Fitch Affirms Voya Financial's Ratings; Outlook Positive
CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'BBB' Issuer Default Rating (IDR), the 'BBB-' senior debt rating and the 'BB' junior subordinated debt rating of Voya Financial, Inc. (Voya), as well as the 'A-' Insurer Financial Strength (IFS) ratings of the U.S. operating entities. A complete list of ratings is provided at the end of this release. The Rating Outlook for all ratings is Positive.
KEY RATING DRIVERS
On March 6, 2014 Fitch revised its Outlook on Voya to Positive from Stable. The revision in the Outlook reflects the significant improvement in Voya's balance sheet strength as well as improved debt servicing capacity. Holding company financial leverage has declined to 23% at June 30, 2014 from 56% at year-end 2010. 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 the aggregate capitalization of Voya, including captives, to be strong for the current rating level. The estimated consolidated risk-based capital (RBC) ratio of the company's U.S. insurance subsidiaries was 501% at June 30, 2014. 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 positively the 2013 contribution of over $1.8 billion of capital to Security Life of Denver International to support certain minimum guarantees in its closed-block variable annuity products.
Statutory dividend capacity has improved in 2014 after Voya transferred amounts out of paid-in capital into unassigned funds in 2013, thereby creating a positive earned surplus account and ordinary statutory dividend capacity. Fitch expects statutory interest coverage to be approximately 4.5x in 2014, up from 1.4x in 2013. This is in excess of Fitch's median ratio guideline for an 'A' rated company of 3x. During the second quarter of 2014, the insurance subsidiaries paid a $722 million ordinary dividend to the holding company. At June 30, 2014 Voya has $879 million of cash at the holding company level, in excess of its intention to hold 24 months of liquidity, or roughly $450 million.
Voya's ratings also reflect the large scale and solid business profile in retirement and individual life markets, improved operating performance within its core businesses, and conservative investment portfolio.
Fitch's key rating concerns include the challenges related to the run-off of Voya's large 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, 2014, Voya had $4.6 billion in reserves and capital supporting the closed-block VA book.
The ratings also recognize the company's above-average reliance on the capital markets for excess reserve financing. Voya's total financing and commitments (TFC) ratio of 0.9x is high compared to other peers and is driven by funding for XXX and AXXX reserve financing, and to a much lesser extent, securities lending agreements. Voya's recently announced reinsurance transaction with Reinsurance Group of America, Inc. will improve the TFC ratio going forward since Voya will unwind one of its captives and the associated redundant reserve financing.
During the first half of 2014, Voya reported an ongoing business adjusted operating return on equity (ROE) of 10.9%, up from 10.3% in 2013 and 8.3% in 2012. Management remains committed to improving this metric to 12% - 13% by 2016. Fitch believes Voya's scalable business model is positioned well to participate in the long-term growth of the retirement savings market. However, Fitch acknowledges that is a highly competitive segment of the market.
ING Groep N.V. (ING Group) has reduced its stake in Voya to approximately 32% following the closing of its September 2014 secondary common stock offering and must fully divest its interest in the company by year-end 2016. Voya's remaining parental ties include letter of credit facilities provided by ING Bank which have been significantly reduced and replaced by third party providers. The remaining facilities are now on an arms-length basis.
The key rating triggers that could result in an upgrade include:
--Continued growth in operating profitability on both a GAAP and statutory basis;
--Sustained maintenance of GAAP adjusted operating earnings-based interest coverage of more than 8x and statutory interest coverage of more than 4x;
--Reported RBC above 450%, and financial leverage below 25%;
--Private sale of closed-block book at good value with boost to capitalization and reduction in volatility and risk.
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;
--Further material reserve charges required in its insurance/variable annuity books or a significant weakening of distribution channel or scale advantages.
Fitch has affirmed the following ratings with a Positive 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 Co.
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'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Insurance Rating Methodology' (Nov. 13, 2013).
Applicable Criteria and Related Research:
Insurance Rating Methodology -- Effective Nov. 13, 2013￢Sept. 4, 2014