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ING LIFE INSURANCE & ANNUITY CO – 10-Q – Management’s Narrative Analysis of the Results of Operations and Financial 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, "we" or "our") for each of the three months ended March 31, 2013 and 2012 and financial condition as of March 31, 2013 and December 31, 2012 . This item should be read in its entirety and in conjunction with the Condensed Consolidated Financial Statements and related notes and other supplemental data, which can be found under Part I, Item 1. contained herein, as well as "Management's Narrative Analysis of Results of Operations and Financial Condition" section contained in our 2012 Annual Report on Form 10-K.
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Forward-Looking Information/Risk Factors
In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, we caution readers regarding certain forward-looking statements contained in this report and in any other statements made by, or on behalf of, us, 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 our beliefs concerning future levels of sales and redemptions of our products, investment spreads and yields, or the earnings and profitability of our 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 our 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, us. 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. Continued difficult conditions in the global capital markets and the
economy generally have affected and may continue to affect our business
and results of operations. 2. Adverse capital and credit market conditions may impact our ability to
access liquidity and capital, as well as the cost of credit and capital.
3. The level of interest rates may adversely affect our profitability,
particularly in the event of a continuation of the current low interest
rate environment.
4. A downgrade or a potential downgrade in our financial strength or credit
ratings could result in a loss of business and adversely affect our results of operations and financial condition. 5. Because we operate in highly competitive markets, we may not be able to
increase or maintain our market share, which may have an adverse effect on
our results of operations.
6. Our risk management policies and procedures, including hedging programs,
may prove inadequate for the risks we face, which could negatively affect
our business or result in losses.
7. The inability of counterparties to meet their financial obligations could
have an adverse effect on our results of operations. 8. Requirements to post collateral or make payments related to changes in market value of specified assets may adversely affect liquidity.
9. Our investment portfolio is subject to several risks that may diminish the
value of our invested assets and the investment returns credited to customers, which could reduce our sales, revenues, AUM and results of operations. 10. Some of our investments are relatively illiquid and are in asset classes that have been experiencing significant market valuation fluctuations. 11. Defaults or delinquencies in our commercial mortgage loan portfolio may adversely affect our profitability.
12. Our products and services are complex and are frequently sold through
intermediaries, and a failure to properly perform services or the
misrepresentation of our products or services could have an adverse effect
on our revenues and income.
13. The valuation of many of our financial instruments includes methodologies,
estimations and assumptions that are subject to differing interpretations
and could result in changes to investment valuations that may materially
and adversely affect our results of operations and financial condition.
14. The determination of the amount of allowances and impairments taken on our
investments is subjective and could materially and adversely impact our
results of operations or financial condition. Gross unrealized losses may
be realized or result in future impairments, resulting in a reduction in
our net income (loss). 50
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15. Our participation in a securities lending program and a reverse repurchase
program subjects us to potential liquidity and other risks.
16. Differences between actual claims experience and reserving assumptions may
adversely affect our results of operations or financial condition. 17. We may face significant losses if mortality rates, morbidity rates,
persistency rates or other underwriting assumptions differ significantly
from our pricing expectations. 18. Unfavorable developments in interest rates, credit spreads and
policyholder behavior can result in adverse financial consequences related
to our stable value products, and our hedging program and risk mitigation
features may not successfully offset these consequences. 19. We may be required to accelerate the amortization of DAC, deferred sales inducements ("DSI") and/or VOBA, any of which could adversely affect our results of operations or financial condition. 20. Reinsurance subjects us to the credit risk of reinsurers and may not be available, affordable or adequate to protect us against losses. 21. A decrease in our RBC ratio (as a result of a reduction in statutory surplus and/or increase in risk-based capital ("RBC") requirements) could
result in increased scrutiny by insurance regulators and rating agencies
and have a material adverse effect on our business, results of operations
and financial condition.
22. Any failure to protect the confidentiality of customer information could
adversely affect our reputation and have a material adverse effect on our
business, financial condition and results of operation. 23. Changes in accounting standards could adversely impact our reported results of operations and our reported financial condition. 24. Under the tax sharing agreement effectiveJanuary 1, 2013 , a change in control could affect availability of cash payments to which we would otherwise be entitled under the prior tax sharing agreement.
25. We may be required to establish an additional valuation allowance against
the deferred income tax asset if our business does not generate sufficient
taxable income or if our tax planning strategies are modified. Increases
in the deferred tax valuation allowance could have a material adverse
effect on results of operations and financial condition.
26. Our business may be negatively affected by adverse publicity or increased
governmental and regulatory actions with respect to us, other well-known
companies or the financial services industry in general.
27. Litigation may adversely affect our profitability and financial condition.
28. A loss of, or significant change in, key product distribution relationships could materially affect sales. 29. The occurrence of natural or man-made disasters may adversely affect our results of operations and financial condition.
30. The loss of key personnel could negatively affect our financial results
and impair our ability to implement our business strategy. 31. Interruption or other operational failures in telecommunication, information technology and other operational systems, or a failure to
maintain the security, integrity, confidentiality or privacy of sensitive
data residing on such systems, including as a result of human error, could harm our business.
32. We may not be able to protect our intellectual property and may be subject
to infringement claims. 33. Although our affiliate,ING USA Annuity and Life Insurance Company ("ING USA ") ceased sales of retail variable annuity products, we continue to
offer variable annuity products and other products with similar features
in our ongoing business. 51
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34. Our businesses and those of ING Group and its affiliates are heavily regulated and changes in regulation or the application of regulation may reduce our profitability. 35. Our businesses are heavily regulated, and changes in regulation inthe United States , enforcement actions and regulatory investigations may reduce profitability. 36. Our products are subject to extensive regulation and failure to meet any of the complex product requirements may reduce profitability. 37. The Dodd-Frank Act, its implementing regulations and other financial regulatory reform initiatives could have adverse consequences for the financial services industry, including us and/or materially affect our results of operations, financial condition or liquidity. 38. Changes in U.S. federal and state securities laws and regulations may affect our operations and our profitability.
39. Changes in U.S. federal income tax law and interpretations of existing tax
law could affect our profitability and financial condition by making some
products less attractive to customers and increasing our tax costs or tax
costs of our customers.
40. Changes to regulations under ERISA could adversely affect our distribution
model by restricting our ability to provide customers with advice. 41. Changes in U.S. pension laws and regulations may affect our results of operations and our profitability. 42. Our separation from ING Group could adversely affect our business and
profitability due to ING Group's strong brand and reputation and various
uncertainties associated with the implementation of our separation from ING Group. 43. Our continuing relationship with ING Group, our ultimate parent, and with
affiliates of ING Group, may affect our ability to operate and finance our
business as we deem appropriate and changes with respect to ING Group could negatively impact us. 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 we filed with theSEC . Except as may be required by the federal securities laws, we disclaim 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 (collectively, the "Company") are providers of financial products and services inthe United States . ILIAC is authorized to conduct its insurance business in all states and in theDistrict of Columbia . The Condensed Consolidated Financial Statements include ILAC and its wholly owned subsidiaries,ING Financial Advisers, LLC ("IFA") andDirected Services, LLC ("DSL"). In 2009, ING Groep N.V. ("ING Group " or "ING") announced the anticipated separation of its global banking and insurance businesses, including the divestiture of ING U.S., Inc., which together with its subsidiaries, including us, constitutesING's U.S.-based retirement, investment management and insurance operations. OnMay 7, 2013 , ING U.S., Inc. completed the offering of 65,192,307 shares of its common stock, including the issuance and sale by ING U.S., Inc. of 30,769,230 shares of common stock and the sale byING Insurance International B.V . ("ING International "), an indirect wholly owned subsidiary of ING Group and previously the sole stockholder of ING U.S., Inc., of 34,423,077 shares of outstanding stock of ING U.S., Inc. (collectively, the "IPO"). Following the IPO,ING International owns approximately 75% of the outstanding common stock of ING U.S., Inc. (before any exercise of the underwriters' option to acquire fromING International up to an additional 9,778,846 shares of ING U.S., Inc. common stock). ILIAC is a direct, wholly owned subsidiary ofLion Connecticut Holdings Inc. ("Lion" or "Parent"), which is a direct, wholly owned subsidiary of ING U.S., Inc. Following the IPO,ING International owns approximately 75% of the common stock of ING U.S., Inc.ING International is a wholly owned subsidiary ofING Verzekeringen N.V. ("ING V"), which is a wholly owned subsidiary ofING Insurance Topholding N.V. , which is a wholly owned subsidiary of ING Group, the ultimate parent company.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 ."
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OnApril 11, 2013 , ING U.S., Inc. announced plans to rebrand in the future as Voya Financial. The Voya Financial identity is reflected in the ING U.S., Inc.'s new ticker symbol (NYSE: VOYA).
We have one operating segment.
Critical Accounting Policies, Judgments and Estimates
The preparation of financial statements in conformity with accounting principles generally accepted inthe United States ("U.S. GAAP") requires the application of accounting policies that often involve a significant degree of judgment. Management, on an ongoing basis reviews estimates and assumptions used in the preparation of the financial statements. There can be no assurance that actual results will conform to estimates and assumptions and that reported results of operations will not be materially affected by the need to make future accounting adjustments to reflect changes in these estimates and assumptions from time to time. We have 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 deferred policy acquisition costs ("DAC") and value of business acquired ("VOBA"), valuation of investments and derivatives, impairments, income taxes and contingencies.
In developing these accounting estimates and policies, we make 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, we believe the amounts provided are appropriate based upon the facts available upon preparation of the Condensed Consolidated Financial Statements.
The above critical accounting estimates are described in the Business, Basis of Presentation and Significant Accounting Policies Note to the Consolidated Financial Statements in the 2012 Annual Report on Form 10-K.
Results of Operations
Overview
Our products 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, 457 and 501, as well as nonqualified deferred compensation plans and related services. Our products are offered primarily to individuals, pension plans, small businesses and employer-sponsored groups in the health care, government and education markets (collectively "not-for-profit" organizations) and corporate markets. Our products are generally distributed through pension professionals, independent agents and brokers, third party administrators, banks, dedicated career agents and financial planners. We derive our 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 investments, (c) realized capital gains (losses) on investments and product guarantees and (d) certain other fees. Our expenses primarily consist of (a) interest credited and other benefits to contract owners, (b) amortization of DAC and VOBA, (c) expenses related to the selling and servicing of the various products offered by us and (d) other general business expenses. In addition, we collect broker-dealer commission revenues through our subsidiaries, DSL and IFA, which are, in turn, paid to broker-dealers and expensed.
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Three Months Ended
Our results of operations for the three months endedMarch 31, 2013 were primarily impacted by a Net realized capital loss in the current year versus a Net realized capital gain in the prior year offset by lower Net amortization of DAC/VOBA, lower Income tax expense and higher Fee income. Three Months Ended March 31, $ Increase % Increase 2013 2012 (Decrease) (Decrease) Revenues: Net investment income$ 348.2 $ 352.0 $ (3.8 ) (1.1 )% Fee income 174.9 155.1 19.8 12.8 % Premiums 7.9 11.8 (3.9 ) (33.1 )% Broker-dealer commission revenue 57.8 55.7 2.1 3.8 % Net realized capital gains (losses): Total other-than-temporary impairments (1.1 ) (1.4 ) 0.3 21.4 % Less: Portion of other-than-temporary impairments recognized in Other comprehensive income (loss) (0.5 ) (0.1 ) (0.4 ) NM Net other-than-temporary impairments recognized in earnings (0.6 ) (1.3 ) 0.7 53.8 % Other net realized capital gains (losses) (39.5 ) 128.6 (168.1 ) NM Total net realized capital gains (losses) (40.1 ) 127.3 (167.4 ) NM Other revenue (4.9 ) 0.5 (5.4 ) NM Total revenues 543.8 702.4 (158.6 ) (22.6 )% Benefits and expenses: Interest credited and other benefits to contract owners 186.8 194.7 (7.9 ) (4.1 )% Operating expenses 173.6 180.4 (6.8 ) (3.8 )% Broker-dealer commission expense 57.8 55.7 2.1 3.8 % Net amortization of deferred policy acquisition costs and value of business acquired 18.6 52.8 (34.2 ) (64.8 )% Interest expense 0.1 0.6 (0.5 ) (83.3 )% Total benefits and expenses 436.9 484.2 (47.3 ) (9.8 )% Income (loss) before income taxes 106.9 218.2 (111.3 ) (51.0 )% Income tax expense (benefit) 31.8 74.2 (42.4 ) (57.1 )% Net income (loss)$ 75.1 $ 144.0 $ (68.9 ) (47.8 )% NM - Not Meaningful Revenues
Total revenues decreased
Fee income increased
Premiums decreased
Total net realized capital gains (losses) changed$(167.4) from$127.3 to$(40.1) primarily due to unfavorable changes in the fair value of embedded derivatives on product guarantees. Gains on guaranteed benefit derivatives were higher in the prior period due to a reduction in expected future guaranteed interest rates on certain Stabilizer contracts in addition to less favorable market changes and unfavorable changes in volatility over the comparable periods. In addition, lower net realized investment gains were mostly due to a reduction in gains on the sale of securities compared to the prior year.
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Benefits and Expenses
Total benefits and expenses decreased
Net amortization of DAC and VOBA decreased$34.2 from$52.8 to$18.6 primarily driven by a decrease in amortization due to lower gross profits in the current period compared to the prior period.
Income Taxes
Income tax expense (benefit) changed$(42.4) from$74.2 to$31.8 primarily due to a decrease in income before income taxes. Also contributing to the change is an increase in the valuation allowance in 2012. Financial Condition Investments Investment Strategy Our 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. Segmented portfolios are established for groups of products with similar liability characteristics. Our investment portfolio consists largely of high quality fixed maturities and short-term investments, investments in commercial mortgage loans, alternative investments and other instruments, including a small amount of equity holdings. Fixed maturities include publicly issued corporate bonds, government bonds, privately placed notes and bonds, ABS, traditional MBS and various CMO tranches managed in combination with financial derivatives as part of a proprietary strategy. We use derivatives for hedging purposes to reduce our exposure to the cash flow variability of assets and liabilities, interest rate risk, credit risk and market risk. In addition, we use credit derivatives to replicate exposure to individual securities or pools of securities as a means of achieving credit exposure similar to bonds of the underlying issuer(s) more efficiently. Since the height of the financial crisis in 2008, we have pursued a substantial repositioning of the investment portfolio aimed at reducing risk, increasing the stability and predictability of returns and pursuing intentional investment risks that are reliant on our core strengths. The repositioning has resulted in a significant decrease in exposure to structured assets, an improvement in the NAIC designation profile of our remaining structured assets and an increase in exposure to public and private investment grade corporate bonds and U.S. Treasury securities. 55
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Portfolio Composition
The following table presents the investment portfolio as ofMarch 31, 2013 andDecember 31, 2012 : 2013 2012 Carrying % of Carrying % of Value Total Value Total Fixed maturities, available-for-sale, excluding securities pledged$ 20,617.8 80.2 %$ 20,690.8 79.4 % Fixed maturities, at fair value using the fair value option 519.9 2.0 % 544.7 2.1 % Equity securities, available-for-sale 127.0 0.5 % 142.8 0.5 % Short-term investments(1) 186.0 0.7 % 679.8 2.6 % Mortgage loans on real estate 3,060.7 11.9 % 2,872.7 11.0 % Policy loans 237.6 0.9 % 240.9 0.9 % Limited partnerships/corporations 182.0 0.7 % 179.6 0.7 % Derivatives 479.1 1.9 % 512.7 2.0 % Securities pledged(2) 310.2 1.2 % 219.7 0.8 % Total investments$ 25,720.3 100.0 %$ 26,083.7 100.0 % (1) Short-term investments include investments with remaining maturities of one year or less, but greater than 3 months, at the time of purchase. (2) See "Management's Discussion and Analysis of Results of Operations and Financial Condition-Liquidity and Capital Resources" for information regarding securities pledged. Fixed Maturities
Total fixed maturities by market sector, including securities pledged, were as presented below as of
2013 Amortized % of Fair % of Cost Total Value Total Fixed Maturities: U.S. Treasuries$ 758.8 3.9 %$ 871.9 4.2 % U.S. government agencies and authorities 379.6 1.9 % 393.5 1.8 % State, municipalities, and political subdivisions 77.2 0.4 % 92.7 0.4 % U.S. corporate securities 9,933.3 51.0 % 10,918.2 50.9 % Foreign securities(1) 5,177.1 26.6 % 5,653.2 26.4 % Residential mortgage-backed securities 1,954.5 10.0 % 2,216.9 10.3 % Commercial mortgage-backed securities 715.8 3.7 % 802.4 3.7 % Other asset-backed securities 478.0 2.5 % 499.1 2.3 % Total fixed maturities, including securities pledged$ 19,474.3 100.0 %$ 21,447.9 100.0 %
(1) Primarily U.S. dollar denominated.
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2012 Amortized % of Fair % of Cost Total Value Total Fixed Maturities: U.S. Treasuries$ 1,011.5 5.3 %$ 1,146.6 5.3 % U.S. government agencies and authorities 379.4 2.0 % 397.0 1.9 % State, municipalities, and political subdivisions 77.2 0.4 % 93.1 0.4 % U.S. corporate securities 9,438.0 49.1 % 10,574.3 49.3 % Foreign securities(1) 5,009.7 26.0 % 5,552.0 25.9 % Residential mortgage-backed securities 2,070.4 10.8 % 2,357.5 11.0 % Commercial mortgage-backed securities 748.7 3.9 % 839.1 3.9 % Other asset-backed securities 475.7 2.5 % 495.6 2.3 % Total fixed maturities, including securities pledged$ 19,210.6 100.0 %$ 21,455.2 100.0 %
(1) Primarily U.S. dollar denominated.
As of
Fixed Maturities Credit Quality - Ratings
Information about certain of our fixed maturity securities holdings by NAIC designation is set forth in the following tables. Corresponding rating agency designation does not directly translate into NAIC designation, but represents our best estimate of comparable ratings from rating agencies, includingFitch Ratings, Inc. ("Fitch"),Moody's Investors Service, Inc. ("Moody's") andStandard & Poor's Ratings Services ("S&P"). If no rating is available from a rating agency, then an internally developed rating is used. The fixed maturities in our portfolio are generally rated by external rating agencies and, if not externally rated, are rated by us on a basis similar to that used by the rating agencies. As ofMarch 31, 2013 andDecember 31, 2012 , the average quality rating of our fixed maturities portfolio was A- and A, respectively. Ratings are derived from three ARO ratings and are applied as follows based on the number of agency ratings received:
? when three ratings are received, the middle rating is applied;
? when two ratings are received, the lower rating is applied;
? when a single rating is received, the ARO rating is applied; and
? when ratings are unavailable, an internal rating is applied.
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Total fixed maturities by NAIC quality designation category, including securities pledged, were as follows as ofMarch 31, 2013 andDecember 31, 2012 : 2013 NAIC Quality Amortized % of Fair % of Designation Cost Total Value Total 1$ 10,015.7 51.4 %$ 10,987.9 51.2 % 2 8,507.2 43.7 % 9,393.9 43.8 % 3 723.2 3.7 % 789.0 3.7 % 4 151.2 0.8 % 158.9 0.7 % 5 24.8 0.1 % 37.7 0.2 % 6 52.2 0.3 % 80.5 0.4 % Total$ 19,474.3 100.0 %$ 21,447.9 100.0 % 2012 NAIC Quality Amortized % of Fair % of Designation Cost Total Value Total 1$ 9,717.0 50.6 %$ 10,801.8 50.3 % 2 8,489.2 44.2 % 9,539.0 44.5 % 3 737.7 3.8 % 797.0 3.7 % 4 181.0 0.9 % 189.8 0.9 % 5 37.2 0.2 % 49.3 0.2 % 6 48.5 0.3 % 78.3 0.4 % Total$ 19,210.6 100.0 %$ 21,455.2 100.0 %
Total fixed maturities by ARO quality rating category, including securities pledged, were as follows as of
2013 ARO Quality Amortized % of Fair % of Ratings Cost Total Value Total AAA$ 3,662.6 18.8 %$ 4,035.3 18.8 % AA 1,009.3 5.2 % 1,112.9 5.2 % A 5,220.6 26.8 % 5,672.7 26.4 % BBB 8,411.9 43.2 % 9,294.6 43.3 % BB 727.2 3.7 % 792.7 3.7 % B and below 442.7 2.3 % 539.7 2.6 % Total$ 19,474.3 100.0 %$ 21,447.9 100.0 % 2012 ARO Quality Amortized % of Fair % of Ratings Cost Total Value Total AAA$ 4,031.2 21.0 %$ 4,461.4 20.8 % AA 871.5 4.5 % 972.4 4.5 % A 4,765.7 24.8 % 5,286.5 24.6 % BBB 8,329.5 43.4 % 9,369.3 43.7 % BB 734.1 3.8 % 798.0 3.7 % B and below 478.6 2.5 % 567.6 2.7 % Total$ 19,210.6 100.0 %$ 21,455.2 100.0 % 58
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Fixed maturities rated BB and below may have speculative characteristics and changes in economic conditions or other circumstances are more likely to lead to a weakened capacity of the issuer to make principal and interest payments than is the case with higher rated fixed maturities. The amortized cost and fair value of fixed maturities, including securities pledged, as ofMarch 31, 2013 andDecember 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 Other ABS are shown separately because they are not due at a single maturity date. 2013 2012 Amortized Cost Fair Value Amortized Cost Fair Value Due to mature: One year or less $ 788.0$ 811.5 $ 853.5$ 880.9 After one year through five years 3,901.9 4,186.5 3,953.8 4,249.9 After five years through ten years 6,078.7 6,673.0 5,700.3 6,339.8 After ten years 5,557.4 6,258.5 5,408.2 6,292.4 Mortgage-backed securities 2,670.3 3,019.3 2,819.1 3,196.6 Other asset-backed securities 478.0 499.1 475.7 495.6 Fixed maturities, including securities pledged$ 19,474.3 $ 21,447.9 $ 19,210.6 $ 21,455.2
As of
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Unrealized Capital Losses
Unrealized capital losses (including noncredit impairments), along with the fair value of fixed maturities, including securities pledged, by market sector and duration were as follows as ofMarch 31, 2013 andDecember 31, 2012 : 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 Losses Value Capital Losses Value Capital Losses Value Capital Losses 2013 U.S. Treasuries $ - $ - $ - $ - $ - $ - $ - $ - U.S. corporate, state and municipalities 1,061.8 23.1 20.2 1.4 32.5 3.3 1,114.5 27.8 Foreign 483.4 13.0 11.8 0.5 43.2 6.8 538.4 20.3 Residential mortgage-backed 212.5 1.8 35.2 0.9 117.9 12.7 365.6 15.4 Commercial mortgage-backed 0.3 - - - 1.9 0.1 2.2 0.1 Other asset-backed 26.5 - 1.5 - 30.3 5.4 58.3 5.4 Total$ 1,784.5 $ 37.9$ 68.7 $ 2.8$ 225.8 $ 28.3$ 2,079.0 $ 69.0 2012 U.S. Treasuries$ 300.0 $ 0.5 $ - $ - $ - $ -$ 300.0 $ 0.5 U.S. corporate, state and municipalities 479.8 6.8 22.5 0.9 49.4 3.4 551.7 11.1 Foreign 166.8 4.7 7.8 0.5 87.7 11.2 262.3 16.4 Residential mortgage-backed 68.7 1.6 7.2 0.3 132.4 16.2 208.3 18.1 Commercial mortgage-backed 7.5 0.1 1.6 - 2.5 0.1 11.6 0.2 Other asset-backed 15.6 - - - 34.2 6.7 49.8 6.7 Total$ 1,038.4 $ 13.7$ 39.1 $ 1.7$ 306.2 $ 37.6$ 1,383.7 $ 53.0
Of the unrealized capital losses aged more than twelve months, the average market value of the related fixed maturities was 88.9% and 89.1% of the average book value as of
For the three months endedMarch 31, 2013 , unrealized capital losses on fixed maturities increased by$16.0 primarily driven by an increase in unrealized losses in Public-Investment Grade Corporate bonds. 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 improving market conditions within Other ABS in addition to tightening credit spreads.
As of
Subprime and Alt-A Mortgage Exposure
The performance of underlying subprime and Alt-A mortgage collateral, originated prior to 2008, has continued to reflect the problems associated with a housing market that has since 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. During 2012, market prices and sector liquidity demonstrated more sustained improvements, driven by an improved technical picture and positive sentiment regarding the potential for fundamental improvement within the sector. This positive momentum continued into 2013, with the first quarter characterized by improving housing market indicators and strong liquidity. In managing our risk exposure to subprime and Alt-A mortgages, we take into account collateral performance and structural characteristics associated with our various positions.
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We do not originate or purchase subprime or Alt-A whole-loan mortgages. Subprime lending is the origination of loans to customers with weaker credit profiles. We define Alt-A mortgages 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. We have exposure to RMBS, CMBS and ABS. Our exposure to subprime mortgage-backed securities is primarily in the form of ABS structures collateralized by subprime residential mortgages and the majority of these holdings were included in Other ABS under "Fixed Maturities" above. As ofMarch 31, 2013 , the fair value, amortized cost, and gross unrealized losses related to our exposure to subprime mortgage-backed securities was$62.3 ,$63.1 and$4.7 , respectively, representing 0.3% of total fixed maturities, including securities pledged, based on fair value. As ofDecember 31, 2012 , the fair value, amortized cost, and gross unrealized losses related to our exposure to subprime mortgage-backed securities were$61.2 ,$65.4 and$6.2 , respectively, representing 0.3% of total fixed maturities, including securities pledged, based on fair value. The NAIC designations for structured securities, including subprime and Alt-A RMBS, are based upon a comparison of the bond's amortized cost to the NAIC's loss expectation for each security. Securities where modeling results in no expected loss in all scenarios are considered to have the highest designation of NAIC 1. A large percentage of our RMBS securities carry a NAIC 1 designation while the ARO rating indicates below investment grade. This is primarily due to the credit and intent impairments recorded by us which reduced the amortized cost on these securities to a level resulting in no expected loss in all scenarios, which corresponds to a NAIC 1 designation. The revised methodology reduces regulatory reliance on rating agencies and allows for greater regulatory input into the assumptions used to estimate expected losses from such structured securities. The following tables present our exposure to subprime mortgage-backed securities by credit quality using NAIC designations, ARO ratings and vintage year as ofMarch 31, 2013 andDecember 31, 2012 : % of Total Subprime Mortgage-backed Securities NAIC Designation ARO Ratings Vintage 2013 1 66.8 % AAA 0.1 % 2007 7.7 % 2 3.3 % AA 3.0 % 2006 6.8 % 3 19.5 % A 14.9 % 2005 and prior 85.5 % 4 9.1 % BBB 20.8 % 100.0 % 5 1.1 % BB and below 61.2 % 6 0.2 % 100.0 % 100.0 % 2012 1 67.8 % AAA 3.2 % 2007 8.0 % 2 3.2 % AA - % 2006 6.0 % 3 19.6 % A 16.2 % 2005 and prior 86.0 % 4 8.7 % BBB 21.5 % 100.0 % 5 0.5 % BB and below 59.1 % 6 0.2 % 100.0 % 100.0 % Our exposure to Alt-A mortgages is included in the "Residential mortgage-backed securities" line item in the "Fixed Maturities" table under "Fixed Maturities" section above. As ofMarch 31, 2013 , the fair value, amortized cost and gross unrealized losses related to our exposure to Alt-A RMBS aggregated to$102.5 ,$84.0 and$6.6 , respectively, representing 0.5% of total fixed maturities, including securities pledged, based on fair value. As ofDecember 31, 2012 , the fair value, amortized cost, and gross unrealized losses related to our exposure to Alt-A RMBS aggregated to$106.0 ,$89.5 and$9.5 , respectively, representing 0.5% of total fixed maturities, including securities pledged, based on fair value. 61
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The following tables present our exposure to Alt-A RMBS by credit quality using NAIC designations, ARO ratings and vintage year as of
% of Total Alt-A Mortgage-backed Securities NAIC Designation ARO Ratings Vintage 2013 1 40.6 % AAA 0.1 % 2007 13.9 % 2 10.8 % AA 0.2 % 2006 29.7 % 3 27.8 % A 4.0 % 2005 and prior 56.4 % 4 18.6 % BBB 2.6 % 100.0 % 5 1.7 % BB and below 93.1 % 6 0.5 % 100.0 % 100.0 % 2012 1 33.4 % AAA 0.2 % 2007 13.8 % 2 12.4 % AA 1.4 % 2006 29.3 % 3 21.0 % A 3.4 % 2005 and prior 56.9 % 4 30.3 % BBB 5.6 % 100.0 % 5 2.3 % BB and below 89.4 % 6 0.6 % 100.0 % 100.0 %
CMBS investments represent pools of commercial mortgages that are broadly diversified across property types and geographical areas. Delinquency rates on commercial mortgages increased over the course of 2009 through mid-2012. Since then, the steep pace of increases observed in the early years following the credit crisis has slowed, and some recent months have posted month over month declines in delinquencies. In addition, other performance metrics like vacancies, property values and rent levels have shown improvements, although these metrics can differ widely by dimensions such as geographic location and property type. The primary market for CMBS continued its recovery from the credit crisis with higher total new issuances in 2012, the fourth straight year of higher new issuances. This positive momentum continued into 2013, with total new issuance volume in Q1 the highest quarterly total since 2007. Higher primary issuance resulted in increased credit availability within the commercial real estate market.
For consumer Other ABS, delinquency and loss rates have exhibited general stability after the credit crisis and done so at levels considered historically low. Relative strength in various credit metrics across multiple types of asset-backed loans have been observed on a sustained basis.
As ofMarch 31, 2013 , the fair value, amortized cost, and gross unrealized losses related to our exposure to CMBS aggregated to$802.4 ,$715.8 and$0.1 , respectively. As ofDecember 31, 2012 , the fair value, amortized cost, and gross unrealized losses related to our exposure to CMBS aggregated to$839.1 ,$748.8 and$0.2 , respectively. 62
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The following tables present our exposure to CMBS holdings by credit quality using NAIC designations, ARO ratings and vintage year as ofMarch 31, 2013 andDecember 31, 2012 : % of Total CMBS NAIC Designation ARO Ratings Vintage 2013 1 99.4 % AAA 52.6 % 2007 29.9 % 2 - % AA 17.0 % 2006 20.7 % 3 0.6 % A 8.9 % 2005 and prior 49.4 % 4 - % BBB 3.6 % 100.0 % 5 - % BB and below 17.9 % 6 - % 100.0 % 100.0 % 2012 1 99.9 % AAA 54.1 % 2007 28.7 % 2 - % AA 17.1 % 2006 20.4 % 3 0.1 % A 8.4 % 2005 and prior 50.9 % 4 - % BBB 5.3 % 100.0 % 5 - % BB and below 15.1 % 6 - % 100.0 % 100.0 % As ofMarch 31, 2013 , the fair value, amortized cost, and gross unrealized losses related to our exposure to Other ABS, excluding subprime exposure, aggregated to$438.1 ,$416.3 and$0.6 , respectively. As ofDecember 31, 2012 , the fair value, amortized cost, and gross unrealized losses related to our exposure to Other ABS, excluding subprime exposure, aggregated to$435.6 ,$411.7 and$0.6 , respectively. As ofMarch 31, 2013 , Other ABS was also broadly diversified both by type and issuer with credit card receivables, nonconsolidated collateralized loan obligations ("CLO") and automobile receivables, comprising 46.3%, 4.3% and 30.6%, respectively, of total Other ABS, excluding subprime exposure. As ofDecember 31, 2012 , Other ABS was also broadly diversified both by type and issuer with credit card receivables, nonconsolidated CLO and automobile receivables, comprising 47.0%, 5.6% and 26.9%, respectively, of total Other ABS, excluding subprime exposure. 63
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The following tables summarize our exposure to Other ABS holdings, excluding subprime exposure, by credit quality using NAIC designations, ARO ratings and vintage year as ofMarch 31, 2013 andDecember 31, 2012 : % of Total Other ABS NAIC Designation ARO Ratings Vintage 2013 1 99.3 % AAA 89.8 % 2013 3.9 % 2 0.6 % AA 2.6 % 2012 21.3 % 3 0.1 % A 6.9 % 2011 12.0 % 4 - % BBB 0.6 % 2010 5.7 % 5 - % BB and below 0.1 % 2009 0.3 % 6 - % 100.0 % 2008 8.8 % 100.0 % 2007 and prior 48.0 % 100.0 % 2012 1 98.3 % AAA 88.4 % 2012 21.4 % 2 1.6 % AA 1.9 % 2011 12.2 % 3 0.1 % A 8.0 % 2010 5.7 % 4 - % BBB 1.6 % 2009 0.3 % 5 - % BB and below 0.1 % 2008 9.5 % 6 - % 100.0 % 2007 22.9 % 100.0 % 2006 and prior 28.0 % 100.0 % Troubled Debt Restructuring We seek to invest in high quality, well performing portfolios of commercial mortgage loans and private placements. Under certain circumstances, modifications are granted to these contracts. Each modification is evaluated as to whether a troubled debt restructuring has occurred. A modification is a troubled debt restructuring when the borrower is in financial difficulty and the creditor makes concessions. Generally, the types of concessions may include reducing the face amount or maturity amount of the debt as originally stated, reducing the contractual interest rate, extending the maturity date at an interest rate lower than current market interest rates and/or reducing accrued interest. We consider 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. As ofMarch 31, 2013 andDecember 31, 2012 , we did not have any troubled debt restructuring.
As of
Mortgage Loans on Real Estate
Our mortgage loans on real estate are all commercial mortgage loans held for investment which totaled$3.1 billion and$2.9 billion as ofMarch 31, 2013 andDecember 31, 2012 , respectively. The carrying value of these loans is reported at amortized cost, less impairment write-downs and allowance for losses. We diversify our commercial mortgage loan portfolio by geographic region and property type to manage concentration risk. We manage risk when originating commercial mortgage loans by generally lending only up to 75% of the estimated fair value of the underlying real estate. Subsequently, we continuously evaluate all mortgage loans based on relevant current information including a review of loan-specific credit, property characteristics and market trends. Loan performance is continuously monitored on a loan-specific basis throughout the year. Our review includes submitted appraisals, operating statements, rent revenues and annual inspection reports, among other items. This review evaluates whether the properties are performing at a consistent and acceptable level to secure the debt. 64
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We rate all commercial mortgages to quantify the level of risk. We place those loans with higher risk on a watch list and closely monitor these loans for collateral deficiency or other credit events that may lead to a potential loss of principal and/or interest. If we determine the value of any mortgage loan to be OTTI (i.e., when it is probable that we will be unable to collect on all amounts due according to the contractual terms of the loan agreement), the carrying value of the mortgage loan is reduced to either the present value of expected cash flows from the loan, discounted at the loan's effective interest rate, or fair value of the collateral. 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. The carrying value of the impaired loans is reduced by establishing an other-than-temporary write-down recorded in Net realized capital gains (losses) in the Condensed Consolidated Statements of Operations.
The following table presents our investment in commercial mortgage loans as of
2013 2012 Commercial mortgage loans$ 3,062.0 $ 2,874.0 Collective valuation allowance (1.3 ) (1.3 )
Total net commercial mortgage loans
There were no impairments taken on the mortgage loan portfolio for the three months ended
The following table presents the activity in the allowance for losses for all commercial mortgage loans for the three months endedMarch 31, 2013 and the year endedDecember 31, 2012 : 2013
2012
Collective valuation allowance for losses, beginning of period
- -
Collective valuation allowance for losses, end of period
Our policy is to recognize interest income until a loan becomes 90 days delinquent or foreclosure proceedings are commenced, at which point interest accrual is discontinued. Interest accrual is not resumed until the loan is brought current.
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. An LTV ratio in excess of 100% indicates the unpaid loan amount exceeds the value of the underlying collateral. 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 (loss) to its debt service payments. A DSC ratio of less than 1.0 indicates that property's operations do not generate sufficient income to cover debt payments. These ratios are utilized as part of the review process described above. The following tables represent LTV and DSC ratios as of March 31, 2013 and December 31, 2012 : 2013(1) 2012(1) Loan-to-Value Ratio: 0% - 50% $ 495.6 $ 501.3 50% - 60% 805.3 768.9 60% - 70% 1,664.6 1,491.6 70% - 80% 81.1 96.4 80% and above 15.4 15.8
Total Commercial mortgage loans
(1) Balances do not include allowance for mortgage loan credit losses.
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2013(1) 2012(1) Debt Service Coverage Ratio: Greater than 1.5x$ 2,238.6 $ 2,114.4 1.25x - 1.5x 444.3 390.5 1.0x - 1.25x 304.7 293.1 Less than 1.0x 74.4 76.0
Total Commercial Mortgage Loans
(1) Balances do not include allowance for mortgage loan credit losses.
Other-Than-Temporary Impairments
We evaluate available-for-sale fixed maturities and equity securities for impairment on a regular 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. See the Note for Business, Basis of Presentation and Significant Accounting Policies to the Consolidated Financial Statements in our Annual Report on Form 10-K for a policy used to evaluate whether the investments are other-than-temporarily impaired. The following table presents our credit-related and intent-related impairments included in the Condensed Consolidated Statements of Operations, excluding impairments included in Accumulated other comprehensive income (loss) by type for the three months endedMarch 31, 2013 and 2012: Three Months Ended March 31, 2013 2012 No. of No. of Impairment Securities Impairment Securities Foreign(1) $ - -$ 0.4 1 Residential mortgage-backed 0.5 20 0.7 23 Commercial mortgage-backed 0.1 2 - - Other asset-backed - - 0.2 2 Total$ 0.6 22$ 1.3 26
(1) Primarily U.S. dollar denominated.
The above table includes$0.5 and$0.8 of write-downs related to credit impairments for the three months endedMarch 31, 2013 and 2012, respectively, in Other-than-temporary impairment losses, which are recognized in the Condensed Consolidated Statements of Operations. The remaining$0.1 and$0.5 in write-downs for the three months endedMarch 31, 2013 and 2012, respectively, are related to intent impairments. The following tables summarize these intent impairments, which are also recognized in earnings, by type for the three months endedMarch 31, 2013 and 2012: Three Months Ended March 31, 2013 2012 No. of No. of Impairment Securities Impairment Securities Foreign(1) $ - -$ 0.4 1 Commercial mortgage-backed 0.1 2 - - Other asset-backed - - 0.1 1 Total$ 0.1 2$ 0.5 2
(1) Primarily U.S. dollar denominated.
As part of our investment strategy, we 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 our previous intent to continue holding a security. Accordingly, these factors may lead us to record additional intent related capital losses. 66
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The fair value of fixed maturities with OTTI as of
During the three months ended
Net Investment Income
Net investment income was as presented below for the three months endedMarch 31, 2013 and 2012: Three Months Ended March 31, 2013 2012 Fixed maturities $ 307.6$ 305.8 Equity securities, available-for-sale 0.9 1.1 Mortgage loans on real estate 36.6 33.6 Policy loans 3.2 3.3 Short-term investments and cash equivalents 0.2 - Other 11.7 19.4 Gross investment income 360.2 363.2 Less: investment expenses 12.0 11.2 Net investment income $ 348.2$ 352.0
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 the credit-related and intent-related other-than-temporary impairment of investments. Realized investment gains and losses are also primarily generated from changes in fair value of embedded derivatives within product guarantees and fixed maturities, changes in fair value of fixed maturity securities recorded at FVO and changes in fair value including accruals on derivative instruments, except for effective cash flow hedges. The cost of the investments on disposal is generally determined based on first-in-first-out ("FIFO") methodology.
Net realized capital gains (losses) were as presented below for the three months ended
Three Months
Ended
2013
2012
Fixed maturities, available-for-sale, including securities pledged $ (0.2 ) $ 39.5 Fixed maturities, at fair value option (38.9 ) (42.9 ) Derivatives (19.9 ) (13.2 ) Embedded derivative - fixed maturities (5.4 ) (4.8 ) Embedded derivative - product guarantees 24.3
149.0
Other investments - (0.3 ) Net realized capital gains (losses)$ (40.1 ) $ 127.3 European Exposures We closely monitor our exposures to European sovereign debt in general, with a primary focus on our exposure to the sovereign debt ofGreece ,Ireland ,Italy ,Portugal andSpain (which we refer to as "peripheralEurope "), as these countries have applied for support from theEuropean Financial Stability Facility or received support from theEuropean Central Bank via government bond purchases in the secondary market. The financial turmoil inEurope continues to be a threat to global capital markets and remains a challenge to global financial stability. Additionally, the possibility of capital market volatility spreading through a highly integrated and interdependent banking system remains elevated. Furthermore, it is our view that the risk among European sovereigns and financial institutions warrants specific scrutiny, in addition to our customary surveillance and risk monitoring, given how highly correlated these sectors of the region have become. 67
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We quantify and allocate our exposure to the region, as described in the table below, by attempting to identify all aspects of the region or country risk to which we are exposed. Among the factors we consider are the nationality of the issuer, the nationality 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, we believe that we develop 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 our ongoing risk and portfolio management process, we closely monitor 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 our portfolio. As ofMarch 31, 2013 , we had$279.7 of exposure to peripheralEurope , which consists of a broadly diversified portfolio of credit-related investments solely in the industrial and utility sectors. We had no fixed maturity and equity securities exposure to peripheral European sovereigns or to financial institutions based in peripheralEurope . Peripheral European exposure included non-sovereign exposure inIreland of$114.8 ,Italy of$94.4 , and <location value="LC/es" idsrc="xmltag.org">Spain of$70.5 . We had no exposure toGreece orPortugal . As ofMarch 31, 2013 , there was$0.4 derivative assets exposure to financial institutions in peripheralEurope . For purposes of calculating the derivative assets exposure, we had aggregated exposure to single name and portfolio product CDS, as well as all non-CDS derivative exposure for which we either had counterparty or direct credit exposure to a company whose country of risk is in scope. Among the remaining$2.7 billion of total non-peripheral European exposure, we had a portfolio of credit-related assets similarly diversified by country and sector across developed and developingEurope . As ofMarch 31, 2013 , our sovereign exposure was$158.5 , which consists of fixed maturities. We also had$379.3 in net exposure to non-peripheral financial institutions with a concentration in theUnited Kingdom of$161.2 ,Switzerland of$78.3 ,The Netherlands of$55.6 andFrance of$36.5 . The balance of$2.2 billion was invested across non-peripheral, non-financial institutions. In addition to aggregate concentration to theUnited Kingdom of$1,012.4 andThe Netherlands of$432.2 , we had significant non-peripheral European total country exposures toSwitzerland of$291.0 ,Germany of$221.3 ,Belgium of$195.7 andFrance of$165.0 . We place additional scrutiny on our financial exposure in theUnited Kingdom ,France andSwitzerland given our concern for the potential for volatility to spread through the European banking system. We believe the primary risk results from market value fluctuations resulting from spread volatility and the secondary risk is default risk, should the European crisis worsen or fail to be resolved. 68
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The following table represents our European exposures at fair value and amortized cost as of
Fixed Maturity and Equity Securities Derivative Assets Total Total, Net Non-U.S. Financial Non-Financial (Fair Total Financial Non-Financial Less: Margin and (Fair Funded at March Sovereign Institutions Institutions Value) (Amortized Cost) Sovereign Institutions Institutions Collateral Value) 31, 2013(1)Ireland $ - $ - $ 114.4$ 114.4 $ 106.7 $ - $ 0.4 $ - $ -$ 0.4 $ 114.8 Italy - - 94.4 94.4 87.9 - - - - - 94.4Spain - - 70.5 70.5 66.9 - - - - - 70.5 Total PeripheralEurope $ - $ - $ 279.3$ 279.3 $ 261.5 $ - $ 0.4 $ - $ -$ 0.4 $ 279.7 Belgium 40.1 - 155.6 195.7 157.9 - - - - - 195.7France - 36.5 128.5 165.0 149.2 - 24.9 - 24.9 - 165.0Germany - 35.0 186.1 221.1 197.5 - 0.2 - - 0.2 221.3Netherlands - 55.6 376.6 432.2 389.7 - - - - - 432.2Switzerland - 53.3 212.7 266.0 235.2 - 27.1 - 2.1 25.0 291.0- 154.5 851.2 1,005.7 933.6 - 24.0 - 17.3 6.7 1,012.4 Other non-peripheral(2) 118.4 12.5 291.3 422.2 389.0 - - - - - 422.2 Total Non-Peripheral Europe 158.5 347.4 2,202.0 2,707.9 2,452.1 - 76.2 - 44.3 31.9 2,739.8 Total$ 158.5 $ 347.4 $ 2,481.3$ 2,987.2 $ 2,713.6 $ - $ 76.6 $ - $ 44.3$ 32.3 $ 3,019.5
(1) Represents: (i) Fixed maturity and equity securities at fair value; and (ii) Derivative assets at fair value. (2) Other non-peripheral countries include:
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Liquidity and Capital Resources
Liquidity is our ability to generate sufficient cash flows to meet the cash requirements of operating, investing and financing activities.
Liquidity Management
Our 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 and payment of dividends. Our 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 us 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. Our asset/liability management discipline includes strategies to minimize exposure to loss as interest rates and economic and market conditions change. In executing this strategy, we use derivative instruments to manage these risks. Our 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. We maintain the following agreements:
• A reciprocal loan agreement with ING U.S., Inc. an affiliate, whereby either
party can borrow from the other up to 3.0% of ILIAC's statutory admitted
assets as of the prior
outstanding receivable, including interest, from ING U.S., Inc. As of
Inc.
• We hold approximately 57.8% of our assets in marketable securities. These
assets include cash, U.S. Treasuries, Agencies, 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 our Liquidity Plan, up to 12% of our 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
which represents approximately 0.4% of our general account statutory admitted
assets.
Management believes that our sources of liquidity are adequate to meet our short-term cash obligations.
Capital Contributions and Dividends
During the three months ended
During the three months ended
OnMarch 27, 2013 , theConnecticut Insurance Department approved an extraordinary dividend of$174.0 from ILIAC to Lion, contingent upon the consummation of the IPO of ING U.S., Inc. no later thanJune 30, 2013 , and the use of such funds for ING U.S. operations. ILIAC paid the extraordinary dividend to Lion onMay 8, 2013 . 70
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Ratings
Our access to funding and our related cost of borrowing, requirements for derivatives collateral posting and the attractiveness of certain of our products to customers are affected by our credit ratings and insurance financial strength ratings, which are periodically reviewed by the rating agencies. Financial strength ratings and credit ratings are important factors affecting public confidence in an insurer and its competitive position in marketing products. The credit ratings are also important for the ability to raise capital through the issuance of debt and for the cost of such financing. A downgrade in our credit ratings or the credit or financial strength ratings of our parent or rated affiliates could potentially, among other things, limit our ability to market products, reduce our competitiveness, increase the number or value of policy surrenders and withdrawals, increase our borrowing costs and potentially make it more difficult to borrow funds, adversely affect the availability of financial guarantees or LOCs, cause additional collateral requirements or other required payments under certain agreements, allow counterparties to terminate derivative agreements and/or hurt our relationships with creditors, distributors or trading counterparties thereby potentially negatively affecting our profitability, liquidity and/or capital. In addition, we consider nonperformance risk in determining the fair value of our liabilities. Therefore, changes in our credit or financial strength ratings or the credit or financial strength ratings of our Parent or rated affiliates may affect the fair value of our liabilities. The following table presents our financial strength and credit ratings. In parentheses is an indication of that rating's relative rank within the agency's rating categories. That ranking refers only to the generic or major rating category and not to the modifiers appended to the rating by the rating agencies to denote relative position within such generic or major category. For each rating, the relative position of the rating within the relevant rating agency's ratings scale is presented, with "1" representing the best rating in the scale. Company A.M. Best Fitch Moody's
S&P
ING Life Insurance and Annuity Company
A A- A3 A- Financial Strength Rating (3 of 16) (3 of 9) (3 of 9) (3 of 9) Rating Agency Financial Strength Rating Scale A.M. Best(1) "A++" to "S" Fitch(2) "AAA" to "C" Moody's(3) "Aaa" to "C" S&P(4) "AAA" to "R" (1)A.M. Best's financial strength rating is an independent opinion of an insurer's financial strength and ability to meet its ongoing insurance policy and contract obligations. It is based on a comprehensive quantitative and qualitative evaluation of a company's balance sheet strength, operating performance and business profile. (2) Fitch's financial strength ratings provide an assessment of the financial strength of an insurance organization. The IFS Rating is assigned to the insurance company's policyholder obligations, including assumed reinsurance obligations and contract holder obligations, such as guaranteed investment contracts. (3) Moody's financial strength ratings are opinions of the ability of insurance companies to repay punctually senior policyholder claims and obligations. Moody's appends numerical modifiers 1, 2, and 3 to each generic rating classification from Aa through Caa. The modifier 1 indicates that the obligation ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of that generic rating category. (4) S&P's insurer financial strength rating is a forward-looking opinion about the financial security characteristics of an insurance organization with respect to its ability to pay under its insurance policies and contracts in accordance with their terms. A "+" or "-" indicates relative strength within a category. Our ratings byA.M. Best Company, Inc. ("A.M. Best"), Fitch, Moody's and S&P 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 our 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. Rating agencies use an "outlook" statement for both industry sectors and individual companies. For an industry sector, a stable outlook generally implies that over the next 12 to 18 months the rating agency expects ratings to remain unchanged among companies in the sector. For a particular company, an outlook generally indicates a medium- or long-term trend in credit fundamentals, which if continued, may lead to a rating change.
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Ratings actions affirmation and outlook changes by Fitch, Moody's and S&P from
• On
completed the recent IPO, Moody's commented that the completion of the IPO
is credit positive for ING U.S., Inc.
• On
its IPO will not affect the ratings or outlook on ING U.S., Inc. or any of
its rated insurance subsidiaries, including us.
• On
ratings of ING U.S., Inc.'s operating subsidiaries, including us. Furthermore, Fitch removed all ratings from Ratings Watch Evolving and assigned a stable outlook to the ratings.
Derivatives
Our use of derivatives is limited mainly to economic hedging to reduce our exposure to cash flow variability of assets and liabilities, interest rate risk, credit risk, exchange rate risk and market risk. It is our policy not to offset amounts recognized for derivative instruments and amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral arising from derivative instruments executed with the same counterparty under a master netting arrangement. We enter into interest rate, equity market, credit default and currency contracts, including swaps, futures, forwards, caps, floors and options, to reduce and manage risks associated with changes in value, yield, price, cash flow, or exchange rates of assets or liabilities held or intended to be held, or to assume or reduce credit exposure associated with a referenced asset, index, or pool. We also utilize options and futures on equity indices to reduce and manage risks associated with our annuity products. Open derivative contracts are reported as Derivatives assets or liabilities on the Condensed Consolidated Balance Sheets at fair value. Changes in the fair value of derivatives are recorded in Net realized capital gains (losses) in the Condensed Consolidated Statements of Operations. If our current debt and claims paying ratings were downgraded in the future, certain terms in our derivative agreements may be triggered, which could negatively impact overall liquidity. For the majority of our counterparties, there is a termination event should our long-term debt ratings drop below BBB+/Baa1. We also have investments in certain fixed maturities and have issued certain retail annuity products that contain embedded derivatives whose fair value is at least partially determined by levels of or changes in domestic and/or foreign interest rates (short-term or long-term), exchange rates, prepayment rates, equity markets, or credit ratings/spreads. Embedded derivatives within fixed maturities are included with the host contract on the Condensed Consolidated Balance Sheets and changes in fair value of the embedded derivatives are recorded in Other net realized capital gains (losses) in the Condensed Consolidated Statements of Operations. Embedded derivatives within certain annuity products are included in Future policy benefits and contract owner account balances on the Condensed Consolidated Balance Sheets and changes in the fair value of the embedded derivatives are recorded in Other net realized capital gains (losses) in the Condensed Consolidated Statements of Operations.
Recent Initiatives
InOctober 2009 , ING Group submitted a restructuring plan (the "2009 Restructuring Plan") to theEuropean Commission ("EC") in order to receive approval for state aid granted to ING Group by the Kingdom ofThe Netherlands (the "Dutch State") inNovember 2008 andMarch 2009 . To receive approval for this state aid, ING Group was required to divest its insurance and investment management businesses, including ING U.S., Inc. and its subsidiaries, including us. OnNovember 19, 2012 , ING Group and the EC announced that the EC approved amendments to the 2009 Restructuring Plan (the "2012 Amended Restructuring Plan"). The 2012 Amended Restructuring Plan requires ING Group to divest at least 25% of ING U.S., Inc. and its subsidiaries, including us byDecember 31, 2013 , more than 50% of ING U.S., Inc. and its subsidiaries, including us byDecember 31, 2014 , and 100% of ING U.S., Inc. and its subsidiaries, including the Company byDecember 31, 2016 . The divestment of 50% of ING U.S., Inc. is measured in terms of a divestment of over 50% of the shares of ING U.S., Inc., the loss of ING Group's majority of directors on ING U.S., Inc.'s board of directors and the accounting deconsolidation of ING U.S., Inc. and its subsidiaries, including us (in line with IFRS accounting rules). In case ING Group does not satisfy its commitment to divest ING U.S., Inc. and its subsidiaries, including us as agreed with the EC, the Dutch State will renotify the recapitalization measure to the EC. In such a case, the EC may require additional restructuring measures or take enforcement actions against ING Group, or, at the request of ING Group and the Dutch State, could allow ING Group more time to complete the divestment. The 2012 Amended Restructuring Plan also contains provisions that could limit our business activities. For additional information on the separation from ING Group and the 72
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2012 Amended Restructuring Plan, see "Risk Factors - Risks Related to Our Separation from, and Continuing Relationship with, ING Group" in our 2012 Annual Report on Form 10-K.
InMay 2013 , ING U.S., Inc. completed the IPO of its common stock. See Business, Basis of Presentation and Significant Accounting Policies Note in the Condensed Consolidated Financial Statements included in Part I, Item 1., herein.ING anticipates divesting the balance of its ownership interest over time, consistent with the divestiture deadlines set out in the 2012 Amended Restructuring Plan approved by the EC.
Impact of New Accounting Pronouncements
For information regarding the impact of new accounting pronouncements, refer to the Business, Basis of Presentation and Significant Accounting Policies Note to the Condensed Consolidated Financial Statements, included in Part I, Item 1, herein. Contingencies For information regarding other contingencies related to legal proceedings, regulatory matters and other contingencies involving us, see the Commitments and Contingencies Note to the Condensed Consolidated Financial Statements included in Part I, Item 1., herein.
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