Business context and reporting period
Voya Financial, Inc. filed this unaudited Form 10-Q for the quarter ended June 30, 2018. The company provides retirement, investment management, employee benefits, and individual life products and services. Amounts below are in millions of dollars unless stated otherwise.
On June 1, 2018, Venerable acquired subsidiaries VIAC and DSL, disposing of substantially all of Voya’s Closed Block Variable Annuity and Annuities businesses. These businesses are presented as discontinued operations for all periods shown. Voya’s continuing reportable segments are Retirement, Investment Management, Employee Benefits, and Individual Life.
Financial results and key metrics
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenues | $2,113 | $2,191 | $4,080 | $4,248 |
| Income from continuing operations | $196 | $155 | $213 | $175 |
| Net income available to common shareholders | $166 | $167 | $612 | $24 |
| Continuing operations diluted EPS | $0.80 | $0.55 | $0.88 | $0.63 |
| Total diluted EPS | $0.96 | $0.89 | $3.48 | $0.12 |
| Adjusted operating earnings before tax | $238 | $107 | $401 | $252 |
| Net investment income | $813 | $832 | $1,636 | $1,675 |
| Net realized capital losses | $(120) | $(25) | $(301) | $(111) |
Q2 adjusted operating earnings before tax were approximately 11.7% of adjusted operating revenue of $2,033, compared with 5.3% of $2,011 in the prior-year quarter. For the first half, the comparable measure was approximately 9.9% of $4,056, versus 6.3% of $3,996. These are calculated ratios, not company-reported GAAP margins.
Continuing income before tax was $241 in Q2, versus $155 a year earlier, and $262 for the first half, versus $268. The six-month common-shareholder profit increase principally reflects discontinued-operations income of $457, including a favorable $505 after-tax adjustment to the estimated sale loss; it should not be read as a comparable increase in ongoing earnings.
Six-month cash flows: operating activities provided $1,054 in total, including $1,462 from discontinued operations; continuing operations used $408. Investing activities provided $87, versus $702 used in the prior-year period. Financing activities used $1,323, compared with $198 used. Ending cash and cash equivalents were $1,534, all in continuing operations.
At June 30, total assets were $162,740 and total liabilities were $153,498; year-end 2017 totals included $59,052 of assets and $58,277 of liabilities held for sale. Shareholders’ equity was $9,242, down from $11,039 at year-end, with accumulated other comprehensive income falling to $943 from $2,731. Long-term debt was $3,458 and short-term debt was $1. The company reported no borrowings or letters of credit outstanding under its $750 revolving credit sublimit; it said it was in compliance with debt covenants.
Material changes versus the prior comparable period
- Adjusted operating earnings rose to $238 in Q2 and $401 for the first half, with Retirement’s improvement a major contributor. Retirement reported $169 for Q2 and $278 for the first half, versus $33 and $181. Management cited lower DAC/VOBA amortization and less unfavorable prior-period unlocking related to changes in guaranteed minimum interest rates, along with higher fees from assets under management.
- Investment Management earnings declined to $52 in Q2 and $113 for the first half, versus $85 and $134, primarily reflecting prior-year carried-interest recovery and lower performance-related revenue, partly offset by higher management fees.
- Employee Benefits earnings increased to $35 in Q2 and $67 for the first half, versus $27 and $38, helped by business growth and favorable stop-loss experience. Individual Life earnings fell to $41 and $58, versus $62 and $94, amid adverse mortality and unfavorable assumption updates and unlocking.
- Fee income increased year over year, while net investment income declined. Net realized losses widened, driven by fair-value changes, securities sales and market movements. Gross unrealized losses on fixed maturities increased to $767 from $243 at year-end, primarily due to rising interest rates.
- The company repurchased 9.6 million shares for $500 during the first half and declared $0.02 per share in dividends. A further $88 of repurchases occurred after June 30.
Outlook, management commentary, risks and unusual items
- Sale accounting and transition: The estimated after-tax loss on sale stood at $1,918 at June 30, compared with $2,423 at year-end 2017. Buyers could request changes to VIAC closing book value or statutory capital during a 180-day review period, potentially changing the final sale loss. Voya also entered transition-services arrangements with Venerable and identified these arrangements as a material change to internal control over financial reporting; Voya retains responsibility for oversight.
- Costs and restructuring: Management expects approximately $30–$35 of additional 2018 restructuring expense for the IT-services initiative. Further continuing-operations organizational restructuring costs through 2019 cannot yet be estimated and could be material. The company is addressing stranded costs following the sale.
- Markets and investments: Management warned that market volatility, interest-rate changes and persistently low yields may affect investment income, product demand, hedging costs, reserves, capital and assets under management. It expects 2018 reinvestment yields to be below the existing portfolio yield absent a material change in market yields. Management’s long-term expected return on certain alternative investments is 8%–9%, but actual results may vary.
- Contingencies: The company estimated reasonably possible litigation and regulatory losses above amounts accrued at up to approximately $50; it could not estimate losses for all matters. Approximately $74 of previously accrued carried interest could be reversed if fund performance hurdles are not maintained. Voya remains obligated to policyholders under certain reinsurance arrangements even where counterparties contractually assumed the liabilities.
- Capital, ratings and regulation: The amended credit facility requires minimum net worth of the greater of $6 billion or 75% of year-end 2017 actual net worth, as calculated under the agreement. Rating downgrades could raise borrowing costs or trigger collateral demands. NAIC risk-based-capital changes effective December 31, 2018 are expected by management to be met.
- Other notable items: The first-half $505 favorable sale-loss adjustment materially affected reported earnings. The company recorded $15 of other-than-temporary impairments in the first half. Its effective tax rate was 18.7% for the first half, and Tax Reform accounting estimates remained subject to review.
Important facts for investors to verify
- Final sale proceeds, closing adjustments, and any subsequent revisions to the $1,918 estimated after-tax loss on the annuity and CBVA divestiture.
- Ongoing earnings and cash generation from continuing operations, separating them from the sale adjustment and other discontinued-operations results.
- Progress on reducing stranded costs, restructuring charges, and the expected economics and oversight of Venerable transition services.
- Interest-rate exposure, unrealized investment losses, credit quality, and the effect of market movements on hedging and insurance liabilities.
- Developments in litigation, including the estimated loss range, and potential reversals of carried interest and other assumption-sensitive balances.
- Debt-covenant headroom, subsidiary dividend capacity, reinsurance collateral needs, and the impact of ratings or regulatory-capital changes.