VOYA JPM Initiation

North America Equity Research
11 June 2013
Initiation
ING U.S., Inc.

Business Performance to Improve, Overall ROE to Remain Low; Initiating Coverage with Neutral Rating
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, along with 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 the retirement 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 $2-3 per share. Overall ROE to remain in 6-7% range, considerably below peer levels. Management is targeting a pickup in ongoing business ROE from 8% in 2012 to 12-13% by 2016 through cost cuts, re-pricing, and other factors. Despite the improvement in ongoing business returns, our model projects the overall ROE (ex. AOCI) to remain sub-par given significant capital tied up in the runoff VA block and low returns in the individual life and fixed annuity businesses. We feel that overall ROE better reflects economic returns than ongoing business ROE, which excludes closed block capital and is adjusted for other items. Tail risk in VA block a long-term concern. Recent equity market strength is a major plus, but the CBVA is likely to remain a drag on returns for the foreseeable future and could pressure capital flexibility in a stress environment. We feel that current valuation limits upside potential. VOYA is trading at 0.7x BV ex. AOCI and 10.7x our 2014 EPS estimate versus the life sector averages of 1.1x BV and 9.3x 2014 estimates, which we feel is reasonable given its sub-par returns (6.4% vs. 10.7% for the group in 2014E). On ongoing business, VOYAs ROE is 10.5% and its P/BV multiple is 1.1x, which do not seem too enticing, especially given potential secondary offerings by ING Groep.
ING U.S., Inc. (VOYA;VOYA US) FYE Dec 2011A EPS (Operating) ($) Q1 (Mar) 0.71 Q2 (Jun) 0.85 Q3 (Sep) 0.87 Q4 (Dec) 0.74 FY 3.16 2012A 0.68 0.56 0.77 0.59 2.60 2013E 0.73A 0.66 0.65 0.69 2.72 2014E 2.66 2015E 2.88
Neutral
VOYA, VOYA US Price: $28.41 Price Target: $28.00
Insurance -- Life Jimmy S. Bhullar, CFA

AC
(1-212) 622-6397 jimmy.s.bhullar@jpmorgan.com
Pablo S. Singzon
(1-212) 622-2295 pablo.s.singzon@jpmorgan.com
Matthew Byrnes, CFA

(1-212) 622-0695 matthew.p.byrnes@jpmorgan.com J.P. Morgan Securities LLC
Initiating Coverage w/ Neutral Rating Key Positives The strong equity market should lift EPS and reduce closed block VA risk Management initiatives to improve profitability in ongoing business DTA a potential source of value Key Concerns Overall returns to remain sub-par Significant execution risk, particularly in retirement Closed block variable annuities presents significant tail risk Overhang of secondary offerings Valuation P/2014E: 10.7x P/BV ex. AOCI: 0.7x P/BV ex. AOCI (ongoing bus.): 1.1x Please visit our Bloomberg page at JPMA Bhullar <GO> Company Data Price ($) Date Of Price 52-week Range ($) Mkt Cap ($ mn) Fiscal Year End Shares O/S (mn) Price Target ($) Price Target End Date
Source: Company data, Bloomberg, J.P. Morgan estimates.
28.41 10 Jun 13 29.06 - 19.20 7,408.45 Dec 261 28.00 31 Dec 14
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 that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. www.jpmorganmarkets.com
Jimmy S. Bhullar, CFA (1-212) 622-6397 jimmy.s.bhullar@jpmorgan.com
North America Equity Research 11 June 2013
Table of Contents
Investment 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 ....................................8 DTA 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 Tables
Table 1: Sec. 382 Limit Based on Market Cap .......................................................10 Table 2: Net Operating Loss Carry-forwards..........................................................10 Table 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.......................................................29 Table 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 Figures
Figure 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..........19 Figure 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
Investment Thesis
ING U.S., Inc. (VOYA)
Neutral
Figure 1: Mix of Ongoing Business

Based on 2013E pretax income
Ind. Life 18% Emp. Ben. 7% Retirement 46%
Inv. Mgt. 12%

Source: J.P. Morgan estimates.
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 of additional secondary offerings.
Annuities 17%
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.
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
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
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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 not affect 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 of 2.38% 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 methodology yields 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 riskreward in other life insurance names that are trading at comparable levels but are projected to generate higher ROEs.
Risks to Rating and Price Target

In 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 than anticipated. 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 from investment 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 major indices. Still, we believe that the prospect of multiple secondary offerings could limit potential upside in the stock.
Company Description
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)
ING U.S. Inc. is a retirement, investment management, and insurance company serving 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 Points

Management 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 ROE
Refers to ROE for the ongoing business
14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% 2012 ROE
2.00% 0.50% 0.40% 0.50% 0.50%
12.2%
8.3%
Expense Reduction
Product Re-pricing
Low-Margin Capital Org. Growth 2016 Target Bus. Run-Off Management and Other ROE
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
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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 and 43.9% 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 higherreturn products. Over time, the companys ROE should also benefit from organic growth in the higher-return retirement and investment management divisions, and concurrent shrinkage of the lower-return annuity business. Within the investment management division, returns should be helped by growth in thirdparty 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 by 50 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 should pressure new money yields.
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 had approximately $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 Valuation at Trigger $5,000 6,000 7,000 7,500 8,000 8,500 9,000 10,000 Share Price $19.17 $23.01 $26.84 $28.76 $30.68 $32.60 $34.51 $38.35 Section 382 Limit $41.6 51.0 60.5 65.2 69.9 74.7 79.4 88.8
Table 2: Net Operating Loss Carry-forwards

$ in millions except per share amounts, as of 3/31/13 Type NOLs life NOLs non-life Life subgroup deferred losses Non-life subgroup deferred losses Total loss carry-forwards Cash taxes Adjusted value
Source: Company reports and J.P. Morgan estimates.
Subject to Section 382? Yes Yes No Partially
DTA ex. Valuation Allowance $201.6 $899.8 $625.0 $275.0 $2,001.5 ($200.0) $1,801.5
PV of Tax Savings $130.1 $240.3 $362.9 $47.6 $780.8 ($158.5) $622.4
PV Per Share $0.50 $0.92 $1.39 $0.18 $2.99 ($0.61) $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, in deriving 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

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
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 the exclusion 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.
Figure 3: Capital by Business

Total Capital at 3/31/13 = $13.6 billion
Ongoing Bus. 66%
Closed Block 34%

Source: Company reports.
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Figure 4: Low ROCs, High Capital

Total Capital at 3/31/13 = $9.0 billion
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 of business 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 midteens 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 business ROE 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.
Other Ongoing Bus. Ind. Life and Annuities Capital = 50% Capital = 50% ROC = 5.7% ROC = 10.3%
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Table 3: VOYA vs. JPM ROE Calc.

$ in millions based on 1Q13 results
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 unlocking plus/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, and closed block institutional spread products. J.P. Morgans preferred return metric, Overall ROE (ex. AOCI) = operating earnings after taxes divided by overall equity ex. AOCI. After-tax operating earnings = sum of pre-tax operating earnings by segment, including corporate and closed block institutional spread products, and excluding closed block variable annuity (CBVA). Using actual interest expense and taxadjusted 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.
VOYA Ongoing bus. pretax inc. DAC adjustments Int. expense @ 5.5% Taxes @ 35% Adj. operating earnings Avg. equity ex. AOCI Add: financial leverage Less: closed blocks Less: debt @ 25% Avg. ongoing bus. equity Annualized ROE
285.4 (7.3) (31.1) (86.5) 160.6 10,051.3 3,757.8 (4,774.6) (2,258.6) 6,775.9 9.5%
JPM Research Ongoing bus. pretax inc. Corporate Closed block - ISP Taxes @ 35% After tax op. earnings Avg. equity ex. AOCI Annualized ROE
285.4 (50.1) 21.4 (89.8) 166.8 10,051.3 6.6%
Source: Company reports and JPM estimates.
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
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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-themoney). 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 reserve additions 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 Total Individual VA Assets GMDB Net Amount at Risk Living Benefit Net Amount at Risk Balance sheet reserve for GMDBs Balance sheet reserve for Liv. Ben. % of assets with GMDB Return of Premium Reset Ratchet Roll-Up Combination / Other % of assets with Living Benefits GMWB GMIB GMAB Combination / other AIG $81,992 $686 $650 $368 $805 AMP 70,882 230 213 4 351 HIG 65,500 1,498 300 872 795 LNC 80,312 1,078 415 93 199 MET 168,559 5,516 8,881 371 1,139 PRU 139,034 4,158 3,781 488 3,807 VOYA 43,846 6,105 4,354 435 2,800
24.4% 1.2% 31.9% 10.0% 0.6%
67.8% 16.1% 13.0% 0.0% 1.4%
33.5% 4.9% 30.5% 2.4% 40.9%
84.2% 0.0% 29.7% 0.2% 0.0%
58.8% 0.0% 17.8% 0.0% 22.2%
74.0% 0.0% 0.0% 0.0% 23.8%
46.6% 0.0% 18.9% 5.5% 29.0%
25.4% 3.7% 1.0% 0.0%
48.4% 0.6% 5.6% 0.0%
41.1% 0.0% 0.0% 0.0%
50.0% 20.0% 0.0% 0.0%
14.5% 55.1% 0.3% 0.0%
0.7% 2.6% 5.6% 73.1%
36.7% 35.3% 2.4% 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 early November 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 Deadline 12/31/2013 12/31/2014 12/31/2016
Maximum Allowable Ownership <75% <50% 0%
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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 Business
Based on 2013E pretax income
Individual Life 18% Investment Management 12% Annuities 17%

Employee Benefits 7% Retirement 46%
Retirement: Strong Market Position, Weak Margins/Returns

Retirement = 46% of earnings 2013E Earnings = $568.0 mil.
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.
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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 to enhance the divisions profitability. Our model projects the retirement business to generate modest returns and subpar 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 private companies ($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 Market
As of 3/31/13, based on AUM of $96 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 2010 Rank 1 2 3 4 5 7 8 6 9 10 12 11 14 17 15 2011 Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 % Change -4.1% 1.1% 4.2% 8.5% -15.4% 17.8% 9.4% 0.8% 4.7% 6.3% 17.4% 3.4% 24.1% 40.2% 15.4% 1.9% 18.6% 3.5% 0.0% 2010 Mkt. Sh. 11.0% 9.0% 8.0% 7.2% 5.2% 3.6% 3.5% 3.7% 3.1% 1.6% 1.3% 1.5% 1.2% 1.0% 1.1% 55.8% 6.2% 62.0% 100.0% 2011 Mkt. Sh. 10.5% 9.1% 8.4% 7.8% 4.4% 4.2% 3.9% 3.7% 3.3% 1.7% 1.6% 1.6% 1.4% 1.4% 1.3% 56.9% 7.3% 64.2% 100.0%
403(b) / 457 52%
401(k) 37%
Manager Fidelity TIAA-CREF Vanguard BlackRock Capital Research Prudential Fin. PIMCO State Street T. Rowe Price INVESCO Galliard Capital Principal Fin. JPM Asset Mgt. Northern Trust ING U.S. Top 10 Companies Cos. Ranked 11-15 Top 15 Companies Total
2010 $493,371 404,265 361,671 323,645 232,231 161,729 158,657 166,585 139,733 70,966 60,274 68,107 52,308 45,880 51,266 2,512,853 277,835 2,790,688 4,500,000
2011 $473,135 408,747 376,693 351,210 196,463 190,464 173,560 167,872 146,256 75,411 70,774 70,447 64,900 64,305 59,163 2,559,811 329,589 2,889,400 4,500,000
Individual Markets 3%
Source: Company reports. Note: AUA at 3/31/13 was $223.0 billion.
Stable Value 9%
Source: Pensions & Investments, Investment Company Institute, and J.P. Morgan estimates.
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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 over profitability, 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 Assets VOYA LNC PFG PRU TROW MFS Avg.
Source: Company reports and J.P. Morgan estimates. Note: VOYA assets include record-keeping assets. Asset levels are average values.
2010 N/A (291.0) 600.0 2,462.0 30,300.0 14,231.0
Net Flows 2011 $3,001.2 504.0 3,830.0 (2,339.0) 14,100.0 5,421.0
2012 $3,465.7 986.0 7,040.0 (2,833.0) 17,200.0 29,447.0
2-Year Average Flows / AUM ROA 1.1% 1.8% 4.6% -1.8% 3.1% 6.3% 2.8% 0.15% 0.49% 0.28% 0.26% 0.25% 0.22% 0.30%
$298,039.3 41,916.8 123,360.0 259,679.5 533,150.0 288,010.5
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 their presence in the small-case segment.
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Figure 7: Margins (ROAs) in the Retirement Business Have Been Declining

ROA = pretax income / average AUM
0.45% 0.40% 0.35% 0.30% 0.25% 0.20% 0.15% 2007 2008 MFS
2009 PFG
2010 PRU
2011 TROW
2012
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.
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Annuities: Low Interest Rates to Challenge Results

Annuities = 17% of earnings 2013E Earnings = $207.4 mil.
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 highly exposed to interest rates given its product mix, which is concentrated mostly in fixed and indexed annuities. VOYAs annuity division has generated mid- to high-singledigit 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, we do 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 Line
Total AUM at 3/31/13 = $26.2 billion
The Annuity division does not include results for the legacy variable annuity business, which are disclosed in the Closed Block VA segment.
Indexed 46.7%
Fixed 30.7%
SPIA 10.7%
Mutual Funds 11.9%
Source: Company reports, J.P. Morgan estimates. Note: Fixed refers to traditional fixed deferred annuities. SPIA refers to single premium immediate annuities.
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Table 8: VOYA Has Modest Share in Traditional Fixed Annuity Market

$ in millions, as ranked by 2012 sales 2012 Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Insurer Allianz New York Life Aviva American Equity Security Benefit Great American Lincoln National Jackson National Midland National Nationwide Fidelity & Guaranty AIG Massachusetts Mutual Life Pacific Genworth Financial North American ING U.S. Symetra Financial EquiTrust Life MetLife Top 10 Companies Cos. Ranked 11-20 Top 20 Companies Total 2011 $6,549 5,411 4,440 5,090 1,029 2,961 3,041 2,270 1,811 765 829 6,670 974 1,095 1,338 2,115 1,498 1,809 645 1,450 33,368 18,422 51,789 75,570 2012 $5,481 4,515 4,132 3,948 3,542 2,880 2,742 2,689 1,935 1,848 1,533 1,479 1,475 1,426 1,408 1,363 1,208 1,196 1,118 1,103 33,710 13,310 47,020 66,810 2011 Mkt. Sh. 8.7% 7.2% 5.9% 6.7% 1.4% 3.9% 4.0% 3.0% 2.4% 1.0% 1.1% 8.8% 1.3% 1.4% 1.8% 2.8% 2.0% 2.4% 0.9% 1.9% 44.2% 24.4% 68.5% 100.0% 2012 Mkt. Sh. 8.2% 6.8% 6.2% 5.9% 5.3% 4.3% 4.1% 4.0% 2.9% 2.8% 2.3% 2.2% 2.2% 2.1% 2.1% 2.0% 1.8% 1.8% 1.7% 1.7% 50.5% 19.9% 70.4% 100.0%
Table 9: Better Positioned in the Indexed Annuity Market

$ in millions, as ranked by 2012 sales 2012 Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Insurer Allianz Aviva American Equity Security Benefit American Financial Jackson National Midland National Old Mutual Lincoln National EquiTrust ING U.S. North American Life Insurance Co. of S.W. (LSW) Phoenix Companies Pacific Life National Western Life CNO Financial Allstate Forethought Life AIG Top 10 Companies Cos. Ranked 11-20 Top 20 Companies Total 2011 $6,319 4,506 4,371 941 1,847 1,497 1,554 757 1,615 569 1,391 1,673 818 891 0 917 720 182 479 239 23,975 7,310 31,285 32,413 2012 $5,403 4,061 3,584 2,945 2,038 1,733 1,614 1,564 1,515 1,174 1,163 1,124 904 747 670 648 507 492 379 274 25,632 6,909 32,541 34,062 2011 Mkt. Sh. 19.5% 13.9% 13.5% 2.9% 5.7% 4.6% 4.8% 2.3% 5.0% 1.8% 4.3% 5.2% 2.5% 2.7% 0.0% 2.8% 2.2% 0.6% 1.5% 0.7% 74.0% 22.6% 96.5% 100.0% 2012 Mkt. Sh. 15.9% 11.9% 10.5% 8.6% 6.0% 5.1% 4.7% 4.6% 4.4% 3.4% 3.4% 3.3% 2.7% 2.2% 2.0% 1.9% 1.5% 1.4% 1.1% 0.8% 75.2% 20.3% 95.5% 100.0%
Source: The Advantage Group and J.P. Morgan estimates.
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 fixed annuities 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 a considerable 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

Inv. Mgt. = 12% of earnings 2013E Earnings = $148.2 mil.
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 than previously 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.
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.
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 under administration). 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).
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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.
Third-Party 23.8% ($58 bil.)
Affiliated 20.4% ($50 bil.)
Retail 32.4% ($61 bil.)
Equity 47.2% ($51 bil.)
Real Estate 6.3% ($7 bil.)
Record-Keeping 22.9% ($56 bil.)
General Account 32.9% ($80 bil.)
Institutional 25.0% ($47 bil.)
General Account 42.6% ($80 bil.)
Money Market 2.2% ($2 bil.)
Fixed Income 44.3% ($48 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 and 2012 (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 Beginning AUM Ending AUM Third-party net flows % of beginning AUM Affiliated net flows % of beginning AUM Total net flows % of beginning AUM $81,209.9 $87,243.6 $2,398.9 3.0% $3,303.5 4.1% $5,702.4 7.0% 2012 87,243.6 101,346.7 3,939.8 4.5% 5,905.8 6.8% 9,845.6 11.3% 2013E 101,346.7 114,805.0 5,614.1 5.5% 504.5 0.5% 6,118.6 6.0% 2014E 114,805.0 124,221.1 4,393.3 3.8% 436.1 0.4% 4,829.4 4.2% 2015E 124,221.1 133,157.5 3,511.6 2.8% 307.0 0.2% 3,818.6 3.1%
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Figure 12: Fees by Source

Total 2012 fees = $474.7 bil.
Third-Party 49.9% Affiliated 17.9%
General Account Record Keeping 28.5% 3.8% Source: Company reports, J.P. Morgan estimates.
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 higherfee assets should supplement growth in external AUM and drive division earnings.
Figure 14: . . . Translates to Growth in Fee Income
Total fee income in $ millions
700.0
Figure 13: Shift Towards External Assets . . .

% of AUM by source
100% 80% 60% 40%
28.5%
26.2%
23.1%
22.3%
21.6%
600.0 500.0
34.9% 15.3%
35.0% 16.8% 21.9%

12/31/11 Affiliated
34.0%
32.0%
31.0% 21.2% 26.2%

12/31/14E
18.6 148.1 76.5 226.1

2011 Third-party
21.5 148.4 82.1 222.7

2012 Affiliated
19.4 147.3 92.2 257.8
19.6 148.6 98.9
19.8 150.0 104.5
400.0 300.0 200.0 100.0 -
20.0% 22.9%
12/31/12 General account
20.9% 24.7%
12/31/13E
20%
285.0
311.7
21.3%
0% 12/31/10 Third-party
2013E General account
2014E
2015E
Record-keeping
Record-keeping
Source: Company reports and J.P. Morgan estimates. Notes: Assets levels are $222 bil. (2010), $225 bil. (2011), $236 bil. (2012), $252 bil. (2013E), and $262 bil. (2014E).
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.
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Figure 15:Retail Investment Performance Mixed

% of AUM in Morningstar performance quartiles, as of 3/31/13
100%
Table 11: Retail Net Flows Have Recovered

$ in millions, higher Morningstar rank is better Morningstar Rank 5 4 3 2 1 Total MS Total AUM $1,399 3,643 9,996 3,790 264 19,092 22,117 2008 $47 467 714 (2,341) (242) (1,355) (1,373) 2009 $(24) (84) 568 (904) (120) (564) (670) Net Flows 2010 $(27) 616 889 (685) (163) 629 1,150 2011 $169 413 431 (921) (121) (29) 1,254 2012 $160 361 804 (657) (87) 582 836
16.2%
80% 60% 40% 20% 0% 1 Yr. Perf. 1st Quartile
7.3% 21.1%
6.6% 45.0%
20.1% 9.2% 16.0%
15.5% 22.2%
43.0% 18.2% 54.6% 28.6%

3 Yr. Perf. 2nd Quartile
46.2%
30.3%
5 Yr. Perf. 3rd Quartile 10 Yr. Perf. 4th Quartile
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.
Source: Morningstar and J.P. Morgan estimates. Note: Refers to retail mutual funds only.
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
100%
16.0%
80% 60% 40% 20% 0% 1 Yr. Perf. 1st Quartile
16.0% 19.4% 28.8%
20.4% 17.1%
22.0%
35.5%
37.6%
26.6%
35.8%
3 Yr. Perf. 2nd Quartile 3rd Quartile
24.8%
5 Yr. Perf. 4th Quartile
Source: eVestment and J.P. Morgan estimates.
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Individual Life: Poor Returns, Modest Growth

Individual Life = 18% of earnings 2013E Earnings = $227.4 mil.
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 several initiatives, including expense reductions, paring back sales of capital-intensive products, and emphasizing more accumulation-oriented offerings such as indexed universal life. Although we view such actions positively, low margins on the in-force book are likely to preclude a material improvement in individual life division results over the next few years. VOYA is a leader in term life, but we consider it a middle-of-the-pack competitor in the overall individual life market. The companys book comprises primarily universal life and term life policies, and generates mid- to high-single-digit returns. Management has launched several initiatives to improve the units profitability, including expense cuts, re-pricing, and a shift in mix towards less capital intensive, higher-margin products. We view management initiatives positively, but expect individual life division returns to remain poor for the foreseeable future given depressed margins in the in-force book. Also, our model projects modest top-line growth in the business.
Figure 17: Face Amount by Product

In-force amount at 3/31/13 = $608.8 bil.
Term Life 81.6%
Variable / Whole Life 5.2%
Universal Life 13.1%
Leader in Term Life, Modest Share in Other Individual Life Markets The individual life business markets various products (term life, universal life, indexed universal life, and variable life) to middle-income and affluent individuals, primarily through independent agents. Historically, the company has focused mostly on selling term life and universal life, which together account for about 84% of the in-force policy count and almost 95% of insurance in-force. The company is among the top-5 competitors in the term insurance market and a top-20 competitor in universal life (based on sales).
Source: Company reports, J.P. Morgan estimates.
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Table 12: VOYA Is a Leading Competitor in the Term Market . . .

$ in millions, as ranked by 2011 Term Life face amount issued 2011 Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Insurer ING U.S. Northwestern MetLife State Farm Primerica NY Life Legal & General AIG Prudential Fin. USAA Aegon Axa / MONY Allstate Fin. MassMutual Lincoln National Farmers Guardian Life Aflac SBL of MA Ohio National Top 10 Cos. Top 11-20 Cos. Top 20 Cos. Total 2010 87,008 86,439 81,526 65,878 64,955 55,808 39,544 40,852 53,336 29,594 50,879 36,369 25,213 21,839 30,011 20,526 16,963 17,054 12,546 15,122 604,939 246,522 851,461 1,136,650 2011 96,664 91,823 84,056 63,791 63,662 62,425 62,136 48,430 47,655 30,598 30,220 28,377 27,753 22,445 19,449 18,553 17,484 16,570 12,753 12,624 651,240 206,227 857,467 1,107,097 2010 Mkt. Sh. 7.7% 7.6% 7.2% 5.8% 5.7% 4.9% 3.5% 3.6% 4.7% 2.6% 4.5% 3.2% 2.2% 1.9% 2.6% 1.8% 1.5% 1.5% 1.1% 1.3% 53.2% 21.7% 74.9% 100.0% 2011 Mkt. Sh. 8.7% 8.3% 7.6% 5.8% 5.8% 5.6% 5.6% 4.4% 4.3% 2.8% 2.7% 2.6% 2.5% 2.0% 1.8% 1.7% 1.6% 1.5% 1.2% 1.1% 58.8% 18.6% 77.5% 100.0%
Table 13: . . . But Has Modest Share in Other Individual Life Products
$ in millions, as ranked by 2011 Ordinary Life face amount issued ex. Term 2011 Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Insurer Genworth MetLife Northwestern NY Life Aegon Lincoln National Manulife Financial AFLAC MassMutual Torchmark Penn Mutual Protective Life State Farm Axa / MONY Guardian Life Aviva Allstate Hartford ING U.S. Knights of Col. Top 10 Cos. Top 11-20 Cos. Top 20 Cos. Total 2010 48,704 38,902 37,464 35,641 16,034 23,025 26,879 11,455 16,457 17,382 13,617 14,874 14,270 10,271 12,381 11,724 12,754 9,741 6,748 7,731 271,943 114,113 386,056 533,632 2011 60,538 46,378 34,751 31,699 26,208 21,742 21,456 17,377 16,775 16,367 15,382 15,354 14,769 13,721 12,888 12,116 11,812 11,036 8,088 7,996 293,293 123,162 416,455 565,112 2010 Mkt. Sh. 9.1% 7.3% 7.0% 6.7% 3.0% 4.3% 5.0% 2.1% 3.1% 3.3% 2.6% 2.8% 2.7% 1.9% 2.3% 2.2% 2.4% 1.8% 1.3% 1.4% 51.0% 21.4% 72.3% 100.0% 2011 Mkt. Sh. 10.7% 8.2% 6.1% 5.6% 4.6% 3.8% 3.8% 3.1% 3.0% 2.9% 2.7% 2.7% 2.6% 2.4% 2.3% 2.1% 2.1% 2.0% 1.4% 1.4% 51.9% 21.8% 73.7% 100.0%
Source: A.M. Best and J.P. Morgan estimates.
Normalized for mortality fluctuations, VOYAs individual life business is generating mid- to high-single-digit returns. As at a few peers, margins in the companys individual life business have been hurt by a combination of past under-pricing, the sluggish economy, sustained low interest rates, and increased cost of redundant reserve financing. The economy continues to weigh on policy sizes (decreasing the cost base for expenses), while low interest rates are a drag on new money yields (driving spread compression, particularly in universal life). In addition, higher reserve funding costs for term and universal life (with secondary guarantees) remain a headwind for margins. Management is undertaking several initiatives to enhance returns, but we do not anticipate a material improvement in the next few years. Management Initiatives to Shift Product Mix and Cut Costs Positives The company is pursuing various initiatives to bolster returns in its individual life division, including re-pricing current term and UL offerings, rationalizing expense and commission structures, and shifting the business mix towards more accumulation-oriented products. In addition, management ceased sales of unprofitable products (secondary guarantee UL and 25-30 year term) in 2012, and launched a new whole life term product in February 2013. We expect the introduction of higher-priced term and UL offerings, along with the pullout of older/lower-priced products, to drive a significant slowdown in sales in the next few quarters. The recently introduced indexed universal life and whole life products
27
should grow, albeit off a small base. As a result, we project individual life premiums and revenues to increase at a low-single-digit rate in the next few years. Expense savings should help margins and mitigate the impact of weak top-line growth. VOYA plans to reduce costs through a combination of lower policy acquisition spending (mainly through a cut in commission rates) and the active management of ongoing expenses. Our model projects the expense ratio (operating expenses/revenues) to improve from 14.0% in 2012 to 12.7% in 2013 and 11.7% in 2015 (each 100 bps improvement in the expense ratio lifts annual pretax income by roughly $12 million and EPS by $0.03). We Project the Individual Life Unit to Generate Poor Returns & Slow Growth We view management actions to shift the product mix and cut expenses positively, but forecast individual life division returns and margins to remain below average nonetheless. Our model projects the division to generate mid- to high-single-digit returns for the next few years. In our view, despite management efforts to shift the product mix, overall division returns will continue to be held back by low margins on older in-force policies, especially given modest new sales. Meanwhile, we expect top-line growth to remain challenged by low interest rates and the sluggish economy. As such, we project division earnings to grow at a mid-single-digit rate.
Employee Benefits: Margins to Expand, Cautious on Growth

Emp. Benefits = 7% of earnings 2013E Earnings = $85.3 mil.
We forecast top-line growth in the employee benefits business to be weak, but expect margins to expand due to price hikes and cost cuts. Employee benefits is VOYAs smallest operating division (accounting for about 7% of pretax earnings), and we expect it to remain a relatively minor contributor to overall results for the foreseeable future. In our view, the sluggish economy and limited hiring activity will suppress revenue growth in the medical stop loss, group life, and voluntary benefits products, especially given managements ongoing efforts to raise prices on underperforming cases. On a positive note, we forecast margins in the business to expand, helped primarily by price hikes in the medical stop loss line and cost savings. Compared to VOYAs other businesses, the employee benefits division is very attractive from an ROE standpoint as it represents roughly 7% of earnings but utilizes less than 5% of the equity in ongoing businesses. VOYAs employee benefits business is a major competitor in the medical stop loss market, but has a relatively small presence in the group life, disability, and voluntary benefits products. We foresee limited top-line growth in these markets in the next few years as the economy holds back job creation and wage inflation. Voluntary benefits presents an attractive long-term growth opportunity, but is likely to remain a modest contributor to division premiums in the next few years. Our outlook for margins is constructive, and we expect results to benefit from the ongoing re-pricing of underperforming stop loss cases and cost savings. Historically, the benefits ratio in the companys stop loss business has been above peer levels, and the gap should narrow given re-pricing actions. Our model projects earnings in the employee benefits division to decline 22% from 2012, which benefited from favorable reserve development in the stop loss line. Beyond 2013, earnings should increase at a high-single-digit rate as margin expansion supplements modest top-line growth.
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Figure 18: Premiums by Product

In-force premium at 12/31/12 = $1.3 bil.
Med. Stop Loss 43.6% Group Life 37.7%
Disability Voluntary Benefits 6.6% 12.1% Source: Company reports, J.P. Morgan estimates.
Medical stop loss is coverage purchased by employers who selffund their medical insurance expenses. It protects employers against large medical claims.
Employee Benefits Top-Line Growth to Be Challenged by Sluggish Economy We forecast employee benefits division revenues to increase at a low-single-digit rate in the next few years. VOYAs employee benefits division is a major competitor in the medical stop loss market (ranked #4 with market share of roughly 11%), but is a much smaller player in the group life (ranked #14 with 2% share) and disability (#21 with <1% share) segments. Medical stop loss accounts for a considerable proportion of the companys in-force book, followed by group life, voluntary benefits, and disability insurance. In our view, the company is relatively well positioned in the stop loss market, but is a marginal competitor in the group life and disability markets. We believe that VOYAs lack of scale is a significant competitive disadvantage in the group life and disability markets, especially given the commoditized nature of the products. Larger competitors such as MET, PRU, and UNM are likely to be able to use their scale advantage to offer more competitive pricing, additional value-added services, or bundled products.
Table 14: VOYA Is a Major Stop Loss Insurer

$ in millions, as ranked by 2012 earned premiums 2012 Rank 1 2 3 4 5 Company CIGNA Sun Life HCC Life ING U.S. Symetra Top 5 Cos. Total 2012 $1,672.0 839.9 777.0 561.4 504.4 4,354.7 5,000.0 2012 Mkt. Sh. 33.4% 16.8% 15.5% 11.2% 10.1% 87.1% 100.0%
Table 15: Small Competitor in Group Life

$ in millions, as ranked by 2011 face amt. issued 2011 Rank 1 2 3 4 5 6 7 8 9 10 14 Company MetLife Pru. Fin. Securian Cigna Unum Hartford Stancorp Lincoln Reliance Sun Life ING U.S. Total 2011 173,952.8 150,253.8 87,929.7 71,492.0 69,469.7 63,443.2 60,839.1 52,047.8 49,340.4 47,695.5 23,959.7 1,159,934 2011 Mkt. Sh. 15.0% 13.0% 7.6% 6.2% 6.0% 5.5% 5.2% 4.5% 4.3% 4.1% 2.1% 100.0%
Table 16: Less than 1% Share in Disability

$ in millions, as ranked by 2011 sales 2011 Rank 1 2 3 4 5 6 7 8 9 10 21 Company Cigna Unum Hartford Lincoln StanCorp Pru. Finan. Sun Life MetLife Reliance Guardian ING U.S. Total 2011 255.5 249.8 205.3 175.8 150.3 131.3 129.7 114.5 103.2 82.0 11.9 1,995.0 2011 Mkt. Sh. 12.8% 12.5% 10.3% 8.8% 7.5% 6.6% 6.5% 5.7% 5.2% 4.1% 0.6% 100.0%
Source: A.M. Best, MyHealthyGuide, company reports, and J.P. Morgan estimates.
Source: John Hewitt and Associates and JPM estimates.
In our view, the sluggish economy will hold back growth in the case count and enrollment levels, weighing on employee benefits division premiums. We expect growth in underlying exposure (number of plans and insured lives) to remain modest unless business creation, hiring activity, and wage inflation pick up. In addition, VOYA is likely to lose share in the market as management enacts price hikes. Also, industry-wide sales could be dampened as employer preoccupation with the implementation of health care reform reduces plans being put out to bid, although this bodes well for persistency. Voluntary Benefits a Long-Term Growth Opportunity We view management efforts to expand the voluntary business positively. Voluntary benefits accounted for 9.6% of sales in 2012 and 12.1% of in-force premiums as of 12/31/12. While the product is likely to remain a modest contributor to overall division results in the next few years, it presents an attractive long-term growth opportunity. Margins and returns in voluntary products are typically higher than
29
those in other employee benefits lines (in 2012 the medical stop loss and group life product lines reported loss ratios of 72.9% and 76.9%, respectively). Our model projects voluntary benefit premiums to increase at a high-single-digit pace in the next few years, albeit off a small base, driven by new product introductions and the ongoing trend of shifting benefits costs from employers to employees. However, given the current size of the voluntary benefits block, it is unlikely to materially drive overall division results in the next few years. Price Hikes and Cost Reductions Should Lift Margins Margins in VOYAs employee benefits division have historically lagged peer levels, primarily due to a high benefits ratio in the stop loss line. We attribute this partly to the companys focus on larger cases than competitors such as SYA (larger cases have higher loss ratios but lower expense ratios). We expect the gap versus competitors to narrow over time given price hikes and anticipated cost reductions. Our model forecasts division margins to decline in 2013 (as 2012 results benefited from favorable prior-year reserve development in the stop loss line), but to expand gradually thereafter. In 2012, the employee benefits business generated a pretax margin of 8.7%, boosted by an unusually low loss ratio, particularly in the medical stop loss line. We project margins to decline to 6.6% in 2013, improving to 7.2% in 2014 and 7.5% in 2015. Each 50 bps of improvement in margins affects annual pretax income by $7 million and after tax EPS by $0.02. Results should benefit from a 25-50 bps improvement in the benefits ratio and a 10-20 bps improvement in the expense ratio over the next few years. Although price hikes likely will pressure sales, especially in the medical stop loss business, we view them positively.
Table 17: VOYAs Stop Loss Benefits Ratios Are Above Peer Levels, Group Life In Line
%, defined as benefits divided by premiums 2009 Medical Stop Loss VOYA SYA HCC Group Life VOYA MET PRU UNM LNC 2010 2011 2012 1Q13
NA 69.8% 71.7%
NA 66.6% 73.6%
82.9% 64.7% 74.5%
72.9% 65.1% 73.7%
77.7% 69.2% 75.2%
NA 90.3% 88.4% 70.1% 77.3%
NA 88.7% 89.7% 70.2% 69.6%
77.5% 88.4% 89.5% 70.3% 72.0%
76.9% 87.3% 90.9% 72.2% 75.1%
85.4% 91.3% 92.2% 70.6% 80.1%
Closed Block: Institutional Spread Products & Others

This segment represents VOYAs spread lending business, which was placed into runoff in 2009. In addition, the block includes assets and liabilities associated with the companys individual reinsurance and group reinsurance units (sold to Scottish Re and Hannover Re via reinsurance transactions over the 2004-2009 period). Our model projects the block to generate pretax income of $41 million in 2013, declining to $15 million in 2014. As the block runs off, it should free modest capital, although the amount is likely to be marginal (allocated capital to the business was roughly $45 million). At 3/31/13, assets backing institutional spread products were $3.9 billion, down from $7.0 billion in 2010.
30
Portfolio De-Risked; Still Riskier than Peers

Figure 19: Portfolio Yield
%, quarterly yield on annualized basis
5.5% 5.0% 4.5% 4.0% 3.5%

1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13
Management has significantly reduced portfolio risk in recent years, but the company remains more exposed to riskier investments than most peers. Following the financial crisis, ING U.S. pared down its exposure to structured investments (Alt-A, subprime, and CMBS) and alternative investments (primarily hedge funds), while increasing its investments in corporate bonds. From 2008 to 2012, VOYA reduced its Alt-A exposure by 91% (on an amortized cost basis), subprime by 72%, and CMBS by 53%. Also, the company has reduced allocations to below-investment-grade securities within its fixed-income portfolio. These measures, along with the low interest rate environment, have pressured the companys portfolio yield, which has dropped about 50 bps over the past two years (from 4.70% in 1Q11 to 4.18% in 1Q13). Meanwhile, VOYAs exposure to peripheral Europe (Ireland, Italy, Portugal, and Spain) seems manageable. As of 3/31/13, VOYA had no exposure to sovereign and financial debt from these countries and non-financial debt of $824 million (about 0.9% of the portfolio).
Table 19: . . . But It Remains Riskier than Peer Levels
as of 12/31/12 1Q13 $75,073.4 5,365.7 7.1% 402.0 0.5% 836.9 1.1% 4,813.2 6.4% 52,713.8 70.2% % of investment portfolio RMBS CMBS 7.9% 5.1% 5.1% 6.0% 3.2% 2.9% VOYA Sector Median
Table 18: Management Has De-Risked the Portfolio . . .

$ in millions, asset allocation as % of fixed income portfolio 1Q11 Total fixed income Below investment grade bonds % of fixed income Alt-A % of fixed income Subprime % of fixed income CMBS % of fixed income Corporate debt % of fixed income $69,221.9 5,878.5 8.5% 499.3 0.7% 1,905.2 2.8% 6,306.2 9.1% 43,396.9 62.7% 1Q12 $70,964.1 5,637.9 7.9% 418.4 0.6% 978.8 1.4% 5,481.4 7.7% 47,475.2 66.9%
ABS % of fixed income portfolio Below investment grade bonds BBB bonds
7.4% 39.1%
6.0% 31.6%
Source: Company reports and J.P. Morgan estimates. Note: Sector median based on data for AFL, AIG, AIZ, AMP, CNO, GNW, HIG, LNC, MET, PFG, PL, PRU, RGA, SYA, TMK, and UNM.
We view managements de-risking actions positively, but VOYAs investment portfolio remains higher-risk than those of most life insurers. The company has above-average allocations to structured investments, with 7.9% of the portfolio in RMBS (versus industry average of 6.0%) and 5.1% of the portfolio in CMBS (versus 3.2% for industry). Also, 7.4% of VOYAs fixed-income portfolio was allocated to below-investment-grade securities (compared with sector average of 6.0%) and 39.1% was allocated to BBB bonds (versus 31.6%). We attribute the companys higher exposure to mortgage-backed securities partly to its proprietary CMO-B investment strategy. This involves the use of agency-backed CMO securities and derivatives to obtain specific exposures (prepayment, duration, etc.) to the U.S. residential mortgage market, and has been in place at ING U.S. for nearly 20 years. The companys RMBS holdings faced significant pressure in 2008, but the CMO-B strategy has performed well in subsequent years.
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Table 20: VOYA Investment Portfolio Summary

As of 12/31/12, $ in millions Mkt. Value Corporate Debt U.S. Govt and Agency Securities Non-U.S. Govt Securities State and Municipal Securities CMBS RMBS Asset-backed Securities Total Fixed Income Securities Cash & Equivalents Short Term Investments Equities Mortgage Loans Partnership Investments Policy Loans Securities Not Classified Above Total Cash and Investments Other Portfolio Metrics Portfolio duration (years) Portfolio Leverage (T. Fixed Income / T. Equity) Portfolio Leverage (T. Investments / T. Equity) Total Portfolio ($ millions) Total Equity ($ millions) $51,958.4 6,607.9 1,190.0 352.8 4,946.4 7,667.0 2,564.6 75,287.1 1,786.8 5,991.2 340.1 8,662.3 465.1 2,200.3 2,541.5 97,274.4 297.9 42.2 Amortized Cost $46,307.9 5,839.7 1,069.4 320.2 4,438.9 6,684.2 2,536.4 67,196.7 Unrealized Gain/(Loss) $5,650.5 768.2 120.6 32.6 507.5 745.2 38.4 7,863.0 % of Investments 53.4% 6.8% 1.2% 0.4% 5.1% 7.9% 2.6% 77.4% 1.8% 6.2% 0.3% 8.9% 0.5% 2.3% 2.6% 100.0% % of Investments (Life Industry) 47.1% 2.0% 3.0% 4.4% 3.2% 6.0% 2.9% 79.8% 2.6% 0.8% 0.6% 7.3% 0.2% 2.0% 2.0%
67,494.6
7,905.2
6.5 - 7.0 5.4 7.0 97,274.4 13,874.9
7.1 5.0 5.8
Source: Company reports, SNL Financial, and J.P. Morgan estimates. Note: Industry refers to median of AFL, AIG, AIZ, AMP, CNO, GNW, HIG, LNC, MET, PFG, PL, PRU, RGA, SYA, TMK, and UNM.
Management: Experienced, New to VOYA

Overall, VOYAs senior management team is highly experienced, although most have been with the company for a short period. Many senior executives, including Rodney Martin (CEO), Alain Karaoglan (COO), and Maliz Beams (CEO, Retirement), joined ING following the financial crisis.
Table 21: Management Team Experienced; Mostly New to VOYA
Name Rodney O. Martin, Jr. Alain M. Karaoglan Ewout L. Steenbergen Maliz E. Beams Jeffrey T. Becker Donald W. Britton Bridget M. Healy Kevin D. Silva Michael S. Smith
Age 60 50 43 57 47 64 58 59 49
Position CEO COO CFO CEO, Retirement CEO, Investment Management CEO, Insurance Solutions EVP, Chief Legal Officer EVP, Chief HR Officer EVP, Chief Risk Officer
At Current Position Since 2011 2012 2010 2012 2009 2009 2007 2012 2012
Joined ING 2011 2011 1993 2011 1998 2004 2007 2012 2009
Previous Roles ALICO (CEO), AmGen (CEO) AIG (VP for Divestiture) ING Asia Pacific (CFO and CRO) TIAA-CREF Ind. & Int. Services (CEO) Aetna Real Est. Inv. (Chief Credit Officer) AmGen Life Division (President) Travelers (Group Counsel) Argo Group (Chief HR Officer) Lincoln (senior management roles)
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Over time, management compensation seems well aligned with shareholder interests, and consists of a base salary, annual cash/equity awards, long-term equity compensation, and retirement benefits. Several senior executives received awards related to the successful execution of the IPO. On an ongoing basis, VOYA sets base salary levels based on a combination of factors including prior performance and competitiveness of managements compensation versus peers. Meanwhile, annual awards and bonuses have historically been determined on the basis of a pooled performance rating which weighs results at corporate and business-unit levels using various metrics such as income before taxes (including and excluding closed block variable annuity), distributable earnings, and the administrative cost ratio.
Table 22: Executive Compensation in 2012
Name Rodney O. Martin, Jr. Alain M. Karaoglan Ewout L. Steenbergen Maliz E. Beams Jeffrey T. Becker
Table 23: IPO Comp Was Significant

Cash Bonus $816,116 593,866 281,032 766,116 897,806 Pension and Others $89,289 88,638 1,501,064 87,351 352,619 Total $2,828,534 2,255,633 2,595,532 2,225,694 2,498,521 Name Rodney O. Martin, Jr. Alain M. Karaoglan Ewout L. Steenbergen Maliz E. Beams Jeffrey T. Becker
Salary $1,000,000 650,000 498,861 600,000 391,667
Stock Awards $923,129 923,129 314,575 772,227 856,429
IPO-Related Comp $6,000,000 2,000,000 800,000 1,500,000 800,000
Valuation
We are establishing a year-end 2014 price target of $28. In deriving our price target, we determine the value of 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 below-average returns. This methodology yields 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.
Our preferred metrics for valuing VOYA are overall ROE ex. AOCI vs. P/BV and sum-of-the-parts. In our view, ongoing business ROE, managements preferred metric, overstates returns.
We test the reasonableness of our price target using several methodologies, including overall ROE ex. AOCI, ongoing business ROE ex. AOCI, and sum of the parts. These analyses yield a fair value for the stock in the $25-29 range. Among the various measures, we consider overall ROE ex. AOCI and sum-of-the-parts superior to managements preferred ongoing business ROE metric, which we believe overstates the companys economic returns. VOYA Appears Overvalued Based on its ROE ex. AOCI The stock currently trades at 0.7x book value (ex. AOCI pro forma for the IPO), below the life insurance sector average of 1.1x, which we feel is justified given the companys below-average returns (2014E ROE ex. AOCI of 6.4% versus sector median of 10.7%). Based on 2014E ROE, VOYA appears overvalued as it is trading above its implied regression-based P/BV multiple. On a P/E basis, VOYA is trading at 10.7x our 2014 EPS estimate, above the life sector average of 9.3x.
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Please see Page 13 for a comparison of ROE ex. AOCI and ongoing business ROE.
Figure 20: VOYA Is Trading Above Value Implied by its ROE ex. AOCI
ROE ex. AOCI and P/BV regression analysis
2.0
TMK
AFL
1.5
MFC PFG SLF PRU
Price / Book Value
FFG
1.0
AIG
SFG
VOYA
GNW PNX
SYA HIG
PL AEL UNM RGA MET AIZ LNC
CNO
0.5
0.0 0.0% 4.0% 8.0% 12.0% 16.0% Next Twelve Months Return on Equity 20.0%
VOYA Appears Fairly Valued Based on Ongoing Business ROE ex. AOCI Using ongoing business, managements preferred metric, VOYA should generate an ROE of roughly 10.5% in 2014, slightly below our expected sector return of 10.7%. On this basis, the company is trading at 1.1x BV (using ongoing business BV ex. AOCI of $25.92), in line with the sector average of 1.1x. However, ongoing business BV is expected to increase only 1% on an annual basis for the next few years (as management does not include excess capital generated in this metric), significantly lower than our 8% BV growth expectation for the sector. As a result, barring further multiple expansion, the stock is likely to underperform peers.
Figure 21: VOYA Appears Fairly Valued Based on Ongoing Business ROE ex. AOCI
Ongoing Business ROE ex. AOCI and P/BV regression analysis
2.0
TMK
AFL
1.5
MFC PFG SLF PRU
Price / Book Value
FFG
VOYA
PL AEL UNM RGA MET AIZ LNC
1.0
AIG CNO
SFG SYA HIG
0.5
GNW PNX
0.0 0.0% 4.0% 8.0% 12.0% 16.0% Next Twelve Months Return on Equity 20.0%
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VOYA Appears Fairly Valued Based on a Sum-of-the-Parts Analysis Our sum-of-the-parts (SOTP) valuation analysis using both P/BV ex. AOCI and P/E yields a fair value in the $27-29 range. In addition to assigning a value to the operating businesses and the runoff institutional spread block, our SOTP analysis adjusts for corporate interest and debt not assigned to the business units. Also, we incorporate the present value of future tax savings from the DTA as well as the present value of expected cash taxes. We are assuming a zero value for the variable annuity closed block. Although the blocks economic value could be positive in a normal or favorable market scenario, it is also likely to be negative in case of adverse macro trends or variance in lapse and withdrawal patterns.
Table 24: Sum-of-the-Parts P/E Analysis
$ in millions expect per share amounts Business Retirement Annuities Investment management Individual life Employee benefits Closed block - institutional Corporate & Other - ex. CBVA Total Value Shares (proforma for IPO) Per share Other Sources of Value: Variable annuity closed block NOL - PV of tax savings PV of cash taxes Adjusted Equity Value
Table 25: Sum-of-the-Parts P/BV ex. AOCI Analysis

$ in millions expect per share amounts 2014E A/T Earn. 374.4 131.7 109.3 165.4 61.4 9.5 (142.2) 709.6 P/E 10.0 7.0 13.0 7.0 8.0 4.0 9.0 9.2 Value 3,744.2 921.8 1,421.5 1,157.7 490.9 38.2 (1,279.4) 6,494.9 260.8 $24.91 Business Retirement Annuities Investment management Individual life Employee benefits Closed block - institutional Unassigned corporate debt Total Value Shares (proforma for IPO) Per share Other Sources of Value: Variable annuity closed blk. NOL - PV of tax savings PV of cash taxes Adjusted Equity Value
2014E P/T Earn. 576.0 202.6 168.2 254.4 94.4 14.7 (218.7) 1,091.7
Sh. Equity (12/31/13) 3,069.8 1,379.9 291.6 2,127.8 312.5 57.7 (1,014.0) 6,225.3
2014E ROE 12.2% 9.5% 37.5% 7.8% 19.6% 16.6% 11.4%
P/BV 1.10 0.80 5.00 0.65 1.50 1.00 1.00 1.10
Value 3,376.8 1,103.9 1,458.0 1,383.1 468.8 57.7 (1,014.0) 6,834.2 260.8 $26.21
0.0 2.99 (0.61) $27.29
0.0 2.99 (0.61) $28.59
In our opinion, a sum-of-the-parts analysis, while useful in estimating a value for the various business units, has several shortcomings. First, we believe that SOTP understates the value that is realizable in an actual break-up of the company as we do not foresee any buyer interest for the VA closed block and due to potential synergies between the various businesses. Second, it is difficult to estimate the true profitability and value of each individual business as there is significant flexibility in how management allocates equity across the company. Given these factors, we believe that it is still more appropriate to value VOYA as a whole instead of on a piecemeal basis, especially when comparing it to peers.
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Other Valuation Considerations Underfunded pension plan: VOYAs primary pension plan is a tax-qualified defined benefit pension plan (ING Americas Retirement Plan), which was recently migrated from a formula based on final average pay to a cash balance pension format. As of 12/31/12, the plan had assets of $1.4 billion and a pension benefit obligation of $2.2 billion, implying a funding shortfall of roughly $860 million or $3.30 on a per-share basis. The underfunding is reflected on the companys balance sheet, so we do not adjust our BV-based valuation analysis for this amount. However, the shortfall is not allocated to the various business units, which overstates ongoing business BV. Also, we feel that the underfunded status merits a lower multiple on a P/E or sum-of-the-parts basis than suggested by the companys earnings or returns. Hedging costs and re-branding expenses not incorporated in valuation. Consistent with most other life insurers, VOYA does not include the cost of hedging its runoff variable annuity book in operating earnings. As a result, we believe that reported income overstates the companys economic returns. We consider hedging an essential component of the companys business and therefore view these costs as an ongoing expense. In addition, we expect the company to incur roughly $40-50 million of re-branding expenses ($0.17 per share), most likely in 2014. We believe that the anticipated expense, which is not reflected on the balance sheet and is not incorporated in managements financial targets, merits a slightly lower P/BV multiple. For the sake of simplicity, we do not reflect this cost in our sum-of-the-parts analysis. Based upon its separation agreement with ING Groep, VOYA can use the ING name and logo for a 24month transition period following the IPO. Management intends to officially change the companys corporate name from ING U.S. to Voya Financial during this period, and is planning a related re-branding/marketing initiative, most of which will be executed in 2014.
Earnings Model
Estimated EPS sensitivity: 10% change in equity market: $0.09 impact to annual EPS (3%) 100 bps chg. in new money yield: $0.11 impact on EPS in yr. 1 (4%)
Our 2013 and 2014 EPS estimates are $2.72 and $2.66, respectively. We forecast the companys overall ROE ex. AOCI to remain in the 6-7% range for the next few years, primarily due to significant capital tied up in the runoff VA block and low returns in the individual life and fixed annuity businesses. We are assuming a 5% increase in the equity market in 2Q13, compared with actual market performance of 5.9%. As such, there could be modest upside to our forecasts. Based on our calculations, a 10% upside in the equity market would lift VOYAs annual EPS by $0.09 (roughly 3%). On interest rates, our model incorporates roughly flat interest rates and credit spreads from the current level. Following are our key assumptions for the various businesses: Retirement: We forecast retirement division earnings to increase 26.6% in 2013 (2012 results were pressured by portfolio restructuring losses) and grow at a lowto mid-single-digit rate in subsequent years. Deposits should grow at a strong pace, but the benefit is likely to be partially offset by high withdrawals, especially in the 401(k) segment, given the companys attempts to raise prices. Hence, we project overall net flows to be modest. We project margins to remain roughly flat (ROA in the 17-18 bps range) as the impact of cost savings is offset by slight pressure on fees and a decline in the investment yield.
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Annuities: Our model projects earnings to grow 102.9% in 2013 (the annuity unit reported a sizeable DAC charge in 2012), but to decrease at a low-singledigit rate in the following years. In 2013, we expect flows, which have been negative for each of the past nine quarters, to remain weak, and forecast spreads to compress 1-2 basis points per quarter. The shift from traditional fixed annuities towards indexed annuities is a positive, but margins and returns in the business are unlikely to improve while interest rates remain low. Investment Management: In our view, investment management earnings will grow at double-digit pace over the next few years, driven by expense saves, healthy net flows (3-4% of beginning assets), and a mix shift towards higher-fee, third-party AUM. We project the proportion of third-party AUM in total AUM and AUA to grow from 22.9% at 12/31/12 to 24.7% at 12/31/13. In addition, we forecast the share of third-party fees in overall fee income to increase from 46.9% in 2012 to 49.9% in 2013. We expect this trend to continue over time, which should sustain robust earnings growth. Individual Life: Our outlook for the individual life business is relatively cautious. We expect the unit to generate mid- to high-single-digit returns in the next few years, and project earnings to increase at a mid-single-digit rate (normalizing for adverse mortality in 2012). While management initiatives to improve the profitability of the business are notable positives, we expect low margins on older in-force blocks to hold back overall results. Also, the sluggish economy and low interest rate environment are likely to weigh on sales. Employee Benefits: We project margins to decline in 2013 (as 2012 results were helped by a favorable reserve development related to the medical stop loss product), but to improve thereafter. In our opinion, results will benefit from price increases (notwithstanding the negative impact on sales) and cost reductions, boosting pretax margins from 6.6% in 2013 to 7.2% in 2014 and 7.5% in 2015. Capital Management: Management has indicated its intent to pay an initial dividend amount of $0.01 per share, and expects to generate excess capital of $1.2-1.4 billion over 2013 to 2016, most of which likely will be deployed in 2015 and 2016. Our model assumes a dividend of $0.01 beginning in 3Q13 (increasing to $0.08 in 2014 and $0.09 in 2015), and share buybacks of $500 million in 2015. We do not anticipate the company to repurchase shares in 2013 and 2014.
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Table 26: Summary Earnings Model

$ in millions
2011 Pretax Income by Segment Retirement Annuities Investment Management Individual Life Employee Benefits Business Segment Pretax Income Corporate Closed Block - Institutional Spread Products Pretax Operating Earnings Other Items Taxes on Operating Income Operating income Average diluted shares outstanding Operating EPS Growth Tax Rate on operating income Items excluded from operating income Closed block VA Net realized gains (losses) Other items Total excluded items Taxes Net Income Net EPS 1Q12 2Q12 3Q12 4Q12 2012 1Q13 2Q13E 3Q13E 4Q13E 2013E 2014E 2015E
441.9 387.6 87.5 279.3 83.3 1,279.6 (230.3) 70.3 1,119.6
123.9 36.4 33.0 55.0 15.6 263.9 (48.4) 24.3 239.8
71.1 26.9 31.2 33.4 29.1 191.7 (32.7) 39.8 198.8
145.4 32.6 39.1 53.2 36.1 306.4 (57.6) 21.8 270.6
108.2 6.3 31.2 54.6 28.6 228.9 (43.6) 23.8 209.1
448.6 102.2 134.5 196.2 109.4 990.9 (182.3) 109.7 918.3
137.8 54.3 30.1 50.8 12.4 285.4 (50.1) 21.4 256.7
138.4 51.4 38.1 54.4 21.0 303.3 (55.5) 7.4 255.2
143.6 51.0 39.5 59.3 21.2 314.6 (56.0) 6.5 265.1
148.1 50.7 40.5 62.9 30.7 332.9 (56.5) 5.6 282.0
568.0 207.4 148.2 227.4 85.3 1,236.2 (218.1) 40.9 1,059.0
576.0 202.6 168.2 254.4 94.4 1,295.7 (218.7) 14.7 1,091.7
600.7 198.7 188.4 268.6 100.9 1,357.2 (218.1) 6.8 1,146.0
392.0 727.6 230.0 $3.16
83.9 155.9 230.0 $0.68 -4.2% 35.0%
69.6 129.2 230.0 $0.56 -33.8% 35.0%
94.6 176.0 230.0 $0.77 -12.0% 35.0%
73.2 135.9 230.0 $0.59 -20.0% 35.0%
321.3 597.0 230.0 $2.60 -17.9% 35.0%
89.9 166.8 230.0 $0.73 7.0% 35.0%
89.3 165.9 250.1 $0.66 18.1% 35.0%
92.8 172.3 265.6 $0.65 -15.2% 35.0%
98.7 183.3 265.8 $0.69 16.7% 35.0%
370.7 688.3 252.9 $2.72 4.9% 35.0%
382.1 709.6 266.3 $2.66 -2.1% 35.0%
401.1 744.9 258.6 $2.88 8.1% 35.0%
35.0%
(564.5) 71.8 (540.0) (1,032.7) 175.0 (88.1) ($0.38)
(907.7) 60.3 110.3 (737.1) 7.9 (505.2) ($2.20)
381.9 132.6 (77.9) 436.6 1.0 634.4 $2.76
0.8 207.9 (125.7) 83.0 (12.9) 366.5 $1.59
(167.3) 54.7 (120.4) (233.0) (1.2) (22.7) ($0.10)
(692.3) 455.5 (213.7) (450.5) (5.2) 473.0 $2.06
(477.1) 41.8 (22.2) (457.5) 11.2 (212.0) ($0.92)
(291.4) 20.0 (30.1) (301.4) (46.2) ($0.18)
(149.0) 10.0 (16.3) (155.3) 109.8 $0.41
(140.4) 5.0 (13.5) (148.8) 133.1 $0.50
(1,057.8) 76.8 (82.0) (1,063.0) 11.2 (15.2) ($0.06)
(545.3) 20.0 (77.4) (602.7) 489.0 $1.84
(480.1) (46.8) (526.9) 619.1 $2.39
Capital & ROE Analysis BV per share BV per share ex. AOCI BV Growth (ex. AOCI) ROE ROE (BV ex. AOCI)
53.71 42.43
51.43 40.19 51.5% 5.2% 6.6%
55.83 42.70 7.6% 4.2% 5.4%
60.48 44.39 1.1% 5.3% 7.0%
60.33 44.19 4.2% 3.9% 5.3%
60.33 44.19 4.2% 4.6% 6.0%
58.22 43.21 7.5% 4.9% 6.6%
53.32 40.15 -6.0% 4.8% 6.4%
53.67 40.55 -8.7% 4.9% 6.4%
54.13 41.03 -7.2% 5.1% 6.8%
54.13 41.03 -7.2% 4.9% 6.5%
55.77 42.77 4.2% 4.8% 6.4%
59.92 46.05 7.7% 5.0% 6.5%
6.7% 8.1%
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Other Companies Recommended in This Report (all prices in this report as of market close on 10 June 2013) ING (ING.AS/7.02/Overweight)
Analyst Certification: The research analyst(s) denoted by an AC on the cover of this report certifies (or, where multiple research analysts are primarily responsible for this report, the research analyst denoted by an AC on the cover or within the document individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the research analyst's compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report.
Important Disclosures
Lead or Co-manager: J.P. Morgan acted as lead or co-manager in a public offering of equity and/or debt securities for ING U.S., Inc., ING within the past 12 months. Client: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients: ING U.S., Inc., ING. Client/Investment Banking: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as investment banking clients: ING U.S., Inc., ING. Client/Non-Investment Banking, Securities-Related: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients, and the services provided were non-investment-banking, securities-related: ING U.S., Inc., ING. Client/Non-Securities-Related: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients, and the services provided were non-securities-related: ING U.S., Inc., ING. Investment Banking (past 12 months): J.P. Morgan received in the past 12 months compensation from investment banking ING U.S., Inc., ING. Investment Banking (next 3 months): J.P. Morgan expects to receive, or intends to seek, compensation for investment banking services in the next three months from ING U.S., Inc., ING. Non-Investment Banking Compensation: J.P. Morgan has received compensation in the past 12 months for products or services other than investment banking from ING U.S., Inc., ING. Company-Specific Disclosures: Important disclosures, including price charts, are available for compendium reports and all J.P. Morgan covered companies by visiting https://mm.jpmorgan.com/disclosures/company, calling 1-800-477-0406, or e-mailing research.disclosure.inquiries@jpmorgan.com with your request. J.P. Morgans Strategy, Technical, and Quantitative Research teams may screen companies not covered by J.P. Morgan. For important disclosures for these companies, please call 1-800-477-0406 or e-mail research.disclosure.inquiries@jpmorgan.com.
ING U.S., Inc. (VOYA, VOYA US) Price Chart
48
40
32 Price($)
24
16
0 May 13 May 13 May 13 Jun 13 Jun 13 Jun 13
Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.
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Date 09-Nov-06 26-Jan-07

ING (ING.AS, INGA NA) Price Chart
Rating Share Price () N N OW OW OW OW OW OW OW OW OW OW OW OW OW OW OW OW OW 35.39 33.47 33.68 21.60 9.48 5.33 5.98 10.15 9.92 7.60 6.81 6.21 7.40 7.68 7.77 9.00 9.18 5.99 4.87 6.01 5.08 4.85 5.07 6.19 6.79
Price Target () 38.30 39.10 39.10 28.00 20.00 16.00 9.00 14.00 13.38 9.68 9.67 10.57 10.72 10.55 10.58 11.61 11.61 9.00 8.60 8.30 8.40 6.50 -9.50 9.90
30-Jan-07 05-Mar-08 20-Oct-08 21-Nov-08 21-Apr-09

OW 9.9
OW 39.1 56 N 39.1 42 Price() 28 OW 16
OW 9.68 OW 10.549 OW 11.613 OW 8.3
NR
OW 13.384 OW 10.724 OW 11.613 OW 8.6OW 6.5
01-Sep-09 16-Nov-09 08-Jan-10 18-Feb-10 30-Jun-10 11-Aug-10 14-Oct-10
N 38.3
OW 28 OW 20 OW 9 OW 14 OW 9.673 OW 10.574 OW 10.584
OW 9 OW 8.4
OW 9.5
14
23-Nov-10 17-Feb-11 01-Apr-11

Sep 06 Jun 07 Mar 08 Dec 08 Sep 09 Jun 10 Mar 11 Dec 11 Sep 12 Jun 13
19-Oct-11 24-Nov-11
Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends. Break in coverage Aug 02, 2012 - Mar 19, 2013.
07-Dec-11 OW 10-May-12 OW 12-Jun-12 02-Aug-12 19-Mar-13 OW NR OW
09-May-13 OW
The chart(s) show J.P. Morgan's continuing coverage of the stocks; the current analysts may or may not have covered it over the entire period. J.P. Morgan ratings or designations: OW = Overweight, N= Neutral, UW = Underweight, NR = Not Rated Explanation of Equity Research Ratings, Designations and Analyst(s) Coverage Universe: J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the average total return of the stocks in the analysts (or the analysts teams) coverage universe.] Neutral [Over the next six to twelve months, we expect this stock will perform in line with the average total return of the stocks in the analysts (or the analysts teams) coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of the stocks in the analysts (or the analysts teams) coverage universe.] Not Rated (NR): J.P. Morgan has removed the rating and, if applicable, the price target, for this stock because of either a lack of a sufficient fundamental basis or for legal, regulatory or policy reasons. The previous rating and, if applicable, the price target, no longer should be relied upon. An NR designation is not a recommendation or a rating. In our Asia (ex-Australia) and U.K. small- and mid-cap equity research, each stocks expected total return is compared to the expected total return of a benchmark country market index, not to those analysts coverage universe. If it does not appear in the Important Disclosures section of this report, the certifying analysts coverage universe can be found on J.P. Morgans research website, www.jpmorganmarkets.com. Coverage Universe: Bhullar, Jimmy S: AFLAC, Inc. (AFL), American International Group (AIG), Assurant, Inc. (AIZ), Genworth Financial, Inc. (GNW), Hartford Financial Services (HIG), Lincoln National (LNC), MetLife, Inc. (MET), National Financial Partners (NFP), Phoenix Companies (PNX), Principal Financial Group (PFG), Protective Life (PL), Prudential Financial (PRU), Reinsurance Group of America (RGA), Symetra Financial (SYA), Torchmark Corp (TMK), Unum Group (UNM)
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J.P. Morgan Equity Research Ratings Distribution, as of March 30, 2013

J.P. Morgan Global Equity Research Coverage IB clients* JPMS Equity Research Coverage IB clients* Overweight (buy) 43% 54% 42% 74% Neutral (hold) 44% 47% 50% 64% Underweight (sell) 13% 38% 9% 57%
*Percentage of investment banking clients in each rating category. For purposes only of FINRA/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold rating category; and our Underweight rating falls into a sell rating category. Please note that stocks with an NR designation are not included in the table above.
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VOYA JPM Initiation

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North America Equity Research

ING U.S., Inc.

Insurance -- Life Jimmy S. Bhullar, CFA

(1-212) 622-6397 jimmy.s.bhullar@jpmorgan.com

Matthew Byrnes, CFA

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

28.41 10 Jun 13 29.06 - 19.20 7,408.45 Dec 261 28.00 31 Dec 14

See page 39 for analyst certification and important disclosures.

Jimmy S. Bhullar, CFA (1-212) 622-6397 jimmy.s.bhullar@jpmorgan.com

North America Equity Research 11 June 2013

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

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

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

Jimmy S. Bhullar, CFA (1-212) 622-6397 jimmy.s.bhullar@jpmorgan.com

North America Equity Research 11 June 2013

Jimmy S. Bhullar, CFA (1-212) 622-6397 jimmy.s.bhullar@jpmorgan.com

North America Equity Research 11 June 2013

Figure 1: Mix of Ongoing Business

Inv. Mgt. 12%

Potential Expansion of Ongoing Business ROE a Plus

Considerable Exposure to High-Return Markets

Deferred Tax Assets a Significant Source of Value

Jimmy S. Bhullar, CFA (1-212) 622-6397 jimmy.s.bhullar@jpmorgan.com

North America Equity Research 11 June 2013

Overall ROE to Remain Sub-Par

Execution Risk in Retirement and Low Rates Key Risks

Jimmy S. Bhullar, CFA (1-212) 622-6397 jimmy.s.bhullar@jpmorgan.com

North America Equity Research 11 June 2013

Closed Block Variable Annuity Presents Tail Risk

Risks to Rating and Price Target

Jimmy S. Bhullar, CFA (1-212) 622-6397 jimmy.s.bhullar@jpmorgan.com

North America Equity Research 11 June 2013

Jimmy S. Bhullar, CFA (1-212) 622-6397 jimmy.s.bhullar@jpmorgan.com

North America Equity Research 11 June 2013

Key Investment Points

2.00% 0.50% 0.40% 0.50% 0.50%

Jimmy S. Bhullar, CFA (1-212) 622-6397 jimmy.s.bhullar@jpmorgan.com

North America Equity Research 11 June 2013

Jimmy S. Bhullar, CFA (1-212) 622-6397 jimmy.s.bhullar@jpmorgan.com

North America Equity Research 11 June 2013

DTA Has Significant Value Not Fully Reflected in B/S

Table 2: Net Operating Loss Carry-forwards

Subject to Section 382? Yes Yes No Partially

PV of Tax Savings $130.1 $240.3 $362.9 $47.6 $780.8 ($158.5) $622.4

PV Per Share $0.50 $0.92 $1.39 $0.18 $2.99 ($0.61) $2.39

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

Jimmy S. Bhullar, CFA (1-212) 622-6397 jimmy.s.bhullar@jpmorgan.com

North America Equity Research 11 June 2013

Overall Returns to Remain Sub-Par

Figure 3: Capital by Business

Ongoing Bus. 66%

Closed Block 34%

Jimmy S. Bhullar, CFA (1-212) 622-6397 jimmy.s.bhullar@jpmorgan.com

North America Equity Research 11 June 2013

Figure 4: Low ROCs, High Capital

Jimmy S. Bhullar, CFA (1-212) 622-6397 jimmy.s.bhullar@jpmorgan.com

North America Equity Research 11 June 2013

Table 3: VOYA vs. JPM ROE Calc.

285.4 (50.1) 21.4 (89.8) 166.8 10,051.3 6.6%

Source: Company reports and JPM estimates.

Closed Block VA Presents Significant Tail Risk

Jimmy S. Bhullar, CFA (1-212) 622-6397 jimmy.s.bhullar@jpmorgan.com

North America Equity Research 11 June 2013