The following table presents the major components of income and expenses of discontinued operations for the periods indicated:
We have audited the accompanying consolidated balance sheets of Voya Financial, Inc. (the Company) as of December 31, 2017 and 2016, the related consolidated statements of operations, comprehensive income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 2017, and the related notes and financial statement schedules listed in the Index at item 15(a) (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company at December 31, 2017 and 2016, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.
The preparation of financial statements in conformity with U.S. GAAP requires management 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 Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting period. Those estimates are inherently subject to change and actual results could differ from those estimates.
The Company amortizes DAC and VOBA related to universal life-type contracts and fixed and variable deferred annuity contracts, except for deferred annuity contracts within the CBVA business, 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 the Company's 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"). For deferred annuity contracts within the CBVA business, the Company amortizes DAC/VOBA and DSI in relation to the emergence of estimated gross revenue.
During the year ended December 31, 2016, for its discontinued operations, the Company's reviews resulted in loss recognition of $313, before income taxes, of which $78 and $19 were related to DAC/VOBA and Sales Inducements, respectively and reported as a loss in Income (loss) from discontinued operations, net of tax with a corresponding decrease in Assets held for sale in the Consolidated Balance Sheets. The loss recognition also included the establishment of $216 of premium deficiency reserves related to the continued decline in earned rates in the current interest rate environment, which was reported as a loss in Income (loss) from discontinued operations, net of tax, with an offsetting increase in Liabilities held for sale on the Consolidated Balance Sheets.
The following table summarizes the major categories of assets and liabilities classified as held for sale in the accompanying Consolidated Balance Sheets as of December 31, 2017 and 2016:
Interest rate swaps: Interest rate swaps are used by the Company primarily to reduce market risks from changes in interest rates and to alter interest rate exposure arising from mismatches between assets and/or liabilities. Interest rate swaps are also used to hedge the interest rate risk associated with the value of assets it owns or in an anticipation of acquiring them. Using interest rate swaps, the Company agrees with another party to exchange, at specified intervals, the difference between fixed rate and floating
The notional amounts and fair values of derivatives from continuing operations were as follows as of the dates indicated:
The Company utilizes a number of valuation methodologies to determine the fair values of its financial assets and liabilities in conformity with the concepts of exit price and the fair value hierarchy as prescribed in ASC Topic 820. Valuations are obtained from third-party commercial pricing services, brokers and industry-standard, vendor-provided software that models the value based on market observable inputs. The valuations obtained from third-party commercial pricing services are non-binding. The Company reviews the assumptions and inputs used by third-party commercial pricing services for each reporting period in order to determine an appropriate fair value hierarchy level. The documentation and analysis obtained from third-party commercial pricing services are reviewed by the Company, including in-depth validation procedures confirming the observability of inputs. The valuations are reviewed and validated monthly through the internal valuation committee price variance review, comparisons to internal pricing models, back testing to recent trades or monitoring of trading volumes.
Broker quotes and prices obtained from pricing services are reviewed and validated through an internal valuation committee price variance review, comparisons to internal pricing models, back testing to recent trades or monitoring of trading volumes. As of December 31, 2017, $1.1 billion and $42.1 billion of a total fair value of $53.4 billion in fixed maturities, including securities pledged, related to continuing operations were valued using unadjusted broker quotes and unadjusted prices obtained from pricing services, respectively, and verified through the review process. As of December 31, 2017, $0.5 billion and $17.6 billion of a total fair value of $23.4 billion in fixed maturities, including securities pledged, related to businesses held for sale were valued using unadjusted broker quotes and unadjusted prices obtained from pricing services, respectively, and verified through the review process. The remaining balances in fixed maturities consisted primarily of privately placed bonds valued using matrix-based pricing. As of December 31, 2016, $1.1 billion and $41.3 billion of a total fair value of $51.9 billion in fixed maturities, including securities pledged, related to continuing operations were valued using unadjusted broker quotes and unadjusted prices obtained from pricing services, respectively, and verified through the review process. As of December 31, 2016, $0.5 billion and $18.0 billion of a total fair value of $23.4 billion in fixed maturities, including securities pledged, related to businesses held for sale were valued using unadjusted broker quotes and unadjusted prices obtained from pricing services, respectively, and verified through the review process. The remaining balances in fixed maturities consisted primarily of privately placed bonds valued using matrix-based pricing.
(1) Includes compensation cost for legacy plans, under which no new awards are being issued.
The following table summarizes dividends permitted to be paid by the Company's Principal Insurance Subsidiaries to Voya Financial, Inc. or Voya Holdings without the need for insurance regulatory approval for the periods presented:
The following table summarizes the Company's pension plan’s target allocation range and actual asset allocation by asset category as of December 31, 2017 and 2016:
On January 23, 2018, Voya Financial, Inc. completed an offering, through a private placement, of $350 aggregate principal amount of 4.7% Fixed-to-Floating Rate Junior Subordinated Notes due 2048 (the "2048 Notes"). The 2048 Notes are guaranteed on an unsecured, junior subordinated basis by Voya Holdings. The Company used the net proceeds from the offering to repay at maturity its 2018 Notes and to pay accrued interest thereon. The remaining proceeds after the repayment of the 2018 Notes were used for general corporate purposes.
Effective May 6, 2016, the Company revised the terms of its Amended and Restated Revolving Credit Agreement ("Amended Credit Agreement"), dated February 14, 2014, by entering into a Second Amended and Restated Revolving Credit Agreement ("Second Amended and Restated Credit Agreement") with a syndicate of banks, a large majority of which participated in the Amended Credit Agreement. The Second Amended and Restated Credit Agreement modifies the Amended Credit Agreement by extending the term of the agreement to May 6, 2021 and reducing the total amount of LOCs that may be issued from $3.0 billion to $2.25 billion. The revolving credit sublimit of $750 present in the Amended Credit Agreement remained unchanged.
Pursuant to the Transaction disclosed in the Business Held for Sale and Discontinued Operations note, which will result in the disposition of substantially all of the Company's CBVA and Annuities businesses, the Company evaluated its segments and determined that the retained CBVA and Annuities policies ("Retained Business") that are not components of the disposed businesses under the Transaction are insignificant. As such, the Company will no longer report its CBVA and Annuities businesses as segments and will include the results of the Retained Business in Corporate. The Company revised prior period information to conform to current period presentation.
(1) For the three months ended December 31, 2017, weighted average shares used for calculating basic and diluted earnings per share are the same, as the inclusion of the 3.5 shares for stock compensation plans would be antidilutive to the earnings per share calculation due to the net loss from continuing operations in the period.
Interest income earned on loans to subsidiaries was $8, $9 and $5 for the years ended December 31, 2017, 2016 and 2015, respectively. Interest income is included in Net investment income in the Condensed Statements of Operations.