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EX-32.2 - EXHIBIT 32.2 - VOYA RETIREMENT INSURANCE & ANNUITY Covriac2017q210-qex322.htm
EX-32.1 - EXHIBIT 32.1 - VOYA RETIREMENT INSURANCE & ANNUITY Covriac2017q210-qex321.htm
EX-31.2 - EXHIBIT 31.2 - VOYA RETIREMENT INSURANCE & ANNUITY Covriac2017q210-qex312.htm
EX-31.1 - EXHIBIT 31.1 - VOYA RETIREMENT INSURANCE & ANNUITY Covriac2017q210-qex311.htm
EX-10.3 - EXHIBIT 10.3 - VOYA RETIREMENT INSURANCE & ANNUITY Covriac2017q210-qex103.htm
EX-10.2 - EXHIBIT 10.2 - VOYA RETIREMENT INSURANCE & ANNUITY Covriac2017q210-qex102.htm
EX-10.1 - EXHIBIT 10.1 - VOYA RETIREMENT INSURANCE & ANNUITY Covriac2017q210-qex101.htm
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
——————————————————————
FORM 10-Q
(Mark One)
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2017

OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                         to                         

Commission File Number: 033-23376

Voya Retirement Insurance and Annuity Company

(Exact name of registrant as specified in its charter)
Connecticut
71-0294708
(State or other jurisdiction of incorporation or organization)
(IRS Employer Identification No.)
One Orange Way
 
Windsor, Connecticut
06095-4774
(Address of principal executive offices)
(Zip Code)
(860) 580-4646
(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.       Yes     ý       No    o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes   ý     No   o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of "large accelerated filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o
Accelerated filer    o
Non-accelerated filer x
Smaller reporting company     o
(Do not check if a smaller reporting company)
Emerging growth company     o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No ý

APPLICABLE ONLY TO CORPORATE ISSUERS:

As of August 7, 2017, 55,000 shares of Common Stock, $50 par value were outstanding, all of which were directly owned by Voya Holdings Inc.

NOTE:  WHEREAS VOYA RETIREMENT INSURANCE AND ANNUITY COMPANY MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(a) AND (b) OF FORM 10-Q, THIS FORM IS BEING FILED WITH THE REDUCED DISCLOSURE FORMAT PURSUANT TO GENERAL INSTRUCTION H(2).
 
 
 
 
 

 
1
 


Voya Retirement Insurance and Annuity Company and Subsidiaries
(A wholly owned subsidiary of Voya Holdings Inc.)
Form 10-Q for the period ended June 30, 2017

INDEX

 
 
PAGE
PART I.
FINANCIAL INFORMATION (UNAUDITED)
 
 
 
 
 
 
 
Item 1.
Financial Statements:
 
 
 
 
 
Condensed Consolidated Statements of Changes in Shareholder's Equity
 
 
 
 
 
Item 2.
Management's Narrative Analysis of the Results of Operations and Financial Condition
 
 
 
Item 4.
 
 
 
 
 
 
PART II.
OTHER INFORMATION
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 6.
 
 
 
 
 
 
 
 


 
2
 


As used in this Quarterly Report on Form 10-Q, "VRIAC" refers to Voya Retirement Insurance and Annuity Company and the "Company," "we," "our" and "us" refer to VRIAC and its wholly owned subsidiaries.

NOTE CONCERNING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q, including "Risk Factors" and "Management’s Narrative Analysis of the Results of Operations and Financial Condition" contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements relating to future developments in our business or expectations for our future financial performance and any statement not involving a historical fact. Forward-looking statements use words such as "anticipate," "believe," "estimate," "expect," "intend," "plan," and other words and terms of similar meaning in connection with a discussion of future operating or financial performance. Actual results, performance or events may differ materially from those projected in any forward-looking statement due to, among other things, (i) general economic conditions, particularly economic conditions in our core markets, (ii) performance of financial markets, including emerging markets, (iii) the frequency and severity of insured loss events, (iv) mortality and morbidity levels, (v) persistency and lapse levels, (vi) interest rates, (vii) currency exchange rates, (viii) general competitive factors, (ix) changes in laws and regulations, including those relating to insurance regulatory reform initiatives applicable to captive reinsurance entities and those made pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act or the U.S. Department of Labor's final rules and exemptions pertaining to the fiduciary status of providers of investment advice; and (x) changes in the policies of governments and/or regulatory authorities. Factors that may cause actual results to differ from those in any forward-looking statement also include those described under "Risk Factors" and "Management’s Narrative Analysis of the Results of Operations and Financial Condition" in the Annual Report on Form 10-K for the year ended December 31, 2016 (File No. 033-23376) (the "Annual Report on Form 10-K") and "Risk Factors," in this Quarterly Report on Form 10-Q.

The risks included here are not exhaustive. Current reports on Form 8-K and other documents filed with the Securities and Exchange Commission ("SEC") include additional factors that could affect our businesses and financial performance. Moreover, we operate in a rapidly changing and competitive environment. New risk factors emerge from time to time, and it is not possible for management to predict all such risk factors.

 
3
 



PART I.    FINANCIAL INFORMATION (UNAUDITED)

Item 1.     Financial Statements
Voya Retirement Insurance and Annuity Company and Subsidiaries
(A wholly owned subsidiary of Voya Holdings Inc.)
Condensed Consolidated Balance Sheets
June 30, 2017 (Unaudited) and December 31, 2016
(In millions, except share and per share data)

 
June 30,
2017
 
December 31,
2016
Assets
 
 
 
Investments:
 
 
 
Fixed maturities, available-for-sale, at fair value (amortized cost of $21,943.1 as of 2017 and $22,364.8 as of 2016)
$
23,206.2

 
$
23,169.9

Fixed maturities, at fair value using the fair value option
998.3

 
957.2

Equity securities, available-for-sale, at fair value (cost of $69.3 as of 2017 and $67.1 as of 2016)
85.2

 
82.3

Short-term investments
4.3

 
32.9

Mortgage loans on real estate, net of valuation allowance of $0.9 as of 2017 and $1.1 as of 2016
4,848.2

 
4,254.5

Policy loans
213.6

 
218.9

Limited partnerships/corporations
388.9

 
347.8

Derivatives
168.2

 
470.8

Securities pledged (amortized cost of $516.4 as of 2017 and $692.8 as of 2016)
594.4

 
767.9

Total investments
30,507.3

 
30,302.2

Cash and cash equivalents
426.5

 
561.0

Short-term investments under securities loan agreements, including collateral delivered
295.1

 
378.8

Accrued investment income
299.8

 
301.5

Receivable for securities sold
90.2

 
0.6

Premiums receivable and reinsurance recoverable
1,557.1

 
1,633.7

Deferred policy acquisition costs, Value of business acquired and Sales inducements to contract owners
808.1

 
1,028.5

Notes receivable from affiliate
175.0

 
175.0

Current income tax recoverable

 
0.7

Due from affiliates
60.4

 
56.4

Property and equipment
65.9

 
67.7

Other assets
116.9

 
158.6

Assets held in separate accounts
68,373.3

 
61,980.7

Total assets
$
102,775.6

 
$
96,645.4



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



Voya Retirement Insurance and Annuity Company and Subsidiaries
(A wholly owned subsidiary of Voya Holdings Inc.)
Condensed Consolidated Balance Sheets
June 30, 2017 (Unaudited) and December 31, 2016
(In millions, except share and per share data)

 
June 30,
2017
 
December 31,
2016
Liabilities and Shareholder's Equity
 
 
 
Future policy benefits and contract owner account balances
$
29,765.3

 
$
29,578.1

Payable for securities purchased
55.7

 
7.7

Payables under securities loan agreements, including collateral held
404.1

 
648.5

Long-term debt
4.9

 
4.9

Due to affiliates
93.5

 
162.1

Derivatives
51.9

 
172.9

Current income tax payable to Parent
9.6

 

Deferred income taxes
299.5

 
222.8

Other liabilities
388.0

 
491.4

Liabilities related to separate accounts
68,373.3

 
61,980.7

Total liabilities
99,445.8

 
93,269.1

 
 
 
 
Commitments and Contingencies (Note 9)


 


 
 
 
 
Shareholder's equity:
 
 
 
Common stock (100,000 shares authorized, 55,000 issued and outstanding as of 2017 and 2016; $50 par value per share)
2.8

 
2.8

Additional paid-in capital
2,733.7

 
2,994.4

Accumulated other comprehensive income (loss)
746.1

 
559.5

Retained earnings (deficit)
(152.8
)
 
(180.4
)
Total shareholder's equity
3,329.8

 
3,376.3

Total liabilities and shareholder's equity
$
102,775.6

 
$
96,645.4




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


Voya Retirement Insurance and Annuity Company and Subsidiaries
(A wholly owned subsidiary of Voya Holdings Inc.)
Condensed Consolidated Statements of Operations
For the Three and Six Months Ended June 30, 2017 and 2016 (Unaudited)
(In millions)


Three Months Ended June 30,

Six Months Ended June 30,

2017

2016

2017

2016
Revenues:
 
 
 
 
 
 
 
Net investment income
$
378.4


$
372.7


$
756.9


$
729.2

Fee income
176.6


180.1


366.9


353.3

Premiums
8.9


124.1


23.9


492.0

Broker-dealer commission revenue
42.3


43.9


86.1


87.6

Net realized capital gains (losses):











Total other-than-temporary impairments
(0.3
)

(1.0
)

(0.4
)

(8.3
)
Less: Portion of other-than-temporary impairments recognized in Other comprehensive income (loss)


0.1




0.1

Net other-than-temporary impairments recognized in earnings
(0.3
)

(1.1
)

(0.4
)

(8.4
)
Other net realized capital gains (losses)
(47.2
)

(63.1
)

(102.4
)

(113.4
)
Total net realized capital gains (losses)
(47.5
)

(64.2
)

(102.8
)

(121.8
)
Other revenue
1.8


0.9


2.0


(0.2
)
Total revenues
560.5


657.5


1,133.0


1,540.1

Benefits and expenses:











Interest credited and other benefits to contract owners/policyholders
245.0


374.7


479.8


986.0

Operating expenses
191.6


198.4


411.4


401.5

Broker-dealer commission expense
42.3


43.9


86.1


87.6

Net amortization of Deferred policy acquisition costs and Value of business acquired
133.7


(1.2
)

135.5


(3.2
)
Interest expense




0.1



Total benefits and expenses
612.6


615.8


1,112.9


1,471.9

Income (loss) before income taxes
(52.1
)

41.7


20.1


68.2

Income tax expense (benefit)
(25.7
)

10.4


(7.5
)

16.4

Net income (loss)
$
(26.4
)

$
31.3


$
27.6


$
51.8



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


Voya Retirement Insurance and Annuity Company and Subsidiaries
(A wholly owned subsidiary of Voya Holdings Inc.)
Condensed Consolidated Statements of Comprehensive Income
For the Three and Six Months Ended June 30, 2017 and 2016 (Unaudited)
(In millions)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Net income (loss)
$
(26.4
)
 
$
31.3

 
$
27.6

 
$
51.8

Other comprehensive income (loss), before tax:
 
 
 
 
 
 
 
Unrealized gains/losses on securities
205.0

 
447.4

 
284.5

 
964.9

Other-than-temporary impairments
0.2

 
0.4

 
1.8

 
0.8

Pension and other postretirement benefits liability
(0.5
)
 
(0.5
)
 
(1.1
)
 
(1.1
)
Other comprehensive income (loss), before tax
204.7

 
447.3

 
285.2

 
964.6

Income tax expense (benefit) related to items of other comprehensive income (loss)
70.8

 
154.4

 
98.6

 
332.4

Other comprehensive income (loss), after tax
133.9

 
292.9

 
186.6

 
632.2

Comprehensive income (loss)
$
107.5

 
$
324.2

 
$
214.2

 
$
684.0



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



Voya Retirement Insurance and Annuity Company and Subsidiaries
(A wholly owned subsidiary of Voya Holdings Inc.)
Condensed Consolidated Statements of Changes in Shareholder’s Equity
For the Six Months Ended June 30, 2017 and 2016 (Unaudited)
(In millions)

 
Common Stock
 
Additional Paid-In Capital
 
Accumulated Other Comprehensive Income (Loss)
 
Retained Earnings (Deficit)
 
Total Shareholder's Equity
Balance as of January 1, 2017
$
2.8

 
$
2,994.4

 
$
559.5

 
$
(180.4
)
 
$
3,376.3

Comprehensive income (loss):
 
 
 
 
 
 
 
 
 
Net income (loss)

 

 

 
27.6

 
27.6

Other comprehensive income (loss), after tax

 

 
186.6

 

 
186.6

Total comprehensive income (loss)
 
 
 
 
 
 
 
 
214.2

Dividends paid and distributions of capital

 
(261.0
)
 

 

 
(261.0
)
Employee related benefits

 
0.3

 

 

 
0.3

Balance as of June 30, 2017
$
2.8

 
$
2,733.7

 
$
746.1

 
$
(152.8
)
 
$
3,329.8

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of January 1, 2016
$
2.8

 
$
3,272.6

 
$
386.8

 
$
(293.2
)
 
$
3,369.0

Comprehensive income (loss):
 
 
 
 
 
 
 
 
 
Net income (loss)

 

 

 
51.8

 
51.8

Other comprehensive income (loss), after tax

 

 
632.2

 

 
632.2

Total comprehensive income (loss)
 
 
 
 
 
 
 
 
684.0

Dividends paid and distributions of capital

 
(274.0
)
 

 

 
(274.0
)
Employee related benefits

 
(0.6
)
 

 

 
(0.6
)
Balance as of June 30, 2016
$
2.8

 
$
2,998.0

 
$
1,019.0

 
$
(241.4
)
 
$
3,778.4




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


Voya Retirement Insurance and Annuity Company and Subsidiaries
(A wholly owned subsidiary of Voya Holdings Inc.)
Condensed Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2017 and 2016 (Unaudited)
(In millions)

 
Six Months Ended June 30,
 
2017
 
2016
Net cash provided by operating activities
$
426.6

 
$
962.8

Cash Flows from Investing Activities:
 
 
 
Proceeds from the sale, maturity, disposal or redemption of:
 
 
 
Fixed maturities
2,277.2

 
1,678.5

Equity securities, available-for-sale

 
49.3

Mortgage loans on real estate
256.7

 
228.2

Limited partnerships/corporations
37.3

 
25.5

Acquisition of:
 
 
 
Fixed maturities
(1,897.6
)
 
(2,548.5
)
Equity securities, available-for-sale
(1.7
)
 

Mortgage loans on real estate
(850.1
)
 
(528.0
)
Limited partnerships/corporations
(64.7
)
 
(51.2
)
Derivatives, net
168.8

 
(4.9
)
Policy loans, net
5.3

 
7.1

Short-term investments, net
28.6

 

Collateral received (delivered), net
(160.7
)
 
66.3

Net cash (used in) investing activities
(200.9
)
 
(1,077.7
)
Cash Flows from Financing Activities:
 
 
 
Deposits received for investment contracts
1,249.0

 
1,740.8

Maturities and withdrawals from investment contracts
(1,315.6
)
 
(1,216.0
)
Settlements on deposit contracts
(32.6
)
 
(27.5
)
Dividends paid and distributions of capital
(261.0
)
 
(274.0
)
Net cash (used in) provided by financing activities
(360.2
)
 
223.3

Net (decrease) increase in cash and cash equivalents
(134.5
)
 
108.4

Cash and cash equivalents, beginning of period
561.0

 
661.1

Cash and cash equivalents, end of period
$
426.5

 
$
769.5



The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
 
 
 
 
9
 

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

 
1.    Business, Basis of Presentation and Significant Accounting Policies

Business

Voya Retirement Insurance and Annuity Company ("VRIAC") is a stock life insurance company domiciled in the State of Connecticut. VRIAC and its wholly owned subsidiaries (collectively, "the Company") provide financial products and services in the United States. VRIAC is authorized to conduct its insurance business in all states and in the District of Columbia and in Guam, Puerto Rico and the Virgin Islands.

Prior to May 2013, Voya Financial, Inc., together with its subsidiaries, including the Company was an indirect, wholly-owned subsidiary of ING Groep N.V. ("ING Group" or "ING"), a global financial services holding company based in The Netherlands. In May 2013, Voya Financial, Inc., completed its initial public offering of common stock, including the issuance and sale of common stock by Voya Financial, Inc. and the sale of shares of common stock owned indirectly by ING Group. Between October 2013 and March 2015, ING Group completed the sale of its remaining shares of common stock of Voya Financial, Inc. in a series of registered public offerings. ING Group continues to hold certain warrants to purchase up to 26,050,846 shares of Voya Financial, Inc. common stock at an exercise price of $48.75, in each case subject to adjustments.

VRIAC is a direct, wholly owned subsidiary of Voya Holdings Inc. ("Parent"), which is a direct, wholly owned subsidiary of Voya Financial, Inc.

The Company offers qualified and nonqualified annuity contracts that include a variety of funding and payout options for individuals and employer-sponsored retirement plans qualified under Internal Revenue Code Sections 401, 403, 408, 457 and 501, as well as nonqualified deferred compensation plans and related services. The Company's products are offered primarily to employer-sponsored groups in the health care, government and education markets (collectively "tax exempt markets"), small to mid-sized corporations and individuals. The Company also provides stable value investment options, including separate account guaranteed investment contracts (e.g., GICs) and synthetic GICs, to institutional clients. Pension risk transfer group annuity solutions were previously offered to institutional plan sponsors who needed to transfer their defined benefit plan obligations to the Company. The Company discontinued sales of these solutions in late 2016 to better align business activities to the Company's priorities. The Company's products are generally distributed through pension professionals, independent agents and brokers, third-party administrators, banks, consultants, dedicated financial guidance, planning and advisory representatives associated with Voya Financial, Inc.'s retail broker-dealer, Voya Financial Advisors, Inc. ("Voya Financial Advisors").

Products offered by the Company include deferred and immediate (i.e., payout) annuity contracts. Company products also include programs offered to qualified plans and nonqualified deferred compensation plans that package administrative and record-keeping services, participant education, and retirement readiness planning tools along with a variety of investment options, including proprietary and non-proprietary mutual funds and variable and fixed investment options. In addition, the Company offers wrapper agreements entered into with retirement plans, which contain certain benefit responsive guarantees (i.e., guarantees of principal and previously accrued interest for benefits paid under the terms of the plan) with respect to portfolios of plan-owned assets not invested with the Company. Stable value products are also provided to institutional plan sponsors where we may or may not be providing other employer sponsored products and services.

The Company has one operating segment.

Basis of Presentation

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


 
10
 

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

The Condensed Consolidated Financial Statements include the accounts of VRIAC and its wholly owned subsidiaries, Voya Financial Partners, LLC ("VFP") and Directed Services LLC ("DSL"). Intercompany transactions and balances have been eliminated.

The accompanying Condensed Consolidated Financial Statements reflect adjustments (including normal, recurring adjustments) necessary to present fairly the financial position of the Company as of June 30, 2017, its results of operations and comprehensive income for the three and six months ended June 30, 2017 and 2016, and its changes in shareholder's equity and statements of cash flows for the six months ended June 30, 2017 and 2016, in conformity with U.S. GAAP. Interim results are not necessarily indicative of full year performance. The December 31, 2016 Consolidated Balance Sheet is from the audited Consolidated Financial Statements included in the Company's Annual Report on Form 10-K, filed with the SEC. Therefore, these unaudited Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and related notes included in the Company's Annual Report on Form 10-K.

Adoption of New Pronouncements

Share-Based Compensation
In March 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-09, “Compensation-Stock Compensation (ASC Topic 718): Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”), which simplifies the accounting for share-based payment award transactions with respect to:

The income tax consequences of awards,
The impact of forfeitures on the recognition of expense for awards,
Classification of awards as either equity or liabilities, and
Classification on the statement of cash flows.

The provisions of ASU 2016-09 were adopted by the Company on January 1, 2017 using the transition method prescribed for each applicable provision:

On a prospective basis, all excess tax benefits and tax deficiencies related to share-based compensation will be reported in Net income (loss), rather than Additional paid-in capital.  Prior year excess tax benefits will remain in Additional paid-in capital. 
The Company elected to retrospectively adopt the requirement to present cash inflows related to excess tax benefits as operating activities, which resulted in a $0.1 reclassification of Share-based compensation cash flows from financing activities to operating activities in the Consolidated Statement of Cash Flows for the six months ended June 30, 2016

The adoption of the remaining provisions of ASU 2016-09 had no effect on the Company's financial condition, results of operations, or cash flows.

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

The provisions of ASU 2016-06 were adopted by the Company on January 1, 2017 using a modified retrospective approach. The The adoption had no effect on the Company's financial condition, results of operations, or cash flows.

Consolidation
In February 2015, the FASB issued ASU 2015-02, “Consolidation (ASC Topic 810): Amendments to the Consolidation Analysis” (“ASU 2015-02”), which:

Modifies the evaluation of whether limited partnerships and similar legal entities are Variable Interest Entities ("VIEs") or Voting Interest Entities ("VOEs"), including the requirement to consider the rights of all equity holders at risk to determine if they have the power to direct the entity's most significant activities.

 
11
 

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

Eliminates the presumption that a general partner should consolidate a limited partnership. Limited partnerships and similar entities will be VIEs unless the limited partners hold substantive kick-out rights in the participating rights.
Affects the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships.
Provides a new scope exception for registered money market funds and similar unregistered money market funds, and ends the deferral granted to investment companies from applying the VIE guidance.

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

Future Adoption of Accounting Pronouncements

Debt Securities
In March 2017, the FASB issued ASU 2017-08, "Receivables-Nonrefundable Fees and Other Costs (ASC Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities" ("ASU 2017-08"), which shortens the amortization period for certain callable debt securities held at a premium by requiring the premium to be amortized to the earliest call date.

The provisions of ASU 2017-08 are effective for fiscal years beginning after December 15, 2018, including interim periods, with early adoption permitted. Initial adoption of ASU 2017-08 is required to be reported using a modified retrospective approach. The Company is currently in the process of determining the impact of adoption of the provisions of ASU 2017-08.

Derecognition of Nonfinancial Assets
In February 2017, the FASB issued ASU 2017-05, “Other Income-Gains and Losses from the Derecognition of Nonfinancial Assets (ASC Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance & Accounting for Partial Sales of Nonfinancial Assets” (“ASU 2017-05”), which requires entities to apply certain recognition and measurement principles in ASU 2014-09, “Revenue from Contracts with Customers (ASC Topic 606)” (see Revenue from Contracts with Customers below) when they derecognize nonfinancial assets and in substance nonfinancial assets through sale or transfer, and the counterparty is not a customer.

The provisions of ASU 2017-05 are effective for annual and interim reporting periods beginning after December 15, 2017, with early adoption permitted, using either a retrospective or modified retrospective method. The Company is currently in the process of determining the impact of adoption of the provisions of ASU 2017-05.

Statement of Cash Flows
In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (ASC Topic 230): Classification of Certain Cash Receipts and Cash Payments” (“ASU 2016-15”), which addresses diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows.  The amendments provide guidance on eight specific cash flow issues.

The provisions of ASU 2016-15 are effective retrospectively for fiscal years beginning after December 15, 2017, including interim periods, with early adoption permitted. The Company is currently in the process of determining the impact of adoption of the provisions of ASU 2016-15.

Financial Instruments - Credit Losses
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments-Credit Losses (ASC Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”), which:

Introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments,
Modifies the impairment model for available-for-sale debt securities, and
Provides a simplified accounting model for purchased financial assets with credit deterioration since their origination.

The provisions of ASU 2016-13 are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted for fiscal years beginning after December 15, 2018. Initial adoption of ASU 2016-13 is required to be reported on a modified retrospective basis, with a cumulative-effect adjustment to retained earnings as of the

 
12
 

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

beginning of the year of adoption, except for certain provisions that are required to be applied prospectively. The Company is currently in the process of determining the impact of adoption of the provisions of ASU 2016-13.

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

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

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

Revenue from Contracts with Customers
In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers (ASC Topic 606)" ("ASU 2014-09"), which requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Revenue is recognized when, or as, the entity satisfies a performance obligation under the contract. ASU 2014-09 also updated the accounting for certain costs associated with obtaining and fulfilling contracts with customers and requires disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. In addition, the FASB issued various amendments during 2016 to clarify the provisions and implementation guidance of ASU 2014-09. Revenue recognition for insurance contracts and financial instruments is explicitly scoped out of the guidance.

The provisions of ASU 2014-09 are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted as of January 1, 2017. Initial adoption of ASU 2014-09 is required to be reported using either a retrospective or modified retrospective approach.

The Company plans to adopt ASU 2014-09 on January 1, 2018. As the scope of ASU 2014-09 excludes insurance contracts and financial instruments, the guidance does not apply to a significant portion of the Company’s business. Consequently, the Company does not currently expect the adoption of this guidance to have a material impact; however, implementation efforts, including assessment of transition approach, are ongoing. Based on review to date, the Company anticipates that the adoption of ASU 2014-09 may result in the deferral of costs to obtain and fulfill certain financial services contracts.


 
13
 

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

2.    Investments
   
Fixed Maturities and Equity Securities

Available-for-sale and fair value option ("FVO") fixed maturities and equity securities were as follows as of June 30, 2017:
 
Amortized
Cost
 
Gross
Unrealized
Capital
Gains
 
Gross
Unrealized
Capital
Losses
 
Embedded Derivatives(2)
 
Fair
Value
 
OTTI(3)(4)
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasuries
$
607.8

 
$
108.4

 
$
0.5

 
$

 
$
715.7

 
$

U.S. Government agencies and authorities
3.6

 

 

 

 
3.6

 

State, municipalities and political subdivisions
836.1

 
28.4

 
6.5

 

 
858.0

 

U.S. corporate public securities
8,861.4

 
706.9

 
29.1

 

 
9,539.2

 

U.S. corporate private securities
3,215.8

 
126.3

 
46.9

 

 
3,295.2

 

Foreign corporate public securities and foreign governments(1)
2,662.8

 
170.2

 
16.2

 

 
2,816.8

 

Foreign corporate private securities(1)
2,883.0

 
141.2

 
10.8

 

 
3,013.4

 

 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Agency
2,087.8

 
77.0

 
14.7

 
7.7

 
2,157.8

 

Non-Agency
482.1

 
54.5

 
1.6

 
7.3

 
542.3

 
4.4

Total Residential mortgage-backed securities
2,569.9

 
131.5

 
16.3

 
15.0

 
2,700.1

 
4.4

Commercial mortgage-backed securities
1,272.1

 
40.5

 
10.3

 

 
1,302.3

 

Other asset-backed securities
545.3

 
10.1

 
0.8

 

 
554.6

 
2.0

 
 
 
 
 
 
 
 
 
 
 
 
Total fixed maturities, including securities pledged
23,457.8

 
1,463.5

 
137.4

 
15.0

 
24,798.9

 
6.4

Less: Securities pledged
516.4

 
80.9

 
2.9

 

 
594.4

 

Total fixed maturities
22,941.4

 
1,382.6

 
134.5

 
15.0

 
24,204.5

 
6.4

Equity securities
69.3

 
15.9

 

 

 
85.2

 

Total fixed maturities and equity securities investments
$
23,010.7

 
$
1,398.5

 
$
134.5

 
$
15.0

 
$
24,289.7

 
$
6.4

(1) Primarily U.S. dollar denominated.
(2) Embedded derivatives within fixed maturity securities are reported with the host investment. The changes in fair value of embedded derivatives are reported in Other net realized capital gains (losses) in the Condensed Consolidated Statements of Operations.
(3) Represents Other-than-Temporary-Impairments ("OTTI") reported as a component of Other comprehensive income (loss).
(4) Amount excludes $191.5 of net unrealized gains on impaired available-for-sale securities.


 
14
 

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

Available-for-sale and FVO fixed maturities and equity securities were as follows as of December 31, 2016:
 
Amortized
Cost
 
Gross
Unrealized
Capital
Gains
 
Gross
Unrealized
Capital
Losses
 
Embedded Derivatives(2)
 
Fair
Value
 
OTTI(3)(4)
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasuries
$
692.8

 
$
95.9

 
$
1.7

 
$

 
$
787.0

 
$

U.S. Government agencies and authorities
3.8

 

 

 

 
3.8

 

State, municipalities and political subdivisions
794.7

 
16.3

 
15.6

 

 
795.4

 

U.S. corporate public securities
9,511.1

 
533.3

 
72.0

 

 
9,972.4

 
1.3

U.S. corporate private securities
2,950.9

 
89.4

 
79.7

 

 
2,960.6

 

Foreign corporate public securities and foreign governments(1)
2,801.4

 
120.6

 
37.6

 

 
2,884.4

 

Foreign corporate private securities(1)
2,822.0

 
113.9

 
25.9

 

 
2,910.0

 

 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Agency
2,356.7

 
81.4

 
27.0

 
9.3

 
2,420.4

 

Non-Agency
313.8

 
47.6

 
2.0

 
8.2

 
367.6

 
4.8

Total Residential mortgage-backed securities
2,670.5

 
129.0

 
29.0

 
17.5

 
2,788.0

 
4.8

Commercial mortgage-backed securities
1,301.2

 
33.2

 
16.7

 

 
1,317.7

 

Other asset-backed securities
466.4

 
10.6

 
1.3

 

 
475.7

 
2.1

 
 
 
 
 
 
 
 
 
 
 
 
Total fixed maturities, including securities pledged
24,014.8

 
1,142.2

 
279.5

 
17.5

 
24,895.0

 
8.2

Less: Securities pledged
692.8

 
81.9

 
6.8

 

 
767.9

 

Total fixed maturities
23,322.0

 
1,060.3

 
272.7

 
17.5

 
24,127.1

 
8.2

Equity securities
67.1

 
15.2

 

 

 
82.3

 

Total fixed maturities and equity securities investments
$
23,389.1

 
$
1,075.5

 
$
272.7

 
$
17.5

 
$
24,209.4

 
$
8.2

(1) Primarily U.S. dollar denominated.
(2) Embedded derivatives within fixed maturity securities are reported with the host investment. The changes in fair value of embedded derivatives are reported in Other net realized capital gains (losses) in the Condensed Consolidated Statements of Operations.
(3) Represents OTTI reported as a component of Other comprehensive income (loss).
(4) Amount excludes $176.3 of net unrealized gains on impaired available-for-sale securities.



 
15
 

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

The amortized cost and fair value of fixed maturities, including securities pledged, as of June 30, 2017, are shown below by contractual maturity. Actual maturities may differ from contractual maturities as securities may be restructured, called or prepaid. Mortgage-backed securities ("MBS") and Other asset-backed securities ("ABS") are shown separately because they are not due at a single maturity date.
 
Amortized
Cost
 
Fair
Value
Due to mature:
 
 
 
One year or less
$
720.9

 
$
729.4

After one year through five years
4,878.9

 
5,116.2

After five years through ten years
5,836.9

 
6,037.8

After ten years
7,633.8

 
8,358.5

Mortgage-backed securities
3,842.0

 
4,002.4

Other asset-backed securities
545.3

 
554.6

Fixed maturities, including securities pledged
$
23,457.8

 
$
24,798.9


The investment portfolio is monitored to maintain a diversified portfolio on an ongoing basis. Credit risk is mitigated by monitoring concentrations by issuer, sector and geographic stratification and limiting exposure to any one issuer. 

As of June 30, 2017 and December 31, 2016, the Company did not have any investments in a single issuer, other than obligations of the U.S. Government and government agencies, with a carrying value in excess of 10% of Total shareholder's equity.

The following tables set forth the composition of the U.S. and foreign corporate securities within the fixed maturity portfolio by industry category as of the dates indicated:
 
Amortized
Cost
 
Gross Unrealized Capital Gains
 
Gross Unrealized Capital Losses
 
Fair Value
June 30, 2017
 
 
 
 
 
 
 
Communications
$
1,192.7

 
$
112.0

 
$
2.0

 
$
1,302.7

Financial
2,754.4

 
178.3

 
3.5

 
2,929.2

Industrial and other companies
8,195.4

 
484.9

 
34.3

 
8,646.0

Energy
1,984.1

 
132.0

 
43.8

 
2,072.3

Utilities
2,571.3

 
179.1

 
14.9

 
2,735.5

Transportation
586.5

 
36.5

 
1.7

 
621.3

Total
$
17,284.4

 
$
1,122.8

 
$
100.2

 
$
18,307.0

 
 
 
 
 
 
 
 
December 31, 2016
 
 
 
 
 
 
 
Communications
$
1,222.6

 
$
85.3

 
$
10.2

 
$
1,297.7

Financial
2,850.4

 
146.7

 
14.1

 
2,983.0

Industrial and other companies
8,479.5

 
346.4

 
98.9

 
8,727.0

Energy
2,144.8

 
104.9

 
48.8

 
2,200.9

Utilities
2,436.2

 
130.1

 
31.3

 
2,535.0

Transportation
617.7

 
25.7

 
5.6

 
637.8

Total
$
17,751.2

 
$
839.1

 
$
208.9

 
$
18,381.4



 
16
 

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

Fixed Maturities and Equity Securities:
The Company's fixed maturities and equity securities are currently designated as available-for-sale, except those accounted for using the FVO. Available-for-sale securities are reported at fair value and unrealized capital gains (losses) on these securities are recorded directly in Accumulated other comprehensive income (loss) ("AOCI") and presented net of related changes in Deferred policy acquisition costs ("DAC"), Value of business acquired ("VOBA") and Deferred income taxes. In addition, certain fixed maturities have embedded derivatives, which are reported with the host contract on the Condensed Consolidated Balance Sheets.
The Company has elected the FVO for certain of its fixed maturities to better match the measurement of assets and liabilities in the Condensed Consolidated Statements of Operations. Certain collateralized mortgage obligations ("CMOs"), primarily interest-only and principal-only strips, are accounted for as hybrid instruments and valued at fair value with changes in the fair value recorded in Other net realized capital gains (losses) in the Condensed Consolidated Statements of Operations.
The Company invests in various categories of CMOs, including CMOs that are not agency-backed, that are subject to different degrees of risk from changes in interest rates and defaults. The principal risks inherent in holding CMOs are prepayment and extension risks related to significant decreases and increases in interest rates resulting in the prepayment of principal from the underlying mortgages, either earlier or later than originally anticipated. As of June 30, 2017 and December 31, 2016, approximately 56.0% and 58.4%, respectively, of the Company’s CMO holdings, were invested in the above mentioned types of CMOs such as interest-only or principal-only strips, that are subject to more prepayment and extension risk than traditional CMOs.

Public corporate fixed maturity securities are distinguished from private corporate fixed maturity securities based upon the manner in which they are transacted. Public corporate fixed maturity securities are issued initially through market intermediaries on a registered basis or pursuant to Rule 144A under the Securities Act of 1933 (the "Securities Act") and are traded on the secondary market through brokers acting as principal. Private corporate fixed maturity securities are originally issued by borrowers directly to investors pursuant to Section 4(a)(2) of the Securities Act, and are traded in the secondary market directly with counterparties, either without the participation of a broker or in agency transactions.
 
Securities Lending

The Company engages in securities lending whereby certain securities from its portfolio are loaned to other institutions through a lending agent for short periods of time. The Company has the right to approve any institution with whom the lending agent transacts on its behalf. Initial collateral is required at a rate of 102% of the market value of the loaned securities. The lending agent retains the collateral and invests it in high quality liquid assets on behalf of the Company. The market value of the loaned securities is monitored on a daily basis with additional collateral obtained or refunded as the market value of the loaned securities fluctuates. The lending agent indemnifies the Company against losses resulting from the failure of a counterparty to return securities pledged where collateral is insufficient to cover the loss. As of June 30, 2017 and December 31, 2016, the fair value of loaned securities was $482.6 and $548.2, respectively, and is included in Securities pledged on the Condensed Consolidated Balance Sheets.

If cash is received as collateral, the lending agent retains the cash collateral and invests it in short-term liquid assets on behalf of the Company. As of June 30, 2017 and December 31, 2016, cash collateral retained by the lending agent and invested in short-term liquid assets on the Company's behalf was $256.7 and $248.4, respectively, and is recorded in Short-term investments under securities loan agreements, including collateral delivered on the Condensed Consolidated Balance Sheets. As of June 30, 2017 and December 31, 2016, liabilities to return collateral of $256.7 and $248.4, respectively, are included in Payables under securities loan agreements, including collateral held, on the Condensed Consolidated Balance Sheets.

During the first quarter of 2016 under an amendment to the securities lending program, the Company began accepting non-cash collateral in the form of securities. The securities retained as collateral by the lending agent may not be sold or re-pledged, except in the event of default, and are not reflected on the Company’s Condensed Consolidated Balance Sheets. This collateral generally consists of U.S. Treasury, U.S. Government agency securities and MBS pools. As of June 30, 2017 and December 31, 2016, the fair value of securities retained as collateral by the lending agent on the Company’s behalf was $242.6 and $315.8, respectively.


 
17
 

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

The following table sets forth borrowings under securities lending transactions by class of collateral pledged for the dates indicated:
 
June 30, 2017 (1)(2)
 
December 31, 2016 (1)(2)
U.S. Treasuries
$
306.0

 
$
303.6

U.S. corporate public securities
132.3

 
179.6

Equity Securities

 
0.4

Short-term Investments
4.1

 
1.0

Foreign corporate public securities and foreign governments
56.9

 
79.6

Payables under securities loan agreements
$
499.3

 
$
564.2

(1) As of June 30, 2017 and December 31, 2016, borrowings under securities lending transactions include cash collateral of $256.7 and $248.4, respectively.
(2) As of June 30, 2017 and December 31, 2016, borrowings under securities lending transactions include non-cash collateral of $242.6 and $315.8, respectively.

The Company's securities lending activities are conducted on an overnight basis, and all securities loaned can be recalled at any time. The Company does not offset assets and liabilities associated with its securities lending program.

Variable Interest Entities ("VIEs")

The Company holds certain VIEs for investment purposes. VIEs may be in the form of private placement securities, structured securities, securitization transactions or limited partnerships. The Company has reviewed each of its holdings and determined that consolidation of these investments in the Company’s financial statements is not required, as the Company is not the primary beneficiary, because the Company does not have both the power to direct the activities that most significantly impact the entity’s economic performance and the obligation or right to potentially significant losses or benefits, for any of its investments in VIEs. The Company did not provide any non-contractual financial support and its carrying value represents the Company’s exposure to loss. The carrying value of the investments in VIEs was $388.9 and $347.8 as of June 30, 2017 and December 31, 2016, respectively; these investments are included in Limited partnerships/corporations on the Condensed Consolidated Balance Sheets. Income and losses recognized on these investments are reported in Net investment income in the Condensed Consolidated Statements of Operations.

Securitizations

The Company invests in various tranches of securitization entities, including Residential mortgage-backed securities ("RMBS"), Commercial mortgage-backed securities ("CMBS") and asset-backed securities ("ABS"). Through its investments, the Company is not obligated to provide any financial or other support to these entities. Each of the RMBS, CMBS and ABS entities are thinly capitalized by design and considered VIEs. The Company's involvement with these entities is limited to that of a passive investor. The Company has no unilateral right to appoint or remove the servicer, special servicer or investment manager, which are generally viewed to have the power to direct the activities that most significantly impact the securitization entities' economic performance, in any of these entities, nor does the Company function in any of these roles. The Company, through its investments or other arrangements, does not have the obligation to absorb losses or the right to receive benefits from the entity that could potentially be significant to the entity. Therefore, the Company is not the primary beneficiary and will not consolidate any of the RMBS, CMBS and ABS entities in which it holds investments. These investments are accounted for as investments available-for-sale as described in the Fair Value Measurements Note to these Condensed Consolidated Financial Statements and unrealized capital gains (losses) on these securities are recorded directly in AOCI, except for certain RMBS that are accounted for under the FVO for which changes in fair value are reflected in Other net realized gains (losses) in the Condensed Consolidated Statements of Operations. The Company’s maximum exposure to loss on these structured investments is limited to the amount of its investment.


 
18
 

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

Unrealized Capital Losses

Unrealized capital losses (including noncredit impairments), along with the fair value of fixed maturity securities, including securities pledged, by market sector and duration were as follows as of June 30, 2017:
 
Six Months or Less
Below Amortized Cost
 
More Than Six
Months and Twelve
Months or Less
Below Amortized Cost
 
More Than Twelve
Months Below
Amortized Cost
 
Total
 
Fair
Value
 
Unrealized
Capital Losses
 
Fair
Value
 
Unrealized
Capital Losses
 
Fair
Value
 
Unrealized
Capital Losses
 
Fair
Value
 
Unrealized
Capital Losses
U.S. Treasuries
$
51.8

 
$
0.2

 
$
35.8

 
$
0.3

 
$

 
$

 
$
87.6

 
$
0.5

State, municipalities and political subdivisions
31.4

 
0.2

 
173.0

 
5.8

 
5.1

 
0.5

 
209.5

 
6.5

U.S. corporate public securities
259.3

 
2.2

 
549.6

 
14.9

 
83.7

 
12.0

 
892.6

 
29.1

U.S. corporate private securities
110.4

 
2.4

 
578.5

 
18.1

 
119.8

 
26.4

 
808.7

 
46.9

Foreign corporate public securities and foreign governments
97.4

 
1.6

 
118.9

 
2.0

 
91.4

 
12.6

 
307.7

 
16.2

Foreign corporate private securities
108.6

 
0.9

 
224.5

 
9.0

 
25.8

 
0.9

 
358.9

 
10.8

Residential mortgage-backed
82.3

 
1.0

 
542.3

 
11.9

 
93.7

 
3.4

 
718.3

 
16.3

Commercial mortgage-backed
141.4

 
1.2

 
198.6

 
9.1

 

 

 
340.0

 
10.3

Other asset-backed
62.1

 
0.3

 
48.6

 
0.3

 
16.3

 
0.2

 
127.0

 
0.8

Total
$
944.7

 
$
10.0

 
$
2,469.8

 
$
71.4

 
$
435.8

 
$
56.0

 
$
3,850.3

 
$
137.4

*Less than $0.1

















 
19
 

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

Unrealized capital losses (including noncredit impairments), along with the fair value of fixed maturity securities, including securities pledged, by market sector and duration were as follows as of December 31, 2016:

 
Six Months or Less
Below Amortized Cost
 
More Than Six
Months and Twelve
Months or Less
Below Amortized Cost
 
More Than Twelve
Months Below
Amortized Cost
 
Total
 
Fair
Value
 
Unrealized
Capital Losses
 
Fair
Value
 
Unrealized
Capital Losses
 
Fair
Value
 
Unrealized
Capital Losses
 
Fair
Value
 
Unrealized
Capital Losses
U.S. Treasuries
$
134.4

 
$
1.7

 
$

 
$

 
$

 
$

 
$
134.4

 
$
1.7

State, municipalities and political subdivisions
426.6

 
14.9

 

 

 
4.9

 
0.7

 
431.5

 
15.6

U.S. corporate public securities
2,107.1

 
53.2

 
2.5

 
0.2

 
179.7

 
18.6

 
2,289.3

 
72.0

U.S. corporate private securities
1,011.2

 
48.2

 
21.7

 
1.0

 
131.5

 
30.5

 
1,164.4

 
79.7

Foreign corporate public securities and foreign governments
678.4

 
20.4

 
1.2

 
0.1

 
132.5

 
17.1

 
812.1

 
37.6

Foreign corporate private securities
599.7

 
22.8

 

 

 
44.8

 
3.1

 
644.5

 
25.9

Residential mortgage-backed
881.2

 
23.5

 
109.0

 
2.7

 
54.5

 
2.8

 
1,044.7

 
29.0

Commercial mortgage-backed
414.3

 
16.7

 
4.9

 

*
6.3

 

*
425.5

 
16.7

Other asset-backed
146.9

 
0.3

 
0.9

 

*
17.3

 
1.0

 
165.1

 
1.3

Total
$
6,399.8

 
$
201.7

 
$
140.2

 
$
4.0

 
$
571.5

 
$
73.8

 
$
7,111.5

 
$
279.5


Of the unrealized capital losses aged more than twelve months, the average market value of the related fixed maturities was 88.6% of the average book value as of June 30, 2017 and December 31, 2016, respectively.


 
20
 

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

Unrealized capital losses (including noncredit impairments) in fixed maturities, including securities pledged, for instances in which fair value declined below amortized cost by greater than or less than 20% for consecutive months as indicated in the tables below, were as follows as of the dates indicated:
 
Amortized Cost
 
Unrealized Capital Losses
 
Number of Securities
 
< 20%
 
> 20%
 
< 20%
 
> 20%
 
< 20%
 
> 20%
June 30, 2017
 
 
 
 
 
 
 
 
 
 
 
Six months or less below amortized cost
$
958.9

 
$
38.7

 
$
10.5

 
$
9.5

 
238

 
9

More than six months and twelve months or less below amortized cost
2,584.9

 

 
77.9

 

 
420

 
4

More than twelve months below amortized cost
333.4

 
71.8

 
15.7

 
23.8

 
127

 
3

Total
$
3,877.2

 
$
110.5

 
$
104.1

 
$
33.3

 
785

 
16

 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
Six months or less below amortized cost
$
6,702.7

 
$
22.0

 
$
215.8

 
$
5.0

 
1,098

 
9

More than six months and twelve months or less below amortized cost
269.4

 
3.3

 
14.2

 
0.8

 
54

 
2

More than twelve months below amortized cost
312.8

 
80.8

 
20.7

 
23.0

 
128

 
5

Total
$
7,284.9

 
$
106.1

 
$
250.7

 
$
28.8

 
1,280

 
16

* Less than $0.1

 
21
 

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

Unrealized capital losses (including noncredit impairments) in fixed maturities, including securities pledged, by market sector for instances in which fair value declined below amortized cost by greater than or less than 20% were as follows as of the dates indicated:
 
Amortized Cost
 
Unrealized Capital Losses
 
Number of Securities
 
< 20%
 
> 20%
 
< 20%
 
> 20%
 
< 20%
 
> 20%
June 30, 2017
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasuries
$
88.1

 
$

 
$
0.5

 
$

 
21

 

State, municipalities and political subdivisions
216.0

 

 
6.5

 

 
115

 

U.S. corporate public securities
893.7

 
28.0

 
22.0

 
7.1

 
178

 
4

U.S. corporate private securities
789.2

 
66.4

 
25.0

 
21.9

 
65

 
2

Foreign corporate public securities and foreign governments
307.8

 
16.1

 
11.9

 
4.3

 
69

 
5

Foreign corporate private securities
369.7

 

*
10.8

 

*
39

 
2

Residential mortgage-backed
734.6

 

*
16.3

 

*
168

 
3

Commercial mortgage-backed
350.3

 

 
10.3

 

 
85

 

Other asset-backed
127.8

 

 
0.8

 

 
45

 

Total
$
3,877.2

 
$
110.5

 
$
104.1

 
$
33.3

 
785

 
16

 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasuries
$
136.1

 
$

 
$
1.7

 
$

 
22

 

State, municipalities and political subdivisions
447.1

 

 
15.6

 

 
187

 

U.S. corporate public securities
2,351.7

 
9.6

 
69.5

 
2.5

 
417

 
3

U.S. corporate private securities
1,162.2

 
81.9

 
56.8

 
22.9

 
108

 
3

Foreign corporate public securities and foreign governments
836.9

 
12.8

 
34.6

 
3.0

 
159

 
3

Foreign corporate private securities
670.4

 

*
25.9

 

*
64

 
2

Residential mortgage-backed
1,073.6

 
0.1

 
29.0

 

*
196

 
3

Commercial mortgage-backed
442.2

 

*
16.7

 

*
90

 
1

Other asset-backed
164.7

 
1.7

 
0.9

 
0.4

 
37

 
1

Total
$
7,284.9

 
$
106.1

 
$
250.7

 
$
28.8

 
1,280

 
16

*Less than $0.1
 
 
 
 
 
 
 
 
 
 
 

Investments with fair values less than amortized cost are included in the Company's other-than-temporary impairments analysis. Impairments were recognized as disclosed in the "Evaluating Securities for Other-Than-Temporary Impairments" section below. The Company evaluates non-agency RMBS and ABS for "other-than-temporary impairments" each quarter based on actual and projected cash flows after considering the quality and updated loan-to-value ratios reflecting current home prices of underlying collateral, forecasted loss severity, the payment priority within the tranche structure of the security and amount of any credit enhancements. The Company's assessment of current levels of cash flows compared to estimated cash flows at the time the securities were acquired (typically pre-2008) indicates the amount and the pace of projected cash flows from the underlying collateral has generally been lower and slower, respectively. However, since cash flows are typically projected at a trust level, the impairment review incorporates the security's position within the trust structure as well as credit enhancement remaining in the trust to determine whether an impairment is warranted. Therefore, while lower and slower cash flows will impact the trust, the effect on the valuation of a particular security within the trust will also be dependent upon the trust structure. Where the assessment continues to project full recovery of principal and interest on schedule, the Company has not recorded an impairment. Based on this analysis, the Company determined that the remaining investments in an unrealized loss position were not other-than-temporarily impaired and therefore no further other-than-temporary impairment was necessary.

 
22
 

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


Troubled Debt Restructuring

The Company invests in high quality, well performing portfolios of commercial mortgage loans and private placements. Under certain circumstances, modifications are granted to these contracts. Each modification is evaluated as to whether a troubled debt restructuring has occurred. A modification is a troubled debt restructuring when the borrower is in financial difficulty and the creditor makes concessions. Generally, the types of concessions may include reducing the face amount or maturity amount of the debt as originally stated, reducing the contractual interest rate, extending the maturity date at an interest rate lower than current market interest rates and/or reducing accrued interest. The Company considers the amount, timing and extent of the concession granted in determining any impairment or changes in the specific valuation allowance recorded in connection with the troubled debt restructuring. A valuation allowance may have been recorded prior to the quarter when the loan is modified in a troubled debt restructuring. Accordingly, the carrying value (net of the specific valuation allowance) before and after modification through a troubled debt restructuring may not change significantly, or may increase if the expected recovery is higher than the pre-modification recovery assessment. As of June 30, 2017, the Company did not have any new commercial mortgage loan troubled debt restructuring and had one new private placement troubled debt restructuring with a pre-modification and post-modification carrying value of $3.3. As of December 31, 2016, the Company had no new troubled debt restructurings for commercial mortgage loans or private placement bonds.

As of June 30, 2017 and December 31, 2016, the Company did not have any commercial mortgage loans or private placements modified in a troubled debt restructuring with a subsequent payment default.

Mortgage Loans on Real Estate

The Company's mortgage loans on real estate are all commercial mortgage loans held for investment, which are reported at amortized cost, less impairment write-downs and allowance for losses. The Company diversifies its commercial mortgage loan portfolio by geographic region and property type to reduce concentration risk. The Company manages risk when originating commercial mortgage loans by generally lending only up to 75% of the estimated fair value of the underlying real estate. Subsequently, the Company continuously evaluates mortgage loans based on relevant current information including a review of loan-specific credit quality, property characteristics and market trends. Loan performance is monitored on a loan-specific basis through the review of submitted appraisals, operating statements, rent revenues and annual inspection reports, among other items. This review ensures properties are performing at a consistent and acceptable level to secure the debt. The components to evaluate debt service coverage are received and reviewed at least annually to determine the level of risk.

The following table summarizes the Company's investment in mortgage loans as of the dates indicated:
 
June 30, 2017
 
December 31, 2016
 
Impaired
 
Non Impaired
 
Total
 
Impaired
 
Non Impaired
 
Total
Commercial mortgage loans
$
4.4

 
$
4,844.7

 
$
4,849.1

 
$
4.6

 
$
4,251.0

 
$
4,255.6

Collective valuation allowance for losses
N/A

 
(0.9
)
 
(0.9
)
 
N/A

 
(1.1
)
 
(1.1
)
Total net commercial mortgage loans
$
4.4

 
$
4,843.8

 
$
4,848.2

 
$
4.6

 
$
4,249.9

 
$
4,254.5

N/A- Not Applicable

There were no impairments taken on the mortgage loan portfolio for the three and six months ended June 30, 2017 and 2016.

The following table summarizes the activity in the allowance for losses for commercial mortgage loans for the periods indicated:
 
June 30, 2017
 
December 31, 2016
Collective valuation allowance for losses, balance at January 1
$
1.1

 
$
1.2

Addition to (reduction of) allowance for losses
(0.2
)
 
(0.1
)
Collective valuation allowance for losses, end of period
$
0.9

 
$
1.1



 
23
 

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

The carrying values and unpaid principal balances of impaired mortgage loans were as follows as of the dates indicated:
 
June 30, 2017
 
December 31, 2016
Impaired loans without allowances for losses
$
4.4

 
$
4.6

Less: Allowances for losses on impaired loans

 

Impaired loans, net
$
4.4

 
$
4.6

Unpaid principal balance of impaired loans
$
5.9

 
$
6.1


As of June 30, 2017 and December 31, 2016 the Company did not have any impaired loans with allowances for losses.
 
 
 
 
The Company defines delinquent mortgage loans consistent with industry practice as 60 days past due. The Company's policy is to recognize interest income until a loan becomes 90 days delinquent or foreclosure proceedings are commenced, at which point interest accrual is discontinued. Interest accrual is not resumed until the loan is brought current.

There were no mortgage loans in the Company's portfolio in process of foreclosure as of June 30, 2017 and December 31, 2016.

There were no loans 30 days or less in arrears, with respect to principal and interest as of June 30, 2017 and December 31, 2016.

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

The following tables present information on the average investment during the period in impaired loans and interest income recognized on impaired and troubled debt restructured loans for the periods indicated:
 
Three Months Ended June 30,
 
2017
 
2016
Impaired loans, average investment during the period (amortized cost)(1)
$
4.5

 
$
4.7

Interest income recognized on impaired loans, on an accrual basis(1)
0.1

 
0.1

Interest income recognized on impaired loans, on a cash basis(1)
0.1

 
0.1

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

 

(1)Includes amounts for Troubled debt restructured loans.
 
 
 
 
Six Months Ended June 30,
 
2017
 
2016
Impaired loans, average investment during the period (amortized cost)(1)
$
4.5

 
$
7.7

Interest income recognized on impaired loans, on an accrual basis(1)
0.2

 
0.2

Interest income recognized on impaired loans, on a cash basis(1)
0.2

 
0.2

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

 

(1)Includes amounts for Troubled debt restructured loans.

Loan-to-value ("LTV") and debt service coverage ("DSC") ratios are measures commonly used to assess the risk and quality of mortgage loans. The LTV ratio, calculated at time of origination, is expressed as a percentage of the amount of the loan relative to the value of the underlying property. A LTV ratio in excess of 100% indicates the unpaid loan amount exceeds the underlying collateral. The DSC ratio, based upon the most recently received financial statements, is expressed as a percentage of the amount of a property’s net income to its debt service payments. A DSC ratio of less than 1.0 indicates that a property’s operations do not generate sufficient income to cover debt payments. These ratios are utilized as part of the review process described above.

 
24
 

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


The following table presents the LTV ratios as of the dates indicated:
 
June 30, 2017 (1)
 
December 31, 2016 (1)
Loan-to-Value Ratio:
 
 
 
0% - 50%
$
460.1

 
$
369.1

>50% - 60%
1,190.3

 
1,078.9

>60% - 70%
2,962.9

 
2,574.1

>70% - 80%
228.0

 
230.8

>80% and above
7.8

 
2.7

Total Commercial mortgage loans
$
4,849.1

 
$
4,255.6

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

The following table presents the DSC ratios as of the dates indicated:
 
June 30, 2017 (1)
 
December 31, 2016 (1)
Debt Service Coverage Ratio:
 
 
 
Greater than 1.5x
$
3,770.1

 
$
3,427.6

>1.25x - 1.5x
426.2

 
415.2

>1.0x - 1.25x
573.4

 
340.7

Less than 1.0x
45.1

 
46.7

Commercial mortgage loans secured by land or construction loans
34.3

 
25.4

Total Commercial mortgage loans
$
4,849.1

 
$
4,255.6

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

Properties collateralizing mortgage loans are geographically dispersed throughout the United States, as well as diversified by property type, as reflected in the following tables as of the dates indicated:
 
June 30, 2017 (1)
 
December 31, 2016 (1)
 
Gross
Carrying Value
 
% of
Total
 
Gross
Carrying Value
 
% of
Total
Commercial Mortgage Loans by U.S. Region:
 
 
 
 
 
 
 
Pacific
$
951.0

 
19.5
%
 
$
968.8

 
22.9
%
South Atlantic
1,026.0

 
21.2
%
 
956.3

 
22.5
%
Middle Atlantic
1,060.3

 
21.9
%
 
710.1

 
16.7
%
West South Central
513.9

 
10.6
%
 
431.9

 
10.1
%
Mountain
449.1

 
9.3
%
 
370.7

 
8.7
%
East North Central
469.6

 
9.7
%
 
447.8

 
10.5
%
New England
80.8

 
1.7
%
 
81.1

 
1.9
%
West North Central
233.5

 
4.8
%
 
223.2

 
5.2
%
East South Central
64.9

 
1.3
%
 
65.7

 
1.5
%
Total Commercial mortgage loans
$
4,849.1

 
100.0
%
 
$
4,255.6

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

 
25
 

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

 
June 30, 2017 (1)
 
December 31, 2016 (1)
 
Gross
Carrying Value
 
% of
Total
 
Gross
Carrying Value
 
% of
Total
Commercial Mortgage Loans by Property Type:
 
 
 
 
 
 
 
Retail
$
1,420.5

 
29.2
%
 
$
1,358.9

 
31.9
%
Industrial
1,366.7

 
28.2
%
 
960.7

 
22.6
%
Apartments
842.2

 
17.4
%
 
793.5

 
18.6
%
Office
793.2

 
16.4
%
 
711.0

 
16.7
%
Hotel/Motel
169.9

 
3.5
%
 
170.2

 
4.0
%
Mixed Use
53.1

 
1.1
%
 
49.9

 
1.2
%
Other
203.5

 
4.2
%
 
211.4

 
5.0
%
Total Commercial mortgage loans
$
4,849.1

 
100.0
%
 
$
4,255.6

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

The following table sets forth the breakdown of mortgages by year of origination as of the dates indicated:
 
June 30, 2017 (1)
 
December 31, 2016 (1)
Year of Origination:
 
 
 
2017
$
815.3

 
$

2016
885.1

 
874.3

2015
718.0

 
729.1

2014
543.1

 
548.0

2013
673.0

 
685.1

2012
576.9

 
681.1

2011 and prior
637.7

 
738.0

Total Commercial mortgage loans
$
4,849.1

 
$
4,255.6

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

Evaluating Securities for Other-Than-Temporary Impairments

The Company performs a regular evaluation, on a security-by-security basis, of its available-for-sale securities holdings, including fixed maturity securities and equity securities in accordance with its impairment policy in order to evaluate whether such investments are other-than-temporarily impaired.


 
26
 

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

The following tables identify the Company's credit-related and intent-related impairments included in the Condensed Consolidated Statements of Operations, excluding impairments included in Other comprehensive income (loss) by type for the periods indicated:
 
Three Months Ended June 30,
 
2017
 
2016
 
Impairment
 
No. of Securities
 
Impairment
 
No. of Securities
U.S. corporate public securities
$
0.1

 
1

 
$

 

Foreign corporate public securities and foreign governments(1)

 

 
0.4

 
1

Foreign corporate private securities(1)

 

 
0.1

 
1

Residential mortgage-backed
0.2

 
7

 
0.6

 
13

Commercial mortgage-backed

*
1

 

 

Total
$
0.3

 
9

 
$
1.1

 
15

(1) Primarily U.S. dollar denominated.
*Less than $0.1
 
Six Months Ended June 30,
 
2017
 
2016
 
Impairment
 
No. of Securities
 
Impairment
 
No. of Securities
U.S. corporate public securities
$
0.1

 
1

 
$
0.1

 
1

Foreign corporate public securities and foreign governments(1)

 

 
7.3

 
2

Foreign corporate private securities(1)

 

 
0.1

 
1

Residential mortgage-backed
0.3

 
11

 
0.9

 
19

Commercial mortgage-backed

*
1

 

 

Total
$
0.4

 
13

 
$
8.4

 
23

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

The above tables include immaterial write-downs related to credit impairments for the three months ended June 30, 2017 and $0.1 of write-downs related to credit impairments for the six months ended June 30, 2017 in Other-than-temporary impairments, which are recognized in the Condensed Consolidated Statements of Operations. The remaining $0.3 in write-downs for the three and six months ended June 30, 2017, respectively, are related to intent impairments.

The above tables include $0.6 and $1.0 of write-downs related to credit impairments for the three and six months ended June 30, 2016, respectively, in Other-than-temporary impairments, which are recognized in the Condensed Consolidated Statements of Operations. The remaining $0.5 and $7.4 in write-downs for the three and six months ended June 30, 2016, respectively, are related to intent impairments.

 
27
 

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

The following tables summarize these intent impairments, which are also recognized in earnings, by type for the periods indicated:
 
Three Months Ended June 30,
 
2017
 
2016
 
Impairment
 
No. of Securities
 
Impairment
 
No. of Securities
U.S. corporate public securities
$
0.1

 
1

 
$

 

Foreign corporate public securities and foreign governments(1)

 

 

 

Residential mortgage-backed
0.2

 
1

 
0.5

 
1

Commercial mortgage-backed

*
1

 

 

Total
$
0.3

 
3

 
$
0.5

 
1

(1) Primarily U.S. dollar denominated.
*Less than $0.1
 
Six Months Ended June 30,
 
2017
 
2016
 
Impairment
 
No. of Securities
 
Impairment
 
No. of Securities
U.S. corporate public securities
$
0.1

 
1

 
$

 

Foreign corporate public securities and foreign governments(1)

 

 
6.9

 
1

Residential mortgage-backed
0.2

 
2

 
0.5

 
2

Commercial mortgage-backed

*
1

 

 

Total
$
0.3

 
4

 
$
7.4

 
3

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

The Company may sell securities during the period in which fair value has declined below amortized cost for fixed maturities or cost for equity securities. In certain situations, new factors, including changes in the business environment, can change the Company’s previous intent to continue holding a security. Accordingly, these factors may lead the Company to record additional intent related capital losses.


 
28
 

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

The following tables identify the amount of credit impairments on fixed maturities for which a portion of the OTTI loss was recognized in Other comprehensive income (loss) and the corresponding changes in such amounts for the periods indicated:
 
Three Months Ended June 30,
 
2017
 
2016
Balance at April 1
$
7.7

 
$
19.1

Additional credit impairments:
 
 
 
On securities previously impaired

 
0.2

Reductions:
 
 
 
Increase in cash flows
0.1

 

Securities sold, matured, prepaid or paid down
0.3

 
0.6

Balance at June 30
$
7.3

 
$
18.7

 
 
Six Months Ended June 30,
 
2017
 
2016
Balance at January 1
$
9.2

 
$
19.3

Additional credit impairments:
 
 
 
On securities previously impaired

 
0.5

Reductions:
 
 
 
Increase in cash flows
0.2

 
0.1

Securities sold, matured, prepaid or paid down
1.7

 
1.0

Balance at June 30
$
7.3

 
$
18.7


Net Investment Income

The following table summarizes Net investment income for the periods indicated:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Fixed maturities
$
324.7

 
$
327.2

 
$
650.7

 
$
651.2

Equity securities, available-for-sale
1.5

 
1.4

 
2.8

 
3.0

Mortgage loans on real estate
52.6

 
51.6

 
103.8

 
94.6

Policy loans
2.9

 
3.0

 
5.8

 
6.0

Short-term investments and cash equivalents
0.2

 
0.5

 
0.5

 
0.9

Other
12.8

 
4.8

 
27.1

 
3.4

Gross investment income
394.7

 
388.5

 
790.7

 
759.1

Less: Investment expenses
16.3

 
15.8

 
33.8

 
29.9

Net investment income
$
378.4

 
$
372.7

 
$
756.9

 
$
729.2


As of June 30, 2017 and December 31, 2016, the Company had $1.3 and $3.0, respectively, of investments in fixed maturities that did not produce net investment income. Fixed maturities are moved to a non-accrual status when the investment defaults.

Interest income on fixed maturities is recorded when earned using an effective yield method, giving effect to amortization of premiums and accretion of discounts. Such interest income is recorded in Net investment income in the Condensed Consolidated Statements of Operations.


 
29
 

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

Net Realized Capital Gains (Losses)

Net realized capital gains (losses) comprise the difference between the amortized cost of investments and proceeds from sale and redemption, as well as losses incurred due to the credit-related and intent-related other-than-temporary impairment of investments. Realized investment gains and losses are also primarily generated from changes in fair value of embedded derivatives within products and fixed maturities, changes in fair value of fixed maturities recorded at FVO and changes in fair value including accruals on derivative instruments, except for effective cash flow hedges. The cost of the investments on disposal is generally determined based on first-in-first-out ("FIFO") methodology.

Net realized capital gains (losses) were as follows for the periods indicated:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Fixed maturities, available-for-sale, including securities pledged
$
(1.6
)
 
$
(6.4
)
 
$
(20.7
)
 
$
(47.6
)
Fixed maturities, at fair value option
(38.3
)
 
(24.6
)
 
(97.1
)
 
(41.9
)
Derivatives
2.4

 
12.2

 
6.3

 
75.1

Embedded derivatives - fixed maturities
(1.0
)
 
(0.6
)
 
(2.5
)
 
0.3

Guaranteed benefit derivatives
(9.3
)
 
(45.1
)
 
11.0

 
(107.9
)
Other investments
0.3

 
0.3

 
0.2

 
0.2

Net realized capital gains (losses)
$
(47.5
)
 
$
(64.2
)
 
$
(102.8
)
 
$
(121.8
)
After-tax net realized capital gains (losses)
$
(30.8
)
 
$
(41.7
)
 
$
(66.8
)
 
$
(79.1
)

Proceeds from the sale of fixed maturities and equity securities, available-for-sale and the related gross realized gains and losses, before tax were as follows for the periods indicated:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Proceeds on sales
$
560.8

 
$
441.5

 
$
1,637.9

 
$
1,134.2

Gross gains
5.3

 
10.9

 
10.7

 
14.8

Gross losses
6.7

 
23.2

 
24.7

 
61.0


3.    Derivative Financial Instruments

The Company enters into the following types of derivatives:

Interest rate caps: The Company uses interest rate cap contracts to hedge the interest rate exposure arising from duration mismatches between assets and liabilities. Interest rate caps are also used to hedge interest rate exposure if rates rise above a specified level. Such increases in rates will require the Company to incur additional expenses. The future payout from the interest rate caps fund this increased exposure. The Company pays an upfront premium to purchase these caps. The Company utilizes these contracts in non-qualifying hedging relationships.

Interest rate swaps: Interest rate swaps are used by the Company primarily to reduce market risks from changes in interest rates and to alter interest rate exposure arising from mismatches between assets and/or liabilities. Interest rate swaps are also used to hedge the interest rate risk associated with the value of assets it owns or in an anticipation of acquiring them. Using interest rate swaps, the Company agrees with another party to exchange, at specified intervals, the difference between fixed rate and floating rate interest payments, calculated by reference to an agreed upon notional principal amount. These transactions are entered into pursuant to master agreements that provide for a single net payment to be made to/from the counterparty at each due date. The Company utilizes these contracts in qualifying hedging relationships as well as non-qualifying hedging relationships.


 
30
 

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

Foreign exchange swaps: The Company uses foreign exchange or currency swaps to reduce the risk of change in the value, yield or cash flows associated with certain foreign denominated invested assets. Foreign exchange swaps represent contracts that require the exchange of foreign currency cash flows against U.S. dollar cash flows at regular periods, typically quarterly or semi-annually. The Company utilizes these contracts in qualifying hedging relationships as well as non-qualifying hedging relationships.

Credit default swaps: Credit default swaps are used to reduce credit loss exposure with respect to certain assets that the Company owns or to assume credit exposure on certain assets that the Company does not own. Payments are made to, or received from, the counterparty at specified intervals. In the event of a default on the underlying credit exposure, the Company will either receive a payment (purchased credit protection) or will be required to make a payment (sold credit protection) equal to the par minus recovery value of the swap contract. Credit default swaps are also used to hedge credit exposure associated with certain variable annuity guarantees. The Company utilizes these contracts in non-qualifying hedging relationships.

Currency forwards: The Company utilizes currency forward contracts to hedge currency exposure related to invested assets. The Company utilizes these contracts in non-qualifying hedging relationships.

Futures: Futures contracts are used to hedge against a decrease in certain equity indices. Such decreases may correlate to a decrease in variable annuity account values which would increase the possibility of the Company incurring an expense for guaranteed benefits in excess of account values. The Companyalso uses interest rate futures contracts to hedge its exposure to market risks due to changes in interest rates. The Company enters into exchange traded futures with regulated futures commissions that are members of the exchange. The Company also posts initial and variation margins, with the exchange, on a daily basis. The Company utilizes exchange-traded futures in non-qualifying hedging relationships. The Company may also use futures contracts as a hedge against an increase in certain equity indices. Such increases may result in increased payments to the holders of fixed index annuity ("FIA") contracts.

Swaptions: A swaption is an option to enter into a swap with a forward starting effective date. The Company uses swaptions to hedge the interest rate exposure associated with the minimum crediting rate and book value guarantees embedded in the retirement products that the Company offers. Increases in interest rates will generate losses on assets that are backing such liabilities. In certain instances, the Company locks in the economic impact of existing purchased swaptions by entering into offsetting written swaptions. The Company pays a premium when it purchases the swaption. The Company utilizes these contracts in non-qualifying hedging relationships.

Options: The Company uses equity options to hedge against an increase in various equity indices. Such increases may result in increased payments to the holders of the FIA contracts. The Company pays an upfront premium to purchase these options. The Company utilizes these options in non-qualifying hedging relationships.

Managed custody guarantees ("MCGs"): The Company issues certain credited rate guarantees on variable fixed income portfolios that represent stand-alone derivatives. The market value is partially determined by, among other things, levels of or changes in interest rates, prepayment rates and credit ratings/spreads.

Embedded derivatives: The Company also invests in certain fixed maturity instruments and has issued certain products that contain embedded derivatives for which market value is at least partially determined by, among other things, levels of or changes in domestic and/or foreign interest rates (short-term or long-term), exchange rates, prepayment rates, equity rates, or credit ratings/spreads. In addition, the Company has entered into coinsurance with funds withheld arrangements, which contain embedded derivatives.

The Company's use of derivatives is limited mainly to economic hedging to reduce the Company's exposure to cash flow variability of assets and liabilities, interest rate risk, credit risk, exchange rate risk and equity market risk. It is the Company's policy not to offset amounts recognized for derivative instruments and amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral arising from derivative instruments executed with the same counterparty under a master netting arrangement, which provides the Company with the legal right of offset. However, in accordance with the Chicago Mercantile Exchange ("CME") rule changes related to the variation margin payments, effective the first quarter of 2017, the Company is required to adjust the derivative balances with the variation margin payments related to our cleared derivatives executed through CME.


 
31
 

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

The notional amounts and fair values of derivatives were as follows as of the dates indicated:
 
June 30, 2017
 
December 31, 2016
 
Notional
Amount
 
Asset
Fair Value
 
Liability
Fair Value
 
Notional
Amount
 
Asset
Fair Value
 
Liability
Fair Value
Derivatives: Qualifying for hedge accounting(1)
 
 
 
 
 
 
 
 
 
 
 
Cash flow hedges:
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
$
35.3

 
$
0.1

 
$

 
$
35.3

 
$
0.4

 
$
0.2

Foreign exchange contracts
270.6

 
2.2

 
15.8

 
230.5

 
12.8

 
6.3

Derivatives: Non-qualifying for hedge accounting(1)
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
25,625.4

 
148.6

 
24.7

 
29,112.2

 
437.1

 
154.2

Foreign exchange contracts
242.1

 
4.6

 
3.5

 
175.4

 
12.6

 
12.0

Equity contracts
125.5

 
3.9

 
1.5

 
89.4

 
2.3

 

Credit contracts
846.7

 
8.8

 
6.4

 
425.5

 
5.6

 
0.2

 
 
 
 
 
 
 
 
 
 
 
 
Embedded derivatives and Managed custody guarantees:
 
 
 
 
 
 
 
 
 
 
 
Within fixed maturity investments
N/A

 
15.0

 

 
N/A

 
17.5

 

Within products
N/A

 

 
164.2

 
N/A

 

 
173.8

Within reinsurance agreements
N/A

 

 
(27.6
)
 
N/A

 

 
(43.5
)
Managed custody guarantees
N/A

 

 

 
N/A

 

 

Total
 
 
$
183.2

 
$
188.5

 
 
 
$
488.3

 
$
303.2

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

Based on the notional amounts, a substantial portion of the Company’s derivative positions was not designated or did not qualify for hedge accounting as part of a hedging relationship as of June 30, 2017 and December 31, 2016. The Company utilizes derivative contracts mainly to hedge exposure to variability in cash flows, interest rate risk, credit risk, foreign exchange risk and equity market risk. The majority of derivatives used by the Company are designated as product hedges, which hedge the exposure arising from insurance liabilities or guarantees embedded in the contracts the Company offers through various product lines. These derivatives do not qualify for hedge accounting as they do not meet the criteria of being "highly effective" as outlined in ASC Topic 815, but do provide an economic hedge, which is in line with the Company’s risk management objectives. The Company also uses derivatives contracts to hedge its exposure to various risks associated with the investment portfolio. The Company does not seek hedge accounting treatment for certain of these derivatives as they generally do not qualify for hedge accounting due to the criteria required under the portfolio hedging rules outlined in ASC Topic 815. The Company also uses credit default swaps coupled with other investments in order to produce the investment characteristics of otherwise permissible investments that do not qualify as effective accounting hedges under ASC Topic 815.


 
32
 

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

Although the Company has not elected to net its derivative exposures, the notional amounts and fair values of Over-The-Counter ("OTC") and cleared derivatives excluding exchange traded contracts and forward contracts (To Be Announced mortgage-backed securities) are presented in the tables below as of the dates indicated:
 
June 30, 2017
 
Notional Amount
 
Asset Fair Value
 
Liability Fair Value
Credit contracts
$
846.7

 
$
8.8

 
$
6.4

Equity contracts
125.5

 
3.9

 
1.5

Foreign exchange contracts
512.7

 
6.8

 
19.3

Interest rate contracts
23,546.9

 
148.1

 
24.7

 
 
 
167.6

 
51.9

 
 
 
 
 
 
Counterparty netting(1)
 
 
(47.5
)
 
(47.5
)
Cash collateral netting(1)
 
 
(107.4
)
 

Securities collateral netting(1)
 
 
(9.2
)
 
(3.3
)
Net receivables/payables
 
 
$
3.5

 
$
1.1

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

 
December 31, 2016
 
Notional Amount
 
Asset Fair Value
 
Liability Fair Value
Credit contracts
$
425.5

 
$
5.6

 
$
0.2

Equity contracts
89.4

 
2.3

 

Foreign exchange contracts
405.9

 
25.4

 
18.3

Interest rate contracts
25,606.7

 
437.5

 
153.8

 
 
 
470.8

 
172.3

 
 
 
 
 
 
Counterparty netting(1)
 
 
(169.0
)
 
(169.0
)
Cash collateral netting(1)
 
 
(265.8
)
 

Securities collateral netting(1)
 
 
(11.0
)
 
(1.7
)
Net receivables/payables
 
 
$
25.0

 
$
1.6

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

Collateral

Under the terms of the OTC Derivative International Swaps and Derivatives Association, Inc. ("ISDA") agreements, the Company may receive from, or deliver to, counterparties, collateral to assure that terms of the ISDA agreements will be met with regard to the Credit Support Annex ("CSA"). The terms of the CSA call for the Company to pay interest on any cash received equal to the Federal Funds rate. To the extent cash collateral is received and delivered, it is included in Payables under securities loan agreements, including collateral held and Short-term investments under securities loan agreements, including collateral delivered, respectively, on the Condensed Consolidated Balance Sheets and is reinvested in short-term investments. Collateral held is used in accordance with the CSA to satisfy any obligations. Investment grade bonds owned by the Company are the source of noncash collateral posted, which is reported in Securities pledged on the Condensed Consolidated Balance Sheets. As of June 30, 2017, the Company held $30.8 and $78.2 of net cash collateral related to OTC derivative contracts and cleared derivative contracts, respectively. As of December 31, 2016, the Company held $42.6 and $227.1 of net cash collateral related to OTC derivative contracts and cleared derivative contracts, respectively. In addition, as of June 30, 2017, the Company delivered $111.8 of securities and held $9.2 of securities as collateral. As of December 31, 2016, the Company delivered $219.7 of securities and held $11.2 of securities as collateral.

 
33
 

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


Net realized gains (losses) on derivatives were as follows for the periods indicated:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Derivatives: Qualifying for hedge accounting(1)
 
 
 
 
 
 
 
Cash flow hedges:
 
 
 
 
 
 
 
Interest rate contracts
$
0.1

 
$
0.1

 
$
0.2

 
$
0.3

Foreign exchange contracts
0.8

 
0.1

 
7.8

 
0.3

Derivatives: Non-qualifying for hedge accounting(2)
 
 
 
 
 
 
 
Interest rate contracts
(1.5
)
 
12.9

 
(4.9
)
 
77.4

Foreign exchange contracts
1.2

 
(1.5
)
 
(0.4
)
 
(3.7
)
Equity contracts
0.3

 
0.1

 
0.8

 
(0.3
)
Credit contracts
1.5

 
0.5

 
2.8

 
1.1

Embedded derivatives and Managed custody guarantees:
 
 
 
 
 
 
 
Within fixed maturity investments(2)
(1.0
)
 
(0.6
)
 
(2.5
)
 
0.3

Within products(2)
(9.3
)
 
(43.6
)
 
10.9

 
(104.0
)
Within reinsurance agreements(3)
(13.4
)
 
(33.0
)
 
(15.9
)
 
(72.3
)
Managed custody guarantees(2)

 
(1.5
)
 
0.1

 
(3.9
)
Total
$
(21.3
)
 
$
(66.5
)
 
$
(1.1
)
 
$
(104.8
)
 
 
 
 
 
 
 
 
(1) Changes in value for effective fair value hedges are recorded in Other net realized capital gains (losses). Changes in fair value upon disposal for effective cash flow hedges are amortized through Net investment income and the ineffective portion is recorded in Other net realized capital gains (losses) in the Condensed Consolidated Statements of Operations. For the three and six months ended June 30, 2017 and 2016, ineffective amounts were immaterial.
(2) Changes in value are included in Other net realized capital gains (losses) in the Condensed Consolidated Statements of Operations.
(3) Changes in value are included in Interest credited and other benefits to contract owners/policyholders in the Condensed Consolidated Statements of Operations.

Credit Default Swaps

The Company has entered into various credit default swaps. When credit default swaps are sold, the Company assumes credit exposure to certain assets that it does not own. Credit default swaps may also be purchased to reduce credit exposure in the Company's portfolio. Credit default swaps involve a transfer of credit risk from one party to another in exchange for periodic payments. As of June 30, 2017, the fair values of credit default swaps of $8.8 and $6.4 were included in Derivatives assets and Derivatives liabilities, respectively, on the Condensed Consolidated Balance Sheets. As of December 31, 2016, the fair values of credit default swaps of $5.6 and $0.2 were included in Derivatives assets and Derivatives liabilities, respectively, on the Condensed Consolidated Balance Sheets. As of June 30, 2017 and December 31, 2016, the maximum potential future exposure to the Company was $552.0 and $402.0, respectively, in credit default swap protection sold. These instruments are typically written for a maturity period of 5 years and contain no recourse provisions. If the Company's current debt and claims paying ratings were downgraded in the future, the terms in the Company's derivative agreements may be triggered, which could negatively impact overall liquidity.


 
34
 

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

4.    Fair Value Measurements

Fair Value Measurement

The Company categorizes its financial instruments into a three-level hierarchy based on the priority of the inputs to the valuation technique, pursuant to ASU 2011-04, "Fair Value Measurements (ASC Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP" ("ASU 2011-04"). The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure fair value fall within different levels of the hierarchy, the category level is based on the lowest priority level input that is significant to the fair value measurement of the instrument.

When available, the estimated fair value of financial instruments is based on quoted prices in active markets that are readily and regularly obtainable. When quoted prices in active markets are not available, the determination of estimated fair value is based on market standard valuation methodologies, including discounted cash flow methodologies, matrix pricing or other similar techniques.



 
35
 

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

The following table presents the Company’s hierarchy for its assets and liabilities measured at fair value on a recurring basis as of June 30, 2017:
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Fixed maturities, including securities pledged:
 
 
 
 
 
 
 
U.S. Treasuries
$
656.0

 
$
59.7

 
$

 
$
715.7

U.S. Government agencies and authorities

 
3.6

 

 
3.6

State, municipalities and political subdivisions

 
858.0

 

 
858.0

U.S. corporate public securities

 
9,512.7

 
26.5

 
9,539.2

U.S. corporate private securities

 
2,700.1

 
595.1

 
3,295.2

Foreign corporate public securities and foreign governments(1)

 
2,816.7

 
0.1

 
2,816.8

Foreign corporate private securities (1)

 
2,885.0

 
128.4

 
3,013.4

Residential mortgage-backed securities

 
2,663.3

 
36.8

 
2,700.1

Commercial mortgage-backed securities

 
1,296.1

 
6.2

 
1,302.3

Other asset-backed securities

 
518.7

 
35.9

 
554.6

Total fixed maturities, including securities pledged
656.0

 
23,313.9

 
829.0

 
24,798.9

Equity securities, available-for-sale
34.9

 

 
50.3

 
85.2

Derivatives:


 


 


 
 
Interest rate contracts
0.6

 
148.1

 

 
148.7

Foreign exchange contracts

 
6.8

 

 
6.8

Equity contracts

 
3.9

 

 
3.9

Credit contracts

 
8.8

 

 
8.8

Cash and cash equivalents, short-term investments and short-term investments under securities loan agreements
721.6

 
4.3

 

 
725.9

Assets held in separate accounts
63,804.5

 
4,565.7

 
3.1

 
68,373.3

Total assets
$
65,217.6

 
$
28,051.5

 
$
882.4

 
$
94,151.5

Liabilities:
 
 
 
 
 
 
 
Derivatives:
 
 
 
 
 
 
 
Guaranteed benefit derivatives:
 
 
 
 
 
 
 
FIA
$

 
$

 
$
23.0

 
$
23.0

Stabilizer and MCGs

 

 
141.2

 
141.2

Other derivatives:
 
 
 
 
 
 
 
Interest rate contracts

 
24.7

 

 
24.7

Foreign exchange contracts

 
19.3

 

 
19.3

Equity contracts

 
1.5

 

 
1.5

Credit contracts

 
6.4

 

 
6.4

Embedded derivative on reinsurance

 
(27.6
)
 

 
(27.6
)
Total liabilities
$

 
$
24.3

 
$
164.2

 
$
188.5

(1) Primarily U.S. dollar denominated.


 
36
 

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

The following table presents the Company’s hierarchy for its assets and liabilities measured at fair value on a recurring basis as of December 31, 2016:
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Fixed maturities, including securities pledged:
 
 
 
 
 
 
 
U.S. Treasuries
$
729.3

 
$
57.7

 
$

 
$
787.0

U.S. Government agencies and authorities

 
3.8

 

 
3.8

State, municipalities and political subdivisions

 
795.4

 

 
795.4

U.S. corporate public securities

 
9,964.9

 
7.5

 
9,972.4

U.S. corporate private securities

 
2,435.9

 
524.7

 
2,960.6

Foreign corporate public securities and foreign governments(1)

 
2,884.3

 
0.1

 
2,884.4

Foreign corporate private securities (1)

 
2,756.0

 
154.0

 
2,910.0

Residential mortgage-backed securities

 
2,766.8

 
21.2

 
2,788.0

Commercial mortgage-backed securities

 
1,307.9

 
9.8

 
1,317.7

Other asset-backed securities

 
449.0

 
26.7

 
475.7

Total fixed maturities, including securities pledged
729.3

 
23,421.7

 
744.0

 
24,895.0

Equity securities, available-for-sale
34.4

 

 
47.9

 
82.3

Derivatives:
 
 
 
 
 
 
 
Interest rate contracts

 
437.5

 

 
437.5

Foreign exchange contracts

 
25.4

 

 
25.4

Equity contracts

 
2.3

 

 
2.3

Credit contracts

 
5.6

 

 
5.6

Cash and cash equivalents, short-term investments and short-term investments under securities loan agreements
939.8

 
32.9

 

 
972.7

Assets held in separate accounts
57,192.4

 
4,782.9

 
5.4

 
61,980.7

Total assets
$
58,895.9

 
$
28,708.3

 
$
797.3

 
$
88,401.5

Liabilities:
 
 
 
 
 
 
 
Derivatives:
 
 
 
 
 
 
 
Guaranteed benefit derivatives:
 
 
 
 
 
 
 
FIA
$

 
$

 
$
23.3

 
$
23.3

Stabilizer and MCGs

 

 
150.5

 
150.5

Other derivatives:
 
 
 
 
 
 
 
Interest rate contracts
0.6

 
153.8

 

 
154.4

Foreign exchange contracts

 
18.3

 

 
18.3

Equity contracts

 

 

 

Credit contracts

 
0.2

 

 
0.2

Embedded derivative on reinsurance

 
(43.5
)
 

 
(43.5
)
Total liabilities
$
0.6

 
$
128.8

 
$
173.8

 
$
303.2

(1) Primarily U.S. dollar denominated.


 
37
 

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

Valuation of Financial Assets and Liabilities at Fair Value

Certain assets and liabilities are measured at estimated fair value on the Company's Condensed Consolidated Balance Sheets. The Company defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The exit price and the transaction (or entry) price will be the same at initial recognition in many circumstances. However, in certain cases, the transaction price may not represent fair value. The fair value of a liability is based on the amount that would be paid to transfer a liability to a third-party with an equal credit standing. Fair value is required to be a market-based measurement that is determined based on a hypothetical transaction at the measurement date, from a market participant's perspective. The Company considers three broad valuation approaches when a quoted price is unavailable: (i) the market approach, (ii) the income approach and (iii) the cost approach. The Company determines the most appropriate valuation technique to use, given the instrument being measured and the availability of sufficient inputs. The Company prioritizes the inputs to fair valuation approaches and allows for the use of unobservable inputs to the extent that observable inputs are not available.

The Company utilizes a number of valuation methodologies to determine the fair values of its financial assets and liabilities in conformity with the concepts of exit price and the fair value hierarchy as prescribed in ASC Topic 820. Valuations are obtained from third-party commercial pricing services, brokers and industry-standard, vendor-provided software that models the value based on market observable inputs. The valuations obtained from third-party commercial pricing services are non-binding. The Company reviews the assumptions and inputs used by third-party commercial pricing services for each reporting period in order to determine an appropriate fair value hierarchy level. The documentation and analysis obtained from third-party commercial pricing services are reviewed by the Company, including in-depth validation procedures confirming the observability of inputs. The valuations are reviewed and validated monthly through the internal valuation committee price variance review, comparisons to internal pricing models, back testing to recent trades or monitoring of trading volumes.

Fixed maturities: The fair values for actively traded marketable bonds are determined based upon the quoted market prices and are classified as Level 1 assets. Assets in this category primarily include certain U.S. Treasury securities.

For fixed maturities classified as Level 2 assets, fair values are determined using a matrix-based market approach, based on prices obtained from third-party commercial pricing services and the Company’s matrix and analytics-based pricing models, which in each case incorporate a variety of market observable information as valuation inputs. The market observable inputs used for these fair value measurements, by fixed maturity asset class, are as follows:

U.S. Treasuries: Fair value is determined using third-party commercial pricing services, with the primary inputs being stripped interest and principal U.S. Treasury yield curves that represent a U.S. Treasury zero-coupon curve.

U.S. government agencies and authorities, State, municipalities and political subdivisions: Fair value is determined using third-party commercial pricing services, with the primary inputs being U.S. Treasury yield curves, trades of comparable securities, credit spreads off benchmark yields and issuer ratings.

U.S. corporate public securities, Foreign corporate public securities and foreign governments: Fair value is determined using third-party commercial pricing services, with the primary inputs being benchmark yields, trades of comparable securities, issuer ratings, bids and credit spreads off benchmark yields.

U.S. corporate private securities and Foreign corporate private securities: Fair values are determined using a matrix and analytics-based pricing model. The model incorporates the current level of risk-free interest rates, current corporate credit spreads, credit quality of the issuer and cash flow characteristics of the security. The model also considers a liquidity spread, the value of any collateral, the capital structure of the issuer, the presence of guarantees, and prices and quotes for comparably rated publicly traded securities.

RMBS, CMBS and ABS: Fair value is determined using third-party commercial pricing services, with the primary inputs being credit spreads off benchmark yields, prepayment speed assumptions, current and forecasted loss severity, debt service coverage ratios, collateral type, payment priority within tranche and the vintage of the loans underlying the security.


 
38
 

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

Transfers in and out of Level 1 and 2

There were no securities transferred between Level 1 and Level 2 for the three and six months ended June 30, 2017 and 2016. The Company’s policy is to recognize transfers in and transfers out as of the beginning of the reporting period.

Level 3 Financial Instruments

The fair values of certain assets and liabilities are determined using prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement (i.e., Level 3 as defined by ASC Topic 820), including but not limited to liquidity spreads for investments within markets deemed not currently active. These valuations, whether derived internally or obtained from a third-party, use critical assumptions that are not widely available to estimate market participant expectations in valuing the asset or liability. In addition, the Company has determined, for certain financial instruments, an active market is such a significant input to determine fair value that the presence of an inactive market may lead to classification in Level 3. In light of the methodologies employed to obtain the fair values of financial assets and liabilities classified as Level 3, additional information is presented below.

 
39
 


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

The following tables summarize the change in fair value of the Company’s Level 3 assets and liabilities and transfers in and out of Level 3 for the periods indicated:
 
Three Months Ended June 30, 2017
 
Fair Value as of April 1
 
Total
Realized/Unrealized
Gains (Losses) Included in:
 
Purchases
 
Issuances
 
Sales
 
Settlements
 
Transfers into Level 3(3)
 
Transfers out of Level 3(3)
 
Fair Value as of June 30
 
Change In Unrealized Gains (Losses) Included in Earnings(4)
 
 
Net Income
 
OCI
Fixed maturities, including securities pledged:


 


 


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Corporate public securities
$
30.4

 
$

 
$
0.5

 
$
6.0

 
$

 
$

 
$
(0.3
)
 
$

 
$
(10.1
)
 
$
26.5

 
$

U.S. Corporate private securities
564.9

 

 
3.5

 
7.9

 

 

 
(0.4
)
 
28.8

 
(9.6
)
 
595.1

 

Foreign corporate public securities and foreign governments(1)
0.1

 

 

 

 

 

 

 

 

 
0.1

 

Foreign corporate private securities(1)
161.1

 
0.1

 
0.3

 

 

 

 

 

 
(33.1
)
 
128.4

 
0.1

Residential mortgage-backed securities
30.4

 
(2.1
)
 
0.2

 
17.4

 

 

 

 
0.8

 
(9.9
)
 
36.8

 
(2.1
)
Commercial mortgage-backed securities
6.0

 

 

 
2.0

 

 

 
(1.8
)
 

 

 
6.2

 

Other asset-backed securities
22.5

 

 
0.1

 
24.4

 

 
(0.3
)
 
(0.3
)
 

 
(10.5
)
 
35.9

 

Total fixed maturities, including securities pledged
815.4

 
(2.0
)
 
4.6

 
57.7

 

 
(0.3
)
 
(2.8
)
 
29.6

 
(73.2
)
 
829.0

 
(2.0
)
Equity securities, available-for-sale
49.9

 

 
0.4

 

 

 

 

 

 

 
50.3

 

Derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Guaranteed benefit derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Stabilizer and MCGs(2)
(131.1
)
 
(9.1
)
 

 

 
(1.0
)
 

 

 

 

 
(141.2
)
 

FIA(2)
(23.1
)
 
(0.2
)
 

 

 
(0.1
)
 

 
0.4

 

 

 
(23.0
)
 

Assets held in separate accounts(5)
12.3

 

 

 
1.1

 

 
(2.5
)
 

 

 
(7.8
)
 
3.1

 

(1) Primarily U.S. dollar denominated.
(2) All gains and losses on Level 3 liabilities are classified as realized gains (losses) for the purpose of this disclosure because it is impracticable to track realized and unrealized gains (losses) separately on a contract-by-contract basis. These amounts are included in Other net realized capital gains (losses) in the Condensed Consolidated Statements of Operations.
(3) The Company’s policy is to recognize transfers in and transfers out as of the beginning of the reporting period.
(4) For financial instruments still held as of June 30, amounts are included in Net investment income and Total net realized capital gains (losses) in the Condensed Consolidated Statements of Operations.
(5) The investment income and realized gains (losses) and change in unrealized gains (losses) included in net income (loss) for separate account assets are offset by an equal amount for separate account liabilities, which results in a net zero impact on Net income (loss) for the Company.

 
40
 


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

 
Six Months Ended June 30, 2017
 
Fair Value
as of
January 1
 
Total
Realized/Unrealized
Gains (Losses) Included in:
 
Purchases
 
Issuances
 
Sales
 
Settlements
 
Transfers into Level 3(3)
 
Transfers out of Level 3(3)
 
Fair Value as of June 30
 
Change in Unrealized Gains (Losses) Included in Earnings(4)
 
 
Net Income
 
OCI
Fixed maturities, including securities pledged:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Corporate public securities
$
7.5

 
$

 
$
0.4

 
$
10.9

 
$

 
$

 
$
(0.9
)
 
$
8.6

 
$

 
$
26.5

 
$

U.S. Corporate private securities
524.7

 

 
4.3

 
44.6

 

 

 
(0.9
)
 
32.0

 
(9.6
)
 
595.1

 

Foreign corporate public securities and foreign governments(1)
0.1

 

 

 

 

 

 

 

 

 
0.1

 

Foreign corporate private securities(1)
154.0

 
0.1

 
(1.1
)
 
18.1

 

 

 
(9.9
)
 

 
(32.8
)
 
128.4

 
0.1

Residential mortgage-backed securities
21.2

 
(3.7
)
 
(0.1
)
 
17.4

 

 

 

 
2.0

 

 
36.8

 
(3.7
)
Commercial mortgage-backed securities
9.8

 

 

 
2.0

 

 

 
(3.0
)
 

 
(2.6
)
 
6.2

 

Other asset-backed securities
26.7

 

 
0.5

 
24.4

 

 

 
(0.7
)
 

 
(15.0
)
 
35.9

 

Total fixed maturities, including securities pledged
744.0

 
(3.6
)
 
4.0

 
117.4

 

 

 
(15.4
)
 
42.6

 
(60.0
)
 
829.0

 
(3.6
)
Equity securities, available-for-sale
47.9

 

 
0.7

 
1.7

 

 

 

 

 

 
50.3

 

Derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Guaranteed benefit derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Stabilizer and MCGs(2)
(150.5
)
 
11.6

 

 

 
(2.3
)
 

 

 

 

 
(141.2
)
 

FIA(2)
(23.3
)
 
(0.6
)
 

 

 
(0.2
)
 

 
1.1

 

 

 
(23.0
)
 

Assets held in separate accounts(5)
5.4

 

 

 
6.1

 

 
(2.7
)
 

 
2.1

 
(7.8
)
 
3.1

 

(1) Primarily U.S. dollar denominated.
(2) All gains and losses on Level 3 liabilities are classified as realized gains (losses) for the purpose of this disclosure because it is impracticable to track realized and unrealized gains (losses) separately on a contract-by-contract basis. These amounts are included in Other net realized capital gains (losses) in the Condensed Consolidated Statements of Operations.
(3) The Company’s policy is to recognize transfers in and transfers out as of the beginning of the reporting period.
(4) For financial instruments still held as of June 30, amounts are included in Net investment income and Total net realized capital gains (losses) in the Condensed Consolidated Statements of Operations.
(5) The investment income and realized gains (losses) and change in unrealized gains (losses) included in net income (loss) for separate account assets are offset by an equal amount for separate account liabilities, which results in a net zero impact on Net income (loss) for the Company.

 
41
 


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

The following tables summarize the change in fair value of the Company’s Level 3 assets and liabilities and transfers in and out of Level 3 for the periods indicated:
 
Three Months Ended June 30, 2016
 
Fair Value as of April 1
 
Total
Realized/Unrealized
Gains (Losses) Included in:
 
Purchases
 
Issuances
 
Sales
 
Settlements
 
Transfers into Level 3(3)
 
Transfers out of Level 3(3)
 
Fair Value as of June 30
 
Change In Unrealized Gains (Losses) Included in Earnings(4)
 
 
Net Income
 
OCI
 
 
 
 
Fixed maturities, including securities pledged:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Corporate public securities
$
1.7

 
$
(0.1
)
 
$
0.4

 
$

 
$

 
$
(0.7
)
 
$

 
$
19.4

 
$

 
$
20.7

 
$

U.S. Corporate private securities
393.5

 
(0.1
)
 
5.9

 
37.0

 

 

 
(20.8
)
 
6.0

 

 
421.5

 

Foreign corporate public securities and foreign governments(1)
0.5

 
(0.4
)
 

 

 

 

 

 

 

 
0.1

 
(0.4
)
Foreign corporate private securities(1)
179.6

 
(1.7
)
 
5.9

 

 

 
(14.6
)
 
(4.1
)
 
2.8

 

 
167.9

 
(0.1
)
Residential mortgage-backed securities
26.9

 
(1.5
)
 

 

 

 

 

 

 

 
25.4

 
(1.5
)
Commercial mortgage-backed securities
0.1

 

 
0.1

 

 

 

 
(1.1
)
 
10.2

 
(0.1
)
 
9.2

 

Other asset-backed securities
12.6

 

 
0.2

 
26.9

 

 

 
(0.3
)
 

 

 
39.4

 

Total fixed maturities, including securities pledged
614.9

 
(3.8
)
 
12.5

 
63.9

 

 
(15.3
)
 
(26.3
)
 
38.4

 
(0.1
)
 
684.2

 
(2.0
)
Equity securities, available-for-sale
48.2

 

 
0.6

 

 

 

 

 

 

 
48.8

 

Derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Guaranteed benefit derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Stabilizer and MCGs(2)
(226.0
)
 
(44.8
)
 

 

 
(1.2
)
 

 

 

 

 
(272.0
)
 

FIA(2)
(21.7
)
 
(0.3
)
 

 

 
0.1

 

 
0.7

 

 

 
(21.2
)
 

Assets held in separate accounts(5)
1.2

 

 

 

 

 

 

 
3.4

 
(1.2
)
 
3.4

 

(1) Primarily U.S. dollar denominated.
(2) All gains and losses on Level 3 liabilities are classified as realized gains (losses) for the purpose of this disclosure because it is impracticable to track realized and unrealized gains (losses) separately on a contract-by-contract basis. These amounts are included in Other net realized capital gains (losses) in the Condensed Consolidated Statements of Operations.
(3) The Company’s policy is to recognize transfers in and transfers out as of the beginning of the reporting period.
(4) For financial instruments still held as of June 30, amounts are included in Net investment income and Total net realized capital gains (losses) in the Condensed Consolidated Statements of Operations.
(5) The investment income and realized gains (losses) and change in unrealized gains (losses) included in net income (loss) for separate account assets are offset by an equal amount for separate account liabilities, which results in a net zero impact on Net income (loss) for the Company.

 
42
 


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

 
Six Months Ended June 30, 2016
 
Fair Value
as of
January 1
 
Total
Realized/Unrealized
Gains (Losses) Included in:
 
Purchases
 
Issuances
 
Sales
 
Settlements
 
Transfers into Level 3(3)
 
Transfers out of Level 3(3)
 
Fair Value as of June 30
 
Change in Unrealized Gains (Losses) Included in Earnings(4)
 
 
Net Income
 
OCI
 
 
 
 
Fixed maturities, including securities pledged:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Corporate public securities
$
2.3

 
$
(0.1
)
 
$
0.9

 
$

 
$

 
$
(0.7
)
 
$
(0.5
)
 
$
18.8

 
$

 
$
20.7

 
$

U.S. Corporate private securities
396.4

 
(0.1
)
 
14.2

 
43.1

 

 
(17.5
)
 
(52.2
)
 
44.2

 
(6.6
)
 
421.5

 
(0.1
)
Foreign corporate public securities and foreign governments(1)
0.5

 
(0.4
)
 

 

 

 

 

 

 

 
0.1

 
(0.4
)
Foreign corporate private securities(1)
158.1

 

 
6.9

 

 

 
(0.1
)
 
(13.9
)
 
19.6

 
(2.7
)
 
167.9

 

Residential mortgage-backed securities
28.2

 
(2.8
)
 

 

 

 

 

 

 

 
25.4

 
(2.8
)
Commercial mortgage-backed securities
12.6

 

 
0.1

 

 

 

 
(2.5
)
 

 
(1.0
)
 
9.2

 

Other asset-backed securities
13.1

 

 

 
26.9

 

 

 
(0.6
)
 

 

 
39.4

 

Total fixed maturities, including securities pledged
611.2

 
(3.4
)
 
22.1

 
70.0

 

 
(18.3
)
 
(69.7
)
 
82.6

 
(10.3
)
 
684.2

 
(3.3
)
Equity securities, available-for-sale
47.5

 

 
1.3

 

 

 

 

 

 

 
48.8

 

Derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Guaranteed benefit derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Stabilizer and MCGs(2)
(161.3
)
 
(108.4
)
 

 

 
(2.3
)
 

 

 

 

 
(272.0
)
 

FIA(2)
(23.1
)
 
0.5

 

 

 
0.2

 

 
1.2

 

 

 
(21.2
)
 

Assets held in separate accounts(5)
4.0

 

 

 

 

 

 

 
3.4

 
(4.0
)
 
3.4

 

(1) Primarily U.S. dollar denominated.
(2) All gains and losses on Level 3 liabilities are classified as realized gains (losses) for the purpose of this disclosure because it is impracticable to track realized and unrealized gains (losses) separately on a contract-by-contract basis. These amounts are included in Other net realized capital gains (losses) in the Condensed Consolidated Statements of Operations.
(3) The Company’s policy is to recognize transfers in and transfers out as of the beginning of the reporting period.
(4) For financial instruments still held as of June 30, amounts are included in Net investment income and Total net realized capital gains (losses) in the Condensed Consolidated Statements of Operations.
(5) The investment income and realized gains (losses) and change in unrealized gains (losses) included in net income (loss) for separate account assets are offset by an equal amount for separate account liabilities, which results in a net zero impact on Net income (loss) for the Company.

 
43
 

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

For the three and six months ended June 30, 2017 and 2016, the transfers in and out of Level 3 for fixed maturities and separate accounts were due to the variation in inputs relied upon for valuation each quarter. Securities that are primarily valued using independent broker quotes when prices are not available from one of the commercial pricing services are reflected as transfers into Level 3. When securities are valued using more widely available information, the securities are transferred out of Level 3 and into Level 1 or 2, as appropriate.

Significant Unobservable Inputs

The Company's Level 3 fair value measurements of its fixed maturities, equity securities available-for-sale and equity and credit derivative contracts are primarily based on broker quotes for which the quantitative detail of the unobservable inputs is neither provided nor reasonably corroborated, thus negating the ability to perform a sensitivity analysis. The Company performs a review of broker quotes by performing a monthly price variance comparison and back tests broker quotes to recent trade prices.

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

Significant unobservable inputs used in the fair value measurements of FIAs include nonperformance risk and policyholder behavior assumptions, such as lapses and partial withdrawals. Such inputs are monitored quarterly.

The significant unobservable inputs used in the fair value measurement of the Stabilizer embedded derivatives and MCG derivative are interest rate implied volatility, nonperformance risk, lapses and policyholder deposits. Such inputs are monitored quarterly.

Following is a description of selected inputs:

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

Nonperformance Risk: For the estimate of the fair value of embedded derivatives associated with the Company's product guarantees, the Company uses a blend of observable, similarly rated peer company credit default swap spreads, adjusted to reflect the credit quality of the Company and the priority of policyholder claims.

Actuarial Assumptions: Management regularly reviews actuarial assumptions, which are based on the Company's experience and periodically reviewed against industry standards. Industry standards and Company experience may be limited on certain products.


 
44
 

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

The following table presents the unobservable inputs for Level 3 fair value measurements as of June 30, 2017:
 
 
Range(1)
 
Unobservable Input
 
FIA
 
Stabilizer / MCG
 
Interest rate implied volatility
 

 
0.1% to 6.7%

 
Nonperformance risk
 
0.45% to 1.2%

 
0.45% to 1.2%

 
Actuarial Assumptions:
 
 
 
 
 
  Partial Withdrawals
 
0% to 7.0%

 

 
Lapses
 
0% to 42%

(2) 
0% to 50%

(3) 
Policyholder Deposits(4)
 

 
0% to 50%

(3) 
(1) Represents the range of reasonable assumptions that management has used in its fair value calculations.
(2) Lapse rates tend to be lower during the contractual surrender charge period and higher after the surrender charge period ends; the highest lapse rates occur in the year immediately after the end of the surrender charge period.
(3) Stabilizer contracts with recordkeeping agreements have different range of lapse and policyholder deposit assumptions from Stabilizer (Investment only) and MCG contracts as shown below:
 
Percentage of Plans
 
Overall Range of Lapse Rates
 
Range of Lapse Rates for 85% of Plans
 
Overall Range of Policyholder Deposits
 
Range of Policyholder Deposits for 85% of Plans
Stabilizer (Investment Only) and MCG Contracts
93
%
 
0- 25%
 
0-15%
 
0-30%
 
0-15%
Stabilizer with Recordkeeping Agreements
7
%
 
0-50%
 
0-30%
 
0-50%
 
0-25%
Aggregate of all plans
100
%
 
0-50%
 
0-30%
 
0-50%
 
0-25%
(4) Measured as a percentage of assets under management or assets under administration.

The following table presents the unobservable inputs for Level 3 fair value measurements as of December 31, 2016:
 
 
Range(1)
 
Unobservable Input
 
FIA
 
Stabilizer / MCG
 
Interest rate implied volatility
 

 
0.1% to 7.5%

 
Nonperformance risk
 
0.25% to 1.6%

 
0.25% to 1.6%

 
Actuarial Assumptions:
 
 
 
 
 
  Partial Withdrawals
 
0% to 7.0%

 

 
Lapses
 
0% to 42%

(2) 
0% to 50%

(3) 
Policyholder Deposits(4)
 

 
0% to 50%

(3) 
(1) Represents the range of reasonable assumptions that management has used in its fair value calculations.
(2) Lapse rates tend to be lower during the contractual surrender charge period and higher after the surrender charge period ends; the highest lapse rates occur in the year immediately after the end of the surrender charge period.
(3) Stabilizer contracts with recordkeeping agreements have different range of lapse and policyholder deposit assumptions from Stabilizer (Investment only) and MCG contracts as shown below:
 
Percentage of Plans
 
Overall Range of Lapse Rates
 
Range of Lapse Rates for 85% of Plans
 
Overall Range of Policyholder Deposits
 
Range of Policyholder Deposits for 85% of Plans
Stabilizer (Investment Only) and MCG Contracts
93
%
 
0-25%
 
0-15%
 
0-30%
 
0-15%
Stabilizer with Recordkeeping Agreements
7
%
 
0-50%
 
0-30%
 
0-50%
 
0-25%
Aggregate of all plans
100
%
 
0-50%
 
0-30%
 
0-50%
 
0-25%
(4) Measured as a percentage of assets under management or assets under administration.

Generally, the following will cause an increase (decrease) in the FIA embedded derivative fair value liability:

A decrease (increase) in nonperformance risk
A decrease (increase) in lapses

 
45
 

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

Generally, the following will cause an increase (decrease) in the derivative and embedded derivative fair value liabilities related to Stabilizer and MCG contracts:

An increase (decrease) in interest rate implied volatility
A decrease (increase) in nonperformance risk
A decrease (increase) in lapses
A decrease (increase) in policyholder deposits

The Company notes the following interrelationships:

Generally, an increase (decrease) in interest rate volatility will increase (decrease) lapses of Stabilizer and MCG contracts due to dynamic participant behavior.

Other Financial Instruments

The carrying values and estimated fair values of the Company’s financial instruments as of the dates indicated:
 
June 30, 2017
 
December 31, 2016
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
Assets:
 
 
 
 
 
 
 
Fixed maturities, including securities pledged
$
24,798.9

 
$
24,798.9

 
$
24,895.0

 
$
24,895.0

Equity securities, available-for-sale
85.2

 
85.2

 
82.3

 
82.3

Mortgage loans on real estate
4,848.2

 
4,913.7

 
4,254.5

 
4,339.6

Policy loans
213.6

 
213.6

 
218.9

 
218.9

Cash and cash equivalents, short-term investments and short-term investments under securities loan agreements
725.9

 
725.9

 
972.7

 
972.7

Derivatives
168.2

 
168.2

 
470.8

 
470.8

Notes receivable from affiliate
175.0

 
225.1

 
175.0

 
216.2

Assets held in separate accounts
68,373.3

 
68,373.3

 
61,980.7

 
61,980.7

Liabilities:
 
 
 
 
 
 
 
Investment contract liabilities:
 
 
 
 
 
 
 
Funding agreements without fixed maturities and deferred annuities(1)
25,255.6

 
29,727.2

 
24,942.7

 
28,876.5

Supplementary contracts, immediate annuities and other
371.9

 
436.3

 
386.1

 
437.5

Deposit liabilities
158.4

 
214.8

 
172.0

 
245.8

Derivatives:
 
 
 
 
 
 
 
Guaranteed benefit derivatives:
 
 
 
 
 
 
 
FIA
23.0

 
23.0

 
23.3

 
23.3

Stabilizer and MCGs
141.2

 
141.2

 
150.5

 
150.5

  Other derivatives
51.9

 
51.9

 
172.9

 
172.9

Long-term debt
4.9

 
4.9

 
4.9

 
4.9

Embedded derivatives on reinsurance
(27.6
)
 
(27.6
)
 
(43.5
)
 
(43.5
)
(1) Certain amounts included in Funding agreements without fixed maturities and deferred annuities are also reflected within the Guaranteed benefit derivatives section of the table above.


 
46
 

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

The following disclosures are made in accordance with the requirements of ASC Topic 825 which requires disclosure of fair value information about financial instruments, whether or not recognized at fair value on the Condensed Consolidated Balance Sheets, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates, in many cases, could not be realized in immediate settlement of the instrument.

ASC Topic 825 excludes certain financial instruments, including insurance contracts and all nonfinancial instruments from its disclosure requirements.  Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.

The following valuation methods and assumptions were used by the Company in estimating the fair value of the following financial instruments, which are not carried at fair value on the Condensed Consolidated Balance Sheets:

Mortgage loans on real estate: The fair values for mortgage loans on real estate are estimated on a monthly basis using discounted cash flow analyses and rates currently being offered in the marketplace for similar loans to borrowers with similar credit ratings. Loans with similar characteristics are aggregated for purposes of the calculations. Mortgage loans on real estate are classified as Level 3.

Policy loans: The fair value of policy loans approximates the carrying value of the loans.  Policy loans are collateralized by the cash surrender value of the associated insurance contracts and are classified as Level 2.

Notes receivable from affiliates: Estimated fair value of the Company’s notes receivable from affiliates is determined primarily using a matrix-based pricing. The model considers the current level of risk-free interest rates, credit quality of the issuer and cash flow characteristics of the security model and is classified as Level 2.

Investment contract liabilities:

Funding agreements without a fixed maturity and deferred annuities: Fair value is estimated as the mean present value of stochastically modeled cash flows associated with the contract liabilities taking into account assumptions about contract holder behavior. The stochastic valuation scenario set is consistent with current market parameters and discount is taken using stochastically evolving risk-free rates in the scenarios plus an adjustment for nonperformance risk. Margins for non-financial risks associated with the contract liabilities are also included. These liabilities are classified as Level 3.

Supplementary contracts and immediate annuities: Fair value is estimated as the mean present value of the single deterministically modeled cash flows associated with the contract liabilities discounted using stochastically evolving short risk-free rates in the scenarios plus an adjustment for nonperformance risk. The valuation is consistent with current market parameters. Margins for non-financial risks associated with the contract liabilities are also included. These liabilities are classified as Level 3.

Deposit liabilities: Fair value is estimated as the present value of expected cash flows associated with the deposit liability discounted using risk-free rates plus adjustments for nonperformance risk and uncertainty in the expected cash flows. These liabilities are classified as Level 3.

Long-term debt: Estimated fair value of the Company’s long-term debt is based upon discounted future cash flows using a discount rate approximating the current market rate, incorporating nonperformance risk. Long-term debt is classified as Level 2.

Fair value estimates are made at a specific point in time, based on available market information and judgments about various financial instruments, such as estimates of timing and amounts of future cash flows. Such estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument, nor do they consider the tax impact of the realization of unrealized capital gains (losses). In many cases, the fair value estimates cannot be substantiated by comparison to independent markets, nor can the disclosed value be realized in immediate settlement of the instruments. In evaluating the Company’s management of interest rate, price and liquidity risks, the fair values of all assets and liabilities should be taken into consideration, not only those presented above.

 
47
 

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

5.    Deferred Policy Acquisition Costs and Value of Business Acquired

The following tables present a rollforward of DAC and VOBA for the periods indicated:

 
2017
 
DAC
 
VOBA
 
Total
Balance as of January 1, 2017
$
476.4

 
$
537.4

 
$
1,013.8

Deferrals of commissions and expenses
38.9

 
2.5

 
41.4

Amortization:
 
 
 
 
 
Amortization, excluding unlocking
(37.0
)
 
(39.2
)
 
(76.2
)
Unlocking (1)
(46.8
)
 
(55.5
)
 
(102.3
)
Interest accrued
19.1

 
23.9

(2) 
43.0

Net amortization included in the Condensed Consolidated Statements of Operations
(64.7
)
 
(70.8
)
 
(135.5
)
Change due to unrealized capital gains/losses on available-for-sale securities
(55.7
)
 
(70.2
)
 
(125.9
)
Balance as of June 30, 2017
$
394.9

 
$
398.9

 
$
793.8

 
2016
 
DAC
 
VOBA
 
Total
Balance as of January 1, 2016
$
520.4

 
$
708.7

 
$
1,229.1

Deferrals of commissions and expenses
37.3

 
2.8

 
40.1

Amortization:
 
 
 
 
 
Amortization, excluding unlocking
(29.8
)
 
(28.5
)
 
(58.3
)
Unlocking (1)
5.6

 
9.9

 
15.5

Interest accrued
18.8

 
27.2

(2) 
46.0

Net amortization included in the Condensed Consolidated Statements of Operations
(5.4
)
 
8.6

 
3.2

Change due to unrealized capital gains/losses on available-for-sale securities
(164.5
)
 
(247.5
)
 
(412.0
)
Balance as of June 30, 2016
$
387.8

 
$
472.6

 
$
860.4

(1) DAC/VOBA unlocking includes the impacts of annual review of assumptions which typically occurs in the third quarter; and retrospective and prospective unlocking. The 2017 amounts include unfavorable unlocking for DAC and VOBA of $48.3 and $79.7, respectively, associated with customer consents to changes related to guaranteed minimum interest rate provisions of certain retirement plan contracts with fixed investment options.
(2) Interest accrued at the following rates for VOBA: 5.5% to 7.0% during 2017 and 2016.


 
48
 

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

6.    Accumulated Other Comprehensive Income (Loss)

Shareholder’s equity included the following components of Accumulated Other Comprehensive Income ("AOCI") as of the dates indicated:
 
June 30,
 
 
2017
 
2016
 
Fixed maturities, net of OTTI
$
1,326.1

 
$
1,853.2

 
Equity securities, available-for-sale
15.9

 
15.9

 
Derivatives
169.3

 
215.3

 
DAC/VOBA and Sales inducements adjustment on available-for-sale securities
(450.3
)
 
(608.7
)
 
Premium deficiency reserve adjustment
(110.2
)
 
(112.0
)
 
Other

 

 
Unrealized capital gains (losses), before tax
950.8

 
1,363.7

 
Deferred income tax asset (liability)
(210.0
)
 
(350.9
)
 
Unrealized capital gains (losses), after tax
740.8

 
1,012.8

 
Pension and other postretirement benefits liability, net of tax
5.3

 
6.2

 
AOCI
$
746.1

 
$
1,019.0

 



 
49
 

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

Changes in AOCI, including the reclassification adjustments recognized in the Condensed Consolidated Statements of Operations were as follows for the periods indicated:
 
 
 
 
 
 
 
 
Three Months Ended June 30, 2017
 
 
Before-Tax Amount
 
Income Tax
 
After-Tax Amount
 
Available-for-sale securities:
 
 
 
 
 
 
Fixed maturities
$
327.6

 
$
(113.9
)
 
$
213.7

 
Equity securities
0.4

 
(0.1
)
 
0.3

 
Other

 

 

 
OTTI
0.2

 
(0.1
)
 
0.1

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

 
(0.5
)
 
1.1

 
DAC/VOBA and Sales inducements
(92.6
)
 
32.3

 
(60.3
)
 
Premium deficiency reserve adjustment
(16.2
)
 
5.7

 
(10.5
)
 
Change in unrealized gains/losses on available-for-sale securities
221.0

 
(76.6
)
 
144.4

 
 
 
 
 
 
 
 
Derivatives:
 
 
 
 
 
 
Derivatives
(10.0
)
(1) 
3.5

 
(6.5
)
 
Adjustments related to effective cash flow hedges for amounts recognized in Net investment income in the Condensed Consolidated Statements of Operations
(5.8
)
 
2.1

 
(3.7
)
 
Change in unrealized gains/losses on derivatives
(15.8
)
 
5.6

 
(10.2
)
 
 
 
 
 
 
 
 
Pension and other postretirement benefits liability:
 
 
 
 
 
 
Amortization of prior service cost recognized in Operating expenses in the Condensed Consolidated Statements of Operations
(0.5
)
 
0.2

 
(0.3
)
 
Change in pension and other postretirement benefits liability
(0.5
)
 
0.2

 
(0.3
)
 
Change in Other comprehensive income (loss)
$
204.7

 
$
(70.8
)
 
$
133.9

 
(1) See the Derivative Financial Instruments Note to these Condensed Consolidated Financial Statements for additional information.


 
50
 

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

 
Six Months Ended June 30, 2017
 
 
Before-Tax Amount
 
Income Tax
 
After-Tax Amount
 
Available-for-sale securities:
 
 
 
 
 
 
Fixed maturities
$
440.9

 
$
(153.3
)
 
$
287.6

 
Equity securities
0.7

 
(0.2
)
 
0.5

 
Other

 

 

 
OTTI
1.8

 
(0.6
)
 
1.2

 
Adjustments for amounts recognized in Net realized capital gains (losses) in the Condensed Consolidated Statements of Operations
20.7

 
(7.2
)
 
13.5

 
DAC/VOBA and Sales inducements
(125.9
)
(1) 
44.0

 
(81.9
)
 
Premium deficiency reserve adjustment
(21.0
)
 
7.4

 
(13.6
)
 
Change in unrealized gains/losses on available-for-sale securities
317.2

 
(109.9
)
 
207.3

 
 
 
 
 
 
 
 
Derivatives:
 
 
 
 
 
 
Derivatives
(19.3
)
(2) 
6.8

 
(12.5
)
 
Adjustments related to effective cash flow hedges for amounts recognized in Net investment income in the Condensed Consolidated Statements of Operations
(11.6
)
 
4.1

 
(7.5
)
 
Change in unrealized gains/losses on derivatives
(30.9
)
 
10.9

 
(20.0
)
 
 
 
 
 
 
 
 
Pension and other postretirement benefits liability:
 
 
 
 
 
 
Amortization of prior service cost recognized in Operating expenses in the Condensed Consolidated Statements of Operations
(1.1
)
 
0.4

 
(0.7
)
 
Change in pension and other postretirement benefits liability
(1.1
)
 
0.4

 
(0.7
)
 
Change in Other comprehensive income (loss)
$
285.2

 
$
(98.6
)
 
$
186.6

 
(1) See the Deferred Policy Acquisition Costs and Value of Business Acquired Note to these Condensed Consolidated Financial Statements for additional information.
(2) See the Derivative Financial Instruments Note to these Condensed Consolidated Financial Statements for additional information.








 
51
 

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

 
 
 
 
 
 
 
 
Three Months Ended June 30, 2016
 
 
Before-Tax Amount
 
Income Tax
 
After-Tax Amount
 
Available-for-sale securities:
 
 
 
 
 
 
Fixed maturities
$
659.9

 
$
(228.6
)
 
$
431.3

 
Equity securities
0.7

 
(0.2
)
 
0.5

 
Other
(0.1
)
 

* 
(0.1
)
 
OTTI
0.4

 
(0.2
)
 
0.2

 
Adjustments for amounts recognized in Net realized capital gains (losses) in the Condensed Consolidated Statements of Operations
6.4

 
(2.3
)
 
4.1

 
DAC/VOBA and Sales inducements
(190.5
)
 
66.7

 
(123.8
)
 
Premium deficiency reserve adjustment
(27.3
)
 
9.5

 
(17.8
)
 
Change in unrealized gains/losses on available-for-sale securities
449.5

 
(155.1
)
 
294.4

 
 
 
 
 
 
 
 
Derivatives:
 
 
 
 
 
 
Derivatives
2.8

(1) 
(1.0
)
 
1.8

 
Adjustments related to effective cash flow hedges for amounts recognized in Net investment income in the Condensed Consolidated Statements of Operations
(4.5
)
 
1.5

 
(3.0
)
 
Change in unrealized gains/losses on derivatives
(1.7
)
 
0.5

 
(1.2
)
 
 
 
 
 
 
 
 
Pension and other postretirement benefits liability:
 
 
 
 
 
 
Amortization of prior service cost recognized in Operating expenses in the Condensed Consolidated Statements of Operations
(0.5
)
 
0.2

 
(0.3
)
 
Change in pension and other postretirement benefits liability
(0.5
)
 
0.2

 
(0.3
)
 
Change in Other comprehensive income (loss)
$
447.3

 
$
(154.4
)
 
$
292.9

 
* Less than $0.1.
(1) See the Derivative Financial Instruments Note to these Condensed Consolidated Financial Statements for additional information.


 
52
 

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

 
Six Months Ended June 30, 2016
 
 
Before-Tax Amount
 
Income Tax
 
After-Tax Amount
 
Available-for-sale securities:
 
 
 
 
 
 
Fixed maturities
$
1,366.9

 
$
(473.1
)
 
$
893.8

 
Equity securities
1.2

 
(0.4
)
 
0.8

 
Other

 

 

 
OTTI
0.8

 
(0.3
)
 
0.5

 
Adjustments for amounts recognized in Net realized capital gains (losses) in the Condensed Consolidated Statements of Operations
47.6

 
(16.7
)
 
30.9

 
DAC/VOBA and Sales inducements
(412.3
)
(1) 
144.3

 
(268.0
)
 
Premium deficiency reserve adjustment
(45.5
)
 
15.9

 
(29.6
)
 
Change in unrealized gains/losses on available-for-sale securities
958.7

 
(330.3
)
 
628.4

 
 
 
 
 
 
 
 
Derivatives:
 
 
 
 
 
 
Derivatives
15.7

(2) 
(5.5
)
 
10.2

 
Adjustments related to effective cash flow hedges for amounts recognized in Net investment income in the Condensed Consolidated Statements of Operations
(8.7
)
 
3.0

 
(5.7
)
 
Change in unrealized gains/losses on derivatives
7.0

 
(2.5
)
 
4.5

 
 
 
 
 
 
 
 
Pension and other postretirement benefits liability:
 
 
 
 
 
 
Amortization of prior service cost recognized in Operating expenses in the Condensed Consolidated Statements of Operations
(1.1
)
 
0.4

 
(0.7
)
 
Change in pension and other postretirement benefits liability
(1.1
)
 
0.4

 
(0.7
)
 
Change in Other comprehensive income (loss)
$
964.6

 
$
(332.4
)
 
$
632.2

 
(1) See the Deferred Policy Acquisition Costs and Value of Business Acquired Note to these Condensed Consolidated Financial Statements for additional information.
(2) See the Derivative Financial Instruments Note to these Condensed Consolidated Financial Statements for additional information.


 
53
 

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

7.    Income Taxes
 
 
 
 
 
 
 
 
The Company's effective tax rates for the three and six months ended June 30, 2017 were 49.3% and (37.3)%, respectively. The effective tax rates differed from the statutory rate of 35% for the three and six months ended June 30, 2017 primarily due to the effect of the dividends received deduction ("DRD").

The Company's effective tax rates for the three and six months ended June 30, 2016 were 24.8% and 24.0%, respectively. The effective tax rates differed from the statutory rate of 35% for the three and six months ended June 30, 2016 primarily due to the effect of the DRD.
 
Tax Sharing Agreement

The results of the Company's operations are included in the consolidated tax return of Voya Financial, Inc. Generally, the Company's consolidated financial statements recognize the current and deferred income tax consequences that result from the Company's activities during the current and preceding periods pursuant to the provisions of Income Taxes (ASC Topic 740) as if the Company were a separate taxpayer rather than a member of Voya Financial, Inc.'s consolidated income tax return group with the exception of any net operating loss carryforwards and capital loss carryforwards, which are recorded pursuant to the tax sharing agreement. If the Company instead were to follow a separate taxpayer approach without any exceptions, there would be no impact to income tax expense (benefit) for the periods indicated above. Also, any current tax benefit related to the Company's tax attributes realized by virtue of its inclusion in the consolidated tax return of Voya Financial, Inc. would have been recorded directly to equity rather than income. Under the tax sharing agreement, Voya Financial, Inc. will pay the Company for the tax benefits of ordinary and capital losses only in the event that the consolidated tax group actually uses the tax benefit of losses generated.

Tax Regulatory Matters

During 2016, the Internal Revenue Service ("IRS") completed its examination of Voya Financial, Inc.'s consolidated return (including the Company) through tax year 2015. The audit settlement did not have a material impact on the Company. Voya Financial, Inc. (including the Company) is currently under audit by the IRS, and it is expected that the examination of tax year 2016 may be finalized within the next twelve months. Voya Financial, Inc. (including the Company) and the IRS have agreed to participate in the Compliance Assurance Process for the tax years 2016 and 2017.

8.    Financing Agreements

Reciprocal Loan Agreement

The Company maintains a reciprocal loan agreement with Voya Financial, Inc., an affiliate, to facilitate the handling of unanticipated short-term cash requirements that arise in the ordinary course of business. Under the prior agreement, which became effective in June 2001 and expired on April 1, 2016, and the current agreement, which became effective on April 1, 2016 and expires April 1, 2021, either party can borrow from the other up to 3.0% of the Company’s statutory admitted assets as of the preceding December 31. Effective January 2014, interest on any borrowing by either the Company or Voya Financial, Inc. is charged at a rate based on the prevailing market rate for similar third-party borrowings or securities.

Under this agreement, the Company did not incur interest expense for the three months ended June 30, 2017 and the Company incurred $0.1 in interest expense for the six months ended June 30, 2017. The Company did not incur interest expense for the three and six months months ended June 30, 2016. The Company earned $0.7 and $0.8 in interest income for the three and six months ended June 30, 2017, respectively and earned $0.2 and $0.4 in interest income for the three and six months ended June 30, 2016, respectively. As of June 30, 2017 and December 31, 2016, the Company did not have an outstanding receivable/payable from/to Voya Financial, Inc. under the reciprocal loan agreement.

For information on the Company's additional financing agreements, see the Financing Agreements Note in the Consolidated Financial Statements in Part II, Item 8. in the Company's Annual Report on Form 10-K.


 
54
 

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

9.    Commitments and Contingencies

Commitments

Through the normal course of investment operations, the Company commits to either purchase or sell securities, mortgage loans, or money market instruments, at a specified future date and at a specified price or yield. The inability of counterparties to honor these commitments may result in either a higher or lower replacement cost. Also, there is likely to be a change in the value of the securities underlying the commitments. As of June 30, 2017 and December 31, 2016, the Company had off-balance sheet commitments to acquire mortgage loans of $118.4 and $602.0, respectively, and purchase limited partnerships and private placement investments of $527.4 and $455.9, respectively.

Restricted Assets

The Company is required to maintain assets on deposit with various regulatory authorities to support its insurance operations. The Company may also post collateral in connection with certain securities lending, repurchase agreements, funding agreements, letter of credit ("LOC") and derivative transactions as described further in this note. The components of the fair value of the restricted assets were as follows as of the dates indicated:
 
June 30, 2017
 
December 31, 2016
Other fixed maturities-state deposits
$
13.8

 
$
13.4

Securities pledged(1)
594.4

 
767.9

Total restricted assets
$
608.2

 
$
781.3

(1) Includes the fair value of loaned securities of $482.6 and $548.2 as of June 30, 2017 and December 31, 2016, respectively. In addition, as of June 30, 2017 and December 31, 2016, the Company delivered securities as collateral of $111.8 and $219.7, respectively. Loaned securities and securities delivered as collateral are included in Securities pledged on the Condensed Consolidated Balance Sheets.

Litigation, Regulatory Matters and Loss Contingencies

Litigation, regulatory and other loss contingencies arise in connection with the Company's activities as a diversified financial services firm. The Company is a defendant in a number of litigation matters arising from the conduct of its business, both in the ordinary course and otherwise. In some of these matters, claimants seek to recover very large or indeterminate amounts, including compensatory, punitive, treble and exemplary damages. Modern pleading practice in the U.S. permits considerable variation in the assertion of monetary damages and other relief. Claimants are not always required to specify the monetary damages they seek or they may be required only to state an amount sufficient to meet a court's jurisdictional requirements. Moreover, some jurisdictions allow claimants to allege monetary damages that far exceed any reasonably possible verdict. The variability in pleading requirements and past experience demonstrates that the monetary and other relief that may be requested in a lawsuit or claim often bears little relevance to the merits or potential value of a claim. Litigation against the Company includes a variety of claims including negligence, breach of contract, fraud, violation of regulation or statute, breach of fiduciary duty, negligent misrepresentation, failure to supervise, elder abuse and other torts.

As with other financial services companies, the Company periodically receives informal and formal requests for information from various state and federal governmental agencies and self-regulatory organizations in connection with inquiries and investigations of the products and practices of the Company or the financial services industry. It is the practice of the Company to cooperate fully in these matters. Regulatory investigations, exams, inquiries and audits could result in regulatory action against the Company. The potential outcome of such action is difficult to predict but could subject the Company to adverse consequences, including, but not limited to, settlement payments, additional payments to beneficiaries, and additional escheatment of funds deemed abandoned under state laws. They may also result in fines and penalties and changes to the Company's procedures for the identification and escheatment of abandoned property or the correction of processing errors and other financial liability.


 
55
 

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

The outcome of a litigation or regulatory matter is difficult to predict and the amount or range of potential losses associated with these or other loss contingencies requires significant management judgment. It is not possible to predict the ultimate outcome or to provide reasonably possible losses or ranges of losses for all pending regulatory matters, litigation, and other loss contingencies. While it is possible that an adverse outcome in certain cases could have a material adverse effect upon the Company's financial position, based on information currently known, management believes that neither the outcome of pending litigation and regulatory matters, nor potential liabilities associated with other loss contingencies, are likely to have such an effect. However, given the large and indeterminate amounts sought in certain litigation and the inherent unpredictability of all such matters, it is possible that an adverse outcome in certain of the Company's litigation or regulatory matters, or liabilities arising from other loss contingencies, could, from time to time, have a material adverse effect upon the Company's results of operations or cash flows in a particular quarterly or annual period.

For some matters, the Company is able to estimate a possible range of loss. For such matters in which a loss is probable, an accrual has been made. For matters where the Company, however, believes a loss is reasonably possible, but not probable, no accrual is required. For matters for which an accrual has been made, but there remains a reasonably possible range of loss in excess of the amounts accrued or for matters where no accrual is required, the Company develops an estimate of the unaccrued amounts of the reasonably possible range of losses. As of June 30, 2017, the Company estimates the aggregate range of reasonably possible losses, in excess of any amounts accrued for these matters as of such date, is not material to the Company.

For other matters, the Company is currently not able to estimate the reasonably possible loss or range of loss. The Company is often unable to estimate the possible loss or range of loss until developments in such matters have provided sufficient information to support an assessment of the range of possible loss, such as quantification of a damage demand from plaintiffs, discovery from plaintiffs and other parties, investigation of factual allegations, rulings by a court on motions or appeals, analysis by experts and the progress of settlement discussions. On a quarterly and annual basis, the Company reviews relevant information with respect to litigation and regulatory contingencies and updates the Company's accruals, disclosures and reasonably possible losses or ranges of loss based on such reviews.

Litigation includes Dezelan v. Voya Retirement Insurance and Annuity Company (USDC District of Connecticut, No. 3:16-cv-1251)(filed July 26, 2016), a putative class action in which plaintiff, a participant in a 403(b) Plan, seeks to represent a class of plans whose assets are invested in VRIAC “Group Annuity Contract Stable Value Funds.”  Plaintiff alleges that VRIAC has violated the Employee Retirement Income Security Act of 1974 by charging unreasonable fees and setting its own compensation in connection with stable value products.  Plaintiff seeks declaratory and injunctive relief, disgorgement of profits, damages and attorney’s fees. The Company denies the allegations, which it believes are without merit, and intends to defend the case vigorously. On July 7, 2017, the district court granted the Company's motion to dismiss, but permitted the plaintiff to file an amended complaint.

10.    Related Party Transactions

Operating Agreements

Prior to May 1, 2017, DSL was the investment adviser to certain U.S. registered investment companies that are investment options under certain of the Company’s variable insurance products. Consequently, DSL was party to various intercompany management and revenue sharing agreements, whereby DSL earned revenues and incurred expenses associated with these intercompany agreements. Effective May 1, 2017, Voya Investments, LLC, an affiliate, was appointed as investment adviser to these U.S. registered investment companies and DSL will no longer provide these advisory and certain other related services to its affiliates. While this change will have an impact on the Company’s and DSL’s total revenues and total expenses, the net impact on the Company’s Net income (loss) is expected to be insignificant.


 
56
 

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

For the three and six months ended June 30, 2017, revenues with affiliated entities related to the operating agreements disclosed in the Related Party Transactions Note in the Consolidated Financial Statements in Part II, Item 8. in the Company's Annual Report on Form 10-K and reflecting changes to certain of these operating agreements described above were $109.5 and $257.3, respectively. For the three and six months ended June 30, 2016, revenues with affiliated entities related to the aforementioned operating agreements, as amended, were $138.8 and $274.1, respectively. For the three and six months ended June 30, 2017, expenses with affiliated entities related to the aforementioned operating agreements, as amended, were $177.5 and $378.9, respectively. For the three and six months ended June 30, 2016, expenses with affiliated entities related to the aforementioned operating agreements, as amended, were $195.6 and $391.3, respectively.

Reinsurance Agreements

The Company has entered into reinsurance agreements that are accounted for under the deposit method with two of its affiliates. As of June 30, 2017 and December 31, 2016, the Company had deposit assets of $74.2 and $80.4, respectively, and deposit liabilities of $158.4 and $172.0, respectively, related to these agreements. Deposit assets and liabilities are included in Other assets and Other liabilities, respectively, on the Condensed Consolidated Balance Sheets. For further information on these reinsurance agreements, see the Related Party Transactions Note in the Consolidated Financial Statements in Part II, Item 8. in the Company's Annual Report on Form 10-K.


 
57
 



Item 2.    Management’s Narrative Analysis of the Results of Operations and Financial Condition
(Dollar amounts in millions, unless otherwise stated)

For the purposes of the discussion in this Quarterly Report on Form 10-Q, the term "VRIAC" refers to Voya Retirement Insurance and Annuity Company, and the terms "Company," "we," "our," "us" refer to Voya Retirement Insurance and Annuity Company and its subsidiaries. We are a direct, wholly owned subsidiary of Voya Holdings Inc., 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 six months ended June 30, 2017 and 2016 and financial condition as of June 30, 2017 and December 31, 2016. 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, 2016 ("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 the State of Connecticut. VRIAC and its wholly owned subsidiaries (collectively, the "Company") provide financial products and services in the United States. VRIAC is authorized to conduct its insurance business in all states and in the District of Columbia, Guam, Puerto Rico and the Virgin Islands.

The Condensed Consolidated Financial Statements include the accounts of VRIAC and its wholly owned subsidiaries, Voya Financial Partners, LLC ("VFP") and Directed Services LLC ("DSL"). Intercompany transactions and balances have been eliminated.

Our products include qualified and nonqualified annuity contracts that include a variety of funding and payout options for individuals and employer-sponsored retirement plans qualified under Internal Revenue Code Sections 401, 403, 408, 457 and 501, as well as nonqualified deferred compensation plans and related services. Our products are offered primarily to employer-sponsored groups in the health care, government and education markets (collectively "tax exempt markets"), small to mid-sized corporations and individuals. We also provide stable value investment options, including separate account guaranteed investment contracts (e.g. GICs) and synthetic GICs, to institutional clients. Our products are generally distributed through pension professionals, independent agents and brokers, third party administrators, banks, consultants, dedicated financial guidance, planning and advisory representatives associated with Voya Financial, Inc.'s retail broker-dealer, Voya Financial Advisors, Inc. ("Voya Financial Advisors").

We derive our revenue mainly from (a) investment income earned on investments (b) Fee income generated from separate account assets supporting variable options under variable annuity contract investments, as designated by contract owners, (c) Premiums, (d) realized capital gains (losses) on investments and changes in fair value of embedded derivatives on product guarantees, and (e) Other revenue which includes certain other fees. Our Benefits and expenses primarily consist of (a) Interest credited and other benefits to contract owners/policyholders, (b) Operating expenses, which include expenses related to the selling and servicing of the various products offered by us and other general business expenses and (c) amortization of DAC and VOBA. In addition, we collect broker-dealer commission revenues through our subsidiaries, DSL and VFP, which are, in turn, paid to broker-dealers and expensed.

We have one operating segment.

During the second quarter of 2017, we solicited customer consents to execute a change to reduce guaranteed minimum interest rate ("GMIR") applicable to future deposits and transfers into fixed investment options for certain retirement plan contracts with above-market GMIRs. This change, which reduces our exposure to low interest rates on new deposits and transfers and in certain plans existing fixed account assets, resulted in unfavorable unlocking of $128.0 million. The unfavorable unlocking was determined based on legally binding consent acceptances received from customers as well as expected future acceptances of consents from

 
58
 


customers solicited during the second quarter of 2017. This unfavorable unlocking was recorded in Net amortization of DAC and VOBA for the three and six months ended June 30, 2017.

Recent Events

On July 31, 2017, our affiliate, Voya Services Company (“Voya Services”) entered into a servicing agreement with a third-party service provider (the “service provider”). Under the agreement, the service provider will provide Voya Services with a broad range of information technology services such as application development and maintenance; infrastructure management and support including for servers, storage and network devices; service desk; security; general service and operations management; and disaster recovery and business continuity. The service provider will be responsible for providing certain computing assets such as server and network hardware. There will be a transition period in connection with the service provider assuming responsibility for these operations. Voya Services will retain responsibility for, among other things, its technology architecture, security strategy, program governance and regulatory oversight responsibilities. The agreement is designed to allow for additional statements of work for additional projects and services to be added in the future.
As part of the transaction, Voya Services expects that certain of its employees will become employees of the service provider, and that certain current employee positions will be eliminated. Under the terms of the agreement, employees of Voya Services transferring to the service provider will become part of the team providing services to Voya Services under the agreement for a minimum period of between one and two years. The services will be provided on Voya Services’ premises, and also at the service provider’s facilities both inside and outside of the United States.
The initial term of the agreement is for five years. Voya Services has the right to extend the initial term for up to three optional extension periods of one year each, by giving notice the service provider no less than 60 days prior to the end of the then-current term. Further, Voya Services has additional rights to extend the agreement for up to an additional 24 months as part of the service provider’s assistance obligations; this extension right applies to any expiration or early termination of the agreement.
Expenses related to this agreement and other related charges are allocated to us under various existing intercompany agreements.

Impact of New Accounting Pronouncements

For information regarding the impact of new accounting pronouncements, see the Business, Basis of Presentation and Significant Accounting Policies Note in our Condensed Consolidated Financial Statements in Part I, Item 1. of this Quarterly Report on Form 10-Q.

Critical Accounting Judgments and Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States ("U.S. GAAP") requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities 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.

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.


 
59
 


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.

Income Taxes

Our effective tax rates for the three and six months ended June 30, 2017 were 49.3% and (37.3)%, respectively. The effective tax rates differed from the statutory rate of 35% for the three and six months ended June 30, 2017 primarily due to the effect of the dividends received deduction ("DRD").

Our effective tax rates for the three and six months ended June 30, 2016 were 24.8% and 24.0%, respectively. The effective tax rates differed from the statutory rate of 35% for the three and six months ended June 30, 2016 primarily due to the effect of the DRD.


 
60
 


Results of Operations

($ in millions) 
Three Months Ended June 30,
 
Six Months Ended June 30,

2017
 
2016
 
2017
 
2016
Revenues:
 
 
 
 
 
 
 
Net investment income
$
378.4

 
$
372.7

 
$
756.9

 
$
729.2

Fee income
176.6

 
180.1

 
366.9

 
353.3

Premiums
8.9

 
124.1

 
23.9

 
492.0

Broker-dealer commission revenue
42.3

 
43.9

 
86.1

 
87.6

Net realized capital gains (losses):
 
 
 
 
 
 
 
Total other-than-temporary impairments
(0.3
)
 
(1.0
)
 
(0.4
)
 
(8.3
)
Less: Portion of other-than-temporary impairments recognized in Other comprehensive income (loss)

 
0.1

 

 
0.1

Net other-than-temporary impairments recognized in earnings
(0.3
)
 
(1.1
)
 
(0.4
)
 
(8.4
)
Other net realized capital gains (losses)
(47.2
)
 
(63.1
)
 
(102.4
)
 
(113.4
)
Total net realized capital gains (losses)
(47.5
)
 
(64.2
)
 
(102.8
)
 
(121.8
)
Other revenue
1.8

 
0.9

 
2.0

 
(0.2
)
Total revenues
560.5

 
657.5

 
1,133.0

 
1,540.1

Benefits and expenses:
 
 
 
 
 
 
 
Interest credited and other benefits to contract owners/policyholders
245.0

 
374.7

 
479.8

 
986.0

Operating expenses
191.6

 
198.4

 
411.4

 
401.5

Broker-dealer commission expense
42.3

 
43.9

 
86.1

 
87.6

Net amortization of Deferred policy acquisition costs and Value of business acquired
133.7

 
(1.2
)
 
135.5

 
(3.2
)
Interest expense

 

 
0.1

 

Total benefits and expenses
612.6

 
615.8

 
1,112.9

 
1,471.9

Income (loss) before income taxes
(52.1
)
 
41.7

 
20.1

 
68.2

Income tax expense (benefit)
(25.7
)
 
10.4

 
(7.5
)
 
16.4

Net income (loss)
$
(26.4
)
 
$
31.3

 
$
27.6

 
$
51.8


Three Months Ended June 30, 2017 compared to Three Months Ended June 30, 2016

Our Net income (loss) for the three months ended June 30, 2017 decreased by $57.7 million from income of $31.3 million to a loss of $26.4 million primarily due to lower Premiums and higher Net amortization of DAC and VOBA, partially offset by lower Interest credited and other benefits to contract owner/policyholders, favorable changes in Income tax expense (benefit), lower Net realized capital losses, lower Operating expenses, and higher Net investment income.

Revenues

Total revenues decreased $97.0 million from $657.5 million to $560.5 million primarily due to lower Premiums, partially offset by lower Net realized capital losses and higher Net investment income.

Net investment income increased $5.7 million from $372.7 million to $378.4 million primarily due to growth in the general account assets driven by positive net flows, including the cumulative impact of participants' transfers from variable investment options into fixed investment options, and higher alternative investment income driven by market performance. This increase was partially offset by lower prepayment fee income and lower yields, including the impact of the continued low interest rate environment on reinvestment rates.



 
61
 


Fee income decreased $3.5 million from $180.1 million to $176.6 million primarily due to lower net investment advisory fee income and a shift in business mix. The lower net investment advisory fee income resulted from changes to the investment advisory relationship with affiliates (See the Related Party Transactions note to the Condensed Consolidated Financial Statements in Part I, Item 1. of this Quarterly Report on Form 10-Q for further detail). These decreases were partially offset by an increase in separate account and institutional/mutual fund assets under management (“AUM”) driven by equity market improvements, and the cumulative impact of positive net flows.

Premiums decreased $115.2 million from $124.1 million to $8.9 million primarily due to lower sales of pension risk transfer contracts, which correspond to lower Interest credited and other benefits to contract owners/policyholders below. This business was closed to new sales at the end of 2016.

Total net realized capital losses decreased $16.7 million from $64.2 million to $47.5 million primarily due to favorable changes in the fair value of embedded derivatives on product guarantees (from a loss of $45.1 million in the prior period to a loss of $9.3 million in the current period) and lower realized losses on the disposal of available-for-sale fixed maturities, including securities pledged. These favorable changes were partially offset by unfavorable changes in the fair value of fixed maturities using the fair value option and derivatives. The changes in embedded derivatives on product guarantees were primarily the result of interest rate movements, partially offset by the impact of non-performance risk. The changes in fixed maturities using the fair value option and derivatives were primarily the result of interest rate movements in the current period compared to the prior period.

Benefits and Expenses

Total benefits and expenses decreased $3.2 million from $615.8 million to $612.6 million primarily due to lower Interest credited and other benefits to contract owners/policyholders and Operating expenses, partially offset by higher Net amortization of DAC and VOBA.

Interest credited and other benefits to contract owners/policyholders decreased $129.7 million from $374.7 million to $245.0 million primarily due to a decrease in the change in reserves associated with the pension risk contracts, and favorable change in the fair value of the embedded derivative on reinsurance, partially offset by an increase in general account liabilities which correspond to the growth in general account assets.

Operating expenses decreased $6.8 million from $198.4 million to $191.6 million primarily due to lower investment advisory fee expenses, resulting from changes to the investment advisory relationship with affiliates, referenced above. This decrease was partially offset by higher asset based commissions, employee-related expenses, and technology costs.

Net amortization of DAC and VOBA increased $134.9 million from a benefit of $1.2 million to an expense of $133.7 million primarily due to unfavorable unlocking related to changes in GMIR provisions of certain retirement plans with fixed investment options. Higher amortization driven by the change in the embedded derivative associated with a reinsurance agreement also contributed to the increase.

Income Taxes

Income tax expense (benefit) changed $36.1 million from an expense of $10.4 million to a benefit of $25.7 million primarily due to a decrease in income before income taxes and an increase in the benefit associated with the dividends received deduction ("DRD").

Six Months Ended June 30, 2017 compared to Six Months Ended June 30, 2016

Our Net income (loss) for the six months ended June 30, 2017 decreased $24.2 million from $51.8 million to $27.6 million primarily due to lower Premiums, higher Net amortization of DAC and VOBA, and higher Operating expenses, partially offset by lower Interest credited and other benefits to contract owner account balances/policyholders, higher Net investment income, favorable changes in Income tax expense (benefit), lower Net realized capital losses and higher Fee income.

Revenues

Total revenues decreased $407.1 million from $1,540.1 million to $1,133.0 million primarily due to lower Premiums, partially offset by higher Net investment income and Fee income and lower Total net realized capital losses.


 
62
 


Net investment income increased $27.7 million from $729.2 million to $756.9 million primarily due to growth in the general account assets driven by positive net flows, including the cumulative impact of participants' transfers from variable investment options into fixed investment options, and higher alternative investment income driven by market performance. This increase was partially offset by lower prepayment fee income and lower yields, including the impact of the continued low interest rate environment on reinvestment rates.

Fee income increased $13.6 million from $353.3 million to $366.9 million primarily due to an increase in separate account and institutional/mutual fund AUM driven by equity market improvements, and the cumulative impact of positive net flows, partially offset by lower net investment advisory fee income, a shift in business mix and the cumulative impact of participant transfers from variable investment options into fixed investment options. The lower net investment advisory fee income resulted from changes to the investment advisory relationship with affiliates, referenced above.

Premiums decreased $468.1 million from $492.0 million to $23.9 million primarily due to lower sales of pension risk transfer contracts, which correspond to lower Interest credited and other benefits to contract owners/policyholders below. This business was closed to new sales at the end of 2016.

Total net realized capital losses decreased $19.0 million from $121.8 million to $102.8 million primarily due to favorable changes in the fair value of embedded derivatives on product guarantees (from a loss of $107.9 million in the prior period to a gain of $11.0 million in the current period) and lower realized losses on the disposal of available-for-sale fixed maturities, including securities pledged. These favorable changes were partially offset by unfavorable changes in the fair value of derivatives and fixed maturities using the fair value option. The changes in embedded derivatives on product guarantees were primarily the result of interest rate movements, partially offset by the impact of non-performance risk. The changes in derivatives and fixed maturities using the fair value option were primarily the result of interest rate movements in the current period compared to the prior period.

Benefits and Expenses

Total benefits and expenses decreased $359.0 million from $1,471.9 million to $1,112.9 million primarily due to lower Interest credited and other benefits to contract owners/policyholders, partially offset by higher Net Amortization of DAC and VOBA and Operating expenses.

Interest credited and other benefits to contract owners/policyholders decreased $506.2 million from $986.0 million to $479.8 million primarily due to a decrease in the change in reserves associated with the pension risk contracts and a favorable change in the fair value of the embedded derivative on reinsurance, partially offset by an increase in general account liabilities, which correspond to the growth in the general account assets. 

Operating expenses increased $9.9 million from $401.5 million to $411.4 million primarily due to an increase in asset based commissions, letter of credit fees, technology costs, and employee-related expenses, partially offset by lower investment advisory fee expenses resulting from changes to the investment advisory relationship with affiliates, referenced above, and IT consulting expenses.

Net amortization of DAC and VOBA increased $138.7 million from a benefit of $3.2 million to an expense of $135.5 million primarily due to unfavorable unlocking related to changes in GMIR provisions of certain retirement plans with fixed investment options. Higher amortization driven by the change in the embedded derivative associated with a reinsurance agreement and higher gross profits also contributed to the increase.

Income Taxes

Income tax expense (benefit) changed $23.9 million from an expense of $16.4 million to a benefit of $7.5 million primarily due to a decrease in income before income taxes and an increase in the benefit associated with the DRD.

 
63
 


Financial Condition
  
Investments

See the Management's Narrative Analysis of the Results of Operations and Financial Condition in our Consolidated Financial Statements in Part II, Item. 7. of our Annual Report on Form 10-K for information on our investment strategy.

See the Investments Note in our Condensed Consolidated Financial Statements in Part I, Item 1. of this Quarterly Report on Form 10-Q for more information on investments.

Portfolio Composition

The following table presents the investment portfolio as of the dates indicated:
 
June 30, 2017
 
December 31, 2016
($ in millions)
Carrying
Value
 
% of
Total
 
Carrying
Value
 
% of
Total
Fixed maturities, available-for-sale, excluding securities pledged
$
23,206.2

 
76.1
%
 
$
23,169.9

 
76.5
%
Fixed maturities, at fair value using the fair value option
998.3

 
3.3
%
 
957.2

 
3.2
%
Equity securities, available-for-sale
85.2

 
0.3
%
 
82.3

 
0.3
%
Short-term investments(1)
4.3

 
%
 
32.9

 
0.1
%
Mortgage loans on real estate
4,848.2

 
15.9
%
 
4,254.5

 
14.0
%
Policy loans
213.6

 
0.7
%
 
218.9

 
0.7
%
Limited partnerships/corporations
388.9

 
1.3
%
 
347.8

 
1.1
%
Derivatives
168.2

 
0.5
%
 
470.8

 
1.6
%
Securities pledged
594.4

 
1.9
%
 
767.9

 
2.5
%
Total investments
$
30,507.3

 
100.0
%
 
$
30,302.2

 
100.0
%

 
64
 



Fixed Maturities

Total fixed maturities by market sector, including securities pledged, were as presented below as of the dates indicated:
 
June 30, 2017
($ in millions)
Amortized
Cost
 
% of
Total
 
Fair
Value
 
% of
Total
Fixed maturities:
 
 
 
 
 
 
 
U.S. Treasuries
$
607.8

 
2.6
%
 
$
715.7

 
2.9
%
U.S. Government agencies and authorities
3.6

 
%
 
3.6

 
%
State, municipalities, and political subdivisions
836.1

 
3.6
%
 
858.0

 
3.5
%
U.S. corporate public securities
8,861.4

 
37.8
%
 
9,539.2

 
38.5
%
U.S. corporate private securities
3,215.8

 
13.7
%
 
3,295.2

 
13.3
%
Foreign corporate public securities and foreign governments(1)
2,662.8

 
11.3
%
 
2,816.8

 
11.4
%
Foreign corporate private securities(1)
2,883.0

 
12.3
%
 
3,013.4

 
12.1
%
Residential mortgage-backed securities
2,569.9

 
11.0
%
 
2,700.1

 
10.9
%
Commercial mortgage-backed securities
1,272.1

 
5.4
%
 
1,302.3

 
5.2
%
Other asset-backed securities
545.3

 
2.3
%
 
554.6

 
2.2
%
Total fixed maturities, including securities pledged
$
23,457.8

 
100.0
%
 
$
24,798.9

 
100.0
%
(1) Primarily U.S. dollar denominated.
 
December 31, 2016
($ in millions)
Amortized
Cost
 
% of
Total
 
Fair
Value
 
% of
Total
Fixed maturities:
 
 
 
 
 
 
 
U.S. Treasuries
$
692.8

 
2.9
%
 
$
787.0

 
3.2
%
U.S. Government agencies and authorities
3.8

 
%
 
3.8

 
%
State, municipalities, and political subdivisions
794.7

 
3.3
%
 
795.4

 
3.2
%
U.S. corporate public securities
9,511.1

 
39.6
%
 
9,972.4

 
40.0
%
U.S. corporate private securities
2,950.9

 
12.3
%
 
2,960.6

 
11.9
%
Foreign corporate public securities and foreign governments(1)
2,801.4

 
11.7
%
 
2,884.4

 
11.6
%
Foreign corporate private securities(1)
2,822.0

 
11.8
%
 
2,910.0

 
11.7
%
Residential mortgage-backed securities
2,670.5

 
11.1
%
 
2,788.0

 
11.2
%
Commercial mortgage-backed securities
1,301.2

 
5.4
%
 
1,317.7

 
5.3
%
Other asset-backed securities
466.4

 
1.9
%
 
475.7

 
1.9
%
Total fixed maturities, including securities pledged
$
24,014.8

 
100.0
%
 
$
24,895.0

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

As of June 30, 2017, the average duration of our fixed maturities portfolio, including securities pledged, is between 7.5 and 8.0 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 our Financial Statements in Part II, Item. 7. of our Annual Report on Form 10-K.



 
65
 


The following tables present credit quality of fixed maturities, including securities pledged, using NAIC designations as of the dates indicated:
($ in millions)
 
June 30, 2017
NAIC Quality Designation
 
1
 
2
 
3
 
4
 
5
 
6
 
Total Fair Value
U.S. Treasuries
 
$
715.7

 
$

 
$

 
$

 
$

 
$

 
$
715.7

U.S. Government agencies and authorities
 
3.6

 

 

 

 

 

 
3.6

State, municipalities and political subdivisions
 
809.8

 
47.8

 
0.4

 

 

 

 
858.0

U.S. corporate public securities
 
4,771.5

 
4,252.0

 
405.4

 
101.6

 
8.7

 

 
9,539.2

U.S. corporate private securities
 
1,536.9

 
1,624.1

 
88.9

 
43.8

 

 
1.5

 
3,295.2

Foreign corporate public securities and foreign governments(1)
 
1,282.5

 
1,291.8

 
219.2

 
19.4

 
3.7

 
0.2

 
2,816.8

Foreign corporate private securities(1)
 
401.6

 
2,369.7

 
219.7

 
20.2

 
1.1

 
1.1

 
3,013.4

Residential mortgage-backed securities
 
2,575.4

 
74.8

 
5.3

 

 
3.8

 
40.8

 
2,700.1

Commercial mortgage-backed securities
 
1,302.3

 

 

 

 

 

 
1,302.3

Other asset-backed securities
 
482.6

 
59.6

 
4.5

 
1.9

 
0.4

 
5.6

 
554.6

Total fixed maturities
 
$
13,881.9

 
$
9,719.8

 
$
943.4

 
$
186.9

 
$
17.7

 
$
49.2

 
$
24,798.9

% of Fair Value
 
56.0
%
 
39.2
%
 
3.8
%
 
0.7
%
 
0.1
%
 
0.2
%
 
100.0
%
(1) Primarily U.S. dollar denominated.
 
 
 
($ in millions)
 
December 31, 2016
NAIC Quality Designation
 
1
 
2
 
3
 
4
 
5
 
6
 
Total Fair Value
U.S. Treasuries
 
$
787.0

 
$

 
$

 
$

 
$

 
$

 
$
787.0

U.S. Government agencies and authorities
 
3.8

 

 

 

 

 

 
3.8

State, municipalities and political subdivisions
 
756.9

 
38.0

 
0.5

 

 

 

 
795.4

U.S. corporate public securities
 
5,087.2

 
4,340.8

 
427.5

 
88.8

 
25.6

 
2.5

 
9,972.4

U.S. corporate private securities
 
1,506.8

 
1,327.3

 
95.1

 
29.9

 

 
1.5

 
2,960.6

Foreign corporate public securities and foreign governments(1)
 
1,392.2

 
1,196.1

 
228.2

 
51.6

 
16.1

 
0.2

 
2,884.4

Foreign corporate private securities(1)
 
426.7

 
2,229.1

 
248.3

 
1.9

 
1.2

 
2.8

 
2,910.0

Residential mortgage-backed securities
 
2,731.9

 
4.7

 
3.1

 

 
4.7

 
43.6

 
2,788.0

Commercial mortgage-backed securities
 
1,317.7

 

 

 

 

 

 
1,317.7

Other asset-backed securities
 
429.5

 
37.8

 
3.2

 
2.2

 

 
3.0

 
475.7

Total fixed maturities
 
$
14,439.7

 
$
9,173.8

 
$
1,005.9

 
$
174.4

 
$
47.6

 
$
53.6

 
$
24,895.0

% of Fair Value
 
58.0
%
 
36.9
%
 
4.0
%
 
0.7
%
 
0.2
%
 
0.2
%
 
100.0
%
(1) Primarily U.S. dollar denominated.


 
66
 


The following tables present credit quality of fixed maturities, including securities pledged, using ARO ratings as of the dates indicated:
($ in millions)
 
June 30, 2017
ARO Quality Ratings
 
AAA
 
AA
 
A
 
BBB
 
BB and Below
 
Total Fair Value
U.S. Treasuries
 
$
715.7

 
$

 
$

 
$

 
$

 
$
715.7

U.S. Government agencies and authorities
 
3.6

 

 

 

 

 
3.6

State, municipalities and political subdivisions
 
84.8

 
530.2

 
194.8

 
47.8

 
0.4

 
858.0

U.S. corporate public securities
 
105.4

 
614.3

 
4,051.8

 
4,252.3

 
515.4

 
9,539.2

U.S. corporate private securities
 
98.1

 
136.5

 
1,299.9

 
1,583.7

 
177.0

 
3,295.2

Foreign corporate public securities and foreign governments(1)
 
32.1

 
303.5

 
946.9

 
1,291.8

 
242.5

 
2,816.8

Foreign corporate private securities(1)
 

 

 
502.7

 
2,392.4

 
118.3

 
3,013.4

Residential mortgage-backed securities
 
2,185.6

 
4.8

 
12.2

 
28.7

 
468.8

 
2,700.1

Commercial mortgage-backed securities
 
1,159.3

 
28.4

 
63.2

 
24.7

 
26.7

 
1,302.3

Other asset-backed securities
 
343.1

 
60.1

 
36.2

 
70.5

 
44.7

 
554.6

Total fixed maturities
 
$
4,727.7

 
$
1,677.8

 
$
7,107.7

 
$
9,691.9

 
$
1,593.8

 
$
24,798.9

% of Fair Value
 
19.1
%
 
6.8
%
 
28.6
%
 
39.1
%
 
6.4
%
 
100.0
%
(1) Primarily U.S. dollar denominated.
 
 
 
($ in millions)
 
December 31, 2016
ARO Quality Ratings
 
AAA
 
AA
 
A
 
BBB
 
BB and Below
 
Total Fair Value
U.S. Treasuries
 
$
787.0

 
$

 
$

 
$

 
$

 
$
787.0

U.S. Government agencies and authorities
 
3.8

 

 

 

 

 
3.8

State, municipalities and political subdivisions
 
85.0

 
482.8

 
189.1

 
38.0

 
0.5

 
795.4

U.S. corporate public securities
 
101.0

 
711.0

 
4,272.1

 
4,328.9

 
559.4

 
9,972.4

U.S. corporate private securities
 
98.1

 
157.7

 
1,172.9

 
1,375.9

 
156.0

 
2,960.6

Foreign corporate public securities and foreign governments(1)
 
31.4

 
339.6

 
1,021.4

 
1,195.9

 
296.1

 
2,884.4

Foreign corporate private securities(1)
 

 

 
503.6

 
2,293.8

 
112.6

 
2,910.0

Residential mortgage-backed securities
 
2,425.2

 
0.5

 
1.7

 
25.1

 
335.5

 
2,788.0

Commercial mortgage-backed securities
 
1,217.3

 
3.3

 
40.6

 
10.1

 
46.4

 
1,317.7

Other asset-backed securities
 
342.6

 
38.8

 
9.9

 
49.7

 
34.7

 
475.7

Total fixed maturities
 
$
5,091.4

 
$
1,733.7

 
$
7,211.3

 
$
9,317.4

 
$
1,541.2

 
$
24,895.0

% of Fair Value
 
20.4
%
 
7.0
%
 
29.0
%
 
37.4
%
 
6.2
%
 
100.0
%
(1) Primarily U.S. dollar denominated.


 
67
 


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 $142.1 million from $279.5 million to $137.4 million for the six months ended June 30, 2017. The decrease in gross unrealized losses was primarily due to declining interest rates and tightening credit spreads.

As of June 30, 2017, we held one fixed maturity with unrealized capital losses in excess of $10.0 million. As of June 30, 2017, the unrealized capital losses on this fixed maturity equaled $15.4 million, or 11.2% of the total unrealized losses. As of December 31, 2016, we held one fixed maturity with unrealized capital losses in excess of $10.0 million. As of December 31, 2016, the unrealized capital losses on this fixed maturity equaled $13.9 million, or 5.0% of the total unrealized losses.

As of June 30, 2017, we had $2.1 billion of energy sector fixed maturity securities, constituting 8.4% of the total fixed maturities portfolio, with gross unrealized capital losses of $43.8 million, including one energy sector fixed maturity security with unrealized capital losses in excess of $10.0 million. The unrealized capital losses on this fixed maturity security equaled $15.4 million. As of June 30, 2017, our fixed maturity exposure to the energy sector is comprised of 87.3% investment grade securities.

As of December 31, 2016, we held $2.2 billion of energy sector fixed maturity securities, constituting 8.8% of the total fixed maturities portfolio, with gross unrealized capital losses of $48.8 million, including one energy sector fixed maturity security with unrealized capital losses in excess of $10.0 million. The unrealized capital loss on this fixed maturity security equaled $13.9 million. As of December 31, 2016, our fixed maturity exposure to the energy sector is comprised of 83.0% investment grade securities.

See the Investments Note in our Condensed Consolidated Financial Statements in Part I, Item 1. of this Quarterly Report on Form 10-Q for further information on unrealized capital losses.

Subprime and Alt-A Mortgage Exposure

Pre-2008 vintage subprime and Alt-A mortgage collateral continues to reflect a housing market entrenched in recovery. While collateral losses continue to be realized, the pace and magnitude at which losses are being realized are steadily decreasing.  Serious delinquencies and other measures of performance, like prepayments and loan defaults, have also displayed sustained periods of improvement. Reflecting these fundamental improvements, related bond prices and sector liquidity have increased substantially since the credit crisis. More broadly, home prices have moved steadily higher, further supporting bond payment performance. Year-over-year home price measures, while at a lower magnitude than experienced in the years following the trough in home prices, have stabilized at sustainable levels, when measured on a nationwide basis. This backdrop remains supportive of continued improvement in overall borrower payment behavior. In managing our risk exposure to subprime and Alt-A mortgages, we take into account collateral performance and structural characteristics associated with our various positions.

While we actively invest in and continue to manage a portfolio of such exposures in the form of securitized investments, wedo not originate or purchase subprime or Alt-A whole-loan mortgages. Subprime lending is the origination of loans to customers with weaker credit profiles. We define Alt-A mortgages to include the following: residential mortgage loans to customers who have strong credit profiles but lack some element(s), such as documentation to substantiate income; residential mortgage loans to borrowers that would otherwise be classified as prime but for which loan structure provides repayment options to the borrower that increase the risk of default; and any securities backed by residential mortgage collateral not clearly identifiable as prime or subprime.

We have exposure to Residential mortgage-backed securities ("RMBS"), Commercial mortgage-backed securities ("CMBS") and ABS. Our exposure to subprime mortgage-backed securities is primarily in the form of ABS structures collateralized by subprime residential mortgages and the majority of these holdings were included in Other ABS under "Fixed Maturities" above. As of June 30, 2017, the fair value, amortized cost, and gross unrealized losses related to our exposure to subprime mortgage-backed securities totaled $43.9 million, $38.9 million and $0.7 million, respectively, representing 0.2% of total fixed maturities, including securities pledged, based on fair value. As of December 31, 2016, the fair value, amortized cost, and gross unrealized losses related to our exposure to subprime mortgage-backed securities totaled $33.1 million, $28.2 million and $0.9 million, respectively, representing 0.1% of total fixed maturities, including securities pledged, based on fair value.
 
 
 
 
 
 
 
 
 

 
68
 


Our exposure to Alt-A mortgages is included in the "RMBS" line item in the "Fixed Maturities" table under "Fixed Maturities" above. As of June 30, 2017, the fair value, amortized cost and gross unrealized losses related to our exposure to Alt-A RMBS totaled $57.4 million, $45.2 million and $0.4 million, respectively, representing 0.2% of total fixed maturities, including securities pledged, based on fair value. As of December 31, 2016, the fair value, amortized cost and gross unrealized losses related to our exposure to Alt-A RMBS totaled $48.4 million, $35.9 million and $0.8 million, respectively, representing 0.2% of total fixed maturities, including securities pledged, based on fair value.
 
 
 
 
 
 
 
 
 
Commercial Mortgage-backed and Other Asset-backed Securities

CMBS investments represent pools of commercial mortgages that are broadly diversified across property types and geographical areas. Delinquency rates on commercial mortgages increased over the course of 2009 through mid-2012. The steep pace of increases observed in this time frame relented, and the percentage of delinquent loans declined through February 2016 (although certain months did post marginal increases). Since then, the delinquency rate has increased, with recent months showing more upward momentum.  Other performance metrics like vacancies, property values and rent levels have posted sustained improvement trends, although these metrics are not observed uniformly, differing by dimensions such as geographic location and property type. These improvements have been buoyed by some of the same macro-economic tailwinds alluded to in regards to our subprime and Alt-A mortgage exposure. A robust environment for property refinancing was particularly supportive of improving credit performance metrics throughout much of the post-credit crisis period. In the first quarter of 2016, however, this virtuous lending cycle was disrupted as the dislocation in corporate credit markets negatively impacted liquidity conditions in CMBS. As a result, the new issuance market for CMBS slowed considerably during the first half of 2016 before normalizing to end the year. Spread performance somewhat mirrored these new issuance trends: volatile in the first half of 2016, signs of increased liquidity and more general stability in credit spreads have been observed since.

For most forms of consumer ABS, delinquency and loss rates have been maintained at levels considered low by historical standards and indicative of high credit quality.  Two exceptions exist in the form of auto loans to subprime borrowers and particular cohorts (loans originated in 2008-2010) of student loan borrowers. Payment performance in these particular ABS sub-sectors has been volatile and weak relative to most other forms of ABS, where relative strength in various credit metrics across multiple types of asset-backed loans have been observed on a sustained basis. In managing our risk exposure to other ABS, we take into account collateral performance and structural characteristics associated with our various positions.
 
 
 
 
 
 
 
 
 
As of June 30, 2017, the fair value, amortized cost and gross unrealized losses of our Other ABS, excluding subprime exposure, totaled $521.2 million, $517.5 million and $0.7 million, respectively. As of December 31, 2016, the fair value, amortized cost and gross unrealized losses of our exposure to Other ABS, excluding subprime exposure, totaled $447.8 million, $443.8 million and $0.9 million, respectively.

As of June 30, 2017, Other ABS was broadly diversified both by type and issuer with credit card receivables, nonconsolidated collateralized loan obligations ("CLOs") and automobile receivables, comprising 13.2%, 56.4% and 5.4%, respectively, of total Other ABS, excluding subprime exposure. As of December 31, 2016, Other ABS was broadly diversified both by type and issuer with credit card receivables, nonconsolidated CLOs and automobile receivables, comprising 31.4%, 44.7% and 6.9%, respectively, of total Other ABS, excluding subprime exposure.
 
 
 
 
 
 
 
 
 
Mortgage Loans on Real Estate

We rate all commercial mortgages to quantify the level of risk. We place those loans with higher risk on a watch list and closely monitor these loans for collateral deficiency or other credit events that may lead to a potential loss of principal and/or interest. If we determine the value of any mortgage loan to be other-than-temporary impairments ("OTTI") (i.e., when it is probable that we will be unable to collect on amounts due according to the contractual terms of the loan agreement), the carrying value of the mortgage loan is reduced to either the present value of expected cash flows from the loan, discounted at the loan's effective interest rate or fair value of the collateral. For those mortgages that are determined to require foreclosure, the carrying value is reduced to the fair value of the underlying collateral, net of estimated costs to obtain and sell at the point of foreclosure. The carrying value of the impaired loans is reduced by establishing an other-than-temporary write-down recorded in Net realized capital gains (losses) in the Condensed Consolidated Statements of Operations.

Loan-to-value ("LTV") and debt service coverage ("DSC") ratios are measures commonly used to assess the risk and quality of commercial mortgage loans. The LTV ratio, calculated at time of origination, is expressed as a percentage of the amount of the loan relative to the value of the underlying property. An LTV ratio in excess of 100% indicates the unpaid loan amount exceeds the value of the underlying collateral. The DSC ratio, based upon the most recently received financial statements, is expressed as a percentage of the amount of a property's Net income (loss) to its debt service payments. A DSC ratio of less than 1.0 indicates

 
69
 


that a property's operations do not generate sufficient income to cover debt payments. These ratios are utilized as part of the review process described above.

As of June 30, 2017, our mortgage loans on real estate portfolio had a weighted average DSC of 2.1 times and a weighted average LTV ratio of 60.1%. As of December 31, 2016, our mortgage loans on real estate portfolio had a weighted average DSC of 2.2 times and a weighted average LTV ratio of 61.3%. See the Investments Note in our Condensed Consolidated Financial Statements in Part I, Item 1. of this Quarterly Report on Form 10-Q for further information on mortgage loans on real estate.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other-Than-Temporary Impairments

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

During the three and six months ended June 30, 2017, we recorded $0.1 million and $0.2 million, respectively, of credit related OTTI of which the primary contributor was $0.1 million and $0.2 million, respectively, of write-downs recorded in the Non-Agency RMBS sector. See the Investments Note in our Condensed Consolidated Financial Statements in Part I, Item 1. of this Quarterly Report on Form 10-Q for further information on OTTI.

European Exposures

We quantify and allocate our exposure to the region by attempting to identify aspects of the region or country risk to which we are exposed. Among the factors we consider are the nationality of the issuer, the nationality of the issuer's ultimate parent, the corporate and economic relationship between the issuer and its parent, as well as the political, legal and economic environment in which each functions. By undertaking this assessment, we believe that we develop a more accurate assessment of the actual geographic risk, with a more integrated understanding of contributing factors to the full risk profile of the issuer.

In the normal course of our ongoing risk and portfolio management process, we closely monitor compliance with a credit limit hierarchy designed to minimize overly concentrated risk exposures by geography, sector and issuer. This framework takes into account various factors such as internal and external ratings, capital efficiency and liquidity and is overseen by a combination of Investment and Corporate Risk Management, as well as insurance portfolio managers focused specifically on managing the investment risk embedded in our portfolio.

While financial conditions in Europe have broadly improved, the possibility of capital market volatility spreading through a highly integrated and interdependent banking system remains. Despite signs of continuous improvement in the region, we continue to closely monitor our exposure to the region.

As of June 30, 2017, the Company's total European exposure had an amortized cost and fair value of $2,848.2 million and $3,021.6 million, respectively. European exposure with a primary focus on Greece, Ireland, Italy, Portugal and Spain (which we refer to as "peripheral Europe") amounts to $240.6 million, which includes non-financial institutions exposure in Ireland of $74.7 million, in Italy of $91.4 million, and in Spain of $62.3 million. We did not have any exposure to Greece or Portugal.

Among the remaining $2.8 billion of total non-peripheral European exposure, we had a portfolio of credit-related assets similarly diversified by country and sector across developed and developing Europe. As of June 30, 2017, our non-peripheral sovereign exposure was $121.1 million, which consisted of fixed maturities. We also had $404.7 million in net exposure to non-peripheral financial institutions with a concentration in France of $54.2 million, The Netherlands of $46.1 million, Switzerland of $88.6 million and the United Kingdom of $185.9 million. The balance of $2.3 billion was invested across non-peripheral, non-financial institutions.

Some of the major country level exposures were in the United Kingdom of $1,253.2 million, in The Netherlands of $347.2 million, in Belgium of $196.8 million, in France of $127.1 million, in Germany of $249.1 million, in Switzerland of $241.1 million and in Russia of $66.4 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.

 
70
 



Liquidity and Capital Resources

Liquidity is our ability to generate sufficient cash flows to meet the cash requirements of operating, investing and financing activities. Capital refers to our long-term financial resources available to support the business operations and contribute to future growth. Our ability to generate and maintain sufficient liquidity and capital depends on the profitability of the businesses, timing of cash flows on investments and products, general economic conditions and access to the capital markets and the alternate sources of liquidity and capital described herein.

Liquidity Management

Our principal available sources of liquidity are product charges, investment income, proceeds from the maturity and sale of investments, proceeds from debt issuance and borrowing facilities, repurchase agreements, securities lending and capital contributions. Primary uses of these funds are payments of commissions and operating expenses, interest credits, investment purchases and contract maturities, withdrawals and surrenders and payment of dividends.

Our liquidity position is managed by maintaining adequate levels of liquid assets, such as cash, cash equivalents and short-term investments. As part of the liquidity management process, different scenarios are modeled to determine whether existing assets are adequate to meet projected cash flows. Key variables in the modeling process include interest rates, equity market movements, quantity and type of interest and equity market hedges, anticipated contract owner behavior, market value of the general account assets, variable separate account performance and implications of rating agency actions.

The fixed account liabilities are supported by a general account portfolio, principally composed of fixed rate investments with matching duration characteristics that can generate predictable, steady rates of return. The portfolio management strategy for the fixed account considers the assets available-for-sale. This strategy enables us to respond to changes in market interest rates, prepayment risk, relative values of asset sectors and individual securities and loans, credit quality outlook and other relevant factors. The objective of portfolio management is to maximize returns, taking into account interest rate and credit risk, as well as other risks. Our asset/liability management discipline includes strategies to minimize exposure to loss as interest rates and economic and market conditions change. In executing this strategy, we use derivative instruments to manage these risks. Our derivative counterparties are of high credit quality.

Liquidity and Capital Resources

Additional sources of liquidity include borrowing facilities to meet short-term cash requirements that arise in the ordinary course of business. We maintain the following agreements:

A reciprocal loan agreement with Voya Financial, Inc., an affiliate, whereby either party can borrow from the other up to 3.0% of VRIAC's statutory admitted assets as of the prior December 31. As of June 30, 2017 and December 31, 2016, we did not have an outstanding receivable/payable from/to Voya Financial, Inc. under the reciprocal loan agreement. We and Voya Financial, Inc. continue to maintain the reciprocal loan agreement and future borrowings by either party will be subject to the reciprocal loan terms summarized above. Effective January 2014, interest on any borrowing by either the Company or Voya Financial, Inc. is charged at a rate based on the prevailing market rate for similar third-party borrowings or securities.

We hold approximately 53.4% of our assets in marketable securities. These assets include cash, U.S. Treasuries, Agencies, Corporate Bonds, ABS, CMBS and collateralized mortgage obligations ("CMO") and Equity securities. In the event of a temporary liquidity need, cash may be raised by entering into repurchase agreements, dollar rolls and/or security lending agreements by temporarily lending securities and receiving cash collateral. Under our Liquidity Plan, up to 12.0% of our general account statutory admitted assets may be allocated to repurchase, securities lending and dollar roll programs. At the time a temporary cash need arises, the actual percentage of admitted assets available for repurchase transactions will depend upon outstanding allocations to the three programs. As of June 30, 2017 and December 31, 2016, VRIAC had securities lending collateral assets of $252.0 million and $242.8 million respectively, which, for both periods represents approximately 0.3% of its general account statutory admitted assets.

Management believes that our sources of liquidity are adequate to meet our short-term cash obligations.


 
71
 


Capital Contributions and Dividends

During the six months ended June 30, 2017 and 2016, VRIAC did not receive any capital contributions from its Parent.

On May 3, 2017, VRIAC declared an ordinary dividend in the amount of $261.0 million, which was paid to its Parent on May 24, 2017. During the six months ended June 30, 2016, VRIAC paid an ordinary dividend in the amount of $274.0 million to its Parent.

On March 3, 2017, VFP declared a $20.0 million dividend which was paid to VRIAC on March 23, 2017; on June 19, 2017, VFP declared a $20.0 million dividend which was paid to VRIAC on June 23, 2017. During the six months ended June 30, 2016, VFP paid dividends of $40.0 million to VRIAC.

Ratings

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

A downgrade in our credit or financial strength ratings or the credit or financial strength ratings of our Parent or rated affiliates could potentially, among other things, limit our ability to market products, reduce our competitiveness, increase the number or value of policy surrenders and withdrawals, increase our borrowing costs and potentially make it more difficult to borrow funds, adversely affect the availability of financial guarantees or Letters of Credit ("LOCs"), cause additional collateral requirements or other required payments under certain agreements, allow counterparties to terminate derivative agreements and/or impair our relationships with creditors, distributors or trading counterparties thereby potentially negatively affecting our profitability, liquidity and/or capital. In addition, we consider nonperformance risk in determining the fair value of our liabilities. Therefore, changes in our credit or financial strength ratings or the credit or financial strength ratings of our Parent or rated affiliates may affect the fair value of our liabilities.

Financial strength ratings represent the opinions of rating agencies regarding the financial ability of an insurance company to meet its obligations under an insurance policy. Credit ratings represent the opinions of rating agencies regarding an entity's ability to repay its indebtedness. These ratings are not a recommendation to buy or hold any of our securities and they may be revised or revoked at any time at the sole discretion of the rating organization.

 
72
 


Our financial strength and credit ratings as of the date of this Quarterly Report on Form 10-Q are summarized in the following table. In parentheses, following the initial occurrence in the table of each rating, is an indication of that rating’s relative rank within the agency’s rating categories. That ranking refers only to the generic or major rating category and not to the modifiers appended to the rating by the rating agencies to denote relative position within such generic or major category. For each rating, the relative position of the rating within the relevant rating agency’s ratings scale is presented, with “1” representing the highest rating in the scale.
Company
 
A.M. Best
 
Fitch
 
Moody's
 
S&P
Voya Retirement Insurance and Annuity Company
 
 
 
 
 
 
 
 
Financial Strength Rating
 
A
(3 of 16)
 
A
(3 of 9)
 
A2
(3 of 9)
 
A
(3 of 9)

Rating Agency
 
Financial Strength Rating Scale
A.M. Best(1)
 
"A++" to "S"
Fitch(2)
 
"AAA" to "C"
Moody's(3)
 
"Aaa" to "C"
S&P(4)
 
"AAA" to "R"
(1) A.M. Best’s financial strength rating is an independent opinion of an insurer's financial strength and ability to meet its ongoing insurance policy and contract obligations. It is based on a comprehensive quantitative and qualitative evaluation of a company's balance sheet strength, operating performance and business profile.
(2) Fitch’s financial strength ratings provide an assessment of the financial strength of an insurance organization. The National Insurer Financial Strength ("IFS") Rating is assigned to the insurance company's policyholder obligations, including assumed reinsurance obligations and contract holder obligations, such as guaranteed investment contracts.
(3) Moody’s financial strength ratings are opinions of the ability of insurance companies to repay punctually senior policyholder claims and obligations. Moody's appends numerical modifiers 1, 2 and 3 to each generic rating classification from Aa through Caa. The modifier 1 indicates that the obligation ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of that generic rating category.
(4) S&P’s insurer financial strength rating is a forward-looking opinion about the financial security characteristics of an insurance organization with respect to its ability to pay under its insurance policies and contracts in accordance with their terms. A "+" or "-" indicates relative strength within a category.

Our ratings by A.M. Best Company, Inc. ("A.M. Best"), Fitch, Moody's and S&P reflect a broader view of how the financial services industry is being challenged by the current economic environment, but also are based on the rating agencies' specific views of our financial strength. In making their ratings decisions, the agencies consider past and expected future capital and earnings, asset quality and risk, profitability and risk of existing liabilities and current products, market share and product distribution capabilities and direct or implied support from parent companies.

Rating agencies use an "outlook" statement for both industry sectors and individual companies. For an industry sector, a stable outlook generally implies that over the next 12 to 18 months the rating agency expects ratings to remain unchanged among companies in the sector. For a particular company, an outlook generally indicates a medium- or long-term trend in credit fundamentals, which if continued, may lead to a rating change.

There were no ratings actions, affirmations or outlook changes by S&P, Fitch, Moody’s or A.M. Best from December 31, 2016 through June 30, 2017 and subsequently through the date of this Quarterly Report on Form 10-Q .



 
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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 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

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

Legislative and Regulatory Developments

Potential Changes to Variable Annuity Reserve Requirements

At various times in the past several years, the NAIC has indicated that it might pursue changes to the current reserve and capital framework that applies to insurers, including the Company, who write or reinsure variable annuity (“VA”) policies. Since 2015 the NAIC’s Variable Annuity Issues Working Group (“VAIWG”) has been considering general proposals for VA reserve and capital reform that would create more uniformity in VA reserving practices and reduce incentives for the use of captive reinsurance arrangements for VA business. These proposals, if adopted, could change the reserves and capital we are required to hold with respect to VA business.

During 2016, VAIWG engaged Oliver Wyman (“OW”) to conduct an initial quantitative impact (“QIS1”) study involving industry participants, including our affiliate Voya Insurance and Annuity Company, of possible revisions to the current VA reserve and capital framework. In late 2016, OW provided the VAIWG a QIS1 report that included preliminary findings and recommended a second quantitative impact study be conducted so that testing can inform the proper calibration for certain conceptual and/or preliminary parameters set out in the QIS1 report. The second quantitative impact study (“QIS2”) began in February 2017 and is

 
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scheduled to be completed by October 2017, with NAIC deliberations on QIS2 results and proposed VA reserve and capital reforms during the fourth quarter of 2017. It is unlikely that any changes adopted by the NAIC would be effective prior to 2019, although timing remains uncertain.

The outcome of QIS2, and the parameters of any VA reserve and capital reform to be proposed by OW or adopted by the VAIWG, is highly uncertain at this time. Certain proposals under consideration as part of QIS2, if adopted as a component of any final VA reserve and capital reform, could negatively impact VA reserve and capital calculations and potentially result in increased collateral requirements at Roaring River II, Inc. ("RRII"), our Arizona captive affiliate that reinsures certain of our VA business. If we are required to increase reserves or RRII becomes subject to increased collateral requirements, we believe it is likely that such increases would be subject to a multiyear grade-in period. Other proposals under consideration for QIS2, if adopted, could result in positive impacts to our VA reserve and capital calculations. At the present time, we cannot predict what, if any, of these proposals may become part of any VA framework reform proposal or what impact any final VAIWG VA framework reform would have on VA reserves, capital or captive collateralization requirements.

DOL Fiduciary Rule

In April 2016, the Department of Labor (“DOL”) issued a final rule that will broaden the definition of "fiduciary" for purposes of the Employee Retirement Income Security Act (“ERISA”) and the Internal Revenue Code, as it applies to a person or entity providing investment advice with respect to ERISA plans or IRAs. The rule expands the circumstances in which providers of investment advice to ERISA plan sponsors and plan participants, and IRA investors are deemed to act in a fiduciary capacity. The rule requires such providers to act in their clients' "best interests", not influenced by any conflicts of interest, including due to the direct or indirect receipt of compensation that varies based on the fiduciary's investment recommendation. In February 2017, the President directed the DOL to re-examine the rule with a view to possibly amending or repealing it. In connection with this re-examination, certain aspects of the rule became effective on June 9, 2017, while the DOL delayed others until January 1, 2018. It is possible that the DOL will revise or repeal the rule as it completes its re-examination. More recently, the DOL requested public comment on whether the January 1, 2018 full compliance date should be further pushed back while the DOL completes its re-examination of the rule. The DOL still has not decided whether to push that date back, however and the outcome of the re-examination is unclear, so we are preparing to comply with the balance of the rule on the January 1, 2018 applicability date. Under the rule, certain business activities in which we engage, such as IRA rollovers and other IRA sales, have become subject to a heightened fiduciary standard. Where VRIAC is deemed to act in a fiduciary capacity, we have either modified our sales and compensation practices or are relying on an applicable exemption.

The DOL concurrently adopted a "best interest contract exemption" ("BIC") intended to enable continuation of certain existing industry practices relating to receipt of commissions and other compensation. This exemption enables us and our distributors to continue many historical practices - subject, among other things, to a heightened best interests standard and a requirement that compensation be "reasonable". The DOL has delayed applicability of several key aspects of this exemption - including aspects that could expose us to class action lawsuits in the event we fail to fully comply with the conditions of the exemption - until January 1, 2018. As noted above, the DOL is considering further delays. While it is too early to predict what impact this will have on our annuities and other businesses, we may experience a material decline in sales of products that can only be practicably sold in reliance on the BIC, such as variable annuities and fixed indexed annuities. The DOL is re-examining the BIC exemption together with the rest of the rule, and may revise or repeal it after completing the re-examination.

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


 
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Item 4.     Controls and Procedures

Disclosure Controls and Procedures

The Company carried out an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended ("Exchange Act")) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that the Company's current disclosure controls and procedures are effective in ensuring that material information relating to the Company required to be disclosed in the Company's periodic SEC filings is made known to them in a timely manner.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the quarter ended June 30, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 
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PART II.    OTHER INFORMATION

Item 1.        Legal Proceedings

See the Commitments and Contingencies Note in our Condensed Consolidated Financial Statements in Part I., Item 1. of this Quarterly Report on Form 10-Q.

Item 1A.    Risk Factors

For a discussion of the Company's potential risks or uncertainties, please see "Risk Factors" in Part I, Item 1A. in our Annual Report on Form 10-K filed with the Securities and Exchange Commission and "Risk Factors" in Part II, Item I A. in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2017. In addition, please see "Management’s Narrative Analysis of the Results of Operations and Financial Condition" herein and in the Annual Report on Form 10-K.

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

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

In April 2016, the Department of Labor ("DOL") issued a final rule that will broaden the definition of "fiduciary" for purposes of the Employee Retirement Income Security Act ("ERISA") and the Internal Revenue Code, as it applies to a person or entity providing investment advice with respect to ERISA plans or IRAs. The rule expands the circumstances in which providers of investment advice to ERISA plan sponsors and plan participants, and IRA investors, are deemed to act in a fiduciary capacity. The rule requires such providers to act in their clients' "best interests", not influenced by any conflicts of interest, including due to the direct or indirect receipt of compensation that varies based on the fiduciary’s investment recommendation. In February 2017, the President directed the DOL to re-examine the rule with a view to possibly amending or repealing it. In connection with this re-examination, certain aspects of the rule became effective on June 9, 2017, while the DOL delayed others until January 1, 2018. It is possible that the DOL will revise or repeal the rule as it completes its re-examination. More recently, the DOL requested public comment on whether the January 1, 2018 full compliance date should be further pushed back while the DOL completes its re-examination of the rule. The DOL still has not decided whether to push that date back, however, and the outcome of the re-examination is unclear, so we are preparing to comply with the balance of the rule on the January 1, 2018 applicability date. Under the rule, certain business activities in which we engage, such as IRA rollovers and other IRA sales, have become subject to a heightened fiduciary standard. Where VRIAC is deemed to act in a fiduciary capacity, we have either modified our sales and compensation practices or are relying on an applicable exemption.

The DOL concurrently adopted a "best interest contract exemption" (“BIC”) intended to enable continuation of certain existing industry practices relating to receipt of commissions and other compensation. This exemption enables us and our distributors to continue many historical practices - subject, among other things, to a heightened best interests standard and a requirement that compensation be “reasonable”. The DOL has delayed applicability of several key aspects of this exemption - including aspects that could expose us to class action lawsuits in the event we fail to fully comply with the conditions of the exemption - until January 1, 2018. As noted above, the DOL is considering further delays. While it is too early to predict what impact this will have on our annuities and other businesses, we may experience a material decline in sales of products that can only be practicably sold in reliance on the BIC, such as variable annuities and fixed indexed annuities. The DOL is re-examining the BIC exemption together with the rest of the rule, and may revise or repeal it after completing the re-examination.

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

Item 6.    Exhibits

See Exhibit Index on page 79 hereof.

 
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SIGNATURE

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


August 9, 2017
 
Voya Retirement Insurance and Annuity Company
(Date)
 
(Registrant)
 
 
 
 
By:
/s/
Francis G. O'Neill
 
 
Francis G. O'Neill
 
 
Senior Vice President and
 
 
Chief Financial Officer
 
 
(Duly Authorized Officer and Principal Financial Officer)


 
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Voya Retirement Insurance and Annuity Company ("VRIAC")

Exhibit Index 
Exhibit
Number
 
Description of Exhibit
10.1+
 
Intercompany Agreement, dated as of December 22, 2010, effective January 1, 2010, as amended, between ILIAC (nka VRIAC) and ING Investment Management LLC (nka Voya Investment Management LLC).
10.2+
 
Amendment No. 6, entered into on June 29, 2017 and effective as of July 1, 2017, amends the Intercompany Agreement, dated as of December 22, 2010, effective January 1, 2010, as amended, by and between VRIAC and Voya Investment Management LLC.
10.3+
 
Termination Amendment, executed on June 29, 2017, effective April 30, 2017, to Intercompany Agreement, dated January 1, 2010, between VRIAC and Directed Services LLC.
31.1+
 
Certificate of Francis G. O'Neill pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2+
 
Certificate of Charles P. Nelson pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1+
 
Certificate of Francis G. O'Neill pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2+
 
Certificate of Charles P. Nelson pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS+
 
XBRL Instance Document
101.SCH+
 
XBRL Taxonomy Extension Schema
101.CAL+
 
XBRL Taxonomy Extension Calculation Linkbase
101.DEF+
 
XBRL Taxonomy Extension Definition Linkbase
101.LAB+
 
XBRL Taxonomy Extension Label Linkbase
101.PRE+
 
XBRL Taxonomy Extension Presentation Linkbase

+Filed herewith.




 
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