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ING LIFE INSURANCE & ANNUITY CO – 10-Q/A – Management’s Narrative Analysis of the Results of Operations andFinancial Condition(Dollar amounts in millions, unless otherwise stated)
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Overview
The following narrative analysis presents a review of the consolidated results of operations of ING Life Insurance and Annuity Company ("ILIAC") and its wholly owned subsidiaries (collectively, the "Company") for each of the three months ended March 31, 2012 and 2011, and financial condition as of March 31, 2012 and December 31, 2011 . This item should be read in its entirety and in conjunction with the Condensed Consolidated 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 2011 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 theSecurities 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 that 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, including, but not limited to the following:
1. While the global economy continues to recover from the financial crisis and
subsequent recession, risks remain for
economies. The uncertainty concerning current global market conditions, and
the impact it has on the U.S. economy, has affected and may continue to affect the Company's results of operations.
2. The default of a major market participant could disrupt the markets.
3. Adverse financial market conditions, changes in rating agency standards and
practices and/or actions taken by ratings agencies may significantly affect
the Company's ability to meet liquidity needs, access to capital and cost of
capital.
4. Circumstances associated with implementation of ING Groep's recently
announced global business strategy and the final restructuring plan
submitted to the
Groep's receipt of state aid from the Dutch State could adversely affect the
Company's results of operations and financial condition.
5. The amount of statutory capital that the Company holds and its risk-based
capital ("RBC") ratio can vary significantly from time to time and is
sensitive to a number of factors, many of which are outside of the Company's
control, and influences its financial strength and credit ratings.
6. The Company has experienced ratings downgrades and may experience additional
future downgrades in the Company's ratings, which may negatively affect
profitability, financial condition, and access to liquidity. 7. The new federal financial regulatory reform law, its implementing
regulations and other financial regulatory reform initiatives, could have
adverse consequences for the financial services industry, including the
Company and/or materially affect the Company's results of operations,
financial condition and liquidity.
8. The valuation of many of the Company's financial instruments includes
methodologies, estimations and assumptions that are subject to differing
interpretations and could result in changes to investment valuations that
may materially adversely affect results of operations and financial condition. 9. The determination of the amount of impairments taken on the Company's
investments is subjective and could materially impact results of operations.
10. The Company may be required to accelerate the amortization of deferred
policy acquisition cost ("DAC"), deferred sales inducements ("DSI") and/or
the valuation of business acquired ("VOBA"), any of which could adversely
affect the Company's results of operations or financial condition. 11. Changes in underwriting and actual experience could materially affect profitability.
12. The Company may be required to establish an additional valuation allowance
against the deferred income tax assets if the Company's business does not
generate sufficient taxable income or if the Company's tax planning strategies are modified. 48
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Increases in the deferred tax valuation allowance could have a material adverse effect on results of operations and financial condition. 13. Reinsurance subjects the Company to the credit risk of reinsurers and may
not be adequate to protect against losses arising from ceded reinsurance.
14. The inability to manage market risk successfully through the usage of derivative instruments could adversely affect the Company's business, operations, financial condition and liquidity.
15. The inability of counterparties to meet their financial obligations could
have an adverse effect on the Company's results of operations.
16. Changes in reserve estimates may reduce profitability.
17. A loss of or significant change in key product distribution relationships
could materially affect sales.
18. Competition could negatively affect the ability to maintain or increase
profitability. 19. Changes in federal income tax law or interpretations of existing tax law
could affect profitability and financial condition by making some products
less attractive to contract owners and increasing tax costs of contract
owners or the Company. 20. The Company may be adversely affected by increased governmental and regulatory scrutiny or negative publicity.
21. The loss of key personnel could negatively affect the Company's financial
results and impair its ability to implement the Company's business strategy.
22. Litigation may adversely affect profitability and financial condition.
23. The Company's businesses are heavily regulated, and changes in regulation in
24. The Company's products are subject to extensive regulation and failure to meet any of the complex product requirements may reduce profitability.
25. Changes in accounting requirements could negatively impact the Company's
reported results of operations and the Company's reported financial position. 26. Failure of a Company operating or information system or a compromise of
security with respect to an operating or information system or portable
electronic device or a failure to implement system modifications or a new
accounting, actuarial or other operating system effectively could adversely
affect the Company's results of operations and financial condition or the effectiveness of internal controls over financial reporting.
27. Requirements to post collateral or make payments due to declines in market
value on assets posted as collateral may adversely affect liquidity. 28. Defaults or delinquencies in the commercial mortgage loan portfolio may adversely affect the Company's profitability.
29. The occurrence of unidentified or unanticipated risks within the Company's
risk management programs could negatively affect the Company's business or
result in losses. 30. The occurrence of natural or man-made disasters may adversely affect the Company's results of operations and financial condition. Investors are also directed to consider the risks and uncertainties discussed in this Item 2. and in Item 1A. of Part II contained herein, as well as in other documents filed by the Company with theSEC . Except as may be required by the federal securities laws, the Company disclaims any obligation to update forward-looking information. Basis of Presentation ILIAC is a stock life insurance company domiciled in the state ofConnecticut . ILIAC and its wholly owned subsidiaries are providers of financial products and services inthe United States . ILIAC is authorized to conduct its insurance business in all states and theDistrict of Columbia . ILIAC is a direct, wholly owned subsidiary of Lion, which is an indirect, wholly owned subsidiary of ING Groep N.V. ("ING").ING is a global financial services holding company based inthe Netherlands , with American Depository Shares listed on theNew York Stock Exchange under the symbol "ING".ING has announced the anticipated separation of its banking and insurance businesses. While all options for effecting this separation remain open, onNovember 10, 2010 ,ING announced that, in connection with the separation plan, it will prepare for a base case of an initial public offering ("IPO") ofING U.S., which constitutesING's US-based retirement, insurance and investment management operations, including the Company.
The Company has one operating segment.
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Critical Accounting Policies, Judgments, and Estimates
General
The preparation of financial statements in conformity with U.S. GAAP requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Critical 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 accounting policies, judgments, and estimates as critical in that they involve a higher degree of judgment and are subject to a significant degree of variability:
Reserves for future policy benefits, valuation and amortization of DAC and VOBA, valuation of investments and derivatives, impairments, income taxes, and contingencies.
In developing these accounting estimates and policies, the Company's management makes subjective and complex judgments that are inherently uncertain and subject to material changes 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 Consolidated Financial Statements.
The above critical accounting estimates are described in Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies, Judgments, and Estimates and the Business, Basis of Presentation and Significant Accounting Policies note to the Consolidated Financial Statements in the 2011 Annual Report.
Results of Operations
Overview
Products currently offered by the Company include qualified and nonqualified annuity contracts that include a variety of funding and payout options for individuals and employer-sponsored retirement plans qualified under Internal Revenue Code Sections 401, 403, 408, and 457, as well as nonqualified deferred compensation plans. OnApril 9, 2009 , the Company's ultimate parent,ING , announced a global business strategy which identified certain core and non-core businesses and geographies, statedING's intention to explore divestiture of non-core businesses over time, withdraw from certain non-core geographies, limit future acquisitions and implement enterprise-wide expense reductions. In particular, with respect toING's U.S. insurance operations,ING is seeking to further reduce its risk by focusing on individual life products, retirement services and lower risk annuity products which the Company commenced selling during the first quarter of 2010. The Company derives its revenue mainly from (a) fee income generated from separate account assets supporting variable options under variable annuity contract investments, as designated by contract owners, (b) investment income earned on assets supporting fixed assets under management ("AUM"), mainly generated from annuity products with fixed investment options, and (c) certain other fees. The Company's expenses primarily consist of (a) interest credited and other benefits to contract owners, (b) amortization of DAC and value of business acquired ("VOBA"), (c) expenses related to the selling and servicing of the various products offered by the Company, and (d) other general business expenses. In addition, the Company collects broker-dealer commissions through its subsidiaries,Directed Services LLC ("DSL") andING Financial Advisers, LLC ("IFA"), which are, in turn, paid to broker-dealers and expensed.
Economic Analysis
The pace of economic growth in the U.S. was subdued in 2011, though the U.S. economy performed better in the second half of the year. The pace of growth in the first quarter of 2012 remained subdued, based on the first estimate published by theBureau of Economic Analysis . The U.S. economy grew 1.7% on annualized basis in the last year. Industrial production rose approximately 2.8% on an annualized basis in the first quarter of 2012. The pace of growth has stayed modest and below trend growth rates due to a variety of factors. Consumer spending has expanded tepidly because of the slow improvement in the labor market, the elevated unemployment rate, and the minimal increase in real disposable income. Business fixed investment is increasing less rapidly, 50
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while the housing sector is still depressed. House prices have continued to decline and residential investment remains weak. Real export growth has been disappointing. Global industrial production and global trade are expanding but at a fairly modest pace because of the slowing in global growth and investors concerns about global financial fragility. Employment growth did improve late last year and in the first quarter of this year. Meanwhile, initial and continuing unemployment claims have been gradually declining. However, the pace of improvement in non-farm payroll employment appears to have slowed in recent months. Overall inflation, as measured by Consumer Price and Personal Consumption Expenditures indices, was contained during 2011 and in first quarter of 2012, even though energy and commodity prices remained elevated. The pace of economic growth is still constrained by high unemployment, modest income growth, lower housing wealth, and tepid expansion of credit. The sustainability of the ongoing recovery still depends on supportive fiscal and monetary policies. The Federal Reserve (the "Fed") has continued to extend the average maturity of the securities in its portfolio, as announced inSeptember 2011 . The Fed intends to exert downward pressure on long-term rates. To that effect, it has announced that it will purchase, by mid-2012, nearly$400 billion of Treasury securities with remaining maturities of 6 years to 30 years, while selling the same amount of Treasury securities with remaining maturities of 3 years or less during the same period. The Fed will also reinvest principal payment for its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities to support conditions in the mortgage market. Furthermore, based on its assessment of current economic conditions, economic outlook and the balance of risks, the Fed is conditionally committed to keeping the federal funds target rate in the range of 0 to 25 basis points until late-2014. Short-termLIBOR remains low by historic standards but has been gradually rising since mid 2011. However, U.S. Treasury rates have declined noticeably since the beginning of 2011. Long-term U.S. Treasury rates decreased in the first quarter of 2012 as compared to the same period in 2011. The decline in U.S. Treasury rates is mainly due to the Fed's commitment to keep the federal funds target rate low until late 2014, low short-term rates, its policy to exert downward pressure on long-term rates, well-anchored inflationary expectations, and flight to safety arising out of private investors' concerns about public debt and deficits in several euro zone countries. In spite of modest improvement in economic activity in the second half of 2011 and the first quarter of 2012 and accommodative policies, risks to the U.S. economy continue to point to possible negative developments. Risks which could lead to negative developments include strains in global financial conditions; weakness in household financial conditions, which could lead to slower consumer spending; larger-than-expected near-term fiscal tightening, which could lower aggregate demand; financial and economic spillover from the eurozone's inability to contain the region's debt crisis; and crude oil prices spiking in the event of an escalation of conflict between the U.S. andIran . There could also be a drag on real GDP growth arising from a decrease in public expenditures and potentially higher taxes next year. These economic conditions and risks are not unique to the Company, but present challenges to the entire insurance and financial services industry. 51
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Three Months Ended
The Company's results of operations for the three months endedMarch 31, 2012 , and changes therein, were primarily impacted by higher Net realized capital gains and increased Net investment income, partially offset by higher Operating expenses, an increase in Net amortization of DAC and VOBA, higher Interest credited and other benefits to contract owners and lower Other income. Three Months Ended March 31, $ Increase % Increase 2012 2011 (Decrease) (Decrease) (As revised) Revenues: Net investment income $ 352.0 $ 343.0 $ 9.0 2.6 % Fee income 155.1 155.1 - - % Premiums 11.8 9.5 2.3 24.2 % Broker-dealer commission revenue 55.7 58.5 (2.8 ) (4.8 )% Net realized capital gains (losses): Total other-than-temporary impairment losses (1.4 ) (21.8 ) 20.4 93.6 % Less: Portion of other-than-temporary impairment losses recognized in Other comprehensive income (loss) (0.1 ) (1.6 ) 1.5 93.8 % Net other-than-temporary impairments recognized in earnings (1.3 ) (20.2 ) 18.9 93.6 % Other net realized capital gains 128.6 39.8 88.8 NM Total net realized capital gains 127.3 19.6 107.7 NM Other income 0.5 10.3 (9.8 ) (95.1 )% Total revenue 702.4 596.0 106.4 17.9 % Benefits and expenses: Interest credited and other benefits to contract owners 194.7 175.2 19.5 11.1 % Operating expenses 180.4 157.1 23.3 14.8 % Broker-dealer commission expense 55.7 58.5 (2.8 ) (4.8 )% Net amortization of deferred policy acquisition costs and value of business acquired 52.8 33.1 19.7 59.5 % Interest expense 0.6 0.7 (0.1 ) (14.3 )% Total benefits and expenses 484.2 424.6 59.6 14.0 % Income before income taxes 218.2 171.4 46.8 27.3 % Income tax expense 74.2 84.0 (9.8 ) (11.7 )% Net income $ 144.0 $ 87.4 $ 56.6 64.8 % NM - Not Meaningful Revenues
Total revenue increased for the three months ended
The increase in Net realized capital gains for the three months endedMarch 31, 2012 is primarily due to a favorable change in the fair value of an embedded derivative within an annuity product, which was favorable due to a change in certain assumptions and due to an increase in interest rates. This was partially offset by an unfavorable change in net realized gains/losses within Fixed maturities, at fair value using the fair value option, due to a decrease in market valuations on certain collateralized mortgage obligation ("CMO") securities during the three months endedMarch 31, 2012 .
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Other income decreased for the three months endedMarch 31, 2012 as compared to the three months endedMarch 31, 2011 due to income recognized in the first three months of 2011 related to consideration received for the transfer of representatives and customer accounts associated with the retail broker-dealer business fromING Financial Advisers, LLC toING Financial Partners, Inc. Net investment income increased for the first three months endedMarch 31, 2012 primarily due to an increase in general account assets. The volatility inherent in the equity market during the second half of 2011 resulted in participants transferring fund from variable investment options into the fixed investment option contributing to an increase in average general account assets.
Benefits and Expenses
Total benefits and expenses increased for the three months endedMarch 31, 2012 primarily due to an increase in Operating expenses, an unfavorable variance in Net amortization of DAC and VOBA and higher Interest credited and other benefits to contract owners.
Operating expenses increased for the three months ended
The increase in Net amortization of DAC and VOBA for the three months endedMarch 31, 2012 is primarily due to increased amortization resulting from higher actual gross profits versus the three months endedMarch 31, 2011 . Also, changes in assumptions associated with refinements in DAC models impacted the increase in Net amortization of DAC and VOBA. Interest credited and other benefits to contract owners was higher for the three months endedMarch 31, 2012 primarily due to an increase in general account liabilities, as participants transferred funds from variable investment options into the fixed investment option contributing to an increase in average general account assets and corresponding liabilities. The increase was partially offset by a decrease in average credited rates on general account liabilities compared to the prior year due to management actions taken inJanuary 2012 to reflect the current interest rate environment.
Income Taxes
Income tax expense decreased for the three months endedMarch 31, 2012 primarily due to a decrease in the tax valuation allowance related to net realized capital losses, and an increase in the dividends received deduction. Financial Condition Investments Investment Strategy The Company's investment strategy seeks to achieve sustainable risk adjusted returns by focusing on principal preservation, disciplined matching of asset characteristics with liability requirements, and the diversification of risks. Investment activities are undertaken according to investment policy statements that contain internally established guidelines and risk tolerances and in all cases are required to comply with applicable laws and insurance regulations. Risk tolerances are established for credit risk, credit spread risk, market risk, liquidity risk, and concentration risk across issuers, sectors and asset types that seek to mitigate the impact of cash flow variability arising from these risks. Investments are managed byING Investment Management LLC , an affiliate of the Company, pursuant to an investment advisory agreement. Segmented portfolios are established for groups of products with similar liability characteristics within the Company. The Company's investment portfolio consists largely of high quality fixed maturity securities and short-term investments, investments in commercial loans, limited partnerships, and other instruments, including a small amount of equity holdings. Fixed maturity securities include publicly issued corporate bonds, government bonds, privately placed notes and bonds, mortgage-backed securities, and asset-backed securities. The Company uses derivatives for hedging purposes and to replicate exposure to other assets as a more efficient means of assuming credit exposure similar to bonds of the underlying issuer(s).
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Portfolio Composition
The following table presents the investment portfolio as ofMarch 31, 2012 andDecember 31, 2011 . 2012 2011 Carrying % of Carrying % of Value Total Value Total Fixed maturities, available-for-sale, including securities pledged $ 18,512.6 78.1 % $ 18,728.3 79.4 % Fixed maturities, at fair value using the fair value option 537.4 2.3 % 511.9 2.1 % Equity securities, available-for-sale 143.1 0.6 % 144.9 0.6 % Short-term investments 337.9 1.4 % 216.8 0.9 % Mortgage loans on real estate 2,590.4 11.0 % 2,373.5 10.1 % Loan-Dutch State obligation 392.8 1.7 % 417.0 1.8 % Policy loans 240.8 1.0 % 245.9 1.0 % Limited partnerships/corporations 518.6 2.2 % 510.6 2.2 % Derivatives 392.9 1.7 % 446.6 1.9 % Total investments $ 23,666.5 100.0 % $ 23,595.5 100.0 % 54
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Available-for-sale and fair value option fixed maturities and equity securities were as follows as of
Gross Gross Unrealized Unrealized Amortized Capital Capital Embedded Fair Cost Gains Losses Derivatives(3) Value OTTI(2) Fixed maturities: U.S. Treasuries $ 736.9 $ 89.7 $ - $ - $ 826.6 $ - U.S. government agencies and authorities 378.9 27.7 - - 406.6 - State, municipalities, and political subdivisions 84.9 11.9 - - 96.8 - U.S. corporate securities 8,420.8 746.4 33.5 - 9,133.7 - Foreign securities(1): Government 393.0 33.9 2.1 - 424.8 - Other 4,303.8 355.4 22.1 - 4,637.1 - Total foreign securities 4,696.8 389.3 24.2 - 5,061.9 - Residential mortgage-backed securities: Agency 1,433.8 198.7 5.6 35.8 1,662.7 0.6 Non-Agency 484.1 66.0 34.8 18.5 533.8 27.4 Total Residential mortgage-backed securities 1,917.9 264.7 40.4 54.3 2,196.5 28.0 Commercial mortgage-backed securities 854.4 69.9 1.7 - 922.6 4.4 Other asset-backed securities 404.4 20.7 19.8 - 405.3 4.0 Total fixed maturities, including securities pledged 17,495.0 1,620.3 119.6 54.3 19,050.0 36.4 Less: securities pledged 187.9 15.3 1.0 - 202.2 - Total fixed maturities 17,307.1 1,605.0 118.6 54.3 18,847.8 36.4 Equity securities 131.1 12.1 0.1 - 143.1 - Total fixed maturities and equity securities $ 17,438.2 $ 1,617.1 $ 118.7 $ 54.3 $ 18,990.9 $ 36.4 (1) Primarily U.S. dollar denominated. (2) Represents other-than-temporary impairments ("OTTI") reported as a component of Other comprehensive income. (3) Embedded derivatives within fixed maturity securities are reported with the host investment. The changes in fair value of embedded derivatives are reported in Other net realized capital gains (losses) in the Condensed Consolidated Statements of Operations. 55
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Available-for-sale and fair value option fixed maturities and equity securities were as follows as of
Gross Gross Unrealized Unrealized Amortized Capital Capital Embedded Fair Cost Gains Losses Derivatives(3) Value OTTI(2) Fixed maturities: U.S. Treasuries $ 1,096.6 $ 135.0 $ - $ - $ 1,231.6 $ -
U.S. government agencies and authorities 379.7 31.0 - - 410.7 - State, municipalities, and political subdivisions 95.1 10.9 - - 106.0 - U.S. corporate securities 8,166.9 770.8 31.1
8,906.6 - Foreign securities(1): Government 308.5 39.8 3.1 - 345.2 - Other 4,352.5 328.8 38.4 - 4,642.9 - Total foreign securities 4,661.0 368.6 41.5 - 4,988.1 - Residential mortgage-backed securities: Agency 1,442.0 218.7 3.4 39.4 1,696.7 0.7 Non-Agency 513.4 66.7 49.5 19.8 550.4 28.8 Total Residential mortgage-backed securities 1,955.4 285.4 52.9 59.2 2,247.1 29.5 Commercial mortgage-backed securities 866.1 51.0 5.8 - 911.3 4.4 Other asset-backed securities 441.5 19.4 22.1 - 438.8 4.2 Total fixed maturities, including securities pledged 17,662.3 1,672.1 153.4 59.2 19,240.2 38.1 Less: securities pledged 572.5 22.4 1.2 - 593.7 - Total fixed maturities 17,089.8 1,649.7 152.2 59.2 18,646.5 38.1 Equity securities 131.8 13.1 - - 144.9 - Total fixed maturities and equity securities $ 17,221.6 $ 1,662.8 $ 152.2 $ 59.2 $ 18,791.4 $ 38.1 (1) Primarily U.S. dollar denominated. (2) Represents other-than-temporary impairments reported as a component of Other comprehensive income. (3) Embedded derivatives within fixed maturity securities are reported with the host investment. The changes in fair value of embedded derivatives are reported in Other net realized capital gains (losses) in the Condensed Consolidated Statements of Operations.
Fixed Maturity Securities Credit Quality - Ratings
The Securities Valuation Office ("SVO") of the National Association of Insurance Commissioners ("NAIC") evaluates the fixed maturity security investments of insurers for regulatory reporting and capital assessment purposes and assigns securities to one of six credit quality categories called "NAIC designations." An internally developed rating is used as permitted by the NAIC if no rating is available. The NAIC designations are generally similar to the credit quality designations of a Nationally Recognized Statistical Rating Organization ("NRSRO") for marketable fixed maturity securities, called "rating agency designations," except for certain structured securities as described below. NAIC designations of "1," highest quality, and "2," high quality, include fixed maturity securities generally considered investment grade ("IG") by such rating organizations. NAIC designations 3 through 6 include fixed maturity securities generally considered below investment grade ("BIG") by such rating organizations. The NAIC adopted revised designation methodologies for non-agency Residential Mortgage-backed Securities ("RMBS"), including RMBS backed by subprime mortgage loans reported within Other Asset-backed Securities ("ABS"), and for Commercial 56
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Mortgage-backed Securities ("CMBS"). The NAIC's objective with the revised designation methodologies for these structured securities was to increase the accuracy in assessing expected losses, and to use the improved assessment to determine a more appropriate capital requirement for such structured securities. The revised methodologies reduce regulatory reliance on rating agencies and allow for greater regulatory input into the assumptions used to estimate expected losses from such structured securities. As a result of time lags between the funding of investments, the finalization of legal documents and the completion of the SVO filing process, the fixed maturity portfolio generally includes securities that have not yet been rated by the SVO as of each balance sheet date, such as private placements. Pending receipt of SVO ratings, the categorization of these securities by NAIC designation is based on the expected ratings indicated by internal analysis. Information about the Company's fixed maturity securities holdings, including securities pledged, by NAIC designations is set forth in the following tables. Corresponding rating agency designation does not directly translate to NAIC designation, but represents the Company's best estimate of comparable ratings from rating agencies, includingMoody's Investors Service, Inc. ("Moody's"), Standard & Poor's ("S&P"), andFitch Ratings Ltd. ("Fitch"). If no rating is available from a rating agency, then an internally developed rating is used. 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. AtMarch 31, 2012 andDecember 31, 2011 , the average quality rating of the Company's fixed maturities portfolio was A- and A, respectively. Ratings are derived from three NRSRO ratings and are applied as follows based on the number of agency rating received:
? when three ratings are received then the middle rating is applied;
? when two ratings are received then the lower rating is applied;
? when a single rating is received, the NRSRO rating is applied;
? and, when ratings are unavailable then an internal rating is applied.
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Total fixed maturities by NAIC quality designation category, including securities pledged to creditors, were as follows as ofMarch 31, 2012 andDecember 31, 2011 . 2012 NAIC Quality Fair % of Amortized % of Designation Value Total Cost Total 1 $ 9,373.3 49.3 % $ 8,549.0 48.9 % 2 8,592.9 45.1 % 7,936.1 45.3 % 3 826.5 4.3 % 795.3 4.5 % 4 131.6 0.7 % 133.3 0.8 % 5 120.1 0.6 % 79.0 0.5 % 6 5.6 0.0 % 2.3 0.0 % Total $ 19,050.0 100.0 % $ 17,495.0 100.0 % 2011 NAIC Quality Fair % of Amortized % of Designation Value Total Cost Total 1 $ 9,718.2 50.5 % $ 8,835.6 50.1 % 2 8,352.5 43.4 % 7,722.6 43.7 % 3 875.0 4.6 % 850.4 4.8 % 4 166.1 0.9 % 170.1 1.0 % 5 84.7 0.4 % 77.3 0.4 % 6 43.7 0.2 % 6.3 0.0 % Total $ 19,240.2 100.0 % $ 17,662.3 100.0 % Total fixed maturities by NRSRO quality rating category, including securities pledged to creditors, were as follows as ofMarch 31, 2012 andDecember 31, 2011 . 2012 NRSRO Quality Fair % of Amortized % of Rating Value Total Cost Total AAA $ 3,973.4 20.9 % $ 3,559.8 20.4 % AA 826.3 4.3 % 758.7 4.3 % A 4,427.5 23.2 % 4,089.5 23.4 % BBB 8,510.4 44.7 % 7,865.1 45.0 % BB 820.0 4.3 % 777.5 4.4 % B and below 492.4 2.6 % 444.4 2.5 % Total $ 19,050.0 100.0 % $ 17,495.0 100.0 % 2011 NRSRO Quality Fair % of Amortized % of Rating Value Total Cost Total AAA $ 4,459.7 23.2 % $ 3,972.4 22.5 % AA 899.0 4.7 % 813.1 4.6 % A 4,273.2 22.2 % 3,949.9 22.4 % BBB 8,244.6 42.9 % 7,633.0 43.2 % BB 835.8 4.3 % 803.5 4.5 % B and below 527.9 2.7 % 490.4 2.8 % Total $ 19,240.2 100.0 % $ 17,662.3 100.0 %
At
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Fixed maturities rated BB and below (Below Investment Grade ("BIG")) 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 securities pledged to creditors, were as follows as of
2012 Fair % of Amortized % of Value Total Cost Total U.S. Treasuries $ 826.6 4.3 % $ 736.9 4.2 % U.S. government agencies and authorities 406.6 2.1 % 378.9 2.2 % U.S. corporate, state, and municipalities 9,230.5 48.6 % 8,505.7 48.6 % Foreign 5,061.9 26.6 % 4,696.8 26.8 % Residential mortgage-backed 2,196.5 11.5 % 1,917.9 11.0 % Commercial mortgage-backed 922.6 4.8 % 854.4 4.9 % Other asset-backed 405.3 2.1 % 404.4 2.3 % Total $ 19,050.0 100.0 % $ 17,495.0 100.0 % 2011 Fair % of Amortized % of Value Total Cost Total U.S. Treasuries $ 1,231.6 6.4 % $ 1,096.6 6.2 % U.S. government agencies and authorities 410.7 2.1 % 379.7 2.1 % U.S. corporate, state, and municipalities 9,012.6 46.8 % 8,262.0 46.8 % Foreign 4,988.1 26.0 % 4,661.0 26.4 % Residential mortgage-backed 2,247.1 11.7 % 1,955.4 11.1 % Commercial mortgage-backed 911.3 4.7 % 866.1 4.9 % Other asset-backed 438.8 2.3 % 441.5 2.5 % Total $ 19,240.2 100.0 % $ 17,662.3 100.0 % The amortized cost and fair value of fixed maturities, including securities pledged, as ofMarch 31, 2012 , are shown below by contractual maturity. Actual maturities may differ from contractual maturities as securities may be restructured, called, or prepaid. Mortgage-backed securities ("MBS") and ABS are shown separately because they are not due at a single maturity date. Amortized Cost Fair Value Due to mature: One year or less $ 309.0 $ 329.4 After one year through five years 3,725.8
3,981.6
After five years through ten years 5,300.6 5,747.3 After ten years 4,982.9 5,467.3 Mortgage-backed securities 2,772.3 3,119.1 Other asset-backed securities 404.4 405.3
Fixed maturities, including securities pledged $ 17,495.0
The Company did not have any investments in a single issuer, other than obligations of the U.S. government and government agencies, and theState of the Netherlands (the "Dutch State") loan obligation, with a carrying value in excess of 10% of the Company's Shareholder's equity atMarch 31, 2012 andDecember 31, 2011 . 59
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The Company invests in various categories of Collateralized Mortgage Obligations ("CMOs"), including CMOs that are not agency-backed, that are subject to different degrees of risk from changes in interest rates and defaults. The principal risks inherent in holding CMOs are prepayment and extension risks related to dramatic decreases and increases in interest rates resulting in the prepayment of principal from the underlying mortgages, either earlier or later than originally anticipated. At March 31, 2012 and December 31, 2011 , approximately 43.0% and 41.1%, respectively, of the Company's CMO holdings were invested in those types of CMOs, such as interest-only or principal-only strips which are subject to more prepayment and extension risk than traditional CMOs.
Subprime and Alt-A Mortgage Exposure
Underlying collateral has continued to reflect the problems associated with a housing market that has seen substantial price declines and an employment market that has declined significantly and remains under stress. Credit spreads have widened meaningfully from issuance and rating agency downgrades have been widespread and severe within the sector. Over the course of 2010 and 2011, market prices and liquidity within the sector have exhibited volatility, driven by various factors, both domestically and globally. During the quarter endedMarch 31, 2012 , market prices and sector liquidity have exhibited increases, given the risk appetite and sentiment regarding the potential for fundamental improvements within the sector. In managing its risk exposure to subprime mortgages, the Company takes into account collateral performance and structural characteristics associated with its various positions. The Company does not originate or purchase subprime or Alt-A whole-loan mortgages. The Company does have exposure to RMBS and ABS. Subprime lending is the origination of loans to customers with weaker credit profiles. The Company defines Alt-A Loans to include the following: residential mortgage loans to customers who have strong credit profiles but lack some element(s), such as documentation to substantiate income; residential mortgage loans to borrowers that would otherwise be classified as prime but whose loan structure provides repayment options to the borrower that increase the risk of default; and any securities backed by residential mortgage collateral not clearly identifiable as prime or subprime. The Company's exposure to subprime mortgages was primarily in the form of ABS structures collateralized by subprime residential mortgages, and the majority of these holdings were included in other asset-backed securities in the fixed maturities by market sector table previously referenced. As ofMarch 31, 2012 , the fair value and gross unrealized losses related to the Company's exposure to subprime mortgages were$59.1 and$19.4 , respectively, representing 0.3% of total fixed maturities, including securities pledged. As ofDecember 31, 2011 , the fair value and gross unrealized losses related to the Company's exposure to subprime mortgages were$59.1 and$21.7 , respectively, representing 0.3% of total fixed maturities, including securities pledged.
The following tables summarize the Company's exposure to subprime mortgage-backed holdings by credit quality using NAIC designations, NRSRO ratings and vintage year as of
% of Total Subprime Mortgage-backed Securities NAIC Designation NRSRO Rating Vintage 2012 1 77.3 % AAA 5.1 % 2007 8.4 % 2 2.8 % AA 0.0 % 2006 4.5 % 3 10.1 % A 13.5 % 2005 and prior 87.1 % 4 9.6 % BBB 24.5 % 100.0 % 5 0.0 % BB and below 56.9 % 6 0.2 % 100.0 % 100.0 % 2011 1 75.8 % AAA 7.5 % 2007 9.1 % 2 5.3 % AA 0.0 % 2006 4.5 % 3 9.3 % A 13.0 % 2005 and prior 86.4 % 4 9.4 % BBB 33.7 % 100.0 % 5 0.0 % BB and below 45.8 % 6 0.2 % 100.0 % 100.0 % 60
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The Company's exposure to Alt-A mortgages was included in residential mortgage-backed securities in the fixed maturities by market sector table above. As ofMarch 31, 2012 , the fair value and gross unrealized losses aggregated to$110.1 and$15.8 , respectively, representing 0.6% of total fixed maturities. As ofDecember 31, 2011 , the fair value and gross unrealized losses aggregated to$111.4 and$19.6 , respectively, representing 0.6% of total fixed maturities. The following tables summarize the Company's exposure to Alt-A mortgage-backed holdings by credit quality using NAIC designations, NRSRO ratings and vintage year as ofMarch 31, 2012 andDecember 31, 2011 : % of Total Alt-A Mortgage-backed Securities NAIC Designation NRSRO Rating Vintage 2012 1 40.3 % AAA 0.3 % 2007 12.4 % 2 12.3 % AA 2.7 % 2006 28.7 % 3 18.0 % A 13.1 % 2005 and prior 58.9 % 4 20.1 % BBB 4.5 % 100.0 % 5 8.6 % BB and below 79.4 % 6 0.7 % 100.0 % 100.0 % 2011 1 39.9 % AAA 0.3 % 2007 12.0 % 2 14.9 % AA 3.1 % 2006 28.3 % 3 14.7 % A 13.1 % 2005 and prior 59.7 % 4 21.1 % BBB 4.6 % 100.0 % 5 4.7 % BB and below 78.9 % 6 4.7 % 100.0 % 100.0 %
Delinquency rates on commercial mortgages have remained elevated in recent months. However, the steep pace of increases observed in the months following the credit crisis has slowed, and some recent months have posted month over month declines in delinquent mortgages. In addition, other performance metrics like vacancies, property values and rent levels have exhibited improvements, providing early signals of a recovery in commercial real estate. In addition, the primary market for CMBS continued its recovery from the credit crisis, with total new issuance in 2011 higher for the third straight year. This had the impact of increasing credit availability within the commercial real estate universe. For consumer asset-backed securities, delinquency and loss rates have continued to decline post credit crisis. Improvements in various credit metrics across multiple types of asset-backed loans have been observed on a sustained basis, positively impacting the behavior and market values of consumer asset-backed securities. As ofMarch 31, 2012 andDecember 31, 2011 , the fair value of the Company's CMBS totaled$922.6 and$911.3 , respectively, and other ABS, excluding subprime exposure, totaled$347.6 and$381.0 , respectively. As ofMarch 31, 2012 , the gross unrealized losses related to CMBS totaled$1.7 and gross unrealized losses related to Other ABS, excluding subprime exposure, totaled$0.6 . CMBS investments represent pools of commercial mortgages that are broadly diversified across property types and geographical areas. As ofMarch 31, 2012 , the other ABS was also broadly diversified both by type and issuer with credit card receivables, collateralized loan obligations and automobile receivables, comprising 49.5%, 6.4%, and 15.2%, respectively, of total other ABS, excluding subprime exposure. As ofDecember 31, 2011 , the other ABS was also broadly diversified both by type and issuer with credit card receivables, collateralized loan obligations and automobile receivables, comprising 49.3%, 5.5%, and 17.2%, respectively, of total other ABS, excluding subprime exposure. 61
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The following tables summarize the Company's exposure to CMBS holdings by credit quality using NAIC designations, NRSRO ratings and vintage year as ofMarch 31, 2012 andDecember 31, 2011 : % of Total CMBS NAIC Designation NRSRO Rating Vintage 2012 1 99.6 % AAA 60.8 % 2008 0.0 % 2 0.2 % AA 2.2 % 2007 24.3 % 3 0.2 % A 20.7 % 2006 18.2 % 4 0.0 % BBB 5.7 % 2005 and prior 57.5 % 5 0.0 % BB and below 10.6 % 100.0 % 6 0.0 % 100.0 % 100.0 % 2011 1 97.4 % AAA 63.7 % 2007 23.4 % 2 0.9 % AA 1.4 % 2006 18.2 % 3 0.7 % A 21.1 % 2005 and prior 58.4 % 4 1.0 % BBB 4.0 % 100.0 % 5 0.0 % BB and below 9.8 % 6 0.0 % 100.0 % 100.0 % The following tables summarize the Company's exposure to other ABS holdings, excluding subprime exposure, by credit quality using NAIC designations, NRSRO ratings and vintage year as ofMarch 31, 2012 andDecember 31, 2011 : % of Total Other ABS NAIC Designation NRSRO Rating Vintage 2012 1 95.9 % AAA 85.3 % 2012 0.9 % 2 3.8 % AA 1.3 % 2011 11.5 % 3 0.0 % A 9.3 % 2010 7.7 % 4 0.3 % BBB 3.8 % 2009 0.4 % 5 0.0 % BB and below 0.3 % 2008 12.3 % 6 0.0 % 100.0 % 2007 29.0 % 100.0 % 2006 7.5 % 2005 and prior 30.7 % 100.0 % 2011 1 95.0 % AAA 82.7 % 2011 14.3 % 2 4.7 % AA 1.2 % 2010 7.3 % 3 0.0 % A 8.4 % 2009 0.4 % 4 0.3 % BBB 7.4 % 2008 11.7 % 5 0.0 % BB and below 0.3 % 2007 30.3 % 6 0.0 % 100.0 % 2006 6.8 % 100.0 % 2005 and prior 29.2 % 100.0 % 62
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Mortgage Loans on Real Estate
The Company's mortgage loans on real estate are all commercial mortgage loans, which totaled$2.6 billlion and$2.4 billion as ofMarch 31, 2012 andDecember 31, 2011 , respectively. These loans are reported at amortized cost, less impairment write-downs and allowance for losses. The Company diversifies its commercial mortgage loan portfolio by geographic region and property type to reduce concentration risk. The Company manages risk when originating commercial mortgage loans by generally lending only up to 75% of the estimated fair value of the underlying real estate. Subsequently, the Company continuously evaluates all mortgage loans based on relevant current information including an appraisal of loan-specific credit quality, property characteristics and market trends. Loan performance is monitored on a loan-specific basis through the review of submitted appraisals, operating statements, rent revenues and annual inspection reports, among other items. This review ensures properties are performing at a consistent and acceptable level to secure the debt. All commercial mortgages are evaluated for the purpose of quantifying the level of risk. Those loans with higher risk are placed on a watch list and are closely monitored for collateral deficiency or other credit events that may lead to a potential loss of principal or interest. 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 the lower of the present value of expected cash flows from the loan, discounted at the loan's effective interest rate, or fair value of the collateral. There were no impairments taken on the mortgage loan portfolio for the three months endedMarch 31, 2012 and 2011, respectively. For those mortgages that are determined to require foreclosure, the carrying value is reduced to the fair value of the underlying collateral, net of estimated costs to obtain and sell at the point of foreclosure. AtMarch 31, 2012 andDecember 31, 2011 , all mortgage loans in the Company's portfolio were current with respect to principal and interest. Due to challenges that the economy presents to the commercial mortgage market, the Company recorded an allowance for probable incurred, but not specifically identified, losses related to factors inherent in the lending process. AtMarch 31, 2012 andDecember 31, 2011 , the Company had a$1.6 and$1.3 allowance for mortgage loan credit losses. Loan-to-value ("LTV") and debt service coverage ("DSC") ratios are measures commonly used to assess the risk and quality of commercial mortgage loans. The LTV ratio, calculated at time of origination, is expressed as a percentage of the amount of the loan relative to the value of the underlying property. The DSC ratio, based upon the most recently received financial statements, is expressed as a percentage of the amount of a property's net income to its debt service payments. These ratios are utilized as part of the review process described above. LTV and DSC ratios as ofMarch 31, 2012 andDecember 31, 2011 , are as follows: 2012(1) 2011(1) Loan-to-Value Ratio: 0% - 50% $ 524.6 $ 552.4 50% - 60% 837.3 771.5 60% - 70% 1,089.4 908.2 70% - 80% 123.6 125.2 80% - 90% 17.1 17.5
Total Commercial Mortgage Loans
(1) Balances do not include allowance for mortgage loan credit losses.
2012(1)
2011(1)
Debt Service Coverage Ratio: Greater than 1.5x $ 1,809.2 $ 1,600.1 1.25x - 1.5x 403.6 408.1 1.0x - 1.25x 301.0 286.7 Less than 1.0x 78.2 79.9
Mortgages secured by loans on land or construction loans -
-
Total Commercial Mortgage Loans $ 2,592.0 $
2,374.8
(1) Balances do not include allowance for mortgage loan credit losses.
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Properties collateralizing mortgage loans are geographically dispersed throughoutthe United States , as well as diversified by property type, as reflected in the following tables as ofMarch 31, 2012 andDecember 31, 2011 . 2012(1) 2011(1) Gross % of Gross % of Carrying Value Total Carrying Value Total Commercial Mortgage Loans by U.S. Region: Pacific $ 550.1 21.2 % $ 514.7 21.7 % South Atlantic 474.6 18.3 % 412.0 17.3 % Middle Atlantic 323.2 12.5 % 325.9 13.7 % East North Central 310.1 12.0 % 285.6 12.0 % West South Central 392.4 15.1 % 358.4 15.1 % Mountain 184.9 7.1 % 191.2 8.0 % New England 113.5 4.4 % 94.2 4.0 % West North Central 152.9 5.9 % 98.9 4.2 % East South Central 90.3 3.5 % 93.9 4.0 % Total Commercial Mortgage Loans $ 2,592.0 100.0 % $ 2,374.8 100.0 %
(1) Balances do not include allowance for mortgage loan credit losses.
2012(1) 2011(1) Gross % of Gross % of Carrying Value Total Carrying Value Total Commercial Mortgage Loans by Property Type: Industrial $ 983.5 38.0 % $ 956.4 40.3 % Retail 638.8 24.7 % 544.7 22.9 % Office 371.3 14.3 % 351.5 14.8 % Apartments 299.2 11.5 % 281.7 11.9 % Hotel/Motel 123.1 4.7 % 132.7 5.6 % Mixed Use 34.6 1.3 % 0.9 0.0 % Other 141.5 5.5 % 106.9 4.5 % Total Commercial Mortgage Loans $ 2,592.0 100.0 % $ 2,374.8 100.0 %
(1) Balances do not include allowance for mortgage loan credit losses.
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The following table sets forth the breakdown of commercial mortgages by year of origination as of
2012(1) 2011(1) Year of Origination: 2012 $ 321.7 $ - 2011 854.5 857.9 2010 161.2 161.9 2009 82.6 92.6 2008 128.7 137.2 2007 197.9 202.1 2006 and prior 845.4 923.1
Total Commercial Mortgage Loans
(1) Balances do not include allowance for mortgage loan credit losses.
Troubled Debt Restructuring
The Company believes it has high quality, well performing portfolios of commercial mortgage loans and private placements. Under certain circumstances, modifications to these contracts are granted. Each modification is evaluated as to whether a troubled debt restructuring has occurred. A modification is a troubled debt restructure when the borrower is in financial difficulty and the creditor makes concessions. Generally, the types of concessions may include: reduction of the face amount or maturity amount of the debt as originally stated, reduction of the contractual interest rate, extension of the maturity date at an interest rate lower than current market interest rates and/or reduction of accrued interest. The Company considers the amount, timing and extent of the concession granted in determining any impairment or changes in the specific valuation allowance recorded in connection with the troubled debt restructuring. A valuation allowance may have been recorded prior to the quarter when the loan is modified in a troubled debt restructuring. Accordingly, the carrying value (net of the specific valuation allowance) before and after modification through a troubled debt restructuring may not change significantly, or may increase if the expected recovery is higher than the pre-modification recovery assessment.
During the three months ended
Unrealized Capital Losses
Unrealized capital losses (including noncredit impairments) in fixed maturities, including securities pledged to creditors, for IG and BIG securities by duration, based on NAIC designations, were as follows as ofMarch 31, 2012 andDecember 31, 2011 . 2012 2011 % of IG % of IG % of IG % of IG IG and BIG BIG and BIG IG and BIG BIG and BIG Six months or less below amortized cost $ 31.8 26.6 % $ 3.1 2.6 % $ 38.4 25.0 % $ 7.1 4.6 % More than six months and twelve months or less below amortized cost 8.8 7.4 % 2.5 2.1 % 12.5 8.1 % 4.1 2.7 % More than twelve months below amortized cost 46.1 38.5 % 27.3 22.8 % 61.4 40.1 % 29.9 19.5 % Total unrealized capital losses $ 86.7 72.5 % $ 32.9 27.5 % $ 112.3 73.2 % $ 41.1 26.8 % 65
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Unrealized capital losses (including noncredit impairments) in fixed maturities, including securities pledged to creditors, for securities rated IG and securities rated BIG by duration, based on NRSRO ratings, were as follows as ofMarch 31, 2012 andDecember 31, 2011 . 2012 2011 % of IG % of IG % of IG % of IG IG and BIG BIG and BIG IG and BIG BIG and BIG Six months or less below amortized cost $ 31.4 26.3 % $ 3.5 3.0 % $ 38.3 25.0 % $ 7.2 4.7 % More than six months and twelve months or less below amortized cost 7.8 6.5 % 3.5 3.0 % 6.8 4.4 % 9.8 6.4 % More than twelve months below amortized cost 28.5 23.7 % 44.9 37.5 % 42.1 27.4 % 49.2 32.1 % Total unrealized capital losses $ 67.7 56.5 % $ 51.9 43.5 % $ 87.2 56.8 % $ 66.2 43.2 % Unrealized capital losses (including noncredit impairments), along with the fair value of fixed maturities, including securities pledged to creditors, by market sector and duration were as follows as ofMarch 31, 2012 andDecember 31, 2011 . More Than Six Months and Twelve More Than Twelve Six Months or Less Months or Less Months Below Below Amortized Cost Below Amortized Cost Amortized Cost Total Fair Unrealized Fair Unrealized Fair Unrealized Fair Unrealized Value Capital Loss Value Capital Loss Value Capital Loss Value Capital Loss 2012 U.S. Treasuries $ 21.0 $ - $ - $ - $ - $ - $ 21.0 $ - U.S. corporate, state, and municipalities 865.0 22.0 143.7 5.6 52.0 5.9 1,060.7 33.5 Foreign 300.1 8.9 94.6 3.4 104.9 11.9 499.6 24.2 Residential mortgage-backed 67.3 3.7 44.4 1.3 215.5 35.4 327.2 40.4 Commercial mortgage-backed 11.3 0.2 19.6 0.8 10.7 0.7 41.6 1.7 Other asset-backed 1.6 0.1 6.5 0.2 49.3 19.5 57.4 19.8 Total $ 1,266.3 $ 34.9 $ 308.8 $ 11.3 $ 432.4 $ 73.4 $ 2,007.5 $ 119.6 2011 U.S. Treasuries $ - $ - $ - $ - $ - $ - $ - $ - U.S. corporate, state, and municipalities 595.1 22.8 46.5 3.0 52.9 5.3 694.5 31.1 Foreign 435.3 19.1 49.9 4.6 169.5 17.8 654.7 41.5 Residential mortgage-backed 49.4 1.6 97.0 5.2 175.4 46.1 321.8 52.9 Commercial mortgage-backed 28.3 1.8 69.0 2.5 8.9 1.5 106.2 5.8 Other asset-backed 32.6 0.2 4.9 1.3 44.1 20.6 81.6 22.1 Total $ 1,140.7 $ 45.5 $ 267.3 $ 16.6 $ 450.8 $ 91.3 $ 1,858.8 $ 153.4
Of the unrealized capital losses aged more than twelve months, the average market value of the related fixed maturities was 85.5% of the average book value as of
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Unrealized capital losses (including noncredit impairments) in fixed maturities, including securities pledged to creditors, for instances in which fair value declined below amortized cost by greater than or less than 20% for consecutive periods as indicated in the tables below, were as follows as ofMarch 31, 2012 andDecember 31, 2011 . Amortized Cost Unrealized Capital Loss Number of Securities < 20% > 20% < 20% > 20% < 20% > 20% 2012 Six months or less below amortized cost $ 1,335.6 $ 11.9 $ 38.2 $ 4.2 232 11 More than six months and twelve months or less below amortized cost 312.7 45.0 10.6 14.3 64 14 More than twelve months below amortized cost 318.9 103.0 18.4 33.9 116 38 Total $ 1,967.2 $ 159.9 $ 67.2 $ 52.4 412 63 2011 Six months or less below amortized cost $ 1,197.2 $ 60.1 $ 46.9 $ 16.9 256 31 More than six months and twelve months or less below amortized cost 270.3 25.1 13.9 9.1 52 9 More than twelve months below amortized cost 355.6 103.9 26.7 39.9 129 37 Total $ 1,823.1 $ 189.1 $ 87.5 $ 65.9 437 77 Unrealized capital losses (including noncredit impairments) in fixed maturities, including securities pledged to creditors, by market sector for instances in which fair value declined below amortized cost by greater than or less than 20% for consecutive periods as indicated in the tables below, were as follows as ofMarch 31, 2012 andDecember 31, 2011 . Amortized Cost Unrealized Capital Loss Number of Securities < 20% > 20% < 20% > 20% < 20% > 20% 2012 U.S. Treasuries $ 21.0 $ - $ - $ - 4 - U.S. corporate, state and municipalities 1,088.1 6.1 31.1 2.4 145 1 Foreign 500.9 22.9 16.8 7.4 89 4 Residential mortgage-backed 282.9 84.7 14.0 26.4 129 41 Commercial mortgage-backed 43.3 - 1.7 - 8 - Other asset-backed 31.0 46.2 3.6 16.2 37 17 Total $ 1,967.2 $ 159.9 $ 67.2 $ 52.4 412 63 2011 U.S. Treasuries $ - $ - $ - $ - - - U.S. corporate, state and municipalities 717.7 7.9 28.8 2.3 119 3 Foreign 670.5 25.7 31.9 9.6 122 7 Residential mortgage-backed 276.5 98.2 19.0 33.9 119 47 Commercial mortgage-backed 110.1 1.9 5.4 0.4 16 1 Other asset-backed 48.3 55.4 2.4 19.7 61 19 Total $ 1,823.1 $ 189.1 $ 87.5 $ 65.9 437 77 67
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For the three months endedMarch 31, 2012 , unrealized capital losses on fixed maturities decreased by$33.8 . The decrease in gross unrealized losses is primarily due to market improvement of the CMBS portfolio and the overall declining yields and tightening spreads, leading to higher fair value of fixed maturities.
At
All investments with fair values less than amortized cost are included in the Company's other-than-temporary impairment analysis, and impairments were recognized as disclosed in OTTI, which follows this section. After detailed impairment analysis was completed, the Company determined that the remaining investments in an unrealized loss position were not other-than-temporarily impaired, and therefore no further other-than-temporary impairment was necessary.
Other-than-Temporary Impairments
The Company evaluates available-for-sale fixed maturity and equity securities for impairment on a quarterly basis. The assessment of whether impairments have occurred is based on a case-by-case evaluation of the underlying reasons for the decline in estimated fair value. The following table identifies the Company's credit-related and intent-related other-than-temporary impairments included in the Condensed Consolidated Statements of Operations, excluding noncredit impairments included in Accumulated other comprehensive income (loss) ("AOCI"), by type for the three months ended March 31, 2012 and 2011. Three Months Ended March 31, 2012 2011 No. of No. of Impairment Securities Impairment Securities U.S. corporate $ - - $ 3.7 (1) 1 Foreign(1) 0.4 1 3.0 8 Residential mortgage-backed 0.7 23 0.3 6 Other asset-backed 0.2 2 13.2 38 Total $ 1.3 26 $ 20.2 53
(1) Primarily U.S. dollar denominated.
The above table includes$0.8 and$2.7 for the three months endedMarch 31, 2012 and 2011, respectively, in other-than-temporary write-downs related to credit impairments, which are recognized in earnings. The remaining$0.5 and$17.5 in write-downs for the three months endedMarch 31, 2012 and 2011, respectively, are related to intent impairments. The following table summarizes these intent impairments, which are also recognized in earnings, by type for the three months endedMarch 31, 2012 and 2011. Three Months Ended March 31, 2012 2011 No. of No. of Impairment Securities Impairment Securities U.S. corporate $ - - $ 3.7 1 Foreign(1) 0.4 1 1.1 4 Residential mortgage-backed - - - * 1 Other asset-backed 0.1 1 12.7 36 Total $ 0.5 2 $ 17.5 42 (1) Primarily U.S. dollar denominated. * Less than$0.1 . 68
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The Company may sell securities during the period in which fair value has declined below amortized cost for fixed maturities or cost for equity securities. In certain situations, new factors, including changes in the business environment, can change the Company's previous intent to continue holding a security.
The fair value of the fixed maturities with OTTI at
The following table identifies the amount of credit impairments on fixed maturities for the three months endedMarch 31, 2012 and 2011, for which a portion of the OTTI was recognized in AOCI, and the corresponding changes in such amounts. Three Months Ended March 31, 2012 2011 Balance at January 1 $ 19.4 $ 59.2 Additional credit impairments: On securities not previously impaired 0.1
0.2
On securities previously impaired 0.6
0.1
Reductions:
Securities intent impairments - (3.3 ) Securities sold, matured, prepaid or paid down (0.6 ) (3.9 ) Balance at March 31 $ 19.5 $ 52.3 Net Investment Income The Company uses the equity method of accounting for investments in limited partnership interests, primarily private equities and hedge funds. Generally, the Company records its share of earnings using a lag methodology, relying upon the most recent financial information available, where the contractual right exists to receive such financial information on a timely basis. The Company's equity in earnings from limited partnership interests is accounted for under the equity method and is recorded in Net investment income. Sources of Net investment income were as follows for the three months endedMarch 31, 2012 and 2011. Three Months Ended March 31, 2012 2011 Fixed maturities $ 305.8 $ 298.2 Equity securities, available-for-sale 1.1 3.6 Mortgage loans on real estate 33.6 26.5 Policy loans 3.3 3.3 Short-term investments and cash equivalents - 0.2 Other 19.4 21.9 Gross investment income 363.2 353.7 Less: investment expenses (11.2 ) (10.7 ) Net investment income $ 352.0 $ 343.0 69
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Net Realized Capital Gains (Losses)
Net realized capital gains (losses) are comprised of the difference between the amortized cost of investments and proceeds from sale and redemption, as well as losses incurred due to credit-related and intent-related other-than-temporary impairment of investments. Realized investment gains and losses are also generated from changes in fair value of fixed maturities accounted for using the fair value option and fair value changes including accruals on derivative instruments, except for effective cash flow hedges. The cost of the investments on disposal is determined based on first-in-first-out ("FIFO") methodology. Net realized capital gains (losses) on investments were as follows for the three months ended March 31, 2012 and 2011. Three Months
Ended March 31,
2012
2011
Fixed maturities, available-for-sale, including securities pledged $ 39.5
$ 31.4 Fixed maturities, at fair value using the fair value option
(42.9 ) (3.4 ) Equity securities, available-for-sale - 1.6 Derivatives (13.2 ) (9.1 ) Embedded derivatives - fixed maturities (4.8 ) (7.3 ) Embedded derivatives - product guarantees 149.0 3.5 Other investments (0.3 ) 2.9 Net realized capital gains (losses) $ 127.3 $ 19.6 After-tax net realized capital gains (losses) $ 78.7 $ (10.3 ) 70
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Fair Value Hierarchy
The following tables present the Company's hierarchy for its assets and liabilities measured at fair value on a recurring basis as ofMarch 31, 2012 andDecember 31, 2011 . 2012 Level 1 Level 2 Level 3(1) Total Assets: Fixed maturities, including securities pledged: U.S. Treasuries $ 778.1 $ 48.5 $ - $ 826.6 U.S. government agencies and authorities - 406.6 - 406.6 U.S. corporate, state and municipalities - 9,083.9 146.6 9,230.5 Foreign - 5,042.2 19.7 5,061.9 Residential mortgage-backed securities - 2,185.5 11.0 2,196.5 Commercial mortgage-backed securities - 922.6 - 922.6 Other asset-backed securities - 376.6 28.7 405.3 Equity securities, available-for-sale 124.6 - 18.5 143.1 Derivatives: Interest rate contracts - 390.1 - 390.1 Foreign exchange contracts - 0.1 - 0.1 Credit contracts - 2.7 - 2.7 Cash and cash equivalents, short-term investments, and short-term investments under securities loan agreement 769.0 0.4 - 769.4 Assets held in separate accounts 46,094.5 4,866.3 23.1 50,983.9 Total $ 47,766.2 $ 23,325.5 $ 247.6 $ 71,339.3 Liabilities: Product guarantees $ - $ - $ 72.0 $ 72.0 Fixed indexed annuities - - 17.9 17.9 Derivatives: Interest rate contracts 3.5 305.7 - 309.2 Foreign exchange contracts - 31.4 - 31.4 Credit contracts - 0.9 - 0.9 Total $ 3.5 $ 338.0 $ 89.9 $ 431.4 (1) Level 3 net assets and liabilities accounted for 0.2% of total net assets and liabilities measured at fair value on a recurring basis. Excluding separate accounts assets for which the policyholder bears the risk, the Level 3 net assets and liabilities in relation to total net assets and liabilities measured at fair value on a recurring basis totaled 0.8%.
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2011 Level 1 Level 2 Level 3(1) Total Assets: Fixed maturities, including securities pledged: U.S. Treasuries $ 1,180.3 $ 51.3 $ - $ 1,231.6 U.S. government agencies and authorities - 410.7 - 410.7 U.S. corporate, state and municipalities - 8,883.5 129.1 9,012.6 Foreign - 4,937.0 51.1 4,988.1 Residential mortgage-backed securities - 2,206.1 41.0 2,247.1 Commercial mortgage-backed securities - 911.3 - 911.3 Other asset-backed securities - 411.1 27.7 438.8 Equity securities, available-for-sale 125.9 - 19.0 144.9 Derivatives: Interest rate contracts 5.7 437.6 - 443.3 Foreign exchange contracts - 0.7 - 0.7 Credit contracts - 2.6 - 2.6 Cash and cash equivalents, short-term investments, and short-term investments under securities loan agreement 953.9 4.8 - 958.7 Assets held in separate accounts 40,556.8 4,722.3 16.1 45,295.2 Total $ 42,822.6 $ 22,979.0 $ 284.0 $ 66,085.6 Liabilities: Product guarantees $ - $ - $ 221.0 $ 221.0 Fixed indexed annuities - - 16.3 16.3 Derivatives: Interest rate contracts - 306.4 - 306.4 Foreign exchange contracts - 32.4 - 32.4 Credit contracts - 8.6 12.7 21.3 Total $ - $ 347.4 $ 250.0 $ 597.4 (1) Level 3 net assets and liabilities accounted for 0.1% of total net assets and liabilities measured at fair value on a recurring basis. Excluding separate accounts assets for which the policyholder bears the risk, the Level 3 net assets and liabilities in relation to total net assets and liabilities measured at fair value on a recurring basis totaled 0.2%.
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European Exposures
In the first half of 2010 concerns arose regarding the creditworthiness of several southern European countries, which later spread to other European countries. As a result of these concerns the fair value of sovereign debt decreased and those exposures were being monitored more closely. With regard to troubled European countries, the Company's main focus is onGreece ,Italy ,Ireland ,Portugal andSpain (henceforth defined as "peripheralEurope ") as these countries have applied for support from theEuropean Financial Stability Fund ("EFSF") or received support from theEuropean Central Bank ("ECB") via government bond purchases in the secondary market. The financial turmoil inEurope continues to be a dominant investment theme across the global capital markets. While certain aspects of this crisis have been avoided due to actions undertaken by theEuropean Central Bank late in 2011 and during the first quarter of 2012, the crisis continues to pose a challenge to global financial stability. Additionally, the possibility of capital markets volatility spreading through a highly integrated and interdependent banking system remains elevated. Furthermore, it is the Company's view that the risk among European sovereigns and financial institutions warrants specific scrutiny in addition to its customary surveillance and risk monitoring given how highly correlated these sectors of the region have become. When quantifying its exposure to the region, the Company attempts to identify the economic country of risk by considering all aspects of the risk to which it is exposed. Among these factors are the country of the issuer, the country of the issuer's ultimate parent, the corporate and economic relationship between the issuer and its parent, as well as the political, legal, and economic environment in which each functions. By undertaking this assessment, the Company believes that it develops a more accurate assessment of the actual geographic risk, with a more integrated understanding of all contributing factors to the full risk profile of the issuer. In the normal course of its on-going risk and portfolio management process, the Company closely monitors compliance with a credit limit hierarchy designed to minimize overly concentrated risk exposures by geography, sector, and issuer. This framework takes into account various factors such as internal and external ratings, capital efficiency, and liquidity and is overseen by a combination of Investment and Corporate Risk Management, as well as insurance portfolio managers focused specifically on managing the investment risk embedded in the Company's portfolio. As ofMarch 31, 2012 , the Company has$361.6 of exposure to peripheralEurope , which consists of a broadly diversified portfolio of credit-related investments in the industrial and utility sectors of$361.6 . As ofMarch 31, 2012 , there were no derivative assets exposure to financial institutions in peripheralEurope . For purposes of calculating the derivative assets exposure, the Company has aggregated exposure to single name and portfolio product credit default swaps ("CDS"), as well as all non-CDS derivative exposure for which it either has counterparty or direct credit exposure to a company whose country of risk is in scope. Notably, the Company has no fixed maturity and equity securities exposure to sovereigns or financial institutions in peripheralEurope , the market segment the Company believes is most vulnerable to continued uncertainty and risk. Peripheral European exposure includes exposure toItaly of$145.4 ,Ireland of$123.9 andSpain of$78.9 . Notably, the Company has no exposure toGreece . Among the remaining$2.7 billion of total non-peripheral European exposure, the Company has a portfolio of credit-related assets similarly diversified by country and sector across developed and developingEurope . Sovereign exposure is$544.1 , which consists of fixed maturity and equity securities of$151.3 and loans and receivables of$392.8 , which consists of the Dutch State payment obligation to the Company under the Illiquid Assets Back-up Facility. The Company also has$404.9 in exposure to non-peripheral financial institutions with a notable concentration in theUnited Kingdom of$178.2 . The balance of$1.8 billion is invested across non-peripheral European non-financials. In addition to notable aggregate concentration to theState of the Netherlands of$752.8 (which includes the$392.8 Dutch State payment obligation) and theUnited Kingdom of$718.6 , the Company has significant non-peripheral European total country exposures toSwitzerland of$288.1 ,Germany of$212.6 ,France of$174.1 andBelgium of$184.6 . The Company's financial exposure to theUnited Kingdom is also notable and receives additional scrutiny given the Company's focus on the potential for European contagion to be spread via the banking system. In each case, the Company believes the primary risk is to market value fluctuations resulting from spread volatility followed by modest default risk should the European crisis fail to be resolved as the Company currently expects. 73
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The following table represents the Company's European exposures at fair value and amortized cost as of
Fixed Maturity and Equity Securities Derivative Assets Loan and Receivables Total Sovereign Total, Net Non-U.S. Financial Non-Financial (Fair Total (Amortized Financial Non-Financial Less: Margin & (Fair Funded at March Sovereign Institutions Institutions Value) (Amortized Cost) Cost) Institutions Sovereign Institutions Collateral Value) 31, 2012(1)Greece $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - $ -Ireland - - 123.9 123.9 115.2 - - - - - - 123.9Italy - - 145.4 145.4 134.2 - - - - - - 145.4Portugal - - 13.4 13.4 12.3 - - - - - - 13.4Spain - - 78.9 78.9 75.2 - - - - - - 78.9 Total PeripheralEurope $ - $ - $ 361.6$ 361.6 $ 336.9 $ - $ - $ - $ - $ - $ - $ 361.6Belgium 35.1 - 149.5 184.6 158.4 - - - - - 184.6France - 41.0 123.2 164.2 154.4 - 9.9 - - - 9.9 174.1Germany - 34.2 178.4 212.6 191.7 - - - - - - 212.6Netherlands - 51.7 308.3 360.0 332.8 392.8 - - - - - 752.8Switzerland - 49.6 212.6 262.2 238.9 - 28.2 - - 2.3 25.9 288.1United Kingdom - 161.0 551.2 712.2 662.3 - 17.2 - - 10.8 6.4 718.6 Other non-peripheral(2) 116.2 12.1 285.2 413.5 389.4 - - - - - - 413.5 Total Non-PeripheralEurope 151.3 349.6 1,808.4 2,309.3 2,127.9 392.8 55.3 - - 13.1 42.2 2,744.3 Total$ 151.3 $ 349.6 $ 2,170.0$ 2,670.9 $ 2,464.8 $ 392.8 $ 55.3 $ - $ - $ 13.1$ 42.2 $ 3,105.9 (1) Represents: (i) Fixed maturity and equity securities at fair value; (ii)
Loan and receivables sovereign at amortized cost; and (iii) Derivative
assets at fair value. (2) Other non-peripheral countries include:Austria ,Belgium ,Bulgaria ,Croatia ,Denmark ,Finland ,Hungary ,Kazakhstan ,Latvia ,Lithuania , Luxembourg,Norway ,Russian Federation ,Sweden , andTurkey . 74
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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.
Liquidity Management
The Company's principal available sources of liquidity are product charges, investment income, proceeds from the maturity and sale of investments, proceeds from debt issuance and borrowing facilities, repurchase agreements, securities lending, and capital contributions. Primary uses of these funds are payments of commissions and operating expenses, interest credits, investment purchases, and contract maturities, withdrawals, and surrenders. The Company's liquidity position is managed by maintaining adequate levels of liquid assets, such as cash, cash equivalents, and short-term investments. As part of the liquidity management process, different scenarios are modeled to determine whether existing assets are adequate to meet projected cash flows. Key variables in the modeling process include interest rates, equity market movements, quantity and type of interest and equity market hedges, anticipated contract owner behavior, market value of general account assets, variable separate account performance, and implications of rating agency actions. The fixed account liabilities are supported by a 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 strategy 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. In executing this strategy, the Company uses derivative instruments to manage these risks. The Company's derivative counterparties are of high credit quality.
Liquidity and Capital Resources
Additional sources of liquidity include borrowing facilities to meet short-term cash requirements that arise in the ordinary course of business. ILIAC maintains the following agreements:
• A reciprocal loan agreement with
AIH"), an affiliate, whereby either party can borrow from the other up to
3.0% of ILIAC's statutory admitted assets as of the prior
receivable, including interest, from ING AIH, respectively. As of April 20,
2012, the Company has an outstanding receivable of
reciprocal loan agreement, and ING AIH repaid
receivable on that date. Such repayment was made from the proceeds of
AIH's
as of that same date. The Company and ING AIH continue to maintain the reciprocal loan agreement and future borrowings by either party will be subject to the reciprocal loan terms summarized above.
• The Company holds approximately 47.0% of its assets in marketable securities.
These assets include cash, U.S. Treasuries, Agencies and Public, Corporate
Bonds, ABS, CMBS and CMO, and equity securities. In the event of a temporary
liquidity need, cash may be raised by entering into reverse repurchase,
dollar rolls, and/or security lending agreements by temporarily lending
securities and receiving cash collateral. Under the Company's Liquidity Plan,
up to 12% of the Company's general account statutory admitted assets may be
allocated to reverse repurchase, securities lending and dollar roll programs.
At the time a temporary cash need arises, the actual percentage of admitted
assets available for reverse repurchase transactions will depend upon
outstanding allocations to the three programs. As of
Company had securities lending obligations of
of the Company's general account statutory admitted assets.
Management believes that its sources of liquidity are adequate to meet the Company's short-term cash obligations.
Capital Contributions and Dividends
During the three months endedMarch 31, 2012 , ILIAC did not receive any capital contributions from its Parent. During the three months endedMarch 31, 2011 , ILIAC received capital contributions of$201.0 in the aggregate from its Parent.
During the three months ended
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Collateral
Under the terms of theCompany's Over-The-Counter Derivative International Swaps and Derivatives Association , Inc. Agreements ("ISDA Agreements"), the Company may receive from, or deliver to, counterparties, collateral to assure that all terms of the ISDA Agreements will be met with regard to the Credit Support Annex ("CSA"). The terms of the CSA call for the Company to pay interest on any cash received equal to the Federal Funds rate. As ofMarch 31, 2012 andDecember 31, 2011 , the Company held$98.3 and$110.0 of cash collateral, respectively, which was included in Payables under securities loan agreement, including collateral held, on the Condensed Consolidated Balance Sheets. In addition, as ofMarch 31, 2012 andDecember 31, 2011 , the Company delivered collateral of$86.3 and$77.9 , respectively, in fixed maturities pledged under derivatives contracts, which was included in Securities pledged on the Condensed Consolidated Balance Sheets.
Ratings
The Company's access to funding and its related cost of borrowing, requirements for derivatives collateral posting and the attractiveness of certain of its products to customers are affected by Company credit ratings and insurance financial strength ratings, which are periodically reviewed by the rating agencies.
On
On
OnMarch 7, 2012 , S&P affirmed the counterparty credit and insurance financial strength rating of the Company at "A-" and revised the outlook to Stable from Watch Negative. OnDecember 8, 2011 , S&P downgraded the counterparty credit and insurance financial strength rating of the Company to "A-" from "A" and revised the outlook to Watch Negative from Stable. OnNovember 17, 2011 , S&P affirmed the "A" rating of the Company and revised the outlook to Stable from Negative based on de-risking and improving business fundamentals.
On
OnDecember 14, 2011 ,A.M. Best affirmed the insurance financial strength rating of the Company at "A", downgraded the issuer credit rating to "a" from "a+" and revised the outlook to Ratings Under Review with Negative Implications from Stable. OnJune 16, 2011 ,A.M. Best affirmed the Company's insurance financial strength rating of "A" and the issuer credit rating of "a+". The ratings of the Company by S&P, Fitch,A.M. Best and Moody's reflect a broader view of how the financial services industry is being challenged by the current economic environment, but also are based on the rating agencies' specific views of the Company's financial strength. In making their ratings decisions, the agencies consider past and expected future capital and earnings, asset quality and risk, profitability and risk of existing liabilities and current products, market share and product distribution capabilities, and direct or implied support from parent companies, including implications of theING restructuring plan, among other factors. The ratings actions, affirmations and outlook changes by S&P, Moody's, andA.M. Best inDecember 2011 followed the fourth quarter 2011 announcements byING regarding a charge ofEUR 0.9 billion to EUR 1.1 billion against fourth quarter results of the U.S. Closed Block Variable Annuity business.
Repurchase Agreements
The Company engages in dollar repurchase agreements with mortgage-backed securities ("dollar rolls") and repurchase agreements with other collateral types to increase its return on investments and improve liquidity. Such arrangements typically meet the requirements to be accounted for as financing arrangements. The Company enters into dollar roll transactions by selling existing mortgage-backed securities and concurrently entering into an agreement to repurchase similar securities within a short time frame in the future at a lower price. Under repurchase agreements, the Company borrows cash from a counterparty at an agreed upon interest rate for an agreed upon time frame and pledges collateral in the form of securities. At the end of the agreement, the counterparty returns the collateral to the Company and the Company, in turn, repays the loan amount along with the additional agreed upon interest. Company policy requires that at all times during the term of the dollar roll and repurchase agreements that cash or other collateral types obtained is sufficient to allow the Company to fund substantially all of the cost of purchasing replacement assets. Cash collateral received is invested in short-term investments, with the offsetting obligation to repay the loan included as a liability on the Condensed Consolidated Balance Sheets. As of March 31, 2012 and December 31, 2011 , the Company did not have any securities pledged in dollar rolls and repurchase agreement transactions.
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The Company also enters into reverse repurchase agreements. These transactions involve a purchase of securities and an agreement to sell substantially the same securities as those purchased. Company policy requires that, at all times during the term of the reverse repurchase agreements, cash or other collateral types provided is sufficient to allow the counterparty to fund substantially all of the cost of purchasing replacement assets. AtMarch 31, 2012 andDecember 31, 2011 , the Company did not have any securities pledged under reverse repurchase agreements.
The primary risk associated with short-term collateralized borrowings is that the counterparty will be unable to perform under the terms of the contract.
The
Company's exposure is limited to the excess of the net replacement cost of the securities over the value of the short-term investments. The Company believes the counterparties to the dollar rolls, repurchase, and reverse repurchase agreements are financially responsible and that the counterparty risk is minimal.
Securities Lending
The Company engages in securities lending whereby certain domestic securities from its portfolio are loaned to other institutions for short periods of time. Initial collateral, primarily cash, is required at a rate of 102% of the market value of the loaned securities. Generally, the lending agent retains all of the cash collateral. Collateral retained by the agent is invested in liquid assets on behalf of the Company. The market value of the loaned securities is monitored on a daily basis with additional collateral obtained or refunded as the market value of the loaned securities fluctuates. As ofMarch 31, 2012 andDecember 31, 2011 , the fair value of loaned securities was$115.9 and$515.8 , respectively, and is included in Securities pledged on the Condensed Consolidated Balance Sheets. Collateral received is included in Short-term investments under securities loan agreement, including collateral delivered. As ofMarch 31, 2012 andDecember 31, 2011 , liabilities to return collateral of$120.2 and$524.8 , respectively, are included in Payables under securities loan agreement, including collateral held, on the Condensed Consolidated Balance Sheets.
Recent Initiatives
OnApril 9, 2009 , the Company's ultimate parent,ING , announced a global business strategy which identified certain core and non-core businesses and geographies, statedING's intention to explore divestiture of non-core businesses over time, withdraw from certain non-core geographies, limit future acquisitions and implement enterprise-wide expense reductions. In particular, with respect toING's U.S. insurance operations,ING is seeking to further reduce its risk by focusing on individual life products, retirement services and lower risk annuity products which the Company commenced selling during the first quarter of 2010. OnOctober 26, 2009 ,ING announced the key components of the final Restructuring Plan ING submitted to the EC as part of the process to receive EC approval for the state aid granted toING by the Dutch State in the form ofEUR 10 billion Core Tier 1 securities issued onNovember 12, 2008 and the full credit risk transfer to the Dutch State of 80% ofING's Alt-A RMBS onMarch 31, 2009 (the "ING-Dutch State Transaction"). As part of the Restructuring Plan,ING has agreed to separate its banking and insurance businesses by 2013.ING intends to achieve this separation by divestment of its insurance and investment management operations, including the Company.ING has announced that it will explore all options for implementing the separation including one or more initial public offerings, sales or combinations thereof. InJanuary 2010 ,ING lodged an appeal with theGeneral Court of the European Union against specific elements of theEuropean Commission's decision regardingING's restructuring plan. In its appeal,ING contests the way theEuropean Commission ("EC") has calculated the amount of state aidING received and the disproportionality of the price leadership restrictions specifically and the disporportionality of restructuring requirements in general. InJuly 2011 , the appeal case was heard orally by theGeneral Court of the European Union . By judgment ofMarch 2, 2012 , the Court partially annulled the EC's decision ofNovember 18, 2009 , as a result of which a new decision has to be taken by the EC. Interested parties can file an appeal against the General Court's judgment before theCourt of Justice of theEuropean Union within two months and ten days after the date of the General Court's judgment. The EC has announced that it will file an appeal and a new decision is expected. OnNovember 10, 2010 ,ING announced that, in connection with the Restructuring Plan, while the option of implementing the separation through one global IPO remains open, it will prepare for a base case of an IPO of the Company and its U.S.-based insurance and investment management affiliates. Preparation for this potential IPO will also require its management to prepare consolidated U.S. GAAP financial statements which would likely include the Company and other affiliates. 77
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Impact of New Accounting Pronouncements
For information regarding the impact of new accounting pronouncements, refer to Note 1 to the Condensed Consolidated Financial Statements, Business, Basis of Presentation and Significant Accounting Policies, included in Part I, Item 1., herein. Recently Enacted Legislation OnJuly 21, 2010 ,President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"). The Dodd-Frank Act directs existing and newly-created government agencies and bodies to promulgate regulations implementing the law, a process that is underway and is expected to continue over the next few years. While some studies have already been completed and the rulemaking process has begun, there continues to be significant uncertainty regarding the results of ongoing studies and the ultimate requirements of regulations that have not yet been adopted. Until such studies and rulemaking are completed, the precise impact of the Dodd-Frank Act onING and its affiliates, including the Company cannot be determined. However, there are major elements of the legislation that the Company has identified to date that are of particular significance toING and/or its affiliates, including the Company, as described below. The Dodd-Frank Act created a new agency, theFinancial Stability Oversight Council ("FSOC"), an inter-agency body that is responsible for monitoring the activities of the U.S. financial system and recommending a framework for substantially increased regulation of significant financial services firms, including large, interconnected bank holding companies and systemically important nonbank financial companies that could consist of securities firms, insurance companies and other providers of financial services, including non-U.S. companies. A company determined to be systemically significant will be supervised by theFederal Reserve Board and will be subject to unspecified heightened prudential standards, including minimum capital requirements, liquidity standards, short-term debt limits, credit exposure requirements, management interlock prohibitions, maintenance of resolution plans, stress testing, additional fees and assessments and restrictions on proprietary trading. If, however,ING or the Company were so designated, failure to meet the requisite measures of financial condition could result in requirements for a capital restoration plan or capital raising; management changes; asset sales; and limitations and restrictions on capital distributions, acquisitions, affiliate transactions and/or product offerings. OnApril 3, 2012 , the FSOC published final rules and interpretive guidance setting forth the process and standards by which it will designate non-bank financial companies for regulation by theFederal Reserve Board . In order to designate a non-bank financial company as subject to regulation by theFederal Reserve Board , the FSOC would need to affirmatively determine that a subject company could pose a threat to the financial stability ofthe United States . It is impossible to predict with certainty whether all or any part ofING's U.S. operations will ultimately receive this designation. Nevertheless, given the high standard for ultimate designation - posing a risk to the financial stability ofthe United States - as well as the nature of its businesses and role in the U.S. financial system, we believe it is unlikely that the Company, or ING U.S. on a standalone basis, would ultimately receive this designation. This conclusion is based in part on the anticipated separation and independence of ING U.S. If the FSOC were, prior to the separation and independence ofING U.S., to consider ING U.S. together withING's banking operations inthe United States , the likelihood of designation may be increased, although even in that circumstance we do not believeING's U.S. operations would collectively meet the standard for such a designation. Although existing state insurance regulators will remain the primary regulators of the Company and its U.S. insurance company affiliates, the legislation also creates a Federal Insurance Office to be housed within theTreasury Department , which will be charged with monitoring (but not regulating) the insurance industry, including gathering information to identify issues or gaps in the regulation of insurers that could contribute to systemic crisis in the insurance industry or U.S. financial system; preparing annual reports toCongress on the insurance industry; conducting studies on modernization of U.S. insurance regulation and the global reinsurance market; and entering into/implementing agreements with foreign governments relating to the recognition of prudential measures with respect to insurance and reinsurance ("International Agreements"), including the authority to preempt U.S. state law if it is found to be inconsistent with an International Agreement and treats a non-U.S. insurer less favorably than a U.S. insurer. The legislation creates a new framework for regulating over-the-counter ("OTC") derivatives, which may increase the costs of hedging and other permitted derivatives trading activity undertaken by the Company. Under the new regulatory regime and subject to certain exceptions, OTC derivatives will be cleared through a centralized clearinghouse and executed on a centralized exchange. It establishes new regulatory authority for theSEC and theCommodity Futures Trading Commission ("CFTC") over derivatives, and "swap dealers" and "major swap participants", as to be defined bySEC and CFTC regulation, each of whom will be subject to as yet unspecified capital and margin requirements. Based on draft final rules jointly developed by the CFTC and theSEC and adopted onApril 18, 2012 , which further define the terms "swap dealer," "security-based swap dealer," "major swap participant," and "major security-based swap participant," the Company does not believe it should be considered a "swap dealer," "security-based swap dealer," "major swap participant," or "major security-based swap participant." However, although not expected to
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change at this stage of rulemaking, the final regulations have not yet been published and could provide otherwise. In addition, whether the Company will meet the criteria and possibly be subject to regulation under one of these definitions depends on the separate pronouncements by the CFTC andSEC on the final definitions of "swap" and "security-based swap" expected later in 2012. Once rulemaking is complete, if there is a determination that the Company meets one of these definitions, it could substantially increase the amount of regulatory requirements for the Company and the cost of hedging and other permitted derivatives trading activity undertaken by the Company. The legislation also requires theSEC and CFTC to conduct a study to determine whether stable value contracts fall within the definition of swap contracts, and if so, to determine whether an exemption to their regulation is appropriate. Stable value contracts are exempt from the legislation's swap provisions, pending the effective date of any such regulatory action. The Dodd-Frank Act imposes various ex-post assessments on certain financial companies, which may include the Company, to provide funds necessary to repay any borrowings and to cover the costs of any special resolution of a financial company under the new resolution authority established under the legislation (although assessments already imposed under state insurance guaranty funds will be taken into account in calculating such assessments). The Company will continue to monitor and assess the potential effects of the Dodd-Frank Act as regulatory requirements are finalized and mandated studies are conducted. The Small Business Job Act of 2010, signed into law onSeptember 27, 2010 , contained provisions that could provide additional opportunities to the Company's retirement business by allowing individuals greater flexibility to manage their retirement savings, through products and services offered by the Company. The new legislation permits both the partial annuitization of non-qualified annuity account balances as well as in-plan Roth conversions of distribution-eligible amounts by 401(k), 403(b) and 457 defined contribution plan participants.
Legislative and Regulatory Initiatives
Legislative proposals, which have been or may again be considered byCongress , include changing the taxation of 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, either on their own or as part of an omnibus deficit reduction package could have a material adverse effect on life insurance, annuity, and other retirement savings product sales, while others could have a material beneficial effect. Administrative budget proposals to disallow insurance companies a portion of the dividends received deduction in connection with variable product separate accounts could increase the cost of such products to policyholders. In 2011, theDepartment of Labor ("DOL") issued interim final regulations concerning the fee disclosure obligations under Employee Retirement Income Security Act of 1974 ("ERISA") for service providers to defined contribution plans as well as final regulations addressing fee disclosure obligations to plan participants. Final plan sponsor fee disclosure regulations were issued onFebruary 2, 2012 . In the final regulations, the DOL extended the effective date of provider fee disclosure toJuly 1, 2012 . The effective date for fee disclosure to plan participants was extended toAugust 30, 2012 . These fee disclosure developments could heighten fee sensitivities in the defined contribution marketplace, and could potentially generate pressure on the pricing of the Company's defined contribution retirement products and services. In the fourth quarter of 2011, the DOL withdrew a proposed rule under ERISA that would more broadly define the circumstances under which a person is considered to be a "fiduciary" by reason of giving investment advice to an employee benefit plan or a plan's participants. The DOL has indicated that it expects to issue a new proposed regulation in 2012. The rule, if ultimately re-proposed and finalized, could potentially alter the way products and services of the Company are marketed and sold to ERISA plans and to ERISA plan participants. TheSEC proposed in the third quarter of 2010, rescinding Rule 12b-1 under the Investment Company Act of 1940 and adopting a new Rule 12b-2. If adopted, the proposal would impose new limitations on the level of distribution-related charges that could be paid by mutual funds, including funds offered for sale through the Company's annuity and other products, and could reduce the levels of revenue the Company derives from fund-related distribution. In connection with theMarch 31, 2009 transfer byING of an economic interest in 80% of its Alt-A RMBS portfolio to the Dutch State, the EC had a nine month period to review and assess the competitive impact of the transaction. OnOctober 26, 2009 ,ING announced the key components of the final Restructuring Plan ING submitted to the EC as part of the process to receive EC approval for the state aid granted toING by the Dutch State in the form ofEUR 10 billion Core Tier 1 securities issued onNovember 12, 2008 and the ING-Dutch State Transaction. As part of the Restructuring Plan,ING has agreed to separate its banking and insurance businesses by 2013.ING intends to achieve this separation by the divestment of all insurance and investment management operations, including the Company. InNovember 2009 , the Restructuring Plan received formal EC approval and the separation of insurance and banking operations and other components of the Restructuring Plan were approved byING shareholders. InJanuary 2010 ,ING lodged an appeal with theGeneral Court of the European Union against specific elements of the EC's decision
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regardingING's restructuring plan. In its appeal,ING contests the way the EC has calculated the amount of state aidING received and the disproportionality of the price leadership restrictions specifically and the disporportionality of restructuring requirements in general. InJuly 2011 , the appeal case was heard orally by theGeneral Court of the European Union . By judgment ofMarch 2, 2012 , the Court partially annulled the EC's decision ofNovember 18, 2009 , as a result of which a new decision has to be taken by the EC. Interested parties can file an appeal against the General Court's judgment before theCourt of Justice of theEuropean Union within two months and ten days after the date of the General Court's judgment. Contingencies
For information regarding other contingencies related to legal proceedings, regulatory matters and other contingencies involving the Company, see the Commitments and Contingent Liabilities note to the Condensed Consolidated Financial Statements included in Part I, Item 1.
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