VOYA RETIREMENT INSURANCE & ANNUITY Co - FORM 10-Q - August 9, 2018

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EX-32.2 - EXHIBIT 32.2 - VOYA RETIREMENT INSURANCE & ANNUITY Covriac2018q210-qex322.htm
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EX-31.2 - EXHIBIT 31.2 - VOYA RETIREMENT INSURANCE & ANNUITY Covriac2018q210-qex312.htm
EX-31.1 - EXHIBIT 31.1 - VOYA RETIREMENT INSURANCE & ANNUITY Covriac2018q210-qex311.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, 2018

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 8, 2018, 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, 2018



 
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; and (xi) our parent company, Voya Financial, Inc.'s ability to successfully manage the separation of Venerable (as defined below), including the transition services on the expected timeline and economic terms. 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, 2017 (File No. 033-23376) (the "Annual Report on Form 10-K").

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, 2018 (Unaudited) and December 31, 2017
(In millions, except share and per share data)

 
June 30,
2018
 
December 31,
2017
Assets
 
 
 
Investments:
 
 
 
Fixed maturities, available-for-sale, at fair value (amortized cost of $22,190 as of 2018 and $21,774 as of 2017)
$
22,572

 
$
23,141

Fixed maturities, at fair value using the fair value option
1,171

 
941

Equity securities, at fair value (cost of $48 as of 2018 and $45 as of 2017)
63

 
60

Short-term investments
1

 
25

Mortgage loans on real estate, net of valuation allowance of $1 as of 2018 and 2017
5,002

 
4,910

Policy loans
212

 
214

Limited partnerships/corporations
568

 
411

Derivatives
163

 
136

Securities pledged (amortized cost of $853 as of 2018 and $864 as of 2017)
907

 
960

Other investments
39

 
—

Total investments
30,698

 
30,798

Cash and cash equivalents
200

 
288

Short-term investments under securities loan agreements, including collateral delivered
724

 
765

Accrued investment income
311

 
304

Premiums receivable and reinsurance recoverable
1,455

 
1,496

Deferred policy acquisition costs, Value of business acquired and Sales inducements to contract owners
1,001

 
766

Notes receivable from affiliate
—

 
175

Short-term loan to affiliate
—

 
80

Due from affiliates
60

 
60

Property and equipment
63

 
64

Other assets
171

 
140

Assets held in separate accounts
74,181

 
73,036

Total assets
$
108,864

 
$
107,972



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, 2018 (Unaudited) and December 31, 2017
(In millions, except share and per share data)

 
June 30,
2018
 
December 31,
2017
Liabilities and Shareholder's Equity
 
 
 
Future policy benefits and contract owner account balances
$
30,183

 
$
29,669

Payable for securities purchased
22

 
79

Payables under securities loan agreements, including collateral held
844

 
845

Short-term debt
1

 
—

Long-term debt
4

 
5

Due to affiliates
64

 
61

Derivatives
70

 
85

Current income tax payable to Parent
13

 
23

Deferred income taxes
62

 
187

Other liabilities
254

 
401

Liabilities related to separate accounts
74,181

 
73,036

Total liabilities
105,698

 
104,391

 
 
 
 
Commitments and Contingencies (Note 9)


 


 
 
 
 
Shareholder's equity:
 
 
 
Common stock (100,000 shares authorized, 55,000 issued and outstanding as of 2018 and 2017; $50 par value per share)
3

 
3

Additional paid-in capital
2,729

 
2,730

Accumulated other comprehensive income (loss)
260

 
818

Retained earnings (deficit)
174

 
30

Total shareholder's equity
3,166

 
3,581

Total liabilities and shareholder's equity
$
108,864

 
$
107,972




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, 2018 and 2017 (Unaudited)
(In millions)


Three Months Ended June 30,

Six Months Ended June 30,

2018

2017

2018

2017
Revenues:
 
 
 
 
 
 
 
Net investment income
$
397


$
378


$
779


$
757

Fee income
175


177


349


367

Premiums
8


9


22


24

Broker-dealer commission revenue
27


42


68


86

Net realized capital gains (losses):











Total other-than-temporary impairments
—


—


(9
)

—

Less: Portion of other-than-temporary impairments recognized in Other comprehensive income (loss)
1


—


1


—

Net other-than-temporary impairments recognized in earnings
(1
)

—


(10
)

—

Other net realized capital gains (losses)
(82
)

(47
)

(160
)

(103
)
Total net realized capital gains (losses)
(83
)

(47
)

(170
)

(103
)
Other revenue
2


2


2


2

Total revenues
526


561


1,050


1,133

Benefits and expenses:











Interest credited and other benefits to contract owners/policyholders
200


245


398


480

Operating expenses
178


192


286


411

Broker-dealer commission expense
27


42


68


86

Net amortization of Deferred policy acquisition costs and Value of business acquired
17


134


82


136

Total benefits and expenses
422


613


834


1,113

Income (loss) before income taxes
104


(52
)

216


20

Income tax expense (benefit)
5


(26
)

30


(8
)
Net income (loss)
$
99


$
(26
)

$
186


$
28



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, 2018 and 2017 (Unaudited)
(In millions)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Net income (loss)
$
99

 
$
(26
)
 
$
186

 
$
28

Other comprehensive income (loss), before tax:
 
 
 
 
 
 
 
Unrealized gains/losses on securities
(218
)
 
205

 
(700
)
 
284

Other-than-temporary impairments
—

 
—

 
7

 
2

Pension and other postretirement benefits liability
—

 
(1
)
 
(1
)
 
(1
)
Other comprehensive income (loss), before tax
(218
)
 
204

 
(694
)
 
285

Income tax expense (benefit) related to items of other comprehensive income (loss)
(40
)
 
71

 
(148
)
 
99

Other comprehensive income (loss), after tax
(178
)
 
133

 
(546
)
 
186

Comprehensive income (loss)
$
(79
)
 
$
107

 
$
(360
)
 
$
214



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, 2018 and 2017 (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, 2018
$
3

 
$
2,730

 
$
818

 
$
30

 
$
3,581

Cumulative effect of changes in accounting:
 
 
 
 
 
 
 
 
 
Adjustment for adoption of ASU 2014-09
—

 
—

 
—

 
72

 
72

Adjustment for adoption of ASU 2016-01
—

 
—

 
(12
)
 
12

 
—

Balance as of January 1, 2018 - As adjusted
3

 
2,730

 
806

 
114

 
3,653

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

 
—

 
—

 
186

 
186

Other comprehensive income (loss), after tax
—

 
—

 
(546
)
 
—

 
(546
)
Total comprehensive income (loss)
 
 
 
 
 
 
 
 
(360
)
Dividends paid and distributions of capital
—

 
—

 
—

 
(126
)
 
(126
)
Employee related benefits
—

 
(1
)
 
—

 
—

 
(1
)
Balance as of June 30, 2018
$
3

 
$
2,729

 
$
260

 
$
174

 
$
3,166

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of January 1, 2017
$
3

 
$
2,994

 
$
560

 
$
(180
)
 
$
3,377

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

 
—

 
—

 
28

 
28

Other comprehensive income (loss), after tax
—

 
—

 
186

 
—

 
186

Total comprehensive income (loss)
 
 
 
 
 
 
 
 
214

Dividends paid and distributions of capital
—

 
(261
)
 
—

 
—

 
(261
)
Employee related benefits
—

 
—

 
—

 
—

 
—

Balance as of June 30, 2017
$
3

 
$
2,733

 
$
746

 
$
(152
)
 
$
3,330




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, 2018 and 2017 (Unaudited)
(In millions)

 
Six Months Ended June 30,
 
2018
 
2017
Net cash provided by operating activities
$
628

 
$
428

Cash Flows from Investing Activities:
 
 
 
Proceeds from the sale, maturity, disposal or redemption of:
 
 
 
Fixed maturities
2,318

 
2,277

Equity securities
—

 
—

Mortgage loans on real estate
309

 
257

Limited partnerships/corporations
27

 
37

Acquisition of:
 
 
 
Fixed maturities
(3,067
)
 
(1,898
)
Equity securities
(3
)
 
(2
)
Mortgage loans on real estate
(402
)
 
(850
)
Limited partnerships/corporations
(165
)
 
(65
)
Derivatives, net
(22
)
 
169

Policy loans, net
2

 
5

Short-term investments, net
24

 
29

Short-term loan to affiliate, net
80

 
—

Collateral received (delivered), net
40

 
(161
)
Other investments, net
(39
)
 
—

Net cash used in investing activities
(898
)
 
(202
)
Cash Flows from Financing Activities:
 
 
 
Deposits received for investment contracts
1,838

 
1,249

Maturities and withdrawals from investment contracts
(1,511
)
 
(1,316
)
Settlements on deposit contracts
(19
)
 
(33
)
Dividends paid and distributions of capital
(126
)
 
(261
)
Net cash provided by (used in) financing activities
182

 
(361
)
Net decrease in cash and cash equivalents
(88
)
 
(135
)
Cash and cash equivalents, beginning of period
288

 
561

Cash and cash equivalents, end of period
$
200

 
$
426



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. ("Voya Financial"), 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.

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

As of June 1, 2018, Directed Services LLC ("DSL") was divested pursuant to the transaction described below. Subsequent to the transaction, VRIAC has one wholly owned non-insurance subsidiary, Voya Financial Partners, LLC ("VFP").

On June 1, 2018, VRIAC's ultimate parent, Voya Financial, consummated a series of transactions (collectively, the "Transaction'') pursuant to a Master Transaction Agreement dated December 20, 2017 (the "MTA") with VA Capital Company LLC ("VA Capital") and Athene Holding Ltd ("Athene"). As part of the Transaction, VA Capital's wholly owned subsidiary Venerable Holdings Inc. ("Venerable") acquired certain of Voya Financial's assets, including all of the shares of capital stock of Voya Insurance and Annuity Company ("VIAC"), the Company's Iowa-domiciled insurance affiliate, as well as the membership interests of DSL, the Company's broker-dealer subsidiary. Following the closing of the Transaction, VRIAC acquired a 9.99% equity interest in VA Capital.

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 the Company may or may not be providing other employer sponsored products and services.

The Company has one operating segment.


 
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)
 
 
 

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.

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. As of June 1, 2018, DSL was divested pursuant to the Transaction.

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, 2018, its results of operations and comprehensive income for the three and six months ended June 30, 2018 and 2017, and its changes in shareholder's equity and statements of cash flows for the six months ended June 30, 2018 and 2017, in conformity with U.S. GAAP. Interim results are not necessarily indicative of full year performance. The December 31, 2017 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.

Significant Accounting Policies

Investments

Effective January 1, 2018, the Company adopted Accounting Standards Update ("ASU") 2016-01 "Financial Instruments-Overall (ASC Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities" ("ASU 2016-01") (See the Adoption of New Pronouncements section below). As a result, the Company measures its equity securities at fair value and recognizes any changes in fair value in net income. Prior to adoption, equity securities were designated as available-for-sale and reported at fair value with unrealized capital gains (losses) recorded in Accumulated other comprehensive income (loss) ("AOCI").

Recognition of Revenue

As of January 1, 2018, the Company changed its method for recognizing costs to obtain and fulfill certain financial services contracts upon the adoption of ASU 2014-09, "Revenue from Contracts with Customers (ASC Topic 606)" ("ASU 2014-09"). (See the Adoption of New Pronouncements section below.)

Financial services revenue is disaggregated by type of service in the following table and represents approximately 12.5% and 13.1% of total revenue for the three and six months ended June 30, 2018, respectively. For the three and six months ended June 30, 2018, a portion of the revenue recognized in the current period from distribution services is related to performance obligations satisfied in previous periods.
 
Three Months Ended June 30, 2018
 
Six Months Ended June 30, 2018
Service Line
 
 
 
Recordkeeping & administration
$
29

 
$
57

Distribution & shareholder servicing
37

 
81

Total financial services revenue
$
66

 
$
138


Receivables of $26 are included in Other assets on the Condensed Consolidated Balance Sheet as of June 30, 2018.


 
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)
 
 
 

Financial Services Revenue
Revenue for various financial services is measured based on consideration specified in a contract with a customer and excludes any amounts collected on behalf of third parties. For recordkeeping and administration services, the Company recognizes revenue as services are provided, generally over time. In addition, the Company may arrange for sub-advisory services for a customer under certain contracts. Revenue is recognized when the Company has satisfied a performance obligation by transferring control of a service to a customer. Contract terms are typically less than one year, and consideration is generally variable and due as services are rendered.

For distribution and shareholder servicing revenue, the Company provides distribution services at a point in time and shareholder services over time. Such revenue is recognized when the Company has satisfied a performance obligation and related consideration is received. Contract terms are less than one year, and consideration is variable. For distribution services, revenue may be recognized in periods subsequent to when the Company has satisfied a performance obligation, as a component of related consideration is constrained under certain contracts.

For a description of principal activities from which the Company generates revenue, see the Business section above for further information.

Revenue for various financial services is recorded in Fee income or Other revenue in the Condensed Consolidated Statements of Operations.

Contract Costs
Contract cost assets represent costs incurred to obtain or fulfill a contract that are expected to be recovered and, thus, have been capitalized and are subject to amortization. Capitalized contract costs include incremental costs of obtaining a contract and fulfillment costs that relate directly to a contract and generate or enhance resources of the Company that are used to satisfy performance obligations.

The Company defers (1) incremental commissions and variable compensation paid to the Company's direct sales force, consultant channel, and intermediary partners, as a result of obtaining certain financial services contracts and (2) account set-up expenses on certain recordkeeping contracts. The Company expenses as incurred deferrable contract costs for which the amortization period would be one year or less (based on the U.S. GAAP practical expedient) and other contract-related costs. The Company periodically reviews contract cost assets for impairment. Capitalized contract costs are included in Other assets on the Condensed Consolidated Balance Sheets, and costs expensed as incurred are included in Operating expenses in the Condensed Consolidated Statements of Operations.

As of June 30, 2018, contract cost assets were $92. Capitalized contract costs are amortized on a straight-line basis over the estimated lives of the contracts, which typically range from 5 to 15 years. This method is consistent with the transfer of services to which the assets relate. For the three and six months ended June 30, 2018, amortization expenses of $4 and $9, respectively, were recorded in Operating expenses in the Condensed Consolidated Statements of Operations. There was no impairment loss in relation to the contract costs capitalized.

Adoption of New Pronouncements

Derecognition of Nonfinancial Assets
In February 2017, the Financial Accounting Standards Board ("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 were adopted January 1, 2018 using the modified retrospective approach. The adoption had no effect on the Company’s financial condition, results of operations, or cash flows.


 
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)
 
 
 

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 were adopted on January 1, 2018 using the retrospective approach. The adoption had no effect on the Company’s financial condition, results of operations, or cash flows.

Share-Based Compensation
In March 2016, the FASB issued 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. For the six months ended June 30, 2017, the Company had no excess tax benefits. 

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.

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 Company adopted the provisions of ASU 2016-01 on January 1, 2018 using a modified retrospective approach, except for certain provisions that were required to be applied prospectively. The impact to the January 1, 2018 Condensed Consolidated Balance Sheets was a $12 increase, net of tax, to Retained earnings (deficit) with a corresponding decrease of $12, net of tax, to AOCI to recognize the unrealized gain associated with Equity securities. The provisions that required prospective adoption had no effect on the Company's financial condition, results of operations, or cash flows. Under previous guidance, prior to January 1, 2018, Equity securities were classified as available for sale with changes in fair value recognized in Other comprehensive income (loss).

Revenue from Contracts with Customers
In May 2014, the FASB issued 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

 
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)
 
 
 

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 Company adopted the provisions of ASU 2014-09 on January 1, 2018, using the modified retrospective approach. The adoption had no impact on revenue recognition. However, the adoption resulted in a $90 increase in Other assets to capitalize costs to obtain and fulfill certain financial services contracts. This adjustment was offset by a related $18 decrease in Deferred income taxes, resulting in a net $72 increase to Retained earnings (deficit) on the Condensed Consolidated Balance Sheet as of January 1, 2018. In addition, disclosures have been updated to reflect accounting policy changes made as a result of the implementation of ASU 2014-09. (See the Significant Accounting Policies section above.)

Comparative information has not been adjusted and continues to be reported under previous revenue recognition guidance. As of June 30, 2018 the adoption of ASU 2014-09 resulted in a $92 increase in Other assets, offset by a related $19 decrease in Deferred income taxes, resulting in a net $73 increase to Retained earnings (deficit) on the Condensed Consolidated Balance Sheet. For the three months ended June 30, 2018, the adoption resulted in an immaterial impact on Operating expenses on the Condensed Consolidated Statement of Operations. For the six months ended June 30, 2018, the adoption resulted in a $1 increase in Operating expenses on the Condensed Consolidated Statement of Operations. For the six months ended June 30, 2018, adopting the provisions of ASU 2014-09 had no impact on Net cash provided by operating activities.

Future Adoption of Accounting Pronouncements

Reclassification of Certain Tax Effects
In February 2018, the FASB issued ASU 2018-02, "Income Statement-Reporting Comprehensive Income (ASC Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income" ("ASU 2018-02"), which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the newly enacted Tax Cuts and Jobs Act of 2017 ("Tax Reform"). Stranded tax effects arise because U.S. GAAP requires that the impact of a change in tax laws or rates on deferred tax liabilities and assets be reported in net income, even if related to items recognized within accumulated other comprehensive income. The amount of the reclassification would be based on the difference between the historical corporate income tax rate and the newly enacted 21% corporate income tax rate, applied to deferred tax liabilities and assets reported within accumulated other comprehensive income.
The provisions of ASU 2018-02 are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. Initial adoption of ASU 2018-02 may be reported either in the period of adoption or on a retrospective basis in each period in which the effect of the change in the U.S. federal corporate income tax rate resulting from Tax Reform is recognized. The Company is currently evaluating the provisions of ASU 2018-02.

Derivatives & Hedging
In August 2017, the FASB issued ASU 2017-12, "Derivatives and Hedging (Topic ASC 815): Targeted Improvements to Accounting for Hedging Activities " ("ASU 2017-12"), which enables entities to better portray risk management activities in their financial statements, as follows:

•
Expands an entity's ability to hedge nonfinancial and financial risk components and reduces complexity in accounting for fair value hedges of interest rate risk,
•
Eliminates the requirement to separately measure and report hedge ineffectiveness and generally requires the entire change in the fair value of a hedging instrument to be presented in the same income statement line as the hedged item,
•
Eases certain documentation and assessment requirements and modifies the accounting for components excluded from the assessment of hedge effectiveness, and
•
Modifies required disclosures.

The provisions of ASU 2017-12 are effective for fiscal years beginning after December 15, 2018, including interim periods, with early adoption permitted. Initial adoption of ASU 2017-12 is required to be reported using a modified retrospective approach, with the exception of the presentation and disclosure requirements which are required to be applied prospectively. The Company is currently in the process of determining the impact of adoption of the provisions of ASU 2017-12.

 
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)
 
 
 


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.

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 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.

Leases
In February 2016, the FASB issued ASU 2016-02, "Leases (ASC Topic 842)" ("ASU 2016-02"), which requires lessees to recognize a right-of-use asset and a lease liability for all leases with terms of more than 12 months. The lease liability will be measured as the present value of the lease payments, and the asset will be based on the liability. For income statement purposes, expense recognition will depend on the lessee's classification of the lease as either finance, with a front-loaded amortization expense pattern similar to current capital leases, or operating, with a straight-line expense pattern similar to current operating leases. Lessor accounting will be similar to the current model, and lessors will be required to classify leases as operating, direct financing, or sales-type.

ASU 2016-02 also replaces the sale-leaseback guidance to align with the new revenue recognition standard, addresses statement of operation and statement of cash flow classification, and requires additional disclosures for all leases. In addition, the FASB issued various amendments during 2018 to clarify and simplify the provisions and implementation guidance of ASU 2016-02.

The provisions of ASU 2016-02 are effective on a modified retrospective basis for fiscal years beginning after December 15, 2018, 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 2016-02.


 
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)
 
 
 

2.    Investments
   
Fixed Maturities and Equity Securities

Available-for-sale and fair value option ("FVO") fixed maturities were as follows as of June 30, 2018:
 
Amortized
Cost
 
Gross
Unrealized
Capital
Gains
 
Gross
Unrealized
Capital
Losses
 
Embedded Derivatives(2)
 
Fair
Value
 
OTTI(3)(4)
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasuries
$
464

 
$
84

 
$
1

 
$
—

 
$
547

 
$
—

U.S. Government agencies and authorities
—

 
—

 
—

 
—

 
—

 
—

State, municipalities and political subdivisions
751

 
20

 
8

 
—

 
763

 
—

U.S. corporate public securities
7,968

 
369

 
119

 
—

 
8,218

 
—

U.S. corporate private securities
3,684

 
95

 
90

 
—

 
3,689

 
—

Foreign corporate public securities and foreign governments(1)
2,481

 
90

 
53

 
—

 
2,518

 
—

Foreign corporate private securities(1)
3,274

 
62

 
65

 
—

 
3,271

 
—

Residential mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Agency
1,998

 
48

 
32

 
4

 
2,018

 
—

Non-Agency
883

 
46

 
6

 
5

 
928

 
4

Total Residential mortgage-backed securities
2,881

 
94

 
38

 
9

 
2,946

 
4

Commercial mortgage-backed securities
1,627

 
13

 
27

 
—

 
1,613

 
—

Other asset-backed securities
1,084

 
6

 
5

 
—

 
1,085

 
2

Total fixed maturities, including securities pledged
24,214

 
833

 
406

 
9

 
24,650

 
6

Less: Securities pledged
853

 
70

 
16

 
—

 
907

 
—

Total fixed maturities
$
23,361

 
$
763

 
$
390

 
$
9

 
$
23,743

 
$
6

(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 $148 of net unrealized gains on impaired available-for-sale securities.


 
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)
 
 
 

Available-for-sale and FVO fixed maturities and equity securities were as follows as of December 31, 2017:
 
Amortized
Cost
 
Gross
Unrealized
Capital
Gains
 
Gross
Unrealized
Capital
Losses
 
Embedded Derivatives(2)
 
Fair
Value
 
OTTI(3)(4)
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasuries
$
547

 
$
109

 
$
—

 
$
—

 
$
656

 
$
—

U.S. Government agencies and authorities
3

 
—

 
—

 
—

 
3

 
—

State, municipalities and political subdivisions
842

 
40

 
4

 
—

 
878

 
—

U.S. corporate public securities
8,476

 
786

 
26

 
—

 
9,236

 
—

U.S. corporate private securities
3,387

 
148

 
38

 
—

 
3,497

 
—

Foreign corporate public securities and foreign governments(1)
2,594

 
192

 
9

 
—

 
2,777

 
—

Foreign corporate private securities(1)
3,105

 
155

 
45

 
—

 
3,215

 
7

Residential mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Agency
1,878

 
65

 
17

 
6

 
1,932

 
—

Non-Agency
639

 
54

 
2

 
6

 
697

 
4

Total Residential mortgage-backed securities
2,517

 
119

 
19

 
12

 
2,629

 
4

Commercial mortgage-backed securities
1,437

 
39

 
6

 
—

 
1,470

 
—

Other asset-backed securities
671

 
11

 
1

 
—

 
681

 
2

Total fixed maturities, including securities pledged
23,579

 
1,599

 
148

 
12

 
25,042

 
13

Less: Securities pledged
864

 
104

 
8

 
—

 
960

 
—

Total fixed maturities
22,715

 
1,495

 
140

 
12

 
24,082

 
13

Equity securities
45

 
15

 
—

 
—

 
60

 
—

Total fixed maturities and equity securities investments
$
22,760

 
$
1,510

 
$
140

 
$
12

 
$
24,142

 
$
13

(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 $190 of net unrealized gains on impaired available-for-sale securities.



 
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 amortized cost and fair value of fixed maturities, including securities pledged, as of June 30, 2018, 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
$
464

 
$
468

After one year through five years
4,244

 
4,311

After five years through ten years
5,901

 
5,863

After ten years
8,013

 
8,364

Mortgage-backed securities
4,508

 
4,559

Other asset-backed securities
1,084

 
1,085

Fixed maturities, including securities pledged
$
24,214

 
$
24,650


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, 2018 and December 31, 2017, the Company did not have any investments in a single issuer, other than obligations of the U.S. Government and government agencies, with a carrying value in excess of 10% of the Company's Total shareholder's equity.

The following tables present 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, 2018
 
 
 
 
 
 
 
Communications
$
1,162

 
$
55

 
$
18

 
$
1,199

Financial
2,805

 
125

 
38

 
2,892

Industrial and other companies
7,629

 
221

 
149

 
7,701

Energy
1,886

 
83

 
51

 
1,918

Utilities
2,854

 
103

 
52

 
2,905

Transportation
725

 
19

 
13

 
731

Total
$
17,061

 
$
606

 
$
321

 
$
17,346

 
 
 
 
 
 
 
 
December 31, 2017
 
 
 
 
 
 
 
Communications
$
1,145

 
$
114

 
$
1

 
$
1,258

Financial
2,750

 
185

 
4

 
2,931

Industrial and other companies
7,953

 
532

 
65

 
8,420

Energy
1,970

 
159

 
33

 
2,096

Utilities
2,725

 
216

 
11

 
2,930

Transportation
697

 
52

 
2

 
747

Total
$
17,240

 
$
1,258

 
$
116

 
$
18,382



 
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)
 
 
 

Fixed Maturities and Equity Securities:
The Company's fixed maturities are currently designated as available-for-sale, except those accounted for using the FVO. Prior to the adoption of ASU 2016-01 as of January 1, 2018, equity securities were also designated as available-for-sale. Available-for-sale securities are reported at fair value and unrealized capital gains (losses) on these securities are recorded directly in 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 reported 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, 2018 and December 31, 2017, approximately 53.8% and 52.1%, 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.
 
Repurchase Agreements

As of June 30, 2018 and December 31, 2017, the Company did not have any securities pledged in dollar rolls, repurchase agreement transactions or reverse repurchase agreements.

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, 2018 and December 31, 2017, the fair value of loaned securities was $745 and $799, 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, 2018 and December 31, 2017, cash collateral retained by the lending agent and invested in short-term liquid assets on the Company's behalf was $711 and $744, 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, 2018 and December 31, 2017, liabilities to return collateral of $711 and $744, respectively, are included in Payables under securities loan agreements, including collateral held, on the Condensed Consolidated Balance Sheets.


 
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)
 
 
 

The Company accepts 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, 2018 and December 31, 2017, the fair value of securities retained as collateral by the lending agent on the Company’s behalf was $60 and $61, respectively.

The following table presents borrowings under securities lending transactions by class of collateral pledged for the dates indicated:
 
June 30, 2018 (1)(2)
 
December 31, 2017 (1)(2)
U.S. Treasuries
$
179

 
$
177

U.S. corporate public securities
429

 
460

Short-term Investments
1

 
—

Foreign corporate public securities and foreign governments
162

 
168

Payables under securities loan agreements
$
771

 
$
805

(1) As of June 30, 2018 and December 31, 2017, borrowings under securities lending transactions include cash collateral of $711 and $744, respectively.
(2) As of June 30, 2018 and December 31, 2017, borrowings under securities lending transactions include non-cash collateral of $60 and $61, 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 $568 and $411 as of June 30, 2018 and December 31, 2017, 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 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 does 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 capital 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.


 
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

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, 2018:
 
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
$
13

 
$
—

 
$
2

 
$
1

 
$
12

 
$
—

 
$
27

 
$
1

State, municipalities and political subdivisions
196

 
3

 
27

 
1

 
65

 
4

 
288

 
8

U.S. corporate public securities
2,384

 
70

 
407

 
26

 
197

 
23

 
2,988

 
119

U.S. corporate private securities
1,258

 
26

 
180

 
11

 
443

 
53

 
1,881

 
90

Foreign corporate public securities and foreign governments
994

 
32

 
105

 
9

 
77

 
12

 
1,176

 
53

Foreign corporate private securities
1,107

 
46

 
67

 
3

 
153

 
16

 
1,327

 
65

Residential mortgage-backed
423

 
7

 
191

 
14

 
313

 
17

 
927

 
38

Commercial mortgage-backed
735

 
10

 
311

 
15

 
33

 
2

 
1,079

 
27

Other asset-backed
547

 
3

 
58

 
1

 
13

 
1

 
618

 
5

Total
$
7,657

 
$
197

 
$
1,348

 
$
81

 
$
1,306

 
$
128

 
$
10,311

 
$
406



















 
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), along with the fair value of fixed maturity securities, including securities pledged, by market sector and duration were as follows as of December 31, 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
$
18

 
$
—

 
$
—

 
$
—

 
$
12

 
$
—

 
$
30

 
$
—

State, municipalities and political subdivisions
34

 
—

 
1

 
—

 
91

 
4

 
126

 
4

U.S. corporate public securities
504

 
11

 
—

 
—

 
304

 
15

 
808

 
26

U.S. corporate private securities
226

 
2

 
46

 
2

 
499

 
34

 
771

 
38

Foreign corporate public securities and foreign governments
148

 
1

 
5

 
—

 
99

 
8

 
252

 
9

Foreign corporate private securities
135

 
38

 
13

 
—

 
161

 
7

 
309

 
45

Residential mortgage-backed
263

 
5

 
26

 
1

 
438

 
13

 
727

 
19

Commercial mortgage-backed
436

 
5

 
19

 
—

 
50

 
1

 
505

 
6

Other asset-backed
95

 
1

 
9

 
—

 
38

 
—

 
142

 
1

Total
$
1,859

 
$
63

 
$
119

 
$
3

 
$
1,692

 
$
82

 
$
3,670

 
$
148


Of the unrealized capital losses aged more than twelve months, the average market value of the related fixed maturities was 91.1% and 95.4% of the average book value as of June 30, 2018 and December 31, 2017, respectively.


 
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)
 
 
 

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, 2018
 
 
 
 
 
 
 
 
 
 
 
Six months or less below amortized cost
$
7,813

 
$
82

 
$
183

 
$
23

 
1,568

 
11

More than six months and twelve months or less below amortized cost
1,434

 
1

 
82

 
—

 
310

 
1

More than twelve months below amortized cost
1,308

 
79

 
96

 
22

 
278

 
5

Total
$
10,555

 
$
162

 
$
361

 
$
45

 
2,156

 
17

 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
Six months or less below amortized cost
$
1,883

 
$
67

 
$
30

 
$
38

 
433

 
7

More than six months and twelve months or less below amortized cost
128

 
7

 
4

 
2

 
37

 
1

More than twelve months below amortized cost
1,661

 
72

 
53

 
21

 
335

 
7

Total
$
3,672

 
$
146

 
$
87

 
$
61

 
805

 
15



 
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)
 
 
 

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, 2018
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasuries
$
28

 
$
—

 
$
1

 
$
—

 
6

 
—

State, municipalities and political subdivisions
296

 
—

 
8

 
—

 
145

 
—

U.S. corporate public securities
3,084

 
23

 
113

 
6

 
655

 
2

U.S. corporate private securities
1,904

 
67

 
72

 
18

 
215

 
2

Foreign corporate public securities and foreign governments
1,215

 
14

 
50

 
3

 
276

 
4

Foreign corporate private securities
1,336

 
56

 
47

 
18

 
122

 
4

Residential mortgage-backed
964

 
1

 
38

 
—

 
382

 
4

Commercial mortgage-backed
1,106

 
—

 
27

 
—

 
217

 
—

Other asset-backed
622

 
1

 
5

 
—

 
138

 
1

Total
$
10,555

 
$
162

 
$
361

 
$
45

 
2,156

 
17

 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasuries
$
30

 
$
—

 
$
—

 
$
—

 
6

 
—

State, municipalities and political subdivisions
130

 
—

 
4

 
—

 
96

 
—

U.S. corporate public securities
828

 
6

 
24

 
2

 
167

 
2

U.S. corporate private securities
743

 
66

 
18

 
20

 
71

 
2

Foreign corporate public securities and foreign governments
254

 
7

 
7

 
2

 
61

 
1

Foreign corporate private securities
288

 
66

 
8

 
37

 
35

 
6

Residential mortgage-backed
746

 
—

 
19

 
—

 
194

 
3

Commercial mortgage-backed
511

 
—

 
6

 
—

 
131

 
—

Other asset-backed
142

 
1

 
1

 
—

 
44

 
1

Total
$
3,672

 
$
146

 
$
87

 
$
61

 
805

 
15


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.

 
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)
 
 
 

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, 2018, the Company did not have any new commercial mortgage loan or private placement troubled debt restructuring. As of December 31, 2017, the Company did not have any new commercial mortgage loan troubled debt restructuring and had one private placement troubled debt restructuring with a pre-modification and post modification carrying value of $3.

As of June 30, 2018 and December 31, 2017, 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, 2018
 
December 31, 2017
 
Impaired
 
Non Impaired
 
Total
 
Impaired
 
Non Impaired
 
Total
Commercial mortgage loans
$
4

 
$
4,999

 
$
5,003

 
$
4

 
$
4,907

 
$
4,911

Collective valuation allowance for losses
N/A

 
(1
)
 
(1
)
 
N/A

 
(1
)
 
(1
)
Total net commercial mortgage loans
$
4

 
$
4,998

 
$
5,002

 
$
4

 
$
4,906

 
$
4,910

N/A- Not Applicable

There were no impairments taken on the mortgage loan portfolio for the three and six months ended June 30, 2018 and 2017.

The following table summarizes the activity in the allowance for losses for commercial mortgage loans for the periods indicated:
 
June 30, 2018
 
December 31, 2017
Collective valuation allowance for losses, balance at January 1
$
1

 
$
1

Addition to (reduction of) allowance for losses
—

 
—

Collective valuation allowance for losses, end of period
$
1

 
$
1



 
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)
 
 
 

The carrying values and unpaid principal balances of impaired mortgage loans were as follows as of the dates indicated:
 
June 30, 2018
 
December 31, 2017
Impaired loans without allowances for losses
$
4

 
$
4

Less: Allowances for losses on impaired loans
—

 
—

Impaired loans, net
$
4

 
$
4

Unpaid principal balance of impaired loans
$
6

 
$
6


As of June 30, 2018 and December 31, 2017 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, 2018 and December 31, 2017.

There were no loans 30 days or less in arrears, with respect to principal and interest as of June 30, 2018 and December 31, 2017.

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,
 
2018
 
2017
Impaired loans, average investment during the period (amortized cost)(1)
$
4

 
$
5

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

 
—

Interest income recognized on impaired loans, on a cash basis(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,
 
2018
 
2017
Impaired loans, average investment during the period (amortized cost)(1)
$
4

 
$
5

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

 
—

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

 
—

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.


 
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 table presents the LTV ratios as of the dates indicated:
 
June 30, 2018 (1)
 
December 31, 2017 (1)
Loan-to-Value Ratio:
 
 
 
0% - 50%
$
360

 
$
341

>50% - 60%
1,275

 
1,256

>60% - 70%
3,024

 
3,042

>70% - 80%
323

 
262

>80% and above
21

 
10

Total Commercial mortgage loans
$
5,003

 
$
4,911

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

The following table presents the DSC ratios as of the dates indicated:
 
June 30, 2018 (1)
 
December 31, 2017 (1)
Debt Service Coverage Ratio:
 
 
 
Greater than 1.5x
$
3,883

 
$
3,902

>1.25x - 1.5x
398

 
340

>1.0x - 1.25x
629

 
600

Less than 1.0x
53

 
54

Commercial mortgage loans secured by land or construction loans
40

 
15

Total Commercial mortgage loans
$
5,003

 
$
4,911

(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, 2018 (1)
 
December 31, 2017 (1)
 
Gross
Carrying Value
 
% of
Total
 
Gross
Carrying Value
 
% of
Total
Commercial Mortgage Loans by U.S. Region:
 
 
 
 
 
 
 
Pacific
$
1,007

 
20.1
%
 
$
985

 
20.1
%
South Atlantic
999

 
20.0
%
 
982

 
20.0
%
Middle Atlantic
1,053

 
21.1
%
 
1,097

 
22.4
%
West South Central
580

 
11.6
%
 
552

 
11.2
%
Mountain
486

 
9.7
%
 
457

 
9.3
%
East North Central
481

 
9.6
%
 
468

 
9.5
%
New England
76

 
1.5
%
 
77

 
1.6
%
West North Central
279

 
5.6
%
 
243

 
4.9
%
East South Central
42

 
0.8
%
 
50

 
1.0
%
Total Commercial mortgage loans
$
5,003

 
100.0
%
 
$
4,911

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

 
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)
 
 
 

 
June 30, 2018 (1)
 
December 31, 2017 (1)
 
Gross
Carrying Value
 
% of
Total
 
Gross
Carrying Value
 
% of
Total
Commercial Mortgage Loans by Property Type:
 
 
 
 
 
 
 
Retail
$
1,376

 
27.5
%
 
$
1,383

 
28.1
%
Industrial
1,345

 
26.9
%
 
1,326

 
27.0
%
Apartments
1,022

 
20.4
%
 
948

 
19.3
%
Office
825

 
16.5
%
 
829

 
16.9
%
Hotel/Motel
175

 
3.5
%
 
177

 
3.6
%
Mixed Use
48

 
1.0
%
 
52

 
1.1
%
Other
212

 
4.2
%
 
196

 
4.0
%
Total Commercial mortgage loans
$
5,003

 
100.0
%
 
$
4,911

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

The following table presents mortgages by year of origination as of the dates indicated:
 
June 30, 2018 (1)
 
December 31, 2017 (1)
Year of Origination:
 
 
 
2018
$
224

 
$
—

2017
1,139

 
1,086

2016
894

 
867

2015
666

 
703

2014
518

 
538

2013
623

 
644

2012 and prior
939

 
1,073

Total Commercial mortgage loans
$
5,003

 
$
4,911

(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 in accordance with its impairment policy in order to evaluate whether such investments are other-than-temporarily impaired.


 
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 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,
 
2018
 
2017
 
Impairment
 
No. of Securities
 
Impairment
 
No. of Securities
U.S. corporate public securities
$
—

 
—

 
$
—

*
1

Foreign corporate private securities(1)
—

 
—

 
—

 
—

Residential mortgage-backed
1

 
21

 
—

*
7

Commercial mortgage-backed
—

 
—

 
—

*
1

Total
$
1

 
21

 
$
—

*
9

(1) Primarily U.S. dollar denominated.
*Less than $1.
 
Six Months Ended June 30,
 
2018
 
2017
 
Impairment
 
No. of Securities
 
Impairment
 
No. of Securities
U.S. corporate public securities
$
—

 
—

 
$
—

*
1

Foreign corporate private securities(1)
9

 
1

 
—

 
—

Residential mortgage-backed
1

 
24

 
—

*
11

Commercial mortgage-backed
—

 
—

 
—

*
1

Total
$
10

 
25

 
$
—

*
13

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

The above table includes $1 and $10 of write-downs related to credit impairments for the three and six months ended June 30, 2018, respectively, in Other-than-temporary impairments, which are recognized in the Condensed Consolidated Statements of Operations. The above table includes immaterial write-downs related to credit impairments for the three and six months months ended June 30, 2017. The remaining write-downs for the three and six months ended June 30, 2018 and June 30, 2017 related to intent impairments are immaterial.
 
 
 
 
 
 
 
 
The Company may sell securities during the period in which fair value has declined below amortized cost for fixed maturities. 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.


 
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)
 
 
 

The following tables present 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,
 
 
2018
 
2017
 
Balance at April 1
$
6

 
$
8

 
Additional credit impairments:
 
 
 
 
On securities previously impaired
—

 
—

 
Reductions:
 
 
 
 
Increase in cash flows
—

 
—

*
Securities sold, matured, prepaid or paid down
1

 
1

 
Balance at June 30
$
5

 
$
7

 
*Less than $1.
 
 
Six Months Ended June 30,
 
 
2018
 
2017
 
Balance at January 1
$
16

 
$
9

 
Additional credit impairments:
 
 
 
 
On securities previously impaired
—

 
—

 
Reductions:
 
 
 
 
Increase in cash flows
—

 
—

*
Securities sold, matured, prepaid or paid down
11

 
2

 
Balance at June 30
$
5

 
$
7

 
*Less than $1.
 

Net Investment Income

The following table summarizes Net investment income for the periods indicated:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Fixed maturities
$
341

 
$
325

 
$
664

 
$
651

Equity securities
1

 
2

 
2

 
3

Mortgage loans on real estate
54

 
53

 
107

 
104

Policy loans
3

 
3

 
5

 
6

Short-term investments and cash equivalents
1

 
—

 
2

 
—

Other
15

 
12

 
34

 
27

Gross investment income
415

 
395

 
814

 
791

Less: Investment expenses
18

 
17

 
35

 
34

Net investment income
$
397

 
$
378

 
$
779

 
$
757


As of June 30, 2018 and December 31, 2017, the Company had $1 and $3, 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.


 
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)
 
 
 

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. Upon the adoption of ASU 2016-01 as of January 1, 2018, realized capital gains (losses) also includes changes in fair value of equity securities.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,
 
2018
 
2017
 
2018
 
2017
Fixed maturities, available-for-sale, including securities pledged
$
(19
)
 
$
(1
)
 
$
(33
)
 
$
(21
)
Fixed maturities, at fair value option
(82
)
 
(38
)
 
(181
)
 
(97
)
Equity securities
2

 
—

 
—

 
—

Derivatives
6

 
2

 
11

 
6

Embedded derivatives - fixed maturities
(2
)
 
(1
)
 
(4
)
 
(2
)
Guaranteed benefit derivatives
12

 
(9
)
 
32

 
11

Other investments
—

 
—

 
5

 
—

Net realized capital gains (losses)
$
(83
)
 
$
(47
)
 
$
(170
)
 
$
(103
)
After-tax net realized capital gains (losses)
$
(61
)
 
$
(31
)
 
$
(140
)
 
$
(67
)

For the three and six months ended June 30, 2018, the change in fair value of equity securities still held as of June 30, 2018 was $2 and $0, respectively.

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,
 
2018
 
2017
 
2018
 
2017
Proceeds on sales
$
1,180

 
$
561

 
$
1,840

 
$
1,638

Gross gains
7

 
6

 
11

 
11

Gross losses
20

 
7

 
27

 
25


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

 
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)
 
 
 

rate interest payments, calculated by reference to an agreed upon notional principal amount. These transactions are entered into pursuant to master agreements that provide for a single net payment to be made to/from the counterparty at each due date. The Company utilizes these contracts in qualifying hedging relationships as well as non-qualifying hedging relationships.

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

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

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: The Company 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.


 
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)
 
 
 

The notional amounts and fair values of derivatives were as follows as of the dates indicated:
 
June 30, 2018
 
December 31, 2017
 
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

 
$
—

 
$
—

 
$
35

 
$
—

 
$
—

Foreign exchange contracts
584

 
2

 
44

 
533

 
—

 
52

Derivatives: Non-qualifying for hedge accounting(1)
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
17,929

 
148

 
19

 
18,769

 
117

 
20

Foreign exchange contracts
14

 
1

 
—

 
26

 
—

 
—

Equity contracts
126

 
5

 
4

 
154

 
9

 
7

Credit contracts
639

 
7

 
3

 
771

 
10

 
6

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

 
9

 
—

 
N/A

 
12

 
—

Within products
N/A

 
—

 
79

 
N/A

 
—

 
117

Within reinsurance agreements
N/A

 
—

 
(70
)
 
N/A

 
—

 
(21
)
Total
 
 
$
172

 
$
79

 
 
 
$
148

 
$
181

(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, 2018 and December 31, 2017. 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.


 
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)
 
 
 

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, 2018
 
Notional Amount
 
Asset Fair Value
 
Liability Fair Value
Credit contracts
$
639

 
$
7

 
$
3

Equity contracts
126

 
5

 
4

Foreign exchange contracts
598

 
3

 
44

Interest rate contracts
15,713

 
148

 
19

 
 
 
163

 
70

Counterparty netting(1)
 
 
(37
)
 
(37
)
Cash collateral netting(1)
 
 
(122
)
 
—

Securities collateral netting(1)
 
 
—

 
(30
)
Net receivables/payables
 
 
$
4

 
$
3

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

 
December 31, 2017
 
Notional Amount
 
Asset Fair Value
 
Liability Fair Value
Credit contracts
$
771

 
$
10

 
$
6

Equity contracts
154

 
9

 
7

Foreign exchange contracts
559

 
—

 
52

Interest rate contracts
17,286

 
117

 
20

 
 
 
136

 
85

Counterparty netting(1)
 
 
(50
)
 
(50
)
Cash collateral netting(1)
 
 
(84
)
 
—

Securities collateral netting(1)
 
 
—

 
(30
)
Net receivables/payables
 
 
$
2

 
$
5

(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, 2018, the Company held $11 and $113 of net cash collateral related to OTC derivative contracts and cleared derivative contracts, respectively. As of December 31, 2017, the Company held $11 and $74 of net cash collateral related to OTC derivative contracts and cleared derivative contracts, respectively. In addition, as of June 30, 2018, the Company delivered $162 of securities and held no securities as collateral. As of December 31, 2017, the Company delivered $161 of securities and held no securities as collateral.


 
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)
 
 
 

Net realized gains (losses) on derivatives were as follows for the periods indicated:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Derivatives: Qualifying for hedge accounting(1)
 
 
 
 
 
 
 
Cash flow hedges:
 
 
 
 
 
 
 
Interest rate contracts
$
—

 
$
—

 
$
—

 
$
—

Foreign exchange contracts
3

 
1

 
4

 
8

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

 
(2
)
 
7

 
(5
)
Foreign exchange contracts
1

 
2

 
—

 
—

Equity contracts
—

 
—

 
—

 
1

Credit contracts
—

 
2

 
—

 
3

Embedded derivatives and Managed custody guarantees:
 
 
 
 
 
 
 
Within fixed maturity investments(2)
(2
)
 
(1
)
 
(4
)
 
(3
)
Within products(2)
12

 
(9
)
 
32

 
11

Within reinsurance agreements(3)
20

 
(14
)
 
49

 
(16
)
Total
$
36

 
$
(21
)
 
$
88

 
$
(1
)
(1) Changes in value for effective fair value hedges are recorded in Other net realized capital gains (losses). Changes in fair value upon disposal for effective cash flow hedges are amortized through Net investment income and the ineffective portion is recorded in Other net realized capital gains (losses) in the Condensed Consolidated Statements of Operations. For the three and six months ended June 30, 2018 and 2017, 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, 2018, the fair values of credit default swaps of $7 and $3 were included in Derivatives assets and Derivatives liabilities, respectively, on the Condensed Consolidated Balance Sheets. As of December 31, 2017, the fair values of credit default swaps of $10 and $6 were included in Derivatives assets and Derivatives liabilities, respectively, on the Condensed Consolidated Balance Sheets. As of June 30, 2018 and December 31, 2017, the maximum potential future exposure to the Company was $422 and $497, respectively, on credit default swaps. These instruments are typically written for a maturity period of 5 years and contain no recourse provisions. If the Company's current debt and claims paying ratings were downgraded in the future, the terms in the Company's derivative agreements may be triggered, which could negatively impact overall liquidity.


 
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)
 
 
 

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.



 
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 June 30, 2018:
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Fixed maturities, including securities pledged:
 
 
 
 
 
 
 
U.S. Treasuries
$
489

 
$
58

 
$
—

 
$
547

U.S. Government agencies and authorities
—

 
—

 
—

 
—

State, municipalities and political subdivisions
—

 
763

 
—

 
763

U.S. corporate public securities
—

 
8,200

 
18

 
8,218

U.S. corporate private securities
—

 
2,951

 
738

 
3,689

Foreign corporate public securities and foreign governments(1)
—

 
2,518

 
—

 
2,518

Foreign corporate private securities (1)
—

 
3,149

 
122

 
3,271

Residential mortgage-backed securities
—

 
2,913

 
33

 
2,946

Commercial mortgage-backed securities
—

 
1,597

 
16

 
1,613

Other asset-backed securities
—

 
988

 
97

 
1,085

Total fixed maturities, including securities pledged
489

 
23,137

 
1,024

 
24,650

Equity securities
10

 
—

 
53

 
63

Derivatives:


 


 


 
 
Interest rate contracts
—

 
148

 
—

 
148

Foreign exchange contracts
—

 
3

 
—

 
3

Equity contracts
—

 
5

 
—

 
5

Credit contracts
—

 
7

 
—

 
7

Cash and cash equivalents, short-term investments and short-term investments under securities loan agreements
924

 
—

 
1

 
925

Assets held in separate accounts
68,652

 
5,491

 
38

 
74,181

Total assets
$
70,075

 
$
28,791

 
$
1,116

 
$
99,982

Percentage of Level to Total
70
%
 
29
%
 
1
%
 
100
%
Liabilities:
 
 
 
 
 
 
 
Derivatives:
 
 
 
 
 
 
 
Guaranteed benefit derivatives:
 
 
 
 
 
 
 
FIA
$
—

 
$
—

 
$
16

 
$
16

Stabilizer and MCGs
—

 
—

 
63

 
63

Other derivatives:
 
 
 
 
 
 
 
Interest rate contracts
—

 
19

 
—

 
19

Foreign exchange contracts
—

 
44

 
—

 
44

Equity contracts
—

 
4

 
—

 
4

Credit contracts
—

 
3

 
—

 
3

Embedded derivative on reinsurance
—

 
(70
)
 
—

 
(70
)
Total liabilities
$
—

 
$
—

 
$
79

 
$
79

(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)
 
 
 

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, 2017:
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Fixed maturities, including securities pledged:
 
 
 
 
 
 
 
U.S. Treasuries
$
597

 
$
59

 
$
—

 
$
656

U.S. Government agencies and authorities
—

 
3

 
—

 
3

State, municipalities and political subdivisions
—

 
878

 
—

 
878

U.S. corporate public securities
—

 
9,210

 
26

 
9,236

U.S. corporate private securities
—

 
2,855

 
642

 
3,497

Foreign corporate public securities and foreign governments(1)
—

 
2,777

 
—

 
2,777

Foreign corporate private securities (1)
—

 
3,123

 
92

 
3,215

Residential mortgage-backed securities
—

 
2,608

 
21

 
2,629

Commercial mortgage-backed securities
—

 
1,463

 
7

 
1,470

Other asset-backed securities
—

 
638

 
43

 
681

Total fixed maturities, including securities pledged
597

 
23,614

 
831

 
25,042

Equity securities, available-for-sale
10

 
—

 
50

 
60

Derivatives:
 
 
 
 
 
 
 
Interest rate contracts
—

 
117

 
—

 
117

Foreign exchange contracts
—

 
—

 
—

 
—

Equity contracts
—

 
9

 
—

 
9

Credit contracts
—

 
10

 
—

 
10

Cash and cash equivalents, short-term investments and short-term investments under securities loan agreements
1,078

 
—

 
—

 
1,078

Assets held in separate accounts
67,966

 
5,059

 
11

 
73,036

Total assets
$
69,651

 
$
28,809

 
$
892

 
$
99,352

Percentage of Level to total
70
%
 
29
%
 
1
%
 
100
%
Liabilities:
 
 
 
 
 
 
 
Derivatives:
 
 
 
 
 
 
 
Guaranteed benefit derivatives:
 
 
 
 
 
 
 
FIA
$
—

 
$
—

 
$
20

 
$
20

Stabilizer and MCGs
—

 
—

 
97

 
97

Other derivatives:
 
 
 
 
 
 
 
Interest rate contracts
—

 
20

 
—

 
20

Foreign exchange contracts
—

 
52

 
—

 
52

Equity contracts
—

 
7

 
—

 
7

Credit contracts
—

 
6

 
—

 
6

Embedded derivative on reinsurance
—

 
(21
)
 
—

 
(21
)
Total liabilities
$
—

 
$
64

 
$
117

 
$
181

(1) Primarily U.S. dollar denominated.


 
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)
 
 
 

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.


 
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)
 
 
 

Generally, the Company does not obtain more than one vendor price from pricing services per instrument. The Company uses a hierarchy process in which prices are obtained from a primary vendor and, if that vendor is unable to provide the price, the next vendor in the hierarchy is contacted until a price is obtained or it is determined that a price cannot be obtained from a commercial pricing service. When a price cannot be obtained from a commercial pricing service, independent broker quotes are solicited.  Securities priced using independent broker quotes are classified as Level 3.

Broker quotes and prices obtained from pricing services are reviewed and validated through an internal valuation committee price variance review, comparisons to internal pricing models, back testing to recent trades or monitoring of trading volumes. After review, for those instruments where the price is determined to be appropriate, the unadjusted price provided is used for financial statement valuation. If it is determined that the price is questionable, another price may be requested from a different vendor. The internal valuation committee then reviews all prices for the instrument again, along with information from the review, to determine which price best represents exit price for the instrument.

Fair values of privately placed bonds are determined primarily using a matrix-based pricing model and are generally classified as Level 2 assets.  The model considers the current level of risk-free interest rates, current corporate spreads, the credit quality of the issuer and cash flow characteristics of the security. Also considered are factors such as the net worth of the borrower, the value of collateral, the capital structure of the borrower, the presence of guarantees and the Company's evaluation of the borrower's ability to compete in its relevant market.  Using this data, the model generates estimated market values which the Company considers reflective of the fair value of each privately placed bond.

Equity securities: Fair values of publicly traded equity securities are based upon quoted market price and are classified as Level 1 assets. Other equity securities, typically private equities or equity securities not traded on an exchange, are valued by other sources such as analytics or brokers and are classified as Level 2 or Level 3 assets.

Derivatives: Derivatives are carried at fair value, which is determined using the Company's derivative accounting system in conjunction with observable key financial data from third party sources, such as yield curves, exchange rates, S&P 500 Index prices, London Interbank Offered Rates ("LIBOR") and Overnight Index Swap ("OIS") rates. The Company uses OIS for valuations of collateralized interest rate derivatives, which are obtained from third-party sources. For those derivatives that are unable to be valued by the accounting system, the Company typically utilizes values established by third-party brokers. Counterparty credit risk is considered and incorporated in the Company's valuation process through counterparty credit rating requirements and monitoring of overall exposure.  It is the Company's policy to transact only with investment grade counterparties with a credit rating of A- or better. The Company's nonperformance risk is also considered and incorporated in the Company's valuation process. Valuations for the Company's futures and interest rate forward contracts are based on unadjusted quoted prices from an active exchange and, therefore, are classified as Level 1. The Company also has certain credit default swaps and options that are priced by third party vendors or by using models that primarily use market observable inputs, but contain inputs that are not observable to market participants, which have been classified as Level 3. The remaining derivative instruments are valued based on market observable inputs and are classified as Level 2.

Cash and cash equivalents, Short-term investments and Short-term investments under securities loan agreement: The carrying amounts for cash reflect the assets' fair values. The fair values for cash equivalents and most short-term investments are determined based on quoted market prices. These assets are classified as Level 1. Other short-term investments are valued and classified in the fair value hierarchy consistent with the policies described herein, depending on investment type.

Assets held in separate accounts: Assets held in separate accounts are reported at the quoted fair values of the underlying investments in the separate accounts.  The underlying investments include mutual funds, short-term investments and cash, the valuations of which are based upon a quoted market price and are included in Level 1.  Fixed maturity valuations are obtained from third-party commercial pricing services and brokers and are classified in the fair value hierarchy consistent with the policy described above for fixed maturities.

Guaranteed benefit derivatives: The index-crediting feature in the Company's FIA contract is an embedded derivative that is required to be accounted for separately from the host contract. The fair value of the obligation is calculated based on actuarial and capital market assumptions related to the projected cash flows, including benefits and related contract charges, over the anticipated life of the related contracts. The cash flow estimates are produced by market implied assumptions. These derivatives are classified as Level 3 liabilities in the fair value hierarchy.

 
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)
 
 
 

The Company records reserves for Stabilizer and MCG contracts containing guaranteed credited rates. The guarantee is treated as an embedded derivative or a stand-alone derivative (depending on the underlying product) and is required to be reported at fair value. The estimated fair value is determined based on the present value of projected future claims, minus the present value of future guaranteed premiums. At inception of the contract, the Company projects a guaranteed premium to be equal to the present value of the projected future claims. The income associated with the contracts is projected using relevant actuarial and capital market assumptions, including benefits and related contract charges, over the anticipated life of the related contracts. The cash flow estimates are produced by using stochastic techniques under a variety of risk neutral scenarios and other market implied assumptions. These derivatives are classified as Level 3 liabilities.

The discount rate used to determine the fair value of the embedded derivatives and stand-alone derivative includes an adjustment for nonperformance risk. The nonperformance risk adjustment incorporates a blend of observable, similarly rated peer holding company credit default swap spreads, adjusted to reflect the credit quality of the Company, the issuer of the guarantee, as well as an adjustment to reflect the priority of policyholder claims.

The Company's valuation actuaries are responsible for the policies and procedures for valuing the embedded derivatives, reflecting the capital markets and actuarial valuation inputs and nonperformance risk in the estimate of the fair value of the embedded derivatives. The actuarial and capital market assumptions for each liability are approved by each product's Chief Risk Officer ("CRO"), including an independent annual review by the CRO. Models used to value the embedded derivatives must comply with the Company's governance policies.

Quarterly, an attribution analysis is performed to quantify changes in fair value measurements and a sensitivity analysis is used to analyze the changes. The changes in fair value measurements are also compared to corresponding movements in the hedge target to assess the validity of the attributions. The results of the attribution analysis are reviewed by the valuation actuaries, responsible CFOs, Controllers, CROs and/or others as nominated by management.

Embedded derivatives on reinsurance: The carrying value of embedded derivatives is estimated based upon the change in the fair value of the assets supporting the funds withheld payable under reinsurance agreements. The fair value of the embedded derivatives is based on market observable inputs and is classified as Level 2.

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, 2018 and 2017. 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.

 
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 period indicated:
 
Three Months Ended June 30, 2018
 
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
$
15

 
$
—

 
$
—

 
$
3

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
18

 
$
—

U.S. Corporate private securities
651

 
—

 
(3
)
 
91

 
—

 
(5
)
 
(8
)
 
12

 
—

 
738

 
—

Foreign corporate private securities(1)
101

 
—

 
2

 
75

 
—

 
(56
)
 
—

 
—

 
—

 
122

 
—

Residential mortgage-backed securities
73

 
(1
)
 
(1
)
 
19

 
—

 
(40
)
 
—

 
—

 
(17
)
 
33

 
2

Commercial mortgage-backed securities
—

 
—

 
—

 
16

 
—

 
—

 
—

 
—

 
—

 
16

 
—

Other asset-backed securities
126

 
—

 
(1
)
 
57

 
—

 
—

 
(1
)
 
21

 
(105
)
 
97

 
—

Total fixed maturities, including securities pledged
966

 
(1
)
 
(3
)
 
261

 
—

 
(101
)
 
(9
)
 
33

 
(122
)
 
1,024

 
2

Equity securities
48

 
2

 
—

 
3

 
—

 
—

 
—

 
—

 
—

 
53

 
2

Derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Guaranteed benefit derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Stabilizer and MCGs(2)
(77
)
 
13

 
—

 
—

 
—

 
—

 
1

 
—

 
—

 
(63
)
 
—

FIA(2)
(18
)
 
(1
)
 
—

 
—

 
—

 
—

 
3

 
—

 
—

 
(16
)
 
—

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

 
—

 
—

 
1

 
—

 
—

 
—

 
—

 
—

 
1

 
—

Assets held in separate accounts(5)
11

 
—

 
—

 
27

 
—

 
—

 
—

 
—

 
—

 
38

 
—

(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, 2018
 
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
$
26

 
$
—

 
$
—

 
$
3

 
$
—

 
$
(5
)
 
$
—

 
$
—

 
$
(6
)
 
$
18

 
$
—

U.S. Corporate private securities
642

 
—

 
(18
)
 
103

 
—

 
(5
)
 
(4
)
 
20

 
—

 
738

 
—

Foreign corporate private securities(1)
92

 
(9
)
 
20

 
75

 
—

 
(56
)
 
—

 
—

 
—

 
122

 
(9
)
Residential mortgage-backed securities
21

 
(3
)
 
—

 
20

 
—

 
—

 
—

 
—

 
(5
)
 
33

 
(3
)
Commercial mortgage-backed securities
7

 
—

 
—

 
16

 
—

 
—

 
—

 
—

 
(7
)
 
16

 
—

Other asset-backed securities
43

 
—

 
(2
)
 
57

 
—

 
—

 
(2
)
 
22

 
(21
)
 
97

 
—

Total fixed maturities, including securities pledged
831

 
(12
)
 
—

 
274

 
—

 
(66
)
 
(6
)
 
42

 
(39
)
 
1,024

 
(12
)
Equity securities
50

 
—

 
—

 
3

 
—

 
—

 
—

 
—

 
—

 
53

 
—

Derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Guaranteed benefit derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Stabilizer and MCGs(2)
(97
)
 
34

 
—

 
—

 
(1
)
 
—

 
1

 
—

 
—

 
(63
)
 
—

FIA(2)
(20
)
 
(2
)
 
—

 
—

 
1

 
—

 
5

 
—

 
—

 
(16
)
 
—

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

 
—

 
—

 
1

 
—

 
—

 
—

 
—

 
—

 
1

 
—

Assets held in separate accounts(5)
11

 
—

 
—

 
27

 
—

 
—

 
—

 
—

 
—

 
38

 
—

(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)
 
 
 

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

 
$
—

 
$
—

 
$
6

 
$
—

 
$
—

 
$
1

 
$
—

 
$
(10
)
 
$
27

 
$
—

U.S. Corporate private securities
565

 
—

 
4

 
8

 
—

 
—

 
(1
)
 
28

 
(9
)
 
595

 
—

Foreign corporate private securities(1)
161

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(33
)
 
128

 
—

Residential mortgage-backed securities
30

 
(2
)
 
1

 
17

 
—

 
—

 
—

 
1

 
(10
)
 
37

 
(2
)
Commercial mortgage-backed securities
6

 
—

 
—

 
2

 
—

 
—

 
(2
)
 
—

 
—

 
6

 
—

Other asset-backed securities
23

 
—

 
—

 
24

 
—

 
—

 
—

 
—

 
(11
)
 
36

 
—

Total fixed maturities, including securities pledged
815

 
(2
)
 
5

 
57

 
—

 
—

 
(2
)
 
29

 
(73
)
 
829

 
(2
)
Equity securities, available-for-sale
50

 
—

 
1

 
—

 
—

 
—

 
—

 
—

 
—

 
51

 
—

Derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Guaranteed benefit derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Stabilizer and MCGs(2)
(131
)
 
(9
)
 
—

 
—

 
(1
)
 
—

 
—

 
—

 
—

 
(141
)
 
—

FIA(2)
(23
)
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(23
)
 
—

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

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Assets held in separate accounts(5)
13

 
—

 
—

 
1

 
—

 
(3
)
 
—

 
—

 
(8
)
 
3

 
—

(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.

 
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)
 
 
 

 
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

 
$
—

 
$
—

 
$
11

 
$
—

 
$
—

 
$
—

 
$
9

 
$
—

 
$
27

 
$
—

U.S. Corporate private securities
525

 
—

 
4

 
45

 
—

 
—

 
(2
)
 
32

 
(9
)
 
595

 
—

Foreign corporate private securities(1)
154

 
—

 
(1
)
 
18

 
—

 
—

 
(10
)
 
—

 
(33
)
 
128

 
—

Residential mortgage-backed securities
21

 
(3
)
 
—

 
17

 
—

 
—

 
—

 
2

 
—

 
37

 
(4
)
Commercial mortgage-backed securities
10

 
—

 
—

 
2

 
—

 
—

 
(3
)
 
—

 
(3
)
 
6

 
—

Other asset-backed securities
27

 
—

 
1

 
24

 
—

 
—

 
(1
)
 
—

 
(15
)
 
36

 
—

Total fixed maturities, including securities pledged
744

 
(3
)
 
4

 
117

 
—

 
—

 
(16
)
 
43

 
(60
)
 
829

 
(4
)
Equity securities, available-for-sale
48

 
—

 
1

 
2

 
—

 
—

 
—

 
—

 
—

 
51

 
—

Derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Guaranteed benefit derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Stabilizer and MCGs(2)
(151
)
 
12

 
—

 
—

 
(2
)
 
—

 
—

 
—

 
—

 
(141
)
 
—

FIA(2)
(23
)
 
(1
)
 
—

 
—

 
—

 
—

 
1

 
—

 
—

 
(23
)
 
—

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

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Assets held in separate accounts(5)
6

 
—

 
—

 
6

 
—

 
(3
)
 
—

 
2

 
(8
)
 
3

 
—

(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.

 
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)
 
 
 

For the three and six months ended June 30, 2018 and 2017, 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 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.

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.


 
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 table presents the unobservable inputs for Level 3 fair value measurements as of June 30, 2018:
 
 
Range(1)
 
Unobservable Input
 
FIA
 
Stabilizer / MCG
 
Interest rate implied volatility
 
—

 
0.1% to 6.5%

 
Nonperformance risk
 
0.07% to 1.2%

 
0.07% to 1.2%

 
Actuarial Assumptions:
 
 
 
 
 
  Partial Withdrawals
 
0% to 7%

 
—

 
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
92
%
 
0-25%
 
0-15%
 
0-30%
 
0-15%
Stabilizer with Recordkeeping Agreements
8
%
 
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, 2017:
 
 
Range(1)
 
Unobservable Input
 
FIA
 
Stabilizer / MCG
 
Interest rate implied volatility
 
—

 
0.1% to 6.3%

 
Nonperformance risk
 
0.02% to 1.1%

 
0.02% to 1.1%

 
Actuarial Assumptions:
 
 
 
 
 
  Partial Withdrawals
 
0.5% to 7%

 
—

 
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
92
%
 
0-25%
 
0-15%
 
0-30%
 
0-15%
Stabilizer with Recordkeeping Agreements
8
%
 
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

 
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)
 
 
 

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 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.

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.

 
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)
 
 
 

The carrying values and estimated fair values of the Company’s financial instruments as of the dates indicated:
 
June 30, 2018
 
December 31, 2017
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
Assets:
 
 
 
 
 
 
 
Fixed maturities, including securities pledged
$
24,650

 
$
24,650

 
$
25,042

 
$
25,042

Equity securities
63

 
63

 
60

 
60

Mortgage loans on real estate
5,002

 
5,018

 
4,910

 
4,924

Policy loans
212

 
212

 
214

 
214

Cash and cash equivalents, short-term investments and short-term investments under securities loan agreements
925

 
925

 
1,078

 
1,078

Derivatives
163

 
163

 
136

 
136

Notes receivable from affiliate
—

 
—

 
175

 
222

Short-term loan to affiliate
—

 
—

 
80

 
80

Other Investments
39

 
39

 
—

 
—

Assets held in separate accounts
74,181

 
74,181

 
73,036

 
73,036

Liabilities:
 
 
 
 
 
 
 
Investment contract liabilities:
 
 
 
 
 
 
 
Funding agreements without fixed maturities and deferred annuities(1)
25,391

 
28,025

 
25,314

 
29,431

Funding agreements with fixed maturities
627

 
637

 
—

 
—

Supplementary contracts, immediate annuities and other
347

 
383

 
365

 
418

Deposit liabilities
77

 
114

 
135

 
198

Derivatives:
 
 
 
 
 
 
 
Guaranteed benefit derivatives:
 
 
 
 
 
 
 
FIA
16

 
16

 
20

 
20

Stabilizer and MCGs
63

 
63

 
97

 
97

  Other derivatives
70

 
70

 
85

 
85

Short-term debt
1

 
1

 
—

 
—

Long-term debt
4

 
4

 
5

 
5

Embedded derivatives on reinsurance
(70
)
 
(70
)
 
(21
)
 
(21
)
(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.

 
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)
 
 
 

The following table presents the classification of financial instruments which are not carried at fair value on the Condensed Consolidated Balance Sheets:

Financial Instrument
Classification
Mortgage loans on real estate
Level 3
Policy loans
Level 2
Notes receivable from affiliates
Level 2
Short-term loan to affiliate
Level 2
Other investments
Level 2
Funding agreements without fixed maturities and deferred annuities
Level 3
Funding agreements with fixed maturities
Level 2
Supplementary contracts, immediate annuities and other
Level 3
Deposit liabilities
Level 3
Short-term debt and Long-term debt
Level 2





 
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)
 
 
 

5.    Deferred Policy Acquisition Costs and Value of Business Acquired

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

 
2018
 
DAC
 
VOBA
 
Total
Balance as of January 1, 2018
$
385

 
$
367

 
$
752

Deferrals of commissions and expenses
27

 
3

 
30

Amortization:
 
 
 
 
 
Amortization, excluding unlocking
(36
)
 
(36
)
 
(72
)
Unlocking (1)
(32
)
 
(15
)
 
(47
)
Interest accrued
18

 
19

(2) 
37

Net amortization included in the Condensed Consolidated Statements of Operations
(50
)
 
(32
)
 
(82
)
Change due to unrealized capital gains/losses on available-for-sale securities
129

 
158

 
287

Balance as of June 30, 2018
$
491

 
$
496

 
$
987

 
2017
 
DAC
 
VOBA
 
Total
Balance as of January 1, 2017
$
476

 
$
537

 
$
1,013

Deferrals of commissions and expenses
39

 
3

 
42

Amortization:
 
 
 
 
 
Amortization, excluding unlocking
(37
)
 
(39
)
 
(76
)
Unlocking (1)
(47
)
 
(56
)
 
(103
)
Interest accrued
19

 
24

(2) 
43

Net amortization included in the Condensed Consolidated Statements of Operations
(65
)
 
(71
)
 
(136
)
Change due to unrealized capital gains/losses on available-for-sale securities
(56
)
 
(70
)
 
(126
)
Balance as of June 30, 2017
$
394

 
$
399

 
$
793


(1) Includes the impacts of annual review of assumptions which typically occurs in the third quarter; and retrospective and prospective unlocking. Additionally, the 2018 amounts include unfavorable unlocking of DAC and VOBA of $25 and $18, respectively, associated with an update to assumptions related to customer consents of changes to guaranteed minimum interest rate provisions. The 2017 amounts include unfavorable unlocking for DAC and VOBA of $48 and $80, respectively, associated with consent acceptances received from customers and expected future acceptances of 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 2018 and 2017.



 
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)
 
 
 

6.    Accumulated Other Comprehensive Income (Loss)

Shareholder’s equity included the following components of AOCI as of the dates indicated:
 
June 30,
 
2018
 
2017
Fixed maturities, net of OTTI
$
427

 
$
1,326

Equity securities
—

 
16

Derivatives
119

 
169

DAC/VOBA and Sales inducements adjustment on available-for-sale securities
(146
)
 
(450
)
Premium deficiency reserve adjustment
(61
)
 
(110
)
Other
—

 
—

Unrealized capital gains (losses), before tax
339

 
951

Deferred income tax asset (liability)
(83
)
 
(210
)
Unrealized capital gains (losses), after tax
256

 
741

Pension and other postretirement benefits liability, net of tax
4

 
5

AOCI
$
260

 
$
746




 
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)
 
 
 

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, 2018
 
Before-Tax Amount
 
Income Tax
 
After-Tax Amount
Available-for-sale securities:
 
 
 
 
 
Fixed maturities
$
(377
)
 
$
71

 
$
(306
)
Equity securities
—

(2) 
—

 
—

Other
—

 
—

 
—

OTTI
—

 
—

 
—

Adjustments for amounts recognized in Net realized capital gains (losses) in the Condensed Consolidated Statements of Operations
19

 
(4
)
 
15

DAC/VOBA and Sales inducements
93

 
(19
)
 
74

Premium deficiency reserve adjustment
21

 
(4
)
 
17

Change in unrealized gains/losses on available-for-sale securities
(244
)
 
44

 
(200
)
 
 
 
 
 
 
Derivatives:
 
 
 
 
 
Derivatives
32

(1) 
(6
)
 
26

Adjustments related to effective cash flow hedges for amounts recognized in Net investment income in the Condensed Consolidated Statements of Operations
(6
)
 
2

 
(4
)
Change in unrealized gains/losses on derivatives
26

 
(4
)
 
22

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

 
—

 
—

Change in pension and other postretirement benefits liability
—

 
—

 
—

Change in Other comprehensive income (loss)
$
(218
)
 
$
40

 
$
(178
)


(1) See the Derivative Financial Instruments Note to these Condensed Consolidated Financial Statements for additional information.
(2) Balance reclassified to Retained earnings due to adoption of ASU 2016-01.











 
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)
 
 
 

 
 
 
 
 
 
 
Six Months Ended June 30, 2018
 
Before-Tax Amount
 
Income Tax
 
After-Tax Amount
Available-for-sale securities:
 
 
 
 
 
Fixed maturities
$
(1,064
)
 
$
224

(4) 
$
(840
)
Equity securities
—

(3) 
—

 
—

Other
(5
)
 
1

 
(4
)
OTTI
7

 
(1
)
 
6

Adjustments for amounts recognized in Net realized capital gains (losses) in the Condensed Consolidated Statements of Operations
33

 
(7
)
 
26

DAC/VOBA and Sales inducements
287

(1) 
(60
)
 
227

Premium deficiency reserve adjustment
54

 
(11
)
 
43

Change in unrealized gains/losses on available-for-sale securities
(688
)
 
146

 
(542
)
 
 
 
 
 
 
Derivatives:
 
 
 
 
 
Derivatives
7

(2) 
(1
)
 
6

Adjustments related to effective cash flow hedges for amounts recognized in Net investment income in the Condensed Consolidated Statements of Operations
(12
)
 
3

 
(9
)
Change in unrealized gains/losses on derivatives
(5
)
 
2

 
(3
)
 
 
 
 
 
 
Pension and other postretirement benefits liability:
 
 
 
 
 
Amortization of prior service cost recognized in Operating expenses in the Condensed Consolidated Statements of Operations
(1
)
 
—

 
(1
)
Change in pension and other postretirement benefits liability
(1
)
 
—

 
(1
)
Change in Other comprehensive income (loss)
$
(694
)
 
$
148

 
$
(546
)


(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.
(3) Balance reclassified to Retained earnings due to adoption of ASU 2016-01.
(4) Amount includes $6 valuation allowance. See the Income Taxes Note these Condensed Consolidated Financial Statements for additional information.



 
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)
 
 
 

 
 
 
 
 
 
 
Three Months Ended June 30, 2017
 
Before-Tax Amount
 
Income Tax
 
After-Tax Amount
Available-for-sale securities:
 
 
 
 
 
Fixed maturities
$
328

 
$
(114
)
 
$
214

Equity securities
—

 
—

 
—

Other
—

 
—

 
—

OTTI
—

 
—

 
—

Adjustments for amounts recognized in Net realized capital gains (losses) in the Condensed Consolidated Statements of Operations
2

 
(1
)
 
1

DAC/VOBA and Sales inducements
(93
)
 
33

 
(60
)
Premium deficiency reserve adjustment
(16
)
 
5

 
(11
)
Change in unrealized gains/losses on available-for-sale securities
221

 
(77
)
 
144

 
 
 
 
 
 
Derivatives:
 
 
 
 
 
Derivatives
(10
)
(1) 
4

 
(6
)
Adjustments related to effective cash flow hedges for amounts recognized in Net investment income in the Condensed Consolidated Statements of Operations
(6
)
 
2

 
(4
)
Change in unrealized gains/losses on derivatives
(16
)
 
6

 
(10
)
 
 
 
 
 
 
Pension and other postretirement benefits liability:
 
 
 
 
 
Amortization of prior service cost recognized in Operating expenses in the Condensed Consolidated Statements of Operations
(1
)
 
—

 
(1
)
Change in pension and other postretirement benefits liability
(1
)
 
—

 
(1
)
Change in Other comprehensive income (loss)
$
204

 
$
(71
)
 
$
133



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























 
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)
 
 
 

 
 
 
 
 
 
 
Six Months Ended June 30, 2017
 
Before-Tax Amount
 
Income Tax
 
After-Tax Amount
Available-for-sale securities:
 
 
 
 
 
Fixed maturities
$
441

 
$
(153
)
 
$
288

Equity securities
1

 
—

 
1

Other
—

 
—

 
—

OTTI
2

 
(1
)
 
1

Adjustments for amounts recognized in Net realized capital gains (losses) in the Condensed Consolidated Statements of Operations
20

 
(7
)
 
13

DAC/VOBA and Sales inducements
(126
)
(1) 
44

 
(82
)
Premium deficiency reserve adjustment
(21
)
 
7

 
(14
)
Change in unrealized gains/losses on available-for-sale securities
317

 
(110
)
 
207

 
 
 
 
 
 
Derivatives:
 
 
 
 
 
Derivatives
(19
)
(2) 
7

 
(12
)
Adjustments related to effective cash flow hedges for amounts recognized in Net investment income in the Condensed Consolidated Statements of Operations
(12
)
 
4

 
(8
)
Change in unrealized gains/losses on derivatives
(31
)
 
11

 
(20
)
 
 
 
 
 
 
Pension and other postretirement benefits liability:
 
 
 
 
 
Amortization of prior service cost recognized in Operating expenses in the Condensed Consolidated Statements of Operations
(1
)
 
—

 
(1
)
Change in pension and other postretirement benefits liability
(1
)
 
—

 
(1
)
Change in Other comprehensive income (loss)
$
285

 
$
(99
)
 
$
186



(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.


 
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)
 
 
 

7.    Income Taxes
 
 
 
 
 
 
 
 
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act ("Tax Reform"). Tax Reform makes broad changes to U.S. federal tax law, including, but not limited to (1) reducing the U.S. federal corporate tax rate from 35% to 21%; (2) changing the computations of the dividends received deduction, tax reserves, and deferred acquisition costs; and (3) eliminating the net operating loss ("NOL") carryback and limiting the NOL carryforward deduction to 80% of taxable income for losses arising in taxable years beginning after December 31, 2017.

The SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address situations where a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting under ASC Topic 740 for certain income tax effects of Tax Reform for the reporting period of enactment. SAB 118 allows the Company to provide a provisional estimate of the impacts of Tax Reform during a measurement period similar to the measurement period used when accounting for business combinations. Adjustments to provisional estimates and additional impacts from Tax Reform must be recorded as they are identified during the measurement period as provided for in SAB 118.

In 2017 in reliance on SAB 118, the Company provisionally remeasured its deferred tax assets and liabilities based on the 21% tax rate at which they are expected to reverse in the future. For the six months ended June 30, 2018, the Company adjusted its provisional estimate related to its calculation of tax reserves. The Company continues to analyze the effects of Tax Reform and will record adjustments and additional impacts from Tax Reform as they are identified during the measurement period as provided for in SAB 118.

The Company's effective tax rate for the three months ended June 30, 2018 was 5.6%. The effective tax rate differed from the statutory rate of 21% for the three months ended June 30, 2018 primarily due to the effect of the dividends received deduction ("DRD") and change in the valuation allowance.

The Company's effective tax rate for the six months ended June 30, 2018 was 14.1%. The effective tax rate differed from the statutory rate of 21% for the six months ended June 30, 2018 primarily due to the effect of the DRD, partially offset by the change in the valuation allowance.

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 rate differed from the statutory rate of 35% for the three and six months ended June 30, 2017 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 2018, the Internal Revenue Service ("IRS") completed its examination of the Company's returns through tax year 2016. The audit settlements did not have a material impact on the Company. The Company is currently under audit by the IRS, and it is expected that the examination of the tax year 2017 will be finalized within the next twelve months. The Company and the IRS have agreed to participate in the Compliance Assurance Process for the tax years 2017 and 2018.


 
57
 
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)
 
 
 

8.    Financing Agreements

Reciprocal Loan Agreement

The Company maintains a reciprocal loan agreement with Voya Financial, Inc., an affiliate, to facilitate the handling of unanticipated short-term cash requirements that arise in the ordinary course of business. Under this agreement, which became effective in June 2001 and expires on 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 incurred immaterial interest expense and interest income for the three months and six months ended June 30, 2018. The Company did not incur interest expense for the three months ended June 30, 2017 and incurred immaterial interest expense for the six months ended June 30, 2017. The Company earned $1 in interest income for the three months and six months ended June 30, 2017. As of December 31, 2017, the Company had an outstanding receivable of $80 and no outstanding payable. During the six months ended June 30, 2018, the outstanding receivable was settled and there were no 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.

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, 2018, the Company had off-balance sheet commitments to acquire mortgage loans of $89 and purchase limited partnerships and private placement investments of $519.

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, 2018
 
December 31, 2017
Fixed maturity collateral pledged to FHLB(1)
$
737

 
$
—

FHLB restricted stock(2)
39

 
—

Other fixed maturities-state deposits
13

 
13

Cash and cash equivalents
5

 
5

Securities pledged(3)
907

 
960

Total restricted assets
$
1,701

 
$
978

(1) Included in Fixed maturities, available for sale, at fair value on the Condensed Consolidated Balance Sheets.
(2) Included in Other investments on the Condensed Consolidated Balance Sheets.
(3) Includes the fair value of loaned securities of $745 and $799 as of June 30, 2018 and December 31, 2017, respectively. In addition, as of June 30, 2018 and December 31, 2017, the Company delivered securities as collateral of $162 and $161, respectively. Loaned securities and securities delivered as collateral are included in Securities pledged on the Condensed Consolidated Balance Sheets.

Federal Home Loan Bank Funding

On January 18, 2018, the Company became a member of the Federal Home Loan Bank of Boston (“FHLB”). The Company is required to pledge collateral to back funding agreements issued to the FHLB. As of June 30, 2018, the Company had $627 in non-

 
58
 
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)
 
 
 

putable funding agreements, which are included in Future policy benefits and contract owner account balances on the Condensed Consolidated Balance Sheets. As of June 30, 2018, assets with a market value of approximately $737 collateralized the FHLB funding agreements. Assets pledged to the FHLB are included in Fixed maturities, available-for-sale, at fair value 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.

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, 2018, 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.


 
59
 
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)
 
 
 

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 19, 2017, the district court granted the Company's motion to dismiss, but permitted the plaintiff to file an amended complaint. The plaintiff has filed a first amended complaint, and the Company moved to dismiss that complaint on September 18, 2017.

Litigation also includes Goetz v. Voya Financial and Voya Retirement Insurance and Annuity Company (USDC District of Delaware, No. 1:17-cv-1289) (filed September 8, 2017), a putative class action in which plaintiff, a participant in a 401(k) plan, seeks to represent other participants in the plan as well as a class of similarly situated plans that “contract with [Voya] for recordkeeping and other services.” Plaintiff alleges that “Voya” breached its fiduciary duty to the plan and other plan participants by charging unreasonable and excessive recordkeeping fees, and that “Voya” distributed materially false and misleading 404a-5 administrative and fund fee disclosures to conceal its excessive fees. The Company denies the allegations, which it believes are without merit, and intends to defend the case vigorously. Plaintiff filed an amended complaint on January 4, 2018, and the Company filed a motion to dismiss the amended complaint of February 8, 2018.

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, ("VIL") an affiliate, was appointed as investment adviser to these U.S. registered investment companies and DSL no longer provided these advisory and certain other related services to its affiliates. While this change has 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. As of June 1, 2018, DSL was divested pursuant to the Transaction.

For the three and six months ended June 30, 2018, 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 $58 and $144, respectively. For the three and six months ended June 30, 2017, revenues with affiliated entities related to the aforementioned operating agreements, as amended were $110 and $257, respectively. For the three and six months ended June 30, 2018, expenses with affiliated entities related to the aforementioned operating agreements, as amended, were $143 and $311, respectively. For the three and six months ended June 30, 2017, expenses with affiliated entities related to the aforementioned operating agreements, as amended, were $178 and $379, respectively.

Reinsurance Agreements

Effective January 1, 2018, the Company recaptured its coinsurance agreement with Langhorne I, LLC (“Langhorne”) to manage the reserve and capital requirements in connection with a portion of its Stabilizer and Managed Custody Guarantee, which resulted in the Company recording a $74 pre-tax gain on recapture of reinsured business that was reported in Operating expenses in the Condensed Consolidated Statement of Operations. This agreement was accounted for under the deposit method.

As of June 30, 2018 and December 31, 2017, the Company had deposit assets of $36 and $63, respectively, and deposit liabilities of $77 and $135, respectively. Deposit assets and liabilities are included in Other assets and Other liabilities, respectively, on the Condensed Consolidated Balance Sheets. For further information, 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.


 
60
 


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, 2018 and 2017 and financial condition as of June 30, 2018 and December 31, 2017. 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, 2017 ("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. As of June 1, 2018, DSL was divested pursuant to the Transaction.

On June 1, 2018, VRIAC's ultimate parent, Voya Financial, Inc ("Voya Financial"), consummated a series of transactions (collectively, the "Transaction") pursuant to a Master Transaction Agreement dated December 20, 2017 (the "MTA") with VA Capital Company LLC ("VA Capital") and Athene Holding Ltd ("Athene"). As part of the Transaction, VA Capital's wholly owned subsidiary Venerable Holdings, Inc. ("Venerable") acquired certain of Voya Financial's assets, including all of the shares of the capital stock of Voya Insurance and Annuity Company ("VIAC"), our Iowa-domiciled insurance affiliate, as well as the membership interests of DSL, our broker-dealer subsidiary. Following the closing of the Transaction, VRIAC acquired a 9.99% equity interest in VA Capital.

Tax Reform

On December 22, 2017, the Tax Cuts and Jobs Act ("Tax Reform") was signed into law. Tax Reform significantly revised U.S. federal corporate income tax law by, among other things, reducing the corporate income tax rate from 35% to 21% and changing various provisions of the Federal tax code that impact life insurance companies.

For more information on Tax Reform, see Critical Accounting Judgments and Estimates in Part II, Item 7. of our Annual Report on Form 10-K and the Income Taxes Note in Part I, Item I. of this Quarterly Report on Form 10-Q.

Our Business

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

 
61
 

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.

In 2017, we began soliciting customer consents to execute a change to reduce the guaranteed minimum interest rate ("GMIR initiative") applicable to future deposits and transfers into fixed investment options for certain retirement plan contracts with above- market GMIRs. This change reduces our interest rate exposure on new deposits, transfers and in certain plans existing fixed account assets and will favorably impact the DAC and VOBA amortization rate and operating earnings over time. See the Assumptions and Periodic Review section in Critical Accounting Estimates and Judgments below.

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.

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.





 
62
 

Assumptions and Periodic Review

Changes in assumptions can have a significant impact on DAC/VOBA and other intangibles balances, amortization rates, reserve levels and results of operations. Assumptions are management's best estimates of future outcome. We periodically review these assumptions against actual experience and, based on additional information that becomes available, update our assumptions. Deviation of emerging experience from our assumptions could have a significant effect on our DAC/VOBA and other intangibles, reserves and the related results of operations.

In 2017, we began soliciting customer consents to execute a change to reduce the guaranteed minimum interest rate ("GMIR initiative") applicable to future deposits and transfers into fixed investment options for certain retirement plan contracts with above-market GMIRs. This change reduces our interest rate exposure on new deposits, transfers and in certain plans existing fixed account assets and will favorably impact the DAC/VOBA amortization rate and Adjusted operating earnings over time. The GMIR initiative unlocking recorded in 2017 reflected management’s best estimate of consent acceptances expected during 2017 and subsequent years related to this initiative. During the six months ended June 30, 2018 and 2017, we recorded unfavorable DAC/VOBA unlocking related to the GMIR initiative of $43 million and $128 million, respectively, which was included in Net amortization of DAC/VOBA in the Condensed Consolidated Financial Statements.

Income Taxes

Changes in Law

Certain changes or future events, such as changes in tax legislation, completion of tax audits, planning opportunities and expectations about future outcomes could have an impact on our estimates of valuation allowances, deferred taxes, tax provisions and effective tax rates.

As discussed in the Income Taxes Note to the Accompanying Condensed Consolidated Financial Statements, Tax Reform makes broad changes to U.S. federal tax law. The SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address situations where a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting under ASC Topic 740 for certain income tax effects of Tax Reform for the reporting period of enactment. SAB 118 allows us to provide a provisional estimate of the impacts of Tax Reform during a measurement period similar to the measurement period used when accounting for business combinations. Adjustments to provisional estimates and additional impacts from Tax Reform must be recorded as they are identified during the measurement period as provided for in SAB 118.
We have relied on SAB 118 to determine the impact of Tax Reform on our net deferred tax asset position as of December 31, 2017. Deferred income tax represents the tax effect of the differences between the book and tax basis of assets and liabilities. Deferred tax assets represent the tax benefit of future deductible temporary differences, operating loss carryforwards and tax credits carryforwards. We periodically evaluate and test our ability to realize our deferred tax assets. Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence, it is more likely than not that some portion, or all, of the deferred tax assets will not be realized. In assessing the more likely than not criteria, we consider future taxable income as well as prudent tax planning strategies.
Pursuant to SAB 118, we estimate that Tax Reform resulted in a one-time decrease in our net deferred tax liability position of $116 million as of December 31, 2017. This decrease is substantially due to the remeasurement of our deferred tax assets and liabilities at 21%, the new federal corporate income tax rate at which the deferred tax assets and liabilities are expected to reverse in the future. This estimate includes the effect of a reduction in our deferred tax liability associated with accumulated other comprehensive income ("AOCI"). The Financial Accounting Standards Board ("FASB") issued guidance in February 2018 that allows reclassification of the reduction in the deferred tax liability associated with AOCI from retained earnings to AOCI. We are currently evaluating this new guidance, which is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. See the Business, Basis of Presentation and Significant Accounting Policies Note, "Future Adoption of Accounting Pronouncements" section, in our Condensed Consolidated Financial Statements in Part I, Item 1. of this Quarterly Report on Form 10-Q for additional information.
We continue to analyze the effects of Tax Reform and will record adjustments and additional impacts as they are identified during the measurement period. For the six months ended June 30, 2018, we have recorded certain adjustments to our provisional estimate. The final impact to our deferred taxes could differ materially from our provisional estimates as a result of future clarifications or guidance related to Tax Reform.


 
63
 

Our effective tax rates for the three months ended June 30, 2018 was 5.6%. The effective tax rate differed from the statutory rate of 21% for the three months ended June 30, 2018 primarily due to the effect of the dividends received deduction ("DRD") and change in the valuation allowance.

The Company's effective tax rate for the six months ended June 30, 2018 was 14.1%. The effective tax rate differed from the statutory rate of 21% for the six months ended June 30, 2018 primarily due to the effect of the DRD, partially offset by the change in the valuation allowance.

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 DRD.

 
64
 

Results of Operations

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

2018
 
2017
 
2018
 
2017
Revenues:
 
 
 
 
 
 
 
Net investment income
$
397

 
$
378

 
$
779

 
$
757

Fee income
175

 
177

 
349

 
367

Premiums
8

 
9

 
22

 
24

Broker-dealer commission revenue
27

 
42

 
68

 
86

Net realized capital gains (losses):
 
 
 
 
 
 
 
Total other-than-temporary impairments
—

 
—

 
(9
)
 
—

Less: Portion of other-than-temporary impairments recognized in Other comprehensive income (loss)
1

 
—

 
1

 
—

Net other-than-temporary impairments recognized in earnings
(1
)
 
—

 
(10
)
 
—

Other net realized capital gains (losses)
(82
)
 
(47
)
 
(160
)
 
(103
)
Total net realized capital gains (losses)
(83
)
 
(47
)
 
(170
)
 
(103
)
Other revenue
2

 
2

 
2

 
2

Total revenues
526

 
561

 
1,050

 
1,133

Benefits and expenses:
 
 
 
 
 
 
 
Interest credited and other benefits to contract owners/policyholders
200

 
245

 
398

 
480

Operating expenses
178

 
192

 
286

 
411

Broker-dealer commission expense
27

 
42

 
68

 
86

Net amortization of Deferred policy acquisition costs and Value of business acquired
17

 
134

 
82

 
136

Total benefits and expenses
422

 
613

 
834

 
1,113

Income (loss) before income taxes
104

 
(52
)
 
216

 
20

Income tax expense (benefit)
5

 
(26
)
 
30

 
(8
)
Net income (loss)
$
99

 
$
(26
)
 
$
186

 
$
28


Three Months Ended June 30, 2018 compared to Three Months Ended June 30, 2017

Revenues

Net investment income increased $19 million from $378 million to $397 million primarily due to:

•
higher alternative investment income; and
•
growth in the general account assets driven by positive net flows, including the cumulative impact of participants' transfers from variable investment option into fixed investment options.

The increase was partially offset by:

•
lower yields, including the impact of the continued low interest rate environment on reinvestment rates.

Broker-dealer commission revenue decreased $15 million from $42 million to $27 million primarily due to:

•
the divestment of DSL pursuant to the Transaction described in the Business, Basis of Presentation and Significant Accounting Policies Note to the Condensed Consolidated Financial Statements in Part I, Item 1. of this Quarterly Report on Form 10-Q.

Total net realized capital losses increased $36 million from $47 million to $83 million primarily due to:

 
65
 


•
unfavorable changes in fixed maturities using the fair value option due to interest rate movements and spread changes; and
•
the disposal of fixed maturities, including securities pledged.

The increase was partially offset by:

•
favorable changes in the fair value of embedded derivatives on product guarantees due to interest rate movements, as well as the impact of non-performance risk; and
•
favorable changes in the fair values of derivatives due to interest rate movements.

Benefits and Expenses

Interest credited and other benefits to contract owners/policyholders decreased $45 million from $245 million to $200 million primarily due to:

•
a favorable change in the fair value of the embedded derivative on reinsurance.

Operating expenses decreased $14 million from $192 million to $178 million primarily due to:

•
lower investment advisory fee income; resulting 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 10-Q for further detail;
•
lower employee related expenses; and
•
lower technology costs.

The decrease was partially offset by:

•
higher asset based commissions.

Broker-dealer commission expense decreased $15 million from $42 million to $27 million primarily due to:

•
the divestment of DSL pursuant to the Transaction described in the Business, Basis of Presentation and Significant Accounting Policies Note to the Condensed Consolidated Financial Statements in Part I, Item 1. of this Quarterly Report on Form 10-Q.

Net amortization of DAC and VOBA decreased $117 million from $134 million to $17 million primarily due to:

•
unfavorable DAC/VOBA unlocking in the prior period due to an update to the assumptions related to the GMIR initiative.

The decrease was partially offset by:

•
higher amortization related to changes in embedded derivative on reinsurance.

Income tax expense (benefit) changed $31 million from a benefit of $26 million to an expense of $5 million primarily due to:

•
an increase in income before income taxes.

This was partially offset by:

•
the impact of the lower federal corporate tax rate;
•
a change in the valuation allowance; and
•
a change in the dividends received deduction ("DRD").

Net income (loss) increased by $125 million from a loss of $26 million to income of $99 million primarily due to:

•
lower Net amortization of DAC and VOBA;
•
lower Interest credited and other benefits to contract owners/policyholders;

 
66
 

•
higher Net investment income; and
•
lower Operating expenses.

The increase was partially offset by:

•
higher Net realized losses; and
•
higher Income tax expense.

Six Months Ended June 30, 2018 compared to Six Months Ended June 30, 2017

Revenues

Net investment income increased $22 million from $757 million to $779 million primarily due to:
 
•
higher alternative investment income; and
•
growth in the general account assets driven by positive net flows, including the cumulative impact of participants' transfers from variable investment options to fixed investment options.

The increase was partially offset by:

•
lower yields, including the impact of the continued low interest rate environment on reinvestment rates.

Fee income decreased $18 million from $367 million to $349 million primarily due to:

•
lower investment advisory fee income, resulting 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;
•
the divestment of DSL pursuant to the transaction described in the Business, Basis of Presentation and Significant Accounting Policies Note to the Condensed Consolidated Financial Statements in Part I, Item 1. of this Quarterly Report 10-Q; and
•
the shift in business mix.

The decrease was partially offset by:

•
an increase in the growth in the separate account and institutional/mutual fund assets under management (“AUM”) driven by equity market improvements.

Broker-dealer commission revenue decreased $18 million from $86 million to $68 million primarily due to:

•
the divestment of DSL pursuant to the Transaction described in the Business, Basis of Presentation and Significant Accounting Policies Note to the Condensed Consolidated Financial Statements in Part I, Item 1. of this Quarterly Report on Form 10-Q.

Total net realized capital losses increased $67 million from $103 million to $170 million primarily due to

•
unfavorable changes in fixed maturities using the fair value option due to interest rate movements and spread changes; and
•
higher net realized losses on the disposal of available for sale fixed maturities, including securities pledged due to higher impairments.

The increase was partially offset by:

•
favorable changes in the fair value of embedded derivatives on product guarantees primarily due to the result of interest rate movements including the impact of non-performance risk; and
•
favorable changes in the fair values of derivatives due to interest rate movements.




 
67
 


Benefits and Expenses

Interest credited and other benefits to contract owners/policyholders decreased $82 million from $480 million to $398 million primarily due to:

•
a favorable change in the fair value of the embedded derivative on reinsurance.

Operating expenses decreased $125 million from $411 million to $286 million primarily due to:

•
a gain on the recapture of the Langhorne coinsurance agreement during the current period. See the Related Party
Transactions Note to the Condensed Consolidated Financial Statements in Part 1, Item 1. of this Quarterly Report on Form 10-Q for further detail;
•
lower investment advisory expenses, resulting from changes to the investment advisory relationship with affiliates, referenced above;
•
lower employee related expenses; and
•
lower technology costs.

Broker-dealer commission expense decreased $18 million from $86 million to $68 million primarily due to:

•
the divestment of DSL pursuant to the Transaction described in the Business, Basis of Presentation and Significant Accounting Policies Note to the Condensed Consolidated Financial Statements in Part I, Item 1. of this Quarterly Report on Form 10-Q.

Net amortization of DAC and VOBA decreased $54 million from $136 million to $82 million primarily due to:

•
Lower unfavorable DAC/VOBA unlocking in the current period driven by changes in GMIR provisions of certain fixed option retirement plan contracts; and
•
lower DAC/VOBA amortization driven by lower gross profits.

The decrease was partially offset by:

•
lower favorable DAC/VOBA unlocking due to separate account performance; and
•
higher DAC/VOBA amortization related to the change in embedded derivative associated with a reinsurance agreement.

Income tax expense (benefit) changed $38 million from a benefit of $8 million to an expense of $30 million primarily due to:

•
an increase in income before income taxes; and
•
a change in the valuation allowance.

This was partially offset by:

•
the impact of the lower federal corporate tax rate; and
•
a change in the DRD.

Net income (loss) increased by $158 million from $28 million to $186 million primarily due to:

•
lower Operating expenses;
•
lower Interest credited and other benefits to contract owners/policyholders;
•
lower Net amortization of DAC and VOBA; and
•
higher Net investment income.

The increase was partially offset by:

•
higher Net realized losses;
•
higher Income tax expense; and
•
lower Fee income.


 
68
 

Financial Condition
  
Investments

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

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

Portfolio Composition

The following table presents the investment portfolio as of the dates indicated:
 
June 30, 2018
 
December 31, 2017
($ in millions)
Carrying
Value
 
% of
Total
 
Carrying
Value
 
% of
Total
Fixed maturities, available-for-sale, excluding securities pledged
$
22,572

 
73.5
%
 
$
23,141

 
75.1
%
Fixed maturities, at fair value using the fair value option
1,171

 
3.8
%
 
941

 
3.1
%
Equity securities, at fair value
63

 
0.2
%
 
60

 
0.2
%
Short-term investments(1)
1

 
—
%
 
25

 
0.1
%
Mortgage loans on real estate
5,002

 
16.3
%
 
4,910

 
15.9
%
Policy loans
212

 
0.7
%
 
214

 
0.7
%
Limited partnerships/corporations
568

 
1.9
%
 
411

 
1.3
%
Derivatives
163

 
0.5
%
 
136

 
0.5
%
Securities pledged
907

 
3.0
%
 
960

 
3.1
%
Other investments
39

 
0.1
%
 
—

 
—
%
Total investments
$
30,698

 
100.0
%
 
$
30,798

 
100.0
%
(1) Short-term investments include investments with remaining maturities of one year or less, but greater than 3 months, at the time of purchase.


 
69
 


Fixed Maturities

The following tables present total fixed maturities, including securities pledged, by market sector as of the dates indicated:
 
June 30, 2018
($ in millions)
Amortized
Cost
 
% of
Total
 
Fair
Value
 
% of
Total
Fixed maturities:
 
 
 
 
 
 
 
U.S. Treasuries
$
464

 
1.9
%
 
$
547

 
2.2
%
U.S. Government agencies and authorities
—

 
—
%
 
—

 
—
%
State, municipalities, and political subdivisions
751

 
3.1
%
 
763

 
3.1
%
U.S. corporate public securities
7,968

 
32.9
%
 
8,218

 
33.3
%
U.S. corporate private securities
3,684

 
15.2
%
 
3,689

 
15.0
%
Foreign corporate public securities and foreign governments(1)
2,481

 
10.2
%
 
2,518

 
10.2
%
Foreign corporate private securities(1)
3,274

 
13.5
%
 
3,271

 
13.3
%
Residential mortgage-backed securities
2,881

 
12.0
%
 
2,946

 
12.0
%
Commercial mortgage-backed securities
1,627

 
6.7
%
 
1,613

 
6.5
%
Other asset-backed securities
1,084

 
4.5
%
 
1,085

 
4.4
%
Total fixed maturities, including securities pledged
$
24,214

 
100.0
%
 
$
24,650

 
100.0
%
(1) Primarily U.S. dollar denominated.
 
December 31, 2017
($ in millions)
Amortized
Cost
 
% of
Total
 
Fair
Value
 
% of
Total
Fixed maturities:
 
 
 
 
 
 
 
U.S. Treasuries
$
547

 
2.3
%
 
$
656

 
2.6
%
U.S. Government agencies and authorities
3

 
—
%
 
3

 
—
%
State, municipalities, and political subdivisions
842

 
3.6
%
 
878

 
3.5
%
U.S. corporate public securities
8,476

 
35.9
%
 
9,236

 
36.9
%
U.S. corporate private securities
3,387

 
14.4
%
 
3,497

 
14.0
%
Foreign corporate public securities and foreign governments(1)
2,594

 
11.0
%
 
2,777

 
11.1
%
Foreign corporate private securities(1)
3,105

 
13.2
%
 
3,215

 
12.8
%
Residential mortgage-backed securities
2,517

 
10.7
%
 
2,629

 
10.5
%
Commercial mortgage-backed securities
1,437

 
6.1
%
 
1,470

 
5.9
%
Other asset-backed securities
671

 
2.8
%
 
681

 
2.7
%
Total fixed maturities, including securities pledged
$
23,579

 
100.0
%
 
$
25,042

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

As of June 30, 2018, the average duration of our fixed maturities portfolio, including securities pledged, is between 7.0 and 7.5 years.

Fixed Maturities Credit Quality - Ratings

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



 
70
 

The following tables present credit quality of fixed maturities, including securities pledged, using NAIC designations as of the dates indicated:
($ in millions)
June 30, 2018
NAIC Quality Designation
1
 
2
 
3
 
4
 
5
 
6
 
Total Fair Value
U.S. Treasuries
$
547

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
547

U.S. Government agencies and authorities
—

 
—

 
—

 
—

 
—

 
—

 
—

State, municipalities and political subdivisions
714

 
48

 
—

 
—

 
—

 
1

 
763

U.S. corporate public securities
3,799

 
3,848

 
414

 
155

 
2

 
—

 
8,218

U.S. corporate private securities
1,496

 
2,019

 
88

 
77

 
9

 
—

 
3,689

Foreign corporate public securities and foreign governments(1)
1,192

 
1,158

 
142

 
22

 
4

 
—

 
2,518

Foreign corporate private securities(1)
380

 
2,574

 
252

 
49

 
15

 
1

 
3,271

Residential mortgage-backed securities
2,778

 
101

 
34

 
—

 
3

 
30

 
2,946

Commercial mortgage-backed securities
1,590

 
14

 
9

 
—

 
—

 
—

 
1,613

Other asset-backed securities
966

 
86

 
13

 
6

 
9

 
5

 
1,085

Total fixed maturities
$
13,462

 
$
9,848

 
$
952

 
$
309

 
$
42

 
$
37

 
$
24,650

% of Fair Value
54.5
%
 
40.0
%
 
3.8
%
 
1.3
%
 
0.2
%
 
0.2
%
 
100.0
%
(1) Primarily U.S. dollar denominated.
 
 
($ in millions)
December 31, 2017
NAIC Quality Designation
1
 
2
 
3
 
4
 
5
 
6
 
Total Fair Value
U.S. Treasuries
$
656

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
656

U.S. Government agencies and authorities
3

 
—

 
—

 
—

 
—

 
—

 
3

State, municipalities and political subdivisions
824

 
53

 
—

 
—

 
—

 
1

 
878

U.S. corporate public securities
4,560

 
4,148

 
395

 
131

 
2

 
—

 
9,236

U.S. corporate private securities
1,497

 
1,862

 
68

 
70

 
—

 
—

 
3,497

Foreign corporate public securities and foreign governments(1)
1,238

 
1,300

 
211

 
25

 
3

 
—

 
2,777

Foreign corporate private securities(1)
492

 
2,398

 
301

 
20

 
1

 
3

 
3,215

Residential mortgage-backed securities
2,564

 
23

 
1

 
—

 
4

 
37

 
2,629

Commercial mortgage-backed securities
1,453

 
17

 
—

 
—

 
—

 
—

 
1,470

Other asset-backed securities
580

 
83

 
9

 
2

 
—

 
7

 
681

Total fixed maturities
$
13,867

 
$
9,884

 
$
985

 
$
248

 
$
10

 
$
48

 
$
25,042

% of Fair Value
55.4
%
 
39.5
%
 
3.9
%
 
1.0
%
 
—
%
 
0.2
%
 
100.0
%
(1) Primarily U.S. dollar denominated.


 
71
 

The following tables present credit quality of fixed maturities, including securities pledged, using NAIC acceptable rating organizations ("ARO") ratings as of the dates indicated:
($ in millions)
 
June 30, 2018
ARO Quality Ratings
 
AAA
 
AA
 
A
 
BBB
 
BB and Below
 
Total Fair Value
U.S. Treasuries
 
$
547

 
$
—

 
$
—

 
$
—

 
$
—

 
$
547

U.S. Government agencies and authorities
 
—

 
—

 
—

 
—

 
—

 
—

State, municipalities and political subdivisions
 
61

 
457

 
196

 
48

 
1

 
763

U.S. corporate public securities
 
84

 
391

 
3,324

 
3,849

 
570

 
8,218

U.S. corporate private securities
 
95

 
143

 
1,294

 
1,985

 
172

 
3,689

Foreign corporate public securities and foreign governments(1)
 
22

 
253

 
923

 
1,152

 
168

 
2,518

Foreign corporate private securities(1)
 
—

 
—

 
456

 
2,672

 
143

 
3,271

Residential mortgage-backed securities
 
2,137

 
25

 
53

 
97

 
634

 
2,946

Commercial mortgage-backed securities
 
940

 
209

 
204

 
207

 
53

 
1,613

Other asset-backed securities
 
523

 
135

 
275

 
98

 
54

 
1,085

Total fixed maturities
 
$
4,409

 
$
1,613

 
$
6,725

 
$
10,108

 
$
1,795

 
$
24,650

% of Fair Value
 
17.9
%
 
6.5
%
 
27.3
%
 
41.0
%
 
7.3
%
 
100.0
%
(1) Primarily U.S. dollar denominated.
 
 
 
($ in millions)
 
December 31, 2017
ARO Quality Ratings
 
AAA
 
AA
 
A
 
BBB
 
BB and Below
 
Total Fair Value
U.S. Treasuries
 
$
656

 
$
—

 
$
—

 
$
—

 
$
—

 
$
656

U.S. Government agencies and authorities
 
3

 
—

 
—

 
—

 
—

 
3

State, municipalities and political subdivisions
 
84

 
540

 
200

 
53

 
1

 
878

U.S. corporate public securities
 
104

 
471

 
3,985

 
4,148

 
528

 
9,236

U.S. corporate private securities
 
104

 
136

 
1,363

 
1,721

 
173

 
3,497

Foreign corporate public securities and foreign governments(1)
 
32

 
258

 
948

 
1,300

 
239

 
2,777

Foreign corporate private securities(1)
 
—

 
—

 
533

 
2,536

 
146

 
3,215

Residential mortgage-backed securities
 
2,001

 
15

 
48

 
24

 
541

 
2,629

Commercial mortgage-backed securities
 
1,126

 
83

 
142

 
92

 
27

 
1,470

Other asset-backed securities
 
378

 
90

 
67

 
104

 
42

 
681

Total fixed maturities
 
$
4,488

 
$
1,593

 
$
7,286

 
$
9,978

 
$
1,697

 
$
25,042

% of Fair Value
 
17.9
%
 
6.4
%
 
29.1
%
 
39.8
%
 
6.8
%
 
100.0
%
(1) Primarily U.S. dollar denominated.


 
72
 

Fixed maturities rated BB and below may have speculative characteristics and changes in economic conditions or other circumstances that are more likely to lead to a weakened capacity of the issuer to make principal and interest payments than is the case with higher rated fixed maturities.

Unrealized Capital Losses

Gross unrealized losses on fixed maturities, including securities pledged, increased $258 million from $148 million to $406 million for the six months ended June 30, 2018. The increase in gross unrealized losses was primarily due to rising interest rates.

As of June 30, 2018, we held one fixed maturity with unrealized capital losses in excess of $10 million. As of June 30, 2018, the unrealized capital losses on this fixed maturity equaled $13 million, or 3.1% of the total unrealized losses. As of December 31, 2017, we held three fixed maturities with unrealized capital losses in excess of $10 million. As of December 31, 2017, the unrealized capital losses on these fixed maturities equaled $37 million, or 25.0% of the total unrealized losses.

As of June 30, 2018, we had $1.9 billion of energy sector fixed maturity securities, constituting 7.8% of the total fixed maturities portfolio, with gross unrealized capital losses of $51 million, including one energy sector fixed maturity security with unrealized capital losses in excess of $10 million. The unrealized capital loss on this fixed maturity security equaled $13 million. As of June 30, 2018, our fixed maturity exposure to the energy sector is comprised of 85.3% investment grade securities.

As of December 31, 2017, we held $2.1 billion of energy sector fixed maturity securities, constituting 8.4% of the total fixed maturities portfolio, with gross unrealized capital losses of $33 million, including one energy sector fixed maturity security with unrealized capital losses in excess of $10 million. The unrealized capital loss on this fixed maturity security equaled $14 million. As of December 31, 2017, our fixed maturity exposure to the energy sector is comprised of 84.7% investment grade securities.

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

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. Despite the rise in mortgage rates experienced this year, 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, we do not originate or purchase subprime or Alt-A whole-loan mortgages. Subprime lending is the origination of loans to customers with weaker credit profiles. We define Alt-A mortgages to include the following: residential mortgage loans to customers who have strong credit profiles but lack some element(s), such as documentation to substantiate income; residential mortgage loans to borrowers that would otherwise be classified as prime but 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 asset-backed securities ("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, 2018, the fair value and amortized cost related to our exposure to subprime mortgage-backed securities totaled $43 million and $39 million, respectively, representing 0.2% of total fixed maturities, including securities pledged, based on fair value. Gross unrealized losses related to our exposure to subprime mortgage-backed securities were immaterial. As of December 31, 2017, the fair value and amortized cost related to our exposure to subprime mortgage-backed securities totaled $44 million and $39 million, respectively, representing 0.2% of total fixed maturities, including securities pledged, based on fair value. Gross unrealized losses related to our exposure to subprime mortgage-backed securities were immaterial.
 
 
 
 
 
 
 
 
 

 
73
 

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, 2018, the fair value and amortized cost related to our exposure to Alt-A RMBS totaled $63 million and $52 million, respectively, representing 0.3% of total fixed maturities, including securities pledged, based on fair value. Gross unrealized losses related to our exposure to Alt-A RMBS were immaterial. As of December 31, 2017, the fair value and amortized cost related to our exposure to Alt-A RMBS totaled $55 million and $43 million, respectively, representing 0.2% of total fixed maturities, including securities pledged, based on fair value. Gross unrealized losses related to our exposure to Alt-A RMBS were immaterial.
 
 
 
 
 
 
 
 
 
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 has generally declined since, with any increases relatively short-lived. 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. Spread performance has been generally reflective of the positive overall environment for commercial real estate, although not immune to periods of volatility.  The first half of 2018 for CMBS can be best characterized by issuance stability and liquid market conditions, while the mix of types of issues (agency versus private label and, within private label, SASB versus conduit) has continued to evolve.

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, 2018, the fair value, amortized cost and gross unrealized losses of our Other ABS, excluding subprime exposure, totaled $1 billion, $1 billion and $5 million, respectively. As of December 31, 2017, the fair value, amortized cost and gross unrealized losses of our exposure to Other ABS, excluding subprime exposure, totaled $652 million, $648 million and $1 million, respectively.

As of June 30, 2018, Other ABS was broadly diversified both by type and issuer with nonconsolidated collateralized loan obligations ("CLOs") and automobile receivables, comprising 72.5% and 0.8%, respectively, of total Other ABS, excluding subprime exposure. As of December 31, 2017, Other ABS was broadly diversified both by type and issuer with credit card receivables, nonconsolidated CLOs and automobile receivables, comprising 2.5%, 61.6% and 4.5%, 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-temporarily impaired ("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 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.

 
74
 


As of June 30, 2018, our mortgage loans on real estate portfolio had a weighted average DSC of 3.5 times and a weighted average LTV ratio of 61.8%. As of December 31, 2017, our mortgage loans on real estate portfolio had a weighted average DSC of 2.2 times and a weighted average LTV ratio of 61.8%. See the Investments Note to our Condensed Consolidated Financial Statements in Part I, Item 1. of this Quarterly Report on Form 10-Q for further information on mortgage loans on real estate.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other-Than-Temporary Impairments

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

See the Investments Note to our Condensed Consolidated Financial Statements in Part I, Item 1. of this Quarterly Report on Form 10-Q for further information on 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, 2018, the Company's total European exposure had an amortized cost and fair value of $2,768 million and $2,797 million, respectively. European exposure with a primary focus on Greece, Ireland, Italy, Portugal and Spain (which we refer to as "peripheral Europe") amounts to $245 million, which includes non-financial institutions exposure in Ireland of $75 million, in Italy of $87 million, and in Spain of $59 million. We did not have any exposure to Greece or Portugal.

Among the remaining $2,552 million of total non-peripheral European exposure, we had a portfolio of credit-related assets similarly diversified by country and sector across developed and developing Europe. As of June 30, 2018, our non-peripheral sovereign exposure was $112 million, which consisted of fixed maturities. We also had $353 million in net exposure to non-peripheral financial institutions with a concentration in France of $56 million, The Netherlands of $42 million, Switzerland of $60 million and the United Kingdom of $177 million. The balance of $2,087 million was invested across non-peripheral, non-financial institutions.

Some of the major country level exposures were in the United Kingdom of $1,301 million, in The Netherlands of $273 million, in Belgium of $174 million, in France of $137 million, in Germany of $181 million, in Switzerland of $205 million and in Russia of $62 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.

 
75
 


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, contract deposits, securities lending and capital contributions. Primary uses of these funds are payments of commissions and operating expenses, interest credits, investment purchases and contract maturities, withdrawals and surrenders and payment of dividends.

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

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

Liquidity and Capital Resources

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

•
A reciprocal loan agreement with Voya Financial, Inc., an affiliate, whereby either party can borrow from the other up to 3.0% of VRIAC's statutory admitted assets as of the prior December 31. As of June 30, 2018, we did not have an outstanding receivable/payable from/to Voya Financial, Inc. under the reciprocal loan agreement. As of December 31, 2017, we had an outstanding receivable of $80 million and no outstanding payable. 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 51.6% of our assets in marketable securities. These assets include cash, U.S. Treasuries, Agencies, Corporate Bonds, ABS, CMBS and collateralized mortgage obligations ("CMO") and Equity securities. In the event of a temporary liquidity need, cash may be raised by entering into repurchase agreements, dollar rolls and/or security lending agreements by temporarily lending securities and receiving cash collateral. Under our Liquidity Plan, up to 12% of our general account statutory admitted assets may be allocated to repurchase, securities lending and dollar roll programs. At the time a temporary cash need arises, the actual percentage of admitted assets available for repurchase transactions will depend upon outstanding allocations to the three programs. As of June 30, 2018, VRIAC had securities lending collateral assets of $687 million, which represents approximately 0.6% of its general account statutory admitted assets. As of December 31, 2017, VRIAC had securities lending collateral assets of $733 million, which represents approximately 0.7% of its general account statutory admitted assets.

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


 
76
 

Capital Contributions and Dividends

During the six months ended June 30, 2018 and 2017, VRIAC did not receive any capital contributions from its Parent.

On May 3, 2018, VRIAC declared an ordinary dividend in the amount of $126 million, which was paid to its parent on May 25, 2018. During the six months ended June 30, 2017, VRIAC paid an ordinary dividend in the amount of $261 million to its Parent.

On March 28, 2018, VFP paid a $20 million dividend to VRIAC, its Parent and on June 28, 2018, VFP paid a $20 million dividend to VRIAC. During the six months ended June 30, 2017, VFP paid dividends of $40 million to VRIAC.

On May 25, 2018, DSL paid a $49 million dividend to VRIAC, its Parent.

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.

 
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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.

Ratings actions affirmation or outlook changes by S&P, Fitch, Moody’s or A.M. Best from December 31, 2017 through June 30, 2018 and subsequently through the date of this Quarterly Report on Form 10-Q are as follows:

•
On June 4, 2018, A.M. Best removed the financial strength rating of VRIAC from under review with developing implications and instead, affirmed the financial strength rating with a stable outlook.

Reinsurance

Effective January 1, 2018, we recaptured our coinsurance agreement with Langhorne I, LLC (“Langhorne”) to manage the reserve and capital requirements in connection with a portion of our Stabilizer and Managed Custody Guarantee, which resulted in us recording a $74 million pre-tax gain on recapture of reinsured business that was reported in Operating expenses in the Condensed Consolidated Statement of Operations.


 
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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.

For changes in commitments related to the acquisition of mortgage loans and the purchase of limited partnerships and private placement investments, see the Commitments and Contingencies Note in our Condensed Consolidated Financial Statements in Part I, Item 1. of this Quarterly Report on Form 10-Q.

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

As a result of Tax Reform, the National Association of Insurance Commissioners (“NAIC”) determined that it needed to update the factors affecting risk-based capital (“RBC”) requirements, including ours, to reflect the lowering of the top corporate tax rate from 35% to 21%. Adjusting these factors in light of Tax Reform will result in an increase in the amount of capital we are required to maintain to satisfy our RBC requirements. On June 28, 2018, the NAIC adopted the required changes, which will become effective on December 31, 2018. We currently expect to be in compliance with these new requirements as of the December 31, 2018 effective date.




 
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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

On June 1, 2018, VRIAC's ultimate parent, Voya Financial, completed the sale (the "Transaction") of its two subsidiaries Voya Insurance and Annuity Company ("VIAC") and Directed Services LLC ("DSL") to Venerable Holdings, Inc. ("Venerable"), a subsidiary of VA Capital Company LLC ("VA Capital"). Upon consummation of the Transaction, Voya Financial entered into services arrangements with Venerable whereby Venerable or its affiliates will provide certain services, which include operational, administrative, financial reporting and actuarial valuation services. Voya Financial retains full responsibility and will continue to oversee the calculations and methodologies that impact the financial control environment. These services which were previously performed in-house affect aspects of Voya Financial and the Company's financial controls. Consequently, Voya Financial and the Company have concluded that entry into these services arrangements constitute a material change in the Company’s internal control over financial reporting for purposes of Rule 13a-15(d) of the Exchange Act. Other than the change noted above, there were no changes in the Company's internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the quarter ended June 30, 2018 that have materially affected, or are reasonably likely to materially affect, the Company's 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 for the year ended December 31, 2017 (the "Annual Report on Form 10-K") filed with the Securities and Exchange Commission. In addition, please see "Management’s Narrative Analysis of the Results of Operations and Financial Condition" herein and in the Annual Report herein and in the Annual Report on Form 10-K.

Item 6.    Exhibits

See Exhibit Index on page 83 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, 2018
 
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
31.1+
 
31.2+
 
32.1+
 
32.2+
 
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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VOYA RETIREMENT INSURANCE & ANNUITY Co Reports