Fitch Affirms Voya's Ratings; Outlook Stable

CHICAGO--()--Fitch Ratings has affirmed Voya Financial, Inc.'s (Voya) senior debt rating at 'BBB' and junior subordinated debt rating at 'BB+'. The Insurer Financial Strength (IFS) ratings of the U.S. operating entities have also been affirmed at 'A'. A complete list of ratings follows at the end of this release. The Rating Outlook for all ratings is 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 $39 billion closed-block VA book and ongoing headwinds associated with the low rate environment, which negatively impacts earnings and reserve adequacy.

KEY RATING DRIVERS

During 2015, Voya reported pre-tax operating income of $978 million and an operating return on equity (ROE) of 7.0%. Pre-tax operating income for the ongoing business was down 12% in 2015 due to higher claims severity in the life segment, lower fee income in the recordkeeping and full service businesses, lower alternative investment income, 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 impact Voya's ability to meaningfully improve earnings.

GAAP adjusted operating earnings-based interest coverage was 7.0x in 2015, down from 7.9x in 2014 but in line with Fitch's median ratio guideline for an 'A' rated company. Based on estimated ordinary statutory dividend capacity of $867 billion in 2016, Fitch estimates Voya's statutory interest coverage will be approximately 5.3x in 2016, down slightly from 5.8x in 2015. This is in excess of Fitch's median ratio guideline of 3x for an 'A' rated company.

At year-end 2015, financial leverage was 22.4%, 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 489% at year-end 2015. 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 $39 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 year-end 2015, Voya had $5.7 billion in reserves and capital supporting the closed-block VA book.

While Fitch views Voya's investment portfolio as generally high quality, the company's exposure to the energy sector totalled $7.3 billion at year-end 2015, or 13.4% of the total corporate bond portfolio. This is slightly above the U.S. life insurance industry's 12% allocation. However, the credit quality of Voya's portfolio is better than the U.S. life industry with approximately 92% of the Voya's energy sector bonds rated investment grade.

RATING SENSITIVITIES

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;

--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';

--5.7% senior notes due July 15, 2043 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'.

Additional information is available on www.fitchratings.com.

Applicable Criteria

Insurance Rating Methodology (pub. 16 Sep 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=871172

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1002203

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1002203

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Tana M. Higman
Director
+1-312-368-3122
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Douglas L. Meyer, CFA
Managing Director
+1-312-368-2061
or
Committee Chairperson
Douglas M. Pawlowski, CFA
Senior Director
+1-312-368-2054
or
Media Relations:
Hannah James, +1 646-582-4947
hannah.james@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Tana M. Higman
Director
+1-312-368-3122
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Douglas L. Meyer, CFA
Managing Director
+1-312-368-2061
or
Committee Chairperson
Douglas M. Pawlowski, CFA
Senior Director
+1-312-368-2054
or
Media Relations:
Hannah James, +1 646-582-4947
hannah.james@fitchratings.com