voya jpm initiation

8/22/2019 VOYA JPM Initiation

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North America Equity Researc11 June 2013

ING U.S., Inc.

Initiation

NeutralOYA, VOYA US

Business Performance to Improve, Overall ROE toRemain Low; Initiating Coverage with Neutral Rating

Price: $28.41

Price Target: $28.00

Insurance -- Life

Jimmy S. Bhullar, CFAAC

(1-212) 622-6397

[email protected]

Pablo S. Singzon

(1-212) 622-2295

[email protected]

Matthew Byrnes, CFA

(1-212) 622-0695

[email protected]

J.P. Morgan Securities LLC

ING U.S., Inc. (VOYA;VOYA US)FYE Dec 2011A 2012A 2013E 2014E 2015EEPS (Operating) ($)Q1 (Mar) 0.71 0.68 0.73A - -Q2 (Jun) 0.85 0.56 0.66 - -Q3 (Sep) 0.87 0.77 0.65 - -Q4 (Dec) 0.74 0.59 0.69 - -FY 3.16 2.60 2.72 2.66 2.88

Source: Company data, Bloomberg, J.P. Morgan estimates.

Company DataPrice ($) 28.4Date Of Price 10 Jun 152-week Range ($) 29.06 - 19.2Mkt Cap ($ mn) 7,408.4Fiscal Year End DeShares O/S (mn) 26Price Target ($) 28.0Price Target End Date 31 Dec 1

See page 39 for analyst certification and important disclosures.J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware ththe firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a singfactor in making their investment decision.

We are initiating coverage of ING U.S. with a Neutral rating and a 12/31/14 price

target of $28. In our view, management initiatives to improve the performance and

returns of its operating businesses are key positives. Also, VOYA has a sizable

DTA, not fully recognized on the balance sheet. On the other hand, despite a

pickup in ongoing business returns, we expect VOYAs overall ROE to remain

sub-par, and are wary of tail risk in the VA block. In our view, these factors, alongwith the prospect of secondary offerings, justify the stocks discount valuation.

Presence in high-return markets and management initiatives to enhance

operating performance are notable positives. VOYA derives about 58% of

its earnings from high-return businesses such as retirement and asset

management, and the proportion could increase over time, which would enable

it to garner a higher multiple. Management is taking several actions to improve

the performance of these divisions, as well as of lower-return segments such as

individual life and annuities. Among its various initiatives, we are confident in

cost cuts, and are skeptical of managements ability to raise prices in theretirement business without losing material share given intense competition.

VOYAs DTA is a valuable asset, not fully recognized on the balance sheet.

Based on our calculations, the DTA is worth $2-3 per share.

Overall ROE to remain in 6-7% range, considerably below peer levels.

Management is targeting a pickup in ongoing business ROE from 8% in 2012 to

12-13% by 2016 through cost cuts, re-pricing, and other factors. Despite the

improvement in ongoing business returns, our model projects the overall ROE

(ex. AOCI) to remain sub-par given significant capital tied up in the runoff VA

block and low returns in the individual life and fixed annuity businesses. Wefeel that overall ROE better reflects economic returns than ongoing businessROE, which excludes closed block capital and is adjusted for other items.

Tail risk in VA block a long-term concern. Recent equity market strength is a

major plus, but the CBVA is likely to remain a drag on returns for theforeseeable future and could pressure capital flexibility in a stress environment.

We feel that current valuation limits upside potential. VOYA is trading at

0.7x BV ex. AOCI and 10.7x our 2014 EPS estimate versus the life sector

averages of 1.1x BV and 9.3x 2014 estimates, which we feel is reasonable given

its sub-par returns (6.4% vs. 10.7% for the group in 2014E). On ongoing

business, VOYAs ROE is 10.5% and its P/BV multiple is 1.1x, which do not

seem too enticing, especially given potential secondary offerings by ING Groep.

Initiating Coverage w/ Neutral Ratin

Key Positives

The strong equity market should l iftEPS and reduce closed block VA risk

Management initiatives to improveprofitability in ongoing business

DTA a potential source of value

Key Concerns

Overall returns to remain sub-par

Significant execution r isk, particularin retirement

Closed block variable annuitiespresents significant tail risk

Overhang of secondary offerings

ValuationP/2014E: 10.7xP/BV ex. AOCI: 0.7xP/BV ex. AOCI (ongoing bus.): 1.1x

Please visit our Bloomberg page at

JPMA Bhullar


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North America Equity Research11 June 2013

Jimmy S. Bhullar, CFA(1-212) [email protected]

Table of ContentsInvestment Thesis ....................................................................4

Potential Expansion of Ongoing Business ROE a Plus ............. .............. ............. .....4

Considerable Exposure to High-Return Markets.......................................................4

Deferred Tax Assets a Significant Source of Value ............ ............. ............. ............4

Overall ROE to Remain Sub-Par ............ .............. ............. ............. ............. ............5

Execution Risk in Retirement and Low Rates Key Risks..........................................5

Closed Block Variable Annuity Presents Tail Risk...................................................6

Risks to Rating and Price Target ............................................6

Company Description..............................................................................................8

Key Investment Points.............................................................8

Management Initiatives to Lift ROE of Ongoing Businesses ............. ............. ..........8DTA Has Significant Value Not Fully Reflected in B/S .............. ............. ............. .10

Overall Returns to Remain Sub-Par ............. ............. ............. ............. .............. .....11

Closed Block VA Presents Significant Tail Risk....................................................13

Overhang of Potential Secondary Offering a Negative ............. .............. ............. ...15

Business Segment Discussion .............................................16

Retirement: Strong Market Position, Weak Margins/Returns..................................16

Annuities: Low Interest Rates to Challenge Results ............. ............. ............. ........20

Investment Management: Healthy Margins, Positive Outlook................... ............. .22

Individual Life: Poor Returns, Modest Growth.......................................................26

Employee Benefits: Margins to Expand, Cautious on Growth.................................28

Closed Block: Institutional Spread Products & Others............................................30

Portfolio De-Risked; Still Riskier than Peers ......................31

Management: Experienced, New to VOYA ...........................32

Valuation.................................................................................33

Earnings Model.......................................................................36

Index of TablesTable 1: Sec. 382 Limit Based on Market Cap ............ ............. .............. ............. ...10

Table 2: Net Operating Loss Carry-forwards..........................................................10Table 3: VOYA vs. JPM ROE Calc. ............ ............. ............. ............. .............. .....13

Table 4: VOYAs Variable Annuity Block Seems Riskier than Most Peers ........... 15

Table 5: ING Groep Sell-down Schedule.............. ............. ............. ............. ..........15

Table 6: VOYA Has 1% Share of Overall DC AUM but Leads in Select Segments 17

Table 7: VOYAs Margins Are Considerably Below Peers Retirement Businesses 18

Table 8: VOYA Has Modest Share in Traditional Fixed Annuity Market ............ ...21

Table 9: Better Positioned in the Indexed Annuity Market......................................21

Table 10: External Net Flows Have Been Robust, but Are Likely to Slow............. .23

Table 11: Retail Net Flows Have Recovered..........................................................25


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Table 12: VOYA Is a Leading Competitor in the Term Market . . ..........................27

Table 13: . . . But Has Modest Share in Other Individual Life Products ............. .....27

Table 14: VOYA Is a Major Stop Loss Insurer.......................................................29Table 15: Small Competitor in Group Life.............................................................29

Table 16: Less than 1% Share in Disability............................................................29

Table 17: VOYAs Stop Loss Benefits Ratios Above Peers, Group Life In Line....30

Table 18: Management Has De-Risked the Portfolio . . . ............. ............. ............. .31

Table 19: . . . But It Remains Riskier than Peer Levels ............. .............. ............. ...31

Table 20: VOYA Investment Portfolio Summary...................................................32

Table 21: Management Team Experienced; Mostly New to VOYA........................32

Table 22: Executive Compensation in 2012 ............ ............. ............. ............. ........33

Table 23: IPO Comp Was Significant............ ............. ............. .............. ............. ...33

Table 24: Sum-of-the-Parts P/E Analysis.............. ............. ............. ............. ..........35

Table 25: Sum-of-the-Parts P/BV ex. AOCI Analysis ............ ............. .............. .....35

Table 26: Summary Earnings Model......................................................................38

Index of FiguresFigure 1: Mix of Ongoing Business ............. ............. ............. ............. .............. .......4

Figure 2: Major Drivers of Expansion in Ongoing Business ROE.............................8

Figure 3: Capital by Business ............. ............. ............. .............. ............. ............. .11

Figure 4: Low ROCs, High Capital........................................................................12

Figure 5: Earnings Mix of VOYAs Ongoing Business ............ .............. ............. ...16

Figure 6: VOYA Retirement AUM by Market ............ ............. .............. ............. ...17

Figure 7: Margins (ROAs) in the Retirement Business Have Been Declining..........19Figure 8: Annuity AUM by Product Line...............................................................20

Figure 9: Total AUM and AUA Breakdown...........................................................23

Figure 10: AUM Breakdown ............ ............. ............. ............. .............. ............. ...23

Figure 11: AUM ex. General Account ............. ............. .............. ............. ............. .23

Figure 12: Fees by Source .............. ............. ............. ............. ............. .............. .....24

Figure 13: Shift Towards External Assets . . ..........................................................24

Figure 14: . . . Translates to Growth in Fee Income ............ ............. ............. ..........24

Figure 15:Retail Investment Performance Mixed ............. ............. ............. ............ 25

Figure 16: Institutional Performance Robust for 3-Year Period, Modest Otherwise.25

Figure 17: Face Amount by Product ............ ............. ............. ............. .............. .....26

Figure 18: Premiums by Product............................................................................29

Figure 19: Portfolio Yield......................................................................................31

Figure 20: VOYA Is Trading Above Value Implied by its ROE ex. AOCI........... ...34

Figure 21: VOYA Fairly Valued Based on Ongoing Business ROE ex. AOCI....... .34


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Investment Thesis

Our outlook for ING U.S. is mixed. We view management initiatives to enhance

operating performance and the potential for expansion in the ongoing business ROE

as major positives. In addition, we believe that the companys sizeable deferred tax

asset presents significant value that is not fully recognized on the balance sheet. On

the other hand, we project returns in the companys major business lines to remain

below peer levels for the foreseeable future, and are skeptical of managements

ability to attain price hikes in the retirement division without losing material share

given intense competition in the DC market. Despite potential expansion in ongoing

business returns, we expect VOYAs overall ROE to remain in the 6-7% range for

the foreseeable future, primarily due to significant capital tied up in the runoff

variable annuity and institutional spread blocks, and low margins in the fixed annuity

and universal life books. Also, we remain wary of tail risk in the VA block. Finally,

we feel that current valuation limits upside potential, especially given the prospect ofadditional secondary offerings.

Potential Expansion of Ongoing Business ROE a Plus

We view management initiatives to boost VOYAs ongoing business returns

positively. VOYAs returns have historically lagged those at peers, partly due to

under-pricing of business, a bloated cost structure, and substantial capital allocated to

the companys closed blocks (variable annuity and institutional spread products).

Management has begun several return-enhancing initiatives, including cost

reductions, re-pricing of business, and a mix shift towards higher-return products,

with the goal of improving ongoing business ROE from 8% in 2012 to 12-13% by

2016. Among the various actions, we expect cost savings and business re-pricing to

have the most impact in the next two years, and capital management and business

mix shift to provide a modest lift in later periods.

Considerable Exposure to High-Return Markets

VOYA derives about 58% of its earnings from the retirement and investment

management businesses and the proportion could increase further over time.

The returns in these markets are considerably higher than those in traditional

insurance products. In addition, earnings in the retirement and asset management

businesses more closely approximate free cash flow compared with the individual

life, annuity, and group insurance products, which represent a majority of other

insurers businesses. On a cautious note, VOYAs performance in the retirement and

investment management divisions lags that of competitors, and management is taking

several actions that should enhance its results. Over time, the proportion of overall

earnings from these businesses could increase further, which would enable the stock

to garner a higher valuation multiple.

Deferred Tax Assets a Significant Source of Value

Based on our estimate of the present value of potential tax savings, VOYAs

deferred tax assets are worth roughly $2-3 per share. We expect the company to

utilize the majority of its life and non-life net operating loss carry-forwards. In our

view, the key constraint in the utilization of tax assets is the Section 382 limitation,

which likely will be triggered by the next secondary offering of the companys shares

(the Section 382 limitation is triggered with a 50% ownership change). The company

Figure 1: Mix of Ongoing BusinessBased on 2013E pretax income

Source: J.P. Morgan estimates.

Reasons we are not Overweight

Overall ROE to remain weak

Execution risk in retirement

Tail risk in variable annuity block

Full valuation

Reasons we are not Underweight

Beneficiary of strong equity market

Business performance to improve

DTA a valuable asset

ING U.S., Inc. (VOYA)

Neutral

Ind. Life18%

Inv.Mgt.12%

Retirement46%

Emp.Ben.7%

Annuities17%


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currently has a valuation allowance against its operating loss carry-forwards, so the

DTA is not fully reflected in the balance sheet. Over time, VOYA could release part

of the valuation allowance, which would lift book value, although this would notaffect our estimate of the DTAs economic value, which we equate to the present

value of future tax savings.

Overall ROE to Remain Sub-Par

Our model projects VOYAs ROE (ex. AOCI) to remain in the 6-7% range for

the foreseeable future, considerably below the life sector average of 10-12%.

Although management initiatives to enhance operating performance should lift the

ROE of the ongoing businesses, we expect the companys overall ROE (which we

consider a superior metric to ongoing business ROE) to remain poor. In our opinion,

the companys returns will be held back by low margins in parts of the ongoing

business (fixed annuities and universal life) and significant capital tied up in runoff

blocks (variable annuities and institutional spread products). As of 3/31/13, the

variable annuity closed block accounted for roughly 34% of VOYAs total capital ex.

AOCI and 46% of equity ex. AOCI (assigning no debt to the VA block). In our

opinion, ROE (ex. AOCI) is a better measure of returns than managements preferred

metric of ongoing business ROE, which excludes capital allocated to closed blocks

and corporate expenses, and is therefore systematically higher than the overall ROE.

Execution Risk in Retirement and Low Rates Key Risks

We view intense competition in the DC market and sustained low interest rates

as key risks to managements financial targets. The retirement division is one of

VOYAs highest-return businesses and represents roughly 46% of total earnings.

While returns in the unit are higher than those in other divisions, they lag peer levels,

which we attribute in part to historical under-pricing of business and an inefficient

cost structure. Management is implementing various initiatives to lift margins,including price hikes, crediting rate reductions, cost cuts, actions to increase plan

retention, and cross-selling to individual plan participants. Among these, we are most

optimistic on planned expense cuts, and are less confident in managements ability to

raise prices without losing material share given intense price competition in the DC

market. We expect industry-wide returns in the DC/401(k) market to remain under

pressure given secular trends such as greater unbundling of services, the rising

utilization of passive investments, and increasing fee disclosure requirements.

In our view, sustained low interest rates would suppress overall investment income

and weigh on margins and sales/flows in the companys retirement, annuity, and

individual life businesses. Managements target for a 12-13% ongoing business ROE

assumes rates rise based on the forward yield curve at 7/31/12 (10-year Treasury of2.38% at 12/31/16). Although rates have increased recently, credit spreads in most

asset classes have tightened considerably in the past 10 months (A corporates have

tightened 47 bps, BBB 35 bps, high yield 153 bps). As a result, new money yields

in insurers portfolios have declined further since the end of July 2012. If rates and

spreads remain close to the current level, there could be 5%+ downside in EPS

versus managements targets. Low rates would pressure the portfolio yield and hurt

margins in interest-sensitive products, especially as a greater proportion of in-force

business reaches minimum guaranteed crediting rates. At 3/31/13, 90% of the

retirement book and over 70% of the individual life block were at minimum

guaranteed crediting rates. Also, low rates are likely to stifle flows in the indexed


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annuity and universal life products. More importantly, sustained low rates would

challenge AUM growth in the VA book and increase tail risk in the closed block.

Closed Block Variable Annuity Presents Tail Risk

We believe that the closed block variable annuity (CBVA) book presents

significant tail risk. Management has made significant enhancements in its hedging

program, and has set aside substantial reserves to serve as a buffer against adverse

market scenarios. Also, the recent equity market strength reduces potential risk.

Nevertheless, we are wary of tail risk in the block given its relatively aggressive

liability profile (in terms of sales vintages, product features, and net amount at risk),

limited policyholder experience (particularly on annuitization), and the books

overall size relative to the overall company (34% of capital). We feel that the block

has positive economic value in a normal market environment, but are concerned

about possible charges and the need for capital infusion under adverse conditions.

ING has reported a series of charges for its VA block, and we are less confident than

management that the closed block is insulated from future market shocks.

Valuation

We are establishing a year-end 2014 price target of $28. In deriving our price

target, we determine a value for VOYAs business and then add our estimate of the

value of its deferred tax assets (adjusted for expected cash taxes). For the companys

businesses, we use a multiple of 0.7x our 12/31/14 book value ex. AOCI estimate

(50% weight), 0.5x our 12/31/14 projected total book value (25%), and 7.0x our

2015 EPS forecast (25% weight). This compares to our assumptions for the life

group of 0.8x book value ex. AOCI, 0.7x total book value, and 7.0x 2015E EPS,

which we feel is reasonable given the companys sub-par returns. This methodologyyields a $26 per share value for the business. To this, we add $2.38 related to the

DTA ($2.99 present value of future tax savings minus present value of expected cash

taxes of $0.61), resulting in a $28 price target. In addition, we assess VOYAs

valuation using several other metrics, which yield a fair value in the $25-29 range.

VOYA currently trades at 0.7x book value (ex. AOCI pro forma for the IPO), below

the life insurance sector average of 1.1x, and at 10.7x 2014E EPS, above the life

group average of 9.3x. Current valuation seems full, and we see more attractive risk-

reward in other life insurance names that are trading at comparable levels but are

projected to generate higher ROEs.

Risks to Rating and Price TargetIn our view, following are the key upside risks to our rating and price target:

Risk in closed block variable annuities (CBVA) declines. Although the CBVA

has potential positive economic value in a normal or favorable scenario, we

believe that it presents substantial downside risk under adverse macro conditions.

In our view, further de-risking of the block, whether due to a rising equity market

or third-party solutions (hedging, reinsurance, or a sale), would help alleviate

investor concerns about the potential for further balance sheet charges or a capital


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shortfall. This, in turn, should reduce the companys cost of capital, lift investor

sentiment, and result in a higher valuation multiple.

Capital deployment towards share repurchases begins sooner thananticipated. VOYAs major operating subsidiaries reset their surplus accounts

(which were previously negative), to zero on 5/8/2013, paving the way for the

resumption of dividend payments to the holding company. Nevertheless, while

we are assuming a modest dividend, we do not anticipate share buybacks until

2015. If the company is able to generate cash and accumulate capital at a faster

pace than expected, management could have the flexibility to repurchase shares

sooner, which would lift returns and drive upside in EPS estimates.

Equity market rally continues. VOYA derives approximately 58% of its

earnings from equity-sensitive businesses (retirement and investment

management). Based on our calculations, an increase of 10% in the market would

lift annual EPS by $0.09 (3%). Besides driving upside to EPS estimates, a strong

market would also reduce the net amount at risk in the CBVA.

The major downside risks to our rating and price target are:

Competition and secular headwinds challenge management in enhancing

retirement division returns. Management efforts to improve the retirement

divisions profitability are a notable plus, but we are wary of execution risk given

high competition and secular headwinds in the 401(k) market. We expect overall

returns in the DC/401(k) market to be held back by high competition, increased

unbundling of services, a preference for passive investments, and greater fee

disclosure requirements. The retirement division accounts for 46% of earnings

and lack of improvement in division results would affect overall returns.

Sustained low interest rates. VOYA derives about half of its revenues frominvestment income (versus the sector average of 30%), and prolonged low rates

would pressure investment income and earnings. Also, low rates would make it

challenging for fixed assets within the CBVA to grow at guaranteed rates,

increasing the risk profile of the block and raising VOYAs cost of capital.

Overhang of additional offerings limits upside in the stock. ING Groep N.V.

(covered by J.P. Morgan European Insurance analyst Ashik Musaddi) owns 71%

of VOYA and is bound by its agreement with the European Commission to

reduce its ownership stake over time (to less than 50% by 12/31/2014 and full

disposal by 12/31/16). In our opinion, there could be a sizable secondary offering

in November 2013 following the expiration of the IPO-related lock-up period

(180 days). Part of the increase in publicly traded shares should be absorbed by

purchases related to the companys likely eligibility for inclusion in majorindices. Still, we believe that the prospect of multiple secondary offerings could

limit potential upside in the stock.


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Company Description

ING U.S. Inc. is a retirement, investment management, and insurance companyserving individual and institutional customers in the domestic market. It distributes

its products via financial intermediaries, independent agents and brokers, affiliated

advisors, and dedicated sales specialists. The company represents the U.S. life

insurance business of ING Groep N.V., a Dutch financial services conglomerate, and

went public via an IPO of 65.2 million shares at a price of $19.50 on May 1, 2013.

The former parent still owns 71% of the firm, but pursuant to an agreement with the

European Commission, it has to reduce its ownership to below 50% by 12/31/14 and

completely divest its position by 12/31/16. As of 3/31/13, ING U.S. had assets of

$220.9 billion and total shareholders equity of $13.4 billion.

Key Investment PointsManagement Initiatives to Lift ROE of Ongoing Businesses

Management has several initiatives to improve the ROE of VOYAs ongoing

businesses from 8% in 2012 to 12-13% by 2016. The companys returns have

historically lagged those at peers, partly due to the under-pricing of business, an

inefficient cost structure, and significant capital tied up in the variable annuity block.

New management considers ROE improvement one of its primary objectives, and is

taking a number of strategic actions to enhance profitability.

Figure 2: Major Drivers of Expansion in Ongoing Business ROERefers to ROE for the ongoing business


Expense reductions. VOYAs expenses and margins in several businesses are

worse than peer levels, part of which we attribute to the series of acquisitions by

ING over the years. Management has implemented a company-wide cost

reduction plan with the goal of reducing annual pre-tax operating expenses by at

least $100 million between 2012 and 2016. In addition, the company intends to

generate expense saves in specific units, particularly in retirement (by cutting

discretionary spending and personnel costs) and individual life (by reducing

8.3%

12.2%

0.50% 0.40%0.50%

0.50%

2.00%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

2012 ROE ExpenseReduction

ProductRe-pricing

Low-MarginBus. Run-Off

CapitalManagement

Org. Growthand Other

2016 TargetROE

ING U.S. built via acquisitions

Security Life of Denver (1977)

Equitable of Iowa (1997)

Furman Selz (1997)

Reliastar / Pilgrim Funds (2000)

Aetna Financial / Aeltus (2000)

CitiStreet (2008)


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operating expenses and commissions), that could result in higher overall savings.

Our model projects VOYAs overall expense ratio (operating expenses/revenues

ex. investment income) to decline from 47.8% in 2012 to 45.9% in 2013 and43.9% in 2015, with a majority of the improvement driven by the retirement and

individual life divisions. Based on our calculations, expense cuts will enhance

VOYAs ROE by roughly 50 bps through 2016.

Re-pricing of business. Management is actively reducing crediting rates in the

retirement and individual life businesses to preserve margins in the face of

declining new money yields. Also, within its individual life division, the

company has launched new, higher-priced term and universal life products to

replace low-margin versions currently being offered. We estimate that re-pricing

initiatives will add roughly 40 bps to ROE by 2016.

Organic growth and mix shift towards less capital intensive and higher-

return products. Over time, the companys ROE should also benefit from

organic growth in the higher-return retirement and investment managementdivisions, and concurrent shrinkage of the lower-return annuity business. Within

the investment management division, returns should be helped by growth in third-

party AUM. Meanwhile, runoff of legacy fixed annuity policies and growth in the

mutual fund business should help annuity division returns. In our view, organic

growth and a mix shift towards less capital intensive products will lift the overall

ROE by over 200 bps by 2016 (50 bps from runoff of low-margin policies and

rest from organic growth), with most of the benefit in later years.

More efficient capital management. Our model incorporates a modest dividend

and does not assume any share repurchases through 2014. However, we expect

the company to begin to deploy free cash flow towards share buybacks in 2015

and beyond. We are currently assuming repurchases of $500 million in 2015 and

$300-400 million annually thereafter, which should lift the overall ROE by50 bps by 2016. Following the IPO, state regulators reset the previously negative

unassigned surplus account of VOYAs operating subsidiaries to zero (this has to

be positive to upstream capital to the holding company). Capital efficiency should

improve further over time as the companys variable annuity block begins to run

off, although the benefit to results in the next few years is likely to be marginal.

Among the major ROE initiatives, we view cost cuts as the most achievable, but

are less confident in managements ability to re-price and grow its business. We

believe that management has already identified the majority of cost-cutting

opportunities. On the other hand, we are skeptical of the companys efforts to raise

prices in highly competitive markets, particularly in the small/mid-case segment of

the retirement business. Also, we expect the impact of a mix shift (in individual life

and annuities) to be gradual given the large in-force blocks of under-priced business.Poor margins in closed blocks (variable annuities and institutional spread products)

are likely to remain a drag on VOYAs results for the foreseeable future.

Furthermore, we feel that a sustained low interest rate environment presents a key

risk to managements ongoing business ROE goal. The companys targets assume

that interest rates will track the forward yield curve as of July 31, 2012. Although

rates have gone up since, credit spreads have tightened significantly, so new money

yields are tracking below those implied by the forward curve at 7/31/12.

VOYAs targets assume that

interest rates will track the

forward yield curve as of July 31,

2012. Rates have increased

since, but credit spreads have

tightened, which shouldpressure new money yields.


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DTA Has Significant Value Not Fully Reflected in B/S

We believe that VOYAs deferred tax assets are worth $2-3 per share, based on

our estimate of the present value of future tax savings. As of 3/31/13, VOYA hadapproximately $1.1 billion in life and non-life federal operating loss carry-forwards,

$600 million of life deferred losses (generated by the VA book), and $300 million of

non-life deferred losses (including goodwill amortization of the CitiStreet

acquisition). The monetization of these assets will depend on several factors,

including: the amount of future life and non-life taxable income, the expiration dates

of the NOLs, and limitations following a change of control as defined by IRS Section

382. As of 3/31/13, the company had a valuation allowance (roughly $1.9 billion)

against these tax assets, so their full value is not reflected in VOYAs balance sheet.

As VOYA is able to generate consistent earnings over the next few quarters, the

valuation allowance could be reduced, and part of the tax assets would appear on the

balance sheet. However, this would not affect our estimate of the economic value of

the deferred tax assets, which is based on the present value of potential tax savings.

Table 1: Sec. 382 Limit Based on Market Cap

$ in millions except per share amounts

Valuationat Trigger Share Price

Section382 Limit

$5,000 $19.17 $41.6

6,000 $23.01 51.0

7,000 $26.84 60.5

7,500 $28.76 65.2

8,000 $30.68 69.9

8,500 $32.60 74.7

9,000 $34.51 79.4

10,000 $38.35 88.8

Source: Company reports and J.P. Morgan estimates.

Table 2: Net Operating Loss Carry- orwards

$ in millions except per share amounts, as of 3/31/13

TypeSubject to

Section 382?DTA ex. Valuation

AllowancePV of TaxSavings

PV PerShare

NOLs life Yes $201.6 $130.1 $0.50

NOLs non-life Yes $899.8 $240.3 $0.92

Life subgroup deferred losses No $625.0 $362.9 $1.39

Non-life subgroup deferred losses Partially $275.0 $47.6 $0.18

Total loss carry- orwards $2,001.5 $780.8 $2.99

Cash taxes ($200.0) ($158.5) ($0.61)

Adjusted value $1,801.5 $622.4 $2.39


Section 382 limitation to cap use of loss carry-forwards. In our view, the key

constraint in the utilization of VOYAs loss carry-forwards is a potential annual

Section 382 ceiling, which we estimate to be $65.2 million (assuming a

$7.5 billion valuation when change of control is triggered). Section 382 limits a

companys ability to use a NOL if it undergoes an ownership change of more

than 50% over a three-year period. We expect Section 382 to be triggered before

year-end 2014 (INGs agreement with the European Commission mandates a

reduction of its ownership in VOYA to below 50% by 12/31/14). Based on our

calculations, VOYA will be able to use most of its operating losses.

Future CBVA operating losses not an allowable offset to taxable income.VOYA sold most of its VA business through its Iowa-domiciled operating

subsidiary (ING USA) but reinsured substantially all guaranteed benefit exposure

to a Cayman-domiciled captive reinsurer (Security Life of Denver or SLDI). As

such, losses associated with VA guarantees appear in the income statement of

SLDI, not ING USA. Under current tax regulations, losses generated by SLDI,

which has opted to be treated as a U.S. company for federal income tax purposes,

can be used to offset its own future taxable income but not income from other

parts of VOYA. Hence, CBVA future losses cannot be utilized to offset taxable

income generated by VOYAs onshore subsidiaries. While we anticipate further

CBVA losses over time, these should not generate tax assets for the company.


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VOYA will still be subject to modest cash taxes. We expect VOYA to incur

cash tax payments of $40-60 million per year from 2013 to 2016, related mostly

to state taxes, non-deductible income, and other miscellaneous items. As such, inderiving our sum-of-the-parts valuation for VOYA, we add the economic value of

the NOL ($2.99 per share) but subtract the present value of potential cash tax

payments ($0.61 per share) assuming cash taxes of $50 million per year.

Actual value of the NOL could be less than our estimate depending on the

discount rate and DRD. In deriving a value for the NOL, we are assuming a

35% tax rate and a 10% discount rate. However, given the dividends received

deduction (which helped results by $101 million in 2012 and $74 million in

2011), VOYAs tax rate would be below 35%. Assuming a 25% tax rate would

reduce the PV of future tax losses by $112 million (or $0.43 per share). In

addition, we feel that one could justify a discount rate close to the companys cost

of capital, which we estimate to be in the low-teens. Assuming a 13% discount

rate would reduce the PV of tax savings by $146 million ($0.56 per share).

Overall Returns to Remain Sub-Par

We project VOYAs overall ROE (ex. AOCI) to remain in the 6-7% range for

the foreseeable future. Management has several initiatives to expand the ongoing

business ROE from 8% in 2012 to 12-13% by 2016. While we view these actions

positively, we expect the companys overall ROE, which we consider a more

accurate measure of its economic returns, to remain lackluster given the substantial

capital allocated to variable annuity closed block and low returns on the legacy

individual life and fixed annuity businesses.

Our model forecasts VOYAs overall ROE (using BV ex. AOCI) to expand from

6.0% in 2012 to 6.4% in 2014 and 6.6% in 2016. Our calculation is based on EPS

ex. realized gains/losses and book value ex. AOCI. The only adjustment to EPS is theexclusion of income/loss from the VA closed block (which generates losses in a

normal market scenario). Despite an improvement in ongoing business ROE, the

companys overall returns are likely to remain significantly below those of most

peers for the next several years as a result of:

Significant capital tied up in closed blocks. Approximately 34% of VOYAs

total capital is tied up in closed blocks, which are expected to generate marginal

returns. At 3/31/13, the company had roughly $4.6 billion of capital allocated to

its closed block variable annuity book (CBVA), and a much smaller amount (less

than $50 million) assigned to closed block institutional spread products. Our

model projects the institutional spread product book to earn roughly $15 million

pretax in 2014 and we expect income to decline to less than $5 million in 2016.Meanwhile, in a rising equity market scenario, the closed block variable annuity

book is expected to generate losses (as the liability declines less than the hedge

assets on a GAAP basis). Furthermore, we expect the closed block to run off at a

very gradual pace, and project the release of capital to take several years. Also, in

an adverse scenario, the VA book could even require additional capital.

Reasons overall ROE is a better

metric than ongoing bus. ROE

Ongoing business ROE excludes

capital tied in closed blocks

Ongoing bus. ROE reflects optimal

capital, not actual capital, which

could be higher than 425% RBC,

especially during stress scenarios

Ongoing business ROE uses

hypothetical interest cost, lower

than total actual interest cost

Ongoing business ROE overstates

potential book value growth

Figure 3: Capital by BusinessTotal Capital at 3/31/13 = $13.6 billion

Source: Company reports.

Ongoing Bus.66%

Closed Block34%


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Under-priced blocks within ongoing business. Within VOYAs ongoing

businesses, we forecast the individual life and annuity divisions to generate

modest returns for the foreseeable future in part due to historical under-pricing ofbusiness and the impact of low interest rates. The individual life and annuity

divisions represent roughly 50% of capital in VOYAs ongoing business. Despite

management efforts to shift the product mix within these divisions, low returns

on the in-force business are likely to continue to pressure overall returns.

We consider overall ROE a better measure of economic returns than

ongoing business ROE. The ongoing business ROE metric does not reflect

capital tied up in the closed block variable annuity (CBVA) and institutional

spread products. In addition, the ongoing business ROE metric computes returns

based on an optimal capital structure, not the companys actual capital base (even

ex. the closed block). On this basis, we think most life insurers would report mid-

teens ROEs compared with actual returns of 10-12%. In our view, excluding

capital tied up in the closed block and using an optimal capital structure

understates the amount of capital needed to operate the business and overstates

potential returns. Also, the ongoing business ROE ignores potential capital and

liquidity buffers at the holding company for stress scenarios. Following the IPO,

VOYA shifted $1.4 billion from its operating subsidiaries to SLDI (the primary

sub that houses the VA risk). This did not affect overall capital but reduced the

RBC of the operating businesses. Pro forma for the IPO, VOYAs combined

RBC ratio was 451% and its debt-to-cap ratio was roughly 25%. The ongoing

business ROE is computed using a debt-to-capital ratio of 25% and RBC of

425%, and uses hypothetical interest expense, which is lower than actual

interest expense. Consistent with management guidance, our model assumes no

share repurchases for 2013 and 2014. The build-up of capital over this period

should lift equity, but have an adverse effect on the companys overall ROE.

However, due to the use of an optimal capital structure, the ongoing businessROE does not reflect the adverse effect of capital build-up (earnings grow, but

the denominator in the ROE calculation does not increase). In our estimation, this

is likely to be one of the key drivers of the improvement in the ongoing business

ROE. Similarly, the ongoing business ROE metric overstates potential book value

growth. Given the use of an optimal capital structure, the ongoing business book

value is expected to grow roughly 1% over the next few years, considerably

below high-single-digit BV growth for competitors with similar returns.

Figure 4: Low ROCs, High CapitalTotal Capital at 3/31/13 = $9.0 billion


Ind. Life and AnnuitiesCapital = 50%ROC = 5.7%

Other Ongoing Bus.Capital = 50%ROC = 10.3%


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Ongoing Business ROE versus Overall ROE (ex. AOCI)

Management defines Ongoing Business ROE as adjusted operating earnings (after

income and interest) divided by equity capital allocated to the ongoing business.

Adjusted operating earnings = pre-tax ongoing business operating income

plus/minus DAC/VOBA unlockingplus/minus interest expense (assuming 25%debt-to-capital ratio and 5.5% interest rate). Tax-adjusted at 35%.

Equity capital = 75% of total capital ex. AOCI allocated to ongoing businesses.

Earnings and equity capital exclude corporate, closed block variably annuity, andclosed block institutional spread products.

J.P. Morgans preferred return metric, Overall ROE (ex. AOCI) = operating earningsafter taxes divided by overall equity ex. AOCI.

After-tax operating earnings = sum of pre-tax operating earnings by segment,

includingcorporate and closed block institutional spread products, and excluding

closed block variable annuity (CBVA). Using actual interest expense and tax-adjusted at 35%.

Equity (ex. AOCI) = total equity ex. AOCI.

We feel that including CBVA in equity (denominator) is more appropriate given

significant capital tied up in the block, its marginal returns, and potential tail risk.

Closed Block VA Presents Significant Tail Risk

VOYA has undertaken de-risking initiatives, but we believe that the CBVA

presents significant potential downside, especially in adverse market conditions.The closed block variable annuity segment consists of retail variable annuity policies

sold over 2001 to early 2010 (the company ceased retail sales of VAs with living

benefits in 1Q 2010). As of 3/31/13, the block had AUM of $44 billion. A majority

of the living benefit guarantees in the closed block are guaranteed minimum income

benefits (35% of account value) and guaranteed minimum lifetime withdrawal

benefits (37% of account value). On a positive note, management has significantly

enhanced its hedging program, and we believe that the block will generate potential

economic value under normal market scenarios. Also, VOYA has significant reserves

to protect against negative market environments. However, on most risk metrics,

VOYAs VA block appears considerably worse than those of competitors. The

companys sales vintages, product features, and net amount at risk compare

unfavorably with peers. Given these factors, we believe that VOYA is at a

disadvantage to other insurers with distressed VA blocks (HIG, MFC) in being able

to access third-party solutions (customer buyouts, reinsurance, block sales, etc.) to

offload risk. The recent strong equity market performance is a notable plus. Still, we

are concerned about the blocks risk profile and limited policyholder behavior data,

and remain wary of the books performance over a full market cycle.

Management de-risking initiatives a plus, but downside risk still significant.

Over the past few years, management has implemented several initiatives to limit

risk in the closed variable annuity block. These include bolstering the blocks

hedging program to cover more risks and protect statutory capital, replacing

contingent capital guaranteed by ING parent with permanent external funding

Table 3: VOYA vs. JPM ROE Calc.

$ in millions based on 1Q13 results

VOYA

Ongoing bus. pretax inc. 285.4

DAC adjustments (7.3)

Int. expense @ 5.5% (31.1)

Taxes @ 35% (86.5)

Adj. operating earnings 160.6

Avg. equity ex. AOCI 10,051.3

Add: inancial leverage 3,757.8

Less: closed blocks (4,774.6)

Less: debt @ 25% (2,258.6)

Avg. ongoing bus. equity 6,775.9

Annualized ROE 9.5%

JPM Research

Ongoing bus. pretax inc. 285.4

Corporate (50.1)

Closed block - ISP 21.4

Taxes @ 35% (89.8)

After tax op. earnings 166.8

Avg. equity ex. AOCI 10,051.3

Annualized ROE 6.6%

Source: Company reports and JPM estimates.


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($1.8 billion contribution partly funded by $1.4 billion of dividends from

VOYAs operating subs), and infusing capital into the block ($500 million in

2Q12). Based on our analysis, the CBVA has economic value in the range of-$2 billion to +$3 billion under various market scenarios. This range is based on

limited company disclosure on the block and a number of assumptions, so we are

unable to derive a more precise estimate of potential results in a normal

environment. While there is potential upside in a positive macro environment,

given modest history on customer behavior, we are concerned that actual results

in an adverse scenario could be worse. Also, the block is unlikely to generate

material capital in the near term but could require a capital infusion in case of a

sharp market correction. In addition, the cost of hedging variable annuity

exposure, which is not included in operating or ongoing business EPS, could

increase substantially under stressed market conditions.

Riskier liability profile versus peer books. In our view, relative to other

insurers that have VA blocks, the liability profile of VOYAs closed block

variable annuity book is significantly riskier. Although the company has higher

reserves, its vintages and product features compare unfavorably. A significant

portion of VOYAs block was sold in the 2006-2008 period when the company

was offering relatively generous features (6-7% rollup rate on GMIB and 4-7%

lifetime withdrawal rate with no cap on benefit base), and equity markets were at

their peak (implying a substantial share of the block is significantly in-the-

money). We estimate that of the $71.6 billion in VA sales generated by VOYA

over 2001 to 2010, roughly 44% (versus 36% for the industry) were made in this

period. Consequently, the companys net amount at risk (NAR) vis--vis variable

annuity assets is considerably above peer levels (13.9% on death benefits and

9.9% on living benefits versus 1.8% and 0.7% for peers, respectively).

Limited policyholder behavior experience a key concern. VOYA has incurred

a series of charges in its VA block in recent years, including GAAP reserveadditions of $741 million in 4Q11 and $115 million in 3Q12 (mainly to reflect

updated policyholder lapse and annuitization experience). Also, VOYA reported

CBVA charges driven by DAC write-downs in 2010 (1.5 billion pre-tax), and

assumption changes in 2009 (343 million, inclusive of ING Parents Japan VA

book).While these reserve increases provide a buffer against future charges, we

remain wary of adverse experience given limited policyholder data on the

annuitization or utilization of benefits. Only a limited number of policyholders

with guaranteed minimum income benefit (GMIB) riders are currently in the

annuitization phase. Similarly, a significant proportion of GMWBL policies have

been in-force for less than the typical 7-year surrender charge period. Credible

experience on annuitization or withdrawal patterns is unlikely to emerge until

2016 or later. To the extent that actual experience varies substantially from

current assumptions, there could be additional balance sheet charges, which could

necessitate capital contributions to the closed block.


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Table 4: VOYAs Variable Annuity Block Seems Riskier than Those of Most Peers

$ in millions except per share amounts, as of 3/31/13

Company AIG AMP HIG LNC MET PRU VOYA

Total Individual VA Assets $81,992 70,882 65,500 80,312 168,559 139,034 43,846

GMDB Net Amount at Risk $686 230 1,498 1,078 5,516 4,158 6,105

Living Benefit Net Amount at Risk $650 213 300 415 8,881 3,781 4,354

Balance sheet reserve for GMDBs $368 4 872 93 371 488 435

Balance sheet reserve for Liv. Ben. $805 351 795 199 1,139 3,807 2,800

% of assets with GMDB

Return of Premium 24.4% 67.8% 33.5% 84.2 58.8% 74.0% 46.6%

Reset 1.2% 16.1% 4.9% 0.0 0.0% 0.0% 0.0%

Ratchet 31.9% 13.0% 30.5% 29.7 17.8% 0.0% 18.9%

Roll-Up 10.0% 0.0% 2.4% 0.2 0.0% 0.0% 5.5%

Combination / Other 0.6% 1.4% 40.9% 0.0 22.2% 23.8% 29.0%

% of assets with Living Benefits

GMWB 25.4% 48.4% 41.1% 50.0 14.5% 0.7% 36.7%

GMIB 3.7% 0.6% 0.0% 20.0 55.1% 2.6% 35.3%

GMAB 1.0% 5.6% 0.0% 0.0 0.3% 5.6% 2.4%

Combination / other 0.0% 0.0% 0.0% 0.0 0.0% 73.1% 0.0%


Overhang of Potential Secondary Offering a Negative

Pro forma for the IPO and the greenshoe, ING Groep owns approximately 71% of

VOYA. Based on its agreement with the European Commission, ING has to reduce

its ownership below pre-specified limits by certain dates. The agreement calls for

ING to reduce its stake to less than 50% by year-end 2014 and to dispose of its entire

holdings by the end of 2016. The lock-up period following the IPO expires in earlyNovember 2013, following which ING Groep could sell additional shares. Part of the

increase in openly traded shares is likely to be offset by purchases related to VOYAs

expected eligibility for inclusion in major indices. Nonetheless, we consider the

prospect of upcoming secondary offerings a negative.

Table 5: ING Groep Sell-down Schedule

Refers to ING Groeps ownership of VOYA

DeadlineMaximum Allowable

Ownership

12/31/2013


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Business Segment Discussion

ING U.S. has five operating units retirement (46% of earnings), individual life

(18%), annuities (17%), investment management (12%), and employee benefits

(7%). The companys retirement business is well positioned in various segments of

the DC market, but has lower margins and returns than competitors. We are

relatively positive on the companys investment management franchise, which we

project to generate double-digit growth. Meanwhile, our outlook for the annuity,

individual life, and employee benefits businesses is relatively cautious as we expect

low interest rates and the sluggish economy to weigh on top-line growth and returns.

Also, sizable low-return blocks in the annuity (fixed annuities) and individual life

(universal life) businesses are likely to hold back the divisions overall returns. The

company also has significant capital tied up in its runoff variable annuity business

(34% of capital), which management excludes from ongoing business results.

Figure 5: Earnings Mix of VOYAs Ongoing BusinessBased on 2013E pretax income


Retirement: Strong Market Position, Weak Margins/Returns

We view VOYAs strong positions in various segments of the retirement market

positively, but expect the business to generate sub-par margins and returns.

Retirement is VOYAs largest business division, representing 46% of pre-tax

earnings. Compared with peers, VOYAs retirement unit generates below-average

margins and returns, which we attribute partly to the companys historical focus on

market share over profitability, an inefficient cost structure, and product mix.

Management has launched several initiatives to boost the divisions margins.

Although we view these actions positively, we do not anticipate a material

improvement in retirement division returns, in part due to secular headwinds and

intense competition in the defined contribution (DC) market.

Retirement46%

Annuities17%

InvestmentManagement

12%

IndividualLife18%

EmployeeBenefits

7%

Retirement = 46% of earnings

2013E Earnings = $568.0 mil.



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VOYAs retirement franchise is a leader in record-keeping. Also, the company is

well positioned in segments of the DC business that have historically been

dominated by insurers (education, government, and small/mid-case 401(k) plans).

Returns and margins in VOYAs retirement division have historically lagged

competitor levels, and management has instituted a number of initiatives toenhance the divisions profitability.

Our model projects the retirement business to generate modest returns and sub-

par margins. While we view management initiatives positively, we feel that there

is execution risk, and are skeptical of a significant improvement in returns given

intense competition and secular challenges facing the DC business.

Strong Market Position a Plus, but Returns and Margins to Lag Peer Levels

The retirement division offers employer-sponsored retirement plans to privatecompanies ($35.4 billion of AUM at 3/31/13) and tax-exempt institutions

($49.3 billion of AUM at 3/31/13) through a mix of affiliated and unaffiliated

distribution channels. The unit also has an individual markets business that provides

various products (custodial IRAs, brokerage accounts, etc.) to retirement plan

participants. VOYA is ranked 15th in terms of total defined contribution AUM, with

market share of only 1%, but is among the leaders in select segments. The company

is a top 5 competitor in the 403b (education), 457 (government), and small/mid-case

401(k) segments of the DC market. Also, VOYA has a leading record-keeping

business, ranked #2 and #3 by number of DC plans and participants, respectively.

Figure 6: VOYA Retirement AUM by MarketAs of 3/31/13, based o n AUM o f $96 bill ion


Note: AUA at 3/31/13 was $223.0 billion.

Table 6: VOYA Has 1% Share of Overall DC AUM but Is a Leader in Select Segments

$ in millions, as ranked by 12/31/11 defined contribution AUM

2010Rank

2011Rank Manager 2010 2011

%Change

2010Mkt. Sh.

2011Mkt. Sh.

1 1 Fidelity $493,371 $473,135 -4.1% 11.0 10.5

2 2 TIAA-CREF 404,265 408,747 1.1% 9.0 9.1

3 3 Vanguard 361,671 376,693 4.2% 8.0 8.4

4 4 BlackRock 323,645 351,210 8.5% 7.2 7.8

5 5 Capital Research 232,231 196,463 -15.4% 5.2 4.4

7 6 Prudential Fin. 161,729 190,464 17.8% 3.6 4.2

8 7 PIMCO 158,657 173,560 9.4% 3.5 3.9

6 8 State Street 166,585 167,872 0.8% 3.7 3.7

9 9 T. Rowe Price 139,733 146,256 4.7% 3.1 3.3

10 10 INVESCO 70,966 75,411 6.3% 1.6 1.7

12 11 Galliard Capital 60,274 70,774 17.4% 1.3 1.6

11 12 Principal Fin. 68,107 70,447 3.4% 1.5 1.6

14 13 JPM Asset Mgt. 52,308 64,900 24.1% 1.2 1.417 14 Northern Trust 45,880 64,305 40.2% 1.0 1.4

15 15 ING U.S. 51,266 59,163 15.4% 1.1% 1.3%

Top 10 Companies 2,512,853 2,559,811 1.9% 55.8 56.9

Cos. Ranked 11-15 277,835 329,589 18.6% 6.2 7.3

Top 15 Companies 2,790,688 2,889,400 3.5% 62.0 64.2

Total 4,500,000 4,500,000 0.0% 100.0% 100.0%

Source: Pensions & Investments, Investment Company Institute, and J.P. Morgan estimates.

403(b) / 45752%

IndividualMarkets3%

401(k)37%

Stable Value9%


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Despite its relatively strong market positions, margins and returns in the companys

retirement division have been consistently below peer levels, partly due to business

mix (significant record-keeping AUM), historical focus on market share overprofitability, and a bloated cost structure. The companys margins (ROAs) have

averaged roughly 15 basis points in the past two years, significantly below those for

most competitors. Meanwhile, VOYAs retirement division returns (ROEs) have

been in the high-single-digit range compared with high teens reported by peers.

Table 7: VOYAs Margins Are Considerably Below Peers Retirement Businesses

$ in millions, as of 12/31/12

Average Net Flows 2-Year Average

Assets 2010 2011 2012 Flows / AUM ROA

VOYA $298,039.3 N/A $3,001.2 $3,465.7 1.1% 0.15%

LNC 41,916.8 (291.0) 504.0 986.0 1.8 0.49%

PFG 123,360.0 600.0 3,830.0 7,040.0 4.6 0.28%PRU 259,679.5 2,462.0 (2,339.0) (2,833.0) -1.8% 0.26%

TROW 533,150.0 30,300.0 14,100.0 17,200.0 3.1 0.25%

MFS 288,010.5 14,231.0 5,421.0 29,447.0 6.3 0.22%

Avg. 2.8% 0.30%


Note: VOYA assets include record-keeping assets. Asset levels are average values.

Management Initiatives a Positive, but Entail Execution Risk

In an effort to boost profitability, management has introduced several initiatives,

including crediting rate reductions, cost cuts, and programs to improve in-force

retention. While we view these actions positively, we project VOYAs retirement

division returns to remain flat for the foreseeable future given secular headwinds and

intense competition in the 401(k) market. Industry-wide margins have declined over

the past few years, and we expect the trend to continue. In particular, we are skeptical

of VOYAs ability to raise prices in the face of competitive pressures that are driving

price reductions across the DC market. Management is also likely to receive

resistance in raising prices while trying to add more proprietary funds on the

companys platform. In addition, we project industry-wide returns to be held back by

secular trends such as greater unbundling of services (separating record keeping and

investment management), the rising popularity of passive investments, increasing fee

disclosure requirements, and a shift towards open-architecture investment platforms.

While these developments have been more prevalent in the large-case 401(k) market,

we expect them to impact the small/mid-case 401(k) plans and other segments of the

DC market as well. Competitors that have historically dominated the large-case

401(k) market (primarily asset managers) seem more interested in expanding theirpresence in the small-case segment.


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Figure 7: Margins (ROAs) in the Retirement Business Have Been DecliningROA = pretax income / average AUM


Earnings Growth to Lag Peers, Margins and Returns to Remain Sub-Par

We project retirement division earnings to increase at a low- to mid-single-digit pace,

slower than anticipated growth for competitors retirement businesses. Deposit

growth should benefit from sales to VOYAs vast record-keeping customer base,

which management is targeting for more extensive DC offerings. However, the

benefit is likely to be partially offset by high withdrawals, especially in the 401(k)

segment, given the companys attempts to raise prices. As a result, overall net flows

should remain modest. Tax-exempt (403(b) and 457) and stable value flows should

be relatively healthy, but 401(k) flows are likely to be negative. Margins are

expected to be flat, as the impact of cost savings is offset by modest pressure on fees

and a declining investment yield (due to low rates).

Our model projects the retirement division to generate an ROA of roughly 17 bps in

the next few years, close to current returns, but lower than the level of 20 bps plus for

most competitors. The divisions ROE should improve as management enhances

profitability by cutting costs and re-pricing under-priced cases, but we expect it to

remain in the range of roughly 10-12% in the next few years, below the high-teens

returns expected in most competitors retirement businesses.

0.15%

0.20%

0.25%

0.30%

0.35%

0.40%

0.45%

2007 2008 2009 2010 2011 2012

MFS PFG PRU TROW


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Annuities: Low Interest Rates to Challenge Results

We expect the annuity business to generate poor flows and weak margins as

results are held back by the low interest rate environment. The division is highlyexposed to interest rates given its product mix, which is concentrated mostly in fixed

and indexed annuities. VOYAs annuity division has generated mid- to high-single-

digit returns in recent years, marked by weak spreads and negative net flows.

Management is trying to enhance returns by shifting the business mix towards the

indexed annuity and mutual fund products, and de-emphasizing traditional fixed

annuities. Although these actions are encouraging, we do not anticipate a meaningful

improvement in results and, barring an increase in interest rates, expect earnings to

decline slightly over the next few years.

We forecast VOYAs annuity division, which comprises primarily traditional

fixed and indexed annuities, to generate negative net flows and weak margins

given the low interest rate environment.

In an effort to enhance profitability, management is shifting the divisions

product mix towards indexed annuities and custodial mutual funds. However, wedo not anticipate a major improvement in results in the foreseeable future.

Our model projects annuity division earnings to decline over the next few years.

VOYA Is a Fairly Small Competitor in Traditional and Indexed Annuities

At 3/31/13, the annuity division had $26.2 billion in assets, comprising traditional

fixed annuities ($8.0 billion), indexed annuities ($12.3 billion), SPIAs ($2.8 billion)

and custodial mutual fund AUM ($2.7 billion). In terms of sales, VOYA is ranked

11th in the fixed indexed annuity segment ($1.2 billion with a market share of 3.4%)

and 17th in fixed annuities ($1.2 billion with a market share of 1.8%).

Figure 8: Annuity AUM by Product LineTotal AUM at 3/31/13 = $26.2 billion

Source: Company reports, J.P. Morgan estimates.Note: Fixed refers to traditional fixed deferred annuities.

SPIA refers to single premium immediate annuities.

Indexed46.7%

Fixed30.7%

MutualFunds11.9%

SPIA10.7%

Annuities = 17% of earnings



The Annuity division does not

include results for the legacy

variable annuity business, whichare disclosed in the Closed

Block VA segment.


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Table 8: VOYA Has Modest Share in Traditional Fixed Annuity Market

$ in millions, as ranked by 2012 sales

2012Rank Insurer 2011 2012

2011Mkt. Sh.

2012Mkt. Sh.

1 Allianz $6,549 $5,481 8.7% 8.2%

2 New York Life 5,411 4,515 7.2% 6.8%

3 Aviva 4,440 4,132 5.9% 6.2%

4 American Equity 5,090 3,948 6.7% 5.9%

5 Security Benefit 1,029 3,542 1.4% 5.3%

6 Great American 2,961 2,880 3.9% 4.3%

7 Lincoln National 3,041 2,742 4.0% 4.1%

8 Jackson National 2,270 2,689 3.0% 4.0%

9 Midland National 1,811 1,935 2.4% 2.9%

10 Nationwide 765 1,848 1.0% 2.8%

11 Fidelity & Guaranty 829 1,533 1.1% 2.3%

12 AIG 6,670 1,479 8.8% 2.2%

13 Massachusetts 974 1,475 1.3% 2.2%14 Pacific Life 1,095 1,426 1.4% 2.1%

15 Genworth Financial 1,338 1,408 1.8% 2.1%

16 North American 2,115 1,363 2.8% 2.0%

17 ING U.S. 1,498 1,208 2.0% 1.8%

18 Symetra Financial 1,809 1,196 2.4% 1.8%

19 EquiTrust Life 645 1,118 0.9% 1.7%

20 MetLife 1,450 1,103 1.9% 1.7%

Top 10 Companies 33,368 33,710 44.2% 50.5%

Cos. Ranked 11-20 18,422 13,310 24.4% 19.9%

Top 20 Companies 51,789 47,020 68.5% 70.4%

Total 75,570 66,810 100.0% 100.0%

Source: The Advantage Group and J.P. Morgan estimates.

Table 9: Better Positioned in the Indexed Annuity Market

$ in millions, as ranked by 2012 sales

2012Rank Insurer 2011 2012

2011Mkt. Sh.

2012Mkt. Sh.

1 Allianz $6,319 $5,403 19.5% 15.9%

2 Aviva 4,506 4,061 13.9% 11.9%

3 American Equity 4,371 3,584 13.5% 10.5%

4 Security Benefit 941 2,945 2.9% 8.6%

5 American Financial 1,847 2,038 5.7% 6.0%

6 Jackson National 1,497 1,733 4.6% 5.1%

7 Midland National 1,554 1,614 4.8% 4.7%

8 Old Mutual 757 1,564 2.3% 4.6%

9 Lincoln National 1,615 1,515 5.0% 4.4%

10 EquiTrust 569 1,174 1.8% 3.4%

11 ING U.S. 1,391 1,163 4.3% 3.4%

12 North American 1,673 1,124 5.2% 3.3%

13 Life Insurance Co. 818 904 2.5% 2.7%14 Phoenix Companies 891 747 2.7% 2.2%

15 Pacific Life 0 670 0.0% 2.0%

16 National Western 917 648 2.8% 1.9%

17 CNO Financial 720 507 2.2% 1.5%

18 Allstate 182 492 0.6% 1.4%

19 Forethought Life 479 379 1.5% 1.1%

20 AIG 239 274 0.7% 0.8%

Top 10 Companies 23,975 25,632 74.0% 75.2%

Cos. Ranked 11-20 7,310 6,909 22.6% 20.3%

Top 20 Companies 31,285 32,541 96.5% 95.5%

Total 32,413 34,062 100.0% 100.0%

Source: Beacon Research and J.P. Morgan estimates.

Low Interest Rate Environment Remains a Major Headwind

In our view, persistent low rates will continue hurting sales, flows, and spreads in the

business. Annuity division net flows have been negative for each of the past nine

quarters, and we expect the trend to continue. Our model projects marginal deposits

in traditional deferred fixed annuities and a decline in deposits in the indexed and

SPIA products in 2013. Management is winding down the traditional fixed annuity

book, which has sub-par margins, to enhance overall returns. Meanwhile, indexed

annuity and SPIA sales are likely to stay weak as low interest rates suppress demand.

Our outlook for margins is cautious as well, and we forecast spreads to compress 1-2

basis points per quarter from 177 bps in 1Q13 (each 1 bps change in annual spreads

affects pretax income by roughly $1 million). The shift away from traditional fixedannuities towards indexed annuities should help margins and returns over time.

However, low rates are expected to preclude a major improvement in the near term.

In addition, runoff of the fixed annuity business, while positive for margins, should

pressure investment income and earnings growth.

Mutual Fund Product to Grow, but Impact on Overall Results to Be Minimal

VOYAs mutual fund business offers tax-qualified accounts in an IRA format to

existing ING U.S. customers looking to roll over their retirement assets. Although we

foresee considerable long-term growth potential, the product currently has AUM of

only $2.7 billion (roughly 10% of annuity division account values), and is unlikely to


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be a major driver of division results in the foreseeable future. Our model projects

mutual fund deposits to increase at a double-digit pace and AUM levels to rise at a

20%+ rate over the next few years, helped in part by VOYAs access to aconsiderable number of retirement plan participants (more than 5 million at

12/31/12). Still, given its modest size, growth in the mutual fund business is unlikely

to fully offset the impact of spread compression in fixed and indexed annuities.

Investment Management: Healthy Margins, Positive Outlook

Our view of the investment management division is relatively positive, and we

forecast results to be marked by healthy net flows and strong earnings growth.

Investment management is VOYAs least capital intensive and highest return

business, and we believe that it presents attractive long-term growth potential given

its leverage to increasing flows and a shift in mix towards higher-fee AUM.

Investment performance has been relatively strong recently, but mixed over longer

periods, and likely will be a major factor influencing future net flows and AUM

growth. Our model projects the division to generate robust returns and double-digit

earnings growth over the next few years.

VOYAs investment management business has grown at a robust pace in recent

years, and we expect the momentum to continue. At 3/31/13, the business had

$187.6 billion of AUM, comprising $80.0 billion of general account assets,$49.7 billion of affiliated assets, and $58.0 billion of third-party assets.

In the past two years, net flows in external AUM (AUM ex. general account)

have averaged 9% of beginning assets (on an annual basis). We expect net flows

to slow to 6% of AUM in 2013 and 3-4% in the following years, lower thanpreviously but healthy nonetheless, driven by growth in third-party AUM.

Investment performance in both the retail and institutional segments has been

relatively strong recently, but mixed over longer periods, and will be a key for

management initiatives to grow the business.

Our model projects investment management earnings to increase at a double-digit

rate over the next few years as results benefit from healthy flows and growth in

external AUM as well as a shift in mix towards higher-fee, third-party assets.

Net Flows to Slow, but Remain Healthy, Driven by Third-Party AUM

VOYAs investment management business manages general account assets, assets

originated through other divisions of the company (primarily the retirement division),

and third-party AUM. In addition, the unit administers assets gathered by ING U.S.

that are sub-advised by external managers (record-keeping AUM or assets underadministration). At 3/31/13, total investment management AUM was $187.6 billion,

comprising $80.0 billion of general account AUM, $49.7 billion of affiliated AUM,

and $58.0 billion of pure third-party AUM. In addition, the unit had record-keeping

assets of $55.7 billion. Of the total assets under management, roughly 32% are from

retail investors, 25% from institutional investors, and 43% related to the general

account. In terms of asset class, 27% of AUM is invested in equities, 66% in fixed

income, 4% in real estate, and 3% in money markets (excluding the general account

47% of AUM are in equities, 44% in fixed income, 6% in real estate, and the

remaining 2% in money markets).

Inv. Mgt. = 12% of earnings



General Account: Refers to insurance

company general account AUM.

Affiliated AUM:Assets raised through

sub-accounts within other VOYA divisions

(such as retirement and annuities).

Third-Party: Third-party assets raised

directly by the asset management division.


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Figure 9: Total AUM and AUA Breakdown

As of 3/31/13, T. AUM = $188 bil., T. AUA = $56 bil.


Figure 10: AUM Breakdown

As of 3/31/13; Total AUM = $188 bil.


Figure 11: AUM ex. General Account

As of 3/31/13; AUM ex. General Acct. = $108 bil.


In recent years, the company has generated robust flows in both the pure third-party

(investment management sourced) and affiliated product categories. In 2011 and2012 (the only publicly disclosed data), net flows in external AUM (AUM ex.

general account) have averaged 9% of beginning assets on an annual basis. Our

model projects external net flows to slow to of 6% of AUM in 2013 and 3-4% in the

following years, lower than in recent years, but healthy nonetheless. Results should

benefit from continued momentum in third-party flows, helped in part by

management efforts to enhance sales force productivity and additional fund offerings

(primarily international). On the other hand, we expect affiliated flows to moderate

due to lower takeover activity as well as elevated withdrawals related to the runoff of

the VA book and loss of retirement plans (due to re-pricing initiatives). Management

is attempting to drive growth in affiliated AUM by increasing the percentage of

assets within other divisions (such as retirement) that are sub-advised to the

investment management division, but we are skeptical of significant traction given

the industry-wide trend towards open-architecture platforms, VOYAs mixed

investment performance, and the companys ongoing attempts to raise prices in the

retirement/defined contribution business.

Table 10: External Net Flows Have Been Robust, but Are Likely to Slow

$ in millions

2011 2012 2013E 2014E 2015E

Beginning AUM $81,209.9 87,243.6 101,346.7 114,805.0 124,221.1

Ending AUM $87,243.6 101,346.7 114,805.0 124,221.1 133,157.5

Third-party net flows $2,398.9 3,939.8 5,614.1 4,393.3 3,511.6

% of beginning AUM 3.0 4.5% 5.5% 3.8 2.8%

Affiliated net flows $3,303.5 5,905.8 504.5 436.1 307.0

% of beginning AUM 4.1 6.8% 0.5% 0.4 0.2%

Total net flows $5,702.4 9,845.6 6,118.6 4,829.4 3,818.6

% of beginning AUM 7.0 11.3% 6.0% 4.2 3.1%


Third-Party23.8% ($58 bil.)

General Account32.9% ($80 bil.)

Record-Keeping22.9% ($56 bil.)

Affiliated20.4% ($50 bil.)

Retail32.4% ($61 bil.)

Institutional25.0% ($47 bil.)

General Account42.6% ($80 bil.)

Equity47.2% ($51 bil.)

Fixed Income44.3% ($48 bil.)

Money Market2.2% ($2 bil.)

Real Estate6.3% ($7 bil.)


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Shift in Asset Mix to Lift Revenues and Earnings

Over time, we expect the mix of investment management division assets to shift

further towards higher-fee third-party AUM (given stronger anticipated net flows).This, coupled with healthy net flows and growth in external AUM (third-party and

affiliated), should enable division earnings to increase at a double-digit pace. As of

3/31/13, third-party AUM accounted for 23.8% of total division AUM and AUA

(assets under administration/recordkeeping), up from 21.7% two years ago. Our

model projects third-party AUM to account for 49.9% of fees in 2013 compared with

46.9% in 2012, and we expect the mix shift to accelerate further over time. We

forecast third-party AUM to represent 27.3% of total AUM and AUA and 53.2% of

fees by the end of 2015. In addition, we expect affiliated AUM (assets managed

through sub-accounts within other VOYA divisions) to grow faster than lower-fee

general account or record-keeping assets. Based on our calculations, VOYA earns

roughly 43 bps in fees on third-party AUM, 18 bps on affiliated AUM and general

account assets, and 3 bps on record-keeping AUA. The shift in mix towards higher-

fee assets should supplement growth in external AUM and drive division earnings.

Figure 13: Shift Towards External Assets . . .% of AUM by source


Notes: Assets levels are $222 bil. (2010), $225 bil. (2011), $236 bil. (2012), $252 bil. (2013E),

and $262 bil. (2014E).

Figure 14: . . . Translates to Growth in Fee IncomeTotal fee income in $ millions


Investment Performance Appears Mixed

In VOYAs retail funds, investment performance appears robust over the 10-year and

1-year periods, but modest over the 3-year and 5-year periods. Based on Morningstar

data covering $19 billion of retail AUM (over 30% of total retail AUM), 55% of

VOYAs mutual fund AUM were in funds ranked in the upper quartile in terms of

10-year performance. However, only 30% and 29% of AUM were in the top quartile

for the 5-year and 3-year periods. Performance has improved over the past year, with

46% of AUM in the first quartile.

21.3% 21.9% 22.9% 24.7% 26.2%

15.3% 16.8%20.0% 20.9%

21.2%

34.9% 35.0%34.0% 32.0% 31.0%

28.5% 26.2% 23.1% 22.3% 21.6%

0%

20%

40%

60%

80%

100%

12/31/10 12/31/11 12/31/12 12/31/13E 12/31/14E

h ird -p arty Affiliated General account Re cord -keeping

226.1 222.7 257.8285.0 311.7

76.5 82.192.2

98.9104.5148.1 148.4

147.3148.6

150.018.6 21.519.4

19.619.8

-

100.0

200.0

300.0

400.0

500.0

600.0

700.0

2011 2012 2013E 2014E 2015E

Third-part y Affiliated General account Record- keeping

Figure 12: Fees by Source

Total 2012 fees = $474.7 bil.

Source: Company reports, J.P. Morgan estimates.

Third-Party49.9%

General Account28.5%

Record Keeping3.8%

Affiliated17.9%


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Figure 15:Retail Investment Performance Mixed% of AUM in Morningstar performance quartiles, as of 3/31/13

Source: Morningstar and J.P. Morgan estimates.

Note: Refers to retail mutual funds only.

Table 11: Retail Net Flows Have Recovered

$ in millions, higher Morningstar rank is better

Morningstar Net FlowsRank AUM 2008 2009 2010 2011 2012

5 $1,399 $47 $(24) $(27) $169 $160

4 3,643 467 (84) 616 413 361

3 9,996 714 568 889 431 804

2 3,790 (2,341) (904) (685) (921) (657)

1 264 (242) (120) (163) (121) (87)

Total MS 19,092 (1,355) (564) 629 (29) 582

Total 22,117 (1,373) (670) 1,150 1,254 836

Source: Morningstar and J.P. Morgan estimates.

Note: Refers to retail mutual funds only. At 3/31/13, only $19 billion out of the total $22 billion in retail

mutual fund AUM had Morningstar rankings.

Investment performance for VOYAs institutional funds seems robust for the 3-year

period but modest for the 1-year and 5-year periods. Based on eVestment data,

24.8% of the companys institutional fund AUM were in funds in the first quartile

relative to comparable funds based on 5-year performance. The percentage in the

first quartile improved to 35.8% over a 3-year performance period, but declined to

26.6% over a 1-year performance period.

Figure 16: Institutional Performance Robust for 3-Year Period, Modest Otherwise% of AUM in eVestment performance quartiles, as of 3/31/13

Source: eVestment and J.P. Morgan estimates.

46.2%28.6% 30.3%

54.6%

22.2%43.0%

18.2%

16.0%

15.5%21.1%

45.0%9.2%

16.2% 7.3% 6.6% 20.1%

0%

20%

40%

60%

80%

100%

1 Yr. Perf. 3 Yr. Perf. 5 Yr. Perf. 10 Yr. Perf.

1st Quartile 2nd Quar tile 3rd Quartile 4th Quartile

26.6%35.8%

24.8%

35.5%28.8%

37.6%

22.0% 19.4% 17.1%

16.0% 16.0% 20.4%

0%

20%

40%

60%

80%

100%

1 Yr. Perf. 3 Yr. Perf. 5 Yr. Perf.

1st Quartile 2nd Quartile 3rd Quartile 4th Quartile


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Individual Life: Poor Returns, Modest Growth

We project the individual life business to generate poor returns and modest

growth, and remain a drag on overall results for the foreseeable future.Managements profit-enhancement initiatives should lift returns over time, but we

expect the improvement to be gradual. VOYAs individual life unit is one of the

companys lowest-ROE businesses, in part due to under-pricing of business in the

past and low industry-wide returns in the product. Additionally, division results are

being pressured by the unfavorable macro environment, with low interest rates and

the sluggish economy holding back top-line growth and margins. In an effort to

enhance profitability, management is undertaking seve

voya jpm initiation

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