Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 2013, for ING U.S., Inc. (announced plans to rebrand as Voya Financial, Inc. in April 2013). The Company is a financial services organization offering retirement services, annuities, investment management, and insurance products. The reporting period coincides with the Company's preparation for its Initial Public Offering (IPO), which was completed on May 7, 2013. The Company operates through five ongoing segments: Retirement, Annuities, Investment Management, Individual Life, and Employee Benefits, alongside Corporate and Closed Block segments.
Key Financial Metrics
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Total Revenues | $1,818.6 million | $1,485.3 million |
| Net Income (Loss) | $(225.5) million | $(520.8) million |
| Net Income (Loss) to Common Shareholder | $(212.0) million | $(505.2) million |
| Operating Earnings Before Income Taxes | $256.7 million | $239.8 million |
| Net Investment Income | $1,198.7 million | $1,277.4 million |
| Net Realized Capital Gains (Losses) | $(874.8) million | $(1,249.9) million |
| Total Assets | $220,850.0 million | $216,394.2 million |
| Total Liabilities | $205,251.1 million | $200,333.0 million |
| Total Shareholder's Equity | $15,598.9 million | $16,061.2 million |
| Cash and Cash Equivalents | $2,787.7 million | $1,786.8 million |
| Short-term Debt | $321.2 million | $1,064.6 million |
| Long-term Debt | $3,440.8 million | $3,171.1 million |
Material Changes vs. Prior Period
- Net Loss Improvement: The net loss available to common shareholders improved significantly from $(505.2) million in Q1 2012 to $(212.0) million in Q1 2013. This improvement was primarily driven by a reduction in net realized capital losses, specifically related to changes in the fair value of guaranteed benefit derivatives due to nonperformance risk and lower losses on the Closed Block Variable Annuity (CBVA) Capital Hedge Overlay (CHO) program.
- Revenue Growth: Total revenues increased by $333.3 million (22.4%) year-over-year, largely due to a decrease in net realized capital losses and higher fee income in Retirement and Annuity segments.
- Investment Income Decline: Net investment income decreased by $78.7 million, attributed to portfolio restructuring in 2012 to improve capital, lower average assets in the Closed Block Institutional Spread Products segment, and the run-off of Multi-Year Guarantee Annuities (MYGAs) with high crediting rates.
- Debt Reduction: Short-term debt decreased by $743.4 million, primarily due to the repayment of commercial paper and the current portion of long-term debt. Long-term debt increased by $269.7 million following the issuance of $1.0 billion in 2.9% Senior Notes due 2018.
- Operating Earnings: Operating earnings before income taxes increased by $16.9 million, driven by improved performance in Retirement Solutions and the Annuities segment, offset by higher interest expense in the Corporate segment.
Guidance, Outlook, and Risks
- Rebranding and IPO: The Company announced plans to rebrand as Voya Financial, Inc. and completed its IPO on May 7, 2013, raising net proceeds of approximately $569.9 million. Following the IPO, ING International retained a 75% ownership stake.
- Market Conditions: Management notes that the low interest rate environment and market volatility continue to impact product demand and profitability. The Company expects yields on new investments to be lower than those on maturing investments in the near term.
- Closed Block Variable Annuity (CBVA): The CBVA segment is managed to protect regulatory and rating agency capital rather than achieve operating metrics. GAAP earnings volatility in this segment is driven by hedging activities and changes in fair value of guaranteed benefit derivatives. The Company utilizes a Capital Hedge Overlay (CHO) program to mitigate equity risk to regulatory capital.
- Dividend Restrictions: The ability of insurance subsidiaries to pay dividends is restricted by state laws. In March and April 2013, subsidiaries received approval for extraordinary distributions totaling $1.434 billion, which were paid on May 8, 2013, contingent on the IPO.
- European Exposure: As of March 31, 2013, the Company had $825.8 million of exposure to peripheral Europe (Ireland, Italy, Spain, Portugal), primarily in industrial and utility sectors, with no exposure to sovereign debt or financial institutions in those regions.
- Subprime and Alt-A Exposure: Exposure to subprime mortgage-backed securities was $836.9 million (1.1% of total fixed maturities), and Alt-A exposure was $402.0 million (0.5% of total fixed maturities).
Key Facts for Investor Verification
- Reconciliation of GAAP to Operating Earnings: Verify the adjustments made to reconcile Net Income to Operating Earnings, specifically the exclusion of the CBVA segment results and net investment gains/losses, to understand core business performance.
- Derivative Valuation Sensitivity: Review the sensitivity analysis for the CBVA segment regarding equity market shocks and interest rate shifts, as these significantly impact GAAP earnings and regulatory capital.
- Debt Covenants and Guarantees: Confirm the terms of the Aetna Notes and the agreement to reduce their principal amount to zero by December 31, 2019, and the associated fees for non-compliance.
- Investment Portfolio Quality: Examine the credit quality ratings (NAIC and ARO) of the fixed maturity portfolio, particularly the portion rated BB and below, and the specific exposure to non-agency RMBS and ABS.
- Subsequent Events: Verify the impact of the May 2013 IPO, the $1.434 billion extraordinary dividend, and the issuance of $750 million in 5.65% Junior Subordinated Notes on the Company's capital structure and liquidity.