Voya Financial, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; unaudited. Dollar amounts are in millions except per-share data. Voya provides retirement, investment management, employee benefits and individual life products. Following its June 2018 transaction, substantially all closed-block variable annuity and annuity businesses are reported as discontinued operations; Voya retained certain policies. The company ceased new Individual Life sales at the end of 2018.
Financial results and position
| Metric | Q1 2019 | Q1 2018 / comparison |
|---|---|---|
| Total revenue | $2,197 | $1,967 |
| Income from continuing operations before tax | $177 | $21 |
| Income from continuing operations | $152 | $17 |
| Adjusted operating earnings before tax | $194 | $163 |
| Net income available to common shareholders | $64; diluted EPS $0.42 | $446; diluted EPS $2.50 |
| Continuing-operations diluted EPS available to common shareholders | $0.95 | $0.10 |
| Net cash from continuing operating activities | $131 | $38 |
| Cash and cash equivalents at quarter-end | $1,033 | $1,538 at Dec. 31, 2018 |
| Long-term debt | $3,136 | $3,136 at Dec. 31, 2018 |
| Total shareholders’ equity | $9,806 | $8,941 at Dec. 31, 2018 |
Total benefits and expenses were $2,020, versus $1,946. The effective tax rate was 14.0%, compared with 21.0%. Net cash used in investing activities was $44 and net cash used in financing activities was $592; financing included a $250 share repurchase. Common dividends were $0.01 per share. Separate-account assets and corresponding liabilities were each $77,649 and are not equivalent to unrestricted company liquidity.
Investments totaled $65,625, including $51,082 of fixed maturities excluding pledged securities and $8,516 of mortgage loans. The general-account investment portfolio was approximately $63.8 billion and earned an annualized yield of approximately 4.9% in the quarter. AOCI increased to $1,966 from $607 at year-end, largely reflecting improved unrealized gains on securities.
Material changes versus the prior period
- Total revenue rose $230, while adjusted operating revenues were unchanged at $2,023. Net investment income declined $8 to $815; fee income declined $11 to $665; and premiums increased $43 to $582.
- Continuing pretax income improved by $156. Adjusted operating earnings before tax increased $31 to $194, with improvement in Retirement, Employee Benefits and Individual Life partly offset by Investment Management, whose earnings fell to $34 from $61.
- Reported net income available to common shareholders fell to $64 from $446 primarily because Q1 2018 included $429 of discontinued-operations income, while Q1 2019 included a $79 after-tax charge related to the sold businesses’ purchase-price true-up. Voya said it did not anticipate further material charges from that transaction.
- Continuing operating cash flow increased to $131 from $38; the prior-year total operating cash flow of $401 included $363 from discontinued operations. Cash declined $505 during Q1 2019.
- Gross unrealized losses on fixed maturities fell to $390 from $1,084 at year-end, primarily due to lower interest rates and tighter credit spreads.
Outlook, management commentary and risks
- Cost savings and restructuring: Voya targeted an additional $100 of savings by the end of 2020, on top of previously announced $110–$130 by mid-2019 and approximately $20 associated with stopping Individual Life sales. Q1 organizational restructuring expense was $83; total expected organizational restructuring costs were $200–$300, continuing at least through 2020. A further $10–$20 of costs was expected to complete an earlier IT transition restructuring.
- Interest rates and markets: Management described a low-rate environment and a sharply lower yield curve in Q1. Reinvested fixed-income proceeds during 2019 were expected to earn below the portfolio’s prevailing yield, potentially pressuring investment margins. Market volatility can affect asset-based fees, sales, outflows, reserves, hedging costs and investment values. No formal earnings guidance is provided in the supplied filing text.
- Liquidity and capital: Voya reported $3,136 of long-term debt, compliance with debt covenants, and no borrowings or letters of credit outstanding under its $1 billion senior unsecured credit facility, which includes a $750 borrowing sublimit and expires in 2021. The facility requires minimum net worth of $6.6 billion. Insurance-subsidiary dividends are subject to regulatory limits; Minnesota and Colorado principal insurance subsidiaries lacked ordinary dividend capacity at quarter-end. Subsequent to quarter-end, Connecticut paid a $270 dividend and Minnesota paid a regulator-approved $360 extraordinary dividend.
- Capital returns: The company repurchased $250 of shares in Q1. On May 2, 2019, the board authorized an additional $500 of repurchases; authorization is not an obligation to buy shares. A further $236 accelerated-repurchase arrangement was entered into in April.
- Contingencies: Voya estimated reasonably possible litigation and other losses above amounts accrued of up to approximately $50; some matters could not be estimated. The filing describes fiduciary-fee, stop-loss and cost-of-insurance lawsuits, which the company disputes. Approximately $79 of previously accrued carried interest could be reversed if fund performance hurdles are not maintained.
- Accounting and operational items: Adoption of the long-duration insurance-contract accounting standard, effective for fiscal years beginning after December 15, 2020, may significantly affect equity and future earnings patterns; the impact was still being evaluated. Voya also disclosed an April 2019 agreement intended to replace Ballantyne Re with Swiss Re, subject to approvals and other conditions, with closing expected before the end of Q3 2019.
Most important facts for investors to verify
- Separate recurring operating performance from market-sensitive gains and losses, restructuring items, pension remeasurement and discontinued-operations adjustments; review the company’s non-GAAP adjusted operating earnings reconciliation.
- Track execution and realized savings against the announced cost-reduction targets, and compare them with restructuring costs and remaining stranded costs.
- Assess the effect of low reinvestment yields, customer behavior and market movements on investment spreads, fee income, reserves and hedging results.
- Review insurer statutory capital, dividend restrictions, collateral requirements and the extent to which parent-company liquidity depends on subsidiary distributions.
- Monitor the sold-business purchase-price true-up, litigation and the carried-interest reversal exposure, as well as the proposed reinsurance novation and its closing conditions.