Voya Financial, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Unaudited U.S. GAAP results; dollar amounts are in millions unless noted. Voya provides retirement, investment management, annuity, life and employee-benefit products, and reports a Closed Block Variable Annuity (CBVA) segment. The filing states interim results are not necessarily indicative of full-year performance.
Financial performance and position
- Q3 revenue: $2,550.2, versus $2,528.5 a year earlier. Nine-month revenue: $7,352.4, down from $8,233.8, reflecting lower premiums and CBVA-related revenue, partly offset by higher fee income and consolidated investment-entity income.
- Net income attributable to common shareholders: Q3 profit of $148.6 ($0.83 basic and $0.81 diluted per share), versus a $248.1 loss in Q3 2016. Nine-month profit was $172.3 ($0.93 basic and $0.92 diluted), versus $105.0 ($0.52 basic and $0.51 diluted) in 2016.
- Operating earnings before income taxes, a non-GAAP measure: $137.9 in Q3 versus $108.4; $553.1 for nine months versus $513.3. Management uses this measure to assess segment performance; it excludes CBVA and other specified items and does not replace GAAP net income.
- Key revenue and expense trends: Q3 net investment income was $1,104.3, down from $1,163.4; fee income was $880.0, up from $857.9; premiums were $581.6, down from $726.7. Nine-month net realized capital losses widened to $944.5 from $458.3. Nine-month policyholder benefits and interest credited totaled $4,111.0, down from $5,332.3. Net DAC/VOBA amortization rose to $563.4 from $381.2 for nine months.
- Cash flow: Nine-month operating cash flow was $1,122.7, down from $2,482.8. Investing activities used $2,283.9; financing activities provided $217.4. Cash and cash equivalents ended at $1,966.9, compared with $2,910.7 at year-end 2016.
- Balance sheet and debt: Total assets were $226,643.9 and total shareholders’ equity $14,611.3. Total investments were $95,741.6. Short- and long-term debt carried at $336.6 and $3,122.2, respectively; Voya reported compliance with debt covenants. The $750 million revolving credit sublimit had no borrowings outstanding.
- Capital returns: Voya reported $622.7 of common-share repurchases for the first nine months and $5.5 of dividends paid. Shares outstanding declined from 194.6 million at December 31, 2016 to 179.7 million at September 30, 2017. On October 26, the board authorized an additional $800 million of repurchases through December 31, 2018; the authorization does not require purchases.
- Assets under management/administration: $540.7 billion at September 30, 2017, versus $479.9 billion a year earlier. The measure includes overlapping affiliate-sourced assets and eliminations as described in the filing.
Material changes and segment results
Operating earnings before income taxes by segment were as follows. CBVA is excluded from this operating measure.
| Segment | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Retirement | $106.8 | $62.9 | $287.8 | $307.1 |
| Investment Management | $53.5 | $51.5 | $187.7 | $106.0 |
| Annuities | $74.4 | $113.3 | $203.7 | $236.6 |
| Individual Life | $(66.2) | $(76.2) | $27.8 | $15.2 |
| Employee Benefits | $58.0 | $41.3 | $95.6 | $94.4 |
| Corporate | $(88.6) | $(84.4) | $(249.5) | $(246.0) |
| Total operating earnings | $137.9 | $108.4 | $553.1 | $513.3 |
- Retirement’s nine-month operating earnings declined amid lower yields and prepayment fees and unfavorable unlocking tied to changes in guaranteed minimum interest rate (GMIR) provisions. Pension risk transfer sales had been closed at the end of 2016.
- Investment Management improved, supported by higher average assets and recovery of previously reversed carried interest. Annuities earnings declined, while Employee Benefits improved in Q3, including favorable reserve refinements.
- CBVA reported a Q3 pretax gain of $141.8 versus a loss of $328.0; its nine-month pretax loss was $273.3 versus $225.5. The Q3 comparison was strongly affected by a $373.4 favorable annual assumption-update impact in 2017, versus a $95.5 unfavorable impact in 2016. CBVA earnings remain volatile and are excluded from management’s operating earnings measure.
Outlook, commentary and risks
- Interest rates and markets: Management cited persistently low rates, a flatter yield curve and potential market volatility as risks to product demand, investment spreads, asset-based fees, hedging costs and capital. The general account portfolio’s annualized average yield was about 4.8% in Q3; management expected reinvestments in the remainder of 2017 to yield 3.75%–4.25%. These are expectations, not formal company-wide earnings guidance.
- Assumptions and unusual items: The annual assumption review produced a $183.6 unfavorable impact to operating earnings before taxes outside CBVA. Nine-month operating results also included $270.9 of unfavorable DAC/VOBA and other-intangible unlocking, including the GMIR initiative. By contrast, CBVA’s annual review produced the $373.4 favorable impact noted above.
- Restructuring and technology: Restructuring expense was $65.7 for nine months and $99.5 cumulative to date. The July 2017 five-year IT services agreement has expected annual costs of $70–$90 and total costs of about $400, including approximately $35 of transition costs. Management expects combined annual run-rate cost savings of at least $100 in 2018 and subsequent years from restructuring initiatives and the Strategic Investment Program; further restructuring costs through 2018 may be material and are not fully estimated.
- CBVA capital and policyholder behavior: Management said CBVA assets supported the S&P CTE95 rating-agency capital standard at quarter-end. Future reserve and capital outcomes depend on mortality, lapses, annuitization and withdrawals. Proposed NAIC variable-annuity reserve and capital reforms could increase reserves or collateral needs and could be material; the ultimate rules and effects were uncertain.
- Investment and derivative exposures: Nine-month derivative-related losses were a significant contributor to net realized capital losses. The filing also reports $2.3 billion maximum potential future exposure on credit-default-swap protection sold and warns that a future ratings downgrade could trigger collateral or liquidity pressure. Fixed-maturity unrealized losses declined to $281.1 from $739.6 at year-end 2016, primarily due to tighter credit spreads.
- Legal and other contingencies: The company estimated reasonably possible litigation and regulatory losses in excess of accruals at up to approximately $75.0; it could not estimate losses for some matters. Carried interest of approximately $63.6 remained subject to full or partial reversal if fund performance hurdles are not maintained.
- Controls: Management concluded disclosure controls were effective. The Cognizant IT-services transition was identified as a material change in internal control over financial reporting; the filing did not report another material control change during the quarter.
Important facts for investors to verify
- Reconcile GAAP net income with non-GAAP operating earnings and understand the large, assumption-sensitive CBVA contribution to Q3 results.
- Assess the persistence of the $183.6 unfavorable non-CBVA assumption impact, GMIR-related unlocking and the expected future benefit from contract changes.
- Review cash generation, parent-company liquidity, insurance-subsidiary dividend restrictions and the timing and funding of share repurchases.
- Monitor low-rate reinvestment pressure, derivative and guarantee exposures, collateral requirements, and potential NAIC reserve and capital reforms.
- Track restructuring spending against the stated savings objective, the Cognizant transition, and developments in litigation and carried-interest reversals.