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Voya Financial
VOYA
#2575
Rank
$7.09 B
Marketcap
๐Ÿ‡บ๐Ÿ‡ธ United States
Country
$74.51
Share price
0.55%
Change (1 day)
1.32%
Change (1 year)
๐Ÿ’ณ Financial services
Categories
  1. Voya Financial
  2. Quarterly Reports (10-Q)
  3. Financial Year FY2019 Q1

Voya Financial - 10-Q quarterly report FY2019 Q1


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voyrfinrgbgrdpos1567a02.jpg
 
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 March 31, 2019

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: 001-35897______________________________________

Voya Financial, Inc.
(Exact name of registrant as specified in its charter)
Delaware
52-1222820
(State or other jurisdiction of incorporation or organization)
(IRS Employer Identification No.)
230 Park Avenue
 
New York, New York
10169
(Address of principal executive offices)
(Zip Code)
(212) 309-8200
(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.           x Yes    o No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).  x Yes    o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer    ý
Accelerated filer    o
Non-accelerated filer     o
Smaller reporting company     o
 
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).             o Yes    x No

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.             o Yes    o No

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading symbol
Name of each exchange on which registered
Common Stock, $.01 Par Value
VOYA
 New York Stock Exchange

APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: As of May 3, 2019, 144,123,309 shares of Common Stock, $0.01 par value, were outstanding.
 

 
1
 

Voya Financial, Inc.
Form 10-Q for the period ended March 31, 2019

INDEX
 
 
PAGE
PART I.
FINANCIAL INFORMATION (UNAUDITED)
 
 
 
 
Item 1.
Financial Statements:
 
 
Condensed Consolidated Balance Sheets
4
 
Condensed Consolidated Statements of Operations
6
 
Condensed Consolidated Statements of Comprehensive Income
7
 
Condensed Consolidated Statements of Changes in Shareholders' Equity
8
 
Condensed Consolidated Statements of Cash Flows
10
 
Notes to Condensed Consolidated Financial Statements:
11
 
1. Business, Basis of Presentation and Significant Accounting Policies
11
 
2. Discontinued Operations
18
 
3. Investments (excluding Consolidated Investment Entities)
19
 
4. Derivative Financial Instruments
35
 
5. Fair Value Measurements (excluding Consolidated Investment Entities)
40
 
6. Deferred Policy Acquisition Costs and Value of Business Acquired
52
 
7. Share-based Incentive Compensation Plans
53
 
8. Shareholders' Equity
55
 
9. Earnings per Common Share
57
 
10. Accumulated Other Comprehensive Income (Loss)
58
 
11. Income Taxes
60
 
12. Financing Agreements
61
 
13. Commitments and Contingencies
62
 
14. Consolidated Investment Entities
64
 
15. Restructuring
71
 
16. Segments
72
 
17. Condensed Consolidating Financial Information
77
 
 
 
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
89
 
 
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
131
 
 
 
Item 4.
Controls and Procedures
134
 
 
 
PART II.
OTHER INFORMATION
 
 
 
 
Item 1.
Legal Proceedings
135
 
 
 
Item 1A.
Risk Factors
135
 
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
135
 
 
 
Item 6.
Exhibits
135
 
 
 
Exhibit Index
 
136
 
 
 
Signature
 
137


 
2
 

For the purposes of the discussion in this Quarterly Report on Form 10-Q, the term Voya Financial, Inc. refers to Voya Financial, Inc. and the terms "Company," "we," "our," and "us" refer to Voya Financial, Inc. and its subsidiaries.

NOTE CONCERNING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q, including "Risk Factors," and "Management’s Discussion and Analysis of Financial Condition and Results of Operations," 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, (x) changes in the policies of governments and/or regulatory authorities, and (xi) our ability to successfully manage the separation of the fixed and variable annuities businesses that we sold to VA Capital Company LLC on June 1, 2018, 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," "Management’s Discussion and Analysis of Financial Condition and Results of Operations-Trends and Uncertainties" in the Annual Report on Form 10-K for the year ended December 31, 2018 (File No. 001-35897) (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

Item 1.        Financial Statements
Voya Financial, Inc.
Condensed Consolidated Balance Sheets
March 31, 2019 (Unaudited) and December 31, 2018
(In millions, except share and per share data)
 
March 31,
2019
 
December 31,
2018
Assets:
 
 
 
Investments:
 
 
 
Fixed maturities, available-for-sale, at fair value (amortized cost of $45,082 as of 2019 and $45,241 as of 2018)
$
47,923

 
$
46,298

Fixed maturities, at fair value using the fair value option
3,159

 
2,956

Equity securities, at fair value (cost of $330 as of 2019 and $255 as of 2018)
355

 
273

Short-term investments
192

 
168

Mortgage loans on real estate, net of valuation allowance of $1 as of 2019 and $2 as of 2018
8,516

 
8,676

Policy loans
1,827

 
1,833

Limited partnerships/corporations
1,166

 
1,158

Derivatives
314

 
247

Other investments
89

 
90

Securities pledged (amortized cost of $1,940 as of 2019 and $1,824 as of 2018)
2,084

 
1,867

Total investments
65,625

 
63,566

Cash and cash equivalents
1,033

 
1,538

Short-term investments under securities loan agreements, including collateral delivered
1,886

 
1,684

Accrued investment income
699

 
650

Premium receivable and reinsurance recoverable
6,753

 
6,860

Deferred policy acquisition costs and Value of business acquired
3,600

 
4,116

Current income taxes
222

 
237

Deferred income taxes
864

 
1,157

Other assets
1,353

 
1,336

Assets related to consolidated investment entities:
 
 
 
Limited partnerships/corporations, at fair value
1,426

 
1,421

Cash and cash equivalents
307

 
331

Corporate loans, at fair value using the fair value option
551

 
542

Other assets
17

 
16

Assets held in separate accounts
77,649

 
71,228

Total assets
$
161,985

 
$
154,682





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

Voya Financial, Inc.
Condensed Consolidated Balance Sheets
March 31, 2019 (Unaudited) and December 31, 2018
(In millions, except share and per share data)

 
March 31,
2019
 
December 31,
2018
Liabilities and Shareholders' Equity:
 
 
 
Future policy benefits
$
14,660

 
$
14,488

Contract owner account balances
50,706

 
51,001

Payables under securities loan and repurchase agreements, including collateral held
1,978

 
1,821

Short-term debt
1

 
1

Long-term debt
3,136

 
3,136

Derivatives
243

 
139

Pension and other postretirement provisions
465

 
551

Other liabilities
2,141

 
2,148

Liabilities related to consolidated investment entities:
 
 
 
Collateralized loan obligations notes, at fair value using the fair value option
529

 
540

Other liabilities
671

 
688

Liabilities related to separate accounts
77,649

 
71,228

Total liabilities
152,179

 
145,741

 
 
 
 
Commitments and Contingencies (Note 13)


 


 
 
 
 
Shareholders' equity:
 
 
 
Preferred stock ($0.01 par value per share; 325,000 shares authorized, issued and outstanding as of 2019 and 2018; $325 aggregate liquidation preference as of 2019 and 2018)
—

 
—

Common stock ($0.01 par value per share; 900,000,000 shares authorized; 274,936,923 and 272,431,745 shares issued as of 2019 and 2018, respectively; 147,970,796 and 150,978,184 shares outstanding as of 2019 and 2018, respectively)
3

 
3

Treasury stock (at cost; 126,966,127 and 121,453,561 shares as of 2019 and 2018, respectively)
(5,203
)
 
(4,981
)
Additional paid-in capital
24,310

 
24,316

Accumulated other comprehensive income (loss)
1,966

 
607

Retained earnings (deficit):
 
 
 
Appropriated-consolidated investment entities
—

 
—

Unappropriated
(12,011
)
 
(11,732
)
Total Voya Financial, Inc. shareholders' equity
9,065

 
8,213

Noncontrolling interest
741

 
728

Total shareholders' equity
9,806

 
8,941

Total liabilities and shareholders' equity
$
161,985

 
$
154,682


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

Voya Financial, Inc.
Condensed Consolidated Statements of Operations
For the Three Months Ended March 31, 2019 and 2018 (Unaudited)
(In millions, except per share data)
 
Three Months Ended March 31,
 
2019
 
2018
Revenues:
 
 
 
Net investment income
$
815

 
$
823

Fee income
665

 
676

Premiums
582

 
539

Net realized capital gains (losses):
 
 
 
Total other-than-temporary impairments
(33
)
 
(14
)
Less: Portion of other-than-temporary impairments recognized in Other comprehensive income (loss)
—

 
—

Net other-than-temporary impairments recognized in earnings
(33
)
 
(14
)
Other net realized capital gains (losses)
50

 
(167
)
Total net realized capital gains (losses)
17

 
(181
)
Other revenue
113

 
99

Income (loss) related to consolidated investment entities:
 
 
 
Net investment income
5

 
11

Total revenues
2,197

 
1,967

Benefits and expenses:
 
 
 
Policyholder benefits
815

 
708

Interest credited to contract owner account balances
371

 
382

Operating expenses
702

 
700

Net amortization of Deferred policy acquisition costs and Value of business acquired
85

 
100

Interest expense
42

 
49

Operating expenses related to consolidated investment entities:
 
 
 
Interest expense
5

 
6

Other expense
—

 
1

Total benefits and expenses
2,020

 
1,946

Income (loss) from continuing operations before income taxes
177

 
21

Income tax expense (benefit)
25

 
4

Income (loss) from continuing operations
152

 
17

Income (loss) from discontinued operations, net of tax
(79
)
 
429

Net income (loss)
73

 
446

Less: Net income (loss) attributable to noncontrolling interest
(1
)
 
—

Net income (loss) available to Voya Financial, Inc.
74

 
446

Less: Preferred stock dividends
10

 
—

Net income (loss) available to Voya Financial, Inc.'s common shareholders
$
64

 
$
446

 
 
 
 
Net income (loss) per common share:
 
 
 
Basic
 
 
 
Income (loss) from continuing operations available to Voya Financial, Inc.'s common shareholders
$
0.97

 
$
0.10

Income (loss) available to Voya Financial, Inc.'s common shareholders
$
0.44

 
$
2.59

 
 
 
 
Diluted
 
 
 
Income (loss) from continuing operations available to Voya Financial, Inc.'s common shareholders
$
0.95

 
$
0.10

Income (loss) available to Voya Financial, Inc.'s common shareholders
$
0.42

 
$
2.50

 
 
 
 
Cash dividends declared per share of common stock
$
0.01

 
$
0.01


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

Voya Financial, Inc.
Condensed Consolidated Statements of Comprehensive Income
For the Three Months Ended March 31, 2019 and 2018 (Unaudited)
(In millions)
 
Three Months Ended March 31,
 
2019
 
2018
Net income (loss)
$
73

 
$
446

Other comprehensive income (loss), before tax:
 
 
 
Unrealized gains (losses) on securities
1,284

 
(1,523
)
Other-than-temporary impairments
1

 
20

Pension and other postretirement benefits liability
(1
)
 
(3
)
Other comprehensive income (loss), before tax
1,284

 
(1,506
)
Income tax expense (benefit) related to items of other comprehensive income (loss)
268

 
(314
)
Other comprehensive income (loss), after tax
1,016

 
(1,192
)
Comprehensive income (loss)
1,089

 
(746
)
Less: Comprehensive income (loss) attributable to noncontrolling interest
(1
)
 
—

Comprehensive income (loss) attributable to Voya Financial, Inc.
$
1,090

 
$
(746
)

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


Voya Financial, Inc.
 Condensed Consolidated Statements of Changes in Shareholders' Equity
For the Three Months Ended March 31, 2019 (Unaudited)
(In millions)
 
Preferred Stock
 
Common
Stock
 
Treasury
Stock
 
Additional
Paid-In
Capital
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Retained Earnings (Deficit)
 
Total
Voya
Financial, Inc.
Shareholders'
Equity
 
Noncontrolling
Interest
 
Total
Shareholders'
Equity
 
Appropriated
 
Unappropriated
Balance as of January 1, 2019
$
—

 
$
3

 
$
(4,981
)
 
$
24,316

 
$
607

 
$
—

 
$
(11,732
)
 
$
8,213

 
$
728

 
$
8,941

 Adoption of ASU 2018-02
—

 
—

 
—

 
—

 
343

 
—

 
(343
)
 
—

 
—

 
—

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

 
—

 
—

 
—

 
—

 
—

 
74

 
74

 
(1
)
 
73

Other comprehensive income (loss), after tax
—

 
—

 
—

 
—

 
1,016

 
—

 
—

 
1,016

 
—

 
1,016

Total comprehensive income (loss)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1,090

 
(1
)
 
1,089

Common stock issuance
—

 
—

 
—

 
2

 
—

 
—

 
—

 
2

 
—

 
2

Common stock acquired - Share repurchase
—

 
—

 
(200
)
 
(50
)
 
—

 
—

 
—

 
(250
)
 
—

 
(250
)
Dividends on preferred stock
—

 
—

 
—

 
—

 
—

 
—

 
(10
)
 
(10
)
 
—

 
(10
)
Dividends on common stock
—

 
—

 
—

 
(1
)
 
—

 
—

 
—

 
(1
)
 
—

 
(1
)
Share-based compensation
—

 
—

 
(22
)
 
43

 
—

 
—

 
—

 
21

 
—

 
21

Contributions from (Distributions to) noncontrolling interest, net
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
14

 
14

Balance as of March 31, 2019
$
—

 
$
3

 
$
(5,203
)
 
$
24,310

 
$
1,966

 
$
—

 
$
(12,011
)
 
$
9,065

 
$
741


$
9,806



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

Voya Financial, Inc.
 Condensed Consolidated Statements of Changes in Shareholders' Equity
For the Three Months Ended March 31, 2018 (Unaudited)
(In millions)
 
Preferred Stock
 
Common
Stock
 
Treasury
Stock
 
Additional
Paid-In
Capital
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Retained Earnings (Deficit)
 
Total
Voya
Financial, Inc.
Shareholders'
Equity
 
Noncontrolling
Interest
 
Total
Shareholders'
Equity
Appropriated
 
Unappropriated
Balance as of January 1, 2018
$
—

 
$
3

 
$
(3,827
)
 
$
23,821

 
$
2,731

 
$
—

 
$
(12,719
)
 
$
10,009

 
$
1,030

 
$
11,039

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

 
—

 
—

 
—

 
—

 
—

 
84

 
84

 
—

 
84

  Adjustment for adoption of ASU 2016-01
—

 
—

 
—

 
—

 
(28
)
 
—

 
28

 
—

 
—

 
—

Balance as of January 1, 2018 - As adjusted
—

 
3

 
(3,827
)
 
23,821

 
2,703

 
—

 
(12,607
)
 
10,093

 
1,030

 
11,123

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

 
—

 
—

 
—

 
—

 
—

 
446

 
446

 
—

 
446

Other comprehensive income (loss), after tax
—

 
—

 
—

 
—

 
(1,192
)
 
—

 
—

 
(1,192
)
 
—

 
(1,192
)
Total comprehensive income (loss)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(746
)
 
—

 
(746
)
Common stock issuance
—

 
—

 
—

 
2

 
—

 
—

 
—

 
2

 
—

 
2

Common stock acquired - Share repurchase
—

 
—

 
(100
)
 
100

 
—

 
—

 
—

 
—

 
—

 
—

Dividends on preferred stock
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Dividends on common stock
—

 
—

 
—

 
(2
)
 
—

 
—

 
—

 
(2
)
 
—

 
(2
)
Share-based compensation
—

 
—

 
(9
)
 
40

 
—

 
—

 
—

 
31

 
—

 
31

Contributions from (Distributions to) noncontrolling interest, net
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
1

 
1

Balance as of March 31, 2018
$
—

 
$
3

 
$
(3,936
)
 
$
23,961

 
$
1,511

 
$
—

 
$
(12,161
)
 
$
9,378

 
$
1,031

 
$
10,409


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

Voya Financial, Inc.
Condensed Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2019 and 2018 (Unaudited)
(In millions)
 
Three Months Ended March 31,
 
2019
 
2018
Cash Flows from Operating Activities:
 
 
 
Net cash provided by operating activities - continuing operations
$
131

 
$
38

Net cash provided by operating activities - discontinued operations
—

 
363

Net cash provided by operating activities
131

 
401

Cash Flows from Investing Activities:
 
 
 
Proceeds from the sale, maturity, disposal or redemption of:
 
 
 
Fixed maturities
2,414

 
2,077

Equity securities
9

 
6

Mortgage loans on real estate
338

 
241

Limited partnerships/corporations
44

 
30

Acquisition of:
 
 
 
Fixed maturities
(2,500
)
 
(2,254
)
Equity securities
(18
)
 
(12
)
Mortgage loans on real estate
(180
)
 
(391
)
Limited partnerships/corporations
(74
)
 
(54
)
Short-term investments, net
(24
)
 
278

Derivatives, net
39

 
17

Sales from consolidated investment entities
57

 
88

Purchases within consolidated investment entities
(91
)
 
(138
)
Collateral received (delivered), net
(45
)
 
—

Other, net
(13
)
 
(17
)
Net cash provided by investing activities - discontinued operations
—

 
365

Net cash (used in) provided by investing activities
(44
)
 
236

Cash Flows from Financing Activities:
 
 
 
Deposits received for investment contracts
1,453

 
1,415

Maturities and withdrawals from investment contracts
(1,780
)
 
(1,360
)
Settlements on deposit contracts
(2
)
 
—

Proceeds from issuance of debt with maturities of more than three months
—

 
350

Repayment of debt with maturities of more than three months
—

 
(350
)
Debt issuance costs
—

 
(6
)
Borrowings of consolidated investment entities
36

 
62

Contributions from (distributions to) participants in consolidated investment entities, net
(25
)
 
(19
)
Proceeds from issuance of common stock, net
2

 
2

Share-based compensation
(15
)
 
(9
)
Common stock acquired - Share repurchase
(250
)
 
—

Dividends paid on common stock
(1
)
 
(2
)
Dividends paid on preferred stock
(10
)
 
—

Net cash used in financing activities - discontinued operations
—

 
(480
)
Net cash used in by financing activities
(592
)
 
(397
)
Net (decrease) increase in cash and cash equivalents
(505
)
 
240

Cash and cash equivalents, beginning of period
1,538

 
1,716

Cash and cash equivalents, end of period
1,033

 
1,956

Less: Cash and cash equivalents of discontinued operations, end of period
—

 
545

Cash and cash equivalents of continuing operations, end of period
$
1,033

 
$
1,411

Non-cash investing and financing activities:
 
 
 
Initial recognition of operating leases upon adoption of ASU 2016-02
$
146

 
$
—


The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
 
 
 
 
10
 

Table of Contents
Voya Financial, 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 Financial, Inc. and its subsidiaries (collectively the "Company") is a financial services organization in the United States that offers a broad range of retirement services, investment management services, mutual funds, group insurance and supplemental health products.

The Company provides its principal products and services through four segments: Retirement, Investment Management, Employee Benefits and Individual Life. In addition, the Company includes in Corporate activities not directly related to its segments, results of the Retained Business (defined in the Discontinued Operations Note in these Condensed Consolidated Financial Statements) and certain run-off activities that are not meaningful to the Company's business strategy. See the Segments Note to these Condensed Consolidated Financial Statements.

After conducting a strategic review of the Individual Life business, in October 2018, the Company announced that it would retain the in-force block of individual life policies and cease new individual life insurance sales, effective December 31, 2018. Applications for individual life insurance policies were accepted through the end of 2018, resulting in some placement of policies in early 2019. The Company will continue to manage its existing in-force Individual Life business as a separate segment, with results included in the Company's Adjusted operating earnings before income taxes.

Prior to May 2013, 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.

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 Voya Financial, Inc. and its subsidiaries, as well as partnerships (voting interest entities ("VOEs")) in which the Company has control and variable interest entities ("VIEs") for which the Company is the primary beneficiary. See the Consolidated Investment Entities Note to these Condensed Consolidated Financial Statements. Intercompany transactions and balances have been eliminated.

The accompanying Condensed Consolidated Financial Statements reflect adjustments (including normal, recurring adjustments) necessary to present fairly the financial position of the Company as of March 31, 2019, its results of operations, comprehensive income, changes in shareholders' equity and statements of cash flows for the three months ended March 31, 2019 and 2018, in conformity with U.S. GAAP. Interim results are not necessarily indicative of full year performance. The December 31, 2018 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.




 
11
 

Table of Contents
Voya Financial, Inc.
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 

Adoption of New Pronouncements

The following table provides a description of the Company's adoption of new ASUs issued by the Financial Accounting Standards Board and the impact of the adoption on the Company's financial statements.
Standard
Description of Requirements
Effective date and method of adoption
Effect on the financial statements or other significant matters
ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
This standard, issued in February 2018, permits a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the 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.
January 1, 2019, with the change reported in the period of adoption.
The impact to the January 1, 2019 Condensed Consolidated Balance Sheet was an increase to Accumulated other comprehensive income of $343, with a corresponding decrease to Retained earnings. The ASU did not have a material impact on the Company's results of operations, cash flows, or disclosures.


 
12
 

Table of Contents
Voya Financial, Inc.
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 

Standard
Description of Requirements
Effective date and method of adoption
Effect on the financial statements or other significant matters
ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities
This standard, issued in August 2017, 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, and
• Eases certain documentation and assessment requirements and modifies the accounting for components excluded from the assessment of hedge effectiveness, and modifies required disclosures.

In October 2018, the FASB issued an amendment which expands the list of U.S. benchmark interest rates permitted in the application of hedge accounting.
January 1, 2019, using the modified retrospective method, with the exception of the presentation and disclosure requirements which were adopted prospectively.
The adoption had no effect on the Company's financial condition, results of operations, or cash flows. The adoption resulted in a change to the Company's significant accounting policy with respect to Derivatives, as follows:

Fair Value Hedge: For derivative instruments that are designated and qualify as a fair value hedge, the entire change in the fair value of the hedging instrument included in the assessment of hedge effectiveness is recorded in the same line item in the Condensed Consolidated Statements of Operations as impacted by the hedged item.

Cash Flow Hedge: For derivative instruments that are designated and qualify as a cash flow hedge, the entire change in the fair value of the hedging instrument included in the assessment of hedge effectiveness is reported as a component of AOCI. Those amounts are subsequently reclassified to earnings when the hedged item affects earnings, and are reported in the same line item in the Condensed Consolidated Statements of Operations as impacted by the hedged item.

Other required disclosure changes have been included in Note 4, Derivative Financial Instruments.


 
13
 

Table of Contents
Voya Financial, Inc.
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 

Standard
Description of Requirements
Effective date and method of adoption
Effect on the financial statements or other significant matters
ASU 2016-02, Leases
This standard, issued in February 2016, 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.
January 1, 2019 using the modified retrospective method.


Adoption of the ASU resulted in the establishment of a $146 lease liability for operating leases and a corresponding right-of-use asset, which are included in Other liabilities and Other assets, respectively. The Company elected the practical expedients at transition. The ASU did not impact the Company's Shareholders’ equity or results of operations, and did not materially impact cash flows or disclosures.


Future Adoption of Accounting Pronouncements
Long-Duration Contracts

In August 2018, the FASB issued ASU 2018-12, "Financial Services - Insurance (Topic 944) Targeted Improvements to the Accounting for Long-Duration Contracts" ("ASU 2018-12"), which changes the measurement and disclosures of insurance liabilities and deferred acquisition costs for long-duration contracts issued by insurers. The provisions of ASU 2018-12 are effective for fiscal years beginning after December 15, 2020, including interim periods, with early adoption permitted. The Company is currently in the process of evaluating the provisions of ASU 2018-12. While it is not possible to estimate the expected impact of adoption at this time, the Company believes there is a reasonable possibility that implementation of ASU 2018-12 may result in a significant impact on Shareholders’ equity and future earnings patterns.

In addition to requiring significantly expanded interim and annual disclosures regarding long-duration insurance contract assets and liabilities, ASU 2018-12's provisions include modifications to the accounting for such contracts in the following areas:

 
14
 

Table of Contents
Voya Financial, Inc.
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 

ASU 2018-12 Subject Area
Description of Requirements
Transition Provisions
Effect on the financial statements or other significant matters
Assumptions used to measure the liability for future policy benefits for nonparticipating traditional and limited payment insurance contracts


Requires insurers to review and, if necessary, update cash flow assumptions at least annually.

The effect of updating cash flow assumptions will be measured on a retrospective catch-up basis and presented in the Statement of operations in the period in which the update is made.
The rate used to discount the liability for future policy benefits will be required to be updated quarterly, with related changes in the liability recorded in Accumulated other comprehensive income. The discount rate will be based on an upper-medium grade fixed-income corporate instrument yield reflecting the duration characteristics of the relevant liabilities.

Initial adoption is required to be reported using either a full retrospective or modified retrospective approach. Under either method, upon adoption the liability for future policy benefits will be remeasured using current discount rates as of the beginning of the earliest period presented with the impact recorded as a cumulative effect adjustment to AOCI.

The application of periodic assumption updates for nonparticipating traditional and limited payment insurance contracts is significantly different from the current accounting approach for such liabilities, which is based on assumptions that are locked in at contract inception unless a premium deficiency occurs. Under the current accounting guidance, the liability discount rate is based on expected yields on the underlying investment portfolio held by the insurer.
The implications of these requirements, including transition options, and related potential financial statement impacts are currently being evaluated.
Measurement of market risk benefits


Creates a new category of benefit features called market risk benefits, defined as features that protect contract holders from capital market risk and expose the insurers to that risk. Market risk benefits will be required to be measured at fair value, with changes in fair value recognized in the Statement of operations, except for changes in fair value attributable to changes in the instrument-specific credit risk, which will be recorded in Accumulated other comprehensive income.

Full retrospective application is required. Upon adoption, any difference between the fair value and pre-adoption carrying value of market risk benefits not currently measured at fair value will be recorded to retained earnings. In addition, the cumulative effect of changes in instrument-specific credit risk will be reclassified from retained earnings to AOCI.
Under the current accounting guidance, certain features that are expected to meet the definition of market risk benefits are accounted for as either insurance liabilities (for example, GMDB and GMIB) or embedded derivatives (for example, GMWBL and GMWB).
The implications of these requirements and related potential financial statement impacts are currently being evaluated.


 
15
 

Table of Contents
Voya Financial, Inc.
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 

ASU 2018-12 Subject Area
Description of Requirements
Transition Provisions
Effect on the financial statements or other significant matters
Amortization of DAC and other balances


Requires DAC (and other balances that refer to the DAC model, such as deferred sales inducement costs and unearned revenue liabilities) for all long-duration contracts to be measured on a constant level basis over the expected life of the contract.

Initial adoption is required to be reported using either a full retrospective or modified retrospective approach. The method of transition applied for DAC and other balances must be consistent with the transition method selected for future policy benefit liabilities, as described above.

This approach is intended to approximate straight-line amortization and cannot be based on revenue or profits as it is under the current accounting model. Related amounts in AOCI will be eliminated upon adoption. ASU 2018-12 did not change the existing accounting guidance related to VOBA and net cost of reinsurance, which allows, but does not require, insurers to amortize such balances on a basis consistent with DAC.

The implications of these requirements, including transition options, and related potential financial statement impacts are currently being evaluated.

 
16
 

Table of Contents
Voya Financial, Inc.
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 

The following table provides a description of future adoptions of other new accounting standards that may have an impact on the Company's financial statements when adopted:
Standard
Description of Requirements

Effective date and transition provisions
Effect on the financial statements or other significant matters
ASU 2019-04, Codification Improvements to Financial Instruments
This standard, issued in April 2019, represents changes to clarify, correct errors in, and improve the financial instruments guidance in the following areas: • Topic 326, Financial Instruments-Credit Losses, • Topic 815, Derivatives and Hedging, and • Topic 825, Financial Instruments.
Generally January 1, 2020, including interim periods, with early adoption permitted. The effective dates and transition methods vary by provision.

The Company is currently in the process of determining the impact of adoption of the provisions of ASU 2019-04.

ASU 2018-15, Implementation costs incurred in a cloud computing arrangement that is a service contract
This standard, issued in August 2018, requires a customer in a hosting arrangement that is a service contract to follow the guidance for internal-use software projects to determine which implementation costs to capitalize as an asset. Capitalized implementation costs are required to be expensed over the term of the hosting arrangement. In addition, a customer is required to apply the impairment and abandonment guidance for long-lived assets to the capitalized implementation costs. Balances related to capitalized implementation costs must be presented in the same financial statement line items as other hosting arrangement balances, and additional disclosures are required.
January 1, 2020 with early adoption permitted. Initial adoption of ASU 2018-15 may be reported either on a prospective or retrospective basis.
The Company is currently in the process of determining the impact of adoption of the provisions of ASU 2018-15.
ASU 2018-14, Changes to the Disclosure Requirements for Defined Benefit Plans
This standard, issued in August 2018, eliminates certain disclosure requirements that are no longer considered cost beneficial and requires new disclosures that are considered relevant.
January 1, 2021 with early adoption permitted. Initial adoption of ASU 2018-14 is required to be reported on a retrospective basis for all periods presented.
The Company is currently in the process of determining the impact of adoption of the provisions of ASU 2018-14.
ASU 2018-13, Changes to the Disclosure Requirements for Fair Value Measurement
This standard, issued in August 2018, simplifies certain disclosure requirements for fair value measurement.
January 1, 2020, including interim periods, with early adoption permitted. The transition method varies by provision.
The Company is currently in the process of determining the impact of adoption of the provisions of ASU 2018-13.
ASU 2016-13, Measurement of Credit Losses on Financial Instruments
This standard, issued in June 2016:
• Introduces a new current expected credit loss ("CECL") model to measure impairment on certain types of financial instruments,
• Requires an entity to estimate lifetime expected credit losses, under the new CECL model, based on relevant information about historical events, current conditions, and reasonable and supportable forecasts,
• 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.
January 1, 2020, including interim periods, with early adoption permitted. 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.



 
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Table of Contents
Voya Financial, Inc.
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 

2.    Discontinued Operations

On June 1, 2018, the Company 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, Venerable Holdings, Inc. ("Venerable"), a wholly owned subsidiary of VA Capital, acquired two of the Company's subsidiaries, Voya Insurance and Annuity Company ("VIAC") and Directed Services, LLC ("DSL"), and VIAC and other Voya subsidiaries reinsured to Athene substantially all of their fixed and fixed indexed annuities business. In connection with the Transaction, VIAC and another Voya subsidiary engaged in a series of reinsurance arrangements pursuant to which Voya and its subsidiaries other than VIAC retained VIAC’s businesses other than variable annuities and fixed and fixed indexed annuities. Pursuant to the terms of the Transaction, we have retained a small number of CBVA and Annuities policies that are not included in the disposed businesses described above as "Retained Business."

VA Capital provided the Company with its proposed purchase price adjustments in December 2018. Income (loss) from discontinued operations, net of tax in the first quarter of 2019 includes a $79 charge related to a proposed settlement of such purchase price true-up amounts payable by the Company in connection with the Transaction. The Company does not anticipate further material charges in connection with the Transaction.

The following table summarizes the components of Income (loss) from discontinued operations, net of tax for the three months ended March 31, 2019 and 2018:
 
Three Months Ended March 31,
 
2019
 
2018
Revenues:
 
 
 
Net investment income
$
—

 
$
305

Fee income
—

 
179

Premiums
—

 
44

Total net realized capital gains (losses)
—

 
(176
)
Other revenue
—

 
6

Total revenues
—

 
358

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

 
320

Operating expenses
—

 
54

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

 
10

Interest expense
—

 
5

Total benefits and expenses
—

 
389

Income (loss) from discontinued operations before income taxes
—

 
(31
)
Income tax expense (benefit)
—

 
(11
)
Adjustment to loss on sale, net of tax
(79
)
 
449

Income (loss) from discontinued operations, net of tax
$
(79
)
 
$
429




 
18
 

Table of Contents
Voya Financial, Inc.
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 

3.    Investments (excluding Consolidated Investment Entities)

Fixed Maturities and Equity Securities

Available-for-sale and fair value option ("FVO") fixed maturities were as follows as of March 31, 2019:
 
Amortized Cost
 
Gross Unrealized Capital Gains
 
Gross Unrealized Capital Losses
 
Embedded Derivatives(2)
 
Fair Value
 
OTTI(3)(4)
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasuries
$
1,789

 
$
413

 
$
1

 
$
—

 
$
2,201

 
$
—

U.S. Government agencies and authorities
204

 
44

 
—

 
—

 
248

 
—

State, municipalities and political subdivisions
1,659

 
63

 
7

 
—

 
1,715

 
—

U.S. corporate public securities
18,671

 
1,649

 
133

 
—

 
20,187

 
—

U.S. corporate private securities
6,364

 
321

 
65

 
—

 
6,620

 
—

Foreign corporate public securities and foreign governments(1)
5,436

 
341

 
63

 
—

 
5,714

 
—

Foreign corporate private securities(1)
5,132

 
171

 
30

 
—

 
5,273

 
—

Residential mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Agency
3,013

 
155

 
18

 
13

 
3,163

 
—

Non-Agency
1,867

 
81

 
11

 
13

 
1,950

 
11

Total Residential mortgage-backed securities
4,880

 
236

 
29

 
26

 
5,113

 
11

Commercial mortgage-backed securities
3,785

 
77

 
35

 
—

 
3,827

 
—

Other asset-backed securities
2,261

 
34

 
27

 
—

 
2,268

 
2

Total fixed maturities, including securities pledged
50,181

 
3,349

 
390

 
26

 
53,166

 
13

Less: Securities pledged
1,940

 
167

 
23

 
—

 
2,084

 
—

Total fixed maturities
$
48,241

 
$
3,182

 
$
367

 
$
26

 
$
51,082

 
$
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 Other-than-Temporary-Impairments ("OTTI") reported as a component of Other comprehensive income (loss).
(4) Amount excludes $349 of net unrealized gains on impaired available-for-sale securities.



 
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Table of Contents
Voya Financial, Inc.
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 

Available-for-sale and FVO fixed maturities were as follows as of December 31, 2018:
 
Amortized Cost
 
Gross Unrealized Capital Gains
 
Gross Unrealized Capital Losses
 
Embedded Derivatives(2)
 
Fair Value
 
OTTI(3)(4)
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasuries
$
1,937

 
$
360

 
$
2

 
$
—

 
$
2,295

 
$
—

U.S. Government agencies and authorities
204

 
38

 
—

 
—

 
242

 
—

State, municipalities and political subdivisions
1,652

 
29

 
22

 
—

 
1,659

 
—

U.S. corporate public securities
19,210

 
1,053

 
415

 
—

 
19,848

 
—

U.S. corporate private securities
6,264

 
138

 
170

 
—

 
6,232

 
—

Foreign corporate public securities and foreign governments(1)
5,429

 
193

 
167

 
—

 
5,455

 
—

Foreign corporate private securities(1)
5,176

 
70

 
152

 
—

 
5,094

 
—

Residential mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
Agency
2,916

 
138

 
34

 
14

 
3,034

 
—

Non-Agency
1,700

 
76

 
19

 
12

 
1,769

 
11

Total Residential mortgage-backed securities
4,616

 
214

 
53

 
26

 
4,803

 
11

Commercial mortgage-backed securities
3,438

 
33

 
55

 
—

 
3,416

 
—

Other asset-backed securities
2,095

 
30

 
48

 
—

 
2,077

 
2

Total fixed maturities, including securities pledged
50,021

 
2,158

 
1,084

 
26

 
51,121

 
13

Less: Securities pledged
1,824

 
107

 
64

 
—

 
1,867

 
—

Total fixed maturities
$
48,197

 
$
2,051

 
$
1,020

 
$
26

 
$
49,254

 
$
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 $300 of net unrealized gains on impaired available-for-sale securities.




 
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Table of Contents
Voya Financial, 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 March 31, 2019, 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
$
1,294

 
$
1,306

After one year through five years
6,772

 
6,961

After five years through ten years
9,447

 
9,746

After ten years
21,742

 
23,945

Mortgage-backed securities
8,665

 
8,940

Other asset-backed securities
2,261

 
2,268

Fixed maturities, including securities pledged
$
50,181

 
$
53,166



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 March 31, 2019 and December 31, 2018, 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 shareholders' 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
March 31, 2019
 
 
 
 
 
 
 
Communications
$
2,447

 
$
265

 
$
9

 
$
2,703

Financial
5,295

 
449

 
23

 
5,721

Industrial and other companies
15,315

 
869

 
121

 
16,063

Energy
3,912

 
347

 
69

 
4,190

Utilities
6,381

 
421

 
48

 
6,754

Transportation
1,408

 
91

 
11

 
1,488

Total
$
34,758

 
$
2,442

 
$
281

 
$
36,919

 
 
 
 
 
 
 
 
December 31, 2018
 
 
 
 
 
 
 
Communications
$
2,554

 
$
162

 
$
35

 
$
2,681

Financial
5,200

 
293

 
90

 
5,403

Industrial and other companies
15,591

 
487

 
422

 
15,656

Energy
4,034

 
194

 
143

 
4,085

Utilities
6,560

 
253

 
158

 
6,655

Transportation
1,281

 
47

 
32

 
1,296

Total
$
35,220

 
$
1,436

 
$
880

 
$
35,776




 
21
 

Table of Contents
Voya Financial, Inc.
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 

Fixed Maturities

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 March 31, 2019 and December 31, 2018, approximately 41.0% and 41.6%, 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 March 31, 2019 and December 31, 2018, the Company did not have any securities pledged in dollar rolls or reverse repurchase agreements. As of March 31, 2019, the carrying value of securities pledged and obligation to repay loans related to repurchase agreement transaction was $49 and $46, respectively, and included in Securities pledged and Payables under securities loan and repurchase agreements, including collateral held, respectively, on the Condensed Consolidated Balance Sheets. As of December 31, 2018, the carrying value of securities pledged and obligation to repay loans related to repurchase agreement transaction was $45 and $46, respectively. Securities pledged related to repurchase agreements are comprised of other asset-backed securities.

Securities Lending

As of March 31, 2019 and December 31, 2018, the fair value of loaned securities was $1,842 and $1,635, 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 March 31, 2019 and December 31, 2018, cash collateral retained by the lending agent and invested in short-term liquid assets on the Company's behalf was $1,681 and $1,581, respectively, and is recorded in Short-term investments under securities loan agreements, including collateral delivered on the Condensed Consolidated Balance Sheets. As of March 31, 2019 and December 31, 2018, liabilities to return collateral of $1,681 and $1,581, respectively, are included in Payables under securities loan and repurchase agreements, including collateral held on the Condensed Consolidated Balance Sheets.

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 March 31, 2019 and December 31, 2018, the fair value of securities retained as collateral by the lending agent on the Company’s behalf was $225 and $111, respectively.


 
22
 

Table of Contents
Voya Financial, Inc.
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 

The following table presents borrowings under securities lending transactions by asset class pledged as of the dates indicated:
 
March 31, 2019 (1)(2)
 
December 31, 2018 (1)(2)
U.S. Treasuries
$
444

 
$
337

U.S. Government agencies and authorities
16

 
7

U.S. corporate public securities
1,077

 
992

Equity Securities
—

 
1

Foreign corporate public securities and foreign governments
369

 
355

Payables under securities loan agreements
$
1,906

 
$
1,692

(1)As of March 31, 2019 and December 31, 2018, borrowings under securities lending transactions include cash collateral of $1,681 and $1,581, respectively.
(2)As of March 31, 2019 and December 31, 2018, borrowings under securities lending transactions include non-cash collateral of $225 and $111, 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.

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 March 31, 2019:
 
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
$
—

 
$
—

 
$
—

 
$
—

 
$
89

 
$
1

 
$
89

 
$
1

State, municipalities and political subdivisions
6

 
—

*
2

 
—

*
245

 
7

 
253

 
7

U.S. corporate public securities
248

 
5

 
711

 
18

 
2,015

 
110

 
2,974

 
133

U.S. corporate private securities
215

 
4

 
27

 
—

*
1,200

 
61

 
1,442

 
65

Foreign corporate public securities and foreign governments
110

 
1

 
185

 
6

 
987

 
56

 
1,282

 
63

Foreign corporate private securities
40

 
—

*
226

 
5

 
741

 
25

 
1,007

 
30

Residential mortgage-backed
449

 
6

 
64

 
1

 
730

 
22

 
1,243

 
29

Commercial mortgage-backed
369

 
3

 
136

 
4

 
654

 
28

 
1,159

 
35

Other asset-backed
643

 
8

 
496

 
13

 
172

 
6

 
1,311

 
27

Total
$
2,080

 
$
27

 
$
1,847

 
$
47

 
$
6,833

 
$
316

 
$
10,760

 
$
390

*Less than $1.



 
23
 

Table of Contents
Voya Financial, 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, 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
$
—

 
$
—

 
$
24

 
$
—

*
$
94

 
$
2

 
$
118

 
$
2

State, municipalities and political subdivisions
140

 
1

 
383

 
9

 
241

 
12

 
764

 
22

U.S. corporate public securities
2,701

 
81

 
3,843

 
224

 
972

 
110

 
7,516

 
415

U.S. corporate private securities
951

 
21

 
1,397

 
47

 
888

 
102

 
3,236

 
170

Foreign corporate public securities and foreign governments
992

 
28

 
1,387

 
91

 
314

 
48

 
2,693

 
167

Foreign corporate private securities
859

 
14

 
1,271

 
99

 
403

 
39

 
2,533

 
152

Residential mortgage-backed
500

 
9

 
397

 
9

 
602

 
35

 
1,499

 
53

Commercial mortgage-backed
854

 
13

 
701

 
20

 
550

 
22

 
2,105

 
55

Other asset-backed
834

 
21

 
602

 
25

 
98

 
2

 
1,534

 
48

Total
$
7,831

 
$
188

 
$
10,005

 
$
524

 
$
4,162

 
$
372

 
$
21,998

 
$
1,084


*Less than $1.

Of the unrealized capital losses aged more than twelve months, the average market value of the related fixed maturities was 95.6% and 91.8% of the average book value as of March 31, 2019 and December 31, 2018, respectively.


 
24
 

Table of Contents
Voya Financial, 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%
March 31, 2019
 
 
 
 
 
 
 
 
 
 
 
Six months or less below amortized cost
$
2,371

 
$
70

 
$
58

 
$
19

 
358

 
14

More than six months and twelve months or less below amortized cost
1,888

 
—

 
44

 
—

 
264

 
4

More than twelve months below amortized cost
6,684

 
137

 
228

 
41

 
1,001

 
12

Total
$
10,943

 
$
207

 
$
330

 
$
60

 
1,623

 
30

 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
Six months or less below amortized cost
$
8,131

 
$
197

 
$
204

 
$
50

 
1,023

 
30

More than six months and twelve months or less below amortized cost
10,364

 
117

 
473

 
44

 
1,314

 
9

More than twelve months below amortized cost
4,154

 
119

 
271

 
42

 
702

 
11

Total
$
22,649

 
$
433

 
$
948

 
$
136

 
3,039

 
50



 
25
 

Table of Contents
Voya Financial, 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%
March 31, 2019
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasuries
$
90

 
$
—

 
$
1

 
$
—

 
18

 
—

State, municipalities and political subdivisions
260

 
—

 
7

 
—

 
66

 
—

U.S. corporate public securities
3,047

 
60

 
112

 
21

 
404

 
3

U.S. corporate private securities
1,414

 
93

 
39

 
26

 
111

 
2

Foreign corporate public securities and foreign governments
1,296

 
49

 
51

 
12

 
160

 
6

Foreign corporate private securities
1,037

 
—

 
30

 
—

 
67

 
—

Residential mortgage-backed
1,269

 
3

 
28

 
1

 
346

 
18

Commercial mortgage-backed
1,194

 
—

 
35

 
—

 
186

 
—

Other asset-backed
1,336

 
2

 
27

 
—

 
265

 
1

Total
$
10,943

 
$
207

 
$
330

 
$
60

 
1,623

 
30

 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasuries
$
120

 
$
—

 
$
2

 
$
—

 
24

 
—

State, municipalities and political subdivisions
786

 
—

 
22

 
—

 
146

 
—

U.S. corporate public securities
7,807

 
124

 
376

 
39

 
1,053

 
10

U.S. corporate private securities
3,312

 
94

 
139

 
31

 
253

 
2

Foreign corporate public securities and foreign governments
2,750

 
110

 
139

 
28

 
376

 
10

Foreign corporate private securities
2,590

 
95

 
117

 
35

 
160

 
6

Residential mortgage-backed
1,551

 
1

 
52

 
1

 
414

 
16

Commercial mortgage-backed
2,160

 
—

 
55

 
—

 
320

 
1

Other asset-backed
1,573

 
9

 
46

 
2

 
293

 
5

Total
$
22,649

 
$
433

 
$
948

 
$
136

 
3,039

 
50





 
26
 

Table of Contents
Voya Financial, Inc.
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 

The following tables summarize loan-to-value, credit enhancement and fixed floating rate details for Residential Mortgage-Backed Securities ("RMBS") and Other Asset-Backed Securities ("ABS") in a gross unrealized loss position as of the dates indicated:
 
Loan-to-Value Ratio
 
Amortized Cost
 
Unrealized Capital Losses
March 31, 2019
< 20%
 
> 20%
 
< 20%
 
> 20%
RMBS and Other ABS(1)
 
 
 
 
 
 
 
Non-agency RMBS > 100%
$
—

 
$
—

 
$
—

 
$
—

Non-agency RMBS > 90% - 100%
—

 
—


—

 
—

Non-agency RMBS 80% - 90%
—

 
1

 
—

 
—

Non-agency RMBS < 80%
677

 
1

 
11

 
—

Agency RMBS
599

 
1

 
17

 
1

Other ABS (Non-RMBS)
1,329

 
2

 
27

 
—

Total RMBS and Other ABS
$
2,605

 
$
5

 
$
55

 
$
1

 
 
 
 
 
 
 
 
 
Credit Enhancement Percentage
 
Amortized Cost
 
Unrealized Capital Losses
March 31, 2019
< 20%
 
> 20%
 
< 20%
 
> 20%
RMBS and Other ABS(1)
 
 
 
 
 
 
 
Non-agency RMBS 10% +
$
241

 
$
—

 
$
4

 
$
—

Non-agency RMBS > 5% - 10%
3

 
—

 
—

 
—

Non-agency RMBS > 0% - 5%
385

 
—

 
5

 
—

Non-agency RMBS 0%
48

 
2

 
2

 
—

Agency RMBS
599

 
1

 
17

 
1

Other ABS (Non-RMBS)
1,329

 
2

 
27

 
—

Total RMBS and Other ABS
$
2,605

 
$
5

 
$
55

 
$
1

 
 
 
 
 
 
 
 
 
Fixed Rate/Floating Rate
 
Amortized Cost
 
Unrealized Capital Losses
March 31, 2019
< 20%
 
> 20%
 
< 20%
 
> 20%
Fixed Rate
$
827

 
$
4

 
$
22

 
$
—

Floating Rate
1,778

 
1

 
33

 
1

Total
$
2,605

 
$
5

 
$
55

 
$
1


(1) For purposes of this table, subprime mortgages are included in Non-agency RMBS categories.




 
27
 

Table of Contents
Voya Financial, Inc.
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 

 
Loan-to-Value Ratio
 
Amortized Cost
 
Unrealized Capital Losses
December 31, 2018
< 20%
 
> 20%
 
< 20%
 
> 20%
RMBS and Other ABS(1)
 
 
 
 
 
 
 
Non-agency RMBS > 100%
$
—

 
$
—

 
$
—

 
$
—

Non-agency RMBS > 90% - 100%
—

 
—

 
—

 
—

Non-agency RMBS 80% - 90%
—

 
—

 
—

 
—

Non-agency RMBS < 80%
759

 
—

 
19

 
—

Agency RMBS
806

 
1

 
33

 
1

Other ABS (Non-RMBS)
1,559

 
9

 
46

 
2

Total RMBS and Other ABS
$
3,124

 
$
10

 
$
98

 
$
3

 
 
 
 
 
 
 
 
 
Credit Enhancement Percentage
 
Amortized Cost
 
Unrealized Capital Losses
December 31, 2018
< 20%
 
> 20%
 
< 20%
 
> 20%
RMBS and Other ABS(1)
 
 
 
 
 
 
 
Non-agency RMBS 10% +
$
332

 
$
—

 
$
8

 
$
—

Non-agency RMBS > 5% - 10%
10

 
—

 
—

 
—

Non-agency RMBS > 0% - 5%
376

 
—

 
9

 
—

Non-agency RMBS 0%
41

 
—

 
2

 
—

Agency RMBS
806

 
1

 
33

 
1

Other ABS (Non-RMBS)
1,559

 
9

 
46

 
2

Total RMBS and Other ABS
$
3,124

 
$
10

 
$
98

 
$
3

 
 
 
 
 
 
 
 
 
Fixed Rate/Floating Rate
 
Amortized Cost
 
Unrealized Capital Losses
December 31, 2018
< 20%
 
> 20%
 
< 20%
 
> 20%
Fixed Rate
$
1,179

 
$
9

 
$
36

 
$
3

Floating Rate
1,945

 
1

 
62

 
—

Total
$
3,124

 
$
10

 
$
98

 
$
3

(1) For purposes of this table, subprime mortgages are included in Non-agency RMBS categories.

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.

 
28
 

Table of Contents
Voya Financial, 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 March 31, 2019, the Company did not have any new commercial mortgage loan troubled debt restructuring and had one new private placement troubled debt restructuring with a pre-modification cost basis of $124 and post-modification carrying value of $95. As of December 31, 2018 the Company did not have any new commercial mortgage loan or private placement troubled debt restructuring.

As of March 31, 2019 and December 31, 2018, 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 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. 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:
 
March 31, 2019
 
December 31, 2018
 
Impaired
 
Non Impaired
 
Total
 
Impaired
 
Non Impaired
 
Total
Commercial mortgage loans
$
9

 
$
8,508

 
$
8,517

 
$
4

 
$
8,674

 
$
8,678

Collective valuation allowance for losses
N/A

 
(1
)
 
(1
)
 
N/A

 
(2
)
 
(2
)
Total net commercial mortgage loans
$
9

 
$
8,507

 
$
8,516

 
$
4

 
$
8,672

 
$
8,676


N/A - Not Applicable

There was one impairment of $2 on the mortgage loan portfolio for the three months ended March 31, 2019. There were no impairments on the mortgage loan portfolio for the three months ended March 31, 2018.

The following table summarizes the activity in the allowance for losses for commercial mortgage loans for the periods indicated:
 
March 31, 2019
 
December 31, 2018
Collective valuation allowance for losses, balance at January 1
$
2

 
$
3

Addition to (reduction of) allowance for losses
(1
)
 
(1
)
Collective valuation allowance for losses, end of period
$
1

 
$
2




 
29
 

Table of Contents
Voya Financial, 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:
 
March 31, 2019
 
December 31, 2018
Impaired loans without allowances for losses
$
9

 
$
4

Less: Allowances for losses on impaired loans
—

 
—

Impaired loans, net
$
9

 
$
4

Unpaid principal balance of impaired loans
$
13

 
$
5



As of March 31, 2019 and December 31, 2018, the Company did not have any impaired loans with allowances for losses.

As of March 31, 2019, the Company had one loan greater than 60 days in arrears, which is also in non-accrual status and in process of foreclosure, with an amortized cost of $5. There were no loans greater than 60 days in arrears and no mortgage loans in the Company's portfolio in process of foreclosure as of December 31, 2018.
The following table presents 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 March 31,
 
2019
 
2018
Impaired loans, average investment during the period (amortized cost) (1)
$
7

 
$
4

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.


 
30
 

Table of Contents
Voya Financial, Inc.
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 

The following table presents the LTV and DSC ratios as of the dates indicated:
 
 
 
 
Recorded Investment
 
 
 
 
Debt Service Coverage Ratios
 
 
 
 
> 1.5x
 
>1.25x - 1.5x
 
>1.0x - 1.25x
 
< 1.0x
 
Commercial mortgage loans secured by land or construction loans
 
Total
 
% of Total
March 31, 2019(1)
 
 
 
 
 
 
 
 
 
 
 
 
 
Loan-to-Value Ratios:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
0%
-
50%
$
729

 
$
46

 
$
25

 
$
2

 
$
—

 
$
802

 
9.4
%
>
50%
-
60%
1,846

 
38

 
55

 
19

 
—

 
1,958

 
23.0
%
>
60%
-
70%
3,543

 
553

 
611

 
205

 
40

 
4,952

 
58.1
%
>
70%
-
80%
322

 
236

 
81

 
79

 
9

 
727

 
8.5
%
>
80%
and above
8

 
27

 
11

 
8

 
24

 
78

 
1.0
%
Total
$
6,448

 
$
900

 
$
783

 
$
313

 
$
73

 
$
8,517

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Recorded Investment
 
 
 
 
Debt Service Coverage Ratios
 
 
 
 
> 1.5x
 
>1.25x - 1.5x
 
>1.0x - 1.25x
 
< 1.0x
 
Commercial mortgage loans secured by land or construction loans
 
Total
 
% of Total
December 31, 2018(1)
 
 
 
 
 
 
 
 
 
 
 
 
 
Loan-to-Value Ratios:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
0%
-
50%
$
724

 
$
53

 
$
25

 
$
2

 
$
—

 
$
804

 
9.3
%
>
50%
-
60%
1,889

 
61

 
51

 
6

 
—

 
2,007

 
23.1
%
>
60%
-
70%
3,767

 
520

 
716

 
63

 
39

 
5,105

 
58.8
%
>
70%
-
80%
402

 
160

 
102

 
24

 
6

 
694

 
8.0
%
>
80%
and above
18

 
7

 
11

 
8

 
24

 
68

 
0.8
%
Total
$
6,800

 
$
801

 
$
905

 
$
103

 
$
69

 
$
8,678

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

 
 
 
 
 
 
 
 



 
31
 

Table of Contents
Voya Financial, Inc.
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 

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:
 
March 31, 2019
 
December 31, 2018
 
Gross Carrying Value
 
% of
Total
 
Gross Carrying Value
 
% of
Total
Commercial Mortgage Loans by U.S. Region:
 
 
 
 
 
 
 
Pacific
$
2,091

 
24.5
%
 
$
2,078

 
23.8
%
South Atlantic
1,674

 
19.6
%
 
1,771

 
20.4
%
Middle Atlantic
1,522

 
17.9
%
 
1,525

 
17.6
%
West South Central
941

 
11.1
%
 
952

 
11.0
%
Mountain
893

 
10.5
%
 
892

 
10.3
%
East North Central
787

 
9.2
%
 
833

 
9.6
%
New England
170

 
2.0
%
 
154

 
1.8
%
West North Central
355

 
4.2
%
 
390

 
4.5
%
East South Central
84

 
1.0
%
 
83

 
1.0
%
Total Commercial mortgage loans
$
8,517

 
100.0
%
 
$
8,678

 
100.0
%

 
March 31, 2019
 
December 31, 2018
 
Gross Carrying Value
 
% of
Total
 
Gross Carrying Value
 
% of
Total
Commercial Mortgage Loans by Property Type:
 
 
 
 
 
 
 
Retail
$
2,442

 
28.6
%
 
$
2,482

 
28.6
%
Industrial
2,035

 
23.9
%
 
2,074

 
23.9
%
Apartments
2,079

 
24.4
%
 
2,110

 
24.3
%
Office
1,248

 
14.7
%
 
1,316

 
15.2
%
Hotel/Motel
231

 
2.7
%
 
210

 
2.4
%
Other
407

 
4.8
%
 
411

 
4.7
%
Mixed Use
75

 
0.9
%
 
75

 
0.9
%
Total Commercial mortgage loans
$
8,517

 
100.0
%
 
$
8,678

 
100.0
%

The following table presents mortgages by year of origination as of the dates indicated:
 
March 31, 2019 (1)
 
December 31, 2018 (1)
Year of Origination:
 
 
 
2019
$
163

 
$
—

2018
743

 
741

2017
1,447

 
1,517

2016
1,386

 
1,446

2015
1,059

 
1,077

2014
1,186

 
1,215

2013 and prior
2,533

 
2,682

Total Commercial mortgage loans
$
8,517

 
$
8,678

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


 
32
 

Table of Contents
Voya Financial, Inc.
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 

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.

The following table identifies 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 March 31,
 
2019
 
2018
 
Impairment
 
No. of
Securities
 
Impairment
 
No. of
Securities
State, municipalities and political subdivisions
$
—

 
—

 
$
—

 
—

U.S. corporate public securities
—

 
—

 
—

 
—

Foreign corporate public securities and foreign governments(1)
—

 
—

 
—

 
—

Foreign corporate private securities(1)
30

 
3

 
14

 
1

Residential mortgage-backed
—

*
19

 
—

*
12

Commercial mortgage-backed
—

 
—

 
—

 
—

Other asset-backed
1

 
2

 
—

 
—

Total
$
31

 
24

 
$
14

 
13

(1) Primarily U.S. dollar denominated.

 
 
 
 
 
 
 
*Less than $1


The above tables include $31 and $14 of write-downs related to credit impairments for the three months ended March 31, 2019 and March 31, 2018, respectively, in other-than-temporary impairments, which are recognized in the Condensed Consolidated Statements of Operations. The remaining immaterial write-downs for the three months ended March 31, 2019 and 2018 are related to intent impairments.

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.

The following table presents 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 March 31,
 
2019
 
2018
Balance at January 1
$
22

 
$
40

Additional credit impairments:
 
 
 
On securities previously impaired
—

 
—

Reductions:
 
 
 
Increase in cash flows
1

 
—

Securities sold, matured, prepaid or paid down
2

 
16

Balance at March 31
$
19

 
$
24




 
33
 

Table of Contents
Voya Financial, Inc.
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 

Net Investment Income

The following table summarizes Net investment income for the periods indicated:
 
Three Months Ended March 31,
 
2019
 
2018
Fixed maturities
$
685

 
$
663

Equity securities
4

 
3

Mortgage loans on real estate
96

 
97

Policy loans
23

 
25

Short-term investments and cash equivalents
4

 
4

Other
24

 
49

Gross investment income
836

 
841

Less: investment expenses
21

 
18

Net investment income
$
815

 
$
823



As of March 31, 2019 and December 31, 2018, the Company had $1 and $5, 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.

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. Net realized capital gains (losses) also include 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 March 31,
 
2019
 
2018
Fixed maturities, available-for-sale, including securities pledged
$
(17
)
 
$
(40
)
Fixed maturities, at fair value option
85

 
(190
)
Equity securities
7

 
(3
)
Derivatives
1

 
17

Embedded derivatives - fixed maturities
1

 
(7
)
Guaranteed benefit derivatives
(58
)
 
28

Other investments
(2
)
 
14

Net realized capital gains (losses)
$
17

 
$
(181
)


For the three months ended March 31, 2019 and March 31, 2018, the change in the fair value of equity securities still held as of March 31, 2019 was $7 and $(3), respectively.


 
34
 

Table of Contents
Voya Financial, Inc.
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 

Proceeds from the sale of fixed maturities, available-for-sale, and equity securities and the related gross realized gains and losses, before tax, were as follows for the periods indicated:
 
Three Months Ended March 31,
 
2019
 
2018
Proceeds on sales
$
1,856

 
$
1,580

Gross gains
35

 
11

Gross losses
30

 
26



4.    Derivative Financial Instruments

The Company enters into the following types of derivatives:

Interest rate caps and floors: 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. The Company uses interest rate floor contracts to hedge interest rate exposure if rates decrease below a specified level. The Company pays an upfront premium to purchase these caps and floors. The Company utilizes these contracts in non-qualifying hedging relationships.

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

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.

Total return swaps: The Company uses total return swaps as a hedge against a decrease in variable annuity account values, which are invested in certain indices. Using total return swaps, the Company agrees with another party to exchange, at specified intervals, the difference between the economic risk and reward of assets or a market index and the LIBOR rate, calculated by reference to an agreed upon notional principal amount. No cash is exchanged at the onset of the contracts. Cash is paid and received over the life of the contract based upon the terms of the swaps. The Company utilizes these contracts in non-qualifying hedging relationships.
 
Currency forwards: The Company utilizes currency forward contracts to hedge currency exposure related to its invested assets. The Company utilizes these contracts in non-qualifying hedging relationships.

Forwards: The Company uses forward contracts to hedge certain invested assets against movement in interest rates, particularly mortgage rates. The Company uses To Be Announced mortgage-backed securities as an economic hedge against rate movements. The Company utilizes forward contracts in non-qualifying hedging relationships.

Futures: Futures contracts are used to hedge against a decrease in certain equity indices. Such decreases may correlate to a decrease in variable annuity account values which would increase the possibility of the Company incurring an expense for guaranteed

 
35
 

Table of Contents
Voya Financial, Inc.
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 

benefits in excess of account values. The Company also 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, and interest rate options to hedge against an increase in the interest rate benchmarked crediting strategies within FIA contracts. Such increases may result in increased payments to the holders of the FIA and IUL contracts. The Company pays an upfront premium to purchase these options. The Company utilizes these options in non-qualifying hedging relationships.

Currency Options:  The Company uses currency option contracts to hedge currency exposure related to its invested assets. The Company utilizes these contracts 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") rules related to the variation margin payments, the Company is required to adjust the derivative balances with the variation margin payments related to its cleared derivatives executed through CME.


 
36
 

Table of Contents
Voya Financial, 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:
 
March 31, 2019
 
December 31, 2018
 
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
$
44

 
$
—

 
$
—

 
$
44

 
$
—

 
$
—

Foreign exchange contracts
778

 
9

 
26

 
744

 
14

 
23

Derivatives: Non-qualifying for hedge accounting(1)
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
22,571

 
136

 
203

 
24,085

 
140

 
109

Foreign exchange contracts
111

 
1

 
—

 
30

 
—

 
—

Equity contracts
1,815

 
168

 
11

 
1,756

 
93

 
4

Credit contracts
258

 
—

 
3

 
281

 
—

 
3

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

 
26

 
—

 
N/A

 
26

 
—

Within products
N/A

 
—

 
187

 
N/A

 
—

 
126

Within reinsurance agreements
N/A

 
—

 
74

 
N/A

 
—

 
21

Total
 
 
$
340

 
$
504

 
 
 
$
273

 
$
286

(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 March 31, 2019 and December 31, 2018. 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.


 
37
 

Table of Contents
Voya Financial, 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:
 
March 31, 2019
 
Notional Amount
 
Asset Fair Value
 
Liability Fair Value
Credit contracts
$
258

 
$
—

 
$
3

Equity contracts
1,687

 
169

 
10

Foreign exchange contracts
889

 
10

 
26

Interest rate contracts
20,295

 
134

 
203

 
 
 
313

 
242

Counterparty netting(1)
 
 
(130
)
 
(130
)
Cash collateral netting(1)
 
 
(153
)
 
(94
)
Securities collateral netting(1)
 
 
(13
)
 
(17
)
Net receivables/payables
 
 
$
17

 
$
1

(1) Represents the netting of receivable balances with payable balances, net of collateral, for the same counterparty under eligible netting agreements.
 
 
 
 
 
 
 
December 31, 2018
 
Notional Amount
 
Asset Fair Value
 
Liability Fair Value
Credit contracts
$
281

 
$
—

 
$
3

Equity contracts
1,616

 
93

 
3

Foreign exchange contracts
774

 
14

 
23

Interest rate contracts
21,575

 
140

 
109

 
 
 
247

 
138

Counterparty netting(1)
 
 
(113
)
 
(113
)
Cash collateral netting(1)
 
 
(112
)
 
(9
)
Securities collateral netting(1)
 
 
(11
)
 
(15
)
Net receivables/payables
 
 
$
11

 
$
1

(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 and repurchase 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 March 31, 2019, the Company held $144 and pledged $82 of net cash collateral related to OTC derivative contracts and cleared derivative contracts, respectively. As of December 31, 2018, the Company held $91 and $16 of net cash collateral related to OTC derivative contracts and cleared derivative contracts, respectively. In addition, as of March 31, 2019, the Company delivered $193 of securities and held $13 of securities as collateral. As of December 31, 2018, the Company delivered $187 of securities and held $11 of securities as collateral.



 
38
 

Table of Contents
Voya Financial, Inc.
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 

The location and effect of derivatives qualifying for hedge accounting on the Condensed Consolidated Statements of Operations and Condensed Consolidated Statements of Comprehensive Income are as follows for the period indicated:
 
Three Months Ended March 31, 2019
 
Amount of Gain or (Loss) Recognized in Other Comprehensive Income
 
Location of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income into Income
 
Amount of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income
Derivatives: Qualifying for hedge accounting
 
 
 
 
 
Cash flow hedges:
 
 
 
 
 
Interest Rate Contracts
$
1

 
Net investment income
 
$
—

Foreign Exchange Contracts
(10
)
 
Net investment income
 
3


The location and amount of gain (loss) recognized in the Condensed Consolidated Statements of Operations for derivatives qualifying for hedge accounting are as follows for the period indicated:
 
Three Months Ended March 31, 2019
 
Net Investment Income
 
Other net realized capital gains/(losses)
Total amounts of line items presented in the statement of operations in which the effects of cash flow hedges are recorded
$
815

 
$
50

Derivatives: Qualifying for hedge accounting
 
 
 
Cash flow hedges:
 
 
 
Foreign exchange contracts:
 
 
 
Gain (loss) reclassified from accumulated other comprehensive income into income
3

 
—


The location and effect of derivatives not designated as hedging instruments on the Condensed Consolidated Statements of Operations are as follows for the period indicated:
 
Location of Gain or (Loss) Recognized in Income on Derivative
 
Three Months Ended March 31,
 
 
2019
 
2018
Derivatives: Non-qualifying for hedge accounting
 
 
 
 
 
Interest rate contracts
Other net realized capital gains (losses)
 
$
(52
)
 
$
21

Foreign exchange contracts
Other net realized capital gains (losses)
 
2

 
(2
)
Equity contracts
Other net realized capital gains (losses)
 
47

 
(4
)
Credit contracts
Other net realized capital gains (losses)
 
4

 
—

Embedded derivatives and Managed custody guarantees:
 
 
 
 
 
Within fixed maturity investments
Other net realized capital gains (losses)
 
1

 
(7
)
Within products
Other net realized capital gains (losses)
 
(58
)
 
28

Within reinsurance agreements
Policyholder benefits
 
(59
)
 
55

Total
 
 
$
(115
)
 
$
91


 
 
 
 
 
 
 
 
 
 
 


 
39
 

Table of Contents
Voya Financial, Inc.
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 

5.    Fair Value Measurements (excluding Consolidated Investment Entities)

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. 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. Financial assets and liabilities recorded at fair value on the Condensed Consolidated Balance Sheets are categorized as follows:

•
Level 1 - Unadjusted quoted prices for identical assets or liabilities in an active market. The Company defines an active market as a market in which transactions take place with sufficient frequency and volume to provide pricing information on an ongoing basis.
•
Level 2 - Quoted prices in markets that are not active or valuation techniques that require inputs that are observable either directly or indirectly for substantially the full term of the asset or liability.
•
Level 3 - Prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. 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.



 
40
 

Table of Contents
Voya Financial, 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 March 31, 2019:
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Fixed maturities, including securities pledged:
 
 
 
 
 
 
 
U.S. Treasuries
$
1,635

 
$
566

 
$
—

 
$
2,201

U.S. Government agencies and authorities
—

 
248

 
—

 
248

State, municipalities and political subdivisions
—

 
1,715

 
—

 
1,715

U.S. corporate public securities
—

 
20,078

 
109

 
20,187

U.S. corporate private securities
—

 
5,055

 
1,565

 
6,620

Foreign corporate public securities and foreign governments(1)
—

 
5,705

 
9

 
5,714

Foreign corporate private securities(1)
—

 
5,007

 
266

 
5,273

Residential mortgage-backed securities
—

 
5,064

 
49

 
5,113

Commercial mortgage-backed securities
—

 
3,811

 
16

 
3,827

Other asset-backed securities
—

 
2,124

 
144

 
2,268

Total fixed maturities, including securities pledged
1,635

 
49,373

 
2,158

 
53,166

Equity securities
171

 
—

 
184

 
355

Derivatives:
 
 
 
 
 
 
 
Interest rate contracts
1

 
135

 
—

 
136

Foreign exchange contracts
—

 
10

 
—

 
10

Equity contracts
—

 
31

 
137

 
168

Credit contracts
—

 
—

 
—

 
—

Cash and cash equivalents, short-term investments and short-term investments under securities loan agreements
3,090

 
21

 
—

 
3,111

Assets held in separate accounts
71,896

 
5,686

 
67

 
77,649

Total assets
$
76,793

 
$
55,256

 
$
2,546

 
$
134,595

Percentage of Level to total
57
%
 
41
%
 
2
%
 
100
%
Liabilities:
 
 
 
 
 
 
 
Derivatives:
 
 
 
 
 
 
 
Guaranteed benefit derivatives:
 
 
 
 
 
 
 
IUL
$
—

 
$
—

 
$
146

 
$
146

Stabilizer and MCGs
—

 
—

 
4

 
4

Other(2)
—

 
—

 
37

 
37

Other derivatives:
 
 
 
 
 
 
 
Interest rate contracts
—

 
203

 
—

 
203

Foreign exchange contracts
—

 
26

 
—

 
26

Equity contracts
1

 
10

 
—

 
11

Credit contracts
—

 
3

 
—

 
3

Embedded derivative on reinsurance
—

 
74

 
—

 
74

Total liabilities
$
1

 
$
316

 
$
187

 
$
504

(1) Primarily U.S. dollar denominated.
(2)Includes Guaranteed minimum withdrawal benefits with life payouts ("GMWBL"), Guaranteed minimum withdrawal benefits ("GMWB") and Fixed Indexed Annuities ("FIA").

 
41
 

Table of Contents
Voya Financial, 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, 2018:
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Fixed maturities, including securities pledged:
 
 
 
 
 
 
 
U.S. Treasuries
$
1,753

 
$
542

 
$
—

 
$
2,295

U.S. Government agencies and authorities
—

 
242

 
—

 
242

State, municipalities and political subdivisions
—

 
1,659

 
—

 
1,659

U.S. corporate public securities
—

 
19,804

 
44

 
19,848

U.S. corporate private securities
—

 
4,839

 
1,393

 
6,232

Foreign corporate public securities and foreign governments(1)
—

 
5,444

 
11

 
5,455

Foreign corporate private securities(1)
—

 
4,843

 
251

 
5,094

Residential mortgage-backed securities
—

 
4,775

 
28

 
4,803

Commercial mortgage-backed securities
—

 
3,402

 
14

 
3,416

Other asset-backed securities
—

 
1,939

 
138

 
2,077

Total fixed maturities, including securities pledged
1,753

 
47,489

 
1,879

 
51,121

Equity securities
144

 
—

 
129

 
273

Derivatives:
 
 
 
 
 
 
 
Interest rate contracts
—

 
140

 
—

 
140

Foreign exchange contracts
—

 
14

 
—

 
14

Equity contracts
—

 
10

 
83

 
93

Credit contracts
—

 
—

 
—

 
—

Cash and cash equivalents, short-term investments and short-term investments under securities loan agreements
3,362

 
28

 
—

 
3,390

Assets held in separate accounts
65,361

 
5,805

 
62

 
71,228

Total assets
$
70,620

 
$
53,486

 
$
2,153

 
$
126,259

Percentage of Level to total
56
%
 
42
%
 
2
%
 
100
%
Liabilities:
 
 
 
 
 
 
 
Derivatives:
 
 
 
 
 
 
 
Guaranteed benefit derivatives:
 
 
 
 
 
 
 
IUL
—

 
—

 
82

 
82

Stabilizer and MCGs
—

 
—

 
5

 
5

Other(2)
—

 
—

 
39

 
39

Other derivatives:
 
 
 
 
 
 
 
Interest rate contracts
—

 
109

 
—

 
109

Foreign exchange contracts
—

 
23

 
—

 
23

Equity contracts
1

 
3

 
—

 
4

Credit contracts
—

 
3

 
—

 
3

Embedded derivative on reinsurance
—

 
21

 
—

 
21

Total liabilities
$
1

 
$
159

 
$
126

 
$
286

(1)Primarily U.S. dollar denominated.
(2)Includes GMWBL, GMWB and FIA.

 
42
 

Table of Contents
Voya Financial, 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.


 
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Table of Contents
Voya Financial, 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.

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 Company records reserves for annuity contracts containing GMWBL and GMWB riders. The guarantee is an embedded derivative and is required to be accounted for separately from the host variable annuity 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 using stochastic techniques under a variety of market return scenarios and other market implied assumptions. These derivatives are classified as Level 3 liabilities in the fair value hierarchy.

The index-crediting feature in the Company's FIA and IUL contracts 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

 
44
 

Table of Contents
Voya Financial, Inc.
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 

related to the projected cash flows, including benefits and related contract charges, over the anticipated life of the related contracts for FIAs and over the current indexed term for IULs. The cash flow estimates are produced by market implied assumptions. These derivatives are classified as Level 3 liabilities in the fair value hierarchy.

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 Company's GMWBL, GMWB, FIA, IUL and Stabilizer embedded derivative liabilities and the stand-alone derivative for MCG includes an adjustment to reflect the risk that these obligations will not be fulfilled ("nonperformance risk"). The nonperformance risk adjustment incorporates a blend of observable, similarly rated peer holding company credit spreads, adjusted to reflect the credit quality of the individual insurance subsidiary that issued the guarantee, as well as an adjustment to reflect the non-default spreads and the priority and recovery rates 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 derivative 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 months ended March 31, 2019 and 2018. 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.

 
45
 

Voya Financial, 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 March 31, 2019
 
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 March 31
 
Change In
Unrealized
Gains
(Losses)
Included in
Earnings(4)
 
 
Net
Income
 
OCI
 
 
 
 
 
 
 
 
Fixed maturities, including securities pledged:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. corporate public securities
$
44

 
$
—

 
$
2

 
$
3

 
$
—

 
$
—

 
$
—

 
$
60

 
$
—

 
$
109

 
$
—

U.S. corporate private securities
1,393

 
—

 
54

 
148

 
—

 
(13
)
 
(17
)
 
—

 
—

 
1,565

 
—

Foreign corporate public securities and foreign governments(1)
11

 
—

 
(2
)
 
—

 
—

 
—

 
—

 
—

 
—

 
9

 
—

Foreign corporate private securities(1)
251

 
(29
)
 
39

 
98

 
—

 
(93
)
 
—

 
—

 
—

 
266

 
—

Residential mortgage-backed securities
28

 
(3
)
 
—

 
24

 
—

 
—

 
—

 
—

 
—

 
49

 
(3
)
Commercial mortgage-backed securities
14

 
—

 
—

 
3

 
—

 
—

 
(1
)
 
—

 
—

 
16

 
—

Other asset-backed securities
138

 
—

 
1

 
31

 
—

 
—

 
(1
)
 
—

 
(25
)
 
144

 
—

Total fixed maturities, including securities pledged
1,879

 
(32
)
 
94

 
307

 
—

 
(106
)
 
(19
)
 
60

 
(25
)
 
2,158

 
(3
)
Equity securities
129

 
6

 
—

 
49

 
—

 
—

 
—

 
—

 
—

 
184

 
6

Derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Guaranteed benefit derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
IUL(2)
(82
)
 
(63
)
 
—

 
—

 
(13
)
 
—

 
12

 
—

 
—

 
(146
)
 
—

Stabilizer and MCGs (2)
(5
)
 
1

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(4
)
 
—

Other (2)(6)
(39
)
 
4

 
—

 
—

 
—

 
—

 
(2
)
 
—

 
—

 
(37
)
 
—

Other derivatives, net
83

 
52

 
—

 
10

 
—

 
—

 
(8
)
 
—

 
—

 
137

 
54

Assets held in separate accounts (5)
62

 
1

 
—

 
6

 
—

 
—

 
—

 
3

 
(5
)
 
67

 
—

(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 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 March 31, 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 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.
(6) Includes GMWBL, GMWB, and FIA.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
46
 

Voya Financial, 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 March 31, 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 March 31
 
Change In
Unrealized
Gains
(Losses)
Included in
Earnings(4)
 
 
Net
Income
 
OCI
 
 
 
 
 
 
 
 
Fixed maturities, including securities pledged:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. corporate public securities
$
57

 
$
—

 
$
—

 
$
—

 
$
—

 
$
(21
)
 
$
—

 
$
—

 
$
—

 
$
36

 
$
—

U.S. corporate private securities
1,127

 
—

 
(26
)
 
31

 
—

 
—

 
(22
)
 
38

 
—

 
1,148

 
—

Foreign corporate public securities and foreign governments (1)
11

 
—

 
1

 
—

 
—

 
—

 
—

 
—

 
—

 
12

 
—

Foreign corporate private securities (1)
169

 
(14
)
 
24

 
—

 
—

 
—

 
—

 
—

 
—

 
179

 
(14
)
Residential mortgage-backed securities
42

 
(3
)
 
—

 
64

 
—

 
—

 
—

 
—

 
(5
)
 
98

 
(3
)
Commercial mortgage-backed securities
17

 
—

 
—

 
8

 
—

 
—

 
—

 
—

 
(17
)
 
8

 
—

Other asset-backed securities
92

 
—

 
(1
)
 
143

 
—

 
—

 
(1
)
 
3

 
(37
)
 
199

 
—

Total fixed maturities, including securities pledged
1,515

 
(17
)
 
(2
)
 
246

 
—

 
(21
)
 
(23
)
 
41

 
(59
)
 
1,680

 
(17
)
Equity securities
102

 
(3
)
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
99

 
(3
)
Derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Guaranteed benefit derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
IUL(2)
(159
)
 
4

 
—

 
—

 
(12
)
 
—

 
17

 
—

 
—

 
(150
)
 
—

Stabilizer and MCGs(2)
(97
)
 
22

 
—

 
—

 
(2
)
 
—

 
—

 
—

 
—

 
(77
)
 
—

Other (2)(6)
(50
)
 
2

 
—

 
—

 
—

 
—

 
3

 
—

 
—

 
(45
)
 
—

Other derivatives, net
159

 
(2
)
 
—

 
10

 
—

 
—

 
(16
)
 
—

 
—

 
151

 
(8
)
Assets held in separate accounts(5)
11

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
11

 
—

(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 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 March 31, 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 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.
(6) Includes GMWBL, GMWB, and FIA.

 
47
 

Table of Contents
Voya Financial, Inc.
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 

For the three months ended March 31, 2019 and 2018, the transfers in and out of Level 3 for fixed maturities 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 IULs include nonperformance risk and policyholder behavior assumptions, such as lapses.

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 holding company credit spreads, adjusted to reflect the credit quality of the individual insurance company subsidiary that issued the guarantee as well as an adjustment to reflect the non-default spreads and the priority and recovery rates 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.

The following table presents the unobservable inputs for Level 3 fair value measurements as of March 31, 2019:
 
 
Range(1)
 
Unobservable Input
 
IUL
 
Stabilizer/MCGs
 
Interest rate implied volatility
 
—

 
0.1% to 5.8%

 
Nonperformance risk
 
0.25% to 0.59%

 
0.25% to .99%

 
Actuarial Assumptions:
 
 
 
 
 
Lapses
 
2% to 10%

 
0% to 50%

(2) 
Policyholder Deposits(3)
 
—

 
0% to 50%

(2) 
Mortality
 
—

(4) 
—

 
(1) 
Represents the range of reasonable assumptions that management has used in its fair value calculations.

 
48
 

Table of Contents
Voya Financial, Inc.
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 

(2) Stabilizer contracts with recordkeeping agreements have a 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%

(3) Measured as a percentage of assets under management or assets under administration.
(4) The mortality rate, along with the associated cost of insurance charges, are based on the 2001 Commissioner's Standard Ordinary table with mortality improvements.

The following table presents the unobservable inputs for Level 3 fair value measurements as of December 31, 2018:
 
 
Range(1)
Unobservable Input
 
IUL
 
Stabilizer/MCGs
 
Interest rate implied volatility
 
—

 
0.1% to 6.5%

 
Nonperformance risk
 
0.38% to 0.84%

 
0.38% to 1.2%

 
Actuarial Assumptions:
 
 
 
 
 
Lapses
 
2% to 10%

 
0% to 50%

(2) 
Policyholder Deposits(3)
 
—

 
0% to 50%

(2) 
Mortality
 
—

(4) 
—

 
(1) 
Represents the range of reasonable assumptions that management has used in its fair value calculations.
(2) Stabilizer contracts with recordkeeping agreements have a 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%

(3) Measured as a percentage of assets under management or assets under administration.
(4) The mortality rate, along with the associated cost of insurance charges, are based on the 2001 Commissioner's Standard Ordinary table with mortality improvements.

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

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

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


 
49
 

Table of Contents
Voya Financial, Inc.
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 

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.

 
50
 

Table of Contents
Voya Financial, 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:
 
March 31, 2019
 
December 31, 2018
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
Assets:
 
 
 
 
 
 
 
Fixed maturities, including securities pledged
$
53,166

 
$
53,166

 
$
51,121

 
$
51,121

Equity securities
355

 
355

 
273

 
273

Mortgage loans on real estate
8,516

 
8,749

 
8,676

 
8,811

Policy loans
1,827

 
1,827

 
1,833

 
1,833

Cash, cash equivalents, short-term investments and short-term investments under securities loan agreements
3,111

 
3,111

 
3,390

 
3,390

Derivatives
314

 
314

 
247

 
247

Other investments
89

 
91

 
90

 
92

Assets held in separate accounts
77,649

 
77,649

 
71,228

 
71,228

Liabilities:
 
 
 
 
 
 
 
Investment contract liabilities:
 
 
 
 
 
 
 
Funding agreements without fixed maturities and deferred annuities(1)
33,805

 
38,132

 
34,053

 
37,052

Funding agreements with fixed maturities
1,254

 
1,248

 
1,209

 
1,197

Supplementary contracts, immediate annuities and other
1,235

 
1,313

 
976

 
960

Derivatives:
 
 
 
 
 
 
 
Guaranteed benefit derivatives:
 
 
 
 
 
 
 
IUL
146

 
146

 
82

 
82

Stabilizer and MCGs
4

 
4

 
5

 
5

Other (2)
37

 
37

 
39

 
39

Other derivatives
243

 
243

 
139

 
139

Short-term debt
1

 
1

 
1

 
1

Long-term debt
3,136

 
3,261

 
3,136

 
3,112

Embedded derivative on reinsurance
74

 
74

 
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.
(2) Includes GMWBL, GMWB and FIA.







 
51
 

Table of Contents
Voya Financial, Inc.
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 

The following table presents the classifications 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
Other investments
Level 2
Funding agreements without fixed maturities and deferred annuities
Level 3
Funding agreements with fixed maturities
Level 2
Supplementary contracts and immediate annuities
Level 3
Short-term debt and Long-term debt
Level 2


6.    Deferred Policy Acquisition Costs and Value of Business Acquired

The following tables present a rollforward of DAC and VOBA for the periods indicated:
 
2019
 
DAC
 
VOBA
 
Total
Balance as of January 1, 2019
$
3,298

 
$
818

 
$
4,116

Deferrals of commissions and expenses
65

 
2

 
67

Amortization:
 
 
 
 
 
Amortization, excluding unlocking
(131
)
 
(36
)
 
(167
)
Unlocking(1)
8

 
15

 
23

Interest accrued
45

 
14

(2) 
59

Net amortization included in Condensed Consolidated Statements of Operations
(78
)
 
(7
)
 
(85
)
Change due to unrealized capital gains/losses on available-for-sale securities
(352
)
 
(146
)
 
(498
)
Balance as of March 31, 2019
$
2,933

 
$
667

 
$
3,600

 
 
 
 
 
 
 
2018
 
DAC
 
VOBA
 
Total
Balance as of January 1, 2018
$
2,818

 
$
556

 
$
3,374

Deferrals of commissions and expenses
49

 
2

 
51

Amortization:
 
 
 
 
 
Amortization, excluding unlocking
(62
)
 
(20
)
 
(82
)
Unlocking(1)
(54
)
 
(26
)
 
(80
)
Interest accrued
46

 
16

(2) 
62

Net amortization included in Condensed Consolidated Statements of Operations
(70
)
 
(30
)
 
(100
)
Change due to unrealized capital gains/losses on available-for-sale securities
287

 
157

 
444

Balance as of March 31, 2018
$
3,084

 
$
685

 
$
3,769


(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 for 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.
(2) Interest accrued at the following rates for VOBA: 3.5% to 7.4% during 2019 and 3.8% to 7.4% during 2018.


 
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Table of Contents
Voya Financial, Inc.
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 

7.     Share-based Incentive Compensation Plans

The Company has provided equity-based compensation awards to its employees under the ING U.S., Inc. 2013 Omnibus Employee Incentive Plan (the "2013 Omnibus Plan") and the Voya Financial, Inc. 2014 Omnibus Employee Incentive Plan (the "2014 Omnibus Plan") (together, the "Omnibus Plans"). As of March 31, 2019, common stock reserved and available for issuance under the 2013 Omnibus Plan and the 2014 Omnibus Plan was 347,663 and 3,486,101 shares, respectively.

The Company offers equity-based awards to Voya Financial, Inc. non-employee directors under the Voya Financial, Inc. 2013 Omnibus Non-Employee Director Incentive Plan ("Director Plan").

Compensation Cost

The following table summarizes share-based compensation expense, which includes expenses related to awards granted under the Omnibus Plans and Director Plan for the periods indicated:
 
Three Months Ended March 31,
 
2019
 
2018
Restricted Stock Unit (RSU) awards
$
17

 
$
19

Performance Stock Unit (PSU) awards
17

 
18

Stock options
2

 
3

Total share-based compensation expense
36

 
40

Income tax benefit
1

 
6

After-tax share-based compensation expense
$
35

 
$
34



Awards Outstanding

The following table summarizes RSU and PSU awards activity under the Omnibus Plans and the Director Plan for the period indicated:
 
RSU Awards
 
PSU Awards
(awards in millions) 
Number of Awards
 
Weighted Average Grant Date Fair Value
 
Number of Awards
 
Weighted Average Grant Date Fair Value
Outstanding as of January 1, 2019
2.4

 
$
43.36

 
2.5

 
$
40.21

Adjustment for PSU performance factor
N/A

 
N/A

 
0.3

 
31.35

Granted
0.8

 
50.03

 
0.7

 
51.64

Vested
(1.1
)
 
39.95

 
(1.2
)
 
28.88

Forfeited
—

*
44.36

 
—

*
43.68

Outstanding as of March 31, 2019
2.1

 
$
47.73

 
2.3

 
$
48.86


* Less than 0.1.


 
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Table of Contents
Voya Financial, Inc.
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 

The following table summarizes the number of options under the Omnibus Plans for the periods indicated:
 
Stock Options
(awards in millions) 
Number of Awards
 
Weighted Average Exercise Price
Outstanding as of January 1, 2019
2.6

 
$
37.60

Granted
1.0

 
50.03

Exercised
(0.2
)
 
37.60

Forfeited
—

 
—

Outstanding as of March 31, 2019
3.4

 
$
41.28

Vested, exercisable, as of March 31, 2019
2.4

 
$
37.60



In February 2019, the Company awarded contingent stock options under the 2014 Omnibus Plan with a per option grant date fair value of $13.78. These options are subject to vesting conditions based on the achievement of specified performance measures, and generally become exercisable one year following satisfaction of the relevant vesting condition. The options have a term of ten years from the grant date.


 
54
 

Table of Contents
Voya Financial, Inc.
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 

8.     Shareholders' Equity

Common Shares

The following table presents the rollforward of common shares used in calculating the weighted average shares utilized in the basic earnings per common share calculation for the periods indicated:
 
Common Shares
(shares in millions) 
Issued
 
Held in Treasury
 
Outstanding
Balance, January 1, 2018
270.0

 
98.0

 
172.0

Common shares issued
—

 
—

 
—

Common shares acquired - share repurchase
—

 
22.8

 
(22.8
)
Share-based compensation
2.4

 
0.6

 
1.8

Balance, December 31, 2018
272.4

 
121.4

 
151.0

Common shares issued
—

 
—

 
—

Common shares acquired - share repurchase
—

 
5.1

 
(5.1
)
Share-based compensation
2.5

 
0.5

 
2.0

Balance, March 31, 2019
274.9

 
127.0

 
147.9



Share Repurchase Program

From time to time, the Company's Board of Directors authorizes the Company to repurchase shares of its common stock. These authorizations permit stock repurchases up to a prescribed dollar amount and generally may be accomplished through various means, including, without limitation, open market transactions, privately negotiated transactions, forward, derivative, or accelerated repurchase, or automatic repurchase transactions, including 10b5-1 plans, or tender offers. Share repurchase authorizations typically expire if unused by a prescribed date.
On May 2, 2019, the Board of Directors provided share repurchase authorization, increasing the aggregate of the Company's common stock authorized for repurchase by $500. The current share repurchase authorization expires on June 30, 2020 (unless extended), and does not obligate the Company to purchase any shares. The authorization for the share repurchase program may be terminated, increased or decreased by the Board of Directors at any time.
On April 9, 2019, the Company entered into a share repurchase agreement with a third-party financial institution, pursuant to which the Company made an upfront payment of $236 and received initial delivery of 3,593,453 shares. This arrangement is scheduled to terminate no later than the beginning of third quarter of 2019, at which time the Company will settle any outstanding positive or negative share balances based on the daily volume-weighted average price of the Company's common stock.

On January 3, 2019, the Company entered into a share repurchase agreement with a third-party financial institution, pursuant to which the Company made an upfront payment of $250 and received initial delivery of 5,059,449 shares. This arrangement closed on April 4, 2019 and an additional 290,765 shares were delivered.


 
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Table of Contents
Voya Financial, Inc.
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 

Warrants

On May 7, 2013, the Company issued to ING Group warrants to purchase up to 26,050,846 shares of the Company's common stock equal in the aggregate to 9.99% of the issued and outstanding shares of common stock at that date. The current exercise price of the warrants is $48.75 per share of common stock, subject to adjustments, including for stock dividends, cash dividends in excess of $0.01 per share a quarter, subdivisions, combinations, reclassifications and non-cash distributions. The warrants also provide for, upon the occurrence of certain change of control events affecting the Company, an increase in the number of shares to which a warrant holder will be entitled upon payment of the aggregate exercise price of the warrant. The warrants became exercisable to ING Group and its affiliates on January 1, 2017 and to all other holders starting on the first anniversary of the completion of the IPO (May 7, 2014). The warrants expire on the tenth anniversary of the completion of the IPO (May 7, 2023). The warrants are net share settled, which means that no cash will be payable by a warrant holder in respect of the exercise price of a warrant upon exercise, and are classified as permanent equity. They have been recorded at their fair value determined on the issuance date of May 7, 2013 in the amount of $94 as an addition and reduction to Additional-paid-in-capital. Warrant holders are not entitled to receive dividends. On March 12, 2018, ING Group sold its remaining interests in the warrants and no longer owns any warrants. As of March 31, 2019, no warrants have been exercised.

Preferred Stock

On September 12, 2018, the Company issued 325,000 shares of 6.125% Fixed-Rate Reset Non-Cumulative Preferred Stock, Series A, with a $0.01 par value per share and a liquidation preference of $1,000 per share, for aggregate net proceeds of $319. The ability of the Company to declare or pay dividends on, or purchase, redeem or otherwise acquire, shares of its common stock will be substantially restricted in the event that the Company does not declare and pay (or set aside) dividends on the Series A Preferred Stock for the last preceding dividend period.
The preferred stock is not subject to any mandatory redemption, sinking fund, retirement fund, purchase fund or similar provisions. The Company may, at its option, redeem the preferred stock, (a) in whole but not in part, at any time, within 90 days after the occurrence of a "rating agency event," at a redemption price equal to $1,020 per share, plus an amount equal to any dividends per share of preferred stock that have accrued but not been declared and paid for the then-current dividend period to, but excluding, the redemption date or (b) (i) in whole but not in part, at any time within 90 days after the occurrence of a "regulatory capital event" or (ii) in whole or in part, from time to time, on September 15, 2023 or any subsequent "reset date," in each case, at a redemption price equal to $1,000 per share of preferred stock, plus an amount equal to any dividends per share of preferred stock that have accrued but not been declared and paid for the then-current dividend period to, but excluding, such redemption date.
A "rating agency event" means that any nationally recognized statistical rating organization that then publishes a rating for the Company amends, clarifies or changes the criteria it uses to assign equity credit to securities like the preferred stock, which results in the lowering of the equity credit assigned to the preferred stock, as applicable, or shortens the length of time that the preferred stock is assigned a particular level of equity credit.
A "regulatory capital event" means that the Company becomes subject to capital adequacy supervision by a capital regulator and the capital adequacy guidelines that apply to the Company as a result of being so subject set forth criteria pursuant to which the preferred stock would not qualify as capital under such capital adequacy guidelines, as the Company may determine at any time, in its sole discretion.
As of March 31, 2019, there were no preferred stock dividends in arrears.

 
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Table of Contents
Voya Financial, Inc.
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 

9.     Earnings per Common Share
The following table presents a reconciliation of Net income (loss) and shares used in calculating basic and diluted net income (loss) per common share for the periods indicated:
 
Three Months Ended March 31,
(in millions, except for per share data)
2019
 
2018
Earnings
 
 
 
Net income (loss) available to common shareholders:
 
 
 
Income (loss) from continuing operations
$
152

 
$
17

Less: Preferred stock dividends
10

 
—

Less: Net income (loss) attributable to noncontrolling interest
(1
)
 
—

Income (loss) from continuing operations available to common shareholders
143

 
17

Income (loss) from discontinued operations, net of tax
(79
)
 
429

Net income (loss) available to common shareholders
$
64

 
$
446

 
 
 
 
Weighted average common shares outstanding
 
 
 
Basic
146.9

 
172.3

Dilutive Effects:
 
 
 
Warrants(1)
—

 
1.5

RSU awards
1.5

 
2.0

PSU awards
2.4

 
1.8

Stock Options
0.5

 
0.8

Diluted
151.3

 
178.4

 
 
 
 
Basic(2)
 
 
 
Income (loss) from continuing operations available to Voya Financial, Inc.'s common shareholders
$
0.97

 
$
0.10

Income (loss) from discontinued operations, net of taxes available to Voya Financial, Inc.'s common shareholders
$
(0.54
)
 
$
2.49

Income (loss) available to Voya Financial, Inc.'s common shareholders
$
0.44

 
$
2.59

Diluted(2)
 
 
 
Income (loss) from continuing operations available to Voya Financial, Inc.'s common shareholders
$
0.95

 
$
0.10

Income (loss) from discontinued operations, net of taxes available to Voya Financial, Inc.'s common shareholders
$
(0.52
)
 
$
2.40

Income (loss) available to Voya Financial, Inc.'s common shareholders
$
0.42

 
$
2.50

(1) For the three months ended March 31, 2019, weighted average shares used for calculating basic and diluted earnings per share excludes the dilutive impact of warrants, as the inclusion of this equity instrument would be antidilutive to the earnings per share calculation due to "out of the moneyness" in the periods presented. For more information on warrants, see the Shareholders' Equity Note to these Condensed Consolidated Financial Statements.
(2) Basic and diluted earnings per share are calculated using unrounded, actual amounts. Therefore, the components of earnings per share may not sum to its corresponding total.

 
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Table of Contents
Voya Financial, Inc.
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 

10.    Accumulated Other Comprehensive Income (Loss)

Shareholders' equity included the following components of Accumulated Other Comprehensive Income ("AOCI") as of the dates indicated:
 
March 31,
 
2019
 
2018
Fixed maturities, net of OTTI
$
2,958

 
$
3,199

Derivatives
154

 
81

DAC/VOBA adjustment on available-for-sale securities
(879
)
 
(918
)
Premium deficiency reserve
(93
)
 
(149
)
Sales inducements and other intangibles adjustment on available-for-sale securities
(112
)
 
(163
)
Other
—

 
(32
)
Unrealized capital gains (losses), before tax
2,028

 
2,018

Deferred income tax asset (liability)
(72
)
 
(520
)
Net unrealized capital gains (losses)
1,956

 
1,498

Pension and other postretirement benefits liability, net of tax
10

 
13

AOCI
$
1,966

 
$
1,511


 
 
 
 
 
 




 
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Table of Contents
Voya Financial, 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 March 31, 2019
 
Before-Tax Amount
 
Income Tax
 
After-Tax Amount
Available-for-sale securities:
 
 
 
 
 
Fixed maturities
$
1,865

 
$
(390
)
 
$
1,475

Other
—

 
—

 
—

OTTI
1

 
—

 
1

Adjustments for amounts recognized in Net realized capital gains (losses) in the Condensed Consolidated Statements of Operations
17

 
(4
)
 
13

DAC/VOBA
(498
)
(1) 
105

 
(393
)
Premium deficiency reserve
(36
)
 
8

 
(28
)
Sales inducements
(48
)
 
10

 
(38
)
Change in unrealized gains/losses on available-for-sale securities
1,301

 
(271
)
 
1,030

 
 
 
 
 
 
Derivatives:
 
 
 
 
 
Derivatives
(10
)
(2) 
2

 
(8
)
Adjustments related to effective cash flow hedges for amounts recognized in Net investment income in the Condensed Consolidated Statements of Operations
(6
)
 
1

 
(5
)
Change in unrealized gains/losses on derivatives
(16
)
 
3

 
(13
)
 
 
 
 
 
 
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 Accumulated other comprehensive income (loss)
$
1,284

 
$
(268
)
 
$
1,016


(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.

 
 
 
 
 
 




 
59
 

Table of Contents
Voya Financial, Inc.
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 

 
Three Months Ended March 31, 2018
 
Before-Tax Amount
 
Income Tax
 
After-Tax Amount
Available-for-sale securities:
 
 
 
 
 
Fixed maturities
$
(2,212
)
 
$
462

 
$
(1,750
)
Other
(14
)
 
3

 
(11
)
OTTI
20

 
(4
)
 
16

Adjustments for amounts recognized in Net realized capital gains (losses) in the Condensed Consolidated Statements of Operations
40

 
(8
)
 
32

DAC/VOBA
553

(1) 
(116
)
 
437

Premium deficiency reserve
41

 
(9
)
 
32

Sales inducements
115

 
(24
)
 
91

Change in unrealized gains/losses on available-for-sale securities
(1,457
)
 
304

 
(1,153
)
 
 
 
 
 
 
Derivatives:
 
 
 
 
 
Derivatives
(40
)
(2) 
8

 
(32
)
Adjustments related to effective cash flow hedges for amounts recognized in Net investment income in the Condensed Consolidated Statements of Operations
(6
)
 
1

 
(5
)
Change in unrealized gains/losses on derivatives
(46
)
 
9

 
(37
)
 
 
 
 
 
 
Pension and other postretirement benefits liability:
 
 
 
 
 
Amortization of prior service cost recognized in Operating expenses in the Condensed Consolidated Statements of Operations
(3
)
 
1

 
(2
)
Change in pension and other postretirement benefits liability
(3
)
 
1

 
(2
)
Change in Accumulated other comprehensive income (loss)
$
(1,506
)
 
$
314

 
$
(1,192
)

(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.

11.    Income Taxes
 
 
 
 

The Company uses the estimated annual effective tax rate method in computing its interim tax provision. Certain items, including changes in the realizability of deferred tax assets and changes in liabilities for uncertain tax positions, are excluded from the estimated annual effective tax rate and the actual tax expense or benefit is reported in the period the related item is incurred.

The Company's effective tax rate for the three months ended March 31, 2019 was 14.0%. The effective tax rate for this period differed from the statutory rate of 21.0% primarily due to the effect of the dividends received deduction ("DRD").

The Company's effective tax rate for the three months ended March 31, 2018 was 21.0%, which is equal to the statutory rate for that period.

Tax Regulatory Matters

For the tax years 2017 through 2019, the Company participates in the IRS Compliance Assurance Process (CAP), which is a continuous audit program provided by the IRS. The Company is under examination for the periods ended December 31, 2017 and December 31, 2018. For the period ended December 31, 2017, the Company expects the examination to be finalized within the next twelve months.

 
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Table of Contents
Voya Financial, Inc.
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 


12.    Financing Agreements

Short-term and Long-term Debt

The following table summarizes the carrying value of the Company’s long-term debt securities issued and outstanding as of March 31, 2019 and December 31, 2018:
 
Maturity
 
March 31, 2019
 
December 31, 2018
5.5% Senior Notes, due 2022
07/15/2022
 
$
96

 
$
96

3.125% Senior Notes, due 2024
07/15/2024
 
396

 
396

3.65% Senior Notes, due 2026
06/15/2026
 
496

 
496

5.7% Senior Notes, due 2043
07/15/2043
 
395

 
395

4.8% Senior Notes, due 2046
06/15/2046
 
297

 
297

4.7% Fixed-to-Floating Rate Junior Subordinated Notes, due 2048
01/23/2048
 
344

 
344

5.65% Fixed-to-Floating Rate Junior Subordinated Notes, due 2053
05/15/2053
 
739

 
739

7.25% Voya Holdings Inc. debentures, due 2023(1)
08/15/2023
 
138

 
138

7.63% Voya Holdings Inc. debentures, due 2026(1)
08/15/2026
 
138

 
138

6.97% Voya Holdings Inc. debentures, due 2036(1)
08/15/2036
 
79

 
79

8.42% Equitable of Iowa Companies Capital Trust II Notes, due 2027
04/01/2027
 
14

 
14

1.00% Windsor Property Loan
06/14/2027
 
5

 
5

Subtotal
 
 
3,137

 
3,137

Less: Current portion of long-term debt
 
 
1

 
1

Total
 
 
$
3,136

 
$
3,136

(1) Guaranteed by ING Group.

Loss on Debt Extinguishment

The Company did not incur a loss on debt extinguishment for the three months ended March 31, 2019. The Company incurred a loss on debt extinguishment of $3 for the three months ended March 31, 2018, which was recorded in Interest Expense in the Condensed Consolidated Statement of Operations.

Aetna Notes

As of March 31, 2019, the outstanding principal amount of the Aetna Notes was $358, which is guaranteed by ING Group. During the three months ended March 31, 2019, the Company deposited $1 of collateral to a control account benefiting ING Group with a third-party collateral agent, thereby increasing the remaining collateral balance to $268. The collateral may be exchanged at any time upon the posting of any other form of acceptable collateral to the account.

Senior Unsecured Credit Facility Agreement

The Company is a party to a Second Amended and Restated Revolving Credit Agreement ("Second Amended and Restated Credit Agreement"), which has been amended from time to time, with a syndicate of banks, which currently expires on May 6, 2021 and requires the Company to maintain a minimum net worth of $6.6 billion. The minimum net worth amount may increase upon any future equity issuances by the Company. There is a $750 sublimit available for direct borrowings.

As of March 31, 2019, there were no amounts outstanding as revolving credit borrowings and no amounts of LOCs outstanding under the senior unsecured credit facility.
 
 
 
 
 
 
 
 
 
 
 
 


 
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Table of Contents
Voya Financial, Inc.
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 

13.    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 March 31, 2019, the Company had off-balance sheet commitments to acquire mortgage loans of $52 and purchase limited partnerships and private placement investments of $1,143, of which $386 related to consolidated investment entities.

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, credit facilities and derivative transactions. The components of the fair value of the restricted assets were as follows as of the dates indicated:
 
March 31, 2019
 
December 31, 2018
Fixed maturity collateral pledged to FHLB (1)
$
1,489

 
$
1,472

FHLB restricted stock(2)
71

 
75

Other fixed maturities-state deposits
135

 
129

Cash and cash equivalents
26

 
13

Securities pledged(3)
2,084

 
1,867

Total restricted assets
$
3,805

 
$
3,556

(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 $1,842 and $1,635 as of March 31, 2019 and December 31, 2018, respectively. In addition, as of March 31, 2019 and December 31, 2018, the Company delivered securities as collateral of $242 and $232, respectively. Loaned securities and securities delivered as collateral are included in Securities pledged on the Condensed Consolidated Balance Sheets.

Federal Home Loan Bank Funding Agreements

The Company is a member of the FHLB of Des Moines, FHLB of Boston and the FHLB of Topeka and is required to pledge collateral to back funding agreements issued to the FHLB. As of March 31, 2019 and December 31, 2018, the Company had $1,254 and $1,209, respectively, in non-putable funding agreements, which are included in Contract owner account balances on the Condensed Consolidated Balance Sheets. As of March 31, 2019 and December 31, 2018, assets with a market value of approximately $1,489 and $1,472, respectively, 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

 
62
 

Table of Contents
Voya Financial, Inc.
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 

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.

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 March 31, 2019, the Company estimates the aggregate range of reasonably possible losses, in excess of any amounts accrued for these matters as of such date, to be up to approximately $50.

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

Litigation includes 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 on February 8, 2018.

Litigation also includes Henkel of America v. ReliaStar Life Insurance Company (USDC District of Connecticut, No. 1:18-cv-00965) (filed June 8, 2018). Plaintiff alleges that ReliaStar breached the terms of a stop loss policy it issued to Plaintiff by refusing to reimburse Plaintiff for more than $47 in claims incurred by participants in prior years and submitted for coverage under the stop loss policy. Plaintiff alleges a breach of contract claim or, in the alternative, that the stop loss policy be declared to cover the submitted claims, and also asserts that ReliaStar engaged in unfair trade practices and unfair insurance practices in violation of state statutes, and did so willfully and intentionally to warrant an award of punitive damages under state law. The Company denies the allegations, which it believes are without merit, and intends to defend the case vigorously.
 
Finally, industry wide, life insurers continue to be exposed to class action litigation related to the cost of insurance rates and periodic deductions from cash value. Common allegations include that insurance companies have breached the terms of their universal life

 
63
 

Table of Contents
Voya Financial, Inc.
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 

insurance policies by establishing or increasing the cost of insurance rates using cost factors not permitted by the contract, thereby unjustly enriching themselves. This litigation is generally known as cost of insurance litigation.

Cost of insurance litigation for the Company includes Cutler v. Voya Financial, Inc. and ReliaStar Life Insurance Company (USDC S.D. Florida, No. 1:18-cv-20723) (filed February 23, 2018), in which the plaintiff alleges that his insurance policy only permitted the Company to rely upon his expected future mortality experience to establish and increase his cost of insurance, but the Company instead relied upon other, non-disclosed factors to do so. Plaintiff alleges breach of contract, unjust enrichment, conversion and fraud claims against the Company. The Company denies the allegations in the complaint, believes the complaint to be without merit, and intends to defend the matter vigorously.

Cost of insurance litigation also includes Barnes v. Security Life of Denver (USDC District of Colorado, No. 1:18-cv-00718) (filed March 27, 2018), a putative class action in which the plaintiff alleges that his insurance policy only permitted the Company to rely upon his expected future mortality experience to establish and increase his cost of insurance, but the Company instead relied upon other, non-disclosed factors to do so. Plaintiff alleges breach of contract and conversion claims against the Company and also seeks declaratory relief. The Company denies the allegations in the complaint, believes the complaint to be without merit, and intends to defend the matter vigorously.

Cost of insurance litigation for the Company includes Advance Trust & Life Escrow Services, LTA v. Security Life of Denver (USDC District of Colorado, No. 1:18-cv-01897) (filed July 26, 2018), a putative class action in which Plaintiff alleges that two specific types of universal life insurance policies only permitted the Company to rely upon the policyholder’s expected future mortality experience to establish and increase the cost of insurance, but the Company instead relied upon other, non-disclosed factors not only in the administration of the policies over time, but also in the decision to increase insurance costs beginning in approximately October 2015. Plaintiff alleges a breach of contract and seeks class certification. The Company denies the allegations in the complaint, believes the complaint to be without merit, and intends to defend the lawsuit vigorously. On August 28, 2018, the Company filed its answer to the complaint with affirmative defenses.
  
On October 6, 2018, the Company received Advance Trust & Life Escrow Services, LTA v. ReliaStar Life Insurance Company (USDC District of Minnesota, No. 1:18-cv-02863) (filed October 5, 2018), a putative class action in which Plaintiff alleges that the Company’s universal life insurance policies only permitted the Company to rely upon the policyholders’ expected future mortality experience to establish the cost of insurance, and that as projected mortality experience improved, the policy language required the Company to decrease the cost of insurance. Plaintiff alleges that the Company did not decrease the cost of insurance as required, thereby breaching its contract with the policyholders, and seeks class certification. The Company denies the allegations in the complaint, believes the complaint to be without merit, and will defend the lawsuit vigorously.

Contingencies related to Performance-based Capital Allocations on Private Equity Funds

Certain performance-based capital allocations related to sponsored private equity funds ("carried interest") are not final until the conclusion of an investment term specified in the relevant asset management contract. As a result, such carried interest, if accrued or paid to the Company during such term, is subject to later adjustment based on subsequent fund performance. If the fund’s cumulative investment return falls below specified investment return hurdles, some or all of the previously accrued carried interest is reversed to the extent that the Company is no longer entitled to the performance-based capital allocation. Should the fund’s cumulative investment return subsequently increase above specified investment return hurdles in future periods, previous reversals could be fully or partially recovered.

As of March 31, 2019, approximately $79 of previously accrued carried interest would be subject to full or partial reversal in future periods if cumulative fund performance hurdles are not maintained throughout the remaining life of the affected funds.

14.     Consolidated Investment Entities

In the normal course of business, the Company provides investment management services to, invests in and has transactions with, various types of investment entities which may be considered VIEs or VOEs. The Company evaluates its involvement with each entity to determine whether consolidation is required.


 
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Voya Financial, Inc.
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 

The Company holds variable interests in certain investment entities in the form of debt or equity investments, as well as the right to receive management fees, performance fees, and carried interest. The Company consolidates certain entities under the VIE guidance when it is determined that the Company is the primary beneficiary. Alternatively, certain entities are consolidated under the VOE guidance when control is obtained through voting rights.

The Company has no right to the benefits from, nor does it bear the risks associated with consolidated investment entities beyond the Company’s direct equity and debt investments in and management fees generated from these entities. Such direct investments amounted to approximately $359 and $354 as of March 31, 2019 and December 31, 2018, respectively. If the Company were to liquidate, the assets held by consolidated investment entities would not be available to the general creditors of the Company as a result of the liquidation.

Consolidated VIEs and VOEs

Collateral Loan Obligations Entities ("CLOs")

The Company is involved in the design, creation, and the ongoing management of CLOs. These entities are created for the purpose of acquiring diversified portfolios of senior secured floating rate leveraged loans, and securitizing these assets by issuing multiple tranches of collateralized debt; thereby providing investors with a broad array of risk and return profiles. Also known as collateralized financing entities under Topic 810, CLOs are variable interest entities by definition.

In return for providing collateral management services, the Company earns investment management fees and contingent performance fees. In addition to earning fee income, the Company often holds an investment in certain of the CLOs it manages, generally within the unrated and most subordinated tranche of each CLO. The fee income earned and investments held are included in the Company's ongoing consolidation assessment for each CLO. The Company was the primary beneficiary of 3 and 2 CLOs as of March 31, 2019 and December 31, 2018, respectively.

Limited Partnerships

The Company invests in and manages various limited partnerships, including private equity funds and hedge funds. These entities have been evaluated by the Company and are determined to be VIEs due to the equity holders, as a group, lacking the characteristics of a controlling financial interest.  

In return for serving as the general partner of and providing investment management services to these entities, the Company earns management fees and carried interest in the normal course of business. Additionally, the Company often holds an investment in each limited partnership it manages, generally in the form of general partner and limited partner interests. The fee income, carried interest, and investments held are included in the Company’s ongoing consolidation analysis for each limited partnership. The Company consolidated 12 funds, which were structured as partnerships, as of March 31, 2019 and December 31, 2018, respectively.

Registered Investment Companies

The Company consolidated one sponsored investment fund accounted for as a VOE as of March 31, 2019 and December 31, 2018, respectively, because it is the majority investor in the fund, and as such, has a controlling financial interest in the fund.


 
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Voya Financial, Inc.
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 

The following table summarizes the components of the consolidated investment entities as of the dates indicated:
 
March 31, 2019
 
December 31, 2018
Assets of Consolidated Investment Entities
 
 
 
VIEs
 
 
 
Cash and cash equivalents
$
302

 
$
331

Corporate loans, at fair value using the fair value option
551

 
542

Limited partnerships/corporations, at fair value
1,313

 
1,313

Other assets
16

 
15

Total VIE assets
2,182

 
2,201

VOEs
 
 
 
Cash and cash equivalents
5

 
—

Limited partnerships/corporations, at fair value
113

 
108

Other assets
1

 
1

Total VOE assets
119

 
109

Total assets of consolidated investment entities
$
2,301

 
$
2,310

 
 
 
 
Liabilities of Consolidated Investment Entities
 
 
 
VIEs
 
 
 
CLO notes, at fair value using the fair value option
$
529

 
$
540

Other liabilities
667

 
681

Total VIE liabilities
1,196

 
1,221

VOEs
 
 
 
Other liabilities
4

 
7

Total VOE liabilities
4

 
7

Total liabilities of consolidated investment entities
$
1,200

 
$
1,228



Fair Value Measurement

Upon consolidation, the Company elected to apply the FVO for financial assets and financial liabilities held by CLOs and continued to measure these assets (primarily corporate loans) and liabilities (debt obligations issued by CLOs) at fair value in subsequent periods. The Company has elected the FVO to more closely align its accounting with the economics of its transactions and allows the Company to more effectively align changes in the fair value of CLO assets with a commensurate change in the fair value of CLO liabilities.

Investments held by consolidated private equity funds are measured and reported at fair value in the Company's Condensed Consolidated Financial Statements. Changes in the fair value of consolidated investment entities are recorded as a separate line item within Income (loss) related to consolidated investment entities in the Company's Condensed Consolidated Statements of Operations.

The methodology for measuring the fair value of financial assets and liabilities of consolidated investment entities, and the classification of these measurements in the fair value hierarchy is consistent with the methodology and classification applied by the Company to its investment portfolio.

As discussed in more detail below, the Company utilizes valuations obtained from third-party commercial pricing services, brokers and investment sponsors or third-party administrators that supply NAV (or its equivalent) per share used as a practical expedient. The valuations obtained from brokers and third-party commercial pricing services are non-binding. These valuations are reviewed on a monthly or quarterly basis depending on the entity and its underlying investments. Procedures include, but are not limited to,

 
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Voya Financial, Inc.
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 

a review of underlying fund investor reports, review of top and worst performing funds requiring further scrutiny, review of variance from prior periods and review of variance from benchmarks, where applicable. In addition, the Company considers both macro and fund specific events that may impact the latest NAV supplied and determines if further adjustments of value should be made. Such changes, if any, are subject to senior management review.

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.

Cash and Cash Equivalents

The carrying amounts for cash reflect the assets’ fair values. The fair value for cash equivalents is determined based on quoted market prices. These assets are classified as Level 1.

CLOs

Corporate loans: Corporate loan investments, which comprise the majority of consolidated CLO portfolio collateral, are senior secured corporate loans maturing at various dates between 2019 and 2026, paying interest at LIBOR, EURIBOR or PRIME plus a spread of up to 10.0%. As of March 31, 2019 and December 31, 2018, the unpaid principal balance exceeded the fair value of the corporate loans by approximately $12 and $13, respectively. Less than 1.0% of the collateral assets were in default as of March 31, 2019 and December 31, 2018.

The fair values for corporate loans are determined using independent commercial pricing services. Fair value measurement based on pricing services may be classified in Level 2 or Level 3 depending on the type, complexity, observability and liquidity of the asset being measured. The inputs used by independent commercial pricing services, such as benchmark yields and credit risk adjustments, are those that are derived principally from or corroborated by observable market data. Hence, the fair value measurement of corporate loans priced by independent pricing service providers is classified within Level 2 of the fair value hierarchy. In addition, there are assets held with CLO portfolios that represent senior level debt of other third party CLOs. These CLO investments are classified within Level 3 of the fair value hierarchy. See description of fair value process for CLO notes below.

CLO notes: The CLO notes are backed by a diversified loan portfolio consisting primarily of senior secured floating rate leveraged loans. Repayment risk is segmented into tranches with credit ratings of these tranches reflecting both the credit quality of underlying collateral as well as how much protection a given tranche is afforded by tranches that are subordinate to it. The most subordinated tranche bears the first loss and receives the residual payments, if any. The interest rates are generally variable rates based on LIBOR plus a pre-defined spread, which varies from 0.7% for the more senior tranches to 5.4% for the more subordinated tranches. CLO notes mature in 2026 and have a weighted average maturity of 7.3 years as of March 31, 2019. The investors in this debt are not affiliated with the Company and have no recourse to the general credit of the Company for this debt.

The fair values of the CLO notes are measured based on the fair value of the CLO's corporate loans, as the Company uses the measurement alternative available under ASU 2014-13 and determined that the inputs for measuring financial assets are more observable. The CLO notes are classified within Level 2 of the fair value hierarchy, consistent with the classification of the majority of the CLO financial assets.

The Company reviews the detailed prices including comparisons to prior periods for reasonableness. The Company utilizes a formal pricing challenge process to request a review of any price during which time the vendor examines its assumptions and relevant market inputs to determine if a price change is warranted.

The following narrative indicates the sensitivity of inputs:

•
Default Rate: An increase (decrease) in the expected default rate would likely increase (decrease) the discount margin (increase risk premium) used to value the CLO investments and CLO notes and, as a result, would potentially decrease the value of the CLO investments and CLO notes.

 
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Voya Financial, Inc.
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 

•
Recovery Rate: A decrease (increase) in the expected recovery of defaulted assets would potentially decrease (increase) the valuation of CLO investments and CLO notes.
•
Prepayment Rate: A decrease (increase) in the expected rate of collateral prepayments would potentially decrease (increase) the valuation of CLO investments and CLO notes as the expected weighted average life ("WAL") would increase (decrease).
•
Discount Margin (spread over LIBOR): An increase (decrease) in the discount margin used to value the CLO investments and CLO notes and would decrease (increase) the value of the CLO investments and CLO notes.

Private Equity Funds

As prescribed in ASC Topic 820, the unit of account for these investments is the interest in the investee fund. The Company owns an undivided interest in the fund portfolio and does not have the ability to dispose of individual assets and liabilities in the fund portfolio. Rather, the Company would be required to redeem or dispose of its entire interest in the investee fund. There is no current active market for interests in underlying private equity funds.

Valuation is generally based on the valuations provided by the fund's general partner or investment manager. The valuations typically reflect the fair value of the Company's capital account balance of each fund investment, including unrealized capital gains (losses), as reported in the financial statements of the respective investee fund as of the respective year end or the latest available date. In circumstances where fair values are not provided, the Company seeks to determine the fair value of fund investments based upon other information provided by the fund's general partner or investment manager or from other sources.

The fair value of securities received in-kind from fund investments is determined based on the restrictions around the securities.

•
Unrestricted, publicly traded securities are valued at the closing public market price on the reporting date;
•
Restricted, publicly traded securities may be valued at a discount from the closing public market price on the reporting date, depending on the circumstances; and
•
Privately held securities are valued by the directors/general partner of the investee fund, based on a variety of factors, including the price of recent transactions in the company's securities and the company's earnings, revenue and book value.

In the case of direct investments or co-investments in private equity companies, the Company initially recognizes investments at cost and subsequently adjusts investments to fair value. On a quarterly basis, the Company reviews the general partner or lead investor's valuation of the investee company, taking into account other available information, such as indications of a market value through subsequent issues of capital or transactions between third parties, performance of the investee company during the period and public, comparable companies' analysis, where appropriate.

Investments in these funds typically may not be fully redeemed at NAV within 90 days because of inherent restriction on near term redemptions.

As of March 31, 2019 and December 31, 2018, certain private equity funds maintained term loans and revolving lines of credit of $833 and $753, respectively. The term loans renew every three years and the revolving lines of credit renew annually; all loans bear interest at LIBOR/EURIBOR plus 150 - 155 bps. The lines of credit are used for funding transactions before capital is called from investors, as well as for the financing of certain purchases. As of March 31, 2019 and December 31, 2018, outstanding borrowings amount to $493 and $584, respectively.

On February 1, 2018, Pomona Investment Fund entered into a three-year revolving credit agreement with Credit Suisse. The size of the facility as of March 31, 2019 is $25; the loan bears interest at LIBOR plus 325 bps and has a commitment fee of 160 bps. There was no outstanding borrowing as of March 31, 2019.
The borrowings are reflected in Liabilities related to consolidated investment entities - other liabilities on the Company's Condensed Consolidated Balance Sheets. The borrowings are carried at an amount equal to the unpaid principal balance.


 
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Voya Financial, Inc.
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 

The following table summarizes the fair value hierarchy levels of consolidated investment entities as of March 31, 2019:
 
Level 1
 
Level 2
 
Level 3
 
NAV
 
Total
Assets
 
 
 
 
 
 
 
 
 
VIEs
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
302

 
$
—

 
$
—

 
$
—

 
$
302

Corporate loans, at fair value using the fair value option
—

 
551

 
—

 
—

 
551

Limited partnerships/corporations, at fair value
—

 
—

 
—

 
1,313

 
1,313

VOEs
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
5

 
—

 
—

 
—

 
5

Limited partnerships/corporations, at fair value
—

 
—

 
—

 
113

 
113

Total assets, at fair value
$
307

 
$
551

 
$
—

 
$
1,426

 
$
2,284

Liabilities
 
 
 
 
 
 
 
 
 
VIEs
 
 
 
 
 
 
 
 
 
CLO notes, at fair value using the fair value option
$
—

 
$
529

 
$
—

 
$
—

 
$
529

Total liabilities, at fair value
$
—

 
$
529

 
$
—

 
$
—

 
$
529


The following table summarizes the fair value hierarchy levels of consolidated investment entities as of December 31, 2018:
 
Level 1
 
Level 2
 
Level 3
 
NAV
 
Total
Assets
 
 
 
 
 
 
 
 
 
VIEs
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
331

 
$
—

 
$
—

 
$
—

 
$
331

Corporate loans, at fair value using the fair value option
—

 
542

 
—

 
—

 
542

Limited partnerships/corporations, at fair value
—

 
—

 
—

 
1,313

 
1,313

VOEs
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
—

 
—

 
—

 
—

 
—

Limited partnerships/corporations, at fair value
—

 
—

 
—

 
108

 
108

Total assets, at fair value
$
331

 
$
542

 
$
—

 
$
1,421

 
$
2,294

Liabilities
 
 
 
 
 
 
 
 
 
VIEs
 
 
 
 
 
 
 
 
 
CLO notes, at fair value using the fair value option
$
—

 
$
540

 
$
—

 
$
—

 
$
540

Total liabilities, at fair value
$
—

 
$
540

 
$
—

 
$
—

 
$
540



Transfers of investments out of Level 3 and into Level 2 or Level 1, if any, are recorded as of the beginning of the period in which the transfer occurred. For the three months ended March 31, 2019 and 2018, there were no transfers in or out of Level 3 or transfers between Level 1 and Level 2.

 
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Voya Financial, Inc.
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 


Deconsolidation of Certain Investment Entities

There were no deconsolidations during the three months ended March 31, 2019. During the three months ended March 31, 2018, the Company determined it was no longer the primary beneficiary of one previously consolidated CLO due to a reduction in the Company’s investment in the CLO. This caused a reduction in the Company's obligation to absorb losses and right to receive benefits of the CLO that could potentially be significant to the CLO. As a result of this determination, the Company deconsolidated one investment entity during the three months ended March 31, 2018.

Nonconsolidated VIEs

CLOs

In addition to the consolidated CLOs, the Company also holds variable interest in certain CLOs that are not consolidated as it has been determined that the Company is not the primary beneficiary. With these CLOs, the Company serves as the investment manager and receives investment management fees and contingent performance fees. Generally, the Company does not hold any interest in the nonconsolidated CLOs but if it does, such ownership has been deemed to be insignificant. The Company has not provided, and is not obligated to provide, any financial or other support to these entities.

The Company reviews its assumptions on a periodic basis to determine if conditions have changed such that the projection of these contingent fees becomes significant enough to reconsider the Company's consolidation status as variable interest holder. As of March 31, 2019 and December 31, 2018, the Company held $524 and $525 ownership interests, respectively, in unconsolidated CLOs.

Limited Partnerships

The Company manages or holds investments in certain private equity funds and hedge funds. With these entities, the Company serves as the investment manager and is entitled to receive at-market investment management fees and at-market contingent performance fees. The Company does not consolidate any of these investment funds for which it is not considered to be the primary beneficiary.

In addition, the Company does not consolidate the funds in which its involvement takes a form of a limited partner interest and is restricted to a role of a passive investor, as a limited partner's interest does not provide the Company with any substantive kick-out or participating rights, nor does it provide the Company with power to direct the activities of the fund.

The following table presents the carrying amounts of the variable interests in VIEs in which the Company concluded that it holds a variable interest, but is not the primary beneficiary as of the dates indicated. The Company determines its maximum exposure to loss to be: (i) the amount invested in the debt or equity of the VIE and (ii) other commitments and guarantees to the VIE.

Variable Interests on the Condensed Consolidated Balance Sheet
 
March 31, 2019
 
December 31, 2018
 
 Carrying Amount
 
Maximum exposure to loss
 
 Carrying Amount
 
Maximum exposure to loss
Fixed maturities, available for sale
$
524

 
$
524

 
$
523

 
$
523

Limited partnership/corporations
1,166

 
1,166

 
1,158

 
1,158



Securitizations

The Company invests in various tranches of securitization entities, including RMBS, 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,

 
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Voya Financial, Inc.
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 

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 (excluding Consolidated Investment Entities) Note to these Condensed Consolidated Financial Statements and unrealized capital gains (losses) on these securities are recorded directly in AOCI, except for certain RMBS which are accounted for under the FVO whose change in fair value is reflected in Other net realized gains (losses) in the Condensed Consolidated Statements of Operations. The Company’s maximum exposure to loss on these structured investments is limited to the amount of its investment. Refer to the Investments (excluding Consolidated Investment Entities) Note to these Condensed Consolidated Financial Statements for details regarding the carrying amounts and classifications of these assets.

15.     Restructuring

Organizational Restructuring

As a result of the closing of the Transaction, the decision to cease new sales following the strategic review of the Company’s Individual Life business and the recently announced additional cost savings targets, the Company is undertaking further restructuring efforts to execute the Transaction, reduce stranded expenses, as well as improve operational efficiency, strengthen technology capabilities and centralize certain sales, operations and investment management activities ("Organizational Restructuring").

These activities have resulted in recognition of severance and organizational transition costs and are reflected in Operating expenses in the Condensed Consolidated Statements of Operations, but excluded from Adjusted operating earnings before income taxes. These expenses are classified as a component of Other adjustments to Income (loss) from continuing operations before income taxes and consequently are not included in the adjusted operating results of the Company's segments. For the three months ended March 31, 2019 and March 31, 2018, the Company has incurred Organizational Restructuring expenses of $83 and $5, respectively associated with continuing operations.

In addition to the restructuring costs incurred above, the anticipated reduction in employees from the execution of the initiatives described above triggered an immaterial curtailment loss and related re-measurement gain of the Company's qualified defined benefit pension plan.

The summary below presents Organizational Restructuring expenses, pre-tax, by type of costs incurred, for the periods indicated:
 
Three Months Ended March 31,
 
Cumulative Amounts Incurred to Date
 
2019
 
2018
 
Severance benefits
$
47

 
$
2

 
$
66

Organizational transition costs
36

 
1

 
76

Total restructuring expenses
$
83

 
$
3

 
$
142



Including the 2019 expense, the aggregate amount of Organizational Restructuring expenses expected is in the range of $200 to $300. The Company anticipates that these costs, which will include severance, organizational transition costs incurred to reorganize operations and other costs such as contract terminations and asset write-offs, will occur at least through the end of 2020.

Restructuring expenses that were directly related to the preparation for and execution of the Transaction are included in Income (loss) from discontinued operations, net of tax, in the Condensed Consolidated Statements of Operations. For the three months ended March 31, 2018, the Company incurred Organizational Restructuring expenses as a result of the Transaction of $(2) of severance and organizational transition costs, which are reflected in discontinued operations.


 
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Voya Financial, Inc.
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 

The following table presents the accrued liability associated with Organizational Restructuring expenses as of March 31, 2019:
 
Severance Benefits
 
Organizational Transition Costs
 
Total
Accrued liability as of January 1, 2019
$
12

 
$
9

 
$
21

Provision
47

 
36

 
83

Payments
(5
)
 
(29
)
 
(34
)
Accrued liability as of March 31, 2019
$
54

 
$
16

 
$
70


2016 Restructuring

In 2016, the Company began implementing a series of initiatives designed to make it a simpler, more agile company able to deliver an enhanced customer experience ("2016 Restructuring"). These initiatives include an increasing emphasis on less capital-intensive products and the achievement of operational synergies.

Substantially all of the initiatives associated with the 2016 Restructuring program concluded at the end of 2018. However, the Company expects to incur approximately $10 to $20 of additional restructuring costs associated with the completion of the information technology transition agreement entered into during 2017.

Total 2016 Restructuring expenses are reflected in Operating expenses in the Condensed Consolidated Statements of Operations, but excluded from Adjusted operating earnings before income taxes. These expenses are classified as a component of Other adjustments to Income (loss) from continuing operations before income taxes and consequently are not included in the adjusted operating results of the Company's segments.

The summary below presents 2016 Restructuring expenses, pre-tax, by type of costs incurred, for the periods indicated:
 
Three Months Ended March 31,
 
Cumulative Amounts Incurred to Date
 
2019
 
2018
 
Severance benefits
$
—

 
$
6

 
$
69

Asset write-off costs
—

 
—

 
17

Transition costs
—

 
5

 
24

Other costs
3

 
3

 
39

Total restructuring expenses
$
3

 
$
14

 
$
149



The following table presents the accrued liability associated with 2016 Restructuring expenses as of March 31, 2019:
 
Severance Benefits
 
Transition Costs
 
Other Costs
 
Total
Accrued liability as of January 1, 2019
$
8

 
$
14

 
$
2

 
$
24

Provision
—

 
—

 
3

 
3

Payments
(1
)
 
—

 
(5
)
 
(6
)
Accrued liability as of March 31, 2019
$
7

 
$
14

 
$
—

 
$
21



16.    Segments

As a result of the Transaction disclosed in the Discontinued Operations Note, which resulted in the disposition of substantially all of the Company's CBVA and Annuities businesses, the Company evaluated its segments and determined that the Retained Business that are not components of the disposed businesses under the Transaction are insignificant. As such, the Company no longer reports its CBVA and Annuities businesses as segments and includes the results of the Retained Business in Corporate.

 
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Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 


The Company provides its principal products and services through four segments: Retirement, Investment Management, Employee Benefits, and Individual Life.

Measurement

Adjusted operating earnings before income taxes is a measure used by management to evaluate segment performance. The Company believes that Adjusted operating earnings before income taxes provides a meaningful measure of its business and segment performances and enhances the understanding of the Company’s financial results by focusing on the operating performance and trends of the underlying business segments and excluding items that tend to be highly variable from period to period based on capital market conditions and/or other factors. The Company uses the same accounting policies and procedures to measure segment Adjusted operating earnings before income taxes as it does for the directly comparable U.S. GAAP measure Income (loss) from continuing operations before income taxes. Adjusted operating earnings before income taxes does not replace Income (loss) from continuing operations before income taxes as the U.S. GAAP measure of the Company’s consolidated results of operations. Therefore, the Company believes that it is useful to evaluate both Income (loss) from continuing operations before income taxes and Adjusted operating earnings before income taxes when reviewing the Company’s financial and operating performance. Each segment’s Adjusted operating earnings before income taxes is calculated by adjusting Income (loss) from continuing operations before income taxes for the following items:

•
Net investment gains (losses), net of related amortization of DAC, VOBA, sales inducements and unearned revenue, which are significantly influenced by economic and market conditions, including interest rates and credit spreads, and are not indicative of normal operations. Net investment gains (losses) include gains (losses) on the sale of securities, impairments, changes in the fair value of investments using the FVO unrelated to the implied loan-backed security income recognition for certain mortgage-backed obligations and changes in the fair value of derivative instruments, excluding realized gains (losses) associated with swap settlements and accrued interest;

•
Net guaranteed benefit hedging gains (losses), which are significantly influenced by economic and market conditions and are not indicative of normal operations, include changes in the fair value of derivatives related to guaranteed benefits, net of related reserve increases (decreases) and net of related amortization of DAC, VOBA and sales inducements, less the estimated cost of these benefits. The estimated cost, which is reflected in operating results, reflects the expected cost of these benefits if markets perform in line with the Company's long-term expectations and includes the cost of hedging. Other derivative and reserve changes related to guaranteed benefits are excluded from adjusted operating earnings, including the impacts related to changes in the Company's nonperformance spread;

•
Income (loss) related to businesses exited through reinsurance or divestment that do not qualify as discontinued operations, which includes gains and (losses) associated with transactions to exit blocks of business (including net investment gains (losses) on securities sold and expenses directly related to these transactions) and residual run-off activity; these gains and (losses) are often related to infrequent events and do not reflect performance of operating segments. Excluding this activity better reveals trends in the Company's core business, which would be obscured by including the effects of business exited, and more closely aligns Adjusted operating earnings before income taxes with how the Company manages its segments;

•
Income (loss) attributable to noncontrolling interest, which represents the interest of shareholders, other than the Company, in consolidated entities. Income (loss) attributable to noncontrolling interest represents such shareholders' interests in the gains and (losses) of those entities, or the attribution of results from consolidated VIEs or VOEs to which the Company is not economically entitled;

•
Dividend payments made to preferred shareholders are included as reductions to reflect the Adjusted operating earnings that is available to common shareholders;

•
Income (loss) related to early extinguishment of debt, which includes losses incurred as a result of transactions where the Company repurchases outstanding principal amounts of debt; these losses are excluded from Adjusted operating earnings before income taxes since the outcome of decisions to restructure debt are not indicative of normal operations;


 
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Voya Financial, Inc.
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 

•
Impairment of goodwill, value of management contract rights and value of customer relationships acquired, which includes losses as a result of impairment analysis; these represent losses related to infrequent events and do not reflect normal, cash-settled expenses;

•
Immediate recognition of net actuarial gains (losses) related to the Company's pension and other postretirement benefit obligations and gains (losses) from plan amendments and curtailments, which includes actuarial gains and losses as a result of differences between actual and expected experience on pension plan assets or projected benefit obligation during a given period. The Company immediately recognizes actuarial gains and (losses) related to pension and other postretirement benefit obligations and gains and losses from plan adjustments and curtailments. These amounts do not reflect normal, cash-settled expenses and are not indicative of current Operating expense fundamentals; and

•
Other items not indicative of normal operations or performance of the Company's segments or related to events such as
capital or organizational restructurings undertaken to achieve long-term economic benefits, including certain costs related to debt and equity offerings and severance and other expenses associated with such activities. These items vary widely in timing, scope and frequency between periods as well as between companies to which the Company is compared. Accordingly, the Company adjusts for these items as management believes that these items distort the ability to make a meaningful evaluation of the current and future performance of the Company's segments.

The summary below reconciles Adjusted operating earnings before income taxes for the segments to Income (loss) from continuing operations before income taxes for the periods indicated:
 
Three Months Ended March 31,
 
2019
 
2018
Income (loss) from continuing operations before income taxes
$
177

 
$
21

Less Adjustments:
 
 
 
Net investment gains (losses) and related charges and adjustments
23

 
(61
)
Net guaranteed benefit hedging gains (losses) and related charges and adjustments
(2
)
 
(14
)
Income (loss) related to businesses exited through reinsurance or divestment
(21
)
 
(45
)
Income (loss) attributable to noncontrolling interest
(1
)
 
—

Loss related to early extinguishment of debt
—

 
(3
)
Immediate recognition of net actuarial gains (losses) related to pension and other post-employment benefit obligations and gains (losses) from plan amendments and curtailments
66

 
—

Dividend payments made to preferred shareholders
10

 
—

Other adjustments
(92
)
 
(19
)
Total adjustments to income (loss) from continuing operations
$
(17
)
 
$
(142
)
 
 
 
 
Adjusted operating earnings before income taxes by segment:
 
 
 
Retirement
$
129

 
$
109

Investment Management
34

 
61

Employee Benefits
38

 
32

Individual Life
48

 
17

Corporate(1)
(55
)
 
(56
)
Total
$
194

 
$
163


(1) Adjusted operating earnings before income taxes for Corporate includes Net investment gains (losses) and Net guaranteed benefit hedging gains (losses) associated with the Retained Business in the prior period. These amounts are insignificant and do not distort the ability to make a meaningful evaluation of the trends of Corporate activities.


 
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Voya Financial, Inc.
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 

Adjusted operating revenues is a measure of the Company's segment revenues. Each segment's Operating revenues are calculated by adjusting Total revenues to exclude the following items:

•
Net investment gains (losses) and related charges and adjustments, which are significantly influenced by economic and market conditions, including interest rates and credit spreads and are not indicative of normal operations. Net investment gains (losses) include gains (losses) on the sale of securities, impairments, changes in the fair value of investments using the FVO unrelated to the implied loan-backed security income recognition for certain mortgage-backed obligations and changes in the fair value of derivative instruments, excluding realized gains (losses) associated with swap settlements and accrued interest. These are net of related amortization of unearned revenue;

•
Gain (loss) on change in fair value of derivatives related to guaranteed benefits, which is significantly influenced by economic and market conditions and not indicative of normal operations, includes changes in the fair value of derivatives related to guaranteed benefits, less the estimated cost of these benefits. The estimated cost, which is reflected in Adjusted operating revenues, reflects the expected cost of these benefits if markets perform in line with the Company's long-term expectations and includes the cost of hedging. Other derivative and reserve changes related to guaranteed benefits are excluded from Adjusted operating revenues, including the impacts related to changes in the Company's nonperformance spread;

•
Revenues related to businesses exited through reinsurance or divestment that do not qualify as discontinued operations, which includes revenues associated with transactions to exit blocks of business (including net investment gains (losses) on securities sold related to these transactions) and residual run-off activity; these gains and (losses) are often related to infrequent events and do not reflect performance of operating segments. Excluding this activity better reveals trends in the Company's core business, which would be obscured by including the effects of business exited, and more closely aligns Operating revenues with how the Company manages its segments;

•
Revenues attributable to noncontrolling interest, which represents the interests of shareholders, other than the Company, in consolidated entities. Revenues attributable to noncontrolling interest represents such shareholders' interests in the gains and losses of those entities, or the attribution of results from consolidated VIEs or VOEs to which the Company is not economically entitled; and

•
Other adjustments to Total revenues primarily reflect fee income earned by the Company's broker-dealers for sales of non-proprietary products, which are reflected net of commission expense in the Company's segments’ operating revenues, other items where the income is passed on to third parties and the elimination of intercompany investment expenses included in Adjusted operating revenues.


 
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Voya Financial, Inc.
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 

The summary below reconciles Adjusted operating revenues for the segments to Total revenues for the periods indicated:
 
Three Months Ended March 31,
 
2019
 
2018
Total revenues
$
2,197

 
$
1,967

 
 
 
 
Adjustments:
 
 
 
Net realized investment gains (losses) and related charges and adjustments
10

 
(73
)
Gain (loss) on change in fair value of derivatives related to guaranteed benefits
(3
)
 
(7
)
Revenues related to businesses exited through reinsurance or divestment
76

 
(40
)
Revenues attributable to noncontrolling interest
4

 
6

Other adjustments
87

 
58

Total adjustments to revenues
174

 
(56
)
 
 
 
 
Adjusted operating revenues by segment:
 
 
 
Retirement
648

 
662

Investment Management
148

 
185

Employee Benefits
508

 
453

Individual Life
626

 
631

Corporate(1)
93

 
92

Total
$
2,023

 
$
2,023


(1) Adjusted operating revenues for Corporate includes Net investment gains (losses) and Gains (losses) on change in fair value of derivatives related to guaranteed benefits associated with the Retained Business in the prior period. These amounts are insignificant and do not distort the ability to make a meaningful evaluation of the trends of Corporate activities.

Other Segment Information

The Investment Management segment revenues include the following intersegment revenues, primarily consisting of asset-based management and administration fees for the periods indicated:
 
Three Months Ended March 31,
 
2019
 
2018
Investment Management intersegment revenues
$
30

 
$
43




 
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Voya Financial, Inc.
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 

The summary below presents Total assets for the Company’s segments as of the dates indicated:
 
March 31, 2019
 
December 31, 2018
Retirement
$
111,385

 
$
104,995

Investment Management
578

 
690

Employee Benefits
2,627

 
2,560

Individual Life
27,218

 
26,431

Corporate
18,235

 
18,051

Total assets, before consolidation(1)
160,043

 
152,727

Consolidation of investment entities
1,942

 
1,955

Total assets
$
161,985

 
$
154,682


(1) Total assets, before consolidation includes the Company's direct investments in CIEs prior to consolidation, which are accounted for using the equity method or fair value option.

17.    Condensed Consolidating Financial Information

The accompanying condensed consolidating financial information has been prepared and presented pursuant to SEC Regulation S-X, Rule 3-10, "Financial Statements of Guarantors and Issuers of Guaranteed Securities Registered or Being Registered" ("Rule 3-10"). The condensed consolidating financial information presents the financial position of Voya Financial, Inc. ("Parent Issuer"), Voya Holdings ("Subsidiary Guarantor") and all other subsidiaries ("Non-Guarantor Subsidiaries") of the Company as of March 31, 2019 and December 31, 2018, their results of operations, comprehensive income and statements of cash flows for the three months ended March 31, 2019 and 2018.

The 5.5% senior notes due 2022, the 5.7% senior notes due 2043, the 3.65% senior notes due 2026, the 4.8% senior notes due 2046, the 3.125% senior notes due 2024 (collectively, the "Senior Notes"), the 5.65% fixed-to-floating rate junior subordinated notes due 2053 and the 4.7% fixed-to-floating junior subordinated notes due 2048 (collectively, the "Junior Subordinated Notes"), each issued by Parent Issuer, are fully and unconditionally guaranteed by Subsidiary Guarantor, a 100% owned subsidiary of Parent Issuer. No other subsidiary of Parent Issuer guarantees the Senior Notes or the Junior Subordinated Notes. Rule 3-10(h) provides that a guarantee is full and unconditional if, when the issuer of a guaranteed security has failed to make a scheduled payment, the guarantor is obligated to make the scheduled payment immediately and, if it does not, any holder of the guaranteed security may immediately bring suit directly against the guarantor for payment of amounts due and payable. In the event that Parent Issuer does not fulfill the guaranteed obligations, any holder of the Senior Notes or the Junior Subordinated Notes may immediately bring a claim against Subsidiary Guarantor for amounts due and payable.

The following condensed consolidating financial information is presented in conformance with the components of the Condensed Consolidated Financial Statements. Investments in subsidiaries are accounted for using the equity method for purposes of illustrating the consolidating presentation. Equity in the subsidiaries is therefore reflected in the Parent Issuer's and Subsidiary Guarantor's Investment in subsidiaries and Equity in earnings of subsidiaries. Non-Guarantor Subsidiaries represent all other subsidiaries on a combined basis. The consolidating adjustments presented herein eliminate investments in subsidiaries and intercompany balances and transactions.

 
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Voya Financial, Inc.
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 

Condensed Consolidating Balance Sheet
March 31, 2019
 
Parent Issuer
 
Subsidiary Guarantor
 
Non-Guarantor Subsidiaries
 
Consolidating Adjustments
 
Consolidated
Assets:
 
 
 
 
 
 
 
 
 
Investments:
 
 
 
 
 
 
 
 
 
Fixed maturities, available-for-sale, at fair value
$
—

 
$
—

 
$
47,938

 
$
(15
)
 
$
47,923

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

 
—

 
3,159

 
—

 
3,159

Equity securities, at fair value
121

 
—

 
234

 
—

 
355

Short-term investments
—

 
—

 
192

 
—

 
192

Mortgage loans on real estate, net of valuation allowance
—

 
—

 
8,516

 
—

 
8,516

Policy loans
—

 
—

 
1,827

 
—

 
1,827

Limited partnerships/corporations
—

 
—

 
1,166

 
—

 
1,166

Derivatives
33

 
—

 
348

 
(67
)
 
314

Investments in subsidiaries
11,042

 
7,930

 
—

 
(18,972
)
 
—

Other investments
—

 
—

 
89

 
—

 
89

Securities pledged
—

 
—

 
2,084

 
—

 
2,084

Total investments
11,196

 
7,930

 
65,553

 
(19,054
)
 
65,625

Cash and cash equivalents
212

 
—

 
821

 
—

 
1,033

Short-term investments under securities loan agreements, including collateral delivered
11

 
—

 
1,875

 
—

 
1,886

Accrued investment income
—

 
—

 
699

 
—

 
699

Premium receivable and reinsurance recoverable
—

 
—

 
6,753

 
—

 
6,753

Deferred policy acquisition costs and Value of business acquired
—

 
—

 
3,600

 
—

 
3,600

Current income taxes
(9
)
 
23

 
208

 
—

 
222

Deferred income taxes
556

 
23

 
285

 
—

 
864

Loans to subsidiaries and affiliates
150

 
—

 
204

 
(354
)
 
—

Due from subsidiaries and affiliates
5

 
—

 
22

 
(27
)
 
—

Other assets
11

 
—

 
1,342

 
—

 
1,353

Assets related to consolidated investment entities:
 
 
 
 
 
 
 
 
 
Limited partnerships/corporations, at fair value
—

 
—

 
1,426

 
—

 
1,426

Cash and cash equivalents
—

 
—

 
307

 
—

 
307

Corporate loans, at fair value using the fair value option
—

 
—

 
551

 
—

 
551

Other assets
—

 
—

 
17

 
—

 
17

Assets held in separate accounts
—

 
—

 
77,649

 
—

 
77,649

Total assets
$
12,132

 
$
7,976

 
$
161,312

 
$
(19,435
)
 
$
161,985



 
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Voya Financial, Inc.
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 

Condensed Consolidating Balance Sheet (Continued)
March 31, 2019
 
Parent Issuer
 
Subsidiary Guarantor
 
Non-Guarantor Subsidiaries
 
Consolidating Adjustments
 
Consolidated
Liabilities and Shareholders' Equity:
 
 
 
 
 
 
 
 
 
Future policy benefits
$
—

 
$
—

 
$
14,660

 
$
—

 
$
14,660

Contract owner account balances
—

 
—

 
50,706

 
—

 
50,706

Payables under securities loan and repurchase agreements, including collateral held
—

 
—

 
1,978

 
—

 
1,978

Short-term debt
204

 
8

 
143

 
(354
)
 
1

Long-term debt
2,763

 
371

 
17

 
(15
)
 
3,136

Derivatives
33

 
—

 
277

 
(67
)
 
243

Pension and other postretirement provisions
—

 
—

 
465

 
—

 
465

Due to subsidiaries and affiliates
11

 
—

 
13

 
(24
)
 
—

Other liabilities
56

 
127

 
1,961

 
(3
)
 
2,141

Liabilities related to consolidated investment entities:
 
 
 
 
 
 
 
 
 
Collateralized loan obligations notes, at fair value using the fair value option
—

 
—

 
529

 
—

 
529

Other liabilities
—

 
—

 
671

 
—

 
671

Liabilities related to separate accounts
—

 
—

 
77,649

 
—

 
77,649

Total liabilities
3,067

 
506

 
149,069

 
(463
)
 
152,179

Shareholders' equity:
 
 
 
 
 
 
 
 
 
Total Voya Financial, Inc. shareholders' equity
9,065

 
7,470

 
11,502

 
(18,972
)
 
9,065

Noncontrolling interest
—

 
—

 
741

 
—

 
741

Total shareholders' equity
9,065

 
7,470

 
12,243

 
(18,972
)
 
9,806

Total liabilities and shareholders' equity
$
12,132

 
$
7,976

 
$
161,312

 
$
(19,435
)
 
$
161,985


 
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Voya Financial, Inc.
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 

Condensed Consolidating Balance Sheet
December 31, 2018
 
Parent Issuer
 
Subsidiary Guarantor
 
Non-Guarantor Subsidiaries
 
Consolidating Adjustments
 
Consolidated
Assets:
 
 
 
 
 
 
 
 
 
Investments:
 
 
 
 
 
 
 
 
 
Fixed maturities, available-for-sale, at fair value
$
—

 
$
—

 
$
46,313

 
$
(15
)
 
$
46,298

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

 
—

 
2,956

 
—

 
2,956

Equity securities, at fair value
99

 
—

 
174

 
—

 
273

Short-term investments
—

 
—

 
168

 
—

 
168

Mortgage loans on real estate, net of valuation allowance
—

 
—

 
8,676

 
—

 
8,676

Policy loans
—

 
—

 
1,833

 
—

 
1,833

Limited partnerships/corporations
—

 
—

 
1,158

 
—

 
1,158

Derivatives
39

 
—

 
286

 
(78
)
 
247

Investments in subsidiaries
10,099

 
7,060

 
—

 
(17,159
)
 
—

Other investments
—

 
—

 
90

 
—

 
90

Securities pledged
—

 
—

 
1,867

 
—

 
1,867

Total investments
10,237

 
7,060

 
63,521

 
(17,252
)
 
63,566

Cash and cash equivalents
209

 
2

 
1,327

 
—

 
1,538

Short-term investments under securities loan agreements, including collateral delivered
11

 
—

 
1,673

 
—

 
1,684

Accrued investment income
—

 
—

 
650

 
—

 
650

Premium receivable and reinsurance recoverable
—

 
—

 
6,860

 
—

 
6,860

Deferred policy acquisition costs and Value of business acquired
—

 
—

 
4,116

 
—

 
4,116

Current income taxes
(37
)
 
26

 
248

 
—

 
237

Deferred income taxes
553

 
22

 
582

 
—

 
1,157

Loans to subsidiaries and affiliates
79

 
—

 
4

 
(83
)
 
—

Due from subsidiaries and affiliates
2

 
—

 
3

 
(5
)
 
—

Other assets
13

 
—

 
1,323

 
—

 
1,336

Assets related to consolidated investment entities:
 
 
 
 
 
 
 
 

Limited partnerships/corporations, at fair value
—

 
—

 
1,421

 
—

 
1,421

Cash and cash equivalents
—

 
—

 
331

 
—

 
331

Corporate loans, at fair value using the fair value option
—

 
—

 
542

 
—

 
542

Other assets
—

 
—

 
16

 
—

 
16

Assets held in separate accounts
—

 
—

 
71,228

 
—

 
71,228

Total assets
$
11,067

 
$
7,110

 
$
153,845

 
$
(17,340
)
 
$
154,682



 
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Voya Financial, Inc.
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 

Condensed Consolidating Balance Sheet (Continued)
December 31, 2018
 
Parent Issuer
 
Subsidiary Guarantor
 
Non-Guarantor Subsidiaries
 
Consolidating Adjustments
 
Consolidated
Liabilities and Shareholders' Equity:
 
 
 
 
 
 
 
 
 
Future policy benefits
$
—

 
$
—

 
$
14,488

 
$
—

 
$
14,488

Contract owner account balances
—

 
—

 
51,001

 
—

 
51,001

Payables under securities loan and repurchase agreements, including collateral held
—

 
—

 
1,821

 
—

 
1,821

Short-term debt
4

 
—

 
80

 
(83
)
 
1

Long-term debt
2,763

 
371

 
17

 
(15
)
 
3,136

Derivatives
39

 
—

 
178

 
(78
)
 
139

Pension and other postretirement provisions
—

 
—

 
551

 
—

 
551

Due to subsidiaries and affiliates
1

 
—

 
2

 
(3
)
 
—

Other liabilities
47

 
55

 
2,048

 
(2
)
 
2,148

Liabilities related to consolidated investment entities:
 
 
 
 
 
 
 
 
 
Collateralized loan obligations notes, at fair value using the fair value option
—

 
—

 
540

 
—

 
540

Other liabilities
—

 
—

 
688

 
—

 
688

Liabilities related to separate accounts
—

 
—

 
71,228

 
—

 
71,228

Total liabilities
2,854

 
426

 
142,642

 
(181
)
 
145,741

Shareholders' equity:
 
 
 
 
 
 
 
 
 
Total Voya Financial, Inc. shareholders' equity
8,213

 
6,684

 
10,475

 
(17,159
)
 
8,213

Noncontrolling interest
—

 
—

 
728

 
—

 
728

Total shareholders' equity
8,213

 
6,684

 
11,203

 
(17,159
)
 
8,941

Total liabilities and shareholders' equity
$
11,067

 
$
7,110

 
$
153,845

 
$
(17,340
)
 
$
154,682





 
 
 
 
 
 
 
 
 
 

 
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Voya Financial, Inc.
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 

Condensed Consolidating Statement of Operations
For the Three Months Ended March 31, 2019
 
Parent Issuer
 
Subsidiary Guarantor
 
Non-Guarantor Subsidiaries
 
Consolidating Adjustments
 
Consolidated
Revenues:
 
 
 
 
 
 
 
 
 
Net investment income
$
15

 
$
—

 
$
803

 
$
(3
)
 
$
815

Fee income
—

 
—

 
665

 
—

 
665

Premiums
—

 
—

 
582

 
—

 
582

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

 
—

 
(33
)
 
—

 
(33
)
Less: Portion of other-than-temporary impairments recognized in Other comprehensive income (loss)
—

 
—

 
—

 
—

 
—

Net other-than-temporary impairments recognized in earnings
—

 
—

 
(33
)
 
—

 
(33
)
Other net realized capital gains (losses)
—

 
—

 
50

 
—

 
50

Total net realized capital gains (losses)
—

 
—

 
17

 
—

 
17

Other revenue
—

 
—

 
113

 
—

 
113

Income (loss) related to consolidated investment entities:
 
 
 
 
 
 
 
 
 
Net investment income
—

 
—

 
5

 
—

 
5

Total revenues
15

 
—

 
2,185

 
(3
)
 
2,197

Benefits and expenses:
 
 
 
 
 
 
 
 
 
Policyholder benefits
—

 
—

 
815

 
—

 
815

Interest credited to contract owner account balances
—

 
—

 
371

 
—

 
371

Operating expenses
3

 
—

 
699

 
—

 
702

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

 
—

 
85

 
—

 
85

Interest expense
37

 
6

 
2

 
(3
)
 
42

Operating expenses related to consolidated investment entities:
 
 
 
 
 
 
 
 
 
Interest expense
—

 
—

 
5

 
—

 
5

Other expense
—

 
—

 
—

 
—

 
—

Total benefits and expenses
40

 
6

 
1,977

 
(3
)
 
2,020

Income (loss) from continuing operations before income taxes
(25
)
 
(6
)
 
208

 
—

 
177

Income tax expense (benefit)
(5
)
 
(1
)
 
31

 
—

 
25

Income (loss) from continuing operations
(20
)
 
(5
)
 
177

 
—

 
152

Income (loss) from discontinued operations, net of tax
—

 
(79
)
 
—

 
—

 
(79
)
Net income (loss) before equity in earnings (losses) of unconsolidated affiliates
(20
)
 
(84
)
 
177

 
—

 
73

Equity in earnings (losses) of subsidiaries, net of tax
94

 
68

 
—

 
(162
)
 
—

Net income (loss)
74

 
(16
)
 
177

 
(162
)
 
73

Less: Net income (loss) attributable to noncontrolling interest
—

 
—

 
(1
)
 
—

 
(1
)
Net income (loss) available to Voya Financial, Inc.
74

 
(16
)
 
178

 
(162
)
 
74

Less: Preferred stock dividends
10

 
—

 
—

 
—

 
10

Net income (loss) available to Voya Financial, Inc.'s common shareholders
$
64

 
$
(16
)
 
$
178

 
$
(162
)
 
$
64



 
82
 

Table of Contents
Voya Financial, Inc.
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 

 
 
 
 
 
 
 
 
 
 
Condensed Consolidating Statement of Operations
For the Three Months Ended March 31, 2018
 
Parent Issuer
 
Subsidiary Guarantor
 
Non-Guarantor Subsidiaries
 
Consolidating Adjustments
 
Consolidated
Revenues:
 
 
 
 
 
 
 
 
 
Net investment income
$
2

 
$
—

 
$
825

 
$
(4
)
 
$
823

Fee income
—

 
—

 
676

 
—

 
676

Premiums
—

 
—

 
539

 
—

 
539

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

 
—

 
(14
)
 
—

 
(14
)
Less: Portion of other-than-temporary impairments recognized in Other comprehensive income (loss)
—

 
—

 
—

 
—

 
—

Net other-than-temporary impairments recognized in earnings
—

 
—

 
(14
)
 
—

 
(14
)
Other net realized capital gains (losses)
—

 
—

 
(167
)
 
—

 
(167
)
Total net realized capital gains (losses)
—

 
—

 
(181
)
 
—

 
(181
)
Other revenue
—

 
—

 
99

 
—

 
99

Income (loss) related to consolidated investment entities:
 
 
 
 
 
 
 
 
 
Net investment income
—

 
—

 
11

 
—

 
11

Total revenues
2

 
—

 
1,969

 
(4
)
 
1,967

Benefits and expenses:
 
 
 
 
 
 
 
 
 
Policyholder benefits
—

 
—

 
708

 
—

 
708

Interest credited to contract owner account balances
—

 
—

 
382

 
—

 
382

Operating expenses
5

 
—

 
695

 
—

 
700

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

 
—

 
100

 
—

 
100

Interest expense
40

 
11

 
2

 
(4
)
 
49

Operating expenses related to consolidated investment entities:
 
 
 
 
 
 
 
 
 
Interest expense
—

 
—

 
6

 
—

 
6

Other expense
—

 
—

 
1

 
—

 
1

Total benefits and expenses
45

 
11

 
1,894

 
(4
)
 
1,946

Income (loss) from continuing operations before income taxes
(43
)
 
(11
)
 
75

 
—

 
21

Income tax expense (benefit)
—

 
(3
)
 
16

 
(9
)
 
4

Income (loss) from continuing operations
(43
)
 
(8
)
 
59

 
9

 
17

Income (loss) from discontinued operations, net of tax
—

 
—

 
429

 
—

 
429

Net income (loss) before equity in earnings (losses) of unconsolidated affiliates
(43
)
 
(8
)
 
488

 
9

 
446

Equity in earnings (losses) of subsidiaries, net of tax
489

 
818

 
—

 
(1,307
)
 
—

Net income (loss)
446

 
810

 
488

 
(1,298
)
 
446

Less: Net income (loss) attributable to noncontrolling interest
—

 
—

 
—

 
—

 
—

Net income (loss) available to Voya Financial, Inc.
446

 
810

 
488

 
(1,298
)
 
446

Less: Preferred stock dividends
—

 
—

 
—

 
—

 
—

Net income (loss) available to Voya Financial, Inc.'s common shareholders
$
446

 
$
810

 
$
488

 
$
(1,298
)
 
$
446



 
83
 

Table of Contents
Voya Financial, Inc.
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 

 
 
 
 
 
 
 
 
 
 
Condensed Consolidating Statement of Comprehensive Income
For the Three Months Ended March 31, 2019
 
Parent Issuer
 
Subsidiary Guarantor
 
Non-Guarantor Subsidiaries
 
Consolidating Adjustments
 
Consolidated
Net income (loss)
$
74

 
$
(16
)
 
$
177

 
$
(162
)
 
$
73

Other comprehensive income (loss), before tax:
 
 
 
 
 
 
 
 
 
Unrealized gains (losses) on securities
1,284

 
1,036

 
1,284

 
(2,320
)
 
1,284

Other-than-temporary impairments
1

 
1

 
1

 
(2
)
 
1

Pension and other postretirement benefits liability
(1
)
 
—

 
(1
)
 
1

 
(1
)
Other comprehensive income (loss), before tax
1,284

 
1,037

 
1,284

 
(2,321
)
 
1,284

Income tax expense (benefit) related to items of other comprehensive income (loss)
268

 
216

 
268

 
(484
)
 
268

Other comprehensive income (loss), after tax
1,016

 
821

 
1,016

 
(1,837
)
 
1,016

Comprehensive income (loss)
1,090

 
805

 
1,193

 
(1,999
)
 
1,089

Less: Comprehensive income (loss) attributable to noncontrolling interest
—

 
—

 
(1
)
 
—

 
(1
)
Comprehensive income (loss) attributable to Voya Financial, Inc.
$
1,090

 
$
805

 
$
1,194

 
$
(1,999
)
 
$
1,090

 
 
 
 
 
 
 
 
 
 

Condensed Consolidating Statement of Comprehensive Income
For the Three Months Ended March 31, 2018
 
Parent Issuer
 
Subsidiary Guarantor
 
Non-Guarantor Subsidiaries
 
Consolidating Adjustments
 
Consolidated
Net income (loss)
$
446

 
$
810

 
$
488

 
$
(1,298
)
 
$
446

Other comprehensive income (loss), before tax:
 
 
 
 
 
 
 
 
 
Unrealized gains (losses) on securities
(1,523
)
 
(1,163
)
 
(1,523
)
 
2,686

 
(1,523
)
Other-than-temporary impairments
20

 
20

 
20

 
(40
)
 
20

Pension and other postretirement benefits liability
(3
)
 
(1
)
 
(3
)
 
4

 
(3
)
Other comprehensive income (loss), before tax
(1,506
)
 
(1,144
)
 
(1,506
)
 
2,650

 
(1,506
)
Income tax expense (benefit) related to items of other comprehensive income (loss)
(314
)
 
(238
)
 
(314
)
 
552

 
(314
)
Other comprehensive income (loss), after tax
(1,192
)
 
(906
)
 
(1,192
)
 
2,098

 
(1,192
)
Comprehensive income (loss)
(746
)
 
(96
)
 
(704
)
 
800

 
(746
)
Less: Comprehensive income (loss) attributable to noncontrolling interest
—

 
—

 
—

 
—

 
—

Comprehensive income (loss) attributable to Voya Financial, Inc.
$
(746
)
 
$
(96
)
 
$
(704
)
 
$
800

 
$
(746
)


 
84
 

Table of Contents
Voya Financial, Inc.
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 

Condensed Consolidating Statement of Cash Flows
For the Three Months Ended March 31, 2019
 
Parent Issuer
 
Subsidiary Guarantor
 
Non-Guarantor Subsidiaries
 
Consolidating Adjustments
 
Consolidated
Net cash (used in) provided by operating activities
$
(42
)
 
$
16

 
$
183

 
$
(26
)
 
$
131

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

 
—

 
2,414

 
—

 
2,414

Equity securities
7

 
—

 
2

 
—

 
9

Mortgage loans on real estate
—

 
—

 
338

 
—

 
338

Limited partnerships/corporations
—

 
—

 
44

 
—

 
44

Acquisition of:
 
 
 
 
 
 
 
 
 
Fixed maturities
—

 
—

 
(2,500
)
 
—

 
(2,500
)
Equity securities
(17
)
 
—

 
(1
)
 
—

 
(18
)
Mortgage loans on real estate
—

 
—

 
(180
)
 
—

 
(180
)
Limited partnerships/corporations
—

 
—

 
(74
)
 
—

 
(74
)
Short-term investments, net
—

 
—

 
(24
)
 
—

 
(24
)
Derivatives, net
—

 
—

 
39

 
—

 
39

Sales from consolidated investments entities
—

 
—

 
57

 
—

 
57

Purchases within consolidated investment entities
—

 
—

 
(91
)
 
—

 
(91
)
Maturity (issuance) of short-term intercompany loans, net
(71
)
 
—

 
(200
)
 
271

 
—

Return of capital contributions and dividends from subsidiaries
200

 
4

 
—

 
(204
)
 
—

Collateral received (delivered), net
—

 
—

 
(45
)
 
—

 
(45
)
Other, net
—

 
—

 
(13
)
 
—

 
(13
)
Net cash provided by (used in) investing activities
119

 
4

 
(234
)
 
67

 
(44
)


 
85
 

Table of Contents
Voya Financial, Inc.
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 

Condensed Consolidating Statement of Cash Flows (Continued)
For the Three Months Ended March 31, 2019
 
Parent Issuer
 
Subsidiary Guarantor
 
Non-Guarantor Subsidiaries
 
Consolidating Adjustments
 
Consolidated
Cash Flows from Financing Activities:
 
 
 
 
 
 
 
 
 
Deposits received for investment contracts
—

 
—

 
1,453

 
—

 
1,453

Maturities and withdrawals from investment contracts
—

 
—

 
(1,780
)
 
—

 
(1,780
)
Settlements on deposit contracts
—

 
—

 
(2
)
 
—

 
(2
)
Net proceeds from (repayments of) short-term intercompany loans
200

 
8

 
63

 
(271
)
 
—

Return of capital contributions and dividends to parent
—

 
(30
)
 
(200
)
 
230

 
—

Borrowings of consolidated investment entities
—

 
—

 
36

 
—

 
36

Contributions from (distributions to) participants in consolidated investment entities
—

 
—

 
(25
)
 
—

 
(25
)
Proceeds from issuance of common stock, net
2

 
—

 
—

 
—

 
2

Share-based compensation
(15
)
 
—

 
—

 
—

 
(15
)
Common stock acquired - Share repurchase
(250
)
 
—

 
—

 
—

 
(250
)
Dividends paid on common stock
(1
)
 
—

 
—

 
—

 
(1
)
Dividends paid on preferred stock
(10
)
 
—

 
—

 
—

 
(10
)
Net cash (used in) provided by financing activities
(74
)
 
(22
)
 
(455
)
 
(41
)
 
(592
)
Net increase (decrease) in cash and cash equivalents
3

 
(2
)
 
(506
)
 
—

 
(505
)
Cash and cash equivalents, beginning of period
209

 
2

 
1,327

 
—

 
1,538

Cash and cash equivalents, end of period
$
212

 
$
—

 
$
821

 
$
—

 
$
1,033



 
86
 

Table of Contents
Voya Financial, Inc.
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 

Condensed Consolidating Statement of Cash Flows
For the Three Months Ended March 31, 2018
 
Parent Issuer
 
Subsidiary Guarantor
 
Non-Guarantor Subsidiaries
 
Consolidating Adjustments
 
Consolidated
Net cash (used in) provided by operating activities
$
(31
)
 
$
120

 
$
451

 
$
(139
)
 
$
401

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

 
—

 
2,077

 
—

 
2,077

Equity securities
4

 
—

 
2

 
—

 
6

Mortgage loans on real estate
—

 
—

 
241

 
—

 
241

Limited partnerships/corporations
—

 
—

 
30

 
—

 
30

Acquisition of:
 
 
 
 
 
 
 
 
 
Fixed maturities
—

 
—

 
(2,254
)
 
—

 
(2,254
)
Equity securities
(11
)
 
—

 
(1
)
 
—

 
(12
)
Mortgage loans on real estate
—

 
—

 
(391
)
 
—

 
(391
)
Limited partnerships/corporations
—

 
—

 
(54
)
 
—

 
(54
)
Short-term investments, net
212

 
—

 
66

 
—

 
278

Derivatives, net
—

 
—

 
17

 
—

 
17

Sales from consolidated investments entities
—

 
—

 
88

 
—

 
88

Purchases within consolidated investment entities
—

 
—

 
(138
)
 
—

 
(138
)
Maturity (issuance) of short-term intercompany loans, net
(68
)
 
—

 
327

 
(259
)
 
—

Return of capital contributions and dividends from subsidiaries
210

 
96

 
—

 
(306
)
 
—

Other, net
—

 
—

 
(17
)
 
—

 
(17
)
Net cash provided by investing activities - discontinued operations
—

 
—

 
365

 
—

 
365

Net cash provided by (used in) investing activities
347

 
96

 
358

 
(565
)
 
236



 
87
 

Table of Contents
Voya Financial, Inc.
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(Dollar amounts in millions, unless otherwise stated)
 
 
 

Condensed Consolidating Statement of Cash Flows (Continued)
For the Three Months Ended March 31, 2018
 
Parent Issuer
 
Subsidiary Guarantor
 
Non-Guarantor Subsidiaries
 
Consolidating Adjustments
 
Consolidated
Cash Flows from Financing Activities:
 
 
 
 
 
 
 
 
 
Deposits received for investment contracts
—

 
—

 
1,415

 
—

 
1,415

Maturities and withdrawals from investment contracts
—

 
—

 
(1,360
)
 
—

 
(1,360
)
Proceeds from issuance of debt with maturities of more than three months
350

 
—

 
—

 
—

 
350

Repayment of debt with maturities of more than three months
(337
)
 
(13
)
 
—

 
—

 
(350
)
Debt issuance costs
(6
)
 
—

 
—

 
—

 
(6
)
Net (repayments of) proceeds from short-term intercompany loans
(327
)
 
6

 
62

 
259

 
—

Return of capital contributions and dividends to parent
—

 
(210
)
 
(235
)
 
445

 
—

Borrowings of consolidated investment entities
—

 
—

 
62

 
—

 
62

Contributions from (distributions to) participants in consolidated investment entities, net
—

 
—

 
(19
)
 
—

 
(19
)
Proceeds from issuance of common stock, net
2

 
—

 
—

 
—

 
2

Share-based compensation
(9
)
 
—

 
—

 
—

 
(9
)
Dividends paid on common stock
(2
)
 
—

 
—

 
—

 
(2
)
Net cash used in financing activities - discontinued operations
—

 
—

 
(480
)
 
—

 
(480
)
Net cash (used in) provided by financing activities
(329
)
 
(217
)
 
(555
)
 
704

 
(397
)
Net (decrease) increase in cash and cash equivalents
(13
)
 
(1
)
 
254

 
—

 
240

Cash and cash equivalents, beginning of period
244

 
1

 
1,471

 
—

 
1,716

Cash and cash equivalents, end of period
231

 
—

 
1,725

 
—

 
1,956

Less: Cash and cash equivalents of discontinued operations, end of period
—

 
—

 
545

 
—

 
545

Cash and cash equivalents of continuing operations, end of period
$
231

 
$
—

 
$
1,180

 
$
—

 
$
1,411




 
88
 

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

For the purposes of the discussion in this Quarterly Report on Form 10-Q, the term Voya Financial, Inc. refers to Voya Financial, Inc. and the terms “Company,” “we,” “our,” and “us” refer to Voya Financial, Inc. and its subsidiaries.

The following discussion and analysis presents a review of our consolidated results of operations for the three months ended March 31, 2019 and 2018 and financial condition as of March 31, 2019 and December 31, 2018. 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 Discussion and Analysis of Financial Condition and Results of Operations” section contained in our Annual Report on Form 10-K for the year ended December 31, 2018 ("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 the Note Concerning Forward-Looking Statements. Investors are directed to consider the risks and uncertainties discussed in Part II, Item 1A. of this Quarterly Report on Form 10-Q, as well as in other documents we have filed with the Securities and Exchange Commission ("SEC").

Overview

We provide our principal products and services through four segments: Retirement, Investment Management, Employee Benefits and Individual Life. Corporate includes activities not directly related to our segments, results of the Retained Business and certain insignificant activities that are not meaningful to our business strategy. See the Segments Note in our Condensed Consolidated Financial Statements in Part I, Item 1. of this Quarterly Report on Form 10-Q for further information on our segments.

In general, our primary sources of revenue include fee income from managing investment portfolios for clients as well as asset management and administrative fees from certain insurance and investment products; investment income on our general account and other funds; and from insurance premiums. Our fee income derives from asset- and participant-based advisory and recordkeeping fees on our retirement products, from management and administrative fees we earn from managing client assets, from the distribution, servicing and management of mutual funds, as well as from other fees such as surrender charges from policy withdrawals. We generate investment income on the assets in our general account, primarily fixed income assets, that back our liabilities and surplus. We earn premiums on insurance policies, including stop-loss, group life, voluntary and disability products as well as individual life insurance and retirement contracts. Our expenses principally consist of general business expenses, commissions and other costs of selling and servicing our products, interest credited on general account liabilities as well as insurance claims and benefits including changes in the reserves we are required to hold for anticipated future insurance benefits.

Because our fee income is generally tied to account values, our profitability is determined in part by the amount of assets we have under management or administration, which in turn depends on sales volumes to new and existing clients, net deposits from retirement plan participants, and changes in the market value of account assets. Our profitability also depends on the difference between the investment income we earn on our general account assets, or our portfolio yield, and crediting rates on client accounts. Underwriting income, principally dependent on our ability to price our insurance products at a level that enables us to earn a margin over the costs associated with providing benefits and administering those products, and to effectively manage actuarial and policyholder behavior factors, is another component of our profitability.

Profitability also depends on our ability to effectively deploy capital and utilize our tax assets. Furthermore, profitability depends on our ability to manage expenses to acquire new business, such as commissions and distribution expenses, as well as other operating costs.






 
89
 

The following represents segment percentage contributions to total Adjusted operating revenues and Adjusted operating earnings before income taxes for the three months ended March 31, 2019:
 
March 31, 2019
percent of total
Adjusted Operating Revenues
 
Adjusted Operating Earnings before Income Taxes
Retirement
32.0
%
 
66.5
 %
Investment Management
7.4
%
 
17.6
 %
Employee Benefits
25.1
%
 
19.6
 %
Individual Life
30.9
%
 
24.7
 %
Corporate
4.6
%
 
(28.4
)%

Discontinued Operations

On June 1, 2018, we consummated a series of transactions (collectively, the "Transaction") pursuant to a Master Transaction Agreement dated December 20, 2017 ("MTA") with VA Capital Company LLC ("VA Capital") and Athene Holding Ltd ("Athene"). As part of the Transaction, Venerable Holdings, Inc. ("Venerable"), a wholly owned subsidiary of VA Capital, acquired two of our subsidiaries, Voya Insurance and Annuity Company ("VIAC") and Directed Services, LLC ("DSL"), and VIAC and other Voya subsidiaries reinsured to Athene substantially all of their fixed and fixed indexed annuities business. The Transaction resulted in the disposition of substantially all of our Closed Block Variable Annuity ("CBVA") and Annuities businesses. Pursuant to the terms of the Transaction, we have retained a small number of CBVA and Annuities policies that are not included in the disposed businesses described above as "Retained Business." Refer to the Discontinued Operations Note in our Condensed Consolidated Financial Statements in Part I, Item 1. of this Quarterly Report on Form 10-Q for further details.

VA Capital provided us with its proposed purchase price adjustments in December 2018. Income (loss) from discontinued operations, net of tax in the first quarter of 2019 includes a $79 million charge related to a proposed settlement of such purchase price true-up amounts payable by us in connection with the Transaction.  We do not anticipate further material charges in connection with the Transaction.



 
90
 

The following table summarizes the components of Income (loss) from discontinued operations, net of tax for the three months ended March 31, 2019 and 2018:
 
Three Months Ended March 31,
 
2019
 
2018
Revenues:
 
 
 
Net investment income
$
—

 
$
305

Fee income
—

 
179

Premiums
—

 
44

Total net realized capital gains (losses)
—

 
(176
)
Other revenue
—

 
6

Total revenues
—

 
358

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

 
320

Operating expenses
—

 
54

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

 
10

Interest expense
—

 
5

Total benefits and expenses
—

 
389

Income (loss) from discontinued operations before income taxes
—

 
(31
)
Income tax expense (benefit)
—

 
(11
)
Adjustment to loss on sale, net of tax
(79
)
 
449

Income (loss) from discontinued operations, net of tax
$
(79
)
 
$
429


Trends and Uncertainties
Throughout this Management’s Discussion and Analysis of Financial Condition and Results of Operations ("MD&A"), we discuss a number of trends and uncertainties that we believe may materially affect our future liquidity, financial condition or results of operations. Where these trends or uncertainties are specific to a particular aspect of our business, we often include such a discussion under the relevant caption of this MD&A, as part of our broader analysis of that area of our business. In addition, the following factors represent some of the key general trends and uncertainties that have influenced the development of our business and our historical financial performance and that we believe will continue to influence our continuing business operations and financial performance in the future. Additionally, key general trends and uncertainties related to discontinued operations are discussed further below.
Market Conditions
As the direction of future domestic monetary policy becomes less certain, an increase in market volatility could affect our business, including through effects on the rate and spread component of yields we earn on invested assets, changes in required reserves and capital, and fluctuations in the value of our assets under management ("AUM") or administration ("AUA"), which for certain of our segments also includes assets under advisement. These effects could be exacerbated by uncertainty about future fiscal policy, changes in tax policy, the scope of potential deregulation, levels of global trade, and geopolitical risk. In the short- to medium-term, the potential for increased volatility, coupled with prevailing interest rates below historical averages, can pressure sales and reduce demand as consumers hesitate to make financial decisions. In addition, this environment could make it difficult to manufacture products that are consistently both attractive to customers and profitable. Financial performance can be adversely affected by market volatility as fees driven by AUM fluctuate, hedging costs increase and revenue declines due to reduced sales and increased outflows. As a company with strong retirement, investment management and insurance capabilities, however, we believe the market conditions noted above may, over the long term, enhance the attractiveness of our broad portfolio of products and services. We will need to continue to monitor the behavior of our customers and other factors, including mortality rates, morbidity rates, and lapse rates, which adjust in response to changes in market conditions in order to ensure that our products and services remain attractive as well as profitable. For additional information on our sensitivity to interest rates and equity market prices, see Quantitative and Qualitative Disclosures About Market Risk in Part I, Item 3. of this Quarterly Report on Form 10-Q.

 
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Interest Rate Environment

In the first quarter of 2019, the term structure of interest rates featured sharply lower rates. While domestic economic conditions spurred an increase in the Fed Funds rate in December 2018 - the eighth increase in less than two years - rates across the term structure rallied late in the fourth quarter and through much of the first quarter on a weakening economic outlook. Intermediate parts of the yield curve inverted - with some intermediate Treasury maturities offering lower yields than shorter-dated maturities - as the market began to price in lower future policy rates. Lower rates and a flattening yield curve in The United States were part of a global phenomenon that saw sovereign bonds rise in price as yields fell, reflecting expectations for lower global growth and subdued inflationary pressures. The timing and impact of any further changes in the Federal Funds rate, or deviations in the expected pace of Federal Reserve balance sheet normalization are uncertain and dependent on the Federal Reserve Board's assessment of economic growth, labor market developments, inflation outlook, fiscal policy developments and other risks that will impact the level and volatility of rates.

The continued low interest rate environment has affected and may continue to affect the demand for our products in various ways. While interest rates remain low by historical standards, we may experience lower sales and reduced demand as it is more difficult to manufacture products that are consistently both attractive to customers and our economic targets. Our financial performance may be adversely affected by the current low interest rate environment, or by rapidly increasing rates.

We believe the interest rate environment will continue to influence our business and financial performance in the future for several reasons, including the following:

•
Our continuing business general account investment portfolio, which was approximately $63.8 billion as of March 31, 2019, consists predominantly of fixed income investments and had an annualized earned yield of approximately 4.9% in the first quarter of 2019. In the near term and absent further material change in yields available on fixed income investments, we expect the yield we earn on new investments will be lower than the yields we earn on maturing investments, which were generally purchased in environments where interest rates were higher than current levels. We currently anticipate that proceeds that are reinvested in fixed income investments during 2019 will earn an average yield below the prevailing portfolio yield. If interest rates were to rise, we expect the yield on our new money investments would also rise and gradually converge toward the yield of those maturing assets. In addition, while less material to financial results than new money investment rates, movements in prevailing interest rates also influence the prices of fixed income investments that we sell on the secondary market rather than holding until maturity or repayment, with rising interest rates generally leading to lower prices in the secondary market, and falling interest rates generally leading to higher prices.

•
Certain of our products pay guaranteed minimum rates - for example, fixed accounts and a portion of the stable value accounts included within defined contribution retirement plans and universal life ("UL") policies. We are required to pay these guaranteed minimum rates even if earnings on our investment portfolio decline, with the resulting investment margin compression negatively impacting earnings. In addition, we expect more policyholders to hold policies (lower lapses) with comparatively high guaranteed rates longer in a low interest rate environment. Conversely, a rise in average yield on our investment portfolio would positively impact earnings if the average interest rate we pay on our products does not rise correspondingly. Similarly, we expect policyholders would be less likely to hold policies (higher lapses) with existing guarantees as interest rates rise.

For additional information on the continued low impact of the interest rate environment, see Risk Factors - The level of interest rates may adversely affect our profitability, particularly in the event of a continuation of the low interest rate environment or a period of rapidly increasing interest rates in Part I, Item 1A. of our Annual Report on Form 10-K. Also, for additional information on our sensitivity to interest rates, see Quantitative and Qualitative Disclosures About Market Risk in Part I, Item 3. of this Quarterly Report on Form 10-Q.


 
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Seasonality and Other Matters

Our business results can vary from quarter to quarter as a result of seasonal factors. For all of our segments, the first quarter of each year typically has elevated operating expenses, reflecting higher payroll taxes, equity compensation grants, and certain other expenses that tend to be concentrated in the first quarters. Additionally, alternative investment income tends to be lower in the first quarters. Other seasonal factors that affect our business include:

Retirement

•
The first quarters tend to have the highest level of recurring deposits in Corporate Markets, due to the increase in participant contributions from the receipt of annual bonus award payments or annual lump sum matches and profit sharing contributions made by many employers. Corporate Market withdrawals also tend to increase in the first quarters as departing sponsors change providers at the start of a new year.

•
In the third quarters, education tax-exempt markets typically have the lowest recurring deposits, due to the timing of vacation schedules in the academic calendar.

•
The fourth quarters tend to have the highest level of single/transfer deposits due to new Corporate Market plan sales as sponsors transfer from other providers when contracts expire at the fiscal or calendar year-end. Recurring deposits in the Corporate Market may be lower in the fourth quarters as higher paid participants scale back or halt their contributions upon reaching the annual maximums allowed for the year. Finally, Corporate Market withdrawals tend to increase in the fourth quarters, as in the first quarters, due to departing sponsors.

Investment Management

•
In the fourth quarters, performance fees are typically higher due to certain performance fees being associated with calendar-year performance against established benchmarks and hurdle rates.

Employee Benefits

•
The first quarters tend to have the highest Group Life loss ratio. Sales for Group Life and Stop Loss also tend to be the highest in the first quarters, as most of our contracts have January start dates in alignment with the start of our clients' fiscal years.

•
The third quarters tend to have the second highest Group Life and Stop Loss sales, as a large number of our contracts have July start dates in alignment with the start of our clients' fiscal years.

In addition to these seasonal factors, our results are impacted by the annual review of assumptions related to future policy benefits and deferred policy acquisition costs ("DAC"), value of business acquired ("VOBA") (collectively, "DAC/VOBA") and other intangibles, which we generally complete in the third quarter of each year, and annual remeasurement related to our employee benefit plans, which we generally complete in the fourth quarter of each year.

Stranded Costs

As a result of the Transaction, certain costs that relate to activities for which we continue to provide transitional services for businesses sold and for which we are reimbursed under a transition services agreement ("TSA"), are reported within continuing operations along with the associated revenues from the TSAs. Additionally, indirect costs, such as those related to corporate and shared service functions that were previously allocated to the businesses sold, and other expenses that do not meet the foregoing criteria are reported within continuing operations. These costs reported within continuing operations ("Stranded Costs") are included in Adjusted operating earnings before income taxes and Income (loss) from continuing operations for all periods presented. Because we do not believe that TSA revenues and Stranded Costs are representative of the future run-rate of revenues and expenses of our continuing operations, they are recorded in Corporate. We plan to address the Stranded Costs through a cost reduction strategy. Refer to Restructuring in Part I, Item 2 of this Quarterly Report on Form 10-Q for more information on this program.

Carried Interest

Net investment income and net realized gains (losses), within our Investment Management segment, includes, for this and previous periods, performance-based capital allocations related to sponsored private equity funds ("carried interest") that are subject to later

 
93
 

reversal based on subsequent fund performance, to the extent that cumulative rates of investment return fall below specified investment hurdle rates. Should the market value of this portfolio increase in future periods, this reversal could be fully or partially recovered. Amounts for carried interest that were reversed or recovered for the three months ended March 31, 2019 and 2018 were immaterial. For further information, 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.

Restructuring

Organizational Restructuring

As a result of the closing of the Transaction, we are undertaking further restructuring efforts to execute the transition and reduce stranded expenses associated with businesses sold, as well as our corporate and shared services functions ("Organizational Restructuring").

In October 2018, we announced our decision to cease new sales following the strategic review of our Individual Life business. See the Business, Basis of Presentation and Significant Accounting Policies Note in Part I, Item 1. of this Quarterly Report on Form 10-Q for additional information.

In November 2018, we announced that we are targeting an additional $100 million of cost savings by the end of 2020, which is in addition to savings previously announced of $110 to $130 million by the middle of 2019 and $20 million of expected savings from ceasing Individual Life sales referenced above. These savings initiatives will improve operational efficiency, strengthen technology capabilities and centralize certain sales, operations and investment management activities. The restructuring charges in connection with these initiatives are not reflected in our run-rate cost savings estimates.

The Organizational Restructuring initiatives described above have resulted in recognition of severance and organizational transition costs and are reflected in Operating expenses in the Condensed Consolidated Statements of Operations, but excluded from Adjusted operating earnings before income taxes. For the three months ended March 31, 2019 and March 31, 2018, we incurred Organizational Restructuring expenses of $83 million and $5 million, respectively, of severance and organizational transition costs associated with continuing operations.

In addition to the restructuring costs incurred above, the anticipated reduction in employees from the execution of the initiatives described above triggered an immaterial curtailment loss and related re-measurement gain of our qualified defined benefit pension plan.

Including the 2019 expense, the aggregate amount of Organizational Restructuring expenses we expect to incur is in the range of $200 to $300 million. We anticipate that these costs, which will include severance, organizational transition costs incurred to reorganize operations and other costs such as contract terminations and asset write-offs, will occur at least through the end of 2020.

Restructuring expenses that were directly related to the preparation for and execution of the Transaction are included in Income (loss) from discontinued operations, net of tax, in the Condensed Consolidated Statements of Operations. For the three months ended March 31, 2018, we incurred Organizational Restructuring expenses as a result of the Transaction of $(2) million of severance and organizational transition costs, which are reflected in discontinued operations.

2016 Restructuring

In 2016, we began implementing a series of initiatives designed to make us a simpler, more agile company able to deliver an enhanced customer experience ("2016 Restructuring"). These initiatives include an increasing emphasis on less capital-intensive products and the achievement of operational synergies.

Substantially all of the initiatives associated with the 2016 Restructuring program concluded at the end of 2018. However, we expect to incur approximately $10 to $20 million of additional restructuring costs associated with the completion of the information technology transition agreement entered into during 2017.

For the three months ended March 31, 2019 and March 31, 2018, the total of all initiatives in the 2016 Restructuring program resulted in restructuring expenses of $3 million and $14 million, respectively, which are reflected in Operating expenses in the Condensed Consolidated Statements of Operations, but are excluded from Adjusted operating earnings before income taxes. These expenses are classified as a component of Other adjustments to Income (loss) from continuing operations before income taxes and consequently are not included in the adjusted operating results of our segments.

 
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Operating Measures

This MD&A includes a discussion of Adjusted operating earnings before income taxes and Adjusted operating revenues, each of which is a measure used by management to evaluate segment performance. We believe that Adjusted operating earnings before income taxes provides a meaningful measure of our business performance and enhances the understanding of our financial results by focusing on the operating performance and trends of the underlying business segments and excluding items that tend to be highly variable from period to period based on capital market conditions or other factors. Adjusted operating earnings before income taxes does not replace Income (loss) from continuing operations before income taxes as the comparable U.S. GAAP measure of our consolidated results of operations. Therefore, we believe that it is useful to evaluate both Income (loss) from continuing operations before income taxes and Adjusted operating earnings before income taxes when reviewing our financial and operating performance. See the Segments Note in our Condensed Consolidated Financial Statements in Part I, Item 1. of this Quarterly Report on Form 10-Q for a description of the adjustments made to reconcile Income (loss) before income taxes to Total adjusted operating earnings before income taxes and the adjustments made to reconcile Total revenues to Total adjusted operating revenues.

Results of Operations - Company Condensed Consolidated

The following table presents summary condensed consolidated financial information for the periods indicated:
 
Three Months Ended March 31,
($ in millions)
2019
 
2018
Revenues:
 
 
 
Net investment income
$
815

 
$
823

Fee income
665

 
676

Premiums
582

 
539

Net realized capital gains (losses)
17

 
(181
)
Other revenue
113

 
99

Income (loss) related to consolidated investment entities
5

 
11

Total revenues
2,197

 
1,967

Benefits and expenses:
 
 
 
Interest credited and other benefits to contract owners/policyholders
1,186

 
1,090

Operating expenses
702

 
700

Net amortization of Deferred policy acquisition costs and Value of business acquired
85

 
100

Interest expense
42

 
49

Operating expenses related to consolidated investment entities
5

 
7

Total benefits and expenses
2,020

 
1,946

Income (loss) from continuing operations before income taxes
177

 
21

Income tax expense (benefit)
25

 
4

Income (loss) from continuing operations
152

 
17

Income (loss) from discontinued operations, net of tax
(79
)
 
429

Net Income (loss)
73

 
446

Less: Net income (loss) attributable to noncontrolling interest
(1
)
 
—

Less: Preferred stock dividends
10

 
—

Net income (loss) available to our common shareholders
$
64

 
$
446


 
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The following table presents information about our Operating expenses for the periods indicated:
 
Three Months Ended March 31,
($ in millions)
2019
 
2018
Operating expenses:
 
 
 
Commissions
$
195

 
$
173

General and administrative expenses:
 
 
 
Net actuarial (gains)/losses related to pension and other postretirement benefit obligations
(66
)
 
—

Restructuring expenses
86

 
19

Other general and administrative expenses
554

 
559

Total general and administrative expenses
574

 
578

Total operating expenses, before DAC/VOBA deferrals
769

 
751

DAC/VOBA deferrals
(67
)
 
(51
)
Total operating expenses
$
702

 
$
700


The following table presents AUM and AUA as of the dates indicated:
 
As of March 31,
($ in millions)
2019
 
2018
AUM and AUA:
 
 
 
Retirement(2)
$
391,856

 
$
417,007

Investment Management
259,610

 
271,459

Employee Benefits
1,767

 
1,794

Individual Life
15,530

 
15,588

Eliminations/Other
(121,380
)
 
(118,368
)
Total AUM and AUA(1)(2)
$
547,383

 
$
587,480

 
 
 
 
AUM
298,180

 
313,532

AUA(2)
249,203

 
273,948

Total AUM and AUA(1)(2)
$
547,383

 
$
587,480

(1) Includes AUM and AUA related to the businesses sold in the prior period, for which a substantial portion of the assets continue to be managed by our Investment Management segment.
(2) Retirement includes Assets Under Advisement, which are presented in AUA. For further detail, refer to the Retirement segment results section below. Prior period information have been revised to conform to current period presentation.

 
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The following table presents a reconciliation of Income (loss) from continuing operations to Adjusted operating earnings before income taxes and the relative contributions of each segment to Adjusted operating earnings before income taxes for the periods indicated:
 
Three Months Ended March 31,
($ in millions)
2019
 
2018
Income (loss) from continuing operations before income taxes
$
177

 
$
21

Less Adjustments(1):
 
 
 
Net investment gains (losses) and related charges and adjustments
23

 
(61
)
Net guaranteed benefit hedging gains (losses) and related charges and adjustments
(2
)
 
(14
)
Loss related to businesses exited through reinsurance or divestment
(21
)
 
(45
)
Income (loss) attributable to noncontrolling interest
(1
)
 
—

Loss related to early extinguishment of debt
—

 
(3
)
Immediate recognition of net actuarial gains (losses) related to pension and other post-employment benefit obligations and gains (losses) from plan amendments and curtailments
66

 
—

Dividend payments made to preferred shareholders
10

 
—

Other adjustments
(92
)
 
(19
)
Total adjustments to income (loss) from continuing operations before income taxes
$
(17
)
 
$
(142
)
 
 
 
 
Adjusted operating earnings before income taxes by segment:
 
 
 
Retirement
$
129

 
$
109

Investment Management
34

 
61

Employee Benefits
38

 
32

Individual Life
48

 
17

Corporate(2)
(55
)
 
(56
)
Total adjusted operating earnings before income taxes
$
194

 
$
163

(1) Refer to the Segments Note to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for a description of these items.
(2) Adjusted operating earnings before income taxes for Corporate includes Net investment gains (losses) and Net guaranteed benefit hedging gains (losses) associated with the Retained Business in the prior period. These amounts are insignificant and do not distort the ability to make a meaningful evaluation of the trends of Corporate activities.

 
97
 

The following table presents a reconciliation of Total revenues to Adjusted operating revenues and the relative contributions of each segment to Adjusted operating revenues for the periods indicated:
 
Three Months Ended March 31,
($ in millions)
2019
 
2018
Total revenues
$
2,197

 
$
1,967

Adjustments(1):
 
 
 
Net realized investment gains (losses) and related charges and adjustments
10

 
(73
)
Gain (loss) on change in fair value of derivatives related to guaranteed benefits
(3
)
 
(7
)
Revenues related to businesses exited through reinsurance or divestment
76

 
(40
)
Revenues attributable to noncontrolling interest
4

 
6

Other adjustments
87

 
58

Total adjustments to revenues
$
174

 
$
(56
)
 
 
 
 
Adjusted operating revenues by segment:
 
 
 
Retirement
$
648

 
$
662

Investment Management
148

 
185

Employee Benefits
508

 
453

Individual Life
626

 
631

Corporate(2)
93

 
92

Total adjusted operating revenues
$
2,023

 
$
2,023

(1) Refer to the Segments Note to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for a description of these items.
(2) Adjusted operating revenues for Corporate includes Net investment gains (losses) and Gains (losses) on change in fair value of derivatives related to guaranteed benefits associated with the Retained Business in the prior period. These amounts are insignificant and do not distort the ability to make a meaningful evaluation of the trends of Corporate activities.

The following tables describe the components of the reconciliation between Adjusted operating earnings before income taxes and Income (loss) from continuing operations before income taxes related to Net investment gains (losses) and related charges and adjustments and Net guaranteed benefits hedging gains (losses) and related charges and adjustments.

The following table presents the adjustment to Income (loss) from continuing operations before income taxes related to Total investment gains (losses) and the related Net amortization of DAC/VOBA and other intangibles for the periods indicated:
 
Three Months Ended March 31,
($ in millions)
2019
 
2018
Other-than-temporary impairments
$
(33
)
 
$
(14
)
CMO-B fair value adjustments(1)
29

 
(38
)
Gains (losses) on the sale of securities
43

 
(27
)
Other, including changes in the fair value of derivatives
(16
)
 
6

Total investment gains (losses)
23

 
(73
)
Net amortization of DAC/VOBA and other intangibles on above
—

 
12

Net investment gains (losses)
$
23

 
$
(61
)
(1) For a description of our CMO-B portfolio, see Investments - CMO-B Portfolio in Part I, Item 2. of this Quarterly report on Form 10-Q and Part II, Item 7. of our Annual Report on Form 10-K.

 
98
 


The following table presents the adjustment to Income (loss) from continuing operations before taxes related to Guaranteed benefit hedging gains (losses) net of DAC/VOBA and other intangibles amortization for the periods indicated.
 
Three Months Ended March 31,
($ in millions)
2019
 
2018
Gain (loss), excluding nonperformance risk
$
(1
)
 
$
(10
)
Gain (loss) due to nonperformance risk
(1
)
 
(4
)
Net gain (loss) prior to related amortization of DAC/VOBA and sales inducements
(2
)
 
(14
)
Net amortization of DAC/VOBA and sales inducements
—

 
—

Net guaranteed benefit hedging gains (losses) and related charges and adjustments
$
(2
)
 
$
(14
)

The following table presents significant items included in Income (loss) from discontinued operations, net of tax for the periods indicated:
 
Three Months Ended March 31,
($ in millions)
2019
 
2018
Adjustment to loss on sale, net of tax excluding costs to sell
$
(79
)
 
$
455

Transaction costs
—

 
(6
)
Net results of discontinued operations, excluding notable items
—

 
207

Income tax benefit (expense)
—

 
11

Notable items in CBVA results:
 
 
 
Net losses related to incurred guaranteed benefits and CBVA hedge program, excluding nonperformance risk
—

 
(198
)
Gain (loss) due to nonperformance risk
—

 
(39
)
DAC/VOBA and other intangibles unlocking
—

 
(1
)
Income (loss) from discontinued operations, net of tax(1)
$
(79
)
 
$
429

(1) Refer to the Discontinued Operations Note in Part I, Item I. of this Quarterly Report on Form 10-Q for further detail.

Terminology Definitions

Net realized capital gains (losses), net realized investment gains (losses) and related charges and adjustments, and Net guaranteed benefit hedging gains (losses) and related charges and adjustments include changes in the fair value of derivatives. Increases in the fair value of derivative assets or decreases in the fair value of derivative liabilities result in "gains." Decreases in the fair value of derivative assets or increases in the fair value of derivative liabilities result in "losses."

In addition, we have certain products that contain guarantees that are embedded derivatives related to guaranteed benefits and index-crediting features, while other products contain such guarantees that are considered derivatives (collectively "guaranteed benefit derivatives").

Consolidated - Three Months Ended March 31, 2019 Compared to Three Months Ended March 31, 2018

Net Income (Loss)

Net investment income decreased $8 million from $823 million to $815 million primarily due to:

•
lower alternative investment income in the current period primarily driven by the impact of equity market performance.

The decrease was partially offset by:

•
higher prepayment fee income; and
•
the impact of the current interest rate environment on reinvestment rates.


 
99
 

Fee income decreased $11 million from $676 million to $665 million primarily due to:

•
margin rate compression and change in business mix in our Retirement segment; and
•
lower management and administrative fees earned in our Investment Management segment due to lower average general account AUM driven by the impact of the Transaction.

The decrease was partially offset by:

•
amortization of unearned revenue reserve, net of unlocking, due to higher gross profits in our Individual Life segment.

Premiums increased $43 million from $539 million to $582 million primarily due to:

•
higher premiums driven by growth of the stop loss, voluntary and group life business in our Employee Benefits segment;

The increase was partially offset by:

•
a decline in term premiums in our Individual Life segment due to discontinued sales;
•
lower considerations of life contingent contracts resulting in lower Premiums which corresponds to a decrease in Interest credited and other benefits to contract owners/policyholders in Retained Business in our Corporate segment.

Net realized capital gains (losses) increased $198 million from a loss of $181 million to a gain of $17 million primarily due to:

•
favorable impact of market value changes associated with business reinsured, which are partially offset by a corresponding amount in Interest credited and other benefits to contract owners/policyholders;
•
higher Net realized investment gains as a result of Gains on the sale of securities and gains in CMO-B fair value adjustments partially offset by losses due to changes in the fair value of derivatives and higher impairments; and
•
favorable change in the fair value of guaranteed benefit derivatives excluding nonperformance risk as a result of interest rate movements.

Other revenue increased $14 million from $99 million to $113 million primarily due to:

•
revenue resulting from transition services agreements.

Interest credited and other benefits to contract owners/policyholders increased $96 million from $1,090 million to $1,186 million primarily due to:

•
market value impacts and changes in the reinsurance deposit asset associated with business reinsured, which are partially offset by a corresponding amount in Net realized capital gains (losses);
•
higher volume on stop loss, voluntary and group life in our Employee Benefits segment.

The increase was partially offset by:

•
reserve changes as a result of favorable net mortality in our Individual Life segment and Retained Business.

Operating expenses increased $2 million from $700 million to $702 million primarily due to:

•
net actuarial gain related to our pension and other postretirement benefit obligations;
•
higher litigation reserves related to a divested business in the prior period; and
•
lower Stranded costs.


 
100
 

The decrease was partially offset by:

•
higher restructuring charges in the current period;
•
an increase in volume based expenses in our Retirement and Employee Benefit segment;
•
higher expenses on our business reinsured; and
•
higher broker-dealer expenses.

Net amortization of DAC/VOBA decreased $15 million from $100 million to $85 million primarily due to:

•
higher unfavorable unlocking and amortization in the prior period driven by an update to the assumptions related the GMIR initiatives in our Retirement segment. See DAC/VOBA and Other Intangibles Unlocking in Part I, Item 2. of this Quarterly Report on Form 10-Q for further information.
    
The increase was partially offset by:
 
•
net unfavorable amortization on our business reinsured;
•
favorable amortization in the prior period due to net investment losses; and
•
higher amortization on the interest sensitive block partially offset by lower unlocking driven by unfavorable mortality in the prior period, in our Individual Life segment.

Income from continuing operations before income taxes increased $156 million from $21 million to a $177 million primarily due to:

•
Net investment gains and related charges and adjustments primarily due to equity market and interest rate movements, discussed below;
•
Immediate recognition of net actuarial gain related to pension plan adjustments and curtailments, discussed below;
•
higher Adjusted operating earnings before income taxes, discussed below;
•
lower Loss related to business exited through reinsurance or divestment, discussed below; and
•
favorable changes in Net guaranteed benefit hedging gains (loss) and related charges and adjustments primarily due to changes in interest rates, discussed below.

The increase was partially offset by:
 
•
unfavorable changes in Other adjustments due to higher restructuring charges in the current period.

Income tax expense (benefit) increased $21 million from $4 million to $25 million primarily due to:

•
an increase in income before income taxes.

The increase was partially offset by:

•
an increase in the dividends received deduction ("DRD").

Income (loss) from discontinued operations, net of tax changed $508 million from a gain of $429 million to a loss of $79 million primarily due to:

•
Adjustment to loss on sale, net of tax excluding costs to sell made in the current period.

Adjusted operating Earnings before Income Taxes

Adjusted operating earnings before income taxes increased $31 million from $163 million to $194 million primarily due to:

•
higher unfavorable DAC/VOBA unlocking in the prior period driven by an update to the assumptions related the GMIR initiative in our Retirement segment;
•
higher net favorable DAC/VOBA and other intangibles unlocking, driven by mortality experience in our Individual Life segment;
•
lower Stranded costs and revenue resulting from transition services agreements in our Corporate segment; and

 
101
 

•
favorable net impact of premiums and benefits incurred in the stop loss, voluntary, and group life blocks in our Employee Benefits segment.

The increase was partially offset by:

•
higher volume related expenses in our Retirement and Employee Benefits segments;
•
lower investment capital returns and lower average general account AUM driven by the impact of the Transaction in our Investment Management segment;
•
a decrease in alternative investment income; and
•
lower net earnings related to runoff business.

Adjustments from Income (Loss) from Continuing Operations before Income Taxes to Adjusted Operating Earnings (Loss) before Income Taxes

Net investment gains (losses) and related charges and adjustments changed $84 million from a loss of $61 million to a gain of $23 million due to:
 
•
gains on the sale of securities in the current period; and
•
favorable changes in CMO-B fair value adjustments as a result of equity market and interest rate movements.

The increase was partially offset by:

•
changes in the fair value of derivatives;
•
higher impairments in the current period; and
•
favorable amortization of DAC/VOBA and sales inducements in the prior period.

Net guaranteed benefit hedging gains losses and related charges and adjustments decreased $12 million from $14 million to $2 million primarily due to:

•
favorable changes in fair value of guaranteed benefit derivatives excluding nonperformance risk as a result of changes in interest rates; and
•
lower losses due to nonperformance risk.

Loss related to businesses exited through reinsurance or divestment decreased $24 million from $45 million to $21 million primarily due to:

•
higher litigation reserves related to a divested business in the prior period.

Immediate recognition of net actuarial gains related to pension and other postretirement benefit obligations and gains from plan adjustments and curtailments changed $66 million due to the remeasurement of the pension plan as a result of a curtailment.
    
Other adjustments to operating earnings changed $73 million from a loss of $19 million to a loss of $92 million primarily due to:
 
•
higher costs recorded in the current period related to restructuring. See the Restructuring Note in Part I, Item 1. of this Quarterly Report on Form 10-Q for further description.



 
102
 

Results of Operations - Segment by Segment

Retirement

The following table presents Adjusted operating earnings before income taxes of our Retirement segment for the periods indicated:
 
Three Months Ended March 31,
($ in millions)
2019
 
2018
Adjusted operating revenues:
 
 
 
Net investment income and net realized gains (losses)
$
415

 
$
423

Fee income
199

 
212

Premiums
1

 
2

Other revenue
33

 
25

Total adjusted operating revenues
648

 
662

Operating benefits and expenses:
 
 
 
Interest credited and other benefits to contract owners/policyholders
231

 
237

Operating expenses
268

 
248

Net amortization of DAC/VOBA
20

 
68

Total operating benefits and expenses
519

 
553

Adjusted operating earnings before income taxes(1)
$
129

 
$
109

(1) See DAC/VOBA and Other Intangibles Unlocking in Part I, Item 2. of this Quarterly Report on Form 10-Q for further information.

Starting Q1 2019, Assets Under Advisement are presented in AUA, which includes recordkeeping, stable value investment-only wrap, brokerage and investment advisory assets. Prior period information have been revised to conform to current period presentation.

The following tables present AUM and AUA for our Retirement segment as of the dates indicated:
 
As of March 31,
($ in millions)
2019
 
2018
Corporate markets
$
65,366

 
$
60,650

Tax-exempt markets
64,610

 
61,954

Total full service plans
129,976

 
122,604

Stable value(1) and pension risk transfer
10,558

 
11,544

Retail wealth management
9,881

 
9,568

Total AUM
150,415

 
143,716

AUA
241,441

 
273,291

Total AUM and AUA
$
391,856

 
$
417,007

(1) Where Voya is the Investment Manager. Stable Value assets move from AUM to AUA when Voya no longer serves as Investment Manager but continues to provide a book value guarantee.

 
As of March 31,
($ in millions)
2019
 
2018
General Account
$
32,784

 
$
32,480

Separate Account
71,008

 
70,361

Mutual Fund/Institutional Funds
46,623

 
40,875

AUA
241,441

 
273,291

Total AUM and AUA
$
391,856

 
$
417,007



 
103
 

The following table presents a rollforward of AUM for our Retirement segment for the periods indicated:
 
Three Months Ended March 31,
($ in millions)
2019
 
2018
Balance as of beginning of period
$
139,133

 
$
138,191

Transfer / Adjustment (1)
—

 
6,016

Deposits
5,466

 
4,519

Surrenders, benefits and product charges
(5,373
)
 
(4,881
)
Net flows
93

 
(362
)
Interest credited and investment performance
11,189

 
(129
)
Balance as of end of period
$
150,415

 
$
143,716

(1) Reflects investment-only products which were transferred from Corporate effective January 1, 2018.

Retirement - Three Months Ended March 31, 2019 Compared to Three Months Ended March 31, 2018

Adjusted operating earnings before income taxes increased $20 million from $109 million to $129 million primarily due to:

•
higher unfavorable DAC/VOBA unlocking in the prior period driven by an update to the assumptions related to the GMIR initiative; and
•
higher investment income margins.

The increase was partially offset by:

•
a decrease in alternative investment income;
•
higher expenses primarily resulting from volume; and
•
lower fee income due to margin rate compression and business mix.

Investment Management

The following table presents Adjusted operating earnings before income taxes of our Investment Management segment for the periods indicated:
 
Three Months Ended March 31,
($ in millions)
2019
 
2018
Adjusted operating revenues:
 
 
 
Net investment income and net realized gains (losses)
$
(2
)
 
$
11

Fee income
145

 
165

Other revenue
5

 
9

Total adjusted operating revenues
148

 
185

Operating benefits and expenses:
 
 
 
Operating expenses
114

 
124

Total operating benefits and expenses
114

 
124

Adjusted operating earnings before income taxes
$
34

 
$
61


Our Investment Management segment operating revenues include the following intersegment revenues, primarily consisting of asset-based management and administration fees.
 
Three Months Ended March 31,
($ in millions)
2019

2018
Investment Management intersegment revenues
$
30

 
$
43


 
104
 


The following table presents AUM and AUA for our Investment Management segment as of the dates indicated:
 
As of March 31,
($ in millions)
2019
 
2018
Assets under Management
 
 
 
External clients:
 
 
 
Investment Management sourced
$
89,819

 
$
101,139

Affiliate sourced(1)
37,605

 
39,419

Variable annuities (2)
26,236

 
—

Total external clients
153,660

 
140,558

General account
56,021

 
81,893

Total AUM
209,681

 
222,451

Assets under Administration (3)
49,929

 
49,008

Total AUM and AUA
$
259,610

 
$
271,459

(1) Affiliate sourced AUM includes assets sourced by other segments and also reported as AUM or AUA by such other segments.
(2) Reflects AUM associated with the businesses divested as part of the Transaction.
(3) AUA includes assets sourced by other segments and also reported as AUA or AUM by such other segments.

The following table presents net flows for our Investment Management segment for the periods indicated:
 
Three Months Ended March 31,
($ in millions)
2019
 
2018
Net Flows:
 
 
 
Investment Management sourced
$
1,165

 
$
56

Affiliate sourced
(554
)
 
(507
)
Variable annuities (1)
(550
)
 
(714
)
Total
$
61

 
$
(1,165
)
(1) Reflects net flows associated with the businesses divested as part of the Transaction.

Investment Management - Three Months Ended March 31, 2019 Compared to Three Months Ended March 31, 2018

Adjusted operating earnings before income taxes decreased $27 million from $61 million to $34 million primarily due to:

•
lower investment capital returns;
•
lower average general account AUM driven by the impact of the Transaction; and
•
a decrease in average Retail AUM driven by negative net flows resulting in lower management and administrative fees earned.

The decrease was partially offset by:

•
lower non-recurring operating expenses.


 
105
 

Employee Benefits

The following table presents Adjusted operating earnings before income taxes of the Employee Benefits segment for the periods indicated:
 
Three Months Ended March 31,
($ in millions)
2019
 
2018
Adjusted operating revenues:
 
 
 
Net investment income and net realized gains (losses)
$
26

 
$
27

Fee income
16

 
16

Premiums
467

 
411

Other revenue
(1
)
 
(1
)
Total adjusted operating revenues
508

 
453

Operating benefits and expenses:
 
 
 
Interest credited and other benefits to contract owners/policyholders
364

 
326

Operating expenses
102

 
91

Net amortization of DAC/VOBA
4

 
4

Total operating benefits and expenses
470

 
421

Adjusted operating earnings before income taxes(1)
$
38

 
$
32

(1) See DAC/VOBA and Other Intangibles Unlocking in Part I, Item 2. of this Quarterly Report on Form 10-Q for further information.

The following table presents sales, gross premiums and in-force for our Employee Benefits segment for the periods indicated:
 
Three Months Ended March 31,
($ in millions)
2019
 
2018
Sales by Product Line:
 
 
 
Group life and Disability
$
104

 
$
60

Stop loss
236

 
179

Total group products
340

 
239

Voluntary products
69

 
65

Total sales by product line
$
409

 
$
304

 
 
 
 
Total gross premiums and deposits
$
521

 
$
462

 
 
 
 
Group life and Disability
$
720

 
$
663

Stop loss
1,053

 
925

Voluntary
390

 
303

Total annualized in-force premiums
$
2,163

 
$
1,891

 
 
 
 
Loss Ratios:
 
 
 
Group life (interest adjusted)
79.5
%
 
79.3
%
Stop loss
77.3
%
 
80.2
%
Total Loss Ratio
72.3
%
 
72.9
%

Employee Benefits - Three Months Ended March 31, 2019 Compared to Three Months Ended March 31, 2018

Adjusted operating earnings before income taxes increased $6 million from $32 million to $38 million primarily due to:

•
higher premiums driven by growth of the stop loss, voluntary, and group life blocks.

 
106
 


The increase was partially offset by:

•
higher benefits incurred due to growth of stop loss, voluntary, and group life blocks; and
•
higher distribution expenses and commissions to support increased volume.

Individual Life

The following table presents Adjusted operating earnings before income taxes of our Individual Life segment for the periods indicated:
 
Three Months Ended March 31,
($ in millions)
2019
 
2018
Adjusted operating revenues:
 
 
 
Net investment income and net realized gains (losses)
$
215

 
$
218

Fee income
308

 
305

Premiums
98

 
105

Other revenue
5

 
3

Total adjusted operating revenues
626

 
631

Operating benefits and expenses:
 
 
 
Interest credited and other benefits to contract owners/policyholders
458

 
495

Operating expenses
71

 
74

Net amortization of DAC/VOBA
49

 
45

Total operating benefits and expenses
578

 
614

Adjusted operating earnings before income taxes(1)
$
48

 
$
17

(1) See DAC/VOBA and Other Intangibles Unlocking in Part I, Item 2. of this Quarterly Report on Form 10-Q for further information.

The following table presents sales, gross premiums, in-force amounts and policy count for our Individual Life segment for the periods indicated:
 
Three Months Ended March 31,
($ in millions)
2019
 
2018
Sales by Product Line:
 
 
 
Universal life:
 
 
 
Indexed
$
33

 
$
16

Accumulation
1

 
1

Total sales by product line
$
34

 
$
17

 
 
 
 
Total gross premiums
$
459

 
$
449

End of period:
 
 
 
In-force face amount
$
330,937

 
$
322,809

In-force policy count
800,198

 
817,167

New business policy count (paid)
1,909

 
1,060



 
107
 

Individual Life - Three Months Ended March 31, 2019 Compared to Three Months Ended March 31, 2018

Adjusted operating earnings before income taxes increased $31 million from $17 million to $48 million primarily due to:

•
higher net favorable DAC/VOBA and other intangibles unlocking, driven by mortality experience; and
•
higher underwriting gains, net of DAC/VOBA and other intangibles amortization, primarily driven by lower net mortality on the interest sensitive block, partially offset by net intangible impacts as a result of higher gross profits and higher reinsurance costs.

The increase was partially offset by:

•
lower net investment income primarily due to lower alternative investment income.

Corporate

The following table presents Adjusted operating earnings before income taxes of Corporate for the periods indicated:
 
Three Months Ended March 31,
($ in millions)
2019
 
2018
Adjusted operating revenues:
 
 
 
Net investment income and net realized gains (losses)
$
57

 
$
61

Fee income
10

 
11

Premiums
15

 
20

Other revenue
11

 
—

Total adjusted operating revenues
93

 
92

Operating benefits and expenses:
 
 
 
Interest credited and other benefits to contract owners/policyholders
55

 
56

Operating expenses
36

 
41

Net amortization of DAC/VOBA
2

 
2

Interest expense
55

 
49

Total operating benefits and expenses
148

 
148

Adjusted operating earnings before income taxes(1)
$
(55
)
 
$
(56
)
(1) The prior periods include insignificant amounts related to net investment gains (losses) and changes in fair value of derivatives related to guaranteed benefits associated with the Retained Business.

The following table presents information about our Operating expenses of Corporate for the periods indicated:
 
Three Months Ended March 31,
($ in millions)
2019
 
2018
Amortization of intangibles
$
9

 
$
9

Other(1)
27

 
32

Total Operating expenses
$
36

 
$
41

(1) Includes expense from corporate operations, Retained Business and other closed blocks, and expense not allocated to our segments, including Stranded Costs.
 
Corporate - Three Months Ended March 31, 2019 Compared to Three Months Ended March 31, 2018

Adjusted operating earnings before income taxes improved $1 million from a loss of $56 million to a loss of $55 million primarily related to:

•
lower Stranded costs;
•
revenue resulting from transition services agreements; and
•
lower interest expense as we converted debt to equity instruments during the fourth quarter of 2018.


 
108
 

This increase was partially offset by:

•
lower earnings related to runoff business;
•
the initial payment of Preferred stock dividends on shares issued during fourth quarter 2018; and
•
residual activity from Retained Business, which will have volatility due to the nature of the block.

Alternative Investment Income

Investment income on certain alternative investments can be volatile due to changes in market conditions. The following table presents the amount of investment income (loss) on certain alternative investments that is included in segment Adjusted operating earnings before income taxes and the average level of assets in each segment, prior to intercompany eliminations, which excludes alternative investments and income that are a component of Assets held for sale and Income (loss) from discontinued operations, net of tax, respectively, and alternative investments and income in Corporate. These alternative investments are carried at fair value, which is estimated based on the net asset value ("NAV") of these funds.

While investment income on these assets can be volatile, based on current plans, we expect to earn 8.0% to 9.0% on these assets over the long term.

Alternative investment income for the three months ended March 31, 2019 and 2018, respectively, and the average assets of alternative investments as of the dates indicated were as follows:
 
Three Months Ended March 31,
($ in millions)
2019
 
2018
Retirement:
 
 
 
Alternative investment income
$
(1
)
 
$
18

Average alternative investment
705

 
536

Investment Management(1):
 
 
 
Alternative investment income
(2
)
 
11

Average alternative investment
208

 
262

Employee Benefits:
 
 
 
Alternative investment income
—

 
2

Average alternative investment
81

 
51

Individual Life:
 
 
 
Alternative investment income
6

 
9

Average alternative investment
463

 
312

(1) Includes performance fees related to sponsored private equity funds (“carried interest”) that are subject to later reversal based on subsequent fund performance, to the extent that cumulative rates of investment return fall below specified investment hurdle rates. Should the market value of a portfolio increase in future periods, reversals of carried interest could be fully or partially recovered. No amounts for carried interest were reversed or recovered for the three months ended March 31, 2019 and 2018.

DAC/VOBA and Other Intangibles Unlocking

Changes in Adjusted operating earnings before income taxes and Net income (loss) are influenced by increases and decreases in amortization of DAC, VOBA, deferred sales inducements ("DSI") and unearned revenue ("URR"), collectively, "DAC/VOBA and other intangibles." For Individual Life, changes in Adjusted operating earnings before income taxes and Net income (loss) are also influenced by increases and decreases in amortization of net cost of reinsurance, as well as by changes in reserves associated with UL and variable universal life ("VUL") secondary guarantees and paid-up guarantees. Unlocking related to DAC, VOBA, DSI and URR, as well as amortization of net cost of reinsurance and reserve adjustments associated with UL and VUL secondary guarantees and paid-up guarantees are referred to as "DAC/VOBA and other intangibles unlocking." See the "Deferred Policy Acquisition Costs, Value of Business Acquired and Other Intangibles," "Reinsurance," and "Future Policy Benefits and Contract Owner Account Balances" sections in the Business, Basis of Presentation and Significant Accounting Policies Note in our Consolidated Financial Statements in Part II, Item 8. as well as the "DAC/VOBA and Other Intangibles Unlocking" section of Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7. of our Annual Report on Form 10-K for more information.


 
109
 

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. See Critical Accounting Judgments and Estimates in the Management's Discussion and Analysis section in Part I, Item 2. of this Quarterly Report on Form 10-Q for further information.

The following table presents the amount of DAC/VOBA and other intangibles unlocking that is included in segment Adjusted operating earnings before income taxes for the periods indicated:
 
Three Months Ended March 31,
($ in millions)
2019
 
2018
Retirement (1)
$
4

 
$
(41
)
Employee Benefits
—

 
(1
)
Individual Life
(3
)
 
(29
)
Corporate
—

 
—

Total DAC/VOBA and other intangibles unlocking
$
1

 
$
(71
)
(1) Includes unfavorable unlocking of $43 million in the three months ended March 31, 2018, associated with the assumption update related to the GMIR initiative.

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

Consolidated Sources and Uses of Liquidity and Capital

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, equity securities issuance, repurchase agreements, contract deposits and securities lending. Primary uses of these funds are payments of policyholder benefits, commissions and operating expenses, interest credits, share repurchases, investment purchases and contract maturities, withdrawals and surrenders.

Parent Company Sources and Uses of Liquidity

Voya Financial, Inc. is largely dependent on cash flows from its operating subsidiaries to meet its obligations. The principal sources of funds available to Voya Financial, Inc. include dividends and returns of capital from its operating subsidiaries, as well as cash and short-term investments, and proceeds from debt issuances, borrowing facilities and equity securities issuances. These sources of funds include the $750 million revolving credit sublimit of our Second Amended and Restated Credit Agreement and reciprocal borrowing facilities maintained with Voya Financial, Inc.'s subsidiaries as well as alternate sources of liquidity described below.


 
110
 

Voya Financial, Inc.'s primary sources and uses of cash for the periods indicated are presented in the following table:
 
Three Months Ended March 31,
($ in millions)
2019
 
2018
Beginning cash and cash equivalents balance
$
209

 
$
244

Sources:
 
 
 
Proceeds from loans from subsidiaries, net of repayments
200

 
—

Dividends and returns of capital from subsidiaries
200

 
210

Refund of income taxes, net
16

 
—

Sale of short-term investments
—

 
212

Proceeds from 2048 Notes offering
—

 
350

Other, net
7

 
—

Total sources
423

 
772

Uses:
 
 
 
Payment of interest expense
31

 
35

Repayments of loans from subsidiaries, net of new issuances
—

 
327

New issuances of loans to subsidiaries, net of repayments
71

 
68

Amounts paid to subsidiaries under tax sharing agreements, net
42

 
—

Debt issuance costs
—

 
6

Common stock acquired - Share repurchase
250

 
—

Share-based compensation
15

 
9

Dividends paid on preferred stock
10

 
—

Dividends paid on common stock
1

 
2

Maturity of 2018 Notes
—

 
337

Other, net
—

 
1

Total uses
420

 
785

Net increase (decrease) in cash and cash equivalents
3

 
(13
)
Ending cash and cash equivalents balance
$
212

 
$
231


Share Repurchase Program and Dividends to Shareholders

On March 13, 2014, our Board of Directors authorized a share repurchase program, pursuant to which we may, from time to time, purchase shares of our common shares through various means, including, without limitation, open market transactions, privately negotiated transactions, forward, derivative, or accelerated repurchase, or automatic repurchase transactions, including 10b5-1 plans, or tender offers.

Since 2014, our Board of Directors has periodically renewed our authority to repurchase our shares. As of March 31, 2019, we were authorized to repurchase shares up to an aggregate purchase price of $286 million. On May 2, 2019, our Board of Directors provided share repurchase authorization, increasing the aggregate of our common stock authorized for repurchase by $500 million. The additional share repurchase authorization expires on June 30, 2020 (unless extended). The authorization for the share repurchase program may be terminated, increased or decreased by the Board of Directors at any time.

On December 26, 2017, we entered into a share repurchase arrangement with a third-party financial institution, pursuant to which we made an up-front payment of $500 million and received initial delivery of 7,821,666 shares during the fourth quarter of 2017. This arrangement closed on March 26, 2018 and an additional 1,947,413 shares were delivered.

On January 3, 2019, we entered into a share repurchase agreement with a third-party financial institution, pursuant to which we made an upfront payment of $250 million and received initial delivery of 5,059,449 shares. This arrangement closed on April 4, 2019 and an additional 290,765 shares were delivered.


 
111
 

On April 9, 2019, we entered into a share repurchase agreement with a third-party financial institution, pursuant to which we made an upfront payment of $236 and received initial delivery of 3,593,453 shares. This arrangement is scheduled to terminate no later than the beginning of third quarter of 2019, at which time we will settle any outstanding positive or negative share balances based on the daily volume-weighted average price of the our common stock.

The following table summarizes our return of capital to common shareholders:
 
Three Months Ended March 31,
($ in millions)
2019
 
2018
Dividends to shareholders
$
1

 
$
2

Repurchase of common shares
200

 
100

Total cash returned to shareholders
$
201

 
$
102


Liquidity

We manage liquidity through access to substantial investment portfolios as well as a variety of other sources of liquidity including committed credit facilities, securities lending and repurchase agreements. Our asset-liability management ("ALM") process takes into account the expected maturity of investments and expected benefit payments as well as the specific nature and risk profile of the liabilities. As part of our liquidity management process, we model different scenarios to determine whether existing assets are adequate to meet projected cash flows.

Capitalization

The primary components of our capital structure consist of debt and equity securities. Our capital position is supported by cash flows within our operating subsidiaries, the availability of borrowed funds under liquidity facilities, and any additional capital we raise to invest in the growth of the business and for general corporate purposes. We manage our capital position based on a variety of factors including, but not limited to, our financial strength, the credit rating of Voya Financial, Inc. and of its insurance company subsidiaries and general macroeconomic conditions.

We had $1 million of short-term debt borrowings outstanding consisting entirely of the current portion of long-term debt as of March 31, 2019. As of March 31, 2019, we had outstanding long-term debt borrowings of $3,136 million. As of March 31, 2019, we were in compliance with our debt covenants.
 
 
 
 
 
 
 
 
 
 
Preferred Stock. As of March 31, 2019, we had 325,000 shares of 6.125% Fixed-Rate Reset Non-Cumulative Preferred Stock, Series A, authorized, issued and outstanding. During the three months ended March 31, 2019, we declared and paid preferred stock dividends of $10 million. As of March 31, 2019, there were no preferred stock dividends in arrears. See the Shareholders' Equity Note in Part I, Item 1. of this Quarterly Report on Form 10-Q for further information.

Senior Notes. As of March 31, 2019, Voya Financial, Inc. had five series of senior notes (collectively, the "Senior Notes") with aggregate outstanding principal amount of $1.7 billion. The Senior Notes are guaranteed by Voya Holdings. We are permitted to redeem all or any portion of the Senior Notes at any time at a redemption price equal to the principal amount redeemed, or, if greater, a "make-whole redemption price," plus, in each case accrued and unpaid interest.

Junior Subordinated Notes. As of March 31, 2019, Voya Financial, Inc. had two series of junior subordinated notes (collectively, the "Junior Subordinated Notes") with aggregate outstanding principal amount of $1.1 billion. The Junior Subordinated Notes are guaranteed on an unsecured, junior subordinated basis by Voya Holdings.

Aetna Notes. As of March 31, 2019, Voya Holdings was the obligor under three series of debentures (collectively, the "Aetna Notes") with aggregate outstanding principal amount of $358 million, which were issued by a predecessor of Voya Holdings and assumed in connection with our acquisition of Aetna’s life insurance and related businesses. In addition, Equitable of Iowa Capital Trust II, a limited purpose trust subsidiary, has outstanding $13 million principal amount of 8.42% Series B Capital Securities due April 1, 2027 (the "Equitable Notes"). ING Group, our previous corporate parent, guarantees the Aetna Notes. The Equitable Notes are guaranteed by Voya Financial, Inc.

As of March 31, 2019, the amount of collateral required to avoid the payment of a fee to ING Group was $258 million.


 
112
 

Senior Unsecured Credit Facility

We have a $1.0 billion senior unsecured credit facility which expires on May 6, 2021. The facility provides $1.0 billion of committed capacity for issuing letters of credit and also includes a revolving credit borrowing sublimit of $750 million. As of March 31, 2019, there were no amounts outstanding as revolving credit borrowings and no amounts of LOCs outstanding under the senior unsecured credit facility. Under the terms of the facility, Voya Financial, Inc. is required to maintain a minimum net worth of $6.6 billion, which may increase upon any future equity issuances by us.

Other Credit Facilities

We use credit facilities to provide collateral required primarily under our affiliated reinsurance transactions with captive insurance subsidiaries. We also issue guarantees and enter into financing arrangements in connection with these credit facilities. These arrangements are designed to facilitate the financing of statutory reserve requirements.

The following table summarizes our credit facilities as of March 31, 2019:
($ in millions)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Obligor / Applicant
 
Business Supported
 
Secured / Unsecured
 
Committed / Uncommitted
 
Expiration
 
Capacity
 
Utilization
 
Unused Commitment
Voya Financial, Inc.
 
Other
 
Unsecured
 
Committed
 
05/06/2021
 
$
1,000

 
$
—

 
$
1,000

Voya Financial, Inc.
 
Other
 
Unsecured
 
Uncommitted
 
Various
 
1

 
1

 
—

Voya Financial, Inc.
 
Other
 
Secured
 
Uncommitted
 
Various
 
10

 
1

 
—

Voya Financial, Inc. /SLDI
 
Other
 
Unsecured
 
Uncommitted
 
09/28/2019
 
300

 
10

 
—

Voya Financial, Inc. / SLDI
 
Retirement
 
Unsecured
 
Committed
 
03/20/2022
 
250

 
220

 
30

Voya Financial, Inc. / SLDI
 
Individual Life
 
Unsecured
 
Committed
 
12/31/2025
 
475

 
475

 
—

Voya Financial, Inc. / SLDI
 
Individual Life
 
Unsecured
 
Committed
 
07/01/2037
 
1,725

 
1,538

 
187

Voya Financial, Inc. /Roaring River LLC
 
Individual Life
 
Unsecured
 
Committed
 
10/01/2025
 
425

 
358

 
67

Voya Financial, Inc. /Roaring River IV, LLC
 
Individual Life
 
Unsecured
 
Committed
 
12/31/2028
 
565

 
314

 
251

Voya Financial, Inc.
 
Individual Life
 
Unsecured
 
Committed
 
12/09/2021
 
195

 
194

 
1

Voya Financial, Inc.
 
Individual Life/Retirement/Other
 
Unsecured
 
Committed
 
02/11/2022
 
300

 
300

 
—

SLDI
 
Hannover Re(1)
 
Unsecured
 
Committed
 
10/29/2023
 
61

 
61

 
—

Voya Financial, Inc.
 
Hannover Re(1)
 
Unsecured
 
Uncommitted
 
04/27/2021
 
156

 
156

 
—

Total
 
 
 
 
 
 
 
 
 
$
5,463

 
$
3,628

 
$
1,536

(1) Individual Life Reinsurance business acquired by Hannover Re in 2009 via indemnity reinsurance.

Total fees associated with credit facilities were $8 million and $9 million for the three months ended March 31, 2019 and 2018, respectively.

Voya Financial, Inc. Credit Support of Subsidiaries

In addition to our Senior Unsecured Credit Facility, Voya Financial, Inc. maintains credit facilities with third-party banks to support the reinsurance obligations of our captive reinsurance subsidiaries in which Voya Financial is either a primary obligor or provides a financial guarantee. As of March 31, 2019, such facilities provided for up to $4.0 billion of capacity, of which $3.2 billion was utilized.

We also provide credit support to our Roaring River IV, LLC ("Roaring River IV") captive reinsurance subsidiary through a surplus maintenance agreement with a third-party bank in connection with a financing arrangement involving $565 million of statutory reserves which matures December 31, 2028. The reimbursement agreement requires Voya Financial, Inc. to cause capital to be

 
113
 

maintained in Roaring River IV Holding LLC, the intermediate holding company of Roaring River IV, and in Roaring River IV. These amounts will vary over time based on a percentage of Roaring River IV in force life insurance.

In addition, we provide guarantees to certain of our subsidiaries to support various business requirements:

•
Under the Buyer Facility Agreement put into place by Hannover Re, Voya Financial, Inc. and Security Life of Denver International Limited ("SLDI") have contingent reimbursement obligations and Voya Financial, Inc. has guarantee obligations, up to the full $2.9 billion principal amount of the note issued pursuant to the agreement, if Security Life of Denver Insurance Company ("SLD") or SLDI were to direct the sale or liquidation of the note other than as permitted by the Buyer Facility Agreement, or fail to return reinsurance collateral (including the note) upon termination of the Buyer Facility Agreement or as otherwise required by the Buyer Facility Agreement. In addition, Voya Financial, Inc. has agreed to indemnify Hannover Re for any losses it incurs in the event that SLD or SLDI were to exercise offset rights unrelated to the Hannover Re block.

•
Voya Financial, Inc. has also entered into a corporate guarantee agreement with a third-party ceding insurer where it guarantees the reinsurance obligations of our subsidiary, SLD, assumed under a reinsurance agreement with the third-party cedent for the amount of the statutory reserves assumed by SLD. The current amount of reserves outstanding as of March 31, 2019 is $13 million.

•
Voya Financial, Inc. guarantees the obligations of Voya Holdings under the $13 million principal amount Equitable Notes maturing in 2027, and provides a back-to-back guarantee to ING Group in respect of its guarantee of $358 million combined principal amount of Aetna Notes. For more information see "Capitalization- Aetna Notes" above.

•
Voya Financial, Inc. and Voya Holdings provide a guarantee to certain Voya insurance subsidiaries of VIAC’s payment obligations to those subsidiaries under certain VIAC surplus notes held by those subsidiaries. The agreement provides for Voya and Voya Holdings to reimburse the applicable subsidiary to the extent that any interest on, principal of, or any redemption payment with respect to such surplus note is unpaid by VIAC on its scheduled date.

We did not recognize any asset or liability as of March 31, 2019 in relation to intercompany indemnifications, guarantees or support agreements. As of March 31, 2019, no circumstances existed in which we were required to currently perform under these arrangements.

Borrowings from Subsidiaries

We maintain revolving reciprocal loan agreements with a number of our life and non-life insurance subsidiaries that are used to fund short-term cash requirements that arise in the ordinary course of business. Under these agreements, either party may borrow up to the maximum allowable under the agreement for a term not more than 270 days. For life insurance subsidiaries, the amounts that either party may borrow from the other under the agreement vary and are between 2% and 5% of the insurance subsidiary's statutory net admitted assets (excluding separate accounts) as of the previous year end depending on the state of domicile. As of March 31, 2019, the aggregate amount that may be borrowed or lent under agreements with life insurance subsidiaries was $1.8 billion. For non-life insurance subsidiaries, the maximum allowable under the agreement is based on the assets of the subsidiaries and their particular cash requirements. As of March 31, 2019, Voya Financial, Inc. had $204 million outstanding borrowings from subsidiaries and had loaned $150 million to its subsidiaries.

Ratings

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

A downgrade in our credit ratings or the credit or financial strength ratings of our rated subsidiaries could have a material adverse effect on our results of operations and financial condition. See Risk Factors- A downgrade or a potential downgrade in our financial strength or credit ratings could result in a loss of business and adversely affect our results of operations and financial condition in Part I, Item 1A. of our Annual Report on Form 10-K for additional information.


 
114
 

With respect to our reinsurance agreements, based on the amount of reinsurance outstanding as of March 31, 2019 and December 31, 2018, a two-notch downgrade of our insurance subsidiaries would have resulted in an estimated increase in our collateral requirements by approximately $13 million and $14 million, respectively. The nature of the collateral that we may be required to post is principally in the form of cash, highly rated securities or LOC.

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.

The financial strength and credit ratings of Voya Financial, Inc. and its principal subsidiaries as of the date of this Quarterly Report on Form 10-Q are summarized in the following table.
 
 
Rating Agency
 
 
A.M. Best
 
Fitch, Inc.
 
Moody's Investors Service, Inc.
 
Standard & Poor's
 
 
("A.M. Best")(1)
 
("Fitch")(2)
 
("Moody's")(3)
 
("S&P")(4)
Long-term Issuer Credit Rating/Outlook:
 
 
 
 
 
 
 
 
Voya Financial, Inc.
 
withdrawn
 
BBB+/stable
 
Baa2/stable
 
BBB/positive
 
 
 
 
 
 
 
 
 
Financial Strength Rating/Outlook:
 
A/stable
 
A/stable
 
A2/stable
 
A/positive
Voya Retirement Insurance and Annuity Company
 
(5) 
 
 
 
 
 
 
Security Life of Denver Insurance Company
 
(5) 
 
 
 
 
 
 
ReliaStar Life Insurance Company
 
 
 
 
 
 
 
 
ReliaStar Life Insurance Company of New York
 
 
 
 
 
 
 
 
(1) A.M. Best's financial strength ratings for insurance companies range from "A++ (superior)" to "s (suspended)." Long-term credit ratings range from "aaa (exceptional)" to "s (suspended)."   
(2) Fitch's financial strength ratings for insurance companies range from "AAA (exceptionally strong)" to "C (distressed)." Long-term credit ratings range from "AAA (highest credit quality)," which denotes exceptionally strong capacity for timely payment of financial commitments, to "D (default)."
(3) Moody’s financial strength ratings for insurance companies range from "Aaa (exceptional)" to "C (lowest)." Numeric modifiers are used to refer to the ranking within the group- with 1 being the highest and 3 being the lowest. These modifiers are used to indicate relative strength within a category. Long-term credit ratings range from "Aaa (highest)" to "C (default)."
(4) S&P's financial strength ratings for insurance companies range from "AAA (extremely strong)" to "D (default)." Long-term credit ratings range from "AAA (extremely strong)" to "D (default)."
(5) Effective April 11, 2019, A.M. Best withdrew, at the Company’s request, its financial strength ratings with respect to Voya Retirement Insurance Annuity Company and Security Life of Denver Insurance Company.

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 and outlook changes by A.M. Best, Fitch, Moody's and S&P from December 31, 2018 through March 31, 2019 and subsequently through the date of this Quarterly Report on Form 10-Q are as follows:

•
On March 11, 2019, Fitch affirmed the ratings of the holding company, Voya Financial, Inc. and revised its outlook on the ratings to Stable from Negative. At the same time, Fitch affirmed the financial strength ratings of Voya's life insurance subsidiaries and maintained its Stable outlook on these ratings.

•
On April 11, 2019, A.M. Best affirmed the financial strength rating of A of the life insurance entities of Voya Financial, Inc. Additionally, A.M. Best affirmed the long-term issuer credit rating of "bbb+" of Voya Financial, Inc. The outlook of these was assigned as Stable. Concurrently, A.M. Best withdrew the ratings of Voya, Voya Retirement Insurance Annuity Company and Security Life of Denver Insurance Company at our request to no longer participate in A.M. Best's rating process with respect to those entities.


 
115
 

Reinsurance

On November 19, 2008, an existing reinsurance agreement between Scottish Re (U.S.), Inc. ("SRUS") and Ballantyne Re, an Irish public limited company ("Ballantyne Re"), concerning a portion of the business that was originally ceded to Scottish Re as part of the 2004 Transaction, was novated with the result that SLD was substituted for SRUS as the ceding company to Ballantyne Re and made the sole beneficiary of the trust established by to support the reserve requirements of the ceded business.  As of December 31, 2018, trust assets with a market value of $1.3 billion supported reserves of $236 million. On April 12, 2019, SLD entered into a Lock-Up Support Agreement (the "Lock-Up Agreement") with Ballantyne Re, certain other companies, and holders of certain notes issued by Ballantyne Re in connection with the restructuring of Ballantyne Re. Under the terms of the Lock-Up Agreement, SLD has agreed, subject to certain conditions, to enter into a novation and related agreements (the "Novation"). The Novation will result in the replacement of Ballantyne Re as reinsurer by Swiss Re Life & Health America ("Swiss Re"). Following receipt of certain approvals and satisfaction of certain conditions, SLD will enter into several agreements, including a Novation Agreement, pursuant to which the Novation will be effected. Swiss Re will establish a new trust account with assets supporting its reinsurance obligation to SLD. The Novation will not change SLD's reinsurance coverage related to the reinsured business. The closing of the Novation is expected to occur prior to the end of the third quarter of 2019.

Restrictions on Dividends and Returns of Capital from Subsidiaries

Our business is conducted through operating subsidiaries. U.S. insurance laws and regulations regulate the payment of dividends and other distributions by our U.S. insurance subsidiaries to their respective parents. These restrictions are based in part on the prior year's statutory income and surplus. In general, dividends up to specified levels are considered ordinary and may be paid without prior approval. Dividends in larger amounts, or "extraordinary" dividends, are subjected to approval by the insurance commissioner of the state of domicile of the insurance subsidiary proposing to pay the dividend. In addition, under the insurance laws of our principal insurance subsidiaries domiciled in Connecticut and Minnesota (these insurance subsidiaries, together with our insurance subsidiary domiciled in Colorado are referred to collectively, as our "Principal Insurance Subsidiaries"), no dividend or other distribution exceeding an amount equal to an insurance company’s earned surplus may be paid without the domiciliary insurance regulator’s prior approval. Our Principal Insurance Subsidiary domiciled in Connecticut has ordinary dividend capacity for 2019. However, as a result of the extraordinary dividends it paid in 2015, 2016 and 2017, together with statutory losses incurred in connection with the recapture and cession to one of our Arizona captives of certain term life business in the fourth quarter of 2016, our Principal Insurance Subsidiary domiciled in Minnesota currently has negative earned surplus. In addition, primarily as a result of statutory losses incurred in connection with the retrocession of our Principal Insurance Subsidiary domiciled in Minnesota of certain life insurance business in the fourth quarter of 2018, our Principal Insurance Subsidiary domiciled in Colorado has a net loss from operations for the twelve-month period ending the preceding December 31. Therefore, neither our Minnesota nor Colorado Principal Insurance Subsidiaries have the capacity at this time to make ordinary dividend payments. Any extraordinary dividend payment would be subject to domiciliary insurance regulatory approval, which can be granted or withheld at the discretion of the regulator.

SLDI and RRII may not declare or pay dividends other than in accordance with their respective annual capital and dividend plans as approved by the Arizona Department of Insurance, which each include a minimum capital requirement.

We may receive dividends from or contribute capital to our wholly owned non-life insurance subsidiaries such as broker-dealers, investment management entities and intermediate holding companies.

Insurance Subsidiaries - Dividends, Returns of Capital, and Capital Contributions
 
 
 
 
 
 
 
 
Voya Financial, Inc.'s principal insurance subsidiary domiciled in Connecticut declared an ordinary dividend on April 4, 2019 in the amount of $270 million, which was paid on April 18, 2019.

Also on April 4, 2019, our principal insurance subsidiary domiciled in Minnesota declared an extraordinary dividend in the amount of $360 million, subject to the approval of the Minnesota Commissioner of Insurance. The Minnesota Commissioner of Insurance provided its approval on April 25, 2019 and the extraordinary dividend was paid on April 30, 2019.

Other Subsidiaries - Dividends, Returns of Capital, and Capital Contributions

On March 26, 2019, RRII declared a dividend in the amount of $152 million payable to its parent, SLDI. On the same date, SLDI declared a dividend of $170 million payable to its parent, Voya Financial. Both of these dividends were paid on March 27, 2019.
 
 
 
 
 
 
 
 

 
116
 

Off-Balance Sheet Arrangements

We have obligations for the return of non-cash collateral under an amendment to our securities lending program. Non-cash collateral received in connection with the securities lending program may not be sold or re-pledged by our lending agent, except in the event of default, and is not reflected on our Condensed Consolidated Balance Sheets. For information regarding obligations under this program, see the Investments (excluding Consolidated Investment Entities) 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 related to consolidated investment entities, 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.

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 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;
•
DAC, VOBA and other intangibles (collectively, "DAC/VOBA and other intangibles");
•
Valuation of investments and derivatives;
•
Impairments;
•
Income taxes;
•
Contingencies; and
•
Employee benefit plans.

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 and the Discontinued Operations Note in our Consolidated Financial Statements in Part II, Item 8. of our Annual Report on Form 10-K.

Assumptions and Periodic Review

Changes in assumptions can have a significant impact on DAC/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

 
117
 

fixed account assets and will favorably impact the DAC/VOBA amortization rate and Adjusted operating earnings over time. There was no unlocking of DAC and VOBA related to GMIR initiative for the three months ended March 31, 2019. For the three months ended 2018, unfavorable unlocking of DAC and VOBA related to GMIR initiative was $43 million, which was included in Net amortization of DAC/VOBA in the Condensed Consolidated Financial Statements.

Sensitivity

We perform sensitivity analyses to assess the impact that certain assumptions have on DAC/VOBA and other intangibles, as well as certain reserves. As of March 31, 2019, there have been no material changes to the sensitivities disclosed in Critical Accounting Judgments and Estimates in Part II. Item 7 of our Annual Report on Form 10-K.
 
 
Income Taxes

We use the estimated annual effective tax rate method in computing our interim tax provision. Certain items, including changes in the realizability of deferred tax assets and changes in liabilities for uncertain tax positions, are excluded from the estimated annual effective tax rate and the actual tax expense or benefit is reported in the period the related item is incurred.

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

Investments (excluding Consolidated Investment Entities)

Investments for our general account are managed by our wholly owned asset manager, Voya Investment Management LLC, pursuant to investment advisory agreements with affiliates. In addition, our internal treasury group manages our holding company liquidity investments, primarily money market funds.

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

See the Investments (excluding Consolidated Investment Entities) 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:
 
March 31, 2019
 
December 31, 2018
($ in millions)
Carrying
Value
 
% of Total
 
Carrying
Value
 
% of Total
Fixed maturities, available-for-sale, excluding securities pledged
$
47,923

 
73.0
%
 
$
46,298

 
72.9
%
Fixed maturities, at fair value using the fair value option
3,159

 
4.8
%
 
2,956

 
4.7
%
Equity securities, available-for-sale
355

 
0.5
%
 
273

 
0.4
%
Short-term investments(1)
192

 
0.3
%
 
168

 
0.3
%
Mortgage loans on real estate
8,516

 
13.0
%
 
8,676

 
13.6
%
Policy loans
1,827

 
2.8
%
 
1,833

 
2.9
%
Limited partnerships/corporations
1,166

 
1.8
%
 
1,158

 
1.8
%
Derivatives
314

 
0.5
%
 
247

 
0.4
%
Other investments
89

 
0.1
%
 
90

 
0.1
%
Securities pledged
2,084

 
3.2
%
 
1,867

 
2.9
%
Total investments
$
65,625

 
100.0
%
 
$
63,566

 
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.


 
118
 

Fixed Maturities

The following tables present total fixed maturities, including securities pledged, by market sector as of the dates indicated:
 
March 31, 2019
($ in millions)
Amortized Cost
 
% of Total
 
Fair Value
 
% of Total
Fixed maturities:
 
 
 
 
 
 
 
U.S. Treasuries
$
1,789

 
3.6
%
 
$
2,201

 
4.1
%
U.S. Government agencies and authorities
204

 
0.4
%
 
248

 
0.5
%
State, municipalities and political subdivisions
1,659

 
3.3
%
 
1,715

 
3.2
%
U.S. corporate public securities
18,671

 
37.3
%
 
20,187

 
38.0
%
U.S. corporate private securities
6,364

 
12.7
%
 
6,620

 
12.5
%
Foreign corporate public securities and foreign governments(1)
5,436

 
10.8
%
 
5,714

 
10.7
%
Foreign corporate private securities(1)
5,132

 
10.2
%
 
5,273

 
9.9
%
Residential mortgage-backed securities
4,880

 
9.7
%
 
5,113

 
9.6
%
Commercial mortgage-backed securities
3,785

 
7.5
%
 
3,827

 
7.2
%
Other asset-backed securities
2,261

 
4.5
%
 
2,268

 
4.3
%
Total fixed maturities, including securities pledged
$
50,181

 
100.0
%
 
$
53,166

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

 
December 31, 2018
($ in millions)
Amortized Cost
 
% of Total
 
Fair Value
 
% of Total
Fixed maturities:
 
 
 
 
 
 
 
U.S. Treasuries
$
1,937

 
3.9
%
 
$
2,295

 
4.5
%
U.S. Government agencies and authorities
204

 
0.4
%
 
242

 
0.5
%
State, municipalities and political subdivisions
1,652

 
3.3
%
 
1,659

 
3.2
%
U.S. corporate public securities
19,210

 
38.4
%
 
19,848

 
38.7
%
U.S. corporate private securities
6,264

 
12.5
%
 
6,232

 
12.2
%
Foreign corporate public securities and foreign governments(1)
5,429

 
10.9
%
 
5,455

 
10.7
%
Foreign corporate private securities(1)
5,176

 
10.3
%
 
5,094

 
10.0
%
Residential mortgage-backed securities
4,616

 
9.2
%
 
4,803

 
9.4
%
Commercial mortgage-backed securities
3,438

 
6.9
%
 
3,416

 
6.7
%
Other asset-backed securities
2,095

 
4.2
%
 
2,077

 
4.1
%
Total fixed maturities, including securities pledged
$
50,021

 
100.0
%
 
$
51,121

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

As of March 31, 2019, the average duration of our fixed maturities portfolio, including securities pledged, is between 8.0 and 8.5 years.

Fixed Maturities Credit Quality - Ratings

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


 
119
 

The following tables present credit quality of fixed maturities, including securities pledged, using NAIC designations as of the dates indicated:
($ in millions)
March 31, 2019
NAIC Quality Designation
1
 
2
 
3
 
4
 
5
 
6
 
Total Fair Value
U.S. Treasuries
$
2,201

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
2,201

U.S. Government agencies and authorities
248

 
—

 
—

 
—

 
—

 
—

 
248

State, municipalities and political subdivisions
1,571

 
141

 
—

 
—

 
1

 
2

 
1,715

U.S. corporate public securities
9,670

 
9,419

 
902

 
183

 
13

 
—

 
20,187

U.S. corporate private securities
2,568

 
3,750

 
169

 
110

 
20

 
3

 
6,620

Foreign corporate public securities and foreign governments(1)
2,319

 
3,064

 
283

 
46

 
—

 
2

 
5,714

Foreign corporate private securities(1)
613

 
4,289

 
294

 
34

 
42

 
1

 
5,273

Residential mortgage-backed securities
4,936

 
81

 
33

 
4

 
9

 
50

 
5,113

Commercial mortgage-backed securities
3,695

 
132

 
—

 
—

 
—

 
—

 
3,827

Other asset-backed securities
1,984

 
204

 
17

 
3

 
33

 
27

 
2,268

Total fixed maturities
$
29,805

 
$
21,080

 
$
1,698

 
$
380

 
$
118

 
$
85

 
$
53,166

% of Fair Value
56.1
%
 
39.6
%
 
3.2
%
 
0.7
%
 
0.2
%
 
0.2
%
 
100.0
%
(1) Primarily U.S. dollar denominated.

 
120
 

($ in millions)
December 31, 2018
NAIC Quality Designation
1
 
2
 
3
 
4
 
5
 
6
 
Total Fair Value
U.S. Treasuries
$
2,295

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
2,295

U.S. Government agencies and authorities
242

 
—

 
—

 
—

 
—

 
—

 
242

State, municipalities and political subdivisions
1,524

 
133

 
—

 
—

 
—

 
2

 
1,659

U.S. corporate public securities
9,062

 
9,653

 
924

 
193

 
16

 
—

 
19,848

U.S. corporate private securities
2,510

 
3,376

 
149

 
175

 
19

 
3

 
6,232

Foreign corporate public securities and foreign governments(1)
2,265

 
2,804

 
331

 
52

 
1

 
2

 
5,455

Foreign corporate private securities(1)
693

 
3,984

 
301

 
73

 
42

 
1

 
5,094

Residential mortgage-backed securities
4,678

 
27

 
40

 
2

 
10

 
46

 
4,803

Commercial mortgage-backed securities
3,317

 
79

 
20

 
—

 
—

 
—

 
3,416

Other asset-backed securities
1,819

 
160

 
33

 
9

 
32

 
24

 
2,077

Total fixed maturities
$
28,405

 
$
20,216

 
$
1,798

 
$
504

 
$
120

 
$
78

 
$
51,121

% of Fair Value
55.6
%
 
39.5
%
 
3.5
%
 
1.0
%
 
0.2
%
 
0.2
%
 
100.0
%
(1)Primarily U.S. dollar denominated.


 
121
 

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)
March 31, 2019
ARO Quality Ratings
AAA
 
AA
 
A
 
BBB
 
BB and Below
 
Total Fair Value
U.S. Treasuries
$
2,201

 
$
—

 
$
—

 
$
—

 
$
—

 
$
2,201

U.S. Government agencies and authorities
239

 
9

 
—

 
—

 
—

 
248

State, municipalities and political subdivisions
115

 
930

 
527

 
141

 
2

 
1,715

U.S. corporate public securities
234

 
1,183

 
8,289

 
9,463

 
1,018

 
20,187

U.S. corporate private securities
157

 
277

 
2,248

 
3,594

 
344

 
6,620

Foreign corporate public securities and foreign governments(1)
46

 
555

 
1,765

 
2,991

 
357

 
5,714

Foreign corporate private securities(1)
—

 
—

 
661

 
4,374

 
238

 
5,273

Residential mortgage-backed securities
3,670

 
101

 
130

 
288

 
924

 
5,113

Commercial mortgage-backed securities
2,017

 
358

 
752

 
554

 
146

 
3,827

Other asset-backed securities
839

 
247

 
753

 
206

 
223

 
2,268

Total fixed maturities
$
9,518

 
$
3,660

 
$
15,125

 
$
21,611

 
$
3,252

 
$
53,166

% of Fair Value
17.9
%
 
6.9
%
 
28.5
%
 
40.6
%
 
6.1
%
 
100.0
%
(1)Primarily U.S. dollar denominated.


 
122
 

($ in millions)
December 31, 2018
ARO Quality Ratings
AAA
 
AA
 
A
 
BBB
 
BB and Below
 
Total Fair Value
U.S. Treasuries
$
2,295

 
$
—

 
$
—

 
$
—

 
$
—

 
$
2,295

U.S. Government agencies and authorities
234

 
8

 
—

 
—

 
—

 
242

State, municipalities and political subdivisions
112

 
920

 
492

 
133

 
2

 
1,659

U.S. corporate public securities
220

 
1,118

 
7,684

 
9,739

 
1,087

 
19,848

U.S. corporate private securities
166

 
273

 
2,221

 
3,230

 
342

 
6,232

Foreign corporate public securities and foreign governments(1)
45

 
533

 
1,725

 
2,767

 
385

 
5,455

Foreign corporate private securities(1)
—

 
—

 
698

 
4,137

 
259

 
5,094

Residential mortgage-backed securities
3,394

 
74

 
64

 
188

 
1,083

 
4,803

Commercial mortgage-backed securities
1,822

 
390

 
596

 
447

 
161

 
3,416

Other asset-backed securities
824

 
210

 
633

 
185

 
225

 
2,077

Total fixed maturities
$
9,112

 
$
3,526

 
$
14,113

 
$
20,826

 
$
3,544

 
$
51,121

% of Fair Value
17.8
%
 
6.9
%
 
27.7
%
 
40.7
%
 
6.9
%
 
100.0
%
(1)Primarily U.S. dollar denominated.

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 capital losses on fixed maturities, including securities pledged, decreased $694 million from $1,084 million to $390 million for the three months ended March 31, 2019. The decrease in gross unrealized capital losses was primarily due to declining interest rates and tightening credit spreads.

As of March 31, 2019 and December 31, 2018, we held one and three fixed maturities, respectively, with unrealized capital losses in excess of $10 million. As of March 31, 2019 and December 31, 2018, the unrealized capital losses on these fixed maturities equaled $18 million or 4.6% and $49 million or 4.5% of the total unrealized losses, respectively.

As of March 31, 2019, we held $4.2 billion of energy sector fixed maturity securities, constituting 7.9% of the total fixed maturities portfolio, with gross unrealized capital losses of $69 million, including one energy sector fixed maturity security with unrealized capital losses in excess of $10 million. The unrealized capital losses on this fixed maturity security equaled $18 million. As of March 31, 2019, our fixed maturity exposure to the energy sector is comprised of 89.7% investment grade securities.

As of December 31, 2018, we held $4.1 billion of energy sector fixed maturity securities, constituting 8.0% of the total fixed maturities portfolio, with gross unrealized capital losses of $143 million, including one energy sector fixed maturity security with unrealized capital losses in excess of $10 million. The unrealized capital losses on this fixed maturity security equaled $22 million. As of December 31, 2018, our fixed maturity exposure to the energy sector is comprised of 87.6% investment grade securities.


 
123
 

The following table presents the U.S. and foreign corporate securities within our energy holdings by sector as of the dates indicated:
($ in millions)
 
March 31, 2019
 
December 31, 2018
Sector Type
 
Amortized Cost
 
Fair Value
 
% Fair Value
 
Amortized Cost
 
Fair Value
 
% Fair Value
Midstream
 
$
1,495

 
$
1,629

 
38.9
%
 
$
1,545

 
$
1,596

 
39.0
%
Integrated Energy
 
799

 
862

 
20.6
%
 
817

 
837

 
20.5
%
Independent Energy
 
920

 
978

 
23.3
%
 
923

 
931

 
22.8
%
Oil Field Services
 
421

 
402

 
9.6
%
 
472

 
428

 
10.5
%
Refining
 
277

 
319

 
7.6
%
 
277

 
293

 
7.2
%
Total
 
$
3,912

 
$
4,190

 
100.0
%
 
$
4,034

 
$
4,085

 
100.0
%

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

CMO-B Portfolio

The following table presents fixed maturities balances held in the CMO-B portfolio by NAIC quality rating as of the dates indicated:
($ in millions)
 
March 31, 2019
 
December 31, 2018
NAIC Quality Designation
 
Amortized Cost
 
Fair Value
 
% Fair Value
 
Amortized Cost
 
Fair Value
 
% Fair Value
1
 
$
2,969

 
$
3,146

 
95.5
%
 
$
2,951

 
$
3,101

 
97.0
%
2
 
67

 
67

 
2.0
%
 
17

 
16

 
0.5
%
3
 
14

 
22

 
0.7
%
 
14

 
25

 
0.8
%
4
 
—

 
—

 
—
%
 
—

 
—

 
—
%
5
 
6

 
9

 
0.3
%
 
5

 
9

 
0.3
%
6
 
34

 
50

 
1.5
%
 
30

 
46

 
1.4
%
Total
 
$
3,090

 
$
3,294

 
100.0
%
 
$
3,017

 
$
3,197

 
100.0
%

For CMO securities where we elected the FVO, amortized cost represents the market values. For details on the NAIC designation methodology, see "Fixed Maturities Credit Quality-Ratings" in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7. of our Annual Report on Form 10-K.

The following table presents the notional amounts and fair values of interest rate derivatives used in our CMO-B portfolio as of the dates indicated:
 
March 31, 2019
 
December 31, 2018
($ in millions)
Notional
Amount  
 
Asset
Fair
Value  
 
Liability
Fair
Value  
 
Notional
Amount  
 
Asset
Fair
Value
 
Liability
Fair
Value  
Derivatives non-qualifying for hedge accounting:
 
 
 
 
 
 
 
 
 
 
 
Interest Rate Contracts
$
13,634

 
$
35

 
$
132

 
$
15,081

 
$
32

 
$
80


The Company utilizes interest rate futures and interest rate swaps as a part of the CMO-B portfolio to hedge interest rate risk.


 
124
 

The following table presents our CMO-B fixed maturity securities balances and tranche type as of the dates indicated:
($ in millions)
 
March 31, 2019
 
December 31, 2018
Tranche Type
 
Amortized Cost
 
Fair Value
 
% Fair Value
 
Amortized Cost
 
Fair Value
 
% Fair Value
Inverse Floater
 
$
403

 
$
503

 
15.3
%
 
$
399

 
$
487

 
15.2
%
Interest Only (IO)
 
157

 
169

 
5.1
%
 
167

 
181

 
5.7
%
Inverse IO
 
1,413

 
1,481

 
44.9
%
 
1,335

 
1,393

 
43.5
%
Principal Only (PO)
 
250

 
253

 
7.7
%
 
249

 
252

 
7.9
%
Floater
 
15

 
16

 
0.5
%
 
16

 
16

 
0.5
%
Agency Credit Risk Transfer
 
850

 
869

 
26.4
%
 
849

 
865

 
27.1
%
Other
 
2

 
3

 
0.1
%
 
2

 
3

 
0.1
%
Total
 
$
3,090

 
$
3,294

 
100.0
%
 
$
3,017

 
$
3,197

 
100.0
%

During the three months ended March 31, 2019, the market value of our CMO-B portfolio increased primarily due to new purchase activity exceeding paydowns and maturities. Valuation of the securities within our CMO-B portfolio improved during the quarter benefited by mute prepayment risk resulting in continued positive relative performance for the strategy. Yields within the CMO-B portfolio continue to decline as higher yielding historical CMO-B assets paydown or mature and are replaced with lower yielding new assets.
 
The following table presents returns for our CMO-B portfolio for the periods indicated:
 
Three Months Ended March 31,
($ in millions)
2019
 
2018
Net investment income (loss)
$
109

 
$
114

Net realized capital gains (losses)(1)
(26
)
 
(94
)
Income (loss) from continuing operations before income taxes
$
83

 
$
20

(1)Net realized capital gains (losses) also include derivatives interest settlements, mark to market adjustments and realized gains (losses) on standalone derivatives contracts that are in the CMO-B portfolio.

In defining the Adjusted operating earnings before income taxes for our CMO-B portfolio, certain recharacterizations are recognized. The net coupon settlement on interest rate swaps hedging CMO-B securities that is included in Net realized capital gains (losses) is reflected as Adjusted operating earnings before income taxes in the table below. In addition, the premium amortization and change in fair value for securities designated under the FVO are included in Net realized capital gains (losses), whereas the coupon for these securities is included in Net investment income. In order to present the economics of these fair value securities in a similar manner to those of an available for sale security, the premium amortization is reclassified from Net realized capital gains (losses) to Adjusted operating earnings before income taxes.

After adjusting for the two items referenced immediately above, the following table presents a reconciliation of Income (loss) from continuing operations before income taxes from our CMO-B portfolio to Adjusted operating earnings before income taxes from our CMO-B portfolio for the periods indicated:
 
Three Months Ended March 31,
($ in millions)
2019
 
2018
Income (loss) from continuing operations before income taxes
$
83

 
$
20

Realized gains/(losses) including OTTI
(1
)
 
(2
)
Fair value adjustments
(29
)
 
38

Total adjustments to income (loss) from continuing operations
(30
)
 
36

Adjusted operating earnings before income taxes
$
53

 
$
56


See Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7. of our Annual Report on Form 10-K for information on our CMO-B portfolio.


 
125
 

Structured Securities

Residential mortgage-backed securities

The following tables present our residential mortgage-backed securities as of March 31, 2019 and December 31, 2018:
 
March 31, 2019
($ in millions)
Amortized Cost
 
Gross Unrealized Capital Gains
 
Gross Unrealized Capital Losses
 
Embedded Derivatives
 
Fair Value
Prime Agency
$
3,013

 
$
155

 
$
18

 
$
13

 
$
3,163

Prime Non-Agency
1,668

 
62

 
10

 
4

 
1,724

Alt-A
173

 
19

 
1

 
9

 
200

Sub-Prime(1)
146

 
25

 
1

 
—

 
170

Total RMBS
$
5,000

 
$
261

 
$
30

 
$
26

 
$
5,257

(1) Includes subprime other asset backed securities.
 
 
 
 
 
 
 
 
 
 
 
December 31, 2018
($ in millions)
Amortized Cost
 
Gross Unrealized Capital Gains
 
Gross Unrealized Capital Losses
 
Embedded Derivatives
 
Fair Value
Prime Agency
$
2,916

 
$
138

 
$
34

 
$
14

 
$
3,034

Prime Non-Agency
1,509

 
56

 
17

 
3

 
1,551

Alt-A
164

 
19

 
—

 
8

 
191

Sub-Prime(1)
151

 
26

 
1

 
—

 
176

Total RMBS
$
4,740

 
$
239

 
$
52

 
$
25

 
$
4,952

(1) Includes subprime other asset backed securities.
 
 
 
 
 
 
 
 
 

 
126
 

Commercial Mortgage-backed securities

The following tables present our commercial mortgage-backed securities as of March 31, 2019 and December 31, 2018:

 
March 31, 2019
($ in millions)
AAA
AA
A
BBB
BB and Below
Total
Amortized Cost
Fair Value
Amortized Cost
Fair Value
Amortized Cost
Fair Value
Amortized Cost
Fair Value
Amortized Cost
Fair Value
Amortized Cost
Fair Value
2013 and prior
$
395

$
410

$
26

$
27

$
98

$
99

$
121

$
128

$
4

$
5

$
644

$
669

2014
370

383

32

32

56

56

25

26

42

41

525

538

2015
355

351

150

152

72

73

134

136

34

35

745

747

2016
119

114

17

17

33

34

53

54

8

8

230

227

2017
327

312

91

90

131

132

45

45

35

35

629

614

2018
262

270

33

34

292

297

129

130

22

22

738

753

2019
173

177

6

6

60

61

35

35

—

—

274

279

Total CMBS
$
2,001

$
2,017

$
355

$
358

$
742

$
752

$
542

$
554

$
145

$
146

$
3,785

$
3,827

 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2018
($ in millions)
AAA
AA
A
BBB
BB and Below
Total
Amortized Cost
Fair Value
Amortized Cost
Fair Value
Amortized Cost
Fair Value
Amortized Cost
Fair Value
Amortized Cost
Fair Value
Amortized Cost
Fair Value
2013 and prior
$
451

$
462

$
65

$
65

$
81

$
80

$
88

$
93

$
22

$
22

$
707

$
722

2014
368

373

40

39

43

42

29

29

37

37

517

520

2015
382

377

148

148

66

66

123

122

30

30

749

743

2016
119

114

18

18

38

37

53

52

8

7

236

228

2017
343

326

91

90

97

95

45

44

34

34

610

589

2018
171

170

30

30

278

276

109

107

31

31

619

614

2019
—

—

—

—

—

—

—

—

—

—

—

—

Total CMBS
$
1,834

$
1,822

$
392

$
390

$
603

$
596

$
447

$
447

$
162

$
161

$
3,438

$
3,416

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
As of March 31, 2019, 96.6% and 3.4% of CMBS investments were designated as NAIC-1 and NAIC-2, respectively. As of December 31, 2018, 97.1% and 2.3% of CMBS investments were designated as NAIC-1 and NAIC-2, respectively.



 
127
 

Other Asset-backed Securities

The following tables present our other asset-backed securities as of March 31, 2019 and December 31, 2018:
 
March 31, 2019
($ in millions)
AAA
AA
A
BBB
BB and Below
Total
Amortized Cost
Fair Value
Amortized Cost
Fair Value
Amortized Cost
Fair Value
Amortized Cost
Fair Value
Amortized Cost
Fair Value
Amortized Cost
Fair Value
Collateralized Obligation
$
708

$
702

$
145

$
144

$
532

$
522

$
30

$
29

$
84

$
80

$
1,499

$
1,477

Auto-Loans
35

35

10

10

9

9

—

—

—

—

54

54

Student Loans
14

14

90

91

108

109

—

—

—

—

212

214

Credit Card loans
20

20

—

—

—

—

—

—

—

—

20

20

Other Loans
68

68

2

2

109

110

173

174

4

5

356

359

Total Other ABS(1)
$
845

$
839

$
247

$
247

$
758

$
750

$
203

$
203

$
88

$
85

$
2,141

$
2,124

(1) Excludes subprime other asset backed securities.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2018
($ in millions)
AAA
AA
A
BBB
BB and Below
Total
Amortized Cost
Fair Value
Amortized Cost
Fair Value
Amortized Cost
Fair Value
Amortized Cost
Fair Value
Amortized Cost
Fair Value
Amortized Cost
Fair Value
Collateralized Obligation
$
708

$
699

$
119

$
116

$
444

$
425

$
29

$
27

$
83

$
75

$
1,383

$
1,342

Auto-Loans
22

21

10

10

9

9

—

—

—

—

41

40

Student Loans
14

14

80

81

99

98

—

—

—

—

193

193

Credit Card loans
21

21

—

—

—

—

—

—

—

—

21

21

Other Loans
68

68

2

2

99

99

160

158

5

5

334

332

Total Other ABS(1)
$
833

$
823

$
211

$
209

$
651

$
631

$
189

$
185

$
88

$
80

$
1,972

$
1,928

(1) Excludes subprime other asset backed securities.
 
 
 
 
 
 
 
 
 
 

As of March 31, 2019, 87.5% and 9.0% of Other ABS investments were designated as NAIC-1 and NAIC-2, respectively. As of December 31, 2018, 87.0% and 8.0% of Other ABS investments were designated as NAIC-1 and NAIC-2, respectively.

Mortgage Loans on Real Estate

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

 
128
 


As of March 31, 2019, our mortgage loans on real estate portfolio had a weighted average DSC of 2.1 times and a weighted average LTV ratio of 61.5%. As of December 31, 2018, our mortgage loans on real estate portfolio had a weighted average DSC of 2.2 times, and a weighted average LTV ratio of 61.4%. See the Investments (excluding Consolidated Investment Entities) 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 and equity securities for impairment on a regular basis. The assessment of whether impairments have occurred is based on a case-by-case evaluation of the underlying reasons for the decline in estimated fair value. See the Business, Basis of Presentation and Significant Accounting Policies Note to our Consolidated Financial Statements in Part II, Item 8. in our Annual Report on Form 10-K for the policy used to evaluate whether the investments are other-than-temporarily impaired.

See the Investments (excluding Consolidated Investment Entities) 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.

Derivatives
 
We use derivatives for a variety of hedging purposes. We also have embedded derivatives within fixed maturities instruments and certain product features. See 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 for further information.

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 March 31, 2019, the Company's total European exposure had an amortized cost and fair value of $5,077 million and $5,298 million, respectively. European exposure with a primary focus on Greece, Ireland, Italy, Portugal and Spain (which we refer to as "peripheral Europe") amounts to $550 million, which includes non-financial institutions exposure in Ireland of $168 million, in Italy of $186 million, in Portugal of $10 million and in Spain of $126 million. We also had financial institutions exposure in Ireland of $21 million, in Italy of $9 million and in Spain of $30 million. We did not have any exposure to Greece.

Among the remaining $4,748 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 March 31, 2019, our non-peripheral sovereign exposure was $185 million, which consisted of fixed maturities and derivative assets. We also had $781 million in net exposure to non-peripheral financial institutions, with a concentration in Switzerland of $170 million and the United Kingdom of $393 million. The balance of $3,782 million was invested across non-peripheral, non-financial institutions.

Some of the major country level exposures were in the United Kingdom of $2,351 million, in The Netherlands of $526 million, in Belgium of $274 million, in France of $288 million, in Germany of $273 million, in Switzerland of $411 million, and in Russia of $90 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.

 
129
 


Consolidated Investment Entities

We provide investment management services to, and have transactions with, various collateralized loan obligations ("CLO entities"), private equity funds, hedge funds, registered investment companies, insurance entities, securitizations and other investment entities in the normal course of business. In certain instances, we serve as the investment manager, making day-to-day investment decisions concerning the assets of these entities. These entities are considered to be either variable interest entities ("VIEs") or voting interest entities ("VOEs"), and we evaluate our involvement with each entity to determine whether consolidation is required.

Certain investment entities are consolidated under consolidation guidance. We consolidate certain entities under the VIE guidance when it is determined that we are the primary beneficiary. We consolidate certain entities under the VOE guidance when we act as the controlling general partner and the limited partners have no substantive rights to impact ongoing governance and operating activities of the entity, or when we otherwise have control through voting rights. See Consolidation and Noncontrolling Interests in 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.

We have no right to the benefits from, nor do we bear the risks associated with these investments beyond our direct debt or equity investments in and management fees generated from these entities. Such direct investments amounted to approximately $359 million and $354 million as of March 31, 2019 and December 31, 2018, respectively. If we were to liquidate, the assets held by consolidated investment entities would not be available to our general creditors as a result of the liquidation.

Fair Value Measurement

Upon consolidation of CLO entities, we elected to apply the FVO for financial assets and financial liabilities held by these entities and have continued to measure these assets (primarily corporate loans) and liabilities (debt obligations issued by CLO entities) at fair value in subsequent periods. We have elected the FVO to more closely align the accounting with the economics of the transactions and allow us to more effectively reflect changes in the fair value of CLO assets with a commensurate change in the fair value of CLO liabilities.
    
Investments held by consolidated private equity funds and hedge funds are reported in our Condensed Consolidated Financial Statements. Changes in the fair value of consolidated investment entities are recorded as a separate line item within Income (loss) related to consolidated investment entities in our Condensed Consolidated Financial Statements.

The methodology for measuring the fair value and fair value hierarchy classification of financial assets and liabilities of consolidated investment entities is consistent with the methodology and fair value hierarchy rules that we apply to our investment portfolio. See Fair Value Measurement in 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.

Nonconsolidated VIEs

We also hold variable interest in certain CLO entities that we do not consolidate because we have determined that we are not the primary beneficiary. With these CLO entities, we serve as the investment manager and receive investment management fees and contingent performance fees. Generally, we do not hold any interest in the nonconsolidated CLO entities, but if we do, such ownership has been deemed to be insignificant. We have not provided and are not obligated to provide any financial or other support to these entities.

We manage or hold investments in certain private equity funds and hedge funds. With these entities, we serve as the investment manager and are entitled to receive investment management fees and contingent performance fees that are generally expected to be insignificant. Although we have the power to direct the activities that significantly impact the economic performance of the funds, we do not hold a significant variable interest in any of these funds and, as such, do not have the obligation to absorb losses or the right to receive benefits from the entity that could potentially be significant to the entity. Accordingly, we are not considered the primary beneficiary and did not consolidate any of these investment funds.

In addition, we do not consolidate funds in which our involvement takes the form of a limited partner interest and is restricted to a role of a passive investor, as a limited partner's interest does not provide us with any substantive kick-out or participating rights, which would overcome the presumption of control by the general partner. See the Consolidated Investment Entities Note to our Condensed Consolidated Financial Statements in Part I, Item 1. of this Quarterly Report on Form 10-Q for more information.


 
130
 

Securitizations

We invest in various tranches of securitization entities, including RMBS, CMBS and ABS. Through our investments, we are 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. Our involvement with these entities is limited to that of a passive investor. We have 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 do we function in any of these roles. We, through our investments or other arrangements, do 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, we are not the primary beneficiary and do not consolidate any of the RMBS, CMBS and ABS entities in which we hold investments. These investments are accounted for as investments available-for-sale as described in the Fair Value Measurements (excluding Consolidated Investment Entities) Note to our Condensed Consolidated Financial Statements in Part I, Item 1. of this Quarterly Report on Form 10-Q and unrealized capital gains (losses) on these securities are recorded directly in AOCI, except for certain RMBS which are accounted for under the FVO whose change in fair value is reflected in Other net realized gains (losses) in the Condensed Consolidated Statements of Operations. Our maximum exposure to loss on these structured investments is limited to the amount of our investment. Refer to the Investments (excluding Consolidated Investment Entities) Note to our Condensed Consolidated Financial Statements in Part I, Item 1. of this Quarterly Report on Form 10-Q for details regarding the carrying amounts and classifications of these assets.

Item 3.        Quantitative and Qualitative Disclosures About Market Risk

Market risk is the risk that our consolidated financial position and results of operations will be affected by fluctuations in the value of financial instruments. We have significant holdings in financial instruments and are naturally exposed to a variety of market risks. The main market risks we are exposed to include interest rate risk, equity market price risk and credit risk. We do not have material market risk exposure to "trading" activities in our Condensed Consolidated Financial Statements. For further details on the Company’s interest rate risk, equity market price risk and credit risk, see Quantitative and Qualitative Disclosures About Market Risk in Part II, Item 7A. in our Annual Report on Form 10-K.


 
131
 

Market Risk Related to Interest Rates

We assess interest rate exposures for financial assets, liabilities and derivatives using hypothetical test scenarios that assume either increasing or decreasing 100 basis point parallel shifts in the yield curve. The following table summarizes the net estimated potential change in fair value from hypothetical 100 basis point upward and downward shifts in interest rates as of March 31, 2019. In calculating these amounts, we exclude gains and losses on separate account fixed income securities related to products for which the investment risk is borne primarily by the separate account contract holder rather than by us. While the test scenarios are for illustrative purposes only and do not reflect our expectations regarding future interest rates or the performance of fixed-income markets, they are a near-term, reasonably possible hypothetical change that illustrates the potential impact of such events. These tests do not measure the change in value that could result from non-parallel shifts in the yield curve. As a result, the actual change in fair value from a 100 basis point change in interest rates could be different from that indicated by these calculations.
 
As of March 31, 2019
 
 
 
 
 
Hypothetical Change in
Fair Value(2)
($ in millions)
Notional
 
Fair Value(1)
 
+ 100 Basis Points Yield Curve Shift
 
- 100 Basis Points Yield Curve Shift
Financial assets with interest rate risk:
 
 
 
 
 
 
 
Fixed maturity securities, including securities pledged
$
—

 
$
53,166

 
$
(4,089
)
 
$
4,326

Commercial mortgage and other loans
—

 
8,749

 
(469
)
 
519

Derivatives:
 
 
 
 
 
 
 
Interest rate contracts
22,615

 
(67
)
 
152

 
(156
)
Financial liabilities with interest rate risk:
 
 
 
 
 
 
 
Investment contracts:
 
 
 
 
 
 
 
Funding agreements without fixed maturities and deferred annuities(3)
—

 
38,132

 
(2,617
)
 
3,242

Funding agreements with fixed maturities
—

 
1,248

 
(42
)
 
44

Supplementary contracts and immediate annuities
—

 
1,313

 
(42
)
 
48

Long-term debt
—

 
3,261

 
(227
)
 
258

Embedded derivatives on reinsurance
—

 
74

 
113

 
(132
)
Guaranteed benefit derivatives(3):
 
 
 
 
 
 
 
IUL
—

 
146

 
10

 
(10
)
Stabilizer and MCGs
—

 
4

 
(4
)
 
51

Other(4)
—

 
37

 
(7
)
 
9

(1) Separate account assets and liabilities, which are interest sensitive, are not included herein as any interest rate risk is borne by the holder of the separate account.
(2) 
(Decreases) in assets or (decreases) in liabilities are presented in parentheses. Increases in assets or increases in liabilities are presented without parentheses.
(3) 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.
(4) Includes GMWBL, GMWB, and FIA products.



 
132
 

The following table summarizes detail on the differences between the interest rate being credited to contract holders as of March 31, 2019, and the respective guaranteed minimum interest rates ("GMIRs"):
 
 
Account Value (1)
 
 
Excess of crediting rate over GMIR
($ in millions)
 
At GMIR
 
Up to 0.50% Above GMIR
 
0.51% - 1.00%
Above GMIR
 
1.01% - 1.50% Above GMIR
 
1.51% - 2.00% Above GMIR
 
More than 2.00% Above GMIR
 
Total
Guaranteed minimum interest rate:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Up to 1.00%
 
$
3,161

 
$
1,657

 
$
1,757

 
$
744

 
$
1,121

 
$
744

 
$
9,184

1.01% - 2.00%
 
1,108

 
102

 
70

 
6

 
10

 
71

 
1,367

2.01% - 3.00%
 
14,378

 
275

 
302

 
180

 
21

 
—

 
15,156

3.01% - 4.00%
 
12,291

 
765

 
439

 
—

 
—

 
—

 
13,495

4.01% and Above
 
2,479

 
99

 
—

 
—

 
—

 
—

 
2,578

Renewable beyond 12 months (MYGA) (2)
 
457

 
1

 
—

 
—

 
8

 
—

 
466

Total discretionary rate setting products
 
$
33,874

 
$
2,899

 
$
2,568

 
$
930

 
$
1,160

 
$
815

 
$
42,246

Percentage of Total
 
80.2
%
 
6.9
%
 
6.1
%
 
2.2
%
 
2.7
%
 
1.9
%
 
100.0
%
(1) 
Includes only the account values for investment spread products with GMIRs and discretionary crediting rates, net of policy loans. Excludes Stabilizer products, which are fee based. Also excludes the portion of the account value of FIA products for which the crediting rate is based on market indexed strategies.
(2)  
Represents MYGA contracts with renewal dates after March 31, 2020 on which we are required to credit interest above the contractual GMIR for at least the next twelve months.


 
133
 

Market Risk Related to Equity Market Prices

We assess equity risk exposures for financial assets, liabilities and derivatives using hypothetical test scenarios that assume either an increase or decrease of 10% in all equity market benchmark levels. The following table summarizes the net estimated potential change in fair value from an instantaneous increase and decrease in all equity market benchmark levels of 10% as of March 31, 2019. In calculating these amounts, we exclude gains and losses on separate account equity securities related to products for which the investment risk is borne primarily by the separate account contract holder rather than by us. While the test scenarios are for illustrative purposes only and do not reflect our expectations regarding the future performance of equity markets, they are near-term, reasonably possible hypothetical changes that illustrate the potential impact of such events. These scenarios consider only the direct effect on fair value of declines in equity benchmark market levels and not changes in asset-based fees recognized as revenue, changes in our estimates of total gross profits used as a basis for amortizing DAC/VOBA, other intangibles and other costs, or changes in any other assumptions such as market volatility or mortality, utilization or persistency rates in variable contracts that could also impact the fair value of our living benefits features. In addition, these scenarios do not reflect the effect of basis risk, such as potential differences in the performance of the investment funds underlying the variable annuity products relative to the equity market benchmark we use as a basis for developing our hedging strategy. The impact of basis risk could result in larger differences between the change in fair value of the equity-based derivatives and the related living benefit features, in comparison to the hypothetical test scenarios.
 
As of March 31, 2019
 
 
 
 
 
Hypothetical Change in
Fair Value(1)
($ in millions)
Notional
 
Fair Value
 
+ 10%
Equity Shock
 
-10%
Equity Shock
Financial assets with equity market risk:
 
 
 
 
 
 
 
Equity securities
$
—

 
$
355

 
$
33

 
$
(33
)
Limited liability partnerships/corporations
—

 
1,166

 
71

 
(71
)
Derivatives:
 
 
 
 
 
 
 
Equity futures and total return swaps
141

 
(1
)
 
(14
)
 
14

Equity options
1,674

 
158

 
90

 
(75
)
Financial liabilities with equity market risk:
 
 
 
 
 
 
 
Guaranteed benefit derivatives:
 
 
 
 
 
 
 
IUL
—

 
146

 
83

 
(69
)
Other(2)
—

 
37

 
(3
)
 
4

(1) (Decreases) in assets or (decreases) in liabilities are presented in parentheses. Increases in assets or increases in liabilities are presented without parentheses.
(2) Includes GMWBL, GMWB, and FIA products.
 
Item 4.        Controls and Procedures

Disclosure Controls and Procedures

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

Changes in Internal Control Over Financial Reporting

There were no changes to 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 March 31, 2019 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

 
134
 

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 and uncertainties, please see Risk Factors in Part I, Item IA. of our Annual Report on Form 10-K for the year ended December 31, 2018 (the "Annual Report on Form 10-K") filed with the SEC. In addition, please see Management’s Discussion and Analysis of Financial Condition and Results of Operations-Trends and Uncertainties in Part I, Item 2. of this Quarterly Report on Form 10-Q.

Item 2.        Unregistered Sales of Equity Securities and Use of Proceeds

Purchases of Equity Securities by the Issuer

The following table summarizes Voya Financial, Inc.’s repurchases of its common stock for the three months ended March 31, 2019:
Period
 
Total Number of Shares Purchased(1)
 
Average Price Paid Per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs(2)
 
 
 
 
 
 
 
 
(in millions) 
January 1, 2019 - January 31, 2019
 
5,065,658

 
$
39.54

 
5,059,449

 
$
286

February 1, 2019 - February 28, 2019
 
196,197

 
49.03

 
—

 
286

March 1, 2019 - March 31, 2019
 
250,711

 
49.27

 
—

 
286

Total
 
5,512,566

 
$
40.32

 
5,059,449

 
N/A

(1) In connection with the exercise or vesting of equity-based compensation awards, employees may remit to Voya Financial, Inc., or Voya Financial, Inc. may withhold into treasury stock, shares of common stock in respect to tax withholding obligations and option exercise cost associated with such exercise or vesting. For the three months ended March 31, 2019, there were 453,117 Treasury share increases in connection with such withholding activities.
(2) On May 2, 2019, the Board of Directors provided share repurchase authorization, increasing the aggregate of our common stock authorized for repurchase by $500. The current share repurchase authorization expires on June 30, 2020 (unless extended), and does not obligate the Company to purchase any shares. The authorization for the share repurchase program may be terminated, increased or decreased by the Board of Directors at any time.

Item 6.        Exhibits

See Exhibit Index on page 136 hereof.

 
135
 

Voya Financial, Inc.
Exhibit Index
Exhibit No.
 
Description of Exhibit
31.1+
 
Rule 13a-14(a)/15d-14(a) Certification of Rodney O. Martin, Jr. Chief Executive Officer (included as Exhibit 31.1 to Form 10-Q)
31.2+
 
Rule 13a-14(a)/15d-14(a) Certification of Michael S. Smith, Chief Financial Officer (included as Exhibit 31.2 to Form 10-Q)
32.1+
 
Section 1350 Certification of Rodney O. Martin, Jr. Chief Executive Officer (included as Exhibit 32.1 to Form 10-Q)
32.2+
 
Section 1350 Certification of Michael S. Smith, Chief Financial Officer (included as Exhibit 32.2 to Form 10-Q)
101.INS+
 
XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL 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.

 
136
 

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.


May 8, 2019
Voya Financial, Inc.
(Date)
(Registrant)
 
 
 
 
 
 
 
By: /s/
Michael S. Smith
 
 
Michael S. Smith
 
 
Executive Vice President and
 
 
Chief Financial Officer
 
 
(Duly Authorized Officer and Principal Financial Officer)


 
137
 

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