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VOYA RETIREMENT INSURANCE & ANNUITY CO – 10-K – Management's Narrative Analysis of the Results of Operations and Financial Condition
For the purposes of the discussion in this Annual Report on Form 10-K, the term "VRIAC" refers toVoya Retirement Insurance and Annuity Company and the terms "Company," "we," "our," "us" refer toVoya Retirement Insurance and Annuity Company and its subsidiaries. We are a direct, wholly owned subsidiary ofVoya 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 years endedDecember 31, 2022 and 2021, and financial condition as ofDecember 31, 2022 and 2021. This item should be read in its entirety and in conjunction with the Consolidated Financial Statements and related notes contained in Part II, Item 8. of this Annual Report on Form 10-K. For discussion and analysis of our results of operations for the years endedDecember 31, 2021 and 2020, refer to our 2021 Annual Report on Form 10-K filed with theSEC onMarch 11, 2022 . 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." Overview VRIAC is a stock life insurance company domiciled in theState of Connecticut . VRIAC and its wholly owned subsidiaries (collectively, the "Company") provide financial products and services inthe United States . VRIAC is authorized to conduct its insurance business in all states and in theDistrict of Columbia ,Guam ,Puerto Rico and theVirgin Islands .
On
Financial"), consummated a series of transactions pursuant to a Master
Transaction Agreement (the "Resolution MTA") entered into on
with
which Resolution Life US acquired all of the shares of the capital stock of
several of Voya Financial's subsidiaries, including Security Life of
Company
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Concurrently with the sale, SLD entered into reinsurance agreements with insurance subsidiaries of Voya Financial, including VRIAC. Pursuant to these agreements, these subsidiaries reinsured to SLD certain in-scope individual life insurance and annuities businesses. VRIAC remains a subsidiary of Voya Financial. These reinsurance transactions were substantially carried out on a coinsurance or modified coinsurance basis, with SLD's reinsurance obligations collateralized by invested assets placed in a comfort trust. The reinsurance agreements along with the sale of the legal entities noted above (referred to as the "Individual Life Transaction") resulted in the disposition of substantially all of Voya Financial's life insurance and legacy non-retirement annuity businesses and related assets. Pursuant to the Individual Life Transaction, VRIAC's reserves related to legacy non-retirement annuity business as well as pension risk transfer products were ceded to SLD and related assets transferred. Furthermore, upon closing of the Individual Life Transaction onJanuary 4, 2021 , DAC and VOBA balances are amortized as a charge to earnings over the life of the underlying policies. Additionally, for the portion of the reinsurance transactions that involve policies that do not meet risk transfer, a deposit asset was established in the amount of$1.5 billion on a pre-tax basis. This compares to liabilities related to Contract owner account balances that currently exist for the related underlying policies. Effective as ofMarch 1, 2021 ,Voya Retirement Insurance and Annuity Company acquired 49.9% of the issued and outstanding common stock ofVoya Special Investments, Inc. from Voya Financial, Inc. The investment has been accounted for as an equity method investment and recognized within Other investments in the Consolidated Balance Sheets. Also, effective as ofMarch 1, 2021 , the Company acquired$80 million of SLD issued surplus notes and$73 million of Resolution (Life U.S. Intermediate Holdings Ltd. ) issued preferred shares from affiliated entities, which were received in connection with the Individual Life Transaction. OnJune 9, 2021 , Voya Financial completed the sale of the independent financial planning channel ofVoya Financial Advisors ("VFA") toCetera Financial Group, Inc , ("Cetera"), one of the nation's largest networks of independently managed broker-dealers. VFA is one of the channels through which VRIAC distributes its products. In connection with this transaction, VFA transferred more than 800 independent financial professionals serving retail customers with approximately$38 billion in assets under advisement to Cetera, while retaining approximately 500 field and phone-based financial professionals who support our business.
Critical Accounting Judgments and Estimates
General
The preparation of financial statements in conformity with accounting principles generally accepted inthe 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 as of the date of the Consolidated 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. The inputs into our estimates and assumptions consider the economic implications of COVID-19 on our critical and significant accounting estimates. Those estimates are inherently subject to change and actual results could differ from those estimates, and the differences may be material to the accompanying Consolidated Financial Statements.
We have identified the following accounting judgments and estimates as critical
in that they involve a higher degree of judgment and are subject to a
significant degree of variability:
•Reserves for future policy benefits;
•Deferred policy acquisition costs ("DAC") and value of business acquired
("VOBA");
•Valuation of investments and derivatives;
•Investment impairments;
•Income taxes; and
•Contingencies.
In developing these accounting estimates, we make subjective and complex
judgments that are inherently uncertain and subject to material changes as facts
and circumstances develop. Although variability is inherent in these estimates,
we believe the amounts provided are appropriate based on the facts available
upon preparation of the Consolidated Financial Statements.
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The above critical accounting estimates are described in the Business, Basis of
Presentation and Significant Accounting Policies Note in our Consolidated
Financial Statements in Part II, Item 8. of this Annual Report on Form 10-K.
Reserves for Future Policy Benefits
The determination of future policy benefit reserves is dependent on actuarial assumptions. The principal assumptions used to establish liabilities for future policy benefits are based on our experience and periodically reviewed against industry standards. These assumptions include mortality, morbidity, policy lapse, contract renewal, payment of subsequent premiums or deposits by the contract owner, retirement, investment returns, inflation, benefit utilization and expenses. The assumptions used require considerable judgments. Changes in, or deviations from, the assumptions used can significantly affect our reserve levels and related results of operations. •Mortality is the incidence of death among policyholders triggering the payment of underlying insurance coverage by the insurer. In addition, mortality also refers to the ceasing of payments on life-contingent annuities due to the death of the annuitant. We utilize a combination of actual and industry experience when setting our mortality assumptions. •A lapse rate is the percentage of in-force policies surrendered by the policyholder or canceled by us due to non-payment of premiums. See the Guaranteed Benefit Features Note in our Consolidated Financial Statements in Part II, Item 8. of this Annual Report on Form 10-K for further information on our reserves for future policy benefits, contract owner account balances and product guarantees.
Insurance and Other Reserves
Reserves for payout contracts with life contingencies are equal to the present value of expected future payments. Assumptions, which are "locked-in" at inception of the contracts, include interest rates, mortality and expenses, and are based on our estimates of anticipated experience at the period the policy is sold or acquired, including a provision for adverse deviation. Such assumptions generally vary by annuity plan type, year of issue and policy duration. Interest rates used to calculate the present value of future benefits ranged from 2.3% to 5.5%. Due to the locked-in assumptions, sensitivity associated with these contracts do not result in significant impacts to our results of operations. Although assumptions are locked-in upon the issuance of payout contracts with life contingencies, significant changes in experience or assumptions may require us to provide for expected future losses on a product by establishing premium deficiency reserves. Premium deficiency reserves are determined based on best estimate assumptions that exist at the time the premium deficiency reserve is established and do not include a provision for adverse deviation.
Product Guarantees and Index-crediting Features
The assumptions used to establish the liabilities for our product guarantees require considerable judgment and are established as management's best estimate of future outcomes. We periodically review these assumptions and, if necessary, update them based on additional information that becomes available. Changes in, or deviations from, the assumptions used can significantly affect our reserve levels and related results of operations.
Stabilizer and MCG: We also issue stabilizer ("Stabilizer") contracts that
contain embedded derivatives that are measured at estimated fair value
separately from the host contracts. The managed custody guarantee product
("MCG") is a stand-alone derivative and is measured in its entirety at estimated
fair value.
The estimated fair value of the Stabilizer embedded derivative and MCG
stand-alone derivative is determined based on the present value of projected
future claims, minus the present value of future guaranteed premiums. At
inception of the contract, we project a guaranteed premium to be equal to the
present value of the projected future claims. The income associated with the
contracts is projected using actuarial and capital market assumptions, including
benefits and related contract charges, over the anticipated life of the related
contracts. The cash flow estimates are projected under multiple capital market
scenarios using observable risk-free rates and other best estimate assumptions.
The liabilities for the Stabilizer embedded derivatives and the MCG stand-alone
derivative include a risk margin to capture uncertainties related to
policyholder behavior assumptions. The margin represents additional compensation
a market participant would require to assume these risks.
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The discount rate used to determine the fair value of the liabilities for our
and Stabilizer embedded derivatives and the MCG stand-alone derivative includes
an adjustment to reflect the risk that these obligations will not be fulfilled
("nonperformance risk"). Our nonperformance risk adjustment is based on a blend
of observable, similarly rated peer holding company credit spreads, adjusted to
reflect the credit quality of the Company, as well as an adjustment to reflect
the non-default spreads and the priority and recovery rates of policyholder
claims.
See Quantitative and Qualitative Disclosures About Market Risk in Part II, Item
7A. of this Annual Report on Form 10-K for additional information regarding the
specific hedging strategies and reinsurance we utilize to mitigate risk for the
product guarantees, as well as sensitivities of the embedded derivative and
stand-alone derivative liabilities to changes in certain capital markets
assumptions.
Deferred Policy Acquisition Costs and Value of Business Acquired
DAC represents policy acquisition costs that have been capitalized and are
subject to amortization and interest. VOBA represents the outstanding value of
in-force business acquired and is subject to amortization and interest.
Assumptions and Periodic Review
Assumptions deemed critical to the DAC/VOBA estimates include the long-term equity rate of return, long-term interest rate, and future mortality. Changes in assumptions can have a significant impact on DAC/VOBA balances, 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. Deviation of emerging experience from our assumptions could have a significant effect on our DAC/VOBA, reserves, and the related results of operations. •One significant assumption is the assumed return associated with the variable account performance. To reflect the volatility in the equity markets, this assumption involves a combination of near-term expectations and long-term assumptions regarding market performance. The overall return on the variable account is dependent on multiple factors, including the relative mix of the underlying sub-accounts among bond funds and equity funds, as well as equity sector weightings. We use a reversion to the mean approach, which assumes that the market returns over the entire mean reversion period are consistent with a long-term level of equity market appreciation. We monitor market events and only change the assumption when sustained deviations are expected. This methodology incorporates an 8% long-term equity return assumption, a 14% cap and a five-year look-forward period. •Assumptions related to interest rate spreads and credit losses also impact estimated gross profits for all applicable products with credited rates. These assumptions are based on the current investment portfolio yields and credit quality, estimated future crediting rates, capital markets, and estimates of future interest rates and defaults. •Other significant assumptions include estimated policyholder behavior assumptions, such as surrender, lapse, and annuitization rates. We use a combination of actual and industry experience when setting and updating our policyholder behavior assumptions, and such assumptions require considerable judgment. Estimated gross profits for our variable annuity contracts are particularly sensitive to these assumptions. During the third quarter of 2022 and 2021, we conducted our annual review of assumptions, including projection model inputs, which resulted in net favorable unlocking of DAC/VOBA of$51 million and$20 million , respectively. Unlocking in the third quarter of 2022 was primarily driven by higher interest rates. Unlocking in the third quarter of 2021 was primarily driven by changes in asset return assumptions. DAC/VOBA unlocking is reflected in Net amortization of Deferred policy acquisition costs and Value of business acquired in the Consolidated Statements of Operations for the years endedDecember 31, 2022 and 2021. During the first quarter of 2021, and as a result of the close of the Individual Life transaction, we reviewed our blocks of business to determine recoverability of DAC, VOBA and other intangibles. This review, referred to as loss recognition testing, resulted in the write down of DAC/VOBA of$2 million and increase in reserves of$216 million in our divested businesses. The loss recognition related to DAC/VOBA and reserves was recorded in Net amortization of Deferred policy acquisition costs and Value of business acquired and Interest credited and other benefits to contract owners/policyholders, respectively, in the Consolidated Statements of Operations for the year endedDecember 31, 2021 . 35
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Sensitivity
We perform sensitivity analyses to assess the impact that certain assumptions have on DAC/VOBA and certain reserves. The following table presents the estimated instantaneous net impact on income before income taxes of various assumption changes on our DAC/VOBA balances and the impact on related reserves for future policy benefits and reinsurance. The effects are not representative of the aggregate impacts that could result if a combination of such changes to equity markets, interest rates and other assumptions occurred. ($ in millions) As of
Decrease in long-term equity rate of return assumption by 100
basis points
$ (36)
A change to the long-term interest rate assumption of -50 basis
points
(16)
A change to the long-term interest rate assumption of +50 basis
points
14 A one-time, 10% decrease in equity market values (5) Lower assumed equity rates of return, lower assumed interest rates and decreases in equity market values generally decrease DAC/VOBA and increase future policy benefits, thus decreasing income before income taxes. Higher assumed interest rates generally increase DAC/VOBA and decrease future policy benefits, thus increasing income before income taxes.
Valuation of Investments and Derivatives
Our investment portfolio includes certain investments recorded at fair value and consists of public and private fixed maturity securities, commercial mortgage and other loans, equity securities, short-term investments, other invested assets and derivative financial instruments. 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. See the Investments Note and the Derivative Financial Instruments Note in our Consolidated Financial Statements in Part II, Item 8. of this Annual Report on Form 10-K for further information.
Investments
We measure the fair value of our financial assets and liabilities based on
assumptions used by market participants in pricing the asset or liability, which
may include inherent risk, restrictions on the sale or use of an asset, or
nonperformance risk, including our own credit risk. The estimate of fair value
is the price that would be received to sell an asset or paid to transfer a
liability ("exit price") in an orderly transaction between market participants
in the principal market, or the most advantageous market in the absence of a
principal market, for that asset or liability. We use a number of valuation
sources to determine the fair values of our financial assets and liabilities,
including quoted market prices, third-party commercial pricing services,
third-party brokers, industry-standard, vendor-provided software that models the
value based on market observable inputs, and other internal modeling techniques
based on projected cash flows.
We categorize our financial instruments into a three-level hierarchy based on
the priority of the inputs to the valuation technique. 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 securities 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
flows, matrix pricing or other similar techniques. Inputs to these methodologies
include, but are not limited to, market observable inputs such as benchmark
yields, credit quality, issuer spreads, bids, offers and cash flow
characteristics of the security. For privately placed bonds, we also consider
such factors as the net worth of the borrower, value of the collateral, the
capital structure of the borrower, the presence of guarantees, and the
borrower's ability to compete in its relevant market. Valuations are reviewed
and validated monthly by an internal valuation committee using price variance
reports, comparisons to internal pricing models, back testing of recent trades,
and monitoring of trading volumes, as appropriate.
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The valuation of financial assets and liabilities involves considerable judgment, is subject to considerable variability, is established using management's best estimate, and is revised as additional information becomes available. As such, changes in, or deviations from, the assumptions used in such valuations can significantly affect our results of operations. Financial markets are subject to significant movements in valuation and liquidity, which can impact our ability to liquidate and the selling price that can be realized for our securities. Derivatives Derivatives are carried at fair value, which is determined by using observable key financial data, such as yield curves, exchange rates, S&P 500 prices,London Interbank Offered Rates ("LIBOR"), Overnight Index Swap Rates ("OIS") and Secured Overnight Financing Rates ("SOFR"), or through values established by third-party sources, such as brokers. Valuations for our futures contracts are based on unadjusted quoted prices from an active exchange. Counterparty credit risk is considered and incorporated in our valuation process through counterparty credit rating requirements and monitoring of overall exposure. Our own credit risk is also considered and incorporated in our valuation process. We have certain CDS and options that are priced by third party vendors or by using models that primarily use market observable inputs, but contain inputs that are not observable to market participants. We also have investments in certain fixed maturities and have issued certain annuity products that contain embedded derivatives for which 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. The fair values of these embedded derivatives are determined using prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. For additional information regarding the valuation of and significant assumptions associated with embedded derivatives and stand-alone derivatives associated with certain annuity contracts, see "Reserves for Future Policy Benefits" above. The valuation of derivatives involves considerable judgment, is subject to considerable variability, is established using management's best estimate and is revised as additional information becomes available. As such, changes in, or deviations from, these assumptions used in such valuations can have a significant effect on our results of operations. For additional information regarding the fair value of our investments and derivatives, see the Fair Value Measurements Note in our Consolidated Financial Statements in Part II, Item 8. of this Annual Report on Form 10-K. For additional information regarding the sensitivities of interest rate risk and equity market price risk and impact on investments and derivatives, see Quantitative and Qualitative Disclosures About Market Risk in Part II, Item 7A. of this Annual Report on Form 10-K.
Investment Impairments
Fixed maturities, available-for-sale, and mortgage loans on real estate can be
subject to credit impairment, which can have a significant effect on the results
of operations. Refer to the Business, Basis of Presentation and Significant
Accounting Policies Note in our Consolidated Financial Statements in Part II,
Item 8. of this Annual Report on Form 10-K for an understanding of our
methodology and significant inputs considered within the allowance for credit
losses and impairments. For additional information regarding the evaluation
process for credit impairments, refer to the Investments Note in our
Consolidated Financial Statements in Part II, Item 8. of this Annual Report on
Form 10-K.
Income Taxes
The results of our operations are included in the consolidated tax return of
Voya Financial. Generally, our Consolidated Financial Statements recognize the
current and deferred income tax consequences that result from our activities
during the current and preceding periods pursuant to the provisions of ASC Topic
740, "Income Taxes" as if we were a separate taxpayer rather than a member of
Voya Financial'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.
Under our tax sharing agreement, Voya Financial will pay us 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.
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Valuation Allowances
We use certain assumptions and estimates in determining the income taxes payable or refundable to/from Voya Financial for the current year, the deferred income tax liabilities and assets for items recognized differently in our Consolidated Financial Statements from amounts shown on our income tax returns and the federal income tax expense. Determining these amounts requires analysis and interpretation of current tax laws and regulations, including the loss limitation rules associated with change in control. We exercise considerable judgment in evaluating the amount and timing of recognition of the resulting income tax liabilities and assets. These judgments are reevaluated on a periodic basis and as regulatory and business factors change. During the year, we had losses in Other comprehensive income of$3.5 billion , resulting in unrealized capital losses of$1.9 billion in Accumulated other comprehensive income as ofDecember 31, 2022 , which generated a deferred tax asset ("DTA"). This DTA was driven primarily by the impact of increasing interest rates on our available-for-sale portfolio. We expect this DTA to be utilized by our capital loss carryback capacity and hold to maturity tax planning strategy. Significant future increases to interest rates and/or the occurrence of other unexpected circumstances, such as changes in the economic environment, liquidity and investment strategy, could result in recording a related valuation allowance on our deferred tax assets in a future period. For additional understanding over the Company's valuation allowance, refer to the Business, Basis of Presentation and Significant Accounting Policies Note in our Consolidated Financial Statements in Part II, Item 8. of this Annual report on Form 10-K. Tax Contingencies We recognize the tax benefit from an uncertain tax position only if it is more likely than not to be sustained under examination by the applicable taxing authority. We also consider positions that have been reviewed and agreed to as part of an examination by the applicable taxing authority. For items that meet the more-likely-than-not recognition threshold, we measure the tax position as the largest amount of benefit that is more than 50% likely to be realized upon ultimate resolution with the applicable tax authority that has full knowledge of all relevant information. Tax positions that do not meet the more-likely-than-not standard are not recognized.
Changes in Law
Certain changes or future events, such as changes in tax legislation, completion of tax audits, planning opportunities and expectations about future outcomes could have an impact on our estimates of valuation allowances, deferred taxes, tax provisions and effective tax rates. InAugust 2022 ,President Biden signed into law the Inflation Reduction Act of 2022 ("IRA of 2022"), which includes a 15% book income alternative minimum tax ("CAMT") on corporations and a 1% excise tax on the fair market value of stock that is repurchased by publicly tradedU.S. corporations or their specified affiliates. The CAMT and the excise tax are effective in taxable years beginning afterDecember 31, 2022 . The Internal Revenue Service has only issued limited guidance on the CAMT, and uncertainty remains regarding the application of and potential adjustments to the CAMT. If the CAMT applies, we will be required to pay tax at the 15% CAMT rate despite ourU.S. Federal net operating loss carryforwards. We do expect to be subject to the 1% excise tax but do not expect that it will have a material impact to our financial statements.
Contingencies
For information regarding our contingencies, see the Commitments and
Contingencies Note in our Consolidated Financial Statements in Part II, Item 8.
of this Annual Report on Form 10-K.
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
Consolidated Financial Statements in Part II, Item 8. of this Annual Report on
Form 10-K.
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Results of Operations
Year ended December 31,
($ in millions) 2022 2021 Change
Revenues:
Net investment income$ 1,619 $ 1,949 $ (330) Fee income 979 1,088 (109) Premiums 18 (2,425) 2,443 Broker-dealer commission revenue 2 2 - Net gains (losses) (429) 166 (595) Other revenue 39 38 1 Total revenues 2,228 818 1,410 Benefits and expenses: Interest credited and other benefits to contract owners/policyholders 763 (1,483) 2,246 Operating expenses 1,130 1,213 (83) Broker-dealer commission expense 2 2 -
Net amortization of Deferred policy acquisition costs
and Value of business acquired
49 97 (48) Interest expense 1 - 1 Total benefits and expenses 1,945 (171) 2,116 Income (loss) before income taxes 283 989 (706) Income tax expense (benefit) (50) 163 (213) Net income$ 333 $ 826 $ (493)
Year Ended
Revenues
Net investment income decreased by
million
•lower alternative investment and prepayment fee income in the current period
primarily driven by the impact of equity market performance.
Fee income decreased by
primarily due to:
•lower average equity markets and a lower earned rate.
Premiums increased by
primarily due to:
•the close of the Individual Life Transaction in the prior year, at which point the Pension Risk Transfer (PRT) and annuity businesses were ceded to Resolution, which are fully offset by a corresponding amount in Interest credited and other benefits to contract owners/policyholders.
Net gains (losses) changed by
of
•an unfavorable change in fixed maturities, available for sale, including securities pledged primarily driven by the transfer of assets from reinsurance portfolios to Resolution upon the close of the transaction; •an unfavorable change in equity securities, at fair value, primarily driven by market value movements; •gains on mortgage loans in the prior period driven by the sale of loans from reinsurance portfolios to Resolution upon the close of the transaction and a decline in CECL allowance; and •a gain in other investments in the prior period due to the sale of the Company's stake inVA Capital . 39
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The change was partially offset by:
•net favorable changes in derivative valuations due to interest rate movements.
Benefits and Expenses
Interest credited and other benefits to contract owners/policyholders increased
by
•the close of the Individual Life Transaction in the prior period, at which point the PRT and annuity businesses were ceded to Resolution, which is fully offset by a corresponding amount in Premiums.
The increase was partially offset by:
•a decrease related to the PRT reserves ceded to Resolution driven by a change in yield assumptions that occurred in the prior year and did not reoccur in the current year.
Net amortization of DAC and VOBA decreased by
•the DAC/VOBA balance related to the annuities business ceded to Resolution being written down to zero in the prior period as the block did not pass loss recognition testing; and •higher favorable DAC unlocking primarily due to third quarter annual assumption updates in the current year.
The decrease was partially offset by:
•an unfavorable change in DAC unlocking primarily due to equity market
performance in the current year.
Income tax expense (benefit) changed by
million
•a decrease in income before income taxes;
•tax credits claimed in 2022 related to tax years 2012 - 2017; and
•an increase in the dividends received deduction.
Investments
Investment Strategy
Our investment strategy seeks to achieve sustainable risk-adjusted returns by
focusing on principal preservation, disciplined matching of asset
characteristics with liability requirements and the diversification of risks.
Investment activities are undertaken according to investment policy statements
that contain internally established guidelines and risk tolerances and are
required to comply with applicable laws and insurance regulations. Risk
tolerances are established for credit risk, credit spread risk, market risk,
liquidity risk and concentration risk across issuers, sectors and asset types
that seek to mitigate the impact of cash flow variability arising from these
risks.
Segmented portfolios are established for groups of products with similar
liability characteristics. Our investment portfolio consists largely of high
quality fixed maturities and short-term investments, investments in commercial
mortgage loans, alternative investments and other instruments, including a small
amount of equity holdings. Fixed maturities include publicly issued corporate
bonds, government bonds, privately placed notes and bonds, bonds issued by
states and municipalities, Other asset-backed securities ("ABS"), and
traditional Mortgage-backed securities ("MBS").
We use derivatives for hedging purposes to reduce our exposure to the cash flow
variability of assets and liabilities, interest rate risk, credit risk and
market risk. In addition, we use credit derivatives to replicate exposure to
individual securities or pools of securities as a means of achieving credit
exposure similar to bonds of the underlying issuer(s) more efficiently.
See the Investments Note in our Consolidated Financial Statements in Part II,
Item 8. of this Annual Report on Form 10-K for more information on investments.
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Portfolio Composition
The following table presents the investment portfolio as of the dates indicated:
December 31, 2022 December 31, 2021
Carrying % of Carrying % of
($ in millions) Value Total Value Total
Fixed maturities, available-for-sale, net of
allowance $ 19,772 70.4 % $ 24,360 75.6 %
Fixed maturities, at fair value option 1,255 4.5 % 1,253 3.9 %
Equity securities, at fair value 133 0.5 % 141 0.4 %
Short-term investments(1) 248 0.9 % - - %
Mortgage loans on real estate, net of allowance 4,213 15.0 % 4,222 13.1 %
Policy loans 159 0.6 % 171 0.5 %
Limited partnerships/corporations 1,043 3.7 % 980 3.0 %
Derivatives 322 1.1 % 149 0.5 %
Securities pledged 792 2.8 % 799 2.5 %
Other investments 132 0.5 % 143 0.5 %
Total investments $ 28,069 100.0 % $ 32,218 100.0 %
(1) Short-term investments include investments with remaining maturities of one
year or less, but greater than 3 months, at the time of purchase.
Fixed Maturities
The following tables present total fixed maturities, including securities
pledged, by market sector as of the dates indicated:
December 31, 2022
Amortized % of Fair % of
($ in millions) Cost Total Value Total
Fixed maturities:
U.S. Treasuries $ 404 1.7 % $ 377 1.7 %
U.S. Government agencies and authorities 33 0.1 % 30 0.1 %
State, municipalities, and political
subdivisions 691 2.8 % 600 2.7 %
U.S. corporate public securities 6,938 28.6 % 5,938 27.2 %
U.S. corporate private securities 3,885 15.9 % 3,568 16.4 %
Foreign corporate public securities and
foreign governments(1) 2,380 9.8 % 2,066 9.5 %
Foreign corporate private securities(1) 2,617 10.7 % 2,438 11.2 %
Residential mortgage-backed securities 3,023 12.4 % 2,893 13.3 %
Commercial mortgage-backed securities 2,978 12.2 % 2,599 11.9 %
Other asset-backed securities 1,418 5.8 % 1,310 6.0 %
Total fixed maturities, including
securities pledged $ 24,367 100.0 % $ 21,819 100.0 %
(1) Primarily
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December 31, 2021
Amortized % of Fair % of
($ in millions) Cost Total Value Total
Fixed maturities:
U.S. Treasuries $ 554 2.3 % $ 691 2.6 %
U.S. Government agencies and authorities 20 0.1 % 20 0.1 %
State, municipalities, and political
subdivisions 716 2.9 % 803 3.0 %
U.S. corporate public securities 7,314 30.1 % 8,269 31.4 %
U.S. corporate private securities 3,620 14.9 % 3,939 14.9 %
Foreign corporate public securities and
foreign governments(1) 2,352 9.7 % 2,591 9.8 %
Foreign corporate private securities(1) 2,563 10.5 % 2,703 10.2 %
Residential mortgage-backed securities 3,081 12.7 % 3,164 12.0 %
Commercial mortgage-backed securities 2,766 11.4 % 2,881 10.9 %
Other asset-backed securities 1,341 5.4 % 1,351 5.1 %
Total fixed maturities, including
securities pledged $ 24,327 100.0 % $ 26,412 100.0 %
(1) Primarily
As of
including securities pledged, is between 6.5 and 7.0 years.
Fixed Maturities Credit Quality - Ratings
The Securities Valuation Office ("SVO") of the NAIC evaluates the fixed maturity
security investments of insurers for regulatory reporting and capital assessment
purposes and assigns securities to one of six credit quality categories called
"NAIC designations." An internally developed rating is used as permitted by the
NAIC if no rating is available. These designations are generally similar to the
credit quality designations of the NAIC acceptable rating organizations ("ARO")
for marketable fixed maturity securities, called rating agency designations
except for certain structured securities as described below. NAIC designations
of "1," highest quality and "2," high quality, include fixed maturity securities
generally considered investment grade by such rating organizations. NAIC
designations 3 through 6 include fixed maturity securities generally considered
below investment grade by such rating organizations.
The NAIC designations for structured securities, including subprime and Alt-A
RMBS, are based upon a comparison of the bond's amortized cost to the NAIC's
loss expectation for each security. Securities where modeling results in no
expected loss in each scenario are considered to have the highest designation of
NAIC 1. A large percentage of our RMBS securities carry the NAIC 1 designation
while the ARO rating indicates below investment grade. This is primarily due to
the credit and intent impairments recorded by us that reduced the amortized cost
on these securities to a level resulting in no expected loss in all scenarios,
which corresponds to the NAIC 1 designation. The methodology reduces regulatory
reliance on rating agencies and allows for greater regulatory input into the
assumptions used to estimate expected losses from such structured securities. In
the tables below, we present the rating of structured securities based on
ratings from the NAIC methodologies described above (which may not correspond to
rating agency designations). NAIC designations (e.g., NAIC 1-6) are based on the
NAIC methodologies.
As a result of time lags between the funding of investments, the finalization of
legal documents and the completion of the SVO filing process, the fixed maturity
portfolio generally includes securities that have not yet been rated by the SVO
as of each balance sheet date, such as private placements. Pending receipt of
SVO ratings, the categorization of these securities by NAIC designation is based
on the expected ratings indicated by internal analysis.
Information about certain of our fixed maturity securities holdings by NAIC
designation is set forth in the following tables. Corresponding rating agency
designation does not directly translate into NAIC designation, but represents
our best estimate of comparable ratings from rating agencies, including Moody's
Investors Service, Inc. ("Moody's"), Standard & Poor's Ratings Services ("S&P")
and Fitch Ratings, Inc. ("Fitch"). If no rating is available from a rating
agency, then an internally developed rating is used. As of December 31, 2022 and
2021 the weighted average NAIC quality rating of our fixed maturities portfolio
was 1.6.
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The fixed maturities in our portfolio are generally rated by external rating agencies and, if not externally rated, are rated by us on a basis similar to that used by the rating agencies. As ofDecember 31, 2022 and 2021, the weighted average quality rating of our fixed maturities portfolio was A. Ratings are derived from three ARO ratings and are applied as follows based on the number of agency ratings received: •when three ratings are received then the middle rating is applied; •when two ratings are received then the lower rating is applied; •when a single rating is received, the ARO rating is applied; and •when ratings are unavailable then an internal rating is applied.
The following tables present credit quality of fixed maturities, including
securities pledged, using NAIC designations as of the dates indicated:
($ in millions) December 31, 2022
Total Fair
NAIC Quality Designation 1 2 3 4 5 6 Value
U.S. Treasuries $ 377 $ - $ - $ - $ - $ - $ 377
U.S. Government agencies and
authorities 30 - - - - - 30
State, municipalities and
political subdivisions 567 33 - - - - 600
U.S. corporate public securities 1,799 3,886 218 26 - 9 5,938
U.S. corporate private
securities 1,293 2,027 180 66 2 - 3,568
Foreign corporate public
securities and foreign
governments(1) 680 1,266 75 40 - 5 2,066
Foreign corporate private
securities(1) 282 2,044 82 21 9 - 2,438
Residential mortgage-backed
securities 2,640 238 2 - 5 8 2,893
Commercial mortgage-backed
securities 2,160 366 59 7 5 2 2,599
Other asset-backed securities 1,081 218 2 5 1 3 1,310
Total fixed maturities $ 10,909 $ 10,078 $ 618 $ 165 $ 22 $ 27 $ 21,819
% of Fair Value 50.0 % 46.2 % 2.8 % 0.8 % 0.1 % 0.1 % 100.0 %
(1) Primarily
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($ in millions) December 31, 2021
Total Fair
NAIC Quality Designation 1 2 3 4 5 6 Value
U.S. Treasuries $ 691 $ - $ - $ - $ - $ - $ 691
U.S. Government agencies and
authorities 20 - - - - - 20
State, municipalities and
political subdivisions 737 65 1 - - - 803
U.S. corporate public securities 2,697 5,285 239 41 7 - 8,269
U.S. corporate private
securities 1,315 2,300 243 79 2 - 3,939
Foreign corporate public
securities and foreign
governments(1) 789 1,689 106 7 - - 2,591
Foreign corporate private
securities(1) 223 2,202 146 67 - 65 2,703
Residential mortgage-backed
securities 3,116 22 - 1 10 15 3,164
Commercial mortgage-backed
securities 2,488 332 54 7 - - 2,881
Other asset-backed securities 1,112 221 4 6 8 - 1,351
Total fixed maturities $ 13,188 $ 12,116 $ 793 $ 208 $ 27 $ 80 $ 26,412
% of Fair Value 49.9 % 45.9 % 3.0 % 0.8 % 0.1 % 0.3 % 100.0 %
(1) Primarily
The following tables present credit quality of fixed maturities, including
securities pledged, using ARO ratings as of the dates indicated:
($ in millions) December 31, 2022
Total Fair
ARO Quality Ratings AAA AA A BBB BB and Below Value
U.S. Treasuries $ 377 $ - $ - $ - $ - $ 377
U.S. Government agencies and
authorities 28 2 - - - 30
State, municipalities and
political subdivisions 38 370 159 33 - 600
U.S. corporate public
securities 21 283 1,679 3,686 269 5,938
U.S. corporate private
securities 27 146 1,065 2,069 261 3,568
Foreign corporate public
securities and foreign
governments(1) 8 116 591 1,218 133 2,066
Foreign corporate private
securities(1) - 26 239 2,047 126 2,438
Residential mortgage-backed
securities 2,210 145 79 185 274 2,893
Commercial mortgage-backed
securities 895 288 608 687 121 2,599
Other asset-backed securities 88 290 694 221 17 1,310
Total fixed maturities $ 3,692 $ 1,666 $ 5,114 $ 10,146 $ 1,201 $ 21,819
% of Fair Value 16.9 % 7.6 % 23.5 % 46.5 % 5.5 % 100.0 %
(1) Primarily
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($ in millions) December 31, 2021
Total Fair
ARO Quality Ratings AAA AA A BBB BB and Below Value
U.S. Treasuries $ 691 $ - $ - $ - $ - $ 691
U.S. Government agencies and
authorities 18 - 2 - - 20
State, municipalities and
political subdivisions 47 465 225 65 1 803
U.S. corporate public
securities 46 483 2,429 5,047 264 8,269
U.S. corporate private
securities 32 68 1,147 2,447 245 3,939
Foreign corporate public
securities and foreign
governments(1) 8 176 716 1,562 129 2,591
Foreign corporate private
securities(1) - 29 198 2,266 210 2,703
Residential mortgage-backed
securities 2,089 214 159 222 480 3,164
Commercial mortgage-backed
securities 1,167 289 580 753 92 2,881
Other asset-backed
securities 150 303 647 217 34 1,351
Total fixed maturities $ 4,248 $ 2,027 $ 6,103 $ 12,579 $ 1,455 $ 26,412
% of Fair Value 16.1 % 7.7 % 23.1 % 47.6 % 5.5 % 100.0 %
(1) Primarily
Fixed maturities rated BB and below may have speculative characteristics and changes in economic conditions or other circumstances that are more likely to lead to a weakened capacity of the issuer to make principal and interest payments than is the case with higher rated fixed maturities.
Unrealized Capital Losses
Gross unrealized losses on fixed maturities, including securities pledged, increased$2.5 billion from$111 million to$2.6 billion for the year endedDecember 31, 2022 . The increase in unrealized losses was driven primarily by sharply higher interest rates across the yield curve and moderately wider credit spreads. Gross unrealized losses on fixed maturities, including securities pledged, increased$4 million from$107 million to$111 million for the year endedDecember 31, 2021 . As ofDecember 31, 2022 , we held three fixed maturity securities with unrealized capital loss in excess of$10 million . The unrealized capital losses on these fixed maturity securities equaled$33.2 million , or 1.3% of the total unrealized losses. As ofDecember 31, 2021 , we held no fixed maturity securities with unrealized capital loss in excess of$10 million . As ofDecember 31, 2022 , we had$1.4 billion of energy sector fixed maturity securities, constituting 6.0% of the total fixed maturities portfolio, with gross unrealized capital losses of$131 million , including no energy sector fixed maturity securities with unrealized capital loss in excess of$10 million . As ofDecember 31, 2022 , our fixed maturity exposure to the energy sector was comprised of 88.0% investment grade securities. As ofDecember 31, 2021 , we held$1.6 billion of energy sector fixed maturity securities, constituting 6.0% of the total fixed maturities portfolio, with gross unrealized capital losses of$14 million , including no energy sector fixed maturity security with unrealized capital loss in excess of$10 million . As ofDecember 31, 2021 , our fixed maturity exposure to the energy sector was comprised of 87.0% investment grade securities. See the Investments Note to our Consolidated Financial Statements in Part II, Item 8. of this Annual Report on Form 10-K for further information on unrealized capital losses. 45
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The following table presents our residential mortgage-backed securities as ofDecember 31, 2022 and 2021: December 31, 2022 Gross Unrealized Gross Unrealized ($ in millions) Amortized Cost Capital Gains Capital Losses Embedded Derivatives Fair Value Prime Agency$ 1,493 $ 12 $ 33 $ -$ 1,472 Prime Non-Agency 1,496 7 118 - 1,385 Alt-A 24 3 1 1 27 Sub-Prime(1) 19 1 1 - 19 Total RMBS$ 3,032 $ 23 $ 153 $ 1$ 2,903
(1) Includes subprime other asset backed securities.
December 31, 2021
Gross Unrealized Gross Unrealized
($ in millions) Amortized Cost Capital Gains Capital Losses Embedded Derivatives Fair Value
Prime Agency $ 1,501 $ 60 $ 5 $ 3 $ 1,559
Prime Non-Agency 1,543 31 14 1 1,561
Alt-A 27 5 1 3 34
Sub-Prime(1) 25 3 - - 28
Total RMBS $ 3,096 $ 99 $ 20 $ 7 $ 3,182
(1) Includes subprime other asset backed securities.
The following table presents our commercial mortgage-backed securities as ofDecember 31, 2022 and 2021: December 31, 2022AAA AA A BBB BB and Below Total ($ in millions) Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value 2016 and prior $ 590$ 518 $ 124$ 115 $ 160$ 148 $ 120$ 105 $ 51$ 46 $ 1,045 $ 932 2017 52 41 15 14 46 39 40 33 32 28 185 155 2018 73 64 19 16 71 64 29 24 17 14 209 182 2019 126 111 33 31 104 94 202 164 6 4 471 404 2020 50 46 21 18 46 37 107 85 - - 224 186 2021 123 98 67 60 138 121 231 200 3 3 562 482 2022 20 17 36 34 114 105 86 76 26 26 282 258 Total CMBS$ 1,034 $ 895 $ 315$ 288 $ 679$ 608 $ 815$ 687 $ 135$ 121 $ 2,978 $ 2,599 46
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December 31, 2021
AAA AA A BBB BB and Below Total
($ in millions) Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value
2016 and prior $ 608
123$ 128 $ 151$ 156 $ 126$ 127 $ 64 $ 62 $ 1,072 $ 1,147 2017 53 58 18 18 46 47 35 36 22 23 174 182 2018 72 80 19 19 74 75 47 48 2 2 214 224 2019 146 163 31 31 112 114 198 199 6 5 493 512 2020 64 66 22 22 45 46 118 119 - - 249 253 2021 126 126 71 71 142 142 225 224 - - 564 563 Total CMBS$ 1,069 $ 1,167 $ 284$ 289 $ 570$ 580 $ 749$ 753 $ 94 $ 92 $ 2,766 $ 2,881 As ofDecember 31, 2022 , 82.9% and 14.2% of CMBS investments were designated as NAIC-1 and NAIC-2, respectively. As ofDecember 31, 2021 , 86.4% and 11.5% of CMBS investments were designated as NAIC-1 and NAIC-2, respectively.
Other Asset-backed Securities
The following table presents our other asset-backed securities as ofDecember 31, 2022 and 2021: December 31, 2022AAA AA A BBB BB and Below Total ($ in millions) Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value Collateralized Obligation $ 50$ 48 $ 247$ 236 $ 658$ 616 $ 72$ 66 $ 15 $ 10 $ 1,042 $ 976 Auto-Loans - - 6 6 - - - - - - 6 6 Student Loans 10 9 53 48 - - - - - - 63 57 Credit Card loans - - - - 2 1 - - - - 2 1 Other Loans 37 30 1 1 86 76 172 153 - - 296 260 Total Other ABS(1) $ 97$ 87 $ 307$ 291 $ 746$ 693 $ 244 $
219
(1) Excludes subprime other asset backed securities
December 31, 2021
AAA AA A BBB BB and Below Total
($ in millions) Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value
Collateralized Obligation $ 100 $ 101 $ 233 $ 233 $ 568 $ 568 $ 71 $ 70 $ 19 $ 17 $ 991 $ 989
Auto-Loans - - 1 1 5 6 - - - - 6 7
Student Loans 12 12 66 68 6 6 2 2 - - 86 88
Credit Card loans - - - - 2 2 - - - - 2 2
Other Loans 35 37 1 1 63 64 141 145 - - 240 247
Total Other ABS(1) $ 147 $ 150 $ 301 $ 303 $ 644 $ 646 $ 214 $ 217 $ 19 $ 17 $ 1,325 $ 1,333
(1) Excludes subprime other asset backed securities
As of
designated as NAIC-1 and NAIC-2, respectively. As of
and 16.4% of Other ABS investments were designated as NAIC-1 and NAIC-2,
respectively.
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Mortgage Loans on Real Estate
As ofDecember 31, 2022 and 2021, our mortgage loans on real estate portfolio had a weighted average DSC of 1.8 and 2.0, times, respectively, and a weighted average LTV ratio of 46.6% and 46.6%, respectively. See the Investments Note and Business, Basis of Presentation and Significant Accounting Policies Note in our Consolidated Financial Statements in Part II, Item 8. of this Annual Report on Form 10-K for further information on mortgage loans on real estate.
Impairments
We evaluate available-for-sale fixed maturities 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 Consolidated Financial Statements in Part II, Item 8. of this Annual Report on Form 10-K for the policy used to evaluate whether the investments are impaired. See the Investments Note in our Consolidated Financial Statements in Part II, Item 8. of this Annual Report on Form 10-K for further information on impairment.
European Exposures
We quantify and allocate our exposure to the region 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. While economic conditions inEurope have broadly improved, geopolitical tensions emanating from theRussia -Ukraine conflict remain a notable tail risk. Despite signs of economic improvement in the region, we continue to closely monitor our exposure to the region. As ofDecember 31, 2022 , the Company's total European exposure had an amortized cost and fair value of$2.4 billion and$2.1 billion , respectively. Some of the major country level exposures were in theUnited Kingdom of$1.0 billion , inThe Netherlands of$207 million , inBelgium of$41 million , inFrance of$172 million , inGermany of$169 million , inSwitzerland of$149 million , and inIreland of$64 million . Our direct exposure inEastern Europe is comparatively small, with only$4 million of exposure inRussia and none inUkraine orBelarus . 48
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Liquidity and Capital Resources
Liquidity refers to our ability to access sufficient sources of cash to meet the requirements of our operating, investing and financing activities. Capital refers to our long-term financial resources available to support business operations and 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 other sources of liquidity and capital described herein. The following discussion presents a review of our sources and uses of liquidity and capital. This discussion should be read in its entirety and in conjunction with the Off-Balance Sheet Arrangements and Aggregate Contractual Obligations table included further below. Liquidity Management Our principal available sources of liquidity are product charges, investment income, proceeds from the maturity and sale of investments, proceeds from debt issuance and borrowing facilities, repurchase agreements, contract deposits, securities lending and capital contributions. Primary uses of these funds are payments of commissions and operating expenses, interest credits, investment purchases and contract maturities, withdrawals and surrenders and payment of dividends. Our liquidity position is managed by maintaining adequate levels of liquid assets, such as cash, cash equivalents and short-term investments. As part of the liquidity management process, different scenarios are modeled to determine whether existing assets are adequate to meet projected cash flows. Key variables in the modeling process include interest rates, equity market movements, quantity and type of interest and equity market hedges, anticipated contract owner behavior, market value of the general account assets, variable separate account performance and implications of rating agency actions. The fixed account liabilities are supported by a general account portfolio, principally composed of fixed rate investments with matching duration characteristics that can generate predictable, steady rates of return. The portfolio management strategy for the fixed account considers the assets available-for-sale. This strategy enables us to respond to changes in market interest rates, prepayment risk, relative values of asset sectors and individual securities and loans, credit quality outlook and other relevant factors. The objective of portfolio management is to maximize returns, taking into account interest rate and credit risk, as well as other risks. Our asset/liability management discipline includes strategies to minimize exposure to loss as interest rates and economic and market conditions change. In executing this strategy, we use derivative instruments to manage these risks. Our derivative counterparties are of high credit quality.
Liquidity and Capital Resources
Additional sources of liquidity include borrowing facilities to meet short-term cash requirements that arise in the ordinary course of business. We maintain the following agreements: •A reciprocal loan agreement with Voya Financial, Inc., an affiliate, whereby either party can borrow from the other up to 3.0% of VRIAC's statutory admitted assets as of the priorDecember 31 . As ofDecember 31, 2022 , we had no outstanding receivable and VIPS had a$31 million outstanding payable. As ofDecember 31, 2021 , we had an outstanding receivable of$130 million and VIPS had a$19 million outstanding payable from/to Voya Financial, Inc. under the reciprocal loan agreement.We and Voya Financial, Inc. continue to maintain the reciprocal loan agreement and future borrowings by either party will be subject to the reciprocal loan terms summarized above. EffectiveJanuary 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 44.2% of our assets in marketable securities. These assets include cash,U.S. Treasuries, Agencies, Corporate Bonds, ABS, CMBS and collateralized mortgage obligations ("CMO") and Equity securities. In the event of a temporary liquidity need, cash may be raised by entering into repurchase agreements, dollar rolls and/or security lending agreements by temporarily lending securities and receiving cash collateral. Under our Liquidity Plan, up to 12.0% of our general account statutory admitted assets may be allocated to repurchase, securities lending and dollar roll programs. At the time a temporary cash need arises, the actual percentage of admitted assets available for repurchase transactions will depend upon outstanding allocations to the three programs. As ofDecember 31, 2022 , VRIAC had securities lending collateral assets of$615 million , which represents approximately 0.6% of its general account statutory admitted assets. As ofDecember 31, 2021 , VRIAC had securities lending collateral assets of$676 million , which represents approximately 0.5% of its general account statutory admitted assets. 49
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Management believes that our sources of liquidity are adequate to meet our
short-term cash obligations.
Capital Contributions and Dividends
See the Capital Contributions, Dividends and Statutory Information Note in our Consolidated Financial Statements in Part II, Item 8. of this Annual report on 10-K for information on capital contributions and dividends.
Collateral
See the Derivatives Note in our Consolidated Financial Statements in Part II,
Item 8. of this Annual report on 10-K for information on collateral for
derivatives.
Ratings
Our access to funding and our related cost of borrowing, collateral requirements for derivatives instruments 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. Credit ratings are also important to our ability to raise capital through the issuance of debt and for the cost of such financing. A downgrade in our credit ratings or the credit or financial strength ratings of our Parent or rated affiliates could have a material adverse effect on our results of operations and financial condition. See A downgrade or a potential downgrade in our financial strength or credit ratings could result in a loss of business and adversely affect our results of operations and financial condition in Risk Factors in Part I, Item 1A. of this Annual Report on Form 10-K. 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 Annual Report
on Form 10-K are summarized in the following table.
Company Fitch
Moody's S&P
Voya Retirement Insurance and Annuity Company Financial Strength Rating A A2 A+ Rating Agency Financial Strength Rating Scale Fitch(1) "AAA" to "C" Moody's(2) "Aaa" to "C" S&P(3) "AAA" to "R" (1) Fitch's financial strength ratings for insurance companies range from "AAA (exceptionally strong)" to "C (distressed)." Long-term credit ratings range from "AAA (highest credit quality)," which denotes exceptionally strong capacity for timely payment of financial commitments, to "D (default)." (2) Moody's financial strength ratings for insurance companies range from "Aaa (exceptional)" to "C (lowest)." Numeric modifiers are used to refer to the ranking within the group with 1 being the highest and 3 being the lowest. These modifiers are used to indicate relative strength within a category. Long-term credit ratings range from "Aaa (highest)" to "C (default)." (3) S&P's financial strength ratings for insurance companies range from "AAA (extremely strong)" to "D (default)." Long-term credit ratings range from "AAA (extremely strong)" to "D (default)." 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. InDecember 2022 , Moody's affirmed its outlook for theU.S. life insurance sector as stable. Also, inDecember 2022 , Fitch affirmed its outlook for theU.S. life insurance sector as neutral. 50
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Other Minimum Guarantees
Other variable annuity contracts contain minimum interest rate guarantees and allow the contract holder to select either the market value of the account or the book value of the account at termination. The book value of the account is equal to deposits plus interest, less any withdrawals. Under the terms of the contract, the book value settlement is paid out over time. These guarantees are offered in our stabilizer and managed custody guarantee products.
Reinsurance
We utilize indemnity reinsurance agreements to reduce our exposure to large
losses from GMDBs in our annuity insurance business. Reinsurance permits
recovery of a portion of losses from reinsurers, although it does not discharge
our primary liability as direct insurer of the risks. We evaluate the financial
strength of potential reinsurers and continually monitor the financial strength
and credit ratings of our reinsurers. Only those reinsurance recoverable
balances deemed probable of recovery are reflected as assets on our Consolidated
Balance Sheets and are stated net of allowances for uncollectible reinsurance.
While we have a significant concentration of reinsurance with Lincoln National
Corporation ("Lincoln") associated with the disposition of our individual life
insurance business to a subsidiary of Lincoln, a trust was established by the
Lincoln subsidiary effective March 1, 2007 , to secure the Lincoln subsidiary's
obligations to us under the reinsurance agreement.
In connection with the Individual Life Transaction on January 4, 2021 , VRIAC
entered into a reinsurance agreement with SLD. Pursuant to this agreement, VRIAC
reinsured to SLD a 100% quota share of its annuities businesses. For further
information, see Overview in Management's Narrative Analysis of the Results of
Operations and Financial Condition in Part II, Item 7. and the Reinsurance Note
in our Consolidated Financial Statements in Part II, Item 8. of this 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. Derivative contracts are
reported as Derivatives assets or liabilities on the Consolidated Balance Sheets
at fair value. Changes in the fair value of derivatives are recorded in Net
gains (losses) in the Consolidated Statements of Operations.
We also have investments in certain fixed maturities and have issued certain
annuity products that contain embedded derivatives for which 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 Consolidated Balance
Sheets and changes in fair value of the embedded derivatives are recorded in Net
gains (losses) in the Consolidated Statements of Operations. Embedded
derivatives within certain annuity products are included in Future policy
benefits and contract owner account balances on the Consolidated Balance Sheets
and changes in the fair value of the embedded derivatives are recorded in Net
gains (losses) in the Consolidated Statements of Operations.
In addition, we have entered into a reinsurance agreement, accounted for under
the deposit method, that contains an embedded derivative, the fair value of
which is based on the change in the fair value of the underlying assets held in
trust. The embedded derivatives within the reinsurance agreements are reported
in Other liabilities on the Consolidated Balance Sheets, and changes in the fair
value of the embedded derivative are recorded in Interest credited and other
benefit to contract owners/policyholders in the Consolidated Statements of
Operations.
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Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
As ofDecember 31, 2022 , the following table presents our on- and off- balance sheet contractual obligations due in various periods. The payments reflected in this table are based on our estimates and assumptions about these obligations. Because these estimates and assumptions are necessarily subjective, the actual cash outflows in future periods will vary, possibly materially, from those presented in the table. ($ in millions) Payments Due by Period Less than 1 More than Contractual Obligations Total Year 1-3 Years 3-5 Years 5 Years Purchase obligations(1)$ 671 $ 651 $ 20 $ - $ - Reserves for insurance obligations(2)(3) 37,696 2,547 4,714 5,027 25,408 Retirement and other plans(4) 51 6 10 11 24 Long-term debt obligation(5) 3 1 1 1 - Securities lending and collateral held(6) 1,024 1,024 - - - Total$ 39,445 $ 4,229 $ 4,745 $ 5,039 $ 25,432 (1) Purchase obligations consist primarily of outstanding commitments under limited partnerships that may occur any time within the terms of the partnership and private loans. The exact timing, however, of funding these commitments related to partnerships and private loans cannot be estimated. Therefore, the total amount of the commitments related to partnerships and private loans is included in the category "Less than 1 Year." (2) Reserves for insurance obligations consist of amounts required to meet our future obligations for future policy benefits and contract owner account balances. Amounts presented in the table represent estimated cash payments under such contracts, including significant assumptions related to the receipt of future premiums, mortality, morbidity, lapse, renewal, retirement, disability and annuitization comparable with actual experience. These assumptions also include market growth and interest crediting consistent with assumptions used in amortizing DAC. All estimated cash payments are undiscounted for the time value of money. (3) Contractual obligations related to certain closed blocks that were divested through reinsurance to third parties with reserves in the amount of$1.0 billion , have been excluded from the table. Although we are not relieved of our legal liability to the contract holder for these closed blocks, third-party collateral of$1.1 billion has been provided for the payment of the related insurance obligations. The sufficiency of collateral held for any individual block may vary. (4) Includes estimated benefit payments under our non-qualified pension plans, and estimated benefit payments under our other postretirement benefit plans. (5) The estimated payments due by period from long-term debt reflects the contractual maturities of principal, as well as estimated future interest payments. See the Financing Agreements Note in our Consolidated Financial Statements in Part II, Item 8. of this Annual Report on Form 10-K. (6) Securities loaned and collateral held represent the liability to return collateral received from counterparties under securities lending agreements, OTC derivative and cleared derivative contracts. Securities lending agreements include provisions which permit us to call back securities with minimal notice and accordingly, the payable is classified as having a term of less than 1 year. Additionally, Securities lending agreements include non-cash collateral of$103 million . Securities Pledged See the Business, Basis of Presentation and Significant Accounting Policies Note and the Investments Note in our Consolidated Financial Statements in Part II, Item 8. of this Annual report on Form 10-K for further information on our securities lending program.
FHLB
OnJanuary 18, 2018 , we became a member of theFederal Home Loan Bank of Boston ("FHLB ofBoston "). We are required to pledge collateral to back funding agreements issued to the FHLB. We have the ability to obtain funding from the FHLB based on a percentage of the value of our assets and subject to the availability of eligible collateral. Collateral is pledged based on the outstanding balances of FHLB funding agreements. The limit for the program is up to an amount that corresponds to the lending value of assets that can be pledged to the FHLB ofBoston , which is limited to 5% of the admitted assets of VRIAC on a statutory basis. The lending value of assets varies based on the type, rating and maturity of the collateral posted to the FHLB. Generally, mortgage securities, commercial real estate andU.S. treasury securities are pledged to the FHLBs. Market value fluctuations resulting from changes in interest rates, spreads and other risk factors for each type of assets are monitored and additional collateral is either pledged or released as needed.
As of
agreements, which are included in Future policy benefits and contract owner
account balances on the Consolidated Balance Sheets. As of
had assets with a market value of approximately
collateralized the FHLB funding agreements. As of
available collateral lending value was approximately
52
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Table of Contents
The Connecticut Insurance Department (the "Department") recognizes only statutory accounting practices prescribed or permitted by theState of Connecticut for determining and reporting the financial condition and results of operations of an insurance company and for determining its solvency under the Connecticut Insurance Law. The NAIC Accounting Practices and Procedures Manual has been adopted as a component of prescribed or permitted practices by theState of Connecticut . We are subject to minimum risk-based capital ("RBC") requirements established by the Department. The formulas for determining the amount of RBC specify various weighting factors that are applied to financial balances or various levels of activity based on the perceived degree of risk. Regulatory compliance is determined by a ratio of total adjusted capital ("TAC"), as defined by the NAIC, to RBC requirements, as defined by the NAIC.
For information regarding our statutory capital and surplus, see the Capital
Contributions, Dividends and Statutory Information Note in our Consolidated
Financial Statements in Part II, Item 8. in this Annual Report on Form 10-K.
Contingencies
For information regarding contingencies related to legal proceedings, regulatory matters and other contingencies involving us, see the Commitments and Contingencies Note in our Consolidated Financial Statements in Part II, Item 8. in this Annual Report on Form 10-K.
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