Business, Basis of Presentation and Significant Accounting Policies

Business

ING USA Annuity and Life Insurance Company ("ING USA" or the "Company") is a stock life insurance company domiciled in the State of Iowa and provides financial products and services in the United States. ING USA is authorized to conduct its insurance business in all states, except New York and the District of Columbia.

ING USA is a direct, wholly owned subsidiary of Lion Connecticut Holdings Inc. ("Lion" or "Parent"), which is a direct, wholly owned subsidiary of ING U.S., Inc. ING U.S., Inc. (name changed from ING America Insurance Holdings, Inc. on June 14, 2012) is an indirect, wholly owned subsidiary of ING Groep N.V. ("ING"). ING is a global financial services holding company based in the Netherlands, with American Depository Shares listed on the New York Stock Exchange under the symbol "ING."

ING has announced the anticipated separation of its global banking and insurance businesses. While all options for effecting this separation remain open, ING has announced that the base case for this separation includes an initial public offering ("IPO") of ING U.S., Inc. which constitutes ING's U.S.-based retirement, investment management, and insurance operations, including the Company. On November 9, 2012, ING U.S., Inc. filed a registration statement on Form S-1 with the U.S. Securities and Exchange Commission (“SEC”) in connection with the proposed IPO of its common stock.

The Company offers various insurance products, including immediate and deferred fixed annuities. The Company's fixed annuity products are distributed by national and regional brokerage and securities firms, independent broker-dealers, banks, life insurance companies with captive agency sales forces, independent insurance agents, independent marketing organizations, and affiliated broker-dealers. The Company's primary annuity customers are individual consumers. The Company ceased new sales of variable annuity products in March of 2010, as part of a global business strategy and risk reduction plan. Some new amounts will continue to be deposited on ING USA variable annuities as add-on premiums to existing contracts.

The Company also offers guaranteed investment contracts and funding agreements sold primarily to institutional investors and corporate benefit plans. These products are marketed by home office personnel or through specialty insurance brokers.

The Company has one operating segment.

Basis of Presentation

The accompanying Condensed Financial Statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States ("U.S. GAAP") and are unaudited. The preparation of financial statements in conformity with U.S. GAAP requires management 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 Condensed Financial Statements and the reported amounts of revenues and expenses during the reporting period. Those estimates are inherently subject to change and actual results could differ from those estimates.

The accompanying Condensed Financial Statements reflect all adjustments (including normal, recurring adjustments) necessary to present fairly the financial position of the Company as of September 30, 2012, its results of operations, comprehensive income, changes in shareholder's equity, and cash flows for the three and nine months ended September 30, 2012 and 2011, in conformity with U.S. GAAP. Interim results are not necessarily indicative of full year performance. The December 31, 2011 Balance Sheet is from the audited Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2011, filed with the SEC, as adjusted for the retrospective application of certain accounting standards noted below, which includes all disclosures required by U.S. GAAP. Therefore, these Condensed Financial Statements should be read in conjunction with the Financial Statements of the Company included in the 2011 Annual Report on Form 10-K.

Certain reclassifications have been made to prior year financial information to conform to the current year classifications, including the presentation of changes in fair value of embedded derivatives within annuity products in order to align with the presentation of ING U.S., Inc. and affiliates. For the three months ended September 30, 2011, reclassifications decreased Fee income by $(51.3), decreased Other net realized capital gains (losses) by $(861.4), increased Other revenue by $12.4, and decreased Interest credited and other benefits to contract owners by $(900.4) in the Condensed Statements of Operations. For the nine months ended September 30, 2011, reclassifications decreased Fee income by $(161.9), decreased Other net realized capital gains (losses) by $(977.0), increased Other revenue by $45.6 and decreased Interest credited and other benefits to contract owners by $(1.1) billion in the Condensed Statements of Operations. Such reclassifications had no impact on Shareholder's equity or Net income (loss).

Accounting Changes

Future Policy Benefits and Contract Owner Accounts

As of January 1, 2012, the Company voluntarily changed to fair value accounting for the guaranteed minimum withdrawal benefits with life payouts ("GMWBL") riders as a retrospective change in accounting principle. Under fair value accounting, GMWBLs are considered embedded derivatives, which are measured at estimated fair value separately from the host annuity contract. Changes in estimated fair value are reported in Other net realized capital gains (losses) in the Condensed Statements of Operations. Previously, GMWBLs were accounted for by estimating the value of expected benefits in excess of the projected account balance and recognizing the excess ratably over the accumulation period based on total expected assessments. The new accounting method is preferable, as it provides more useful financial reporting information to financial statement users and fair value is more closely aligned with the underlying economics of the guarantee.

The cumulative effect of this change as of January 1, 2011, is a decrease to Retained earnings and to Accumulated other comprehensive income ("AOCI") of $15.9 and $22.3, respectively, net of other related impacts of Deferred acquisition costs ("DAC"), other intangible assets, and taxes. There was no impact, however, to Net cash provided by operating activities in the Condensed Statements of Cash Flows.

Employee Benefit Plans

As of January 1, 2012, the Company voluntarily changed its method of recognizing actuarial gains and losses related to its pension and post-retirement benefit plans. Previously, actuarial gains and losses were recognized in Accumulated other comprehensive income ("AOCI") and, to the extent outside a corridor, amortized into operating results over the average remaining service period of active plan participants or the average remaining life expectancy of inactive plan participants, as applicable. The Company has elected to immediately recognize actuarial gains and losses in the Condensed Statements of Operations in the year in which the gains and losses occur. The new accounting method is preferable, as it eliminates the delay in recognition of actuarial gains and losses. These gains and losses are generally only measured annually as of December 31 and accordingly will be recorded during the fourth quarter.

The Company's change in accounting methodology has been applied retrospectively. The cumulative effect of this change as of January 1, 2011, is a decrease to Retained earnings, with a corresponding increase to AOCI of $3.7, net of tax.

The impacts of the accounting changes as of September 30, 2012 to the Condensed Balance Sheet and for the three and nine months ended September 30, 2012 to the Condensed Statements of Operations were as follows:



	September 30, 2012
	Before Change in Method			Effect of GMWBL Change			Effect of Pension Change			As Reported
Deferred policy acquisition costs, Value of business acquired and Sales inducements to contract owners	$	2,785.9		$	948.9		$	—		$	3,734.8
Future policy benefits and claims reserves	25,927.3			1,467.0			—			27,394.3
Deferred income taxes	233.6			(181.4		)	0.1			52.3
Accumulated other comprehensive income (loss)	631.4			(196.3		)	2.9			438.0
Retained earnings (deficit)	(1,990.4		)	(140.5		)	(2.8		)	(2,133.7		)

	Three Months Ended September 30, 2012
	Before Change in Method			Effect of GMWBL Change			Effect of Pension Change			As Reported
Other net realized capital gains (losses)	$	(694.3	)	$	485.4		$	—		$	(208.9	)
Operating expenses	106.6			—			(0.3		)	106.3
Net amortization of deferred policy acquisition costs and value of business acquired	652.4			(413.9		)	—			238.5
Income tax expense (benefit)	20.6			25.0			—			45.6
Net income (loss)	145.4			46.5			0.3			192.2

	Nine Months Ended September 30, 2012
	Before Change in Method			Effect of GMWBL Change			Effect of Pension Change			As Reported
Other net realized capital gains (losses)	$	(1,332.0	)	$	271.0		$	—		$	(1,061.0	)
Operating expenses	332.4			—			(0.4		)	332.0
Net amortization of deferred policy acquisition costs and value of business acquired	515.7			(231.1		)	—			284.6
Income tax expense (benefit)	(41.5		)	14.0			0.1			(27.4		)
Net income (loss)	(76.8		)	25.9			0.3			(50.6		)

The impacts of the accounting changes as of December 31, 2011 to the Condensed Balance Sheet and for the three and nine months ended September 30, 2011 to the Condensed Statements of Operations were as follows:



	December 31, 2011
	As Previously Filed			Effect of GMWBL Change			Effect of Pension Change			Other Changes⁽¹⁾			As Revised
Deferred policy acquisition costs, Value of business acquired and Sales inducements to contract owners	$	3,974.9		$	1,037.6		$	—		$	(616.0	)	$	4,396.5
Other assets	385.8			—			—			8.8			394.6
Future policy benefits and claims reserves	27,970.2			1,738.1			—			—			29,708.3
Deferred income taxes	418.9			(245.1		)	—			(212.4		)	(38.6		)	⁽²⁾
Accumulated other comprehensive income (loss)	435.2			(288.9		)	3.2			95.6			245.1
Retained earnings (deficit)	(1,423.3		)	(166.4		)	(3.2		)	(490.2		)	(2,083.1		)
⁽¹⁾See reclassifications in Basis of Presentation above and Adoption of New Pronouncements below.
⁽²⁾Reflects a deferred income tax asset.



	Three Months Ended September 30, 2011
	As Previously Filed			Effect of GMWBL Change			Effect of Pension Change			Other Changes⁽¹⁾			As Revised
Fee income	$	261.4		$	—		$	—		$	(51.3	)	$	210.1
Other net realized capital gains (losses)	2,012.7			—			—			(861.4		)	1,151.3
Other revenue	0.4			—			—			12.4			12.8
Interest credited and other benefits to contract owners	2,437.8			802.6			—			(900.4		)	2,340.0
Operating expenses	105.8			—			(0.2		)	2.8			108.4
Net amortization of deferred policy acquisition costs and value of business acquired	(242.3		)	(548.6		)	—			95.0			(695.9		)
Other expense	10.4			—			—			0.2			10.6
Income tax expense (benefit)	23.1			(88.9		)	0.1			(34.3		)	(100.0		)
Net income (loss)	350.9			(165.1		)	—			(63.5		)	122.3
⁽¹⁾See reclassifications in Basis of Presentation above and Adoption of New Pronouncements below.

	Nine Months Ended September 30, 2011
	As Previously Filed			Effect of GMWBL Change			Effect of Pension Change			Other Changes⁽¹⁾			As Revised
Fee income	$	820.4		$	—		$	—		$	(161.9	)	$	658.5
Other net realized capital gains (losses)	1,828.9			—			—			(977.0		)	851.9
Other revenue	0.8			—			—			45.6			46.4
Interest credited and other benefits to contract owners	3,167.7			815.9			—			(1,093.5		)	2,890.1
Operating expenses	325.6			—			(0.4		)	8.1			333.3
Net amortization of deferred policy acquisition costs and value of business acquired	(131.7		)	(498.2		)	—			63.3			(566.6		)
Other expense	26.7			—			—			0.5			27.2
Income tax expense (benefit)	41.6			(111.2		)	0.2			(25.1		)	(94.5		)
Net income (loss)	489.3			(206.5		)	0.1			(46.5		)	236.4
⁽¹⁾See reclassifications in Basis of Presentation above and Adoption of New Pronouncements below.

Adoption of New Pronouncements

Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts

In October 2010, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2010-26, "Financial Services - Insurance (Accounting Standards Codification^TM ("ASC") Topic 944): Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts" ("ASU 2010-26"), which clarifies what costs relating to the acquisition of new or renewal insurance contracts qualify for deferral. Costs that should be capitalized include (1) incremental direct costs of successful contract acquisition and (2) certain costs related directly to successful acquisition activities (underwriting, policy issuance and processing, medical and inspection and sales force contract selling) performed by the insurer for the contract. Advertising costs should be included in deferred acquisition costs only if the capitalization criteria in the U.S. GAAP direct-response advertising guidance are met. All other acquisition-related costs should be charged to expense as incurred.

The provisions of ASU 2010-26 were adopted retrospectively by the Company on January 1, 2012. As a result of implementing ASU 2010-26, the Company recognized a cumulative effect of change in accounting principle of $394.3, net of income taxes of $212.3, as a reduction to January 1, 2011 Retained earnings (deficit). In addition, the Company recognized a $41.1 increase to AOCI.

Reconsideration of Effective Control for Repurchase Agreements

In April 2011, the FASB issued ASU 2011-03, "Transfers and Servicing (ASC Topic 860): Reconsideration of Effective Control for Repurchase Agreements" ("ASU 2011-03"), which removes from the assessment of effective control (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms and (2) the collateral maintenance implementation guidance related to that criterion.

The provisions of ASU 2011-03 were adopted by the Company on January 1, 2012. The Company determined, however, that there was no effect on the Company's financial condition, results of operations, or cash flows, as the conclusion is consistent with that previously applied by the Company.

Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards ("IFRS")

In May 2011, the FASB issued ASU 2011-04, "Fair Value Measurement (ASC Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs" ("ASU 2011-04"), which includes the following amendments:


•	The concepts of highest and best use and valuation premise are relevant only when measuring the fair value of nonfinancial assets;


•	The requirements for measuring the fair value of equity instruments are consistent with those for measuring liabilities;


•	An entity is permitted to measure the fair value of financial instruments managed within a portfolio at the price that would be received to sell or transfer a net position for a particular risk; and


•	The application of premiums and discounts in a fair value measurement is related to the unit of account for the asset or liability.

ASU 2011-04 also requires additional disclosures, including use of a nonfinancial asset in a way that differs from its highest and best use, categorization by level for items in which fair value is required to be disclosed and further information regarding Level 3 fair value measurements.

The provisions of ASU 2011-04 were adopted by the Company on January 1, 2012. The disclosures required by ASU 2011-04 are included in the Fair Value Measurements note to these Condensed Financial Statements. As the pronouncement only pertains to additional disclosures, the adoption had no effect on the Company's financial condition, results of operations, or cash flows.

Presentation of Comprehensive Income

In June 2011, the FASB issued ASU 2011-05, "Comprehensive Income (ASC Topic 220): Presentation of Comprehensive Income" ("ASU 2011-05"), which states that an entity has the option to present total comprehensive income and the components of net income and other comprehensive income either in a single, continuous statement of comprehensive income or in two separate, consecutive statements.

In December 2011, the FASB issued ASU 2011-12, which defers the ASU 2011-05 requirements to present, on the face of the financial statements, the effects of reclassification out of AOCI on the components of net income and other comprehensive income.

The Company early adopted provisions of ASU 2011-05 and ASU 2010-12 as of December 31, 2011 and applied the provisions retrospectively. The Condensed Statement of Comprehensive Income, with corresponding revisions to the Condensed Statements of Changes in Shareholder's Equity, is included in these Condensed Financial Statements. In addition, the required disclosures are included in the Accumulated Other Comprehensive Income (Loss) note to these Condensed Financial Statements.

Future Adoption of Accounting Pronouncements

Disclosures about Offsetting Assets and Liabilities

In December 2011, the FASB issued ASU 2011-11, "Balance Sheet (ASC Topic 210): Disclosures about Offsetting Assets and Liabilities" ("ASU 2011-11"), which requires an entity to disclose both gross and net information about instruments and transactions eligible for offset in the statement of financial position, as well as instruments and transactions subject to an agreement similar to

a master netting arrangement. In addition, the standard requires disclosure of collateral received and posted in connection with master netting agreements or similar arrangements.

The provisions of ASU 2011-11 are effective, retrospectively, for annual reporting periods beginning on or after January 1, 2013 and interim periods within those annual reporting periods. The Company is currently in the process of determining the disclosure impact of adoption of the provisions of ASU 2011-11.