For the purposes of the discussion in this Quarterly Report on Form 10-Q, the
term
The following discussion and analysis presents a review of our consolidated results of operations for the three and six months endedJune 30, 2020 and 2019 and financial condition as ofJune 30, 2020 andDecember 31, 2019 . This item should be read in its entirety and in conjunction with the Condensed Consolidated Financial Statements and related notes contained in Part I, Item 1. of this Quarterly Report on Form 10-Q, as well as "Management's Discussion and Analysis of Financial Condition and Results of Operations" section contained in our Annual Report on Form 10-K for the year ended December 31, 2019 ("Annual Report on Form 10-K"). In addition to historical data, this discussion contains forward-looking statements about our business, operations and financial performance based on current expectations that involve risks, uncertainties and assumptions. Actual results may differ materially from those discussed in the forward-looking statements as a result of various factors. See the Note Concerning Forward-Looking Statements.
Overview
We provide our principal products and services through three segments: Retirement, Investment Management and Employee Benefits. Corporate includes activities not directly related to our segments and certain insignificant run-off activities that are not meaningful to our business strategy. See the Segments Note to our Consolidated Financial Statements in Part II, Item 8. of our Annual Report on Form 10-K for further information on our segments.
The following represents segment percentage contributions to total Adjusted
operating revenues and Adjusted operating earnings before income taxes for the
six months ended
June 30, 2020 Adjusted Operating Adjusted Operating Earnings before Income percent of total Revenues Taxes Retirement 47.1 % 106.0 % Investment Management 11.2 % 39.1 % Employee Benefits 41.0 % 64.9 % Corporate 0.7 % (109.9) % Discontinued Operations
The Individual Life Transaction
OnDecember 18, 2019 , we entered into a Master Transaction Agreement (the "Resolution MTA") withResolution Life U.S. Holdings Inc. , aDelaware corporation ("Resolution Life US"), pursuant to which Resolution Life US will acquire certain of our subsidiaries, includingSecurity Life of Denver Insurance Company ("SLD"),Security Life of Denver International Limited ("SLDI") andRoaring River II, Inc. ("RRII"). The transaction is expected to close bySeptember 30, 2020 and is subject to conditions specified in the Resolution MTA, including the receipt of required regulatory approvals. We have determined that the legal entities to be sold and the Individual Life and Annuities businesses within these entities meet the criteria to be classified as held for sale and that the sale represents a strategic shift that will have a major effect on our operations. Accordingly, the results of operations of the businesses to be sold have been presented as discontinued operations, and the assets and liabilities of the related businesses have been classified as held for sale and segregated for all periods presented in this Quarterly Report on Form 10-Q. As ofDecember 31, 2019 , we recorded an estimated loss on sale, net of tax of$1,108 to write down the carrying value of the businesses held for sale to estimated fair value, which is based on the estimated sales price of the Individual Life Transaction (as defined below) as ofDecember 31, 2019 , less cost to sell and other adjustments in accordance with the Resolution MTA. In addition, we are required to remeasure the estimated fair value and loss on sale at the end of each quarter until closing of the 111 -------------------------------------------------------------------------------- Table of Contents Individual Life Transaction. As such, Income (loss) from discontinued operations, net of tax, for the six months endedJune 30, 2020 includes an additional estimated loss on sale of$240 , net of tax. The estimated loss on sale, net of tax as ofJune 30, 2020 of$1,348 , represents the excess of the estimated carrying value of the businesses held for sale over the estimated purchase price, which approximates fair value, less cost to sell. Additionally, the estimated loss on sale is based on assumptions that are subject to change due to fluctuations in market conditions and other variables that may occur prior to the closing date. For additional information on the Individual Life Transaction and the related estimated loss on sale, see Trends and Uncertainties in Part I, Item 2 of this Quarterly Report on Form 10-Q. Concurrently with the sale, SLD will enter into reinsurance agreements withReliastar Life Insurance Company ("RLI"),ReliaStar Life Insurance Company of New York ("RLNY"), andVoya Retirement Insurance and Annuity Company ("VRIAC"), each of which is a direct or indirect wholly owned subsidiary of the Company. Pursuant to these agreements, RLI and VRIAC will reinsure to SLD a 100% quota share, and RLNY will reinsure to SLD a 75% quota share, of their respective in-scope individual life insurance and annuities businesses. RLI, RLNY, and VRIAC will remain subsidiaries of the Company. We currently expect that these reinsurance transactions will be carried out on a coinsurance or modified coinsurance basis, with SLD's reinsurance obligations collateralized in one of three ways: (1) invested assets placed in a comfort trust; (2) funds withheld basis with invested assets remaining on the respective subsidiaries of the Company; or (3) some combination of these two collateralization structures. During the second quarter of 2020, we recorded$50 million in intent impairments based on assets we expect to transfer to the comfort trust upon closing. Based on values as ofJune 30, 2020 ,U.S. GAAP reserves to be ceded under the Individual Life Transaction are expected to be approximately$10.3 billion and are subject to change until closing. The reinsurance agreements along with the sale of the legal entities noted above (referred to as the "Individual Life Transaction") will result in the disposition of substantially all of the Company's life insurance and legacy non-retirement annuity businesses. The revenues and net results of the Individual Life and Annuities businesses that will be disposed of via reinsurance are reported in businesses exited or to be exited through reinsurance or divestment which is an adjustment to ourU.S. GAAP revenues and earnings measures to calculate Adjusted operating revenues and Adjusted operating earnings before income taxes, respectively. At the closing of the transaction, in addition to the loss on sale described above, we will recognize a further adjustment to Total shareholders' equity, excluding Accumulated other comprehensive income, associated with the portion of the transaction that involves a sale through reinsurance, to the extent the structure is carried out on a coinsurance basis with a comfort trust. We currently estimate that we could realize capital gains, net of DAC and tax, on the investment securities we sell into the comfort trust of our reinsurance counterparty. We also estimate that an allowance for credit losses for the reinsurance recoverable will be established, based on the credit worthiness of our counterparty, form of collateral and other factors. We currently estimate these newly established credit losses, as well as the expected reversal of credit losses on our commercial mortgages are expected to be immaterial on a net basis. Overall, the net aggregate reduction in Total shareholders' equity, excluding Accumulated other comprehensive income, due to the Individual Life Transaction would be in the range of$250 million to$750 million . We currently expect to be towards the lower end of the range, which includes an estimate of realized gains on investments of approximately$1.1 billion , net of DAC and taxes, based on asset values as ofJune 30, 2020 . These estimated impacts are subject to changes through the date of the transaction closing due to many factors including interest rate movements, other investment valuation items, asset selections and changes to the structure of the reinsurance transactions, including an ultimate reinsurance structure that is not entirely on a coinsurance basis with a comfort trust. Furthermore, upon closing of the Individual Life Transaction, we expect to have deferred intangibles in the range of$1.5 billion to$2.0 billion net of tax, subject to changes due to the same factors mentioned above regarding the reduction in Total shareholders' equity, excluding Accumulated other comprehensive income. The deferred intangibles will consist of (1) existing DAC, VOBA and URR balances on businesses already exited via reinsurance and for the portion of the transaction that involves a sale through reinsurance, (2) existing deferred Cost of reinsurance ("COR") on businesses already exited via reinsurance and (3) deferred COR (and to the extent policies do not meet risk transfer, a Deposit asset) to be established upon closing of the reinsurance transactions mentioned above. The aggregate deferred intangibles will be amortized as a charge to earnings over the life of the underlying policies. We expect the annual impact of the amortization of these deferred intangibles to be approximately$100 million to$150 million , net of tax which will be classified as a component of Income (loss) related to businesses exited or to be exited via reinsurance which is an adjustment to Income (loss) from continuing operations before income taxes to calculate Adjusted operating earnings before taxes and consequently are not included in the adjusted operating results of our segments. Additionally, we would expect the annual impact of the amortization of the deferred intangibles to decline over time. 112 -------------------------------------------------------------------------------- Table of Contents The following table summarizes the components of Income (loss) from discontinued operations, net of tax related to the Individual Life Transaction for the six months endedJune 30, 2020 and 2019: Six Months Ended June 30, 2020 2019 Revenues: Net investment income$ 304 $ 327 Fee income 352 371 Premiums 15 15 Total net realized capital gains (losses) 17 54 Other revenue (9) (4) Total revenues 679 763 Benefits and expenses: Interest credited and other benefits to contract owners/policyholders 553 533 Operating expenses 68 43 Net amortization of Deferred policy acquisition costs and Value of business acquired 30 51 Interest expense 4 5 Total benefits and expenses 655 632 Income (loss) from discontinued operations before income taxes 24 131 Income tax expense (benefit) 5 27 Loss on sale, net of tax (240) - Income (loss) from discontinued operations, net of tax$ (221) $ 104 The 2018 Transaction OnJune 1, 2018 , we consummated a series of transactions (collectively, the "2018 Transaction") pursuant to a Master Transaction Agreement withVA Capital Company LLC ("VA Capital ") and Athene Holding Ltd. ("Athene"). As part of the 2018 Transaction,Venerable Holdings, Inc. ("Venerable"), a wholly owned subsidiary ofVA Capital , acquired two of our subsidiaries,Voya Insurance and Annuity Company ("VIAC") andDirected Services, LLC ("DSL"), and VIAC and other Voya subsidiaries reinsured to Athene substantially all of their fixed and fixed indexed annuities business. The 2018 Transaction resulted in the disposition of substantially all of our Closed Block Variable Annuity ("CBVA") and Annuities businesses. Income (loss) from discontinued operations for the six months endedJune 30, 2019 included an additional loss on sale of$82 related to purchase price true-up amounts withVA Capital which was settled during the second quarter of 2019. Upon execution of the Individual Life Transaction including the reinsurance arrangements disclosed above, we will continue to hold an insignificant number of Individual Life, Annuities and CBVA policies. These policies are referred to in this Quarterly Report on Form 10-Q as "Residual Runoff Business". Trends and Uncertainties We describe known material trends and uncertainties that might affect our business in our Annual Report on Form 10-K for the year ended December 31, 2019, under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations - Trends and Uncertainties", and in other sections of that document, including "Risk Factors". In addition, we describe below in this Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") more recently developing known trends and uncertainties that we believe may materially affect our future liquidity, financial condition or results of operations. All statements in this section, other than statements of historical fact, are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. For a discussion of factors that could cause actual results, performance, or events to differ from those discussed in any forward-looking statement, including in a material manner, see "Note Concerning Forward-Looking Statements" in this Quarterly Report on Form 10-Q. 113
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COVID-19 and its Effect on the Global Economy COVID-19, the disease caused by the novel coronavirus, has had a significant adverse effect on the global economy since March of 2020. Although the number of reported cases and deaths from COVID-19 has slowed in most parts of the world, the disease continues to spread widely in manyU.S. states, among other regions. The persistence of new infections has slowed the re-opening of theU.S. economy and, even in countries where restrictions have largely been lifted, economic activity has been slow to recover. The effects of COVID-19 on theU.S. and global economies have been severe. Based on advance estimates,U.S. GDP declined by 33% in the second quarter of 2020, after a decline of 5% in the first quarter, while theU.S. unemployment rate is near historic highs. Longer-term, the economic outlook is uncertain, but will likely depend in significant part on progress with respect to effective therapies to treat COVID-19 or a vaccine, or on a marked change to public health policy. In late March and earlyApril 2020 , in reaction to the rapidly developing economic turmoil, global financial markets experienced a period of extreme volatility. Equity markets dropped significantly from new highs set in February, although they largely recovered in the second quarter, although volatility remains high. Credit markets have also experienced a significant shock, with 10-yearU.S. treasury yields declining approximately 100 bps between late February and early March. The 10-year yield currently sits near an all-time low at approximately 0.6%. Also since late February, shorter-dated treasury rates have approached zero, while the 30-year rate has traded at historic lows below 1.40%. Certain credit market sectors, such as energy, real estate, transportation, and retail, continue to be under considerable stress. Additionally, certain commodity markets, in particular for oil, experienced dramatic declines in prices in the first half of 2020, and have only partially recovered. Effect onVoya Financial - Financial Condition, Capital and Liquidity Because both public health and economic circumstances are changing so rapidly at present, it is impossible to predict how COVID-19 will affectVoya Financial's future financial condition. Absent a further significant and prolonged market shock, however, we do not anticipate a material effect on our balance sheet, statutory capital, or liquidity. Our capital levels remain strong and significantly above our targets. As ofJune 30, 2020 , our estimated combined RBC ratio was 468%, above our 400% target. We believe that we have ample liquidity for the foreseeable future, and, with no debt maturities until 2023, we have no immediate need for significant amounts of capital. If a need for additional liquidity were to arise, we continue to have access to our existing credit facilities and our P-CAPS contingent capital facility, and we believe that we also maintain ready access to debt capital markets. Although several ratings agencies have changed their industry outlooks forU.S. life insurance companies, we have not had any change to our corporate credit ratings or outlooks, or on the financial strength ratings of our insurance subsidiaries. We completed repurchases of approximately$400 million of our common shares in the first half of 2020, although we paused repurchases later in the first quarter as a prudent measure in light of current market uncertainties. We do not anticipate any reduction in our dividend. The dividends-paying capacity of our insurance subsidiaries could decline if asset impairments significantly increase, or our asset portfolio experiences a material number of ratings downgrades and we are required to hold additional amounts of risk-based capital. If this effect is pronounced, as might be the case in an extended or particularly deep recession, the impact on our holding company liquidity could be significant. In such a case, we would need to consider additional steps to preserve liquidity at the holding company, which could include reducing or eliminating planned share buybacks or our dividend. In extreme scenarios, we might need to seek waivers from our bank lenders for net worth covenants contained in our credit facilities. See "-Investments-Potential Credit Related COVID-19 Exposures" in this Management's Discussion and Analysis for a discussion of our asset portfolio exposures to certain sectors that have been particularly affected by the economic conditions created by COVID-19 and "-Liquidity and Capital-Credit Facilities" for a discussion of our credit facilities. To the extent that our credit ratings or outlooks are downgraded due to adverse developments in our general account or for other reasons, we may face more difficulty accessing credit markets should we seek to do so as a means of generating liquidity. To the extent that an economic downturn affects our estimates of future profitability, we may also be required to establish an additional valuation allowance against our deferred tax assets, which would reduce the carrying value of such assets. With respect to our GAAP balance sheet, such reductions would decrease our GAAP equity and increase our leverage ratios. The 114 -------------------------------------------------------------------------------- Table of Contents statutory surplus of our insurance subsidiaries could also be affected if there is a reduction in the statutory carrying value of our deferred tax asset admitted for statutory purposes.
Effect on
Predicting with accuracy the consequences of COVID-19 on our results of operations is impossible. Based on current information, however, we believe that the most significant effects of adverse economic conditions will be on our fee-based income, with net investment income experiencing milder effects. Underwriting income, which will principally be affected by increases to mortality and morbidity due to the disease, could also face significant declines, particularly under severe epidemiological scenarios.
Effects on fee income or net investment income could be material to our results, particularly if a recession were to be deeper or more prolonged than we currently anticipate, although we do not currently believe that such effects will materialize in the near term. And although longer-term effects are more difficult to judge should adverse economic conditions persist, we currently believe that sufficient management actions should be available, particularly with respect to expenses and capital management, to meaningfully offset, on a per-share basis, the effect of such conditions on our earnings in 2021. Fee income is affected significantly by levels of AUM, which in turn depends on average daily equity market prices throughout the quarter. Although equity prices declined materially by the end of the first quarter and into early second quarter, equity prices have continued to largely recover from the lows experienced earlier this year. As expected, the effect on our fee income from the decline in equity prices was more pronounced in the second quarter. However, the equity price recoveries that have continued ultimately resulted in average S&P index levels only being down approximately 4% from the first quarter of the year. Additionally, if the S&P 500 index levels as ofJuly 31 were to remain constant through the end of third quarter, the average daily S&P 500 index level would actually be approximately 11% higher in the third quarter, as compared to the second quarter. Despite the recent recovery in equity prices, volatility continues to play a large role in the markets and the ultimate impact on our fee income cannot be predicted. However, we estimate that, for every 1% decline in the average daily level of the S&P 500 index, our annual adjusted operating earnings decline by approximately$4-5 million . Underwriting income in our Employee Benefits and Individual Life businesses (with respect to the latter, until we close our divestment of that business) would be adversely affected to the extent that mortality claims for individual or group life policies, or medical expense claims under voluntary benefit or stop loss policies, exceed the related reserves and deductibles. Accordingly, to the extent that COVID-19 leads to a material increase in overall mortality or medical expense among our insured population, our financial results could be materially affected.
Effect on Segment Results of Operations
Retirement
In Retirement, we believe the primary consequences of COVID-19 will result from changes in equity prices, interest rates and spreads, and increased market volatility. Our business will also be affected by reduced participant counts and AUM / AUA, due to: •lower forecasted sales volumes, particularly in corporate markets, as companies delay new plan RFPs, offset in part by anticipated lower plan surrenders; •a decline in deposits, as plan sponsors suspend or reduce matching contributions; •furloughs and terminations of plan participants; and •an increase in participant loans, hardship withdrawals, and qualifying CARES Act distributions and withdrawals, offset to some extent by a reduction in required minimum distributions. The recently enacted federal CARES Act eliminates many disincentives for plan withdrawals and loans, although it has not yet resulted in any significant increase in withdrawals or loans among our plan participants. Although some CARES Act provisions automatically apply to participants and plans without further action, those provisions that significantly relax restrictions on loans and distributions must be affirmatively elected by plan sponsors. Based on our experience to date, we believe that a significant number of employers, particularly those who sponsor smaller plans, will decline to adopt these provisions. In aggregate, we anticipate near-term pressure on Retirement net flows and earnings, with effects weighted more heavily towards our full-service corporate markets business and less on recordkeeping business. Although the impact will primarily be on fee-based income, we estimate that lower interest rates will contribute to a run-rate reduction of approximately$15 million 115 -------------------------------------------------------------------------------- Table of Contents in spread-based income over 2020. Longer-term effects will depend significantly on equity market performance and prevailing interest rate levels, as well as the magnitude and duration of elevated unemployment levels. We believe that expense reductions and other management actions would be available to offset a portion of any impact. Investment ManagementIn Investment Management , we have seen COVID 19 impacts on business driven primarily by lower fund revaluation results reported in investment capital including carried interests and performance fees related to investments that Voya manages. Due to normal lag in reporting from the underlying fund investments, these investment capital results are recognized generally one quarter in arrears. We believe, in aggregate, that investment capital valuations will begin to improve in the second half of 2020, however if the economy worsens, investment capital results could decline further. In addition, we have had an elevated level of outflows associated with our retail business at the outset of the pandemic. The outflows had an adverse effect on fee revenues earned since fees are typically based upon the fair value of assets. The elevated level of outflows subsided in the second quarter of 2020, however elevated outflows could persist if the economy weakens, investors desire liquidity or relative investment performance declines. Other business impacts resulting from COVID 19 include a reduction in sales meetings and request for proposal activities. As another impact of COVID 19, we could see short term delays in certain anticipated issuances of investment vehicles, which could negatively impact future sales activity. A prolonged economic contraction would likely result in lower anticipated AUM throughout the remainder of 2020 and potentially into 2021 due to asset price levels and potential reduction in anticipated net flows.
Employee Benefits
In Employee Benefits, effects from COVID-19 are likely to be seen primarily in increased mortality claims on group life policies, and in a reduction in anticipated premium revenues, with premium revenues particularly affected in a more severe recession scenario with significant and prolonged unemployment. We currently do not expect a significant increase in medical stop loss claims, since we believe most COVID-19 related claims are likely to fall below applicable deductibles. Because the sales cycle for our Employee Benefits products is weighted heavily towards the start of the calendar year, we do not anticipate a material effect on full-year 2020 sales due to COVID-19. To the extent that market and workplace disruptions persist further into 2020, we will likely see an effect on the 2021 sales cycle, especially in group life & disability and voluntary sales. Although new case sales are likely to decline, we anticipate an offset from higher in-force case retention. Premium revenues will face headwinds from increased levels of unemployment as participant counts decrease, although the impact could be muted to some extent by increased participation rates in voluntary products. The magnitude and duration of this effect is likely to be proportional to the depth and length of adverse economic conditions, particularly employment rates. We expect mortality claims in group life to be elevated through the second half of 2020 and into early 2021 due to COVID-19 related deaths, with the magnitude of such claims dependent on mortality rates from the disease. Voluntary claims are likely to be similarly affected to the extent that COVID-19 increases hospitalizations and related medical expenses. Because COVID-19 disproportionately affects older individuals, and our group life policies generally insure the lives of working-age individuals, the impact of population-wide mortality rates should be mitigated to some extent by the younger average age of our covered lives. While the prevalence of COVID-19 among theU.S. population, and its mortality rate, has been difficult or impossible to determine, unless mortality experience materially exceeds that predicted by most epidemiological models, we believe that increased claims will have a significant, but not material, effect on the financial results of our Employee Benefits business in 2020. We currently estimate that, for every 10,000 incremental deaths inthe United States due to COVID-19, operating earnings of our Employment Benefits segment would decline by approximately$1 to$2 million due to increased claims. Individual Life Although we have entered into an agreement to sell our Individual Life business, the financial performance of that business continues to be reflected in our financial results until that transaction closes, which we currently expect to occur in the third quarter of 2020. Individual Life financial performance is reported partially within discontinued operations and partially as a non-operating adjustment to our consolidated net income. As with the group life policies that we have underwritten in our Employee Benefits business, we would expect Individual Life mortality claims to be elevated for the next several quarters due to COVID-19 related deaths, with the magnitude of such claims dependent on mortality rates from the disease. As is the case with group life claims, unless mortality experience related to COVID-19 materially exceeds that predicted by most epidemiological models, we believe that increased death claims will have 116 -------------------------------------------------------------------------------- Table of Contents a significant, but not material, effect on the financial results of our Individual Life business over that time. We currently estimate that, for every 10,000 incremental deaths inthe United States due to COVID-19, the earnings of our Individual Life segment would decline by approximately$1 to$3 million due to increased claims.
Effect on Voya Financial Business Operations
The mandatory business shutdowns and stay-at-home orders implemented in most states have required us to make significant changes to the way in which we conduct day-to-day business. Although our business has been deemed an essential service in most or all jurisdictions in which we operate, the vast majority ofVoya Financial employees have been working from home sinceMarch 2020 . Based on our experience to date, this transition has been very successful. In particular, our customer service and IT functions have exhibited a high degree of performance under these conditions. Although we have begun preparations for an eventual return to a traditional office-based workforce, it is currently unclear when or in what manner that may happen. Despite this considerable success, like others in our industry we are experiencing some adverse effects from such a significant change to our business model. Sales visits, client presentations, and other direct customer contact opportunities have moved to virtual interactions, and many clients or potential clients have reduced their sales-related activity, which has affected sales pipelines and other revenue sources. Activities such as transaction processing and document handling, which generally require physical presence within our offices, have continued without incident, but are made more difficult with only skeleton staff available on-site. The transition to work-from-home also increases vulnerabilities to cybersecurity threats and other fraudulent activities. Although we are remaining vigilant on this issue and have not experienced any significant incidents, we are expending a substantial amount of resources to defend against potential attacks, which may occur while in this state of heightened risk. In addition, our business process and IT operations depend to a significant extent on outsourcing providers and a joint venture based inIndia , which is currently subject to a strict countrywide lockdown that requires the employees of these companies to work from home. Although our joint venture operations did not experience any notable disruptions from this transition, several outsourcing providers have experienced difficulty in moving their employee bases to a work-from-home arrangement. While these difficulties have not yet materially interfered with our business operations, there is a risk of future disruptions, particularly if the Indian lockdown persists for an extended period of time.
Interest Rates
We believe the interest rate environment will continue to influence our business and financial performance in the future for several reasons, including the following:
•Our continuing business general account investment portfolio, which was approximately$54.8 billion as ofJune 30, 2020 , consists predominantly of fixed income investments and had an annualized earned yield of approximately 4.2% in the second quarter of 2020. In the near term and absent further material change in yields available on fixed income investments, we expect the yield we earn on new investments will be lower than the yields we earn on maturing investments, which were generally purchased in environments where interest rates were higher than current levels. We currently anticipate that proceeds that are reinvested in fixed income investments during 2020 will earn an average yield below the prevailing portfolio yield. If interest rates were to rise, we expect the yield on our new money investments would also rise and gradually converge toward the yield of those maturing assets. In addition, while less material to financial results than new money investment rates, movements in prevailing interest rates also influence the prices of fixed income investments that we sell on the secondary market rather than holding until maturity or repayment, with rising interest rates generally leading to lower prices in the secondary market, and falling interest rates generally leading to higher prices. •Certain of our products pay guaranteed minimum rates such as fixed accounts and a portion of the stable value accounts included within defined contribution retirement plans. We are required to pay these guaranteed minimum rates even if earnings on our investment portfolio decline, with the resulting investment margin compression negatively impacting earnings. In addition, we expect more policyholders to hold policies (lower lapses) with comparatively high guaranteed rates longer in a low interest rate environment. Conversely, a rise in average yield on our investment portfolio would positively impact earnings if the average interest rate we pay on our products does not rise correspondingly. Similarly, we expect policyholders would be less likely to hold policies (higher lapses) with existing guarantees as interest rates rise. 117 -------------------------------------------------------------------------------- Table of Contents Further changes in interest rates, whether positive or negative, would likely have modest effects on our future Adjusted operating earnings. For example, we estimate that a 100 basis point increase or decrease in corporate bond yields over the next three years would generally increase or decrease our Adjusted operating earnings by approximately$10 to$60 million over that period, with the impacts increasing from the lower to the higher end of the range the longer the rate change persists. Discontinued Operations As described above, as ofDecember 31, 2019 , we recorded an estimated loss on sale, net of tax of$1,108 related to the Individual Life Transaction. In addition, the Company is required to remeasure the estimated fair value and loss on sale at the end of each quarter until closing of the Individual Life Transaction. As such, Income (loss) from discontinued operations, net of tax, for the six months endedJune 30, 2020 includes an additional estimated loss on sale of$240 , net of tax. The estimated loss on sale, net of tax as ofJune 30, 2020 of$1,348 represents the excess of the estimated carrying value of the businesses held for sale over the estimated purchase price, which approximates fair value, less cost to sell. The purchase price in the transaction is approximately$1.25 billion , with an adjustment based on the adjusted capital and surplus of SLD, SLDI and RRII at closing including the assumption of surplus notes. The estimated purchase price and estimated carrying value of the legal entities to be sold as of the future date of closing, and therefore the estimated loss on sale related to the Individual Life Transaction, are subject to adjustment in future quarters until closing, and may be influenced by, but not limited to, the following factors: •The performance of the businesses held for sale, including the impact of mortality, reinsurance rates and financing costs; •Changes in the terms of the Transaction, including as the result of subsequent negotiations or as necessary to obtain regulatory approval; and •Other changes in the terms of the Transaction due to unanticipated developments. The Company is required to remeasure the estimated fair value and loss on sale at the end of each quarter until the closing of the Individual Life Transaction. Changes in the estimated loss on sale that occur prior to closing of the Individual Life Transaction will be reported as an adjustment to Income (loss) from discontinued operations, net of tax, in future quarters prior to closing.
Stranded Costs
As a result of the 2018 Transaction and the Individual Life Transaction, the historical revenues and certain expenses of the sold businesses have been classified as discontinued operations. Historical revenues and certain expenses of the businesses that will be divested via reinsurance at closing of the Individual Life Transaction (including an insignificant amount of Individual Life and closed block non retirement annuities that are not part of the transaction) are reported within continuing operations, but are excluded from adjusted operating earnings as businesses exited or to be exited through reinsurance or divestment. Expenses classified within discontinued operations and businesses exited or to be exited through reinsurance include only direct operating expenses incurred by these businesses and then only to the extent that the nature of such expenses was such that we would cease to incur such expenses upon the close of the 2018 Transaction and the Individual Life Transaction. Certain other direct costs of these businesses, including those which relate to activities for which we have or will provide transitional services and for which we have or will be reimbursed under transition services agreements ("TSAs") are reported within continuing operations along with the associated revenues from the TSAs. Additionally, indirect costs, such as those related to corporate and shared service functions that were previously allocated to the businesses sold or divested via reinsurance, are reported within continuing operations. These costs ("Stranded Costs") and the associated revenues from the TSAs are reported within continuing operations in Corporate, since we do not believe they are representative of the future run-rate of revenues and expenses of our continuing operations. The Stranded Costs related to the 2018 Transaction were removed in the fourth quarter of 2019 and we plan to address the Stranded Costs related to the Individual Life Transaction through a cost reduction strategy. Refer to Restructuring in the section below for more information on this program.
Restructuring
Organizational Restructuring
As a result of the closing of the 2018 Transaction, we have undertaken restructuring efforts to execute the transition and reduce stranded expenses associated with our CBVA and fixed and fixed indexed annuities businesses, as well as our corporate and shared services functions ("Organizational Restructuring"). 118
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InAugust 2018 , we announced that we were targeting a cost savings of$110 million to$130 million by the middle of 2019 to address the stranded costs of the 2018 Transaction. Additionally, inOctober 2018 , we announced our decision to cease new sales following the strategic review of our Individual Life business, which was expected to result in cost savings of$20 million . The initiatives associated with these restructuring efforts concluded during 2019. InNovember 2018 , we announced that we are targeting an additional$100 million of cost savings by the end of 2020 in addition to the cost savings referenced above. These savings initiatives will improve operational efficiency, strengthen technology capabilities and centralize certain sales, operations and investment management activities. The restructuring charges in connection with these initiatives are not reflected in our run-rate cost savings estimates. The Organizational Restructuring initiatives described above have resulted in recognition of severance and organizational transition costs that are reflected in both continuing operations and discontinued operations. Amounts reflected in continuing operations are reported in Operating expenses in the Condensed Consolidated Statements of Operations, but excluded from Adjusted operating earnings before income taxes. For the three and six months endedJune 30, 2020 , we incurred Organizational Restructuring expenses of$21 million and$36 million , respectively, associated with continuing operations. For the three and six months endedJune 30, 2019 , the Company incurred Organizational Restructuring expenses of$55 million and$138 million , respectively, associated with continuing operations. In addition to the restructuring costs incurred above, the anticipated reduction in employees from the execution of the initiatives described above triggered an immaterial curtailment loss and related re-measurement gain of our qualified defined benefit pension plan as ofJanuary 31, 2019 , which was recorded during the first quarter of 2019. The aggregate amount of Organizational Restructuring expenses incurred in 2019 and expected to be incurred through the end of 2020, excluding restructuring efforts resulting from the Individual Life Transaction, is in the range of$250 million to$300 million . We anticipate that these costs will include severance, organizational transition costs incurred to reorganize operations and other costs such as contract terminations and asset write-offs. Pursuant to the Individual Life Transaction, we will divest or dissolve four regulated insurance entities, including its life companies domiciled inColorado andIndiana , and captive entities domiciled inArizona . We will also divestVoya America Equities LLC , a regulated broker-dealer, and transfer or cease usage of a substantial number of administrative systems. We will undertake further restructuring efforts to reduce stranded expenses associated with our Individual Life business as well as our corporate and shared services functions. We anticipate incurring additional restructuring expenses directly related to the disposition beyond 2020, in addition to the$22 million and$26 million incurred for the three and six months endedJune 30, 2020 , respectively, a substantial portion of which is included in Income (loss) from discontinued operations, net of tax in the Condensed Consolidated Statements of Operations. These collective costs, which include severance, transition and other costs, cannot currently be estimated but could be material. We expect to be able to estimate the costs in fourth quarter 2020. Operating Measures This MD&A includes a discussion of Adjusted operating earnings before income taxes and Adjusted operating revenues, each of which is a measure used by management to evaluate segment performance. We believe that Adjusted operating earnings before income taxes provides a meaningful measure of our business performance and enhances the understanding of our financial results by focusing on the operating performance and trends of the underlying business segments and excluding items that tend to be highly variable from period to period based on capital market conditions or other factors. Adjusted operating earnings before income taxes does not replace Income (loss) from continuing operations before income taxes as the comparableU.S. GAAP measure of our consolidated results of operations. Therefore, we believe that it is useful to evaluate both Income (loss) from continuing operations before income taxes and Adjusted operating earnings before income taxes when reviewing our financial and operating performance. See the Segments Note in our Condensed Consolidated Financial Statements in Part I, Item 1. of this Quarterly Report on Form 10-Q for a description of the adjustments made to reconcile Income (loss) before income taxes to Total adjusted operating earnings before income taxes and the adjustments made to reconcile Total revenues to Total adjusted operating revenues. 119
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