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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, 2022 and 2021 and financial condition as ofSeptember 30, 2022 andDecember 31, 2021 . 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, 2021 ("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 . OnJanuary 4, 2021 , VRIAC's ultimate parent, Voya Financial, completed 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 whichResolution Life US acquired all of the shares of the capital stock ofSecurity Life of Denver 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. 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. See the Reinsurance Note in Part II, Item 8. of our Annual Report on Form 10-K for more information regarding the Individual Life Transaction. 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 Condensed 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, Inc. ("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. During the third quarter of 2022 and 2021, 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. 53 -------------------------------------------------------------------------------- Table of Contents 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 Condensed 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 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 .
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 2022 and 2021, 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 2022, the impact of annual assumption changes on our results of operations was$51 million favorable DAC/VOBA unlocking. The favorable DAC/VOBA unlocking for the current period was primarily driven by higher interest rates. DAC/VOBA unlocking is reflected in Net amortization of Deferred policy acquisition costs and Value of business acquired in the Condensed Consolidated Statements of Operations for the three and nine months endedSeptember 30, 2022 . 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$216 million in our divested businesses. The loss recognition related to DAC/VOBA and reserves was recorded in Net amortization of Deferred policy acquisition costs and Value of business acquired and Interest credited and other benefits to contract owners/policyholders, respectively in the Condensed Consolidated Statements of Operations for the nine months endedSeptember 30, 2021 . 54
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For the third quarter of 2021, the impact of annual assumption changes on our
results of operations was
favorable DAC/VOBA unlocking during 2021 was primarily driven by changes in
asset return assumptions.
Sensitivity
We perform sensitivity analyses to assess the impact that certain assumptions
have on DAC/VOBA and other intangibles, as well as certain reserves. The
following table presents the estimated instantaneous net impact to income from
continuing operations of various assumption changes on our DAC/VOBA and other
intangible balances and the impact on related reserves for future policy
benefits and reinsurance. The effects are not representative of the aggregate
impacts that could result if a combination of such changes to equity markets,
interest rates and other assumptions occurred.
As of September
($ in millions)
30, 2022
Decrease in long-term equity rate of return assumption by 100 basis points $
(35)
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
13 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
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. The CAMT is effective in taxable years beginning afterDecember 31, 2022 . The IRA of 2022 has tasked theU.S. Department of Treasury with issuing regulations at a future date. As these regulations have not yet been issued, we are uncertain as to whether we will qualify for the CAMT and will continue to evaluate the applicability as more guidance is provided. 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.
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 vaccinations are widely available 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 impacted 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,
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-------------------------------------------------------------------------------- Table of Contents 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.
The effects of COVID-19 have become less distinguishable as other geopolitical
developments have driven uncertainty in the macroeconomic environment. Ongoing
equity market volatility and declines drive variability in AUM levels and
associated fee-based margin. Higher interest rate levels have provided and may
continue to provide some offsetting revenue lift on our general account fixed
products. On a prospective basis, general economic uncertainty due to COVID-19,
combined with other factors and events, could serve to negatively impact sales
and flows into our products.
Results of Operations
Three Months Ended September Nine Months Ended
($ in millions) 30, September 30,
2022 2021 Change 2022 2021 Change
Revenues:
Net investment income $ 366 $ 514 $ (148) $ 1,235 $ 1,485 $ (250)
Fee income 237 280 (43) 746 810 (64)
Premiums 3 10 (7) 14 (2,431) 2,445
Broker-dealer commission revenue - 1 (1) 1 2 (1)
Total net gains (losses) (70) (88) 18 (388) 317 (705)
Other revenue 8 8 - 36 25 11
Total revenues 544 725 (181) 1,644 208 1,436
Benefits and expenses:
Interest credited and other benefits to
contract owners/policyholders 181 206 (25) 574 (1,674) 2,248
Operating expenses 269 312 (43) 868 904 (36)
Broker-dealer commission expense - 1 (1) 1 2 (1)
Net amortization of Deferred policy
acquisition costs and Value of business
acquired (29) 5 (34) 39 83 (44)
Interest expense 1 - 1 1 - -
Total benefits and expenses 422 524 (102) 1,483 (685) 2,168
Income (loss) before income taxes 122 201 (79) 161 893 (732)
Income tax expense (benefit) 14 31 (17) (1) 154 (155)
Net income (loss) $ 108 $ 170 $ (62) $ 162 $ 739 $ (577)
Three Months Ended
30, 2021
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
due to:
•lower fee income primarily driven by lower average equity markets and a lower
earned rate.
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Premiums decreased by
to:
•a shift from monthly to quarterly Annuity valuation payout processes.
Total net gains (losses) decreased by
a loss of
•favorable changes in derivatives due to interest rate movements; and
•favorable changes in fixed maturities, including securities pledged driven by a
reduction in CECL allowance.
The decrease was partially offset by: •unfavorable changes in fixed maturities, using the fair value option due to interest rate movements and spread changes; •higher gains on mortgage loans in the prior period driven by a decrease in loss rates; and •unfavorable changes in equity securities, available-for-sale driven by market value movements. Benefits and Expenses
Interest credited and other benefits to contract owners/policyholders decreased
by
•a reclass of products between Annuity and CBVA;
•run off of Annuity business in reserves; and
•a shift from monthly to quarterly Annuity valuation payout processes.
Operating expenses decreased by
primarily due to:
• a decrease in asset based commission and a legal accrual in the prior period.
Net amortization of DAC and VOBA decreased by
•higher favorable unlocking in the current period compared to prior period due
to annual assumption updates.
Income tax expense decreased by
primarily due to:
•a decrease in income before income taxes.
Nine Months Ended
2021
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.
Premiums increased by
primarily due to:
•the close of the Individual Life Transaction in the prior period, at which
point the Pension Risk Transfer (PRT) and annuity business was ceded to
Resolution.
Total net gains (losses) changed by
a loss of
•higher gains on fixed maturities, including securities pledged, in the prior
period driven by the transfer of assets from reinsurance portfolios to
Resolution upon the close of the transaction;
•unfavorable changes in fixed maturities, using the fair value option due to
interest rate movements and spread changes;
•unfavorable changes in equity securities, available-for-sale driven by market
value movements;
•unfavorable changes in derivatives due to interest rate movements;
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•higher 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
•unfavorable changes in other investments driven by the sale of the Company's
stake in VA Capital in the prior period.
Benefits and Expense
Interest credited and other benefits to contract owners/policyholders increased
by
•the ceding of the PRT and annuity business to Resolution as part of the Life
Transaction in the prior period.
The increase was partially offset by:
•a decrease in PRT reserves which were updated to reflect a change in yield assumptions related to liabilities in the current period that did not occur in the prior period.
Net amortization of DAC and VOBA decreased by
•DAC/VOBA balance within the Annuities business being written down to zero in
the prior period as the block did not pass Loss Recognition Testing (LRT)
The decrease was partially offset by:
•higher favorable DAC unlocking primarily due to third quarter annual assumption
updates in the current year.
Income tax expense (benefit) changed by
million
•a decrease in income before income taxes.
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.
Portfolio Composition
The following table presents the investment portfolio as of the dates indicated:
September 30, 2022 December 31, 2021
Carrying % of Carrying % of
($ in millions) Value Total Value Total
Fixed maturities, available-for-sale, excluding
securities pledged $ 20,222 71.6 % $ 24,360 75.6 %
Fixed maturities, at fair value option 1,206 4.3 % 1,253 3.9 %
Equity securities, at fair value 139 0.5 % 141 0.4 %
Mortgage loans on real estate 4,183 14.8 % 4,222 13.1 %
Policy loans 162 0.6 % 171 0.5 %
Limited partnerships/corporations 1,033 3.7 % 980 3.0 %
Derivatives 379 1.3 % 149 0.5 %
Securities pledged 750 2.7 % 799 2.5 %
Other investments 134 0.5 % 143 0.5 %
Total investments $ 28,208 100.0 % $ 32,218 100.0 %
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-------------------------------------------------------------------------------- Table of Contents Fixed Maturities
The following tables present total fixed maturities, including securities
pledged, by market sector as of the dates indicated:
September 30, 2022
Amortized % of Fair % of
($ in millions) Cost Total Value Total
Fixed maturities:
U.S. Treasuries $ 564 2.3 % $ 549 2.5 %
U.S. Government agencies and authorities 20 0.1 % 17 0.1 %
State, municipalities, and political
subdivisions 705 2.8 % 616 2.8 %
U.S. corporate public securities 7,396 29.6 % 6,228 28.1 %
U.S. corporate private securities 3,841 15.3 % 3,466 15.6 %
Foreign corporate public securities and
foreign governments(1) 2,382 9.5 % 2,002 9.0 %
Foreign corporate private securities(1) 2,686 10.7 % 2,426 10.9 %
Residential mortgage-backed securities 3,028 12.1 % 2,899 13.1 %
Commercial mortgage-backed securities 2,997 12.0 % 2,689 12.1 %
Other asset-backed securities 1,413 5.6 % 1,286 5.8 %
Total fixed maturities, including
securities pledged $ 25,032 100.0 % $ 22,178 100.0 %
(1) Primarily
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
portfolio, including securities pledged, is between 6.5 and 7.0 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, 2022 NAIC Quality Designation 1 2 3 4 5 6 Total Fair Value U.S. Treasuries$ 549 $ - $ - $ - $ - $ - $ 549U.S. Government agencies and authorities 17 - - - - - 17 State, municipalities and political subdivisions 576 40 - - - - 616 U.S. corporate public securities 1,988 4,020 198 15 - 7 6,228U.S. corporate private securities 1,279 1,918 192 75 2 - 3,466 Foreign corporate public securities and foreign governments(1) 638 1,244 69 40 - 11 2,002 Foreign corporate private securities(1) 313 1,976 106 22 9 - 2,426 Residential mortgage-backed securities 2,654 232 - 1 6 6 2,899 Commercial mortgage-backed securities 2,269 357 55 8 - - 2,689 Other asset-backed securities 1,056 218 2 5 5 - 1,286 Total fixed maturities$ 11,339 $ 10,005 $ 622 $ 166 $ 22 $ 24 $ 22,178 % of Fair Value 51.1% 45.1% 2.8% 0.8% 0.1% 0.1% 100.0%
(1) Primarily
($ in millions) December 31, 2021 NAIC Quality Designation 1 2 3 4 5 6 Total Fair Value U.S. Treasuries$ 691 $ - $ - $ - $ - $ - $ 691U.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 - 8,269U.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) PrimarilyU.S. dollar denominated. 60
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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, 2022
Total Fair
ARO Quality Ratings AAA AA A BBB BB and Below Value
U.S. Treasuries $ 549 $ - $ - $ - $ - $ 549
U.S. Government agencies and
authorities 15 2 - - - 17
State, municipalities and
political subdivisions 49 364 163 38 2 616
U.S. corporate public
securities 22 311 1,813 3,845 237 6,228
U.S. corporate private
securities 27 130 1,067 1,973 269 3,466
Foreign corporate public
securities and foreign
governments(1) 8 127 567 1,169 131 2,002
Foreign corporate private
securities(1) - 32 239 2,023 132 2,426
Residential mortgage-backed
securities 2,026 331 106 178 258 2,899
Commercial mortgage-backed
securities 952 284 636 714 103 2,689
Other asset-backed securities 90 280 675 218 23 1,286
Total fixed maturities $ 3,738 $ 1,861 $ 5,266 $ 10,158 $ 1,155 $22,178
% of Fair Value 16.9 % 8.4 % 23.7 % 45.8 % 5.2 % 100.0 %
(1) Primarily
($ 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) - 29 198 210 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
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Unrealized Capital Losses
Gross unrealized losses on fixed maturities, including securities pledged, increased$2,805 million from$111 million to$2,916 million for the nine months endedSeptember 30, 2022 . The large increase in unrealized losses was driven primarily by materially higher interest rates across the curve and moderately wider credit spreads. As ofSeptember 30, 2022 , we held nine fixed maturity securities with unrealized capital losses in excess of$10 million . The unrealized capital losses on these fixed maturities equaled$103 million or 3.5% of the total unrealized losses. As ofDecember 31, 2021 , we held no fixed maturity securities with unrealized capital losses in excess of$10 million . As ofSeptember 30, 2022 , we had$1.2 billion of energy sector fixed maturity securities, constituting 5.6% of the total fixed maturities portfolio, with gross unrealized capital losses of$147 million , including no energy sector fixed maturity security with unrealized capital loss in excess of$10 million . As ofSeptember 30, 2022 , our fixed maturity exposure to the energy sector is comprised of 87.7% 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$10 million . As ofDecember 31, 2021 , our fixed maturity exposure to the energy sector is comprised of 87.0% investment grade securities. See the Investments Note to our Condensed Consolidated Financial Statements in Part I, Item 1. of this Quarterly Report on Form 10-Q for further information on unrealized capital losses.
The following tables present our residential mortgage-backed securities as of
September 30, 2022
Gross Unrealized Gross Unrealized
($ in millions) Amortized Cost Capital Gains Capital Losses Embedded Derivatives Fair Value
Prime Agency $ 1,403 $ 13 $ 34 $ 1 $ 1,383
Prime Non-Agency 1,592 7 118 - 1,481
Alt-A 23 3 1 1 26
Sub-Prime(1) 21 1 - - 22
Total RMBS $ 3,039 $ 24 $ 153 $ 2 $ 2,912
(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.
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-------------------------------------------------------------------------------- Table of ContentsCommercial Mortgage-backed Securities
The following tables present our commercial mortgage-backed securities as of
September 30, 2022
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
2015 and prior $ 588 $ 531 $ 107 $ 101 $ 149 $ 141 $ 92 $ 87 $ 63 $ 60 $ 999 $ 920
2016 23 20 17 16 30 28 24 20 - - 94 84
2017 52 43 16 15 45 40 49 42 23 21 185 161
2018 73 66 19 17 71 66 29 25 17 15 209 189
2019 135 127 33 31 104 94 201 168 6 4 479 424
2020 51 47 21 18 46 38 107 88 - - 225 191
2021 124 101 67 62 138 124 231 206 3 3 563 496
2022 20 17 26 24 112 105 85 78 - - 243 224
Total CMBS $ 1,066 $ 952 $ 306 $ 284 $ 695 $ 636 $ 818 $ 714 $ 112 $ 103 $ 2,997 $ 2,689
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
2015 and prior $ 585
107$ 111 $ 129$ 133 $ 102$ 103 $ 64$ 62 $ 987$ 1,058 2016 23 25 16 17 22 23 24 24 - - 85 89 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 ofSeptember 30, 2022 , 84.4% and 13.3% 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. 63 -------------------------------------------------------------------------------- Table of ContentsOther Asset-backed Securities
The following tables present our other asset-backed securities as of
September 30, 2022
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 $ 50 $ 47 $ 239 $ 224 $ 655 $ 600 $ 72 $ 63 $ 15 $ 11 $ 1,031 $ 945
Auto-Loans - - 5 5 1 1 - - - - 6 6
Student Loans 11 11 53 49 - - 1 1 - - 65 61
Credit Card loans - - - - 2 2 - - - - 2 2
Other Loans 38 32 1 1 84 72 172 154 - - 295 259
Total Other ABS(1) $ 99 $ 90 $ 298 $ 279 $ 742 $ 675 $ 245 $
218
(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
(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.
Mortgage Loans on Real Estate
As ofSeptember 30, 2022 , our mortgage loans on real estate portfolio had a weighted average DSC of 1.9 times and a weighted average LTV ratio of 46.8%. As ofDecember 31, 2021 , our mortgage loans on real estate portfolio had a weighted average DSC of 2.0 times and a weighted average LTV ratio of 46.6%. 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
64
-------------------------------------------------------------------------------- Table of Contents 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 ofSeptember 30, 2022 , the Company's total European exposure had an amortized cost and fair value of$2,426 million and$2,090 million , respectively. Some of the major country level exposures were in theUnited Kingdom of$963 million , inFrance of$170 million , inThe Netherlands of$197 million , inSwitzerland of$157 million , inGermany of$159 million , and inBelgium of$82 million . Our direct exposure inEastern Europe is comparatively small, with only$11 million of exposure inRussia and none inUkraine orBelarus .
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.
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, 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 ofSeptember 30, 2022 , VRIAC had$104 million outstanding receivables and VIPS had a$99 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 under the reciprocal 65 -------------------------------------------------------------------------------- Table of Contents loan agreement. We and Voya Financial continue to maintain the reciprocal loan agreement and future borrowings by either party will be subjected to the reciprocal loan terms summarized above. Interest on any borrowing by either us or Voya Financial is charged at a rate based on the prevailing market rate for similar third-party borrowings or securities. •We hold approximately 47.6% of our assets in marketable securities. These assets include cash,U.S. Treasuries, Agencies, Corporate Bonds, ABS, CMBS and collateralized mortgage obligations ("CMO") and Equity securities. In the event of a temporary liquidity need, cash may be raised by entering into repurchase agreements, dollar rolls and/or security lending agreements by temporarily lending securities and receiving cash collateral. Under our Liquidity Plan, up to 12% 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 ofSeptember 30, 2022 , VRIAC had securities lending collateral assets of$610 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.
Management believes that our sources of liquidity are adequate to meet our
short-term cash obligations.
Capital Contributions and Dividends
During the nine months ended
capital contribution from its Parent. During the nine months ended
2021
comprised of cash and non-cash assets.
During the nine months endedSeptember 30, 2022 , VRIAC paid an ordinary and extraordinary dividend to its Parent in the aggregate amount of$48 million and$809 million , respectively. 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.
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.
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Our financial strength rating as of the date of this Quarterly Report on Form
10-Q are summarized in the following table.
Rating Agency
Moody's Investors Service,
Fitch, Inc. Inc. Standard & Poor's
Company ("Fitch")(1) ("Moody's")(2) ("S&P")(3)
Voya Retirement Insurance and Annuity
Company
Financial Strength Rating A A2 A+
(1) Fitch's financial strength rating 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. In June 2021 , Moody's revised its
outlook for the U.S. life insurance sector from negative to stable. In December
2021 , Fitch revised its outlook for the U.S. life insurance sector from negative
to neutral.
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 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 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 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 in the event of default, and is not reflected on our Condensed
Consolidated Balance Sheets. For information regarding
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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
InAugust 2022 ,President Biden signed into law the Inflation Reduction Act of 2022 (the "Inflation Reduction Act"), 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. For additional information about this development, see Income Taxes in 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.
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