**UNITED STATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

----

 

**FORM 10-Q**

 

**(Mark One)**

 

**ý****                                ****QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended June 30, 2005**

 

**OR**

 

**o****                                ****TRANSITION REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the transition periodfrom                            to**

 

**Commission file number:  333-86276, 333-86278, 333-123934**

 

# **ING Life Insurance andAnnuity Company**

(Exact name of registrant as specified in itscharter)

 
| **Connecticut**                                                 | ** ** | **71-0294708**                    |
|-----------------------------------------------------------------|------------|-----------------------------------|
| (State or other jurisdiction of  incorporation or organization) |       | (IRS employer identification no.) |
|                                                            |       |                              |
| **151 Farmington Avenue, Hartford, Connecticut**                | ** ** | **06156**                         |
| (Address of principal executive offices)                        |       | (Zip code)                        |

 

Registrant’s telephone number, including area code  **(860) 723-4646**

 

 

Former name, former address and former fiscalyear, if changed since last report

 

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 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 90 days.

Yes ý     No o

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2 of theExchange Act).

Yes o     No ý

 

**APPLICABLE ONLY TO CORPORATE ISSUERS:**

 

Indicatethe number of shares outstanding of each of the issuer’s classes of commonstock, as of the latest practicable date: 55,000 shares of Common Stock as ofAugust 11, 2005, all of which were directly owned by Lion Connecticut HoldingsInc.

 

*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 REDUCED DISCLOSURE FORMATPURSUANT TO GENERAL INSTRUCTION H(2).*

 

 

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**ING Life Insurance and Annuity Company andSubsidiaries**

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

**Form 10-Q for the period ended June 30, 2005**

 

**INDEX**

 
| ** **     |                                                                                       | **Page** |
|----------------|--------------------------------------------------------------------------------------------|----------|
| **PART I.**    | **FINANCIAL INFORMATION (Unaudited)**                                                      |     |
|           |                                                                                       |     |
| 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                                            | 7        |
|           | Notes  to Condensed Consolidated Financial Statements                                      | 8        |
|           |                                                                                       |     |
| Item 2.        | Management’s Narrative Analysis of the Results of Operations and  Financial Condition | 16       |
|           |                                                                                       |     |
| Item 4.        | Controls and Procedures                                                                    | 27       |
|           |                                                                                       |     |
| ***PART II.*** | ***OTHER INFORMATION***                                                                    | * * |
| * *       | * *                                                                                   | * * |
| Item  1.       | Legal  Proceedings                                                                         | 28       |
|           |                                                                                       |     |
| Item 6.        | Exhibits                                                                                   | 28       |
|           |                                                                                       |     |
| Signatures     |                                                                                       | 32       |

 

2

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**ING Life Insurance and Annuity Company and Subsidiaries(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)**

 

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

 

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

 

**Condensed Consolidated Statements ofOperations**

(Unaudited)

(In millions)

 
| ** **                                                                        | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|-----------------------------------------------------------------------------------|------------|---------------------------------|------------|-------------------------------|------------|
| ** **                                                                        | ** ** | **2005**                        | ** ** | **2004**                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Revenues:**                                                                     |       |                            |       |                          |       |   |   |   |   |
| Net investment income                                                             |       | $                               | 270.1      |                          | $          | 241.6 |   | $ | 524.5 |   | $ | 479.2 |   |
| Fee income                                                                        |       | 117.7                           |       | 112.8                         |       | 235.9 |   | 230.0 |   |
| Premiums                                                                          |       | 12.4                            |       | 8.8                           |       | 26.2 |   | 19.7 |   |
| Net realized capital gains (losses)                                               |       | 5.2                             |       | (2.6                          | )          | 1.9 |   | 15.9 |   |
| Other income                                                                      |       | 0.9                             |       | 0.9                           |       | 2.1 |   | 0.8 |   |
| Total revenue                                                                     |       | 406.3                           |       | 361.5                         |       | 790.6 |   | 745.6 |   |
| **Benefits and expenses:**                                                        |       |                            |       |                          |       |   |   |   |   |
| Interest credited and other benefits to  contractowners                           |       | 191.7                           |       | 177.6                         |       | 379.4 |   | 365.2 |   |
| Operating expenses                                                                |       | 105.8                           |       | 92.7                          |       | 208.6 |   | 186.8 |   |
| Amortization of deferred policy acquisition  costs and value of business acquired |       | 44.1                            |       | 36.3                          |       | 93.3 |   | 74.2 |   |
| Interest expense                                                                  |       | 0.2                             |       | 0.2                           |       | 0.4 |   | 0.3 |   |
| Total benefits and expenses                                                       |       | 341.8                           |       | 306.8                         |       | 681.7 |   | 626.5 |   |
| Income before income taxes                                                        |       | 64.5                            |       | 54.7                          |       | 108.9 |   | 119.1 |   |
| Income tax expense                                                                |       | 19.1                            |       | 17.0                          |       | 31.7 |   | 37.4 |   |
| Net income                                                                        |       | $                               | 45.4       |                          | $          | 37.7 |   | $ | 77.2 |   | $ | 81.7 |   |

 

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

 

3

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## **INGLife Insurance and Annuity Company and Subsidiaries**

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

##  

## **CondensedConsolidated Balance Sheets**

(In millions, except share data)

 
| ** **                                                                                                              | ** ** | **As of**       | ** ** | **As of**        | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|-----------------|------------|------------------|------------|
| ** **                                                                                                              | ** ** | **June 30,**    | ** ** | **December 31,** | ** ** |
| ** **                                                                                                              | ** ** | **2005**        | ** ** | **2004**         | ** ** |
| ** **                                                                                                              | ** ** | **(Unaudited)** | ** ** | ** **       | ** ** |
| **Assets**                                                                                                              | ** ** | ** **      | ** ** | ** **       | ** ** |
| Investments:                                                                                                            |       |            |       |             |       |
| Fixed maturities, available-for-sale, at  fair value  (amortized cost of  $16,932.5 at 2005 and $16,684.7 at 2004) |       | $               | 17,377.4   |             | $          | 17,151.3 |   |
| Equity securities, available-for-sale, at  fair value  (cost of $156.1 at 2005 and  $153.9 at 2004)                |       | 164.0           |       | 162.6            |       |
| Mortgage loans on real estate                                                                                           |       | 1,153.5         |       | 1,090.2          |       |
| Policy loans                                                                                                            |       | 259.7           |       | 262.7            |       |
| Other investments                                                                                                       |       | 81.6            |       | 57.0             |       |
| Securities pledged (amortized cost of  $1,252.5 at 2005 and $1,258.8 at 2004)                                           |       | 1,264.9         |       | 1,274.3          |       |
| Total investments                                                                                                       |       | 20,301.1        |       | 19,998.1         |       |
| Cash and cash equivalents                                                                                               |       | 215.5           |       | 187.3            |       |
| Short-term investments under securities  loan agreement                                                                 |       | 247.8           |       | 219.5            |       |
| Accrued investment income                                                                                               |       | 200.5           |       | 181.7            |       |
| Receivables for securities sold                                                                                         |       | 567.8           |       | 0.2              |       |
| Reinsurance recoverable                                                                                                 |       | 2,933.3         |       | 2,902.7          |       |
| Deferred policy acquisition costs                                                                                       |       | 463.1           |       | 414.5            |       |
| Value of business acquired                                                                                              |       | 1,315.3         |       | 1,365.2          |       |
| Notes receivable from affiliate                                                                                         |       | 175.0           |       | 175.0            |       |
| Due from affiliates                                                                                                     |       | 40.1            |       | 25.9             |       |
| Other assets                                                                                                            |       | 72.2            |       | 67.2             |       |
| Assets held in separate accounts                                                                                        |       | 33,682.0        |       | 33,310.5         |       |
| Total assets                                                                                                            |       | $               | 60,213.7   |             | $          | 58,847.8 |   |

 

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

 

4

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##  

## **INGLife Insurance and Annuity Company and Subsidiaries**

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

##  

## **CondensedConsolidated Balance Sheets**

(In millions, except share data)

 
| ** **                                                                                           | ** ** | **As of**       | ** ** | **As of**        | ** ** |
|------------------------------------------------------------------------------------------------------|------------|-----------------|------------|------------------|------------|
| ** **                                                                                           | ** ** | **June 30,**    | ** ** | **December 31,** | ** ** |
| ** **                                                                                           | ** ** | **2005**        | ** ** | **2004**         | ** ** |
| ** **                                                                                           | ** ** | **(Unaudited)** | ** ** | ** **       | ** ** |
| **Liabilities and Shareholder’s Equity**                                                        |       |            |       |             |       |
| Future policy benefits and claims reserves                                                           |       | $               | 21,165.8   |             | 20,886.4   |   |
| Payables for securities purchased                                                                    |       | 544.0           |       | 25.1             |       |
| Payables under securities loan agreement                                                             |       | 247.8           |       | 219.5            |       |
| Borrowed money                                                                                       |       | 1,018.5         |       | 1,057.4          |       |
| Notes payable                                                                                        |       | 97.0            |       | —           |       |
| Due to affiliates                                                                                    |       | 30.3            |       | 49.4             |       |
| Current income taxes                                                                                 |       | 87.4            |       | 82.6             |       |
| Deferred income taxes                                                                                |       | 241.0           |       | 209.3            |       |
| Other liabilities                                                                                    |       | 278.5           |       | 283.4            |       |
| Liabilities related to separate accounts                                                             |       | 33,682.0        |       | 33,310.5         |       |
| Total liabilities                                                                                    |       | 57,392.3        |       | 56,123.6         |       |
|                                                                                                 |       |            |       |             |       |
| Shareholder’s equity:                                                                           |       |            |       |             |       |
| Common stock (100,000 shares authorized;  55,000 shares issued and outstanding; $50 per share value) |       | 2.8             |       | 2.8              |       |
| Additional paid-in capital                                                                           |       | 4,577.7         |       | 4,576.5          |       |
| Accumulated other comprehensive income                                                               |       | 85.9            |       | 67.1             |       |
| Retained earnings (deficit)                                                                          |       | (1,845.0        | )          | (1,922.2         | )          |
| Total shareholder’s equity                                                                      |       | 2,821.4         |       | 2,724.2          |       |
| Total liabilities and shareholder’s equity                                                      |       | $               | 60,213.7   |             | $          | 58,847.8 |   |
|                                                                                                      |            |                 |            |                  |            |  |  |

 

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

 

5

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## **INGLife Insurance and Annuity Company and Subsidiaries**

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

##  

## **CondensedConsolidated Statements of Changes in Shareholder’s Equity**

(Unaudited)

(In millions)

 
| ** **                                           | ** ** | ** ** | ** ** | ** **     | ** ** | **Accumulated**   | ** ** | ** **    | ** ** | ** **             | ** ** |
|------------------------------------------------------|------------|------------|------------|----------------|------------|-------------------|------------|---------------|------------|------------------------|------------|
| ** **                                           | ** ** | ** ** | ** ** | **Additional** | ** ** | **Other**         | ** ** | **Retained**  | ** ** | **Total**              | ** ** |
| ** **                                           | ** ** | **Common** | ** ** | **Paid-In**    | ** ** | **Comprehensive** | ** ** | **Earnings**  | ** ** | **Shareholder’s** | ** ** |
| ** **                                           | ** ** | **Stock**  | ** ** | **Capital**    | ** ** | **Income**        | ** ** | **(Deficit)** | ** ** | **Equity**             | ** ** |
|                                                 |       |       |       |           |       |              |       |          |       |                   |       |
| Balance at December 31, 2003                         |       | $          | 2.8        |           | $          | 4,646.5           |       | $             | 116.0      |                   | $          | (2,119.4 | ) | $ | 2,645.9 |   |
| Comprehensive income:                                |       |       |       |           |       |              |       |          |       |                   |       |
| Net income                                           |       |       |       |           |       |              |       | 81.7          |       | 81.7                   |       |
| Other comprehensive loss, net of tax:                |       |       |       |           |       |              |       |          |       |                   |       |
| Net unrealized loss on securities (($116.9)  pretax) |       |       |       |           |       | (76.0             | )          |          |       | (76.0                  | )          |
| Total comprehensive income                           |       |       |       |           |       |              |       |          |       | 5.7                    |       |
| Other                                                |       |       |       |           |       |              |       | (2.1          | )          | (2.1                   | )          |
| Balance at June 30, 2004                             |       | $          | 2.8        |           | $          | 4,646.5           |       | $             | 40.0       |                   | $          | (2,039.8 | ) | $ | 2,649.5 |   |
|                                                 |       |       |       |           |       |              |       |          |       |                   |       |
| Balance at December 31, 2004                         |       | $          | 2.8        |           | $          | 4,576.5           |       | $             | 67.1       |                   | $          | (1,922.2 | ) | $ | 2,724.2 |   |
| Comprehensive income:                                |       |       |       |           |       |              |       |          |       |                   |       |
| Net income                                           |       |       |       |           |       |              |       | 77.2          |       | 77.2                   |       |
| Other comprehensive income, net of tax:              |       |       |       |           |       |              |       |          |       |                   |       |
| Net unrealized gain on securities ($32.7  pretax)    |       |       |       |           |       | 18.8              |       |          |       | 18.8                   |       |
| Total comprehensive income                           |       |       |       |           |       |              |       |          |       | 96.0                   |       |
| Employee share-based payments                        |       |       |       | 1.2            |       |              |       |          |       | 1.2                    |       |
| Balance at June 30, 2005                             |       | $          | 2.8        |           | $          | 4,577.7           |       | $             | 85.9       |                   | $          | (1,845.0 | ) | $ | 2,821.4 |   |

 

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

 

6

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## **INGLife Insurance and Annuity Company and Subsidiaries**

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

##  

## **CondensedConsolidated Statements of Cash Flows**

(Unaudited)

(In millions)

 
| ** **                                            | ** ** | **Six Months Ended June 30,** | ** ** |
|-------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                            | ** ** | **2005**                      | ** ** | **2004** | ** ** |
| ** **                                            | ** ** | ** **                    | ** ** | **(Restated)** | ** ** |
| Net cash provided by operating activities             |       | $                             | 415.0      |   | $ | 428.6 |   |
|                                                  |       |                          |       |   |   |
| Cash Flows from Investing Activities:                 |       |                          |       |   |   |
| Proceeds from the sale, maturity, or  redemption of:  |       |                          |       |   |   |
| Fixed maturities, available-for-sale                  |       | 10,174.1                      |       | 15,415.8 |   |
| Equity securities, available-for-sale                 |       | 35.5                          |       | 28.5 |   |
| Mortgage loans on real estate                         |       | 137.3                         |       | 7.0 |   |
| Acquisition of:                                       |       |                          |       |   |   |
| Fixed maturities, available-for-sale                  |       | (10,519.9                     | )          | (15,280.9 | ) |
| Equity securities, available-for-sale                 |       | (36.0                         | )          | (34.0 | ) |
| Mortgage loans on real estate                         |       | (200.6                        | )          | (251.5 | ) |
| Policy loans                                          |       | 3.0                           |       | 6.8 |   |
| Other investments                                     |       | (24.8                         | )          | (7.1 | ) |
| (Purchases) sales of property and  equipment, net     |       | (9.7                          | )          | 0.2 |   |
| Net cash used for investing activities                |       | (441.1                        | )          | (115.2 | ) |
|                                                  |       |                          |       |   |   |
| Cash Flows from Financing Activities:                 |       |                          |       |   |   |
| Deposits received for investment contracts            |       | 1,036.7                       |       | 925.2 |   |
| Maturities and withdrawals from investment  contracts |       | (1,040.5                      | )          | (945.5 | ) |
| Short-term loans                                      |       | 58.1                          |       | (259.3 | ) |
| Net cash provided by (used for) financing  activities |       | 54.3                          |       | (279.6 | ) |
| Net increase in cash and cash equivalents             |       | 28.2                          |       | 33.8 |   |
| Cash and cash equivalents, beginning of  period       |       | 187.3                         |       | 57.8 |   |
| Cash and cash equivalents, end of period              |       | $                             | 215.5      |   | $ | 91.6 |   |

 

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

 

7

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**ING LIFEINSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES**

**(Awholly-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***

* *

ING Life Insurance and Annuity Company (“ILIAC”), is a stocklife insurance company domiciled in the state of Connecticut.  ILIAC and its wholly-owned subsidiaries(collectively, the “Company”) are providers of financial products and servicesin the United States.  ILIAC isauthorized to conduct its insurance business in the District of Columbia andall states.

 

The condensed consolidated financial statements include ILIACand its wholly-owned subsidiaries, ING Insurance Company of America (“IICA”)and ING Financial Advisers, LLC (“IFA”). ILIAC is a direct, wholly-owned subsidiary of Lion Connecticut HoldingsInc. (“Lion” or “Parent”), which is an indirect, wholly-owned subsidiary of INGGroep N.V. (“ING”).  ING is a globalfinancial services holding company based in The Netherlands, with AmericanDepository Shares listed on the New York Stock Exchange under the symbol “ING.”

 

The condensed consolidated financial statements and notes asof June 30, 2005 and December 31, 2004, and for the three and sixmonths ended June 30, 2005 and 2004 (“interim periods”), have beenprepared in accordance with generally accepted accounting principles in the UnitedStates and are unaudited.

 

The condensed consolidated financial statements reflect alladjustments (consisting only of normal, recurring accruals) which are, in theopinion of management, necessary for the fair presentation of the consolidatedfinancial position, results of operations, and cash flows for the interimperiods.  These condensed consolidatedfinancial statements and notes should be read in conjunction with theconsolidated financial statements and related notes as presented in the Company’s2004 Annual Report on Form 10-K.  Theresults of operations for the interim periods may not be considered indicativeof results to be expected for the full year.

 

***Description of Business***

* *

The Company offers qualified and nonqualified annuitycontracts that include a variety of funding and payout options for individualsand employer-sponsored retirement plans qualified under Internal Revenue CodeSections 401, 403, 408 and 457, as well as nonqualified deferred compensationplans.  The Company’s products areoffered primarily to individuals, pension plans, small businesses, andemployer-sponsored groups in the health care, government, education(collectively “not-for-profit” organizations), and corporate markets.  The Company’s products generally are distributedthrough pension professionals, independent agents and brokers, third partyadministrators, banks, dedicated career agents, and financial planners.

 

Annuity contracts may be deferred or immediate (payoutannuities). These products also include programs offered to qualified plans andnonqualified deferred compensation

 

8

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**ING LIFEINSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES**

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

**Notes to Condensed Consolidated Financial Statements (Unaudited)**

(Dollar amounts in millions,unless otherwise stated)

 

plans that package administrative and record-keeping servicesalong with a variety of investment options, including affiliated andnonaffiliated mutual funds, and variable and fixed investment options. Inaddition, the Company offers wrapper agreements entered into with retirementplans which contain certain benefit responsive guarantees (i.e. liquidityguarantees of principal and previously accrued interest for benefits paid underthe terms of the plan) with respect to portfolios of plan-owned assets notinvested with the Company. The Company also offers investment advisory servicesand pension plan administrative services.

 

***Useof Estimates***

 

The preparation of financial statements in conformity withaccounting principles generally accepted in the United States 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***

 

Certain reclassifications have been made to prior yearfinancial information to conform to the current year classifications (seefootnote 9).

 

***SignificantAccounting Policies***

 

For a description of significant accounting policies, seeNote 1 to the Consolidated Financial Statements included in the Company’s 2004Annual Report on Form 10-K.

 

**2.**                                      RecentlyAdopted Accounting Standards

** **

***Investor’s Accounting for an Investment in a LimitedPartnership When the Investor is the Sole General Partner and the LimitedPartners Have Certain Rights***

* *

In June 2005, the Emerging Issues Task Force (“EITF”) reacheda consensus on EITF Issue 04-5: “Investor’s Accounting for an Investment in aLimited Partnership When the Investor is the Sole General Partner and theLimited Partners Have Certain Rights” (“EITF 04-5”), which states that thegeneral partner in a limited partnership should presume that it controls and,thus, should consolidate the limited partnership, unless the limited partnershave either (a) substantive ability to dissolve the limited partnership orotherwise remove the general partner without cause or (b) substantiveparticipating rights.  EITF 04-5 appliesto limited partnerships that are not variable interest entities under FASBInterpretation No. 46(R): “Consolidation of Variable Interest Entities” (“FIN46(R)”).  EITF 04-5 is effectiveimmediately for all new limited partnerships formed and for existing limitedpartnerships for which partnership agreements are modified after June 29,2005, and is effective for all other limited partnerships at the commencementof the first reporting period beginning after December 15, 2005.

 

9

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**ING LIFEINSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES**

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

**Notes to Condensed Consolidated Financial Statements (Unaudited)**

(Dollar amounts in millions,unless otherwise stated)

 

EITF 04-5 had no impact on ILIAC as of June 30, 2005, asthe Company’s investments in limited partnerships are generally consideredvariable interest entities under FIN 46(R), and are accounted for using thecost or equity method of accounting since the Company is not the primarybeneficiary.  Investments in limitedpartnerships are included in Other Investments on the Condensed Balance Sheets.

 

***Share-Based Payment***

* *

In December 2004, the Financial Accounting Standards Board (“FASB”)issued Statement of Financial Standard (“FAS”) No. 123 (revised 2004), “Share-BasedPayment” (“FAS 123R”), which requires all share-based payments to employees berecognized in the financial statements based upon the fair value.  FAS 123R is effective at the beginning of thefirst annual period beginning after June 15, 2005 for registrants.  Earlier adoption is encouraged.  FAS 123R provides two transition methods,modified-prospective and modified-retrospective.

 

The Company early adopted the provisions of FAS 123R onJanuary 1, 2005, using the modified-prospective method.  Under the modified-prospective method,compensation cost recognized in the first six months of 2005 includes: (a)compensation cost for all share-based payments granted prior to, but not yet vestedas of January 1, 2005, based on the grant date fair value estimated inaccordance with the original provisions of FASB Statement No. 123, “Accountingfor Stock-Based Compensation” (“FAS 123”), and (b) compensation costfor all share-based payments granted subsequent to January 1, 2005, based onthe grant-date fair value in accordance with the provisions of FAS 123R.  Results for prior periods are notrestated.  Prior to January 1, 2005,the Company applied the intrinsic value-based provisions set forth in APBOpinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”), andrelated Interpretations, as permitted by FAS 123.  No stock based employee compensation cost wasrecognized in the Statement of Operations during 2004, as all options grantedduring the year had an exercise price equal to the market value of theunderlying common stock on the date of grant. All shares granted during 2005 and 2004 were those of ING, the Company’sultimate parent.  As a result of adoptingFAS 123R, the Company’s net income for the three and six months endedJune 30, 2005, is $0.3 and $0.8, lower, respectively, than if it hadcontinued to account for share-based payments under APB 25.

 

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

** **

Deferred policy acquisition costs (“DAC”) represent policyacquisition costs that have been capitalized and are subject toamortization.  Such costs consistprincipally of certain commissions, underwriting, contract issuance, andcertain agency expenses, related to the production of new and renewal business.

 

10

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**ING LIFEINSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES**

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

**Notes to Condensed Consolidated Financial Statements (Unaudited)**

(Dollar amounts in millions,unless otherwise stated)

 

Value of business acquired (“VOBA”) represents theoutstanding value of in force business capitalized and is subject toamortization in purchase accounting when the Company was acquired.  The value is based on the present value ofestimated net cash flows embedded in the Company’s contracts.

 

The amortization methodology used for DAC and VOBA varies byproduct type.  Universal life andinvestment-type products’, such as fixed and variable deferred annuities, DACand VOBA are amortized, with interest, over the life of the related contracts(usually 25 years) in relation to the present value of estimated future grossprofits from investment, mortality, and expense margins; asset-based fees,policy administration, and surrender charges; less policy maintenance fees andnon-capitalized commissions, as well as realized gains and losses oninvestments.

 

Traditional life insurance products, primarily traditionalwhole life and term life insurance contracts, DAC and VOBA are amortized overthe premium payment period, in proportion to the premium revenue recognized.

 

Activity for the six months ended June 30, 2005 and2004, within DAC, was as follows:

 
| ** **                   | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------|------------|----------|------------|----------|------------|
| Balance at January 1         |       | $        | 414.5      |     | $          | 307.9 |   |
| Adjustment for FAS No. 115   |       | 1.7      |       | 3.3      |       |
| Deferrals                    |       | 60.6     |       | 56.3     |       |
| Interest accrued at 5% to 7% |       | 14.4     |       | 11.1     |       |
| Amortization                 |       | (28.1    | )          | (23.2    | )          |
| Implementation of SOP-TPA    |       | —   |       | 0.2      |       |
| Balance at June 30           |       | $        | 463.1      |     | $          | 355.6 |   |

 

Activity for the six months ended June 30, 2005 and 2004within VOBA, was as follows:

 
| ** **                   | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------|------------|----------|------------|----------|------------|
| Balance at January 1         |       | $        | 1,365.2    |     | $          | 1,415.4 |   |
| Adjustment for FAS No. 115   |       | 4.5      |       | 11.9     |       |
| Deferrals                    |       | 25.2     |       | 27.2     |       |
| Interest accrued at 5% to 7% |       | 44.8     |       | 46.5     |       |
| Amortization                 |       | (124.4   | )          | (108.6   | )          |
| Balance at June 30           |       | $        | 1,315.3    |     | $          | 1,392.4 |   |

 

11

----

 

**ING LIFEINSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES**

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

**Notes to Condensed Consolidated Financial Statements (Unaudited)**

(Dollar amounts in millions,unless otherwise stated)

 

**4.**                                      Investments

** **

***Impairments***

 

The following table identifies the Company’sother-than-temporary impairments, included in net realized capital gains(losses), by type for the three and six months ended June 30, 2005 and2004:

 
| ** **                  | ** ** | **Three Months Ended June 30,** | ** ** |
|-----------------------------|------------|---------------------------------|------------|
| ** **                  | ** ** | **2005**                        | ** ** | **2004** | ** ** |
| ** **                  | ** ** | ** **                      | ** ** | **No. of** | ** ** | ** ** | ** ** | **No. of** | ** ** |
| ** **                  | ** ** | **Impairment**                  | ** ** | **Securities** | ** ** | **Impairment** | ** ** | **Securities** | ** ** |
| Residential mortgage-backed |       | $                               | 7.6        |   | 52 |   | $ | 1.3 |   | 8 |   |
| Total                       |       | $                               | 7.6        |   | 52 |   | $ | 1.3 |   | 8 |   |

 
| ** **                  | ** ** | **Six Months Ended June 30,** | ** ** |
|-----------------------------|------------|-------------------------------|------------|
| ** **                  | ** ** | **2005**                      | ** ** | **2004** | ** ** |
| ** **                  | ** ** | ** **                    | ** ** | **No. of** | ** ** | ** ** | ** ** | **No. of** | ** ** |
| ** **                  | ** ** | **Impairment**                | ** ** | **Securities** | ** ** | **Impairment** | ** ** | **Securities** | ** ** |
| Residential mortgage-backed |       | $                             | 33.8       |   | 74 |   | $ | 6.4 |   | 36 |   |
| Total                       |       | $                             | 33.8       |   | 74 |   | $ | 6.4 |   | 36 |   |

 

The remaining fair value of the fixed maturities withother-than-temporary impairments at June 30, 2005 and 2004 is $187.9 and$118.6, respectively.

 

**5.**                                      Income Taxes

** **

The Company’s effective tax rates for the three months endedJune 30, 2005 and 2004 were 29.6% and 31.1%, respectively.  The effective tax rates for the six monthsended June 30, 2005 and 2004 were 29.1% and 31.4%, respectively.  The effective rate differs from the statutoryrate, and the decrease in the effective rate, for the three months ended June30, 2005 is primarily due to an increase in the dividends received deduction,while the differential and decrease for the six months ended June 30, 2005 isrelated to both a decrease in pretax income and the increase in the dividendsreceived deduction.

 

**6.**                                      FinancingAgreements

** **

The Company maintains an uncommitted revolving loan facilitywith SunTrust Bank, Atlanta (the “Bank”) to meet short-term cash requirementsthat arise in the ordinary course of business. Under this agreement, which isdue on demand, the Company can borrow up to $125.0 from the Bank. Interest onany borrowing accrues at an annual rate equal to a rate quoted by the Bank tothe Company for the borrowing.  Under theagreement, the Company incurred minimal interest expense for the three and sixmonth periods ended June 30, 2005 and 2004, respectively.  At June 30, 2005, the Company had 

 

12

----

 

**ING LIFEINSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES**

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

**Notes to Condensed Consolidated Financial Statements (Unaudited)**

(Dollar amounts in millions,unless otherwise stated)

 

$97.0 payable to the Bank. At December 31, 2004, the Company did not have any balances payableto the Bank.  The outstanding balance of$97.0 at June 30, 2005 was repaid on July 1, 2005.

 

ILIACmaintains a reciprocal loan agreement with ING AIH, an indirect wholly-ownedsubsidiary of ING and affiliate to ILIAC, to facilitate the handling of unanticipatedshort-term cash requirements. Under this agreement, which became effective in June2001 and expires on April 1, 2011, ILIAC and ING AIH can borrow up to 3% ofILIAC’s statutory admitted assets as of the preceding December 31 from oneanother. Interest on any ILIAC borrowings is charged at the rate of ING AIH’scost of funds for the interest period plus 0.15%. Interest on any ING AIHborrowings is charged at a rate based on the prevailing interest rate of U.S.commercial paper available for purchase with a similar duration. Under thisagreement, ILIAC incurred minimal interest expense for the three and six monthsended June 30, 2005, respectively, and earned interest income of $0.2 and $0.6for the three and six months ended June 30, 2005, respectively. At June 30,2005 and December 31, 2004, respectively, ILIAC had a $39.0 and $25.0 receivablefrom ING AIH under this agreement.

 

**7.**                                      Commitmentsand Contingent Liabilities

** **

***Commitments***

 

Through the normal course of investment operations, theCompany commits to either purchase or sell securities, commercial mortgageloans, or money market instruments, at a specified future date and at aspecified price or yield. The inability of counterparties to honor thesecommitments may result in either a higher or lower replacement cost. Also,there is likely to be a change in the value of the securities underlying thecommitments. At June 30, 2005, the Company had off-balance sheetcommitments to purchase investments equal to their fair value of $531.4, $427.4of which was with related parties.  AtDecember 31, 2004, the Company had off-balance sheet commitments topurchase investments equal to their fair value of $778.2, $440.4 of which waswith related parties.  During the threeand six months ended June 30, 2005, $36.9 and $42.6 were funded to relatedparties under these commitments, respectively.

 

***Litigation***

 

The Company is a party to threatened or pendinglawsuits/arbitrations arising from the normal conduct of business.  Due to the climate in insurance and businesslitigation/arbitrations, suits against the Company sometimes include claims forsubstantial compensatory, consequential, or punitive damages, and other typesof relief.  Moreover, certain claims areasserted as class actions, purporting to represent a group of similarly situatedindividuals.  While it is not possible toforecast the outcome of such lawsuits/arbitrations, in light of existinginsurance, 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.

 

13

----

 

**ING LIFEINSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES**

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

**Notes to Condensed Consolidated Financial Statements (Unaudited)**

(Dollar amounts in millions,unless otherwise stated)

 

**8.**                                      AccumulatedOther Comprehensive Income

** **

Shareholder’s equity included the following components ofaccumulated other comprehensive income (loss) as of June 30, 2005 and2004:

 
| ** **                                 | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------------------|------------|----------|------------|----------|------------|
| Net unrealized capital gains (losses):     |       |     |       |     |       |
| Fixed maturities                           |       | $        | 152.0      |     | $          | 46.6 |   |
| Equity securities                          |       | 7.9      |       | 13.0     |       |
| DAC/VOBA                                   |       | (3.3     | )          | (4.4     | )          |
| Sales inducements                          |       | (0.1     | )          | (0.1     | )          |
| Other investments                          |       | 1.1      |       | 1.5      |       |
| Subtotal                                   |       | 157.6    |       | 56.6     |       |
| Less: deferred income taxes                |       | 55.0     |       | 16.6     |       |
| Net unrealized capital gains               |       | 102.6    |       | 40.0     |       |
| Minimum pension liability                  |       | (16.7    | )          | —   |       |
| Net accumulated other comprehensive income |       | $        | 85.9       |     | $          | 40.0 |   |

 

Net unrealized capital gains allocated to experience-ratedcontracts of $305.3 and $97.1 at June 30, 2005 and 2004, respectively, arereflected on the Condensed Consolidated Balance Sheets in future policybenefits and claims reserves and are not included in shareholder’s equity.

 

Changes in accumulated othercomprehensive income related to changes in net unrealized gains (losses) onsecurities, including securities pledged and excluding those related toexperience-rated contractowners, were as follows:

 
| ** **                                                                                   | ** ** | **Six Months Ended June 30,** | ** ** |
|----------------------------------------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                                                   | ** ** | **2005**                      | ** ** | **2004** | ** ** |
| Unrealized holding gains (losses) arising  during the period (1)                        |       | $                             | 28.3       |   | $ | (38.6 | ) |
| Less: reclassification adjustment for gains  and other items included in net income (2) |       | 9.5                           |       | 37.4 |   |
| Net unrealized gains (losses) on securities                                                  |       | $                             | 18.8       |   | $ | (76.0 | ) |

 

----

(1)          Pretax unrealizedholding gains (losses) arising during the period were $49.3 and $(59.3), forthe six months ended June 30, 2005 and 2004, respectively.

(2)          Pretax reclassificationadjustments for gains (losses) and other items included in net income were$16.6 and $57.6, for the six months ended June 30, 2005 and 2004,respectively.

 

14

----

 

**ING LIFEINSURANCE AND ANNUITY COMPANY AND SUBSIDIARIES**

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

**Notes to Condensed Consolidated Financial Statements (Unaudited)**

(Dollar amounts in millions,unless otherwise stated)

 

**9.**                                      Reclassificationsand Changes to Prior Year Presentation

 

During 2005, certain changes were made to the CondensedStatement of Cash Flows for the six months ended June 30, 2004, to reflectthe correct balances, primarily related to investment contracts.  As a result of these adjustments, the Companyhas labeled the Condensed Statement of Cash Flows for the six months endedJune 30, 2004, as restated.  Thefollowing summarizes the adjustments:

 
| ** **                                | ** ** | **Previously** | ** ** | ** **     | ** ** | ** **   | ** ** |
|-------------------------------------------|------------|----------------|------------|----------------|------------|--------------|------------|
| **Six Months Ended June 30, 2004**        | ** ** | **Reported**   | ** ** | **Adjustment** | ** ** | **Restated** | ** ** |
| Net cash used for operating activities    |       | $              | 119.9      |           | $          | 308.7        |       | $ | 428.6 |   |
| Net cash used for investing activities    |       | (99.0          | )          | (16.2          | )          | (115.2       | )          |
| Net cash provided by financing activities |       | 12.9           |       | (292.5         | )          | (279.6       | )          |
|                                           |            |                |            |                |            |              |            |  |  |  |

 

15

----

 

**Item2.**          Management’sNarrative Analysis of the Consolidated Results of Operations and FinancialCondition

# **(Dollaramounts in millions, unless otherwise stated)**

 

# **Overview**

 

The following narrative analysis presents areview of the consolidated results of operations of ING Life Insurance andAnnuity Company (“ILIAC”) and its wholly-owned subsidiaries (collectively, the “Company”)for the three and six month periods ended June 30, 2005 and 2004, andfinancial condition as of June 30, 2005 and December 31, 2004.  This item should be read in its entirety andin conjunction with the condensed consolidated financial statements and relatednotes, which can be found under Part I, Item 1 contained herein, as well as the“Management’s Narrative Analysis of the Results of Operations and FinancialCondition” section contained in the Company’s 2004 Annual Report on Form 10-K.

 

# **Forward-Looking Information/Risk Factors**

 

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

 

Forward-looking statements are necessarilybased on estimates and assumptions that are inherently subject to significantbusiness, economic, and competitive uncertainties and contingencies, many ofwhich are beyond the Company’s control and many of which are subject to change.These uncertainties and contingencies could cause actual results to differmaterially from those expressed in any forward-looking statements made by, oron behalf of, the Company.  Whether ornot actual results differ materially from forward-looking statements may dependon numerous foreseeable and unforeseeable developments. Some may be national inscope, such as general economic conditions, changes in tax law, and changes ininterest rates. Some may be related to the insurance industry generally, suchas pricing competition, regulatory developments, and industry consolidation.Others may relate to the Company specifically, such as litigation, regulatoryaction, and risks associated with the Company’s investment portfolio such aschanges in credit quality, price volatility, and liquidity. Investors are alsodirected to consider other risks and uncertainties discussed in other documentsfiled by the Company with the SEC. Except as may be required by the federal securities laws, the Companydisclaims any obligation to update forward-looking information.

 

16

----

 

**Critical AccountingPolicies**

 

There have been no material changes to theCompany’s critical accounting policies since the filing of the Company’s 2004Form 10-K Annual Report.

 

**Results of Operations**

 

*Overview*

 

The Company’s results of operations for thethree and six months ended June 30, 2005, reflect higher assets undermanagement (“AUM”), increasing deposits and sales, changing equity market andinterest rate conditions, and portfolio realignment, as well as risingexpenses.

 

*Revenues*

 
| ** **                          | ** ** | **Three Months Ended June 30,** | ** ** | **$****Increase** | ** ** | **%****Increase** | ** ** |
|-------------------------------------|------------|---------------------------------|------------|-------------------|------------|-------------------|------------|
| ** **                          | ** ** | **2005**                        | ** ** | **2004**          | ** ** | **(Decrease)**    | ** ** | **(Decrease)** | ** ** |
| **Revenues:**                       | ** ** | ** **                      | ** ** | ** **        | ** ** | ** **        | ** ** | ** ** | ** ** |
| Net investment income               |       | $                               | 270.1      |              | $          | 241.6             |       | $ | 28.5 |   | 11.8 | % |
| Fee income                          |       | 117.7                           |       | 112.8             |       | 4.9               |       | 4.3 | % |
| Premiums                            |       | 12.4                            |       | 8.8               |       | 3.6               |       | 40.9 | % |
| Net realized capital gains (losses) |       | 5.2                             |       | (2.6              | )          | 7.8               |       | NM |   |
| Other income                        |       | 0.9                             |       | 0.9               |       | —            |       | 0.0 | % |
| **Total revenue**                   |       | $                               | 406.3      |              | $          | 361.5             |       | $ | 44.8 |   | 12.4 | % |

 
| ** **                          | ** ** | **Six Months Ended June 30,** | ** **  | **$****Increase** | ** ** | **%****Increase** | ** ** |
|-------------------------------------|------------|-------------------------------|-------------|-------------------|------------|-------------------|------------|
| ** **                          | ** ** | **2005**                      | ** **  | **2004**          | ** ** | **(Decrease)**    | ** ** | **(Decrease)** | ** ** |
| **Revenues:**                       | ** ** | ** **                    | ** **  | ** **        | ** ** | ** **        | ** ** | ** ** | ** ** |
| Net investment income               |       | $                             | 524.5       |              | $          | 479.2             |       | $ | 45.3 |   | 9.5 | % |
| Fee income                          |       | 235.9                         |        | 230.0             |       | 5.9               |       | 2.6 | % |
| Premiums                            |       | 26.2                          |        | 19.7              |       | 6.5               |       | 33.0 | % |
| Net realized capital (losses) gains |       | 1.9                           |        | 15.9              |       | (14.0             | )          | -88.1 | % |
| Other income                        |       | 2.1                           |        | 0.8               |       | 1.3               |       | NM |   |
| **Total revenue**                   |       | $                             |  790.6 |              | $          |  745.6       |       | $ |  45.0 |   | 6.0 | % |
|                                     |            |                               |             |                   |            |                   |            |  |  |  |  |  |  |  |  |

 

NM - Not meaningful

 

*Total revenue*increasedfor the three and six months ended June 30, 2005, respectively, primarilydue to changes in Net investment income, Fee income, and Net realized capitalgains (losses). *Net investment income*forthe three and six months ended June 30, 2005 increased due to higheraverage fixed AUM.  The increase inaverage fixed AUM reflects the increase in contractowner deposits for existingproducts, as well as a rise in sales, net of surrenders and withdrawals. Theincrease in sales mainly reflects the 403(b) education products.  *Fee income*also increased for the three and six months ended June 30, 2005, asaverage variable AUM increased, driven by market increases in the latter partof 2004.  Partially offsetting thisincrease is a decline in deposits received for variable products, net ofsurrenders and withdrawals.  Premiumsincreased due to the rise in annuitizations in rollover/payout 

 

17

----

 

products. Changing interest rate conditions contributed to the fluctuations in *Net realized capital gains (losses).*Duringthe three and six months ended June 30, 2005, realized gains on openderivative contracts decreased.  Inaddition, the Company sold various fixed maturities in an effort to realign theinvestment portfolio more closely to the business, which resulted in anincrease in realized gains.  However, forthe six months ended June 30, 2005, these gains were mostly offset by anincrease in realized losses from impairments.

 

*Other income* did not fluctuate significantly duringthe three and six month periods ended June 30, 2005, compared to the sameperiods for 2004.

 

*Benefitsand Expenses*

 
| ** **                                                                        | ** ** | **Three Months Ended June 30,** | ** ** | **$****Increase** | ** ** | **%****Increase** | ** ** |
|-----------------------------------------------------------------------------------|------------|---------------------------------|------------|-------------------|------------|-------------------|------------|
| ** **                                                                        | ** ** | **2005**                        | ** ** | **2004**          | ** ** | **(Decrease)**    | ** ** | **(Decrease)** | ** ** |
| **Benefits and expenses:**                                                        |       |                            |       |              |       |              |       |   |   |
| Interest credited and other benefits to  contractowners                           |       | $                               | 191.7      |              | $          | 177.6             |       | $ | 14.1 |   | 7.9 | % |
| Operating expenses                                                                |       | 105.8                           |       | 92.7              |       | 13.1              |       | 14.1 | % |
| Amortization of deferred policy acquisition  costs and value of business acquired |       | 44.1                            |       | 36.3              |       | 7.8               |       | 21.5 | % |
| Interest expense                                                                  |       | 0.2                             |       | 0.2               |       | —            |       | 0.0 | % |
| **Total benefits and expenses**                                                   |       | $                               | 341.8      |              | $          | 306.8             |       | $ | 35.0 |   | 11.4 | % |

 
| ** **                                                                        | ** ** | **Six Months Ended June 30,** | ** ** | **$****Increase** | ** ** | **%****Increase** | ** ** |
|-----------------------------------------------------------------------------------|------------|-------------------------------|------------|-------------------|------------|-------------------|------------|
| ** **                                                                        | ** ** | **2005**                      | ** ** | **2004**          | ** ** | **(Decrease)**    | ** ** | **(Decrease)** | ** ** |
| **Benefits and expenses:**                                                        |       |                          |       |              |       |              |       |   |   |
| Interest credited and other benefits to  contractowners                           |       | $                             | 379.4      |              | $          | 365.2             |       | $ | 14.2 |   | 3.9 | % |
| Operating expenses                                                                |       | 208.6                         |       | 186.8             |       | 21.8              |       | 11.7 | % |
| Amortization of deferred policy acquisition  costs and value of business acquired |       | 93.3                          |       | 74.2              |       | 19.1              |       | 25.7 | % |
| Interest expense                                                                  |       | 0.4                           |       | 0.3               |       | 0.1               |       | 33.3 | % |
| **Total benefits and expenses**                                                   |       | $                             | 681.7      |              | $          | 626.5             |       | $ | 55.2 |   | 8.8 | % |

 

*Interest credited and other benefits tocontractowners*for the three and six months ended June30, 2005 increased, primarily due to higher average fixed AUM. In addition, *Operating expenses* increased inconjunction with the overall growth of the business for the three and sixmonths ended June 30, 2005.  The increasewas primarily driven by increases in general expenses related to the overallgrowth of the business, as well as an increase in net commissions.  *Amortizationof DAC and VOBA*also**increasedfor the three and six months ended June 30, 2005, due to increased growth andprofitability of the business.

 

18

----

 

*Net Income and Taxes*

 
| ** **                 | ** ** | **Three Months Ended June 30,** | ** ** | **$****Increase** | ** ** | **%****Increase** | ** ** |
|----------------------------|------------|---------------------------------|------------|-------------------|------------|-------------------|------------|
| ** **                 | ** ** | **2005**                        | ** ** | **2004**          | ** ** | **(Decrease)**    | ** ** | **(Decrease)** | ** ** |
| Income before income taxes |       | $                               | 64.5       |              | $          | 54.7              |       | $ | 9.8 |   | 17.9 | % |
| Income tax expense         |       | 19.1                            |       | 17.0              |       | 2.1               |       | 12.4 | % |
| **Net income**             |       | $                               | 45.4       |              | $          | 37.7              |       | $ | 7.7 |   | 20.4 | % |
|                       |       |                            |       |              |       |              |       |   |   |
| Effective tax rate         |       | 29.6                            | %          | 31.1              | %          | NM                |       | -4.7 | % |

 
| ** **                 | ** ** | **Six Months Ended June 30,** | ** ** | **$****Increase** | ** ** | **%****Increase** | ** ** |
|----------------------------|------------|-------------------------------|------------|-------------------|------------|-------------------|------------|
| ** **                 | ** ** | **2005**                      | ** ** | **2004**          | ** ** | **(Decrease)**    | ** ** | **(Decrease)** | ** ** |
| Income before income taxes |       | $                             | 108.9      |              | $          | 119.1             |       | $ | (10.2 | ) | -8.6 | % |
| Income tax expense         |       | 31.7                          |       | 37.4              |       | (5.7              | )          | -15.2 | % |
| **Net income**             |       | $                             | 77.2       |              | $          | 81.7              |       | $ | (4.5 | ) | -5.5 | % |
|                       |       |                          |       |              |       |              |       |   |   |
| Effective tax rate         |       | 29.1                          | %          | 31.4              | %          | NM                |       | -7.3 | % |

 

NM - Not meaningful.

 

*Income tax expense*increasedfor the three months and decreased for the six months ended June 30, 2005,respectively, in conjunction with the overall change in pretax income for eachperiod and the dividends received deduction.

 

***FinancialCondition***

* *

***Investments***

* *

*InvestmentStrategy*

* *

The Company’s investment strategy for its general account investmentsinvolves diversification by asset class, and seeks to add economicdiversification and to reduce the risks of credit, liquidity, and embeddedoptions within certain investment products, such as convexity risk oncollateralized mortgage obligations and call options.  The investment management function iscentralized under ING Investment Management LLC (“IIM”), an affiliate of theCompany, pursuant to an investment advisory agreement.  Separate portfolios are established for eachgeneral type of product within the Company.

 

The Company’s use of derivatives is limited mainly to hedging purposesto reduce the Company’s exposure to cash flow variability of assets andliabilities, interest rate risk, and market risk. The Company does not seekhedge accounting treatment.

 

19

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*PortfolioComposition*

* *

The following table presents the investmentportfolio at June 30, 2005 and December 31, 2004.

 
| ** **                                      | ** ** | **2005**           | ** ** | **2004** | ** ** |
|-------------------------------------------------|------------|--------------------|------------|----------|------------|
| ** **                                      | ** ** | **Carrying Value** | ** ** | **%**    | ** ** | **Carrying Value** | ** ** | **%** | ** ** |
| Fixed maturities, including securities  pledged |       | $                  | 18,642.3   |     | 91.8       | % | $ | 18,425.6 |   | 92.1 | % |
| Equity securities                               |       | 164.0              |       | 0.8      | %          | 162.6 |   | 0.8 | % |
| Mortgage loans on real estate                   |       | 1,153.5            |       | 5.7      | %          | 1,090.2 |   | 5.5 | % |
| Policy loans                                    |       | 259.7              |       | 1.3      | %          | 262.7 |   | 1.3 | % |
| Other investments                               |       | 81.6               |       | 0.4      | %          | 57.0 |   | 0.3 | % |
|                                            |       | $                  | 20,301.1   |     | 100.0      | % | $ | 19,998.1 |   | 100.0 | % |

 

*FixedMaturities*

* *

Fixed maturities available-for-sale as ofJune 30, 2005, were as follows:

 
| ** **                                                  | ** ** | ** **    | ** ** | **Gross**      | ** ** | **Gross**      | ** ** | ** ** | ** ** |
|-------------------------------------------------------------|------------|---------------|------------|----------------|------------|----------------|------------|------------|------------|
| ** **                                                  | ** ** | **Amortized** | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Fair**   | ** ** |
| ** **                                                  | ** ** | **Cost**      | ** ** | **Gains**      | ** ** | **Losses**     | ** ** | **Value**  | ** ** |
| Fixed maturities:                                           |       |          |       |           |       |           |       |       |       |
| U.S. government and government agencies and  authorities    |       | $             | 247.3      |           | $          | 1.0            |       | $          | 0.1        |   | $ | 248.2 |   |
| States, municipalities, and political subdivisions          |       | 60.0          |       | 1.9            |       | 1.0            |       | 60.9       |       |
|                                                        |       |          |       |           |       |           |       |       |       |
| U.S. corporate securities:                                  |       |          |       |           |       |           |       |       |       |
| Public utilities                                            |       | 1,495.3       |       | 75.6           |       | 5.1            |       | 1,565.8    |       |
| Other corporate securities                                  |       | 6,645.0       |       | 291.9          |       | 34.8           |       | 6,902.1    |       |
| Total U.S. corporate securities                             |       | 8,140.3       |       | 367.5          |       | 39.9           |       | 8,467.9    |       |
|                                                        |       |          |       |           |       |           |       |       |       |
| Foreign securities:                                         |       |          |       |           |       |           |       |       |       |
| Government                                                  |       | 310.4         |       | 6.9            |       | 2.2            |       | 315.1      |       |
| Other                                                       |       | 638.6         |       | 30.8           |       | 3.3            |       | 666.1      |       |
| Total foreign securities                                    |       | 949.0         |       | 37.7           |       | 5.5            |       | 981.2      |       |
|                                                        |       |          |       |           |       |           |       |       |       |
| Residential mortgage-backed securities                      |       | 5,885.4       |       | 71.0           |       | 41.0           |       | 5,915.4    |       |
| Commercial mortgage-backed securities                       |       | 1,897.1       |       | 66.7           |       | 3.1            |       | 1,960.7    |       |
| Other asset-backed securities                               |       | 1,005.9       |       | 11.8           |       | 9.7            |       | 1,008.0    |       |
|                                                        |       |          |       |           |       |           |       |       |       |
| Total fixed maturities, including fixed maturities  pledged |       | 18,185.0      |       | 557.6          |       | 100.3          |       | 18,642.3   |       |
| Less: fixed maturities pledged                              |       | 1,252.5       |       | 14.6           |       | 2.2            |       | 1,264.9    |       |
|                                                        |       |          |       |           |       |           |       |       |       |
| Fixed maturities                                            |       | $             | 16,932.5   |           | $          | 543.0          |       | $          | 98.1       |   | $ | 17,377.4 |   |
|                                                             |            |               |            |                |            |                |            |            |            |  |  |  |  |  |

 

20

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Fixed maturities available-for-sale as ofDecember 31, 2004, were as follows:

 
| ** **                                                  | ** ** | ** **    | ** ** | **Gross**      | ** ** | **Gross**      | ** ** | ** ** | ** ** |
|-------------------------------------------------------------|------------|---------------|------------|----------------|------------|----------------|------------|------------|------------|
| ** **                                                  | ** ** | **Amortized** | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Fair**   | ** ** |
| ** **                                                  | ** ** | **Cost**      | ** ** | **Gains**      | ** ** | **Losses**     | ** ** | **Value**  | ** ** |
| Fixed maturities:                                           |       |          |       |           |       |           |       |       |       |
| U.S. government and government agencies and  authorities    |       | $             | 197.3      |           | $          | 0.9            |       | $          | 0.9        |   | $ | 197.3 |   |
| States, municipalities, and political subdivisions          |       | 32.1          |       | 0.2            |       | 0.9            |       | 31.4       |       |
|                                                        |       |          |       |           |       |           |       |       |       |
| U.S. corporate securities:                                  |       |          |       |           |       |           |       |       |       |
| Public utilities                                            |       | 1,207.6       |       | 50.0           |       | 5.0            |       | 1,252.6    |       |
| Other corporate securities                                  |       | 5,846.5       |       | 275.0          |       | 25.4           |       | 6,096.1    |       |
| Total U.S. corporate securities                             |       | 7,054.1       |       | 325.0          |       | 30.4           |       | 7,348.7    |       |
|                                                        |       |          |       |           |       |           |       |       |       |
| Foreign securities:                                         |       |          |       |           |       |           |       |       |       |
| Government                                                  |       | 660.2         |       | 33.9           |       | 3.1            |       | 691.0      |       |
| Other                                                       |       | 1,656.4       |       | 78.4           |       | 6.1            |       | 1,728.7    |       |
| Total foreign securities                                    |       | 2,316.6       |       | 112.3          |       | 9.2            |       | 2,419.7    |       |
|                                                        |       |          |       |           |       |           |       |       |       |
| Residential mortgage-backed securities                      |       | 5,497.6       |       | 65.6           |       | 58.2           |       | 5,505.0    |       |
| Commercial mortgage-backed securities                       |       | 1,491.2       |       | 73.2           |       | 4.4            |       | 1,560.0    |       |
| Other asset-backed securities                               |       | 1,354.6       |       | 22.6           |       | 13.7           |       | 1,363.5    |       |
|                                                        |       |          |       |           |       |           |       |       |       |
| Total fixed maturities, including fixed maturities  pledged |       | 17,943.5      |       | 599.8          |       | 117.7          |       | 18,425.6   |       |
| Less: fixed maturities pledged                              |       | 1,258.8       |       | 18.0           |       | 2.5            |       | 1,274.3    |       |
|                                                        |       |          |       |           |       |           |       |       |       |
| Fixed maturities                                            |       | $             | 16,684.7   |           | $          | 581.8          |       | $          | 115.2      |   | $ | 17,151.3 |   |
|                                                             |            |               |            |                |            |                |            |            |            |  |  |  |  |  |

 

It is management’s objective that theportfolio of fixed maturities be of high quality and be well diversified bymarket sector.  The fixed maturities inthe Company’s portfolio are generally rated by external rating agencies and, ifnot externally rated, are rated by the Company on a basis believed to besimilar to that used by the rating agencies. The average quality rating of the Company’s fixed maturities portfoliowas AA- at June 30, 2005 and December 31, 2004.  Ratings are calculated using a ratinghierarchy that considers S&P, Moody’s, and internal ratings.

 

21

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Total fixed maturities by quality ratingcategory, including fixed maturities pledged to creditors, were as follows atJune 30, 2005 and December 31, 2004:

 
| ** **  | ** ** | **2005**  | ** ** | **2004**    | ** ** |
|-------------|------------|-----------|------------|-------------|------------|
| ** **  | ** ** | **Fair**  | ** ** | **%****of** | ** ** | **Fair** | ** ** | **%****of** | ** ** |
| ** **  | ** ** | **Value** | ** ** | **Total**   | ** ** | **Value** | ** ** | **Total** | ** ** |
| AAA         |       | $         | 8,814.2    |        | 47.3       | % | $ | 8,675.4 |   | 47.1 | % |
| AA          |       | 1,022.7   |       | 5.5         | %          | 910.4 |   | 4.9 | % |
| A           |       | 3,770.6   |       | 20.2        | %          | 3,754.3 |   | 20.4 | % |
| BBB         |       | 4,304.0   |       | 23.1        | %          | 4,311.4 |   | 23.4 | % |
| BB          |       | 657.3     |       | 3.5         | %          | 698.9 |   | 3.8 | % |
| B and below |       | 73.5      |       | 0.4         | %          | 75.2 |   | 0.4 | % |
| Total       |       | $         | 18,642.3   |        | 100.0      | % | $ | 18,425.6 |   | 100.0 | % |

 

96.1% and 95.8% of fixed maturities wereinvested in securities rated BBB and above (Investment Grade) at June 30,2005 and December 31, 2004, respectively.

 

Fixed maturities rated BB and below (BelowInvestment Grade) may have speculative characteristics, and changes in economicconditions or other circumstances are more likely to lead to a weakenedcapacity of the issuer to make principal and interest payments than is the casewith higher rated fixed maturities.

 

Total fixed maturities by market sector,including fixed maturities pledged to creditors, were as follows atJune 30, 2005 and December 31, 2004:

 
| ** **                                 | ** ** | **2005**  | ** ** | **2004**    | ** ** |
|--------------------------------------------|------------|-----------|------------|-------------|------------|
| ** **                                 | ** ** | **Fair**  | ** ** | **%****of** | ** ** | **Fair** | ** ** | **%****of** | ** ** |
| ** **                                 | ** ** | **Value** | ** ** | **Total**   | ** ** | **Value** | ** ** | **Total** | ** ** |
| U.S. corporate, states, and municipalities |       | $         | 8,528.8    |        | 45.8       | % | $ | 7,380.1 |   | 40.1 | % |
| Residential mortgage-backed                |       | 5,915.4   |       | 31.7        | %          | 5,505.0 |   | 29.9 | % |
| Foreign (1)                                |       | 981.2     |       | 5.3         | %          | 2,419.7 |   | 13.1 | % |
| Commercial/multifamily mortgage-backed     |       | 1,960.7   |       | 10.5        | %          | 1,560.0 |   | 8.5 | % |
| Asset-backed                               |       | 1,008.0   |       | 5.4         | %          | 1,363.5 |   | 7.4 | % |
| U.S. treasuries/agencies                   |       | 248.2     |       | 1.3         | %          | 197.3 |   | 1.0 | % |
| Total                                      |       | $         | 18,642.3   |        | 100.0      | % | $ | 18,425.6 |   | 100.0 | % |

 

(1)           Primarily U.S. dollar denominated

 

The Company did not have any investments in asingle issuer, other than obligations of the U.S. government, with a carryingvalue in excess of 10% of the Company’s shareholder’s equity at June 30,2005.

 

*Mortgage Loans*

 

Mortgage loans, primarily commercial mortgageloans, totaled $1,153.5 at June 30, 2005 and $1,090.2 at December 31,2004.  These loans are reported atamortized cost, less impairment writedowns. If the value of any mortgage loan is determined to be impaired (i.e.,when it is probable that the Company will be unable to collect on all amountsdue according to the contractual terms of the loan agreement), the carryingvalue of the mortgage loan is reduced to either the present value of expectedcash

 

22

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flows, cash flows from the loan (discountedat the loan’s effective interest rate), or fair value of the collateral.  If the loan is in foreclosure, the carryingvalue is reduced to the fair value of the underlying collateral, net ofestimated costs to obtain and sell.  Thecarrying value of the impaired loans is reduced by establishing a permanentwrite down charged to realized loss.  AtJune 30, 2005 and December 31, 2004, the Company had no allowance formortgage loan credit losses.

 

## *UnrealizedLosses*

##  

Fixed maturities, includingsecurities pledged to creditors, comprise 91.8% and 92.1% of the Company’stotal investment portfolio at June 30, 2005 and December 31, 2004,respectively.  Unrealized losses relatedto fixed maturities are analyzed in detail in the following tables.

 

Unrealized losses in fixedmaturities, including securities pledged to creditors, for Investment Grade (“IG”)and Below Investment Grade (“BIG”) securities by duration were as follows atJune 30, 2005 and December 31, 2004:

 
| ** **                                                             | ** ** | **2005**   | ** ** | **2004**        | ** ** |
|------------------------------------------------------------------------|------------|------------|------------|-----------------|------------|
| ** **                                                             | ** ** | ** ** | ** ** | **%****of  IG** | ** ** | ** ** | ** ** | **%****of  IG** | ** ** | ** ** | ** ** | **%****of  IG** | ** ** | ** ** | ** ** | **%****of  IG** | ** ** |
| ** **                                                             | ** ** | **IG**     | ** ** | **and BIG**     | ** ** | **BIG** | ** ** | **and BIG** | ** ** | **IG** | ** ** | **and BIG** | ** ** | **BIG** | ** ** | **and BIG** | ** ** |
| Less than six months below amortized cost                              |       | $          | 20.9       |            | 20.8       | % | $ | 1.5 |   | 1.5 | % | $ | 37.3 |   | 31.7 | % | $ | 0.5 |   | 0.4 | % |
| More than six months and less than twelve  months below amortized cost |       | 20.2       |       | 20.1            | %          | 0.8 |   | 0.8 | % | 33.1 |   | 28.1 | % | 1.6 |   | 1.4 | % |
| More than twelve months below amortized  cost                          |       | 55.9       |       | 55.8            | %          | 1.0 |   | 1.0 | % | 44.4 |   | 37.7 | % | 0.8 |   | 0.7 | % |
| Total unrealized loss                                                  |       | $          | 97.0       |            | 96.7       | % | $ | 3.3 |   | 3.3 | % | $ | 114.8 |   | 97.5 | % | $ | 2.9 |   | 2.5 | % |

 

Unrealized losses at June 30, 2005, wereprimarily related to interest rate movement or spread widening for other thancredit-related reasons and to asset-backed securities.  Asset-backed securities include U.S.government backed securities, principal protected securities, and structuredsecurities, which did not have an adverse change in cash flows. The followingtable summarizes the unrealized losses by duration and reason, along with thecarrying amount of securities in unrealized loss positions at June 30,2005:

 
| ** **                       | ** ** | ** **     | ** ** | **More than**     | ** ** | ** **        | ** ** |
|----------------------------------|------------|----------------|------------|-------------------|------------|-------------------|------------|
| ** **                       | ** ** | ** **     | ** ** | **Six Months**    | ** ** | ** **        | ** ** |
| ** **                       | ** ** | **Less than**  | ** ** | **and less than** | ** ** | **More than**     | ** ** |
| ** **                       | ** ** | **Six Months** | ** ** | **Twelve Months** | ** ** | **Twelve Months** | ** ** |
| Interest rate or spread widening |       | $              | 7.8        |              | $          | 12.8              |       | $ | 25.4 |   |
| Asset-backed securities          |       | 14.6           |       | 8.2               |       | 31.5              |       |
| Total unrealized loss            |       | $              | 22.4       |              | $          | 21.0              |       | $ | 56.9 |   |
| Carrying amount                  |       | $              | 2,814.8    |              | $          | 1,856.6           |       | $ | 1,939.1 |   |
|                                  |            |                |            |                   |            |                   |            |  |  |  |  |

 

23

----

 

Unrealized losses in fixed maturities, including securities pledged tocreditors, by market sector and duration were as follows at June 30, 2005:

 
| ** **                                                             | ** ** | ** **    | ** ** | ** **      | ** ** | **Commercial/**  | ** ** | ** **  | ** ** | ** **      | ** ** | ** ** | ** ** | ** ** | ** ** |
|------------------------------------------------------------------------|------------|---------------|------------|-----------------|------------|------------------|------------|-------------|------------|-----------------|------------|------------|------------|------------|------------|
| ** **                                                             | ** ** | ** **    | ** ** | **Residential** | ** ** | **Multi-family** | ** ** | ** **  | ** ** | **U.S.**        | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                             | ** ** | **U.S.**      | ** ** | **Mortgage-**   | ** ** | **Mortgage-**    | ** ** | ** **  | ** ** | **Treasuries/** | ** ** | **Asset-** | ** ** | ** ** | ** ** |
| ** **                                                             | ** ** | **Corporate** | ** ** | **Backed**      | ** ** | **Backed**       | ** ** | **Foreign** | ** ** | **Agencies**    | ** ** | **Backed** | ** ** | **Total**  | ** ** |
| Less than six  months below amortized cost                             |       | $             | 6.3        |            | $          | 13.7             |       | $           | 0.4        |            | $          | 1.5        |       | $          | —     |   | $ | 0.5 |   | $ | 22.4 |   |
| More than six  months and less than twelve months below amortized cost |       | 10.9          |       | 5.4             |       | 0.8              |       | 1.9         |       | —          |       | 2.0        |       | 21.0       |       |
| More than twelve  months below amortized cost                          |       | 23.8          |       | 21.9            |       | 1.9              |       | 2.1         |       | —          |       | 7.2        |       | 56.9       |       |
| Total unrealized  loss                                                 |       | $             | 41.0       |            | $          | 41.0             |       | $           | 3.1        |            | $          | 5.5        |       | $          | —     |   | $ | 9.7 |   | $ | 100.3 |   |

 

*Other-Than-TemporaryImpairments*

* *

The Company analyzes the general accountinvestments to determine whether there has been an other-than-temporary declinein fair value below the amortized cost basis. Management considers the length of time and the extent to which the fairvalue has been less than amortized cost; the financial condition and near-termprospects of the issuer; future economic conditions and market forecasts; andthe Company’s intent and ability to retain the investment in the issuer for aperiod of time sufficient to allow for recovery in market value.  If it is probable that all amounts dueaccording to the contractual terms of an investment will not be collected, another-than-temporary impairment is considered to have occurred.

 

In addition, the Company invests in otherasset-backed securities.  Determinationof the required impairment is based on credit risk and the possibility ofsignificant prepayment risk that restricts the Company’s ability to recover theinvestment.  An impairment is recognizedif the fair value of the security is less than book value and there has been anadverse change in cash flow since the last remeasurement date.

 

When a decline in fair value is determined tobe other-than-temporary, the individual security is written down to fair valueand the loss is accounted for as a realized loss.

 

The following table identifies the Company’sother-than-temporary impairments by type for the three and six months endedJune 30, 2005 and 2004:

 
| ** **                  | ** ** | **Three Months Ended June 30,** | ** ** |
|-----------------------------|------------|---------------------------------|------------|
| ** **                  | ** ** | **2005**                        | ** ** | **2004** | ** ** |
| ** **                  | ** ** | ** **                      | ** ** | **No. of** | ** ** | ** ** | ** ** | **No. of** | ** ** |
| ** **                  | ** ** | **Impairment**                  | ** ** | **Securities** | ** ** | **Impairment** | ** ** | **Securities** | ** ** |
| Residential mortgage-backed |       | $                               | 7.6        |   | 52 |   | $ | 1.3 |   | 8 |   |
| Total                       |       | $                               | 7.6        |   | 52 |   | $ | 1.3 |   | 8 |   |

 

24

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| ** **                  | ** ** | **Six Months Ended June 30,** | ** ** |
|-----------------------------|------------|-------------------------------|------------|
| ** **                  | ** ** | **2005**                      | ** ** | **2004** | ** ** |
| ** **                  | ** ** | ** **                    | ** ** | **No. of** | ** ** | ** ** | ** ** | **No. of** | ** ** |
| ** **                  | ** ** | **Impairment**                | ** ** | **Securities** | ** ** | **Impairment** | ** ** | **Securities** | ** ** |
| Residential mortgage-backed |       | $                             | 33.8       |   | 74 |   | $ | 6.4 |   | 36 |   |
| Total                       |       | $                             | 33.8       |   | 74 |   | $ | 6.4 |   | 36 |   |

 

*Net Realized CapitalGains and Losses*

 

Net realized capital gains (losses) arecomprised of the difference between the carrying value of investments andproceeds from sale, maturity, and redemption, as well as losses incurred due toother-than-temporary impairment of investments. Net realized capital gains (losses) on investments were as follows:

 
| ** **                                     | ** ** | **Three Months Ended June 30,** | ** ** |
|------------------------------------------------|------------|---------------------------------|------------|
| ** **                                     | ** ** | **2005**                        | ** ** | **2004** | ** ** |
| Fixed maturities                               |       | $                               | 8.3        |   | $ | (23.0 | ) |
| Equity securities                              |       | 1.7                             |       | 1.9 |   |
| Derivatives                                    |       | (4.8                            | )          | 17.7 |   |
| Other                                          |       | —                          |       | 0.8 |   |
| Pretax net realized capital gains (losses)     |       | $                               | 5.2        |   | $ | (2.6 | ) |
| After-tax net realized capital gains  (losses) |       | $                               | 3.4        |   | $ | (1.7 | ) |

 
| ** **                           | ** ** | **Six Months Ended June 30,** | ** ** |
|--------------------------------------|------------|-------------------------------|------------|
| ** **                           | ** ** | **2005**                      | ** ** | **2004** | ** ** |
| Fixed maturities                     |       | $                             | (5.2       | ) | $ | (5.4 | ) |
| Equity securities                    |       | 1.7                           |       | 1.9 |   |
| Derivatives                          |       | 5.4                           |       | 18.0 |   |
| Other                                |       | —                        |       | 1.4 |   |
| Pretax net realized capital gains    |       | $                             | 1.9        |   | $ | 15.9 |   |
| After-tax net realized capital gains |       | $                             | 1.2        |   | $ | 10.3 |   |

 

Net realized capital gains allocated toexperience-rated contracts of $18.4 and $14.1 for the three months endedJune 30, 2005 and 2004, respectively, and $13.8 and $48.7 for the sixmonths ended June 30, 2005 and 2004, respectively, were deducted from netrealized capital gains (losses), and an offsetting amount was reflected infuture policy benefits and claim reserves on the Condensed Consolidated BalanceSheets.  Net unamortized realized gainsallocated to experience-rated contractowners were $239.4 and $233.4 atJune 30, 2005 and December 31, 2004, respectively.

 

***Liquidity andCapital Resources***

* *

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

 

25

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*Sourcesand Uses of Liquidity*

* *

The Company’s principal sources of liquidityare product charges, investment income, proceeds from the maturing and sale ofinvestments, and capital contributions. Primary uses of these funds arepayments of commissions and operating expenses, interest and premium credits,investment purchases, and contract maturities, withdrawals, and surrenders.

 

The Company’s liquidity position is managedby maintaining adequate levels of liquid assets, such as cash or cashequivalents and short-term investments. Asset/liability management is integrated into many aspects of theCompany’s operations, including investment decisions, product development, anddetermination of crediting rates.  Aspart of the risk management process, different economic scenarios are modeled,including cash flow testing required for insurance regulatory purposes, todetermine that existing assets are adequate to meet projected liability cashflows.  Key variables in the modelingprocess include interest rates, anticipated contractowner behavior, andvariable separate account performance. Contractowners bear the investment risk related to variable annuityproducts, subject, in limited cases, to certain minimum guaranteed rates.

 

The fixed account liabilities are supportedby a general account portfolio principally composed of fixed rate investmentswith matching duration characteristics that can generate predictable, steadyrates of return.  The portfoliomanagement strategy for the fixed account considers the assetsavailable-for-sale.  This strategyenables the Company to respond to changes in market interest rates, prepaymentrisk, relative values of asset sectors and individual securities and loans,credit quality outlook, and other relevant factors.  The objective of portfolio management is tomaximize returns, taking into account interest rate and credit risk, as well asother risks.  The Company’sasset/liability management discipline includes strategies to minimize exposureto loss as interest rates and economic and market conditions change.

 

Additional sources of liquidity includeborrowing facilities to meet short-term cash requirements that arise in theordinary course of business. ILIAC maintains a reciprocal loan agreement withING America Insurance Holdings, Inc. (“ING AIH”), an affiliate, whereby eitherparty can borrow from the other up to 3% of ILIAC’s statutory admitted assetsas of the prior December 31.  TheCompany had $39.0 and $25.0 receivable from ING AIH under the reciprocal loanagreement as of June 30, 2005 and December 31, 2004,respectively.  ILIAC also maintains a$125.0 uncommitted revolving note facility with SunTrust Bank and a $100.0uncommitted, perpetual revolving note facility with the Bank of New York.  At June 30, 2005, the Company had $97.0outstanding under the revolving note facility with SunTrust Bank, which wasrepaid on July 1, 2005, and no amounts outstanding as of December 31,2004.  Management believes that thesesources of liquidity are adequate to meet the Company’s short-term cashobligations.

 

*CapitalContributions and Dividends*

* *

ILIAC hasentered into agreements with ING Insurance Company of America (“IICA”), underwhich ILIAC has agreed to cause IICA to have sufficient capital to 

 

26

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meet certaincapital and surplus levels. ILIAC did not make capital contributions to IICAduring the six month periods ended June 30, 2005 and 2004.

 

ILIAC did not pay dividends to its parent orreceive capital contributions from its parent during the six month periodsended June 30, 2005 and 2004.

 

**Recently Adopted Accounting Standards**

 

(See the Recently Adopted AccountingStandards Footnote to the condensed consolidated financial statements forfurther information.)

 

**Legislative Initiatives**

 

Legislative proposals which have been or arebeing considered by Congress include repealing the estate tax, reducing thetaxation on annuity benefits, changing the tax treatment of non-insurancefinancial products relative to insurance products, and changing life insurancecompany taxation.  Some of theseproposals, if enacted, could have a material effect on life insurance, annuity,and other retirement savings product sales. The President has also established an advisory panel to study reform ofthe Internal Revenue Code.  The panel isscheduled to report its findings and make recommendations to the Secretary ofTreasury by the end of September 2005. The recommendations of this panel, if enacted by Congress, could affectthe tax treatment of life insurance companies and products.  Legislation to restructure the SocialSecurity System and expand private pension plan incentives also may beconsidered.  Prospects for enactment andthe ultimate effect of these proposals are uncertain.

 

**Item4.**          Controlsand Procedures

 

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

 

b)             There has not been anychange in the internal controls over financial reporting of the Company thatoccurred during the period covered by this report that has materially affectedor is reasonably likely to materially affect these internal controls.

 

27

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**PART II.**            OTHER INFORMATION

 

**Item 1.**          Legal Proceedings

 

The Company is a party to threatened orpending lawsuits/arbitrations arising from the normal conduct of business.  Due to the climate in insurance and businesslitigation/arbitration, suits against the Company sometimes include claims forsubstantial compensatory, consequential or punitive damages and other types ofrelief.  Moreover, certain claims areasserted as class actions, purporting to represent a group of similarlysituated individuals. While it is not possible to forecast the outcome of suchlawsuits/arbitrations, in light of existing insurance, reinsurance andestablished reserves, it is the opinion of management that the disposition ofsuch lawsuits/arbitrations will not have a materially adverse effect on theCompany’s operations or financial position.

 

As with many financial services companies,the Company and its affiliates have received informal and formal requests forinformation from various state and federal governmental agencies andself-regulatory organizations in connection with inquiries and investigationsof the products and practices of the financial services industry.  In each case, the Company and its affiliateshave been and are providing full cooperation. This discussion should be read in conjunction with the “Other RegulatoryMatters” section of “Management’s Narrative Analysis of the Results ofOperations and Financial Condition” included in the Company’s 2004 Form 10-KAnnual Report.

 

**Item 6.**    Exhibits

 

3.(i)                            Certificateof Incorporation as amended and restated January 1, 2002, incorporated byreference to the ILIAC Form 10-K, as filed with the SEC on March 28, 2002(File No. 33-23376).

 

3.(ii)                         Amendedand Restated ING Life Insurance and Annuity Company By-Laws, effective January1, 2005, incorporated by reference to the ILIAC Form 10-Q, as filed with theSEC on May 13, 2005 (File No. 033-23376).

 

4.(a)                         InstrumentsDefining the Rights of Security Holders, Including Indentures (AnnuityContracts)

 

Incorporatedby reference to Post-Effective Amendment No. 14 to Registration Statement onForm N-4 (File No. 33-75964), as filed on July 29, 1997.

 

Incorporatedby reference to Post-Effective Amendment No. 6 to Registration Statement onForm N-4 (File No. 33-75980), as filed on February 12, 1997.

 

Incorporatedby reference to Post-Effective Amendment No. 12 to Registration Statement onForm N-4 (File No. 33-75964), as filed on February 11, 1997.

 

Incorporatedby reference to Post-Effective Amendment No. 5 to Registration Statement onForm N-4 (File No. 33-75986), as filed on April 12, 1996.

 

28

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Incorporatedby reference to Post-Effective Amendment No. 12 to Registration Statement onForm N-4 (File No. 333-01107), as filed on February 4, 1999.

 

Incorporatedby reference to Post-Effective Amendment No. 4 to Registration Statement onForm N-4 (File No. 33-75988), as filed on April 15, 1996.

 

Incorporatedby reference to Post-Effective Amendment No. 3 to Registration Statement onForm N-4 (File No. 33-81216), as filed on April 17, 1996.

 

Incorporatedby reference to Post-Effective Amendment No. 3 to Registration Statement onForm N-4 (File No. 33-91846), as filed on April 15, 1996.

 

Incorporatedby reference to Post-Effective Amendment No. 6 to Registration Statement onForm N-4 (File No. 33-91846), as filed on August 6, 1996.

 

Incorporatedby reference to Registration Statement on Form N-4 (File No. 333-01107), asfiled on February 21, 1996.

 

Incorporatedby reference to Post-Effective Amendment No. 12 to Registration Statement onForm N-4 (File No. 33-75982), as filed on February 20, 1997.

 

Incorporatedby reference to Post-Effective Amendment No. 7 to Registration Statement onForm N-4 (File No. 33-75992), as filed on February 13, 1997.

 

Incorporatedby reference to Post-Effective Amendment No. 6 to Registration Statement onForm N-4 (File No. 33-75974), as filed on February 28, 1997.

 

Incorporatedby reference to Post-Effective Amendment No. 6 to Registration Statement onForm N-4 (File No. 33-75962), as filed on April 17, 1996.

 

Incorporatedby reference to Post-Effective Amendment No. 14 to Registration Statement onForm N-4 (File No. 33-75962), as filed on April 17, 1998.

 

Incorporatedby reference to Post-Effective Amendment No. 6 to Registration Statement onForm N-4 (File No. 33-75982), as filed on April 22, 1996.

 

Incorporatedby reference to Post-Effective Amendment No. 8 to Registration Statement onForm N-4 (File No. 33-75980), as filed on August 19, 1997.

 

Incorporatedby reference to Registration Statement on Form N-4 (File No. 333-56297), asfiled on June 8, 1998.

 

Incorporatedby reference to Post-Effective Amendment No. 3 to Registration Statement onForm N-4 (File No. 33-79122), as filed on August 16, 1995.

 

Incorporatedby reference to Post-Effective Amendment No. 32 to Registration Statement onForm N-4 (File No. 33-34370), as filed on December 16, 1997.

 

Incorporatedby reference to Post-Effective Amendment No. 30 to Registration Statement onForm N-4 (File No. 33-34370), as filed on September 29, 1997.

 

29

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Incorporatedby reference to Post-Effective Amendment No. 26 to Registration Statement onForm N-4 (File No. 33-34370), as filed on February 21, 1997.

 

Incorporatedby reference to Post-Effective Amendment No. 35 to Registration Statement onForm N-4 (File No. 33-34370), as filed on April 17, 1998.

 

Incorporatedby reference to Post-Effective Amendment No. 1 to Registration Statement onForm N-4 (File No. 33-87932), as filed on September 19, 1995.

 

Incorporatedby reference to Post-Effective Amendment No. 8 to Registration Statement onForm N-4 (File No. 33-79122), as filed on April 17, 1998.

 

Incorporatedby reference to Post-Effective Amendment No. 7 to Registration Statement onForm N-4 (File No. 33-79122), as filed on April 22, 1997.

 

Incorporatedby reference to Post-Effective Amendment No. 21 to Registration Statement onForm N-4 (File No. 33-75996), as filed on February 16, 2000.

 

Incorporated byreference to Post-Effective Amendment No. 13 to Registration Statement on FormN-4 (File No. 333-01107), as filed on April 7, 1999.

 

Incorporatedby reference to Post-Effective Amendment No. 37 to Registration Statement onForm N-4 (File No. 33-34370), as filed on April 9, 1999.

 

Incorporatedby reference to Post-Effective Amendment No. 1 to Registration Statement onForm N-4 (File No. 333-87305), as filed on December 13, 1999.

 

Incorporatedby reference to Post-Effective Amendment No. 18 to Registration Statement onForm N-4 (File No. 33-56297), as filed on August 30, 2000.

 

Incorporatedby reference to Post-Effective Amendment No.17 to Registration Statement onForm N-4 (File No. 33-75996), as filed on April 7, 1999.

 

Incorporatedby reference to Post-Effective Amendment No. 19 to Registration Statement onFrom N-4 (File No. 333-01107), as filed on February 16, 2000.

 

Incorporatedby reference to the Registration Statement on Form S-2 (File No. 33- 64331), asfiled on November 16, 1995.

 

Incorporatedby reference to Pre-Effective Amendment No. 2 to the Registration Statement onForm S-2 (File No. 33-64331), as filed on January 17, 1996.

 

Incorporatedby reference to Post-Effective Amendment No. 30 to Registration Statement onForm N-4 (File No. 33-75988), as filed on December 30, 2003

 

Incorporatedby reference to Post-Effective Amendment No. 18 to Registration Statement onForm N-4 (File No. 33-75980), as filed on April 16, 2003.

 

30

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Incorporatedby reference to Post-Effective Amendment No. 30 to Registration Statement onForm N-4 (File No. 333-01107), as filed on April 10, 2002.

 

Incorporatedby reference to Post-Effective Amendment No. 24 to Registration Statement onForm N-4 (File No. 33-81216), as filed on April 11, 2003.

 

Incorporatedby reference to Registration Statement on Form N-4 (File No. 333-109860), asfiled on October 21, 2003.

 

Incorporatedby reference to Post-Effective Amendment No. 39 to Registration Statement onForm N-4 (File No. 33-75962), as filed on December 17, 2004.

 

31.1                           Certificateof David A. Wheat pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

31.2                           Certificateof Brian D. Comer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

32.1                           Certificateof David A. Wheat pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

32.2                           Certificateof Brian D. Comer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

31

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**SIGNATURES**

 

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

 

 
|            | ING LIFE INSURANCE AND ANNUITY COMPANY |   |
|-----------------|----------------------------------------|--------|
|            | (Registrant)                           |   |
|            |                                   |
|            |                                   |
|            | By                                     |   | /s/ David A. Wheat |
|            |                                   |   | David A. Wheat |
|            |                                   |   | Director, Executive Vice President and  Chief Financial Officer |
| August 11, 2005 |                                   |   |   | (Duly Authorized Officer and Principal Financial Officer) |
| (Date)          |                                   |   |
|                 |                                        |        |  |  |  |

 

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