Fitch Affirms Voya's Ratings; Outlook Stable
The affirmation reflects Voya's balance sheet strength and ample debt servicing capacity. Voya's ratings also reflect the large-scale and solid business profile in retirement, employee benefits and universal life markets, improved operating performance within its core businesses, and conservative investment portfolio. Offsetting these positives are the challenges related to the run-off of Voya's $34 billion closed-block variable annuity (VA) book and ongoing headwinds associated with the low rate environment, which negatively impacts earnings and reserve adequacy.
KEY RATING DRIVERS
During the first half of 2016 (IH16), Voya reported pre-tax operating income of $405 million and an operating return on equity (ROE) of 5.7%. Adjusted pre-tax operating income for the ongoing business was down 14% during that time period due to lower alternative investment income, lower fee income in the recordkeeping and full service businesses, the impact of the continued low interest rate environment on reinvestment rates, and higher operating expenses as a result of the company's strategic investment program. Voya will be making incremental investments of $350 million over the next four years designed to increase growth and reduce costs.
While Voya expects operating income to improve, operating ROE will continue to be impacted by the significant amount of capital supporting the closed-block VA and individual life business. Fitch expects a sustained low interest rate environment will create headwinds and could affect Voya's ability to meaningfully improve earnings.
GAAP adjusted operating earnings-based interest coverage was 5.5x in 1H16, down from 7.0x in full-year 2015. Based on estimated ordinary statutory dividend capacity of $867 billion in 2016, Fitch estimates Voya's statutory interest coverage will be approximately 4.9x in 2016, down from 5.8x in 2015. This is in excess of Fitch's median ratio guideline of 3x for an 'A' rated company. Cash and short-term investments at the holding company were $722 million at June 30, 2016, in excess of management's target of 24 months liquidity, or roughly $450 million.
At June 30, 2016, financial leverage was 22.9%, below management's stated long-term target of 25% and below Fitch's median guideline of 28% for Voya's current rating. Fitch believes the quality of the company's common equity is better than peer averages, with minimal exposure to goodwill and other intangibles.
Fitch considers Voya's aggregate capitalization, including captives, to be strong for the current rating level. The consolidated risk-based capital (RBC) ratio for the company's U. S. insurance subsidiaries was estimated at 461% at June 30, 2016. Fitch expects reported RBC to remain in the 425% - 450% range over the intermediate term driven by improved statutory operating performance offset by distributions to the holding company. Fitch views Voya's share repurchase program as a more prudent use of excess capital than acquisitions or rapid growth. Fitch's expectation is that share repurchase will be funded through operating earnings and will not result in a material increase in financial leverage or deterioration in subsidiary capitalization.
Fitch's key rating concerns include the challenges related to the run-off of Voya's $34 billion closed-block VA book, particularly in a tail-risk scenario. Fitch notes as positive that the company has utilized dynamic and macro hedging to mitigate the statutory capital impact associated with changes in the equity markets and/or interest rates. However, policyholder behavior assumptions cannot be hedged and therefore remain a risk. At June 30, 2016, Voya had $6.8 billion in reserves and capital supporting the closed-block VA book.
The key rating triggers that could result in an upgrade include:
--Continued growth in operating profitability which leads to an improvement in operating ROE to over 11%;
--Sustained maintenance of GAAP adjusted operating earnings-based interest coverage of more than 10x;
--Private sale of closed-block book at good value with boost to capitalization and reduction in volatility and risk;
--Reported RBC above 450%, and financial leverage below 20%.
The key rating triggers that could result in a downgrade include:
--A decline in reported RBC below 375%;
--Financial leverage exceeding 30%;
--Significant adverse operating results which leads to GAAP adjusted operating earnings-based interest coverage below 6x;
--Sustained decline in operating ROE below 6%;
--Material reserve charges required in its insurance/variable annuity books.
FULL LIST OF RATING ACTIONS
Fitch has affirmed the following ratings with a Stable Outlook:
Voya Financial, Inc.
--Long-Term IDR at 'BBB+';
--5.5% senior notes due July 15, 2022 at 'BBB';
--2.9% senior notes due Feb. 15, 2018 at 'BBB';
--3.65% senior notes due June 15, 2026 at 'BBB';
--5.7% senior notes due July 15, 2043 at 'BBB';
--4.8% senior notes due June 15, 2046 at 'BBB';
--5.65% fixed-to-floating junior subordinated notes due May 15, 2053 at 'BB+'.
Voya Retirement Insurance and Annuity Company
Voya Insurance and Annuity Company
ReliaStar Life Insurance Company
ReliaStar Life Insurance Company of New York
Security Life of Denver Insurance Company
--IFS at 'A'.
Equitable of Iowa Companies, Inc.
--Long-term IDR at 'BBB+'.
Equitable of Iowa Companies Capital Trust II
--8.424% Trust Preferred Stock at 'BB+'.
Peachtree Corners Funding Trust
--$500 million of 3.976% pre-capitalized trust securities due 2025 at 'BBB'.
Voya Holdings Inc.
--7.25% senior notes due Aug. 15, 2023 at 'A+';
--7.625% senior notes due Aug. 15, 2026 at 'A+';
--6.97% senior notes due Aug. 15, 2036 at 'A+'.