VOYA INSURANCE & ANNUITY Co - FORM 10-Q - May 12, 2016

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EX-31.1 - EXHIBIT 31.1 - VOYA INSURANCE & ANNUITY Coviac2016q110-qex311.htm
EX-32.2 - EXHIBIT 32.2 - VOYA INSURANCE & ANNUITY Coviac2016q110-qex322.htm
EX-10 - EXHIBIT 10 - VOYA INSURANCE & ANNUITY Coviac2016q110-qex10.htm
EX-32.1 - EXHIBIT 32.1 - VOYA INSURANCE & ANNUITY Coviac2016q110-qex321.htm
EX-31.2 - EXHIBIT 31.2 - VOYA INSURANCE & ANNUITY Coviac2016q110-qex312.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 March 31, 2016
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: 333-196392, 333-203647, 333-203648, 333-203649, 333-203650, 333-203651

Voya Insurance and Annuity Company
(Exact name of registrant as specified in its charter)
Iowa
41-0991508
(State or other jurisdiction of incorporation or organization)
(IRS Employer Identification No.)
 
 
1475 Dunwoody Drive
 
West Chester, Pennsylvania
19380-1478
(Address of principal executive offices)
(Zip Code)
(610) 425-3400
(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 May 9, 2016, 250,000 shares of Common Stock, $10 par value, were outstanding, all of which were directly owned by Voya Holdings Inc.

NOTE:  WHEREAS VOYA 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 Insurance and Annuity Company
(A wholly owned subsidiary of Voya Holdings Inc.)
Form 10-Q for the period ended March 31, 2016

INDEX
 
 
PAGE
PART I.
FINANCIAL INFORMATION (UNAUDITED)
 
 
 
 
Item 1.
Financial Statements:
 
 
 
 
 
Condensed 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, "VIAC," the "Company," "we," "our" and "us" refer to Voya Insurance and Annuity Company.

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 insurance regulatory reform initiatives applicable 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 final 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, 2015 (File No. 001-32625) (the "Annual Report on Form 10-K") and "Risk Factors," in this Quarterly Report on Form 10-Q.

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 Insurance and Annuity Company
(A wholly owned subsidiary of Voya Holdings Inc.)
Condensed Balance Sheets
March 31, 2016 (Unaudited) and December 31, 2015
(In millions, except share and per share data)
 
March 31,
2016
 
December 31,
2015
Assets
 
 
 
Investments:
 
 
 
Fixed maturities, available-for-sale, at fair value (amortized cost of $22,338.9 as of 2016 and $22,069.6 as of 2015)
$
23,390.5

 
$
22,458.4

Fixed maturities, at fair value using the fair value option
636.4

 
547.4

Equity securities, available-for-sale, at fair value (cost of $15.4 as of 2016 and 2015)
18.8

 
19.2

Short-term investments
941.4

 
1,069.4

Mortgage loans on real estate, net of valuation allowance of $1.1 as of 2016 and $1.0 as of 2015
3,590.0

 
3,310.9

Policy loans
78.1

 
79.8

Limited partnerships/corporations
191.7

 
186.3

Derivatives
1,463.7

 
799.4

Other investments
48.6

 
48.6

Securities pledged (amortized cost of $661.6 as of 2016 and $633.3 as of 2015)
730.8

 
672.4

Total investments
31,090.0

 
29,191.8

Cash and cash equivalents
460.6

 
646.5

Short-term investments under securities loan agreements, including collateral delivered
471.2

 
232.7

Accrued investment income
251.5

 
239.3

Deposits and reinsurance recoverable
5,995.3

 
5,645.9

Deferred policy acquisition costs, Value of business acquired and Sales inducements to contract owners
2,410.5

 
2,576.4

Short-term loans to affiliate
215.0

 
—

Due from affiliates
17.8

 
27.5

Current income tax recoverable from Parent
23.2

 
—

Deferred income taxes
7.8

 
94.8

Other assets
382.0

 
337.5

Assets held in separate accounts
32,495.1

 
33,355.5

Total assets
$
73,820.0

 
$
72,347.9

 

The accompanying notes are an integral part of these Condensed Financial Statements.
 
 
 
 
4
 


Voya Insurance and Annuity Company
(A wholly owned subsidiary of Voya Holdings Inc.)
Condensed Balance Sheets
March 31, 2016 (Unaudited) and December 31, 2015
(In millions, except share and per share data)
 
March 31,
2016
 
December 31,
2015
Liabilities and Shareholder's Equity
 
 
 
Future policy benefits and contract owner account balances
$
28,367.5

 
$
27,749.8

Payable for securities purchased
77.9

 
108.1

Payables under securities loan agreements, including collateral held
1,381.7

 
656.1

Long-term debt
435.0

 
435.0

Due to affiliates
52.6

 
44.4

Funds held under reinsurance treaties with affiliates
7,382.2

 
6,797.1

Derivatives
498.0

 
204.6

Current income tax payable to Parent
—

 
27.6

Other liabilities
134.7

 
153.4

Liabilities related to separate accounts
32,495.1

 
33,355.5

Total liabilities
70,824.7

 
69,531.6

 
 
 
 
Commitments and Contingencies (Note 9)
 
 
 
 
 
 
 
Shareholder's equity:
 
 
 
Common stock (250,000 shares authorized, issued and outstanding as of 2016 and 2015; $10 par value per share)
2.5

 
2.5

Additional paid-in capital
4,821.3

 
4,821.2

Accumulated other comprehensive income (loss)
499.1

 
319.6

Retained earnings (deficit)
(2,327.6
)
 
(2,327.0
)
Total shareholder's equity
2,995.3

 
2,816.3

Total liabilities and shareholder's equity
$
73,820.0

 
$
72,347.9


The accompanying notes are an integral part of these Condensed Financial Statements.
 
 
 
 
5
 


Voya Insurance and Annuity Company
(A wholly owned subsidiary of Voya Holdings Inc.)
Condensed Statements of Operations
For the Three Months Ended March 31, 2016 and 2015 (Unaudited)
(In millions)
 
Three Months Ended March 31,
 
2016
2015
Revenues:
 
 
Net investment income
$
326.4

$
320.1

Fee income
153.7

185.1

Premiums
119.1

118.8

Net realized capital gains (losses):
 
 
Total other-than-temporary impairments
(2.1
)
(0.3
)
Less: Portion of other-than-temporary impairments recognized in Other comprehensive income (loss)
0.5

0.7

Net other-than-temporary impairments recognized in earnings
(2.6
)
(1.0
)
Other net realized capital gains (losses)
101.3

(224.2
)
Total net realized capital gains (losses)
98.7

(225.2
)
Other revenue
4.9

5.5

Total revenues
702.8

404.3

Benefits and expenses:
 
 
Interest credited and other benefits to contract owners/policyholders
785.4

432.3

Operating expenses
120.6

121.2

Net amortization of Deferred policy acquisition costs and Value of business acquired
(213.7
)
(144.6
)
Interest expense
7.0

6.9

Other expense
4.4

8.7

Total benefits and expenses
703.7

424.5

Income (loss) before income taxes
(0.9
)
(20.2
)
Income tax expense (benefit)
(0.3
)
(7.1
)
Net income (loss)
$
(0.6
)
$
(13.1
)


The accompanying notes are an integral part of these Condensed Financial Statements.
 
 
 
 
6
 


Voya Insurance and Annuity Company
(A wholly owned subsidiary of Voya Holdings Inc.)
Condensed Statements of Comprehensive Income
For the Three Months Ended March 31, 2016 and 2015 (Unaudited)
(In millions)
 
Three Months Ended March 31,
 
2016
 
2015
Net income (loss)
$
(0.6
)
 
$
(13.1
)
Other comprehensive income (loss), before tax:
 
 
 
Unrealized gains/losses on securities
237.1

 
82.8

Other-than-temporary impairments
1.3

 
2.1

Pension and other postretirement benefits liability
(0.1
)
 
(0.1
)
Other comprehensive income (loss), before tax
238.3

 
84.8

Income tax expense (benefit) related to items of other comprehensive income (loss)
58.8

 
47.4

Other comprehensive income (loss), after tax
179.5

 
37.4

Comprehensive income (loss)
$
178.9

 
$
24.3



The accompanying notes are an integral part of these Condensed Financial Statements.
 
 
 
 
7
 


Voya Insurance and Annuity Company
(A wholly owned subsidiary of Voya Holdings Inc.)
Condensed Statements of Changes in Shareholder’s Equity
For the Three Months Ended March 31, 2016 and 2015 (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, 2016
$
2.5

 
$
4,821.2

 
$
319.6

 
$
(2,327.0
)
 
$
2,816.3

Comprehensive income (loss):
 
 
 
 
 
 
 
 
 
Net income (loss)
—

 
—

 
—

 
(0.6
)
 
(0.6
)
Other comprehensive income (loss), after tax
—

 
—

 
179.5

 
—

 
179.5

Total comprehensive income (loss)

 

 

 

 
178.9

Employee related benefits
—

 
0.1

 
—

 
—

 
0.1

Balance as of March 31, 2016
$
2.5

 
$
4,821.3

 
$
499.1

 
$
(2,327.6
)
 
$
2,995.3

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of January 1, 2015
$
2.5

 
$
5,310.6

 
$
609.0

 
$
(2,301.9
)
 
$
3,620.2

Comprehensive income (loss):
 
 
 
 
 
 
 
 
 
Net income (loss)
—

 
—

 
—

 
(13.1
)
 
(13.1
)
Other comprehensive income (loss), after tax
—

 
—

 
37.4

 
—

 
37.4

Total comprehensive income (loss)
 
 
 
 
 
 
 
 
24.3

Employee related benefits
—

 
0.1

 
—

 
—

 
0.1

Balance as of March 31, 2015
$
2.5

 
$
5,310.7

 
$
646.4

 
$
(2,315.0
)
 
$
3,644.6





The accompanying notes are an integral part of these Condensed Financial Statements.
 
 
 
 
8
 


Voya Insurance and Annuity Company
(A wholly owned subsidiary of Voya Holdings Inc.)
Condensed Statements of Cash Flows
For the Three Months Ended March 31, 2016 and 2015 (Unaudited)
(In millions)
 
Three Months Ended March 31,
 
2016
 
2015
Net cash provided by operating activities
$
179.0

 
$
266.3

Cash Flows from Investing Activities:
 
 
 
Proceeds from the sale, maturity, disposal or redemption of:
 
 
 
Fixed maturities
1,117.4

 
513.2

Mortgage loans on real estate
116.4

 
88.9

Limited partnerships/corporations
6.0

 
3.3

Acquisition of:
 
 
 
Fixed maturities
(1,563.7
)
 
(767.5
)
Mortgage loans on real estate
(395.5
)
 
(259.3
)
Limited partnerships/corporations
(16.6
)
 
(6.6
)
Derivatives, net
(226.8
)
 
(98.4
)
Short-term investments, net
128.0

 
25.0

Policy loans, net
1.7

 
1.7

Collateral received (delivered), net
487.1

 
315.3

  Short-term loans to affiliates, net
(215.0
)
 
(120.1
)
Other, net
(1.1
)
 
—

Net cash used in investing activities
(562.1
)
 
(304.5
)
Cash Flows from Financing Activities:
 
 
 
Deposits received for investment contracts
754.6

 
529.0

Maturities and withdrawals from investment contracts
(556.9
)
 
(543.7
)
(Settlements) receipts on deposit contracts
(0.5
)
 
11.7

Excess tax benefits on share-based compensation
—

 
0.4

Net cash provided by (used in) financing activities
197.2

 
(2.6
)
Net decrease in cash and cash equivalents
(185.9
)
 
(40.8
)
Cash and cash equivalents, beginning of period
646.5

 
362.4

Cash and cash equivalents, end of period
$
460.6

 
$
321.6


The accompanying notes are an integral part of these Condensed Financial Statements.
 
 
 
 
9
 
 
Voya Insurance and Annuity Company
(A wholly owned subsidiary of Voya Holdings Inc.)
Notes to the Condensed Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 

 
1.    Business, Basis of Presentation and Significant Accounting Policies

Business

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

Prior to May 2013, Voya Financial, Inc., 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. In May 2013, Voya Financial, Inc., completed its initial public offering of common stock, including the issuance and sale of common stock by Voya Financial, Inc. and the sale of shares of common stock owned indirectly by ING Group. Between October 2013 and March 2015, ING Group completed the sale of its remaining shares of common stock of Voya Financial, Inc. in a series of registered public offerings. ING Group continues to hold certain 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.
VIAC is a direct, wholly owned subsidiary of Voya Holdings Inc. ("Parent"), which is a direct, wholly owned subsidiary of Voya Financial, Inc.

The Company offers various insurance products, including fixed and indexed annuities, investment-only products and payout annuities for pre-retirement wealth accumulation and postretirement income management. The Company's annuity products are distributed by national and regional brokerage and securities firms, independent broker-dealers, banks, life insurance companies with captive agency sales forces, independent insurance agents, independent marketing organizations and affiliated broker-dealers. The Company's primary annuity customers are individual consumers. The Company stopped actively writing new retail variable annuity products with substantial guarantee features in early 2010, as part of a global business strategy and risk reduction plan. New amounts will continue to be deposited in VIAC variable annuities as add-on premiums to existing contracts.

The Company has historically issued guaranteed investment contracts and funding agreements (collectively referred to as "GICs"), primarily to institutional investors and corporate benefit plans. In 2009, the Company made a strategic decision to run-off the assets and liabilities in the GIC business over time. New GIC contracts may be issued on a limited basis to replace maturing contracts.

The Company has one operating segment.

Basis of Presentation

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

The accompanying Condensed Financial Statements reflect adjustments (including normal, recurring adjustments) necessary to present fairly the financial position of the Company as of March 31, 2016, and its results of operations, comprehensive income, changes in shareholder's equity and statements of cash flows for the three months ended March 31, 2016 and 2015, in conformity with U.S. GAAP. Interim results are not necessarily indicative of full year performance. The December 31, 2015 Balance Sheet is from the audited Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2015 ("Annual Report on Form 10-K"), filed with the SEC. Therefore, these unaudited Condensed Financial Statements should be read in conjunction with the audited Financial Statements and related notes included in the Company's Annual Report on Form 10-K.


 
10
 
 
Voya Insurance and Annuity Company
(A wholly owned subsidiary of Voya Holdings Inc.)
Notes to the Condensed Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 

Adoption of New Pronouncements

Derivative Contract Novations
In March 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-05, “Derivatives and Hedging (Accounting Standards Codification ("ASC") Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships” (“ASU 2016-05”), which clarifies that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument under ASC Topic 815 does not, in and of itself, require dedesignation of that hedging relationship.

The provisions of ASU 2016-05 are effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2016 with early adoption permitted, using either a prospective or modified retrospective approach. The Company elected to early adopt ASU 2016-05 as of January 1, 2016 on a prospective basis. The adoption had no effect on the Company's financial condition, results of operations, or cash flows.

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 Company adopted the provisions of ASU 2015-02 on January 1, 2016 using a modified retrospective approach. The adoption had no effect on the Company's financial condition or results of operations, but impacted disclosures only. Investments in limited partnerships previously accounted for as VOEs became VIEs under the new guidance as the limited partners do not hold substantive kick-out rights or participating rights. See Variable Interest Entities ("VIEs") section of the Investments Note to these Condensed Financial Statements for additional information

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 were adopted by the Company on January 1, 2016. The adoption had no effect on the Company’s financial condition, results of operations or cash flows.

Future Adoption of Accounting Pronouncements

Debt Instruments
In March 2016, the FASB issued ASU 2016-06, “Derivatives and Hedging (ASC Topic 815): Contingent Put and Call Options in Debt Instruments” (“ASU 2016-06”), which clarifies that an entity is only required to follow the four-step decision sequence when assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts for purposes of bifurcating an embedded derivative. The entity does not need to assess whether the event that triggers the ability to exercise a call (put) option is related to interest rates or credit risks.


 
11
 
 
Voya Insurance and Annuity Company
(A wholly owned subsidiary of Voya Holdings Inc.)
Notes to the Condensed Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 

The provisions of ASU 2016-06 are effective on a modified retrospective basis for fiscal years beginning after December 15, 2016, including interim periods, with early adoption permitted. The Company is currently in the process of determining the impact of adoption of the provisions of ASU 2016-06.

Financial Instruments
In January 2016, the FASB issued ASU 2016-01, “Financial Instruments-Overall (ASC Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities” (“ASU 2016-01”), which requires:

•
Equity investments (except those consolidated or accounted for under the equity method) to be measured at fair value with changes in fair value recognized in net income.
•
Elimination of the disclosure of methods and significant assumptions used to estimate the fair value for financial instruments measured at amortized cost.
•
The use of the exit price notion when measuring the fair value of financial instruments for disclosure purposes.
•
Separate presentation in other comprehensive income of the portion of the total change in fair value of a liability resulting from a change in own credit risk if the liability is measured at fair value under the fair value option.
•
Separate presentation on the balance sheet or financial statement notes of financial assets and financial liabilities by measurement category and form of financial asset.

The provisions of ASU 2016-01 are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption only permitted for certain provisions. Initial adoption of ASU 2016-01 should be reported on a modified retrospective basis, with a cumulative-effect adjustment to balance sheet as of the beginning of the year of adoption, except for certain provisions that should be applied prospectively. The Company is currently in the process of determining the impact of adoption of the provisions of ASU 2016-01.

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.
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 2016, the FASB issued ASU 2016-08, “Principal versus Agent Considerations” (“ASU 2016-08”) and ASU 2016-10, “Identifying Performance Obligations and Licensing” (“ASU 2016-10”) as amendments to ASU 2014-09. ASU 2016-08 clarifies the implementation guidance and indicators for assessing whether an entity has control of a specified good or service before that good or service is transferred to a customer, and is, thus, a principal in the satisfaction of the performance obligation. ASU 2016-10 clarifies the provisions for identifying performance obligations and the implementation guidance for licensing.

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 and its amendments.

 
12
 
 
Voya Insurance and Annuity Company
(A wholly owned subsidiary of Voya Holdings Inc.)
Notes to the Condensed 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 March 31, 2016:
 
Amortized
Cost
 
Gross
Unrealized
Capital
Gains
 
Gross
Unrealized
Capital
Losses
 
Embedded Derivatives(2)
 
Fair Value
 
OTTI(3)
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasuries
$
1,132.7

 
$
92.9

 
$
—

 
$
—

 
$
1,225.6

 
$
—

U.S. Government agencies and authorities
80.4

 
4.7

 
0.4

 
—

 
84.7

 
—

State, municipalities and political subdivisions
384.6

 
18.2

 
1.2

 
—

 
401.6

 
—

U.S. corporate public securities
10,740.1

 
672.6

 
113.8

 
—

 
11,298.9

 
4.1

U.S. corporate private securities
2,345.2

 
110.0

 
25.8

 
—

 
2,429.4

 
—

Foreign corporate public securities and foreign governments(1)
2,784.5

 
109.0

 
60.0

 
—

 
2,833.5

 
—

Foreign corporate private securities(1)
2,645.4

 
138.5

 
20.4

 
—

 
2,763.5

 
—

 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Agency
1,696.1

 
89.4

 
3.6

 
15.4

 
1,797.3

 
—

Non-Agency
271.1

 
44.2

 
3.5

 
6.5

 
318.3

 
18.6

Total Residential mortgage-backed securities
1,967.2

 
133.6

 
7.1

 
21.9

 
2,115.6

 
18.6

Commercial mortgage-backed securities
1,304.8

 
46.9

 
2.7

 
—

 
1,349.0

 
—

Other asset-backed securities
252.0

 
10.3

 
6.4

 
—

 
255.9

 
0.3

 
 
 
 
 
 
 
 
 
 
 
 
Total fixed maturities, including securities pledged
23,636.9

 
1,336.7

 
237.8

 
21.9

 
24,757.7

 
23.0

Less: Securities pledged
661.6

 
74.1

 
4.9

 
—

 
730.8

 
—

Total fixed maturities
22,975.3

 
1,262.6

 
232.9

 
21.9

 
24,026.9

 
23.0

Equity securities
15.4

 
3.4

 
—

 
—

 
18.8

 
—

Total fixed maturities and equity securities investments
$
22,990.7

 
$
1,266.0

 
$
232.9

 
$
21.9

 
$
24,045.7

 
$
23.0

(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 Statements of Operations.
(3) Represents Other-than-Temporary Impairments ("OTTI") reported as a component of Other comprehensive income (loss).

 
13
 
 
Voya Insurance and Annuity Company
(A wholly owned subsidiary of Voya Holdings Inc.)
Notes to the Condensed 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, 2015:
 
Amortized
Cost
 
Gross
Unrealized
Capital
Gains
 
Gross
Unrealized
Capital
Losses
 
Embedded Derivatives(2)
 
Fair
Value
 
OTTI(3)
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasuries
$
992.7

 
$
70.2

 
$
4.2

 
$
—

 
$
1,058.7

 
$
—

U.S. Government agencies and authorities
79.4

 
2.8

 
0.3

 
—

 
81.9

 
—

State, municipalities and political subdivisions
359.1

 
6.6

 
5.2

 
—

 
360.5

 
—

U.S. corporate public securities
10,718.9

 
389.2

 
236.2

 
—

 
10,871.9

 
4.5

U.S. corporate private securities
2,365.0

 
74.3

 
44.9

 
—

 
2,394.4

 
—

Foreign corporate public securities and foreign governments(1)
2,826.9

 
67.3

 
101.2

 
—

 
2,793.0

 
—

Foreign corporate private securities(1)
2,592.9

 
95.0

 
61.9

 
—

 
2,626.0

 
—

 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
Agency
1,525.4

 
81.2

 
5.8

 
14.9

 
1,615.7

 
—

Non-Agency
221.4

 
43.9

 
2.1

 
6.2

 
269.4

 
19.5

Total Residential mortgage-backed securities
1,746.8

 
125.1

 
7.9

 
21.1

 
1,885.1

 
19.5

Commercial mortgage-backed securities
1,311.0

 
35.8

 
3.4

 
—

 
1,343.4

 
—

Other asset-backed securities
257.6

 
11.3

 
5.6

 
—

 
263.3

 
0.3

 
 
 
 
 
 
 
 
 
 
 
 
Total fixed maturities, including securities pledged
23,250.3

 
877.6

 
470.8

 
21.1

 
23,678.2

 
24.3

Less: Securities pledged
633.3

 
52.2

 
13.1

 
—

 
672.4

 
—

Total fixed maturities
22,617.0

 
825.4

 
457.7

 
21.1

 
23,005.8

 
24.3

Equity securities
15.4

 
3.8

 
—

 
—

 
19.2

 
—

Total fixed maturities and equity securities investments
$
22,632.4

 
$
829.2

 
$
457.7

 
$
21.1

 
$
23,025.0

 
$
24.3

(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 Statements of Operations.
(3) Represents OTTI reported as a component of Other comprehensive income (loss).


 
14
 
 
Voya Insurance and Annuity Company
(A wholly owned subsidiary of Voya Holdings Inc.)
Notes to the Condensed Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 

The amortized cost and fair value of fixed maturities, including securities pledged, as of March 31, 2016, 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
$
430.8

 
$
435.4

After one year through five years
5,398.5

 
5,634.7

After five years through ten years
8,723.6

 
8,996.5

After ten years
5,560.0

 
5,970.6

Mortgage-backed securities
3,272.0

 
3,464.6

Other asset-backed securities
252.0

 
255.9

Fixed maturities, including securities pledged
$
23,636.9

 
$
24,757.7


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 March 31, 2016 and December 31, 2015, 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 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
March 31, 2016
 
 
 
 
 
 
 
Communications
$
1,157.2

 
$
96.9

 
$
7.2

 
$
1,246.9

Financial
2,851.8

 
151.3

 
21.8

 
2,981.3

Industrial and other companies
8,882.6

 
506.8

 
56.2

 
9,333.2

Energy
2,105.4

 
52.8

 
107.9

 
2,050.3

Utilities
2,560.7

 
176.9

 
16.2

 
2,721.4

Transportation
602.1

 
34.4

 
2.9

 
633.6

Total
$
18,159.8

 
$
1,019.1

 
$
212.2

 
$
18,966.7

 
 
 
 
 
 
 
 
December 31, 2015
 
 
 
 
 
 
 
Communications
$
1,147.2

 
$
64.9

 
$
17.9

 
$
1,194.2

Financial
2,798.2

 
108.8

 
22.1

 
2,884.9

Industrial and other companies
8,778.0

 
282.1

 
165.9

 
8,894.2

Energy
2,357.3

 
32.2

 
175.9

 
2,213.6

Utilities
2,500.6

 
113.6

 
31.2

 
2,583.0

Transportation
571.8

 
17.0

 
13.8

 
575.0

Total
$
18,153.1

 
$
618.6

 
$
426.8

 
$
18,344.9



 
15
 
 
Voya Insurance and Annuity Company
(A wholly owned subsidiary of Voya Holdings Inc.)
Notes to the Condensed 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 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 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 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 March 31, 2016 and December 31, 2015, approximately 46.1% and 46.6%, 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.

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 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 high quality 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 March 31, 2016 and December 31, 2015, the fair value of loaned securities was $242.7 and $147.9, respectively, and is included in Securities pledged on the Condensed Balance Sheets.

If cash is received as collateral, the lending agent retains the cash collateral and invests it in short-term liquid assets on behalf of the Company. As of March 31, 2016 and December 31, 2015, cash collateral retained by the lending agent and invested in short-term liquid assets on the Company's behalf was $171.7 and $153.6, respectively, and is recorded in Short-term investments under securities loan agreements, including collateral delivered on the Condensed Balance Sheets. As of March 31, 2016 and December 31, 2015, liabilities to return collateral of $171.7 and $153.6, respectively, are included in Payables under securities loan agreements, including collateral held on the Condensed Balance Sheets.

During the first quarter of 2016 under an amendment to the securities lending program, the Company began accepting non-cash collateral in the form of securities. The securities retained as collateral by the lending agent may not be sold or re-pledged, except in the event of default, and are not reflected in the Company’s Condensed Consolidated Balance Sheets. This collateral generally consists of U.S. Treasury, U.S. Government agency securities and MBS pools. As of March 31, 2016, the fair value of securities retained as collateral by the lending agent on the Company’s behalf was $78.9. As of December 31, 2015, the Company did not retain any securities as collateral.




 
16
 
 
Voya Insurance and Annuity Company
(A wholly owned subsidiary of Voya Holdings Inc.)
Notes to the Condensed 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:
 
March 31, 2016 (1)
 
December 31, 2015

U.S. Treasuries
$
35.7

 
$
—

U.S. corporate public securities
122.3

 
73.5

Foreign corporate public securities and foreign governments
92.6

 
80.1

Payables under securities loan agreements
$
250.6

 
$
153.6

(1) Borrowings under securities lending transactions include both cash and non-cash collateral of $171.7 and $78.9, respectively.

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 investments in VIEs was $191.7 and $1.2 as of March 31, 2016 and December 31, 2015, respectively; these investments are included in Limited partnerships/corporations on the Condensed Balance Sheets. Income and losses recognized on these investments are reported in Net investment income in the Condensed 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 Financial Statements and unrealized capital gains (losses) on these securities are recorded directly in AOCI, except for certain RMBS, which are accounted for under the FVO, for which changes in fair value are reflected in Other net realized gains (losses) in the Condensed Statements of Operations. The Company's maximum exposure to loss on these structured investments is limited to the amount of its investment.


 
17
 
 
Voya Insurance and Annuity Company
(A wholly owned subsidiary of Voya Holdings Inc.)
Notes to the Condensed 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 March 31, 2016:
 
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
—

 
—

 
50.4

 
0.4

 
—

 
—

 
50.4

 
0.4

 
State, municipalities and political subdivisions
3.0

 
—

*
26.1

 
0.9

 
1.6

 
0.3

 
30.7

 
1.2

 
U.S. corporate public securities
367.6

 
13.0

 
937.7

 
67.8

 
233.3

 
33.0

 
1,538.6

 
113.8

 
U.S. corporate private securities
96.8

 
2.1

 
137.1

 
12.8

 
85.9

 
10.9

 
319.8

 
25.8

 
Foreign corporate public securities and foreign governments
129.5

 
5.1

 
326.7

 
23.5

 
180.8

 
31.4

 
637.0

 
60.0

 
Foreign corporate private securities
95.9

 
3.5

 
243.5

 
10.0

 
46.2

 
6.9

 
385.6

 
20.4

 
Residential mortgage-backed
133.9

 
1.4

 
44.6

 
0.6

 
169.1

 
5.1

 
347.6

 
7.1

 
Commercial mortgage-backed
145.6

 
0.8

 
50.9

 
1.1

 
0.4

 
0.8

 
196.9

 
2.7

 
Other asset-backed
27.0

 
0.1

 
12.3

 
0.2

 
73.6

 
6.1

 
112.9

 
6.4

 
Total
$
999.3

 
$
26.0

 
$
1,829.3

 
$
117.3

 
$
790.9

 
$
94.5

 
$
3,619.5

 
$
237.8

 
* Less than $0.1.
 


 
18
 
 
Voya Insurance and Annuity Company
(A wholly owned subsidiary of Voya Holdings Inc.)
Notes to the Condensed 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, 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
$
311.6

 
$
4.2

 
$
—

 
$
—

 
$
—

 
$
—

 
$
311.6

 
$
4.2

 
U.S. Government agencies and authorities
49.3

 
0.3

 
—

 
—

 
—

 
—

 
49.3

 
0.3

 
State, municipalities and political subdivisions
116.9

 
1.3

 
98.9

 
3.9

 
—

 
—

 
215.8

 
5.2

 
U.S. corporate public securities
1,973.2

 
63.0

 
2,250.3

 
140.7

 
136.1

 
32.5

 
4,359.6

 
236.2

 
U.S. corporate private securities
362.0

 
9.7

 
369.5

 
28.2

 
34.3

 
7.0

 
765.8

 
44.9

 
Foreign corporate public securities and foreign governments
815.3

 
28.0

 
416.3

 
45.7

 
134.0

 
27.5

 
1,365.6

 
101.2

 
Foreign corporate private securities
492.8

 
40.6

 
194.5

 
14.3

 
23.0

 
7.0

 
710.3

 
61.9

 
Residential mortgage-backed
145.8

 
1.0

 
94.1

 
1.7

 
150.8

 
5.2

 
390.7

 
7.9

 
Commercial mortgage-backed
236.2

 
1.9

 
25.2

 
0.8

 
0.7

 
0.7

 
262.1

 
3.4

 
Other asset-backed
13.5

 
—

*
—

 
—

 
76.7

 
5.6

 
90.2

 
5.6

 
Total
$
4,516.6

 
$
150.0

 
$
3,448.8

 
$
235.3

 
$
555.6

 
$
85.5

 
$
8,521.0

 
$
470.8

 
*Less than $0.1.

 

Of the unrealized capital losses aged more than twelve months, the average market value of the related fixed maturities was 89.3% and 86.6% of the average book value as of March 31, 2016 and December 31, 2015, respectively.


 
19
 
 
Voya Insurance and Annuity Company
(A wholly owned subsidiary of Voya Holdings Inc.)
Notes to the Condensed 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%
March 31, 2016
 
 
 
 
 
 
 
 
 
 
 
Six months or less below amortized cost
$
1,416.0

 
$
195.2

 
$
78.5

 
$
52.8

 
266

 
42

More than six months and twelve months or less below amortized cost
1,564.6

 
66.0

 
54.2

 
20.3

 
271

 
17

More than twelve months below amortized cost
612.8

 
2.7

 
30.8

 
1.2

 
183

 
2

Total
$
3,593.4

 
$
263.9

 
$
163.5

 
$
74.3

 
720

 
61

 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2015
 
 
 
 
 
 
 
 
 
 
 
Six months or less below amortized cost
$
4,611.3

 
$
468.6

 
$
131.4

 
$
131.5

 
758

 
93

More than six months and twelve months or less below amortized cost
3,445.1

 
—

 
171.2

 
—

 
524

 
—

More than twelve months below amortized cost
450.4

 
16.4

 
32.4

 
4.3

 
158

 
3

Total
$
8,506.8

 
$
485.0

 
$
335.0

 
$
135.8

 
1,440

 
96


  

 
20
 
 
Voya Insurance and Annuity Company
(A wholly owned subsidiary of Voya Holdings Inc.)
Notes to the Condensed 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%
March 31, 2016
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasuries
$
—

 
$
—

 
$
—

 
$
—

 
—

 
—

U.S. Government agencies and authorities
50.8

 
—

 
0.4

 
—

 
1

 
—

State, municipalities and political subdivisions
31.9

 
—

 
1.2

 
—

 
12

 
—

U.S. corporate public securities
1,534.7

 
117.7

 
82.3

 
31.5

 
296

 
23

U.S. corporate private securities
315.4

 
30.2

 
16.3

 
9.5

 
33

 
4

Foreign corporate public securities and foreign governments
600.0

 
97.0

 
33.4

 
26.6

 
128

 
20

Foreign corporate private securities
396.9

 
9.1

 
16.9

 
3.5

 
43

 
3

Residential mortgage-backed
353.9

 
0.8

 
6.8

 
0.3

 
140

 
4

Commercial mortgage-backed
195.1

 
4.5

 
0.8

 
1.9

 
26

 
4

Other asset-backed
114.7

 
4.6

 
5.4

 
1.0

 
41

 
3

Total
$
3,593.4

 
$
263.9

 
$
163.5

 
$
74.3

 
720

 
61

 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2015
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasuries
$
315.8

 
$
—

 
$
4.2

 
$
—

 
8

 
—

U.S. Government agencies and authorities
49.6

 
—

 
0.3

 
—

 
1

 
—

State, municipalities and political subdivisions
221.0

 
—

 
5.2

 
—

 
117

 
—

U.S. corporate public securities
4,316.2

 
279.6

 
159.1

 
77.1

 
681

 
57

U.S. corporate private securities
769.5

 
41.2

 
33.3

 
11.6

 
90

 
4

Foreign corporate public securities and foreign governments
1,343.5

 
123.3

 
66.6

 
34.6

 
251

 
26

Foreign corporate private securities
734.2

 
38.0

 
50.4

 
11.5

 
81

 
5

Residential mortgage-backed
398.6

 
—

*
7.9

 
—

*
141

 
2

Commercial mortgage-backed
264.1

 
1.4

 
2.7

 
0.7

 
33

 
1

Other asset-backed
94.3

 
1.5

 
5.3

 
0.3

 
37

 
1

Total
$
8,506.8

 
$
485.0

 
$
335.0

 
$
135.8

 
1,440

 
96

*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 of a particular security within the trust will also be dependent upon the trust structure. Where the assessment continues to project

 
21
 
 
Voya Insurance and Annuity Company
(A wholly owned subsidiary of Voya Holdings Inc.)
Notes to the Condensed Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 

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 three months ended March 31, 2016 and the year ended December 31, 2015, the Company had no new troubled debt restructurings for private placement bonds or commercial mortgage loans.

As of March 31, 2016 the Company held no commercial mortgage troubled debt restructured loans. During the three months ended March 31, 2016, 8 commercial mortgage loans that were restructured in August 2013 with a pre and post modification carrying value of $11.6 were paid in full. These loans represent what remained of an initial portfolio of 20 restructures with a pre and post modification carrying value of $24.6.

As of March 31, 2016 and December 31, 2015, 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:
 
March 31, 2016
 
December 31, 2015
 
Impaired
 
Non Impaired
 
Total
 
Impaired
 
Non Impaired
 
Total
Commercial mortgage loans
$
—

 
$
3,591.1

 
$
3,591.1

 
$
3.7

 
$
3,308.2

 
$
3,311.9

Collective valuation allowance for losses
N/A

 
(1.1
)
 
(1.1
)
 
N/A

 
(1.0
)
 
(1.0
)
Total net commercial mortgage loans
$
—

 
$
3,590.0

 
$
3,590.0

 
$
3.7

 
$
3,307.2

 
$
3,310.9

N/A - Not Applicable

There were no impairments taken on the mortgage loan portfolio for the three months ended March 31, 2016 and 2015.

 
22
 
 
Voya Insurance and Annuity Company
(A wholly owned subsidiary of Voya Holdings Inc.)
Notes to the Condensed 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:
 
March 31, 2016
 
December 31, 2015
Collective valuation allowance for losses, balance at January 1
$
1.0

 
$
0.8

Addition to (reduction of) allowance for losses
0.1

 
0.2

Collective valuation allowance for losses, end of period
$
1.1

 
$
1.0


The carrying values and unpaid principal balances of impaired mortgage loans were as follows as of the dates indicated:
 
March 31, 2016
 
December 31, 2015
Impaired loans without allowances for losses
$
—

 
$
3.7

Less: Allowances for losses on impaired loans
—

 
—

Impaired loans, net
$
—

 
$
3.7

Unpaid principal balance of impaired loans
$
—

 
$
3.7


The following table presents information on restructured loans as of the dates indicated:
 
March 31, 2016
 
December 31, 2015
Troubled debt restructured loans
$
—

 
$
3.7


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 as of March 31, 2016 and December 31, 2015.

There were one and two loans 30 days or less in arrears, with respect to principal and interest as of March 31, 2016 and December 31, 2015, with a total amortized cost of $1.0 and $2.1, respectively.

Commercial loans are placed on non-accrual status when 90 days in arrears if the Company has concerns regarding the collectability of future payments, or if a loan has matured without being paid off or extended. Factors considered may include conversations with the borrower, loss of major tenant, bankruptcy of borrower or major tenant, decreased property cash flow, number of days past due, or various other circumstances. Based on an assessment as to the collectability of the principal, a determination is made to either apply against the book value or apply according to the contractual terms of the loan. Funds recovered in excess of book value would then be applied to recover expenses, impairments, and then interest. Accrual of interest resumes after factors resulting in doubts about collectability have improved.

The following table presents 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 March 31,
 
2016
 
2015
Impaired loans, average investment during the period (amortized cost) (1)
$
1.8

 
$
13.4

Interest income recognized on impaired loans, on an accrual basis (1)
—

 
0.2

Interest income recognized on impaired loans, on a cash basis (1)
—

 
0.2

Interest income recognized on troubled debt restructured loans, on an accrual basis
—

 
0.2

(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

 
23
 
 
Voya Insurance and Annuity Company
(A wholly owned subsidiary of Voya Holdings Inc.)
Notes to the Condensed Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 

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 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:
 
March 31, 2016(1)
 
December 31, 2015(1)
Loan-to-Value Ratio:
 
 
 
0% - 50%
$
386.7

 
$
399.9

> 50% - 60%
1,067.1

 
927.9

> 60% - 70%
1,888.6

 
1,772.0

> 70% - 80%
242.5

 
207.0

> 80% and above
6.2

 
5.1

Total Commercial mortgage loans
$
3,591.1

 
$
3,311.9

(1) Balances do not include collective valuation allowance for losses.

The following table presents the DSC ratios as of the dates indicated:
 
March 31, 2016(1)
 
December 31, 2015(1)
Debt Service Coverage Ratio:
 
 
 
Greater than 1.5x
$
2,852.5

 
$
2,569.3

> 1.25x - 1.5x
497.1

 
505.3

> 1.0x - 1.25x
172.2

 
145.6

Less than 1.0x
35.1

 
40.4

Commercial mortgage loans secured by land or construction loans
34.2

 
51.3

Total Commercial mortgage loans
$
3,591.1

 
$
3,311.9

(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:
 
March 31, 2016(1)
 
December 31, 2015(1)
 
Gross
Carrying Value
 
% of Total
 
Gross
Carrying Value
 
% of Total
Commercial Mortgage Loans by U.S. Region:
 
 
 
 
 
 
 
Pacific
$
780.0

 
21.7
%
 
$
763.0

 
23.0
%
South Atlantic
894.1

 
24.9
%
 
792.5

 
23.9
%
Middle Atlantic
468.8

 
13.1
%
 
467.2

 
14.1
%
West South Central
421.8

 
11.7
%
 
388.8

 
11.7
%
Mountain
399.4

 
11.1
%
 
334.1

 
10.1
%
East North Central
366.5

 
10.2
%
 
324.2

 
9.8
%
New England
57.3

 
1.6
%
 
58.2

 
1.8
%
West North Central
134.7

 
3.8
%
 
117.6

 
3.6
%
East South Central
68.5

 
1.9
%
 
66.3

 
2.0
%
Total Commercial mortgage loans
$
3,591.1

 
100.0
%
 
$
3,311.9

 
100.0
%
(1) Balances do not include collective valuation allowance for losses.

 
24
 
 
Voya Insurance and Annuity Company
(A wholly owned subsidiary of Voya Holdings Inc.)
Notes to the Condensed Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 

 
March 31, 2016(1)
 
December 31, 2015(1)
 
Gross
Carrying Value
 
% of Total
 
Gross
Carrying Value
 
% of Total
Commercial Mortgage Loans by Property Type:
 
 
 
 
 
 
 
Retail
$
1,154.3

 
32.2
%
 
$
1,125.1

 
33.9
%
Industrial
887.9

 
24.7
%
 
788.3

 
23.8
%
Apartments
701.9

 
19.5
%
 
615.2

 
18.6
%
Office
599.1

 
16.7
%
 
535.6

 
16.2
%
Hotel/Motel
82.7

 
2.3
%
 
83.3

 
2.5
%
Mixed Use
31.5

 
0.9
%
 
29.9

 
0.9
%
Other
133.7

 
3.7
%
 
134.5

 
4.1
%
Total Commercial mortgage loans
$
3,591.1

 
100.0
%
 
$
3,311.9

 
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:
 
March 31, 2016(1)
 
December 31, 2015(1)
Year of Origination:
 
 
 
2016
$
391.9

 
$
—

2015
807.9

 
810.1

2014
557.2

 
557.9

2013
616.1

 
624.7

2012
231.2

 
232.8

2011
445.8

 
460.4

2010 and prior
541.0

 
626.0

Total Commercial mortgage loans
$
3,591.1

 
$
3,311.9

(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.


 
25
 
 
Voya Insurance and Annuity Company
(A wholly owned subsidiary of Voya Holdings Inc.)
Notes to the Condensed Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 

The following table identifies the Company’s credit-related and intent-related impairments included in the Condensed Statements of Operations, excluding impairments included in Other comprehensive income (loss) by type for the periods indicated:
 
Three Months Ended March 31,
 
2016
 
2015
 
Impairment
 
No. of
Securities
 
Impairment
 
No. of
Securities
U.S. corporate public securities
$
0.2

 
1

 
$
—

 
—

Foreign corporate public securities and foreign governments(1)
1.8

 
1

 
0.2

 
1

Residential mortgage-backed
0.6

 
18

 
0.8

 
15

Equity
—

 
—

 
—

*
1

Total
$
2.6

 
20

 
$
1.0

 
17

(1) Primarily U.S. dollar denominated.
*Less than $0.1.

The above table includes $0.8 and $0.8 of write-downs related to credit impairments for the three months ended March 31, 2016 and 2015, respectively, in Other-than-temporary impairments, which are recognized in the Condensed Statements of Operations. The remaining $1.8 and $0.2 in write-downs for the three months ended March 31, 2016 and 2015, respectively, are related to intent impairments.

The following table summarizes these intent impairments, which are also recognized in earnings, by type for the periods indicated:
 
Three Months Ended March 31,
 
2016
 
2015
 
Impairment
 
No. of
Securities
 
Impairment
 
No. of
Securities
U.S. corporate public securities
$
—

 
—

 
$
—

 
—

Foreign corporate public securities and foreign governments(1)
1.8

 
1

 
0.2

 
1

Residential mortgage-backed
—

*
2

 
—

*
1

Equity
—

 
—

 
—

 
—

Total
$
1.8

 
3

 
$
0.2

 
2

(1) Primarily U.S. dollar denominated.
*Less than $0.1.

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.


 
26
 
 
Voya Insurance and Annuity Company
(A wholly owned subsidiary of Voya Holdings Inc.)
Notes to the Condensed Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 

The following table identifies 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 March 31,
 
2016
 
2015
Balance at January 1
$
27.2

 
$
33.1

Additional credit impairments:
 
 
 
On securities previously impaired
0.8

 
0.8

Reductions:
 
 
 
Increase in cash flows
0.1

 
0.2

Securities sold, matured, prepaid or paid down
1.0

 
1.4

Balance at March 31
$
26.9

 
$
32.3


Net Investment Income

The following table summarizes Net investment income for the periods indicated:
 
Three Months Ended March 31,
 
2016
 
2015
Fixed maturities
$
299.7

 
$
290.3

Equity securities, available-for-sale
0.6

 
0.4

Mortgage loans on real estate
39.6

 
36.3

Policy loans
1.4

 
1.2

Short-term investments and cash equivalents
0.2

 
0.1

Other
(0.5
)
 
4.8

Gross investment income
341.0

 
333.1

Less: Investment expenses
14.6

 
13.0

Net investment income
$
326.4

 
$
320.1


As of March 31, 2016 and December 31, 2015, the Company had $1.7 of investments in fixed maturities that did not produce net investment income. Fixed maturities are moved to a non-accrual status when the investment defaults.
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 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 products 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.


 
27
 
 
Voya Insurance and Annuity Company
(A wholly owned subsidiary of Voya Holdings Inc.)
Notes to the Condensed Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 

Net realized capital gains (losses) were as follows for the periods indicated:
 
Three Months Ended March 31,
 
2016
 
2015
Fixed maturities, available-for-sale, including securities pledged
$
(2.8
)
 
$
1.7

Fixed maturities, at fair value option
(12.6
)
 
(7.1
)
Derivatives
144.5

 
53.5

Embedded derivatives - fixed maturities
0.7

 
(0.5
)
Guaranteed benefit derivatives
(31.2
)
 
(272.8
)
Other investments
0.1

 
—

Net realized capital gains (losses)
$
98.7

 
$
(225.2
)
After-tax net realized capital gains (losses)
$
64.1

 
$
(146.4
)

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 March 31,
 
2016
 
2015
Proceeds on sales
$
759.9

 
$
200.2

Gross gains
30.0

 
1.6

Gross losses
33.1

 
1.9


3.    Derivative Financial Instruments

The Company enters into the following types of derivatives:

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.

Total return swaps: The Company uses total return swaps as a hedge against a decrease in variable annuity account values, which are invested in certain indices. Using total return swaps, the Company agrees with another party to exchange, at specified intervals, the difference between the economic risk and reward of assets or a market index and the LIBOR rate, calculated by reference to an agreed upon notional principal amount. No cash is exchanged at the onset of the contracts. Cash is paid and received over the life of the contract based upon the terms of the swaps. The Company utilizes these contracts in non-qualifying hedging relationships.

 
28
 
 
Voya Insurance and Annuity Company
(A wholly owned subsidiary of Voya Holdings Inc.)
Notes to the Condensed Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 


Currency forwards: The Company uses currency forward contracts to hedge policyholder liabilities associated with the variable annuity contracts which are linked to foreign indices. The currency fluctuations may result in a decrease in account values, which would increase the possibility of the Company incurring an expense for guaranteed benefits in excess of account values. The Company also utilizes currency forward contracts to hedge currency exposure related to invested assets. The Company utilizes these 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 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. The Company also used futures contracts as a hedge against an increase in certain equity indices. Such increases may result in increased payments to the holders of fixed index annuity ("FIA") contracts. During the three months ended March 31, 2016, the Company moved to a static hedging strategy for its FIA contracts and replaced futures contracts with equity options.

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. The Company pays a premium when it purchases the swaption. The Company utilizes these contracts in non-qualifying hedging relationships.

Options: The Company uses options to manage the equity, interest rate and equity volatility risk of the economic liabilities associated with certain variable annuity minimum guaranteed benefits and/or to mitigate certain rebalancing costs resulting from increased volatility. The Company also uses equity options to hedge against an increase in various equity indices, and interest rate options to hedge against an increase in the interest rate benchmarked crediting strategies within FIA contracts. Such increases may result in increased payments to the holders of the FIA contracts. The Company pays an upfront premium to purchase these options. The Company utilizes these options in non-qualifying hedging relationships.

Variance swaps: The Company uses variance swaps to manage equity volatility risk on the economic liabilities associated with certain minimum guaranteed living benefits and/or to mitigate certain rebalancing costs resulting from increased volatility. An increase in the equity volatility results in higher valuations of such liabilities. In an equity variance swap, the Company agrees with another party to exchange amounts in the future, based on the changes in equity volatility over a defined period. The Company utilizes equity variance swaps in non-qualifying hedging relationships.

Embedded derivatives: The Company also invests in certain fixed maturity instruments and has issued certain 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.

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.


 
29
 
 
Voya Insurance and Annuity Company
(A wholly owned subsidiary of Voya Holdings Inc.)
Notes to the Condensed Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 

The notional amounts and fair values of derivatives were as follows as of the dates indicated:
 
March 31, 2016
 
December 31, 2015
 
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
$
18.2

 
$
1.2

 
$
—

 
$
18.2

 
$
0.5

 
$
—

Foreign exchange contracts
57.1

 
8.9

 
—

 
57.1

 
11.7

 
—

Fair value hedges:
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
285.1

 
—

 
7.0

 
295.1

 
0.8

 
5.9

Derivatives: Non-qualifying for hedge accounting(1)
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
27,825.5

 
1,142.7

 
353.9

 
27,139.0

 
529.5

 
114.9

Foreign exchange contracts
981.6

 
12.5

 
21.4

 
967.0

 
30.9

 
12.3

Equity contracts
26,466.3

 
296.2

 
104.6

 
19,062.4

 
223.7

 
65.6

Credit contracts
1,230.0

 
2.2

 
11.1

 
1,230.0

 
2.3

 
5.9

Embedded derivatives:
 
 
 
 
 
 
 
 
 
 
 
Within fixed maturity investments
N/A

 
21.9

 
—

 
N/A

 
21.1

 
—

Within products
N/A

 
—

 
3,728.7

 
N/A

 
—

 
3,628.1

Within reinsurance agreements 
N/A

 
2.1

 
248.7

 
N/A

 
(15.6
)
 
10.2

Total
 
 
$
1,487.7

 
$
4,475.4

 
 
 
$
804.9

 
$
3,842.9

(1) Open derivative contracts are reported as Derivatives assets or liabilities on the Condensed Balance Sheets at fair value.
N/A - Not Applicable

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 March 31, 2016 and December 31, 2015. 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.

 
30
 
 
Voya Insurance and Annuity Company
(A wholly owned subsidiary of Voya Holdings Inc.)
Notes to the Condensed 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:
 
March 31, 2016
 
Notional Amount
 
Asset Fair Value
 
Liability Fair Value
Credit contracts
$
1,230.0

 
$
2.2

 
$
11.1

Equity contracts
19,581.0

 
281.7

 
104.6

Foreign exchange contracts
1,038.7

 
21.4

 
21.4

Interest rate contracts
25,158.6

 
1,143.9

 
360.1

 
 
 
1,449.2

 
497.2

Counterparty netting(1)
 
 
(425.4
)
 
(425.4
)
Cash collateral netting(1)
 
 
(950.1
)
 
(47.1
)
Securities collateral netting(1)
 
 
(11.1
)
 
(10.4
)
Net receivables/payables
 
 
$
62.6

 
$
14.3

(1) Represents the netting of receivable balances with payable balances, net of collateral, for the same counterparty under eligible netting agreements.

 
December 31, 2015
 
Notional Amount
 
Asset Fair Value
 
Liability Fair Value
Credit contracts
$
1,230.0

 
$
2.3

 
$
5.9

Equity contracts
11,528.3

 
167.5

 
53.9

Foreign exchange contracts
1,024.1

 
42.6

 
12.3

Interest rate contracts
24,030.4

 
530.8

 
120.1

 
 
 
743.2

 
192.2

Counterparty netting(1)
 
 
(184.6
)
 
(184.6
)
Cash collateral netting(1)
 
 
(427.3
)
 
(5.9
)
Securities collateral netting(1)
 
 
(12.5
)
 
(1.7
)
Net receivables/payables
 
 
$
118.8

 
$
—

(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 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 Balance Sheets. As of March 31, 2016, the Company held $945.4 of net cash collateral and pledged $34.9 of net cash collateral related to OTC derivative contracts and cleared derivative contracts, respectively. As of December 31, 2015, the Company held $423.0 and $0.4 of net cash collateral related to OTC derivative contracts and cleared derivative contracts, respectively. In addition, as of March 31, 2016, the Company delivered $488.1 of securities and held $11.1 securities as collateral. As of December 31, 2015, the Company delivered $524.5 of securities and held $12.9 of securities as collateral.


 
31
 
 
Voya Insurance and Annuity Company
(A wholly owned subsidiary of Voya Holdings Inc.)
Notes to the Condensed 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 March 31,
 
2016
 
2015
Derivatives: Qualifying for hedge accounting(1)
 
 
 
Cash flow hedges:
 
 
 
Interest rate contracts
$
0.1

 
$
—

  Foreign exchange contracts
0.2

 
0.2

Fair value hedges:
 
 
 
Interest rate contracts
(3.0
)
 
(3.0
)
Derivatives: Non-qualifying for hedge accounting(2)
 
 
 
Interest rate contracts
364.6

 
224.4

Foreign exchange contracts
(22.1
)
 
59.5

Equity contracts
(192.2
)
 
(224.7
)
Credit contracts
(3.1
)
 
(2.9
)
Embedded derivatives:
 
 
 
Within fixed maturity investments(2)
0.7

 
(0.5
)
Within products(2)
(31.2
)
 
(272.8
)
Within reinsurance agreements(3)
(220.8
)
 
(92.3
)
Total
$
(106.8
)
 
$
(312.1
)
(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 Statements of Operations. For the three months ended March 31, 2016 and 2015, ineffective amounts were immaterial.
(2) Changes in value are included in Other net realized capital gains (losses) in the Condensed Statements of Operations.
(3) Changes in value are included in Interest credited and other benefits to contract owners/policyholders in the Condensed 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 March 31, 2016, the fair values of credit default swaps of $2.2 and $11.1 were included in Derivatives assets and Derivatives liabilities, respectively, on the Condensed Balance Sheets. As of December 31, 2015, the fair values of credit default swaps of $2.3 and $5.9 were included in Derivatives assets and Derivatives liabilities, respectively, on the Condensed Balance Sheets.  As of March 31, 2016 and December 31, 2015, the maximum potential future net exposure to the Company was $220.0 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.


 
32
 
 
Voya Insurance and Annuity Company
(A wholly owned subsidiary of Voya Holdings Inc.)
Notes to the Condensed 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). 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.

 
33
 
 
Voya Insurance and Annuity Company
(A wholly owned subsidiary of Voya Holdings Inc.)
Notes to the Condensed 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 March 31, 2016:
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Fixed maturities, including securities pledged:
 
 
 
 
 
 
 
U.S. Treasuries
$
1,216.0

 
$
9.6

 
$
—

 
$
1,225.6

U.S. Government agencies and authorities
—

 
84.7

 
—

 
84.7

State, municipalities and political subdivisions
—

 
401.6

 
—

 
401.6

U.S. corporate public securities
—

 
11,298.3

 
0.6

 
11,298.9

U.S. corporate private securities
—

 
2,129.7

 
299.7

 
2,429.4

Foreign corporate public securities and foreign governments(1)
—

 
2,832.3

 
1.2

 
2,833.5

Foreign corporate private securities(1)
—

 
2,603.0

 
160.5

 
2,763.5

Residential mortgage-backed securities
—

 
2,088.0

 
27.6

 
2,115.6

Commercial mortgage-backed securities
—

 
1,342.6

 
6.4

 
1,349.0

Other asset-backed securities
—

 
245.1

 
10.8

 
255.9

Total fixed maturities, including securities pledged
1,216.0

 
23,034.9

 
506.8

 
24,757.7

Equity securities, available-for-sale
11.8

 
—

 
7.0

 
18.8

Derivatives:
 
 
 
 
 
 
 
Interest rate contracts
—

 
1,143.9

 
—

 
1,143.9

Foreign exchange contracts
—

 
21.4

 
—

 
21.4

Equity contracts
14.5

 
273.7

 
8.0

 
296.2

Credit contracts
—

 
2.2

 
—

 
2.2

Embedded derivative on reinsurance
—

 
2.1

 
—

 
2.1

Cash and cash equivalents, short-term investments and short-term investments under securities loan agreements
1,871.8

 
1.4

 
—

 
1,873.2

Assets held in separate accounts
32,495.1

 
—

 
—

 
32,495.1

Total assets
$
35,609.2

 
$
24,479.6

 
$
521.8

 
$
60,610.6

Liabilities:
 
 
 
 
 
 
 
Derivatives:
 
 
 
 
 
 
 
Guaranteed benefit derivatives:
 
 
 
 
 
 
 
 FIA
$
—

 
$
—

 
$
1,647.7

 
$
1,647.7

 GMAB/GMWB/GMWBL(2)
—

 
—

 
2,081.0

 
2,081.0

 Other derivatives:
 
 
 
 
 
 
 
 Interest rate contracts
0.8

 
360.1

 
—

 
360.9

 Foreign exchange contracts
—

 
21.4

 
—

 
21.4

 Equity contracts
—

 
104.6

 
—

 
104.6

 Credit contracts
—

 
11.1

 
—

 
11.1

 Embedded derivative on reinsurance
—

 
248.7

 
—

 
248.7

Total liabilities
$
0.8

 
$
745.9

 
$
3,728.7

 
$
4,475.4

(1) Primarily U.S. dollar denominated.
(2) Guaranteed minimum accumulation benefits ("GMAB"), Guaranteed minimum withdrawal benefits ("GMWB") and Guaranteed minimum withdrawal benefits with life payouts ("GMWBL").


 
34
 
 
Voya Insurance and Annuity Company
(A wholly owned subsidiary of Voya Holdings Inc.)
Notes to the Condensed 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, 2015:
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Fixed maturities, including securities pledged:
 
 
 
 
 
 
 
U.S. Treasuries
$
1,049.2

 
$
9.5

 
$
—

 
$
1,058.7

U.S. Government agencies and authorities
—

 
81.9

 
—

 
81.9

State, municipalities and political subdivisions
—

 
360.5

 
—

 
360.5

U.S. corporate public securities
—

 
10,871.2

 
0.7

 
10,871.9

U.S. corporate private securities
—

 
2,067.1

 
327.3

 
2,394.4

Foreign corporate public securities and foreign governments(1)
—

 
2,791.8

 
1.2

 
2,793.0

Foreign corporate private securities(1)
—

 
2,481.0

 
145.0

 
2,626.0

Residential mortgage-backed securities
—

 
1,856.5

 
28.6

 
1,885.1

Commercial mortgage-backed securities
—

 
1,331.3

 
12.1

 
1,343.4

Other asset-backed securities
—

 
252.0

 
11.3

 
263.3

Total fixed maturities, including securities pledged
1,049.2

 
22,102.8

 
526.2

 
23,678.2

Equity securities, available-for-sale
12.5

 
—

 
6.7

 
19.2

Derivatives:
 
 
 
 
 
 


Interest rate contracts
—

 
530.8

 
—

 
530.8

Foreign exchange contracts
—

 
42.6

 
—

 
42.6

Equity contracts
56.2

 
161.8

 
5.7

 
223.7

Credit contracts
—

 
2.3

 
—

 
2.3

Embedded derivative on reinsurance
—

 
(15.6
)
 
—

 
(15.6
)
Cash and cash equivalents, short-term investments and short-term investments under securities loan agreements
1,947.2

 
1.4

 
—

 
1,948.6

Assets held in separate accounts
33,355.5

 
—

 
—

 
33,355.5

Total assets
$
36,420.6

 
$
22,826.1

 
$
538.6

 
$
59,785.3

Liabilities:
 
 
 
 
 
 
 
Derivatives:
 
 
 
 
 
 
 
Guaranteed benefit derivatives:
 
 
 
 
 
 
 
 FIA
$
—

 
$
—

 
$
1,779.1

 
$
1,779.1

 GMAB/GMWB/GMWBL(2)
—

 
—

 
1,849.0

 
1,849.0

 Other derivatives:
 
 
 
 
 
 


 Interest rate contracts
0.7

 
120.1

 
—

 
120.8

 Foreign exchange contracts
—

 
12.3

 
—

 
12.3

 Equity contracts
11.7

 
53.9

 
—

 
65.6

 Credit contracts
—

 
5.9

 
—

 
5.9

   Embedded derivative on reinsurance
—

 
10.2

 
—

 
10.2

Total liabilities
$
12.4

 
$
202.4

 
$
3,628.1

 
$
3,842.9

(1) Primarily U.S. dollar denominated.
(2) Guaranteed minimum accumulation benefits ("GMAB"), Guaranteed minimum withdrawal benefits ("GMWB") and Guaranteed minimum withdrawal benefits with life payouts ("GMWBL").


 
35
 
 
Voya Insurance and Annuity Company
(A wholly owned subsidiary of Voya Holdings Inc.)
Notes to the Condensed 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 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.


 
36
 
 
Voya Insurance and Annuity Company
(A wholly owned subsidiary of Voya Holdings Inc.)
Notes to the Condensed 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 months ended March 31, 2016 and 2015. 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.


 
37
 

Voya Insurance and Annuity Company
(A wholly owned subsidiary of Voya Holdings Inc.)
Notes to the Condensed Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 
 

The following table summarizes the change in fair value of the Company’s Level 3 assets and liabilities and transfers in and out of Level 3 for the period indicated:
 
Three Months Ended March 31, 2016
 
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 March 31
 
Change In
Unrealized
Gains (Losses)
Included in
Earnings (4)
 
 
Net 
Income
 
OCI
 
 
 
 
 
 
 
 
Fixed maturities, including securities pledged:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. corporate public securities
$
0.7

 
$
—

 
$
(0.1
)
 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
0.6

 
$
—

U.S. corporate private securities
327.3

 
(0.1
)
 
6.9

 
0.3

 
—

 
(14.0
)
 
(32.1
)
 
18.6

 
(7.2
)
 
299.7

 
(0.1
)
Foreign corporate public securities and foreign governments(1)
1.2

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
1.2

 
—

Foreign corporate private securities(1)
145.0

 
—

 
3.3

 
—

 
—

 
(0.1
)
 
(6.0
)
 
23.8

 
(5.5
)
 
160.5

 
—

Residential mortgage-backed securities
28.6

 
(1.0
)
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
27.6

 
(1.0
)
Commercial mortgage-backed securities
12.1

 
—

 
—

 
6.4

 
—

 
—

 
—

 
—

 
(12.1
)
 
6.4

 
—

Other asset-backed securities
11.3

 
—

 
(0.2
)
 
—

 
—

 
—

 
(0.3
)
 
—

 
—

 
10.8

 
—

Total fixed maturities, including securities pledged
526.2

 
(1.1
)
 
9.9

 
6.7

 
—

 
(14.1
)
 
(38.4
)
 
42.4

 
(24.8
)
 
506.8

 
(1.1
)
Equity securities, available-for-sale
6.7

 
—

 
0.3

 
—

 
—

 
—

 
—

 
—

 
—

 
7.0

 
—

Derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


 
 
Guaranteed benefit derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


 
 
FIA(2)
(1,779.1
)
 
163.8

 
—

 
—

 
(76.9
)
 
—

 
44.5

 
—

 
—

 
(1,647.7
)
 
—

GMWB/GMAB/GMWBL(2)
(1,849.0
)
 
(195.0
)
 
—

 
—

 
(37.1
)
 
—

 
0.1

 
—

 
—

 
(2,081.0
)
 
—

Other derivatives, net
5.7

 
(5.5
)
 
—

 
7.8

 
—

 
—

 
—

 
—

 
—

 
8.0

 
2.2

Cash and cash equivalents, short-term investments and short-term investments under securities loan agreements
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

(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 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 March 31, amounts are included in Net investment income and Total net realized capital gains (losses) in the Condensed Statements of Operations.


 
38
 

Voya Insurance and Annuity Company
(A wholly owned subsidiary of Voya Holdings Inc.)
Notes to the Condensed Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 
 

The following table summarizes the change in fair value of the Company’s Level 3 assets and liabilities and transfers in and out of Level 3 for the period indicated:
 
Three Months Ended March 31, 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 March 31
 
Change in
Unrealized
Gains (Losses)
Included in
Earnings (4)
 
 
Net 
Income
 
OCI
 
 
 
 
 
 
Fixed maturities, including securities pledged:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. corporate public securities
$
81.5

 
$
—

 
$
1.3

 
$
18.8

 
$
—

 
$
—

 
$
(0.1
)
 
$
—

 
$
—

 
$
101.5

 
$
—

U.S. corporate private securities
232.5

 
(0.1
)
 
0.3

 
8.7

 
—

 
—

 
(24.9
)
 
27.9

 
—

 
244.4

 
—

Foreign corporate public securities and foreign governments(1)
—

 
—

 
—

 
1.3

 
—

 
—

 
—

 
—

 
—

 
1.3

 
—

Foreign corporate private securities(1)
147.3

 
0.1

 
(0.8
)
 
2.7

 
—

 
—

 
(3.3
)
 
21.4

 
—

 
167.4

 
—

Residential mortgage-backed securities
31.3

 
(0.7
)
 
—

 
—

 
—

 
—

 
(0.1
)
 
1.9

 
—

 
32.4

 
(0.6
)
Commercial mortgage-backed securities
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Other asset-backed securities
0.9

 
—

 
—

 
—

 
—

 
—

 
(0.3
)
 
—

 
—

 
0.6

 
—

Total fixed maturities, including securities pledged
493.5

 
(0.7
)
 
0.8

 
31.5

 
—

 
—

 
(28.7
)
 
51.2

 
—

 
547.6

 
(0.6
)
Equity securities, available-for-sale
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


 
 
Guaranteed benefit derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


 
 
FIA(2)
(1,924.4
)
 
(44.1
)
 
—

 
—

 
(40.4
)
 
—

 
40.1

 
—

 
—

 
(1,968.8
)
 
—

GMWB/GMAB/GMWBL(2)
(1,564.4
)
 
(228.7
)
 
—

 
—

 
(40.5
)
 
—

 
0.2

 
—

 
—

 
(1,833.4
)
 
—

Other derivatives, net
31.2

 
(9.6
)
 
—

 
5.0

 
—

 
—

 
(8.6
)
 
—

 
—

 
18.0

 
(13.2
)
Cash and cash equivalents, short-term investments and short-term investments under securities loan agreements
1.8

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
1.8

 
—

(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 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 March 31, amounts are included in Net investment income and Total net realized capital gains (losses) in the Condensed Statements of Operations.

 
39
 
 
Voya Insurance and Annuity Company
(A wholly owned subsidiary of Voya Holdings Inc.)
Notes to the Condensed Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 

For the three months ended March 31, 2016 and 2015, the transfers in and out of Level 3 for fixed maturities, 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

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.

Quantitative information about the significant unobservable inputs used in the Company's Level 3 fair value measurements of its guaranteed benefit derivatives is presented in the following sections and table.

Significant unobservable inputs used in the fair value measurements of GMABs, GMWBs and GMWBLs include long-term equity and interest rate implied volatility, correlations between the rate of return on policyholder funds and between interest rates and equity returns, nonperformance risk, mortality and policyholder behavior assumptions, such as benefit utilization, lapses and partial withdrawals. Such inputs are monitored quarterly.

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.

Following is a description of selected inputs:

Equity / Interest Rate Volatility: A term-structure model is used to approximate implied volatility for the equity indices and swap rates for GMAB, GMWB and GMWBL fair value measurements. Where no implied volatility is readily available in the market, an alternative approach is applied based on historical volatility.

Correlations: Integrated interest rate and equity scenarios are used in GMAB, GMWB and GMWBL fair value measurements to better reflect market interest rates and interest rate volatility correlations between equity and fixed income fund groups and between equity fund groups and interest rates. The correlations are based on historical fund returns and swap rates from external sources.

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 as well as adjustment to reflect 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 Company experience may be limited on certain products.


 
40
 
 
Voya Insurance and Annuity Company
(A wholly owned subsidiary of Voya Holdings Inc.)
Notes to the Condensed 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 March 31, 2016:
 
 
Range(1)
Unobservable Input
 
GMWB / GMWBL
 
GMAB
 
FIA
 
Long-term equity implied volatility
 
15% to 25%

 
15% to 25%

 
—

 
Interest rate implied volatility
 
0.2% to 17%

 
0.2% to 17%

 
—

 
Correlations between:
 
 
 
 
 
 
 
Equity Funds
 
48% to 98%

 
48% to 98%

 
—

 
Equity and Fixed Income Funds
 
-38% to 62%

 
-38% to 62%

 
—

 
Interest Rates and Equity Funds
 
-32% to 17%

 
-32% to 17%

 
—

 
Nonperformance risk
 
0.23% to 1.6%

 
0.23% to 1.6%

 
0.23% to 1.6%

 
Actuarial Assumptions:
 
 
 
 
 
 
 
Benefit Utilization
 
85% to 100%

(2) 
—

 
—

 
Partial Withdrawals
 
0% to 10%

 
0% to 10%

 
0% to 10%

 
Lapses
 
0.08% to 22%

(3)(4) 
0.08% to 25%

(3)(4) 
0% to 60%

(3) 
Mortality
 
—

(5) 
—

(5) 
—

(5) 
(1) 
Represents the range of reasonable assumptions that management has used in its fair value calculations.
(2) Those policyholders who have elected systematic withdrawals are assumed to continue taking withdrawals. As a percent of account value, 37% are taking systematic withdrawals. Of those policyholders who are not taking withdrawals, the Company assumes that 85% will begin systematic withdrawals after a delay period. The utilization function varies by policyholder age and policy duration. Interactions with lapse and mortality also affect utilization. The utilization rate for GMWB and GMWBL tends to be lower for younger contract owners and contracts that have not reached their maximum accumulated GMWB and GMWBL benefit amount. There is also a lower utilization rate, though indirectly, for contracts that are less "in the money" (i.e., where the notional benefit amount is in excess of the account value) due to higher lapses. Conversely, the utilization rate tends to be higher for contract owners near or beyond retirement age and contracts that have accumulated their maximum GMWB or GMWBL benefit amount. There is also a higher utilization rate, though indirectly, for contracts which are highly "in the money." The chart below provides the GMWBL account value by current age group and average expected delay times from the associated attained age group as of March 31, 2016 (account value amounts are in $ billions).
 
 
Account Values
 
 
 
Attained Age Group
 
In the Money
 
Out of the Money
 
Total
 
Average Expected Delay (Years)**
 
< 60
 
$
2.1

 
$
—

*
$
2.1

 
8.9
 
60-69
 
5.9

 
—

*
5.9

 
4.0
 
70+
 
5.4

 
0.1

 
5.5

 
2.3
 
 
 
$
13.4

 
$
0.1

 
$
13.5

 
4.8
 
* Less than $0.1.
** For population expected to withdraw in future. Excludes policies taking systematic withdraws and 15% of policies the Company assumes will never withdraw.
(3) 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.
(4) The Company makes dynamic adjustments to lower the lapse rates for contracts that are more "in the money." The table below shows an analysis of policy account values according to whether they are in or out of the surrender charge period and to whether they are "in the money" or "out of the money" as of March 31, 2016 (account value amounts are in $ billions).

 
41
 
 
Voya Insurance and Annuity Company
(A wholly owned subsidiary of Voya Holdings Inc.)
Notes to the Condensed Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 

 
 
 
GMAB
 
GMWB/GMWBL
 
Moneyness
 
Account Value
 
Lapse Range
 
Account Value
 
Lapse Range
During Surrender Charge Period
 
 
 
 
 
 
 
 
 
 
In the Money**
 
$
—

*
0.08% to 7.2%
 
$
4.1

 
0.08% to 5.6%
 
Out of the Money
 
—

*
0.41% to 7.9%
 
—

*
0.36% to 5.9%
After Surrender Charge Period
 
 
 
 
 
 
 
 
 
 
In the Money**
 
—

*
2.5% to 22.5%
 
9.4

 
1.4% to 20.7%
 
Out of the Money
 
—

*
11.9% to 24.8%
 
0.6

 
5.0% to 21.7%
*Less than $0.1.
** The low end of the range corresponds to policies that are highly "in the money." The high end of the range corresponds to the policies that are close to zero in terms of "in the moneyness."
(5) The mortality rate is based on the 2012 Individual Annuity Mortality Basic table with mortality improvements.

The following table presents the unobservable inputs for Level 3 fair value measurements as of December 31, 2015:
 
 
Range(1)
Unobservable Input
 
GMWB / GMWBL
 
GMAB
 
FIA
 
Long-term equity implied volatility
 
15% to 25%

 
15% to 25%

 
—

 
Interest rate implied volatility
 
0.1% to 18%

 
0.1% to 18%

 
—

 
Correlations between:
 
 
 
 
 
 
 
Equity Funds
 
48% to 98%

 
48% to 98%

 
—

 
Equity and Fixed Income Funds
 
-38% to 62%

 
-38% to 62%

 
—

 
Interest Rates and Equity Funds
 
-32% to 16%

 
-32% to 16%

 
—

 
Nonperformance risk
 
0.23% to 1.3%

 
0.23% to 1.3%

 
0.23% to 1.3%

 
Actuarial Assumptions:
 
 
 
 
 
 
 
Benefit Utilization
 
85% to 100%

(2) 
—

 
—

 
Partial Withdrawals
 
0% to 10%

 
0% to 10%

 
0% to 10%

 
Lapses
 
0.08% to 22%

(3)(4) 
0.08% to 25%

(3)(4) 
0% to 60%

(3) 
Mortality
 
—

(5) 
—

(5) 
—

(5) 
(1) Represents the range of reasonable assumptions that management has used in its fair value calculations.
(2) Those policyholders who have elected systematic withdrawals are assumed to continue taking withdrawals. As a percent of account value, 36% are taking systematic withdrawals. Of those policyholders who are not taking withdrawals, the Company assumes that 85% will begin systematic withdrawals after a delay period. The utilization function varies by policyholder age and policy duration. Interactions with lapse and mortality also affect utilization. The utilization rate for GMWB and GMWBL tends to be lower for younger contract owners and contracts that have not reached their maximum accumulated GMWB and GMWBL benefit amount. There is also a lower utilization rate, though indirectly, for contracts that are less "in the money" (i.e., where the notional benefit amount is in excess of the account value) due to higher lapses. Conversely, the utilization rate tends to be higher for contract owners near or beyond retirement age and contracts that have accumulated their maximum GMWB or GMWBL benefit amount. There is also a higher utilization rate, though indirectly, for contracts which are highly "in the money." The chart below provides the GMWBL account value by current age group and average expected delay times from the associated attained age group as of December 31, 2015 (account value amounts are in $ billions).

 
42
 
 
Voya Insurance and Annuity Company
(A wholly owned subsidiary of Voya Holdings Inc.)
Notes to the Condensed Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 

 
 
Account Values
 
 
 
Attained Age Group
 
In the Money
 
Out of the Money
 
Total
 
Average Expected Delay (Years)**
 
< 60
 
$
2.2

 
$
—

*
$
2.2

 
9.0
 
60-69
 
6.1

 
—

*
6.1

 
4.2
 
70+
 
5.4

 
—

*
5.4

 
2.4
 
 
 
$
13.7

 
$
—

*
$
13.7

 
5.0
 
* Less than $0.1
** For population expected to withdraw in future. Excludes policies taking systematic withdraws and 15% of policies the Company assumes will never withdraw.
(3) 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.
(4) The Company makes dynamic adjustments to lower the lapse rates for contracts that are more "in the money." The table below shows an analysis of policy account values according to whether they are in or out of the surrender charge period and to whether they are "in the money" or "out of the money" as of December 31, 2015 (account value amounts are in $ billions).
 
 
 
GMAB
 
GMWB/GMWBL
 
Moneyness
 
Account Value
 
Lapse Range
 
Account Value
 
Lapse Range
During Surrender Charge Period
 
 
 
 
 
 
 
 
 
 
In the Money**
 
$
—

*
0.08% to 7.2%
 
$
4.9

 
0.08% to 5.6%
 
Out of the Money
 
—

*
0.41% to 7.9%
 
—

*
0.36% to 5.9%
After Surrender Charge Period
 
 
 
 
 
 
 
 
 
 
In the Money**
 
—

*
2.5% to 22.5%
 
8.8

 
1.4% to 20.7%
 
Out of the Money
 
—

*
11.9% to 24.8%
 
0.6

 
5.0% to 21.7%
*Less than $0.1.
** The low end of the range corresponds to policies that are highly "in the money." The high end of the range corresponds to the policies that are close to zero in terms of "in the moneyness."
(5) The mortality rate is based on the 2012 Individual Annuity Mortality Basic table with mortality improvements.

Generally, the following will cause an increase (decrease) in the GMAB, GMWB and GMWBL embedded derivative fair value liabilities:

•
An increase (decrease) in long-term equity implied volatility
•
An increase (decrease) in interest rate implied volatility
•
An increase (decrease) in equity-interest rate correlations
•
A decrease (increase) in nonperformance risk
•
A decrease (increase) in mortality
•
An increase (decrease) in benefit utilization
•
A decrease (increase) in lapses

Changes in fund correlations may increase or decrease the fair value depending on the direction of the movement and the mix of funds. Changes in partial withdrawals may increase or decrease the fair value depending on the timing and magnitude of withdrawals.

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

The Company notes the following interrelationships:

•
Higher long-term equity implied volatility is often correlated with lower equity returns, which will result in higher in-the-moneyness, which in turn, results in lower lapses due to the dynamic lapse component reducing the lapses. This increases the projected number of policies that are available to use the GMWBL benefit and may also increase the fair value of the GMWBL.
•
Generally, an increase (decrease) in benefit utilization will decrease (increase) lapses for GMWB and GMWBL.

 
43
 
 
Voya Insurance and Annuity Company
(A wholly owned subsidiary of Voya Holdings Inc.)
Notes to the Condensed Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 

Other Financial Instruments

The carrying values and estimated fair values of the Company’s financial instruments as of the dates indicated:
 
March 31, 2016
 
December 31, 2015
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
Assets:
 
 
 
 
 
 
 
Fixed maturities, including securities pledged
$
24,757.7

 
$
24,757.7

 
$
23,678.2

 
$
23,678.2

Equity securities, available-for-sale
18.8

 
18.8

 
19.2

 
19.2

Mortgage loans on real estate
3,590.0

 
3,713.2

 
3,310.9

 
3,429.8

Policy loans
78.1

 
78.1

 
79.8

 
79.8

Cash and cash equivalents, short-term investments and short-term investments under securities loan agreements
1,873.2

 
1,873.2

 
1,948.6

 
1,948.6

Derivatives
1,463.7

 
1,463.7

 
799.4

 
799.4

Other investments
48.6

 
48.6

 
48.6

 
48.6

Deposits from affiliates
155.8

 
156.7

 
155.3

 
156.3

Short-term loans to affiliate
215.0

 
215.0

 
—

 
—

Embedded derivative on reinsurance
2.1

 
2.1

 
(15.6
)
 
(15.6
)
Assets held in separate accounts
32,495.1

 
32,495.1

 
33,355.5

 
33,355.5

Liabilities:
 
 
 
 
 
 
 
Investment contract liabilities:
 
 
 
 
 
 
 
Deferred annuities(1)
19,514.2

 
19,721.6

 
19,274.7

 
19,367.9

Funding agreements with fixed maturities and guaranteed investment contracts
1,106.1

 
1,084.6

 
1,105.7

 
1,083.1

Supplementary contracts, immediate annuities and other
1,880.9

 
2,092.4

 
1,766.5

 
1,955.3

Derivatives:
 
 
 
 
 
 
 
Guaranteed benefit derivatives:
 
 
 
 
 
 
 
FIA
1,647.7

 
1,647.7

 
1,779.1

 
1,779.1

GMAB/GMWB/GMWBL
2,081.0

 
2,081.0

 
1,849.0

 
1,849.0

 Other derivatives
498.0

 
498.0

 
204.6

 
204.6

Long-term debt
435.0

 
536.1

 
435.0

 
524.7

Embedded derivative on reinsurance
248.7

 
248.7

 
10.2

 
10.2

(1) Certain amounts included in Deferred annuities are also reflected within the Guaranteed benefit derivatives section of the table above.

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 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.


 
44
 
 
Voya Insurance and Annuity Company
(A wholly owned subsidiary of Voya Holdings Inc.)
Notes to the Condensed Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 

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 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. 

Other investments: Federal Home Loan Bank ("FHLB") stock is carried at cost and periodically evaluated for impairment based on ultimate recovery of par value and is classified as Level 1.

Deposits from affiliates: Fair value is estimated based on the fair value of the liabilities for the underlying contracts. Fair value is estimated by discounting cash flows, including associated expenses for maintaining the contracts, at rates, that are risk-free rates plus an adjustment for nonperformance risk. These liabilities are classified as Level 2.

Short-term loans to affiliate: Due to their short-term nature, fair value approximates carrying value. Short-term loans to affiliate are classified as Level 2.

Investment contract liabilities:

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.

Funding agreements with fixed maturities and guaranteed investment contracts: Fair value is estimated by discounting cash flows, including associated expenses for maintaining the contracts, at rates, that are risk-free rates plus an adjustment for nonperformance risk. These liabilities are classified as Level 2.

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 notes to affiliates is based upon discounted future cash flows using a discount rate approximating the current market rate, incorporating nonperformance risk and 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.


 
45
 
 
Voya Insurance and Annuity Company
(A wholly owned subsidiary of Voya Holdings Inc.)
Notes to the Condensed 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:
 
2016
 
DAC
 
VOBA
 
Total
Balance as of January 1, 2016
$
2,100.2

 
$
44.6

 
$
2,144.8

Deferrals of commissions and expenses
36.5

 
—

 
36.5

Amortization:
 
 
 
 
 
Amortization(1)
193.3

 
(1.8
)
 
191.5

Interest accrued(2)
21.6

 
0.6

 
22.2

Net amortization included in the Condensed Statements of Operations
214.9

 
(1.2
)
 
213.7

Change due to unrealized capital gains/losses on available-for-sale securities
(342.7
)
 
(10.9
)
 
(353.6
)
Balance as of March 31, 2016
$
2,008.9

 
$
32.5

 
$
2,041.4


 
2015
 
DAC
 
VOBA
 
Total
Balance as of January 1, 2015
$
2,212.9

 
$
39.1

 
$
2,252.0

Deferrals of commissions and expenses
23.2

 
—

 
23.2

Amortization:
 
 
 
 
 
Amortization
120.5

 
(2.3
)
 
118.2

Interest accrued(2)
25.5

 
0.9

 
26.4

Net amortization included in the Condensed Statements of Operations
146.0

 
(1.4
)
 
144.6

Change due to unrealized capital gains/losses on available-for-sale securities
(141.7
)
 
(4.8
)
 
(146.5
)
Balance as of March 31, 2015
$
2,240.4

 
$
32.9

 
$
2,273.3

(1) Includes loss recognition of $82.9 related to DAC and $0.4 related to VOBA.
(2) Interest accrued at the following rates for VOBA: 3.9% to 5.8% during 2016 and 4.5% to 5.8% during 2015.

Loss recognition related to Sales inducements to contract owners for the three months ended March 31, 2016 was $19.5. There was no loss recognition related to Sales inducements to contract owners for the three months ended March 31, 2015.


 
46
 
 
Voya Insurance and Annuity Company
(A wholly owned subsidiary of Voya Holdings Inc.)
Notes to the Condensed Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 

6.    Accumulated Other Comprehensive Income (Loss)

Shareholder’s equity included the following components of Accumulated Other Comprehensive Income ("AOCI") as of the dates indicated:
 
March 31,
 
2016
 
2015
Fixed maturities, net of OTTI
$
1,098.9

 
$
1,642.0

Equity securities, available-for-sale
3.4

 
3.8

Derivatives
10.0

 
12.2

DAC/VOBA, Sales inducements and Other intangibles adjustments on available-for-sale securities
(633.0
)
 
(887.4
)
Other
(35.7
)
 
(35.5
)
Unrealized capital gains (losses), before tax
443.6

 
735.1

Deferred income tax asset (liability)
54.9

 
(89.4
)
Unrealized capital gains (losses), after tax
498.5

 
645.7

Pension and other postretirement benefits liability, net of tax
0.6

 
0.7

AOCI
$
499.1

 
$
646.4



 
47
 
 
Voya Insurance and Annuity Company
(A wholly owned subsidiary of Voya Holdings Inc.)
Notes to the Condensed Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 

Changes in AOCI, including the reclassification adjustments recognized in the Condensed Statements of Operations, were as follows for the periods indicated:
 
 
 
 
 
 
 
Three Months Ended March 31, 2016
 
Before-Tax Amount
 
Income Tax
 
After-Tax Amount
Available-for-sale securities:
 
 
 
 
 
Fixed maturities
$
688.0

 
$
(216.0
)
(3) 
$
472.0

Equity securities
(0.4
)
 
0.1

 
(0.3
)
Other
0.2

 
(0.1
)
 
0.1

OTTI
1.3

 
(0.5
)
 
0.8

Adjustments for amounts recognized in Net realized capital gains (losses) in the Condensed Statements of Operations
2.8

 
(1.0
)
 
1.8

DAC/VOBA, Sales inducements and Other intangibles
(451.7
)
(1) 
158.1

 
(293.6
)
Change in unrealized gains/losses on available-for-sale securities
240.2

 
(59.4
)
 
180.8

 
 
 
 
 
 
Derivatives:
 
 
 
 
 
Derivatives
(1.8
)
(2) 
0.6

 
(1.2
)
Adjustments related to effective cash flow hedges for amounts recognized in Net investment income in the Condensed Statements of Operations
—

 
—

 
—

Change in unrealized gains/losses on derivatives
(1.8
)
 
0.6

 
(1.2
)
 
 
 
 
 
 
Pension and other postretirement benefits liability:
 
 
 
 
 
Amortization of prior service cost recognized in Operating expenses in the Condensed Statements of Operations
(0.1
)
 
—

 
(0.1
)
Change in pension and other postretirement benefits liability
(0.1
)
 
—

 
(0.1
)
Change in Other comprehensive income (loss)
$
238.3

 
$
(58.8
)
 
$
179.5

 
 
 
 
 
 
(1) See the Deferred Policy Acquisition Costs and Value of Business Acquired Note to these Condensed Financial Statements for additional information.
(2) See the Derivative Financial Instruments Note to these Condensed Financial Statements for additional information.
(3) Amount includes $24.7 valuation allowance. See the Income Taxes Note to these Condensed Financial Statements for additional information.


 
 
 
 
 
 




 
48
 
 
Voya Insurance and Annuity Company
(A wholly owned subsidiary of Voya Holdings Inc.)
Notes to the Condensed Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 

 
Three Months Ended March 31, 2015
 
Before-Tax Amount
 
Income Tax
 
After-Tax Amount
Available-for-sale securities:
 
 
 
 
 
Fixed maturities
$
253.0

 
$
(106.3
)
(3) 
$
146.7

Equity securities
0.2

 
(0.1
)
 
0.1

Other
—

 
—

 
—

OTTI
2.1

 
(0.7
)
 
1.4

Adjustments for amounts recognized in Net realized capital gains (losses) in the Condensed Statements of Operations
(1.6
)
 
0.6

 
(1.0
)
DAC/VOBA, Sales inducements and Other intangibles
(173.4
)
(1) 
60.7

 
(112.7
)
Change in unrealized gains/losses on available-for-sale securities
80.3

 
(45.8
)
 
34.5

 
 
 
 
 
 
Derivatives:
 
 
 
 
 
Derivatives
4.6

(2) 
(1.6
)
 
3.0

Adjustments related to effective cash flow hedges for amounts recognized in Net investment income in the Condensed Statements of Operations
—

 
—

 
—

Change in unrealized gains/losses on derivatives
4.6

 
(1.6
)
 
3.0

 
 
 
 
 
 
Pension and other postretirement benefits liability:
 
 
 
 
 
Amortization of prior service cost recognized in Operating expenses in the Condensed Statements of Operations
(0.1
)
 
—

 
(0.1
)
Change in pension and other postretirement benefits liability
(0.1
)
 
—

 
(0.1
)
Change in Other comprehensive income (loss)
$
84.8

 
$
(47.4
)
 
$
37.4


(1) See the Deferred Policy Acquisition Costs and Value of Business Acquired Note to these Condensed Financial Statements for additional information.
(2) See the Derivative Financial Instruments Note to these Condensed Financial Statements for additional information.
(3) Amount includes $(17.8) valuation allowance. See the Income Taxes Note to these Condensed Financial Statements for additional information.


 
49
 
 
Voya Insurance and Annuity Company
(A wholly owned subsidiary of Voya Holdings Inc.)
Notes to the Condensed Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 

7.    Income Taxes
 
 
 
 
 
 
 
 
The Company's effective tax rate for the three months ended March 31, 2016 was 35.0%. The effective tax rate did not differ from the statutory rate of 35.0% for the three months ended March 31, 2016 due to the effect that certain amounts were allocated to other comprehensive income in accordance with the exception described in ASC 740-20-45-7.

The Company's effective tax rate for the three months ended March 31, 2015 was 35.0%.The effective tax rate did not differ from the statutory rate of 35.0% for the three months ended March 31, 2015 due to the effect that certain amounts were allocated to other comprehensive income in accordance with the exception described in ASC 740-20-45-7.

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 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 2016, the Internal Revenue Service ("IRS") completed its examination of Voya Financial, Inc.'s consolidated return (including the Company) through tax year 2014. The 2014 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 2015 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 2015 and 2016.

The Company does not expect any material changes in the amount of the unrecognized tax benefit of $5.5 within the next twelve months. The timing of a payment (if any) associated with the unrecognized tax benefit cannot be reliably estimated.

8.    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 January 2004 and based upon its renewal on January 14, 2014, expires on January 14, 2024, either party can borrow from the other up to 3.0% of the Company's statutory net 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 did not incur interest expense for the three months ended March 31, 2016 and 2015. The Company earned $0.2 in interest income for the three months ended March 31, 2016 and earned $0.1 in interest income for the three months ended March 31, 2015. As of March 31, 2016, the Company had an outstanding receivable of $215.0 and no outstanding payable. As of December 31, 2015, 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 Related Party Transactions Note in the Financial Statements in Part II, Item 8. in the Company's Annual Report on Form 10-K.


 
50
 
 
Voya Insurance and Annuity Company
(A wholly owned subsidiary of Voya Holdings Inc.)
Notes to the Condensed Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 

9.    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 March 31, 2016 and December 31, 2015, the Company had off-balance sheet commitments to acquire mortgage loans of $242.1 and $323.6, respectively, and purchase limited partnerships and private placement investments of $389.9 and $285.9, respectively.

Federal Home Loan Bank Funding

The Company is a member of the FHLB of Des Moines and is required to maintain collateral to back funding agreements issued to the FHLB. As of March 31, 2016 and December 31, 2015, the Company had $950.3 and $950.4, respectively, in non-putable funding agreements, including accrued interest, issued to the FHLB. These non-putable funding agreements are included in Future policy benefits and contract owner account balances on the Condensed Balance Sheets. As of March 31, 2016 and December 31, 2015, assets with a market value of $1.1 billion collateralized the funding agreements to the FHLB. Assets pledged to the FHLB are included in Fixed maturities, available-for-sale, on the Condensed Balance Sheets.

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:
 
March 31, 2016
 
December 31, 2015
Fixed maturity collateral pledged to FHLB
$
1,093.3

 
$
1,096.0

FHLB restricted stock(1)
48.0

 
48.0

Other fixed maturities-state deposits
11.5

 
11.5

Securities pledged(2)
730.8

 
672.4

Total restricted assets
$
1,883.6

 
$
1,827.9

(1) Reported in Other investments on the Condensed Balance Sheets.
(2) Includes the fair value of loaned securities of $242.7 and $147.9 as of March 31, 2016 and December 31, 2015, respectively. In addition, as of March 31, 2016 and December 31, 2015, the Company delivered securities as collateral of $488.1 and $524.5, respectively. Loaned securities and securities delivered as collateral are included in Securities pledged on the Condensed 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.

 
51
 
 
Voya Insurance and Annuity Company
(A wholly owned subsidiary of Voya Holdings Inc.)
Notes to the Condensed 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 March 31, 2016, 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.

 
52
 
 
Voya Insurance and Annuity Company
(A wholly owned subsidiary of Voya Holdings Inc.)
Notes to the Condensed Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 


10.    Related Party Transactions

Operating Agreements

For the three months ended March 31, 2016 and 2015, revenues with affiliated entities related to the operating agreements disclosed in the Related Party Transactions Note in the Financial Statements in Part II, Item 8. in the Company's Annual Report on Form 10-K were $35.1 and $42.2, respectively. For the three months ended March 31, 2016 and 2015, expenses with affiliated entities related to the aforementioned operating agreements were $96.8 and $105.3, respectively.

Reinsurance Agreements

Reinsurance Ceded

As of March 31, 2016 and December 31, 2015, total reserves ceded to affiliates were $5,300.6 and $5,019.9, respectively. For the three months ended March 31, 2016 and 2015, premiums ceded to affiliates were $104.7 and $88.2, respectively.

Guaranteed Living Benefit — Coinsurance and Coinsurance Funds Withheld

Effective June 30, 2008, the Company entered into an automatic reinsurance agreement with an affiliate, Security Life of Denver International Limited ("SLDI"), covering 100% of the benefits guaranteed under specific variable annuity guaranteed living benefit riders attached to certain variable annuity contracts issued by the Company on or after January 1, 2000.

Also effective June 30, 2008, the Company entered into a services agreement with SLDI, under which the Company provides certain actuarial risk modeling consulting services to SLDI with respect to hedge positions undertaken by SLDI in connection with the reinsurance agreement. For the three months ended March 31, 2016 and 2015, revenue related to the agreement was $2.4 and $2.9, respectively.

Effective July 1, 2009, the reinsurance agreement was amended and restated to change the reinsurance basis from coinsurance to a combined coinsurance and coinsurance funds withheld basis. On July 31, 2009, SLDI transferred assets with a market value of $3.2 billion to the Company, and the Company deposited those assets into a funds withheld trust account. As of March 31, 2016 and December 31, 2015, the assets on deposit in the trust account were $7.2 billion and $6.6 billion, respectively. The Company also established a corresponding funds withheld liability to SLDI, which is included in Funds held under reinsurance treaties with affiliates on the Condensed Balance Sheets. Funds held under reinsurance treaties with affiliates related to this agreement had a balance of $7.0 billion and $6.6 billion as of March 31, 2016 and December 31, 2015, respectively. In addition, as of March 31, 2016 and December 31, 2015, the Company had an embedded derivative with a value of $248.1 and $15.8, respectively, which is recorded in Funds held under reinsurance treaties with affiliates on the Condensed Balance Sheets.

Also effective July 1, 2009, the Company and SLDI entered into an asset management services agreement, under which SLDI serves as asset manager for the funds withheld account. SLDI has retained its affiliate, Voya Investment Management LLC as sub-advisor for the funds withheld account.
 
Effective October 1, 2011, the Company and SLDI entered into an amended and restated automatic reinsurance agreement in order to provide more flexibility to the Company and SLDI with respect to the collateralization of the reserves related to the variable annuity guaranteed living benefits reinsured under the agreement. As of March 31, 2016 and December 31, 2015, reserves ceded by the Company under this agreement were $5.1 billion and $4.8 billion, respectively. In addition, a deferred loss in the amount of $278.0 and $283.3 as of March 31, 2016 and December 31, 2015, respectively, is included in Other assets on the Condensed Balance Sheets and is amortized over the period of benefit in Other expense in the Condensed Statements of Operations.


 
53
 
 
Voya Insurance and Annuity Company
(A wholly owned subsidiary of Voya Holdings Inc.)
Notes to the Condensed Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 

Reinsurance Assumed

As of March 31, 2016 and December 31, 2015, total reserves assumed from affiliates were $440.7 and $438.7, respectively. For the three months ended March 31, 2016 and 2015, premiums assumed from affiliates were $103.3 and $101.5, respectively.

Deposits Receivable

As of March 31, 2016 and December 31, 2015, deposits receivable from affiliates were $155.8 and $155.3, respectively.





 
54
 



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 terms "Company," "we," "our," "us" and "VIAC" refer to Voya Insurance and Annuity Company. We are a direct, wholly owned subsidiary of Voya 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 months ended March 31, 2016 and 2015 and financial condition as of March 31, 2016 and December 31, 2015. This item should be read in its entirety and in conjunction with the Condensed 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, 2015 ("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

VIAC is a stock life insurance company domiciled in the State of Iowa and provides financial products and services in the United States. VIAC is authorized to conduct its insurance business in all states, except New York, and in the District of Columbia.

Products currently offered by us include fixed and indexed annuities, and payout annuities, designed to address customer needs for tax-advantaged savings, retirement needs and wealth-protection concerns. We also offer guaranteed investment contracts and funding agreements (collectively referred to as "GICs"). We stopped actively writing new retail annuity products with substantial guarantee features in early 2010.

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 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.

We have identified the following accounting judgments and estimates as critical in that they involve a higher degree of judgment and are subject to a significant degree of variability:

•
Reserves for future policy benefits;
•
Deferred policy acquisition costs ("DAC"), value of business acquired ("VOBA") and deferred sales inducements ("DSI");
•
Valuation of investments and derivatives;
•
Impairments;
•
Income taxes; and
•
Contingencies.


 
55
 

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 Financial Statements.

The above critical accounting estimates are described in the Business, Basis of Presentation and Significant Accounting Policies Note in our Financial Statements in Part II, Item 8. of our Annual Report on Form 10-K.

Assumptions and Periodic Review

Changes in assumptions can have a significant impact on DAC, VOBA, DSI, (collectively, “DAC/VOBA and other intangibles”), amortization rates, reserve levels 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.
We also review the recoverability of DAC, VOBA and DSI balances each period. These assets are deemed to be unrecoverable if the estimated gross profits do not exceed these balances and a write-down is recorded as loss recognition. During the three months ended March 31, 2016, we recognized loss recognition of $102.8 million before income taxes, of which $83.3 million and $19.5 million was recorded to Net amortization of DAC and VOBA; and Interest credited and other benefits to contract owners, respectively, in the Condensed Statements of Operations, with a corresponding decrease on the Condensed Balance Sheets to Deferred policy acquisition costs, Value of business acquired, and Sales inducements to contract owners. We also established premium deficiency reserves of $6.2 million before tax related to certain payout annuity contracts, which was recorded as an increase in Policyholder benefits and contract owner balances with a corresponding increase in Deposits and reinsurance recoverable, as the reserves are ceded to an affiliate on a 100% coinsurance and coinsurance funds withheld basis. As a result, the establishment of this premium deficiency reserve had no impact on the Condensed Statements of Operations for the three months ended March 31, 2016.

Income Taxes

The Company's effective tax rate for the three months ended March 31, 2016 was 35.0%. The effective tax rate did not differ from the statutory rate of 35.0% for the three months ended March 31, 2016 due to the effect that certain amounts were allocated to Other comprehensive income in accordance with the exception described in ASC 740-20-45-7.

The Company's effective tax rate for the three months ended March 31, 2015 was 35.0%. The effective tax rate did not differ from the statutory rate of 35.0% for the three months ended March 31, 2015 due to the effect that certain amounts were allocated to Other comprehensive income in accordance with the exception described in ASC 740-20-45-7.


 
56
 


Results of Operations

($ in millions) 
Three Months Ended March 31,
 
2016
 
2015
Revenues:
 
 
 
Net investment income
$
326.4

 
$
320.1

Fee income
153.7

 
185.1

Premiums
119.1

 
118.8

Net realized capital gains (losses):
 
 
 
Total other-than-temporary impairments
(2.1
)
 
(0.3
)
Less: Portion of other-than-temporary impairments recognized in Other comprehensive income (loss)
0.5

 
0.7

Net other-than-temporary impairments recognized in earnings
(2.6
)
 
(1.0
)
Other net realized capital gains (losses)
101.3

 
(224.2
)
Total net realized capital gains (losses)
98.7

 
(225.2
)
Other revenue
4.9

 
5.5

Total revenues
702.8

 
404.3

Benefits and expenses:
 
 
 
Interest credited and other benefits to contract owners/policyholders
785.4

 
432.3

Operating expenses
120.6

 
121.2

Net amortization of Deferred policy acquisition costs and Value of business acquired
(213.7
)
 
(144.6
)
Interest expense
7.0

 
6.9

Other expense
4.4

 
8.7

Total benefits and expenses
703.7

 
424.5

Income (loss) before income taxes
(0.9
)
 
(20.2
)
Income tax expense (benefit)
(0.3
)
 
(7.1
)
Net income (loss)
$
(0.6
)
 
$
(13.1
)

Three Months Ended March 31, 2016 compared to Three Months Ended March 31, 2015

Our Net income (loss) for the three months ended March 31, 2016 reflected a lower loss than the prior period due to favorable changes in Total net realized capital gains (losses) and Net amortization of DAC and VOBA and an increase in Net investment income, mostly offset by an increase in Interest credited and other benefits to contract owners/policyholders, a decrease in Fee income and a decrease in the Income tax benefit.

Revenues

Total revenues increased $298.5 million from $404.3 million to $702.8 million primarily due to favorable changes in Total net realized capital gains (losses) and an increase in Net investment income, partially offset by a decrease in Fee income.

Net investment income increased $6.3 million from $320.1 million to $326.4 million primarily due to growth in the general account assets, partially offset by lower prepayment fee income and lower alternative investment income and the impact of the continued low interest rate environment on reinvestment rates.

Fee income decreased $31.4 million from $185.1 million to $153.7 million primarily due to lower average separate account assets under management resulting from the continued runoff of our closed block of variable annuity business.




 
57
 


Total net realized capital gains (losses) increased $323.9 million from a loss of $225.2 million to a gain of $98.7 million primarily due to favorable changes in the fair value of embedded derivatives on product guarantees and favorable changes in annuity hedging derivatives. The favorable changes of $241.6 million in the fair value of embedded derivatives on variable annuity and fixed indexed annuity product guarantees (from a loss of $272.8 million in the prior period to a loss of $31.2 million in the current period) were due to favorable impacts resulting from nonperformance risk, partially offset by unfavorable impacts from interest rates, equity market movements and implied volatility. Under the variable annuity and fixed indexed annuity hedge programs, changes in equity and interest markets during the current period resulted in net favorable changes in equity, interest and foreign exchange derivatives of $91.1 million compared to the prior period (net gains of $144.6 million in the current period compared to net gains of $53.5 million during the prior period). A portion of these derivative gains were ceded to SLDI under the combined coinsurance and coinsurance funds withheld agreement (gains of $239.2 million for the current period compared to gains of $86.3 million for the prior period) and an offset was recorded to Interest credited and other benefits to contract owners/policyholders.

Benefits and Expenses

Total benefits and expenses increased $279.2 million from $424.5 million to $703.7 million primarily due to an increase in Interest credited and other benefits to contract owners/policyholders, partially offset by a favorable changes in Net amortization of DAC and VOBA and Other expense.

Interest credited and other benefits to contract owners/policyholders increased $353.1 million from $432.3 million to $785.4 million primarily due to the change in the amount of equity and interest rate derivative gains/losses transferred under the combined coinsurance and coinsurance funds withheld agreement with SLDI (the corresponding offsetting amount is reported in Total net realized capital gains (losses)) and the unfavorable change in the embedded derivative on the coinsurance funds withheld arrangements resulting from interest rate movements. Higher amortization of sales inducements, primarily due to loss recognition in the current period, as well as higher assumed claims from an affiliate due to higher claims volumes and higher loss ratios also contributed to the increase. These increases were partially offset by lower interest credited due to the continued run-off of our closed block of variable annuity business.

Net amortization of DAC and VOBA decreased $69.1 million from a benefit of $144.6 million to a benefit of $213.7 million primarily due to higher favorable amortization as a result of lower gross profits in the current period compared to the prior period, partially offset by loss recognition in the current period. See Critical Accounting Judgments and Estimates for further detail on the loss recognition of DAC and VOBA.

Other expense decreased $4.3 million from $8.7 million to $4.4 million primarily due to lower amortization on deferred reinsurance losses. Additionally, expenses incurred in the prior period related to the multi-year guaranteed fixed annuity contracts coinsurance agreement did not reoccur in the current period due to the recapture of this agreement in the third quarter of 2015.

Income Taxes

Income tax benefit decreased $6.8 million from a benefit of $7.1 million to a benefit of $0.3 million due to a decrease in loss before income taxes.

Financial Condition

Investments

See the Management’s Narrative Analysis of the Results of Operations and Financial Condition in our 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 Financial Statements in Part I., Item 1. of this Quarterly Report on Form 10-Q for more information on investments.


 
58
 



Portfolio Composition

The following table presents the investment portfolio as of the dates indicated:
 
March 31, 2016
 
December 31, 2015
($ in millions)
Carrying
Value
 
% of
Total
 
Carrying
Value
 
% of
Total
Fixed maturities, available-for-sale, excluding securities pledged
$
23,390.5

 
75.2
%
 
$
22,458.4

 
76.9
%
Fixed maturities, at fair value using the fair value option
636.4

 
2.0
%
 
547.4

 
1.9
%
Equity securities, available-for-sale
18.8

 
0.1
%
 
19.2

 
0.1
%
Short-term investments(1)
941.4

 
3.0
%
 
1,069.4

 
3.7
%
Mortgage loans on real estate
3,590.0

 
11.5
%
 
3,310.9

 
11.3
%
Policy loans
78.1

 
0.3
%
 
79.8

 
0.3
%
Limited partnerships/corporations
191.7

 
0.6
%
 
186.3

 
0.6
%
Derivatives
1,463.7

 
4.7
%
 
799.4

 
2.7
%
Other investments
48.6

 
0.2
%
 
48.6

 
0.2
%
Securities pledged
730.8

 
2.4
%
 
672.4

 
2.3
%
Total investments
$
31,090.0

 
100.0
%
 
$
29,191.8

 
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.



 
59
 


Fixed Maturities

Total fixed maturities by market sector, including securities pledged, were as presented below as of the dates indicated:
 
March 31, 2016
($ in millions)
Amortized
Cost
 
% of
Total
 
Fair
Value
 
% of
Total
Fixed maturities:
 
 
 
 
 
 
 
U.S. Treasuries
$
1,132.7

 
4.8
%
 
$
1,225.6

 
5.0
%
U.S. Government agencies and authorities
80.4

 
0.3
%
 
84.7

 
0.3
%
State, municipalities and political subdivisions
384.6

 
1.6
%
 
401.6

 
1.6
%
U.S. corporate public securities
10,740.1

 
45.4
%
 
11,298.9

 
45.6
%
U.S. corporate private securities
2,345.2

 
10.0
%
 
2,429.4

 
9.8
%
Foreign corporate public securities and foreign governments(1)
2,784.5

 
11.8
%
 
2,833.5

 
11.5
%
Foreign corporate private securities(1)
2,645.4

 
11.2
%
 
2,763.5

 
11.2
%
Residential mortgage-backed securities
1,967.2

 
8.3
%
 
2,115.6

 
8.5
%
Commercial mortgage-backed securities
1,304.8

 
5.5
%
 
1,349.0

 
5.5
%
Other asset-backed securities
252.0

 
1.1
%
 
255.9

 
1.0
%
Total fixed maturities, including securities pledged
$
23,636.9

 
100.0
%
 
$
24,757.7

 
100.0
%
(1) Primarily U.S. dollar denominated.
 
December 31, 2015
($ in millions)
Amortized
Cost
 
% of
Total
 
Fair
Value
 
% of
Total
Fixed maturities:
 
 
 
 
 
 
 
U.S. Treasuries
$
992.7

 
4.3
%
 
$
1,058.7

 
4.5
%
U.S. Government agencies and authorities
79.4

 
0.3
%
 
81.9

 
0.3
%
State, municipalities and political subdivisions
359.1

 
1.5
%
 
360.5

 
1.5
%
U.S. corporate public securities
10,718.9

 
46.1
%
 
10,871.9

 
45.9
%
U.S. corporate private securities
2,365.0

 
10.2
%
 
2,394.4

 
10.1
%
Foreign corporate public securities and foreign governments(1)
2,826.9

 
12.2
%
 
2,793.0

 
11.8
%
Foreign corporate private securities(1)
2,592.9

 
11.2
%
 
2,626.0

 
11.1
%
Residential mortgage-backed securities
1,746.8

 
7.5
%
 
1,885.1

 
8.0
%
Commercial mortgage-backed securities
1,311.0

 
5.6
%
 
1,343.4

 
5.7
%
Other asset-backed securities
257.6

 
1.1
%
 
263.3

 
1.1
%
Total fixed maturities, including securities pledged
$
23,250.3

 
100.0
%
 
$
23,678.2

 
100.0
%
(1) Primarily U.S. dollar denominated.

As of March 31, 2016, the average duration of our fixed maturities portfolio, including securities pledged, is between 6.0 and 6.5 years.

Fixed Maturities Credit Quality - Ratings

For information regarding our fixed maturities credit quality ratings, see the Management’s Narrative Analysis of the Results of Operations and Financial Condition in our Financial Statements in Part II, Item. 7. of our Annual Report on Form 10-K.







 
60
 


The following tables present credit quality of fixed maturities, including securities pledged, using NAIC designations as of the dates indicated:
($ in millions)
 
March 31, 2016
NAIC Quality Designation
 
1
 
2
 
3
 
4
 
5
 
6
 
Total Fair Value
U.S. Treasuries
 
$
1,225.6

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
1,225.6

U.S. Government agencies and authorities
 
84.7

 
—

 
—

 
—

 
—

 
—

 
84.7

State, municipalities and political subdivisions
 
380.1

 
21.2

 
0.3

 
—

 
—

 
—

 
401.6

U.S. corporate public securities
 
6,232.5

 
4,625.5

 
355.9

 
74.3

 
2.4

 
8.3

 
11,298.9

U.S. corporate private securities
 
1,150.4

 
1,153.1

 
98.3

 
25.3

 
—

 
2.3

 
2,429.4

Foreign corporate public securities and foreign governments(1)
 
1,491.2

 
1,127.1

 
183.4

 
30.6

 
—

 
1.2

 
2,833.5

Foreign corporate private securities(1)
 
328.7

 
2,327.9

 
94.1

 
12.3

 
—

 
0.5

 
2,763.5

Residential mortgage-backed securities
 
2,026.7

 
21.3

 
3.5

 
15.5

 
18.6

 
30.0

 
2,115.6

Commercial mortgage-backed securities
 
1,346.6

 
—

 
—

 
2.4

 
—

 
—

 
1,349.0

Other asset-backed securities
 
230.5

 
7.5

 
13.8

 
3.0

 
1.1

 
—

 
255.9

Total fixed maturities
 
$
14,497.0

 
$
9,283.6

 
$
749.3

 
$
163.4

 
$
22.1

 
$
42.3

 
$
24,757.7

% of Fair Value
 
58.5
%
 
37.5
%
 
3.0
%
 
0.7
%
 
0.1
%
 
0.2
%
 
100.0
%
(1) Primarily U.S. dollar denominated.
 
 
 
($ in millions)
 
December 31, 2015
NAIC Quality Designation
 
1
 
2
 
3
 
4
 
5
 
6
 
Total Fair Value
U.S. Treasuries
 
$
1,058.7

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
1,058.7

U.S. Government agencies and authorities
 
81.9

 
—

 
—

 
—

 
—

 
—

 
81.9

State, municipalities and political subdivisions
 
340.3

 
19.9

 
0.3

 
—

 
—

 
—

 
360.5

U.S. corporate public securities
 
5,854.3

 
4,568.0

 
346.1

 
93.9

 
—

 
9.6

 
10,871.9

U.S. corporate private securities
 
1,118.2

 
1,160.5

 
98.0

 
17.7

 
—

 
—

 
2,394.4

Foreign corporate public securities and foreign governments(1)
 
1,528.0

 
1,086.2

 
168.2

 
8.4

 
1.0

 
1.2

 
2,793.0

Foreign corporate private securities(1)
 
319.3

 
2,205.5

 
86.5

 
14.2

 
—

 
0.5

 
2,626.0

Residential mortgage-backed securities
 
1,812.3

 
7.0

 
3.8

 
15.8

 
18.0

 
28.2

 
1,885.1

Commercial mortgage-backed securities
 
1,339.7

 
—

 
1.1

 
2.6

 
—

 
—

 
1,343.4

Other asset-backed securities
 
237.1

 
8.3

 
5.4

 
11.3

 
1.2

 
—

 
263.3

Total fixed maturities
 
$
13,689.8

 
$
9,055.4

 
$
709.4

 
$
163.9

 
$
20.2

 
$
39.5

 
$
23,678.2

% of Fair Value
 
57.8
%
 
38.2
%
 
3.0
%
 
0.7
%
 
0.1
%
 
0.2
%
 
100.0
%
(1) Primarily U.S. dollar denominated.


 
61
 



The following tables present credit quality of fixed maturities, including securities pledged, using ARO ratings as of the dates indicated:
($ in millions)
 
March 31, 2016
ARO Quality Ratings
 
AAA
 
AA
 
A
 
BBB
 
BB and Below
 
Total Fair Value
U.S. Treasuries
 
$
1,225.6

 
$
—

 
$
—

 
$
—

 
$
—

 
$
1,225.6

U.S. Government agencies and authorities
 
84.7

 
—

 
—

 
—

 
—

 
84.7

State, municipalities and political subdivisions
 
39.7

 
250.5

 
89.9

 
21.2

 
0.3

 
401.6

U.S. corporate public securities
 
275.5

 
868.0

 
5,069.2

 
4,625.5

 
460.7

 
11,298.9

U.S. corporate private securities
 
91.1

 
38.5

 
904.4

 
1,298.1

 
97.3

 
2,429.4

Foreign corporate public securities and foreign governments(1)
 
37.1

 
356.3

 
1,109.0

 
1,115.9

 
215.2

 
2,833.5

Foreign corporate private securities(1)
 
—

 
9.9

 
442.7

 
2,202.8

 
108.1

 
2,763.5

Residential mortgage-backed securities
 
1,789.1

 
2.7

 
2.6

 
16.8

 
304.4

 
2,115.6

Commercial mortgage-backed securities
 
949.6

 
81.2

 
91.0

 
43.5

 
183.7

 
1,349.0

Other asset-backed securities
 
115.2

 
5.6

 
18.0

 
30.4

 
86.7

 
255.9

Total fixed maturities
 
$
4,607.6

 
$
1,612.7

 
$
7,726.8

 
$
9,354.2

 
$
1,456.4

 
$
24,757.7

% of Fair Value
 
18.6
%
 
6.5
%
 
31.2
%
 
37.8
%
 
5.9
%
 
100.0
%
(1) Primarily U.S. dollar denominated.
 
 
 
($ in millions)
 
December 31, 2015
ARO Quality Ratings
 
AAA
 
AA
 
A
 
BBB
 
BB and Below
 
Total Fair Value
U.S. Treasuries
 
$
1,058.7

 
$
—

 
$
—

 
$
—

 
$
—

 
$
1,058.7

U.S. Government agencies and authorities
 
81.9

 
—

 
—

 
—

 
—

 
81.9

State, municipalities and political subdivisions
 
40.0

 
221.1

 
79.2

 
19.9

 
0.3

 
360.5

U.S. corporate public securities
 
224.4

 
775.3

 
4,834.3

 
4,568.0

 
469.9

 
10,871.9

U.S. corporate private securities
 
116.2

 
50.9

 
867.9

 
1,280.1

 
79.3

 
2,394.4

Foreign corporate public securities and foreign governments(1)
 
36.6

 
456.8

 
1,046.1

 
1,074.6

 
178.9

 
2,793.0

Foreign corporate private securities(1)
 
—

 
9.8

 
411.7

 
2,095.6

 
108.9

 
2,626.0

Residential mortgage-backed securities
 
1,604.1

 
6.6

 
2.9

 
17.9

 
253.6

 
1,885.1

Commercial mortgage-backed securities
 
853.0

 
148.8

 
99.3

 
52.0

 
190.3

 
1,343.4

Other asset-backed securities
 
115.6

 
6.5

 
18.3

 
23.0

 
99.9

 
263.3

Total fixed maturities
 
$
4,130.5

 
$
1,675.8

 
$
7,359.7

 
$
9,131.1

 
$
1,381.1

 
$
23,678.2

% of Fair Value
 
17.4
%
 
7.1
%
 
31.1
%
 
38.6
%
 
5.8
%
 
100.0
%
(1) Primarily U.S. dollar denominated.


 
62
 


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, decreased $233.0 million from $470.8 million to $237.8 million for the three months ended March 31, 2016. The decrease in gross unrealized losses was primarily due to declining interest rates.

As of March 31, 2016 and December 31, 2015, we did not have any fixed maturities with an unrealized capital losses in excess of $10.0 million.

As of March 31, 2016 and December 31, 2015, we had $2.1 billion and $2.2 billion, fair value of energy sector fixed maturity securities, constituting 8.3% and 9.3%, of total fixed maturities portfolio, with gross unrealized capital losses of $107.9 million and $175.9 million, respectively. See the Investments Note in our Condensed 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 pace and magnitude at which losses are being realized are steadily decreasing. Serious delinquencies and other measures of performance, like prepayments and loan defaults, 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 March 31, 2016, the fair value, amortized cost and gross unrealized losses related to our exposure to subprime mortgage-backed securities totaled $112.5 million, $112.0 million and $6.2 million, respectively, representing 0.5% of total fixed maturities, including securities pledged, based on fair value. As of December 31, 2015, the fair value, amortized cost and gross unrealized losses related to our exposure to subprime mortgage-backed securities totaled $118.9 million, $116.3 million and $5.6 million, respectively, representing 0.5% of total fixed maturities, including securities pledged, based on fair value.
 
 
 
 
 
 
 
 
 
Our exposure to Alt-A mortgages is included in the "RMBS" line item in the "Fixed Maturities" table under "Fixed Maturities" above. As of March 31, 2016, the fair value, amortized cost and gross unrealized losses related to our exposure to Alt-A RMBS totaled $81.9 million, $73.1 million and $2.5 million, respectively, representing 0.3% of total fixed maturities including securities pledged, based on fair value. As of December 31, 2015, the fair value, amortized cost and gross unrealized losses related to our exposure to Alt-A RMBS totaled $87.0 million, $76.0 million and $1.5 million, respectively, representing 0.4% of total fixed maturities, including securities pledged, based on fair value.
 
 
 
 
 
 
 
 
 
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 2015 and the first quarter of 2016, this trend has generally continued (certain months

 
63
 


did post marginal increases), 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. A robust environment for property refinancing was particularly supportive of improving credit performance metrics throughout much of the post-credit crisis period.  In the first quarter of 2016, however, this virtuous lending cycle was disrupted as the dislocation in corporate credit markets negatively impacted liquidity conditions in CMBS.  As a result, the new issuance market for CMBS slowed considerably during the quarter.  This dynamic, should it persist, is a risk for the overall performance health of the sectors and is being monitored closely for potential negative impacts. Spread performance in the first quarter of 2016 was volatile, reflecting the weak liquidity situation that evolved during the quarter.

For non-student loan consumer 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.
 
 
 
 
 
 
 
 
 
As of March 31, 2016, the fair value, amortized cost and gross unrealized losses of our exposure to Other ABS, excluding subprime exposure, totaled $145.7 million, $141.5 million and $0.2 million, respectively. As of December 31, 2015, the fair value and amortized cost of our exposure to Other ABS, excluding subprime exposure, totaled $147.0 million and $142.8 million, respectively. There were no gross unrealized losses related to Other ABS.

As of March 31, 2016, Other ABS was broadly diversified both by type and issuer with credit card receivables and automobile receivables comprising 51.2% and 8.2%, respectively, of total Other ABS, excluding subprime exposure. There were no nonconsolidated collateralized loan obligations ("CLOs") related to Other ABS. As of December 31, 2015, Other ABS was broadly diversified both by type and issuer with credit card receivables, comprising 55.3%, of total Other ABS, excluding subprime exposure.There were no automobile receivables and nonconsolidated collateralized loan obligations ("CLOs") related to Other ABS.
 
 
 
 
 
 
 
 
 
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 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 Statements of Operations.

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 March 31, 2016 and December 31, 2015 , our mortgage loans on real estate portfolio had a weighted average DSC of 2.2 times and a weighted average LTV ratio of 60.5% and 60.4%, respectively. See the Investments Note in our Condensed Financial Statements in Part I, Item I. of this Quarterly Report on Form 10-Q for further information on mortgage loans on real estate.
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
64
 


Other-Than-Temporary Impairments

We evaluate available-for-sale fixed maturities and equity securities for impairment on a regular basis. The assessment of whether impairments have occurred is based on a case-by-case evaluation of the underlying reasons for the decline in estimated fair value. See the Business, Basis of Presentation and Significant Accounting Policies Note in our Financial Statements in Part II., Item 8. of our Annual Report on Form 10-K for the policy used to evaluate whether the investments are other-than-temporarily impaired.

During the three months ended March 31, 2016, we recorded $0.8 million of credit related OTTI of which the primary contributor was $0.3 million of write-downs recorded in the RMBS sector on securities collateralized by Alt-A residential mortgages. During the three months ended March 31, 2016, we recorded $1.8 million of intent related OTTI, which were primarily related to the intent to sell positions in energy sector public corporate credits either because of a commitment to sell or an expectation that we may be required to sell as a result of our investment guidelines. See the Investments Note in our Condensed 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 continue to maintain sanctions against select Russian businesses in response to the ongoing conflict in eastern Ukraine.  We remain comfortable with our aggregate Russian exposure of $46.4 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.

The following table presents our European exposures, for selected countries based on risk, at fair value and amortized cost as of March 31, 2016:

Selected Countries Fixed Maturities and Equity Securities
($ in millions)
Sovereign
 
Financial Institutions
 
Non-Financial Institutions
 
Total (Fair Value)
 
Total (Amortized Cost)
Ireland
$
—

 
$
—

 
$
45.4

(1) 
$
45.4

(1) 
$
39.7

Italy
—

 
—

 
94.7

 
94.7

 
90.0

Spain
—

 
—

 
71.6

 
71.6

 
63.8

Total Peripheral Europe
$
—

 
$
—

 
$
211.7

 
$
211.7

 
$
193.5

(1) Includes $0.4 million derivative assets.


 
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We did not have any exposure to Greece or Portugal. Among the remaining $3.0 billion of total non-peripheral European exposure, we had a portfolio of credit-related assets similarly diversified by country and sector across developed and developing Europe. As of March 31, 2016, our sovereign exposure was $80.6 million, which consisted of fixed maturities. We also had $423.1 million in net exposure to non-peripheral financial institutions with a concentration in France of $92.1 million, The Netherlands of $87.2 million, Switzerland of $103.6 million and the United Kingdom of $102.3 million. The balance of $2.4 billion was invested across non-peripheral, non-financial institutions.

In addition to aggregate concentration in the United Kingdom of $1,101.4 million, we had significant non-peripheral European total country exposures in The Netherlands of $391.8 million, in France of $345.8 million, in Germany of $295.2 million and in Switzerland of $335.3 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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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 annuity product charges, GICs, funding agreements and fixed annuity deposits, investment income, proceeds from the maturity and sale of investments, proceeds from debt issuance and borrowing facilities, repurchase agreements, securities lending, reinsurance and capital contributions. Primary uses of these funds are payments of commissions and operating expenses, interest and premium credits, payments under guaranteed death and living benefits, investment purchases, repayment of debt 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 our statutory net admitted assets as of the preceding December 31. As of March 31, 2016, we had an outstanding receivable of $215.0 million and no outstanding payable. As of December 31, 2015, we did not have an outstanding receivable/payable from/to from 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 48.9% of our assets in marketable securities. These assets include cash, U.S. Treasuries, Agencies, Corporate Bonds, ABS, CMBS, 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 March 31, 2016, we had securities lending obligations of $171.7 million, which represents approximately 0.3% of our general account statutory admitted assets. As of December 31, 2015 , we had securities lending obligations of $153.6 million, which represents approximately 0.2% of our 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 three months ended March 31, 2016 and 2015, we did not receive any capital contributions from our Parent.

During the three months ended March 31, 2016 and 2015, we did not pay a dividend or return of capital distribution on our common stock to our Parent.

Reinsurance Agreements

Reinsurance Ceded

As of March 31, 2016 and December 31, 2015, total reserves ceded to affiliates were $5.3 billion and $5.0 billion, respectively. For the three months ended March 31, 2016 and 2015, premiums ceded to affiliates were $104.7 million and $88.2 million, respectively.

Guaranteed Living Benefit — Coinsurance and Coinsurance Funds Withheld

Effective June 30, 2008, we entered into an automatic reinsurance agreement with an affiliate, SLDI, covering 100% of the benefits guaranteed under specific variable annuity guaranteed living benefit riders attached to certain variable annuity contracts issued by us on or after January 1, 2000.

Also effective June 30, 2008, we entered into a services agreement with SLDI, under which we provide certain actuarial risk modeling consulting services to SLDI with respect to hedge positions undertaken by SLDI in connection with the reinsurance agreement. For the three months ended March 31, 2016 and 2015, revenue related to the agreement was $2.4 million and $2.9 million, respectively.

Effective July 1, 2009, the reinsurance agreement was amended and restated to change the reinsurance basis from coinsurance to a combined coinsurance and coinsurance funds withheld basis. On July 31, 2009, SLDI transferred assets with a market value of $3.2 billion to us, and we deposited those assets into a funds withheld trust account. As of March 31, 2016 and December 31, 2015, the assets on deposit in the trust account were $7.2 billion and $6.6 billion, respectively. We also established a corresponding funds withheld liability to SLDI, which is included in Funds held under reinsurance treaties with affiliates on the Condensed Balance Sheets. Funds held under reinsurance treaties with affiliates had a balance of $7.0 billion and $6.6 billion as of March 31, 2016 and December 31, 2015, respectively. In addition, as of March 31, 2016 and December 31, 2015, we had an embedded derivative with a value of $248.1 million and $15.8 million, respectively, which is recorded in Funds held under reinsurance treaties with affiliates on the Condensed Balance Sheets.

Also effective July 1, 2009, we and SLDI entered into an asset management services agreement, under which SLDI serves as asset manager for the funds withheld account. SLDI has retained its affiliate, Voya Investment Management LLC as sub-advisor for the funds withheld account.
 
Effective October 1, 2011, we and SLDI entered into an amended and restated automatic reinsurance agreement in order to provide more flexibility to us and SLDI with respect to the collateralization of the reserves related to the variable annuity guaranteed living benefits reinsured under the agreement. As of March 31, 2016 and December 31, 2015, reserves ceded by us under this agreement were $5.1 billion and $4.8 billion, respectively. In addition, a deferred loss in the amount of $278.0 million and $283.3 million as of March 31, 2016 and December 31, 2015, respectively, is included in Other assets on the Condensed Balance Sheets and is amortized over the period of benefit in Other expense in the Condensed Statements of Operations.

Reinsurance Assumed

As of March 31, 2016 and December 31, 2015, total reserves assumed from affiliates were $440.7 million and $438.7 million, respectively. For the three months ended March 31, 2016, premiums assumed from affiliates were $103.3 million and $101.5 million, respectively.

Deposits Receivable

As of March 31, 2016 and December 31, 2015, deposits receivable from affiliates were $155.8 million and $155.3 million, respectively.


 
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Ratings

Our access to funding and our related cost of borrowing, requirements for derivatives collateral posting and the attractiveness of certain of our products to customers are affected by our credit ratings and insurance financial strength ratings, which are periodically reviewed by the rating agencies. Financial strength ratings and credit ratings are important factors affecting public confidence in an insurer and its competitive position in marketing products. The credit ratings are also important for the ability to raise capital through the issuance of debt and for the cost of such financing.

A downgrade in our credit or financial strength 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 impair 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.

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 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.


 
69
 


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, Moody's, Fitch and A.M. Best from December 31, 2015 through March 31, 2016 and subsequently through the date of this Quarterly Report on Form 10-Q are as follows:

•
On April 8, 2016, Fitch affirmed Voya's senior debt rating at 'BBB' and junior subordinated debt rating at 'BB+'. The financial strength ratings of the U.S. operating entities, including us, were also affirmed at "A". The rating outlook for all ratings is Stable.

Net Amount at Risk ("NAR")

Minimum Guarantees
 
Variable annuity contracts containing minimum guaranteed death and living benefits expose us to equity risk. A decrease in the equity markets may cause a decrease in the account values, thereby increasing the possibility that we may be required to pay amounts to contract owners due to guaranteed death and living benefits. An increase in the value of the equity markets may increase account values for these contracts, thereby decreasing our risk associated with guaranteed death and living benefits.

.

As of the dates indicated, the guaranteed value of death benefits in excess of account values, was estimated to be as follows:
($ in millions) 
March 31, 2016
Net amount at risk, before reinsurance
$
6,556

Net amount at risk, net of reinsurance
6,178

($ in millions) 
December 31, 2015
Net amount at risk, before reinsurance
$
6,458

Net amount at risk, net of reinsurance
6,074


The increase in the guaranteed value of these death benefits was primarily driven by relatively flat equity markets which resulted in unfavorable fund performance net of deductions for fees during the three months ended March 31, 2016.

The additional liabilities recognized related to guaranteed minimum death benefits ("GMDB"), as of the dates indicated, were as follows:
($ in millions) 
March 31, 2016
Separate account liability
$
32,447.4

Additional liability balance
524.3

($ in millions) 
December 31, 2015
Separate account liability
$
33,321.3

Additional liability balance
517.2


The above additional liability recorded by us, net of reinsurance, represented the estimated net present value of our future obligation for guaranteed minimum death benefits in excess of account values. The decrease in the additional separate account liability and the increase in additional liability balance is mainly due to unfavorable fund performance.


 
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The following guaranteed living benefits information is as of the dates indicated:
 
Non-reinsured Living Benefits (GMAB/GMWB)
 
Reinsured Living Benefits (GMIB/GMWBL)
($ in millions) 
March 31, 2016
Net amount at risk, before reinsurance
$
17

 
$
6,457

Net amount at risk, net of reinsurance
17

 
—

($ in millions) 
December 31, 2015
Net amount at risk, before reinsurance
$
17

 
$
5,087

Net amount at risk, net of reinsurance
17

 
—

(1)Guaranteed Minimum Accumulation Benefit ("GMAB")/Guaranteed Minimum Withdrawal Benefit ("GMWB")
(2)Guaranteed Minimum Income Benefit ("GMIB")/Guaranteed Minimum Withdrawal Benefit for Life ("GMWBL")

The net amount at risk for the reinsured living benefits is equal to the excess of the present value of the minimum guaranteed annuity payments available to the contractholder over the current account value. The methodology used to calculate the net amount at risk partially reflects the current interest rate environment and also includes a provision for the expected mortality of the clients covered by these living benefits. The increase in the net amount at risk of these living benefits (GMIB/GMWBL) from December 31, 2015 to March 31, 2016 was primarily driven by lower interest rates.

The net amount at risk for the non-reinsured living benefits is equal to the guaranteed value of these benefits in excess of the account values, which is reflected in the table above.

The separate account liabilities subject to the requirements for additional reserve liabilities under ASC Topic 944 for minimum guaranteed benefits and the additional liabilities recognized related to minimum guarantees, by type, as of the dates indicated, were as follows:
 
Non-reinsured Living Benefits (GMAB/GMWB)
 
Reinsured Living Benefits (GMIB/GMWBL)
($ in millions) 
March 31, 2016
Separate account liability
$
569.6

 
$
24,513.7

Additional liability balance, net of reinsurance
31.7

 
1,446.9

($ in millions) 
December 31, 2015
Separate account liability
$
593.5

 
$
25,149.5

Additional liability balance, net of reinsurance
29.1

 
1,246.0


As of March 31, 2016 and December 31, 2015, the above additional liabilities for non-reinsured living benefits recorded by us, net of reinsurance, represent the estimated net present value of our future obligations for these benefits. The above additional liabilities for reinsured living benefits recorded by us, net of reinsurance, represent the present value of future claims less the present value of future attributed fees (GMWBLs) or the benefits ratio approach (GMIBs), less the reinsurance ceded reserve calculated under Accounting Standards Codification Topic 944. The additional liability for GMIBs was zero. The increase in the additional liability balance for reinsured living benefits corresponds to the increase in the GMWBL liability, which increased mainly due to a decrease in the interest rates during the three months ended March 31, 2016.

Variable Annuity Hedge Program

Variable Annuity Guarantee Hedge Program

We primarily mitigate variable annuity market risk exposures through hedging. Market risk arises primarily from the minimum guarantees within the variable annuity products, whose economic costs are primarily dependent on future equity market returns, interest rate levels, equity volatility levels and policyholder behavior. The Variable Annuity Guarantee Hedge Program is used to mitigate our exposure to equity market and interest rate changes and seeks to ensure that the required assets are available to satisfy future death benefit and living benefit obligations. While the Variable Annuity Guarantee Hedge Program does not explicitly hedge

 
71
 


statutory or U.S. GAAP reserves, as markets move up or down, in aggregate the returns generated by the Variable Annuity Guarantee Hedge Program will significantly offset the statutory and U.S. GAAP reserve changes due to market movements.

For further information on our Variable Annuity Guarantee Hedge program, see Quantitative and Qualitative Disclosures About Market Risk in Part II, Item 7A. of our Annual Report on Form 10-K.

Variable Annuity Capital Hedge Overlay ("CHO") Program

Variable annuity guaranteed benefits are hedged based on their economic or fair value; however, the statutory reserves and rating agency required assets are not based on a market value. When equity markets decrease, the statutory reserve and rating agency required assets for the variable annuity guaranteed benefits can increase more quickly than the value of the derivatives held under the Variable Annuity Guarantee Hedge Program. This causes regulatory reserves to increase and rating agency capital to decrease. The CHO program is intended to mitigate market risk to the regulatory and rating agency capital of the Company.

For further information on our Variable Annuity CHO program, see Quantitative and Qualitative Disclosures About Market Risk in Part II, Item 7A. of our Annual Report on Form 10-K.

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 Balance Sheets at fair value. Changes in the fair value of derivatives are recorded in Other net realized capital gains (losses) in the Condensed 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 Balance Sheets and changes in fair value of the embedded derivatives are recorded in Other net realized capital gains (losses) in the Condensed Statements of Operations. Embedded derivatives within certain annuity products are included in Future policy benefits and contract owner account balances on the Condensed Balance Sheets and changes in the fair value of the embedded derivatives are recorded in Other net realized capital gains (losses) in the Condensed Statements of Operations.

In addition, we have entered into coinsurance with funds withheld arrangements that contain embedded derivatives, the fair value of which is based on the change in the fair value of the underlying assets held in trust. Embedded derivatives within coinsurance with funds withheld arrangements are reported with the host contract in Deposits and reinsurance recoverable (assumed reinsurance) or Funds held under reinsurance treaties with affiliates (ceded reinsurance) on the Condensed Balance Sheets, and changes in the fair value of the embedded derivatives are recorded in Interest credited and other benefits to contract owners/policyholders in the Condensed Statements of Operations.

Deposits and Reinsurance Recoverable

We utilize reinsurance agreements to reduce our exposure to large losses in most aspects of our insurance business. Such reinsurance permits recovery of a portion of losses from reinsurers, although it does not discharge our primary liability as direct insurer of the risks reinsured. We evaluate the financial strength of potential reinsurers and continually monitor the financial condition of reinsurers. Only those reinsurance recoverable balances deemed probable of recovery are reflected as assets on our Condensed Balance Sheets.


 
72
 


Off-Balance Sheet Arrangements

The Company has obligations for the return of non-cash collateral under a recent amendment to our securities lending program. Non-cash collateral received in connection with the securities lending program may not be sold or re-pledged by our lending agent, except in the event of default, and is not reflected on the Company’s Condensed Balance Sheets. For information regarding obligations under this new program, see the Investments Note in our Condensed Financial Statements in Part I, Item 1. of this Quarterly Report on Form 10-Q. Except for this item, there have been no material changes to our off-balance sheet arrangements since the filing of our Annual Report on Form 10-K.

Legislative and Regulatory Developments

In April 2016, the Department of Labor ("DOL") issued a final rule that will broaden the definition of "fiduciary" for purposes of the Employment Retirement Income Security Act ("ERISA") and the Internal Revenue Code, as it applies to a person or entity providing investment advice with respect to ERISA plans or IRAs. The rule expands the circumstances in which providers of investment advice to ERISA plan sponsors and plan participants, and IRA investors, are deemed to act in a fiduciary capacity. The rule requires 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 that varies based on the fiduciary’s investment recommendation. As a consequence, certain business activities in which we and our affiliates currently engage, such as IRA rollovers and other IRA sales, will become subject to a heightened fiduciary standard when the rule begins to apply in April 2017. Where we and our affiliates are deemed to act in a fiduciary capacity, we and our affiliates will in certain cases need to modify our sales and compensation practices. While it is too early to predict what impact this rule will have on us, we expect the impact on most of our businesses to be relatively limited, with more substantial impact expected in our retail annuities and wealth management businesses conducted by our affiliates. See “Risk Factors—Changes to federal regulations could adversely affect our distribution model by restricting our ability, and our distributors’ ability, to provide customers with advice.” If the rule does slow IRA rollover activities, there may be a corresponding reduction in the sale of our annuity products for use as IRAs.
Item 4.    Controls and Procedures

Disclosure 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 were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the quarter ended March 31, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 
73
 


PART II.    OTHER INFORMATION

Item 1.    Legal Proceedings

See the Commitments and Contingencies Note in our Condensed 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 and uncertainties, please see "Risk Factors" in Part I, Item IA. of our Annual Report on Form 10-K for the year ended December 31, 2015 (the "Annual Report on Form 10-K") filed with the SEC. In addition, please see "Management's Narrative Analysis of the Results of Operations and Financial Condition" in Part I, Item 2. of this Quarterly Report on Form 10-Q.

The following should be read in conjunction with and supplements and amends the risk factors described in our Annual Report on Form 10-K.

Changes to federal regulations could adversely affect our distribution model by restricting our ability, and our distributors’ ability, to provide customers with advice.

In April 2016, the DOL issued a final rule that will broaden the definition of "fiduciary" for purposes of ERISA and the Internal Revenue Code, as it applies to a person or entity providing investment advice with respect to ERISA plans or IRAs. The rule expands the circumstances in which providers of investment advice to ERISA plan sponsors and plan participants, and IRA investors, are deemed to act in a fiduciary capacity. The rule requires 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 that varies based on the fiduciary’s investment recommendation. As a consequence, certain business activities in which we and our affiliates currently engage, such as IRA rollovers and other IRA sales, will become subject to a heightened fiduciary standard when the rule begins to apply in April 2017. Where we and our affiliates are deemed to act in a fiduciary capacity, we and our affiliates will in certain cases need to either modify our sales and compensation practices or find an applicable exemption.

The DOL concurrently adopted a "best interest contract exemption" (“BIC”) intended to enable continuation of certain existing industry practices relating to receipt of commissions and other compensation. While this exemption will enable us and our distributors to continue many historical practices - subject, among other things, to a heightened best interests standard and a requirement that compensation be “reasonable” - there are practical difficulties with relying on the exemption that we believe will limit its utility in certain markets, particularly for distributors of our annuity products who are not able to rely on the exemption because they do not do business through regulated financial institutions.

In addition, the proposed rule may make it easier for the DOL in enforcement actions, and for plaintiffs' attorneys in litigation, to attempt to extend fiduciary status to, or to claim fiduciary or contractual breach by, advisors who would not be deemed fiduciaries under current regulations. Compliance with the proposed rule could also increase our overall operational costs for providing some of the services we currently provide.

Item 6.    Exhibits
 
See Exhibit Index on page 76 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.


May 12, 2016
 
Voya Insurance and Annuity Company
(Date)
 
(Registrant)
 
 
 
 
 
 
 
 
By: /s/
David P. Wiland
 
 
David P. Wiland
Senior Vice President and
Chief Financial Officer
(Duly Authorized Officer and Principal Financial Officer)


 
75
 


Voya Insurance and Annuity Company (the "Company")

Exhibit Index
Exhibit
Number
 
Description of Exhibit
10+
 
Amended and Restated Services Agreement, made effective as of April 1, 2015, between the Company, the affiliated insurance companies and certain other affiliated companies specified in Exhibit B of the Agreement.
31.1+
 
Certificate of David P. Wiland pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2+
 
Certificate of Michael S. Smith pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1+
 
Certificate of David P. Wiland pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2+
 
Certificate of Michael S. Smith 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.



 
76
 

VOYA INSURANCE & ANNUITY Co Reports