For the purposes of the discussion in this Annual Report on Form 10-K, the termVoya Financial, Inc. refers toVoya Financial, Inc. and the terms "Company," "we," "our," and "us" refer toVoya Financial, Inc. and its subsidiaries.
The following discussion and analysis presents a review of our results of
operations for the years ended
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."
Overview
We provide our principal products and services through three segments: Retirement, Investment Management and Employee Benefits. Corporate includes activities not directly related to our segments and certain run-off activities that are not meaningful to our business strategy.
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, administration or advisement, 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. The following represents segment percentage contributions to total Adjusted operating revenues and Adjusted operating earnings before income taxes for the year endedDecember 31, 2019 : Year Ended December 31, 2019 Adjusted Operating Adjusted Earnings Operating before percent of total Revenues Income Taxes Retirement 49.2 % 99.5 % Investment Management 12.3 % 30.5 % Employee Benefits 36.8 % 33.7 % Corporate 1.8 % (63.7 )% 58
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Business Held for Sale and Discontinued Operations
The Individual Life Transaction
OnDecember 18, 2019 , we entered into a Master Transaction Agreement (the "Resolution MTA") withResolution Life U.S. Holdings Inc. , aDelaware corporation ("Resolution Life US"), pursuant to which Resolution Life US will acquire Security Life ofDenver Company ("SLD"),Security Life of Denver International Limited ("SLDI") andRoaring River II, Inc. ("RRII") including several subsidiaries of SLD. The transaction is expected to close bySeptember 30, 2020 and is subject to conditions specified in the Resolution MTA, including the receipt of required regulatory approvals. We have determined that the legal entities to be sold and the Individual Life and Annuities businesses within these entities meet the criteria to be classified as held for sale and that the sale represents a strategic shift that will have a major effect on our operations. Accordingly, the results of operations of the businesses to be sold have been presented as discontinued operations, and the assets and liabilities of the related businesses have been classified as held for sale and segregated for all periods presented in this Annual Report on Form 10-K. During the fourth quarter of 2019, we recorded an estimated loss on sale, net of tax, of$1,108 million to write down the carrying value of the businesses held for sale to estimated fair value, which is based on the estimated sales price of the transaction, less cost to sell and other adjustments in accordance with the Resolution MTA. Additionally, the estimated loss on sale is based on assumptions that are subject to change due to fluctuations in market conditions and other variables that may occur prior to the closing date. For additional information on the Transaction and the related estimated loss on sale, see Trends and Uncertainties in Part II, Item 7 of this Annual Report on Form 10-K. Concurrently with the sale, SLD will enter into reinsurance agreements withReliastar Life Insurance Company ("RLI"),ReliaStar Life Insurance Company of New York ("RLNY"), andVoya Retirement Insurance and Annuity Company ("VRIAC"), each of which is a direct or indirect wholly owned subsidiary of the Company. Pursuant to these agreements, RLI and VRIAC will reinsure to SLD a 100% quota share, and RLNY will reinsure to SLD a 75% quota share, of their respective individual life insurance and annuities businesses. RLI, RLNY, and VRIAC will remain subsidiaries of the Company. We currently expect that these reinsurance transactions will be carried out on a coinsurance basis, with SLD's reinsurance obligations collateralized by assets in trust. Based on values as ofDecember 31, 2019 ,U.S. GAAP reserves to be ceded under the Individual Life Transaction (defined below) are expected to be approximately$11.0 billion and are subject to change until closing. The reinsurance agreements along with the sale of the legal entities noted above (referred to as the "Individual Life Transaction") will result in the disposition of substantially all of the Company's life insurance and legacy non-retirement annuity businesses and related assets. The revenues and net results of the Individual Life and Annuities businesses that will be disposed of via reinsurance are reported in businesses exited or to be exited through reinsurance or divestment which is an adjustment to ourU.S. GAAP revenues and earnings measures to calculate Adjusted operating revenues and Adjusted operating earnings before income taxes, respectively. At close, we will recognize a further adjustment to Total shareholders' equity, excluding Accumulated other comprehensive income, associated with the portion of the transaction that involves a sale through reinsurance. We currently estimate that we would realize a partially offsetting book value gain, net of DAC and tax, on the assets expected to be transferred upon execution of the arrangements, such that the total reduction in Total shareholders' equity, excluding Accumulated other comprehensive income, due to the Individual Life Transaction would be in the range of$250 million to$750 million . These impacts are subject to changes due to many factors including interest rate movements, asset selections and changes to the structure of the reinsurance transactions. 59
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The following table presents the major components of income and expenses of discontinued operations, net of tax related to the Individual Life Transaction for the periods indicated: Year Ended December 31, 2019 2018 2017 Revenues: Net investment income$ 665 $ 649 $ 672 Fee income 750 743 754 Premiums 27 27 24 Total net realized capital gains (losses) 45 (44 ) (18 ) Other revenue (21 ) 4 (8 ) Total revenues 1,466 1,379 1,424 Benefits and expenses: Interest credited and other benefits to contract owners/policyholders 1,065 1,050 978 Operating expenses 83 96 102 Net amortization of Deferred policy acquisition costs and Value of business acquired 153 135 176 Interest expense 10 9 8 Total benefits and expenses 1,311 1,290 1,264 Income (loss) from discontinued operations before income taxes 155 89 160 Income tax expense (benefit) 31 17 53 Loss on sale, net of tax (1,108 ) - - Income (loss) from discontinued operations, net of tax$ (984 ) $ 72 $ 107 The 2018 Transaction OnJune 1, 2018 , we consummated a series of transactions (collectively, the "2018 Transaction") pursuant to a Master Transaction Agreement datedDecember 20, 2017 ("2018 MTA") withVA Capital Company LLC ("VA Capital ") and Athene Holding Ltd ("Athene"). As part of the 2018 Transaction,Venerable Holdings, Inc. ("Venerable"), a wholly owned subsidiary ofVA Capital , acquired two of our subsidiaries,Voya Insurance and Annuity Company ("VIAC") andDirected Services, LLC ("DSL"), and VIAC and other Voya subsidiaries reinsured to Athene substantially all of their fixed and fixed indexed annuities business. The 2018 Transaction resulted in the disposition of substantially all of our Closed Block Variable Annuity ("CBVA") and Annuities businesses. During 2019, we settled the outstanding purchase price true-up amounts withVA Capital . We do not anticipate further material charges in connection with the 2018 Transaction. Income (loss) from discontinued operations, net of tax for the year endedDecember 31, 2019 includes a charge of$82 million related to the purchase price true-up settlement in connection with the 2018 Transaction. Upon execution of the Individual Life Transaction including the reinsurance arrangements disclosed above, we will continue to hold an insignificant number of Individual Life, Annuities and CBVA policies. These policies are referred to in this Annual Report on Form 10-K as "Residual Runoff Business".
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The following table summarizes the components of Income (loss) from discontinued
operations, net of tax related to the 2018 Transaction for the years ended
Year Ended December 31, 2019 2018 (1) 2017 Revenues: Net investment income $ -$ 510 $ 1,266 Fee income - 295 801 Premiums - (50 ) 190 Total net realized capital gains (losses) - (345 ) (1,234 ) Other revenue - 10 19 Total revenues - 420 1,042 Benefits and expenses: Interest credited and other benefits to contract owners/policyholders - 442 978 Operating expenses - (14 ) 250 Net amortization of Deferred policy acquisition costs and Value of business acquired - 49 127 Interest expense - 10 22 Total benefits and expenses - 487 1,377 Income (loss) from discontinued operations before income taxes - (67 ) (335 ) Income tax expense (benefit) - (19 ) (178 ) Loss on sale, net of tax (82 ) 505 (2,423 ) Income (loss) from discontinued operations, net of tax$ (82 ) $
457
(1) Reflects Income (loss) from discontinued operations, net of tax for the five
months ended
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.
Market Conditions
While extraordinary monetary accommodation has suppressed volatility in rate, credit and domestic equity markets for an extended period, global capital markets are now past peak accommodation as theU.S. Federal Reserve continues its gradual pace of policy normalization. As global monetary policy becomes less accommodative, 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"), administration or advisement ("AUA"). 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 II, Item 7A. of this Annual Report on Form 10-K. 61
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Interest Rate Environment 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
fixed income investments and had an annualized earned yield of approximately
5.3% in the fourth 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 2020 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 impact of the continued low 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 current low interest rate environment or a period of rapidly increasing interest rates in Part I, Item 1A. of this 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 II, Item 7A. of this Annual Report on Form 10-K. Discontinued Operations Income (loss) from discontinued operations, net of tax, for the year endedDecember 18, 2019 includes the estimated loss on sale for the Individual Life Transaction of$1,108 million . The estimated loss on sale represents the excess of the estimated carrying value of the businesses held for sale over the estimated purchase price, which approximates fair value, less cost to sell. The purchase price in the transaction is approximately$1.25 billion , with an adjustment based on the adjusted capital and surplus of SLD, SLDI and RRII at closing including the assumption of surplus notes. The estimated purchase price and estimated carrying value of the legal entities to be sold as of the future date of closing, and therefore the estimated loss on sale related to the Individual Life Transaction, are subject to adjustment in future quarters until closing, and may be influenced by, but not limited to, the following factors:
• The performance of the businesses held for sale, including the impact of
mortality, reinsurance rates and financing costs; • Changes in the terms of the Transaction, including as the result of
subsequent negotiations or as necessary to obtain regulatory approval; and
• Other changes in the terms of the Transaction due to unanticipated developments. The Company is required to remeasure the estimated fair value and loss on sale at the end of each quarter until the closing of the Individual Life Transaction. Changes in the estimated loss on sale that occur prior to closing of the Individual Life Transaction will be reported as an adjustment to Income (loss) from discontinued operations, net of tax, in future quarters prior to closing. 62
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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. See Critical Accounting Judgments and Estimates in Part II, Item 7. of this Annual Report on Form 10-K for further information. Stranded Costs As a result of the 2018 Transaction and the Individual Life Transaction, the historical revenues and certain expenses of the sold businesses have been classified as discontinued operations. Historical revenues and certain expenses of the businesses that will be divested via reinsurance at closing of the Individual Life Transaction (including an insignificant amount of Individual Life and closed block non retirement annuities that are not part of the transaction) are reported within continuing operations, but are excluded from adjusted operating earnings as businesses exited or to be exited through reinsurance or divestment. Expenses classified within discontinued operations and businesses exited or to be exited through reinsurance include only direct operating expenses incurred by these businesses and then only to the extent that the nature of such expenses was such that we would cease to incur such expenses upon the close of the 2018 Transaction and the Individual Life Transaction. Certain other direct costs of these businesses, including those which relate to activities for which we have or will provide transitional services and for which we have or will be reimbursed under transition services agreements ("TSAs") 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 or divested via reinsurance, are reported within continuing operations. These costs ("Stranded Costs") and the associated revenues from the TSAs are reported within continuing operations in Corporate, since we do not believe they are representative of the future run-rate of revenues and expenses of our continuing operations. The Stranded Costs related to the 2018 63
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Transaction were removed in the fourth quarter of 2019 and we plan to address the Stranded Costs related to the Individual Life Transaction through a cost reduction strategy. Refer to Restructuring in Part II, Item 7 of this Annual Report on Form 10-K for more information on this program.
Carried Interest
Net investment income and net realized gains (losses), within our Investment Management segment, includes, for the current and previous periods, performance-based capital allocations 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. Any such reversal could be fully or partially recovered in subsequent periods if cumulative fund performance later exceeds applicable hurdles. For the year endedDecember 31, 2019 , our carried interest total net results were immaterial. For the year endedDecember 31, 2018 , our carried interest total net results were a gain of$13 million . For the year endedDecember 31, 2017 , our carried interest total net results were a gain of$35 million , including the recovery of$25 million in previously reversed accrued carried interest related to a private equity fund which experienced an increase in fund performance during 2017. For additional information on carried interest, see Risk Factors - Revenues, earnings and income from our Investment Management business operations could be adversely affected if the terms of our asset management agreements are significantly altered or the agreements are terminated, or if certain performance hurdles are not realized in Part I, Item 1A. of this Annual Report on Form 10-K.
Restructuring
Organizational Restructuring
As a result of the closing of the 2018 Transaction, we have undertaken restructuring efforts to execute the transition and reduce stranded expenses associated with our CBVA and fixed and fixed indexed annuities businesses, as well as our corporate and shared services functions ("Organizational Restructuring"). InAugust 2018 , we announced that we were targeting a cost savings of$110 million to$130 million by the middle of 2019 to address the stranded costs of the 2018 Transaction. Additionally, inOctober 2018 , we announced our decision to cease new sales following the strategic review of our Individual Life business, which was expected to result in cost savings of$20 million . The initiatives associated with these restructuring efforts concluded during 2019. InNovember 2018 , we announced that we are targeting an additional$100 million of cost savings by the end of 2020 in addition to the cost savings 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 Consolidated Statements of Operations, but excluded from Adjusted operating earnings before income taxes. For the years endedDecember 31, 2019 and 2018, we incurred Organizational Restructuring expenses of$201 million and$49 million 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 as ofJanuary 31, 2019 , which was recorded during the first quarter of 2019. Including the expense of$201 million for the year endedDecember 31, 2019 , the aggregate amount of additional Organizational Restructuring expenses expected is in the range of$250 million 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 2018 Transaction are included in Income (loss) from discontinued operations, net of tax, in the Consolidated Statements of Operations. For the year endedDecember 31, 2019 , we did not incur any Organizational Restructuring expenses associated with discontinued operations as a result of the 2018 Transaction. For the year endedDecember 31, 2018 , we incurred Organizational Restructuring expenses as a result of the 2018 Transaction of$6 million of severance and organizational transition costs, which are reflected in discontinued operations.
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Pursuant to the Individual Life Transaction, we will divest or dissolve five regulated insurance entities, including its life companies domiciled inColorado andIndiana , and captive entities domiciled inArizona andMissouri . We will also divestVoya America Equities LLC , a regulated broker-dealer, and transfer or cease usage of a substantial number of administrative systems. As such, we will undertake further restructuring efforts to reduce stranded expenses associated with our Individual Life business as well as our corporate and shared services functions. Through the closing of the Individual Life Transaction, we anticipate incurring additional restructuring expenses directly related to the disposition. These collective costs, which include severance, transition and other costs, cannot currently be estimated but could be material.
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. For the years endedDecember 31, 2019 , 2018 and 2017, the total of all initiatives in the 2016 Restructuring program resulted in restructuring expenses of$8 million ,$30 million and$82 million , respectively, which are reflected in Operating expenses in the 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.
Results of Operations
Operating Measures
In this MD&A, we discuss Adjusted operating earnings before income taxes and Adjusted operating revenues, each of which is a measure used by management to evaluate segment performance. We provide more information on each measure below.
Adjusted Operating Earnings before Income Taxes
Adjusted operating earnings before income taxes. We believe that Adjusted operating earnings before income taxes provides a meaningful measure of our business and segment 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. We use the same accounting policies and procedures to measure segment Adjusted operating earnings before income taxes as we do for the directly comparableU.S. GAAP measure, which is 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 a 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. 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 fair value option
("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 adjusted operating earnings, reflects the
expected cost of these benefits if markets perform in line with our
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
our nonperformance spread; • Income (loss) related to businesses exited or to be exited through
reinsurance or divestment, which includes gains and (losses) associated
with transactions to exit blocks of business within continuing operations
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gains (losses) on securities sold and expenses directly related to these transactions) and residual run-off activity (including an insignificant number of Individual Life, Annuities and CBVA policies that were not part of the Individual Life and 2018 Transactions). Excluding this activity, which also includes amortization of intangible assets related to businesses exited or to be exited, better reveals trends in our core business and more closely aligns Adjusted operating earnings before income taxes with how we manage our segments; • Income (loss) attributable to noncontrolling interest represents the interest of shareholders, other than those ofVoya Financial, Inc. , 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
variable interest entities ("VIEs") or voting interest entities ("VOEs")
to which we are 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 part of transactions where we repurchase 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 infrequent and not indicative of normal operations;
• 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 our
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. We immediately recognize actuarial gains and losses related to
pension and other postretirement benefit obligations 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 our 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, acquisition
/ merger integration expenses, severance and other third-party expenses
associated with such activities. These items vary widely in timing, scope
and frequency between periods as well as between companies to which we are
compared. Accordingly, we adjust for these items as our management believes that these items distort the ability to make a meaningful evaluation of the current and future performance of our segments. The most directly comparableU.S. GAAP measure to Adjusted operating earnings before income taxes is Income (loss) from continuing operations before income taxes. For a reconciliation of Income (loss) from continuing operations before income taxes to Adjusted operating earnings before income taxes, see Results of Operations-Company Consolidated below.
Adjusted Operating Revenues
Adjusted operating revenues is a measure of our segment revenues. Each segment's Adjusted 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 our 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 our nonperformance spread;
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• Revenues related to businesses exited or to be exited through reinsurance
or divestment, which includes revenues associated with transactions to exit blocks of business within continuing operation (including net investment gains (losses) on securities sold related to these
transactions) and residual run-off activity (including an insignificant
number of Individual Life, Annuities and CBVA policies that were not part
of the Individual Life and 2018 Transactions). Excluding this activity
better reveals trends in our core business and more closely aligns Adjusted operating revenues with how we manage our segments;
• Revenues attributable to noncontrolling interest represents the interest
of shareholders, other than of
consolidated entities. Revenues attributable to noncontrolling interest
represents such shareholders' interests in the revenues of those entities,
or the attribution of results from consolidated VIEs or VOEs to which we
are not economically entitled; and
• Other adjustments to Total revenues primarily reflect fee income earned by
our broker-dealers for sales of non-proprietary products, which are
reflected net of commission expense in our 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. The most directly comparableU.S. GAAP measure to Adjusted operating revenues is Total revenues. For a reconciliation of Total revenues to Adjusted operating revenues, see Results of Operations-Company Consolidated below.
AUM and AUA
A substantial portion of our fees, other charges and margins are based on AUM. AUM represents on-balance sheet assets supporting customer account values/liabilities and surplus as well as off-balance sheet institutional/mutual funds. Customer account values reflect the amount of policyholder equity that has accumulated within retirement, annuity and universal-life type products. AUM includes general account assets managed by our Investment Management segment in which we bear the investment risk, separate account assets in which the contract owner bears the investment risk and institutional/mutual funds, which are excluded from our balance sheets. AUM-based revenues increase or decrease with a rise or fall in the amount of AUM, whether caused by changes in capital markets or by net flows. AUM is principally affected by net deposits (i.e., new deposits, less surrenders and other outflows) and investment performance (i.e., interest credited to contract owner accounts for assets that earn a fixed return or market performance for assets that earn a variable return). Separate account AUM and institutional/mutual fund AUM include assets managed by our Investment Management segment, as well as assets managed by third-party investment managers. OurInvestment Management segment reflects the revenues earned for managing affiliated assets for our other segments as well as assets managed for third parties. AUA represents accumulated assets on contracts pursuant to which we either provide administrative or advisement services or product guarantees for assets managed by third parties. These contracts are not insurance contracts and the assets are excluded from the Consolidated Financial Statements. Fees earned on AUA are generally based on the number of participants, asset levels and/or the level of services or product guarantees that are provided.
Our consolidated AUM/AUA includes eliminations of AUM/AUA managed by our Investment Management segment that is also reflected in other segments' AUM/AUA and adjustments for AUM not reflected in any segments.
Sales Statistics
In our discussion of our segment results under Results of Operations-Segment by Segment, we sometimes refer to sales activity for various products. The term "sales" is used differently for different products, as described more fully below. These sales statistics do not correspond to revenues underU.S. GAAP and are used by us as operating statistics underlying our financial performance.
Net flows are deposits less redemptions (including benefits and other product charges).
Sales for Employee Benefits products are based on a calculation of annual premiums, which represent regular premiums on new policies, plus a portion of new single premiums.
Total gross premiums and deposits are defined as premium revenue and deposits for policies written and assumed. This measure provides information as to growth and persistency trends related to premium and deposits.
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Table of Contents Other Measures Total annualized in-force premiums are defined as a full year of premium at the rate in effect at the end of the period. This measure provides information as to the growth and persistency trends in premium revenue. Interest adjusted loss ratios are defined as the ratio of benefits expense to premium revenue exclusive of the discount component in the change in benefit reserve. This measure reports the loss ratio related to mortality on life products and morbidity on health products.
Results of Operations - Company Consolidated
The following table presents the consolidated financial information for the periods indicated: Year Ended December 31, ($ in millions) 2019 2018 2017 Revenues: Net investment income$ 2,792 $ 2,669 $ 2,641 Fee income 1,969 1,982 1,889 Premiums 2,273 2,132 2,097 Net realized capital gains (losses) (166 ) (355 ) (209 ) Other revenue 465 443
379
Income (loss) related to consolidated investment entities 143 292 432 Total revenues 7,476 7,163 7,229 Benefits and expenses: Interest credited and other benefits to contract owners/policyholders 3,750 3,526
3,658
Operating expenses 2,746 2,606
2,562
Net amortization of Deferred policy acquisition costs and Value of business acquired (1) 199 233
353
Interest expense 176 221
184
Operating expenses related to consolidated investment entities 45 49 87 Total benefits and expenses 6,916 6,635
6,844
Income (loss) from continuing operations before income taxes 560 528
385
Income tax expense (benefit) (205 ) 37
687
Income (loss) from continuing operations 765 491 (302 ) Income (loss) from discontinued operations, net of tax (1,066 ) 529 (2,473 ) Net Income (loss) (301 ) 1,020 (2,775 ) Less: Net income (loss) attributable to noncontrolling interest 50 145
217
Less: Preferred stock dividends 28 - - Net income (loss) available to our common shareholders$ (379 ) $ 875
(1) Refer to DAC/VOBA and Other Intangibles Unlocking in Part II, Item 7. of this Annual Report on Form 10-K for further detail.
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The following table presents information about our Operating expenses for the periods indicated: Year Ended December 31, ($ in millions) 2019 2018 2017 Operating expenses: Commissions$ 673 $ 643 $ 656 General and administrative expenses: Net actuarial (gains)/losses related to pension and other postretirement benefit obligations (3 ) 47 16 Restructuring expenses 209 79 82 Strategic Investment Program (1) - - 80 Other general and administrative expenses 1,977 1,943
1,862
Total general and administrative expenses 2,183 2,069
2,040
Total operating expenses, before DAC/VOBA deferrals 2,856 2,712 2,696 DAC/VOBA deferrals (110 ) (106 ) (134 ) Total operating expenses$ 2,746 $ 2,606 $ 2,562
(1) Beginning in 2018, remaining costs of our Strategic Investment Program related to IT simplification, digital and analytics are insignificant and have been allocated to our reportable segments within Other general and administrative expenses.
The following table presents AUM and AUA as of the dates indicated:
As of December 31, ($ in millions) 2019 2018 2017 AUM and AUA: Retirement (2)$ 440,043 $ 361,575 $ 432,341 Investment Management 272,730 250,468 274,304 Employee Benefits 1,797 1,788 1,829
Eliminations/Other (111,783 ) (102,527 ) (105,492 )
Total AUM and AUA(1) (2)
AUM$ 322,538 $ 281,380 $ 307,980 AUA (2) 280,249 229,924 295,002
Total AUM and AUA(1) (2)
(1) Includes AUM and AUA related to the Individual Life and 2018 Transactions, 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. 69
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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: Year Ended December 31, ($ in millions) 2019 2018 2017 Income (loss) from continuing operations before income taxes$ 560 $ 528 $ 385 Less Adjustments: Net investment gains (losses) and related charges and adjustments 25 (124 ) (112 ) Net guaranteed benefit hedging gains (losses) and related charges and adjustments (14 ) 62 46 Income (loss) related to businesses exited or to be exited through reinsurance or divestment 98 (40 ) 59 Income (loss) attributable to noncontrolling interests 50 145 217 Income (loss) related to early extinguishment of debt (12 ) (40 ) (4 ) Immediate recognition of net actuarial gains (losses) related to pension and other postretirement benefit obligations and gains (losses) from plan amendments and curtailments 3 (47 ) (16 ) Dividend payments made to preferred shareholders 28 - - Other adjustments (209 ) (79 ) (97 )
Total adjustments to income (loss) from
continuing operations before income taxes
Adjusted operating earnings before income taxes by segment: Retirement$ 588 $ 701 $ 456 Investment Management 180 205 248 Employee Benefits 199 160 127 Corporate (376 ) (415 ) (539 ) Total adjusted operating earnings before income taxes$ 591 $ 651 $ 292 70
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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:
Year Ended December 31, ($ in millions) 2019 2018 2017 Total revenues$ 7,476 $ 7,163 $ 7,229 Adjustments: Net realized investment gains (losses) and related charges and adjustments 18 (148 ) (132 ) Gain (loss) on change in fair value of derivatives related to guaranteed benefits (13 ) 63 46 Revenues related to businesses exited or to be exited through reinsurance or divestment 1,531 1,446
1,618
Revenues attributable to noncontrolling interests 109 214
321
Other adjustments 321 238
193
Total adjustments to revenues$ 1,966 $ 1,813
Adjusted operating revenues by segment: Retirement$ 2,712 $ 2,727 $ 2,538 Investment Management 675 683 731 Employee Benefits 2,026 1,849 1,767 Corporate 97 91 147
Total adjusted operating revenues
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: Year Ended December 31, ($ in millions) 2019 2018 2017 Other-than-temporary impairments $ (60 )$ (32 ) $ (20 ) CMO-B fair value adjustments(1) 62 (107 ) (69 ) Gains (losses) on the sale of securities 36 (14 ) - Other, including changes in the fair value of derivatives (34 ) 11 (10 ) Total investment gains (losses) including businesses to be exited through reinsurance or divestment 4 (142 ) (99 ) Net amortization of DAC/VOBA and other intangibles on above 10 31 16 Net investment gains (losses) including businesses to be exited through reinsurance or divestment $ 14$ (111 ) $ (83 ) Less: Net investment gains (losses) related to the businesses to be exited through reinsurance or divestment, net of DAC/VOBA and other intangibles 11 (13 ) (29 ) Net investment gains (losses) excluding businesses to be exited through reinsurance or divestment $ 25 $ (124
)
(1) For a description of our CMO-B portfolio, refer to Investments - CMO-
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The following table presents the adjustment to Income (loss) from continuing operations before income taxes related to Guaranteed benefit hedging gains (losses) net of DAC/VOBA and other intangibles amortization for the periods indicated:
Year Ended December 31, ($ in millions) 2019 2018
2017
Gain (loss), excluding nonperformance risk $ (15 ) $ 75 $ 63 Gain (loss) due to nonperformance risk(1)
1 (13 ) (17 ) Net gain (loss) prior to related amortization of DAC/VOBA and sales inducements (14 ) 62 46 Net amortization of DAC/VOBA and sales inducements - - - Net guaranteed benefit hedging gains (losses) and related charges and adjustments $ (14 ) $
62 $ 46
(1) Refer to Critical Accounting Judgments and Estimates in Part II, Item 7. of this Annual Report on Form 10-K for further detail.
The following tables present businesses exited or to be exited through reinsurance or divestment adjustments to Income (loss) from continuing operations and Total revenues for the periods indicated:
Year Ended December 31, ($ in millions) 2019 2018
2017
Income (loss) related to businesses exited through reinsurance or divestment $ 25$ (71 ) $ 18 Income (loss) related to businesses to be exited through reinsurance or divestment 73 31 41 Total income (loss) related to business exited or to be exited through reinsurance or divestment $ 98$ (40 ) $ 59 Year Ended December 31, ($ in millions) 2019 2018 2017 Revenues related to businesses exited through reinsurance or divestment$ 124 $ (43 ) $ 92 Revenues related to businesses to be exited through reinsurance or divestment 1,407 1,489
1,526
Total revenues related to business exited or to be exited through reinsurance or divestment$ 1,531 $ 1,446 $ 1,618
The following table presents summary information related to the Income (loss) from discontinued operations, net of tax for the periods indicated:
Year Ended
2019 2018
2017
Income (loss) from discontinued operations, net of tax (1) Individual Life Transaction$ (984 ) $ 72 $ 107 2018 Transaction (82 ) 457 (2,580 ) Total$ (1,066 ) $ 529 $ (2,473 )
(1) Refer to Overview in Part II, Item 7. of this Annual Report on Form 10-K for further detail.
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The following table presents significant items included in Income (loss) from discontinued operations, net of tax related to the Individual Life Transaction for the periods indicated: Year Ended December 31, ($ in millions) 2019 2018 2017 Loss on sale, net of tax excluding costs to sell$ (1,072 ) $ - $ - Transaction costs (36 ) - - Net results of discontinued operations (1) 93 55 54 Income tax benefit (expense) 31 17 53 Income (loss) from discontinued operations, net of tax (2)$ (984 ) $
72
(1) Includes$31 million ,$102 million and$59 million of DAC,VOBA and other intangibles unlocking for the years endedDecember 31, 2019 , 2018 and 2017, respectively. (2) Refer to Overview in Part II, Item 7. of this Annual Report on Form 10-K for further detail. The following table presents significant items included in Income (loss) from discontinued operations, net of tax related to the 2018 Transaction for the periods indicated: Year Ended December 31, ($ in millions) 2019 2018 2017 Loss on sale, net of tax excluding costs to sell $ (82 )$ 507 $ (2,392 ) Transaction costs - (2 ) (31 ) Net results of discontinued operations, excluding notable items - 339
1,072
Income tax benefit (expense) - 19 178 Notable items in CBVA results: Net gains (losses) related to incurred guaranteed benefits and CBVA hedge program, excluding nonperformance risk - (409 ) (1,136 ) Gain (loss) due to nonperformance risk - 4 (284 ) DAC/VOBA and other intangibles unlocking - (1 ) 13 Income (loss) from discontinued operations, net of tax (1) $ (82 )$ 457
(1) Refer to Overview in Part II, Item 7. of this Annual Report on Form 10-K 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 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 - Year Ended
Net Income (Loss)
Net investment income increased
• the impact of the current interest rate environment on fair value adjustments;
• higher prepayment fee income; and
• growth in general account assets in our Retirement segment.
The increase was partially offset by:
• lower alternative investment income primarily driven by lower yields in
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Fee income decreased
• lower management and administrative fees earned in our Investment
Management segment due to lower average general account AUM driven by the
impact of the 2018 Transaction; and
• margin rate compression and change in business mix in our Retirement segment.
The decrease was partially offset by:
• an increase in full service fees in our Retirement segment driven by equity market improvements and business growth.
Premiums increased
• higher premiums driven by growth of the stop loss, voluntary blocks and
group life business in our Employee Benefits segment.
The increase was partially offset by:
• a decline in premiums associated with our business to be reinsured due to
discontinued sales and lower considerations of life contingent contracts
which corresponds to a decrease in Interest credited and other benefits to
contract owners/policyholder.
Net realized capital losses decreased
• higher Net investment gains and related charges and adjustments primarily
due to interest rate and equity market movements, discussed below; and
• gains from market value changes associated with business reinsured, which
are fully offset by a corresponding amount in Interest credited and other benefits to contract owners/policyholders.
The gains were partially offset by:
• unfavorable change in the fair value of guaranteed benefit derivatives
excluding nonperformance risk as a result of interest rate movements
partially offset by gain due to nonperformance risk; and
• gain on sale of real estate and other non-recurring items in the prior period.
Other revenue increased
• higher performance fees in our Investment Management segment; and
• higher revenue resulting from transition services agreements.
The increase was partially offset by:
• lower broker-dealer revenues in our Retirement segment.
Interest credited and other benefits to contract owners/policyholders increased
• market value impacts and changes in the reinsurance deposit asset associated with business reinsured, which are fully offset by a corresponding amount in Net realized capital gains (losses); and
• growth on stop loss, voluntary blocks and group life business partially
offset by lower loss ratios in our Employee Benefits segment.
The increase was partially offset by:
• a decline in interest credited and other benefits to contract
owners/policyholders associated with our business to be reinsured due to
lower considerations of life contingent contracts which corresponds to a decrease in Premiums; and
• Reserve release associated with our business to be reinsured.
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Operating expenses increased
• an increase in growth-based expenses in our Retirement, Investment
Management and Employee Benefit segments;
• higher restructuring charges in the current period; and
• higher litigation reserves in our Retirement segment.
The increase was partially offset by:
• litigation recovery related to a divested business in the current period;
• lower Stranded Costs; and
• net actuarial gain related to our pension and other postretirement benefit
obligations, discussed below.
Net amortization of DAC/VOBA decreased
• favorable amortization on our business to be reinsured driven by favorable
unlocking in the current period; • unfavorable unlocking and amortization in the prior period driven by an update to the assumptions related to the GMIR initiatives in our Retirement segment. See DAC/VOBA and Other Intangibles Unlocking in Part
II, Item 7. of this Annual Report on Form 10-K for further information;
and
• net favorable amortization on our business reinsured.
The decrease was partially offset by:
• a higher net unfavorable impact of annual assumption updates. See Results
of Operations - Segment by Segment in Part II, Item 7. of this Annual
Report on Form 10-K; and
• favorable amortization in the prior period due to net investment losses.
Interest expense decreased
• debt extinguishment in connection with repurchased debt in the prior period that did not reoccur at the same level in the current period and
preferred stock issuances in the fourth quarter of 2018 and second quarter
of 2019. See Liquidity and Capital Resources in Part II, Item 7. of this Annual Report on Form 10-K for further information.
Income (loss) from continuing operations before income taxes increased
• higher Net investment gains and related charges and adjustments, discussed
below; • Income on business exited or to be exited through reinsurance or divestment, discussed below; • Immediate recognition of net actuarial gain related to pension plan adjustments and curtailments, discussed below; and
• lower losses related to early extinguishment of debt, discussed below.
The decrease was partially offset by:
• unfavorable changes in Other adjustments due to higher restructuring
charges in the current period;
• lower Income attributable to noncontrolling interest;
• unfavorable changes in Net guaranteed benefit hedging gains (loss) and related charges and adjustments primarily due to changes in interest rates, discussed below; and
• lower Adjusted operating earnings before income taxes, discussed below.
Income tax expense changed
• a release of a portion of the valuation allowance; and
• a change in tax credits.
The change was partially offset by:
• a change in noncontrolling interest;
• a change in the dividends received deduction ("DRD"); and
• an increase in income before income taxes.
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Income (loss) from discontinued operations, net of tax changed
• Individual Life Transaction loss on sale, net of tax excluding costs to
sell made in the current period;
• a favorable Adjustment to the 2018 Transaction loss on sale, net of tax
excluding costs to sell in the prior period;
• a decrease in Net results from discontinued operations primarily due to
favorable results in the prior period related to the 2018 Transaction
partially offset by a favorable change in the Individual Life Transaction
Net results from discontinued operations in the current period; and
• Transaction costs related to the Individual Life Transaction.
The change was partially offset by:
• Net losses related to incurred guaranteed benefits and CBVA hedge program,
excluding nonperformance risk in businesses held for sale related to the 2018 Transaction in the prior period.
Adjusted Operating Earnings before Income Taxes
Adjusted operating earnings before income taxes decreased
• higher expenses primarily resulting from business growth and non-recurring
items in our Retirement, Investment Management and Employee Benefits segments; • higher benefits incurred in stop loss, voluntary blocks and group life
business partially offset by lower loss ratios in our Employee Benefits
segment; • lower average general account AUM driven by the impact of the 2018 Transaction; • unfavorable DAC/VOBA unlocking due to annual assumption updates in our Retirement segment;
• lower alternative investment income; and
• lower Net investment income in our Corporate segment due to run-off
business and other non-recurring activity in the prior period.
The decrease was partially offset by:
• higher premiums driven by growth of the stop loss, voluntary blocks and
group life business in our Employee Benefits segment;
• lower Stranded costs; and
• higher performance fees in our Investment Management segment.
Adjustments from Income (Loss) from Continuing Operations before Income Taxes to Adjusted Operating Earnings before Income Taxes
Net investment gains (losses) and related charges and adjustments increased
• favorable changes in CMO-B fair value adjustments as a result of equity
market and interest rate movements; and
• gains on the sale of securities in the current period.
The increase was partially offset by:
• unfavorable changes in the fair value of derivatives;
• higher impairments in the current period;
•favorable change in Net investment gains associated with our business to be reinsured; and •lower favorable amortization of DAC/VOBA and sales inducements.
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Net guaranteed benefit hedging gains (losses) and related charges and
adjustments decreased
• unfavorable changes in fair value of guaranteed benefit derivatives
excluding nonperformance risk as a result of changes in interest rates.
The decrease was partially offset by:
• favorable changes due to nonperformance risk in the current period.
Loss related to businesses exited through reinsurance or divestment increased$138 million from a loss of$40 million to a gain of$98 million primarily due to: • a litigation recovery related to a divested business in the current period; • net favorable amortization associated with business reinsured and to be reinsured in the current period; and
• reserve release associated with the social security master death file.
The increase was partially offset by:
• a decline in premiums due to lower considerations on life contingent
contracts and discontinued sales.
Loss related to early extinguishment of debt decreased
• higher losses in connection with repurchased and restructured debt in the
prior period. See Liquidity and Capital Resources in Part II, Item 7. of
this Annual Report on Form 10-K for further information.
Immediate recognition of net actuarial gains (losses) related to pension and other postretirement benefit obligations and gains (losses) from plan adjustments and curtailments changed$50 million . See Critical Accounting Judgments and Estimates - Employee Benefits Plans in Part II, Item 7. of this Annual Report on Form 10-K for further information.
Other adjustments increased
• higher costs recorded in the current period related to restructuring. See
Overview - Restructuring in Part II, Item 7. of this Annual Report on Form
10-K for further information.
Consolidated - Year Ended
Net Income (Loss)
Net investment income increased
• higher alternative investment income.
The increase was partially offset by:
• a recovery of previously reversed carried interest in the prior period in
our Investment Management segment; and
• lower investment income in our runoff blocks of business.
Fee income increased
• an increase in separate account and institutional/mutual fund AUM in our
Retirement segment driven by market improvements and the cumulative impact
of positive net flows resulting in higher full service fees;
• an increase in recordkeeping fees in our Retirement segment; and
• higher management and administrative fees earned in our Investment Management segment.
The increase was partially offset by:
• a shift in the business mix in our Retirement segment.
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Premiums increased
• higher premiums driven by growth of the voluntary and group life business
partially offset by a decline in stop loss premiums in our Employee Benefits segment.
The increase was partially offset by:
• a decline in premiums associated with our business to be reinsured due to
lower considerations on life contingent contracts and discontinued sales.
Net realized capital losses increased
• unfavorable market value changes associated with business reinsured; and
• higher Net realized investment losses as a result of greater losses in
CMO-B fair value adjustments, losses on the sale of securities, and higher
impairments partially offset by gains due to changes in the fair value of
derivatives.
The losses were partially offset by:
• higher gains in the fair value of net guaranteed benefit derivatives,
excluding nonperformance risk due to changes in interest rates.
Other revenue increased
• higher broker-dealer revenues in our Retirement segment;
• revenue resulting from a transition services agreement;
• favorable market value adjustments on separate accounts in our Retirement
segment; and
The increase was partially offset by:
• lower performance fees in our Investment Management segment.
Interest credited and other benefits to contract owners/policyholders decreased
• market value impacts and changes in the reinsurance deposit asset associated with business reinsured; and • improvement as a result of a certain block of funding agreements in run-off during 2017.
The decrease was partially offset by:
• higher loss ratio on group life and voluntary benefits partially offset by
lower benefits incurred on stop loss in our Employee Benefits segment.
Operating expenses increased
• higher litigation reserves related to a divested business;
• higher net actuarial losses related to our pension and other postretirement benefit obligations;
• higher recordkeeping expenses in our Retirement segment; and
• higher broker-dealer expenses.
The increase was partially offset by:
• a decline in expenses associated with our Strategic Investment Program;
• lower expenses related to net compensation adjustments;
• a decrease in compliance-related expenses in the current period; and
• lower restructuring charges in the current period.
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Net amortization of DAC/VOBA decreased
• favorable impact of annual assumption updates in our Retirement segment,
excluding GMIR;
• lower unfavorable unlocking in the current period driven by an update to
the assumptions related the GMIR initiatives in our Retirement segment;
and
• lower amortization as a result of the GMIR initiatives referenced above.
The decrease was partially offset by:
• net unfavorable amortization on our business reinsured.
Interest expense increased
• debt extinguishment in connection with repurchased debt.
Income (loss) from continuing operations before income taxes increased
• higher Adjusted operating earnings before income taxes, discussed below; and
• favorable changes in Other adjustments due to lower restructuring charges
in the current period.
The increase was partially offset by:
• higher Loss related to business exited through reinsurance or divestment,
discussed below;
• lower Income attributable to noncontrolling interest;
• higher expenses related to early extinguishment of debt;
• higher Immediate recognition of net actuarial losses related to pension
and other postretirement benefit obligations and losses from plan adjustments and curtailments, discussed below; and • higher Net investment losses and related charges and adjustments, discussed below.
Income tax expense decreased
• a decrease in the federal income tax rate from 35% to 21%;
• a large Tax Reform-related expense associated with revaluing deferred tax
assets in 2017 that did not recur in 2018; and
• a change in the DRD.
The decrease was partially offset by:
• a change in noncontrolling interest;
• an increase in income before income taxes; and
• a change in non-deductible expenses.
Income (loss) from discontinued operations, net of tax changed
• a favorable Adjustment to the loss on sale associated with the CBVA and
Annuities business, net of tax excluding costs to sell in the current
period; and
• a decrease in Net losses related to incurred guaranteed benefits and CBVA
hedge program, excluding nonperformance risk in businesses held for sale.
The increase was partially offset by:
• a decrease in Net results of discontinued operations, excluding notable
items, primarily due to the unfavorable impact of equity market movements
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Adjusted Operating Earnings before Income Taxes
Adjusted operating earnings before income taxes increased
• favorable net DAC/VOBA unlocking due to annual assumption updates as described above and lower unfavorable impact of GMIR initiatives in our Retirement segment;
• excluding the impact of a nonrecurring positive reserve refinement in the
prior period as noted below, favorable net impact of premium and benefits
incurred in the stop loss and voluntary blocks partially offset by net
unfavorable result in the group life block in our Employee Benefits
segment;
• higher net investment income primarily due to higher alternative
investment income;
• a decline in expenses associated with our Strategic Investment Program;
• an increase in separate account and institutional/mutual fund AUM driven
by equity market improvements resulting in higher full service fees in our
Retirement segment; • higher Corporate earnings primarily due to lower net compensation adjustments, Stranded costs and compliance related expenses; and • an increase in average AUM driven by market improvements and the
cumulative impact of positive net flows resulting in higher management and
administrative fees earned in our Investment Management segment.
The increase was partially offset by:
• positive reserve refinement in the prior period that did not reoccur in
our Employee Benefits segment; and • a recovery of accrued carried interest in the prior period in our Investment Management segment.
Adjustments from Income (Loss) from Continuing Operations before Income Taxes to Adjusted Operating Earnings before Income Taxes
Net investment gains (losses) and related charges and adjustments increased
• greater losses on CMO-B fair value adjustments;
• losses on the sale of securities in the current period; and
• higher impairments in the current period.
The change was partially offset by:
•gains due to changes in the fair value of derivatives in the current period; •unfavorable change in Net investment gains associated with our business to be reinsured; and • favorable changes in DAC/VOBA and other intangibles unlocking related to
net investment gains and losses.
Net guaranteed benefit hedging gains (losses) and related charges and
adjustments increased
• higher gains in the fair value of net guaranteed benefit derivatives,
excluding nonperformance risk due to changes in interest rates.
Income (Loss) related to businesses exited or to be exited through reinsurance or divestment changed by$99 million from a gain of$59 million to a loss of$40 million primarily due to:
• higher litigation reserves related to a divested business;
• net unfavorable amortization; and
• a decline in premiums due to lower considerations on life contingent
contracts and discontinued sales.
Loss related to early extinguishment of debt of increased
• Losses in connection with repurchased debt.
Immediate recognition of net actuarial gains (losses) related to pension and other postretirement benefit obligations and gains (losses) from plan adjustments and curtailments changed$31 million from a loss of$16 million to a loss of$47 million . See Critical
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Accounting Judgments and Estimates - Employee Benefits Plans in Part II, Item 7. of this Annual Report on Form 10-K for further information.
Other adjustments decreased
• lower costs recorded in the current period related to restructuring. See
Overview - Restructuring in Part II, Item 7. of this Annual Report on Form
10-K for further information; and
• rebranding costs incurred in the prior period.
Results of Operations - Segment by Segment
Retirement
The following table presents Adjusted operating earnings before income taxes of our Retirement segment for the periods indicated:
Year Ended December 31, ($ in millions) 2019 2018
2017
Adjusted operating revenues: Net investment income and net realized gains (losses)$ 1,750 $ 1,758 $ 1,703 Fee income(1) 852 844 744 Premiums 5 7 6 Other revenue 105 118 85 Total adjusted operating revenues 2,712 2,727 2,538 Operating benefits and expenses: Interest credited and other benefits to contract owners/policyholders 946 956 958 Operating expenses 1,046 959 850 Net amortization of DAC/VOBA 132 111 274 Total operating benefits and expenses 2,124 2,026 2,082 Adjusted operating earnings before income taxes (2) $ 588$ 701
(1) Year endedDecember 31, 2017 excludes investment-only products, which were transfered from Corporate during the year endedDecember 31, 2018 . (2) Refer to DAC/VOBA and Other Intangibles Unlocking in Part II, Item 7. of this Annual Report on Form 10-K for further description. The following table presents DAC/VOBA and other intangibles unlocking, including unlocking related to the GMIR initiative, and annual review of the assumptions, included in Adjusted operating earnings before income taxes for the periods indicated: Year Ended December 31, ($ in millions) 2019 2018 2017
DAC/VOBA and other intangibles unlocking
The net impact of annual review of the assumptions, completed in the third quarter 2019, 2018 and 2017, resulted in unlocking of$(25) million ,$48 million and$(47) million , respectively. The net unfavorable unlocking in 2019 reflects impacts related to our reduction in the long-term interest rate of 50 basis points and lower net margins. The net favorable unlocking in 2018 reflects changes in equity market assumptions partially offset by$51 million unfavorable adjustment related to the GMIR initiatives. The net unfavorable unlocking in 2017 reflects$220 million related to the GMIR initiative. Excluding the GMIR-related unlocking, the favorable DAC/VOBA unlocking from the annual review of assumptions was primarily driven by favorable liability and expense assumption changes. Starting first quarter of 2019, Assets Under Advisement are presented in AUA, which includes recordkeeping, stable value investment-only wrap, brokerage and investment advisory assets. Prior period information have been revised to conform to current period presentation.
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The following tables present AUM and AUA for our Retirement segment as of the dates indicated: As of December 31, ($ in millions) 2019 2018 2017 Corporate markets$ 73,497 $ 58,705 $ 60,495 Tax exempt markets 70,109 60,514 62,070 Total full service plans 143,606 119,219 122,565 Stable value(1) and pension risk transfer 10,298 10,815 11,982 Retail wealth management 10,843 9,099 3,644 Total AUM 164,747 139,133 138,191 AUA 275,296 222,442 294,150 Total AUM and AUA$ 440,043 $ 361,575 $ 432,341 (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 December 31, ($ in millions) 2019 2018 2017 General Account$ 32,932 $ 33,006 $ 32,571 Separate Account 77,748 65,417 71,233 Mutual Fund/Institutional Funds 54,067 40,710 34,387 AUA 275,296 222,442 294,150 Total AUM and AUA$ 440,043 $ 361,575 $ 432,341 The following table presents a rollforward of AUM for our Retirement segment for the periods indicated: Year Ended December 31, ($ in millions) 2019 2018 2017 Balance as of beginning of period$ 139,133 $ 138,191 $ 121,408 Transfers / Adjustments(1) - 6,212 - Deposits 20,563 19,474 18,014
Surrenders, benefits and product charges (19,666 ) (19,439 )
(16,509 )
Net flows 897 35
1,505
Interest credited and investment performance 24,717 (5,305 )
15,278 Balance as of end of period$ 164,747 $ 139,133 $ 138,191
(1) Reflects investment-only products which were transferred from Corporate
effective
Retirement - Year Ended
Adjusted operating earnings before income taxes decreased
• higher expenses primarily resulting from business growth and non-recurring
items, including the write-off previously deferred expenses related to policy acquisition cost;
• unfavorable DAC/VOBA unlocking due to annual assumption updates; and
• lower investment spread income.
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The decrease was partially offset by:
• higher fee revenue resulting from business growth and equity market
improvements.
Retirement - Year Ended
Adjusted operating earnings before income taxes increased
• favorable changes in DAC/VOBA unlocking primarily due to annual assumption
updates;
• an increase in separate account and institutional/mutual fund AUM driven
by equity market improvements and the cumulative impact of positive net flows resulting in higher full service fees;
• growth in general account assets resulting from the cumulative impact of
participants' transfers from variable investment options into fixed investment options;
• an increase in alternative investment income primarily driven by market
performance; and
• the impact of expense management efforts partially offset by higher
expenses due to the growth in business.
The increase was partially offset by:
• unfavorable DAC/VOBA unlocking due to the GMIR initiative which reduces
our interest rate exposure on new deposits, transfers and in certain plans existing fixed account assets; • lower investment yields, including the impact of the continued low interest rate environment;
• lower prepayment fee income; and
• the shift in the business mix from participants' transfers from variable
investment options into fixed investment options.
Investment Management
The following table presents Adjusted operating earnings before income taxes of our Investment Management segment for the periods indicated:
Year Ended December 31, ($ in millions) 2019 2018 2017 Adjusted operating revenues: Net investment income and net realized gains (losses)$ 13 $ 29 $ 57 Fee income 611 635 632 Other revenue 51 19 42 Total adjusted operating revenues 675 683 731 Operating benefits and expenses: Operating expenses 495 478 483 Total operating benefits and expenses 495 478 483 Adjusted operating earnings before income taxes$ 180
Our
Year Ended December 31, ($ in millions) 2019 2018
2017
Investment Management intersegment revenues$ 104 $ 101 $ 103 83
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The following table presents AUM and AUA for our Investment Management segment as of the dates indicated: As of December 31, ($ in millions) 2019 2018 2017 Assets under Management External clients: Investment Management sourced$ 99,589 $ 85,573 $ 85,804 Affiliate sourced(1) 38,785 34,372 56,476 Variable annuities(2) 28,448 27,231 - Total external clients 166,822 147,176 142,280 General account 56,651 56,288 82,006 Total AUM 223,473 203,464 224,286
Assets under Administration(3) 49,257 47,004 50,018 Total AUM and AUA
$ 272,730 $ 250,468 $ 274,304 (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 2018 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: Year Ended December 31, ($ in millions) 2019 2018 2017
Net Flows:
Investment Management sourced
(1,348 ) (2,124 ) (978 )
Variable annuities (1) (2,626 ) (2,519 ) (4,505 ) Sub-advisor replacements (2) 2,806
76 857 Total$ 2,780 $ (1,576 ) $ 391 (1) Reflects net flows associated with the businesses divested as part of the 2018 Transaction. (2) Reflects net flows mainly associated with outside managed funds.
Investment Management - Year Ended
Adjusted operating earnings before income taxes decreased
• lower average general account AUM driven by the impact of the 2018
Transaction;
• lower investment capital returns; and
• higher operating expenses due primarily to higher volume expenses associated with business growth.
The decrease was partially offset by:
• higher Other revenue primarily due to higher performance and production
fees earned in the current period.
Investment Management - Year Ended
Adjusted operating earnings before income taxes decreased
• higher alternative investment income primarily driven by the recovery of
accrued carried interest previously reversed in the prior period related
to a sponsored private equity fund that experienced market value improvements in the current period; and • an increase in average AUM driven by market improvements and the
cumulative impact of positive net flows resulting in higher management and
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The decrease was partially offset by:
• higher operating expenses including higher compensation related expenses
primarily associated with higher operating earnings; and
• lower Other revenue related to performance fees earned in the current period.
Employee Benefits
The following table presents Adjusted operating earnings before income taxes of the Employee Benefits segment for the periods indicated:
Year Ended December 31, ($ in millions) 2019 2018 2017 Adjusted operating revenues: Net investment income and net realized gains (losses) $ 114 $ 114 $ 109 Fee income 64 69 63 Premiums 1,856 1,672 1,600 Other revenue (8 ) (6 ) (5 ) Total adjusted operating revenues 2,026 1,849 1,767 Operating benefits and expenses: Interest credited and other benefits to contract owners/policyholders 1,406 1,317 (1,293 ) Operating expenses 405 355 (336 ) Net amortization of DAC/VOBA 16 17 (11 ) Total operating benefits and expenses 1,827 1,689 (1,640 ) Adjusted operating earnings before income taxes (1) $ 199 $
160 $ 127
(1) Refer to DAC/VOBA and Other Intangibles Unlocking in Part II, Item 7. of this Annual Report on Form 10-K for further description.
In the third quarter 2019 and 2017, the net impact of the annual review of the
assumptions were not material. In the third quarter 2018, the net favorable
impact of the annual review of the assumptions was
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The following table presents sales, gross premiums and in-force for our Employee Benefits segment for the periods indicated:
Year Ended December 31, ($ in millions) 2019 2018 2017 Sales by Product Line: Group life and Disability$ 133 $ 99 $ 85 Stop loss 282 255 286 Total group products 415 354 371 Voluntary products 114 94 70 Total sales by product line$ 529 $ 448 $ 441
Total gross premiums and deposits
Group life and Disability 710 659 623 Stop loss 1,038 969 969 Voluntary 390 311 257
Total annualized in-force premiums
Loss Ratios: Group life (interest adjusted) 75.6 % 79.5 % 76.0 % Stop loss 78.4 % 79.1 % 82.7 % Total Loss Ratio 70.2 % 72.5 % 74.0 %
Employee Benefits - Year Ended
Adjusted operating earnings before income taxes increased
•higher premiums driven by growth of the stop loss, voluntary and group life blocks.
The increase was partially offset by:
•higher benefits incurred due to growth in business partially offset by lower loss ratios; and •higher distribution expenses and commissions to support business growth.
Employee Benefits - Year Ended
Adjusted operating earnings before income taxes increased
• higher premiums driven by growth of the stop loss and voluntary business;
• favorable group life and voluntary experience;
• a favorable reserve refinement related to expired claims on the stop loss
block; excluding the effect of this refinement, the loss ratio for stop loss is 83.7% for the current period; and
• the current and prior periods both benefited from favorable voluntary
reserve refinements.
The increase was partially offset by:
• higher benefits incurred due to a higher loss ratio on stop loss and growth of the business; and
• higher volume related expenses associated with growth of the stop loss and
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Corporate
The following table presents Adjusted operating earnings before income taxes of Corporate for the periods indicated:
Year Ended December
31,
($ in millions) 2019 2018
2017
Adjusted operating revenues: Net investment income and net realized gains (losses) $ 54 $ 56 $ 68 Fee income(1) - - 67 Premiums 3 3 3 Other revenue 40 32 9 Total adjusted operating revenues 97 91 147 Operating benefits and expenses: Interest credited and other benefits to contract owners/policyholders 42 32 16 Operating expenses (2) 225 290 484 Net amortization of DAC/VOBA - - - Interest Expense (3) 206 184 186 Total operating benefits and expenses 473 506 686 Adjusted operating earnings before income taxes$ (376 ) $ (415
)
(1) Year endedDecember 31, 2017 includes investment-only products, which were transferred to our Retirement segment during the year endedDecember 31, 2018 . (2) Includes expenses from corporate activities, and expenses not allocated to our segments. Years endedDecember 31, 2019 and 2018 primarily include stranded costs related to the 2018 and Individual Life Transactions and amortization of intangibles. Year endedDecember 31, 2017 also includes expenses related to our Strategic Investment Program and investment-only products. (3)Includes dividend payments made to preferred shareholders.
Corporate - Year Ended
Adjusted operating earnings before income taxes increased
• lower Stranded costs; and
• lower net compensation adjustments.
This increase was partially offset by:
• Preferred stock dividends in the current year partially offset by lower interest expense as we converted debt to equity instruments during the fourth quarter of 2018 and second quarter of 2019; and • income due to run-off business and other non-recurring activity in the prior period.
Corporate - Year Ended
Adjusted operating earnings before income taxes increased
• decline in expenses associated with our Strategic Investment Program as
the expense is allocated to our segments beginning in the first quarter of
2018;
• lower net compensation adjustments;
• a decrease in compliance-related expenses in the current period; and
• lower Stranded costs. 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
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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, Income (loss) related to businesses exited or to be exited through reinsurance or divestment 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 9.0% on these assets over the long-term.
The following table presents the investment income for the years ended
Year Ended December 31, ($ in millions) 2019 2018 2017
Retirement:
Alternative investment income$ 84 $ 99 $ 62 Average alternative investments 758 595 517 Investment Management: Alternative investment income(1) 13 28 57 Average alternative investments 223 232 229 Employee Benefits: Alternative investment income 10 10 6 Average alternative investments 86 57 49 (1) No amounts for carried interest were reversed or recovered in 2019. Includes the recoveries of$1 million and$25 million in 2018 and 2017, respectively, of previously reversed accrued carried interest related to a private equity fund which experienced an increase in fund performance.
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". Unlocking, described below, related to DAC, VOBA, DSI and URR, are referred to as "DAC/VOBA and other intangibles unlocking." We amortize DAC/VOBA and other intangibles related to universal life-type contracts and fixed and variable deferred annuity contracts over the estimated lives of the contracts in relation to the emergence of estimated gross profits. Assumptions as to mortality, persistency, interest crediting rates, returns associated with separate account performance, impact of hedge performance, expenses to administer the business and certain economic variables, such as inflation, are based on our experience and our overall short-term and long-term future expectations for returns available in the capital markets. At each valuation date, estimated gross profits are updated with actual gross profits and the assumptions underlying future estimated gross profits are evaluated for continued reasonableness. Adjustments to estimated gross profits require that amortization rates be revised retroactively to the date of the contract issuance, which is referred to as unlocking. As a result of this process, the cumulative balances of DAC/VOBA and other intangibles are adjusted with an offsetting benefit or charge to income to reflect changes in the period of the revision. An unlocking event that results in a benefit to income ("favorable unlocking") generally occurs as a result of actual experience or future expectations being favorable compared to previous estimates. Changes in DAC/VOBA and other intangibles due to contract changes or contract terminations higher than estimated are also included in "unlocking." At each valuation date, we evaluate these assumptions and, if actual experience or other evidence suggests that earlier assumptions should be revised, we adjust the reserve balance, with a related charge or credit to Policyholder benefits. These reserve adjustments are included in unlocking associated with all our segments. An unlocking event that results in a charge to income ("unfavorable unlocking") generally occurs as a result of actual experience or future expectations being unfavorable compared to previous estimates. As a result of unlocking, the amortization schedules for future periods are also adjusted. We also review the estimated gross profits for each of our blocks of business to determine recoverability of DAC, VOBA and DSI balances each period. If these assets are deemed to be unrecoverable, a write-down is recorded that is referred to as loss recognition. Refer to Critical Accounting Judgments and Estimates in Part II, Item 7. of this Annual Report on Form 10-K for more information.
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The following table presents DAC/VOBA and other intangibles unlocking, including unlocking related to the guaranteed minimum interest rate ("GMIR initiative") and annual review of the assumptions, included in Adjusted operating earnings before income taxes for the periods indicated: Year Ended December 31, ($ in millions) 2019 2018 2017 Retirement (1)$ (30 ) $ (1 ) $ (137 ) Employee Benefits - (1 )
(2 )
Total DAC/VOBA and other intangibles unlocking
(1) Includes unfavorable unlocking of
The following table presents the impact on segment Adjusted operating earnings before income taxes of the annual assumption updates for the periods indicated:
Year Ended December 31, ($ in millions) 2019 2018 2017 Retirement$ (25 ) $ 48 $ (47 ) Employee Benefits - 1 - Total$ (25 ) $ 49 $ (47 ) During the third quarter of 2019, 2018, and 2017, we completed our annual review of the assumptions, including projection model inputs, in each of our segments (except for the Investment Management segment for which assumption reviews are not relevant). As a result of this review, we made a number of changes to our assumptions resulting in a net unfavorable impact of$25 million to Adjusted operating earnings before income taxes in the current period, compared to an favorable impact of$49 million in the third quarter of 2018 and an unfavorable impact of$47 million in the third quarter of 2017. The unlocking in third quarter 2019 was driven principally by a reduction in the long-term interest rate of 50 basis points. The unlocking in the third quarter 2018 was driven principally by the unfavorable adjustment of the GMIR initiative partially offset by favorable changes in equity market assumptions in our Retirement business. The unlocking in the third quarter 2017 was driven principally by GMIR initiative and favorable liability and expense assumption changes. For information about the impacts of the annual review of assumptions on DAC/VOBA and other intangibles and Adjusted operating earnings before income taxes related to our segments, see Results of Operations - Segment by Segment in Part II, Item 7. of this Annual Report on Form 10-K. In 2017, we began soliciting customer consents to execute a change to reduce the 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 resulted in unfavorable unlocking during 2017 and 2018. The unfavorable unlocking for 2018 and 2017 was$51 million and$220 million , respectively and was recorded in Net amortization of DAC/VOBA. Of these amounts,$8 million and$92 million were reflected in the annual assumption updates described above for 2018 and 2017, respectively.
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.
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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 toVoya 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$750 million revolving credit sublimit of our Second Amended and Restated Credit Agreement and reciprocal borrowing facilities maintained withVoya Financial, Inc's subsidiaries as well as alternate sources of liquidity described below.
Year Ended December 31, ($ in millions) 2019 2018
2017
Beginning cash and cash equivalents balance
$ 257 Sources: Proceeds from loans from subsidiaries, net of repayments 65 - 408 Dividends and returns of capital from subsidiaries 1,064 1,207
1,093
Repayment of loans to subsidiaries, net of new issuances - 111 87 Proceeds from 2024 Notes offering - - 399 Proceeds from 2048 Notes offering - 350 - Proceeds from issuance of preferred stock, net 293 319 - Amounts received from subsidiaries under tax sharing agreements, net - 63 - Refund of income taxes, net 128 - 154 Proceeds from sale of equity securities, net 121 - - Sale of short-term investments - 212 - Other, net 15 1 - Total sources 1,686 2,263 2,141 Uses: Repurchase of Senior Notes 97 266 490 Premium paid and other fees related to debt extinguishment 9 20 4 Payment of interest expense 136 152 138 Capital provided to subsidiaries 3 55 467 Repayments of loans from subsidiaries, net of new issuances - 414 - New issuances of loans to subsidiaries, net of repayments 85 - - Amounts paid to subsidiaries under tax sharing arrangements, net 123 - 104 Payment of income taxes, net - 1 - Debt issuance costs - 6 3 Common stock acquired - Share repurchase 1,136 1,025 923 Share-based compensation 22 14 8 Dividends paid on preferred stock 28 - - Dividends paid on common stock 44 6 8 Maturity of 2018 Notes - 337 - Acquisition of equity securities, net - 2 9 Total uses 1,683 2,298
2,154
Net increase (decrease) in cash and cash equivalents 3 (35 ) (13 )
Ending cash and cash equivalents balance
$ 244 90
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Share Repurchase Program and Dividends to Shareholders
OnMarch 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. OnMay 2, 2019 , the Board of Directors provided share repurchase authorization, increasing the aggregate of our common stock authorized for repurchase by$500 million . OnOctober 31, 2019 , the Board of Directors provided its most recent share repurchase authorization, increasing the aggregate of our common stock authorized for repurchase by$800 million . The additional share repurchase authorization expires onDecember 31, 2020 (unless extended) and does not obligate us 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. As ofDecember 31, 2019 , we were authorized to repurchase shares up to an aggregate purchase price of$690 million .
The following table presents repurchases of our common stock through share
repurchase agreements with third-party financial institutions for the year ended
2019 Initial Additional Shares Shares Total Shares Execution Date Payment Delivered Closing Date Delivered Repurchased January 3, 2019 $ 250 5,059,449 April 4, 2019 290,765 5,350,214 April 9, 2019 $ 236 3,593,453 June 4, 2019 879,199 4,472,652 June 19, 2019 $ 200 2,963,512 August 6, 2019 695,566 3,659,078 December 19, 2019 $ 200 2,591,093 (1) (1) (1) (1)This arrangement is scheduled to terminate no later than the end of first quarter of 2020, at which time we will settle any outstanding positive or negative share balances based on the daily volume-weighted average price of our common stock. 2017 Initial Additional Shares Shares Total Shares Execution Date Payment Delivered Closing Date Delivered Repurchased March 9, 2017 $ 150 - April 12, 2017 3,986,647 3,986,647 December 26, 2017 $ 500 7,821,666 March 26, 2018 1,947,413 9,769,079
The following table presents repurchases of our common stock through open market
repurchases for the year ended
Year Ended December 31, 2019 2018 2017 Shares of common stock 4,926,775 20,843,047 7,437,994 Payment$ 250 $ 1,025 $ 273 The following table summarizes our payment of common dividends and repurchases of common shares: ($ in millions) Year Ended December 31, 2019 2018 2017
Dividends paid on common shares
$ 1,140 $ 1,131 $ 1,031 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
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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 ofVoya Financial, Inc. and of its insurance company subsidiaries and general macroeconomic conditions.
As of
Beginning Maturities
and
($ in millions) Balance Issuance Repayment Other Changes Ending Balance Long-Term Debt: Debt securities$ 3,132 $ - $ (96 ) $ 3 $ 3,039 Windsor property loan 5 - - (1 ) 4 Subtotal 3,137 - (96 ) 2 3,043 Less: Current portion of long-term debt 1 - - - 1 Total long-term debt$ 3,136 $ - $ (96 ) $ 2 $ 3,042 As ofDecember 31, 2018 , we had$1 million of short-term debt borrowings outstanding consisting entirely of the current portion of long-term debt. The following table summarizes our borrowing activities for the year endedDecember 31, 2018 : Beginning Maturities and ($ in millions) Balance Issuance Repayment Other Changes Ending Balance Long-Term Debt: Debt securities$ 3,455 $ 350 $ (672 ) $ (1 ) $ 3,132 Windsor property loan 5 - - - 5 Subtotal 3,460 350 (672 ) (1 ) 3,137 Less: Current portion of long-term debt 337 - (337 ) 1 1 Total long-term debt$ 3,123 $ 350 $ (335 ) $ (2 ) $ 3,136
As of
Preferred Stock
OnJune 11, 2019 , we issued 300,000 shares of 5.35% Fixed-Rate Reset Non-Cumulative Preferred Stock, Series B ("the Series B preferred stock"), with a$0.01 par value per share and a liquidation preference of$1,000 per share, represented by 12,000,000 Depository Shares each representing a 1/40th interest in a share of the Series B preferred stock, for aggregate net proceeds of$293 million . OnSeptember 12, 2018 , we issued 325,000 shares of 6.125% Fixed-Rate Reset Non-Cumulative Preferred Stock, Series A ("the Series A preferred stock"), with a$0.01 par value per share and a liquidation preference of$1,000 per share, for aggregate net proceeds of$319 million . Our ability to declare or pay dividends on, or purchase, redeem or otherwise acquire, shares of our common stock will be substantially restricted in the event that we do not declare and pay (or set aside) dividends on the Series A and Series B preferred stock for the last preceding dividend period.
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During the year endedDecember 31, 2019 , we declared and paid dividends of$20 million and$8 million on the Series A and Series B preferred stock, respectively. During the year endedDecember 31, 2018 , there were no declarations or payments of dividends on preferred stock. As ofDecember 31, 2019 , there were no preferred stock dividends in arrears. See the Shareholders' Equity Note in Part II, Item 8. of this Annual Report on Form 10-K for further information. Senior Notes As ofDecember 31, 2019 and 2018,Voya Financial, Inc. had four and five series of senior notes (collectively, the "Senior Notes"), respectively, with aggregate outstanding principal amount of$1.6 billion and$1.7 billion , respectively. The Senior Notes are guaranteed byVoya 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. OnJuly 12, 2019 , we completed the redemption of our remaining$97 million aggregate principal amount of 5.5% Senior Notes due 2022 (the "2022 Notes"). In connection with this transaction, we incurred a loss on debt extinguishment of$9 million for the year endedDecember 31, 2019 , which was recorded in Interest Expense in the Consolidated Statements of Operations.
Junior Subordinated Notes
As ofDecember 31, 2019 and 2018,Voya Financial, Inc. had two series of junior subordinated notes (collectively, the "Junior Subordinated Notes") with aggregate outstanding principal amount of$1.1 billion , respectively. The Junior Subordinated Notes are guaranteed on an unsecured, junior subordinated basis byVoya Holdings .Aetna Notes As ofDecember 31, 2019 and 2018,Voya Holdings was the obligor under three series of debentures (collectively, the "Aetna Notes") with aggregate outstanding principal amount of$358 million , respectively, which were issued by a predecessor ofVoya Holdings and assumed in connection with our acquisition ofAetna '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 dueApril 1, 2027 (the "Equitable Notes"). ING Group, our previous corporate parent, guarantees theAetna Notes. The Equitable Notes are also guaranteed byVoya Financial, Inc. Concurrent with the completion of our Initial Public Offering ("IPO"), we entered into a shareholder agreement with ING Group that governs certain aspects of our continuing relationship. Pursuant to that agreement, we are obligated to reduce the aggregate outstanding principal amount ofAetna Notes to no more than zero as ofDecember 31, 2019 , or otherwise to make provision for ING Group's guarantee of any outstandingAetna Notes in excess of such amounts.
Our obligation to ING Group with respect to the
If we fail to meet these obligations to ING Group, we have agreed to pay a prescribed quarterly fee (1.25% per quarter for 2020) to ING Group based on the outstanding principal amount ofAetna Notes for which provision has not been made, in excess of the limits set forth above.
As of
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Put Option Agreement for Senior Debt Issuance
OnMarch 17, 2015 , we entered into an off-balance sheet ten-year put option agreement with aDelaware trust that we formed, in connection with the completion of the sale by the trust of$500 million aggregate amount of pre-capitalized trust securities redeemableFebruary 15, 2025 ("P-Caps") in a Rule 144A private placement. The trust invested the proceeds from the sale of the P-Caps in a portfolio of principal and interest strips ofU.S. Treasury securities. The put option agreement providesVoya Financial, Inc. the right to sell to the trust at any time up to$500 million principal amount of its 3.976% Senior Notes due 2025 ("3.976% Senior Notes") and receive in exchange a corresponding principal amount of theU.S. Treasury securities held by the trust. The 3.976% Senior Notes will not be issued unless and until the put option is exercised. In return, we pay a semi-annual put premium to the trust at a rate of 1.875% per annum applied to the unexercised portion of the put option, and reimburse the trust for its expenses. The put premium and expense reimbursements are recorded in Operating expenses in the Consolidated Statements of Operations. If and when issued, the 3.976% Senior Notes will be guaranteed byVoya Holdings . Our obligations under the put option agreement and the expense reimbursement agreement with the trust are also guaranteed byVoya Holdings . The put option described above will be exercised automatically in full if we fail to make certain payments to the trust, including any failure to pay the put option premium or expense reimbursements when due, if such failure is not cured within 30 days, and upon certain bankruptcy event involving us orVoya Holdings . We are also required to exercise the put option in full: (i) if we reasonably believe that our consolidated shareholders' equity, calculated in accordance withU.S. GAAP but excluding Accumulated other comprehensive income (loss) and Noncontrolling interest, has fallen below$3.0 billion , subject to adjustment in certain cases; (ii) upon the occurrence of an event of default under the 3.976% Senior Notes; and (iii) upon certain events relating to the trust's status as an "investment company" under the Investment Company Act of 1940. We have a one-time right to unwind a prior voluntary exercise of the put option by exchanging all of the 3.976% Senior Notes then held by the trust forU.S. Treasury securities. If the put option has been fully exercised, the 3.976% Senior Notes issued may be redeemed by us prior to their maturity at par or, if greater, at a make-whole redemption price, in each case plus accrued and unpaid interest to the date of redemption. The P-Caps are to be redeemed by the trust onFebruary 15, 2025 or upon any early redemption of the 3.976% Senior Notes.
Senior Unsecured Credit Facility
Prior toNovember 1, 2019 , we had a$1.0 billion senior unsecured credit facility which was set to expire onMay 6, 2021 . The facility provided$1.0 billion of committed capacity for issuing letters of credit and also included a revolving credit borrowing sublimit of$750 million . As ofSeptember 30, 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. was required to maintain a minimum net worth of$6.6 billion , which may increase upon any future equity issuances by us. EffectiveNovember 1, 2019 , we revised the terms of our senior unsecured credit facility by entering into a Third Amended and Restated Revolving Credit Agreement ("Third Amended and Restated Credit Agreement") with a syndicate of banks, all of which previously participated in the facility. The Third Amended and Restated Credit Agreement modifies the senior unsecured credit facility by extending the term of the agreement toNovember 1, 2024 and reducing the total amount of LOCs that may be issued from$1.0 billion to$500 million . The revolving credit sublimit was removed and the full$500 million may be utilized for direct borrowings. The terms require us to maintain a minimum net worth of$6.15 billion . The minimum net worth amount may increase upon any future equity issuances by us. Other Credit Facilities We use credit facilities to provide collateral required primarily under our affiliated reinsurance transactions with captive insurance subsidiaries. We also issue guarantees and enter into financing arrangements in connection with these credit facilities. These arrangements are designed to facilitate the financing of statutory reserve requirements.
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The following table summarizes our credit facilities as ofDecember 31, 2019 : ($ in millions) Obligor / Secured/ Committed/ Applicant Business Supported Unsecured Uncommitted Expiration Capacity Utilization Unused Commitment Voya Financial, Inc. Other Unsecured Committed 11/01/2024$ 500 $ - $ 500 Voya Financial, Inc. Other Secured Uncommitted Various 10 1 - Voya Financial, Inc. / SLDI Other(4) Unsecured Uncommitted 12/31/2020 300 58 - Voya Financial, Inc. / SLDI Retirement(1) Unsecured Committed 03/20/2022 250 242 8 Voya Financial, Inc. / SLDI Individual Life(3) Unsecured Committed 12/31/2025 475 475 - Voya Financial, Inc. / SLDI Individual Life(3) Unsecured Committed 07/01/2037 1,725 1,606 119 Voya Financial, Inc. / Roaring River LLC Individual Life(3) Unsecured Committed 10/01/2025 425 392 33 Voya Financial, Inc. / Roaring River IV, LLC Individual Life(3) Unsecured Committed 12/31/2028 565 357 208 Voya Financial, Inc. Individual Life(4) Unsecured Committed 12/09/2024 300 250 50 Voya Financial, Individual Inc. Life/Retirement/Other(4) Unsecured Committed 02/11/2022 300 300 - SLDI Hannover Re(2) Unsecured Committed 10/29/2023 61 51 10 Voya Financial, Inc. Hannover Re(2)(4) Unsecured Uncommitted 04/27/2021 125 125 - Total$ 5,036 $ 3,857 $ 928 N/A- Not Applicable (1) OnJanuary 10, 2020 , the facility was cancelled. (2) Individual Life Reinsurance business acquired by Hannover Re in 2009 via indemnity reinsurance, see "Reinsurance" below for further information. (3) These facilities will be terminated as a result of the sale of SLD and SLDI to Resolution. Fees associated with these facilities for the years endedDecember 31, 2019 , 2018 and 2017 were$22 million ,$23 million and$24 million , respectively. (4) InDecember 2019 andJanuary 2020 , these facilities were amended to include terms which require us to maintain a minimum net worth of$6.15 billion . The minimum net worth may increase upon any future equity issuances by us.
Total fees associated with credit facilities for the years ended
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 whichVoya Financial is either a primary obligor or provides a financial guarantee. As ofDecember 31, 2019 , such facilities provided for up to$4.4 billion of capacity, of which$3.6 billion was utilized. We also provide credit support to ourRoaring 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 maturesDecember 31, 2028 . The reimbursement agreement requiresVoya Financial, Inc. to cause capital to be maintained inRoaring 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. Upon closing the transaction, we expect to unwind this financing arrangement, and this guarantee will therefore terminate .
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 SLDI have contingent reimbursement obligations andVoya Financial, Inc. has guarantee obligations, up to the full$2.9
billion principal amount of the note and one
issued pursuant to the agreement, if 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 95
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that SLD or SLDI were to exercise offset rights unrelated to the Hannover Re block. We expect to restructure this guarantee arrangement in connection with the Individual Life Transaction.
•
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
arrangement in connection with the Individual Life Transaction.
•
provides a back-to-back guarantee to ING Group in respect of its guarantee
of$358 million combined principal amount ofAetna Notes. For more information see "Capitalization-Aetna Notes" above.
•
insurance subsidiaries of VIAC's payment obligations to those subsidiaries
under certain VIAC surplus notes held by those subsidiaries. The agreement
provides for
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 ofDecember 31, 2019 and 2018 in relation to intercompany indemnifications, guarantees or support agreements. As ofDecember 31, 2019 and 2018, no circumstances existed in which we were required to currently perform under these arrangements.
Securities Lending
We engage in securities lending whereby certain securities from our portfolio are loaned to other institutions for short periods of time. We have the right to approve any institution with whom the lending agent transacts on our behalf. Initial collateral, primarily cash, is required at a rate of 102% of the market value of the loaned securities. The lending agent retains the collateral and invests it in short-term liquid assets on our behalf. The market value of the loaned securities is monitored on a daily basis with additional collateral obtained or refunded as the market value of the loaned securities fluctuates. The lending agent indemnifies us against losses resulting from the failure of a counterparty to return securities pledged where collateral is insufficient to cover the loss. As ofDecember 31, 2019 and 2018, the fair value of loaned securities was$1,159 million and$1,237 million , respectively, and is included in Securities pledged on the Consolidated Balance Sheets. As ofDecember 31, 2019 and 2018, collateral retained by the lending agent and invested in liquid assets on our behalf was$1,055 million and$1,190 million , respectively, and is recorded in Short-term investments under securities loan agreements, including collateral delivered on the Consolidated Balance Sheets. As ofDecember 31, 2019 and 2018, liabilities to return collateral of$1,055 million and$1,190 million , respectively, are included in Payables under securities loan and repurchase agreements, including collateral held on the Consolidated Balance Sheets.
Repurchase Agreements
We engage in dollar repurchase agreements with mortgage-backed securities ("dollar rolls") and repurchase agreements with other collateral types to increase our return on investments and improve liquidity. Such arrangements meet the requirements to be accounted for as financing arrangements. We enter into dollar roll transactions by selling existing mortgage-backed securities ("MBS") and concurrently entering into an agreement to repurchase similar securities within a short time frame at a lower price. Under repurchase agreements, we borrow cash from a counterparty at an agreed upon interest rate for an agreed upon time frame and pledge collateral in the form of securities. At the end of the agreement, the counterparty returns the collateral to us, and we, in turn, repay the loan amount along with the additional agreed upon interest. We require that, at all times during the term of the dollar roll and repurchase agreements, cash or other collateral types obtained is sufficient to allow us to fund substantially all of the cost of purchasing replacement assets. Cash received is generally invested in short-term investments, with the offsetting obligation to repay the loan included within Payables under securities loan and repurchase agreements, including collateral held on the Consolidated Balance Sheets. As per the terms of the agreements, the market value of the loaned securities is monitored with additional collateral obtained or refunded as the market value of the loaned securities fluctuates due to changes in interest rates, spreads and other risk factors. The carrying value of the securities pledged in dollar rolls and repurchase agreement transactions is included in Securities pledged on the Consolidated Balance Sheets. As ofDecember 31, 2019 , the carrying value of securities pledged and obligation to repay loans related to repurchase agreement transactions was$66 million , respectively. As ofDecember 31, 2018 , the carrying value of securities pledged and obligation to repay loans related to repurchase agreement transactions was$45 million , respectively. As ofDecember 31, 2019 and 2018, we did not have any securities pledged in dollar rolls.
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We also enter into reverse repurchase agreements. These transactions involve a purchase of securities and an agreement to sell substantially the same securities as those purchased. We require that, at all times during the term of the reverse repurchase agreements, cash or other collateral types provided is sufficient to allow the counterparty to fund substantially all of the cost of purchasing the replacement assets. As ofDecember 31, 2019 and 2018, we did not have any securities pledged under reverse repurchase agreements. The primary risk associated with short-term collateralized borrowings is that the counterparty will be unable to perform under the terms of the contract. Our exposure is limited to the excess of the net replacement cost of the securities over the value of the short-term investments. We believe the counterparties to the dollar rolls, repurchase and reverse repurchase agreements are financially responsible and that the counterparty risk is minimal.
FHLB
We are currently a member of the FHLB ofBoston and the FHLB ofDes Moines . We are required to maintain a collateral deposit to back any funding agreements issued by the FHLB. We have the ability to obtain funding from the FHLBs based on a percentage of the value of our assets and subject to the availability of eligible collateral. The limits across all programs are up to an amount that corresponds to the lending value of assets that can be pledged to the FHLBBoston which is limited to total statutory surplus of VRIAC and lending value of assets that can be pledged to the FHLB Des Moines which is limited to 30% of the total assets of the general and separate accounts of RLI. Furthermore, collateral is pledged based on the outstanding balances of FHLB funding agreements. The amount varies based on the type, rating and maturity of the collateral posted to the FHLB. Generally, mortgage securities, commercial real estate andU.S. treasury securities are pledged to the FHLBs. Market value fluctuations resulting from changes in interest rates, spreads and other risk factors for each type of assets are monitored and additional collateral is either pledged or released as needed. Additionally, SLD is currently a member of FHLB ofTopeka . Our capacity under this facility will transfer toResolution Life with the sale of SLD under the Individual Life Transaction. Our maximum borrowing capacity for our continuing operations under the FHLB ofBoston and the FHLB ofDes Moines was$7.8 billion as ofDecember 31, 2019 , and does not have an expiration date as long as we maintain a satisfactory level of creditworthiness based on the FHLBs' credit assessment. As ofDecember 31, 2019 and 2018, we had$877 million and$657 million in non-putable FHLB funding agreements, respectively, which are included in Contract owner account balances on the Consolidated Balance Sheets. As ofDecember 31, 2019 and 2018, we had assets with a market value of approximately$1,211 million and$771 million , respectively, which collateralized the FHLB funding agreements.
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 ofDecember 31, 2019 , the aggregate amount that may be borrowed or lent under agreements with life insurance subsidiaries was$1.9 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 ofDecember 31, 2019 ,Voya Financial, Inc. had$69 million in outstanding borrowings from subsidiaries and had loaned$164 million to its subsidiaries.
Collateral - Derivative Contracts
Under the terms of our over-the-counter ("OTC") Derivative ISDA agreements, we may receive from, or deliver to, counterparties, collateral to assure that the terms of theInternational Swaps and Derivatives Association, Inc. ("ISDA") agreements will be met with regard to the Credit Support Annex ("CSA"). The terms of the CSA call for us 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 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 us are the source of noncash collateral posted, which is reported in Securities pledged on the Consolidated Balance Sheets. As ofDecember 31, 2019 , we held$9 million and$82 million of net cash collateral related to OTC derivative contracts and cleared derivative contracts, respectively. As ofDecember 31, 2018 , we held$27 million and$16 million of net cash collateral related to OTC derivative contracts and cleared derivative contracts, respectively. In addition, as ofDecember 31, 2019 , we delivered$183 million of securities and held no securities as collateral. As ofDecember 31, 2018 , we delivered$180 million of securities and held no securities as collateral.
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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 this Annual Report on Form 10-K. With respect to our credit facility and derivative agreements, based on the amount of credit outstanding as ofDecember 31, 2019 , a one-notch or two-notch downgrade inVoya Financial, Inc.'s credit ratings by S&P or Moody's would not have resulted in an additional increase in our collateral requirements. With respect to certain SLD reinsurance agreements, based on the amount of reinsurance outstanding as ofDecember 31, 2019 andDecember 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
Rating Agency Moody's Investors Service, Standard & A.M. Best Fitch, Inc. Inc. Poor's ("A.M. ("Moody's") Best") (1) ("Fitch") (2) (3) ("S&P") (4) Long-term Issuer Credit Rating/Outlook: Voya Financial, Inc. withdrawn BBB+/stable Baa2/stable BBB+/stable Financial Strength Rating/Outlook: Voya Retirement Insurance and (5) A/stable A2/stable A+/stable Annuity Company Security Life of Denver (5) A/stable A3/Under A+/stable Insurance Company Review
ReliaStar Life Insurance Company A/stable A/stable A2/stable
A+/stable
ReliaStar Life Insurance Company A/stable A/stable A2/stable
A+/stable
of
(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) EffectiveApril 11, 2019 ,A.M. Best withdrew, at the Company's request, its financial strength ratings with respect toVoya Retirement Insurance Annuity Company andSecurity 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.
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Ratings actions and outlook changes byA.M. Best , Fitch, Moody's and S&P fromDecember 31, 2018 throughDecember 31, 2019 and subsequently through the date of this Annual Report on Form 10-K are as follows:
• On
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
of the life insurance entities of
Best affirmed the long-term issuer credit rating of "bbb+" of Voya
Company andSecurity Life of Denver Insurance Company at our request to no longer participate inA.M. Best's rating process with respect to those entities.
• On
strength rating of the insurance entities of
Positive to A+, Stable.
• On
the rating on review for downgrade. The ratings of
and those of its other affiliates are not included in this rating action.
Reinsurance We reinsure our business through a diversified group of well capitalized, highly rated reinsurers. However, we remain liable to the extent our reinsurers do not meet their obligations under the reinsurance agreements.We monitor trends in arbitration and any litigation outcomes with our reinsurers. Collectability of reinsurance balances are evaluated by monitoring ratings and evaluating the financial strength of our reinsurers. Large reinsurance recoverable balances with offshore or other non-accredited reinsurers are secured through various forms of collateral, including secured trusts, funds withheld accounts and irrevocable LOCs. The S&P financial strength rating of our reinsurers with our largest reinsurance recoverable balances are AA- rated or better. These reinsurers are (i)Lincoln National Life Insurance Company andLincoln Life & Annuity Company of New York and subsidiaries of Lincoln National Corporation ("Lincoln"). Only those reinsurance recoverable balances where recovery is deemed probable are recognized as assets on our Consolidated Balance Sheets. In 1998, in order to divest of a block of the individual life business, we entered into an indemnity reinsurance agreement with a subsidiary of Lincoln, which established a trust to secure its obligations to us under the reinsurance transaction. Of the Premium receivable and reinsurance recoverable on the Consolidated Balance Sheets,$1.3 billion and$1.4 billion as ofDecember 31, 2019 and 2018, respectively, is related to the reinsurance recoverable from the subsidiary of Lincoln under this reinsurance agreement. Pursuant to the terms of the 2018 MTA disclosed in the Overview section of the Management's Discussion and Analysis in Item 7. of Part II of the Annual Report on Form 10-K and prior to the closing of the Transaction, the Company entered into the following reinsurance transactions:
• VIAC recaptured from the Company the CBVA business previously assumed by
Roaring River II, Inc., a subsidiary of the Company. • Our company, through one of our subsidiaries ceded, under modified coinsurance agreements, as amended, fixed and fixed indexed annuity reserves of$451 million toAthene Life Re, Ltd. ("ALRe"). Under the terms
of the agreements, ALRe contractually assumed the policyholder liabilities
and obligations related to the policies, although we remain obligated to
the policyholders. Upon the consummation of the agreements, we recognized
no gain or loss in the Consolidated Statements of Operations.
• Our company, through one of our subsidiaries, assumed, under coinsurance
and modified coinsurance agreements, certain individual life and deferred
annuity policies from VIAC. Upon the consummation of the agreements, we
recognized no gain or loss in the Consolidated Statements of Operations.
As ofDecember 31, 2019 and 2018, assumed reserves related to these agreements were$782 million and$837 million , respectively. As a result of the Individual Life Transaction described in the Overview section of the Management's Discussion and Analysis in Part II, Item 7. of the Annual Report on Form 10-K, the following reinsurance transactions have been reported as held for sale in our Consolidated Financial Statements:
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OnDecember 31, 2004 , we reinsured the individual life reinsurance business (and sold certain systems and operating assets used in the individual life reinsurance business) to Scottish Re on a 100% coinsurance basis (the "2004 Transaction") through our wholly owned subsidiaries, SLD and SLDI. As part of the 2004 Transaction, the ceding commission (net of taxes), along with other reserve assets, was placed in trust for our benefit to secure Scottish Re's obligations as reinsurers of the acquired business. OnNovember 19, 2008 , an existing reinsurance agreement betweenScottish Re (U.S.), Inc. ("SRUS") andBallantyne 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 toBallantyne Re and made the sole beneficiary of the trust established by to support the reserve requirements of the ceded business. OnApril 12, 2019 , SLD entered into a Lock-Up Support Agreement (the "Lock-Up Agreement") withBallantyne Re , certain other companies, and holders of certain notes issued byBallantyne Re in connection with the restructuring ofBallantyne Re . Under the terms of the Lock-Up Agreement, SLD agreed, subject to certain conditions, to enter into a novation and related agreements (the "Novation"). The Novation occurred onJune 12, 2019 with the result thatSwiss Re Life & Health America Inc. ("Swiss Re") was substituted forBallantyne Re as the reinsurer effectiveApril 1, 2019 . As part of the Novation, Swiss Re established a trust account with assets supporting its reinsurance obligation to SLD. The Novation did not change SLD's reinsurance coverage related to the reinsured business. As ofDecember 31, 2019 , trust assets with a market value of$559 million supported reserves of$528 million . EffectiveJanuary 1, 2009 , we entered into the Master Purchase Agreement ("MPA") with Scottish Re and Hannover Re such that Hannover Re acquired the individual life reinsurance business from Scottish Re. Of the Assets held for sale on the Consolidated Balance Sheets,$2.1 billion and$2.4 billion as ofDecember 31, 2019 and 2018, respectively, is related to the reinsurance recoverable from Hannover Re under this reinsurance agreement. As ofDecember 31, 2018 , the premium deficiency reserve established in 2017 related to the business assumed was$0.3 billion and had no impact on the Consolidated Statements of Operations as the business is 100% reinsured. For additional information regarding our reinsurance recoverable balances, see Quantitative and Qualitative Disclosures About Market Risk in Part II, Item 7A. of this Annual Report on Form 10-K.
Pension and Postretirement Plans
When contributing to our qualified retirement plans we will take into consideration the minimum and maximum amounts required by ERISA, the attained funding target percentage of the plan, the variable-rate premiums that may be required by thePension Benefit Guaranty Corporation ("PBGC") and any funding relief that might be enacted byCongress . Contributions to our nonqualified plans and other postretirement and post-employment plans are funded from general assets of the respective sponsoring subsidiary company as benefits are paid.
For additional information on our pension and postretirement plan arrangements, see the Employee Benefit Arrangements Note in our Consolidated Financial Statements in Part II, Item 8. of this Annual Report on Form 10-K.
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 ourU.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 subject 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 inConnecticut andMinnesota (these insurance subsidiaries, together with our insurance subsidiary domiciled inColorado , 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. OurPrincipal Insurance Subsidiary domiciled inConnecticut has ordinary dividend capacity for 2020. 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 ourArizona captives of certain term life business in the fourth quarter of 2016, our Principal Insurance Subsidiary domiciled inMinnesota 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 inMinnesota of certain life insurance business in the fourth quarter of 2018, our Principal Insurance Subsidiary domiciled inColorado has a net loss from operations for the twelve-month period ending the precedingDecember 31 . Therefore, neither ourMinnesota norColorado 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.
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For a summary of applicable laws and regulations governing dividends, see the Insurance Subsidiaries Dividend Restrictions section of the Insurance Subsidiaries Note in our Consolidated Financial Statements in Part II, Item 8. of this Annual Report on Form 10-K. The following table summarizes dividends permitted to be paid by our Principal Insurance Subsidiaries toVoya Financial, Inc. orVoya Holdings without the need for insurance regulatory approval and dividends and extraordinary distributions paid by each of our Principal Insurance Subsidiaries to its parent for the periods indicated: Dividends Permitted without Approval Dividends Paid Extraordinary Distributions Paid Year Ended December 31, Year Ended December 31, ($ in millions) 2020 2019 2019 2018 2019 2018 SubsidiaryName (State of domicile):Voya Retirement Insurance and Annuity Company (CT)$ 295 $ 396 $ 396 $ 126 $ - $ - Security Life ofDenver Insurance Company (CO) - - - 52 - -ReliaStar Life Insurance Company (MN) - - - - 360 -
Other Subsidiaries - Dividends, Returns of Capital, and Capital Contributions
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. For the years endedDecember 31, 2019 and 2018, dividends net of capital contributions received byVoya Financial, Inc. andVoya Holdings from non-life subsidiaries were$78 million and$114 million , respectively. OnMarch 27, 2019 , RRII paid a dividend of$152 million to SLDI, which in turn paid a dividend of$170 million toVoya Financial . OnDecember 31, 2019 , RRII paid a dividend of$2 million to SLDI, which in turn paid a dividend of$58 million toVoya Financial .
Each of our wholly owned Principal Insurance Subsidiaries is subjected to minimum risk based capital ("RBC") requirements established by the insurance departments of their applicable state of domicile. The formulas for determining the amount of RBC specify various weighting factors that are applied to financial balances or various levels of activity based on the perceived degree of risk. Regulatory compliance is determined by a ratio of total adjusted capital ("TAC"), as defined by the NAIC, to RBC requirements, as defined by the NAIC. Each of ourU.S. insurance subsidiaries exceeded the minimum RBC requirements that would require regulatory or corrective action for all periods presented herein. Our estimated RBC ratio on a combined basis for our Principal Insurance Subsidiaries, with adjustments for certain intercompany transactions, was approximately 490% as ofDecember 31, 2019 . As a result of Tax Reform, the NAIC updated the factors affecting RBC requirements, including ours, to reflect the lowering of the top corporate tax rate from 35% to 21%. Adjusting these factors in light of Tax Reform resulted in an increase in the amount of capital we are required to maintain to satisfy our RBC requirements. During the fourth quarter of 2018, we also established a new RBC target of 400%. Our wholly owned insurance subsidiaries are required to prepare statutory financial statements in accordance with statutory accounting practices prescribed or permitted by the insurance department of the state of domicile of the respective insurance subsidiary. Statutory accounting practices primarily differ fromU.S. GAAP by charging policy acquisition costs to expense as incurred, establishing future policy benefit liabilities using different actuarial assumptions as well as valuing investments and certain assets and accounting for deferred taxes on a different basis. Certain assets that are not admitted under statutory accounting principles are charged directly to surplus. Depending on the regulations of the insurance department of the state of domicile, the entire amount or a portion of an asset balance can be non-admitted depending on specific rules regarding admissibility. The most significant non-admitted assets are typically a portion of deferred tax assets in excess of prescribed thresholds.
For a summary of statutory capital and surplus of our Principal Insurance Subsidiaries, see the Insurance Subsidiaries Note in our Consolidated Financial Statements in Part II, Item 8. of this Annual Report on Form 10-K.
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We monitor the ratio of our insurance subsidiaries' TAC toCompany Action Level Risk-Based Capital ("CAL"). A ratio in excess of 125% indicates that the insurance subsidiary is not required to take any corrective actions to increase capital levels at the direction of the applicable state of domicile.
The following table summarizes the ratio of TAC to CAL on a combined basis primarily for our Principal Insurance Subsidiaries, with adjustments for certain intercompany transactions, as of the dates indicated below: ($ in millions)
($ in millions) As of December 31, 2019 As of December 31, 2018 CAL TAC Ratio CAL TAC Ratio$ 1,046 $ 5,126 490 %$ 1,072 $ 5,129 478 %
For additional information regarding RBC, see Business-Regulation-Insurance Regulation in Part I, Item 1. of this Annual Report on Form 10-K.
As ofDecember 31, 2019 , SLD had the following surplus notes outstanding to its affiliateSLDI Georgia Holdings, Inc. "(Georgia Holdings "). Issuance Date Maturity 2019 2018 12/21/1994 4/15/2021$ 40 $ 60 12/19/2000 4/15/2021 26 39 4/15/2017 4/15/2042 61 61 4/15/2018 4/15/2043 62 62 4/15/2019 4/15/2044 63 -
Upon the closing of the Resolution MTA,
Captive Reinsurance Subsidiaries
Uncertainties associated with our continued use of affiliated captive reinsurance subsidiaries are primarily related to potential regulatory changes. For example, effectiveJanuary 1, 2016 , the NAIC heightened the standards applicable to captives related to XXX and AXXX business issued and ceded afterDecember 31, 2014 . The NAIC left for future action application of the standards to captives that assume variable annuity business.
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
As ofDecember 31, 2019 , the following table presents our on- and off- balance sheet contractual obligations due in various periods. The payments reflected in this table are based on our estimates and assumptions about these obligations. Because these estimates and assumptions are necessarily subjective, the actual cash outflows in future periods will vary, possibly materially, from those presented in the table. 102
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Table of Contents Less than More than ($ in millions) Total 1 Year 1-3 Years 3-5 Years 5 Years Contractual Obligations: Purchase obligations(1)$ 1,016 $ 972 $ 44 $ - $ - Reserves for insurance obligations(2)(3) 62,689 4,031 6,581 6,962 45,115 Retirement and other plans(4) 1,668 149 299 317 903 Short-term and long-term debt obligations(5) 6,652 166 309 473 5,704 Operating leases(6) 187 33 64 49 41 Finance leases(7) 65 21 42 2 - Securities lending, repurchase agreements and collateral held(8) 1,519 1,453 - - 66 Total(9)$ 73,796 $ 6,825 $ 7,339 $ 7,803 $ 51,829 Contractual Obligations of businesses held for sale: Purchase obligations(1)$ 305 $ 294 $ 11 $ - $ - Reserves for insurance obligations 33,353 224 924 1,102 31,103 Securities lending and repurchase agreements(8) 241 241 - - - Total(9)$ 33,899 $ 759 $ 935 $ 1,102 $ 31,103 (1) Purchase obligations consist primarily of outstanding commitments under alternative investments that may occur any time within the terms of the partnership and private loans. The exact timing, however, of funding these commitments related to partnerships and private loans cannot be estimated. Therefore, the amount of the commitments related to partnerships and private loans is included in the category "Less than 1 Year." (2) Reserves for insurance obligations consist of amounts required to meet our future obligations for future policy benefits and contract owner account balances. Amounts presented in the table represent estimated cash payments under such contracts, including significant assumptions related to the receipt of future premiums, mortality, morbidity, lapse, renewal, retirement, disability and annuitization comparable with actual experience. These assumptions also include market growth and interest crediting consistent with assumptions used in amortizing DAC. Estimated cash payments are undiscounted for the time value of money. Accordingly, the sum of cash flows presented of$62.7 billion significantly exceeds the sum of Future policy benefits and Contract owner account balances of$50.9 billion recorded on our Consolidated Balance Sheets as ofDecember 31, 2019 . Estimated cash payments are also presented gross of reinsurance. Due to the significance of the assumptions used, the amounts presented could materially differ from actual results. (3) Contractual obligations related to certain closed blocks, with reserves in the amount of$1.5 billion , have been excluded from the table because the blocks were divested through reinsurance contracts and collateral is provided by third parties that is accessible by us. Although we are not relieved of legal liability to the contract holder for these closed blocks, third-party collateral of$1.7 billion has been provided for the payment of the related insurance obligations. The sufficiency of collateral held for any individual block may vary. (4) Includes estimated benefit payments under our qualified and non-qualified pension plans, estimated benefit payments under our other postretirement benefit plans, and estimated payments of deferred compensation based on participant elections and an average retirement age. (5) The estimated payments due by period for long-term debt reflects the contractual maturities of principal, as well as estimated future interest payments. The payment of principal and estimated future interest for short-term debt are reflected in estimated payments due in less than one year. See the Financing Agreements Note in our Consolidated Financial Statements in Part II, Item 8. of this Annual Report on Form 10-K for additional information concerning the short-term and long-term debt obligations. (6) Operating leases consist primarily of outstanding commitments for office space, equipment and automobiles. (7) Finance lease obligation is associated with a service contract. (8) Securities loan, repurchase agreements, and collateral held represent the liability to return collateral received from counterparties under securities lending agreements, OTC derivative and cleared derivative contracts as well as the obligations related to borrowings under repurchase agreements. Securities lending agreements include provisions which permit us to call back securities with minimal notice and accordingly, the payable is classified as having a term of less than 1 year. Additionally, Securities lending agreements and collateral held include off-balance sheet non-cash collateral of$146 million and$0 million , respectively. (9) Unrecognized tax benefits are excluded from the table due to immateriality. In addition, in 2015 we entered into a put option agreement with aDelaware trust that givesVoya Financial, Inc. the right, at any time over a 10-year period, to issue up to$500 million of senior notes to the trust in return for principal and interest strips ofU.S. Treasury securities that are held by the trust. See Liquidity-Put Option Agreement for Senior Debt Issuance for more information on this agreement.
Critical Accounting Judgments and Estimates
General
The preparation of financial statements in conformity withU.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 103
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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:
• Estimated loss on businesses held for sale;
• 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 Consolidated Financial Statements. The above critical accounting estimates are described in the Business, Basis of Presentation and Significant Accounting Policies Note and the Business Held for Sale and Discontinued Operations Note in our Consolidated Financial Statements in Part II, Item 8. of this Annual Report on Form 10-K.
Estimated loss on businesses held for sale
OnDecember 18, 2019 , we entered into the Resolution MTA with Resolution Life US pursuant to which Resolution Life US will acquire all of the shares of the capital stock of SLD and SLDI, including the capital stock of several subsidiaries of SLD and SLDI. This transaction will result in the sale of a significant portion of of our Individual Life business as well as the fixed and variable Annuities business associated with the subsidiaries sold. We have determined that the businesses to be disposed via sale meet the criteria to be classified as held for sale and the sale represents a strategic shift that will have a major effect on our operations. Accordingly, the results of operations of the businesses to be sold have been presented as discontinued operations in the accompanying Consolidated Statements of Operations and Consolidated Statements of Cash Flows, and the assets and liabilities of the businesses have been classified as held for sale and segregated for all periods presented in the Consolidated Balance Sheets. A business classified as held for sale is recorded at the lower of its carrying value or estimated fair value less cost to sell. If the carrying value exceeds its estimated fair value less cost to sell, a loss is recognized. Transactions between the businesses held for sale and businesses in continuing operations that are expected to continue to exist after the disposal are not eliminated to appropriately reflect the continuing operations and the assets, liabilities and results of the businesses held for sale. In connection with the this transaction, we recorded an estimated loss on sale, net of tax, of$1,108 million in the fourth quarter of 2019. The estimated loss on sale, net of tax is based on assumptions that are subject to change due to fluctuations in market conditions and other variables that may occur prior to the closing date, which is expected to take place bySeptember 30, 2020 . For additional information on the Individual Life Transaction and the related estimated loss on sale, net of tax, see Trends and Uncertainties in Part II, Item 7. of this Annual Report on Form 10-K and the Business Held for Sale and Discontinued Operations Note to our accompanying Consolidated Financial Statements.
Reserves for Future Policy Benefits
The determination of future policy benefit reserves is dependent on actuarial assumptions. The principal assumptions used to establish liabilities for future policy benefits are based on our experience and periodically reviewed against industry standards. These assumptions include mortality, morbidity, policy lapse, contract renewal, payment of subsequent premiums or deposits by the contract owner, retirement, investment returns, inflation, benefit utilization and expenses. The assumptions used require considerable judgments. Changes in, or deviations from, the assumptions used can significantly affect our reserve levels and related results of operations.
• Mortality is the incidence of death among policyholders triggering the
payment of underlying insurance coverage by the insurer. In addition,
mortality also refers to the ceasing of payments on life-contingent
annuities due to the death of the annuitant. We utilize a combination of
actual and industry experience when setting our mortality assumptions.
• A lapse rate is the percentage of in-force policies surrendered by the policyholder or canceled by us due to non-payment of premiums. 104
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See the Reserves for Future Policy Benefits and Contract Owner Account Balances Note and the Guaranteed Benefit Features Note in our Consolidated Financial Statements in Part II, Item 8. of this Annual Report on Form 10-K for further information on our reserves for future policy benefits, contract owner account balances and product guarantees.
Insurance and Other Reserves
Reserves for traditional life insurance contracts (term insurance, participating and non-participating whole life insurance and traditional group life insurance) and accident and health insurance represent the present value of future benefits to be paid to or on behalf of contract owners and related expenses, less the present value of future net premiums. Assumptions as to interest rates, mortality, expenses and persistency are based on our estimates of anticipated experience at the period the policy is sold or acquired, including a provision for adverse deviation. Interest rates used to calculate the present value of these reserves ranged from 2.3% to 7.7%. Reserves for payout contracts with life contingencies are equal to the present value of expected future payments. Assumptions as to interest rates, mortality and expenses are based on our estimates of anticipated experience at the period the policy is sold or acquired, including a provision for adverse deviation. Such assumptions generally vary by annuity plan type, year of issue and policy duration. Interest rates used to calculate the present value of future benefits ranged from 2.7% to 8.3%. Although assumptions are "locked-in" upon the issuance of traditional life insurance contracts, certain accident and health insurance contracts and payout contracts with life contingencies, significant changes in experience or assumptions may require us to provide for expected future losses on a product by establishing premium deficiency reserves. Premium deficiency reserves are determined based on best estimate assumptions that exist at the time the premium deficiency reserve is established and do not include a provision for adverse deviation. See "Deferred Policy Acquisition Costs, Value of Business Acquired and Other Intangibles" below for premium deficiency reserves established during 2019 and 2018.
Product Guarantees and Index-crediting Features
The assumptions used to establish the liabilities for our product guarantees require considerable judgment and are established as management's best estimate of future outcomes. We periodically review these assumptions and, if necessary, update them based on additional information that becomes available. Changes in, or deviations from, the assumptions used can significantly affect our reserve levels and related results of operations. IUL, Stabilizer and MCG: We also issue certain products that contain embedded derivatives that are measured at estimated fair value separately from the host contracts. These products include IUL, and stabilizer ("Stabilizer") contracts. The managed custody guarantee product ("MCG") is a stand-alone derivative and is measured in its entirety at estimated fair value. The estimated fair value of the embedded derivative in the IUL contracts is based on the present value of the excess of interest payments to the contract owners over the growth in the minimum guaranteed account value. The excess interest payments are determined as the excess of projected index driven benefits over the projected guaranteed benefits. The projection horizon is over the current indexed term of the related contracts, which takes into account best estimate actuarial assumptions, such as partial withdrawals, full surrenders, deaths and maturities. The estimated fair value of the Stabilizer embedded derivative and MCG stand-alone derivative is determined based on the present value of projected future claims, minus the present value of future guaranteed premiums. At inception of the contract, we project a guaranteed premium to be equal to the present value of the projected future claims. The income associated with the contracts is projected using actuarial and capital market assumptions, including benefits and related contract charges, over the anticipated life of the related contracts. The cash flow estimates are projected under multiple capital market scenarios using observable risk-free rates and other best estimate assumptions. The liabilities for the IUL and Stabilizer embedded derivatives and the MCG stand-alone derivative include a risk margin to capture uncertainties related to policyholder behavior assumptions. The margin represents additional compensation a market participant would require to assume these risks.
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The discount rate used to determine the fair value of the liabilities for our IUL and Stabilizer embedded derivatives and the MCG stand-alone derivative includes an adjustment to reflect the risk that these obligations will not be fulfilled ("nonperformance risk"). Our nonperformance risk adjustment is based on a blend of observable, similarly rated peer holding company credit spreads, adjusted to reflect the credit quality of our 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. Universal and Variable Universal Life: Reserves for UL and variable universal life ("VUL") secondary guarantees and paid-up guarantees are calculated by estimating the expected value of death benefits payable and recognizing those benefits ratably over the accumulation period based on total expected assessments. The reserve for such products recognizes the portion of contract assessments received in early years used to compensate us for benefits provided in later years. Assumptions used, such as the interest rate, lapse rate and mortality, are consistent with assumptions used in estimating gross profits for purposes of amortizing DAC. See Quantitative and Qualitative Disclosures About Market Risk in Part II, Item 7A. of this Annual Report on Form 10-K for additional information regarding specific hedging strategies we utilize to mitigate risk for the product guarantees, as well as sensitivities of the embedded derivative and stand-alone derivative liabilities to changes in certain capital markets assumptions.
Deferred Policy Acquisition Costs, Value of Business Acquired and Other Intangibles
DAC represents policy acquisition costs that have been capitalized and are subject to amortization and interest.VOBA represents the outstanding value of in-force business acquired and is subject to amortization and interest. DSI represents benefits paid to contract owners for a specified period that are incremental to the amounts we credit on similar contracts without sales inducements and are higher than the contract's expected ongoing crediting rates for periods after the inducement. URR relates to UL and VUL products and represents policy charges for benefits or services to be provided in future periods. Collectively, we refer to DAC, VOBA, DSI and URR as "DAC/VOBA and other intangibles". See the Deferred Policy Acquisition Costs and Value of Business Acquired Note in our Consolidated Financial Statements in Part II, Item 8. of this Annual Report on Form 10-K for additional information on DAC/VOBA and other intangibles. Amortization Methodologies We amortize DAC and VOBA related to certain traditional life insurance contracts and certain accident and health insurance contracts over the premium payment period in proportion to the present value of expected gross premiums. Assumptions as to mortality, morbidity, persistency and interest rates, which include provisions for adverse deviation, are consistent with the assumptions used to calculate reserves for future policy benefits. These assumptions are "locked-in" at issue and not revised unless the DAC or VOBA balance is deemed to be unrecoverable from future expected profits. Recoverability testing is performed for current issue year products to determine if gross premiums are sufficient to cover DAC or VOBA, estimated benefits and related expenses. In subsequent periods, the recoverability of DAC and VOBA is determined by assessing whether future gross premiums are sufficient to amortize DAC or VOBA, as well as provide for expected future benefits and related expenses. If a premium deficiency is deemed to be present, charges will be applied against the DAC and VOBA balances before an additional reserve is established. Absent such a premium deficiency, variability in amortization after policy issuance or acquisition relates only to variability in premium volumes. We amortize DAC and VOBA related to universal life-type contracts and fixed and variable deferred annuity contracts over the estimated lives of the contracts in relation to the emergence of estimated gross profits. Assumptions as to mortality, persistency, interest crediting rates, fee income, returns associated with separate account performance, impact of hedge performance, expenses to administer the business and certain economic variables, such as inflation, are based on our experience and overall capital markets. At each valuation date, estimated gross profits are updated with actual gross profits, and the assumptions underlying future estimated gross profits are evaluated for continued reasonableness. Adjustments to estimated gross profits require that amortization rates be revised retroactively to the date of the contract issuance ("unlocking"). If the update of assumptions causes estimated gross profits to increase, DAC and VOBA amortization will decrease, resulting in a current period increase to earnings. The opposite result occurs when the assumption update causes estimated gross profits to decrease. We amortize the DSI and URR over the estimated lives of the related contracts using the same methodology and assumptions used to amortize DAC. For universal life-type contracts and fixed and variable deferred annuity contracts, recoverability testing is performed for current issue year products to determine if gross profits are sufficient to cover DAC/VOBA and other intangibles, estimated benefits and related expenses. In subsequent periods, we perform testing to assess the recoverability of DAC/VOBA and other intangibles on 106
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an annual basis, or more frequently if circumstances indicate a potential loss recognition issue exists. If DAC/VOBA or other intangibles are not deemed recoverable from future gross profits, charges will be applied against the DAC/VOBA or other intangible balances before an additional reserve is established.
During the year endedDecember 31, 2017 , as a result of the 2018 Transaction and the sale of substantially all of the Annuities and CBVA businesses discussed above, we have evaluated and redefined our contract groupings for loss recognition testing in those businesses. This has resulted in the establishment of premium deficiency reserves for the Annuities and CBVA business that was not included in the 2018 Transaction of$43 million , as ofDecember 31, 2017 . Of that amount,$18 million is recorded as an increase in Policyholder benefits in the Consolidated Statement of Operations, with a corresponding increase to Future policy benefits on the Consolidated Balance Sheet, and$25 million is reported within Income (loss) from discontinued operations, net of tax in the Consolidated Statement of Operations, with a corresponding amount in Liabilities held for sale on the Consolidated Balance Sheet.
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.
• One significant assumption is the assumed return associated with the
variable account performance, which has historically had a greater impact
on variable annuity than VUL products. To reflect the volatility in the equity markets, this assumption involves a combination of near-term expectations and long-term assumptions regarding market performance. The
overall return on the variable account is dependent on multiple factors,
including the relative mix of the underlying sub-accounts among bond funds
and equity funds, as well as equity sector weightings. We use a reversion
to the mean approach, which assumes that the market returns over the entire mean reversion period are consistent with a long-term level of equity market appreciation. We monitor market events and only change the assumption when sustained deviations are expected. This methodology incorporates a 9% long-term equity return assumption, a 14% cap and a five-year look-forward period.
• Another significant assumption used in the estimation of gross profits for
certain products is mortality. We utilize a combination of actual and industry experience when setting our mortality assumptions, which are
consistent with the assumptions used to calculate reserves for future
policy benefits.
• Assumptions related to interest rate spreads and credit losses also impact
estimated gross profits for applicable products with credited rates. These assumptions are based on the current investment portfolio yields and credit quality, estimated future crediting rates, capital markets, and estimates of future interest rates and defaults.
• Other significant assumptions include estimated policyholder behavior
assumptions, such as surrender, lapse, and annuitization rates. We use a
combination of actual and industry experience when setting and updating
our policyholder behavior assumptions, and such assumptions require
considerable judgment. Estimated gross revenues and gross profits for our
variable annuity contracts are particularly sensitive to these assumptions.
We include the impact of the change in value of the embedded derivative associated with the IUL contracts in gross profits for purposes of determining DAC amortization.
During the third quarter of 2019, 2018 and 2017, we conducted our annual review of assumptions, including projection model inputs, and made a number of changes to our assumptions which impacted the results of our segments reflected in Income (loss). The following are the impacts of assumption changes during 2019, 2018 and 2017. During the third quarter of 2019, we updated our assumptions to reflect, among other changes, a reduction in the long-term interest rate of 50 basis points and updates to our Individual Life business assumptions including higher than expected persistency at older ages, lower net margins and refinements to our policyholder behavior assumptions. The impact of assumption changes on our results from continuing operations was a loss of$70 million in the third quarter of 2019, of which a loss of$25 million was included in Adjusted operating earnings before income taxes and reflects net unfavorable DAC/VOBA and other intangibles unlocking. During the third quarter of 2018, we updated our assumptions to reflect, among other changes, increases in reinsurance rate assumptions in our Individual Life business and the unfavorable adjustment of the GMIR initiative partially offset by favorable changes in equity market assumptions in our Retirement business. The impact of assumption changes on our results from continuing operations was a loss of$51 million in the third quarter of 2018 of which a gain of$49 million was included in Adjusted operating earnings before income taxes and reflects net favorable DAC/VOBA and other intangibles unlocking.
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During the third quarter of 2017, the impact of assumption changes on our results from continuing operations resulted in a loss of$130 million , of which a loss of$47 million was included in Adjusted operating earnings before income taxes and reflects net unfavorable DAC/VOBA and other intangibles unlocking. For the third quarter of 2019, 2018 and 2017, the impact of assumption changes related to our disposed businesses reported in discontinued operations were losses of$31 million ,$102 million and$59 million , respectively and reflected unfavorable DAC/VOBA and other intangibles unlocking.
Sensitivity
We perform sensitivity analyses to assess the impact that certain assumptions have on DAC/VOBA and other intangibles, as well as certain reserves. The following table presents the estimated instantaneous net impact to income from continuing and discontinued operations of various assumption changes on our DAC/VOBA and other intangible balances and the impact on related reserves for future policy benefits and reinsurance. The effects are not representative of the aggregate impacts that could result if a combination of such changes to equity markets, interest rates and other assumptions occurred. ($ in millions) As of
Continuing Operations (1) Discontinued Operations Total Decrease in long-term equity rate of return assumption by 100 basis points $ (37 ) $ -$ (37 ) A change to the long-term interest rate assumption of -50 basis points (43 ) (22 ) (65 ) A change to the long-term interest rate assumption of +50 basis points 30 20 50 An assumed increase in future mortality by 1% (10 ) (12 ) (22 )
1) Includes DAC/VOBA and other intangibles of the Individual Life business that will be exited via reinsurance pursuant to the Resolution MTA.
We generally assume that the rate of return on fixed income investments backing CBVA contracts moves in a manner correlated with changes to our assumed long-term rate of return. Furthermore, assumptions regarding shifts in market factors may be overly simplistic and not indicative of actual market behavior in stress scenarios. Lower assumed equity rates of return, lower assumed interest rates, increased assumed future mortality and decreased equity market values generally decrease DAC/VOBA and other intangibles and increase future policy benefits, thus decreasing income before income taxes. Higher assumed interest rates generally increase DAC/VOBA and other intangibles and decrease future policy benefits, thus increasing income before income taxes.
Valuation of Investments and Derivatives
Our investment portfolio consists of public and private fixed maturity securities, commercial mortgage and other loans, equity securities, short-term investments, other invested assets and derivative financial instruments. We enter into interest rate, equity market, credit default and currency contracts, including swaps, futures, forwards, caps, floors and options, to reduce and manage various risks associated with changes in value, yield, price, cash flow or exchange rates of assets or liabilities held or intended to be held, or to assume or reduce credit exposure associated with a referenced asset, index or pool. We also utilize options and futures on equity indices to reduce and manage risks associated with our universal-life type and annuity products. See the Investments (excluding Consolidated Investment Entities) Note and the Derivative Financial Instruments Note in our Consolidated Financial Statements in Part II, Item 8. of this Annual Report on Form 10-K for further information.
Investments
We measure the fair value of our financial assets and liabilities based on assumptions used by market participants in pricing the asset or liability, which may include inherent risk, restrictions on the sale or use of an asset, or nonperformance risk, including our own credit risk. The estimate of fair value is the price that would be received to sell an asset or transfer a liability ("exit price") in an orderly transaction between market participants in the principal market, or the most advantageous market in the absence of a principal market, for that asset or liability. We use a number of valuation sources to determine the fair values of our financial assets and liabilities, including quoted market prices, third-party commercial pricing services, third-party brokers, industry-standard, 108
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vendor-provided software that models the value based on market observable inputs, and other internal modeling techniques based on projected cash flows.
We categorize our financial instruments into a three-level hierarchy based on the priority of the inputs to the valuation technique. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure fair value fall within different levels of the hierarchy, the category level is based on the lowest priority level input that is significant to the fair value measurement of the instrument. When available, the estimated fair value of securities is based on quoted prices in active markets that are readily and regularly obtainable. When quoted prices in active markets are not available, the determination of estimated fair value is based on market standard valuation methodologies, including discounted cash flows, matrix pricing or other similar techniques. Inputs to these methodologies include, but are not limited to, market observable inputs such as benchmark yields, credit quality, issuer spreads, bids, offers and cash flow characteristics of the security. For privately placed bonds, we also consider such factors as the net worth of the borrower, value of the collateral, the capital structure of the borrower, the presence of guarantees, and the borrower's ability to compete in its relevant market. Valuations are reviewed and validated monthly by an internal valuation committee using price variance reports, comparisons to internal pricing models, back testing of recent trades, and monitoring of trading volumes, as appropriate. The valuation of financial assets and liabilities involves considerable judgment, is subject to considerable variability, is established using management's best estimate, and is revised as additional information becomes available. As such, changes in, or deviations from, the assumptions used in such valuations can significantly affect our results of operations. Financial markets are subject to significant movements in valuation and liquidity, which can impact our ability to liquidate and the selling price that can be realized for our securities. Derivatives Derivatives are carried at fair value, which is determined by using observable key financial data, such as yield curves, exchange rates, S&P 500 prices, LIBOR and Overnight Index Swap Rates ("OIS") or through values established by third-party sources, such as brokers. Valuations for our futures contracts are based on unadjusted quoted prices from an active exchange. Counterparty credit risk is considered and incorporated in our valuation process through counterparty credit rating requirements and monitoring of overall exposure. Our own credit risk is also considered and incorporated in our valuation process. We have certain CDS 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. We also have investments in certain fixed maturities and have issued certain universal life-type and annuity products that contain embedded derivatives for which fair value is at least partially determined by levels of or changes in domestic and/or foreign interest rates (short-term or long-term), exchange rates, prepayment rates, equity markets, or credit ratings/spreads. The fair values of these embedded derivatives are determined using prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. For additional information regarding the valuation of and significant assumptions associated with embedded derivatives and stand-alone derivatives associated with certain universal life-type and annuity contracts, see "Reserves for Future Policy Benefits" above. In addition, we have entered into coinsurance with funds withheld reinsurance arrangements that contain embedded derivatives. The fair value of the embedded derivatives is based on the change in the fair value of the underlying assets held in the trust using the valuation methods and assumptions described for our investments held. The valuation of derivatives involves considerable judgment, is subject to considerable variability, is established using management's best estimate and is revised as additional information becomes available. As such, changes in, or deviations from, these assumptions used in such valuations can have a significant effect on the results of operations. For additional information regarding the fair value of our investments and derivatives, see the Fair Value Measurements (excludingConsolidated Investment Entities) Note in our Consolidated Financial Statements in Part II, Item 8. of this Annual Report on Form 10-K.
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Impairments
We evaluate our available-for-sale investments quarterly to determine whether there has been an other-than-temporary decline in fair value below the amortized cost basis. This evaluation process entails considerable judgment and estimation. Factors considered in this analysis include, but are not limited to, the length of time and the extent to which the fair value has been less than amortized cost, the issuer's financial condition and near-term prospects, future economic conditions and market forecasts, interest rate changes and changes in ratings of the security. An extended and severe unrealized loss position on a fixed maturity may not have any impact on: (a) the ability of the issuer to service all scheduled interest and principal payments and (b) the evaluation of recoverability of all contractual cash flows or the ability to recover an amount at least equal to its amortized cost based on the present value of the expected future cash flows to be collected. In contrast, for certain equity securities, we give greater weight and consideration to a decline in market value and the likelihood such market value decline will recover. When assessing our intent to sell a security, or if it is more likely than not we will be required to sell a security before recovery of its amortized cost basis, we evaluate facts and circumstances such as, but not limited to, decisions to rebalance the investment portfolio and sales of investments to meet cash flow or capital needs.
We use the following methodology and significant inputs to determine the amount of the OTTI credit loss:
• When determining collectability and the period over which the value is
expected to recover for
government securities and state and political subdivision securities, we
apply the same considerations utilized in our overall impairment
evaluation process, which incorporates information regarding the specific
security, the industry and geographic area in which the issuer operates
and overall macroeconomic conditions. Projected future cash flows are
estimated using assumptions derived from our best estimates of likely
scenario-based outcomes, after giving consideration to a variety of
variables that includes, but is not limited to: general payment terms of
the security; the likelihood that the issuer can service the scheduled
interest and principal payments; the quality and amount of any credit
enhancements; the security's position within the capital structure of the
issuer; possible corporate restructurings or asset sales by the issuer;
and changes to the rating of the security or the issuer by rating agencies.
• Additional considerations are made when assessing the unique features that
apply to certain structured securities, such as subprime, Alt-A,
non-agency RMBS, CMBS and ABS. These additional factors for structured
securities include, but are not limited to: the quality of underlying
collateral; expected prepayment speeds; loan-to-value ratio; debt service
coverage ratios; current and forecasted loss severity; consideration of
the payment terms of the underlying assets backing a particular security;
and the payment priority within the tranche structure of the security.
• When determining the amount of the credit loss for
corporate securities, foreign government securities and state and
political subdivision securities, we consider the estimated fair value as
the recovery value when available information does not indicate that
another value is more appropriate. When information is identified that
indicates a recovery value other than estimated fair value, we consider in
the determination of recovery value the same considerations utilized in
its overall impairment evaluation process, which incorporates available
information and our best estimate of scenario-based outcomes regarding the
specific security and issuer; possible corporate restructurings or asset
sales by the issuer; the quality and amount of any credit enhancements;
the security's position within the capital structure of the issuer;
fundamentals of the industry and geographic area in which the security
issuer operates; and the overall macroeconomic conditions.
• We perform a discounted cash flow analysis comparing the current amortized
cost of a security to the present value of future cash flows expected to
be received, including estimated defaults and prepayments. The discount
rate is generally the effective interest rate of the fixed maturity prior to impairment. Mortgage loans on real estate are all commercial mortgage loans. If a mortgage loan is determined to be impaired (i.e., when it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement), the carrying value of the mortgage loan is reduced to the lower of either the present value of expected cash flows from the loan, discounted at the loan's original purchase yield, or the 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. Impairment analysis of the investment portfolio involves considerable judgment, is subject to considerable variability, is established using management's best estimate and is revised as additional information becomes available. As such, changes in, or deviations from, the assumptions used in such analysis can have a significant effect on the results of operations. For additional information regarding the evaluation process for impairments, see the Investments (excluding Consolidated Investment Entities) Note in our Consolidated Financial Statements in Part II, Item 8. of this Annual Report on Form 10-K. 110
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Table of Contents Income Taxes Valuation Allowances We use certain assumptions and estimates in determining the income taxes payable or refundable for the current year, the deferred income tax liabilities and assets for items recognized differently in our Consolidated Financial Statements from amounts shown on our income tax returns and the federal income tax expense. Determining these amounts requires analysis and interpretation of current tax laws and regulations, including the loss limitation rules associated with change in control. We exercise considerable judgment in evaluating the amount and timing of recognition of the resulting income tax liabilities and assets. These judgments and estimates are reevaluated on a periodic basis and as regulatory and business factors change. Deferred tax assets represent the tax benefit of future deductible temporary differences, net operating loss carryforwards and tax credit carryforwards. We evaluate and test the recoverability of deferred tax assets. Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence, it is more likely than not that some portion, or all, of the deferred tax assets will not be realized. Considerable judgment and the use of estimates are required in determining whether a valuation allowance is necessary and, if so, the amount of such valuation allowance. In evaluating the need for a valuation allowance, we consider many factors, including:
• The nature, frequency and severity of book income or losses in recent years;
• The nature and character of the deferred tax assets and liabilities;
• The nature and character of income by life and non-life subgroups;
• The recent cumulative book income (loss) position after adjustment for permanent differences;
• Taxable income in prior carryback years;
• Projected future taxable income, exclusive of reversing temporary differences and carryforwards;
• Projected future reversals of existing temporary differences;
• The length of time carryforwards can be utilized;
• Prudent and feasible tax planning strategies we would employ to avoid a
tax benefit from expiring unused; and
• Tax rules that would impact the utilization of the deferred tax assets.
We have assessed whether it is more likely than not that the deferred tax assets will be realized in the future. In making this assessment, we considered the available sources of income and positive and negative evidence regarding our ability to generate sufficient taxable income to realize our deferred tax assets, which include net operating loss carryforwards ("NOLs"), capital loss carryforwards and tax credit carryforwards. After considering the impact of the above factors on the valuation allowance, including the impact of the Individual Life Transaction, we determined that it is more likely than not that$250 million of additional deferred tax asset will be realized. As a result, we recorded a valuation allowance release of$250 million . The valuation allowance was approximately$388 million and$638 million as ofDecember 31, 2019 and 2018, respectively. The decrease is primarily related to the tax valuation allowance release of$250 million . Pursuant toU.S. GAAP, we do not specifically identify the valuation allowance with individual categories. However, we estimate that balances of approximately$198 million as ofDecember 31, 2019 and$445 million as ofDecember 31, 2018 were related to federal net operating and capital losses. The remaining balances were attributable to various items, including state taxes and other deferred tax assets. InDecember 2014 , we entered into an Issue Resolution Agreement ("IA") with theIRS relating to the Internal Revenue Code Section 382 calculation of the annual limitation on the use of certain of the Company's federal tax attributes that will apply as a consequence of the Section 382 event experienced by the Company inMarch 2014 . We do not expect the annual limitation to impact our ability to utilize the losses or credits. As ofDecember 31, 2019 , we had approximately$9.6 billion of federal net operating loss carryforwards and$17 million of capital loss carryforwards. For further information on our income taxes see the Income Taxes Note to our Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K. Tax Contingencies In establishing unrecognized tax benefits, we determine whether a tax position is more likely than not to be sustained under examination by the appropriate taxing authority. We also consider positions which have been reviewed and agreed to as part of an 111
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examination by the appropriate taxing authority. Tax positions that do not meet the more likely than not standard are not recognized. Tax positions that meet this standard are recognized in our Consolidated Financial Statements. We measure the tax position as the largest amount of benefit that is greater than 50% likely of being realized upon ultimate resolution with the taxing authority that has full knowledge of all relevant information.
Changes in Law
Certain changes or future events, such as changes in tax legislation, geographic mix of earnings, completion of tax audits, planning opportunities and expectations about future outcomes could have an impact on our estimates of deferred taxes, valuation allowances, tax provisions and effective tax rates.
Contingencies
For information regarding our contingencies, see the Commitments and Contingencies Note in our Consolidated Financial Statements in Part II, Item 8. of this Annual Report on Form 10-K.
Employee Benefits Plans
We sponsor defined benefit pension and other postretirement benefit plans covering eligible employees, sales representatives and other individuals. The net periodic benefit cost and projected benefit obligations are calculated based on assumptions, such as discount rate, expected rate of return on plan assets, rate of future compensation increases and health care cost trend rates. These assumptions require considerable judgment, are subject to considerable variability and are established using our best estimate. Actual results could vary significantly from assumptions based on changes, such as economic and market conditions, demographics of participants in the plans and amendments to benefits provided under the plans. Differences between the expected return and the actual return on plan assets and other actuarial changes, which could be significant, are immediately recognized in the Consolidated Statements of Operations, generally in the fourth quarter.
The table below summarizes the components of the net actuarial (gains) losses related to pension obligations recognized within Operating expenses in our Consolidated Statements of Operations for the periods indicated: (Gain)/Loss Recognized ($ in millions) 2019 2018 2017 Discount Rate
$ 292 $ (160 ) $ 196 Asset Returns (263 ) 207 (142 ) Mortality Table Assumptions (22 ) (6 ) (14 ) Demographic Data and other (11 ) 9 (25 )
Total Net Actuarial (Gain)/Loss Recognized
For the year endedDecember 31, 2019 , we decreased our pension plans discount rate by 1.1% resulting in an increase in our benefit obligations and a corresponding actuarial loss of$292 million . This decrease in the discount rate was driven by decrease in the 30-yearTreasury and corporate AA yields. For the year endedDecember 31, 2018 , we increased our pension plans discount rate by 0.61%, resulting in a decrease in our benefit obligations and a corresponding actuarial gain of$160 million . This increase in the discount rate was driven by an increase in the 30-yearTreasury and corporate AA yields. For the year endedDecember 31, 2017 , we decreased our pension plans discount rate by 0.70%, resulting in an increase in our benefit obligations and a corresponding actuarial loss of$196 million . This decrease in discount rate was driven by a decrease in corporate AA yields and 30-yearTreasury yields. Our expected long-term rate of return on our Voya Retirement Plan (the "Retirement Plan") assets was 6.75% and 7.5% for 2019 and 2018, respectively. Our expected return on plan assets is calculated using 30-year forward looking assumptions based on the long-term target asset allocation. In 2019, the actual return on our Retirement Plan assets was approximately 24.4%, resulting in an actuarial gain of$263 million . In 2018, the actual return on our Retirement Plan assets was approximately (4.1)%, resulting in an actuarial loss of$207 million . In 2017, the actual return on our Retirement Plan assets was approximately 17.4%, resulting in an actuarial gain of$142 million . InOctober 2019 , theSociety of Actuaries ("SOA") published and we adopted the Pri. A-2012 Private Retirement Plans Mortality Tables report that provides new base mortality assumptions; and new mortality improvement projection scales (MP-2019) that project a lower rate of mortality improvement than what was used in 2018. These mortality assumption changes lowered our total benefit liability by approximately 1% in 2019 and contributed$(22) million to the net actuarial gain for the year ended December
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31, 2019. Changes in mortality assumptions in 2018 and 2017 contributed
The Retirement Plan is a tax qualified defined benefit plan, the benefits of which are guaranteed (within certain specified legal limits) by thePension Benefit Guaranty Corporation ("PBGC"). BeginningJanuary 1, 2012 , the Retirement Plan adopted a cash balance pension formula instead of a final average pay ("FAP") formula, allowing all eligible employees to participate in the Retirement Plan. Participants earn an annual credit equal to 4% of eligible compensation. Interest is credited monthly based on a 30-yearU.S. Treasury securities bond rate published by theIRS in the preceding August of each year. The accrued vested cash pension balance benefit is portable; participants can take it if they leave us. Sensitivity The discount rate and expected rate of return assumptions relating to our defined benefit pension plans have historically had the most significant effect on our net periodic benefit costs and the projected and accumulated projected benefit obligations associated with these plans. The discount rates are based on current market information provided by plan actuaries. The discount rate modeling process involves selecting a portfolio of high quality, non-callable bonds that will match the cash flows of the defined benefit pension plans. The weighted average discount rate in 2019 for the net periodic benefit cost was 4.37% for defined benefit pension plans. The discount rate as of December 31, 2019 for the benefit obligation of our pension plans was 3.36%. As of December 31, 2019, the sensitivities of the effect of a change in the discount rate are as presented below. This represents the estimate of actuarial gains (losses) that would be recognized immediately through Operating expenses in our Consolidated Statements of Operations: Increase (Decrease) in Net Periodic Benefit ($ in millions) Cost-Pension Plans Increase in discount rate by 100 basis points $ (266 ) Decrease in discount rate by 100 basis points 330 Increase (Decrease) in ($ in millions) Pension Benefit Obligation Increase in discount rate by 100 basis points $ (266 ) Decrease in discount rate by 100 basis points 330 The expected rate of return considers the asset allocation, historical returns on the types of assets held and current economic environment. Based on these factors, we expect that the assets will earn an average percentage per year over the long term. This estimation is based on an active return on a compound basis, with a reduction for administrative expenses and manager fees paid to non-affiliated companies from the assets. For estimation purposes, we assume the long-term asset mix will be consistent with the current mix. Changes in the asset mix could impact the amount of recorded pension income or expense, the funded status of the Retirement Plan and the need for future cash contributions. The expected rate of return for 2019 was 6.75%, net of expenses, for the Retirement Plan. The expected rate of return assumption is only applicable to the Retirement Plan as assets are not held by any of the other pension and other postretirement plans. As of December 31, 2019, the effect of a change in the actual rate of return on the net periodic benefit cost is presented in the table below. This represents the estimate of actuarial gains (losses) that would be recognized immediately through Operating expenses in our Consolidated Statements of Operations: Increase (Decrease) in Net Periodic ($ in millions) Benefit Cost-Pension Plans Increase in actual rate of return by 100 basis points $ (17 ) Decrease in actual rate of return by 100 basis points 17 113
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The expected rate of return for 2020 is 6.25%, net of expenses, for the Retirement Plan, reflecting a change in asset allocation from equity securities to fixed maturities. The estimated impact of this change as well as the actuarial gain experienced on plan assets in 2019 is expected to decrease our net periodic benefit cost by approximately $10 million. For more information related to our employee benefit plans, see the Employee Benefit Arrangements Note in our Consolidated Financial Statements in Part II, Item 8. of this Annual Report on Form 10-K.
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 Consolidated Financial Statements in Part II, Item 8. of this Annual Report on Form 10-K. 114
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Table of Contents INVESTMENTS (excluding Consolidated Investment Entities)
Investments for our general account are managed by our wholly owned asset
manager,
Investment Strategy
Our investment strategy seeks to achieve sustainable risk-adjusted returns by focusing on principal preservation, disciplined matching of asset characteristics with liability requirements and the diversification of risks. Investment activities are undertaken according to investment policy statements that contain internally established guidelines and risk tolerances and are required to comply with applicable laws and insurance regulations. Risk tolerances are established for credit risk, credit spread risk, market risk, liquidity risk and concentration risk across issuers, sectors and asset types that seek to mitigate the impact of cash flow variability arising from these risks. Segmented portfolios are established for groups of products with similar liability characteristics. Our investment portfolio consists largely of high quality fixed maturities and short-term investments, investments in commercial mortgage loans, alternative investments and other instruments, including a small amount of equity holdings. Fixed maturities include publicly issued corporate bonds, government bonds, privately placed notes and bonds, bonds issued by states and municipalities, ABS, traditional MBS and various CMO tranches managed in combination with financial derivatives as part of a proprietary strategy known as CMO-B. We use derivatives for hedging purposes to reduce our exposure to the cash flow variability of assets and liabilities, interest rate risk, credit risk and market risk. In addition, we use credit derivatives to replicate exposure to individual securities or pools of securities as a means of achieving credit exposure similar to bonds of the underlying issuer(s) more efficiently. See the Investments (excluding Consolidated Investment Entities) Note in our Consolidated Financial Statements in Part II, Item 8. of this Annual Report on Form 10-K. Portfolio Composition The following table presents the investment portfolio as of the dates indicated: December 31, 2019 December 31, 2018 Carrying Carrying ($ in millions) Value % of Total Value % of Total Fixed maturities, available-for-sale, excluding securities pledged $ 39,663 74.0 % $ 36,897 73.0 % Fixed maturities, at fair value using the fair value option 2,707 5.0 % 2,233 4.4 % Equity securities, available-for-sale 196 0.4 % 247 0.5 % Short-term investments(1) 68 0.1 % 126 0.2 % Mortgage loans on real estate 6,878 12.8 % 7,281 14.4 % Policy loans 776 1.4 % 814 1.6 % Limited partnerships/corporations 1,290 2.4 % 982 1.9 % Derivatives 316 0.6 % 194 0.4 % Other investments 385 0.7 % 379 0.7 % Securities pledged 1,408 2.6 % 1,462 2.9 % Total investments $ 53,687 100.0 % $ 50,615 100.0 %
(1) Short-term investments include investments with remaining maturities of one year or less, but greater than three months, at the time of purchase.
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Fixed Maturities
The following tables present total fixed maturities, including securities pledged, by market sector, as of the dates indicated:
December 31, 2019 ($ in millions) Amortized Cost % of Total Fair Value % of Total Fixed maturities: U.S. Treasuries $ 1,074 2.7 % $ 1,382 3.2 %U.S. Government agencies and authorities 74 0.2 % 95 0.2 % State, municipalities and political subdivisions 1,220 3.1 % 1,323 3.0 % U.S. corporate public securities 12,980 32.5 % 14,938 34.0 %U.S. corporate private securities 5,568 14.0 % 6,035 13.8 % Foreign corporate public securities and foreign governments(1) 3,887 9.8 % 4,341 10.0 % Foreign corporate private securities(1) 4,545 11.4 % 4,831 11.0 % Residential mortgage-backed securities 4,999 12.6 % 5,204 11.9 % Commercial mortgage-backed securities 3,402 8.5 % 3,574 8.2 % Other asset-backed securities 2,058 5.2 % 2,055 4.7 % Total fixed maturities, including securities pledged $ 39,807 100.0 % $ 43,778 100.0 %
(1) Primarily
December 31, 2018 ($ in millions) Amortized Cost % of Total Fair Value % of Total Fixed maturities: U.S. Treasuries $ 1,228 3.1 % $ 1,423 3.5 %U.S. Government agencies and authorities 62 0.1 % 74 0.2 % State, municipalities and political subdivisions 1,241 3.1 % 1,250 3.1 % U.S. corporate public securities 14,455 36.2 % 14,876 36.6 %U.S. corporate private securities 5,499 13.8 % 5,491 13.5 % Foreign corporate public securities and foreign governments(1) 4,139 10.4 % 4,135 10.2 % Foreign corporate private securities(1) 4,705 11.8 % 4,640 11.4 % Residential mortgage-backed securities 4,143 10.4 % 4,282 10.6 % Commercial mortgage-backed securities 2,777 6.9 % 2,763 6.8 % Other asset-backed securities 1,688 4.2 % 1,658 4.1 % Total fixed maturities, including securities pledged $ 39,937 100.0 % $ 40,592 100.0 %
(1) Primarily
As of December 31, 2019, the average duration of our fixed maturities portfolio, including securities pledged, is between 7.5 and 8.0 years.
Fixed Maturities Credit Quality - Ratings
The Securities Valuation Office ("SVO") of the NAIC evaluates the fixed maturity security investments of insurers for regulatory reporting and capital assessment purposes and assigns securities to one of six credit quality categories called "NAIC designations." An internally developed rating is used as permitted by the NAIC if no rating is available. These designations are generally similar to the credit quality designations of the NAIC acceptable rating organizations ("ARO") for marketable fixed maturity securities, called rating agency designations except for certain structured securities as described below. NAIC designations of "1," highest quality and "2," high quality, include fixed maturity securities generally considered investment grade by such rating organizations.
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NAIC designations 3 through 6 include fixed maturity securities generally considered below investment grade by such rating organizations.
The NAIC designations for structured securities, including subprime and Alt-A RMBS, are based upon a comparison of the bond's amortized cost to the NAIC's loss expectation for each security. Securities where modeling results in no expected loss in each scenario are considered to have the highest designation of NAIC 1. A large percentage of our RMBS securities carry the NAIC 1 designation while the ARO rating indicates below investment grade. This is primarily due to the credit and intent impairments recorded by us that reduced the amortized cost on these securities to a level resulting in no expected loss in any scenario, which corresponds to the NAIC 1 designation. The methodology reduces regulatory reliance on rating agencies and allows for greater regulatory input into the assumptions used to estimate expected losses from such structured securities. In the tables below, we present the rating of structured securities based on ratings from the NAIC methodologies described above (which may not correspond to rating agency designations). NAIC designations (e.g., NAIC 1-6) are based on the NAIC methodologies. As a result of time lags between the funding of investments, the finalization of legal documents and the completion of the SVO filing process, the fixed maturity portfolio generally includes securities, that have not yet been rated by the SVO as of each balance sheet date, such as private placements. Pending receipt of SVO ratings, the categorization of these securities by NAIC designation is based on the expected ratings indicated by internal analysis. Information about certain of our fixed maturity securities holdings by the NAIC designation is set forth in the following tables. Corresponding rating agency designation does not directly translate into NAIC designation, but represents our best estimate of comparable ratings from rating agencies, including Moody's, S&P and Fitch. If no rating is available from a rating agency, then an internally developed rating is used. As of December 31, 2019 and 2018, the weighted average NAIC quality rating of our fixed maturities portfolio was 1.5. 117
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The following tables present credit quality of fixed maturities, including securities pledged, using NAIC designations as of dates indicated: ($ in millions)
December 31, 2019 NAIC Quality Total Fair Designation 1 2 3 4 5 6 Value
- $ - $ 1,382U.S. Government agencies and authorities 95 - - - - - 95 State, municipalities and political subdivisions 1,200 121 - - - 2 1,323 U.S. corporate public securities 6,783 7,327 682 124 22 - 14,938 U.S. corporate private securities 2,095 3,620 157 148 15 - 6,035 Foreign corporate public securities and foreign governments(1) 1,758 2,389 148 46 - - 4,341 Foreign corporate private securities(1) 505 4,050 232 44 - - 4,831 Residential mortgage-backed securities 5,030 111 18 1 19 25 5,204
Commercial
mortgage-backed
securities 3,166 322 66 12 8 - 3,574 Other asset-backed securities 1,765 209 21 3 57 - 2,055 Total fixed maturities $ 23,779 $ 18,149 $ 1,324 $ 378 $ 121 $ 27 $ 43,778 % of Fair Value 54.2 % 41.5 % 3.0 % 0.9 %
0.3 % 0.1 % 100.0 %
(1) Primarily
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($ in millions) December 31, 2018 NAIC Quality Total Fair Designation 1 2 3 4 5 6 Value
- $ - $ 1,423U.S. Government agencies and authorities 74 - - - - - 74 State, municipalities and political subdivisions 1,148 100 - - - 2 1,250 U.S. corporate public securities 6,660 7,293 752 158 13 - 14,876 U.S. corporate private securities 2,161 3,034 128 149 16 3 5,491 Foreign corporate public securities and foreign governments(1) 1,808 2,069 219 37 1 1 4,135 Foreign corporate private securities(1) 587 3,671 275 65 42 - 4,640 Residential mortgage-backed securities 4,177 25 34 2 7 37 4,282
Commercial
mortgage-backed
securities 2,668 75 20 - - - 2,763 Other asset-backed securities 1,423 144 30 7 31 23 1,658 Total fixed maturities $ 22,129 $ 16,411 $ 1,458 $ 418 $ 110 $ 66 $ 40,592 % of Fair Value 54.5 % 40.4 % 3.6 % 1.0 %
0.3 % 0.2 % 100.0 %
(1) Primarily
The fixed maturities in our portfolio are generally rated by external rating agencies and, if not externally rated, are rated by us on a basis similar to that used by the rating agencies. As of December 31, 2019 and 2018, the weighted average quality rating of our fixed maturities portfolio was A. Ratings are derived from three ARO ratings and are applied as follows, based on the number of agency ratings received:
• when three ratings are received then the middle rating is applied; • when two ratings are received then the lower rating is applied; • when a single rating is received, the ARO rating is applied; and • when ratings are unavailable then an internal rating is applied.
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The following tables present credit quality of fixed maturities, including securities pledged, using ARO ratings as of the dates indicated: ($ in millions) December 31, 2019 Total Fair ARO Quality Ratings AAA AA A BBB BB and Below Value U.S. Treasuries $ 1,382 $ - $ - $ - $ - $ 1,382U.S. Government agencies and authorities 89 6 - - - 95 State, municipalities and political subdivisions 83 757 360 121 2 1,323U.S. corporate public securities 152 924 5,715 7,373 774 14,938U.S. corporate private securities 148 184 1,882 3,494 327 6,035 Foreign corporate public securities and foreign governments(1) 13 377 1,353 2,378 220 4,341 Foreign corporate private securities(1) - - 591 4,022 218 4,831
Residential
mortgage-backed securities 3,768 175 110 383 768 5,204 Commercial mortgage-backed securities 1,397 365 872 777 163 3,574 Other asset-backed securities 393 411 920 215 116 2,055 Total fixed maturities $ 7,425 $ 3,199 $ 11,803 $ 18,763 $ 2,588 $ 43,778 % of Fair Value 17.0 % 7.3 % 27.0 % 42.8 % 5.9 % 100.0 %
(1) Primarily
($ in millions) December 31, 2018 Total Fair ARO Quality Ratings AAA AA A BBB BB and Below Value U.S. Treasuries $ 1,423 $ - $ - $ - $ - $ 1,423U.S. Government agencies and authorities 69 5 - - - 74 State, municipalities and political subdivisions 89 697 362 100 2 1,250U.S. corporate public securities 171 829 5,643 7,321 912 14,876U.S. corporate private securities 156 211 1,933 2,901 290 5,491 Foreign corporate public securities and foreign governments(1) 26 430 1,378 2,042 259 4,135 Foreign corporate private securities(1) - - 610 3,791 239 4,640
Residential
mortgage-backed securities 3,064 73 57 158 930 4,282 Commercial mortgage-backed securities 1,358 335 523 404 143 2,763 Other asset-backed securities 629 185 554 166 124 1,658 Total fixed maturities $ 6,985 $ 2,765 $ 11,060 $ 16,883 $ 2,899 $ 40,592 % of Fair Value 17.2 % 6.8 % 27.3 % 41.6 % 7.1 % 100.0 %
(1) Primarily
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 $756 million from $847 million to $91 million for the year ended December 31, 2019. The decrease in gross unrealized capital losses was primarily due to declining interest rates and tightening credit spreads. Gross unrealized losses on fixed maturities, including securities pledged, increased 120
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$645 million from $202 million to $847 million for the year ended December 31, 2018. The increase in gross unrealized capital losses was primarily due to rising interest rates and widening credit spreads.
As of December 31, 2019, we held one fixed maturity security with unrealized capital losses in excess of $10 million. The unrealized capital losses on this fixed maturity security equaled $13 million, or 14.2% of the total unrealized losses. As of December 31, 2018, we held three fixed maturities with unrealized capital losses in excess of $10 million. The unrealized capital losses on these fixed maturities equaled $44 million, or 5.2% of the total unrealized losses. As of December 31, 2019, we held $3.2 billion of energy sector fixed maturity securities, constituting 7.2% of the total fixed maturities portfolio, with gross unrealized capital losses of $27 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 $13 million. As of December 31, 2019, our fixed maturity exposure to the energy sector is comprised of 91.1% investment grade securities. As of December 31, 2018, we held $3.2 billion of energy sector fixed maturity securities, constituting 7.9% of the total fixed maturities portfolio, with gross unrealized capital losses of $117 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 $21 million. As of December 31, 2018, our fixed maturity exposure to the energy sector is comprised of 86.9% investment grade securities. The following table presents theU.S. and foreign corporate securities within our energy holdings by sector as of the dates indicated: ($ in millions) December 31, 2019 December 31, 2018 Sector Type Amortized Cost Fair Value % Fair Value Amortized Cost Fair Value % Fair Value Midstream $ 1,132 $ 1,284 40.6 % $ 1,228 $ 1,264 39.5 % Integrated Energy 485 566 17.9 % 679 689 21.5 % Independent Energy 696 755 23.9 % 716 715 22.3 % Oil Field Services 302 309 9.8 % 356 321 10.0 % Refining 204 246 7.8 % 201 213 6.7 % Total $ 2,819 $ 3,160 100.0 % $ 3,180 $ 3,202 100.0 % See the Investments (excluding Consolidated Investment Entities) Note in our Consolidated Financial Statements in Part II, Item 8. of this Annual Report on Form 10-K for further information on unrealized capital losses.
CMO-
As part of our broadly diversified investment portfolio, we have a core holding in a proprietary mortgage derivatives strategy known as CMO-B, which invests in a variety of CMO securities in combination with interest rate derivatives in targeting a specific type of exposure to theU.S. residential mortgage market. Because of their relative complexity and generally small natural buyer base, we believe certain types of CMO securities are consistently priced below their intrinsic value, thereby providing a source of potential return for investors in this strategy. The CMO securities that are part of our CMO-B portfolio are either notional or principal securities, backed by the interest and principal components, respectively, of mortgages secured by single-family residential real estate. There are many variations of these two types of securities including interest only and principal only securities, as well as inverse-floating rate (principal) securities and inverse interest only securities, all of which are part of our CMO-B portfolio. This strategy has been in place for nearly two decades and thus far has been a significant source of investment income while exhibiting relatively low volatility and correlation compared to the other asset types in the investment portfolio, although we cannot predict whether favorable returns will continue in future periods. To protect against the potential for credit loss associated with financially troubled borrowers, investments in our CMO-B portfolio are primarily in CMO securities backed by one of the government sponsored entities: the Federal National Mortgage Association ("Fannie Mae"), the Federal Home Loan Mortgage Corporation ("Freddie Mac") orGovernment National Mortgage Association ("Ginnie Mae"). Because the timing of the receipt of the underlying cash flow is highly dependent on the level and direction of interest rates, our CMO-B portfolio also has exposure to both interest rate and convexity risk. The exposure to interest rate risk-the potential for changes in value that results from changes in the general level of interest rates-is managed to a defined target duration using interest 121
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rate swaps and interest rate futures. The exposure to convexity risk-the potential for changes in value that result from changes in duration caused by changes in interest rates-is dynamically hedged using interest rate swaps and at times, interest rate swaptions. Prepayment risk represents the potential for adverse changes in portfolio value resulting from changes in residential mortgage prepayment speed (actual and projected), which in turn depends on a number of factors, including conditions in both credit markets and housing markets. Changes in the prepayment behavior of homeowners represent both a risk and potential source of return for our CMO-B portfolio. As a result, we seek to invest in securities that are broadly diversified by collateral type to take advantage of the uncorrelated prepayment experiences of homeowners with unique characteristics that influence their ability or desire to prepay their mortgage. We choose collateral types and individual securities based on an in-depth quantitative analysis of prepayment incentives across available borrower types.
The following table presents fixed maturities balances held in the CMO-B portfolio by NAIC quality rating as of the dates indicated: ($ in millions)
December 31, 2019 December 31, 2018 NAIC Quality Designation Amortized Cost Fair Value % Fair Value Amortized Cost Fair Value % Fair Value 1 $ 3,131 $ 3,273 95.4 % $ 2,723 $ 2,835 97.1 % 2 104 105 3.1 % 15 15 0.5 % 3 12 12 0.3 % 15 25 0.9 % 4 - - - % - - - % 5 8 18 0.5 % 3 6 0.2 % 6 19 25 0.7 % 23 37 1.3 % Total $ 3,274 $ 3,433 100.0 % $ 2,779 $ 2,918 100.0 %
For CMO securities where we elected the FVO, amortized cost represents the market values. For details on the NAIC designation methodology, please see "Fixed Maturities Credit Quality-Ratings" above.
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:
December 31, 2019 December 31, 2018 Asset Liability Asset Liability Notional Fair Fair Notional Fair Fair ($ in millions) Amount Value Value Amount Value Value Derivatives non-qualifying for hedge accounting: Interest Rate Contracts $ 13,772 $ 58 $ 131 $ 14,969 $ 32 $ 79
We utilize interest rate futures and interest rate swaps as a part of the CMO-B portfolio to hedge interest rate risk.
The following table presents our CMO-B fixed maturity securities balances and tranche type as of the dates indicated: ($ in millions) December 31, 2019 December 31, 2018 Tranche Type Amortized Cost Fair Value % Fair Value Amortized Cost Fair Value % Fair Value Inverse Floater $ 273 $ 350 10.2 % $ 300 $ 360 12.3 % Interest Only (IO) 179 183 5.3 % 164 177 6.1 % Inverse IO 1,615 1,681 49.1 % 1,315 1,365 46.8 % Principal Only (PO) 230 235 6.8 % 246 248 8.5 % Floater 11 12 0.3 % 13 14 0.5 % Agency Credit Risk Transfer 957 962 28.0 % 739 751 25.7 % Other 9 10 0.3 % 2 3 0.1 % Total $ 3,274 $ 3,433 100.0 % $ 2,779 $ 2,918 100.0 % 122
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For the year ended December 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 have benefited from a benign prepayment environment for seasoned collateral resulting in continued positive relative performance for the strategy. Yields within the CMO-B portfolio continue to decline, however, 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: Year Ended December 31, ($ in millions) 2019 2018 2017 Net investment income $ 452 $ 413 $ 408 Net realized capital gains (losses)(1) (203 ) (339 ) (289 ) Income (loss) from continuing operations before income taxes $ 249 $
74 $ 119
(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 (including CMO-B portfolio income (loss) related to businesses to be exited through reinsurance or divestment) 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. 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). 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 (including CMO-B portfolio income (loss) related to businesses to be exited through reinsurance or divestment) for the periods indicated: Year Ended December 31, ($ in millions) 2019 2018 2017 Income (loss) from continuing operations before income taxes $ 249 $ 74 $ 119 Realized gains/(losses) including OTTI 3 15 1 Fair value adjustments (62 ) 107 69 Total adjustments to income (loss) from continuing operations (59 ) 122 70 Total(1) $ 190 $ 196 $ 189
(1) Includes CMO-B portfolio income related to adjusted operating earnings and businesses to be exited through reinsurance or divestment.
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Residential Mortgage-backed Securities
The following tables present our residential mortgage-backed securities as of the dates indicated: December 31, 2019 Gross Unrealized Gross Unrealized ($ in millions) Amortized Cost Capital Gains Capital Losses Embedded Derivatives Fair Value Prime Agency $ 2,783 $ 137 $ 3 $ 10 $ 2,927 Prime Non-Agency 2,062 47 10 2 2,101 Alt-A 133 14 - 8 155 Sub-Prime(1) 52 6 1 - 57 Total RMBS $ 5,030 $ 204 $ 14 $ 20 $ 5,240
(1) Includes subprime other asset backed securities.
December 31, 2018 Gross Unrealized Gross Unrealized ($ in millions) Amortized Cost Capital Gains Capital Losses Embedded Derivatives Fair Value Prime Agency $ 2,647 $ 110 $ 31 $ 8 $ 2,734 Prime Non-Agency 1,333 45 16 2 1,364 Alt-A 141 15 - 7 163 Sub-Prime(1) 68 7 1 - 74 Total RMBS $ 4,189 $ 177 $ 48 $ 17 $ 4,335
(1) Includes subprime other asset backed securities.
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Commercial Mortgage-backed Securities
The following tables present our commercial mortgage-backed securities as of the dates indicated: December 31, 2019 ($ inAAA AA A BBB BB and Below Total
millions) Amortized Cost Fair Value Amortized Cost Fair Value
Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value 2013 and prior $ 286 $ 316 $ 42 $ 43 $ 70 $ 71 $ 124 $ 131 $ 3 $ 4 $ 525 $ 565 2014 307 336 44 45 59 61 28 29 25 25 463 496 2015 234 248 160 165 115 119 127 132 25 25 661 689 2016 59 61 17 18 30 32 50 53 8 8 164 172 2017 131 138 41 41 129 134 66 68 66 68 433 449 2018 121 137 24 25 231 240 95 98 2 2 473 502 2019 143 160 28 28 213 215 268 267 31 31 683 701 Total CMBS $ 1,281 $ 1,396 $ 356 $ 365 $ 847 $ 872 $ 758 $ 778 $ 160 $ 163 $ 3,402 $ 3,574 December 31, 2018 ($ inAAA AA A BBB BB and Below Total
millions) Amortized Cost Fair Value Amortized Cost Fair Value
Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value 2013 and prior $ 370 $ 380 $ 63 $ 63 $ 78 $ 78 $ 76 $ 81 $ 9 $ 9 $ 596 $ 611 2014 342 345 33 32 40 40 27 27 37 37 479 481 2015 302 297 148 147 61 61 116 116 27 27 654 648 2016 91 86 15 15 33 32 43 43 7 7 189 183 2017 203 193 55 54 85 83 42 41 33 33 418 404 2018 57 56 24 24 231 229 98 97 31 30 441 436 2019 - - - - - - - - - - - - Total CMBS $ 1,365 $ 1,357 $ 338 $ 335 $ 528 $ 523 $ 402 $ 405 $ 144 $ 143 $ 2,777 $ 2,763 As of December 31, 2019, 88.6% and 9.0% of CMBS investments were designated as NAIC-1 and NAIC-2, respectively. As of December 31, 2018, 96.6% and 2.7% of CMBS investments were designated as NAIC-1 and NAIC-2, respectively. 125
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Other Asset-backed Securities
The following tables present our other asset-backed securities as of the dates indicated: December 31, 2019 ($ inAAA AA A BBB BB and Below Total
millions) Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value
Amortized Cost Fair Value Amortized Cost Fair Value Collateralized Obligation $ 317 $ 315 $ 298 $ 298 $ 699 $ 689 $ 31 $ 30 $ 86 $ 76 $ 1,431 $ 1,408 Auto-Loans 3 4 10 10 8 8 - - - - 21 22 Student Loans 17 17 94 96 93 95 2 1 - - 206 209 Credit Card loans 1 1 - - - - - - - - 1 1 Other Loans 55 58 6 7 123 126 179 183 5 5 368 379 Total Other ABS(1) $ 393 $ 395 $ 408 $ 411 $ 923 $ 918 $ 212 $ 214 $
91 $ 81 $ 2,027 $ 2,019 (1) Excludes subprime other asset backed securities.
December 31, 2018 ($ inAAA AA A BBB BB and Below Total
millions) Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value
Amortized Cost Fair Value Amortized Cost Fair Value Collateralized Obligation $ 558 $ 550 $ 93 $ 91 $ 370 $ 354 $ 26 $ 24 $ 77 $ 70 $ 1,124 $ 1,089 Auto-Loans 3 3 10 10 8 8 - - - - 21 21 Student Loans 9 9 80 81 95 94 - - - - 184 184 Credit Card loans 2 2 - - - - - - - - 2 2 Other Loans 66 65 2 2 94 95 144 142 5 5 311 309 Total Other ABS(1) $ 638 $ 629 $ 185 $ 184 $ 567 $ 551 $ 170 $ 166 $ 82 $ 75 $ 1,642 $ 1,605
(1) Excludes subprime other asset backed securities.
As of December 31, 2019, 85.9% and 10.2% of Other ABS investments were designated as NAIC-1 and NAIC-2, respectively. As of December 31, 2018, 85.8% and 8.7% 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 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. 126
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As of December 31, 2019 and 2018, our mortgage loans on real estate portfolio had a weighted average DSC of 2.3 times and 2.2 times, and a weighted average LTV ratio of 61.5% and 61.6%, respectively. See the Investments (excluding Consolidated Investment Entities) Note in our Consolidated Financial Statements in Part II, Item 8. of this Annual Report on Form 10-K 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 in our Consolidated Financial Statements in Part II, Item 8. of this Annual Report on Form 10-K for the policy used to evaluate whether the investments are other-than-temporarily impaired. For the year ended December 31, 2019, we recorded $28 million of credit related OTTI. See the Investments (excluding Consolidated Investment Entities) Note in our Consolidated Financial Statements of Part II, Item 8. in this Annual Report on Form 10-K 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 and the Derivatives Note in our Consolidated Financial Statements in Part II, Item 8. of this 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 inEurope 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 December 31, 2019 , our total European exposure had an amortized cost and fair value of $4,000 million and $4,368 million, respectively. European exposure with a primary focus onGreece ,Ireland ,Italy ,Portugal andSpain (which we refer to as "peripheralEurope ") amounts to $483 million, which includes non-financial institutions exposure inIreland of $175 million, inItaly of $135 million and inSpain of $111 million. We also had financial institutions exposure inIreland of $21 million, inItaly of $10 million and inSpain of $31 million. We did not have any exposure toGreece . Among the remaining $3,885 million of total non-peripheral European exposure, we had a portfolio of credit-related assets similarly diversified by country and sector across developed and developingEurope . As of December 31, 2019, our non-peripheral sovereign exposure was $160 million, which consisted of fixed maturities and derivative assets. We also had $633 million in net exposure to non-peripheral financial institutions, with a concentration inSwitzerland of $125 million and theUnited Kingdom of $334 million. The balance of $3,092 million was invested across non-peripheral, non-financial institutions. Some of the major country level exposures were in theUnited Kingdom of $1,956 million, inThe Netherlands of $372 million, inBelgium of $222 million, inFrance of $313 million, inGermany of $197 million, inSwitzerland of $305 million, and inRussia of $81 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 inEurope .
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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 this 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 $279 million and $290 million on a continuing basis as of December 31, 2019 and 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 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 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 this 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 in our Consolidated Financial Statements in Part II, Item 8. of this Annual Report on Form 10-K for more information.
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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 in our Consolidated Financial Statements in Part II, Item 8. of this Annual Report on Form 10-K 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 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 in our Consolidated Financial Statements in Part II, Item 8. of this Annual Report on Form 10-K for details regarding the carrying amounts and classifications of these assets.
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