Attached files
| file | filename |
|---|---|
| EX-31.1 - EXHIBIT 31.1 - VOYA RETIREMENT INSURANCE & ANNUITY Co | vriac2015q3ex311.htm |
| EX-32.2 - EXHIBIT 32.2 - VOYA RETIREMENT INSURANCE & ANNUITY Co | vriac2015q3ex322.htm |
| EX-32.1 - EXHIBIT 32.1 - VOYA RETIREMENT INSURANCE & ANNUITY Co | vriac2015q3ex321.htm |
| EX-31.2 - EXHIBIT 31.2 - VOYA RETIREMENT INSURANCE & ANNUITY Co | vriac2015q3ex312.htm |
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
——————————————————————
FORM 10-Q
(Mark One) | |
ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2015
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 333-200435, 333-203610, 333-203619, 333-203643, 333-203644, 333-203645, 333-203646
Voya Retirement Insurance and Annuity Company
(Exact name of registrant as specified in its charter)
Connecticut | 71-0294708 |
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) |
One Orange Way | |
Windsor, Connecticut | 06095-4774 |
(Address of principal executive offices) | (Zip Code) |
(860) 580-4646
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer o |
Non-accelerated filer x | Smaller reporting company o |
(Do not check if a smaller reporting company) | |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of November 5, 2015, 55,000 shares of Common Stock, $50 par value were outstanding, all of which were directly owned by Voya Holdings Inc.
NOTE: WHEREAS VOYA RETIREMENT INSURANCE AND ANNUITY COMPANY MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(a) AND (b) OF FORM 10-Q, THIS FORM IS BEING FILED WITH THE REDUCED DISCLOSURE FORMAT PURSUANT TO GENERAL INSTRUCTION H(2).
Voya Retirement Insurance and Annuity Company and Subsidiaries
(A wholly owned subsidiary of Voya Holdings Inc.)
Form 10-Q for the period ended September 30, 2015
INDEX | ||
PAGE | ||
PART I. | FINANCIAL INFORMATION (UNAUDITED) | |
Item 1. | Financial Statements: | |
Condensed Consolidated Statements of Changes in Shareholder's Equity | ||
Item 2. | Management's Narrative Analysis of the Results of Operations and Financial Condition | |
Item 4. | ||
PART II. | OTHER INFORMATION | |
Item 1. | ||
Item 1A. | ||
Item 6. | ||
2 | ||
As used in this Quarterly Report on Form 10-Q, "VRIAC" refers to Voya Retirement Insurance and Annuity Company and the "Company," "we," "our" and "us" refer to VRIAC and its wholly owned subsidiaries.
NOTE CONCERNING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q, including "Risk Factors" and "Management’s Narrative Analysis of the Results of Operations and Financial Condition" contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements relating to future developments in our business or expectations for our future financial performance and any statement not involving a historical fact. Forward-looking statements use words such as "anticipate," "believe," "estimate," "expect," "intend," "plan," and other words and terms of similar meaning in connection with a discussion of future operating or financial performance. Actual results, performance or events may differ materially from those projected in any forward-looking statement due to, among other things, (i) general economic conditions, particularly economic conditions in our core markets, (ii) performance of financial markets, including emerging markets, (iii) the frequency and severity of insured loss events, (iv) mortality and morbidity levels, (v) persistency and lapse levels, (vi) interest rates, (vii) currency exchange rates, (viii) general competitive factors, (ix) changes in laws and regulations, including those relating to the use and possible application of accreditation standards to captive reinsurance entities and those made pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act or the U.S. Department of Labor's proposed rules and exemptions pertaining to the fiduciary status of providers of investment advice; and (x) changes in the policies of governments and/or regulatory authorities. Factors that may cause actual results to differ from those in any forward-looking statement also include those described under "Risk Factors" and "Management’s Narrative Analysis of the Results of Operations and Financial Condition" in the Annual Report on Form 10-K for the year ended December 31, 2014 (File No. 033-23376) (the "Annual Report on Form 10-K") and "Risk Factors," in the Quarterly Report on Form 10-Q for the quarter ended March 31, 2015 (File No. 033-23376).
The risks included here are not exhaustive. Current reports on Form 8-K and other documents filed with the Securities and Exchange Commission ("SEC") include additional factors that could affect our businesses and financial performance. Moreover, we operate in a rapidly changing and competitive environment. New risk factors emerge from time to time, and it is not possible for management to predict all such risk factors.
3 | ||
PART I. FINANCIAL INFORMATION (UNAUDITED)
Item 1. Financial Statements
Voya Retirement Insurance and Annuity Company and Subsidiaries
(A wholly owned subsidiary of Voya Holdings Inc.)
Condensed Consolidated Balance Sheets
September 30, 2015 (Unaudited) and December 31, 2014
(In millions, except share and per share data)
September 30, 2015 | December 31, 2014 | ||||||
Assets | |||||||
Investments: | |||||||
Fixed maturities, available-for-sale, at fair value (amortized cost of $20,256.8 as of 2015 and $19,085.0 as of 2014) | $ | 21,136.4 | $ | 20,655.6 | |||
Fixed maturities, at fair value using the fair value option | 785.0 | 725.7 | |||||
Equity securities, available-for-sale, at fair value (cost of $117.4 as of 2015 and $107.4 as of 2014) | 132.1 | 121.9 | |||||
Short-term investments | — | 241.5 | |||||
Mortgage loans on real estate, net of valuation allowance of $1.2 as of 2015 and $1.1 as of 2014 | 3,867.4 | 3,513.0 | |||||
Policy loans | 233.6 | 239.1 | |||||
Limited partnerships/corporations | 296.1 | 248.4 | |||||
Derivatives | 530.6 | 562.0 | |||||
Securities pledged (amortized cost of $261.8 as of 2015 and $224.4 as of 2014) | 264.2 | 235.3 | |||||
Total investments | 27,245.4 | 26,542.5 | |||||
Cash and cash equivalents | 639.2 | 481.2 | |||||
Short-term investments under securities loan agreements, including collateral delivered | 285.2 | 325.4 | |||||
Accrued investment income | 302.5 | 285.2 | |||||
Reinsurance recoverable | 1,857.0 | 1,929.5 | |||||
Deferred policy acquisition costs, Value of business acquired and Sales inducements to contract owners | 1,107.4 | 939.1 | |||||
Notes receivable from affiliate | 175.0 | 175.0 | |||||
Current income tax recoverable | — | 10.1 | |||||
Due from affiliates | 62.9 | 60.6 | |||||
Property and equipment | 72.2 | 74.8 | |||||
Other assets | 165.1 | 170.0 | |||||
Assets held in separate accounts | 57,384.2 | 62,808.1 | |||||
Total assets | $ | 89,296.1 | $ | 93,801.5 | |||
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements. | ||
4 | ||
Voya Retirement Insurance and Annuity Company and Subsidiaries
(A wholly owned subsidiary of Voya Holdings Inc.)
Condensed Consolidated Balance Sheets
September 30, 2015 (Unaudited) and December 31, 2014
(In millions, except share and per share data)
September 30, 2015 | December 31, 2014 | ||||||
Liabilities and Shareholder's Equity | |||||||
Future policy benefits and contract owner account balances | $ | 26,689.0 | $ | 25,129.9 | |||
Payable for securities purchased | 102.3 | 12.1 | |||||
Payables under securities loan agreements, including collateral held | 628.9 | 617.1 | |||||
Long-term debt | 4.9 | 4.9 | |||||
Due to affiliates | 76.8 | 111.1 | |||||
Derivatives | 162.2 | 217.0 | |||||
Current income tax payable to Parent | 5.4 | — | |||||
Deferred income taxes | 224.4 | 367.5 | |||||
Other liabilities | 421.8 | 572.0 | |||||
Liabilities related to separate accounts | 57,384.2 | 62,808.1 | |||||
Total liabilities | 85,699.9 | 89,839.7 | |||||
Shareholder's equity: | |||||||
Common stock (100,000 shares authorized, 55,000 issued and outstanding as of 2015 and 2014; $50 par value per share) | 2.8 | 2.8 | |||||
Additional paid-in capital | 3,362.5 | 3,583.9 | |||||
Accumulated other comprehensive income (loss) | 567.2 | 841.5 | |||||
Retained earnings (deficit) | (336.3 | ) | (466.4 | ) | |||
Total shareholder's equity | 3,596.2 | 3,961.8 | |||||
Total liabilities and shareholder's equity | $ | 89,296.1 | $ | 93,801.5 | |||
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements. | ||
5 | ||
Voya Retirement Insurance and Annuity Company and Subsidiaries
(A wholly owned subsidiary of Voya Holdings Inc.)
Condensed Consolidated Statements of Operations
For the Three and Nine Months Ended September 30, 2015 and 2014 (Unaudited)
(In millions)
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2015 | 2014 | 2015 | 2014 | ||||||||||||
Revenues: | |||||||||||||||
Net investment income | $ | 353.0 | $ | 348.2 | $ | 1,044.7 | $ | 1,031.9 | |||||||
Fee income | 189.2 | 198.4 | 579.7 | 587.6 | |||||||||||
Premiums | 556.0 | 27.5 | 592.1 | 56.0 | |||||||||||
Broker-dealer commission revenue | 56.0 | 61.6 | 175.5 | 184.8 | |||||||||||
Net realized capital gains (losses): | |||||||||||||||
Total other-than-temporary impairments | (21.9 | ) | (1.9 | ) | (25.4 | ) | (4.2 | ) | |||||||
Less: Portion of other-than-temporary impairments recognized in Other comprehensive income (loss) | 0.3 | — | 1.1 | — | |||||||||||
Net other-than-temporary impairments recognized in earnings | (22.2 | ) | (1.9 | ) | (26.5 | ) | (4.2 | ) | |||||||
Other net realized capital gains (losses) | (68.4 | ) | (40.2 | ) | (159.6 | ) | (106.0 | ) | |||||||
Total net realized capital gains (losses) | (90.6 | ) | (42.1 | ) | (186.1 | ) | (110.2 | ) | |||||||
Other revenue | 0.4 | 1.9 | 1.2 | 3.6 | |||||||||||
Total revenues | 1,064.0 | 595.5 | 2,207.1 | 1,753.7 | |||||||||||
Benefits and expenses: | |||||||||||||||
Interest credited and other benefits to contract owners/policyholders | 759.0 | 225.4 | 1,163.1 | 688.2 | |||||||||||
Operating expenses | 197.2 | 185.0 | 579.4 | 565.8 | |||||||||||
Broker-dealer commission expense | 56.0 | 61.6 | 175.5 | 184.8 | |||||||||||
Net amortization of Deferred policy acquisition costs and Value of business acquired | 64.0 | 63.5 | 116.1 | 90.2 | |||||||||||
Interest expense | 0.1 | — | 0.1 | — | |||||||||||
Total benefits and expenses | 1,076.3 | 535.5 | 2,034.2 | 1,529.0 | |||||||||||
Income (loss) before income taxes | (12.3 | ) | 60.0 | 172.9 | 224.7 | ||||||||||
Income tax expense (benefit) | (6.4 | ) | 9.8 | 42.8 | 54.2 | ||||||||||
Net income (loss) | $ | (5.9 | ) | $ | 50.2 | $ | 130.1 | $ | 170.5 | ||||||
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements. | ||
6 | ||
Voya Retirement Insurance and Annuity Company and Subsidiaries
(A wholly owned subsidiary of Voya Holdings Inc.)
Condensed Consolidated Statements of Comprehensive Income
For the Three and Nine Months Ended September 30, 2015 and 2014 (Unaudited)
(In millions)
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2015 | 2014 | 2015 | 2014 | ||||||||||||
Net income (loss) | $ | (5.9 | ) | $ | 50.2 | $ | 130.1 | $ | 170.5 | ||||||
Other comprehensive income (loss), before tax: | |||||||||||||||
Unrealized gains/losses on securities | (44.9 | ) | (148.6 | ) | (419.3 | ) | 420.8 | ||||||||
Other-than-temporary impairments | 0.6 | 1.0 | 2.3 | 8.3 | |||||||||||
Pension and other postretirement benefits liability | (0.6 | ) | (0.6 | ) | (1.7 | ) | (1.7 | ) | |||||||
Other comprehensive income (loss), before tax | (44.9 | ) | (148.2 | ) | (418.7 | ) | 427.4 | ||||||||
Income tax expense (benefit) related to items of other comprehensive income (loss) | (15.4 | ) | (49.8 | ) | (144.4 | ) | 149.6 | ||||||||
Other comprehensive income (loss), after tax | (29.5 | ) | (98.4 | ) | (274.3 | ) | 277.8 | ||||||||
Comprehensive income (loss) | $ | (35.4 | ) | $ | (48.2 | ) | $ | (144.2 | ) | $ | 448.3 | ||||
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements. | ||
7 | ||
Voya Retirement Insurance and Annuity Company and Subsidiaries
(A wholly owned subsidiary of Voya Holdings Inc.)
Condensed Consolidated Statements of Changes in Shareholder’s Equity
For the Nine Months Ended September 30, 2015 and 2014 (Unaudited)
(In millions)
Common Stock | Additional Paid-In Capital | Accumulated Other Comprehensive Income (Loss) | Retained Earnings (Deficit) | Total Shareholder's Equity | |||||||||||||||
Balance as of January 1, 2015 | $ | 2.8 | $ | 3,583.9 | $ | 841.5 | $ | (466.4 | ) | $ | 3,961.8 | ||||||||
Comprehensive income (loss): | |||||||||||||||||||
Net income (loss) | — | — | — | 130.1 | 130.1 | ||||||||||||||
Other comprehensive income (loss), after tax | — | — | (274.3 | ) | — | (274.3 | ) | ||||||||||||
Total comprehensive income (loss) | (144.2 | ) | |||||||||||||||||
Dividends paid and distributions of capital | — | (231.0 | ) | — | — | (231.0 | ) | ||||||||||||
Employee related benefits | — | 9.6 | — | — | 9.6 | ||||||||||||||
Balance as of September 30, 2015 | $ | 2.8 | $ | 3,362.5 | $ | 567.2 | $ | (336.3 | ) | $ | 3,596.2 | ||||||||
Balance as of January 1, 2014 | $ | 2.8 | $ | 3,953.3 | $ | 495.4 | $ | (698.1 | ) | $ | 3,753.4 | ||||||||
Comprehensive income (loss): | |||||||||||||||||||
Net income (loss) | — | — | — | 170.5 | 170.5 | ||||||||||||||
Other comprehensive income (loss), after tax | — | — | 277.8 | — | 277.8 | ||||||||||||||
Total comprehensive income (loss) | 448.3 | ||||||||||||||||||
Dividends paid and distributions of capital | — | (281.0 | ) | — | — | (281.0 | ) | ||||||||||||
Employee related benefits | — | 1.5 | — | — | 1.5 | ||||||||||||||
Balance as of September 30, 2014 | $ | 2.8 | $ | 3,673.8 | $ | 773.2 | $ | (527.6 | ) | $ | 3,922.2 | ||||||||
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements. | ||
8 | ||
Voya Retirement Insurance and Annuity Company and Subsidiaries
(A wholly owned subsidiary of Voya Holdings Inc.)
Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2015 and 2014 (Unaudited)
(In millions)
Nine Months Ended September 30, | |||||||
2015 | 2014 | ||||||
Net cash provided by operating activities | $ | 1,312.4 | $ | 732.3 | |||
Cash Flows from Investing Activities: | |||||||
Proceeds from the sale, maturity, disposal or redemption of: | |||||||
Fixed maturities | 2,413.2 | 2,215.0 | |||||
Equity securities, available-for-sale | 17.4 | 14.1 | |||||
Mortgage loans on real estate | 345.7 | 314.1 | |||||
Limited partnerships/corporations | 31.1 | 34.9 | |||||
Acquisition of: | |||||||
Fixed maturities | (3,685.6 | ) | (2,290.6 | ) | |||
Equity securities, available-for-sale | (28.0 | ) | — | ||||
Mortgage loans on real estate | (700.1 | ) | (482.6 | ) | |||
Limited partnerships/corporations | (72.6 | ) | (93.2 | ) | |||
Derivatives, net | (55.8 | ) | (22.9 | ) | |||
Policy loans, net | 5.5 | 1.8 | |||||
Short-term investments, net | 241.5 | (6.3 | ) | ||||
Collateral received (delivered), net | 52.1 | 103.2 | |||||
Net cash used in investing activities | (1,435.6 | ) | (212.5 | ) | |||
Cash Flows from Financing Activities: | |||||||
Deposits received for investment contracts | 2,317.5 | 1,669.9 | |||||
Maturities and withdrawals from investment contracts | (1,756.6 | ) | (1,946.3 | ) | |||
Receipts on deposit contracts | — | 124.7 | |||||
Settlements on deposit contracts | (49.4 | ) | (36.2 | ) | |||
Excess tax benefits on share-based compensation | 0.7 | — | |||||
Dividends paid and distributions of capital | (231.0 | ) | (281.0 | ) | |||
Net cash provided by (used in) financing activities | 281.2 | (468.9 | ) | ||||
Net increase in cash and cash equivalents | 158.0 | 50.9 | |||||
Cash and cash equivalents, beginning of period | 481.2 | 378.9 | |||||
Cash and cash equivalents, end of period | $ | 639.2 | $ | 429.8 | |||
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements. | ||
9 | ||
Voya Retirement Insurance and Annuity Company and Subsidiaries
(A wholly owned subsidiary of Voya Holdings Inc.)
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
1. Business, Basis of Presentation and Significant Accounting Policies
Business
Voya Retirement Insurance and Annuity Company ("VRIAC"), which changed its name from ING Life Insurance and Annuity Company on September 1, 2014, is a stock life insurance company domiciled in the State of Connecticut. VRIAC and its wholly owned subsidiaries (collectively, "the Company") provide financial products and services in the United States. VRIAC is authorized to conduct its insurance business in all states and in the District of Columbia, Guam, Puerto Rico and the Virgin Islands.
Prior to May 2013, Voya Financial, Inc. (which changed its name from ING U.S., Inc. on April 7, 2014), together with its subsidiaries, including the Company was an indirect, wholly-owned subsidiary of ING Groep N.V. ("ING Group" or "ING"), a global financial services holding company based in The Netherlands, with American Depository Shares listed on the New York Stock Exchange. In 2009, ING Group announced the anticipated separation of its global banking and insurance businesses, including the divestiture of Voya Financial, Inc. together with its subsidiaries, including the Company. On April 11, 2013, Voya Financial, Inc. announced plans to rebrand as Voya Financial. On May 2, 2013, the common stock of Voya Financial, Inc. began trading on the New York Stock Exchange under the symbol "VOYA." On May 7, 2013 and May 31, 2013, Voya Financial, Inc. completed its initial public offering of common stock, including the issuance and sale by Voya Financial, Inc. of 30,769,230 shares of common stock and the sale by ING Insurance International B.V. ("ING International"), an indirect wholly owned subsidiary of ING Group and previously the sole stockholder of Voya Financial, Inc., of 44,201,773 shares of outstanding common stock of Voya Financial, Inc. (collectively, the "IPO"). On September 30, 2013, ING International transferred all of its remaining shares of Voya Financial, Inc. common stock to ING Group.
On October 29, 2013, ING Group completed a sale of 37,950,000 shares of common stock of Voya Financial, Inc. in a registered public offering ("Secondary Offering"), reducing ING Group's ownership of Voya Financial, Inc. to 57%.
In 2014, ING Group completed sales of 82,783,006 shares of common stock of Voya Financial, Inc. in three registered public offerings throughout the year ("the 2014 Offerings"). In conjunction with each of these offerings, pursuant to the terms of share repurchase agreements between ING Group and Voya Financial, Inc., Voya Financial, Inc. acquired 19,447,847 shares of its common stock from ING Group (the “2014 Direct Share Repurchases”) (the 2014 Offerings and the 2014 Direct Share Repurchases collectively, the “2014 Transactions”). Upon completion of the 2014 Transactions, ING Group's ownership of Voya Financial, Inc. was reduced to approximately 19%.
On March 9, 2015, ING Group completed a sale of 32,018,100 shares of common stock of Voya Financial, Inc. in a registered public offering (the “March 2015 Offering”). Also on March 9, 2015, pursuant to the terms of a share repurchase agreement between ING Group and Voya Financial, Inc., Voya Financial, Inc. acquired 13,599,274 shares of its common stock from ING Group (the “March 2015 Direct Share Buyback”) (the March 2015 Offering and the March 2015 Direct Share Buyback collectively, the “March 2015 Transactions”). Upon completion of the March 2015 Transactions, ING Group has exited its stake in Voya Financial, Inc. common stock. ING Group continues to hold warrants to purchase up to 26,050,846 shares of Voya Financial, Inc. common stock at an exercise price of $48.75, in each case subject to adjustments. As a result of the completion of the March 2015 Transactions, ING Group has satisfied the provisions of its agreement with the European Union regarding the divestment of its U.S. insurance and investment operations, which required ING Group to divest 100% of its ownership interest in Voya Financial, Inc. together with its subsidiaries, including the Company by the end of 2016.
VRIAC is a direct, wholly owned subsidiary of Voya Holdings Inc. (formerly Lion Connecticut Holdings Inc.) ("Parent"), which is a direct, wholly owned subsidiary of Voya Financial, Inc.
The Company offers 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. The Company's 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. Additionally, the Company provides pension risk transfer solutions to institutional customers looking to transfer their defined benefit plan obligations to the Company. The Company's products are generally
10 | ||
Voya Retirement Insurance and Annuity Company and Subsidiaries
(A wholly owned subsidiary of Voya Holdings Inc.)
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
distributed through pension professionals, independent agents and brokers, third-party administrators, banks, dedicated career agents and financial planners.
Products offered by the Company include deferred and immediate (i.e., payout) annuity contracts. Company products also include programs offered to qualified plans and nonqualified deferred compensation plans that package administrative and record-keeping services along with a variety of investment options, including affiliated and nonaffiliated mutual funds and variable and fixed investment options. In addition, the Company offers wrapper agreements entered into with retirement plans, which contain certain benefit responsive guarantees (i.e., guarantees of principal and previously accrued interest for benefits paid under the terms of the plan) with respect to portfolios of plan-owned assets not invested with the Company. The Company also offers retirement savings plan administrative services.
The Company has one operating segment.
Basis of Presentation
The accompanying Condensed Consolidated 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 Consolidated 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 Condensed Consolidated Financial Statements include the accounts of VRIAC and its wholly owned subsidiaries, Voya Financial Partners, LLC ("VFP"), which changed its name from ING Financial Advisers, LLC on September 1, 2014, and Directed Services LLC ("DSL"). Intercompany transactions and balances have been eliminated.
The accompanying Condensed Consolidated Financial Statements reflect adjustments (including normal, recurring adjustments) necessary to present fairly the financial position of the Company as of September 30, 2015, and its results of operations and comprehensive income for the three and nine months ended September 30, 2015 and 2014, and its changes in shareholder's equity and statements of cash flows for the nine months ended September 30, 2015 and 2014, in conformity with U.S. GAAP. Interim results are not necessarily indicative of full year performance. The December 31, 2014 Consolidated Balance Sheet is from the audited Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2014 ("Annual Report on Form 10-K"), filed with the SEC. Therefore, these unaudited Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and related notes included in the Company's Annual Report on Form 10-K.
Adoption of New Pronouncements
Repurchase Agreements
In June 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-11, "Transfers and Servicing (Accounting Standards Codification ("ASC") Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures" ("ASU 2014-11"), which (1) changes the accounting for repurchase-to-maturity transactions to secured borrowing accounting and (2) requires separate accounting for a transfer of a financial asset executed with a repurchase agreement with the same counterparty. This will result in secured borrowing accounting for the repurchase agreement. The amendments also require additional disclosures for certain transactions accounted for as a sale and for repurchase agreements, securities lending transactions and repurchase-to-maturity transactions that are accounted for as secured borrowings.
The provisions of ASU 2014-11 were adopted by the Company on January 1, 2015, with the exception of disclosure amendments for repurchase agreements, securities lending transactions and repurchase-to-maturity transactions that are accounted for as secured borrowings, which were adopted April 1, 2015. The adoption of the January 1, 2015 provisions had no effect on the Company's financial condition, results of operations or cash flows. The April 1, 2015 disclosure provisions are included in the Investments Note to these Condensed Consolidated Financial Statements.
11 | ||
Voya Retirement Insurance and Annuity Company and Subsidiaries
(A wholly owned subsidiary of Voya Holdings Inc.)
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
Discontinued Operations and Disposals
In April 2014, the FASB issued ASU 2014-08, "Presentation of Financial Statements (ASC Topic 205) and Property, Plant, and Equipment (ASC Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity" ("ASU 2014-08"), which requires the disposal of a component of an entity to be reported in discontinued operations if the disposal represents a strategic shift that has, or will have, a major effect on the entity's operations and financial results. The component should be reported in discontinued operations when it meets the criteria to be classified as held for sale, is disposed of by sale or is disposed of other than by sale.
The amendments also require additional disclosures about discontinued operations, including disclosures about an entity’s significant continuing involvement with a discontinued operation and disclosures for a disposal of an individually significant component of an entity that does not qualify for discontinued operations.
The provisions of ASU 2014-08 were adopted prospectively by the Company on January 1, 2015. The adoption had no effect on the Company’s financial condition, results of operations or cash flows.
Future Adoption of Accounting Pronouncements
Short-Duration Contracts
In May 2015, the FASB issued ASU 2015-09, "Financial Services - Insurance (ASC Topic 944): Disclosures about Short-Duration Contracts" ("ASU 2015-09"), which requires insurance entities to disclose for annual reporting periods information about the liability for unpaid claims and claim adjustment expenses and about significant changes in methodologies and assumptions used to calculate the liability for unpaid claims and claims adjustment expenses. The standard also requires entities to disclose, for annual and interim reporting periods, a rollforward of the liability for unpaid claims and claim adjustment expenses.
The provisions of ASU 2015-09 are effective, retrospectively, for annual periods beginning after December 15, 2015, and interim periods within annual periods beginning after December 15, 2016, with early adoption permitted. The Company is currently in the process of determining the impact of adoption of the provisions of ASU 2015-09.
Internal-Use Software
In April 2015, the FASB issued ASU 2015-05, "Intangibles - Goodwill and Other-Internal-Use Software (ASC Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement" ("ASU 2015-05"), which clarifies that customers should account for software licenses included in cloud computing arrangements (ex. software as a service) consistent with the acquisition of other software licenses. If the arrangement does not include a software license, the customer should account for the arrangement as a service contract.
The provisions of ASU 2015-05 are effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2015, with early adoption permitted. The amendments can be applied prospectively or retrospectively. The Company is currently in the process of determining the impact of adoption of the provisions of ASU 2015-05.
Defined Benefit Plans
In April 2015, the FASB issued ASU 2015-04, "Compensation - Retirement Benefits (ASC Topic 715): Practical Expedient for the Measurement Date of an Employer’s Defined Benefit Obligation and Plan Assets" ("ASU 2015-04"), which permits remeasurement of defined benefit plan assets and obligations resulting from the occurrence of a significant event using the month-end that is closest to the date of the event.
The provisions of ASU 2015-04 are effective, prospectively, for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years, with early adoption permitted. The Company does not expect ASU 2015-04 to have an impact.
12 | ||
Voya Retirement Insurance and Annuity Company and Subsidiaries
(A wholly owned subsidiary of Voya Holdings Inc.)
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
Consolidation
In February 2015, the FASB issued ASU 2015-02, “Consolidation (ASC Topic 810): Amendments to the Consolidation Analysis” (“ASU 2015-02”), which:
• | Modifies the evaluation of whether limited partnerships and similar legal entities are Variable Interest Entities ("VIEs") or Voting Interest Entities ("VOEs"), including the requirement to consider the rights of all equity holders at risk to determine if they have the power to direct the entity's most significant activities. |
• | Eliminates the presumption that a general partner should consolidate a limited partnership. Limited partnerships and similar entities will be VIEs unless the limited partners hold substantive kick-out rights in the participating rights. |
• | Affects the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships. |
• | Provides a new scope exception for registered money market funds and similar unregistered money market funds, and ends the deferral granted to investment companies from applying the VIE guidance. |
The provisions of ASU 2015-02 are effective for annual periods, and for interim periods within those annual periods, beginning after December 15, 2015, with early adoption permitted, using either a retrospective or modified retrospective approach. The Company does not expect ASU 2015-02 to have an impact.
Hybrid Financial Instruments
In November 2014, the FASB issued ASU 2014-16, “Derivatives and Hedging (ASC Topic 815): Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity” (“ASU 2014-16”), which requires an entity to determine the nature of the host contract by considering the economic characteristics and risks of the entire hybrid financial instrument, including all embedded derivative features.
The provisions of ASU 2014-16 are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015, with early adoption permitted. Initial adoption of ASU 2014-16 may be reported on a modified retrospective basis, with a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption, or on a full retrospective basis, with application to all prior periods presented. The Company is currently in the process of determining the impact of adoption of the provisions of ASU 2014-16.
Going Concern
In August 2014, the FASB issued ASU 2014-15, "Presentation of Financial Statements-Going Concern (ASC Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern" ("ASU 2014-15"), which requires management to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued. The provisions of ASU 2014-15 will not affect a company's financial condition, results of operations, or cash flows, but require disclosure if management determines there is substantial doubt, including management’s plans to alleviate or mitigate the conditions or events that raise substantial doubt.
The provisions of ASU 2014-15 are effective for annual periods ending after December 15, 2016, and annual and interim periods thereafter. The Company does not expect ASU 2014-15 to have an impact.
Revenue from Contracts with Customers
In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers (ASC Topic 606)" ("ASU 2014-09"), which requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Revenue is recognized when, or as, the entity satisfies a performance obligation under the contract. The standard also requires disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.
In August 2015, the FASB issued ASU 2015-14 to amend the effective date of ASU 2014-09 to fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted as of the original effective date, which is January 1, 2017. The provisions of ASU 2014-09 are effective retrospectively. The Company is currently in the process of determining the impact of adoption of the provisions of ASU 2014-09.
13 | ||
Voya Retirement Insurance and Annuity Company and Subsidiaries
(A wholly owned subsidiary of Voya Holdings Inc.)
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
2. Investments
Fixed Maturities and Equity Securities
Available-for-sale and fair value option ("FVO") fixed maturities and equity securities were as follows as of September 30, 2015:
Amortized Cost | Gross Unrealized Capital Gains | Gross Unrealized Capital Losses | Embedded Derivatives(2) | Fair Value | OTTI(3) | ||||||||||||||||||
Fixed maturities: | |||||||||||||||||||||||
U.S. Treasuries | $ | 792.0 | $ | 120.0 | $ | — | $ | — | $ | 912.0 | $ | — | |||||||||||
U.S. Government agencies and authorities | 4.3 | 0.1 | — | — | 4.4 | — | |||||||||||||||||
State, municipalities and political subdivisions | 494.6 | 14.9 | 6.1 | — | 503.4 | — | |||||||||||||||||
U.S. corporate public securities | 9,048.5 | 476.4 | 168.1 | — | 9,356.8 | 1.4 | |||||||||||||||||
U.S. corporate private securities | 2,278.8 | 106.6 | 41.0 | — | 2,344.4 | — | |||||||||||||||||
Foreign corporate public securities and foreign governments(1) | 2,798.6 | 114.0 | 120.6 | — | 2,792.0 | — | |||||||||||||||||
Foreign corporate private securities(1) | 2,752.9 | 137.1 | 26.1 | — | 2,863.9 | — | |||||||||||||||||
Residential mortgage-backed securities: | |||||||||||||||||||||||
Agency | 1,543.7 | 123.2 | 2.3 | 14.2 | 1,678.8 | — | |||||||||||||||||
Non-Agency | 195.0 | 50.3 | 2.0 | 11.6 | 254.9 | 6.9 | |||||||||||||||||
Total Residential mortgage-backed securities | 1,738.7 | 173.5 | 4.3 | 25.8 | 1,933.7 | 6.9 | |||||||||||||||||
Commercial mortgage-backed securities | 1,115.7 | 68.8 | 1.1 | — | 1,183.4 | 6.7 | |||||||||||||||||
Other asset-backed securities | 279.5 | 13.5 | 1.4 | — | 291.6 | 2.4 | |||||||||||||||||
Total fixed maturities, including securities pledged | 21,303.6 | 1,224.9 | 368.7 | 25.8 | 22,185.6 | 17.4 | |||||||||||||||||
Less: Securities pledged | 261.8 | 20.4 | 18.0 | — | 264.2 | — | |||||||||||||||||
Total fixed maturities | 21,041.8 | 1,204.5 | 350.7 | 25.8 | 21,921.4 | 17.4 | |||||||||||||||||
Equity securities | 117.4 | 14.7 | — | — | 132.1 | — | |||||||||||||||||
Total fixed maturities and equity securities investments | $ | 21,159.2 | $ | 1,219.2 | $ | 350.7 | $ | 25.8 | $ | 22,053.5 | $ | 17.4 | |||||||||||
(1) Primarily U.S. dollar denominated.
(2) Embedded derivatives within fixed maturity securities are reported with the host investment. The changes in fair value of embedded derivatives are reported in Other net realized capital gains (losses) in the Condensed Consolidated Statements of Operations.
(3) Represents Other-than-Temporary-Impairments ("OTTI") reported as a component of Other comprehensive income (loss).
14 | ||
Voya Retirement Insurance and Annuity Company and Subsidiaries
(A wholly owned subsidiary of Voya Holdings Inc.)
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
Available-for-sale and FVO fixed maturities and equity securities were as follows as of December 31, 2014:
Amortized Cost | Gross Unrealized Capital Gains | Gross Unrealized Capital Losses | Embedded Derivatives(2) | Fair Value | OTTI(3) | ||||||||||||||||||
Fixed maturities: | |||||||||||||||||||||||
U.S. Treasuries | $ | 649.0 | $ | 124.1 | $ | — | $ | — | $ | 773.1 | $ | — | |||||||||||
U.S. Government agencies and authorities | 45.7 | 0.9 | — | — | 46.6 | — | |||||||||||||||||
State, municipalities and political subdivisions | 259.0 | 18.3 | 0.1 | — | 277.2 | — | |||||||||||||||||
U.S. corporate public securities | 8,345.9 | 762.9 | 40.2 | — | 9,068.6 | 1.5 | |||||||||||||||||
U.S. corporate private securities | 2,020.8 | 139.5 | 8.9 | — | 2,151.4 | — | |||||||||||||||||
Foreign corporate public securities and foreign governments(1) | 2,778.3 | 159.1 | 50.3 | — | 2,887.1 | — | |||||||||||||||||
Foreign corporate private securities(1) | 2,707.1 | 189.4 | 5.7 | — | 2,890.8 | — | |||||||||||||||||
Residential mortgage-backed securities: | |||||||||||||||||||||||
Agency | 1,613.5 | 125.4 | 3.6 | 15.7 | 1,751.0 | 0.2 | |||||||||||||||||
Non-Agency | 227.9 | 54.6 | 2.2 | 12.1 | 292.4 | 8.7 | |||||||||||||||||
Total Residential mortgage-backed securities | 1,841.4 | 180.0 | 5.8 | 27.8 | 2,043.4 | 8.9 | |||||||||||||||||
Commercial mortgage-backed securities | 998.9 | 79.2 | 0.1 | — | 1,078.0 | 6.7 | |||||||||||||||||
Other asset-backed securities | 389.0 | 13.1 | 1.7 | — | 400.4 | 2.6 | |||||||||||||||||
Total fixed maturities, including securities pledged | 20,035.1 | 1,666.5 | 112.8 | 27.8 | 21,616.6 | 19.7 | |||||||||||||||||
Less: Securities pledged | 224.4 | 17.8 | 6.9 | — | 235.3 | — | |||||||||||||||||
Total fixed maturities | 19,810.7 | 1,648.7 | 105.9 | 27.8 | 21,381.3 | 19.7 | |||||||||||||||||
Equity securities | 107.4 | 14.5 | — | — | 121.9 | — | |||||||||||||||||
Total fixed maturities and equity securities investments | $ | 19,918.1 | $ | 1,663.2 | $ | 105.9 | $ | 27.8 | $ | 21,503.2 | $ | 19.7 | |||||||||||
(1) Primarily U.S. dollar denominated.
(2) Embedded derivatives within fixed maturity securities are reported with the host investment. The changes in fair value of embedded derivatives are reported in Other net realized capital gains (losses) in the Condensed Consolidated Statements of Operations.
(3) Represents OTTI reported as a component of Other comprehensive income (loss).
15 | ||
Voya Retirement Insurance and Annuity Company and Subsidiaries
(A wholly owned subsidiary of Voya Holdings Inc.)
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
The amortized cost and fair value of fixed maturities, including securities pledged, as of September 30, 2015, 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 asset-backed securities ("ABS") are shown separately because they are not due at a single maturity date.
Amortized Cost | Fair Value | ||||||
Due to mature: | |||||||
One year or less | $ | 446.4 | $ | 452.2 | |||
After one year through five years | 4,356.3 | 4,550.0 | |||||
After five years through ten years | 6,309.4 | 6,446.9 | |||||
After ten years | 7,057.6 | 7,327.8 | |||||
Mortgage-backed securities | 2,854.4 | 3,117.1 | |||||
Other asset-backed securities | 279.5 | 291.6 | |||||
Fixed maturities, including securities pledged | $ | 21,303.6 | $ | 22,185.6 | |||
The investment portfolio is monitored to maintain a diversified portfolio on an ongoing basis. Credit risk is mitigated by monitoring concentrations by issuer, sector and geographic stratification and limiting exposure to any one issuer.
As of September 30, 2015 and December 31, 2014, the Company did not have any investments in a single issuer, other than obligations of the U.S. Government and government agencies, with a carrying value in excess of 10% of the Company's condensed consolidated Shareholder's equity.
The following tables set forth the composition of the U.S. and foreign corporate securities within the fixed maturity portfolio by industry category as of the dates indicated:
Amortized Cost | Gross Unrealized Capital Gains | Gross Unrealized Capital Losses | Fair Value | ||||||||||||
September 30, 2015 | |||||||||||||||
Communications | $ | 1,179.1 | $ | 78.9 | $ | 21.6 | $ | 1,236.4 | |||||||
Financial | 2,495.7 | 173.1 | 8.1 | 2,660.7 | |||||||||||
Industrial and other companies | 9,732.4 | 373.8 | 280.4 | 9,825.8 | |||||||||||
Utilities | 2,598.9 | 168.1 | 25.0 | 2,742.0 | |||||||||||
Transportation | 533.2 | 20.5 | 8.5 | 545.2 | |||||||||||
Total | $ | 16,539.3 | $ | 814.4 | $ | 343.6 | $ | 17,010.1 | |||||||
December 31, 2014 | |||||||||||||||
Communications | $ | 1,226.1 | $ | 136.8 | $ | 2.4 | $ | 1,360.5 | |||||||
Financial | 2,310.5 | 221.4 | 1.6 | 2,530.3 | |||||||||||
Industrial and other companies | 8,962.6 | 569.4 | 90.0 | 9,442.0 | |||||||||||
Utilities | 2,555.7 | 259.2 | 4.3 | 2,810.6 | |||||||||||
Transportation | 450.7 | 40.3 | 1.3 | 489.7 | |||||||||||
Total | $ | 15,505.6 | $ | 1,227.1 | $ | 99.6 | $ | 16,633.1 | |||||||
16 | ||
Voya Retirement Insurance and Annuity Company and Subsidiaries
(A wholly owned subsidiary of Voya Holdings Inc.)
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
Fixed Maturities and Equity Securities:
The Company's fixed maturities and equity securities are currently designated as available-for-sale, except those accounted for using the FVO. Available-for-sale securities are reported at fair value and unrealized capital gains (losses) on these securities are recorded directly in Accumulated other comprehensive income (loss) ("AOCI") and presented net of related changes in Deferred policy acquisition costs ("DAC"), Value of business acquired ("VOBA") and Deferred income taxes. In addition, certain fixed maturities have embedded derivatives, which are reported with the host contract on the Condensed Consolidated Balance Sheets.
The Company has elected the FVO for certain of its fixed maturities to better match the measurement of assets and liabilities in the Condensed Consolidated Statements of Operations. Certain collateralized mortgage obligations ("CMOs"), primarily interest-only and principal-only strips, are accounted for as hybrid instruments and valued at fair value with changes in the fair value recorded in Other net realized capital gains (losses) in the Condensed Consolidated Statements of Operations.
The Company invests in various categories of CMOs, including CMOs that are not agency-backed, that are subject to different degrees of risk from changes in interest rates and defaults. The principal risks inherent in holding CMOs are prepayment and extension risks related to significant decreases and increases in interest rates resulting in the prepayment of principal from the underlying mortgages, either earlier or later than originally anticipated. As of September 30, 2015 and December 31, 2014, approximately 62.0% and 57.3%, respectively, of the Company’s CMO holdings, were invested in the above mentioned types of CMOs such as interest-only or principal-only strips, that are subject to more prepayment and extension risk than traditional CMOs.
Public corporate fixed maturity securities are distinguished from private corporate fixed maturity securities based upon the manner in which they are transacted. Public corporate fixed maturity securities are issued initially through market intermediaries on a registered basis or pursuant to Rule 144A under the Securities Act of 1933 (the "Securities Act") and are traded on the secondary market through brokers acting as principal. Private corporate fixed maturity securities are originally issued by borrowers directly to investors pursuant to Section 4(a)(2) of the Securities Act, and are traded in the secondary market directly with counterparties, either without the participation of a broker or in agency transactions.
Repurchase Agreements
The Company engages in dollar repurchase agreements with mortgage-backed securities ("dollar rolls") and repurchase agreements with other collateral types to increase its return on investments and improve liquidity. Such arrangements meet the requirements to be accounted for as financing arrangements. The Company also enters into reverse repurchase agreements. These transactions involve a purchase of securities and an agreement to sell substantially the same securities as those purchased. As of September 30, 2015 and December 31, 2014, the Company did not have any securities pledged in dollar rolls, repurchase agreement transactions or reverse repurchase agreements.
Securities Lending
The Company engages in securities lending whereby certain securities from its portfolio are loaned to other institutions through a lending agent for short periods of time. The Company has the right to approve any institution with whom the lending agent transacts on its behalf. Initial collateral, primarily cash, is required at a rate of 102% of the market value of the loaned securities. The lending agent retains the collateral and invests it in short-term liquid assets on behalf of the Company. The market value of the loaned securities is monitored on a daily basis with additional collateral obtained or refunded as the market value of the loaned securities fluctuates. The lending agent indemnifies the Company against losses resulting from the failure of a counterparty to return securities pledged where collateral is insufficient to cover the loss. As of September 30, 2015 and December 31, 2014, the fair value of loaned securities was $192.5 and $174.9, respectively, and is included in Securities pledged on the Condensed Consolidated Balance Sheets. As of September 30, 2015 and December 31, 2014, collateral retained by the lending agent and invested in short-term liquid assets on the Company's behalf was $199.8 and $182.0, respectively, and is recorded in Short-term investments under securities loan agreements, including collateral delivered on the Condensed Consolidated Balance Sheets. As of September 30, 2015 and December 31, 2014, liabilities to return collateral of $199.8 and $182.0, respectively, is included in Payables under securities loan agreements, including collateral held on the Condensed Consolidated Balance Sheets.
17 | ||
Voya Retirement Insurance and Annuity Company and Subsidiaries
(A wholly owned subsidiary of Voya Holdings Inc.)
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
The following table sets forth borrowings under securities lending transactions by class of collateral pledged for the dates indicated:
September 30, 2015 | December 31, 2014 | ||||||
U.S. Treasuries | $ | — | $ | 55.7 | |||
U.S. corporate public securities | 112.5 | 68.8 | |||||
Foreign corporate public securities and foreign governments | 87.3 | 57.5 | |||||
Payables under securities loan agreements | $ | 199.8 | $ | 182.0 | |||
The Company's securities lending activities are conducted on an overnight basis, and all securities loaned can be recalled at any time. The Company does not offset assets and liabilities associated with its securities lending program.
Variable Interest Entities ("VIEs")
The Company holds certain VIEs for investment purposes. VIEs may be in the form of private placement securities, structured securities, securitization transactions or limited partnerships. The Company has reviewed each of its holdings and determined that consolidation of these investments in the Company’s financial statements is not required, as the Company is not the primary beneficiary, because the Company does not have both the power to direct the activities that most significantly impact the entity’s economic performance and the obligation or right to potentially significant losses or benefits, for any of its investments in VIEs. The Company did not provide any non-contractual financial support and its carrying value represents the Company’s exposure to loss. The carrying value of the equity tranches of the Collateralized loan obligations ("CLOs") of $0.5 and $0.7 as of September 30, 2015 and December 31, 2014, respectively, is included in Limited partnerships/corporations on the Condensed Consolidated Balance Sheets. Income and losses recognized on these investments are reported in Net investment income in the Condensed Consolidated Statements of Operations.
Securitizations
The Company invests in various tranches of securitization entities, including Residential mortgage-backed securities ("RMBS"), Commercial mortgage-backed securities ("CMBS") and asset-backed securities ("ABS"). Through its investments, the Company is not obligated to provide any financial or other support to these entities. Each of the RMBS, CMBS and ABS entities are thinly capitalized by design and considered VIEs. The Company's involvement with these entities is limited to that of a passive investor. The Company has no unilateral right to appoint or remove the servicer, special servicer or investment manager, which are generally viewed to have the power to direct the activities that most significantly impact the securitization entities' economic performance, in any of these entities, nor does the Company function in any of these roles. The Company, through its investments or other arrangements, does not have the obligation to absorb losses or the right to receive benefits from the entity that could potentially be significant to the entity. Therefore, the Company is not the primary beneficiary and will not consolidate any of the RMBS, CMBS and ABS entities in which it holds investments. These investments are accounted for as investments available-for-sale as described in the Fair Value Measurements Note to these Condensed Consolidated Financial Statements and unrealized capital gains (losses) on these securities are recorded directly in AOCI, except for certain RMBS that are accounted for under the FVO for which changes in fair value are reflected in Other net realized gains (losses) in the Condensed Consolidated Statements of Operations. The Company’s maximum exposure to loss on these structured investments is limited to the amount of its investment.
18 | ||
Voya Retirement Insurance and Annuity Company and Subsidiaries
(A wholly owned subsidiary of Voya Holdings Inc.)
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
Unrealized Capital Losses
Unrealized capital losses (including noncredit impairments), along with the fair value of fixed maturity securities, including securities pledged, by market sector and duration were as follows as of September 30, 2015:
Six Months or Less Below Amortized Cost | More Than Six Months and Twelve Months or Less Below Amortized Cost | More Than Twelve Months Below Amortized Cost | Total | |||||||||||||||||||||||||||||
Fair Value | Unrealized Capital Losses | Fair Value | Unrealized Capital Losses | Fair Value | Unrealized Capital Losses | Fair Value | Unrealized Capital Losses | |||||||||||||||||||||||||
U.S. Treasuries | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||
U.S. Government, agencies and authorities | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
State, municipalities and political subdivisions | 212.0 | 5.3 | 12.2 | 0.8 | — | — | 224.2 | 6.1 | ||||||||||||||||||||||||
U.S. corporate public securities | 2,235.9 | 101.1 | 315.7 | 32.2 | 202.2 | 34.8 | 2,753.8 | 168.1 | ||||||||||||||||||||||||
U.S. corporate private securities | 501.1 | 30.7 | 40.4 | 3.2 | 36.4 | 7.1 | 577.9 | 41.0 | ||||||||||||||||||||||||
Foreign corporate public securities and foreign governments | 728.4 | 55.6 | 232.3 | 28.3 | 146.5 | 36.7 | 1,107.2 | 120.6 | ||||||||||||||||||||||||
Foreign corporate private securities | 586.5 | 21.6 | 19.0 | 2.5 | 18.9 | 2.0 | 624.4 | 26.1 | ||||||||||||||||||||||||
Residential mortgage-backed | 50.5 | 0.7 | 27.5 | 0.2 | 125.8 | 3.4 | 203.8 | 4.3 | ||||||||||||||||||||||||
Commercial mortgage-backed | 103.2 | 1.1 | 4.9 | — | * | — | — | 108.1 | 1.1 | |||||||||||||||||||||||
Other asset-backed | 13.2 | — | * | 0.1 | — | * | 14.0 | 1.4 | 27.3 | 1.4 | ||||||||||||||||||||||
Total | $ | 4,430.8 | $ | 216.1 | $ | 652.1 | $ | 67.2 | $ | 543.8 | $ | 85.4 | $ | 5,626.7 | $ | 368.7 | ||||||||||||||||
*Less than $0.1 | ||||||||||||||||||||||||||||||||
19 | ||
Voya Retirement Insurance and Annuity Company and Subsidiaries
(A wholly owned subsidiary of Voya Holdings Inc.)
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
Unrealized capital losses (including noncredit impairments), along with the fair value of fixed maturity securities, including securities pledged, by market sector and duration were as follows as of December 31, 2014:
Six Months or Less Below Amortized Cost | More Than Six Months and Twelve Months or Less Below Amortized Cost | More Than Twelve Months Below Amortized Cost | Total | |||||||||||||||||||||||||||||
Fair Value | Unrealized Capital Losses | Fair Value | Unrealized Capital Losses | Fair Value | Unrealized Capital Losses | Fair Value | Unrealized Capital Losses | |||||||||||||||||||||||||
U.S. Treasuries | $ | 12.4 | $ | — | * | $ | — | $ | — | $ | — | $ | — | $ | 12.4 | $ | — | * | ||||||||||||||
U.S. Government, agencies and authorities | 2.3 | — | * | — | — | — | — | 2.3 | — | * | ||||||||||||||||||||||
State, municipalities and political subdivisions | 22.5 | 0.1 | — | — | — | — | 22.5 | 0.1 | ||||||||||||||||||||||||
U.S. corporate public securities | 611.8 | 18.0 | 14.9 | 1.4 | 612.8 | 20.8 | 1,239.5 | 40.2 | ||||||||||||||||||||||||
U.S. corporate private securities | 160.3 | 2.0 | 19.9 | 0.1 | 100.0 | 6.8 | 280.2 | 8.9 | ||||||||||||||||||||||||
Foreign corporate public securities and foreign governments | 545.4 | 33.5 | 9.7 | 0.2 | 324.4 | 16.6 | 879.5 | 50.3 | ||||||||||||||||||||||||
Foreign corporate private securities | 125.6 | 2.2 | — | — | 25.8 | 3.5 | 151.4 | 5.7 | ||||||||||||||||||||||||
Residential mortgage-backed | 94.5 | 0.7 | 25.2 | 0.6 | 163.1 | 4.5 | 282.8 | 5.8 | ||||||||||||||||||||||||
Commercial mortgage-backed | 59.1 | 0.1 | — | — | — | — | 59.1 | 0.1 | ||||||||||||||||||||||||
Other asset-backed | 27.0 | 0.1 | — | — | 18.4 | 1.6 | 45.4 | 1.7 | ||||||||||||||||||||||||
Total | $ | 1,660.9 | $ | 56.7 | $ | 69.7 | $ | 2.3 | $ | 1,244.5 | $ | 53.8 | $ | 2,975.1 | $ | 112.8 | ||||||||||||||||
*Less than $0.1 | ||||||||||||||||||||||||||||||||
Of the unrealized capital losses aged more than twelve months, the average market value of the related fixed maturities was 86.4% and 95.9% of the average book value as of September 30, 2015 and December 31, 2014, respectively.
20 | ||
Voya Retirement Insurance and Annuity Company and Subsidiaries
(A wholly owned subsidiary of Voya Holdings Inc.)
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
Unrealized capital losses (including noncredit impairments) in fixed maturities, including securities pledged, for instances in which fair value declined below amortized cost by greater than or less than 20% for consecutive months as indicated in the tables below, were as follows as of the dates indicated:
Amortized Cost | Unrealized Capital Losses | Number of Securities | |||||||||||||||||||
< 20% | > 20% | < 20% | > 20% | < 20% | > 20% | ||||||||||||||||
September 30, 2015 | |||||||||||||||||||||
Six months or less below amortized cost | $ | 4,550.6 | $ | 328.1 | $ | 191.9 | $ | 96.3 | 804 | 52 | |||||||||||
More than six months and twelve months or less below amortized cost | 653.5 | 15.5 | 42.6 | 3.6 | 110 | 2 | |||||||||||||||
More than twelve months below amortized cost | 424.8 | 22.9 | 28.6 | 5.7 | 142 | 2 | |||||||||||||||
Total | $ | 5,628.9 | $ | 366.5 | $ | 263.1 | $ | 105.6 | 1,056 | 56 | |||||||||||
December 31, 2014 | |||||||||||||||||||||
Six months or less below amortized cost | $ | 1,690.4 | $ | 59.7 | $ | 50.5 | $ | 13.2 | 341 | 13 | |||||||||||
More than six months and twelve months or less below amortized cost | 115.1 | — | 6.7 | — | 34 | — | |||||||||||||||
More than twelve months below amortized cost | 1,220.5 | 2.2 | 41.8 | 0.6 | 223 | 2 | |||||||||||||||
Total | $ | 3,026.0 | $ | 61.9 | $ | 99.0 | $ | 13.8 | 598 | 15 | |||||||||||
21 | ||
Voya Retirement Insurance and Annuity Company and Subsidiaries
(A wholly owned subsidiary of Voya Holdings Inc.)
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
Unrealized capital losses (including noncredit impairments) in fixed maturities, including securities pledged, by market sector for instances in which fair value declined below amortized cost by greater than or less than 20% were as follows as of the dates indicated:
Amortized Cost | Unrealized Capital Losses | Number of Securities | |||||||||||||||||||
< 20% | > 20% | < 20% | > 20% | < 20% | > 20% | ||||||||||||||||
September 30, 2015 | |||||||||||||||||||||
U.S. Treasuries | $ | — | $ | — | $ | — | $ | — | — | — | |||||||||||
U.S. Government, agencies and authorities | — | — | — | — | — | — | |||||||||||||||
State, municipalities and political subdivisions | 230.3 | — | 6.1 | — | 70 | — | |||||||||||||||
U.S. corporate public securities | 2,779.7 | 142.2 | 125.9 | 42.2 | 526 | 22 | |||||||||||||||
U.S. corporate private securities | 603.4 | 15.5 | 37.5 | 3.5 | 50 | 1 | |||||||||||||||
Foreign corporate public securities and foreign governments | 1,025.6 | 202.2 | 62.4 | 58.2 | 207 | 30 | |||||||||||||||
Foreign corporate private securities | 645.7 | 4.8 | 24.8 | 1.3 | 68 | 1 | |||||||||||||||
Residential mortgage-backed | 208.1 | — | * | 4.3 | — | * | 106 | 1 | |||||||||||||
Commercial mortgage-backed | 109.2 | — | 1.1 | — | 15 | — | |||||||||||||||
Other asset-backed | 26.9 | 1.8 | 1.0 | 0.4 | 14 | 1 | |||||||||||||||
Total | $ | 5,628.9 | $ | 366.5 | $ | 263.1 | $ | 105.6 | 1,056 | 56 | |||||||||||
December 31, 2014 | |||||||||||||||||||||
U.S. Treasuries | $ | 12.4 | $ | — | $ | — | * | $ | — | 1 | — | ||||||||||
U.S. Government, agencies and authorities | 2.3 | — | — | * | — | 1 | — | ||||||||||||||
State, municipalities and political subdivisions | 22.6 | — | 0.1 | — | 8 | — | |||||||||||||||
U.S. corporate public securities | 1,270.1 | 9.6 | 38.1 | 2.1 | 224 | 4 | |||||||||||||||
U.S. corporate private securities | 273.6 | 15.5 | 5.3 | 3.6 | 30 | 1 | |||||||||||||||
Foreign corporate public securities and foreign governments | 903.6 | 26.2 | 44.5 | 5.8 | 165 | 5 | |||||||||||||||
Foreign corporate private securities | 148.7 | 8.4 | 4.0 | 1.7 | 20 | 1 | |||||||||||||||
Residential mortgage-backed | 288.6 | — | * | 5.8 | — | * | 124 | 2 | |||||||||||||
Commercial mortgage-backed | 59.2 | — | 0.1 | — | 11 | — | |||||||||||||||
Other asset-backed | 44.9 | 2.2 | 1.1 | 0.6 | 14 | 2 | |||||||||||||||
Total | $ | 3,026.0 | $ | 61.9 | $ | 99.0 | $ | 13.8 | 598 | 15 | |||||||||||
* Less than $0.1. | |||||||||||||||||||||
Investments with fair values less than amortized cost are included in the Company's other-than-temporary impairments analysis. Impairments were recognized as disclosed in the "Evaluating Securities for Other-Than-Temporary Impairments" section below. The Company evaluates non-agency RMBS and ABS for "other-than-temporary impairments" each quarter based on actual and projected cash flows after considering the quality and updated loan-to-value ratios reflecting current home prices of underlying collateral, forecasted loss severity, the payment priority within the tranche structure of the security and amount of any credit enhancements. The Company's assessment of current levels of cash flows compared to estimated cash flows at the time the securities were acquired (typically pre-2008) indicates the amount and the pace of projected cash flows from the underlying collateral has generally been lower and slower, respectively. However, since cash flows are typically projected at a trust level, the impairment review incorporates the security's position within the trust structure as well as credit enhancement remaining in the trust to determine whether an impairment is warranted. Therefore, while lower and slower cash flows will impact the trust, the effect on the valuation
22 | ||
Voya Retirement Insurance and Annuity Company and Subsidiaries
(A wholly owned subsidiary of Voya Holdings Inc.)
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
of a particular security within the trust will also be dependent upon the trust structure. Where the assessment continues to project full recovery of principal and interest on schedule, the Company has not recorded an impairment. Based on this analysis, the Company determined that the remaining investments in an unrealized loss position were not other-than-temporarily impaired and therefore no further other-than-temporary impairment was necessary.
Troubled Debt Restructuring
The Company invests 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. The Company considers the amount, timing and extent of the concession granted in determining any impairment or changes in the specific valuation allowance recorded in connection with the troubled debt restructuring. A valuation allowance may have been recorded prior to the quarter when the loan is modified in a troubled debt restructuring. Accordingly, the carrying value (net of the specific valuation allowance) before and after modification through a troubled debt restructuring may not change significantly, or may increase if the expected recovery is higher than the pre-modification recovery assessment. For the nine months ended September 30, 2015, and for the year ended December 31, 2014 the Company had no new troubled debt restructurings for private placement bonds or commercial mortgage loans.
As of September 30, 2015 the Company held 10 commercial mortgage troubled debt restructured loans with a carrying value of $7.9. These 10 commercial mortgage loans were restructured in August 2013 with a pre-modification and post modification carrying value of $21.5. These loans represent what remains of an initial portfolio of 20 restructures with a pre-modification and post modification carrying value of $39.4. This portfolio of loans is comprised of cross-defaulted, cross-collateralized individual loans, which are owned by the same sponsor. Between the date of the troubled debt restructurings and September 30, 2015, these loans have repaid $31.5 in principal.
As of September 30, 2015 and December 31, 2014, the Company did not have any commercial mortgage loans or private placements modified in a troubled debt restructuring with a subsequent payment default.
Mortgage Loans on Real Estate
The Company's mortgage loans on real estate are all commercial mortgage loans held for investment, which are reported at amortized cost, less impairment write-downs and allowance for losses. The Company diversifies its commercial mortgage loan portfolio by geographic region and property type to reduce concentration risk. The Company manages risk when originating commercial mortgage loans by generally lending only up to 75% of the estimated fair value of the underlying real estate. Subsequently, the Company continuously evaluates mortgage loans based on relevant current information including a review of loan-specific credit quality, property characteristics and market trends. Loan performance is monitored on a loan-specific basis through the review of submitted appraisals, operating statements, rent revenues and annual inspection reports, among other items. This review ensures properties are performing at a consistent and acceptable level to secure the debt. The components to evaluate debt service coverage are received and reviewed at least annually to determine the level of risk.
The following table summarizes the Company's investment in mortgage loans as of the dates indicated:
September 30, 2015 | December 31, 2014 | ||||||
Commercial mortgage loans | $ | 3,868.6 | $ | 3,514.1 | |||
Collective valuation allowance for losses | (1.2 | ) | (1.1 | ) | |||
Total net commercial mortgage loans | $ | 3,867.4 | $ | 3,513.0 | |||
There were no impairments taken on the mortgage loan portfolio for the three and nine months ended September 30, 2015 and 2014.
23 | ||
Voya Retirement Insurance and Annuity Company and Subsidiaries
(A wholly owned subsidiary of Voya Holdings Inc.)
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
The following table summarizes the activity in the allowance for losses for commercial mortgage loans for the periods indicated:
September 30, 2015 | December 31, 2014 | ||||||
Collective valuation allowance for losses, balance at January 1 | $ | 1.1 | $ | 1.2 | |||
Addition to (reduction of) allowance for losses | 0.1 | (0.1 | ) | ||||
Collective valuation allowance for losses, end of period | $ | 1.2 | $ | 1.1 | |||
The carrying values and unpaid principal balances of impaired mortgage loans were as follows as of the dates indicated:
September 30, 2015 | December 31, 2014 | ||||||
Impaired loans without allowances for losses | $ | 12.9 | $ | 32.4 | |||
Less: Allowances for losses on impaired loans | — | — | |||||
Impaired loans, net | $ | 12.9 | $ | 32.4 | |||
Unpaid principal balance of impaired loans | $ | 14.4 | $ | 33.9 | |||
The following table presents information on restructured loans as of the dates indicated:
September 30, 2015 | December 31, 2014 | ||||||
Troubled debt restructured loans | $ | 7.9 | $ | 27.3 | |||
The Company defines delinquent mortgage loans consistent with industry practice as 60 days past due. The Company's 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.
There were no mortgage loans in the Company's portfolio in process of foreclosure or in arrears with respect to principal and interest as of September 30, 2015 and December 31, 2014.
The following tables present information on the average investment during the period in impaired loans and interest income recognized on impaired and troubled debt restructured loans for the periods indicated:
Three Months Ended September 30, | |||||||
2015 | 2014 | ||||||
Impaired loans, average investment during the period (amortized cost)(1) | $ | 16.8 | $ | 37.1 | |||
Interest income recognized on impaired loans, on an accrual basis(1) | 0.2 | 0.5 | |||||
Interest income recognized on impaired loans, on a cash basis(1) | 0.3 | 0.5 | |||||
Interest income recognized on troubled debt restructured loans, on an accrual basis | 0.2 | 0.4 | |||||
Nine Months Ended September 30, | |||||||
2015 | 2014 | ||||||
Impaired loans, average investment during the period (amortized cost)(1) | $ | 22.6 | $ | 40.0 | |||
Interest income recognized on impaired loans, on an accrual basis(1) | 1.0 | 1.7 | |||||
Interest income recognized on impaired loans, on a cash basis(1) | 1.1 | 1.5 | |||||
Interest income recognized on troubled debt restructured loans, on an accrual basis | 0.7 | 1.4 | |||||
(1)Includes amounts for Troubled debt restructured loans. | |||||||
Loan-to-value ("LTV") and debt service coverage ("DSC") ratios are measures commonly used to assess the risk and quality of 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. A LTV ratio in excess of 100% indicates the unpaid loan amount exceeds the underlying collateral. The DSC ratio, based upon the most recently received financial statements, is expressed as a percentage of the amount
24 | ||
Voya Retirement Insurance and Annuity Company and Subsidiaries
(A wholly owned subsidiary of Voya Holdings Inc.)
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
of a property’s net income 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.
The following table presents the LTV ratios as of the dates indicated:
September 30, 2015(1) | December 31, 2014(1) | ||||||
Loan-to-Value Ratio: | |||||||
0% - 50% | $ | 417.5 | $ | 411.0 | |||
>50% - 60% | 1,032.1 | 824.1 | |||||
>60% - 70% | 2,265.1 | 2,107.9 | |||||
>70% - 80% | 150.8 | 159.7 | |||||
>80% and above | 3.1 | 11.4 | |||||
Total Commercial mortgage loans | $ | 3,868.6 | $ | 3,514.1 | |||
(1) Balances do not include collective valuation allowance for losses.
The following table presents the DSC ratios as of the dates indicated:
September 30, 2015(1) | December 31, 2014(1) | ||||||
Debt Service Coverage Ratio: | |||||||
Greater than 1.5x | $ | 3,080.9 | $ | 2,600.1 | |||
>1.25x - 1.5x | 506.4 | 520.0 | |||||
>1.0x - 1.25x | 225.6 | 258.7 | |||||
Less than 1.0x | 34.9 | 131.3 | |||||
Commercial mortgage loans secured by land or construction loans | 20.8 | 4.0 | |||||
Total Commercial mortgage loans | $ | 3,868.6 | $ | 3,514.1 | |||
(1) Balances do not include collective valuation allowance for losses.
Properties collateralizing mortgage loans are geographically dispersed throughout the United States, as well as diversified by property type, as reflected in the following tables as of the dates indicated:
September 30, 2015(1) | December 31, 2014(1) | ||||||||||||
Gross Carrying Value | % of Total | Gross Carrying Value | % of Total | ||||||||||
Commercial Mortgage Loans by U.S. Region: | |||||||||||||
Pacific | $ | 921.1 | 23.8 | % | $ | 802.6 | 22.8 | % | |||||
South Atlantic | 854.8 | 22.1 | % | 746.5 | 21.2 | % | |||||||
West South Central | 464.8 | 12.0 | % | 448.4 | 12.8 | % | |||||||
Middle Atlantic | 563.9 | 14.6 | % | 505.8 | 14.4 | % | |||||||
East North Central | 406.2 | 10.5 | % | 355.3 | 10.1 | % | |||||||
Mountain | 300.9 | 7.8 | % | 274.0 | 7.8 | % | |||||||
West North Central | 212.9 | 5.5 | % | 219.6 | 6.3 | % | |||||||
East South Central | 60.4 | 1.5 | % | 87.1 | 2.5 | % | |||||||
New England | 83.6 | 2.2 | % | 74.8 | 2.1 | % | |||||||
Total Commercial mortgage loans | $ | 3,868.6 | 100.0 | % | $ | 3,514.1 | 100.0 | % | |||||
(1) Balances do not include collective valuation allowance for losses.
25 | ||
Voya Retirement Insurance and Annuity Company and Subsidiaries
(A wholly owned subsidiary of Voya Holdings Inc.)
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
September 30, 2015(1) | December 31, 2014(1) | ||||||||||||
Gross Carrying Value | % of Total | Gross Carrying Value | % of Total | ||||||||||
Commercial Mortgage Loans by Property Type: | |||||||||||||
Retail | $ | 1,351.8 | 35.0 | % | $ | 1,236.4 | 35.2 | % | |||||
Industrial | 866.6 | 22.4 | % | 796.8 | 22.7 | % | |||||||
Apartments | 623.9 | 16.1 | % | 550.6 | 15.7 | % | |||||||
Office | 581.6 | 15.0 | % | 443.1 | 12.6 | % | |||||||
Hotel/Motel | 178.8 | 4.6 | % | 149.7 | 4.2 | % | |||||||
Mixed Use | 47.4 | 1.2 | % | 142.8 | 4.1 | % | |||||||
Other | 218.5 | 5.7 | % | 194.7 | 5.5 | % | |||||||
Total Commercial mortgage loans | $ | 3,868.6 | 100.0 | % | $ | 3,514.1 | 100.0 | % | |||||
(1) Balances do not include collective valuation allowance for losses.
The following table sets forth the breakdown of mortgages by year of origination as of the dates indicated:
September 30, 2015(1) | December 31, 2014(1) | ||||||
Year of Origination: | |||||||
2015 | $ | 682.3 | $ | — | |||
2014 | 574.1 | 580.0 | |||||
2013 | 725.9 | 758.8 | |||||
2012 | 796.1 | 854.5 | |||||
2011 | 633.0 | 674.4 | |||||
2010 | 51.9 | 66.0 | |||||
2009 and prior | 405.3 | 580.4 | |||||
Total Commercial mortgage loans | $ | 3,868.6 | $ | 3,514.1 | |||
(1) Balances do not include collective valuation allowance for losses.
Evaluating Securities for Other-Than-Temporary Impairments
The Company performs a regular evaluation, on a security-by-security basis, of its available-for-sale securities holdings, including fixed maturity securities and equity securities in accordance with its impairment policy in order to evaluate whether such investments are other-than-temporarily impaired.
26 | ||
Voya Retirement Insurance and Annuity Company and Subsidiaries
(A wholly owned subsidiary of Voya Holdings Inc.)
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
The following tables identify the Company's credit-related and intent-related impairments included in the Condensed Consolidated Statements of Operations, excluding impairments included in Other comprehensive income (loss) by type for the periods indicated:
Three Months Ended September 30, | |||||||||||||
2015 | 2014 | ||||||||||||
Impairment | No. of Securities | Impairment | No. of Securities | ||||||||||
U.S. corporate public securities | $ | 1.5 | 1 | $ | 1.6 | 2 | |||||||
Foreign corporate public securities and foreign governments(1) | 20.0 | 6 | — | — | |||||||||
Foreign corporate private securities(1) | — | — | — | — | |||||||||
Residential mortgage-backed | 0.6 | 8 | 0.3 | 13 | |||||||||
Commercial mortgage-backed | — | — | — | — | |||||||||
Other asset-backed | 0.1 | 1 | — | * | 1 | ||||||||
Total | $ | 22.2 | 16 | $ | 1.9 | 16 | |||||||
(1) Primarily U.S. dollar denominated. | |||||||||||||
*Less than $0.1 | |||||||||||||
Nine Months Ended September 30, | |||||||||||||
2015 | 2014 | ||||||||||||
Impairment | No. of Securities | Impairment | No. of Securities | ||||||||||
U.S. corporate public securities | $ | 1.5 | 1 | $ | 1.7 | 2 | |||||||
Foreign corporate public securities and foreign governments(1) | 22.3 | 7 | 1.2 | 5 | |||||||||
Foreign corporate private securities(1) | 0.5 | 1 | — | — | |||||||||
Residential mortgage-backed | 2.1 | 25 | 1.2 | 22 | |||||||||
Commercial mortgage-backed | — | — | 0.1 | 2 | |||||||||
Other asset-backed | 0.1 | 1 | — | * | 1 | ||||||||
Total | $ | 26.5 | 35 | $ | 4.2 | 32 | |||||||
(1) Primarily U.S. dollar denominated. | |||||||||||||
*Less than $0.1 | |||||||||||||
The above tables include $0.2 and $3.3 of write-downs related to credit impairments for the three and nine months ended September 30, 2015, respectively, in Other-than-temporary impairments, which are recognized in the Condensed Consolidated Statements of Operations. The remaining $22.0 and $23.2 in write-downs for the three and nine months ended September 30, 2015, respectively, are related to intent impairments.
The above tables include $0.3 and $1.2 and of write-downs related to credit impairments for the three and nine months ended September 30, 2014, respectively, in Other-than-temporary impairments, which are recognized in the Condensed Consolidated Statements of Operations. The remaining $1.6 and $3.0 in write-downs for the three and nine months ended September 30, 2014, respectively, are related to intent impairments.
27 | ||
Voya Retirement Insurance and Annuity Company and Subsidiaries
(A wholly owned subsidiary of Voya Holdings Inc.)
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
The following tables summarize these intent impairments, which are also recognized in earnings, by type for the periods indicated:
Three Months Ended September 30, | |||||||||||||
2015 | 2014 | ||||||||||||
Impairment | No. of Securities | Impairment | No. of Securities | ||||||||||
U.S. corporate public securities | $ | 1.5 | 1 | $ | 1.6 | 2 | |||||||
Foreign corporate public securities and foreign governments(1) | 19.9 | 6 | — | — | |||||||||
Foreign corporate private securities(1) | — | — | — | — | |||||||||
Residential mortgage-backed | 0.6 | 3 | — | — | |||||||||
Commercial mortgage-backed | — | — | — | — | |||||||||
Other asset-backed | — | — | — | — | |||||||||
Total | $ | 22.0 | 10 | $ | 1.6 | 2 | |||||||
(1) Primarily U.S. dollar denominated. | |||||||||||||
Nine Months Ended September 30, | |||||||||||||
2015 | 2014 | ||||||||||||
Impairment | No. of Securities | Impairment | No. of Securities | ||||||||||
U.S. corporate public securities | $ | 1.5 | 1 | $ | 1.6 | 2 | |||||||
Foreign corporate public securities and foreign governments(1) | 20.6 | 6 | 1.2 | 5 | |||||||||
Foreign corporate private securities(1) | — | — | — | — | |||||||||
Residential mortgage-backed | 1.1 | 5 | 0.1 | 2 | |||||||||
Commercial mortgage-backed | — | — | 0.1 | 2 | |||||||||
Other asset-backed | — | — | — | — | |||||||||
Total | $ | 23.2 | 12 | $ | 3.0 | 11 | |||||||
(1) Primarily U.S. dollar denominated. | |||||||||||||
The Company may sell securities during the period in which fair value has declined below amortized cost for fixed maturities or cost for equity securities. In certain situations, new factors, including changes in the business environment, can change the Company’s previous intent to continue holding a security. Accordingly, these factors may lead the Company to record additional intent related capital losses.
28 | ||
Voya Retirement Insurance and Annuity Company and Subsidiaries
(A wholly owned subsidiary of Voya Holdings Inc.)
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
The following tables identify the amount of credit impairments on fixed maturities for which a portion of the OTTI loss was recognized in Other comprehensive income (loss) and the corresponding changes in such amounts for the periods indicated:
Three Months Ended September 30, | |||||||
2015 | 2014 | ||||||
Balance at July 1 | $ | 21.4 | $ | 27.4 | |||
Additional credit impairments: | |||||||
On securities not previously impaired | — | — | |||||
On securities previously impaired | 0.2 | 0.3 | |||||
Reductions: | |||||||
Increase in cash flows | 0.1 | — | |||||
Securities sold, matured, prepaid or paid down | 0.8 | 1.1 | |||||
Balance at September 30 | $ | 20.7 | $ | 26.6 | |||
Nine Months Ended September 30, | |||||||
2015 | 2014 | ||||||
Balance at January 1 | $ | 22.4 | $ | 28.0 | |||
Additional credit impairments: | |||||||
On securities not previously impaired | — | 0.7 | |||||
On securities previously impaired | 1.0 | 0.5 | |||||
Reductions: | |||||||
Increase in cash flows | 0.2 | — | |||||
Securities sold, matured, prepaid or paid down | 2.5 | 2.6 | |||||
Balance at September 30 | $ | 20.7 | $ | 26.6 | |||
Net Investment Income
The following table summarizes Net investment income for the periods indicated:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2015 | 2014 | 2015 | 2014 | ||||||||||||
Fixed maturities | $ | 305.0 | $ | 306.4 | $ | 911.2 | $ | 904.7 | |||||||
Equity securities, available-for-sale | 2.0 | 0.7 | 3.5 | 5.2 | |||||||||||
Mortgage loans on real estate | 51.2 | 41.7 | 139.4 | 123.5 | |||||||||||
Policy loans | 3.1 | 3.4 | 9.6 | 10.0 | |||||||||||
Short-term investments and cash equivalents | 0.1 | 0.1 | 0.5 | 0.4 | |||||||||||
Other | 5.4 | 9.0 | 20.7 | 26.5 | |||||||||||
Gross investment income | 366.8 | 361.3 | 1,084.9 | 1,070.3 | |||||||||||
Less: Investment expenses | 13.8 | 13.1 | 40.2 | 38.4 | |||||||||||
Net investment income | $ | 353.0 | $ | 348.2 | $ | 1,044.7 | $ | 1,031.9 | |||||||
As of September 30, 2015, the Company had $1.2 of investments in fixed maturities that did not produce net investment income. As of December 31, 2014 the Company did not have any investments in fixed maturities that did not produce net investment income. Fixed maturities are moved to a non-accrual status when the investment defaults.
29 | ||
Voya Retirement Insurance and Annuity Company and Subsidiaries
(A wholly owned subsidiary of Voya Holdings Inc.)
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
Interest income on fixed maturities is recorded when earned using an effective yield method, giving effect to amortization of premiums and accretion of discounts. Such interest income is recorded in Net investment income in the Condensed Consolidated Statements of Operations.
Net Realized Capital Gains (Losses)
Net realized capital gains (losses) comprise 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 maturities 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 follows for the periods indicated:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2015 | 2014 | 2015 | 2014 | ||||||||||||
Fixed maturities, available-for-sale, including securities pledged | $ | (26.1 | ) | $ | (6.8 | ) | $ | (36.5 | ) | $ | (6.5 | ) | |||
Fixed maturities, at fair value option | (31.2 | ) | (34.7 | ) | (83.6 | ) | (58.2 | ) | |||||||
Equity securities, available-for-sale | — | — | (0.3 | ) | 1.3 | ||||||||||
Derivatives | 31.8 | 11.5 | (9.9 | ) | (1.4 | ) | |||||||||
Embedded derivative - fixed maturities | 0.7 | 0.4 | (2.0 | ) | (0.9 | ) | |||||||||
Embedded derivative - product guarantees | (65.7 | ) | (12.5 | ) | (53.7 | ) | (44.5 | ) | |||||||
Other investments | (0.1 | ) | — | (0.1 | ) | — | |||||||||
Net realized capital gains (losses) | $ | (90.6 | ) | $ | (42.1 | ) | $ | (186.1 | ) | $ | (110.2 | ) | |||
After-tax net realized capital gains (losses) | $ | (58.9 | ) | $ | (27.4 | ) | $ | (121.0 | ) | $ | (71.6 | ) | |||
Proceeds from the sale of fixed maturities and equity securities, available-for-sale and the related gross realized gains and losses, before tax were as follows for the periods indicated:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2015 | 2014 | 2015 | 2014 | ||||||||||||
Proceeds on sales | $ | 610.1 | $ | 308.7 | $ | 1,246.6 | $ | 1,278.7 | |||||||
Gross gains | 3.7 | 1.3 | 11.5 | 22.2 | |||||||||||
Gross losses | 7.6 | 6.9 | 23.1 | 27.0 | |||||||||||
3. Derivative Financial Instruments
The Company enters into the following types of derivatives:
Interest rate caps: The Company uses interest rate cap contracts to hedge the interest rate exposure arising from duration mismatches between assets and liabilities. Interest rate caps are also used to hedge interest rate exposure if rates rise above a specified level. Such increases in rates will require the Company to incur additional expenses. The future payout from the interest rate caps fund this increased exposure. The Company pays an upfront premium to purchase these caps. The Company utilizes these contracts in non-qualifying hedging relationships.
30 | ||
Voya Retirement Insurance and Annuity Company and Subsidiaries
(A wholly owned subsidiary of Voya Holdings Inc.)
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
Interest rate swaps: Interest rate swaps are used by the Company primarily to reduce market risks from changes in interest rates and to alter interest rate exposure arising from mismatches between assets and/or liabilities. Interest rate swaps are also used to hedge the interest rate risk associated with the value of assets it owns or in an anticipation of acquiring them. Using interest rate swaps, the Company agrees with another party to exchange, at specified intervals, the difference between fixed rate and floating rate interest payments, calculated by reference to an agreed upon notional principal amount. These transactions are entered into pursuant to master agreements that provide for a single net payment to be made to/from the counterparty at each due date. The Company utilizes these contracts in qualifying hedging relationships as well as non-qualifying hedging relationships.
Foreign exchange swaps: The Company uses foreign exchange or currency swaps to reduce the risk of change in the value, yield or cash flows associated with certain foreign denominated invested assets. Foreign exchange swaps represent contracts that require the exchange of foreign currency cash flows against U.S. dollar cash flows at regular periods, typically quarterly or semi-annually. The Company utilizes these contracts in qualifying hedging relationships as well as non-qualifying hedging relationships.
Credit default swaps: Credit default swaps are used to reduce credit loss exposure with respect to certain assets that the Company owns or to assume credit exposure on certain assets that the Company does not own. Payments are made to, or received from, the counterparty at specified intervals. In the event of a default on the underlying credit exposure, the Company will either receive a payment (purchased credit protection) or will be required to make a payment (sold credit protection) equal to the par minus recovery value of the swap contract. The Company utilizes these contracts in non-qualifying hedging relationships.
Currency forwards: The Company utilizes currency forward contracts to hedge currency exposure related to invested assets. The Company utilizes these contracts in non-qualifying hedging relationships.
Forwards: The Company uses forward contracts to hedge certain invested assets against movement in interest rates, particularly mortgage rates. The Company uses To Be Announced mortgage-backed securities as an economic hedge against rate movements. The Company utilizes forward contracts in non-qualifying hedging relationships.
Futures: Futures contracts are used to hedge against a decrease in certain equity indices. Such decreases may result in a decrease in variable annuity account values which would increase the possibility of the Company incurring an expense for guaranteed benefits in excess of account values. The Company also uses futures contracts as a hedge against an increase in certain equity indices. Such increases may result in increased payments to the holders of the fixed index annuity ("FIA") contracts. The Company also uses interest rate futures contracts to hedge its exposure to market risks due to changes in interest rates. The Company enters into exchange traded futures with regulated futures commissions that are members of the exchange. The Company also posts initial and variation margins, with the exchange, on a daily basis. The Company utilizes exchange-traded futures in non-qualifying hedging relationships.
Swaptions: A swaption is an option to enter into a swap with a forward starting effective date. The Company uses swaptions to hedge the interest rate exposure associated with the minimum crediting rate and book value guarantees embedded in the retirement products that the Company offers. Increases in interest rates will generate losses on assets that are backing such liabilities. In certain instances, the Company locks in the economic impact of existing purchased swaptions by entering into offsetting written swaptions. Swaptions are also used to hedge against an increase in the interest rate benchmarked crediting strategies within FIA contracts. Such increases may result in increased payments to contract holders of FIA contracts and the interest rate swaptions offset this increased exposure. The Company pays a premium when it purchases the swaption. The Company utilizes these contracts in non-qualifying hedging relationships.
Managed custody guarantees ("MCGs"): The Company issues certain credited rate guarantees on variable fixed income portfolios that represent stand-alone derivatives. The market value is partially determined by, among other things, levels of or changes in interest rates, prepayment rates and credit ratings/spreads.
Embedded derivatives: The Company also invests in certain fixed maturity instruments and has issued certain annuity products that contain embedded derivatives whose market value is at least partially determined by, among other things, levels of or changes in domestic and/or foreign interest rates (short-term or long-term), exchange rates, prepayment rates, equity rates, or credit ratings/spreads. In addition, the Company has entered into coinsurance with funds withheld arrangements, which contain embedded derivatives.
31 | ||
Voya Retirement Insurance and Annuity Company and Subsidiaries
(A wholly owned subsidiary of Voya Holdings Inc.)
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
The Company's use of derivatives is limited mainly to economic hedging to reduce the Company's exposure to cash flow variability of assets and liabilities, interest rate risk, credit risk, exchange rate risk and market risk. It is the Company's 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, which provides the Company with the legal right of offset.
The notional amounts and fair values of derivatives were as follows as of the dates indicated:
September 30, 2015 | December 31, 2014 | ||||||||||||||||||||||
Notional Amount | Asset Fair Value | Liability Fair Value | Notional Amount | Asset Fair Value | Liability Fair Value | ||||||||||||||||||
Derivatives: Qualifying for hedge accounting(1) | |||||||||||||||||||||||
Cash flow hedges: | |||||||||||||||||||||||
Interest rate contracts | $ | 347.8 | $ | 79.3 | $ | — | $ | 513.3 | $ | 104.4 | $ | — | |||||||||||
Foreign exchange contracts | 51.2 | 10.0 | — | 51.2 | 7.7 | — | |||||||||||||||||
Derivatives: Non-qualifying for hedge accounting(1) | |||||||||||||||||||||||
Interest rate contracts | 24,640.8 | 423.3 | 151.9 | 27,632.9 | 432.8 | 209.2 | |||||||||||||||||
Foreign exchange contracts | 144.5 | 13.9 | 10.1 | 130.1 | 10.6 | 7.7 | |||||||||||||||||
Equity contracts | 11.8 | 0.2 | — | 14.0 | — | 0.1 | |||||||||||||||||
Credit contracts | 407.5 | 3.9 | 0.2 | 384.0 | 6.5 | — | |||||||||||||||||
Embedded derivatives and Managed custody guarantees: | |||||||||||||||||||||||
Within fixed maturity investments | N/A | 25.8 | — | N/A | 27.8 | — | |||||||||||||||||
Within annuity products | N/A | — | 184.6 | N/A | — | 129.2 | |||||||||||||||||
Within reinsurance agreements | N/A | — | (47.8 | ) | N/A | — | (13.0 | ) | |||||||||||||||
Managed custody guarantees | N/A | — | 0.6 | N/A | — | — | |||||||||||||||||
Total | $ | 556.4 | $ | 299.6 | $ | 589.8 | $ | 333.2 | |||||||||||||||
(1) | Open derivative contracts are reported as Derivatives assets or liabilities on the Condensed Consolidated Balance Sheets at fair value. |
N/A - Not Applicable
The maximum length of time over which the Company is hedging its exposure to the variability in future cash flows for forecasted transactions is through the fourth quarter of 2016.
Based on the notional amounts, a substantial portion of the Company’s derivative positions was not designated or did not qualify for hedge accounting as part of a hedging relationship as of September 30, 2015 and December 31, 2014. The Company utilizes derivative contracts mainly to hedge exposure to variability in cash flows, interest rate risk, credit risk, foreign exchange risk and equity market risk. The majority of derivatives used by the Company are designated as product hedges, which hedge the exposure arising from insurance liabilities or guarantees embedded in the contracts the Company offers through various product lines. These derivatives do not qualify for hedge accounting as they do not meet the criteria of being "highly effective" as outlined in ASC Topic 815, but do provide an economic hedge, which is in line with the Company’s risk management objectives. The Company also uses derivatives contracts to hedge its exposure to various risks associated with the investment portfolio. The Company does not seek hedge accounting treatment for certain of these derivatives as they generally do not qualify for hedge accounting due to the criteria required under the portfolio hedging rules outlined in ASC Topic 815. The Company also uses credit default swaps coupled with other investments in order to produce the investment characteristics of otherwise permissible investments that do not qualify as effective accounting hedges under ASC Topic 815.
32 | ||
Voya Retirement Insurance and Annuity Company and Subsidiaries
(A wholly owned subsidiary of Voya Holdings Inc.)
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
Although the Company has not elected to net its derivative exposures, the notional amounts and fair values of Over-The-Counter ("OTC") and cleared derivatives excluding exchange traded contracts and forward contracts (To Be Announced mortgage-backed securities) are presented in the tables below as of the dates indicated:
September 30, 2015 | |||||||||||
Notional Amount | Asset Fair Value | Liability Fair Value | |||||||||
Credit contracts | $ | 407.5 | $ | 3.9 | $ | 0.2 | |||||
Foreign exchange contracts | 195.7 | 23.9 | 10.1 | ||||||||
Interest rate contracts | 22,017.1 | 502.2 | 151.9 | ||||||||
530.0 | 162.2 | ||||||||||
Counterparty netting(1) | (155.6 | ) | (155.6 | ) | |||||||
Cash collateral netting(1) | (343.5 | ) | (0.2 | ) | |||||||
Securities collateral netting(1) | (7.3 | ) | (6.5 | ) | |||||||
Net receivables/payables | $ | 23.6 | $ | (0.1 | ) | ||||||
(1) Represents the netting of receivable balances with payable balances, net of collateral, for the same counterparty under eligible netting agreements.
December 31, 2014 | |||||||||||
Notional Amount | Asset Fair Value | Liability Fair Value | |||||||||
Credit contracts | $ | 384.0 | $ | 6.5 | $ | — | |||||
Foreign exchange contracts | 181.3 | 18.3 | 7.7 | ||||||||
Interest rate contracts | 28,146.2 | 537.2 | 209.2 | ||||||||
562.0 | 216.9 | ||||||||||
Counterparty netting(1) | (216.2 | ) | (216.2 | ) | |||||||
Cash collateral netting(1) | (291.5 | ) | — | ||||||||
Securities collateral netting(1) | (6.6 | ) | — | ||||||||
Net receivables/payables | $ | 47.7 | $ | 0.7 | |||||||
(1) Represents the netting of receivable balances with payable balances, net of collateral, for the same counterparty under eligible netting agreements.
Collateral
Under the terms of the OTC Derivative International Swaps and Derivatives Association, Inc. ("ISDA") agreements, the Company may receive from, or deliver to, counterparties, collateral to assure that terms of the ISDA agreements will be met with regard to the Credit Support Annex ("CSA"). The terms of the CSA call for the Company to pay interest on any cash received equal to the Federal Funds rate. To the extent cash collateral is received and delivered, it is included in Payables under securities loan agreements, including collateral held and Short term investments under securities loan agreements, including collateral delivered, respectively, on the Condensed Consolidated Balance Sheets and is reinvested in short-term investments. Collateral held is used in accordance with the CSA to satisfy any obligations. Investment grade bonds owned by the Company are the source of noncash collateral posted, which is reported in Securities pledged on the Condensed Consolidated Balance Sheets. As of September 30, 2015, the Company held $148.3 and $195.4 of net cash collateral related to OTC derivative contracts and cleared derivative contracts, respectively. As of December 31, 2014, the Company held $161.5 and $130.2 of net cash collateral related to OTC derivative contracts and cleared derivative contracts, respectively. In addition, as of September 30, 2015, the Company delivered $71.7 of securities and held $7.4 securities as collateral. As of December 31, 2014, the Company delivered $60.4 of securities and held $6.6 of securities as collateral.
33 | ||
Voya Retirement Insurance and Annuity Company and Subsidiaries
(A wholly owned subsidiary of Voya Holdings Inc.)
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
Net realized gains (losses) on derivatives were as follows for the periods indicated:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2015 | 2014 | 2015 | 2014 | ||||||||||||
Derivatives: Qualifying for hedge accounting(1) | |||||||||||||||
Cash flow hedges: | |||||||||||||||
Interest rate contracts | $ | 0.2 | $ | 0.1 | $ | 0.6 | $ | 0.1 | |||||||
Foreign exchange contracts | 0.2 | 0.1 | 0.4 | 0.4 | |||||||||||
Derivatives: Non-qualifying for hedge accounting(2) | |||||||||||||||
Interest rate contracts | 34.3 | 9.1 | (10.7 | ) | (6.5 | ) | |||||||||
Foreign exchange contracts | (0.3 | ) | 2.3 | 1.1 | 2.3 | ||||||||||
Equity contracts | (2.1 | ) | — | (1.4 | ) | 1.0 | |||||||||
Credit contracts | (0.5 | ) | (0.1 | ) | 0.1 | 1.3 | |||||||||
Embedded derivatives and Managed custody guarantees: | |||||||||||||||
Within fixed maturity investments(2) | 0.7 | 0.4 | (2.0 | ) | (0.9 | ) | |||||||||
Within annuity products(2) | (65.1 | ) | (12.5 | ) | (53.2 | ) | (44.6 | ) | |||||||
Within reinsurance agreements(3) | 2.8 | 11.8 | 34.8 | (29.6 | ) | ||||||||||
Managed custody guarantees(2) | (0.6 | ) | — | (0.5 | ) | 0.1 | |||||||||
Total | $ | (30.4 | ) | $ | 11.2 | $ | (30.8 | ) | $ | (76.4 | ) | ||||
(1) Changes in value for effective fair value hedges are recorded in Other net realized capital gains (losses). Changes in fair value upon disposal for effective cash flow hedges are amortized through Net investment income and the ineffective portion is recorded in Other net realized capital gains (losses) in the Condensed Consolidated Statements of Operations. For the three and nine months ended September 30, 2015 and 2014, ineffective amounts were immaterial.
(2) Changes in value are included in Other net realized capital gains (losses) in the Condensed Consolidated Statements of Operations.
(3) Changes in value are included in Interest credited and other benefits to contract owners/policyholders in the Condensed Consolidated Statements of Operations.
Credit Default Swaps
The Company has entered into various credit default swaps. When credit default swaps are sold, the Company assumes credit exposure to certain assets that it does not own. Credit default swaps may also be purchased to reduce credit exposure in the Company's portfolio. Credit default swaps involve a transfer of credit risk from one party to another in exchange for periodic payments. As of September 30, 2015, the fair values of credit default swaps of $3.9 and $0.2 were included in Derivatives assets and Derivatives liabilities, respectively, on the Condensed Consolidated Balance Sheets. As of December 31, 2014, the fair values of credit default swaps of $6.5 were included in Derivatives assets and there were no credit default swaps included in Derivatives liabilities, on the Condensed Consolidated Balance Sheets. As of September 30, 2015 and December 31, 2014, the maximum potential future exposure to the Company was $384.0 in credit default swaps. These instruments are typically written for a maturity period of 5 years and contain no recourse provisions. If the Company's current debt and claims paying ratings were downgraded in the future, the terms in the Company's derivative agreements may be triggered, which could negatively impact overall liquidity.
34 | ||
Voya Retirement Insurance and Annuity Company and Subsidiaries
(A wholly owned subsidiary of Voya Holdings Inc.)
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
4. Fair Value Measurements
Fair Value Measurement
The Company categorizes its financial instruments into a three-level hierarchy based on the priority of the inputs to the valuation technique, pursuant to ASU 2011-04, "Fair Value Measurements (ASC Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP" ("ASU 2011-04"). The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3), as described in the Fair Value Measurements Note in the Consolidated Financial Statements in Part II, Item 8. of the Company's 2014 Annual Report on Form 10-K. If the inputs used to measure fair value fall within different levels of the hierarchy, the category level is based on the lowest priority level input that is significant to the fair value measurement of the instrument.
When available, the estimated fair value of financial instruments is based on quoted prices in active markets that are readily and regularly obtainable. When quoted prices in active markets are not available, the determination of estimated fair value is based on market standard valuation methodologies, including discounted cash flow methodologies, matrix pricing or other similar techniques.
35 | ||
Voya Retirement Insurance and Annuity Company and Subsidiaries
(A wholly owned subsidiary of Voya Holdings Inc.)
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
The following table presents the Company’s hierarchy for its assets and liabilities measured at fair value on a recurring basis as of September 30, 2015:
Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Assets: | |||||||||||||||
Fixed maturities, including securities pledged: | |||||||||||||||
U.S. Treasuries | $ | 850.2 | $ | 61.8 | $ | — | $ | 912.0 | |||||||
U.S. Government agencies and authorities | — | 4.4 | — | 4.4 | |||||||||||
State, municipalities and political subdivisions | — | 503.4 | — | 503.4 | |||||||||||
U.S. corporate public securities | — | 9,323.7 | 33.1 | 9,356.8 | |||||||||||
U.S. corporate private securities | — | 1,988.8 | 355.6 | 2,344.4 | |||||||||||
Foreign corporate public securities and foreign governments(1) | — | 2,791.5 | 0.5 | 2,792.0 | |||||||||||
Foreign corporate private securities (1) | — | 2,707.1 | 156.8 | 2,863.9 | |||||||||||
Residential mortgage-backed securities | — | 1,913.1 | 20.6 | 1,933.7 | |||||||||||
Commercial mortgage-backed securities | — | 1,174.4 | 9.0 | 1,183.4 | |||||||||||
Other asset-backed securities | — | 278.2 | 13.4 | 291.6 | |||||||||||
Total fixed maturities, including securities pledged | 850.2 | 20,746.4 | 589.0 | 22,185.6 | |||||||||||
Equity securities, available-for-sale | 84.6 | — | 47.5 | 132.1 | |||||||||||
Derivatives: | |||||||||||||||
Interest rate contracts | 0.4 | 502.2 | — | 502.6 | |||||||||||
Foreign exchange contracts | — | 23.9 | — | 23.9 | |||||||||||
Equity contracts | 0.2 | — | — | 0.2 | |||||||||||
Credit contracts | — | 3.9 | — | 3.9 | |||||||||||
Cash and cash equivalents, short-term investments and short-term investments under securities loan agreements | 924.4 | — | — | 924.4 | |||||||||||
Assets held in separate accounts | 52,940.1 | 4,440.1 | 4.0 | 57,384.2 | |||||||||||
Total assets | $ | 54,799.9 | $ | 25,716.5 | $ | 640.5 | $ | 81,156.9 | |||||||
Liabilities: | |||||||||||||||
Derivatives: | |||||||||||||||
Annuity product guarantees: | |||||||||||||||
FIA | $ | — | $ | — | $ | 22.6 | $ | 22.6 | |||||||
Stabilizer and MCGs | — | — | 162.6 | 162.6 | |||||||||||
Other derivatives: | |||||||||||||||
Interest rate contracts | — | 151.9 | — | 151.9 | |||||||||||
Foreign exchange contracts | — | 10.1 | — | 10.1 | |||||||||||
Equity contracts | — | — | — | — | |||||||||||
Credit contracts | — | 0.2 | — | 0.2 | |||||||||||
Embedded derivative on reinsurance | — | (47.8 | ) | — | (47.8 | ) | |||||||||
Total liabilities | $ | — | $ | 114.4 | $ | 185.2 | $ | 299.6 | |||||||
(1) Primarily U.S. dollar denominated.
36 | ||
Voya Retirement Insurance and Annuity Company and Subsidiaries
(A wholly owned subsidiary of Voya Holdings Inc.)
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
The following table presents the Company’s hierarchy for its assets and liabilities measured at fair value on a recurring basis as of December 31, 2014:
Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Assets: | |||||||||||||||
Fixed maturities, including securities pledged: | |||||||||||||||
U.S. Treasuries | $ | 712.9 | $ | 60.2 | $ | — | $ | 773.1 | |||||||
U.S. Government agencies and authorities | — | 46.6 | — | 46.6 | |||||||||||
State, municipalities and political subdivisions | — | 277.2 | — | 277.2 | |||||||||||
U.S. corporate public securities | — | 9,049.3 | 19.3 | 9,068.6 | |||||||||||
U.S. corporate private securities | — | 1,795.9 | 355.5 | 2,151.4 | |||||||||||
Foreign corporate public securities and foreign governments(1) | — | 2,887.1 | — | 2,887.1 | |||||||||||
Foreign corporate private securities (1) | — | 2,725.1 | 165.7 | 2,890.8 | |||||||||||
Residential mortgage-backed securities | — | 2,026.1 | 17.3 | 2,043.4 | |||||||||||
Commercial mortgage-backed securities | — | 1,059.0 | 19.0 | 1,078.0 | |||||||||||
Other asset-backed securities | — | 398.0 | 2.4 | 400.4 | |||||||||||
Total fixed maturities, including securities pledged | 712.9 | 20,324.5 | 579.2 | 21,616.6 | |||||||||||
Equity securities, available-for-sale | 85.3 | — | 36.6 | 121.9 | |||||||||||
Derivatives: | |||||||||||||||
Interest rate contracts | — | 537.2 | — | 537.2 | |||||||||||
Foreign exchange contracts | — | 18.3 | — | 18.3 | |||||||||||
Equity contracts | — | — | — | — | |||||||||||
Credit contracts | — | 6.5 | — | 6.5 | |||||||||||
Cash and cash equivalents, short-term investments and short-term investments under securities loan agreements | 1,046.6 | — | 1.5 | 1,048.1 | |||||||||||
Assets held in separate accounts | 57,492.6 | 5,313.1 | 2.4 | 62,808.1 | |||||||||||
Total assets | $ | 59,337.4 | $ | 26,199.6 | $ | 619.7 | $ | 86,156.7 | |||||||
Liabilities: | |||||||||||||||
Derivatives: | |||||||||||||||
Annuity product guarantees: | |||||||||||||||
FIA | $ | — | $ | — | $ | 26.3 | $ | 26.3 | |||||||
Stabilizer and MCGs | — | — | 102.9 | 102.9 | |||||||||||
Other derivatives: | |||||||||||||||
Interest rate contracts | — | 209.2 | — | 209.2 | |||||||||||
Foreign exchange contracts | — | 7.7 | — | 7.7 | |||||||||||
Equity contracts | 0.1 | — | — | 0.1 | |||||||||||
Credit contracts | — | — | — | — | |||||||||||
Embedded derivative on reinsurance | — | (13.0 | ) | — | (13.0 | ) | |||||||||
Total liabilities | $ | 0.1 | $ | 203.9 | $ | 129.2 | $ | 333.2 | |||||||
(1) Primarily U.S. dollar denominated.
37 | ||
Voya Retirement Insurance and Annuity Company and Subsidiaries
(A wholly owned subsidiary of Voya Holdings Inc.)
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
Valuation of Financial Assets and Liabilities at Fair Value
Certain assets and liabilities are measured at estimated fair value on the Company's Condensed Consolidated Balance Sheets. The Company defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The exit price and the transaction (or entry) price will be the same at initial recognition in many circumstances. However, in certain cases, the transaction price may not represent fair value. The fair value of a liability is based on the amount that would be paid to transfer a liability to a third-party with an equal credit standing. Fair value is required to be a market-based measurement that is determined based on a hypothetical transaction at the measurement date, from a market participant's perspective. The Company considers three broad valuation techniques when a quoted price is unavailable: (i) the market approach, (ii) the income approach and (iii) the cost approach. The Company determines the most appropriate valuation technique to use, given the instrument being measured and the availability of sufficient inputs. The Company prioritizes the inputs to fair valuation techniques and allows for the use of unobservable inputs to the extent that observable inputs are not available.
The Company utilizes a number of valuation methodologies to determine the fair values of its financial assets and liabilities in conformity with the concepts of "exit price" and the fair value hierarchy as prescribed in ASC Topic 820. Valuations are obtained from third-party commercial pricing services, brokers and industry-standard, vendor-provided software that models the value based on market observable inputs. The valuations obtained from third-party commercial pricing services are non-binding. The Company reviews the assumptions and inputs used by third-party commercial pricing services for each reporting period in order to determine an appropriate fair value hierarchy level. The documentation and analysis obtained from third-party commercial pricing services are reviewed by the Company, including in-depth validation procedures confirming the observability of inputs. The valuations are reviewed and validated monthly through the internal valuation committee price variance review, comparisons to internal pricing models, back testing to recent trades or monitoring of trading volumes.
Fixed maturities: The fair values for actively traded marketable bonds are determined based upon the quoted market prices and are classified as Level 1 assets. Assets in this category primarily include certain U.S. Treasury securities.
For fixed maturities classified as Level 2 assets, fair values are determined using a matrix-based market approach, based on prices obtained from third-party commercial pricing services and the Company’s matrix and analytics-based pricing models, which in each case incorporate a variety of market observable information as valuation inputs. The market observable inputs used for these fair value measurements, by fixed maturity asset class, are as follows:
U.S. Treasuries: Fair value is determined using third-party commercial pricing services, with the primary inputs being stripped interest and principal U.S. Treasury yield curves that represent a U.S. Treasury zero-coupon curve.
U.S. Government agencies and authorities, State, municipalities and political subdivisions: Fair value is determined using third-party commercial pricing services, with the primary inputs being U.S. Treasury yield curves, trades of comparable securities, credit spreads off benchmark yields and issuer ratings.
U.S. corporate public securities, Foreign corporate public securities, and foreign governments: Fair value is determined using third-party commercial pricing services, with the primary inputs being benchmark yields, trades of comparable securities, issuer ratings, bids and credit spreads off benchmark yields.
U.S. corporate private securities and Foreign corporate private securities: Fair values are determined using a matrix and analytics-based pricing model. The model incorporates the current level of risk-free interest rates, current corporate credit spreads, credit quality of the issuer and cash flow characteristics of the security. The model also considers a liquidity spread, the value of any collateral, the capital structure of the issuer, the presence of guarantees, and prices and quotes for comparably rated publicly traded securities.
RMBS, CMBS and ABS: Fair value is determined using third-party commercial pricing services, with the primary inputs being credit spreads off benchmark yields, prepayment speed assumptions, current and forecasted loss severity, debt service coverage ratios, collateral type, payment priority within tranche and the vintage of the loans underlying the security.
38 | ||
Voya Retirement Insurance and Annuity Company and Subsidiaries
(A wholly owned subsidiary of Voya Holdings Inc.)
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
Transfers in and out of Level 1 and 2
There were no securities transferred between Level 1 and Level 2 for the three and nine months ended September 30, 2015 and 2014. The Company’s policy is to recognize transfers in and transfers out as of the beginning of the reporting period.
Level 3 Financial Instruments
The fair values of certain assets and liabilities are determined using prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement (i.e., Level 3 as defined by ASC Topic 820), including but not limited to liquidity spreads for investments within markets deemed not currently active. These valuations, whether derived internally or obtained from a third-party, use critical assumptions that are not widely available to estimate market participant expectations in valuing the asset or liability. In addition, the Company has determined, for certain financial instruments, an active market is such a significant input to determine fair value that the presence of an inactive market may lead to classification in Level 3. In light of the methodologies employed to obtain the fair values of financial assets and liabilities classified as Level 3, additional information is presented below.
39 | ||
Voya Retirement Insurance and Annuity Company and Subsidiaries
(A wholly owned subsidiary of Voya Holdings Inc.)
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
The following tables summarize the change in fair value of the Company’s Level 3 assets and liabilities and transfers in and out of Level 3 for the periods indicated:
Three Months Ended September 30, 2015 | |||||||||||||||||||||||||||||||||||||||||||
Fair Value as of July 1 | Total Realized/Unrealized Gains (Losses) Included in: | Purchases | Issuances | Sales | Settlements | Transfers into Level 3(3) | Transfers out of Level 3(3) | Fair Value as of September 30 | Change In Unrealized Gains (Losses) Included in Earnings(4) | ||||||||||||||||||||||||||||||||||
Net Income | OCI | ||||||||||||||||||||||||||||||||||||||||||
Fixed maturities, including securities pledged: | |||||||||||||||||||||||||||||||||||||||||||
U.S. Government agencies and authorities | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||||||||
U.S. Corporate public securities | 12.1 | — | (0.1 | ) | 30.7 | — | — | — | — | (9.6 | ) | 33.1 | — | ||||||||||||||||||||||||||||||
U.S. Corporate private securities | 369.4 | (0.1 | ) | (0.6 | ) | 5.7 | — | — | (2.7 | ) | — | (16.1 | ) | 355.6 | (0.1 | ) | |||||||||||||||||||||||||||
Foreign corporate public securities and foreign governments(1) | 1.7 | — | — | — | — | — | (1.2 | ) | — | — | 0.5 | — | |||||||||||||||||||||||||||||||
Foreign corporate private securities(1) | 167.0 | — | 0.5 | — | — | — | (9.9 | ) | — | (0.8 | ) | 156.8 | — | ||||||||||||||||||||||||||||||
Residential mortgage-backed securities | 21.5 | (1.1 | ) | 0.2 | — | — | — | — | — | — | 20.6 | (1.1 | ) | ||||||||||||||||||||||||||||||
Commercial mortgage-backed securities | — | — | — | 10.0 | — | — | (1.0 | ) | — | — | 9.0 | — | |||||||||||||||||||||||||||||||
Other asset-backed securities | 13.8 | — | — | — | — | — | (0.4 | ) | — | — | 13.4 | — | |||||||||||||||||||||||||||||||
Total fixed maturities, including securities pledged | 585.5 | (1.2 | ) | — | 46.4 | — | — | (15.2 | ) | — | (26.5 | ) | 589.0 | (1.2 | ) | ||||||||||||||||||||||||||||
Equity securities, available-for-sale | 37.0 | — | 0.2 | 10.3 | — | — | — | — | — | 47.5 | — | ||||||||||||||||||||||||||||||||
Derivatives: | |||||||||||||||||||||||||||||||||||||||||||
Product guarantees: | |||||||||||||||||||||||||||||||||||||||||||
Stabilizer and MCGs(2) | (92.0 | ) | (69.5 | ) | — | — | (1.1 | ) | — | — | — | — | (162.6 | ) | — | ||||||||||||||||||||||||||||
FIA(2) | (27.2 | ) | 3.8 | — | — | (0.1 | ) | — | 0.9 | — | — | (22.6 | ) | — | |||||||||||||||||||||||||||||
Cash and cash equivalents, short-term investments, and short-term investments under securities loan agreement | 1.5 | — | — | — | — | — | (1.5 | ) | — | — | — | — | |||||||||||||||||||||||||||||||
Assets held in separate accounts(5) | — | — | — | 4.0 | — | — | — | — | — | 4.0 | — | ||||||||||||||||||||||||||||||||
(1) Primarily U.S. dollar denominated. | |||||||||||||||||||||||||||||||||||||||||||
(2) All gains and losses on Level 3 liabilities are classified as realized gains (losses) for the purpose of this disclosure because it is impracticable to track realized and unrealized gains (losses) separately on a contract-by-contract basis. These amounts are included in Other net realized capital gains (losses) in the Condensed Consolidated Statements of Operations. | |||||||||||||||||||||||||||||||||||||||||||
(3) The Company’s policy is to recognize transfers in and transfers out as of the beginning of the reporting period. | |||||||||||||||||||||||||||||||||||||||||||
(4) For financial instruments still held as of September 30, amounts are included in Net investment income and Total net realized capital gains (losses) in the Condensed Consolidated Statements of Operations. | |||||||||||||||||||||||||||||||||||||||||||
(5) The investment income and realized gains (losses) and change in unrealized gains (losses) included in net income (loss) for separate account assets are offset by an equal amount for separate account liabilities, which results in a net zero impact on Net income (loss) for the Company. | |||||||||||||||||||||||||||||||||||||||||||
40 | ||
Voya Retirement Insurance and Annuity Company and Subsidiaries
(A wholly owned subsidiary of Voya Holdings Inc.)
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
Nine Months Ended September 30, 2015 | |||||||||||||||||||||||||||||||||||||||||||
Fair Value as of January 1 | Total Realized/Unrealized Gains (Losses) Included in: | Purchases | Issuances | Sales | Settlements | Transfers into Level 3(3) | Transfers out of Level 3(3) | Fair Value as of September 30 | Change in Unrealized Gains (Losses) Included in Earnings(4) | ||||||||||||||||||||||||||||||||||
Net Income | OCI | ||||||||||||||||||||||||||||||||||||||||||
Fixed maturities, including securities pledged: | |||||||||||||||||||||||||||||||||||||||||||
U.S. Government agencies and authorities | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||||||||
U.S. Corporate public securities | 19.3 | — | (0.1 | ) | 30.7 | — | — | (0.8 | ) | — | (16.0 | ) | 33.1 | — | |||||||||||||||||||||||||||||
U.S. Corporate private securities | 355.5 | (0.1 | ) | (6.0 | ) | 63.0 | — | — | (56.8 | ) | — | — | 355.6 | (0.1 | ) | ||||||||||||||||||||||||||||
Foreign corporate public securities and foreign governments(1) | — | (1.7 | ) | (0.1 | ) | — | — | — | (2.1 | ) | 4.4 | — | 0.5 | (1.7 | ) | ||||||||||||||||||||||||||||
Foreign corporate private securities(1) | 165.7 | 0.2 | 0.2 | 1.8 | — | — | (27.2 | ) | 16.1 | — | 156.8 | — | |||||||||||||||||||||||||||||||
Residential mortgage-backed securities | 17.3 | (2.6 | ) | (0.7 | ) | — | — | — | — | 6.6 | — | 20.6 | (2.6 | ) | |||||||||||||||||||||||||||||
Commercial mortgage-backed securities | 19.0 | — | — | 10.0 | — | — | (1.0 | ) | — | (19.0 | ) | 9.0 | — | ||||||||||||||||||||||||||||||
Other asset-backed securities | 2.4 | — | — | 12.4 | — | — | (0.5 | ) | 5.3 | (6.2 | ) | 13.4 | — | ||||||||||||||||||||||||||||||
Total fixed maturities, including securities pledged | 579.2 | (4.2 | ) | (6.7 | ) | 117.9 | — | — | (88.4 | ) | 32.4 | (41.2 | ) | 589.0 | (4.4 | ) | |||||||||||||||||||||||||||
Equity securities, available-for-sale | 36.6 | — | 0.6 | 10.3 | — | — | — | — | — | 47.5 | — | ||||||||||||||||||||||||||||||||
Derivatives: | |||||||||||||||||||||||||||||||||||||||||||
Product guarantees: | |||||||||||||||||||||||||||||||||||||||||||
Stabilizer and MCGs(2) | (102.9 | ) | (56.3 | ) | — | — | (3.4 | ) | — | — | — | — | (162.6 | ) | — | ||||||||||||||||||||||||||||
FIA(2) | (26.3 | ) | 2.6 | — | — | (0.1 | ) | — | 1.2 | — | — | (22.6 | ) | — | |||||||||||||||||||||||||||||
Cash and cash equivalents, short-term investments, and short-term investments under securities loan agreement | 1.5 | — | — | — | — | — | (1.5 | ) | — | — | — | — | |||||||||||||||||||||||||||||||
Assets held in separate accounts(5) | 2.4 | — | — | 4.0 | — | — | — | — | (2.4 | ) | 4.0 | — | |||||||||||||||||||||||||||||||
(1) Primarily U.S. dollar denominated. | |||||||||||||||||||||||||||||||||||||||||||
(2) All gains and losses on Level 3 liabilities are classified as realized gains (losses) for the purpose of this disclosure because it is impracticable to track realized and unrealized gains (losses) separately on a contract-by-contract basis. These amounts are included in Other net realized capital gains (losses) in the Condensed Consolidated Statements of Operations. | |||||||||||||||||||||||||||||||||||||||||||
(3) The Company’s policy is to recognize transfers in and transfers out as of the beginning of the reporting period. | |||||||||||||||||||||||||||||||||||||||||||
(4) For financial instruments still held as of September 30, amounts are included in Net investment income and Total net realized capital gains (losses) in the Condensed Consolidated Statements of Operations. | |||||||||||||||||||||||||||||||||||||||||||
(5) The investment income and realized gains (losses) and change in unrealized gains (losses) included in net income (loss) for separate account assets are offset by an equal amount for separate account liabilities, which results in a net zero impact on Net income (loss) for the Company. | |||||||||||||||||||||||||||||||||||||||||||
41 | ||
Voya Retirement Insurance and Annuity Company and Subsidiaries
(A wholly owned subsidiary of Voya Holdings Inc.)
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
Three Months Ended September 30, 2014 | |||||||||||||||||||||||||||||||||||||||||||
Fair Value as of July 1 | Total Realized/Unrealized Gains (Losses) Included in: | Purchases | Issuances | Sales | Settlements | Transfers into Level 3(3) | Transfers out of Level 3(3) | Fair Value as of September 30 | Change In Unrealized Gains (Losses) Included in Earnings(4) | ||||||||||||||||||||||||||||||||||
Net Income | OCI | ||||||||||||||||||||||||||||||||||||||||||
Fixed maturities, including securities pledged: | |||||||||||||||||||||||||||||||||||||||||||
U.S. government agencies and authorities | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||||||||
U.S. Corporate public securities | 48.0 | — | (0.6 | ) | 6.9 | — | — | (1.1 | ) | 1.0 | (5.5 | ) | 48.7 | — | |||||||||||||||||||||||||||||
U.S. Corporate private securities | 223.4 | (0.1 | ) | (9.3 | ) | 10.8 | — | — | — | 124.3 | (11.0 | ) | 338.1 | (0.1 | ) | ||||||||||||||||||||||||||||
Foreign corporate public securities and foreign governments(1) | — | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||
Foreign corporate private securities(1) | 145.6 | — | (0.7 | ) | — | — | — | — | — | — | 144.9 | — | |||||||||||||||||||||||||||||||
Residential mortgage-backed securities | 21.2 | (0.9 | ) | 0.3 | 3.3 | — | — | — | 1.7 | (6.6 | ) | 19.0 | (0.9 | ) | |||||||||||||||||||||||||||||
Commercial mortgage-backed securities | — | — | — | 18.9 | — | — | — | — | — | 18.9 | — | ||||||||||||||||||||||||||||||||
Other asset-backed securities | 2.4 | — | — | — | — | — | — | — | — | 2.4 | — | ||||||||||||||||||||||||||||||||
Total fixed maturities, including securities pledged | 440.6 | (1.0 | ) | (10.3 | ) | 39.9 | — | — | (1.1 | ) | 127.0 | (23.1 | ) | 572.0 | (1.0 | ) | |||||||||||||||||||||||||||
Equity securities, available-for-sale | 37.2 | — | 0.2 | — | — | — | — | — | — | 37.4 | — | ||||||||||||||||||||||||||||||||
Derivatives: | |||||||||||||||||||||||||||||||||||||||||||
Product guarantees: | |||||||||||||||||||||||||||||||||||||||||||
Stabilizer and MCGs(2) | (32.0 | ) | (11.9 | ) | — | — | (1.1 | ) | — | — | — | — | (45.0 | ) | — | ||||||||||||||||||||||||||||
FIA(2) | (25.7 | ) | (0.6 | ) | — | — | — | — | — | — | — | (26.3 | ) | — | |||||||||||||||||||||||||||||
Cash and cash equivalents, short-term investments, and short-term investments under securities loan agreement | — | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||
Assets held in separate accounts(5) | 15.9 | — | — | 4.7 | — | (1.3 | ) | — | 0.9 | (6.6 | ) | 13.6 | — | ||||||||||||||||||||||||||||||
(1) Primarily U.S. dollar denominated. | |||||||||||||||||||||||||||||||||||||||||||
(2) All gains and losses on Level 3 liabilities are classified as realized gains (losses) for the purpose of this disclosure because it is impracticable to track realized and unrealized gains (losses) separately on a contract-by-contract basis. These amounts are included in Other net realized capital gains (losses) in the Condensed Consolidated Statements of Operations. | |||||||||||||||||||||||||||||||||||||||||||
(3) The Company’s policy is to recognize transfers in and transfers out as of the beginning of the reporting period. | |||||||||||||||||||||||||||||||||||||||||||
(4) For financial instruments still held as of September 30, amounts are included in Net investment income and Total net realized capital gains (losses) in the Condensed Consolidated Statements of Operations. | |||||||||||||||||||||||||||||||||||||||||||
(5) The investment income and realized gains (losses) and change in unrealized gains (losses) included in net income (loss) for separate account assets are offset by an equal amount for separate account liabilities, which results in a net zero impact on Net income (loss) for the Company. | |||||||||||||||||||||||||||||||||||||||||||
42 | ||
Voya Retirement Insurance and Annuity Company and Subsidiaries
(A wholly owned subsidiary of Voya Holdings Inc.)
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
Nine Months Ended September 30, 2014 | |||||||||||||||||||||||||||||||||||||||||||
Fair Value as of January 1 | Total Realized/Unrealized Gains (Losses) Included in: | Purchases | Issuances | Sales | Settlements | Transfers into Level 3(3) | Transfers out of Level 3(3) | Fair Value as of September 30 | Change in Unrealized Gains (Losses) Included in Earnings(4) | ||||||||||||||||||||||||||||||||||
Net Income | OCI | ||||||||||||||||||||||||||||||||||||||||||
Fixed maturities, including securities pledged: | |||||||||||||||||||||||||||||||||||||||||||
U.S. government agencies and authorities | $ | 5.1 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | (5.1 | ) | $ | — | $ | — | ||||||||||||||||||||
U.S. Corporate public securities | 39.3 | (0.1 | ) | 0.4 | 13.2 | — | — | (4.1 | ) | — | — | 48.7 | (0.1 | ) | |||||||||||||||||||||||||||||
U.S. Corporate private securities | 106.0 | (0.1 | ) | (1.5 | ) | 94.5 | — | — | — | 139.2 | — | 338.1 | (0.1 | ) | |||||||||||||||||||||||||||||
Foreign corporate public securities and foreign governments(1) | — | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||
Foreign corporate private securities(1) | 42.8 | — | 1.2 | 56.3 | — | — | 66.8 | (22.2 | ) | 144.9 | — | ||||||||||||||||||||||||||||||||
Residential mortgage-backed securities | 23.7 | (1.6 | ) | 0.4 | 3.5 | — | — | — | — | (7.0 | ) | 19.0 | (1.6 | ) | |||||||||||||||||||||||||||||
Commercial mortgage-backed securities | — | — | — | 18.9 | — | — | — | — | — | 18.9 | — | ||||||||||||||||||||||||||||||||
Other asset-backed securities | 17.7 | 0.8 | (0.6 | ) | — | — | — | (8.1 | ) | — | (7.4 | ) | 2.4 | — | |||||||||||||||||||||||||||||
Total fixed maturities, including securities pledged | 234.6 | (1.0 | ) | (0.1 | ) | 186.4 | — | — | (12.2 | ) | 206.0 | (41.7 | ) | 572.0 | (1.8 | ) | |||||||||||||||||||||||||||
Equity securities, available-for-sale | 35.9 | — | 1.5 | — | — | — | — | — | — | 37.4 | — | ||||||||||||||||||||||||||||||||
Derivatives: | |||||||||||||||||||||||||||||||||||||||||||
Product guarantees: | |||||||||||||||||||||||||||||||||||||||||||
Stabilizer and MCGs(2) | — | (41.5 | ) | — | — | (3.5 | ) | — | — | — | — | (45.0 | ) | — | |||||||||||||||||||||||||||||
FIA(2) | (23.1 | ) | (3.0 | ) | — | — | (0.2 | ) | — | — | — | — | (26.3 | ) | — | ||||||||||||||||||||||||||||
Cash and cash equivalents, short-term investments, and short-term investments under securities loan agreement | — | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||
Assets held in separate accounts(5) | 13.1 | 0.1 | — | 10.6 | — | (4.5 | ) | — | 0.9 | (6.6 | ) | 13.6 | — | ||||||||||||||||||||||||||||||
(1) Primarily U.S. dollar denominated. | |||||||||||||||||||||||||||||||||||||||||||
(2) All gains and losses on Level 3 liabilities are classified as realized gains (losses) for the purpose of this disclosure because it is impracticable to track realized and unrealized gains (losses) separately on a contract-by-contract basis. These amounts are included in Other net realized capital gains (losses) in the Condensed Consolidated Statements of Operations. | |||||||||||||||||||||||||||||||||||||||||||
(3) The Company’s policy is to recognize transfers in and transfers out as of the beginning of the reporting period. | |||||||||||||||||||||||||||||||||||||||||||
(4) For financial instruments still held as of September 30, amounts are included in Net investment income and Total net realized capital gains (losses) in the Condensed Consolidated Statements of Operations. | |||||||||||||||||||||||||||||||||||||||||||
(5) The investment income and realized gains (losses) and change in unrealized gains (losses) included in net income (loss) for separate account assets are offset by an equal amount for separate account liabilities, which results in a net zero impact on Net income (loss) for the Company. | |||||||||||||||||||||||||||||||||||||||||||
43 | ||
Voya Retirement Insurance and Annuity Company and Subsidiaries
(A wholly owned subsidiary of Voya Holdings Inc.)
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
For the three and nine months ended September 30, 2015 and 2014, the transfers in and out of Level 3 for fixed maturities and equity securities, as well as separate accounts, were due to the variation in inputs relied upon for valuation each quarter. Securities that are primarily valued using independent broker quotes when prices are not available from one of the commercial pricing services are reflected as transfers into Level 3. When securities are valued using more widely available information, the securities are transferred out of Level 3 and into Level 1 or 2, as appropriate.
Significant Unobservable Inputs
Quantitative information about the significant unobservable inputs used in the Company's Level 3 fair value measurements of its annuity product guarantees is presented in the following sections and table.
The Company's Level 3 fair value measurements of its fixed maturities, equity securities available-for-sale and equity and credit derivative contracts are primarily based on broker quotes for which the quantitative detail of the unobservable inputs is neither provided nor reasonably corroborated, thus negating the ability to perform a sensitivity analysis. The Company performs a review of broker quotes by performing a monthly price variance comparison and back tests broker quotes to recent trade prices.
Significant unobservable inputs used in the fair value measurements of FIAs include nonperformance risk and policyholder behavior assumptions, such as lapses and partial withdrawals. Such inputs are monitored quarterly.
The significant unobservable inputs used in the fair value measurement of the Stabilizer embedded derivatives and MCG derivative are interest rate implied volatility, nonperformance risk, lapses and policyholder deposits. Such inputs are monitored quarterly.
Following is a description of selected inputs:
Interest Rate Volatility: A term-structure model is used to approximate implied volatility for the swap rates for the Stabilizer and MCG fair value measurements. Where no implied volatility is readily available in the market, an alternative approach is applied based on historical volatility.
Nonperformance Risk: For the estimate of the fair value of embedded derivatives associated with the Company's product guarantees, the Company uses a blend of observable, similarly rated peer company credit default swap spreads, adjusted to reflect the credit quality of the Company and the priority of policyholder claims.
Actuarial Assumptions: Management regularly reviews actuarial assumptions, which are based on the Company's experience and periodically reviewed against industry standards. Industry standards and the Company experience may be limited on certain products.
44 | ||
Voya Retirement Insurance and Annuity Company and Subsidiaries
(A wholly owned subsidiary of Voya Holdings Inc.)
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
The following table presents the unobservable inputs for Level 3 fair value measurements as of September 30, 2015:
Range(1) | |||||||
Unobservable Input | FIA | Stabilizer / MCG | |||||
Interest rate implied volatility | — | 0.1% to 7.5% | |||||
Nonperformance risk | 0.21% to 1.4% | 0.21% to 1.4% | |||||
Actuarial Assumptions: | |||||||
Partial Withdrawals | 0.4% to 3.2% | — | |||||
Lapses | 0% to 45% | (2) | 0% to 50% | (3) | |||
Policyholder Deposits(4) | — | 0% to 65% | (3) | ||||
(1) Represents the range of reasonable assumptions that management has used in its fair value calculations.
(2) Lapse rates tend to be lower during the contractual surrender charge period and higher after the surrender charge period ends; the highest lapse rates occur in the year immediately after the end of the surrender charge period.
(3) Stabilizer contracts with recordkeeping agreements have different range of lapse and policyholder deposit assumptions from Stabilizer (Investment only) and MCG contracts as shown below:
Percentage of Plans | Overall Range of Lapse Rates | Range of Lapse Rates for 85% of Plans | Overall Range of Policyholder Deposits | Range of Policyholder Deposits for 85% of Plans | ||||||
Stabilizer (Investment Only) and MCG Contracts | 90 | % | 0-25% | 0-15% | 0-30% | 0-15% | ||||
Stabilizer with Recordkeeping Agreements | 10 | % | 0-50% | 0-25% | 0-65% | 0-25% | ||||
Aggregate of all plans | 100 | % | 0-50% | 0-25% | 0-65% | 0-25% | ||||
(4) Measured as a percentage of assets under management or assets under administration.
The following table presents the unobservable inputs for Level 3 fair value measurements as of December 31, 2014:
Range(1) | |||||||
Unobservable Input | FIA | Stabilizer / MCG | |||||
Interest rate implied volatility | — | 0.2% to 7.6% | |||||
Nonperformance risk | 0.13% to 1.1% | 0.13% to 1.1% | |||||
Actuarial Assumptions: | |||||||
Partial Withdrawals | 0.4% to 3.2% | — | |||||
Lapses | 0% to 45% | (2) | 0% to 50% | (3) | |||
Policyholder Deposits(4) | — | 0% to 65% | (3) | ||||
(1) Represents the range of reasonable assumptions that management has used in its fair value calculations.
(2) Lapse rates tend to be lower during the contractual surrender charge period and higher after the surrender charge period ends; the highest lapse rates occur in the year immediately after the end of the surrender charge period.
(3) Stabilizer contracts with recordkeeping agreements have different range of lapse and policyholder deposit assumptions from Stabilizer (Investment only) and MCG contracts as shown below:
Percentage of Plans | Overall Range of Lapse Rates | Range of Lapse Rates for 85% of Plans | Overall Range of Policyholder Deposits | Range of Policyholder Deposits for 85% of Plans | ||||||
Stabilizer (Investment Only) and MCG Contracts | 87 | % | 0-30% | 0-15% | 0-45% | 0-15% | ||||
Stabilizer with Recordkeeping Agreements | 13 | % | 0-50% | 0-25% | 0-65% | 0-25% | ||||
Aggregate of all plans | 100 | % | 0-50% | 0-25% | 0-65% | 0-25% | ||||
(4) Measured as a percentage of assets under management or assets under administration.
Generally, the following will cause an increase (decrease) in the FIA embedded derivative fair value liability:
• | A decrease (increase) in nonperformance risk |
• | A decrease (increase) in lapses |
45 | ||
Voya Retirement Insurance and Annuity Company and Subsidiaries
(A wholly owned subsidiary of Voya Holdings Inc.)
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
Generally, the following will cause an increase (decrease) in the derivative and embedded derivative fair value liabilities related to Stabilizer and MCG contracts:
• | An increase (decrease) in interest rate implied volatility |
• | A decrease (increase) in nonperformance risk |
• | A decrease (increase) in lapses |
• | A decrease (increase) in policyholder deposits |
The Company notes the following interrelationships:
• | Generally, an increase (decrease) in interest rate volatility will increase (decrease) lapses of Stabilizer and MCG contracts due to dynamic participant behavior. |
Other Financial Instruments
The carrying values and estimated fair values of the Company’s financial instruments as of the dates indicated:
September 30, 2015 | December 31, 2014 | ||||||||||||||
Carrying Value | Fair Value | Carrying Value | Fair Value | ||||||||||||
Assets: | |||||||||||||||
Fixed maturities, including securities pledged | $ | 22,185.6 | $ | 22,185.6 | $ | 21,616.6 | $ | 21,616.6 | |||||||
Equity securities, available-for-sale | 132.1 | 132.1 | 121.9 | 121.9 | |||||||||||
Mortgage loans on real estate | 3,867.4 | 4,031.6 | 3,513.0 | 3,680.6 | |||||||||||
Policy loans | 233.6 | 233.6 | 239.1 | 239.1 | |||||||||||
Cash, cash equivalents, short-term investments and short-term investments under securities loan agreements | 924.4 | 924.4 | 1,048.1 | 1,048.1 | |||||||||||
Derivatives | 530.6 | 530.6 | 562.0 | 562.0 | |||||||||||
Notes receivable from affiliate | 175.0 | 208.3 | 175.0 | 216.7 | |||||||||||
Assets held in separate accounts | 57,384.2 | 57,384.2 | 62,808.1 | 62,808.1 | |||||||||||
Liabilities: | |||||||||||||||
Investment contract liabilities: | |||||||||||||||
Funding agreements without fixed maturities and deferred annuities(1) | 22,594.4 | 27,297.5 | 21,503.3 | 26,023.3 | |||||||||||
Supplementary contracts, immediate annuities and other | 421.7 | 507.5 | 442.4 | 546.3 | |||||||||||
Derivatives: | |||||||||||||||
Annuity product guarantees: | |||||||||||||||
FIA | 22.6 | 22.6 | 26.3 | 26.3 | |||||||||||
Stabilizer and MCGs | 162.6 | 162.6 | 102.9 | 102.9 | |||||||||||
Other derivatives | 162.2 | 162.2 | 217.0 | 217.0 | |||||||||||
Long-term debt | 4.9 | 4.9 | 4.9 | 4.9 | |||||||||||
Embedded derivatives on reinsurance | (47.8 | ) | (47.8 | ) | (13.0 | ) | (13.0 | ) | |||||||
(1) Certain amounts included in Funding agreements without fixed maturities and deferred annuities are also reflected within the Annuity product guarantees section of the table above.
46 | ||
Voya Retirement Insurance and Annuity Company and Subsidiaries
(A wholly owned subsidiary of Voya Holdings Inc.)
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
The following disclosures are made in accordance with the requirements of ASC Topic 825 which requires disclosure of fair value information about financial instruments, whether or not recognized at fair value on the Condensed Consolidated Balance Sheets, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates, in many cases, could not be realized in immediate settlement of the instrument.
ASC Topic 825 excludes certain financial instruments, including insurance contracts and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.
The following valuation methods and assumptions were used by the Company in estimating the fair value of the following financial instruments, which are not carried at fair value on the Condensed Consolidated Balance Sheets:
Mortgage loans on real estate: The fair values for mortgage loans on real estate are estimated on a monthly basis using discounted cash flow analyses and rates currently being offered in the marketplace for similar loans to borrowers with similar credit ratings. Loans with similar characteristics are aggregated for purposes of the calculations. Mortgage loans on real estate are classified as Level 3.
Policy loans: The fair value of policy loans approximates the carrying value of the loans. Policy loans are collateralized by the cash surrender value of the associated insurance contracts and are classified as Level 2.
Notes receivable from affiliates: Estimated fair value of the Company’s notes receivable from affiliates is determined primarily using a matrix-based pricing. The model considers the current level of risk-free interest rates, credit quality of the issuer and cash flow characteristics of the security model and is classified as Level 2.
Investment contract liabilities:
Funding agreements without a fixed maturity and deferred annuities: Fair value is estimated as the mean present value of stochastically modeled cash flows associated with the contract liabilities taking into account assumptions about contract holder behavior. The stochastic valuation scenario set is consistent with current market parameters and discount is taken using stochastically evolving risk-free rates in the scenarios plus an adjustment for nonperformance risk. Margins for non-financial risks associated with the contract liabilities are also included. These liabilities are classified as Level 3.
Supplementary contracts and immediate annuities: Fair value is estimated as the mean present value of the single deterministically modeled cash flows associated with the contract liabilities discounted using stochastically evolving short risk-free rates in the scenarios plus an adjustment for nonperformance risk. The valuation is consistent with current market parameters. Margins for non-financial risks associated with the contract liabilities are also included. These liabilities are classified as Level 3.
Long-term debt: Estimated fair value of the Company’s long-term debt is based upon discounted future cash flows using a discount rate approximating the current market rate, incorporating nonperformance risk. Long-term debt is classified as Level 2.
Fair value estimates are made at a specific point in time, based on available market information and judgments about various financial instruments, such as estimates of timing and amounts of future cash flows. Such estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument, nor do they consider the tax impact of the realization of unrealized capital gains (losses). In many cases, the fair value estimates cannot be substantiated by comparison to independent markets, nor can the disclosed value be realized in immediate settlement of the instruments. In evaluating the Company’s management of interest rate, price and liquidity risks, the fair values of all assets and liabilities should be taken into consideration, not only those presented above.
47 | ||
Voya Retirement Insurance and Annuity Company and Subsidiaries
(A wholly owned subsidiary of Voya Holdings Inc.)
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
5. Deferred Policy Acquisition Costs and Value of Business Acquired
The following tables present a rollforward of DAC and VOBA for the periods indicated:
2015 | |||||||||||
DAC | VOBA | Total | |||||||||
Balance as of January 1, 2015 | $ | 396.5 | $ | 526.8 | $ | 923.3 | |||||
Deferrals of commissions and expenses | 56.0 | 4.4 | 60.4 | ||||||||
Amortization: | |||||||||||
Amortization | (85.9 | ) | (99.6 | ) | (185.5 | ) | |||||
Interest accrued(1) | 27.1 | 42.3 | 69.4 | ||||||||
Net amortization included in the Condensed Consolidated Statements of Operations | (58.8 | ) | (57.3 | ) | (116.1 | ) | |||||
Change in unrealized capital gains/losses on available-for-sale securities | 70.2 | 154.0 | 224.2 | ||||||||
Balance as of September 30, 2015 | $ | 463.9 | $ | 627.9 | $ | 1,091.8 | |||||
2014 | |||||||||||
DAC | VOBA | Total | |||||||||
Balance as of January 1, 2014 | $ | 476.2 | $ | 696.6 | $ | 1,172.8 | |||||
Deferrals of commissions and expenses | 51.0 | 5.2 | 56.2 | ||||||||
Amortization: | |||||||||||
Amortization | (69.6 | ) | (92.2 | ) | (161.8 | ) | |||||
Interest accrued(1) | 26.8 | 44.8 | 71.6 | ||||||||
Net amortization included in the Condensed Consolidated Statements of Operations | (42.8 | ) | (47.4 | ) | (90.2 | ) | |||||
Change in unrealized capital gains/losses on available-for-sale securities | (75.4 | ) | (102.4 | ) | (177.8 | ) | |||||
Balance as of September 30, 2014 | $ | 409.0 | $ | 552.0 | $ | 961.0 | |||||
(1) Interest accrued at the following rates for VOBA: 5.5% to 7.0% during 2015 and 2014.
48 | ||
Voya Retirement Insurance and Annuity Company and Subsidiaries
(A wholly owned subsidiary of Voya Holdings Inc.)
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
6. Capital Contributions and Dividends
During the nine months ended September 30, 2015 and 2014, VRIAC did not receive any capital contributions from its Parent.
During the nine months ended September 30, 2015, VRIAC declared an ordinary dividend to its Parent in the amount of $231.0, which was paid to its Parent on May 20, 2015. During the nine months ended September 30, 2014, VRIAC paid an ordinary dividend in the amount of $281.0 to its Parent.
7. Accumulated Other Comprehensive Income (Loss)
Shareholder’s equity included the following components of Accumulated Other Comprehensive Income ("AOCI") as of the dates indicated:
September 30, | ||||||||
2015 | 2014 | |||||||
Fixed maturities, net of OTTI | $ | 856.2 | $ | 1,417.5 | ||||
Equity securities, available-for-sale | 14.7 | 15.4 | ||||||
Derivatives | 215.0 | 178.8 | ||||||
DAC/VOBA and Sales inducements adjustment on available-for-sale securities | (328.0 | ) | (513.1 | ) | ||||
Premium deficiency reserve adjustment | (86.4 | ) | (117.8 | ) | ||||
Other | 0.1 | — | * | |||||
Unrealized capital gains (losses), before tax | 671.6 | 980.8 | ||||||
Deferred income tax asset (liability) | (111.7 | ) | (216.3 | ) | ||||
Unrealized capital gains (losses), after tax | 559.9 | 764.5 | ||||||
Pension and other postretirement benefits liability, net of tax | 7.3 | 8.7 | ||||||
AOCI | $ | 567.2 | $ | 773.2 | ||||
* Less than $0.1.
49 | ||
Voya Retirement Insurance and Annuity Company and Subsidiaries
(A wholly owned subsidiary of Voya Holdings Inc.)
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
Changes in AOCI, including the reclassification adjustments recognized in the Condensed Consolidated Statements of Operations were as follows for the periods indicated:
Three Months Ended September 30, 2015 | ||||||||||||
Before-Tax Amount | Income Tax | After-Tax Amount | ||||||||||
Available-for-sale securities: | ||||||||||||
Fixed maturities | $ | (137.4 | ) | $ | 47.7 | $ | (89.7 | ) | ||||
Equity securities | — | — | — | |||||||||
Other | — | — | — | |||||||||
OTTI | 0.6 | (0.2 | ) | 0.4 | ||||||||
Adjustments for amounts recognized in Net realized capital gains (losses) in the Condensed Consolidated Statements of Operations | 26.1 | (9.2 | ) | 16.9 | ||||||||
DAC/VOBA and Sales inducements | 44.0 | (15.4 | ) | 28.6 | ||||||||
Premium deficiency reserve adjustment | 8.4 | (2.9 | ) | 5.5 | ||||||||
Change in unrealized gains/losses on available-for-sale securities | (58.3 | ) | 20.0 | (38.3 | ) | |||||||
Derivatives: | ||||||||||||
Derivatives | 17.3 | (1) | (6.0 | ) | 11.3 | |||||||
Adjustments related to effective cash flow hedges for amounts recognized in Net investment income in the Condensed Consolidated Statements of Operations | (3.3 | ) | 1.2 | (2.1 | ) | |||||||
Change in unrealized gains/losses on derivatives | 14.0 | (4.8 | ) | 9.2 | ||||||||
Pension and other postretirement benefits liability: | ||||||||||||
Amortization of prior service cost recognized in Operating expenses in the Condensed Consolidated Statements of Operations | (0.6 | ) | 0.2 | (0.4 | ) | |||||||
Change in pension and other postretirement benefits liability | (0.6 | ) | 0.2 | (0.4 | ) | |||||||
Change in Other comprehensive income (loss) | $ | (44.9 | ) | $ | 15.4 | $ | (29.5 | ) | ||||
(1) See the Derivative Financial Instruments Note to these Condensed Consolidated Financial Statements for additional information. | ||||||||||||
50 | ||
Voya Retirement Insurance and Annuity Company and Subsidiaries
(A wholly owned subsidiary of Voya Holdings Inc.)
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
Nine Months Ended September 30, 2015 | ||||||||||||
Before-Tax Amount | Income Tax | After-Tax Amount | ||||||||||
Available-for-sale securities: | ||||||||||||
Fixed maturities | $ | (736.2 | ) | $ | 255.5 | $ | (480.7 | ) | ||||
Equity securities | (0.1 | ) | — | (0.1 | ) | |||||||
Other | — | — | — | |||||||||
OTTI | 2.3 | (0.8 | ) | 1.5 | ||||||||
Adjustments for amounts recognized in Net realized capital gains (losses) in the Condensed Consolidated Statements of Operations | 36.8 | (12.9 | ) | 23.9 | ||||||||
DAC/VOBA and Sales inducements | 224.4 | (1) | (78.5 | ) | 145.9 | |||||||
Premium deficiency reserve adjustment | 43.4 | (15.2 | ) | 28.2 | ||||||||
Change in unrealized gains/losses on available-for-sale securities | (429.4 | ) | 148.1 | (281.3 | ) | |||||||
Derivatives: | ||||||||||||
Derivatives | 22.6 | (2) | (7.9 | ) | 14.7 | |||||||
Adjustments related to effective cash flow hedges for amounts recognized in Net investment income in the Condensed Consolidated Statements of Operations | (10.2 | ) | 3.6 | (6.6 | ) | |||||||
Change in unrealized gains/losses on derivatives | 12.4 | (4.3 | ) | 8.1 | ||||||||
Pension and other postretirement benefits liability: | ||||||||||||
Amortization of prior service cost recognized in Operating expenses in the Condensed Consolidated Statements of Operations | (1.7 | ) | 0.6 | (1.1 | ) | |||||||
Change in pension and other postretirement benefits liability | (1.7 | ) | 0.6 | (1.1 | ) | |||||||
Change in Other comprehensive income (loss) | $ | (418.7 | ) | $ | 144.4 | $ | (274.3 | ) | ||||
(1) See the Deferred Policy Acquisition Costs and Value of Business Acquired Note to these Condensed Consolidated Financial Statements for additional information.
(2) See the Derivative Financial Instruments Note to these Condensed Consolidated Financial Statements for additional information.
51 | ||
Voya Retirement Insurance and Annuity Company and Subsidiaries
(A wholly owned subsidiary of Voya Holdings Inc.)
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
Three Months Ended September 30, 2014 | ||||||||||||
Before-Tax Amount | Income Tax | After-Tax Amount | ||||||||||
Available-for-sale securities: | ||||||||||||
Fixed maturities | $ | (235.9 | ) | $ | 80.6 | $ | (155.3 | ) | ||||
Equity securities | (0.5 | ) | — | (0.5 | ) | |||||||
Other | — | * | — | * | — | * | ||||||
OTTI | 1.0 | (0.3 | ) | 0.7 | ||||||||
Adjustments for amounts recognized in Net realized capital gains (losses) in the Condensed Consolidated Statements of Operations | 6.8 | (2.4 | ) | 4.4 | ||||||||
DAC/VOBA and Sales inducements | 67.1 | (23.4 | ) | 43.7 | ||||||||
Premium deficiency reserve adjustment | 9.9 | (3.5 | ) | 6.4 | ||||||||
Change in unrealized gains/losses on available-for-sale securities | (151.6 | ) | 51.0 | (100.6 | ) | |||||||
Derivatives: | ||||||||||||
Derivatives | 6.0 | (1) | (2.1 | ) | 3.9 | |||||||
Adjustments related to effective cash flow hedges for amounts recognized in Net investment income in the Condensed Consolidated Statements of Operations | (2.0 | ) | 0.7 | (1.3 | ) | |||||||
Change in unrealized gains/losses on derivatives | 4.0 | (1.4 | ) | 2.6 | ||||||||
Pension and other postretirement benefits liability: | ||||||||||||
Amortization of prior service cost recognized in Operating expenses in the Condensed Consolidated Statements of Operations | (0.6 | ) | 0.2 | (0.4 | ) | |||||||
Change in pension and other postretirement benefits liability | (0.6 | ) | 0.2 | (0.4 | ) | |||||||
Change in Other comprehensive income (loss) | $ | (148.2 | ) | $ | 49.8 | $ | (98.4 | ) | ||||
* Less than $0.1. | ||||||||||||
(1) See the Derivative Financial Instruments Note to these Condensed Consolidated Financial Statements for additional information. | ||||||||||||
52 | ||
Voya Retirement Insurance and Annuity Company and Subsidiaries
(A wholly owned subsidiary of Voya Holdings Inc.)
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
Nine Months Ended September 30, 2014 | ||||||||||||
Before-Tax Amount | Income Tax | After-Tax Amount | ||||||||||
Available-for-sale securities: | ||||||||||||
Fixed maturities | $ | 581.7 | $ | (203.6 | ) | $ | 378.1 | |||||
Equity securities | (0.4 | ) | — | (0.4 | ) | |||||||
Other | — | * | — | * | — | * | ||||||
OTTI | 8.3 | (2.9 | ) | 5.4 | ||||||||
Adjustments for amounts recognized in Net realized capital gains (losses) in the Condensed Consolidated Statements of Operations | 6.9 | (2.4 | ) | 4.5 | ||||||||
DAC/VOBA and Sales inducements | (177.8 | ) | (1) | 62.3 | (115.5 | ) | ||||||
Premium deficiency reserve adjustment | (35.4 | ) | 12.4 | (23.0 | ) | |||||||
Change in unrealized gains/losses on available-for-sale securities | 383.3 | (134.2 | ) | 249.1 | ||||||||
Derivatives: | ||||||||||||
Derivatives | 50.9 | (2) | (17.8 | ) | 33.1 | |||||||
Adjustments related to effective cash flow hedges for amounts recognized in Net investment income in the Condensed Consolidated Statements of Operations | (5.1 | ) | 1.8 | (3.3 | ) | |||||||
Change in unrealized gains/losses on derivatives | 45.8 | (16.0 | ) | 29.8 | ||||||||
Pension and other postretirement benefits liability: | ||||||||||||
Amortization of prior service cost recognized in Operating expenses in the Condensed Consolidated Statements of Operations | (1.7 | ) | 0.6 | (1.1 | ) | |||||||
Change in pension and other postretirement benefits liability | (1.7 | ) | 0.6 | (1.1 | ) | |||||||
Change in Other comprehensive income (loss) | $ | 427.4 | $ | (149.6 | ) | $ | 277.8 | |||||
* Less than $0.1.
(1) See the Deferred Policy Acquisition Costs and Value of Business Acquired Note to these Condensed Consolidated Financial Statements for additional information.
(2) See the Derivative Financial Instruments Note to these Condensed Consolidated Financial Statements for additional information.
53 | ||
Voya Retirement Insurance and Annuity Company and Subsidiaries
(A wholly owned subsidiary of Voya Holdings Inc.)
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
8. Income Taxes
Income taxes were different from the amount computed by applying the federal income tax rate to Income (loss) before income taxes for the following reasons for the periods indicated:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2015 | 2014 | 2015 | 2014 | ||||||||||||
Income (loss) before income taxes | $ | (12.3 | ) | $ | 60.0 | $ | 172.9 | $ | 224.7 | ||||||
Tax rate | 35.0 | % | 35.0 | % | 35.0 | % | 35.0 | % | |||||||
Income tax expense (benefit) at federal statutory rate | (4.3 | ) | 21.0 | 60.5 | 78.6 | ||||||||||
Tax effect of: | |||||||||||||||
Dividends received deduction | (3.2 | ) | (9.9 | ) | (17.2 | ) | (23.8 | ) | |||||||
IRS audit adjustment | — | — | (0.1 | ) | (0.1 | ) | |||||||||
Other | 1.1 | (1.3 | ) | (0.4 | ) | (0.5 | ) | ||||||||
Income tax expense (benefit) | $ | (6.4 | ) | $ | 9.8 | $ | 42.8 | $ | 54.2 | ||||||
Valuation allowances are provided when it is considered unlikely that deferred tax assets will be realized. As of September 30, 2015 and December 31, 2014, the Company had a total valuation allowance of $10.7. As of September 30, 2015 and December 31, 2014, $130.0 was allocated to continuing operations, and $(119.3) was allocated to Other comprehensive income related to realized and unrealized capital losses.
For the three and nine months ended September 30, 2015 and 2014, there were no changes in the valuation allowance or the allocation to continuing operations or Other comprehensive income.
Tax Sharing Agreement
The results of the Company's operations are included in the consolidated tax return of Voya Financial, Inc. Generally, the Company's Condensed Consolidated Financial Statements recognize the current and deferred income tax consequences that result from the Company's activities during the current and preceding periods pursuant to the provisions of Income Taxes (ASC Topic 740) as if the Company were a separate taxpayer rather than a member of Voya Financial, Inc.'s consolidated income tax return group with the exception of any net operating loss carryforwards and capital loss carryforwards, which are recorded pursuant to the tax sharing agreement. If the Company instead were to follow a separate taxpayer approach without any exceptions, there would be no impact to income tax expense (benefit) for the periods indicated above. Also, any current tax benefit related to the Company's tax attributes realized by virtue of its inclusion in the consolidated tax return of Voya Financial, Inc. would have been recorded directly to equity rather than income. Under the tax sharing agreement, Voya Financial, Inc. will pay the Company for the tax benefits of ordinary and capital losses only in the event that the consolidated tax group actually uses the tax benefit of losses generated.
Tax Regulatory Matters
During April 2015, the Internal Revenue Service ("IRS") completed its examination of Voya Financial, Inc.'s consolidated return (including the Company) through tax year 2013. The 2013 audit settlement did not have a material impact on the Company. Voya Financial, Inc. (including the Company) is currently under audit by the IRS, and it is expected that the examination of tax year 2014 will be finalized within the next twelve months. Voya Financial, Inc. (including the Company) and the IRS have agreed to participate in the Compliance Assurance Process for the tax years 2014 and 2015.
9. Financing Agreements
Reciprocal Loan Agreement
The Company maintains a reciprocal loan agreement with Voya Financial, Inc., an affiliate, to facilitate the handling of unanticipated short-term cash requirements that arise in the ordinary course of business. Under this agreement, which became effective in June
54 | ||
Voya Retirement Insurance and Annuity Company and Subsidiaries
(A wholly owned subsidiary of Voya Holdings Inc.)
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
2001 and expires on April 1, 2016, either party can borrow from the other up to 3.0% of the Company’s statutory admitted assets as of the preceding December 31. 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.
Under this agreement, the Company incurred $0.1 in interest expense for both three and nine months ended September 30, 2015. The Company incurred minimal interest expense for the three and nine months ended September 30, 2014. The Company did not earn interest income for the three months ended September 30, 2015 and earned $0.7 in interest income for the nine months ended September 30, 2015. The Company did not earn interest income for the three months ended September 30, 2014 and earned $0.2 in interest income for the nine months ended September 30, 2014. As of September 30, 2015 and December 31, 2014, the Company did not have an outstanding receivable/payable from/to Voya Financial, Inc. under the reciprocal loan agreement.
For information on the Company's additional financing agreements, see the Financing Agreements Note in the Consolidated Financial Statements in Part II, Item 8. in the Annual Report on Form 10-K.
10. Commitments and Contingencies
Commitments
Through the normal course of investment operations, the Company commits to either purchase or sell securities, mortgage loans, or money market instruments, at a specified future date and at a specified price or yield. The inability of counterparties to honor these commitments may result in either a higher or lower replacement cost. Also, there is likely to be a change in the value of the securities underlying the commitments.
As of September 30, 2015 and December 31, 2014, the Company had off-balance sheet commitments to purchase investments of $488.7 and $334.0, respectively.
Restricted Assets
The Company is required to maintain assets on deposit with various regulatory authorities to support its insurance operations. The Company may also post collateral in connection with certain securities lending, repurchase agreements, funding agreements, letter of credit ("LOC") and derivative transactions as described further in this note. The components of the fair value of the restricted assets were as follows as of the dates indicated:
September 30, 2015 | December 31, 2014 | ||||||
Other fixed maturities-state deposits | $ | 13.5 | $ | 13.5 | |||
Securities pledged(1) | 264.2 | 235.3 | |||||
Total restricted assets | $ | 277.7 | $ | 248.8 | |||
(1) Includes the fair value of loaned securities of $192.5 and $174.9 as of September 30, 2015 and December 31, 2014, respectively. In addition, as of September 30, 2015 and December 31, 2014, the Company delivered securities as collateral of $71.7 and $60.4, respectively. Loaned securities and securities delivered as collateral are included in Securities pledged on the Condensed Consolidated Balance Sheets.
Litigation, Regulatory Matters and Loss Contingencies
Litigation, regulatory and other loss contingencies arise in connection with the Company's activities as a diversified financial services firm. The Company is a defendant in a number of litigation matters arising from the conduct of its business, both in the ordinary course and otherwise. In some of these matters, claimants seek to recover very large or indeterminate amounts, including compensatory, punitive, treble and exemplary damages. Modern pleading practice in the U.S. permits considerable variation in the assertion of monetary damages and other relief. Claimants are not always required to specify the monetary damages they seek or they may be required only to state an amount sufficient to meet a court's jurisdictional requirements. Moreover, some jurisdictions allow claimants to allege monetary damages that far exceed any reasonably possible verdict. The variability in pleading requirements and past experience demonstrates that the monetary and other relief that may be requested in a lawsuit or claim often bears little relevance to the merits or potential value of a claim. Litigation against the Company includes a variety of claims including negligence, breach of contract, fraud, violation of regulation or statute, breach of fiduciary duty, negligent misrepresentation, failure to supervise, elder abuse and other torts.
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Voya Retirement Insurance and Annuity Company and Subsidiaries
(A wholly owned subsidiary of Voya Holdings Inc.)
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
As with other financial services companies, the Company periodically receives informal and formal requests for information from various state and federal governmental agencies and self-regulatory organizations in connection with inquiries and investigations of the products and practices of the Company or the financial services industry. It is the practice of the Company to cooperate fully in these matters. Regulatory investigations, exams, inquiries and audits could result in regulatory action against the Company. The potential outcome of such action is difficult to predict but could subject the Company to adverse consequences, including, but not limited to, settlement payments, additional payments to beneficiaries, and additional escheatment of funds deemed abandoned under state laws. They may also result in fines and penalties and changes to the Company's procedures for the identification and escheatment of abandoned property or the correction of processing errors and other financial liability.
The outcome of a litigation or regulatory matter is difficult to predict and the amount or range of potential losses associated with these or other loss contingencies requires significant management judgment. It is not possible to predict the ultimate outcome or to provide reasonably possible losses or ranges of losses for all pending regulatory matters, litigation, and other loss contingencies. While it is possible that an adverse outcome in certain cases could have a material adverse effect upon the Company's financial position, based on information currently known, management believes that neither the outcome of pending litigation and regulatory matters, nor potential liabilities associated with other loss contingencies, are likely to have such an effect. However, given the large and indeterminate amounts sought in certain litigation and the inherent unpredictability of all such matters, it is possible that an adverse outcome in certain of the Company's litigation or regulatory matters, or liabilities arising from other loss contingencies, could, from time to time, have a material adverse effect upon the Company's results of operations or cash flows in a particular quarterly or annual period.
For some matters, the Company is able to estimate a possible range of loss. For such matters in which a loss is probable, an accrual has been made. For matters where the Company, however, believes a loss is reasonably possible, but not probable, no accrual is required. For matters for which an accrual has been made, but there remains a reasonably possible range of loss in excess of the amounts accrued or for matters where no accrual is required, the Company develops an estimate of the unaccrued amounts of the reasonably possible range of losses. As of September 30, 2015, the Company estimates the aggregate range of reasonably possible losses, in excess of any amounts accrued for these matters as of such date, is not material to the Company.
For other matters, the Company is currently not able to estimate the reasonably possible loss or range of loss. The Company is often unable to estimate the possible loss or range of loss until developments in such matters have provided sufficient information to support an assessment of the range of possible loss, such as quantification of a damage demand from plaintiffs, discovery from plaintiffs and other parties, investigation of factual allegations, rulings by a court on motions or appeals, analysis by experts and the progress of settlement discussions. On a quarterly and annual basis, the Company reviews relevant information with respect to litigation and regulatory contingencies and updates the Company's accruals, disclosures and reasonably possible losses or ranges of loss based on such reviews.
11. Related Party Transactions
Reinsurance Agreements
The Company has entered into the following agreements that were accounted for under the deposit method with two of its affiliates. As of September 30, 2015 and December 31, 2014, the Company had deposit assets of $91.1 and $93.9, respectively, and deposit liabilities of $195.2 and $201.1, respectively related to these agreements. Deposit assets and liabilities are included in Other assets and Other liabilities, respectively, on the Condensed Consolidated Balance Sheets.
Effective January 1, 2014, VRIAC entered into a coinsurance agreement with Langhorne I, LLC, an affiliated captive reinsurance company, to manage reserve and capital requirements in connection with a portion of the Company's Stabilizer and Managed Custody Guarantee business.
Effective December 31, 2012, the Company entered into an automatic reinsurance agreement with its affiliate, Security Life of Denver International Limited ("SLDI"), to manage the reserve and capital requirements in connection with a portion of its deferred annuities business. Under the terms of the agreement, the Company reinsures to SLDI, on an indemnity reinsurance basis, a quota share of its liabilities on the certain contracts. The quota share percentage with respect to the contracts that are delivered or issued for delivery in the State of New York is 90%, and the quota share percentage with respect to the contracts that are delivered or issued for delivery outside of the State of New York is 100%.
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Item 2. Management’s Narrative Analysis of the Results of Operations and Financial Condition
(Dollar amounts in millions, unless otherwise stated)
For the purposes of the discussion in this Quarterly Report on Form 10-Q, the term "VRIAC" refers to Voya Retirement Insurance and Annuity Company (formerly ING Life Insurance and Annuity Company), and the terms "Company," "we," "our," "us" refer to Voya Retirement Insurance and Annuity Company and its subsidiaries. We are a direct, wholly owned subsidiary of Voya Holdings Inc. (formerly Lion Connecticut Holdings Inc.) ("Parent"), which is a direct, wholly owned subsidiary of Voya Financial, Inc.
The following discussion and analysis presents a review of our results of operations for the three and nine months ended September 30, 2015 and 2014 and financial condition as of September 30, 2015 and December 31, 2014. This item should be read in its entirety and in conjunction with the Condensed Consolidated Financial Statements and related notes contained in Part I., Item 1. of this Quarterly Report on Form 10-Q, as well as "Management's Narrative Analysis of the Results of Operations and Financial Condition" section contained in our Annual Report on Form 10-K for the year ended December 31, 2014 ("Annual Report on Form 10-K").
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
VRIAC is a stock life insurance company domiciled in the State of Connecticut. VRIAC and its wholly owned subsidiaries (collectively, the "Company") provide financial products and services in the United States. VRIAC is authorized to conduct its insurance business in all states and in the District of Columbia, Guam, Puerto Rico and the Virgin Islands.
The Condensed Consolidated Financial Statements include the accounts of VRIAC and its wholly owned subsidiaries, Voya Financial Partners, LLC (formerly ING Financial Advisers, LLC) ("VFP") 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. Additionally, we provide pension risk transfer solutions to institutional customers looking to transfer their defined benefit plan obligations to us. 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.
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. of this Quarterly Report on Form 10-Q.
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.
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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") and 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 on 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.
Assumptions and Periodic Review
Changes in assumptions can have a significant impact on DAC and VOBA, amortization rates and results of operations. Assumptions are management's best estimates of future outcome. We periodically review these assumptions against actual experience and, based on additional information that becomes available, update our assumptions.
During the third quarter of 2015 and 2014, we conducted our annual review of assumptions, including projection model inputs. As a result of these reviews, we made a number of changes, which resulted in net unfavorable unlocking of DAC and VOBA of $36.5 million recorded in the current period. For the three months ended September 30, 2014, changes in assumptions resulted in net unfavorable unlocking of DAC and VOBA of $24.7 million.
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Results of Operations
($ in millions) | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||
2015 | 2014 | 2015 | 2014 | ||||||||||||
Revenues: | |||||||||||||||
Net investment income | $ | 353.0 | $ | 348.2 | $ | 1,044.7 | $ | 1,031.9 | |||||||
Fee income | 189.2 | 198.4 | 579.7 | 587.6 | |||||||||||
Premiums | 556.0 | 27.5 | 592.1 | 56.0 | |||||||||||
Broker-dealer commission revenue | 56.0 | 61.6 | 175.5 | 184.8 | |||||||||||
Net realized capital gains (losses): | |||||||||||||||
Total other-than-temporary impairments | (21.9 | ) | (1.9 | ) | (25.4 | ) | (4.2 | ) | |||||||
Less: Portion of other-than-temporary impairments recognized in Other comprehensive income (loss) | 0.3 | — | 1.1 | — | |||||||||||
Net other-than-temporary impairments recognized in earnings | (22.2 | ) | (1.9 | ) | (26.5 | ) | (4.2 | ) | |||||||
Other net realized capital gains (losses) | (68.4 | ) | (40.2 | ) | (159.6 | ) | (106.0 | ) | |||||||
Total net realized capital gains (losses) | (90.6 | ) | (42.1 | ) | (186.1 | ) | (110.2 | ) | |||||||
Other revenue | 0.4 | 1.9 | 1.2 | 3.6 | |||||||||||
Total revenues | 1,064.0 | 595.5 | 2,207.1 | 1,753.7 | |||||||||||
Benefits and expenses: | |||||||||||||||
Interest credited and other benefits to contract owners/policyholders | 759.0 | 225.4 | 1,163.1 | 688.2 | |||||||||||
Operating expenses | 197.2 | 185.0 | 579.4 | 565.8 | |||||||||||
Broker-dealer commission expense | 56.0 | 61.6 | 175.5 | 184.8 | |||||||||||
Net amortization of Deferred policy acquisition costs and Value of business acquired | 64.0 | 63.5 | 116.1 | 90.2 | |||||||||||
Interest expense | 0.1 | — | 0.1 | — | |||||||||||
Total benefits and expenses | 1,076.3 | 535.5 | 2,034.2 | 1,529.0 | |||||||||||
Income (loss) before income taxes | (12.3 | ) | 60.0 | 172.9 | 224.7 | ||||||||||
Income tax expense (benefit) | (6.4 | ) | 9.8 | 42.8 | 54.2 | ||||||||||
Net income (loss) | $ | (5.9 | ) | $ | 50.2 | $ | 130.1 | $ | 170.5 | ||||||
Three Months Ended September 30, 2015 compared to Three Months Ended September 30, 2014
Our Net income (loss) for the three months ended September 30, 2015 changed $56.1 million from net income of $50.2 million to net loss of $5.9 million, primarily due to higher Interest credited to contract owner account balances, unfavorable changes in Total net realized capital gains (losses), higher Operating expenses and lower Fee income, mostly offset by higher Premiums, higher Net investment income and a tax benefit.
Revenues
Total revenues increased $468.5 million from $595.5 million to $1,064.0 million primarily due to favorable changes in Premiums, partially offset by unfavorable changes in Total net realized capital gains (losses) and lower Fee income.
Net investment income increased $4.8 million from $348.2 million to $353.0 million primarily due to growth in the general account assets and higher prepayment income, partially offset by lower alternative investment income and the impact of the continued low interest rate environment on reinvestment rates.
Fee income decreased $9.2 million from $198.4 million to $189.2 million primarily due to lower retirement plan fees resulting from terminated contracts and the impact of unfavorable equity markets on Assets Under Management. Also contributing to the decrease were lower advisory fees.
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Premiums increased $528.5 million from $27.5 million to $556.0 million primarily due to premiums from pension risk transfer contracts, a new product that launched in the fourth quarter 2014. This increase corresponds to higher Interest credited and other benefits to contract owners/policyholders.
Total net realized capital losses increased $48.5 million from $42.1 million to $90.6 million primarily due to unfavorable changes in the fair value of embedded derivatives on product guarantees (from a loss of $12.5 million in the prior period to a loss of $65.7 million in the current period) and unfavorable changes in the realized losses from the impairment of available-for-sale fixed maturities, including securities pledged, partially offset by favorable changes in the fair values of derivatives. The changes in the fair value of the embedded derivatives on product guarantees and derivatives were primarily the result of interest rate movements in the current period compared to the prior period.
Benefits and Expenses
Total benefits and expenses increased $540.8 million from $535.5 million to $1,076.3 million due to higher Interest credited and other benefits to contract owners/policyholders and Operating expenses.
Interest credited and other benefits to contract owners/policyholders increased $533.6 million from $225.4 million to $759.0 million primarily due to an increase in reserves associated with pension risk transfer contracts.
Net amortization of DAC and VOBA increased $0.5 million from $63.5 million to $64.0 million primarily due to higher unfavorable unlocking driven by the annual assumption updates, mostly offset by lower amortization due to lower amortization rates and the impact of the embedded derivative associated with a reinsurance agreement.
Operating expenses increased $12.2 million from $185.0 million to $197.2 million primarily due to higher distribution expenses and higher administrative expenses, partially offset by lower mutual fund expenses.
Income Taxes
Income tax expense (benefit) changed $16.2 million from an expense of $9.8 million to a benefit of $6.4 million primarily due to a decrease in income before income taxes, partially offset by a decrease in the dividends received deduction.
Nine Months Ended September 30, 2015 compared to Nine Months Ended September 30, 2014
Our Net income (loss) for the nine months ended September 30, 2015 decreased by $40.4 million from $170.5 million to $130.1 million primarily due to higher Interest credited and other benefits to contract owners/policyholders, unfavorable changes in Total net realized capital gains (losses), higher Net amortization of DAC and VOBA and higher Operating expenses, partially offset by higher Premiums, higher Net investment income and lower Income tax expense.
Revenues
Total revenues increased $453.4 million from $1,753.7 million to $2,207.1 million, primarily due to higher Premiums and Net investment income, partially offset by unfavorable changes in Total net realized capital gains (losses) and lower Fee income.
Net investment income increased $12.8 million from $1,031.9 million to $1,044.7 million primarily due to growth in the general account assets and higher prepayment income, partially offset by lower alternative investment income and the impact of the continued low interest rate environment on reinvestment rates.
Premiums increased $536.1 million from $56.0 million to $592.1 million primarily due to premiums from pension risk transfer contracts. This increase in premiums corresponds to higher Interest credited and other benefits to contract owners/policyholders.
Fee income decreased $7.9 million from $587.6 million to $579.7 million primarily due to lower advisory fees, partially offset by growth in mutual fund custodial products.
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Total net realized capital losses increased $75.9 million from $110.2 million to $186.1 million primarily due to impairment of fixed maturities available-for-sale, including securities pledged and unfavorable changes in the fair value of fixed maturities using the fair value option and derivatives. Also contributing to the increase were unfavorable changes in the fair value of embedded derivatives on product guarantees (from a loss of $44.5 million in the prior period to a loss of $53.7 million in the current period). The changes in the fair value of fixed maturities using the fair value option, derivatives and embedded derivatives on product guarantees were primarily the result of interest rate movements in the current period compared to the prior period.
Other revenue decreased $2.4 million from $3.6 million to $1.2 million primarily due to changes in the market value adjustments related to retirement plans upon surrender during the current period.
Benefits and Expenses
Total benefits and expenses increased $505.2 million from $1,529.0 million to $2,034.2 million primarily due to higher Interest credited and other benefits to contract owners/policyholders and higher Net amortization of DAC and VOBA.
Interest credited and other benefits to contract owners/policyholders increased $474.9 million from $688.2 million to $1,163.1 million primarily due to an increase in reserves associated with pension risk transfer contracts and higher interest credited due to an increase in general account liabilities, which corresponds to the increase in general account assets, partially offset by a favorable change in the fair value of the embedded derivative on reinsurance.
Net amortization of DAC and VOBA increased $25.9 million from $90.2 million to $116.1 million primarily due to higher unfavorable unlocking driven by the annual assumption updates and the impact of the embedded derivative associated with a reinsurance agreement, partially offset by lower amortization due to lower amortization rates.
Operating expenses increased $13.6 million from $565.8 million to $579.4 million primarily due to higher commissions, higher distribution expenses and administrative expenses, partially offset by lower mutual fund expense.
Income Taxes
Income tax expense decreased $11.4 million from $54.2 million to $42.8 million primarily due to a decrease in income before income taxes, partially offset by a decrease in the dividends received deduction.
Financial Condition
Investments
See the Management's Narrative Analysis of the Results of Operations and Financial Condition in our Consolidated Financial Statements in Part II, Item. 7. of our Annual Report on Form 10-K for information on our investment strategy.
See the Investments Note in our Condensed Consolidated Financial Statements in Part I., Item 1.of this Quarterly Report on Form 10-Q for more information on investments.
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Portfolio Composition
The following table presents the investment portfolio as of the dates indicated:
($ in millions) | September 30, 2015 | December 31, 2014 | |||||||||||
Carrying Value | % of Total | Carrying Value | % of Total | ||||||||||
Fixed maturities, available-for-sale, excluding securities pledged | $ | 21,136.4 | 77.6 | % | $ | 20,655.6 | 77.8 | % | |||||
Fixed maturities, at fair value using the fair value option | 785.0 | 2.9 | % | 725.7 | 2.7 | % | |||||||
Equity securities, available-for-sale | 132.1 | 0.5 | % | 121.9 | 0.5 | % | |||||||
Short-term investments(1) | — | — | % | 241.5 | 1.0 | % | |||||||
Mortgage loans on real estate | 3,867.4 | 14.2 | % | 3,513.0 | 13.2 | % | |||||||
Policy loans | 233.6 | 0.8 | % | 239.1 | 0.9 | % | |||||||
Limited partnerships/corporations | 296.1 | 1.1 | % | 248.4 | 0.9 | % | |||||||
Derivatives | 530.6 | 1.9 | % | 562.0 | 2.1 | % | |||||||
Securities pledged | 264.2 | 1.0 | % | 235.3 | 0.9 | % | |||||||
Total investments | $ | 27,245.4 | 100.0 | % | $ | 26,542.5 | 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) | September 30, 2015 | ||||||||||||
Amortized Cost | % of Total | Fair Value | % of Total | ||||||||||
Fixed maturities: | |||||||||||||
U.S. Treasuries | $ | 792.0 | 3.7 | % | $ | 912.0 | 4.1 | % | |||||
U.S. Government agencies and authorities | 4.3 | — | % | 4.4 | — | % | |||||||
State, municipalities, and political subdivisions | 494.6 | 2.3 | % | 503.4 | 2.3 | % | |||||||
U.S. corporate public securities | 9,048.5 | 42.5 | % | 9,356.8 | 42.2 | % | |||||||
U.S. corporate private securities | 2,278.8 | 10.7 | % | 2,344.4 | 10.6 | % | |||||||
Foreign corporate public securities and foreign governments(1) | 2,798.6 | 13.1 | % | 2,792.0 | 12.6 | % | |||||||
Foreign corporate private securities(1) | 2,752.9 | 13.0 | % | 2,863.9 | 12.9 | % | |||||||
Residential mortgage-backed securities | 1,738.7 | 8.2 | % | 1,933.7 | 8.7 | % | |||||||
Commercial mortgage-backed securities | 1,115.7 | 5.2 | % | 1,183.4 | 5.3 | % | |||||||
Other asset-backed securities | 279.5 | 1.3 | % | 291.6 | 1.3 | % | |||||||
Total fixed maturities, including securities pledged | $ | 21,303.6 | 100.0 | % | $ | 22,185.6 | 100.0 | % | |||||
(1) Primarily U.S. dollar denominated.
($ in millions) | December 31, 2014 | ||||||||||||
Amortized Cost | % of Total | Fair Value | % of Total | ||||||||||
Fixed maturities: | |||||||||||||
U.S. Treasuries | $ | 649.0 | 3.2 | % | $ | 773.1 | 3.6 | % | |||||
U.S. Government agencies and authorities | 45.7 | 0.2 | % | 46.6 | 0.2 | % | |||||||
State, municipalities, and political subdivisions | 259.0 | 1.3 | % | 277.2 | 1.3 | % | |||||||
U.S. corporate public securities | 8,345.9 | 41.6 | % | 9,068.6 | 41.9 | % | |||||||
U.S. corporate private securities | 2,020.8 | 10.1 | % | 2,151.4 | 10.0 | % | |||||||
Foreign corporate public securities and foreign governments(1) | 2,778.3 | 13.9 | % | 2,887.1 | 13.3 | % | |||||||
Foreign corporate private securities(1) | 2,707.1 | 13.5 | % | 2,890.8 | 13.4 | % | |||||||
Residential mortgage-backed securities | 1,841.4 | 9.2 | % | 2,043.4 | 9.5 | % | |||||||
Commercial mortgage-backed securities | 998.9 | 5.0 | % | 1,078.0 | 5.0 | % | |||||||
Other asset-backed securities | 389.0 | 2.0 | % | 400.4 | 1.8 | % | |||||||
Total fixed maturities, including securities pledged | $ | 20,035.1 | 100.0 | % | $ | 21,616.6 | 100.0 | % | |||||
(1) Primarily U.S. dollar denominated.
As of September 30, 2015, the average duration of our fixed maturities portfolio, including securities pledged, is between 7.0 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.
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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 each scenario are considered to have the highest designation of NAIC 1. A large percentage of our RMBS securities carry the 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 any scenarios, which corresponds to the NAIC 1 designation. The 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 NAIC methodologies described above (which may not correspond to rating agency designations). NAIC designations (e.g., NAIC 1-6) are based on the 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 Moody's, S&P and Fitch . 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 September 30, 2015 and December 31, 2014, 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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The following tables present credit quality of fixed maturities, including securities pledged, using NAIC designations as of the dates indicated:
($ in millions) | September 30, 2015 | |||||||||||||||||||||||||||
NAIC Quality Designation | 1 | 2 | 3 | 4 | 5 | 6 | Total Fair Value | |||||||||||||||||||||
U.S. Treasuries | $ | 912.0 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 912.0 | ||||||||||||||
U.S. Government agencies and authorities | 4.4 | — | — | — | — | — | 4.4 | |||||||||||||||||||||
State, municipalities and political subdivisions | 491.7 | 11.7 | — | — | — | — | 503.4 | |||||||||||||||||||||
U.S. corporate public securities | 4,342.5 | 4,422.7 | 529.2 | 59.0 | — | 3.4 | 9,356.8 | |||||||||||||||||||||
U.S. corporate private securities | 1,207.8 | 1,032.9 | 84.2 | 19.5 | — | — | 2,344.4 | |||||||||||||||||||||
Foreign corporate public securities and foreign governments(1) | 1,268.7 | 1,306.0 | 203.2 | 13.6 | — | 0.5 | 2,792.0 | |||||||||||||||||||||
Foreign corporate private securities(1) | 369.2 | 2,349.1 | 145.0 | — | — | 0.6 | 2,863.9 | |||||||||||||||||||||
Residential mortgage-backed securities | 1,836.0 | 24.5 | 6.3 | 0.1 | 7.9 | 58.9 | 1,933.7 | |||||||||||||||||||||
Commercial mortgage-backed securities | 1,179.0 | — | 4.4 | — | — | — | 1,183.4 | |||||||||||||||||||||
Other asset-backed securities | 280.4 | 8.0 | — | 1.9 | 0.6 | 0.7 | 291.6 | |||||||||||||||||||||
Total fixed maturities | $ | 11,891.7 | $ | 9,154.9 | $ | 972.3 | $ | 94.1 | $ | 8.5 | $ | 64.1 | $ | 22,185.6 | ||||||||||||||
% of Fair Value | 53.6 | % | 41.3 | % | 4.4 | % | 0.4 | % | — | % | 0.3 | % | 100.0 | % | ||||||||||||||
(1) Primarily U.S. dollar denominated. | ||||||||||||||||||||||||||||
($ in millions) | December 31, 2014 | |||||||||||||||||||||||||||
NAIC Quality Designation | 1 | 2 | 3 | 4 | 5 | 6 | Total Fair Value | |||||||||||||||||||||
U.S. Treasuries | $ | 773.1 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 773.1 | ||||||||||||||
U.S. Government agencies and authorities | 46.6 | — | — | — | — | — | 46.6 | |||||||||||||||||||||
State, municipalities and political subdivisions | 272.1 | 5.1 | — | — | — | — | 277.2 | |||||||||||||||||||||
U.S. corporate public securities | 4,162.1 | 4,298.1 | 523.8 | 80.3 | 0.9 | 3.4 | 9,068.6 | |||||||||||||||||||||
U.S. corporate private securities | 897.7 | 1,135.6 | 109.9 | 8.2 | — | — | 2,151.4 | |||||||||||||||||||||
Foreign corporate public securities and foreign governments(1) | 1,283.7 | 1,437.1 | 158.7 | 7.6 | — | — | 2,887.1 | |||||||||||||||||||||
Foreign corporate private securities(1) | 317.3 | 2,509.6 | 47.7 | 12.9 | — | 3.3 | 2,890.8 | |||||||||||||||||||||
Residential mortgage-backed securities | 1,938.5 | 9.0 | 27.6 | — | 8.7 | 59.6 | 2,043.4 | |||||||||||||||||||||
Commercial mortgage-backed securities | 1,073.6 | — | 4.4 | — | — | — | 1,078.0 | |||||||||||||||||||||
Other asset-backed securities | 393.4 | 5.5 | 0.1 | — | 0.6 | 0.8 | 400.4 | |||||||||||||||||||||
Total fixed maturities | $ | 11,158.1 | $ | 9,400.0 | $ | 872.2 | $ | 109.0 | $ | 10.2 | $ | 67.1 | $ | 21,616.6 | ||||||||||||||
% of Fair Value | 51.6 | % | 43.5 | % | 4.0 | % | 0.5 | % | 0.1 | % | 0.3 | % | 100.0 | % | ||||||||||||||
(1) Primarily U.S. dollar denominated. | ||||||||||||||||||||||||||||
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The following tables present credit quality of fixed maturities, including securities pledged, using ARO ratings as of the dates indicated:
($ in millions) | September 30, 2015 | |||||||||||||||||||||||
ARO Quality Ratings | AAA | AA | A | BBB | BB and Below | Total Fair Value | ||||||||||||||||||
U.S. Treasuries | $ | 912.0 | $ | — | $ | — | $ | — | $ | — | $ | 912.0 | ||||||||||||
U.S. Government agencies and authorities | 4.4 | — | — | — | — | 4.4 | ||||||||||||||||||
State, municipalities and political subdivisions | 67.8 | 329.4 | 94.5 | 11.7 | — | 503.4 | ||||||||||||||||||
U.S. corporate public securities | 94.5 | 408.5 | 3,825.0 | 4,428.9 | 599.9 | 9,356.8 | ||||||||||||||||||
U.S. corporate private securities | 95.7 | 125.3 | 928.9 | 1,111.9 | 82.6 | 2,344.4 | ||||||||||||||||||
Foreign corporate public securities and foreign governments(1) | 31.4 | 344.5 | 893.4 | 1,305.4 | 217.3 | 2,792.0 | ||||||||||||||||||
Foreign corporate private securities(1) | — | 6.6 | 451.7 | 2,318.2 | 87.4 | 2,863.9 | ||||||||||||||||||
Residential mortgage-backed securities | 1,679.9 | 6.6 | 2.9 | 24.5 | 219.8 | 1,933.7 | ||||||||||||||||||
Commercial mortgage-backed securities | 983.1 | 2.0 | 58.4 | 9.4 | 130.5 | 1,183.4 | ||||||||||||||||||
Other asset-backed securities | 236.8 | — | 1.4 | 14.3 | 39.1 | 291.6 | ||||||||||||||||||
Total fixed maturities | $ | 4,105.6 | $ | 1,222.9 | $ | 6,256.2 | $ | 9,224.3 | $ | 1,376.6 | $ | 22,185.6 | ||||||||||||
% of Fair Value | 18.5 | % | 5.5 | % | 28.2 | % | 41.6 | % | 6.2 | % | 100.0 | % | ||||||||||||
(1) Primarily U.S. dollar denominated. | ||||||||||||||||||||||||
($ in millions) | December 31, 2014 | |||||||||||||||||||||||
ARO Quality Ratings | AAA | AA | A | BBB | BB and Below | Total Fair Value | ||||||||||||||||||
U.S. Treasuries | $ | 773.1 | $ | — | $ | — | $ | — | $ | — | $ | 773.1 | ||||||||||||
U.S. Government agencies and authorities | 46.6 | — | — | — | — | 46.6 | ||||||||||||||||||
State, municipalities and political subdivisions | 32.6 | 192.9 | 46.6 | 5.1 | — | 277.2 | ||||||||||||||||||
U.S. corporate public securities | 55.6 | 376.1 | 3,715.0 | 4,303.0 | 618.9 | 9,068.6 | ||||||||||||||||||
U.S. corporate private securities | 118.1 | 101.4 | 699.2 | 1,173.1 | 59.6 | 2,151.4 | ||||||||||||||||||
Foreign corporate public securities and foreign governments(1) | 42.0 | 386.5 | 856.1 | 1,436.2 | 166.3 | 2,887.1 | ||||||||||||||||||
Foreign corporate private securities(1) | — | 26.2 | 401.7 | 2,393.4 | 69.5 | 2,890.8 | ||||||||||||||||||
Residential mortgage-backed securities | 1,747.3 | 8.1 | 4.2 | 31.7 | 252.1 | 2,043.4 | ||||||||||||||||||
Commercial mortgage-backed securities | 826.5 | 18.5 | 44.6 | 45.5 | 142.9 | 1,078.0 | ||||||||||||||||||
Other asset-backed securities | 329.9 | 6.3 | 21.0 | 7.4 | 35.8 | 400.4 | ||||||||||||||||||
Total fixed maturities | $ | 3,971.7 | $ | 1,116.0 | $ | 5,788.4 | $ | 9,395.4 | $ | 1,345.1 | $ | 21,616.6 | ||||||||||||
% of Fair Value | 18.4 | % | 5.2 | % | 26.7 | % | 43.5 | % | 6.2 | % | 100.0 | % | ||||||||||||
(1) Primarily U.S. dollar denominated. | ||||||||||||||||||||||||
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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.
Unrealized Capital Losses
Gross unrealized losses on fixed maturities, including securities pledged, increased $255.9 million from $112.8 million to $368.7 million for the nine months ended September 30, 2015. The increase in gross unrealized losses was primarily due to widening credit spreads.
As of September 30, 2015 and December 31, 2014, we did not have any fixed maturities with an unrealized capital loss in excess of $10.0 million. See the Investments Note in our Condensed Consolidated Financial Statements in Part I., Item 1. of this Quarterly Report on Form 10-Q for further information on unrealized capital losses.
Subprime and Alt-A Mortgage Exposure
Pre-2008 vintage subprime and Alt-A mortgage collateral continues to distance itself from the credit crisis and payment performance reflects a housing market firmly entrenched in recovery. While collateral losses continue to be realized, the amounts are steadily decreasing. Serious delinquencies and other measures of performance, like prepayments and loan default, have also displayed sustained periods of improvement. Reflecting these fundamental improvements, related bond prices and sector liquidity have increased substantially since the credit crisis. Home prices have moved steadily higher, further supporting payment performance. Year-over-year home price measures, while at a lower magnitude than experienced in recent years, appear to have stabilized at sustainable levels, when measured on a nationwide basis. This backdrop remains supportive of continued improvement in overall borrower payment behavior. 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 September 30, 2015, the fair value, amortized cost, and gross unrealized losses related to our exposure to subprime mortgage-backed securities totaled $41.9 million, $38.2 million and $1.4 million, respectively, representing 0.2% of total fixed maturities, including securities pledged, based on fair value. As of December 31, 2014, the fair value, amortized cost, and gross unrealized losses related to our exposure to subprime mortgage-backed securities totaled $47.1 million, $43.7 million and $1.3 million, respectively, representing 0.2% 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 | |||||||||
September 30, 2015 | |||||||||||
1 | 88.0 | % | AAA | — | % | 2007 | 3.7 | % | |||
2 | 9.1 | % | AA | — | % | 2006 | 18.0 | % | |||
3 | — | % | A | 1.7 | % | 2005 and prior | 78.3 | % | |||
4 | — | % | BBB | 2.6 | % | 100.0 | % | ||||
5 | 1.3 | % | BB and below | 95.7 | % | ||||||
6 | 1.6 | % | 100.0 | % | |||||||
100.0% | |||||||||||
December 31, 2014 | |||||||||||
1 | 88.9 | % | AAA | 0.4 | % | 2007 | 4.7 | % | |||
2 | 8.2 | % | AA | — | % | 2006 | 16.7 | % | |||
3 | — | % | A | 2.4 | % | 2005 and prior | 78.6 | % | |||
4 | — | % | BBB | 12.1 | % | 100.0 | % | ||||
5 | 1.3 | % | BB and below | 85.1 | % | ||||||
6 | 1.6 | % | 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" above. As of September 30, 2015, the fair value, amortized cost and gross unrealized losses related to our exposure to Alt-A RMBS totaled $68.2 million, $50.0 million and $0.8 million, respectively, representing 0.3% of total fixed maturities, including securities pledged, based on fair value. As of December 31, 2014, the fair value, amortized cost and gross unrealized losses related to our exposure to Alt-A RMBS totaled $78.9 million, $59.6 million and $1.1 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 | |||||||||
September 30, 2015 | |||||||||||
1 | 82.7 | % | AAA | 0.1 | % | 2007 | 16.1 | % | |||
2 | 10.6 | % | AA | — | % | 2006 | 33.0 | % | |||
3 | 6.7 | % | A | 1.7 | % | 2005 and prior | 50.9 | % | |||
4 | — | % | BBB | 2.4 | % | 100.0 | % | ||||
5 | — | % | BB and below | 95.8 | % | ||||||
6 | — | % | 100.0 | % | |||||||
100.0 | % | ||||||||||
December 31, 2014 | |||||||||||
1 | 79.9 | % | AAA | 0.1 | % | 2007 | 15.0 | % | |||
2 | 10.2 | % | AA | — | % | 2006 | 31.7 | % | |||
3 | 9.9 | % | A | 1.8 | % | 2005 and prior | 53.3 | % | |||
4 | — | % | BBB | 3.1 | % | 100.0 | % | ||||
5 | — | % | BB and below | 95.0 | % | ||||||
6 | — | % | 100.0 | % | |||||||
100.0 | % | ||||||||||
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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 declined through 2013 and the majority of 2014. In the first three quarters of 2015, this trend has continued, leaving delinquency measures at multi-year lows. Other performance metrics like vacancies, property values and rent levels have also continued to improve, 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 throughout the year. The new issue market for CMBS has been a meaningful contributor to the refinance environment. It has continued its recovery from the credit crisis with meaningful new issuance since the credit crisis, increasing each year to set successive new post crisis highs. While market conditions softened in Q3 with the disruptions in broader risk markets, new issue volume for the nine months ended September 30, 2015, 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 | |||||||||
September 30, 2015 | |||||||||||
1 | 99.6 | % | AAA | 83.1 | % | 2015 | 12.9 | % | |||
2 | — | % | AA | 0.2 | % | 2014 | 33.3 | % | |||
3 | 0.4 | % | A | 4.9 | % | 2013 | 21.8 | % | |||
4 | — | % | BBB | 0.8 | % | 2012 | 1.0 | % | |||
5 | — | % | BB and below | 11.0 | % | 2011 | 1.4 | % | |||
6 | — | % | 100.0 | % | 2010 | 0.8 | % | ||||
100.0 | % | 2009 and prior | 28.8 | % | |||||||
100.0 | % | ||||||||||
December 31, 2014 | |||||||||||
1 | 99.6 | % | AAA | 76.7 | % | 2014 | 32.7 | % | |||
2 | — | % | AA | 1.7 | % | 2013 | 22.0 | % | |||
3 | 0.4 | % | A | 4.1 | % | 2012 | 0.5 | % | |||
4 | — | % | BBB | 4.2 | % | 2011 | 0.4 | % | |||
5 | — | % | BB and below | 13.3 | % | 2010 | 0.7 | % | |||
6 | — | % | 100.0 | % | 2009 | — | % | ||||
100.0 | % | 2008 and prior | 43.7 | % | |||||||
100.0 | % | ||||||||||
As of September 30, 2015, the fair value, amortized cost and gross unrealized losses of our Other ABS, excluding subprime exposure, totaled $255.6 million, $247.8 million and $0.5 million, respectively. As of December 31, 2014, the fair value, amortized cost and gross unrealized losses of our exposure to Other ABS, excluding subprime exposure, totaled $357.7 million, $349.9 million and $0.6 million, respectively.
As of September 30, 2015, Other ABS was broadly diversified both by type and issuer with credit card receivables and automobile receivables, comprising 75.3% and 2.5%, respectively, of total Other ABS, excluding subprime exposure. There was no nonconsolidated collateralized loan obligations ("CLOs") related to Other ABS. As of December 31, 2014, Other ABS was broadly
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diversified both by type and issuer with credit card receivables, nonconsolidated CLOs and automobile receivables, comprising 63.1%, 1.4% and 19.7%, respectively, of total Other ABS, excluding subprime exposure.
The following table presents 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 | |||||||||
September 30, 2015 | |||||||||||
1 | 97.6 | % | AAA | 92.6 | % | 2015 | 14.7 | % | |||
2 | 1.6 | % | AA | — | % | 2014 | 15.8 | % | |||
3 | — | % | A | 0.3 | % | 2013 | — | % | |||
4 | 0.8 | % | BBB | 5.2 | % | 2012 | 7.7 | % | |||
5 | — | % | BB and below | 1.9 | % | 2011 | 0.5 | % | |||
6 | — | % | 100.0 | % | 2010 | 3.9 | % | ||||
100.0 | % | 2009 and prior | 57.4 | % | |||||||
100.0 | % | ||||||||||
December 31, 2014 | |||||||||||
1 | 99.5 | % | AAA | 92.2 | % | 2014 | 11.1 | % | |||
2 | 0.5 | % | AA | 1.8 | % | 2013 | 10.8 | % | |||
3 | — | % | A | 5.5 | % | 2012 | 12.2 | % | |||
4 | — | % | BBB | 0.5 | % | 2011 | 5.9 | % | |||
5 | — | % | BB and below | — | % | 2010 | 3.3 | % | |||
6 | — | % | 100.0 | % | 2009 | — | % | ||||
100.0 | % | 2008 and prior | 56.7 | % | |||||||
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. of this Quarterly Report on Form 10-Q for further information on troubled debt restructuring.
Mortgage Loans on Real Estate
We rate 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 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.
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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 September 30, 2015 and December 31, 2014, our mortgage loans on real estate portfolio had a weighted average DSC of 2.1 and 2.0 times, respectively, and a weighted average LTV ratio of 60.7% for both periods. See the Investments Note in our Condensed Consolidated Financial Statements in Part I., Item 1. of this Quarterly Report on Form 10-Q for further information on mortgage loans on real estate.
Recorded Investment | ||||||||||||||||||||||||||
Debt Service Coverage Ratios | ||||||||||||||||||||||||||
($ in millions) | > 1.5x | >1.25x - 1.5x | >1.0x - 1.25x | < 1.0x | Commercial mortgage loans secured by land or construction loans | Total | % of Total | |||||||||||||||||||
September 30, 2015 | ||||||||||||||||||||||||||
Loan-to-Value Ratios: | ||||||||||||||||||||||||||
0% - 50% | $ | 386.3 | $ | 16.7 | $ | 14.5 | $ | — | $ | — | $ | 417.5 | 10.8 | % | ||||||||||||
>50% - 60% | 868.5 | 69.8 | 76.7 | 12.8 | 4.3 | 1,032.1 | 26.7 | % | ||||||||||||||||||
>60% - 70% | 1,782.5 | 317.5 | 133.8 | 18.0 | 13.3 | 2,265.1 | 58.5 | % | ||||||||||||||||||
>70% - 80% | 43.6 | 102.4 | 0.6 | 1.0 | 3.2 | 150.8 | 3.9 | % | ||||||||||||||||||
>80% and above | — | — | — | 3.1 | — | 3.1 | 0.1 | % | ||||||||||||||||||
Total | $ | 3,080.9 | $ | 506.4 | $ | 225.6 | $ | 34.9 | $ | 20.8 | $ | 3,868.6 | 100.0 | % | ||||||||||||
Recorded Investment | ||||||||||||||||||||||||||
Debt Service Coverage Ratios | ||||||||||||||||||||||||||
($ in millions) | > 1.5x | >1.25x - 1.5x | >1.0x - 1.25x | < 1.0x | Commercial mortgage loans secured by land or construction loans | Total | % of Total | |||||||||||||||||||
December 31, 2014 | ||||||||||||||||||||||||||
Loan-to-Value Ratios: | ||||||||||||||||||||||||||
0% - 50% | $ | 336.5 | $ | 29.0 | $ | 19.0 | $ | 26.5 | $ | — | $ | 411.0 | 11.7 | % | ||||||||||||
>50% - 60% | 684.0 | 30.4 | 63.6 | 46.1 | — | 824.1 | 23.5 | % | ||||||||||||||||||
>60% - 70% | 1,567.0 | 329.7 | 155.0 | 52.2 | 4.0 | 2,107.9 | 60.0 | % | ||||||||||||||||||
>70% - 80% | 12.6 | 123.2 | 21.1 | 2.8 | — | 159.7 | 4.5 | % | ||||||||||||||||||
>80% and above | — | 7.7 | — | 3.7 | — | 11.4 | 0.3 | % | ||||||||||||||||||
Total | $ | 2,600.1 | $ | 520.0 | $ | 258.7 | $ | 131.3 | $ | 4.0 | $ | 3,514.1 | 100.0 | % | ||||||||||||
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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., Item 8. 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 nine months ended September 30, 2015, we recorded $0.2 million and $3.3 million, respectively, of credit related OTTI of which the primary contributor was $0.1 million and $1.7 million, respectively, of write-downs recorded in the Other ABS and Foreign Government and Public sector. See the Investments Note in our Condensed Consolidated Financial Statements in Part I., Item 1. of this Quarterly Report on 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 $73.3 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 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 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 September 30, 2015, we had $208.5 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 $80.1 million, Italy of $87.9 million and Spain of $40.5 million. We did not have any exposure to Greece or Portugal. As of September 30, 2015, 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 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 $2.9 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 September 30, 2015, our sovereign exposure was $116.6 million, which consisted of fixed maturities. We also had $404.6 million in net exposure to non-peripheral financial institutions with a concentration in France of $64.4 million, The Netherlands of $53.0 million, Switzerland of $88.8 million and the United Kingdom of $164.8 million. The balance of $2.3 billion was invested across non-peripheral, non-financial institutions.
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In addition to aggregate concentration in the United Kingdom of $1,233.7 million, we had significant non-peripheral European total country exposures in The Netherlands of $368.5 million, in Belgium of $164.3 million, in France of $160.2 million, in Germany of $306.4 million and in Switzerland of $284.5 million. We place additional scrutiny on our financial exposure in the United Kingdom, France, Switzerland and The Netherlands given our concern for the potential for volatility to spread through the European banking system. We believe the primary risk results from market value fluctuations resulting from spread volatility and the secondary risk is default risk, dependent upon the strength of the recovery of economic conditions in Europe.
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The following table presents our European exposures at fair value and amortized cost as of September 30, 2015:
($ in millions) | Fixed Maturities and Equity Securities | Derivative Assets | |||||||||||||||||||||||||||||||||||||||||||||
Sovereign | Financial Institutions | Non-Financial Institutions | Total (Fair Value) | Total (Amortized Cost) | Loan and Receivables Sovereign (Amortized Cost) | Sovereign | Financial Institutions | Non-Financial Institutions | Less: Margin and Collateral | Total, (Fair Value) | Net Non-U.S. Funded(1) | ||||||||||||||||||||||||||||||||||||
Ireland | $ | — | $ | — | $ | 79.5 | $ | 79.5 | $ | 72.9 | $ | — | $ | — | $ | — | $ | 0.6 | $ | — | $ | 0.6 | $ | 80.1 | |||||||||||||||||||||||
Italy | — | — | 87.9 | 87.9 | 86.0 | — | — | — | — | — | — | 87.9 | |||||||||||||||||||||||||||||||||||
Spain | — | — | 40.5 | 40.5 | 36.7 | — | — | — | — | — | — | 40.5 | |||||||||||||||||||||||||||||||||||
Total peripheral Europe | $ | — | $ | — | $ | 207.9 | $ | 207.9 | $ | 195.6 | $ | — | $ | — | $ | — | $ | 0.6 | $ | — | $ | 0.6 | $ | 208.5 | |||||||||||||||||||||||
Belgium | $ | 36.9 | $ | — | $ | 127.4 | $ | 164.3 | $ | 139.8 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 164.3 | |||||||||||||||||||||||
France | — | 48.4 | 95.8 | 144.2 | 133.5 | — | — | 52.1 | — | 36.1 | 16.0 | 160.2 | |||||||||||||||||||||||||||||||||||
Germany | — | 15.0 | 290.6 | 305.6 | 293.7 | — | — | 5.7 | — | 4.9 | 0.8 | 306.4 | |||||||||||||||||||||||||||||||||||
Netherlands | — | 53.0 | 315.5 | 368.5 | 350.0 | — | — | — | — | — | — | 368.5 | |||||||||||||||||||||||||||||||||||
Switzerland | — | 87.5 | 195.1 | 282.6 | 268.7 | — | — | 1.3 | 0.6 | — | 1.9 | 284.5 | |||||||||||||||||||||||||||||||||||
United Kingdom | — | 164.5 | 1,068.9 | 1,233.4 | 1,202.4 | — | — | 39.3 | — | 39.0 | 0.3 | 1,233.7 | |||||||||||||||||||||||||||||||||||
Other non- peripheral(2) | 79.7 | 17.8 | 242.4 | 339.9 | 328.3 | — | — | — | — | — | — | 339.9 | |||||||||||||||||||||||||||||||||||
Total non-peripheral Europe | 116.6 | 386.2 | 2,335.7 | 2,838.5 | 2,716.4 | — | — | 98.4 | 0.6 | 80.0 | 19.0 | 2,857.5 | |||||||||||||||||||||||||||||||||||
Total | $ | 116.6 | $ | 386.2 | $ | 2,543.6 | $ | 3,046.4 | $ | 2,912.0 | $ | — | $ | — | $ | 98.4 | $ | 1.2 | $ | 80.0 | $ | 19.6 | $ | 3,066.0 | |||||||||||||||||||||||
(1) Represents: (i) Fixed maturity and equity securities at fair value; and (ii) Derivative assets at fair value.
(2) Other non-peripheral countries include: Croatia, Czech Republic, Denmark, Finland, 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 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 the 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 VRIAC's statutory admitted assets as of the prior December 31. As of September 30, 2015 and December 31, 2014, 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 54.6% of our assets in marketable securities. These assets include cash, U.S. Treasuries, Agencies, Corporate Bonds, ABS, CMBS and collateralized mortgage obligations ("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 September 30, 2015 and December 31, 2014, VRIAC had securities lending collateral assets of $187.8 million and $164.4 million, respectively, which, for both periods, represents approximately 0.2% of its general account statutory admitted assets. |
Management believes that our sources of liquidity are adequate to meet our short-term cash obligations.
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Capital Contributions and Dividends
During the nine months ended September 30, 2015 and 2014, VRIAC did not receive any capital contributions from its Parent.
During the nine months ended September 30, 2015, VRIAC declared an ordinary dividend to its Parent in the amount of $231.0 million, which was paid to its Parent on May 20, 2015. During the nine months ended September 30, 2014, VRIAC paid an ordinary dividend in the amount of $281.0 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 Letters of Credit ("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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Our financial strength and credit ratings 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 | ||||
Voya Retirement Insurance and Annuity Company | ||||||||
Financial Strength Rating | A (3 of 16) | A (3 of 9) | A2 (3 of 9) | A (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 National Insurer Financial Strength ("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, 2015 through September 30, 2015 and subsequently through the date of this Quarterly Report on Form 10-Q are as follows:
• | On August 19, 2015, 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 and Voya Financial, Inc. as well as the ratings on the outstanding debt of Voya Financial, Inc. |
• | On March 16, 2015, Fitch raised the issuer credit ratings on Voya Financial, Inc. and Voya Holdings Inc. to BBB+ from BBB. Fitch also raised the senior unsecured credit ratings of Voya Financial, Inc. to BBB from BBB- and its junior subordinated debt credit ratings to BB+ from BB. Fitch raised the financial strength ratings of the operating subsidiaries, including VRIAC, to A from A-. All ratings were assigned a Stable outlook. |
• | On March 3, 2015, Moody's raised the issuer credit ratings on Voya Financial, Inc. and Voya Holdings Inc. to Baa2 from Baa3. Moody's also raised the senior unsecured credit ratings of Voya Financial, Inc. to Baa2 from Baa3 and its junior subordinated debt credit ratings to Baa3(hyb) from Ba1(hyb). Moody's raised the financial strength ratings of the operating subsidiaries, including VRIAC, to A2 from A3. All ratings were assigned a Stable outlook. |
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• | On February 17, 2015, S&P raised the issuer credit ratings on Voya Financial, Inc. and Voya Holdings Inc. to BBB from BBB-. S&P also raised the senior unsecured credit ratings of Voya Financial, Inc. to BBB from BBB- and its junior subordinated debt credit ratings to BB+ from BB. S&P raised the financial strength ratings of the operating subsidiaries, including VRIAC, to A from A-. All ratings were assigned a Stable outlook. |
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.
Legislative and Regulatory Developments
Department of Labor Proposed Rule Regarding the Definition of “Fiduciary”
In April 2015, the Department of Labor (“DOL”) published its revised proposal to broaden the definition of “fiduciary” under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”) and for other purposes. The proposal was subject to public comment and is currently under review by the DOL. We submitted a comment letter to the DOL on July 16, 2015, expressing our views on the proposed rule and participated in a DOL hearing concerning the proposal on August 11, 2015. We currently expect a final rule to be published sometime during the first half of 2016.
As proposed, the rule would expand the circumstances in which providers of investment advice to small plan sponsors, plan participants and beneficiaries, and IRA investors are deemed to act in a fiduciary capacity. The rule would require such providers to act in their clients’ “best interests”, not influenced by any conflicts of interest, including due to the direct or indirect receipt of compensation. The DOL concurrently proposed a “best interest contract exemption” intended to enable continuation of certain existing industry practices relating to receipt of commissions and other compensation, but the exemption includes conditions and requirements that may make it difficult to rely upon in practice. Although the final outcome of the DOL rulemaking remains uncertain, the proposed rule, if adopted in its current form, would substantially change the legal framework within which we and our affiliates provide certain of our products and services. While these changes, as proposed, would restrict certain advisory practices and compensation arrangements that are common in our industry, we believe our experience providing retirement and investment products and services in a fiduciary environment positions us well to remain competitive as the industry adjusts to any final rulemaking from the DOL.
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Recent Activity by the NAIC
On February 24, 2015, the National Association of Insurance Commissioners (“NAIC”) Financial Regulation Standards and Accreditation (F) Committee (“Accreditation Committee”) exposed for public comment a proposed revised preamble to the NAIC accreditation standards that would apply to captives that assume XXX/AXXX, variable annuity and long-term care business. In May 2015, the Accreditation Committee adopted the proposal (the “Standard”), but deferred consideration of possible grandfathering provisions and effective dates to the 2015 NAIC Summer National Meeting. At the 2015 NAIC Summer National Meeting in August 2015, the Accreditation Committee adopted an effective date of January 1, 2016 for application of the accreditation standards to captives that assume XXX/AXXX business. Under the Standard, a state will be deemed in compliance as it relates to XXX/AXXX captives if the applicable reinsurance transaction satisfies the XXX/AXXX Framework adopted by the NAIC in December 2014. In addition, the Standard applies prospectively, so that XXX/AXXX captives will not be subject to the Standard if reinsured policies were issued prior to January 1, 2015 and ceded so that they were part of a reinsurance arrangement as of December 31, 2014. The Accreditation Committee left for future action application of the Standard to captives that assume variable annuity business.
At the NAIC Spring National Meeting in March 2015, the NAIC Financial Conditions (E) Committee established the Variable Annuities Issues (E) Working Group (“VAIWG”) to oversee the NAIC’s efforts to study and address, as appropriate, regulatory issues resulting in variable annuity captive reinsurance transactions. The VAIWG retained Oliver Wyman to study the industry’s use of variable annuity captive reinsurance and to develop a set of recommended changes to address the issues involving variable annuity captives. In September 2015, Oliver Wyman issued an initial report, which was adopted by the VAIWG, outlining its preliminary findings and making recommendations for enhancements to the variable annuity statutory framework. On November 5, 2015, upon recommendation of the VAIWG, the E Committee adopted a Variable Annuities Framework for Change (“VA Framework for Change”) which recommends charges for NAIC groups to adjust the variable annuity statutory framework applicable to all insurers that have written or are writing variable annuity business. The VA Framework for Change contemplates a holistic set of reforms that would improve the current reserve and capital framework and address root cause issues that result in the use of captive arrangements. Although the current exposure draft recommends an effective date of January 1, 2017, the timing of these proposals remains uncertain. We cannot predict what revisions, if any, will be made to the VA Framework for Change proposal as a result of NAIC deliberations, whether this or other proposals will be adopted by the NAIC, what revisions to the current VA statutory framework will be made as a result of the implementation of the VA Framework for Change or any other NAIC proposals, or what additional actions and regulatory changes will result from the continued VA captives scrutiny and reform efforts by the NAIC and other regulatory bodies.
For a discussion of the Company's potential risks or uncertainties related to possible regulatory changes that may result from regulatory scrutiny of captives, please see Risk Factors-Risks Related to Regulation - "Our businesses are heavily regulated, and changes in regulation in the United States, enforcement actions and regulatory investigations may reduce profitability" in Part I, Item IA. of our Annual Report on Form 10-K (File No. 033-23376).
Item 4. Controls and Procedures
The Company carried out an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended ("Exchange Act")) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that the Company's current disclosure controls and procedures are effective in ensuring that material information relating to the Company required to be disclosed in the Company's periodic SEC filings is made known to them in a timely manner.
Changes in Internal Control Over Financial Reporting
There has not been any change in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the quarter ended September 30, 2015 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See the Commitments and Contingencies Note in our Condensed Consolidated Financial Statements in Part I., Item 1. of this Form 10-Q.
Item 1A. Risk Factors
For a discussion of the Company's potential risks or uncertainties, please see "Risk Factors" in Part I, Item 1A. in our Annual Report on Form 10-K filed with the Securities and Exchange Commission and "Risk Factors" in Part II, Item 1A. in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2015. In addition, please see "Management’s Narrative Analysis of the Results of Operations and Financial Condition" herein and in the Annual Report on Form 10-K.
Item 6. Exhibits
See Exhibit Index on page 82 hereof.
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SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
November 9, 2015 | Voya Retirement Insurance and Annuity Company | ||
(Date) | (Registrant) | ||
By: | /s/ | Francis G. O'Neill | |
Francis G. O'Neill | |||
Senior Vice President and | |||
Chief Financial Officer | |||
(Duly Authorized Officer and Principal Financial Officer) | |||
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Voya Retirement Insurance and Annuity Company ("VRIAC")
Exhibit Index | ||
Exhibit Number | Description of Exhibit | |
31.1+ | Certificate of Francis G. O'Neill pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2+ | Certificate of Charles P. Nelson pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1+ | Certificate of Francis G. O'Neill pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.2+ | Certificate of Charles P. Nelson pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
101.INS+ | XBRL Instance Document | |
101.SCH+ | XBRL Taxonomy Extension Schema | |
101.CAL+ | XBRL Taxonomy Extension Calculation Linkbase | |
101.DEF+ | XBRL Taxonomy Extension Definition Linkbase | |
101.LAB+ | XBRL Taxonomy Extension Label Linkbase | |
101.PRE+ | XBRL Taxonomy Extension Presentation Linkbase | |
+Filed herewith.
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