 1,379.7    |                                  |  $    | 571.2                              |   |  $ | 69.3 |   |  $ | 212.3 |   | 316 |   | 142 |
|                                      |       |                    |       |                                  |       |                               |   |   |   |   |   |   |
| **2009**                                  | ** ** | ** **              | ** ** | ** **                            | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| U.S.  Treasuries                          |       |  $                 | 1,040.5    |                                  |  $    | -                        |   |  $ | 38.3 |   |  $ | -   |   | 9 |   | - |
| U.S.  corporate, state and municipalities |       | 1,532.2                 |       | 118.0                                 |       | 53.5                               |   | 32.4 |   | 256 |   | 23 |
| Foreign                                   |       | 830.0                   |       | 105.8                                 |       | 31.7                               |   | 33.7 |   | 111 |   | 22 |
| Residential  mortgage-backed              |       | 522.0                   |       | 220.8                                 |       | 55.1                               |   | 73.6 |   | 115 |   | 109 |
| Commercial  mortgage-backed               |       | 732.4                   |       | 372.0                                 |       | 49.3                               |   | 165.0 |   | 59 |   | 39 |
| Other  asset-backed                       |       | 160.5                   |       | 275.5                                 |       | 8.5                                |   | 127.0 |   | 37 |   | 82 |
| Total                                     |       |  $                 | 4,817.6    |                                  |  $    | 1,092.1                            |   |  $ | 236.4 |   |  $ | 431.7 |   | 587 |   | 275 |

 

During the nine months ended September 30, 2010,unrealized capital losses on fixed maturities decreased by $386.5. 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 2 fixedmaturities with unrealized capital losses in excess of $10.0.  The unrealized capital losses on these fixedmaturities equaled $30.3, or 10.8% of the total unrealized capital losses, asof September 30, 2010.  AtDecember 31, 2009, the Company held 8 fixed maturities with unrealizedcapital losses in excess of $10.0.  Theunrealized capital losses on these fixed maturities equaled $118.2, or 17.7% ofthe total unrealized capital 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-temporarily impaired, andtherefore no further other-than-temporary impairment was necessary.

 

81

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*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 fair valuehas declined below amortized cost (“intent impairment”) the individual securityis written down from amortized cost to fair value and a corresponding charge isrecorded in Net realized capital gains (losses) on the Condensed ConsolidatedStatements 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(“noncredit impairment”).  The creditimpairment is recorded in Net realized capital gains (losses) on the CondensedConsolidated Statements of Operations. The noncredit impairment is recorded inOther comprehensive income (loss) on the Condensed Consolidated Balance Sheetsin accordance with the requirements of Accounting Standards Codification(“ASC”) Topic 320, “Investments - Debt and Equity Securities”.

 

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

 

§      Recovery value is estimatedby performing a discounted cash flow analysis based upon the best estimate ofexpected future cash flows, discounted at the effective interest rate implicitin the underlying debt security.  Theeffective interest rate is the current yield prior to impairment for a fixed ratesecurity or current coupon yield for a floating rate security.

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

 

82

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§      Additionalfactors considered for structured securities such as RMBS, CMBS and other ABSinclude, but are not limited to, quality of underlying collateral, anticipatedloss severities, collateral default rates, and other collateral characteristicssuch as vintage, re-payment terms, and the geographical makeup of thecollateral.

 

The following tables identify the Company’scredit-related and intent-related other-than-temporary impairments included inthe Condensed Consolidated Statements of Operations, excluding impairmentsincluded in Other comprehensive income (loss), by type for the three and ninemonths ended September 30, 2010 and 2009.

 
| ** **                     | ** ** | **Three Months Ended September 30,** |
|--------------------------------|------------|----------------------------------------------------------|
| ** **                     | ** ** | **2010**                                                 | ** ** | **2009** |
| ** **                     | ** ** | ** **                                               | ** ** | **No. of** | ** ** | ** ** | ** ** | **No. of** |
| ** **                     | ** ** | **Impairment**                                           | ** ** | **Securities** | ** ** | **Impairment** | ** ** | **Securities** |
| Other  U.S. corporate          |       |  $                                                  | 0.1 |   |   | 1 |   |   |  $ | 3.0 |   |   | 1 |   |
| Foreign(1)                     |       | 6.9                                                      |   |   | 3 |   |   | 1.8 |   |   | 7 |   |
| Residential  mortgage-backed   |       | 0.8                                                      |   |   | 12 |   |   | 3.3 |   |   | 31 |   |
| Commercial  mortgage-backed    |       | 0.6                                                      |   |   | 1 |   |   | -   |   |   | - |   |
| Other  asset-backed            |       | 2.5                                                      |   |   | 9 |   |   | 2.2 |   |   | 9 |   |
| Limited  partnerships          |       | 0.2                                                      |   |   | 1 |   |   | -  |   |   | - |   |
| Equity  securities             |       | 0.1                                                      |   |   | 1 |   |   | -  |   |   | - |   |
| Mortgage  loans on real estate |       | -                                                   |   |   | -  |   |   | 4.3 |   |   | 1 |   |
| Total                          |       |  $                                                  | 11.2 |   |   | 28 |   |   |  $ | 14.6 |   |   | 49 |   |

 

(1) PrimarilyU.S. dollar denominated.

 
| ** **                     | ** ** | **Nine Months Ended September 30,** |
|--------------------------------|------------|---------------------------------------------------------|
| ** **                     | ** ** | **2010**                                                | ** ** | **2009** |
| ** **                     | ** ** | ** **                                              | ** ** | **No. of** | ** ** | ** ** | ** ** | **No. of** |
| ** **                     | ** ** | **Impairment**                                          | ** ** | **Securities** | ** ** | **Impairment** | ** ** | **Securities** |
| U.S.  Treasuries               |       |  $                                                 | 1.7 |   |   | 1 |   |   |  $ | 152.0 |   |   | 18 |   |
| Public  utilities              |       | 1.3                                                     |   |   | 5 |   |   | -  |   |   | - |   |
| Other  U.S. corporate          |       | 5.2                                                     |   |   | 19 |   |   | 37.0 |   |   | 52 |   |
| Foreign(1)                     |       | 41.6                                                    |   |   | 17 |   |   | 46.6 |   |   | 36 |   |
| Residential  mortgage-backed   |       | 5.6                                                     |   |   | 41 |   |   | 47.6 |   |   | 85 |   |
| Commercial  mortgage-backed    |       | 4.2                                                     |   |   | 2 |   |   | -  |   |   | - |   |
| Other  asset-backed            |       | 14.7                                                    |   |   | 25 |   |   | 24.2 |   |   | 31 |   |
| Limited  partnerships          |       | 1.2                                                     |   |   | 3 |   |   | 15.0 |   |   | 16 |   |
| Equity  securities             |       | 0.1                                                     |   |   | 1 |   |   | 18.5 |   |   | 8 |   |
| Mortgage  loans on real estate |       | 1.0                                                     |   |   | 1 |   |   | 4.3 |   |   | 1 |   |
| Total                          |       |  $                                                 | 76.6 |   |   | 115 |   |   |  $ | 345.2 |   |   | 247 |   |

 

(1) PrimarilyU.S. dollar denominated.

 

83

----

 

Theabove schedule includes $11.1 and $39.2 for the three and nine months ended September 30,2010, respectively, and $10.3 and $84.1 for the three and nine months endedSeptember 30, 2009, respectively, in other-than-temporary write-downsrelated to credit impairments, which are recognized in earnings.  The remaining write-downs reflected in theschedules above are related to intent impairments.

 

Thefollowing tables summarize these intent impairments, which are also recognizedin earnings, by type for the three and nine months ended September 30,2010 and 2009.

 
| ** **           | ** ** | **Three Months Ended September 30,** | ** ** |
|----------------------|------------|----------------------------------------------------------|------------|
| ** **           | ** ** | **2010**                                                 | ** ** | **2009** | ** ** |
| ** **           | ** ** | ** **                                               | ** ** | **No. of** | ** ** | ** ** | ** ** | **No. of** | ** ** |
| ** **           | ** ** | **Impairment**                                           | ** ** | **Securities** | ** ** | **Impairment** | ** ** | **Securities** | ** ** |
| Other U.S. corporate |       |  $                                                  | 0.1        |   | 1 |   |  $ | 3.0 |   | 1 |   |
| Foreign(1)           |       | -                                              |       | - |   | 1.3 |   | 5 |   |
| Total                |       |  $                                                  | 0.1        |   | 1 |   |  $ | 4.3 |   | 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             |       |  $                                                 | 1.7        |   | 1 |   |  $ | 152.0 |   | 18 |   |
| Public utilities            |       | 1.4                                                     |       | 5 |   | -   |   | - |   |
| Other U.S. corporate        |       | 5.3                                                     |       | 19 |   | 28.2 |   | 36 |   |
| Foreign(1)                  |       | 27.6                                                    |       | 12 |   | 44.6 |   | 33 |   |
| Residential mortgage-backed |       | -                                             |       | - |   | 22.5 |   | 8 |   |
| Other asset-backed          |       | 1.4                                                     |       | 1 |   | 13.8 |   | 6 |   |
| Total                       |       |  $                                                 | 37.4       |   | 38 |   |  $ | 261.1 |   | 101 |   |

 

(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.

 

84

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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** | ** ** |
| Residential mortgage-backed |       |  $                                                  | 3.9        |   | 4 |   |  $ | 5.2 |   | 18 |   |
| Other asset-backed          |       | 9.2                                                      |       | 5 |   | 1.7 |   | 7 |   |
| Total                       |       |  $                                                  | 13.1       |   | 9 |   |  $ | 6.9 |   | 25 |   |

 
| ** **                  | ** ** | **Nine Months Ended September 30,** | ** **    |
|-----------------------------|------------|---------------------------------------------------------|---------------|
| ** **                  | ** ** | **2010**                                                | ** **    | **2009** | ** ** |
| ** **                  | ** ** | ** **                                              | ** **    | **No. of** | ** ** | ** ** | ** ** | **No. of** | ** ** |
| ** **                  | ** ** | **Impairment**                                          | ** **    | **Securities** | ** ** | **Impairment** | ** ** | **Securities** | ** ** |
| U.S. corporate              |       |  $                                                 | -   |   | - |   |  $ | 3.6 |   | 1 |   |
| Foreign                     |       | -                                             |          | - |   | 0.1 |   | 3 |   |
| Commercial                  |       | 14.9                                                    |          | 2 |   | -   |   | - |   |
| Residential mortgage-backed |       | 9.5                                                     |          | 17 |   | 15.4 |   | 11 |   |
| Other asset-backed          |       | 17.2                                                    |          | 14 |   | 2.1 |   | 11 |   |
| Total                       |       |  $                                                 | 41.6          |   | 33 |   |  $ | 21.2 |   | 26 |   |

 

(1) Primarily U.S. dollar denominated.

 

85

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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 from saleand 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 $(10.9) and $(10.3) in 2010 and 2009, respectively                       |       |  $                                                  | 47.5  |   |  $ | 84.2  |   |
| Equity securities, available-for-sale, including  net OTTI of $(0.1) and $0.0 in 2010 and 2009, respectively                          |       | (0.9)                                                    |       | 10.4  |   |
| Derivatives                                                                                                                           |       | (13.3)                                                   |       | (38.5) |   |
| Other investments, including net OTTI of $(0.2)  and $(4.3) in 2010 and 2009, respectively                                            |       | (0.1)                                                    |       | (2.1) |   |
| Less: allocation to experience-rated contracts,  including net OTTI of $(0.1) and $3.6 in 2010 and 2009, respectively                 |       | 30.0                                                |       | 69.0  |   |
| Net realized capital gains (losses)                                                                                                   |       |  $                                                  | 3.2   |   |  $ | (15.0) |   |
| After-tax net realized capital gains (losses)  including tax valuation allowance of $21.0 and $11.7 for 2010 and 2009,  respectively  |       |  $                                                  | 23.1  |   |  $ | 1.9  |   |
|                                                                                                                                  |       |                                                     |       |   |   |
| ** **                                                                                                                            | ** ** | **Nine Months Ended September 30,**  | ** ** |
| ** **                                                                                                                            | ** ** | **2010**                                                 | ** ** | **2009** | ** ** |
| Fixed maturities, available-for-sale, including  net OTTI of $(74.3) and $(307.4) in 2010 and 2009, respectively                      |       |  $                                                  | 55.6  |   |  $ | (15.5) |   |
| Equity securities, available-for-sale, including  net OTTI of $(0.1) and $(18.5) in 2010 and 2009, respectively                       |       | 2.8                                                 |       | (3.2) |   |
| Derivatives                                                                                                                           |       | (48.4)                                                   |       | (176.6) |   |
| Other investments, including net OTTI of $(2.2)  and $(19.3) in 2010 and 2009, respectively                                           |       | 2.5                                                 |       | (13.2) |   |
| Less: allocation to experience-rated contracts,  including net OTTI of $(31.0) and $(166.2) in 2010 and 2009, respectively            |       | 35.3                                                |       | (9.2) |   |
| Net realized capital losses                                                                                                           |       |  $                                                  | (22.8)     |   |  $ | (199.3) |   |
| After-tax net realized capital gains (losses)  including tax valuation allowance of $33.0 and $113.2 for 2010 and 2009,  respectively |       |  $                                                  | 18.2  |   |  $ | (16.3) |   |
|                                                                                                                                       |            |                                                          |            |  |  |  |  |  |

 

The decrease in *Total net realized capitallosses*for the three and nine months ended September 30, 2010,was primarily due to lower credit and intent related impairments on fixedmaturities in the first nine months of 2010 driven by the improved economic andinterest rate environment. In addition, the Company experienced lower losses onderivatives, driven by the unwinding of futures at the end of 2009 which wereused to hedge fee income from variable annuity products. For the three and ninemonths ended September 30, 2009, the Company recognized losses on thesefutures.

 

86

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Net realized capital gains (losses) allocated toexperience-rated contracts are deducted from Net realized capital gains(losses), with an offsetting amount reflected in Future policy benefits andclaims reserves on the Condensed Consolidated Balance Sheets.  During 2009 and continuing in 2010, as aresult of the economic environment, which resulted in significant realizedlosses associated with experience-rated contracts, the Company accelerated theamortization of realized losses rather than reflecting these losses in Futurepolicy benefits and claims reserves.  Forthe nine months ended September 30, 2010 and 2009, the Company fullyamortized $35.3 and $9.2, respectively, of net unamortized realized capitalgains (losses) allocated to experience-rated contractowners, which arereflected in Interest credited and other benefits to contractowners in theCondensed Consolidated Statements of Operations.

 

87

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*Fair Value Hierarchy*

 

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

 
| ** **                                                                                                     | ** ** | **2010**         | ** **    |
|----------------------------------------------------------------------------------------------------------------|------------|------------------|---------------|
| ** **                                                                                                     | ** ** | **Level 1** | ** **    | **Level 2** | ** ** | **Level 3****(1)** | ** ** | **Total** | ** ** |
| Assets:                                                                                                        | ** ** | ** **       | ** **    | ** ** |   |   |   |   |   |
| Fixed maturities, available-for-sale, including  securities pledged:                                           |       |             |          |   |   |   |   |   |   |   |   |   |   |
| U.S. Treasuries                                                                                                |       |  $          | 630.7         |   |   |  $ | 77.1 |   |   |  $ | -   |   |   |  $ | 707.8 |   |   |
| U.S. government agencies and authorities                                                                       |       | -      |          |   | 695.9 |   |   | -   |   |   | 695.9 |   |   |
| U.S. corporate, state and municipalities                                                                       |       | -      |          |   | 7,604.7 |   |   | 6.2 |   |   | 7,610.9 |   |   |
| Foreign                                                                                                        |       | -      |          |   | 4,534.1 |   |   | 15.7 |   |   | 4,549.8 |   |   |
| Residential mortgage-backed securities                                                                         |       | -      |          |   | 2,140.9 |   |   | 423.5 |   |   | 2,564.4 |   |   |
| Commercial mortgage-backed securities                                                                          |       | -      |          |   | 1,005.1 |   |   | -   |   |   | 1,005.1 |   |   |
| Other asset-backed securities                                                                                  |       | -      |          |   | 399.9 |   |   | 268.2 |   |   | 668.1 |   |   |
| Equity securities, available-for-sale                                                                          |       | 185.0            |          |   | -   |   |   | 31.3 |   |   | 216.3 |   |   |
| Derivatives:                                                                                                   |       |             |          |   |   |   |   |   |   |   |   |   |   |
| Interest rate contracts                                                                                        |       | -      |          |   | 212.5 |   |   | -   |   |   | 212.5 |   |   |
| Foreign exchange contracts                                                                                     |       | -      |          |   | 1.0 |   |   |   |   |   | 1.0 |   |   |
| Credit contracts                                                                                               |       | -      |          |   | 2.5 |   |   | -   |   |   | 2.5 |   |   |
| Cash and cash equivalents, short-term investments,  and short-term investments under securities loan agreement |       | 1,131.8          |          |   | -   |   |   | -   |   |   | 1,131.8 |   |   |
| Assets held in separate accounts                                                                               |       | 39,024.4         |          |   | 3,644.3 |   |   | 20.2 |   |   | 42,688.9 |   |   |
| Total                                                                                                          |       |  $          | 40,971.9      |   |   |  $ | 20,318.0 |   |   |  $ | 765.1 |   |   |  $ | 62,055.0 |   |   |
|                                                                                                           |       |             |          |   |   |   |   |   |   |   |   |   |   |
| Liabilities:                                                                                                   |       |             |          |   |   |   |   |   |   |   |   |   |   |
| Product guarantees                                                                                             |       |  $          | -   |   |   |  $ | -   |   |   |  $ | 62.7 |   |   |  $ | 62.7 |   |   |
| Derivatives:                                                                                                   |       |             |          |   |   |   |   |   |   |   |   |   |   |
| Interest rate contracts                                                                                        |       | -      |          |   | 278.4 |   |   | -   |   |   | 278.4 |   |   |
| Foreign exchange contracts                                                                                     |       | -      |          |   | 37.1 |   |   | -   |   |   | 37.1 |   |   |
| Credit contracts                                                                                               |       | -      |          |   | 2.9 |   |   | 26.6 |   |   | 29.5 |   |   |
| Total                                                                                                          |       |  $          | -   |   |   |  $ | 318.4 |   |   |  $ | 89.3 |   |   |  $ | 407.7 |   |   |

 
| (1) | Level 3 net assets and liabilities accounted for 1.1%  of total net assets and liabilities measured at fair value on a recurring basis.  Excluding separate accounts assets for  which the policyholder bears the risk, the Level 3 net assets and liabilities  in relation to total net assets and liabilities measured at fair value on a  recurring basis totaled 3.6%. |   |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|

 

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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                                                                                                |       |  $          | 1,861.9       |   |   |  $ | -   |   |   |  $ | -   |   |   |  $ | 1,861.9 |   |   |
| U.S.  government agencies and authorities                                                                       |       | -      |          |   | 673.6 |   |   | -   |   |   | 673.6 |   |   |
| U.S.  corporate, state and municipalities                                                                       |       | -      |          |   | 5,842.5 |   |   | -   |   |   | 5,842.5 |   |   |
| Foreign                                                                                                         |       | -      |          |   | 3,358.3 |   |   | -   |   |   | 3,358.3 |   |   |
| Residential  mortgage-backed securities                                                                         |       | -      |          |   | 772.1 |   |   | 1,284.1 |   |   | 2,056.2 |   |   |
| Commercial  mortgage-backed securities                                                                          |       | -      |          |   | 1,331.1 |   |   | -   |   |   | 1,331.1 |   |   |
| Other  asset-backed securities                                                                                  |       | -      |          |   | 342.9 |   |   | 188.8 |   |   | 531.7 |   |   |
| Equity  securities, available-for-sale                                                                          |       | 148.1            |          |   | -   |   |   | 39.8 |   |   | 187.9 |   |   |
| Derivatives:                                                                                                    |       |             |          |   |   |   |   |   |   |   |   |   |   |
| Interest  rate contracts                                                                                        |       | -      |          |   | 128.8 |   |   | -   |   |   | 128.8 |   |   |
| Credit  contracts                                                                                               |       | -      |          |   | 0.2 |   |   | -   |   |   | 0.2 |   |   |
| Cash  and cash equivalents, short-term investments, and short-term investments under  securities loan agreement |       | 1,128.0          |          |   | 1.8 |   |   | -   |   |   | 1,129.8 |   |   |
| Assets  held in separate accounts                                                                               |       | 34,936.7         |          |   | 6,433.1 |   |   | -   |   |   | 41,369.8 |   |   |
| Total                                                                                                           |       |  $          | 38,074.7      |   |   |  $ | 18,884.4 |   |   |  $ | 1,512.7 |   |   |  $ | 58,471.8 |   |   |
|                                                                                                            |       |             |          |   |   |   |   |   |   |   |   |   |   |
| Liabilities:                                                                                                    |       |             |          |   |   |   |   |   |   |   |   |   |   |
| Product  guarantees                                                                                             |       |  $          | -   |   |   |  $ | -   |   |   |  $ | 6.0 |   |   |  $ | 6.0 |   |   |
| Derivatives:                                                                                                    |       |             |          |   |   |   |   |   |   |   |   |   |   |
| Interest  rate contracts                                                                                        |       | -      |          |   | 234.9 |   |   | -   |   |   | 234.9 |   |   |
| Foreign  exchange contracts                                                                                     |       | -      |          |   | 43.3 |   |   | -   |   |   | 43.3 |   |   |
| Credit  contracts                                                                                               |       | -      |          |   | 5.2 |   |   | 48.3 |   |   | 53.5 |   |   |
| Total                                                                                                           |       |  $          | -   |   |   |  $ | 283.4 |   |   |  $ | 54.3 |   |   |  $ | 337.7 |   |   |

 
| (1) | Level 3 net assets and liabilities accounted for 2.5%  of total net assets and liabilities measured at fair value on a recurring basis.  Excluding separate accounts assets for  which the policyholder bears the risk, the Level 3 net assets and liabilities  in relation to total net assets and liabilities measured at fair value on a  recurring basis totaled 8.7%. |   |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|

 

**Liquidityand Capital Resources**

 

Liquidity is the ability of the Company to generatesufficient cash flows to meet the cash requirements of operating, investing,and financing activities.

 

*Liquidity Management*

 

The Company’s principal available sources of liquidityare product charges, investment income, proceeds from the maturity and sale ofinvestments, proceeds from debt issuance and borrowing facilities, repurchaseagreements, securities lending, and capital contributions.  Primary uses of these funds are payments ofcommissions and operating expenses, interest credits, investment purchases, andcontract maturities, 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 of 

 

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the liquidity management process, different scenariosare modeled to determine that existing assets are adequate to meet projectedcash flows.  Key variables in themodeling process include interest rates, equity market movements, quantity and typeof interest and equity market hedges, anticipated contractowner behavior,market value of general account assets, variable separate account performance,and implications of rating agency actions.

 

The fixed account liabilities are supported by a generalaccount portfolio, principally composed of fixed rate investments with matchingduration characteristics that can generate predictable, steady rates ofreturn.  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 rateand credit risk, as well as other risks. The Company’s asset/liability management discipline includes strategiesto minimize exposure to loss as interest rates and economic and market conditionschange. In executing this strategy, the Company uses derivative instruments tomanage these risks. The Company’s derivative counterparties are of high creditquality. As of September 30, 2010, the Company held net derivativeliabilities with a fair value of $129.0.

 

*Liquidity and Capital Resources*

 

Additional sources of liquidity include borrowingfacilities to meet short-term cash requirements that arise in the ordinarycourse of business.  ILIAC maintains thefollowing agreements:

 

§      A reciprocal loan agreement with ING AmericaInsurance Holdings, Inc. (“ING AIH”), an affiliate, whereby either partycan borrow from the other up to 3.0% of ILIAC’s statutory admitted assets as ofthe prior December 31. As of September 30, 2010 and December 31,2009, the Company had a $308.3 and $287.2 receivable, including interest, fromING AIH, respectively.

§      A $50.0 uncommitted, perpetual revolving notefacility with the Bank of New York.  Asof September 30, 2010 and December 31, 2009, ILIAC had noamounts outstanding under the revolving note facility.

§      The Company holds approximately 55% of its assetsin marketable securities.  These assetsinclude cash, US Treasuries, Agencies and Public, Corporate Bonds, ABS, CMBSand CMO.  In the event of a temporaryliquidity need, cash may be raised by entering into reverse repurchase, dollarrolls, and/or security lending agreements by temporarily lending securities andreceiving cash collateral.  Under theCompany’s Liquidity Plan, up to 12% of the Company’s general account statutoryassets may be allocated to reverse repurchase, securities lending and dollarroll programs.  At the time a temporarycash need arises, the actual percentage of admitted assets available forreverse repurchase transactions will depend upon outstanding allocations to thethree programs.  As of September 30,2010, the Company had securities lending obligations of 

 

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$665.0, which represents less than 1.0% of the Company’sgeneral account statutory assets.

 

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

 

*Capital Contributions and Dividends*

 

During the nine months ended September 30, 2010, ILIACdid not receive any capital contributions from its parent. During the ninemonths ended September 30, 2009, ILIAC received a $365.0 capitalcontribution from its Parent.

 

During the nine months ended September 30, 2010, ILIACpaid a $203.0 dividend on its common stock to its Parent.  During the nine months endedSeptember 30, 2009, ILIAC did not pay any dividends on its commonstock to its Parent.  On October 30,2010, ING Financial Advisers, LLC paid a $60.0 dividend to ILIAC, itsparent.

 

*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, the Companyheld $29.6 of cash collateral, which was included in Payables under securitiesloan agreement, including collateral held, on the Condensed ConsolidatedBalance Sheets. As of December 31, 2009, the Company did not hold any cashcollateral. In addition, as of September 30, 2010 and December 31,2009, the Company delivered collateral of $142.1 and $130.3, respectively, infixed maturities pledged under derivatives contracts, which was included inSecurities pledged on the Condensed Consolidated Balance Sheets.

 

*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.

 

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”.

 

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On September 16, 2010, Standard & Poor’sRatings Services (“S&P”) lowered the counterparty credit and insurerfinancial strength ratings of the Company to “A” from “A+”.  On November 10, 2010, S&P placed theCompany’s counterparty credit and insurer financial strength ratings onCreditWatch 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”.

 

Inresponse to weakening global markets, the rating agencies have beencontinuously re-evaluating their ratings of banks and insurance companiesaround the world. Over the past several quarters, the rating agencies havemaintained a negative outlook of the financial services industry, whilereviewing the individual ratings they give to specific entities.  The downgrades of the Company by S&P,Fitch, A.M. Best and Moody’s reflect a broader view of how the financialservices industry is being challenged by the current economic environment, butalso are based on the rating agencies’ specific views of the Company’sfinancial strength.  In making theirratings 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, includingimplications of the ING restructuring plan, among other factors.

 

*Securities Lending*

 

TheCompany engages in securities lending whereby certain securities from itsportfolio are loaned to other institutions for short periods of time.  Initial collateral, primarily cash, isrequired at a rate of 102% of the market value of the loaned domesticsecurities.  The collateral is depositedby the borrower with a lending agent, and retained and invested by the lendingagent according to the Company’s guidelines to generate additional income.  The market value of the loaned securities ismonitored on a daily basis with additional collateral obtained or refunded asthe market value of the loaned securities fluctuates. At September 30,2010 and December 31, 2009, the fair value of loaned securities was $714.3and $339.5, respectively, and is included in Securities pledged on theCondensed Consolidated Balance Sheets.

 

*IncomeTaxes*

 

Estimatedliabilities have been provided for uncertain tax benefits related to InternalRevenue Service (“IRS”) tax audits and state tax exams that have not beencompleted.  The current payable of $24.7may be reduced in less than one year, upon completion of such audits andexams.  The timing of the payment of theremaining allowance of $2.9 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 

 

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form of EUR 10 billion Core Tier 1 securities issuedon November 12, 2008 and the full credit risk transfer to the Dutch Stateof 80% of ING’s Alt-A RMBS on March 31, 2009 (the “ING-Dutch StateTransaction”). As part of the Restructuring Plan, ING has agreed toseparate its banking and insurance business by 2013. ING intends to achievethis separation by divestment of its insurance and investment managementoperations, including the Company. ING has announced that it will explore alloptions for implementing the separation including one or more initial publicofferings, 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 the Companyand 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 a part of this evaluation, the Company isassessing whether to implement a reversion to the mean technique of estimatingits short-term equity market return assumptions. The reversion to the meantechnique is a common industry practice in which DAC and VOBA unlocking forshort-term equity returns only occurs if equity market performance fallsoutside established parameters.

 

In 2009, the Company took certain actions to reduceits exposure to interest rate and market risks. These actions included reducing guaranteed interest rates for newbusiness, reducing credited rates on existing business, curtailing sales ofsome 

 

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products, reassessment of the investment strategy, aswell as continuing a short-term program to hedge certain equity market risksassociated with variable fee income. While the short-term hedge program wasterminated in June 2009, the Company continues to use the remaininginitiatives, which will be monitored, along with their financial impacts, todetermine whether further actions are necessary.

 

On April 9, 2009, the Company’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 which the Company commencedselling during the first quarter of 2010.

 

**Recently Adopted Accounting Standards**

 

(See the Recently Adopted Accounting Standards and NewAccounting Pronouncements footnotes to the condensed consolidated financialstatements.)

 

**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 

 

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have identified to date that are of particularsignificance to ING and/or its affiliates, including the Company, as describedbelow.

 

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, 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 requires the SEC and CFTC to conduct astudy to determine whether stable value contracts fall within the definition ofswap contracts, and if so, to determine whether an exemption to theirregulation is appropriate.  Stable valuecontracts are exempt from the legislation’s swap provisions, pending theeffective date of any such regulatory action.

 

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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.

 

The Small Business Job Act of 2010, signed into law onSeptember 27, 2010, contains provisions that could provide additionalopportunities to the Company’s retirement business by allowing individualsgreater flexibility to manage their retirement savings, through products andservices offered by the Company.  The newlegislation permits both the partial annuitization of non-qualified annuityaccount balances as well as in-plan Roth conversions of distribution-eligibleamounts by 401(k), 403(b) and 457 defined contribution plan participants.

 

**Legislative and 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 theassessments imposed on certain financial companies by the Dodd-Frank Act, it ispossible that Congress may adopt a form of “financial crisis responsibility”fee or tax on banks and other financial firms to mitigate costs to taxpayers ofvarious government programs established to address the financial crisis and tooffset costs of potential future crises. The Department of Labor recently issued interim final regulationsconcerning the fee disclosure obligations under ERISA for service providers todefined contribution plans as well as final regulations addressing feedisclosure obligations to plan participants. These fee disclosure developments could heighten fee sensitivities inthe defined contribution marketplace, and could potentially generate pressureon the pricing of the Company’s defined contribution retirement products andservices.

 

The SEC is proposing to rescind Rule 12b-1 underthe Investment Company Act of 1940 and to adopt a new Rule 12b-2.  If adopted, the proposal would impose newlimitations on the level of distribution-related charges that could be paid bymutual 

 

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funds, including funds offered for sale through theCompany’s annuity and other products, and could reduce the levels of revenuethe Company derives from fund-related distribution.

 

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 announcedthe key components of the final Restructuring Plan ING submitted to the EC aspart of the process to receive EC approval for the state aid granted to ING bythe Dutch State in the form of EUR 10 billion Core Tier 1 securities issued on November 12,2008 and the ING-Dutch State Transaction. As part of the Restructuring Plan, INGhas agreed to separate its banking and insurance businesses by 2013. INGintends to achieve this separation by the divestment of all insurance andinvestment management operations, including the Company.  In November 2009, the Restructuring Planreceived formal EC approval and the separation of insurance and bankingoperations and other components of the Restructuring Plan were approved by INGshareholders.  On January 28, 2010, INGannounced the filing of its appeal with the General Court of the European Unionagainst specific 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.

 

**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) and15d-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.****          OTHER INFORMATION**

 

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

 

ING Life Insurance and Annuity Company (“ILIAC”) andits wholly-owned subsidiaries (collectively, the “Company”) are 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 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.

 

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 the actionsundertaken by ING in connection therewith, see the “Other Regulatory Matters”section of “Management’s Narrative Analysis of the Results of Operations andFinancial Condition” included in the Company’s 2009 Annual Report on Form 10-K/Afiled on April 5, 2010 (SEC File No. 033-23376).

 

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

 

The following should beread in conjunction with and supplements and amends the risk factors that mayaffect the Company’s business or operations described under “Risk Factors” in Part I, Item1A. of the 2009 Annual Report on Form 10-K/A.

 

*Circumstancesassociated with implementation of ING Groep’s recently announced globalbusiness strategy and the final restructuring plan submitted to the EuropeanCommission in connection with its review of ING Groep’s receipt of state aidfrom the Dutch State could adversely affect the Company’s results of operationsand financial condition*

 

On April 9,2009, the Company’s ultimate parent, ING Groep N.V. (“ING”) announced aglobal business strategy which identified certain core and non-core businessesand geographies, stated ING’s intention to explore divestiture of non-corebusinesses over time, withdraw from certain non-core geographies, limit futureacquisitions and implement enterprise-wide expense reductions. In addition, ING’sissuance of EUR 10 billion Core Tier 1 securities to the Dutch State and thetransfer by ING of an economic interest in 80% of its Alt-A RMBS portfolio tothe 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.

 

On October 26, 2009, INGannounced the key components of the final restructuring plan (the “RestructuringPlan”) ING submitted to the EC as part of the EC state aid review and approvalprocess. As part of the Restructuring Plan, ING has agreed to separate itsbanking and insurance businesses by 2013. This separation will be achieved byING’s divestment of its insurance and investment management operations,including the Company. ING has announced that it will explore all options forimplementing the separation, including one or more initial public offerings,sales or combinations thereof. In November 2009, the Restructuring Planreceived formal EC approval and the separation of insurance and bankingoperations and other components of the Restructuring Plan were approved by INGshareholders. ING also reached an agreement with the Dutch State to alter therepayment terms of the Core Tier 1 securities in order to facilitate earlyrepayment and ING repurchased in December 2009 EUR 5 billion of the totalEUR 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 formalseparation of banking and insurance and the divestment of the latter.  On November 10, 2010, ING announcedthat while 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 itspreparation for a potential U.S.-focused IPO, management of ING’s U.S.insurance operations is implementing a program to sharpen the strategic focusof the U.S. insurance business on life insurance and retirement services whilereducing annual expenses for overall U.S. Insurance operations by approximately$125.0 per year. The objective of these initiatives is to create a stronger andmore profitable 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 transitioningor divesting 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 whichis to prevent trafficking in tax losses. If applicable, this limitation rule would restrict ING’s ability touse its losses.  The rule istriggered when the ownership of a company changes by more than 50% (measured byvalue) on a cumulative basis in any three year period. If triggered,restrictions may be imposed on the future use of net operating losses as wellas certain losses that are built into the assets of the impacted company at thetime of the ownership change and that are realized within the next five years.If this should 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 for the financial servicesindustry, including the Company and/or materially affect the Company’s resultsof 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 increased constraintson the liquidity available in the banking system and financial markets andincreased pressure on stock prices, any of which could materially and adverselyaffect the Company’s results of operations, financial condition and liquidity.In the event of future material deterioration in business conditions, theCompany may need to raise additional capital or consider other transactions tomanage 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 ING or its U.S. operations were designatedas systemically significant, then ING and its subsidiaries would be supervisedby the Federal Reserve Board and subject to heightened prudential standards,including minimum capital requirements, liquidity standards, short-term debtlimits, credit exposure requirements, management interlock prohibitions,maintenance of resolution plans, stress testing, and restrictions onproprietary trading. If ING or the Company were designated as a SystemicallySignificant Company, failure to meet the requisite measures of financialcondition applicable to a Systemically Significant Company could result inrequirements for a capital restoration plan or capital raising; managementchanges; asset sales; and limitations and restrictions on capitaldistributions, acquisitions, affiliate transactions and/or product offerings.We cannot predict whether ING or the Company will be designated as aSystemically 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 to Congresson 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 intoagreements with foreign governments relating to the recognition of prudentialmeasures with 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 inthe legislation 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 theSecurities and Exchange Commission (“SEC”) and the Commodity Futures TradingCommission (“CFTC”) over derivatives, and “swap dealers” and “major swapparticipants,” as to be defined by the SEC and CFTC, each of whom will besubject to as yet unspecified capital and margin requirements.  Although we do not believe the Company shouldbe considered a “swap dealer” or a “major swap participant”, the finalregulations adopted could provide otherwise, which could substantially increasethe cost of hedging and related activities undertaken by the Company.  The cost of hedging and related activitiescould also be adversely affected if it is determined by the Secretary ofTreasury that foreign currency swaps and forwards are not excluded from theforegoing requirements.  The legislationrequires the SEC and CFTC to conduct a study to determine whether stable valuecontracts fall within the definition of swap contract, and if so, to determinewhether an exemption to their regulation is appropriate.  Stable value contracts are exempt from thelegislation’s swap provisions, pending the effective date of such regulatoryaction.  If it is determined to regulatesuch products as swaps, we cannot predict how such regulations would be appliedor the effect such regulation might have on the profitability or attractivenessof such products to our clients.  Asdepository banks may be restricted in their ability to conduct OTC derivativesbusiness, the legislation may require the Company to use more non-bank counterpartiesfor its hedging activities or otherwise have the effect of limiting theavailability to the Company of derivatives counterparties that meet minimuminsurance regulatory requirements.  Inaddition, restrictions imposed by the legislation on netting of derivativestransactions with non-banks and the possible lower credit quality and/orcapitalization of non-bank derivatives counterparties may increase thecounterparty credit risk to the 

 

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Company.  Wecannot predict the specific impacts and costs of the Dodd-Frank Act or thepending regulations on our hedging activities and strategies until therulemaking process is substantially 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 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). In addition to the assessments imposed on certain financialcompanies by the Dodd-Frank Act, it is possible that Congress may adopt a formof “financial crisis responsibility” fee or tax on banks and other financialfirms to mitigate costs to taxpayers of various government programs establishedto address 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 National Associationof Insurance Commissioners, the SEC, FINRA, Financial Accounting StandardsBoard, and state attorneys general. In light of the financial crisis, some ofthese authorities are considering, or may in the future consider, enhanced ornew requirements intended to prevent future crises or otherwise assure thestability of institutions under their supervision. These authorities may alsoseek to exercise their supervisory or enforcement authority in new or morerobust ways. In addition, regulators and lawmakers in non-U.S. jurisdictionsare engaged in addressing the causes of the financial crisis and means ofavoiding such crises in the future.  Forexample, the G20 and the Financial Stability Board have issued a series ofpapers intended to produce significant changes in how financial companies, andin particular large and complex global financial companies, such as ING, shouldbe regulated.  Such papers and proposalsaddress financial group supervision, capital and solvency measures, corporategovernance and systemic financial risk, among other things.  Government in jurisdictions in which ING doesbusiness are considering, or may in the future consider, introducinglegislation or regulations to implement certain recommendations of the G20 andFinancial 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 

 

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increased capital requirements, any of which in turncould materially affect the Company’s results of operations, financialcondition and liquidity.

 

*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 ormaturity.  If the FASB determines this isnot a valid tax strategy to recognize deferred tax assets on unrealized losses,the Company may be required to write-off related deferred tax asset amounts.

 

As of September 30, 2010, the Company’s valuationallowance was $64.7.  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’s resultsof 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 thecompetitive position 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 issuer credit ratings of “a+”.  Theoutlook was improved to “stable” from “negative”.  On September 16, 2010, Standard &Poor’s Ratings Services (“S&P”) lowered the counterparty credit and insurerfinancial strength ratings of the Company to “A” from “A+”.  On November 10, 2010, S&P placed theCompany’s counterparty credit and insurer financial strength ratings onCreditWatch with negative implications. On September 21, 2010, Fitch maintained the Company on a “RatingsWatch Negative” 

 

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with a financial strength rating of “A-”.  The outlook remains “negative”.  See “Ratings” in Item 1. Business.

 

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:

 

§      Increase in contractsurrenders and withdrawals;

§      Termination of relationshipswith broker-dealers, banks, agents, wholesalers, and other distributors ofproducts and services;

§      Decrease in deposits toexisting qualified and unqualified annuity contracts, sales of new qualifiedand unqualified annuity contracts and/or decrease in renewal of existingqualified and unqualified annuity contracts;

§      Ratings triggers underCollateral Support Annexes of derivatives contracts, which would require theCompany to post additional collateral; and

§      Decrease in loans availablefrom parent company and/or affiliates due to the parent’s and/or affiliates’reduced access to the commercial paper market and/or letters of 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:

 

§      Statutory capital;

§      Risk of investmentportfolio;

§      Economic trends affectingthe financial services industry;

§      Changes in models andformulas used by rating organizations to assess the financial strength of arated company;

§      Strength of the Company’smanagement team;

§      Enterprise risk management;

§      Parent company businessstrategies (including implications of restructuring plans);

§      Access to productiondistribution channels;

§      Expected futureprofitability;

§      Market share and brandrecognition; and

§      Other circumstances outsidethe 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 a negativeoutlook of the financial services industry, while reviewing the individualratings of specific entities.  Thedowngrades of the Company by S&P, Fitch, A.M. Best and Moody’s reflecta broader view of how the financial services industry is being challenged bythe current economic environment, but also are based on the rating 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 

 

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scope of their credit reviews, will request additionalinformation from the companies that they rate, and may adjust upward thecapital and other requirements employed in the rating organization models formaintenance of certain ratings levels. It is possible that the outcome of suchreviews of the Company will have additional adverse ratings consequences, whichcould have a material adverse effect on results of operations and financialcondition.

 

*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 financialcondition. Distributors may elect to reduce or terminate their distributionrelationships with the Company, including for such reasons as changes in theCompany’s distribution strategy, adverse developments in the Company’s business,adverse rating agency actions or concerns about market-related risks. TheCompany is also at risk that key distribution partners may merge, change theirbusiness models in ways that affect how Company products are sold, or terminatetheir distribution 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 are scheduled 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 

 

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incurred under existing tax law and adversely impactprofitability.**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 such potentiallegislation is uncertain, it could include lessening or eliminating some or allof the tax advantages currently benefiting the Company or its policyholders,including but not limited to, those mentioned above or imposing new costs.

 

 

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

 

See Exhibit Indexon pages 109-112 hereof.

 

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**SIGNATURE**

 

 

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.

 

 

 
| November 5, 2010                                               |         | ING Life Insurance and Annuity 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 LIFEINSURANCE AND ANNUITY COMPANY (“ILIAC”)**

**Exhibit Index**

 
| **Exhibit  Number** | ** ** | **Description  of Exhibit**                                                                                                                                                                                                                                                                |
|---------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                                                                                                                                                       |
| 3.1                 |       | Certificate of  Incorporation as amended and restated October 1, 2007, incorporated by  reference to the ILIAC Form 10-K, as filed with the SEC on March 31, 2008  (File No. 33-23376).                                                                                                    |
|                |       |                                                                                                                                                                                                                                                                                       |
| 3.2                 |       | Amended and  Restated ING Life Insurance and Annuity Company By-Laws, effective October 1,  2007, incorporated by reference to the ILIAC Form 10-K, as filed with the SEC  on March 31, 2008 (File No. 33-23376).                                                                          |
|                |       |                                                                                                                                                                                                                                                                                       |
| 4.1                 |       | Single Premium  Deferred Modified Guaranteed Annuity Contract (IU-IA-3096) — Incorporated  herein by reference to Initial Registration Statement on Form S-1 for ING  Life Insurance and Annuity Company as filed with the SEC on September 25,  2009 (File No. 333-162140).          |
|                |       |                                                                                                                                                                                                                                                                                       |
| 4.2                 |       | IRA Endorsement  (IU-RA-4021) and Roth IRA Endorsement (IU-RA-4022) — Incorporated herein by  reference to Pre-Effective Amendment No. 1 to Registration Statement on Form  S-1 for ING Life Insurance and Annuity Company, as filed with the SEC on  December 31, 2009 (333-162140). |
|                |       |                                                                                                                                                                                                                                                                                       |
| 4.3                 |       | Incorporated by  reference to Post-Effective Amendment No. 14 to Registration Statement on  Form N-4 (File No. 33-75964), as filed on July 29, 1997.                                                                                                                                       |
|                |       |                                                                                                                                                                                                                                                                                       |
| 4.4                 |       | Incorporated by  reference to Post-Effective Amendment No. 6 to Registration Statement on Form  N-4 (File No. 33-75980), as filed on February 12, 1997.                                                                                                                                    |
|                |       |                                                                                                                                                                                                                                                                                       |
| 4.5                 |       | Incorporated by  reference to Post-Effective Amendment No. 12 to Registration Statement on  Form N-4 (File No. 33-75964), as filed on February 11, 1997.                                                                                                                                   |
|                |       |                                                                                                                                                                                                                                                                                       |
| 4.6                 |       | Incorporated by  reference to Post-Effective Amendment No. 5 to Registration Statement on Form  N-4 (File No. 33-75986), as filed on April 12, 1996.                                                                                                                                       |
|                |       |                                                                                                                                                                                                                                                                                       |
| 4.7                 |       | Incorporated by  reference to Post-Effective Amendment No. 12 to Registration Statement on  Form N-4 (File No. 333-01107), as filed on February 4, 1999.                                                                                                                                   |
|                |       |                                                                                                                                                                                                                                                                                       |
| 4.8                 |       | Incorporated by  reference to Post-Effective Amendment No. 4 to Registration Statement on Form  N-4 (File No. 33-75988), as filed on April 15, 1996.                                                                                                                                       |
|                |       |                                                                                                                                                                                                                                                                                       |
| 4.9                 |       | Incorporated by  reference to Post-Effective Amendment No. 3 to Registration Statement on Form  N-4 (File No. 33-81216), as filed on April 17, 1996.                                                                                                                                       |
|                |       |                                                                                                                                                                                                                                                                                       |
| 4.10                |       | Incorporated by  reference to Post-Effective Amendment No. 3 to Registration Statement on Form  N-4 (File No. 33-91846), as filed on April 15, 1996.                                                                                                                                       |
|                |       |                                                                                                                                                                                                                                                                                       |
| 4.11                |       | Incorporated by  reference to Post-Effective Amendment No. 6 to Registration Statement on Form  N-4 (File No. 33-91846), as filed on August 6, 1996.                                                                                                                                       |
|                |       |                                                                                                                                                                                                                                                                                       |
| 4.12                |       | Incorporated by  reference to Registration Statement on Form N-4 (File No. 333-01107), as  filed on February 21, 1996.                                                                                                                                                                     |
|                |       |                                                                                                                                                                                                                                                                                       |
| 4.13                |       | Incorporated by  reference to Post-Effective Amendment No. 12 to Registration Statement on  Form N-4 (File No. 33-75982), as filed on February 20, 1997.                                                                                                                                   |
|                |       |                                                                                                                                                                                                                                                                                       |
| 4.14                |       | Incorporated by  reference to Post-Effective Amendment No. 7 to Registration Statement on Form  N-4 (File No. 33-75992), as filed on February 13, 1997.                                                                                                                                    |
|                |       |                                                                                                                                                                                                                                                                                       |
| 4.15                |       | Incorporated by  reference to Post-Effective Amendment No. 6 to Registration Statement on Form  N-4 (File No. 33-75974), as filed on February 28, 1997.                                                                                                                                    |

 

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| 4.16   |   | Incorporated by  reference to Post-Effective Amendment No. 6 to Registration Statement on Form  N-4 (File No. 33-75962), as filed on April 17, 1996.      |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                      |
| 4.17   |   | Incorporated by  reference to Post-Effective Amendment No. 14 to Registration Statement on  Form N-4 (File No. 33-75962), as filed on April 17, 1998.     |
|   |   |                                                                                                                                                      |
| 4.18   |   | Incorporated by  reference to Post-Effective Amendment No. 6 to Registration Statement on Form  N-4 (File No. 33-75982), as filed on April 22, 1996.      |
|   |   |                                                                                                                                                      |
| 4.19   |   | Incorporated by  reference to Post-Effective Amendment No. 8 to Registration Statement on Form  N-4 (File No. 33-75980), as filed on August 19, 1997.     |
|   |   |                                                                                                                                                      |
| 4.20   |   | Incorporated by  reference to Registration Statement on Form N-4 (File No. 333-56297), as  filed on June 8, 1998.                                         |
|   |   |                                                                                                                                                      |
| 4.21   |   | Incorporated by  reference to Post-Effective Amendment No. 3 to Registration Statement on Form  N-4 (File No. 33-79122), as filed on August 16, 1995.     |
|   |   |                                                                                                                                                      |
| 4.22   |   | Incorporated by  reference to Post-Effective Amendment No. 32 to Registration Statement on  Form N-4 (File No. 33-34370), as filed on December 16, 1997.  |
|   |   |                                                                                                                                                      |
| 4.23   |   | Incorporated by  reference to Post-Effective Amendment No. 30 to Registration Statement on  Form N-4 (File No. 33-34370), as filed on September 29, 1997. |
|   |   |                                                                                                                                                      |
| 4.24   |   | Incorporated by  reference to Post-Effective Amendment No. 26 to Registration Statement on  Form N-4 (File No. 33-34370), as filed on February 21, 1997.  |
|   |   |                                                                                                                                                      |
| 4.25   |   | Incorporated by  reference to Post-Effective Amendment No. 35 to Registration Statement on  Form N-4 (File No. 33-34370), as filed on April 17, 1998.     |
|   |   |                                                                                                                                                      |
| 4.26   |   | Incorporated by  reference to Post-Effective Amendment No. 1 to Registration Statement on Form  N-4 (File No. 33-87932), as filed on September 19, 1995.  |
|   |   |                                                                                                                                                      |
| 4.27   |   | Incorporated by  reference to Post-Effective Amendment No. 8 to Registration Statement on Form  N-4 (File No. 33-79122), as filed on April 17, 1998.      |
|   |   |                                                                                                                                                      |
| 4.28   |   | Incorporated by  reference to Post-Effective Amendment No. 7 to Registration Statement on Form  N-4 (File No. 33-79122), as filed on April 22, 1997.      |
|   |   |                                                                                                                                                      |
| 4.29   |   | Incorporated by  reference to Post-Effective Amendment No. 21 to Registration Statement on  Form N-4 (File No. 33-75996), as filed on February 16, 2000.  |
|   |   |                                                                                                                                                      |
| 4.30   |   | Incorporated by  reference to Post-Effective Amendment No. 13 to Registration Statement on  Form N-4 (File No. 333-01107), as filed on April 7, 1999.     |
|   |   |                                                                                                                                                      |
| 4.31   |   | Incorporated by  reference to Post-Effective Amendment No. 37 to Registration Statement on  Form N-4 (File No. 33-34370), as filed on April 9, 1999.      |
|   |   |                                                                                                                                                      |
| 4.32   |   | Incorporated by  reference to Post-Effective Amendment No. 1 to Registration Statement on Form  N-4 (File No. 333-87305), as filed on December 13, 1999.  |
|   |   |                                                                                                                                                      |
| 4.33   |   | Incorporated by  reference to Post-Effective Amendment No. 18 to Registration Statement on  Form N-4 (File No. 33-56297), as filed on August 30, 2000.    |
|   |   |                                                                                                                                                      |
| 4.34   |   | Incorporated by  reference to Post-Effective Amendment No.17 to Registration Statement on Form  N-4 (File No. 33-75996), as filed on April 7, 1999.       |
|   |   |                                                                                                                                                      |
| 4.35   |   | Incorporated by  reference to Post-Effective Amendment No. 19 to Registration Statement on  From N-4 (File No. 333-01107), as filed on February 16, 2000. |

 

110

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| 4.36   |   | Incorporated by  reference to the Registration Statement on Form S-2 (File No. 33- 64331), as  filed on November 16, 1995.                                |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                      |
| 4.37   |   | Incorporated by  reference to Pre-Effective Amendment No. 2 to the Registration Statement on  Form S-2 (File No. 33-64331), as filed on January 17, 1996. |
|   |   |                                                                                                                                                      |
| 4.38   |   | Incorporated by  reference to Post-Effective Amendment No. 30 to Registration Statement on  Form N-4 (File No. 33-75988), as filed on December 30, 2003.  |
|   |   |                                                                                                                                                      |
| 4.39   |   | Incorporated by  reference to Post-Effective Amendment No. 18 to Registration Statement on  Form N-4 (File No. 33-75980), as filed on April 16, 2003.     |
|   |   |                                                                                                                                                      |
| 4.40   |   | Incorporated by  reference to Post-Effective Amendment No. 30 to Registration Statement on  Form N-4 (File No. 333-01107), as filed on April 10, 2002.    |
|   |   |                                                                                                                                                      |
| 4.41   |   | Incorporated by  reference to Post-Effective Amendment No. 24 to Registration Statement on  Form N-4 (File No. 33-81216), as filed on April 11, 2003.     |
|   |   |                                                                                                                                                      |
| 4.42   |   | Incorporated by  reference to Registration Statement on Form N-4 (File No. 333-109860), as  filed on October 21, 2003.                                    |
|   |   |                                                                                                                                                      |
| 4.43   |   | Incorporated by  reference to Post-Effective Amendment No. 39 to Registration Statement on  Form N-4 (File No. 33-75962), as filed on December 17, 2004.  |
|   |   |                                                                                                                                                      |
| 4.44   |   | Incorporated by  reference to Initial Registration Statement on Form N-4 (File No.  333-130822), as filed on January 3, 2006.                             |
|   |   |                                                                                                                                                      |
| 4.45   |   | Incorporated by  reference to Post-Effective Amendment No. 1 to Registration Statement on Form  N-4 (File No. 333-87131), as filed on December 15, 1999.  |
|   |   |                                                                                                                                                      |
| 4.46   |   | Incorporated by  reference to Registration Statement on Form N-4 (File No. 33-59749), as filed  on June 1, 1995.                                          |
|   |   |                                                                                                                                                      |
| 4.47   |   | Incorporated by  reference to Post-Effective Amendment No. 4 to Registration Statement on Form  N-4 (File No. 33-59749), as filed on April 16, 1997.      |
|   |   |                                                                                                                                                      |
| 4.48   |   | Incorporated by  reference to Post-Effective Amendment No. 9 to Registration Statement on Form  N-4 (File No. 33-80750), as filed on April 17, 1998.      |
|   |   |                                                                                                                                                      |
| 4.49   |   | Incorporated by  reference to Post-Effective Amendment No. 8 to Registration Statement on Form  N-4 (File No. 33-80750), as filed on April 23, 1997.      |
|   |   |                                                                                                                                                      |
| 4.50   |   | Incorporated by  reference to Post-Effective Amendment No. 6 to Registration Statement on Form  N-4 (File No. 33-59749), as filed on November 26, 1997.   |
|   |   |                                                                                                                                                      |
| 4.51   |   | Incorporated by  reference to Registration Statement on Form S-2 (File No. 33-63657), as filed  on October 25, 1995.                                      |
|   |   |                                                                                                                                                      |
| 4.52   |   | Incorporated by  reference to Pre-Effective Amendment No. 3 to Registration Statement on Form  S-2 (File No. 33-63657), as filed on January 17, 1996.     |
|   |   |                                                                                                                                                      |
| 4.53   |   | Incorporated by  reference to Post-Effective Amendment No. 3 to Registration Statement on Form  S-2 (File No. 33-63657), as filed on November 24, 1997.   |
|   |   |                                                                                                                                                      |
| 4.54   |   | Incorporated by  reference to Post-Effective Amendment No. 3 to Registration Statement on Form  S-2 (File No. 33-64331), as filed on November 24, 1997.   |
|   |   |                                                                                                                                                      |
| 4.55   |   | Incorporated by  reference to Post-Effective Amendment No. 6 to Registration Statement on Form  N-4 (File No. 33-59749), as filed on November 26, 1997.   |

 

111

----

 
| 4.56   |   | Incorporated by  reference to Registration Statement on Form N-4 (File No. 33-59749), as filed  on June 1, 1995.                                                                                                                                                                                        |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                    |
| 4.57   |   | Incorporated by  reference to Post-Effective Amendment No. 4 to Registration Statement on Form  N-4 (File No. 33-59749), as filed on April 16, 1997.                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                    |
| 4.58   |   | Modified Single  Premium Deferred Annuity Contract (5 year) (Form No. IU-IA-3089) -  Incorporated herein by reference to Pre-Effective Amendment No. 1 to  Registration Statement on Form S-1 for ING Life Insurance and Annuity  Company, as filed with the SEC on May 19, 2010 (File No. 333-162420). |
|   |   |                                                                                                                                                                                                                                                                                                    |
| 4.59   |   | Modified Single  Premium Deferred Annuity Contract (7 year) (Form No. IU-IA-3090) -  Incorporated herein by reference to Pre-Effective Amendment No. 1 to  Registration Statement on Form S-1 for ING Life Insurance and Annuity  Company, as filed with the SEC on May 19, 2010 (File No. 333-162420). |
|   |   |                                                                                                                                                                                                                                                                                                    |
| 31.1+  |   | Certificate of  Ewout L. Steenbergen pursuant to Section 302 of the Sarbanes-Oxley Act of  2002.                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                    |
| 31.2+  |   | Certificate of  Catherine H. Smith pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                    |
| 32.1+  |   | Certificate of  Ewout L. Steenbergen pursuant to Section 906 of the Sarbanes-Oxley Act of  2002.                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                    |
| 32.2+  |   | Certificate of  Catherine H. Smith pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                           |

 

+ Filed herewith.

 

112

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