Fitch Upgrades Voya Financial's Ratings; Outlook Stable

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has upgraded Voya Financial, Inc.'s (Voya) Issuer Default Rating (IDR) to 'BBB+' from 'BBB', senior debt rating to 'BBB' from 'BBB-', and junior subordinated debt rating to 'BB+' from 'BB'. The Insurer Financial Strength (IFS) ratings of the U.S. operating entities have also been upgraded to 'A' from 'A-'. A complete list of ratings follows at the end of this release. The Rating Outlook for all ratings is Stable.

KEY RATING DRIVERS

The upgrade reflects the significant improvement in Voya's balance sheet strength as well as improved debt servicing capacity. 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.

Holding company financial leverage has declined to 21% at year-end 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 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 537% at year-end 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.

During 2014, Voya reported pre-tax operating income of $1.2 billion and an operating ROE of 8.4%. Operating income benefitted from higher prepayment income, higher sales and improved loss ratios in Employee Benefits segment, improved margins in Annuities and Investment Management segments, and an increase in fees associated with higher assets under management. Offsetting these positives were unfavorable mortality changes on the universal life blocks due to an aging block, the impact of the continued low interest rate environment on reinvestment rates and higher operating expenses. 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.

Statutory dividend capacity 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. Statutory interest coverage improved to 4.5x in 2014, up from 1.4x in 2013. Based on estimated ordinary statutory dividend capacity of $1.0 billion in 2015, Fitch estimates Voya's statutory interest coverage will improve further to approximately 6x in 2015. This is in excess of Fitch's median ratio guideline for an 'A' rated company of 3x. GAAP adjusted operating earnings-based interest coverage increased to 7.9x in 2014 from 6.6x the prior year.

Fitch's key rating concerns include the challenges related to the run-off of Voya's $43 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 2014, Voya had $5.0 billion in reserves and capital supporting the closed-block VA book.

The ratings also recognize the company's reliance on the capital markets for excess reserve financing. Voya's total financing and commitments (TFC) ratio of 0.7x is driven by funding for XXX and AXXX reserve financing, and to a much lesser extent, securities lending agreements. In 2014 Voya completed a reinsurance transaction with Reinsurance Group of America, Inc. that improved the TFC ratio since Voya was able to unwind one of its captives and the associated redundant reserve financing.

On March 9, 2015 ING Groep N.V. fully exited its stake its stake in Voya common stock.

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.

Fitch has upgraded the following ratings with a Stable Outlook:

Voya Financial, Inc.

--Long-term IDR to 'BBB+' from 'BBB';

--5.5% senior notes due July 15, 2022 to 'BBB' from 'BBB-';

--2.9% senior notes due Feb. 15, 2018 to 'BBB' from 'BBB-';

--5.7% senior notes due July 15, 2043 to 'BBB' from 'BBB-';

--5.65% fixed-to-floating junior subordinated notes due May 15, 2053 to 'BB+' from '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 to 'A' from 'A-'.

Equitable of Iowa Companies, Inc.

--Long-term IDR to 'BBB+' from 'BBB'.

Equitable of Iowa Companies Capital Trust II

--8.424% Trust Preferred Stock to 'BB+' from 'BB'.

Peachtree Corners Funding Trust

--$500 million of 3.976% pre-capitalized trust securities due 2025 to 'BBB' from 'BBB-'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Insurance Rating Methodology' (Sept. 4, 2014).

Applicable Criteria and Related Research:

Insurance Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=756650

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=981413

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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
Andrew Davidson, CFA
Senior Director
+1-312-368-3144
or
Committee Chairperson
James Auden
Managing Director
+1-312-368-3146
or
Media Relations:
Alyssa Castelli, +1-212-908-0540
[email protected]
Elizabeth Fogerty, +1-212-908-0526
[email protected]

Source: Fitch Ratings

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