Voya Financial, Inc. — Q1 2017 Form 10-Q
Business context and reporting period
Unaudited results cover the three months ended March 31, 2017, compared with the three months ended March 31, 2016. Voya provides retirement, investment management, annuity, individual life and employee-benefit products and services, and reports a Closed Block Variable Annuity (CBVA) segment.
Financial highlights
| Metric | Q1 2017 | Q1 2016 / prior balance |
|---|---|---|
| Total revenue | $2,213.4 million | $3,009.3 million |
| Net realized capital gains (losses) | $(505.6) million | $10.7 million |
| Income (loss) before tax | $(159.4) million | $241.3 million |
| Net income (loss) attributable to common shareholders | $(143.5) million; $(0.75) per diluted share | $191.6 million; $0.92 per diluted share |
| Operating earnings before tax, company measure | $231.1 million | $169.8 million |
| Operating revenues, company measure | $2,188.6 million | $2,425.3 million |
| Operating earnings / operating revenues | 10.6% (calculated) | 7.0% (calculated) |
| Net cash from operating activities | $(49.8) million | $656.7 million |
Net investment income rose 5.6% to $1,155.5 million and fee income rose 3.0% to $850.8 million. Premiums fell to $591.6 million from $966.8 million, principally following the closure of pension risk transfer sales and lower CBVA life-contingent annuitizations. The sharp GAAP earnings reversal primarily reflected unfavorable fair-value movements in guaranteed-benefit derivatives, including nonperformance-risk effects, and CBVA-related losses; it should be distinguished from the increase in management’s operating-earnings measure.
Segment operating earnings before tax were: Retirement $148.1 million (up from $103.7 million); Investment Management $49.3 million (up from $22.7 million); Annuities $63.5 million (up from $50.7 million); Individual Life $31.7 million (down from $41.1 million); Employee Benefits $10.6 million (down from $20.8 million); and Corporate loss $72.1 million (versus $69.2 million loss). CBVA reported a GAAP pretax loss of $387.1 million, versus income of $46.0 million.
Financial position, liquidity and capital
- At March 31, total assets were $217.0 billion, total liabilities $203.1 billion and total shareholders’ equity $13.9 billion. Separate-account assets and corresponding liabilities were each $100.8 billion.
- Cash and cash equivalents were $2.30 billion, down from $2.91 billion at year-end. Cash declined $612.4 million during the quarter; operating cash flow was negative, investing activities provided $190.8 million and financing activities used $753.4 million.
- Debt was $3.46 billion before current-portion classification: $735.5 million was classified as short-term and $2.73 billion as long-term. Voya repurchased $90 million principal of 2.9% notes due 2018 and recorded a $1.1 million extinguishment loss. No revolving borrowings were outstanding under its $750 million revolver sublimit; $306 million of letters of credit were outstanding under the facility. The company reported covenant compliance.
- Book equity was $13.9 billion, compared with $14.0 billion at year-end. The quarter included $190.3 million of cash share repurchases, plus a $150 million advance payment for shares delivered in Q2; reported shareholder cash returns were $249.2 million, including dividends.
- Investment portfolio total was $92.4 billion. Fixed maturities had $75.0 billion fair value; gross unrealized losses fell to $551.1 million from $739.6 million at year-end. Management attributed the decline mainly to falling interest rates.
Material changes, outlook and risks
- Management reported operating earnings growth, supported by favorable alternative-investment income, higher fees and positive market performance. Alternative-investment income was $38.4 million versus a $31.1 million loss a year earlier; management’s long-term expected return for these assets is 8%–9%.
- Management said the general-account portfolio yield was approximately 4.9% annualized in Q1 and expected reinvested fixed-income proceeds for the remainder of 2017 to earn 3.75%–4.25%. It warned that low rates may pressure reinvestment spreads, product demand and profitability; rapidly rising rates and market volatility also pose risks.
- The company expects restructuring initiatives, together with its Strategic Investment Program, to support at least $100 million in annual run-rate cost savings in 2018 and later years. Q1 restructuring expense was $12.2 million; additional costs through the expected end-2018 completion cannot currently be estimated and could be material.
- CBVA is managed principally to protect regulatory and rating-agency capital, not to produce stable GAAP earnings. Voya said it met its S&P CTE95 capital objective at quarter-end. An enhanced surrender offer for certain variable-annuity contracts contributed to Q1 losses and reduced risk in the block.
- Potential NAIC variable-annuity reserve and capital reforms remained uncertain; management said some proposals could materially increase CBVA capital or captive collateral needs. The DOL fiduciary rule was under review and partly delayed; Voya was preparing for the stated applicability dates while warning of possible higher costs and lower annuity sales.
- Management estimated reasonably possible litigation and regulatory losses in excess of accrued amounts of up to approximately $75 million. It also disclosed $30.9 million of previously accrued carried interest that could be reversed if fund performance hurdles are not maintained.
- Other stated exposures include investment-market, credit, interest-rate, mortality, morbidity, lapse and persistency risks; downgrade-related collateral demands; and a potential loss-recognition charge of up to approximately $100 million under a 50-basis-point decline in the long-term interest-rate assumption.
Most important facts for investors to verify
- Reconcile the $505.6 million realized loss and $387.1 million CBVA pretax loss to the derivative fair-value and nonperformance-risk disclosures, and assess the surrender-offer impact.
- Review cash-flow deterioration and the timing of debt maturities, refinancing needs and share repurchases, including the $150 million payment made before Q2 share delivery.
- Track operating earnings quality: segment trends, alternative-investment income, investment spreads, net flows and the difference between operating results and GAAP earnings.
- Monitor statutory and rating-agency capital, potential VA rule changes, captive collateral requirements and the effect of interest-rate or equity-market shocks.
- Assess progress toward the $100 million cost-savings target against remaining restructuring costs, as well as litigation, carried-interest reversal and DOL-rule exposure.