News Column

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)

August 12, 2014

For the purposes of this discussion, "ILIAC" refers to ING Life Insurance and Annuity Company, and the "Company," "we," "our," "us" refer to ING Life Insurance and Annuity Company and its subsidiaries. We are a direct, wholly owned subsidiary of Lion Connecticut Holdings Inc. ("Lion" or "Parent"), which is a direct, wholly owned subsidiary of Voya Financial, Inc. As of the date of this Quarterly Report on Form 10-Q, ING Groep N.V. ("ING Group" or "ING") is the largest shareholder of Voya Financial, Inc. The following discussion and analysis of our results of operations and financial condition should be read in conjunction with the Condensed Consolidated Financial Statements and related notes contained in Part I., Item 1. of this Form 10-Q. In addition to historical data, this discussion contains forward-looking statements about our business, operations and financial performance based on current expectations that involve risks, uncertainties and assumptions. Actual results may differ materially from those discussed in the forward-looking statements as a result of various factors. See "Note Concerning Forward-Looking Statements."



Basis of Presentation

ILIAC is a stock life insurance company domiciled in the State of Connecticut. ILIAC and its wholly owned subsidiaries (collectively, the "Company") provide financial products and services in the United States. ILIAC is authorized to conduct its insurance business in all states and in the District of Columbia. The Condensed Consolidated Financial Statements include the accounts of ILIAC and its wholly owned subsidiaries, ING Financial Advisers, LLC ("IFA") and Directed Services LLC ("DSL"). Intercompany transactions and balances have been eliminated. 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 "tax exempt markets") 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 have one operating segment.

Critical Accounting Judgments and Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States ("U.S. GAAP") requires us to make 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 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 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, deferred policy acquisition costs ("DAC"), value of business acquired ("VOBA"), valuation of investments and derivatives, impairments, income taxes and contingencies. In developing these accounting estimates, 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 in our Consolidated Financial Statements in Part II, Item 8. in our Annual Report on Form 10-K.

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Impact of New Accounting Pronouncements

For information regarding the impact of new accounting pronouncements, see the Business, Basis of Presentation and Significant Accounting Policies Note in our Condensed Consolidated Financial Statements in Part I, Item 1. in this Form 10-Q.



Income Taxes

As of June 30, 2014, we have recognized $93.6 million deferred tax assets based on tax planning strategies related to unrealized gains on investment assets. Such tax planning strategies support the recognition of deferred tax assets associated with deductible temporary differences and may be adversely impacted by decreases in unrealized gains.



The deferred tax valuation allowance as of June 30, 2014 was $11.1 million related to foreign tax credits.

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Results of Operations ($ in millions) Three Months Ended June 30, Six Months Ended June 30, 2014 2013 2014 2013 Revenues: Net investment income $ 340.1$ 342.9$ 683.7$ 691.1 Fee income 195.5 183.1 389.2 358.0 Premiums 14.5 7.2 28.5 15.1 Broker-dealer commission revenue 61.1 61.0 123.2 118.8 Net realized capital gains (losses): Total other-than-temporary impairments (1.4 ) (1.8 ) (2.3 ) (2.9 ) Less: Portion of other-than-temporary impairments recognized in Other comprehensive income (loss) - (0.5 ) - (1.0 ) Net other-than-temporary impairments recognized in earnings (1.4 ) (1.3 ) (2.3 ) (1.9 ) Other net realized capital gains (losses) (22.8 ) (68.6 ) (65.8 ) (108.1 ) Total net realized capital gains (losses) (24.2 ) (69.9 ) (68.1 ) (110.0 ) Other revenue 0.2 (0.6 ) 1.7 (5.5 ) Total revenues 587.2 523.7 1,158.2 1,067.5 Benefits and expenses: Interest credited and other benefits to contract owners/policyholders 228.7 145.3 462.8 332.1 Operating expenses 187.5 176.3 380.8 349.9 Broker-dealer commission expense 61.1 61.0 123.2 118.8 Net amortization of Deferred policy acquisition costs and Value of business acquired 6.9 28.3 26.7 46.9 Interest expense - - - 0.1 Total benefits and expenses 484.2 410.9 993.5 847.8 Income (loss) before income taxes 103.0 112.8 164.7 219.7 Income tax expense (benefit) 28.4 35.9 44.4 67.7 Net income (loss) $ 74.6$ 76.9$ 120.3$ 152.0



Three Months Ended June 30, 2014 compared to Three Months Ended June 30, 2013

Our results of operations for the three months ended June 30, 2014 were primarily impacted by higher Interest credited and other benefits to contract owners/policyholders and higher Operating expenses, partially offset by lower Total net realized capital losses, lower Net amortization of DAC and VOBA, higher Premiums and lower Income tax expense.



Revenues

Total revenues increased $63.5 million from $523.7 million to $587.2 million for the three months ended June 30, 2014, primarily impacted by lower Total net realized capital losses, higher Fee income and higher Premiums.

Fee income increased $12.4 million from $183.1 million to $195.5 million primarily due to an increase in full service retirement plan fees. The increase in fees related to full service retirement plans was driven by net increases in separate accounts and institutional/mutual fund average Assets Under Management ("AUM"). Premiums increased $7.3 million from $7.2 million to $14.5 million primarily due to higher sales of immediate annuities with life contingencies as well as higher premiums associated with the annuitization of life contingent contracts.



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Total net realized capital losses decreased $45.7 million from $69.9 million to $24.2 million primarily due to favorable changes in the fair value of derivatives and fixed maturities using fair value option, partially offset by unfavorable changes in the fair value of embedded derivatives on product guarantees. The favorable changes in the fair value of derivatives and fixed maturities using fair value option were primarily a result of a decrease in interest rates in the current period. Partially offsetting these favorable changes were unfavorable changes of $66.4 million in the fair value of the embedded derivatives on product guarantees (from a gain of $52.2 million in the second quarter of 2013 to a loss of $14.2 million in the second quarter of 2014) primarily due to a decrease in interest rates in the second quarter of 2014 compared to an increase in interest rates in the second quarter of 2013.



Benefits and Expenses

Total benefits and expenses increased $73.3 million from $410.9 million to $484.2 million for the three months ended June 30, 2014 primarily impacted by higher Interest credited and other benefits to contract owners/policyholders and higher Operating expenses, partially offset by lower Net amortization of DAC and VOBA. Interest credited and other benefits to contract owners/policyholders increased $83.4 million from $145.3 million to $228.7 million primarily due to a change in the fair value of an embedded derivative on a reinsurance agreement driven by a decrease in interest rates during the current period and financing costs related to a new reinsurance agreement. Also contributing to the increase was higher credited interest due to higher general account liabilities, which corresponds to the increase in general account assets. These increases were partially offset by a decrease in the average credited rates due to actions taken in January 2014 to reflect the continuing low interest rate environment. Operating expenses increased $11.2 million from $176.3 million to $187.5 million primarily due to investments in the business in the current period and a reduction in estimated variable compensation accruals in the prior period that did not repeat. Net amortization of DAC and VOBA decreased $21.4 million from $28.3 million to $6.9 million primarily due to the impact on gross profits of a change in the embedded derivative associated with a reinsurance agreement and higher favorable unlocking, partially offset by an increase in amortization. Higher favorable unlocking was a result of improved equity market performance in the current period. The increase in amortization was a result of higher realized gains in the current period. Income Tax Income tax expense decreased $7.5 million from $35.9 million to $28.4 million primarily due to a decrease in income before taxes, a decrease in the valuation allowance, and an increase in the dividends received deduction ("DRD").



Six Months Ended June 30, 2014 compared to Six Months Ended June 30, 2013

Our results of operations for the six months ended June 30, 2014 were primarily impacted by higher Interest credited and other benefits to contract owners/policyholders and higher Operating expenses, partially offset by lower Total net realized capital losses, higher Fee income, lower Income tax expense, lower Net amortization of DAC and VOBA and higher Premiums.



Revenues

Total revenues increased $90.7 million from $1,067.5 million to $1,158.2 million primarily due to lower Total net realized capital losses, higher Fee income, higher Premiums, and higher Other revenue. Fee income increased $31.2 million from $358.0 million to $389.2 million primarily due to an increase in full service retirement plan fees. The increase in fees related to full service retirement plans was driven by net increases in separate accounts and institutional/mutual fund average AUM.



Premiums increased $13.4 million from $15.1 million to $28.5 million due to higher sales of immediate annuities with life contingencies as well as higher premiums associated with the annuitization of life contingent contracts.

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Total net realized capital losses decreased $41.9 million from $110.0 million to $68.1 million primarily due to favorable changes in the fair value fixed maturities using fair value option and derivatives, partially offset by unfavorable changes in the fair value of embedded derivatives on product guarantees. The favorable changes in the fair value fixed maturities using fair value option and derivatives were primarily a result of a decrease in interest rates in the current period. Partially offsetting these favorable changes were unfavorable changes of $108.5 million in the fair value of the embedded derivatives on product guarantees (from a gain of $76.5 million for the six months ended June 30, 2013 to a loss of $32.0 million for the six months ended June 30, 2014) primarily due to a decrease in interest rates in the six months ended June 30, 2014 compared to an increase in interest rates in the six months ended June 30, 2013.



Other revenue changed $7.2 million from $(5.5) million to $1.7 million primarily due to changes in market value adjustments related to retirement plans upon surrender.

Benefits and Expenses

Total benefits and expenses increased $145.7 million from $847.8 million to $993.5 million primarily impacted by higher Interest credited and other benefits to contract owners/policyholders and higher Operating expenses, partially offset by lower Net amortization of DAC and VOBA. Interest credited and other benefits to contract owners/policyholders increased $130.7 million from $332.1 million to $462.8 million primarily due to a change in the fair value of an embedded derivative on a reinsurance agreement and financing costs related to a new reinsurance agreement. The decrease in the fair value of the embedded derivative on reinsurance was a result of a decrease in interest rates during the current period. Also contributing to the increase was higher credited interest due to higher general account liabilities, which corresponds to the increase in general account assets. These increases were partially offset by a decrease in the average credited rates due to actions taken in January 2014 to reflect the continuing low interest rate environment. Operating expenses increased $30.9 million from $349.9 million to $380.8 million primarily due to investments in the business in the current period and a reduction in estimated variable compensation accruals in the prior period that did not repeat. Net amortization of DAC and VOBA decreased $20.2 million from $46.9 million to $26.7 million primarily due to the impact on gross profits of a change in the embedded derivative associated with a reinsurance agreement, partially offset by an increase in amortization as a result of higher realized gains in the current period and lower favorable unlocking as a result of contract changes that occurred in the current period.



Income Taxes

Income tax expense decreased $23.3 million from $67.7 million to $44.4 million primarily due to a decrease in income before taxes, a decrease in the valuation allowance, and an increase in the DRD. 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, bonds issued by states and municipalities, Other asset-backed securities ("ABS") and traditional Mortgage-backed securities ("MBS").



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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.



See the Investments Note in our Condensed Consolidated Financial Statements in Part I, Item I. in this Form 10-Q.

Portfolio Composition

The following table presents the investment portfolio as of the dates indicated: ($ in millions) June 30, 2014 December 31, 2013 Carrying % of Carrying % of Value Total Value Total Fixed maturities, available-for-sale, excluding securities pledged $ 20,597.4 79.1 % $ 19,944.4 79.3 % Fixed maturities, at fair value using the fair value option 693.7 2.7 % 621.3 2.5 % Equity securities, available-for-sale 123.1 0.5 % 134.9 0.5 % Short-term investments(1) 15.0 0.1 % 15.0 0.1 % Mortgage loans on real estate 3,434.4 13.2 % 3,396.1 13.5 % Policy loans 239.6 0.9 % 242.0 1.0 % Limited partnerships/corporations 228.9 0.9 % 180.9 0.7 % Derivatives 445.8 1.7 % 464.4 1.8 % Securities pledged 236.4 0.9 % 140.1 0.6 % Total investments $ 26,014.3 100.0 % $ 25,139.1 100.0 %



(1) Short-term investments include investments with remaining maturities of one year or less, but greater than 3 months, at the time of purchase.

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Fixed Maturities

Total fixed maturities by market sector, including securities pledged, were as presented below as of the dates indicated: ($ in millions) June 30, 2014 Amortized % of Fair % of Cost Total Value Total Fixed maturities: U.S. Treasuries $ 692.5 3.5 % $ 771.2 3.6 % U.S. Government agencies and authorities 54.9 0.3 % 56.8 0.3 % State, municipalities, and political subdivisions 109.1 0.5 % 120.7 0.6 % U.S. corporate securities 10,304.5 52.0 % 11,180.5 51.9 % Foreign securities(1) 5,583.0 28.1 % 5,997.1 27.9 % Residential mortgage-backed securities 1,891.8 9.5 % 2,098.7 9.7 % Commercial mortgage-backed securities 756.4 3.8 % 826.4 3.8 % Other asset-backed securities 461.7 2.3 % 476.1 2.2 % Total fixed maturities, including securities pledged $ 19,853.9 100.0 % $ 21,527.5 100.0 % (1) Primarily U.S. dollar denominated. ($ in millions) December 31, 2013 Amortized % of Fair % of Cost Total Value Total Fixed maturities: U.S. Treasuries $ 636.5 3.2 % $ 670.1 3.2 % U.S. Government agencies and authorities 237.1 1.2 % 242.1 1.2 % State, municipalities, and political subdivisions 77.2 0.4 % 83.0 0.4 % U.S. corporate securities 10,326.0 52.0 % 10,668.2 51.6 % Foreign securities(1) 5,572.5 28.1 % 5,770.6 27.9 % Residential mortgage-backed securities 1,916.3 9.7 % 2,099.7 10.1 % Commercial mortgage-backed securities 624.5 3.1 % 691.7 3.3 % Other asset-backed securities 465.8 2.3 % 480.4 2.3 % Total fixed maturities, including securities pledged $ 19,855.9 100.0 % $ 20,705.8 100.0 %



(1) Primarily U.S. dollar denominated.

As of June 30, 2014, the average duration of our fixed maturities portfolio, including securities pledged, was between 6.5 and 7.5 years.

Fixed Maturities Credit Quality - Ratings

The Securities Valuation Office ("SVO") of the 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. These designations are generally similar to the credit quality designations of the NAIC acceptable rating organizations ("ARO") 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 by such rating organizations. NAIC designations 3 through 6 include fixed maturity securities generally considered below investment grade by such rating organizations. The NAIC adopted revised designation methodologies for non-agency RMBS, including RMBS backed by subprime mortgage loans reported within ABS and for 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 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.



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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 that 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. In the tables below, we present the rating of structured securities based on ratings from the revised NAIC rating methodologies described above (which may not correspond to rating agency designations). All NAIC designations (e.g., NAIC 1-6) are based on the revised NAIC methodologies. 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 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, including Fitch Ratings, Inc. ("Fitch"), Moody's Investors Service, Inc. ("Moody's") and Standard & 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 of June 30, 2014 and December 31, 2013, the weighted average quality rating of our fixed maturities portfolio was A-. 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 then the middle rating is applied;

? when two ratings are received then the lower rating is applied;

? when a single rating is received, the ARO rating is applied; and

? when ratings are unavailable then an internal rating is applied.

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Total fixed maturities by NAIC designation category, including securities pledged, were as follows as of the dates indicated: ($ in millions)

June 30, 2014 NAIC Quality Designation 1 2 3 4 5 6 Total Fair Value U.S. Treasuries $ 771.2 $ - $ - $ - $ - $ - $ 771.2 U.S. Government agencies and authorities 56.8 - - - - - 56.8 State, municipalities and political subdivisions 116.3 4.4 - - - - 120.7 U.S. corporate securities 4,859.8 5,631.1 604.4 79.9 1.1 4.2 11,180.5



Foreign

securities(1) 1,690.4 3,980.6 292.1 30.6

- 3.4 5,997.1



Residential

mortgage-backed

securities 1,978.1 19.6 27.3 6.9 9.4 57.4 2,098.7 Commercial mortgage-backed securities 799.0 22.9 0.4 4.1 - - 826.4 Other asset-backed securities 458.4 12.4 3.9 - 1.2 0.2 476.1 Total fixed maturities $ 10,730.0$ 9,671.0$ 928.1$ 121.5$ 11.7$ 65.2$ 21,527.5 % of Fair Value 49.8 % 44.9 % 4.3 % 0.6 % 0.1 % 0.3 % 100.0 %



(1) Primarily U.S. dollar denominated.

($ in millions) December 31,



2013

NAIC Quality Designation 1 2 3 4 5 6 Total Fair Value U.S. Treasuries $ 670.1 $ - $ - $ - $ - $ - $ 670.1 U.S. Government agencies and authorities 242.1 - - - - - 242.1 State, municipalities and political subdivisions 82.0 1.0 - - - - 83.0 U.S. corporate securities 4,668.0 5,461.7 451.3 83.7 - 3.5 10,668.2



Foreign

securities(1) 1,708.0 3,747.5 299.2 12.7

- 3.2 5,770.6



Residential

mortgage-backed

securities 1,974.1 24.2 30.7 4.8 10.0 55.9 2,099.7 Commercial mortgage-backed securities 687.4 - 0.4 3.9 - - 691.7 Other asset-backed securities 462.8 13.1 3.6 - 0.7 0.2 480.4 Total fixed maturities $ 10,494.5$ 9,247.5$ 785.2$ 105.1$ 10.7$ 62.8$ 20,705.8 % of Fair Value 50.7 % 44.6 % 3.8 % 0.5 % 0.1 % 0.3 % 100.0 %



(1) Primarily U.S. dollar denominated.

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Total fixed maturities by ARO quality rating category, including securities pledged, were as follows as of the dates indicated: ($ in millions)

June 30, 2014 ARO Quality Ratings AAA AA A BBB BB and Below Total Fair Value U.S. Treasuries $ 771.2 $ - $ - $ - $ - $ 771.2 U.S. Government agencies and authorities 56.8 - - - - 56.8 State, municipalities and political subdivisions 20.6 83.0 12.7 4.4 - 120.7 U.S. corporate securities 175.1 461.3 4,256.2 5,609.1 678.8 11,180.5 Foreign securities(1) 33.0 426.9 1,397.6 3,896.2 243.4 5,997.1 Residential mortgage-backed securities 1,774.0 8.1 9.7 42.3 264.6 2,098.7 Commercial mortgage-backed securities 565.1 18.9 50.4 49.0 143.0 826.4 Other asset-backed securities 393.5 3.5 31.6 11.0 36.5 476.1 Total fixed maturities $ 3,789.3$ 1,001.7$ 5,758.2$ 9,612.0



$ 1,366.3$ 21,527.5 % of Fair Value 17.6 % 4.7 % 26.7 % 44.7 %

6.3 % 100.0 %



(1) Primarily U.S. dollar denominated.

($ in millions) December 31, 2013 ARO Quality Ratings AAA AA A BBB BB and Below Total Fair Value U.S. Treasuries $ 670.1 $ - $ - $ - $ - $ 670.1 U.S. Government agencies and authorities 242.1 - - - - 242.1 State, municipalities and political subdivisions 19.5 62.5 0.1 0.9 - 83.0 U.S. corporate securities 164.4 435.3 4,110.6 5,393.0 564.9 10,668.2 Foreign securities(1) 30.8 424.1 1,415.1 3,660.6 240.0 5,770.6 Residential mortgage-backed securities 1,755.9 9.4 11.0 48.3 275.1 2,099.7 Commercial mortgage-backed securities 342.3 98.6 53.1 48.4 149.3 691.7 Other asset-backed securities 385.8 11.1 32.3 14.3 36.9 480.4 Total fixed maturities $ 3,610.9$ 1,041.0$ 5,622.2$ 9,165.5



$ 1,266.2$ 20,705.8 % of Fair Value 17.4 % 5.0 % 27.2 % 44.3 %

6.1 % 100.0 %



(1) Primarily U.S. dollar denominated.

Fixed maturities rated BB and below may have speculative characteristics and changes in economic conditions or other circumstances that 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.



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Unrealized Capital Losses

Gross unrealized losses on fixed maturities, including securities pledged, decreased $288.7 million from $368.8 million to $80.1 million for the six months ended June 30, 2014. The decrease was primarily due to declining interest rates.

As of June 30, 2014 and December 31, 2013, we did not have any fixed maturities with an unrealized capital loss in excess of $10.0 million. See the Investments Note to the Condensed Consolidated Financial Statements in Part I, Item 1. in this Form 10-Q for further information on unrealized capital losses.



Subprime and Alt-A Mortgage Exposure

The performance of pre-2008 vintage subprime and Alt-A mortgage collateral has exhibited sustained signs of recovery, after struggling through a multi-year correction in nationwide home values. While collateral losses continue to be realized, serious delinquencies and other measures of performance, like prepayments and severities, have displayed sustained periods of improvement. Reflecting these fundamental improvements, related bond prices and sector liquidity increased substantially since the credit crisis. Despite these improvements, the sector remains susceptible to various market risks. For example, early in the third quarter of 2013, the upward momentum in bond prices and market liquidity was disrupted, at least in part, by the pick-up in interest rate volatility. As this volatility dissipated, prices and liquidity recovered into the end of the year, supported by strength in the U.S. economy and, more specifically, the housing market. The six months ended June 30, 2014 have been characterized by continued stability in underlying fundamentals, despite the adverse seasonal related impacts observed in certain housing activity related measures in the first quarter. 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. 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 Residential mortgage-backed securities ("RMBS"), Commercial mortgage-backed securities ("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 of June 30, 2014, the fair value, amortized cost, and gross unrealized losses related to our exposure to subprime mortgage-backed securities totaled $57.4 million, $54.4 million and $1.5 million, respectively, representing 0.3% of total fixed maturities, including securities pledged, based on fair value. As of December 31, 2013, the fair value, amortized cost, and gross unrealized losses related to our exposure to subprime mortgage-backed securities totaled $58.1 million, $56.1 million and $2.5 million, respectively, representing 0.3% of total fixed maturities, including securities pledged, based on fair value.



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The following table presents our exposure to subprime mortgage-backed securities by credit quality using NAIC designations, ARO ratings and vintage year as of the dates indicated: % of Total Subprime Mortgage-backed Securities NAIC Quality Designation ARO Quality Ratings Vintage June 30, 2014 1 72.5 % AAA 1.2 % 2007 5.0 % 2 18.3 % AA - % 2006 14.0 % 3 6.7 % A 11.4 % 2005 and prior 81.0 % 4 - % BBB 16.0 % 100.0 % 5 2.1 % BB and below 71.4 % 6 0.4 % 100.0 % 100.0% December 31, 2013 1 74.0 % AAA 0.1 % 2007 6.5 % 2 18.7 % AA 2.1 % 2006 7.8 % 3 5.9 % A 11.9 % 2005 and prior 85.7 % 4 - % BBB 20.7 % 100.0 % 5 1.1 % BB and below 65.2 % 6 0.3 % 100.0 % 100.0 % Our exposure to Alt-A mortgages is included in the "RMBS" line item in the "Fixed Maturities" table under "Fixed Maturities" section above. As of June 30, 2014, the fair value, amortized cost and gross unrealized losses related to our exposure to Alt-A RMBS totaled $84.5 million, $64.9 million and $1.2 million, respectively, representing 0.4% of total fixed maturities, including securities pledged, based on fair value. As of December 31, 2013, the fair value, amortized cost and gross unrealized losses related to our exposure to Alt-A RMBS totaled $87.3 million, $70.1 million and $2.5 million, respectively, representing 0.4% of total fixed maturities, including securities pledged, based on fair value.



The following table presents our exposure to Alt-A RMBS by credit quality using NAIC designations, ARO ratings and vintage year as of the dates indicated:

% of Total Alt-A Mortgage-backed Securities NAIC Quality Designation ARO Quality Ratings Vintage June 30, 2014 1 70.6 % AAA 0.1 % 2007 14.8 % 2 15.0 % AA - % 2006 30.9 % 3 6.4 % A 2.2 % 2005 and prior 54.3 % 4 8.0 % BBB 3.0 % 100.0 % 5 - % BB and below 94.7 % 6 - % 100.0 % 100.0 % December 31, 2013 1 65.4 % AAA 0.1 % 2007 14.6 % 2 22.9 % AA - % 2006 30.0 % 3 6.1 % A 2.7 % 2005 and prior 55.4 % 4 5.6 % BBB 3.4 % 100.0 % 5 - % BB and below 93.8 % 6 - % 100.0 % 100.0 % 65



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Commercial Mortgage-Backed and Other Asset-backed Securities

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 ceased, and the percentage of delinquent loans has declined through 2013 and the six months ended June 30, 2014. Other performance metrics like vacancies, property values and rent levels have also shown improvements, although these metrics are not observed uniformly, differing by dimensions such as geographic location and property type. These improvements have been buoyed by some of the same macro-economic tailwinds alluded to in regards to our subprime and Alt-A mortgage exposure. In addition, a robust environment for property refinancing has continued to be supportive of improving credit performance metrics into 2014. The new issue market for CMBS has been a major contributor to the refinance environment. It has continued its recovery from the credit crisis with meaningful new issuance in 2014, following 5 straight years of increasing new issuance volumes since the credit crisis. The volume for the six months ended June 30, 2014, while slightly lower on a year-over-year basis, remains robust, reflective of the active and competitive refinancing market.



For consumer Other ABS, delinquency and loss rates have been maintained at levels considered low by historical standards and indicative of high credit quality. Relative strength in various credit metrics across multiple types of asset-backed loans have been observed on a sustained basis.

The following table presents our exposure to CMBS holdings by credit quality using NAIC designations, ARO ratings and vintage year as of the dates indicated: % of Total CMBS NAIC Quality Designation ARO Quality Ratings Vintage June 30, 2014 1 96.7 % AAA 68.4 % 2014 12.8 % 2 2.8 % AA 2.3 % 2013 19.1 % 3 - % A 6.1 % 2012 0.2 % 4 0.5 % BBB 5.9 % 2011 - % 5 - % BB and below 17.3 % 2010 0.3 % 6 - % 100.0 % 2009 - % 100.0 % 2008 and prior 67.6 % 100.0 % December 31, 2013 1 99.3 % AAA 49.5 % 2013 8.3 % 2 - % AA 14.3 % 2012 - % 3 0.1 % A 7.6 % 2011 - % 4 0.6 % BBB 7.0 % 2010 - % 5 - % BB and below 21.6 % 2009 - % 6 - % 100.0 % 2008 - % 100.0 % 2007 and prior 91.7 % 100.0 % As of June 30, 2014, the fair value, amortized cost and gross unrealized losses of our Other ABS, excluding subprime exposure, totaled $423.3 million, $411.9 million and $0.5 million, respectively. As of December 31, 2013, the fair value, amortized cost and gross unrealized losses of our exposure to Other ABS, excluding subprime exposure, totaled $423.4 million, $410.9 million and $0.9 million, respectively.



As of June 30, 2014, Other ABS was also broadly diversified both by type and issuer with credit card receivables, nonconsolidated collateralized loan obligations ("CLO") and automobile receivables, comprising 55.7%, 1.8% and 27.1%, respectively, of total Other ABS, excluding subprime exposure. As of December 31, 2013, Other ABS was also broadly diversified both by type and

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issuer with credit card receivables, nonconsolidated CLOs and automobile receivables, comprising 47.1%, 3.3% and 32.7%, respectively, of total Other ABS, excluding subprime exposure.

The following table summarizes our exposure to Other ABS holdings, excluding subprime exposure, by credit quality using NAIC designations, ARO ratings and vintage year as of the dates indicated: % of Total Other ABS NAIC Quality Designation ARO Quality Ratings Vintage June 30, 2014 1 99.5 % AAA 92.8 % 2014 9.3 % 2 0.4 % AA 0.8 % 2013 15.5 % 3 0.1 % A 6.0 % 2012 12.2 % 4 - % BBB 0.4 % 2011 7.6 % 5 - % BB and below - % 2010 3.4 % 6 - % 100.0 % 2009 - % 100.0 % 2008 and prior 52.0 % 100.0 % December 31, 2013 1 99.4 % AAA 91.1 % 2013 15.4 % 2 0.5 % AA 2.3 % 2012 12.3 % 3 0.1 % A 6.0 % 2011 12.1 % 4 - % BBB 0.5 % 2010 4.5 % 5 - % BB and below 0.1 % 2009 0.3 % 6 - % 100.0 % 2008 11.4 % 100.0 % 2007 and prior 44.0 % 100.0 % Troubled Debt Restructuring Although our portfolio of commercial mortgage loans and private placements is high quality, a small number of these contracts have been granted modifications, certain of which are considered to be troubled debt restructurings. See the Investments Note in our Condensed Consolidated Financial Statements in Part I, Item 1 in this Form 10-Q for further information on troubled debt restructuring.



Mortgage Loans on Real Estate

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 other-than-temporary impairments ("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. 67



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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 a property's operations do not generate sufficient income to cover debt payments. These ratios are utilized as part of the review process described above. As of June 30, 2014, our mortgage loans on real estate portfolio had a weighted average DSC of 2.0 times and a weighted average LTV of 60.2%. As of December 31, 2013, our mortgage loans on real estate portfolio had a weighted average DSC of 2.0 times and a weighted average LTV ratio of 59.8%. See the Investments Note in our Condensed Consolidated Financial Statements in Part I, Item 1. in this Form 10-Q for further information on mortgage loans on real estate. Recorded Investment Debt Service Coverage Ratios Commercial mortgage loans secured by land ($ in or construction millions) > 1.5x >1.25x - 1.5x >1.0x - 1.25x < 1.0x loans Total % of Total June 30, 2014 Loan-to-Value Ratios: 0% - 50% $ 336.7 $ 39.5 $ 19.1 $ 45.0 $ - $ 440.3 12.8 % >50% - 60% 675.7 100.8 89.3 46.8 - 912.6 26.6 % >60% - 70% 1,410.1 318.4 148.9 79.2 0.4 1,957.0 57.0 % >70% - 80% 6.6 81.5 17.7 7.8 - 113.6 3.3 % >80% and above - - 7.9 4.2 - 12.1 0.3 % Total $ 2,429.1 $ 540.2 $ 282.9 $ 183.0 $ 0.4 $ 3,435.6 100.0 % Recorded Investment Debt Service Coverage Ratios Commercial mortgage loans secured by land ($ in or construction millions) > 1.5x >1.25x - 1.5x >1.0x - 1.25x < 1.0x loans Total % of Total December 31, 2013 Loan-to-Value Ratios: 0% - 50% $ 390.9 $ 40.3 $ 20.3 $ 44.2 $ - $ 495.7 14.6 % >50% - 60% 653.6 93.3 94.7 52.9 - 894.5 26.3 % >60% - 70% 1,330.1 322.0 146.5 80.8 0.1 1,879.5 55.3 % >70% - 80% 13.9 86.8 6.2 8.0 - 114.9 3.4 % >80% and above - - 8.1 4.6 - 12.7 0.4 % Total $ 2,388.5 $ 542.4 $ 275.8 $ 190.5 $ 0.1 $ 3,397.3 100.0 % 68



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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 Business, Basis of Presentation and Significant Accounting Policies Note in our Consolidated Financial Statements in Part II., Item8. in our Annual Report on Form 10-K for the policy used to evaluate whether the investments are other-than-temporarily impaired. During the three and six months ended June 30, 2014, we recorded $0.1 million and $0.9 million, respectively, of credit related OTTI of which the primary contributor being $0.1 million and $0.8 million, respectively of write-downs recorded in the RMBS sector on securities collateralized by Alt-A residential mortgages. See the Investments Note to the Condensed Consolidated Financial Statements in Part I., Item 1. of this Form 10-Q for further information on OTTI.



European Exposures

We closely monitor our exposures to European sovereign debt in general, with a primary focus on the sovereign debt of Greece, Ireland, Italy, Portugal and Spain (which we refer to as "peripheral Europe"), as these countries have applied for support from the European Financial Stability Facility or received support from the European Central Bank via government bond purchases in the secondary market. The financial turmoil in Europe continues to be a potential 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. Despite signs of continuous improvement in the region, it is our view that the risk among European sovereigns and financial institutions still warrants scrutiny, in addition to our customary surveillance and risk monitoring, given how highly correlated these sectors of the region have become.



The United States and European Union have recently imposed sanctions against select Russian businesses in response to the ongoing conflict in eastern Ukraine. We remain comfortable with our aggregate Russian exposure of $89.6 million, given its relatively small allocation in our total investment portfolio.

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 of June 30, 2014, we had $287.5 million of exposure to peripheral Europe, which consisted of a broadly diversified portfolio of credit-related investments primarily in the industrial and utility sectors. We did not have any fixed maturities or equity securities exposure to European sovereigns or to financial institutions based in peripheral Europe. Peripheral European exposure included non-sovereign exposure in Ireland of $104.3 million, Italy of $111.2 million and Spain of $72.0 million. We did not have any exposure to Greece or Portugal. As of June 30, 2014, we did not have any exposure to derivative assets within the financial institutions based in peripheral Europe. For purposes of calculating the derivative assets exposure, we have aggregated exposure to single name and portfolio product CDS, as well as all non-CDS derivative exposure for which it either had counterparty or direct credit exposure to a company whose country of risk is in scope. Among the remaining $3.0 billion of total non-peripheral European exposure, we had a portfolio of credit-related assets similarly diversified by country and sector across developed and developing Europe. As of June 30, 2014, our sovereign exposure was $140.4 million, which consisted of fixed maturities. We also had $371.4 million in net exposure to non-peripheral financial institutions with a concentration in France of $63.8 million, The Netherlands of $53.4 million, Switzerland of $54.6 million and the United Kingdom of $135.9 million. The balance of $2.5 billion was invested across non-peripheral, non-financial institutions. 69



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In addition to aggregate concentration in The Netherlands of $432.0 million and the United Kingdom of $1,159.0 million, we had significant non-peripheral European total country exposures in Belgium of $187.7 million, France of $218.2 million, Germany of $279.8 million and Switzerland of $295.7 million. We place additional scrutiny on our financial exposure in the United Kingdom, France and Switzerland 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.



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The following table represents our European exposures at fair value and amortized cost as of June 30, 2014: ($ in millions) Fixed Maturities and Equity Securities Derivative Assets Loan and Receivables Net Non-U.S. Total Sovereign Total, Funded at June Financial Non-Financial (Fair Total (Amortized Financial Non-Financial Less: Margin and (Fair 30, Sovereign Institutions Institutions Value) (Amortized Cost) Cost) Sovereign Institutions Institutions Collateral Value) 2014(1) Ireland $ - $ - $ 103.7 $ 103.7 $ 96.3 $ - $ - $ - $ 0.6 $ - $ 0.6 104.3 Italy - - 111.2 111.2 99.8 - - - - - - 111.2 Spain - - 72.0 72.0 66.9 - - - - - - 72.0 Total peripheral Europe - - 286.9 286.9 263.0 - - - 0.6 - 0.6 287.5 Belgium 37.3 - 150.4 187.7 157.3 - - - - - - 187.7 France - 48.2 154.4 202.6 189.2 - - 34.9 - 19.3 15.6 218.2 Germany - 35.4 244.4 279.8 258.6 - - - - - - 279.8 Netherlands - 53.4 378.6 432.0 397.3 - - - - - - 432.0 Switzerland - 49.4 240.5 289.9 265.2 - - 5.2 0.6 - 5.8 295.7 United Kingdom - 135.9 1,023.1 1,159.0 1,094.3 - - 75.2 - 75.2 - 1,159.0 Other non- peripheral(2) 103.1 28.3 271.3 402.7 379.9 - - - - - - 402.7 Total non-peripheral Europe 140.4 350.6 2,462.7 2,953.7 2,741.8 - - 115.3 0.6 94.5 21.4 2,975.1 Total $ 140.4 $ 350.6 $ 2,749.6 $ 3,240.6 $ 3,004.8 $ - $ - $ 115.3 $ 1.2 $ 94.5 $ 22.0$ 3,262.6 (1) Represents: (i) Fixed maturity and equity securities at fair value; and (ii) Derivative assets at fair value. (2) Other non-peripheral countries include: Bulgaria, Croatia, Czech Republic, Denmark, Finland, Hungary, Iceland, Kazakhstan, Latvia, Lithuania, Luxembourg, Norway, Russian Federation, Slovakia, Sweden and Turkey.



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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. Capital refers to our long-term financial resources available to support the business operations and contribute to future growth. Our ability to generate and maintain sufficient liquidity and capital depends on the profitability of the businesses, timing of cash flows on investments and products, general economic conditions and access to the capital markets and the alternate sources of liquidity and capital described herein.



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. 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 Voya Financial, 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 December 31. As of June 30, 2014 and

December 31, 2013, we did not have an outstanding receivable/payable from/to

Voya Financial, Inc. under the reciprocal loan agreement. We and Voya

Financial, Inc. continue to maintain the reciprocal loan agreement and future

borrowings by either party will be subject to the reciprocal loan terms

summarized above. Effective January 2014, interest on any borrowing by either

the Company or Voya Financial, Inc. is charged at a rate based on the

prevailing market rate for similar third-party borrowings or securities.

• We hold approximately 55.2% 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 repurchase agreements, dollar rolls

and/or security lending agreements by temporarily lending securities and

receiving cash collateral. Under our Liquidity Plan, up to 12.0% of our

general account statutory admitted assets may be allocated to repurchase,

securities lending and dollar roll programs. At the time a temporary cash

need arises, the actual percentage of admitted assets available for

repurchase transactions will depend upon outstanding allocations to the three

programs. As of June 30, 2014, ILIAC had securities lending collateral assets

of $182.8 million, which represents approximately 0.2% of its general account

statutory admitted assets.

We believe that our sources of liquidity are adequate to meet our short-term cash obligations.

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Capital Contributions and Dividends

During the six months ended June 30, 2014 and 2013, ILIAC did not receive any capital contributions from its Parent.

On May 2, 2014, we declared an ordinary dividend in the amount of $281.0 million, which was paid on May 19, 2014. During the six months ended June 30, 2013, following receipt of required approval from our domiciliary state insurance regulator and consummation of the initial public offering of Voya Financial, Inc., ILIAC paid an extraordinary dividend in the amount of $174.0 million to its Parent. 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. Financial strength ratings represent the opinions of rating agencies regarding the financial ability of an insurance company to meet its obligations under an insurance policy. Credit ratings represent the opinions of rating agencies regarding an entity's ability to repay its indebtedness. These ratings are not a recommendation to buy or hold any of our securities and they may be revised or revoked at any time at the sole discretion of the rating organization.



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The financial strength and credit ratings of the Company as of the date of this Quarterly Report on Form 10-Q are summarized in the following table. In parentheses, following the initial occurrence in the table of each rating, 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 highest rating in the scale. Company A.M. Best Fitch Moody's



S&P

ING Life Insurance and Annuity Company Financial Strength Rating A A- A3 A- (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 by A.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.



Ratings actions affirmation and outlook changes by S&P, Fitch, Moody's and A.M. Best from January 1, 2014 through August 12, 2014 are as follows:

• On July 3, 2014, A.M. Best affirmed the ratings of Voya Financial, Inc. and its operating subsidiaries, including us. A.M. Best maintained its stable outlook on the financial strength rating of the key life subsidiaries, including us.



• On May 13, 2014, Moody's affirmed the ratings of Voya Financial, Inc. and

its operating subsidiaries, including us, and revised the rating outlook

to Positive from Stable.

• On March 14, 2014, S&P affirmed the ratings of Voya Financial, Inc. and

its operating subsidiaries, including us, and revised the rating outlook

to Positive from Stable.

• On March 6, 2014, Fitch affirmed the ratings of Voya Financial, Inc. and

its operating subsidiaries, including us, and revised the rating outlook

to Positive from Stable. 74



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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 various 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. We also have investments in certain fixed maturities and have issued certain 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. In addition, we have entered into a reinsurance agreement, accounted for under the deposit method, that contains an embedded derivative, the fair value of which is based on the change in the fair value of the underlying assets held in trust. The embedded derivative is included in Other liabilities on the Condensed Consolidated Balance Sheets, and changes in the fair value of the embedded derivative are recorded in Interest credited and other benefits to contract owners/policyholders in the Condensed Consolidated Statements of Operations.



Reinsurance

Effective January 1, 2014, ILIAC entered into a coinsurance agreement with Langhorne I, LLC, a newly formed affiliated captive reinsurance company to manage reserve and capital requirements in connection with a portion of our Stabilizer and Managed Custody Guarantee business. This agreement is accounted for under the deposit method. As of June 30, 2014, a $123.3 million deposit liability and $56.8 million reinsurance asset are included in Other Liabilities and Other Assets, respectively, on the Balance Sheets.


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