Voya Financial, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; financial statements are unaudited. Dollar amounts are in millions unless otherwise stated. Voya provides retirement, investment management, employee benefits, individual life and related financial services.
Business context and transaction
Voya agreed to sell subsidiaries Voya Insurance and Annuity Company and Directed Services, including substantially all of its Closed Block Variable Annuity and annuity businesses, to Venerable, a VA Capital subsidiary. The sale was expected to close in Q2 or Q3 2018, subject to regulatory and other conditions. The businesses are reported as discontinued operations and held for sale. Voya reported a $1,974 estimated after-tax loss on sale at March 31, down from $2,423 at year-end, including a favorable $449 after-tax estimate adjustment recorded in Q1. The estimate remains subject to quarterly remeasurement until closing.
Financial results and liquidity
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Continuing-operations revenue | $1,967 | $2,057 |
| Continuing-operations pretax income | $21 | $113 |
| Continuing-operations net income | $17 | $20 |
| Discontinued-operations income (loss), net of tax | $429 | $(162) |
| Net income (loss) attributable to common shareholders | $446 | $(143) |
| Diluted EPS | $2.50 | $(0.74) |
| Adjusted operating earnings before tax, non-GAAP | $163 | $145 |
| Adjusted operating revenue, non-GAAP | $2,023 | $1,985 |
| Net cash from operating activities | $401 | $(49) |
- Continuing revenue declined 4%; fee income rose $39 to $676, while net investment income fell $20 to $823. Net realized capital losses increased to $181 from $86.
- Continuing pretax income fell $92. Management cited larger investment losses, higher litigation reserves related to a divested business, and less favorable guaranteed-benefit hedging results. The 2018 effective tax rate was 21.0%, versus 82.3% in Q1 2017.
- Adjusted operating earnings increased $18, with improvement in Investment Management, Employee Benefits and Corporate partly offset by lower Retirement and Individual Life results. Adjusted operating earnings divided by adjusted operating revenue was approximately 8.1%, versus 7.3%.
- Operating cash flow from continuing operations was $38, versus $(208); discontinued operations contributed $363, versus $159. Cash and cash equivalents of continuing operations ended at $1,411, compared with $1,218 at December 31, 2017.
- Total assets were $219,824 and total shareholders’ equity was $10,409 at March 31, versus $222,532 and $11,039 at year-end. Continuing long-term debt was $3,458, up from $3,123; short-term debt was immaterial. Voya reported compliance with debt covenants and no revolving borrowings under its $750 revolving sublimit.
- Other comprehensive loss was $1,192 after tax, mainly reflecting unrealized fixed-maturity losses; AOCI declined to $1,511 from $2,731. Gross unrealized fixed-maturity losses rose to $522 from $243, primarily due to higher interest rates.
Segments, changes and management commentary
- Retirement: Adjusted operating earnings fell to $109 from $148, principally due to unfavorable DAC/VOBA unlocking, including a $43 charge from revised assumptions for expected customer consents to reduce guaranteed minimum interest rates.
- Investment Management: Earnings rose to $61 from $49, supported by higher average assets and alternative investment income. Segment net flows were negative $1,165.
- Employee Benefits: Earnings rose to $32 from $11, reflecting favorable claims experience and growth. Management noted a favorable stop-loss reserve refinement; excluding it, the stop-loss loss ratio was 81.5%.
- Individual Life: Earnings declined to $17 from $32, primarily due to unusually adverse mortality experience and unfavorable unlocking.
- Corporate: Adjusted operating loss improved to $56 from $95, partly due to lower expenses and reduced Strategic Investment Program costs.
- Voya’s $429 discontinued-operations profit was driven by the $449 favorable adjustment to the estimated sale loss; discontinued businesses’ underlying pretax loss was $31, compared with $273 in Q1 2017.
- Management described higher market volatility and persistently low rates as risks to asset-based fees, sales, investment spreads, hedging costs and reserves. The continuing general-account portfolio was approximately $62.7 billion, with a Q1 annualized earned yield of 5.1%; reinvestment yields in 2018 were expected to be below the prevailing portfolio yield. Long-term alternative investment returns were expected to be 8%–9%.
Debt, capital actions, risks and contingencies
- Voya issued $350 of 4.7% fixed-to-floating junior subordinated notes due 2048 and used proceeds primarily to repay the $337 2.9% notes that matured in February. It also repurchased $10 principal of Aetna debentures and recorded a $3 debt-extinguishment loss.
- The board authorized an additional $500 of share repurchases in February. The Q1 statements report $100 of share repurchases; an additional 3.2 million shares costing $164 were repurchased after March 31. The quarterly dividend was $0.01 per share.
- A California appeals court affirmed damages in the Beeson litigation. Voya recorded $47 of Q1 expense; damages and post-judgment interest totaled $60. Voya sought insurance recovery, which the insurer disputed. The filing estimates aggregate reasonably possible losses in excess of accruals of up to approximately $50 for certain matters; other matters could not be quantified.
- The transaction depends on regulatory approvals and other closing conditions. Its estimated sale loss may change with markets, business performance, hedging, transaction terms and policyholder behavior. The agreement includes a $105 reverse termination fee in specified circumstances and limits on certain pre-closing capital obligations.
- Voya disclosed interest-rate, equity, credit, counterparty, policyholder-behavior and ratings risks. A two-notch downgrade of insurance subsidiaries was estimated to increase collateral requirements by $21. Insurance dividend capacity is subject to regulatory restrictions.
- Q1 restructuring expenses were $14 under the 2016 program and $5 in continuing operations under organizational restructuring. Additional costs through 2018 and 2019, respectively, could be material but were not quantified. Approximately $66 of previously accrued carried interest remained subject to reversal if fund hurdles are not maintained.
Important facts for investors to verify
- Whether the Venerable transaction closed on expected terms and how final proceeds, transaction costs and sale-loss adjustments compared with the March estimate.
- Underlying continuing-operations earnings and cash generation, excluding the sale-accounting gain and volatile investment and hedging items.
- Developments in the Beeson appeal, insurance recovery and other litigation, including amounts accrued versus reasonably possible losses.
- Realization of expected cost reductions and stranded-cost mitigation, alongside restructuring costs and the technology-services commitment.
- Investment portfolio credit quality, unrealized losses, reinvestment yields, and exposure to rate, equity and guarantee-related movements.
- Debt, liquidity, credit-facility covenant headroom, ratings-related collateral needs, and regulatory limits on subsidiary dividends.