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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
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: 333-49581, 033-63657
ING INSURANCE COMPANY OF AMERICA
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(Exact name of registrant as specified in its charter)
Florida 06-1286272
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(State or other jurisdiction of incorporation or organization) (IRS employer identification no.)
Corporate Center One, 2202 North Westshore Boulevard, #350, Tampa, Florida 33607
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (813) 281-3773
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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: 25,500 shares of Common Stock
as of May 14, 2004, all of which were directly owned by ING Life Insurance and
Annuity Company.
NOTE: WHEREAS ING INSURANCE COMPANY OF AMERICA MEETS THE CONDITIONS SET FORTH IN
GENERAL INSTRUCTION H(1)(a) AND (b) OF FORM 10Q, THIS FORM IS BEING FILED WITH
THE REDUCED DISCLOSURE FORMAT PURSUANT TO GENERAL INSTRUCTION H(2).
ING INSURANCE COMPANY OF AMERICA
(A WHOLLY-OWNED SUBSIDIARY OF ING LIFE INSURANCE AND ANNUITY COMPANY)
FORM 10-Q FOR THE PERIOD ENDED MARCH 31, 2004
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION (UNAUDITED)
Item 1. Financial Statements:
Condensed Statements of Income 3
Condensed Balance Sheets 4
Condensed Statements of Changes in Shareholder's Equity 5
Condensed Statements of Cash Flows 6
Notes to Condensed Financial Statements 7
Item 2. Management's Narrative Analysis of the Results of
Operations and Financial Condition 12
Item 4. Controls and Procedures 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
2
ING INSURANCE COMPANY OF AMERICA
(A WHOLLY-OWNED SUBSIDIARY OF ING LIFE INSURANCE AND ANNUITY COMPANY)
FORM 10-Q FOR THE PERIOD ENDED MARCH 31, 2004
PART I. FINANCIAL INFORMATION (UNAUDITED)
ITEM 1. FINANCIAL STATEMENTS
ING INSURANCE COMPANY OF AMERICA
(A WHOLLY-OWNED SUBSIDIARY OF ING LIFE INSURANCE AND ANNUITY COMPANY)
CONDENSED STATEMENTS OF INCOME
(Unaudited)
(Millions)
THREE MONTHS ENDED MARCH 31,
2004 2003
------------- --------------
Revenue:
Fee income $ 2.5 $ 2.5
Net investment income 2.4 2.5
Net realized capital gains 0.4 0.3
------------- --------------
Total revenue 5.3 5.3
------------- --------------
Benefits, losses and expenses:
Benefits:
Interest credited and other benefits to policyholders 1.5 2.4
Underwriting, acquisition, and insurance expenses:
General expenses 0.4 0.5
Commissions 0.5 0.4
Policy acquisition costs deferred (0.1) (0.1)
Amortization of deferred policy acquisition costs and value of
business acquired 1.2 1.9
------------- --------------
Total benefits, losses and expenses 3.5 5.1
------------- --------------
Income before income taxes 1.8 0.2
Income tax expense 0.5 -
------------- --------------
Net income $ 1.3 $ 0.2
============= ==============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
3
ING INSURANCE COMPANY OF AMERICA
(A WHOLLY-OWNED SUBSIDIARY OF ING LIFE INSURANCE AND ANNUITY COMPANY)
CONDENSED BALANCE SHEETS
(Millions, except share data)
MARCH 31, DECEMBER 31,
2004 2003
------------- --------------
(Unaudited)
ASSETS
Investments:
Fixed maturities, available for sale, at fair value (amortized cost of
$190.5 at 2004 and $127.9 at 2003) $ 199.4 $ 133.1
Securities pledged to creditors (amortized cost of $7.6 at 2004) 7.9 -
------------- --------------
Total investments 207.3 133.1
Cash and cash equivalents 7.5 4.8
Short term investments under securities loan agreement 8.2 -
Accrued investment income 2.0 1.3
Deferred policy acquisition costs 1.0 0.9
Value of business acquired 30.1 31.6
Other assets 1.5 20.3
Assets held in separate accounts 576.6 660.7
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Total assets $ 834.2 $ 852.7
============= ==============
LIABILITIES AND SHAREHOLDER'S EQUITY
Policy liabilities and accruals:
Due to affiliates $ 2.6 $ 0.6
Other policyholder's funds 141.0 86.6
Payables under securities loan agreement 8.2 -
Current income taxes 2.7 1.7
Deferred income taxes 7.7 7.9
Other liabilities 2.5 2.6
Liabilities related to separate accounts 576.6 660.7
------------- --------------
740.3 760.1
------------- --------------
Shareholder's equity
Common stock (35,000 shares authorized, 25,500 issued and
outstanding; $100 per share par value) 2.5 2.5
Additional paid-in capital 181.2 181.2
Accumulated other comprehensive income 1.2 2.2
Retained deficit (92.0) (93.3)
------------- --------------
Total shareholder's equity 92.9 92.6
------------- --------------
Total liabilities and shareholder's equity $ 834.2 $ 852.7
============= ==============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
4
ING INSURANCE COMPANY OF AMERICA
(A WHOLLY-OWNED SUBSIDIARY OF ING LIFE INSURANCE AND ANNUITY COMPANY)
CONDENSED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
(Unaudited)
(Millions)
THREE MONTHS ENDED MARCH 31,
2004 2003
------------- --------------
Shareholder's equity, beginning of period $ 92.6 $ 85.9
Comprehensive income (loss):
Net income (loss) 1.3 0.2
Other comprehensive income net of tax: Unrealized gain (loss)
on securities ($(1.5) and $1.5, pretax year to date) (1.0) 1.0
------------- --------------
Total comprehensive income (loss) 0.3 1.2
Other - (0.1)
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Shareholder's equity, end of period $ 92.9 $ 87.0
============= ==============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
5
ING INSURANCE COMPANY OF AMERICA
(A WHOLLY-OWNED SUBSIDIARY OF ING LIFE INSURANCE AND ANNUITY COMPANY)
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(Millions)
THREE MONTHS ENDED MARCH 31,
2004 2003
------------- --------------
Net cash provided by operating activities $ 1.3 $ 5.4
Cash Flows from Investing Activities
Proceeds from the sale of:
Fixed maturities available for sale 71.1 25.6
Investment maturities and collections of:
Fixed maturities available for sale 4.5 3.8
Acquisition of investments:
Fixed maturities available for sale (74.2) (13.2)
Short-term investments - -
Other, net - -
------------- --------------
Net cash provided by investing activities 1.4 16.2
------------- --------------
Cash Flows from Financing Activities
Deposits and interest credited for investment contracts 0.1 0.1
Maturities and withdrawals from insurance and investment contracts (0.1) (2.2)
Other, net - (3.8)
------------- --------------
Net cash used for financing activities - (5.9)
------------- --------------
Net change in cash and cash equivalents 2.7 15.7
Cash and cash equivalents, beginning of period 4.8 5.2
------------- --------------
Cash and cash equivalents, end of period $ 7.5 $ 20.9
============= ==============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
6
ING INSURANCE COMPANY OF AMERICA
(A WHOLLY-OWNED SUBSIDIARY OF ING LIFE INSURANCE AND ANNUITY COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
ING Insurance Company of America ("IICA", or the "Company"), is a provider
of financial products and services in the United States. The Company is a
wholly-owned subsidiary of ING Life Insurance and Annuity Company
("ILIAC"). ILIAC is a wholly-owned subsidiary of Lion Connecticut Holdings,
Inc. ("Lion Connecticut"). Lion Connecticut's ultimate parent is ING Groep
N.V. ("ING"), a financial services company based in The Netherlands.
The condensed financial statements and notes as of March 31, 2004 and
December 31, 2003 and for the three month periods ended March 31, 2004
and 2003 ("interim periods") have been prepared in accordance with
accounting principles generally accepted in the United States of America
and are unaudited. The condensed financial statements reflect all normal
recuring 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 2003 Annual Report on Form 10-K. The results of
operations for the interim periods should not be considered indicative of
results to be expected for the full year.
The Company has one operating segment, U.S. Financial Services ("USFS"),
and all revenue reported by the Company comes from external customers.
2. RECENTLY ADOPTED ACCOUNTING STANDARDS
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.
SOP 03-1 establishes several new accounting and disclosure requirements
for certain nontraditional long-duration contracts and for separate
accounts including, among other things, a requirement that assets and
liabilities of separate account arrangements that do not meet certain
criteria be accounted for as general account assets and liabilities, and
that revenues and expenses related to such arrangements be consolidated
with respective revenue and expense lines in the Condensed Statement of
Operations. In addition, the SOP requires additional liabilities be
established for certain guaranteed death and other benefits and for
Universal Life products with certain patterns of cost of insurance
charges, and that sales inducements provided to contractholders be
recognized on the balance sheet separately from deferred acquisition
costs and amortized as a component of benefits expense using methodology
and assumptions consistent with those used for amortization of deferred
policy acquisition costs.
The Company evaluated all requirements of SOP 03-1 and determined that it
is affected by the SOP's requirements to account for certain separate
account arrangements as general account arrangements and to defer,
amortize, and recognize separately, sales inducements to contractholders.
Requirements to establish additional liabilities for minimum guarantee
benefits are applicable to the Company, however, the Company's policies
on policy liabilities have historically been, and continue to be, in
conformity with the requirements newly
7
established. Requirements for recognition of additional liabilities for
Universal Life products with certain patterns of cost of insurance
charges are not applicable to the Company.
The adoption of SOP 03-1 did not have a significant effect on the Company's
results of operations, and had no impact on the Company's net income.
In 2003, the Derivative Implementation Group ("DIG") responsible for
issuing guidance on behalf of the FASB for implementation of FAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" issued
Statement Implementation Issue No. B36, "Embedded Derivatives: Modified
Coinsurance Arrangements and Debt Instruments That Incorporate Credit Risk
Exposures That Are Unrelated or Only Partially Related to the Credit
Worthiness of the Obligor under Those Instruments" ("DIG B36"). Under this
interpretation, modified coinsurance and coinsurance with funds withheld
reinsurance agreements as well as other types of receivables and payables
where interest is determined by reference to a pool of fixed maturity
assets or total return debt index may be determined to contain embedded
derivatives that are required to be bifurcated. The Company adopted DIG B36
on October 1, 2003. The Company has no investment or insurance products
that are applicable to the guidance and, therefore, the guidance has no
impact on the Company's financial position, results of operations or cash
flows.
3. DEFERRED POLICY ACQUISITION COSTS AND VALUE OF BUSINESS ACQUIRED
Deferred Policy Acquisition Costs ("DAC") is an asset, which represents
certain costs of acquiring certain insurance business, which are deferred
and amortized. These costs, all of which vary with and are primarily
related to the production of new and renewal business, consist principally
of commissions, certain underwriting and contract issuance expenses, and
certain agency expenses. Value of business acquired ("VOBA") is an asset,
which represents the present value of estimated net cash flows embedded in
the Company's contracts, which existed at the time the Company was acquired
by ING. DAC and VOBA are evaluated for recoverability at each balance sheet
date and these assets would be reduced to the extent that gross profits are
inadequate to recover the asset.
The amortization methodology varies by product type based upon two
accounting standards: FAS No. 60, "Accounting and Reporting by Insurance
Enterprises" ("FAS No. 60") and FAS No. 97, "Accounting and Reporting by
Insurance Enterprises for Certain Long-Duration Contracts and Realized
Gains and Losses from the Sale of Investments" ("FAS No. 97").
Under FAS No. 60, acquisition costs for traditional life insurance
products, which primarily include whole life and term life insurance
contracts, are amortized over the premium payment period in proportion to
the premium revenue recognition.
Under FAS No. 97, acquisition costs for universal life and investment-type
products, which include universal life policies and fixed and variable
deferred annuities, are amortized over the life of the blocks of policies
(usually 25 years) in relation to the
8
emergence of estimated gross profits from surrender charges, investment
margins, mortality and expense margins, asset-based fee income, and actual
realized gains (losses) on investments. Amortization is adjusted
retrospectively when estimates of current or future gross profits to be
realized from a group of products are revised.
VOBA activity for the three month periods ended March 31, 2004 and 2003
was as follows:
(MILLIONS) 2004 2003
---------- ---------- ----------
Balance at December 31, 2003 $ 31.6 $ 34.2
Interest accrued at 5.0% - 7.0% 0.4 0.7
Amortization (1.5) (3.1)
Adjustment for unrealized gain (loss) (0.4) -
---------- ----------
Balance at March 31, 2004 $ 30.1 $ 31.8
========== ==========
4. SEPARATE ACCOUNTS
Separate Account assets and liabilities generally represent funds
maintained to meet specific investment objectives of contractholders who
bear the investment risk, subject, in limited cases, to minimum guaranteed
rates. Investment income and investment gains and losses generally accrue
directly to such contractholders. The assets of each account are legally
segregated and are not subject to claims that arise out of any other
business of the Company.
Separate Account assets supporting variable options under universal life
and annuity contracts are invested, as designated by the policyholder or
participant (who bears the investment risk subject, in limited cases, to
minimum guaranteed rates) under a contract in shares of mutual funds which
are managed by the Company, or in other selected mutual funds not managed
by the Company.
Separate Account assets and liabilities are carried at fair value and shown
as separate captions in the Consolidated Balance Sheets. Deposits,
investment income and net realized and unrealized capital gains and losses
of the Separate Accounts are not reflected in the Consolidated Financial
Statements (with the exception of realized and unrealized capital gains and
losses on the assets supporting the guaranteed interest option). The
Consolidated Statements of Cash Flows do not reflect investment activity of
the Separate Accounts.
Assets and liabilities of separate account arrangements that do not meet
the criteria in SOP 03-1 for separate presentation in the Condensed
Balance Sheets (those arrangements supporting the guaranteed interest
option) and revenues and expenses related to such arrangements, were
reclassified to the general account on January 1, 2004, in accordance
with the SOP requirements.
9
5. ADDITIONAL INSURANCE BENEFITS AND MINIMUM GUARANTEES
Under SOP 03-1, the Company calculates an additional liability (the "SOP
reserve") for certain guaranteed benefits in order to recognize the
expected value of death benefits in excess of the projected account
balance over the accumulation period based on total expected assessments.
The SOP reserve calculated is the minimum guaranteed death benefits
("MGDB") reserve and is determined each period by estimating the expected
value of death benefits in excess of the projected account balance and
recognizing the excess ratably over the accumulation period based on total
expected assessments. The Company regularly evaluates estimates used to
adjust the additional liability balance, with a related charge or credit to
benefit expense, if actual experience or other evidence suggests that
earlier assumptions should be revised. The following assumptions and
methodology were used to determine the MGDB SOP reserve at March 31, 2004:
AREA ASSUMPTIONS/BASIS FOR ASSUMPTIONS
------------------------------- ------------------------------------------------------------------
Data used Based on 101 investment performance scenarios stratified based on
10,000 random generated scenarios
Mean investment performance 8.5%
Volatility 20.0%
Mortality 60.0% of the 90-95 ultimate mortality table
Lapse rates Vary by contract type and duration; range between 1.0% and 40.0%
Discount rates 6.5%, based on the portfolio earned rate of the general account
As of March 31, 2004, the separate account liability subject to SOP 03-1
for minimum guaranteed benefits and the additional liability recognized
related to minimum guarantees is $561.0 million and $0.2 million,
respectively. During the three months ended March 31, 2004, there were no
incurred guaranteed benefits and paid guaranteed benefits. The net amount
at risk (net of reinsurance) and the weighted average attained age of
contractholders is $7.2 million and 72, respectively, as of March 31,
2004.
The aggregate fair value of assets, by major investment asset category,
supporting separate accounts with additional insurance benefits and minimum
investment return guarantees as of March 31, 2004 are:
(MILLIONS)
----------
Private Corporate Securities $ 335.8
Public Corporate Securities 39.3
U.S. Treasury & Agency 27.4
Commercial Mortgage Obligations 22.8
Commercial Mortgage Backed Securities 135.7
--------------
Total $ 561.0
==============
10
6. INCOME TAXES
The Company's effective tax rates for the three months ended March 31,
2004 and 2003 were 27.3% and 0.0%, respectively. The increase in the
effective tax rate resulted primarily from a larger increase in pre-tax
book income relative to the increase in the deduction allowed for
dividends received.
7. COMMITMENTS AND CONTINGENT LIABILITIES
LITIGATION
The Company is a party to threatened or pending lawsuits arising from the
normal conduct of business. Due to the climate in insurance and business
litigation, 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, in light of
existing insurance, reinsurance and established reserves, it is the opinion
of management that the disposition of such lawsuits will not have a
materially adverse effect on the Company's operations or financial
position.
8. RECLASSIFICATIONS AND CHANGES TO PRIOR YEAR PRESENTATION
Certain reclassifications have been made to prior year financial
information to conform to the current year classifications.
During 2003, certain changes were made to the classification of MGDB
excess reserves, which previously were included as a reduction to
fee income period. These changes had no impact on net income or
shareholder's equity of the Company. The following summarizes the
change in classification to each financial statement line item (in
millions):
PREVIOUSLY
THREE MONTHS ENDED 3/31/2003 REPORTED 2003 ADJUSTMENTS RESTATED 2003
----------------------------------------------------
Fee Income $ 1.9 $ 0.6 $ 2.5
----------------------------------------------------
Total Revenue $ 4.7 $ 0.6 $ 5.3
====================================================
Interest credited and other benefits to policyholders $ 1.8 $ 0.6 $ 2.4
----------------------------------------------------
Total Expense $ 4.5 $ 0.6 $ 5.1
====================================================
PREVIOUSLY
SIX MONTHS ENDED 6/30/2003 REPORTED 2003 ADJUSTMENTS RESTATED 2003
----------------------------------------------------
Fee Income $ 3.6 $ 1.7 $ 5.3
----------------------------------------------------
Total Revenue $ 9.7 $ 1.7 $ 11.4
====================================================
Interest credited and other benefits to policyholders $ 2.1 $ 1.7 $ 3.8
----------------------------------------------------
Total Expense $ 6.7 $ 1.7 $ 8.4
====================================================
PREVIOUSLY
NINE MONTHS ENDED 9/30/2003 REPORTED 2003 ADJUSTMENTS RESTATED 2003
----------------------------------------------------
Fee Income $ 5.0 $ 2.7 $ 7.7
----------------------------------------------------
Total Revenue $ 13.5 $ 2.7 $ 16.2
====================================================
Interest credited and other benefits to policyholders $ 3.0 $ 2.7 $ 5.7
----------------------------------------------------
Total Expense $ 7.5 $ 2.7 $ 10.2
====================================================
PREVIOUSLY
TWELVE MONTHS ENDED 12/31/2003 REPORTED 2003 ADJUSTMENTS RESTATED 2003
----------------------------------------------------
Fee Income $ 6.7 $ 3.0 $ 9.7
----------------------------------------------------
Total Revenue $ 15.6 $ 3.0 $ 18.6
====================================================
Interest credited and other benefits to policyholders $ 0.3 $ 3.0 $ 3.3
----------------------------------------------------
Total Expense $ 7.3 $ 3.0 $ 10.3
====================================================
11
ITEM 2. MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
OVERVIEW
The following narrative analysis of the results of operations and
financial condition presents a review of the ING Insurance Company of
America ("IICA", or the "Company") as of March 31, 2004 and December 31,
2003 and for the three month periods ended March 31, 2004 and 2003. This
review should be read in conjunction with the condensed financial
statements and other data presented herein, as well as the "Management's
Narrative Analysis of the Results of Operations and Financial Condition"
section contained in the Company's 2003 Annual Report on Form 10-K.
NATURE OF BUSINESS
The Company principally offers annuity contracts to individuals on a
qualified non-qualified basis and to employer sponsored retirement plans
qualified under Internal Revenue Code Sections 401, 403, and 408. The
Company's products are offered primarily to individuals and
employer-sponsored groups in the education market. The Company's
products are generally sold through a managed network of broker/dealers
and dedicated career agents.
RECENTLY ADOPTED ACCOUNTING STANDARDS
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. SOP 03-1 establishes several new accounting and disclosure
requirements for certain nontraditional long-duration contracts and
for separate accounts including, among other things, a requirement
that assets and liabilities of separate account arrangements that do
not meet certain criteria be accounted for as general account assets
and liabilities, and that revenues and expenses related to such
arrangements, be consolidated with respective revenue and expense
lines in the Condensed Statement of Operations. In addition, the SOP
requires additional liabilities be established for certain guaranteed
death benefits and for products with certain patterns of cost of
insurance charges, and that sales inducements provided to
contractholders be recognized on the balance sheet separately from
deferred acquisition costs and amortized as a component of benefits
expense using methodology and assumptions consistent with those used
for amortization of deferred policy acquisition costs.
The Company evaluated all requirements of SOP 03-1 and determined that
it is affected by the SOP's requirements to account for certain
separate account arrangements as general account arrangements and to
defer, amortize, and recognize separately, sales inducements to
contractholders. Requirements to establish additional liabilities for
minimum guarantee benefits are applicable to the Company, however, the
Company's policies on policy liabilities have historically been, and
continue to be, in conformity with the requirements newly established.
Requirements for recognition of additional liabilities for Universal
Life products with certain patterns of cost of insurance charges are
not applicable to the Company.
12
The adoption of SOP 03-1 did not have a significant effect on the
Company's results of operations, and had no impact on the Company's
net income.
In 2003, the Derivative Implementation Group ("DIG") responsible for
issuing guidance on behalf of the FASB for implementation of FAS No.
133, "Accounting for Derivative Instruments and Hedging Activities"
issued Statement Implementation Issue No. B36, "Embedded Derivatives:
Modified Coinsurance Arrangements and Debt Instruments That Incorporate
Credit Risk Exposures That Are Unrelated or Only Partially Related to
the Credit Worthiness of the Obligor under Those Instruments" ("DIG
B36"). Under this interpretation, modified coinsurance and coinsurance
with funds withheld reinsurance agreements as well as other types of
receivables and payables where interest is determined by reference to a
pool of fixed maturity assets or total return debt index may be
determined to contain embedded derivatives that are required to be
bifurcated. The Company adopted DIG B36 on October 1, 2003. The Company
has no investment or insurance products that are applicable to the
guidance and, therefore, the guidance has no impact on the Company's
financial position, results of operations or cash flows.
CRITICAL ACCOUNTING POLICIES
GENERAL
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires the use of
estimates and assumptions in certain circumstances that affect amounts
reported in the accompanying condensed financial statements and related
footnotes. These estimates and assumptions are evaluated on an on-going
basis based on historical developments, market conditions, industry
trends and other information that is reasonable under the circumstances.
There can be no assurance that actual results will conform to estimates
and assumptions, and that reported results of operations will not be
materially adversely affected by the need to make future accounting
adjustments to reflect changes in these estimates and assumptions from
time to time.
The Company has identified the following estimates as critical in that
they involve a higher degree of judgment and are subject to a
significant degree of variability. In developing these estimates
management makes subjective and complex judgments that are inherently
uncertain and subject to material change as facts and circumstances
develop. Although variability is inherent in these estimates, management
believes the amounts provided are appropriate based upon the facts
available upon compilation of the condensed financial statements.
INVESTMENT IMPAIRMENT TESTING
The Company reviews the general account investments for impairments by
considering the length of the time and the extent to which the fair
value has been less than amortized 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
in the issuer for a period of time sufficient to allow for recovery in
fair value. Based on the facts and circumstances of each case,
13
management uses judgment in deciding whether any calculated impairments
are temporary or other than temporary. For those impairments judged to
be other than temporary, the Company reduces the carrying value of those
investments to the current fair value and records impairment losses for
the difference.
AMORTIZATION OF DEFERRED ACQUISITION COSTS AND VALUE OF BUSINESS
ACQUIRED
Deferred policy acquisition costs ("DAC") and value of business acquired
("VOBA") are amortized with interest over the life of the contracts
(usually 25 years) in relation to the present value of estimated gross
profits from projected interest margins, asset-based fees, policy
administration and surrender charges less policy maintenance fees.
Changes in assumptions can have a significant impact on the calculation
of DAC/VOBA and its related amortization patterns. Due to the relative
size of the DAC/VOBA balance and the sensitivity of the calculation to
minor changes in the underlying assumptions and the related volatility
that could result in the reported DAC/VOBA balance, the Company performs
a quarterly analysis of DAC/VOBA. At each balance sheet date, actual
historical gross profits are reflected and expected future gross profits
and related assumptions are evaluated for continued reasonableness.
Any adjustment in estimated profit requires that the amortization rate
be revised retroactively to the date of policy or contract issuance
("unlocking"), which could be significant. The cumulative difference
related to prior periods is recognized as a component of the current
period's amortization, along with amortization associated with the
actual gross profits of the period. In general, increases in estimated
returns result in increased expected future profitability and may lower
the rate of amortization, while increases in lapse/surrender and
mortality assumptions or decreases in returns reduce the expected future
profitability of the underlying business and may increase the rate of
amortization.
One of the most significant assumptions involved in the estimation of
future gross profits for variable universal life and deferred annuity
products is the assumed return associated with future separate account
performance. To reflect the near-term and long-term volatility in the
equity markets this assumption involves a combination of near-term
expectations and a long-term assumption about market performance. The
overall return generated by the separate account is dependent on several
factors, including the relative mix of the underlying sub-accounts among
bond funds and equity funds as well as equity sector weightings.
14
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 (for
additional information, see the Legislative Initiatives section below).
Some may relate to the insurance industry generally, such as pricing
competition, regulatory developments and industry consolidation. Others
may relate to the Company specifically, such as credit, volatility and
other risks associated with the Company's investment portfolio.
Investors are also directed to consider other risks and uncertainties
discussed in documents filed by the Company with the SEC. The Company
disclaims any obligation to update forward-looking information.
RESULTS OF OPERATIONS
Fee income for the three months ended March 31, 2004 compared to the
three months ended March 31, 2003 remained stable.
Net investment income decreased $0.1 million for the three months
ended March 31, 2004 compared to the same period in 2003. Net
investment income decreased primarily due to investments in lower
yielding fixed securities combined with the relatively stable interest
rate environment.
Net realized capital gains for the three months ended March 31, 2004
increased by $0.1 million compared to same period in 2003. Net
realized gains result from sales of fixed maturities having a fair
value greater than book value. The increase in net realized capital
gains is the result of credit related losses realized in 2003.
15
Interest credited and other benefits to policyholders decreased $0.9
million for the three months ended March 31, 2003 in contrast to the
comparative period in 2003. The decrease was primarily a result of a
decline in assets under management with fixed options coupled with a
decrease in credited interest rates resulting from a management decision
to lower credited rates.
Underwriting, acquisition, and insurance expenses for the three months
ended March 31, 2004 compared to the three months ended March 31, 2003
remained relatively stable.
Amortization of deferred policy acquisition costs and value of business
acquired for the three months ended March 31, 2004, decreased by $0.7
million compared to the same period in 2003. Amortization of
long-duration products is recorded in proportion to actual and estimated
future gross profits. Estimated gross profits are computed based on
assumptions related to the underlying contracts, including but not
limited to interest margins, surrenders, withdrawals, expenses, and
asset growth. The decrease in the amortization of deferred policy
acquisition costs and value of insurance acquired reflects the impact of
these variables on the overall book of business.
Net income increased by $1.1 million for the three months ended March
31, 2004, compared to the three months ended March 31, 2003. Higher
net income is primarily the result of the slight increase in net
realized capital gains in addition to more significant declines in
interest credited and DAC and VOBA amortization, slightly offset by
the decrease in net investment income.
The Company's annuity deposits and assets under management are as
follows:
MARCH 31, DECEMBER 31,
(MILLIONS) (UNAUDITED) 2004 2003
------------ ------------
Deposits
Annuities - fixed options $ 0.6 $ 4.6
Annuities - variable options 4.7 17.9
------------ ------------
Total - deposits $ 5.3 $ 22.5
============ ============
Assets under management
Annuities - fixed options (1) $ 134.3 $ 138.9
Annuities - variable options (2) 576.6 584.4
------------ ------------
Total - assets under management $ 710.9 $ 723.3
============ ============
(1) Excludes net unrealized capital gains of $9.2 million and $5.2
million at March 31, 2004 and December 31, 2003.
(2) Includes $431.9 million and $440.5 million at March 31, 2004 and
December 31, 2003, respectively, of assets invested through the
Company's products in unaffiliated mutual funds.
16
FINANCIAL CONDITION
INVESTMENTS
FIXED MATURITIES
At March 31, 2004 and December 31, 2003, the Company's carrying value
of available for sale fixed maturities including securities pledged to
creditors (hereinafter referred to as "total fixed maturities")
represented 100.0% of the total general account for 2004 and 2003. For
the same periods, $92.1 million, or 44.0% of total fixed maturities,
and $92.3 million, or 69.0% of total fixed maturities, respectively,
supported experience-rated products. Total fixed maturities reflected
net unrealized capital gains of $9.2 million and $5.2 million at March
31, 2004 and December 31, 2003, respectively.
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 AA at March 31, 2004 and AA- at December 31, 2003.
Fixed maturities rated BBB and below 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.
The percentage of total fixed maturities by quality rating category is
as follows:
MARCH 31, DECEMBER 31,
2004 2003
----------- --------------
AAA 43.7% 47.7%
AA 3.7 1.2
A 27.1 27.7
BBB 22.2 22.6
BB 2.3 0.1
B and below 1.0 0.7
----------- --------------
Total 100.0% 100.0%
=========== ==============
17
The percentage of total fixed maturities by market sector is as follows:
MARCH 31 DECEMBER 31,
2004 2003
-------------- --------------
U.S. Corporate 56.2% 56.9%
Residential Mortgaged-Backed 16.6 19.7
U.S. Treasuries/Agencies 5.8 6.0
Foreign (1) 5.3 7.2
Asset-Backed 9.9 6.2
Commercial/Multifamily Mortgage-Backed 6.2 4.0
-------------- --------------
Total $ 100.0% $ 100.0%
============== ==============
(1) Primarily U.S. dollar denominated
The Company analyzes the general account investments to determine
whether there has been an other than temporary decline in fair value
below the amortized cost basis in accordance with FAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities".
Management considers the length of the time and the extent to which the
fair value has been less than amortized 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 in the issuer for a period of time sufficient to allow for
recovery in fair value. If it is probable that all amounts due according
to the contractual terms of a fixed maturity investment will not be
collected, an other than temporary impairment is considered to have
occurred.
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
accounted for as a realized loss.
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. The Company's principal sources of liquidity are
product charges, investment income and maturing investments. Primary
uses of these funds are payments of commissions and operating expenses,
interest credits, investment purchases, as well as withdrawals and
surrenders.
Management believes that its sources of liquidity are adequate to meet
the Company's short-term cash obligations. The Company has entered into
agreements with ILIAC under which ILIAC has agreed to cause the Company
to have sufficient capital to meet certain capital and surplus levels.
The National Association of Insurance Commissioners' ("NAIC") risk-based
capital requirements require insurance companies to calculate and report
information under a risk-based capital formula. These requirements are
intended to allow insurance regulators to monitor the capitalization of
insurance companies based upon the type and mixture of risks inherent in
a Company's operations. The formula includes components for asset risk,
liability risk, interest rate exposure, and other factors. The Company
has complied with the NAIC's risk-based capital reporting requirements.
18
Amounts reported indicate that the Company has total adjusted capital
above all required capital levels.
LEGISLATIVE INITIATIVES
The Jobs and Growth Tax Relief Reconciliation Act of 2003 which was
enacted in the second quarter of 2003 may impact the Company. The Act's
provisions, which reduce the tax rates on long-term capital gains and
corporate dividends, impact the relative competitiveness of the
Company's products, especially variable annuities.
Other legislative proposals under consideration include repealing the
estate tax, changing the taxation of products, changing life insurance
company taxation and making changes to nonqualified deferred
compensation arrangements. Some of these proposals, if enacted, could
have a material effect on life insurance, annuity and other retirement
savings product sales.
The impact on the Company's tax position and products cannot be
predicted.
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ITEM 4. CONTROLS AND PROCEDURES
a) The Company carried out an evaluation, under the supervision and
with the participation of its management, including its Chief
Executive Officer and Chief Financial Officer, of the effectiveness
of the Company's disclosure controls and procedures (as defined in
Rule 13a-15(e) and 15d-15(e)) of the Securities Exchange Act of
1934) as of the end of the period covered by this report. Based on
that evaluation, the Chief Executive Officer and the Chief Financial
Officer have concluded that the Company's current disclosure
controls and procedures are effective in ensuring that material
information relating to the Company required to be disclosed in the
Company's periodic SEC filings is made known to them in a timely
manner.
b) There has not been any change in the internal controls over
financial reporting of the Company that occurred during the period
covered by this report that has materially affected or is reasonably
likely to materially affect these internal controls.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is a party to threatened or pending lawsuits arising from
the normal conduct of business. Due to the climate in insurance and
business litigation, 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, in light of existing insurance, reinsurance and established
reserves, it is the opinion of management that the disposition of such
lawsuits will not have a materially adverse effect on the Company's
operations or financial position.
As with many financial services companies, affiliates of the Company
have received requests for information from various governmental and
self-regulatory agencies in connection with investigations related to
trading in investment company shares. In each case, full cooperation
and responses are being provided. The Company is also reviewing its
policies and procedures in this area.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31.1 Certificate of David A. Wheat pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certificate of Keith Gubbay 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 Keith Gubbay pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
A Amendment to the Investment Advisory Agreement dated as of
August 26, 2003, between ING Insurance Company of America
and ING Investment Management LLC.
(b) Reports on Form 8-K.
None.
21
SIGNATURES
Pursuant to the requirements 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 INSURANCE COMPANY OF AMERICA
--------------------------------
(Registrant)
By
- ------------------------ ------------------------------------
(Date) David A. Wheat
Director, Senior Vice President, and
Chief Financial Officer
22