UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2005
--------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________ to
Commission file number 333-57212, 333-104539, 333-104546, 333-104547,
333-104548, and 333-123936
ING USA Annuity and Life Insurance Company
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Iowa 41-0991508
- --------------------------------------------------------------------------------
(State or other jurisdiction of (IRS employer
incorporation or organization identification no.)
1475 Dunwoody Drive, West Chester, Pennsylvania 19380-1478
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (610) 425-3400
--------------
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ X ] No [ ]
--------------
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [ X ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: As of May 12, 2005, 250,000
shares of Common Stock, $10 Par Value, are authorized, issued, and outstanding,
all of which were directly owned by Lion Connecticut Holdings Inc.
NOTE: WHEREAS ING USA ANNUITY AND LIFE INSURANCE COMPANY MEETS THE CONDITIONS
SET FORTH IN GENERAL INSTRUCTION H(1)(a) AND (b) OF FORM 10-Q, THIS FORM IS
BEING FILED WITH THE REDUCED DISCLOSURE FORMAT PURSUANT TO GENERAL INSTRUCTION
H(2).
1
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Form 10-Q for period ended March 31, 2005
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION (Unaudited)
Item 1. Financial Statements:
Condensed Statements of Operations 3
Condensed Balance Sheets 4
Condensed Statements of Changes in Shareholder's Equity 6
Condensed Statements of Cash Flows 7
Notes to Condensed Financial Statements 8
Item 2. Management's Narrative Analysis of the Results of Operations
and Financial Condition 16
Item 4. Controls and Procedures 30
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 31
Item 6. Exhibits 31
Signatures 35
2
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
PART I. FINANCIAL INFORMATION (UNAUDITED)
Item 1. Financial Statements
Condensed Statements of Operations
(Unaudited)
(In millions)
Three months ended March 31,
2005 2004
----------------- -----------------
Revenue:
Net investment income $ 285.1 $ 283.7
Fee income 167.5 126.6
Premiums 5.5 4.7
Net realized capital gains 8.8 15.3
Other income - 2.2
----------------- -----------------
Total revenue 466.9 432.5
----------------- -----------------
Benefits and expenses:
Interest credited and other benefits to contractowners 264.4 285.5
Operating expenses 47.4 41.5
Amortization of deferred policy acquisition costs
and value of business acquired 104.5 69.2
Interest expense 11.7 3.7
Other 0.5 0.6
----------------- -----------------
Total benefits and expenses 428.5 400.5
----------------- -----------------
Income before income taxes and cumulative effect
of change in accounting principle 38.4 32.0
Income tax expense 12.2 9.8
----------------- -----------------
Income before cumulative effect of change
in accounting principle 26.2 22.2
Cumulative effect of change in accounting
principle, net of tax - (1.0)
----------------- -----------------
Net income $ 26.2 $ 21.2
================= =================
The accompanying notes are an integral part of these financial statements.
3
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Condensed Balance Sheets
(In millions, except share data)
As of As of
March 31, December 31,
2005 2004
----------------- -----------------
(Unaudited)
Assets
Investments:
Fixed maturities, available-for-sale, at fair value (amortized cost of
$17,412.2 at 2005 and $17,045.9 at 2004) $ 17,570.9 $ 17,489.2
Equity securities, available-for-sale, at fair value
(cost of $34.3 at 2005 and $34.8 at 2004) 34.8 35.3
Mortgage loans on real estate 3,894.6 3,851.8
Policy loans 169.2 169.0
Other investments 212.0 228.8
Securities pledged (amortized cost of $1,417.3 at 2005 and $1,100.5 at 2004) 1,410.1 1,108.6
----------------- -----------------
Total investments 23,291.6 22,882.7
Cash and cash equivalents 67.0 209.0
Short-term investments under securities loan agreement 671.1 402.8
Accrued investment income 214.6 205.8
Receivable for securities sold 30.5 38.9
Reinsurance recoverable 880.6 1,388.1
Deferred policy acquisition costs 1,892.5 1,704.1
Value of business acquired 128.1 112.2
Sales inducements to contractowners 527.8 514.6
Due from affiliates 19.0 184.3
Deferred income taxes 23.7 -
Other assets 28.0 28.4
Assets held in separate accounts 25,232.9 24,746.7
----------------- -----------------
Total assets $ 53,007.4 $ 52,417.6
================= =================
The accompanying notes are an integral part of these financial statements.
4
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Condensed Balance Sheets
(In millions, except share data)
As of As of
March 31, December 31,
2005 2004
----------------- ----------------
(Unaudited)
Liabilities and Shareholder's Equity
Future policy benefits and claims reserves $ 22,596.5 $ 22,961.0
Notes to affiliates 435.0 435.0
Notes payable 18.1 -
Due to affiliates 0.1 43.6
Payables for securities purchased 246.7 35.9
Payables under securities loan agreement 671.1 402.8
Borrowed money 759.5 713.4
Current income taxes 15.7 15.7
Deferred income taxes - 12.6
Other liabilities 314.4 276.4
Liabilities related to separate accounts 25,232.9 24,746.7
----------------- ----------------
Total liabilities 50,290.0 49,643.1
----------------- ----------------
Shareholder's equity
Common stock (250,000 shares authorized, issued and outstanding;
$10.00 per share value) 2.5 2.5
Additional paid-in capital 4,041.7 4,041.1
Accumulated other comprehensive income 28.8 112.7
Retained earnings (deficit) (1,355.6) (1,381.8)
----------------- ----------------
Total shareholder's equity 2,717.4 2,774.5
----------------- ----------------
Total liabilities and shareholder's equity $ 53,007.4 $ 52,417.6
================= ================
The accompanying notes are an integral part of these financial statements.
5
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Condensed Statements of Changes in Shareholder's Equity
(Unaudited)
(In millions)
Accumulated
Additional Other Retained Total
Common Paid-In Comprehensive Earnings Shareholder's
Stock Capital Income (Deficit) Equity
------------- --------------- ---------------- -------------- ----------------
Balance at December 31, 2003 $ 2.5 $ 3,811.1 $ 188.1 $ (1,473.7) $ 2,528.0
Comprehensive income:
Net income - - - 21.2 21.2
Other comprehensive income
net of tax:
Net unrealized gain on
securities ($164.7 pretax) - - 112.7 - 112.7
----------------
Total comprehensive income 133.9
------------- --------------- ---------------- -------------- ----------------
Balance at March 31, 2004 $ 2.5 $ 3,811.1 $ 300.8 $ (1,452.5) $ 2,661.9
============= =============== ================ ============== ================
Balance at December 31, 2004 $ 2.5 $ 4,041.1 $ 112.7 $ (1,381.8) $ 2,774.5
Comprehensive loss:
Net income - - - 26.2 26.2
Other comprehensive loss
net of tax:
Net unrealized loss on
securities (($132.3) pretax) - - (83.9) - (83.9)
----------------
Total comprehensive loss (57.7)
----------------
Employee share-based payments - 0.6 - - 0.6
------------- --------------- ---------------- -------------- ----------------
Balance at March 31, 2005 $ 2.5 $ 4,041.7 $ 28.8 $ (1,355.6) $ 2,717.4
============= =============== ================ ============== ================
The accompanying notes are an integral part of these financial statements.
6
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Condensed Statements of Cash Flows
(Unaudited)
(In millions)
Three months ended March 31,
2005 2004
----------------- -----------------
(Restated)
Net cash provided by operating activities $ 613.6 $ 343.0
Cash Flows from Investing Activities:
Proceeds from the sale, maturity, or redemption of:
Fixed maturities, available-for-sale 3,262.7 4,919.8
Equity securities, available-for-sale 0.6 68.9
Mortgage loans on real estate 68.5 66.0
Acquisition of:
Fixed maturities, available-for-sale (3,976.1) (5,381.5)
Equity securities, available-for-sale - (3.8)
Mortgage loans on real estate (111.8) (154.1)
Other investments 9.2 (26.5)
Short-term investments 5.9 (9.7)
Other, net 2.8 3.7
----------------- -----------------
Net cash used in investing activities (738.2) (517.2)
----------------- -----------------
Cash Flows from Financing Activities:
Deposits received for investment contracts 486.4 527.8
Maturities and withdrawals from investment contracts (1,075.5) (475.0)
Reinsurance recoverable on investment contracts 507.5 (0.8)
Short-term loans 64.2 225.2
----------------- -----------------
Net cash (used in) provided by financing activities (17.4) 277.2
----------------- -----------------
Net (decrease) increase in cash and cash equivalents (142.0) 103.0
Cash and cash equivalents, beginning of period 209.0 65.1
----------------- -----------------
Cash and cash equivalents, end of period $ 67.0 $ 168.1
================= =================
The accompanying notes are an integral part of these financial statements.
7
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Condensed Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
- --------------------------------------------------------------------------------
1. Organization and Significant Accounting Policies
Basis of Presentation
ING USA Annuity and Life Insurance Company ("ING USA" or the "Company" as
appropriate), a wholly-owned subsidiary of Lion Connecticut Holdings Inc.
("Lion" or "Parent"), is a stock life insurance company organized under the
laws of the State of Iowa.
Lion is an indirect, wholly-owned subsidiary of ING Groep N.V. ("ING"), a
global financial services holding company based in The Netherlands, with
American Depository Shares listed on the New York Stock Exchange under the
symbol "ING". ING USA is authorized to conduct its insurance business in
the District of Columbia and all states except New York. ING USA was
domiciled as a life insurance company under the laws of the State of
Delaware until December 31, 2003 and has been domiciled as such in Iowa
since January 1, 2004.
On January 1, 2004, the Company simultaneously redomesticated from Delaware
to Iowa, changed its name from Golden American Life Insurance Company to
ING USA Annuity and Life Insurance Company, and merged the following
affiliates into the Company: Equitable Life Insurance Company of Iowa
("Equitable Life"), USG Annuity & Life Company ("USG"), and United Life &
Annuity Insurance Company ("ULA"). Prior to the merger date, ING USA was a
wholly-owned subsidiary of Equitable Life.
The condensed financial statements and notes as of March 31, 2005 and
December 31, 2004 and for the three month periods ended March 31, 2005 and
2004 ("interim periods") have been prepared in accordance with generally
accepted accounting principles in the United States and are unaudited.
The condensed financial statements reflect all adjustments (consisting only
of normal, recurring accruals) which are, in the opinion of management,
necessary for the fair presentation of the financial position, results of
operations and cash flows for the interim periods. These condensed
financial statements and notes should be read in conjunction with the
financial statements and related notes as presented in the Company's 2004
Annual Report on Form 10-K. The results of operations for the interim
periods may not be considered indicative of results to be expected for the
full year.
8
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Condensed Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
- --------------------------------------------------------------------------------
Description of Business
The Company offers various insurance products including immediate and
deferred variable and fixed annuities. The Company also offers guaranteed
investment contracts ("GICs") and funding agreements marketed by direct
sale by home office personnel or through specialty insurance brokers.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to
make estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could differ
from reported results using those estimates.
Reclassifications
Certain reclassifications have been made to prior period financial
information to conform to the current period classifications (see footnote
9).
Significant Accounting Policies
For a description of significant accounting policies, see Note 1 to the
Financial Statements included in the Company's 2004 Annual Report on Form
10-K.
2. Recently Adopted Accounting Standards
Share-Based Payment
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("FAS") No. 123 (revised 2004),
"Share-Based Payment" ("FAS 123R"), which requires all share-based payments
to employees be recognized in the financial statements based upon the fair
value. As a result of Securities and Exchange Commission ("SEC") Release
No. 33-8568: Amendment to Rule 4-01(a) of Regulation S-X Regarding the
Compliance Date for Statement of Financial Accounting Standards No. 123
(Revised 2004), "Share-Based Payment", adopted on April 14, 2005, FAS 123R
is effective at the beginning of the first 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 on January 1, 2005,
using the modified-prospective method. Under the modified-prospective
method, compensation cost recognized in the first three months of 2005
includes: (a) compensation cost for all share-based payments granted prior
to, but not yet vested as of January 1, 2005, based on the grant date fair
9
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Condensed Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
- --------------------------------------------------------------------------------
value estimated in accordance with the original provisions of FASB
Statement No. 123, "Accounting for Stock-Based Compensation" ("FAS 123"),
and (b) compensation cost for all share-based payments granted subsequent
to January 1, 2005, based on the grant-date fair value in accordance with
the provisions of FAS 123R. Results for prior periods are not restated.
Prior to January 1, 2005, the Company applied the intrinsic value-based
provisions set forth in APB Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"), and related Interpretations, as permitted by FAS
123. No stock based employee compensation cost was recognized in the
Statement of Operations during 2004, as all options granted during the year
had an exercise price equal to the market value of the underlying common
stock on the date of grant. All shares granted during 2005 and 2004 were
those of ING, the Company's ultimate parent. As a result of adopting FAS
123R, the Company's income before income taxes and net income for the three
months ended March 31, 2005, are $0.6 and $0.4, lower, respectively, than
if it had continued to account for share-based payments under APB 25.
Accounting and Reporting by Insurance Enterprises for Certain
Nontraditional Long-Duration Contracts and for Separate Accounts
The Company adopted Statement of Position ("SOP") 03-1, "Accounting and
Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration
Contracts and for Separate Accounts," on January 1, 2004. The Company
determined that it was affected by the SOP's requirements to establish
additional liabilities for certain guaranteed benefits and products with
patterns of cost of insurance charges resulting in losses in later policy
durations from the insurance benefit function and to defer, amortize, and
recognize separately, sales inducements to contractowners.
In the fourth quarter of 2004, the Company implemented Technical Practice
Aid 6300.05 - 6300.08, "Q&As Related to the Implementation of SOP 03-1,
`Accounting and Reporting by Insurance Enterprises for Certain
Nontraditional Long-Duration Contracts and for Separate Accounts"' (the
"TPA"). The TPA was implemented retroactive to the original implementation
date of SOP 03-1, January 1, 2004, and reported as an adjustment to the SOP
03-1 cumulative effect of change in accounting principle.
The adoptions of SOP 03-1 and the TPA resulted in a cumulative effect of a
change in accounting principles of $(1.6), before tax or $(1.0), net of
$0.6 of income taxes, and decreased 2004 net income $2.3, approximately
$0.6 in each quarter.
In addition, on July 1, 2004, the Company adopted FASB Staff Position No.
FAS 97-1 ("FSP FAS 97-1"), "Situations in Which Paragraphs 17(b) and 20 of
FASB Statement No. 97, `Accounting and Reporting by Insurance Enterprises
for Certain Long-Duration Contracts and for Realized Gains and Losses from
the Sale of Investments,' Permit or Require Accrual of an Unearned Revenue
Liability," effective for fiscal periods beginning subsequent to the date
the guidance was issued, June 18, 2004.
10
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Condensed Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
- --------------------------------------------------------------------------------
3. Deferred Policy Acquisition Costs and Value of Business Acquired
Deferred policy acquisition costs ("DAC") represent policy acquisition
costs that have been capitalized and are subject to amortization. Such
costs consist principally of certain commissions, underwriting, contract
issuance, and agency expenses, related to the production of new and renewal
business.
Value of business acquired ("VOBA") represents the outstanding value of in
force business capitalized and are subject to amortization in purchase
accounting when the Company was acquired. The value is based on the present
value of estimated net cash flows embedded in the Company's contracts.
The amortization methodology used for DAC and VOBA varies by product type.
FAS No. 97, "Accounting and Reporting by Insurance Enterprises for Certain
Long-Duration Contracts and for Realized Gains and Losses from the Sale of
Investments" ("FAS No. 97"),applies to universal life and investment-type
products, such as fixed and variable deferred annuities. Under FAS No. 97,
DAC and VOBA are amortized, with interest, over the life of the related
contracts (usually 25 years) in relation to the present value of estimated
future gross profits from investment, mortality, and expense margins;
asset-based fees, policy administration, and surrender charges; less policy
maintenance fees and non-capitalized commissions, as well as realized gains
and losses on investments. DAC related to guaranteed investment contracts,
however, is amortized on a straight-line basis over the life of the
contract.
FAS No. 60, "Accounting and Reporting by Insurance Enterprises," ("FAS No.
60"), applies to traditional life insurance products, primarily traditional
whole life and term life insurance contracts. Under FAS No. 60, DAC and
VOBA are amortized over the premium payment period, in proportion to the
premium revenue recognized.
Activity for the three months ended March 31, 2005 and 2004, within VOBA
was as follows:
Balance at December 31, 2003 $ 111.5
Adjustment for FAS No. 115 (16.4)
Interest accrued at 5% 1.4
Amortization 2.0
-----------------
Balance at March 31, 2004 $ 98.5
=================
Balance at December 31, 2004 $ 112.2
Adjustment for FAS No. 115 20.3
Interest accrued at 4-5% 1.6
Amortization (6.0)
-----------------
Balance at March 31, 2005 $ 128.1
=================
11
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Condensed Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
- --------------------------------------------------------------------------------
4. Investments
Impairments
The following table identifies the Company's other-than-temporary
impairments, included in net realized capital gains (losses), by type for
the three months ended March 31, 2005 and 2004:
2005 2004
------------------------------------ -------------------------------------
No. of No. of
Impairment Securities Impairment Securities
----------------- ----------------- ------------------ -----------------
U.S. Corporate $ - - $ 1.2 1
Residential mortgage-backed 10.3 67 4.9 59
Asset-backed 0.4 1 - -
----------------- ----------------- ------------------ -----------------
Total $ 10.7 68 $ 6.1 60
================= ================= ================== =================
The remaining fair value of the fixed maturities with other-than-temporary
impairments at March 31, 2005 and 2004 is $182.7 and $172.9, respectively.
5. Income Taxes
The effective tax rates for the three months ended March 31, 2005 and 2004
were 31.8% and 30.6%, respectively. The effective rate differs from the
expected rate primarily due to the benefit from the dividends received
deduction. The increase in the effective tax rate resulted primarily from a
decrease in the deduction allowed for dividends received relative to
pre-tax income.
6. Financing Agreements
The Company maintains a revolving loan agreement with SunTrust Bank,
Atlanta (the "Bank"). Under this agreement, which is due on demand, the
Company can borrow up to $125.0 from the Bank. Interest on any borrowing
accrues at an annual rate equal to a rate quoted by the Bank to the Company
for the borrowing. Under the agreement, the Company incurred minimal
interest expense for the three months ended March 31, 2005 and 2004. At
March 31, 2005, the Company had $18.1 payable to the Bank. At December 31,
2004, the Company did not have any balances payable to the Bank. The
outstanding balance of $18.1 at March 31, 2005 was repaid on April 4, 2005.
12
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Condensed Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
- --------------------------------------------------------------------------------
7. Commitments and Contingent Liabilities
Commitments
Through the normal course of investment operations, the Company commits to
either purchase or sell securities, commercial mortgage loans, or money
market instruments at a specified future date and at a specified price or
yield. The inability of counterparties to honor these commitments may
result in either a higher or lower replacement cost. Also, there is likely
to be a change in the value of the securities underlying the commitments.
At March 31, 2005 and December 31, 2004, the Company had off-balance sheet
commitments to purchase investments equal to their fair value of $332.8 and
$175.3, respectively.
Litigation
The Company is a party to threatened or pending lawsuits/arbitrations
arising from the normal conduct of business. Due to the climate in
insurance and business litigation/arbitrations, suits against the Company
sometimes include claims for substantial compensatory, consequential or
punitive damages and other types of relief. Moreover, certain claims are
asserted as class actions, purporting to represent a group of similarly
situated individuals. While it is not possible to forecast the outcome of
such lawsuits/arbitrations, in light of existing insurance, reinsurance and
established reserves, it is the opinion of management that the disposition
of such lawsuits/arbitrations will not have a materially adverse effect on
the Company's operations or financial position.
8. Accumulated Other Comprehensive Income
The components of accumulated other comprehensive income as of March 31,
2005 and 2004 were as follows:
2005 2004
------------------ -----------------
Net unrealized capital gains (losses):
Fixed maturities $ 151.5 $ 762.7
Equity securities 0.5 2.5
DAC/VOBA (97.3) (271.3)
Sales inducements (0.3) (18.4)
Other (2.7) (12.8)
------------------ -----------------
Subtotal 51.7 462.7
Less: Deferred income taxes 18.0 161.9
------------------ -----------------
Net unrealized capital gains 33.7 300.8
Minimum pension liability (4.9) -
------------------ -----------------
Net accumulated other comprehensive income $ 28.8 $ 300.8
================== =================
13
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Condensed Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
- --------------------------------------------------------------------------------
Changes in accumulated other comprehensive income related to changes in net
unrealized gains (losses) on securities, including securities pledged, were
as follows:
Three months ended March 31,
2005 2004
------------------ -----------------
Unrealized holding (losses) gains arising
during the year (1) $ (84.5) $ 147.8
Less: reclassification adjustment for (losses)
gains and other items included in
net income (2) (0.6) 35.1
------------------ -----------------
Net unrealized (losses) gains on securities $ (83.9) $ 112.7
================== =================
(1) Pretax unrealized holding gains (losses) arising during the period
were $(133.3) and $216.0, for the three months ended March 31, 2005
and 2004, respectively.
(2) Pretax reclassification adjustments for gains (losses) and other items
included in net income were $(1.0) and $51.3, for the three months
ended March 31, 2005 and 2004, respectively.
9. Reclassifications and Changes to Prior Year Presentation
During the three months ended March 31, 2005, certain changes were made to
the Statements of Cash Flows for the three months ended March 31, 2004 to
reflect the correct balances primarily related to short-term investments
and short-term loans. As a result of these adjustments, the Company has
labeled the Statement of Cash Flows for the three months ended March 31,
2004 as restated. The following summarizes the adjustments:
Previously
Three months ended March 31, 2004 Reported Adjustment Restated
--------------- --------------- --------------
Net cash provided by operating activities $ 950.2 $ (607.2) $ 343.0
Net cash used for investing activities (899.6) 382.4 (517.2)
Net cash provided by financing activities 52.4 224.8 277.2
10. Subsequent Events
Coinsurance Agreement
In an effort to diversify the product based between affiliate entities,
effective May 1, 2005 (the "Effective Date"), ING USA entered into a
coinsurance agreement (the "Agreement") with its affiliate, Security Life
of Denver Insurance Company ("Security Life"). Under the terms of the
Agreement, as of the Effective Date, ING USA ceded to Security Life and
Security Life assumed and indemnity reinsured, on a coinsurance basis, 100%
of the reinsured liabilities arising under certain fixed annuity contracts
issued by ING USA between January 1, 2001 and December 31, 2003 (the
"Covered Contracts"). ING USA remains directly obligated to the
contractowners of the Covered Contracts. The account balances ceded by ING
14
ING USA Annuity and Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Condensed Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
- --------------------------------------------------------------------------------
USA to Security Life under the terms of the Agreement as of the Effective
Date were approximately $2.5 billion. As of the Effective Date, the assets
backing the reserves for the liabilities assumed by Security Life were
transferred by ING USA to Security Life. Total assets transferred including
ceding commission by ING USA to Security Life as of the Effective Date were
approximately $2.7 billion, subject to final valuation adjustment. As
additional consideration for Security Life assuming the liabilities under
the Agreement, ING USA has assigned to Security Life any and all premiums
received by ING USA after the Effective Date that are attributable to the
contract liabilities assumed under the Agreement.
Purchase of Assets
Subsequent to March 31, 2005, the Company purchased $194.3 of invested
assets at fair value from Life Insurance Company of Georgia ("LOG"), an
affiliate, in conjunction with the sale of LOG, which is expected to close
during the second quarter of 2005.
15
Item 2. Management's Narrative Analysis of the Results of Operations
and Financial Condition
(Dollar amounts in millions, unless otherwise stated)
Overview
The following narrative analysis of the results of operations presents
a review of ING USA Annuity and Life Insurance Company ("ING USA" or
"the Company") for the three month periods ending March 31, 2005 and
2004 and financial condition as of March 31, 2005 and December 31,
2004. This item should be read in its entirety and in conjunction with
the condensed financial statements and related notes, which can be
found under Part I, Item 1 contained herein, as well as the
"Management's Narrative Analysis of the Results of Operations and
Financial Condition" section contained in the Company's 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 Company cautions readers
regarding certain forward-looking statements contained in this report
and in any other statements made by, or on behalf of, the Company,
whether or not in future filings with the Securities and Exchange
Commission ("SEC"). Forward-looking statements are statements not
based on historical information and which relate to future operations,
strategies, financial results, or other developments. Statements using
verbs such as "expect," "anticipate," "believe" or words of similar
import generally involve forward-looking statements. Without limiting
the foregoing, forward-looking statements include statements which
represent the Company's beliefs concerning future levels of sales and
redemptions of the Company's products, investment spreads and yields,
or the earnings and profitability of the Company's activities.
Forward-looking statements are necessarily based on estimates and
assumptions that are inherently subject to significant business,
economic, and competitive uncertainties and contingencies, many of
which are beyond the Company's control and many of which are subject
to change. These uncertainties and contingencies could cause actual
results to differ materially from those expressed in any
forward-looking statements made by, or on behalf of, the Company.
Whether or not actual results differ materially from forward-looking
statements may depend on numerous foreseeable and unforeseeable
developments. Some may be national in scope, such as general economic
conditions, changes in tax law and changes in interest rates. Some may
be related to the insurance industry generally, such as pricing
competition, regulatory developments, and industry consolidation.
Others may relate to the Company specifically, such as litigation,
regulatory action, and risks associated with the Company's investment
portfolio, such as changes in credit quality, price volatility and
liquidity. Investors are also directed to consider other risks and
uncertainties discussed in other documents filed by the Company with
the SEC. Except as may be required by the federal securities laws, the
Company disclaims any obligation to update forward-looking
information.
16
Basis of Presentation
ING USA Annuity and Life Insurance Company ("ING USA" or the
"Company"), a wholly-owned subsidiary of Lion Connecticut Holdings
Inc. ("Lion" or "Parent"), is a stock life insurance company organized
under the laws of the State of Iowa.
Lion is an indirect, wholly-owned subsidiary of ING Groep N.V.
("ING"), a global financial services holding company based in The
Netherlands, with American Depository Shares on the New York Stock
Exchange under the symbol "ING". ING USA is authorized to do business
in the District of Columbia and all states except New York. ING USA
was domiciled as a life insurance company under the laws of the State
of Delaware until December 31, 2003 and has been domiciled as such in
Iowa since January 1, 2004.
On January 1, 2004, the Company simultaneously redomesticated from
Delaware to Iowa, changed its name from Golden American Life Insurance
Company to ING USA Annuity and Life Insurance Company, and merged the
following affiliates into the Company: Equitable Life Insurance
Company of Iowa ("Equitable Life"), USG Annuity & Life Company
("USG"), and United Life & Annuity Insurance Company ("ULA"). Prior to
the merger date, ING USA was a wholly-owned subsidiary of Equitable
Life.
Critical Accounting Policies
There have been no material changes to the Company's critical
accounting policies since the filing of the Company's 2004 Form 10-K
Annual Report.
Results of Operations
Net Income: Net income increased by $5.0 to $26.2 for the three months
ended March 31, 2005 from $21.2 for the three months ended March 31,
2004. The increase in income is primarily the result of higher fee
income and lower benefits to contractowners, partially offset by
higher amortization of DAC and VOBA.
Fee Income: Fee income increased by $40.9 to $167.5 for the three
months ended March 31, 2005 from $126.6 for the three months ended
March 31, 2004. The increase is primarily due to a $6.0 billion
increase in the average variable annuity assets under management
resulting from continued growth in sales of variable annuities and
equity market performance in late 2004. Also contributing to the
increase in fee income were sales of products with higher charges for
living benefits during 2004 and 2005.
Net Realized Capital Gains (Losses): Net realized capital gains
decreased by $6.5 to $8.8 for the three months ended March 31, 2005
from $15.3 for the three months ended March 31, 2004. The decrease in
gains is primarily due to rising interest rates in 2005. In an
increasing rate environment, the market value of fixed maturities in
17
the portfolios decreases, which in turn, results in lower realized
gains upon sale. Partially offsetting this decrease is a rise in the
gains on derivatives.
Interest Credited and Other Benefits to Contractowners: Interest
credited and other benefits to contractowners decreased by $21.1 to
$264.4 for the three months ended March 31, 2005 from $285.5 for the
three months ended March 31, 2004. The decrease is primarily due to an
overall decrease in the cost of guaranteed benefits. This decrease is
primarily driven by the decline in market performance during the first
three months of 2005 relative to the first three months of 2004, which
caused a decline in equity-indexed annuity benefits (EIAs), and a
partially offsetting increase in guaranteed minimum death benefits
(GMDBs). The overall decrease is partially offset by an increase in
interest credited due to growth in average fixed annuity and GIC
account values.
Operating Expenses: Operating expenses increased by $5.9 to $47.4 for
the three months ended March 31, 2005 from $41.5 for the three months
ended March 31, 2004. The increase is primarily due to the rise in
general expenses associated with higher strategic spending on
information technology projects and the implementation of the Sarbanes
Oxley Act of 2002, partially offset by an increase in expense
deferrals. Also contributing to the increase is the rise in
commissions consistent with growth in sales and assets under
management, partially offset by the increase in commission deferrals.
Amortization of DAC and VOBA: Amortization of DAC and VOBA increased
by $35.3 to $104.5 for the three months ended March 31, 2005 from
$69.2 for the three months ended March 31, 2004. The increase is
mainly due to amortization over higher gross profit streams in the
first three months of 2005, resulting from the combination of
increased variable annuity fee revenue, and an increase in hedge gains
in excess of the increase in benefit costs. In addition, the decline
in the equity market performance during the first three months of 2005
resulted in an acceleration of amortization of $15.2
Interest Expense: Interest expense increased by $8.0 to $11.7 for the
three months ended March 31, 2005 from $3.7 for the three months ended
March 31, 2004. The increase is primarily due to interest on the
Company's $400.0 in surplus notes, which were issued to affiliates in
December 2004.
Income Tax Expense (Benefit): Income tax expense increased by $2.4 to
$12.2 for the three months ended March 31, 2005 from $9.8 for the
three months ended March 31, 2004. The increase is primarily
attributable to the increase in pre-tax income in the first quarter of
2005.
18
Financial Condition
Investments
Investment Strategy
The Company's investment strategy for its general account investments
involves diversification by asset class, and seeks to add economic
diversification and to reduce the risks of credit, liquidity, and
embedded options within certain investment products, such as convexity
risk on collateralized mortgage obligations and call options. The
investment management function is centralized under ING Investment
Management LLC ("IIM"), an affiliate of the Company pursuant to an
investment advisory agreement. Separate portfolios are established for
each general type of product within the Company.
For a discussion of the Company's use of derivatives, see "Liquidity
and Capital Resources - Derivatives."
Portfolio Composition
The following table presents the investment portfolio at March 31,
2005 and December 31, 2004.
2005 2004
---------------------------- ----------------------------
Carrying Value % Carrying Value %
----------------- --------- ----------------- ---------
Fixed maturities, including
securities pledged $ 18,981.0 81.5% $ 18,597.8 81.3%
Equity securities 34.8 0.2% 35.3 0.2%
Mortgage loans on real estate 3,894.6 16.7% 3,851.8 16.8%
Real estate - 0.0% 1.8 0.0%
Policy loans 169.2 0.7% 169.0 0.7%
Short-term investments 1.0 0.0% 6.9 0.0%
Other investments 211.0 0.9% 220.1 1.0%
----------------- --------- ----------------- ---------
$ 23,291.6 100.0% $ 22,882.7 100.0%
================= ========= ================= =========
19
Fixed Maturities
Fixed maturities available-for-sale as of March 31, 2005, were as
follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------- -------------- --------------- --------------
Fixed maturities:
U.S. government and government
agencies and authorities $ 770.1 $ 2.2 $ 7.8 $ 764.5
State, municipalities and political
subdivisions 20.7 - 0.9 19.8
U.S. corporate securities:
Public utilities 1,784.0 59.5 16.5 1,827.0
Other corporate securities 6,226.6 151.9 71.1 6,307.4
-------------- -------------- --------------- --------------
Total U.S. corporate securities 8,010.6 211.4 87.6 8,134.4
-------------- -------------- --------------- --------------
Foreign securities:
Government 446.6 17.6 4.8 459.4
Other 2,561.4 59.8 25.3 2,595.9
-------------- -------------- --------------- --------------
Total foreign securities 3,008.0 77.4 30.1 3,055.3
-------------- -------------- --------------- --------------
Residential mortgage-backed securities 3,898.6 34.0 42.7 3,889.9
Commercial mortgaged-backed securities 1,158.8 20.9 13.1 1,166.6
Other asset-backed securities 1,962.7 10.2 22.4 1,950.5
-------------- -------------- --------------- --------------
Total fixed maturities, including fixed
maturities pledged 18,829.5 356.1 204.6 18,981.0
Less: fixed maturities pledged 1,417.3 6.3 13.5 1,410.1
-------------- -------------- --------------- --------------
Fixed maturities $ 17,412.2 $ 349.8 $ 191.1 $ 17,570.9
============== ============== =============== ==============
20
Fixed maturities available-for-sale as of December 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 $ 464.0 $ 1.8 $ 1.1 $ 464.7
State, municipalities and political
subdivisions 20.7 - 0.8 19.9
U.S. corporate securities:
Public utilities 1,796.9 78.4 8.9 1,866.4
Other corporate securities 6,292.4 243.5 22.7 6,513.2
--------------- -------------- -------------- ---------------
Total U.S. corporate securities 8,089.3 321.9 31.6 8,379.6
--------------- -------------- -------------- ---------------
Foreign securities:
Government 518.9 24.2 2.2 540.9
Other 2,571.2 97.7 11.5 2,657.4
--------------- -------------- -------------- ---------------
Total foreign securities 3,090.1 121.9 13.7 3,198.3
--------------- -------------- -------------- ---------------
Residential mortgage-backed securities 3,440.3 43.9 22.4 3,461.8
Commercial mortgaged-backed securities 1,107.8 34.9 3.0 1,139.7
Other asset-backed securities 1,934.2 14.3 14.7 1,933.8
--------------- -------------- -------------- ---------------
Total fixed maturities, including fixed
maturities pledged 18,146.4 538.7 87.3 18,597.8
Less: fixed maturities pledged 1,100.5 9.8 1.7 1,108.6
--------------- -------------- -------------- ---------------
Fixed maturities $ 17,045.9 $ 528.9 $ 85.6 $ 17,489.2
=============== ============== ============== ===============
It is management's objective that the portfolio of fixed maturities be
of high quality and be well diversified by market sector. The fixed
maturities in the Company's portfolio are generally rated by external
rating agencies and, if not externally rated, are rated by the Company
on a basis believed to be similar to that used by the rating agencies.
The average quality rating of the Company's fixed maturities portfolio
was A+ at March 31, 2005 and December 31, 2004. Ratings are calculated
using a rating hierarchy that considers S&P, Moody's, and internal
ratings.
21
Total fixed maturities by quality rating category, including fixed
maturities pledged to creditors, were as follows at March 31, 2005 and
December 31, 2004:
2005 2004
--------------------------- ---------------------------
Fair % of Fair % of
Value Total Value Total
--------------- ---------- -------------- -----------
AAA $ 7,061.5 37.2% $ 6,542.5 35.2%
AA 1,010.6 5.3% 865.3 4.7%
A 3,996.3 21.1% 4,035.7 21.7%
BBB 6,118.9 32.2% 6,325.2 34.0%
BB 697.1 3.7% 710.7 3.8%
B and below 96.6 0.5% 118.4 0.6%
--------------- ---------- -------------- -----------
Total $18,981.0 100.0% $ 18,597.8 100.0%
=============== ========== ============== ===========
95.8% and 95.6% of the fixed maturities were invested in securities
rated BBB and above (Investment Grade) at March 31, 2005 and December
31, 2004, respectively.
Fixed maturities rated BB and below (Below Investment Grade) may have
speculative characteristics, and changes in economic conditions or
other circumstances are more likely to lead to a weakened capacity of
the issuer to make principal and interest payments than is the case
with higher rated fixed maturities.
Total fixed maturities by market sector, including fixed maturities
pledged to creditors, were as follows at March 31, 2005 and December
31, 2004:
2005 2004
--------------------------- ---------------------------
Fair % of Fair % of
Value Total Value Total
--------------- ---------- -------------- -----------
U.S. Corporate $ 8,154.2 43.0% $ 8,399.5 45.2%
Residential mortgage-backed 3,889.9 20.5% 3,461.8 18.6%
Commercial/multifamily mortgage-backed 1,166.6 6.1% 1,139.7 6.1%
Foreign(1) 3,055.3 16.1% 3,198.3 17.2%
U.S. Treasuries/Agencies 764.5 4.0% 464.7 2.5%
Asset-backed 1,950.5 10.3% 1,933.8 10.4%
--------------- ---------- -------------- -----------
Total $ 18,981.0 100.0% $ 18,597.8 100.0%
=============== ========== ============== ===========
(1) Primarily U.S. dollar denominated.
22
The Company did not have any investments in a single issuer, other
than obligations of the U.S. government, with a carrying value in
excess of 10% of the Company's shareholder's equity at March 31, 2005.
Mortgage Loans
Mortgage loans, primarily commercial mortgage loans, totaled $3,894.6
at March 31, 2005 and $3,851.8 at December 31, 2004. These loans are
reported at amortized cost less impairment writedowns. If the value of
any mortgage loan is determined to be impaired (i.e., when it is
probable that the Company will be unable to collect on all amounts due
according to the contractual terms of the loan agreement), the
carrying value of the mortgage loan is reduced to either the present
value of expected cash flows, cash flows from the loan (discounted at
the loan's effective interest rate), or fair value of the collateral.
If the loan is in foreclosure, the carrying value is reduced to the
fair value of the underlying collateral, net of estimated costs to
obtain and sell. The carrying value of the impaired loans is reduced
by establishing a permanent write down charged to realized loss. At
March 31, 2005 and December 31, 2004, the Company had no allowance for
mortgage loan credit losses.
Unrealized Losses
Fixed maturities, including securities pledged to creditors, comprise
81.5% and 81.3% of the Company's total investment portfolio at March
31, 2005 and December 31, 2004, respectively. Unrealized losses
related to fixed maturities are analyzed in the following tables.
Fixed maturities, including securities pledged to creditors, in
unrealized loss positions for Investment Grade ("IG") and Below
Investment Grade ("BIG") securities by duration were as follows at
March 31, 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 $ 109.0 53.3% $ 8.1 3.9% $ 26.6 30.5% $ 0.6 0.7%
More than six months
and less than twelve months
below amortized cost 35.1 17.2% 2.7 1.3% 28.0 32.0% 1.9 2.2%
More than twelve months
below amortized cost 47.0 23.0% 2.7 1.3% 26.1 29.9% 4.1 4.7%
--------- --------- --------- --------- --------- --------- --------- ---------
Total unrealized loss $ 191.1 93.5% $ 13.5 6.5% $ 80.7 92.4% $ 6.6 7.6%
========= ========= ========= ========= ========= ========= ========= =========
Unrealized losses at March 31, 2005 were primarily related to interest
rate movement or spread widening for other than credit-related reasons
and to securities under the guidance prescribed by Emerging Issues
Task Force ("EITF") Issue No. 99-20, "Recognition of Interest Income
and Impairment on Purchased and Retained Beneficial Interests in
Securitized Financial Assets". Securities affected by EITF Issue No.
99-20 include U.S. government backed securities, principal protected
23
securities, and structured securities, which did not have an adverse
change in cash flows. The following table summarizes the unrealized
losses by duration and reason, along with the carrying amount of
securities with unrealized losses at March 31, 2005:
More than
Six Months
Less than and less than More than
Six Months Twelve Months Twelve Months
----------------- ----------------- -----------------
Interest rate or spread widening $ 73.2 $ 21.5 $ 31.9
EITF Issue No.99-20 43.9 16.3 17.8
----------------- ----------------- -----------------
Total unrealized loss $ 117.1 $ 37.8 $ 49.7
================= ================= =================
Carrying amount $ 7,188.3 $ 1,477.5 $ 934.0
================= ================= =================
Fixed maturities, including securities pledged to creditors, in
unrealized loss positions by market sector and duration were as
follows at March 31, 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 $ 49.9 $ 28.7 $ 9.3 $ 15.5 $ 7.6 $ 6.1 $ 117.1
More than six month and less than
twelve months below
amortized cost 18.8 7.3 2.2 2.7 - 6.8 37.8
More than twelve months
below amortized cost 19.8 6.7 1.6 11.9 0.2 9.5 49.7
--------- ----------- ------------- --------- ---------- --------- -----------
Total unrealized loss $ 88.5 $ 42.7 $ 13.1 $ 30.1 $ 7.8 $ 22.4 $ 204.6
========= =========== ============= ========= ========== ========= ===========
Other-Than-Temporary Impairments
The Company analyzes the general account investments to determine
whether there has been an other-than-temporary decline in fair value
below amortized cost basis. Management considers the length of the
time and the extent to which the market value has been less than cost;
the financial condition and near term prospects of the issuer; future
economic conditions and market forecasts; and the Company's intent and
ability to retain the investment for a period of time sufficient to
allow for recovery in market value. If it is probable that all amounts
due according to the contractual terms of an investment will not be
collected, an other-than-temporary impairment is considered to have
occurred.
In addition, the Company invests in structured securities that meet
the criteria of EITF Issue No. 99-20. Under EITF Issue No. 99-20, a
determination of the required impairment is based on credit risk and
the possibility of significant prepayment risk that restricts the
Company's ability to recover the investment. An impairment is
24
recognized if the fair value of the security is less than amortized
cost and there has been an adverse change in cash flow since the last
remeasurement date.
When a decline in fair value is determined to be other-than-temporary,
the individual security is written down to fair value and the loss is
accounted for as a realized loss.
The following table identifies the Company's other-than-temporary
impairments by type for the three months ended March 31, 2005 and
2004:
2005 2004
------------------------------------ ------------------------------------
No. of No. of
Impairment Securities Impairment Securities
----------------- ----------------- ----------------- ------------------
U.S. Corporate $ - - $ 1.2 1
Residential mortgage-backed 10.3 67 4.9 59
Asset-backed 0.4 1 - -
----------------- ----------------- ----------------- ------------------
Total $ 10.7 68 $ 6.1 60
================= ================= ================= ==================
Net Realized Capital Gains and Losses
Net realized capital gains (losses) are comprised of the difference
between the carrying value of investments and proceeds from sale,
maturity, and redemption, as well as losses incurred due to the
other-than-temporary impairment of investments. Net realized capital
gains (losses) on investments were as follows:
Three months ended March 31,
2005 2004
----------------- -----------------
Fixed maturities $ (4.8) $ 49.1
Equity securities 0.1 3.5
Derivatives 13.1 (37.3)
Other 0.4 -
----------------- -----------------
Pretax net realized capital gains $ 8.8 $ 15.3
================= =================
After-tax net realized capital gains $ 5.7 $ 9.9
================= =================
Liquidity and Capital Resources
Liquidity is the ability of the Company to generate sufficient cash
flows to meet the cash requirements of operating, investing, and
financing activities.
Sources and Uses of Liquidity
The Company's principal sources of liquidity are annuity premiums and
product charges, GIC deposits, investment income, proceeds from the
maturing and sale of investments, proceeds from debt issuance, and
capital contributions. Primary uses of these funds are payments of
commissions and operating expenses, interest and premium credits,
payments under guaranteed death and living benefits, investment
purchases, repayment of debt, as well as contract maturities,
withdrawals and surrenders.
25
The Company's liquidity position is managed by maintaining adequate
levels of liquid assets, such as cash or cash equivalents and
short-term investments. Asset/liability management is integrated into
many aspects of the Company's operations, including investment
decisions, product development, and determination of crediting rates.
As part of the risk management process, different economic scenarios
are modeled, including cash flow testing required for insurance
regulatory purposes, to determine that existing assets are adequate to
meet projected liability cash flows. Key variables in the modeling
process include interest rates, anticipated contractowner behavior,
and variable separate account performance. Contractowners bear the
investment risk related to variable annuity products, subject to the
minimum guaranteed death and living benefits included in these
contracts.
The fixed account liabilities are supported by a general account
portfolio principally composed of fixed rate investments with matching
duration characteristics that can generate predictable, steady rates
of return. The portfolio management strategy for the fixed account
considers the assets available-for-sale. This enables the Company to
respond to changes in market interest rates, prepayment risk, relative
values of asset sectors and individual securities and loans, credit
quality outlook, and other relevant factors. The objective of
portfolio management is to maximize returns, taking into account
interest rate and credit risk, as well as other risks. The Company's
asset/liability management discipline includes strategies to minimize
exposure to loss as interest rates and economic and market conditions
change.
Additional sources of liquidity include borrowing facilities to meet
short-term cash requirements. The Company maintains a reciprocal loan
agreement with ING America Insurance Holding Company, Inc. ("ING
AIH"), an affiliate, whereby either party can borrow from the other up
to 3% of the Company's total admitted assets, a $100.0 revolving note
facility with Bank of New York, and a $125.0 revolving note facility
with SunTrust Bank, which expires on July 30, 2005. At March 31, 2005,
the Company had $18.1 outstanding under the revolving note facility
with SunTrust Bank, which was repaid on April 4, 2005, and no amounts
outstanding as of December 31, 2004. The Company had no amounts
receivable from ING AIH under the reciprocal loan agreement as of
March 31, 2005, and $184.2 receivable as of December 31, 2004.
Management believes that these sources of liquidity are adequate to
meet the Company's short-term cash obligations.
The Company is a member of the FHLB and is required to maintain a
collateral deposit that backs funding agreements issued to the FHLB.
At March 31, 2005 and December 31, 2004, respectively, the Company had
$275.9 and $376.3 in non-putable funding agreements issued to FHLB. At
March 31, 2005 and December 31, 2004, respectively, assets with a
carrying value of approximately $421.6 and $422.0 collateralized the
funding agreements issued to the FHLB. Assets pledged to the FHLB are
included in fixed maturities in the Balance Sheets.
26
Capital Contributions and Dividends
During the three months ended March 31, 2005 and 2004, the Company
received no capital contributions from its parent. The Company did not
pay any dividends on its common stock during the three months ended
March 31, 2005 and 2004.
Minimum Guarantees
Variable annuity contracts containing guaranteed death and living
benefits expose the Company to equity risk. An increase in the value
of the equity markets will increase account values for these
contracts, thereby decreasing the Company's risk associated with the
guaranteed minimum death benefits ("GMDBs"), guaranteed minimum income
benefits ("GMIBs"), guaranteed minimum withdrawal benefits ("GMWBs"),
and guaranteed minimum accumulation benefits ("GMABs"). A decrease in
the equity markets, that causes a decrease in the account values, will
increase the possibility that the Company may be required to pay
amounts to customers due to guaranteed death or living benefits.
The Company sells variable annuity contracts that offer one or more of
the following guaranteed death benefits and living benefits:
Guaranteed Minimum Death Benefits ("GMDB"): The Company has offered
the following guaranteed death benefits:
- Standard - This guarantees that upon the death of the annuitant
the death benefit will be no less than the premiums paid by the
contractowner net of any contract withdrawals.
- Ratchet - This guarantees that upon the death of the annuitant
the death benefit will be no less than the greater of (1)
Standard or (2) the maximum anniversary (or quarterly) value of
the variable annuity.
- Rollup (7% or 5.5% Solution) - This guarantees that upon the
death of the annuitant the death benefit will be no less than the
aggregate premiums paid by the contractowner accruing interest at
7% or 5.5% per annum, subject to a maximum cap on the account
value. (The Company has discontinued this option for new sales.)
- Combo (Max 7) - This guarantees that upon the death of the
annuitant the death benefit will be no less than the greater of
(1) Ratchet or (2) Rollup.
At March 31, 2005, the guaranteed value of these death benefits in
excess of account values was estimated to be $2.8 billion before
reinsurance, which was a $0.3 billion increase from the estimated $2.5
billion at December 31, 2004. The increase was primarily driven by the
decline in equity markets during the first three months of 2005. For
contracts issued prior to January 1, 2000, most contracts with
enhanced death benefit guarantees were reinsured to third party
reinsurers to mitigate the risk produced by such guaranteed death
benefits. For contracts issued after December 31, 1999, the Company
has instituted an equity hedging program in lieu of reinsurance, to
mitigate the risk produced by the guaranteed death benefits. The
27
equity hedging program is based on the Company entering into
derivative positions to offset exposures to guaranteed minimum death
benefits due to adverse changes in the equity markets. At March 31,
2005, the guaranteed value of minimum guaranteed death benefits in
excess of account values, net of reinsurance, was estimated to be $1.6
billion, of which $866.0 is projected to be covered by the Company's
equity hedging program. These amounts are consistent with December 31,
2004. As of March 31, 2005, the Company has recorded a liability of
$84.5, net of reinsurance, representing the estimated net present
value of the Company's future obligation for guaranteed minimum death
benefits in excess of account values. The liability increased $17.6
from $66.9 at December 31, 2004, mainly due to the increase in fees
used to fund the reserve and the decline in equity markets during the
first three months of 2005. The liability is recorded in accordance
with the provisions of SOP 03-1.
Guaranteed Living Benefits: The Company offers the following
guaranteed living benefits:
- Guaranteed Minimum Income Benefit ("GMIB") - This guarantees a
minimum income payout, exercisable each contract anniversary on
or after the 10th rider anniversary. This type of living benefit
is the predominant selection in the Company's sales of variable
annuities.
- Guaranteed Minimum Withdrawal Benefit ("GMWB") - This guarantees
that annual withdrawals of up to 7% of eligible premiums may be
made until eligible premiums previously paid by the contractowner
are returned, regardless of account value performance. The GMWB
rider (ING Principal Guard) provides reset and step-up features,
which provide, in certain instances, for increases in the amount
available for withdrawal.
- Guaranteed Minimum Accumulation Benefit ("GMAB") - Guarantees
that the account value will be at least 100% of the premiums paid
by the contractowner after 10 years (GMAB10) or 200% after 20
years (GMAB20).
At March 31, 2005, the guaranteed value of these living benefits in
excess of account values was estimated to be $405.2, which is an
increase of $135.5 from an estimated $269.7 at December 31, 2004. The
increase was primarily driven by the decline in equity markets during
the first three months of 2005. All living benefits are covered by the
Company's equity hedging program. As of March 31, 2005, the Company
has recorded a liability of $53.3 representing the estimated net
present value of its future obligation for living benefits in excess
of account values. The liability increased $13.0 from $40.3 at
December 31, 2004, mainly due to the increase in fees used to fund the
reserve and the decline in equity markets during the first three
months of 2005. For GMIBs, the liability is recorded in accordance
with the provisions of SOP 03-1. For GMABs and GMWBs, the liability is
held at fair value in accordance with FAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities".
28
Derivatives
The Company's use of derivatives is limited mainly to hedging purposes
to reduce the Company's exposure to cash flow variability of assets
and liabilities, interest rate risk, and market risk. These
derivatives are not accounted for using hedge accounting treatment
under FAS No. 133, as the Company does not seek hedge accounting
treatment. The Company enters into interest rate and currency
contracts, including swaps, caps, floors, options, and futures, to
reduce and manage risks associated with changes in value, yield,
price, cash flow, or exchange rates of assets or liabilities held or
intended to be held. The Company also purchases options on equity
indexes to reduce and manage risks associated with its equity-index
annuity products. Changes in the fair value of open derivative
contracts are recorded in net realized capital gains and losses.
Derivatives are included in other investments on the Balance Sheets.
The Company also had investments in certain fixed maturity instruments
and retail annuity products that contain embedded derivatives,
including those whose market value is at least partially determined
by, among other things, levels of or changes in domestic and/or
foreign interest rates (short- or long-term), exchange rates,
prepayment rates, equity markets or, credit ratings/spreads. Changes
in the fair value of embedded derivatives are recorded in net realized
capital gains (losses) in the Statements of Operations. Embedded
derivatives within securities are included in fixed maturities on the
Balance Sheets. Embedded derivatives within retail annuity products
are included in future policy benefits and claims reserves on the
Balance Sheets.
Reinsurance Recoverable
The reinsurance recoverable decreased by $507.5 to $880.6 for the
three months ended March 31, 2005, from $1,388.1 for the year ended
December 31, 2004. The decrease is primarily due to decreased
reinsurance of GICs to an affiliate company, Security Life of Denver
Insurance Company, of approximately $510.8.
Coinsurance Agreement
Effective May 1, 2005 (the "Effective Date"), ING USA entered into a
coinsurance agreement (the "Agreement") with its affiliate, Security
Life of Denver Insurance Company ("Security Life"). Under the terms of
the Agreement, as of the Effective Date, ING USA ceded to Security
Life and Security Life assumed and indemnity reinsured, on a
coinsurance basis, 100% of the reinsured liabilities arising under
certain fixed annuity contracts issued by ING USA between January 1,
2001 and December 31, 2003 (the "Covered Contracts"). ING USA remains
directly obligated to the contractowners of the Covered Contracts. The
account balances ceded by ING USA to Security Life under the terms of
the Agreement as of the Effective Date were approximately $2.5
billion. As of the Effective Date, the assets backing the reserves for
the liabilities assumed by Security Life were transferred by ING USA
to Security Life. Total assets transferred including ceding commission
by ING USA to Security Life as of the Effective Date were
approximately $2.7 billion, subject to final valuation adjustment. As
29
additional consideration for Security Life assuming the liabilities
under the Agreement, ING USA has assigned to Security Life any and all
premiums received by ING USA after the Effective Date that are
attributable to the contract liabilities assumed under the Agreement.
Recently Adopted Accounting Standards
(See the Recently Adopted Accounting Standards Footnote to the
condensed financial statements for further information.)
Legislative Initiatives
Legislative proposals which have been or are being considered by
Congress include repealing the estate tax, reducing the taxation on
annuity benefits, changing the tax treatment of insurance products
relative to other financial products, and changing life insurance
company taxation. Some of these proposals, if enacted, could have a
material effect on life insurance, annuity, and other retirement
savings product sales. The President has also established an advisory
panel to study reform of the Internal Revenue Code. The panel is
scheduled to report its findings and make recommendations to the
Secretary of Treasury by the end of July, 2005. The recommendations of
this panel, if enacted by Congress, could affect the tax treatment of
life insurance companies and products. Legislation to restructure the
Social Security System and expand private pension plan incentives also
may be considered. Prospects for enactment and the ultimate effect of
these proposals are uncertain.
Item 4. Controls and Procedures
a) The Company carried out an evaluation, under the supervision and
with the participation of its management, including its Chief
Executive Officer and Chief Financial Officer, of the
effectiveness of the Company's disclosure controls and procedures
(as defined in Rule 13a-15(e) and 15d-15(e) of the Securities
Exchange Act of 1934) as of the end of the period covered by this
report. Based on that evaluation, the Chief Executive Officer and
the Chief Financial Officer have concluded that the Company's
current disclosure controls and procedures are effective in
ensuring that material information relating to the Company
required to be disclosed in the Company's periodic SEC filings is
made known to them in a timely manner.
b) There has not been any change in the internal controls over
financial reporting of the Company that occurred during the
period covered by this report that has materially affected or is
reasonably likely to materially affect these internal controls.
30
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is a party to threatened or pending lawsuits/arbitrations
arising from the normal conduct of business. Due to the climate in
insurance and business litigation/arbitrations, suits against the
Company sometimes include claims for substantial compensatory,
consequential or punitive damages and other types of relief. Moreover,
certain claims are asserted as class actions, purporting to represent
a group of similarly situated individuals. While it is not possible to
forecast the outcome of such lawsuits/arbitrations, in light of
existing insurance, reinsurance and established reserves, it is the
opinion of management that the disposition of such
lawsuits/arbitrations will not have a materially adverse effect on the
Company's operations or financial position.
As with many financial services companies, the Company and its
affiliates have received informal and formal requests for information
from various state and federal governmental agencies and
self-regulatory organizations in connection with inquiries and
investigations of the products and practices of the financial services
industry. In each case, the Company and its affiliates have been and
are providing full cooperation. This discussion should be read in
conjunction with the "Other Regulatory Matters" section of
Management's Narrative Analysis of the Results of Operations and
Financial Condition" included in the Company's 2004 Form 10-K Annual
Report.
Item 6. Exhibits
2. Agreement and Plan of Merger dated June 25, 2003, by and between
USG Annuity & Life Company, United Life & Annuity Insurance
Company, Equitable Life Insurance Company of Iowa and Golden
American, incorporated by reference in Exhibit 99-8 in the
Company's Form 8K filed with the SEC on January 2, 2004 (File No.
333-87270).
3.(i)Restated Articles of Incorporation Providing for the
Redomestication of Golden American Life Insurance Company dated
July 2 and 3, 2003, effective January 1, 2004, incorporated by
reference to Company's 10-K, as filed with the SEC on March 29,
2004 (File No. 033-87270).
Amendment to Articles of Incorporation Providing for the Name
Change of Golden American Life Insurance Company dated November
20, 2003, effective January 1, 2004, incorporated by reference to
the Company's 10-K, as filed with the SEC on March 29, 2004 (File
No. 033-87270).
31
Amendment to Articles of Incorporation Providing for the Change
in Purpose and Powers of ING USA Annuity and Life Insurance
Company dated March 3 and 4, 2004, effective March 11, 2004,
incorporated by reference to the Company's 10-Q, as filed with
the SEC on May 17, 2004 (File No. 033-87270).
(ii) Amended and Restated By-Laws of ING USA Annuity and Life
Insurance Company, effective January 1, 2005.
4. Instruments Defining the Rights of Security Holders, including
Indentures (Annuity Contracts).
(a) Single Premium Deferred Modified Guaranteed Annuity Contract,
Single Premium Deferred Modified Guaranteed Annuity Master
Contract, and Single Premium Deferred Modified Guaranteed Annuity
Certificate - Incorporated herein by reference to Pre-Effective
Amendment No. 1 to Registration Statement on Form S-1 for Golden
American Life Insurance Company as filed with the SEC on February
8, 2002 (File No. 333-67660).
(b) Single Premium Deferred Modified Guaranteed Annuity Contract -
Incorporated herein by reference to the initial Registration
Statement on Form S-1 for Golden American Life Insurance Company,
as filed with the SEC on June 30, 2000 (File No. 333-40596).
(b.1)Single Premium Deferred Modified Guaranteed Annuity Master
Contract and Single Premium Deferred Modified Guaranteed Annuity
Certificate - Incorporated by reference to Post-Effective
Amendment No. 1 to Registration Statement on Form S-1 for Golden
American Life Insurance Company, as filed with the SEC on
September 13, 2000 (File No. 333-40596).
(c) Individual Retirement Rider; Roth Individual Retirement Annuity
Rider; Individual Retirement Annuity Rider; and Simple Retirement
Account Rider - Incorporated herein by reference to
Post-Effective Amendment No. 34 to Registration Statement on Form
N-4 for Golden American Life Insurance Company Separate Account
B, as filed with the SEC on April 15, 2003 (File No. 033-23351).
(c.1)403(b) Rider - Incorporated herein by reference to Initial
Registration Statement on Form S-2 for Golden American Life
Insurance Company, as filed with the SEC on April 15, 2003 (File
No. 333-104547).
(d) Single Premium Deferred Equity Indexed Modified Guaranteed
Annuity Contract; Single Premium Deferred Modified Guaranteed
Annuity Group Master Contract; and Single Premium Deferred Equity
Indexed Modified Guaranteed Annuity Certificate, - Incorporated
32
herein by reference to Pre-Effective Amendment No. 1 to
Registration Statement on Form S-2, as filed with the SEC on
August 13, 2004 (File No. 333-116137).
(e) Interest in Fixed Account I under Variable Annuity Contracts -
Incorporated herein by reference to: Post-Effective Amendment No.
12 to Registration Statement on Form N-4 for Golden American Life
Insurance Company Separate Account B, as filed with the
Securities and Exchange Commission on April 23, 1999 (File Nos.
333-59261, 811-5626); Incorporated by reference to Post-Effective
Amendment No. 3 to Registration Statement on Form N-4 for Golden
American life Insurance Company, as filed with the SEC on April
23, 1999 (File Nos. 333-28769, 811-5626); and Incorporated by
reference to Pre-Effective Amendment No. 1 to Registration
statement on Form N-4 for Golden American Life Insurance Company
Separate Account B, as filed with the SEC on June 24, 2000 (File
Nos. 333-33914, 811-5626).
(f) Interests in Fixed Account II under Variable Annuity Contracts -
Incorporated herein by reference to Post-Effective Amendment No.
7 to Registration Statement on Form N-4 for Separate Account B of
Golden American Life Insurance Company as filed with the SEC on
October 2, 2000 (File No. 333-28679, 811-5626), Incorporated
herein by reference to Post-Effective Amendment No. 2 to
Registration Statement on Form N-4 for Separate Account B of
Golden American Life Insurance Company as filed with the SEC on
October 2, 2000 (File No. 333-30180, 811-5626), Incorporated
herein by reference to Post-Effective Amendment No. 5 to
Registration Statement on Form N-4 for Separate Account B of
Golden American Life Insurance Company as filed with the SEC on
April 23, 1999 (File No. 333-28755, 811-5626), Incorporated
herein by reference to Post-Effective Amendment No. 1 to
Registration Statement on Form N-4 for Separate Account B of
Golden American Life Insurance Company as filed with the SEC on
April 23, 1999 (File No. 333-66757, 811-5626), Incorporated
herein by reference to Pre-Effective Amendment No. 1 to
Registration Statement on Form N-4 for Separate Account B of
Golden American Life Insurance Company as filed with the SEC on
October 26, 2001 (File No. 333-63692, 811-5626), Incorporated
herein by reference to Pre-Effective Amendment No. 1 to
Registration Statement on Form N-4 for Separate Account B of
Golden American Life Insurance Company as filed with the SEC on
December 11, 2001 (File No. 333-70600, 811-5626), Incorporated
herein by reference to Post-Effective Amendment No. 1 to
Registration Statement on Form N-4 for Golden American Life
Insurance Company Separate Account B, as filed with the SEC on
April 16, 2003 (File No. 333-90516, 811-5626), Incorporated
herein by reference to Pre-Effective Amendment No. 1 to
Registration Statement on Form N-4 for Separate Account B of
Golden American Life Insurance Company as filed with the SEC on
July 3, 2003 (File No. 333-101481; 811-5626), and Incorporated
herein by reference to an Initial filing to Registration
33
Statement on Form N-4 for Separate Account B of ING USA Annuity
and Life Insurance Company as filed with the SEC on July 9, 2004
(File No. 333-117260; 811-5626).
(g) Interest in the Guaranteed Account under Variable Annuity
Contracts - Incorporated herein by reference to Pre-Effective
Amendment No. 1 to Registration Statement on Form S-2 for Golden
American Life Insurance Company, as filed with the SEC on June
29, 2001 (File No. 333-57212).
31.1 Certificate of David A. Wheat pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certificate of Harry N. Stout pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certificate of David A. Wheat pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certificate of Harry N. Stout pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
34
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
ING USA Annuity and Life Insurance Company
(Registrant)
May 12, 2005 By: /s/ David A. Wheat
- -------------- -------------------------------------------------------
(Date) David A. Wheat
Director, Senior Vice President and
Chief Financial Officer
(Duly Authorized Officer and Principal Financial
Officer)
35
Exhibit 3.(ii)
AMENDED AND RESTATED BY-LAWS OF
ING USA ANNUITY AND LIFE INSURANCE COMPANY
ARTICLE I
LOCATION
Section 1. The principal office of ING USA Annuity and Life Insurance
Company ("ING USA" or the "Company") shall be in the City of Des Moines, Polk
County, State of Iowa. The Company may establish and maintain such other office
or offices, within or without the State of Iowa, as the Board of Directors
("Board") may authorize or the business of the Company may require.
ARTICLE II
SHAREHOLDERS
Section 1. TIME AND PLACE OF MEETINGS. All meetings of the shareholders of
the Company may be held at such time and place, within or without the State of
Iowa, as fixed by the Board, or as designated in the notice of meeting, provided
that any or all shareholders may participate in such meeting by means of
conference telephone, video conference, or similar telephonic communications by
means of which all persons participating in the meeting can simultaneously hear
each other. A shareholder participating in a meeting by this means shall be
considered to be present at the meeting.
Section 2. ANNUAL MEETING. The annual meeting of the shareholders shall be
held each year at a time and place designated by the Board. Annual meetings may
be called by the Board or by any officer of the Company instructed by the Board
to call the meeting. At the annual meeting, the shareholders shall elect
Directors, and may elect a Chairman of the Board ("Chairman"), to serve until
the next annual meeting or until their successors shall be elected and
qualified, whichever is later. Any other proper business may also be transacted
at the annual meeting
Section 3. SPECIAL MEETINGS. Special meetings of shareholders may be called
at any time by the Chairman, the Board acting upon majority vote, the President
or Secretary of the Company. A special meeting of shareholders shall also be
called by the Secretary upon the written request of shareholders who together
own of record a majority of the outstanding shares of each class of stock
entitled to vote at such meeting, which written request shall state the purpose
for the meeting. No business other than that specified in the notice of meeting
shall be transacted at a special meeting of the shareholders.
1
Section 4. NOTICE OF MEETING. A written notice, in either paper or
electronic format, stating the time and place of any meeting of shareholders,
and in the case of a special meeting the purpose of the meeting, shall be mailed
or delivered to each shareholder entitled to vote at the meeting, as required by
law. Shareholders may waive notice of any meeting, and the presence of a
shareholder at any meeting, in person or represented by proxy, shall constitute
a waiver of notice of such meeting.
Section 5. ORGANIZATION. Meetings of shareholders shall be presided over by
the Chairman, or in his absence by the President, or if in his absence by a
Vice-President, or in the absence of all of the foregoing persons, a person
designated by the Board. The Secretary shall act as the secretary of the
meeting, but in his absence the chairman of the meeting may appoint any person
to act as secretary of the meeting.
Section 6. ADJOURNMENTS. Any meeting of shareholders, annual or special,
may adjourn from time to time to reconvene at the same or some other place, and
notice need not be given of any such reconvened meeting if the time and place
thereof are announced at the meeting at which the adjournment is taken. Any
business which might have been transacted at the original meeting, can be
transacted at the reconvened meeting. If the adjournment is for more than thirty
(30) days, or if after the adjournment a new record date is fixed for the
reconvened meeting, a notice of the reconvened meeting shall be given to each
shareholder of record entitled to vote at the meeting.
Section 7. QUORUM. Except as otherwise provided by law or these by-laws, a
quorum at any meeting of the shareholders shall consist of the number of
shareholders holding a majority of the shares of each class of outstanding
voting stock, present in person or represented by proxy. For purposes of the
foregoing, two or more classes or series of stock shall be considered a single
class if holders thereof are entitled to vote together as a single class at the
meeting.
Section 8. VOTING AND PROXIES. At all meetings of the shareholders, each
shareholder may cast one vote in person or by proxy for each share held. All
proxies must be in writing and signed by the shareholder or by his duly
authorized attorney-in-fact. All proxies shall be filed with the Secretary of
the Company and recorded as part of the minutes of the shareholders meetings.
Section 9. DETERMINATION OF SHAREHOLDERS OF RECORD. The Company shall
determine the shareholders entitled to notice of or to vote at any meeting of
shareholders, or to express consent to an action without a meeting, or to
receive payment of any dividend or other distribution or allotment of rights, or
to exercise any shareholder rights, as follows: (i) the record date for
determining shareholders entitled to notice of or to vote at a meeting of
shareholders shall be at the close of business on the day next preceding the day
on which notice is given, or if notice is waived, at the close of business on
the day next preceding the day on which the meeting is held; (ii) the record
date for determining shareholders entitled to express consent to an action in
writing without a meeting shall be the day on which the written consent is
signed by the shareholder; and (iii) the record date for determining
shareholders for any other purpose shall be at the close of business on the day
on which the Board adopts the resolution relating thereto.
2
Section 10. ACTION WITHOUT MEETING. Any action required or permitted to be
taken at any annual or special meeting of shareholders may be taken without a
meeting, without prior notice or vote, if all shareholders consent in writing to
the action. Written actions must describe the action taken, bear the signature
of each of the shareholders, and be delivered to the Secretary to be filed in
the Company's records. The written action shall be effective on the date the
last of the shareholders has approved the action unless a different date is
specified.
ARTICLE III
BOARD OF DIRECTORS
Section 1. GENERAL POWERS. The affairs, property and business of the
Company shall be managed by the Board.
Section 2. NUMBER, TERM, AND QUALIFICATIONS OF DIRECTORS. The Board shall
consist of not less than five (5) nor more than fifteen (15) persons elected by
the shareholders at the annual meeting of the shareholders. The number of
directors may be increased or decreased by amendment to, or in the manner
provided in, these by-laws or articles of incorporation. The number of directors
to be elected may be determined by a resolution of the shareholders, but in the
absence of such a resolution, there shall be elected the number of directors
that were elected at the previous annual meeting of shareholders. Each Director
shall hold office for the term for which he was elected, until his successor
shall have been elected and qualified, or until his earlier resignation or
removal.
Section 3. RESIGNATION. A Director may resign at any time by providing
written notice to the Board, the Chairman, or the Secretary. If no effective
date is specified in the notice, it will become effective at the time it is
received by the Secretary.
Section 4. REMOVAL. At any meeting of shareholders, any Director or
Directors may be removed from office, with or without cause, by the affirmative
vote of the holders of a majority of the outstanding shares entitled to vote.
Section 5. VACANCIES. Unless otherwise provided in the Articles of
Incorporation or these by-laws, vacancies and any newly created directorships
resulting from any increase in the authorized number of directors may be filled
by the affirmative vote of a majority of the Directors then in office, even if
less than a quorum of the Board. A Director so elected shall be elected for the
unexpired term of his predecessor in office or for the full term of a new
directorship.
Section 6. TIME AND PLACE OF MEETINGS. The Board may hold regular meetings
at such time and place as fixed by the Board from time to time. Special meetings
may also be called by the Chairman, or any other member of the Board, the
President, or the Secretary. Members of the Board may participate in such
meeting by means of conference telephone, video conference, or similar
telephonic communications by means of which all persons participating in the
meeting can simultaneously hear each other. A Director participating in a
meeting by this means is considered to be present at the meeting.
3
Section 7. NOTICE OF MEETINGS. Notice shall not be required with respect to
any regular meeting called by the Board. With respect to a special meeting
called by the Chairman or any other member of the Board, the President or the
Secretary, written notice, in either paper or electronic format, stating the
time, place and purpose of the meeting shall be mailed or delivered to each
Director not less than twenty-four (24) hours before such meeting. Directors may
waive notice of any meeting, and the presence of a Director at any meeting shall
constitute a waiver of notice of such meeting.
Section 8. ORGANIZATION. Meetings shall be presided over by the Chairman,
or in his absence by the President, or if in his absence by a Vice-President, or
in the absence of all of the foregoing persons a person designated by the Board.
The Secretary shall act as the secretary of the meeting, but in his absence the
chairman of the meeting may appoint any person to act as secretary of the
meeting.
Section 9. ADJOURNMENTS. Any meeting may be adjourned from time to time to
reconvene at the same or some other place, and notice need not be given of any
such reconvened meeting if the time and place thereof are announced at the
meeting at which the adjournment is taken. Any business which might have been
transacted at the original meeting, can be transacted at the reconvened meeting.
Section 10. QUORUM. Except as otherwise provided by law or these by-laws, a
majority of the entire Board currently holding office shall constitute a quorum
at any meeting of the Board. The act of a majority of the Directors at a meeting
at which a quorum is present shall constitute the act of the Board, unless the
law or these by-laws shall require the vote of a greater number. At any meeting
of the Board where a quorum is not present, the Directors present shall adjourn
the meeting until such time as a quorum shall be present.
Section 11. ACTION BY BOARD OF DIRECTORS WITHOUT MEETING. Any action that
might be taken at a meeting of the Board may be taken without a meeting if done
in writing signed by all of the Directors currently holding office. Written
actions must describe the action taken, bear the signature of each of the
Directors, and be delivered to the Secretary to be filed in the Company's
records. The written action shall be effective on the date the last of the
Directors has approved the action unless a different date is specified.
ARTICLE IV
COMMITTEES OF THE BOARD
Section 1. COMMITTEE CREATION. The Board may, in its discretion, appoint
one or more committees consisting of one or more members of the Board. The
duties and responsibilities of each committee so appointed shall be determined
in accordance with customary corporate practice, and as more specifically set
forth in the Board resolution creating such committee and in the charter of such
Committee which must be approved by the Board. Each committee shall have all the
authority of the Board, except as expressly limited by the Board and applicable
law. Committee actions shall be subject to revision or alteration by the Board
provided rights of third parties would not be affected.
4
Section 2. QUORUM; ALTERNATE MEMBER. A majority of the members of any
Committee appointed by the Board shall constitute a quorum for the transaction
of any business at any meeting of such Committee. The Board may appoint one or
more members of the Board as alternate members of any Committee, who will act in
the place of any absent or disqualified Committee member. Any vacancy occurring
in the membership of the Committee will be filled by any alternate Committee
member previously appointed by the Board, until such time as the Board may
appoint a replacement Committee member who will serve for the remainder of the
vacating member's term. If a committee member is absent from or disqualified
from voting at a Committee meeting and no alternate Committee member has been
appointed by the Board, the remaining member or members of the Committee at the
meeting, whether or not he or they constitute a quorum, may unanimously select
from the Board a Director to act at the meeting in place of the absent or
disqualified Committee member. The Board may remove a member of a Committee,
with or without cause, whenever in its judgment such removal would serve the
best interests of the Company.
Section 3. COMMITTEE RULES AND OPERATIONS. Unless the Board otherwise
provides, each Committee appointed by the Board may adopt, amend and repeal
rules for the conduct of its business without the approval of the Board, so long
as such rules are not inconsistent with the Board resolution creating such
Committee or with the Committee charter. In the absence of a specific provision
in the Committee charter or the rules of the Committee, each Committee shall
conduct its business in the same manner as the Board conducts its business
pursuant to the relevant provisions of Article III of these by-laws.
Section 4. REPORTS TO THE BOARD. The Secretary of the Company (or such
other officer as the Committee members shall designate) shall keep a written
record of each Committee's proceedings and shall submit a report of the
Committee's activities to the Board as stated in the Board resolution creating
such Committee or as otherwise required by the Board.
ARTICLE V
OFFICERS
Section 1. ELECTION OF OFFICERS. As soon as practicable after the annual
meeting of shareholders, the Board may, at its option, elect from among its
members a Chairman, who shall be designated as the Chairman of the Board and an
elected officer of the Company, but in any event shall elect a President; one or
more Vice Presidents; a Treasurer; a Secretary; and such other officers as the
Board deems necessary and may give them such designations or titles it considers
desirable. The Board may authorize the classification of certain levels of Vice
President and may authorize Assistant Treasurers, Assistant Secretaries, and
other categories it deems proper. The Board of Directors may also elect or, by
resolution, delegate to the President of the Company, the authority to appoint
from time to time one or more business unit Presidents to act as the chief
operating officers of the various business units of the Company. Unless
prohibited by applicable law, the same person may hold two or more offices
simultaneously.
Section 2. TERM OF OFFICE. Elected officers shall hold office until a
successor is elected and qualified, or until his death, resignation, removal or
suspension. Any officer vacancy may be filled prior to the next annual election
by the Board at any regular or special meeting of the Board, or by written Board
5
action without a meeting. Election as an officer shall not of itself create any
contractual rights or expectation of continued employment.
The Board may remove an elected officer, with or without cause, whenever in
its judgment such removal would serve the best interests of the Company. Such
removal may be with or without prejudice to the contractual rights of such
officer, if any.
An officer may resign at any time upon written notice to the Board, the
President or the Secretary of the Company. Such resignation shall take effect at
the time specified therein, and unless otherwise specified therein, no
acceptance of such resignation shall be necessary to make it effective. If no
time is specified in the written resignation notice, it shall be effective upon
delivery.
Section 3. POWERS AND DUTIES OF THE CHAIRMAN OF THE BOARD. If one is
elected, the Chairman shall preside at all meetings of the Board and shall
perform such other duties and have such other authority as the Board may from
time to time prescribe.
Section 4. POWERS AND DUTIES OF THE PRESIDENT. The President shall have
operational charge and management of the affairs, property and business of the
Company, as well as all duties prescribed by the Board from time to time. The
President shall also be responsible to ensure that all directives and
resolutions of the Board are carried into effect.
Any business unit President appointed by the President shall be the chief
operating executive for and shall have supervisory authority over the business
unit for which he is appointed. Powers and duties of the business unit
Presidents shall also include, but not be limited to, all of the authority,
powers, and duties usually incident to the office of Vice President.
Section 5. POWERS AND DUTIES OF VICE PRESIDENTS. Vice Presidents shall have
such authority, powers and duties in the management of the Company as generally
pertain to such office, as well as all duties prescribed by the Board or
President from time to time.
Section 6. POWERS AND DUTIES OF THE TREASURER. The Treasurer (and Assistant
Treasurers), except as otherwise required by law, shall have charge and custody
of all funds and securities of the Company under the direction of the Board;
shall deposit all moneys of the company to the credit of the Company in such
depositories as are authorized by the Board; shall see that all expenditures are
duly authorized and evidenced; and perform all other duties usually incident to
the office of Treasurer, as well as all duties prescribed by the Board or
President from time to time.
Section 7. POWERS AND DUTIES OF THE SECRETARY. The Secretary (and Assistant
Secretaries) shall give, or cause to be given, all required notices of Board and
shareholders meetings; attend all Board and shareholders meetings and record and
retain the minutes of such meetings (if the Secretary is absent from any
meeting, the Chairman of the meeting may appoint a temporary secretary to act at
such meeting); have custody of the stock register, minute books, and seal of the
Company; and perform all other duties usually incident to the office of
Secretary, as well as all duties prescribed by the Board from time to time.
6
ARTICLE VI
CAPITAL STOCK
All certificates of stock shall be signed by the President or a Vice
President, and the Secretary or an Assistant Secretary of the Company. When a
certificate is signed by a transfer agent or registrar appointed by the Board of
Directors, the signature of any corporate officer and the corporate seal upon
the certificate may be facsimiles, engraved, printed, or digital. The Company
may issue a new certificate of stock to replace one that has been lost, stolen,
or destroyed, and may require the owner or the owner's legal representative to
indemnify the Company against any claim that may be made against it on account
of the loss.
ARTICLE VII
INDEMNIFICATION OF DIRECTORS, OFFICERS, AND OTHER PERSONNEL
Section 1. RIGHT TO INDEMNIFICATION AND STANDARD OF CONDUCT. To the full
extent permitted by Iowa law, Section 490.851-490.859, as amended from time to
time, or by other provisions of applicable law, each person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, wherever brought, whether civil, criminal,
administrative or investigative, by reason of the fact that he or she is or was
a director, officer, fiduciary or employee of the Company, or is or was serving
at the request of the Company as a director, officer, fiduciary, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, shall be indemnified by the company against expenses, including
attorneys' fees, judgments, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with such action, suit or proceeding,
if he acted in good faith and in a manner reasonably believed to be in and not
opposed to the best interests of the Company, and with respect to any criminal
action or proceeding, had no reasonable cause to believe his conduct was
unlawful.
Section 2. AUTHORIZATION. Any indemnification under this Article VII
(unless ordered by a court) shall be made by the Company only as authorized in
the specific case upon a determination that the indemnification is proper in the
circumstances because the person claiming indemnification has met the applicable
standard of conduct set forth in Section 1. Such determination shall be made by
the Board by a majority vote of a quorum consisting of Directors who were not
parties to the action, suit or proceeding in question. If such a quorum is not
obtainable, the Board shall retain independent legal counsel who shall make such
determination in a written opinion.
Section 3. ADVANCE PAYMENT OF EXPENSES. Expenses (including attorney's
fees) incurred in defending a civil or criminal action, suit, or proceeding may
be paid by the Company in advance of the final disposition of such action upon
receipt of an undertaking by or on behalf of a person entitled to claim
indemnification to repay such amount, unless it is ultimately determined that he
is entitled to be indemnified under this Article VII.
Section 4. INSURANCE. The Company shall have power to purchase and maintain
insurance on behalf of any person described in Section 1 against any liability
asserted against and incurred by him, whether or not the Company would have the
power to indemnify him against such liability under this Article VII.
7
Section 5. NON-EXCLUSIVITY. The indemnification provided by this Article
VII shall not be deemed exclusive of any other rights to which any person
indemnified may be entitled under the Articles of Incorporation, any agreement,
insurance policy, vote of the shareholders or disinterested Directors, or
otherwise.
Section 6. CONTINUANCE. The indemnification provided by this Article VII
shall continue as to a person who has ceased to be director, officer, fiduciary,
employee or agent with regard to acts or omissions of such person occurring or
alleged to have occurred while the person was so engaged, shall apply whether or
not the claim against such person arises out of matters occurring before the
adoption of this by-law, and shall inure to the benefit of heirs, executors, and
administrators of such person.
ARTICLE VIII
MISCELLANEOUS
Section 1. FISCAL YEAR. The fiscal year of the Company begins with January
first and ends with December thirty-first, or as otherwise determined by the
Board from time to time.
Section 2. SEAL. The seal of the Company shall bear the corporate name of
the Company, the place of its home office and such other features as may be
approved by the Board from time to time. The seal of the Company shall be kept
in the custody of the Secretary and may be affixed to any instrument requiring a
seal and may be duly attested to by any officer of the Company.
Section 3. DIVIDENDS. The Board may from time to time declare, subject
where required to regulatory approval or notice, and cause to be paid dividends
of cash, property, or shares of stock or securities of, or owned by, the
Company.
Section 4. INVESTMENTS. The President, a Vice President, the Secretary, and
the Treasurer, or other officers or employees designated by the Board, have
authority to sign instruments, including but not limited to: all note, bond,
stock, or other securities purchase agreements and security, mortgage, or real
estate commitment letters and amendments thereto, deeds and leases, and
assignments, releases, or partial releases, or payment or performance
moratoriums of any mortgages, debt obligations or other security interests held
by the Company.
Section 5. POLICY CONTRACTS. All insurance policies and contracts for
annuities, guaranteed investment contracts (GICs) or funding agreements, and for
the disposition of the proceeds thereof, may be signed by any of the following
officers: the President, a Vice President, the Treasurer, the Secretary or an
Assistant Secretary; with respect to GICs or funding agreements, the business
unit President may also execute contracts on behalf of the Company. The
signatures may be facsimile, digital or electronic signatures.
Section 6. AGENCY AND OTHER CONTRACTS. The President, a Vice President, the
Secretary and other officers or employees designated by the Board shall have
authority to sign or approve agency contracts and related agreements, tax
returns or reports, and any other reports filed with governmental agencies.
8
Section 7. OTHER INSTRUMENTS. All other contracts and written instruments
not previously described shall be signed by one of the following officers: the
President, a Vice President, the Secretary or the Treasurer, or by any other
officer or employee of the Company designated by the Board, or by such other
person or persons as may be designated from time to time by the Board.
Section 8. STATUTORY AGENTS. The President, a Vice President and the
Secretary or an Assistant Secretary are authorized to appoint statutory agents
of the Company and to execute powers of attorney as needed, to accept service of
process against the Company, to execute papers to comply with laws in order to
qualify the Company to do business in any state, territory, district, country or
jurisdiction and to take other actions needed to be taken to comply with laws,
rules, or regulations in order to qualify the Company to do business.
Section 9. FORM OF RECORDS. Unless otherwise required by law, any records
maintained by the Company in the regular course of its business, including its
stock ledger, books of account and minute books, may be kept on, or be in the
form of, magnetic tape, magnetic disk, optical disk, CD-ROM, microfiche,
microfilm, or any other information storage format, provided that the records so
kept can be converted into clearly legible form within a reasonable time.
Section 10. AMENDMENTS. The Board shall have the power to make, alter,
amend or repeal any and all of these by-laws. Any such action by the Board may
be amended, altered, or repealed by the shareholders.
These amended and restated bylaws were duly adopted by the Board of
Directors of the Company on the 15th day of December, 2004
/s/ Paula Cludray-Engelke
--------------------------------------
Paula Cludray-Engelke
9
Exhibit 31.1
CERTIFICATION
I, David A. Wheat, certify that:
1. I have reviewed this quarterly report on Form 10-Q of ING USA Annuity and
Life Insurance Company;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: May 12, 2005
By /s/ David A. Wheat
----------------------------------------------------------------
David A. Wheat
Director, Senior Vice President and Chief Financial Officer
(Duly Authorized Officer and Principal Financial Officer)
Exhibit 31.2
CERTIFICATION
I, Harry N. Stout, certify that:
1. I have reviewed this quarterly report on Form 10-Q of ING USA Annuity and
Life Insurance Company;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: May 12, 2005
By /s/ Harry N. Stout
--------------------------------------------------------------
Harry N. Stout
President
(Duly Authorized Officer and Principal Executive Officer)