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VOYA RETIREMENT INSURANCE & ANNUITY CO – 10-Q – Management's Narrative Analysis of the Results of Operations and Financial Condition (Dollar amounts in millions, unless otherwise stated)
For the purposes of the discussion in this Quarterly Report on Form 10-Q, the term "VRIAC" refers 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. , which is a direct, wholly owned subsidiary of Voya Financial, Inc. The following discussion and analysis presents a review of our results of operations for the three and nine months endedSeptember 30, 2021 and 2020 and financial condition as ofSeptember 30, 2021 andDecember 31, 2020 . This item should be read in its entirety and in conjunction with the Condensed Consolidated Financial Statements and related notes contained in Part I., Item 1. of this Quarterly Report on Form 10-Q, as well as "Management's Narrative Analysis of the Results of Operations and Financial Condition" section contained in our Annual Report on Form 10-K for the year ended December 31, 2020 ("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." 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 . EffectiveDecember 31, 2019 , VRIAC's sole shareholder,Voya Holdings, Inc. , transferred ownership ofVoya Institutional Plan Services, LLC ("VIPS") andVoya Retirement Advisors, LLC ("VRA") to VRIAC for no cash consideration. VIPS and VRA provide retirement recordkeeping and investment advisory services, respectively, and the transfer was made to more closely align recordkeeping and related activities of VRIAC's retirement business. It also had the effect of reducing VRIAC's tax liability. In addition to these non-insurance subsidiaries, VRIAC also has the wholly-owned non-insurance subsidiary,Voya Financial Partners, LLC ("VFP"). OnJanuary 4, 2021 , VRIAC's ultimate parent, Voya Financial Inc. ("Voya Financial"), consummated a series of transactions pursuant to a Master Transaction Agreement (the "Resolution MTA") entered into onDecember 18, 2019 withResolution Life U.S. Holdings Inc. , aDelaware corporation ("Resolution Life US"), pursuant to which Resolution Life US acquired all of the shares of the capital stock of Security Life ofDenver Company ("SLD") andSecurity Life of Denver International Limited ("SLDI"), including the capital stock of several subsidiaries of SLD and SLDI. Concurrently with the sale, SLD entered into reinsurance agreements withReliaStar Life Insurance Company ("RLI"),ReliaStar Life Insurance Company of New York ("RLNY"), and VRIAC, each of which is a direct or indirect wholly owned subsidiary of Voya Financial. Pursuant to these agreements, RLI and VRIAC reinsured to SLD a 100% quota share, and RLNY will reinsure to SLD a 75% quota share, of their respective in-scope individual life insurance and annuities businesses. RLI, RLNY, and VRIAC remain subsidiaries 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 , we have$63 million of pre-tax deferred intangibles associated with the divested businesses. The deferred intangibles will consist of deferred cost of reinsurance ("COR") established as a result of the Individual Life transaction. The aggregate deferred intangibles will be 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. 55 -------------------------------------------------------------------------------- Table of Contents 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 Consolidated Balance Sheets. Also, effective as ofMarch 1, 2021 , the Company acquired$80 of SLD issued surplus notes and$73 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 600 field and phone-based financial professionals who support our business. During the third quarter of 2021 and 2020, we conducted our annual review of assumptions, market conditions and other projection model inputs. For further information, see the Critical Accounting Judgements and Estimates section of the Management's Discussion and Analysis of Financial Condition and Results of Operations in Part I, Item 2. of this Quarterly Report on Form 10-Q.
Impact of New Accounting Pronouncements
For information regarding the impact of new accounting pronouncements, see the Business, Basis of Presentation and Significant Accounting Policies Note in our Condensed Consolidated Financial Statements in Part I, Item 1. of this Quarterly Report on Form 10-Q.
Critical Accounting Judgments and Estimates
The preparation of financial statements in conformity with accounting principles generally accepted 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 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 Condensed 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; •Impairments; •Income taxes; and •Contingencies. In developing these accounting estimates, we make subjective and complex judgments that are inherently uncertain and subject to material changes as facts and circumstances develop. Although variability is inherent in these estimates, we believe the amounts provided are appropriate based on the facts available upon preparation of the Condensed Consolidated Financial Statements.
The above critical accounting estimates are described in the Business, Basis of
Presentation and Significant Accounting Policies Note in our Consolidated
Financial Statements in Part II, Item 8. of our Annual Report on Form 10-K .
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Assumptions and Periodic Review
Changes in assumptions can have a significant impact on DAC and 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 and VOBA, reserves
and the related results of operations. During the third quarter of 2021 and
2020, we conducted our annual review of assumptions, including projection model
inputs and made a number of changes to our assumptions which impacted the
results of our segments included in our Net income (loss) and discussed below.
For the third quarter of 2021, the impact of annual assumption changes on our
results of operations was
favorable DAC/VOBA unlocking for the current period was primarily driven by
changes in asset return assumptions.
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, has 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 DAC and VOBA and Interest credited and other benefits to contract owners/policyholders, respectively in the Consolidated Statements of Operations for the nine months endedSeptember 30, 2021 . During the third quarter of 2020, the impact of annual assumption changes on our results of operations was unfavorable unlocking of DAC and VOBA of$138 million . Unlocking in the third quarter of 2020 was primarily driven by changes in long term interest and equity rates.
Sensitivity
We perform sensitivity analyses to assess the impact that certain assumptions
have on DAC/VOBA and other intangibles, as well as certain reserves. The
following table presents the estimated instantaneous net impact to income from
continuing operations of various assumption changes on our DAC/VOBA and other
intangible balances and the impact on related reserves for future policy
benefits and reinsurance. The effects are not representative of the aggregate
impacts that could result if a combination of such changes to equity markets,
interest rates and other assumptions occurred.
As of September
($ in millions)
30, 2021
Decrease in long-term equity rate of return assumption by 100 basis points $
(37)
A change to the long-term interest rate assumption of -50 basis points
(23)
A change to the long-term interest rate assumption of +50 basis points
14 An assumed increase in future mortality by 1% -
Lower assumed equity rates of return, lower assumed interest rates and decreases
in equity market values generally decrease DAC and VOBA and increase future
policy benefits, thus decreasing income before income taxes. Higher assumed
interest rates generally increase DAC and VOBA and decrease future policy
benefits, thus increasing income before income taxes.
Income Taxes
See the Income Taxes Note to our Condensed Consolidated Financial Statements in
Part I, Item 1. of this Quarterly Report on Form 10-Q for more information on
income taxes.
Recent Developments
All statements in this section, other than statements of historical fact, are
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. For a discussion of factors that could cause
actual results, performance, or events to differ from those discussed in any
forward-looking statement, including in a material manner, see "Note Concerning
Forward-Looking Statements" in this Quarterly Report on Form 10-Q.
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-------------------------------------------------------------------------------- Table of Contents COVID-19 and its Effect on the Global Economy COVID-19, the disease caused by the novel coronavirus, has had a significant adverse effect on the global economy since March of 2020. Even though the pace of vaccinations are increasing in many countries, includingthe United States , the disease continues to spread throughout the world. The persistence of new infections, including the introduction of new variants, has slowed the re-opening of theU.S. economy and, even in regions where restrictions have largely been lifted, economic activity has been slow to recover. Longer-term, the economic outlook is uncertain, but may depend in significant part on progress with respect to effective therapies to treat COVID-19 or the approval of additional vaccines and the pace at which they are administered globally.
Effect on VRIAC - Financial Condition, Capital and Liquidity
Because both public health and economic circumstances are changing so rapidly at present, it is impossible to predict how COVID-19 will affect VRIAC's future financial condition. Absent a further significant and prolonged market shock, however, we do not anticipate a material effect on our balance sheet or liquidity. Our capital levels remain strong and significantly above our targets.
Effect on VRIAC - Results of Operations
Predicting with accuracy the consequences of COVID-19 on our results of
operations is impossible. To date, the most significant effects of adverse
economic conditions have been on our fee-based income, with net investment
income experiencing milder effects. Underwriting income, principally affected by
increases to mortality and morbidity due to the disease, has also been
negatively affected.
We initially experienced pressure on earnings driven by equity market volatility
as well as lower interest rates, with effects weighted more heavily towards our
full-service corporate markets business and less on recordkeeping business.
While equity market improvements over the last year have resulted in higher AUM
levels and positive favorable results in fee-based income, we estimate that
lower interest rates will continue to contribute to a lower spread-based income.
Longer-term effects will depend significantly on equity market performance and
prevailing interest rate levels, as well as unemployment levels. We believe that
expense reductions and other management actions would be available to offset a
portion of any impact.
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Results of Operations
Three Months Ended September Nine Months Ended
($ in millions) 30, September 30,
2021 2020 Change 2021 2020 Change
Revenues:
Net investment income $ 514 $ 505 $ 9 $ 1,485 $ 1,329 $ 156
Fee income 280 230 50 810 654 156
Premiums 10 13 (3) (2,431) 25 (2,456)
Broker-dealer commission revenue 1 - 1 2 1 1
Total net realized capital gains (losses) (88) (78) (10) 317 (199) 516
Other revenue 8 2 6 25 1 24
Total revenues 725 672 53 208 1,811 (1,603)
Benefits and expenses:
Interest credited and other benefits to
contract owners/policyholders 206 386 (180) (1,674) 808 (2,482)
Operating expenses 312 259 53 904 800 104
Broker-dealer commission expense 1 (1) 2 2 - 2
Net amortization of Deferred policy
acquisition costs and Value of business
acquired 5 160 (155) 83 203 (120)
Total benefits and expenses 524 804 (280) (685) 1,811 (2,496)
Income (loss) before income taxes 201 (132) 333 893 - 893
Income tax expense (benefit) 31 (38) 69 154 (33) 187
Net income (loss) $ 170 $ (94) $ 264 $ 739 $ 33 $ 706
Three Months Ended
30, 2020
Revenues
Fee income increased
to:
•an increase in separate account and institutional/mutual fund assets under
management driven by equity market performance.
Total net realized capital losses increased by
•unfavorable changes in the fair value of embedded derivatives on product
guarantees as a result of interest rate movements and the impact of
non-performance risk in the current period compared to the prior period.
The increase was partially offset by:
•favorable changes in fixed maturities, using fair value option due to interest
rate movements and spread changes.
Other revenue increased by
due to:
•TSA service fees with Resolution resulting from the Life Transaction.
Benefits and Expenses
Interest credited and other benefits to contract owners/policyholders decreased
by
•the ceding of the Pension Risk Transfer (PRT) and annuity business to
Resolution as part of the Life Transaction, and unlocking in the prior period
compared to the current period.
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The decrease was partially offset by:
•a favorable change in the interest on general account reserves.
Operating expenses increased by
primarily due to:
• an increase in growth-based expenses and higher bonuses due to stronger
performance in the current period.
Net amortization of DAC and VOBA decreased by
•unfavorable unlocking in the prior period compared to favorable unlocking in the current period due to annual assumption updates; and •the DAC/VOBA balance within the Annuities business being written down to zero in Q1 2021 as the block did not pass Loss Recognition Testing (LRT).
Income tax expense (benefit) changed by
million
•an increase in income before income taxes.
Nine Months Ended
2020
Revenues Net investment income increased by$156 million from$1,329 million to$1,485 million primarily due to: •higher alternative investment income in the current period primarily driven by the impact of equity market performance. The increase was partially offset by: •decline related to the sale of assets within the reinsurance portfolios to Resolution.
Fee income increased by
due to:
•an increase in separate account and institutional/mutual fund assets under
management driven by equity market performance.
Premiums decreased by
million
•the ceding of the Pension Risk Transfer (PRT) and annuity business to
Resolution as part of the Life Transaction.
Total net realized capital gains (losses) changed by
•favorable changes in fixed maturities, including securities pledged due to reinsurance agreements resulting from the Resolution transaction, normal portfolio activity, and intent impairments; •favorable changes in the fair value of embedded derivatives on product guarantees as a result of interest rate movements and the impact of non-performance risk in the current period compared to the prior period; •favorable changes in commercial mortgage loans driven by the sale of loans from reinsurance portfolios to Resolution upon the close of the transaction and improvement in the commercial real estate markets; and •favorable changes in other investments related to the sale of the Company's stake inVA Capital .
The increase was partially offset by:
•unfavorable changes in fixed maturities, using the fair value option due to interest rate movements and spread changes; and •unfavorable changes in derivatives - VIM (including embedded derivatives) due to interest rate changes.
Other revenue increased by
due to:
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•TSA service fees with Resolution resulting from the Life Transaction.
Benefits and Expense
Interest credited and other benefits to contract owners/policyholders decreased
by
•the ceding of the Pension Risk Transfer (PRT) and annuity business to
Resolution as part of the Life Transaction.
Operating expenses increased by
primarily due to:
• an increase in growth-based expenses and higher bonuses due to stronger performance in the current period. Net amortization of DAC and VOBA decreased by$120 million from$203 million to$83 million primarily due to: •favorable DAC/VOBA unlocking in the current period compared to unfavorable unlocking in the prior period due to annual assumption updates; and •DAC/VOBA balance within the Annuities business being written down to zero in Q1 2021 as the block did not pass LRT.
Income tax expense (benefit) changed by
million
•an increase in income before income taxes.
Financial Condition Investments
See Management's Narrative Analysis of the Results of Operations and Financial
Condition in Part II, Item. 7. of our Annual Report on Form 10-K for
information on our investment strategy.
See the Investments Note to our Condensed Consolidated Financial Statements in
Part I, Item 1. of this Quarterly Report on Form 10-Q for more information on
investments.
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Portfolio Composition
The following table presents the investment portfolio as of the dates indicated:
September 30, 2021 December 31, 2020
Carrying % of Carrying % of
($ in millions) Value Total Value Total
Fixed maturities, available-for-sale, excluding
securities pledged $ 24,713 75.6 % $ 28,043 77.9 %
Fixed maturities, at fair value option 1,388 4.2 % 1,730 4.8 %
Fixed maturities, trading, at fair value 4 - % - - %
Equity securities, at fair value 173 0.5 % 116 0.3 %
Short-term investments(1) - - % 17 - %
Mortgage loans on real estate 4,148 12.7 % 4,627 12.9 %
Policy loans 175 0.5 % 187 0.5 %
Limited partnerships/corporations 938 2.9 % 815 2.3 %
Derivatives 121 0.4 % 145 0.4 %
Securities pledged 902 2.8 % 220 0.7 %
Other investments 137 0.4 % 43 0.2 %
Total investments $ 32,699 100.0 % $ 35,943 100.0 %
(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:
September 30, 2021
Amortized % of Fair % of
($ in millions) Cost Total Value Total
Fixed maturities:
U.S. Treasuries $ 553 2.2 % $ 687 2.5 %
U.S. Government agencies and authorities 21 0.1 % 21 0.1 %
State, municipalities, and political
subdivisions 679 2.8 % 767 2.8 %
U.S. corporate public securities 7,557 30.6 % 8,572 31.8 %
U.S. corporate private securities 3,485 14.1 % 3,835 14.2 %
Foreign corporate public securities and
foreign governments(1) 2,396 9.7 % 2,661 9.9 %
Foreign corporate private securities(1) 2,569 10.4 % 2,774 10.3 %
Residential mortgage-backed securities 3,327 13.5 % 3,433 12.7 %
Commercial mortgage-backed securities 2,669 10.8 % 2,813 10.4 %
Other asset-backed securities 1,421 5.8 % 1,440 5.3 %
Total fixed maturities, including
securities pledged $ 24,677 100.0 % $ 27,003 100.0 %
(1) Primarily
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December 31, 2020
Amortized % of Fair % of
($ in millions) Cost Total Value Total
Fixed maturities:
U.S. Treasuries $ 535 2.0 % $ 721 2.4 %
U.S. Government agencies and authorities 18 0.1 % 19 0.1 %
State, municipalities, and political
subdivisions 698 2.6 % 814 2.7 %
U.S. corporate public securities 7,632 28.7 % 9,156 30.6 %
U.S. corporate private securities 3,870 14.6 % 4,379 14.6 %
Foreign corporate public securities and
foreign governments(1) 2,539 9.6 % 2,951 9.8 %
Foreign corporate private securities(1) 2,991 11.3 % 3,303 11.0 %
Residential mortgage-backed securities 4,071 15.3 % 4,237 14.1 %
Commercial mortgage-backed securities 2,712 10.2 % 2,893 9.6 %
Other asset-backed securities 1,500 5.6 % 1,520 5.1 %
Total fixed maturities, including
securities pledged $ 26,566 100.0 % $ 29,993 100.0 %
(1) Primarily
As of
portfolio, including securities pledged, is between 7.0 and 7.5 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 Part II, Item. 7. of our Annual Report on Form 10-K .
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The following tables present credit quality of fixed maturities, including
securities pledged, using NAIC designations as of the dates indicated:
($ in millions)
September 30, 2021 NAIC Quality Designation 1 2 3 4 5 6 Total Fair Value U.S. Treasuries$ 687 $ - $ - $ - $ - $ - $ 687U.S. Government agencies and authorities 21 - - - - - 21 State, municipalities and political subdivisions 700 65 2 - - - 767 U.S. corporate public securities 2,815 5,398 309 42 8 - 8,572U.S. corporate private securities 1,242 2,279 233 79 2 - 3,835 Foreign corporate public securities and foreign governments(1) 832 1,705 116 7 - 1 2,661 Foreign corporate private securities(1) 181 2,276 161 88 - 68 2,774 Residential mortgage-backed securities 3,126 239 40 - 10 18 3,433 Commercial mortgage-backed securities 2,457 293 54 9 - - 2,813 Other asset-backed securities 1,234 187 4 6 9 - 1,440 Total fixed maturities$ 13,295 $ 12,442 $ 919 $ 231 $ 29 $ 87 $ 27,003 % of Fair Value 49.2% 46.1% 3.4% 0.9% 0.1% 0.3% 100.0%
(1) Primarily
($ in millions) December 31, 2020 NAIC Quality Designation 1 2 3 4 5 6 Total Fair Value U.S. Treasuries$ 721 $ - $ - $ - $ - $ - $ 721U.S. Government agencies and authorities 19 - - - - - 19 State, municipalities and political subdivisions 750 63 1 - - - 814 U.S. corporate public securities 3,198 5,468 450 35 5 - 9,156U.S. corporate private securities 1,528 2,472 285 85 9 - 4,379 Foreign corporate public securities and foreign governments(1) 1,108 1,704 128 11 - - 2,951 Foreign corporate private securities(1) 276 2,763 94 170 - - 3,303 Residential mortgage-backed securities 3,947 188 68 - 13 21 4,237 Commercial mortgage-backed securities 2,648 203 38 4 - - 2,893 Other asset-backed securities 1,353 147 5 7 8 - 1,520 Total fixed maturities$ 15,548 $ 13,008 $ 1,069 $ 312 $ 35 $ 21 $ 29,993 % of Fair Value 51.8 % 43.4 % 3.6 % 1.0 % 0.1 % 0.1 % 100.0 % (1) PrimarilyU.S. dollar denominated. 64
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The following tables present credit quality of fixed maturities, including
securities pledged, using ARO ratings as of the dates
indicated:
($ in millions) September 30, 2021
Total Fair
ARO Quality Ratings AAA AA A BBB BB and Below Value
U.S. Treasuries $ 687 $ - $ - $ - $ - $ 687
U.S. Government agencies and
authorities 18 - 3 - - 21
State, municipalities and
political subdivisions 46 446 204 70 1 767
U.S. corporate public
securities 46 525 2,539 5,118 344 8,572
U.S. corporate private
securities 64 78 1,066 2,402 225 3,835
Foreign corporate public
securities and foreign
governments(1) 9 199 736 1,578 139 2,661
Foreign corporate private
securities(1) - 30 214 2,288 242 2,774
Residential mortgage-backed
securities 2,283 232 74 238 606 3,433
Commercial mortgage-backed
securities 1,167 300 555 701 90 2,813
Other asset-backed
securities 227 356 638 183 36 1,440
Total fixed maturities $ 4,547 $ 2,166 $ 6,029 $ 12,578 $ 1,683 $27,003
% of Fair Value 16.8 % 8.0 % 22.3 % 46.7 % 6.2 % 100.0 %
(1) Primarily
($ in millions) December 31, 2020
Total Fair
ARO Quality Ratings AAA AA A BBB BB and Below Value
U.S. Treasuries $ 721 $ - $ - $ - $ - $ 721
U.S. Government agencies and
authorities 19 - - - - 19
State, municipalities and
political subdivisions 56 489 201 67 1 814
U.S. corporate public
securities 80 469 3,044 5,118 445 9,156
U.S. corporate private
securities 65 105 1,384 2,478 347 4,379
Foreign corporate public
securities and foreign
governments(1) 8 283 914 1,586 160 2,951
Foreign corporate private
securities(1) - 30 276 2,760 237 3,303
Residential mortgage-backed
securities 3,006 266 115 215 635 4,237
Commercial mortgage-backed
securities 1,128 333 589 724 119 2,893
Other asset-backed
securities 297 361 680 146 36 1,520
Total fixed maturities $ 5,380 $ 2,336 $ 7,203 $ 13,094 $ 1,980 $ 29,993
% of Fair Value 17.9 % 7.8 % 24.0 % 43.7 % 6.6 % 100.0 %
(1) Primarily
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Fixed maturities rated BB and below may have speculative characteristics and
changes in economic conditions or other circumstances that are more likely to
lead to a weakened capacity of the issuer to make principal and interest
payments than is the case with higher rated fixed maturities.
Unrealized Capital Losses
Gross unrealized losses on fixed maturities, including securities pledged,
decreased
tightening credit spreads.
As ofSeptember 30, 2021 , we held no fixed maturity securities with unrealized capital loss in excess of$10 million . As ofDecember 31, 2020 , we held three fixed maturity securities with unrealized capital loss in excess of$10 million . The unrealized capital losses on these fixed maturity equaled$34 million or 31.5% of the total unrealized losses. As ofSeptember 30, 2021 , we had$1.6 billion of energy sector fixed maturity securities, constituting 5.9% 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 ofSeptember 30, 2021 , our fixed maturity exposure to the energy sector is comprised of 85.2% investment grade securities. As ofDecember 31, 2020 , we held$1.8 billion of energy sector fixed maturity securities, constituting 6.0% of the total fixed maturities portfolio, with gross unrealized capital losses of$22 million , including one energy sector fixed maturity security with unrealized capital loss in excess of$10 million . The unrealized capital loss on this fixed maturity security equaled$12 million . As ofDecember 31, 2020 , our fixed maturity exposure to the energy sector is comprised of 83.3% investment grade securities. See the Investments Note to our Condensed Consolidated Financial Statements in Part I, Item 1. of this Quarterly Report on Form 10-Q for further information on unrealized capital losses.
The following tables present our residential mortgage-backed securities as of
September 30, 2021
Gross Unrealized Gross Unrealized Embedded
($ in millions) Amortized Cost Capital Gains Capital Losses Derivatives Fair Value
Prime Agency $ 1,681 $ 71 $ 5 $ 4 $ 1,751
Prime Non-Agency 1,605 39 11 1 1,634
Alt-A 30 5 1 3 37
Sub-Prime(1) 26 4 - - 30
Total RMBS $ 3,342 $ 119 $ 17 $ 8 $ 3,452
(1) Includes subprime other asset backed securities.
December 31, 2020
Gross Unrealized Gross Unrealized Embedded
($ in millions) Amortized Cost Capital Gains Capital Losses Derivatives Fair Value
Prime Agency $ 2,286 $ 110 $ 2 $ 6 $ 2,400
Prime Non-Agency 1,732 55 12 1 1,776
Alt-A 39 5 1 4 47
Sub-Prime(1) 28 4 - - 32
Total RMBS $ 4,085 $ 174 $ 15 $ 11 $ 4,255
(1) Includes subprime other asset backed securities.
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-------------------------------------------------------------------------------- Table of ContentsCommercial Mortgage-backed Securities
The following tables present our commercial mortgage-backed securities as of
September 30, 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
2014 and prior $ 450 $ 504 $ 41 $ 43 $ 95 $ 100 $ 60 $ 62 $ 41 $ 39 $ 687 $ 748
2015 132 147 77 82 34 35 53 54 15 15 311 333
2016 23 25 16 18 22 24 26 27 - - 87 94
2017 54 58 18 18 50 51 35 36 27 28 184 191
2018 72 80 19 19 76 79 50 52 2 2 219 232
2019 146 164 33 33 113 116 218 223 6 6 516 542
2020 66 68 26 27 46 48 124 127 - - 262 270
2021 121 121 60 60 102 102 120 120 - - 403 403
Total CMBS $ 1,064 $ 1,167 $ 290 $ 300 $ 538 $ 555 $ 686 $ 701 $ 91 $ 90 $ 2,669 $ 2,813
December 31, 2020
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
2014 and prior $ 448
93$ 95 $ 109$ 113 $ 80$ 81 $ 41$ 41 $ 771$ 855 2015 162 187 89 96 41 42 72 74 21 21 385 420 2016 30 33 17 18 29 32 25 25 - - 101 108 2017 56 63 31 31 61 61 49 50 35 35 232 240 2018 74 86 26 26 141 144 101 100 13 14 355 370 2019 138 162 39 39 133 130 269 274 8 8 587 613 2020 70 72 27 28 66 67 118 120 - - 281 287 Total CMBS $ 978$ 1,128 $ 322$ 333 $ 580$ 589 $ 714$ 724 $ 118$ 119 $ 2,712 $ 2,893 As ofSeptember 30, 2021 , 87.3% and 10.5% of CMBS investments were designated as NAIC-1 and NAIC-2, respectively. As ofDecember 31, 2020 , 91.5% and 7.0% of CMBS investments were designated as NAIC-1 and NAIC-2, respectively. 67 -------------------------------------------------------------------------------- Table of ContentsOther Asset-backed Securities
The following tables present our other asset-backed securities as of
September 30, 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 $ 177 $ 178 $ 274 $ 275 $ 551 $ 552 $ 40 $ 39 $ 19 $ 18 $ 1,061 $ 1,062
Auto-Loans - - - 1 5 6 - - - - 5 7
Student Loans 13 14 71 73 10 10 1 2 - - 95 99
Other Loans 33 36 8 8 64 67 136 142 - - 241 253
Total Other ABS(1) $ 223 $ 228 $ 353 $ 357 $ 630 $ 635 $ 177 $
183
(1) Excludes subprime other asset backed securities
December 31, 2020
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 $ 224 $ 223 $ 258 $ 259 $ 556 $ 554 $ 8 $ 8 $ 22 $ 19 $ 1,068 $ 1,063
Auto-Loans 1 1 10 10 7 7 - - - - 18 18
Student Loans 30 31 80 84 32 33 1 2 - - 143 150
Other Loans 37 41 9 9 81 85 129 136 - - 256 271
Total Other ABS(1) $ 292 $ 296 $ 357 $ 362 $ 676 $ 679 $ 138 $
146
(1) Excludes subprime other asset backed securities
As of
designated as NAIC-1 and NAIC-2, respectively. As of
and 9.8% of Other ABS investments were designated as NAIC-1 and NAIC-2,
respectively.
Mortgage Loans on Real Estate
As ofSeptember 30, 2021 , our mortgage loans on real estate portfolio had a weighted average DSC of 2.1 times and a weighted average LTV ratio of 46.9%. As ofDecember 31, 2020 , our mortgage loans on real estate portfolio had a weighted average DSC of 2.2 times and a weighted average LTV ratio of 46.0%. See the Investments Note to our Condensed Consolidated Financial Statements in Part I, Item 1. of this Quarterly Report on Form 10-Q for further information on mortgage loans on real estate.
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 to our Consolidated 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 impaired.
See the Investments Note to our Condensed Consolidated Financial Statements in
Part I, Item 1. of this Quarterly Report on Form 10-Q for further information on
impairments.
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
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in which each functions. By undertaking this assessment, we believe that we
develop a more accurate assessment of the actual geographic risk, with a more
integrated understanding of contributing factors to the full risk profile of the
issuer.
In the normal course of our ongoing risk and portfolio management process, we
closely monitor compliance with a credit limit hierarchy designed to minimize
overly concentrated risk exposures by geography, sector and issuer. This
framework takes into account various factors such as internal and external
ratings, capital efficiency and liquidity and is overseen by a combination of
Investment and Corporate Risk Management, as well as insurance portfolio
managers focused specifically on managing the investment risk embedded in our
portfolio.
As of September 30, 2021 , the Company's total European exposure had an amortized
cost and fair value of $2,475 million and $2,689 million , respectively. European
exposure with a primary focus on Greece , Ireland , Italy , Portugal and Spain
(which we refer to as "peripheral Europe ") amounts to $189 million , which
includes non-financial institutions exposure in Ireland of $30 million , in Italy
of $92 million , and in Spain of $51 million . We also had financial institutions
exposure in Italy of $5 million and in Spain of $11 million . We did not have any
exposure to Greece or Portugal .
Among the remaining $2,500 million of total non-peripheral European exposure, we
had a portfolio of credit-related assets similarly diversified by country and
sector across developed and developing Europe . As of September 30, 2021 , our
non-peripheral sovereign exposure was $69 million , which consisted of fixed
maturities. We also had $413 million in net exposure to non-peripheral financial
institutions with a concentration in France of $87 million , The Netherlands of
$36 million , Switzerland of $78 million and the United Kingdom of $177 million .
The balance of $2,022 million was invested across non-peripheral, non-financial
institutions.
Some of the major country level exposures were in the United Kingdom of $1,327
million , in The Netherlands of $208 million , in Belgium of $120 million , in
France of $236 million , in Germany of $176 million , in Switzerland of $175
million and in Russia of $48 million . 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 continued recovery of
economic conditions in Europe .
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.
Liquidity Management
Our principal available sources of liquidity are product charges, investment
income, proceeds from 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.
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Liquidity and Capital Resources
Additional sources of liquidity include borrowing facilities to meet short-term
cash requirements that arise in the ordinary course of business. We maintain the
following agreements:
•A reciprocal loan agreement with Voya Financial, Inc., an affiliate, whereby
either party can borrow from the other up to 3.0% of VRIAC's statutory admitted
assets as of the prior December 31 . As of September 30, 2021 , VRIAC had no
outstanding receivables and VIPS had a $67 million outstanding payable. As of
December 31, 2020 , we had an outstanding receivable of $653 million and VIPS had
a $7 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
subjected to the reciprocal loan terms summarized above. Effective January 2014 ,
interest on any borrowing by either us 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 48.1% 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% of our general account statutory admitted assets may be allocated to
repurchase, securities lending and dollar roll programs. At the time a temporary
cash need arises, the actual percentage of admitted assets available for
repurchase transactions will depend upon outstanding allocations to the three
programs. As of September 30, 2021 , VRIAC had securities lending collateral
assets of $729 million , which represents approximately 0.6% of its general
account statutory admitted assets. As of December 31, 2020 , VRIAC had securities
lending collateral assets of $74 million , which represents approximately 0.1% of
its general account statutory admitted assets.
Management believes that our sources of liquidity are adequate to meet our
short-term cash obligations.
Capital Contributions and Dividends
During the nine months endedSeptember 30, 2021 , VRIAC received a$318 million capital contribution from its Parent, comprised of cash and non-cash assets. During the nine months endedSeptember 30, 2020 , VRIAC did not receive any capital contributions from its Parent. During the nine months endedSeptember 30, 2021 , VRIAC paid an ordinary and extraordinary dividends to its Parent in the aggregate amount of$78 million and$474 million , respectively. During the nine months endedSeptember 30, 2020 , VRIAC paid an ordinary dividends to its Parent in the aggregate amount of$294 million . Ratings Our access to funding and our related cost of borrowing, collateral requirements for derivative 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 Risk Factors- 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 Part I, Item 1A. of our Annual Report on Form 10-K for additional information. 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. 70 -------------------------------------------------------------------------------- Table of Contents Our financial strength rating as of the date of this Quarterly Report on Form 10-Q are summarized in the following table. Company Fitch
Moody's S&P
Voya Retirement Insurance and Annuity Company Financial Strength Rating A A2 A+ (3 of 9) (3 of 9) (3 of 9) 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 rating for insurance companies range from "AAA (exceptionally strong)" to "C (distressed). " (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. (3) S&P's financial strength ratings for insurance companies 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. In May of 2021, Moody's changed its outlook for theU.S. life insurance sector to stable from negative. In May of 2021, Fitch revised its outlook on the life insurance sector to stable from negative.
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 Condensed Consolidated Balance Sheets at fair value. Changes in the fair value of derivatives are recorded in Other net realized capital gains (losses) in the Condensed Consolidated Statements of Operations. We also have investments in certain fixed maturities and have issued certain annuity products that contain embedded derivatives 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 Condensed Consolidated Balance Sheets and changes in fair value of the embedded derivatives are recorded in Other net realized capital gains (losses) in the Condensed Consolidated Statements of Operations. Embedded derivatives within certain annuity products are included in Future policy benefits and contract owner account balances on the Condensed Consolidated Balance Sheets and changes in the fair value of the embedded derivatives are recorded in Other net realized capital gains (losses) in the Condensed Consolidated Statements of Operations. In addition, we have entered into a reinsurance agreement, accounted for under the deposit method, that contains an embedded derivative, the fair value of which is based on the change in the fair value of the underlying assets held in trust. The embedded derivatives within the reinsurance agreements are reported in Other liabilities on the Condensed Consolidated Balance Sheets, and changes in the fair value of the embedded derivative are recorded in Interest credited and other benefit to contract owners/policyholders in the Condensed Consolidated Statements of Operations.
Off-Balance Sheet Arrangements
We have obligations for the return of non-cash collateral under an 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
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in the event of default, and is not reflected on our Condensed Consolidated
Balance Sheets. For information regarding obligations under this program, see
the Investments Note in our Condensed Consolidated Financial Statements in Part
I, Item 1. of this Quarterly Report on Form 10-Q.
For changes in commitments related to the acquisition of mortgage loans and the
purchase of limited partnerships and private placement investments, see the
Commitments and Contingencies Note in our Condensed Consolidated Financial
Statements in Part I, Item 1. of this Quarterly Report on Form 10-Q.
Legislative and Regulatory Developments
Changes to NAIC RBC Requirements
The NAIC adopted changes to the RBC requirements for certain investment portfolio assets. The changes lead to an expansion in the number of NAIC asset class categories for factor-based RBC requirements and the adoption of new factors, which increased capital requirements on some securities and decreased capital requirements on others. The impact on our RBC ratio is expected to be manageable. The new factors will become effective onDecember 31, 2021 .
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