Voya Financial, Inc. quarterly report, Q2 FY2014

Voya Financial, Inc. — Q2 2014 Form 10-Q

Reporting period: Three and six months ended June 30, 2014; filed August 7, 2014. Amounts are in millions of dollars unless stated otherwise. Voya provides retirement, investment management, annuity, life insurance and employee-benefit products. The company changed its name from ING U.S., Inc. on April 7, 2014.

Financial results and position

Metric	Q2 2014	Q2 2013	Six months 2014	Six months 2013
Total revenue	$2,698.1	$2,140.6	$5,369.0	$3,959.2
Income (loss) before tax	$419.0	$(75.2)	$721.3	$(289.5)
Net income (loss)	$412.9	$(85.3)	$684.5	$(310.8)
Net income (loss) available to common shareholders	$246.3	$(82.2)	$504.4	$(294.2)
Diluted earnings (loss) per share	$0.96	$(0.33)	$1.94	$(1.22)
Operating earnings before tax (non-GAAP)	$328.3	$272.0	$559.4	$528.7
Operating revenues (non-GAAP)	$2,176.9	$2,097.5	$4,372.3	$4,188.0

The ratio of operating earnings before tax to operating revenues was approximately 15.1% in Q2 2014 versus 13.0% in Q2 2013, and 12.8% versus 12.6% for the respective six-month periods; these are calculated ratios, not company-reported GAAP margins.

Q2 net investment income was $1,120.9, up from $1,112.2; fee income was $897.3, down from $909.7; premiums were $629.4, up from $474.8. Net realized capital losses narrowed to $366.5 from $565.9.
For the first half, net investment income was $2,266.5 versus $2,310.9; fee income was $1,829.1 versus $1,801.6; premiums were $1,230.3 versus $946.7. Net realized capital losses narrowed to $557.1 from $1,440.7.
Six-month operating cash flow was $1,817.4, compared with $1,289.9. Investing activities used $1,463.6; financing activities used $52.6. Cash and cash equivalents ended the period at $3,142.0, versus $2,840.8 at year-end 2013.
At June 30, total assets were $228,078.0, total liabilities $210,814.7 and total shareholders’ equity $17,263.3. Long-term debt was $3,515.2; there were no short-term debt borrowings outstanding. Credit facilities had $4,440.7 of unused commitment.
Assets under management and administration were $524.5 billion, up from $481.7 billion at June 30, 2013. Total AUM was $283.5 billion and AUA was $241.1 billion.

Material changes versus comparable periods

GAAP earnings moved from losses to profits in both the quarter and first half. Management attributed the improvement principally to lower losses associated with the closed-block variable annuity (CBVA) guarantee and hedge programs, reduced nonperformance-risk losses, and improved operating results. These items make reported earnings sensitive to market movements and accounting marks.
Operating earnings before tax rose 20.7% in Q2 and 5.8% in the first half. Q2 ongoing-business operating earnings increased to $356.1 from $306.8; first-half ongoing-business earnings were $623.6 versus $592.2.
The increase in reported revenue partly reflects consolidated investment entities, including their investment income and related expenses, as well as higher premiums and smaller realized capital losses. Consolidated investment entity assets and liabilities are not generally available to Voya’s general creditors.
Q2 operating earnings improved in Investment Management ($54.9 versus $41.1), Individual Life ($63.4 versus $40.0), Annuities ($64.2 versus $59.5) and Employee Benefits ($37.8 versus $34.1). Retirement earnings were $135.8 versus $132.1 in Q2, but fell to $250.7 from $269.9 for the first half, in part reflecting higher expenses.
Investment Management reported Q2 net outflows of $1.9 billion, compared with net inflows of $3.1 billion a year earlier; first-half flows remained positive at $3.0 billion, versus $6.3 billion.
Accumulated other comprehensive income was $3,152.7 at June 30, up from $1,849.1 at year-end, mainly reflecting gains on securities. Gross unrealized losses on fixed maturities declined to $289.0 from $1,136.5, primarily due to declining interest rates.

Outlook, management commentary and risks

Management gave no overall company earnings guidance in the supplied filing text. It expected proceeds reinvested in fixed-income investments during the remainder of 2014 to earn an average 4.00%–4.25%, below the approximately 5.0% average yield on the general account portfolio. Management warned that persistently low rates may pressure reinvestment income, product demand and margins.
Management expects alternative investments to earn 8.0%–9.0% over the long term, while noting that period-to-period results can be volatile. It also described potential market volatility as monetary policy normalizes and said sales, AUM-based fees, hedging costs, customer behavior and product profitability may be affected.
The CBVA hedge program is designed primarily to protect regulatory and rating-agency capital, not to eliminate GAAP earnings volatility. Management highlighted risks from equity and interest-rate movements, hedge mismatch, basis risk, policyholder behavior and changing reserve assumptions.
At June 30, the company had $802.3 of peripheral European exposure, with no exposure to Greek investments or peripheral European sovereign fixed maturities or equity securities. The filing also discusses Russian exposure as relatively small and subject to monitoring amid the Ukraine conflict.
The company estimated reasonably possible litigation and regulatory losses of up to approximately $100.0 in excess of amounts accrued. A proposed class settlement in an ERISA revenue-sharing case involved a payment of approximately $15.0 and disclosure changes, subject to court approval. Management said pending matters were not expected, based on information then known, to materially affect financial position, while acknowledging possible material effects on a particular period’s results or cash flows.
Deferred tax valuation allowances were approximately $2.7 billion. Management said negative evidence continued to outweigh positive evidence for recognizing deferred tax assets, although trends had improved. Recovery of these assets and the effect of the Section 382 ownership change remain uncertainties.
Insurance-subsidiary dividends are subject to regulatory limits. The parent received $722.0 of ordinary dividends from principal insurance subsidiaries in the first half and contributed $150.0 to its Arizona captive. The board authorized an additional $500.0 for share repurchases on July 31, 2014; the company declared a $0.01-per-share quarterly dividend.
Management reported effective disclosure controls and procedures as of June 30, 2014. A.M. Best, Moody’s, S&P and Fitch had affirmed ratings and revised outlooks to positive during 2014; the filing warns that downgrades could increase collateral needs, borrowing costs, surrenders or liquidity pressure.

Important facts for investors to verify

Reconcile GAAP earnings to non-GAAP operating earnings, with particular attention to CBVA market-sensitive gains and losses, hedge results and nonperformance-risk effects.
Assess how much reported revenue and earnings reflect consolidated investment entities and noncontrolling interests; Q2 net income included $166.6 attributable to noncontrolling interests.
Track investment-management net flows, reinvestment yields, guaranteed-rate obligations and the impact of low rates on margins and product demand.
Review statutory capital, dividend capacity and collateral requirements at insurance subsidiaries, rather than relying solely on consolidated cash and unused credit facilities.
Monitor the realization of deferred tax assets, litigation developments and any changes in reserve, policyholder-behavior or hedge assumptions.
Confirm subsequent execution of the expanded repurchase authorization, dividend payments and any material changes in debt, credit ratings or liquidity.