Voya Financial, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Amounts are in millions of dollars, except per-share data, percentages and where otherwise noted. Unaudited results are not necessarily indicative of full-year performance.
Business context
Voya provides retirement, investment management, employee benefits and individual life products. Its 2018 sale and reinsurance transaction substantially exited its fixed and variable annuity businesses; remaining policies are reported as Retained Business. Voya ceased new Individual Life sales effective December 31, 2018 and continues to manage its in-force policies.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $2,346 | $2,113 | $4,543 | $4,080 |
| Income from continuing operations before tax | $298 | $241 | $475 | $262 |
| Income from continuing operations | $254 | $196 | $406 | $213 |
| Net income available to common shareholders | $226 | $166 | $290 | $612 |
| Diluted EPS from continuing operations | $1.53 | $0.80 | $2.47 | $0.88 |
| Adjusted operating earnings before tax (non-GAAP) | $278 | $238 | $472 | $401 |
| Adjusted operating revenues (non-GAAP) | $2,095 | $2,033 | $4,118 | $4,056 |
Adjusted operating earnings as a share of adjusted operating revenues were approximately 13.3% for Q2 2019 versus 11.7% for Q2 2018, and 11.5% for the first half versus 9.9% a year earlier. These are simple ratios of Voya’s non-GAAP measures, not reported GAAP margins.
- Revenue and earnings drivers: Q2 net investment income increased $67 year over year, to $880, mainly from alternative investment and prepayment income; premiums rose $52, to $585, reflecting Employee Benefits growth. For the first half, premiums increased $95, while fee income declined $9, largely due to lower Investment Management fees following the 2018 transaction.
- Segment adjusted operating earnings before tax: Q2 / first-half results were Retirement $180 / $309; Investment Management $41 / $75; Employee Benefits $49 / $87; Individual Life $47 / $95; and Corporate losses of $39 / $94. Year-over-year first-half growth in total adjusted operating earnings was partly offset by weaker Investment Management results.
- Cash flow: First-half operating cash flow was $549, versus $1,054 in 2018; continuing-operations operating cash flow improved to $549 from a use of $408, while the prior-year total included $1,462 from discontinued operations. Investing cash flow was $73 versus $87; financing used $678 versus $1,323. Cash and cash equivalents were $1,482 at June 30, down from $1,538 at year-end.
- Balance sheet and capital: Total assets were $165,162, up from $154,682 at year-end; shareholders’ equity was $10,739, up from $8,941. AOCI rose to $2,867 from $607, primarily reflecting higher unrealized fixed-maturity gains as rates declined. Contract owner account balances were $50,580. Long-term debt was $3,041 and short-term debt, consisting of current long-term debt, was $97. The $1 billion senior unsecured credit facility had no borrowings or letters of credit outstanding; the company reported compliance with debt covenants.
Material changes and unusual items
- First-half common-shareholder income fell to $290 from $612, despite higher continuing-operations income, because 2018 included a $457 after-tax gain from discontinued operations; 2019 included an $82 after-tax charge for the 2018 transaction purchase-price true-up. Management said it did not anticipate further material charges related to that transaction.
- Q2 net realized capital gains were $50 versus a $120 loss a year earlier; first-half gains were $67 versus a $301 loss. Results were affected by fair-value movements in the CMO-B portfolio, securities sales and derivatives. Such investment and guarantee-related changes can be volatile and are excluded from adjusted operating earnings under Voya’s reconciliation.
- Organizational restructuring expense was $138 in the first half, versus $12 in the comparable 2018 period. Voya expects total costs of $200–$300, including amounts already incurred, with spending expected to continue at least through 2020. The initiatives include reducing stranded costs and pursuing additional cost savings.
- Voya issued Series B preferred shares in June, receiving $293 net proceeds. It repurchased $686 of common stock in the first half and declared common dividends of $0.02 per share for the period. The board authorized a $0.15-per-share third-quarter dividend on August 1, 2019.
- Voya redeemed its $97 principal amount of 2022 senior notes on July 12, 2019 and expected a $9 debt-extinguishment loss in Q3 2019.
Outlook, risks and contingencies
- Interest rates: Management reported significant rate declines and a flattening/inverted portion of the yield curve. The general account portfolio was approximately $65.3 billion and had an annualized second-quarter earned yield of about 5.4%. Voya expects yields on new investments to be below yields on maturing investments absent a material market change; low rates may also pressure margins on products with guaranteed minimum rates. Management estimated a 100-basis-point rate change sustained over three years would generally increase or decrease future adjusted operating earnings by about 2%–4%.
- Capital returns and subsidiary liquidity: Voya depends substantially on operating-subsidiary cash flows. Insurance regulation limits distributions; the Minnesota and Colorado principal insurance subsidiaries did not have capacity at that time to make ordinary dividends. The filing also describes substantial collateral and reinsurance support arrangements.
- Legal matters: The company faces litigation and regulatory contingencies, including fiduciary-fee, stop-loss coverage and cost-of-insurance claims. Management estimated reasonably possible losses above accruals of up to approximately $50; it said outcomes are uncertain and some matters cannot yet be estimated.
- Other exposures: About $77 of previously accrued carried interest could be partly or fully reversed if fund performance hurdles are not maintained. Off-balance-sheet commitments included $1,177 to purchase limited partnerships and private-placement investments, plus $43 to acquire mortgage loans. Lower rates, investment-market movements, credit risk, mortality, lapses, regulation and execution of restructuring and transition services remain relevant risks.
- No specific full-year earnings guidance is provided in the supplied filing text. Voya said it expects a 9.0% long-term return on certain alternative investments; actual income can be volatile.
Key facts investors should verify
- Whether continuing-operations and adjusted operating earnings trends persist, particularly segment results and the effects of mortality, business growth and lower reinvestment yields.
- How much reported earnings and equity reflect recurring operations versus investment fair-value movements, AOCI changes and other excluded or unusual items.
- Progress and realized savings from the restructuring program, including its expected $200–$300 total cost and timing.
- Developments in the transaction true-up, litigation and regulatory matters, carried-interest exposure, and reinsurance collateral and guarantees.
- Capital deployment and liquidity after share repurchases, preferred issuance, debt redemption and restrictions on subsidiary dividends.