Voya Financial, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; unaudited. Comparisons are with Q1 2014 unless otherwise noted. Voya provides retirement, investment management, life insurance, employee benefits, and annuity products and services.
Financial performance and position
- Revenue: $2.626 billion, down 1.7% from $2.671 billion. Net investment income rose to $1.175 billion from $1.146 billion; fee income fell to $900 million from $932 million; premiums increased to $609 million from $601 million.
- Profit: GAAP net income was $212 million versus $272 million; income available to common shareholders was $186 million versus $258 million. Diluted EPS was $0.77 versus $0.98. Pretax income was $256 million versus $302 million.
- Operating earnings: Non-GAAP operating earnings before tax increased to $290 million from $231 million. Ongoing-business operating earnings rose to $324 million from $268 million. These measures exclude specified items and are not GAAP results.
- Key earnings pressure: Net realized capital losses widened to $265 million from $191 million, largely reflecting fair-value changes in derivatives and guaranteed-benefit liabilities. CBVA reported a $34 million pretax loss, versus $20 million income a year earlier, amid hedge and guarantee valuation volatility.
- Cash flow: Operating cash flow was $1.054 billion, up from $787 million. Investing activities used $1.246 billion and financing activities used $463 million. Cash and cash equivalents decreased $656 million during the quarter to $1.875 billion.
- Balance sheet and debt: Total assets were $229.0 billion and shareholders’ equity $18.7 billion at March 31. Long-term debt was $3.516 billion; no short-term debt borrowings were outstanding. Debt covenants were met.
- Liquidity: Credit facilities had $8.042 billion of capacity, of which $4.854 billion was utilized and $3.179 billion remained unused. Parent-company cash was $250 million at quarter-end. Access to subsidiary dividends is subject to insurance-regulatory restrictions.
- Investment and capital: General-account investments totaled $93.1 billion, primarily fixed maturities. The portfolio’s weighted-average quality rating was A. AOCI was $3.531 billion, up from $3.104 billion at year-end 2014. Voya repurchased $622 million of shares and paid $2.4 million in dividends; the declared quarterly dividend was $0.01 per share.
Material changes versus comparable periods
- GAAP earnings declined despite higher operating earnings. Management attributed the difference primarily to CBVA and guaranteed-benefit hedge accounting volatility, lower alternative-investment income, and the low-rate reinvestment environment.
- Ongoing-business operating earnings improved, led by Employee Benefits, Annuities, Individual Life, and Retirement. Corporate operating losses increased to $48 million from $37 million.
- Total reported AUM and AUA were $485.5 billion at March 31, 2015, down from $513.8 billion at March 31, 2014. Retirement AUA also reflected assets transferred to a reinsurer.
- On March 9, 2015, ING Group sold its remaining Voya shares and Voya repurchased 13.6 million shares from ING for $600 million. ING exited its equity stake but retained warrants to purchase up to 26.1 million shares at $48.75 per share, subject to adjustments.
- Effective April 20, 2015, Voya reorganized its principal businesses into two ongoing businesses; the five operating segments were unchanged.
Outlook, management commentary, risks, and unusual items
- Interest rates: Management cited prolonged low rates as a risk to product demand, investment spreads, and returns on reinvested assets. It expected 2015 reinvestment yields on fixed-income investments to average 3.75%–4.00%, below the portfolio’s approximately 5.0% average yield. These are expectations, not formal earnings guidance.
- Other investment outlook: Management expected long-term returns of 8%–9% on certain alternative investments, while noting that quarterly results can be volatile.
- Market and insurance risks: Results are exposed to interest rates, equity markets, credit spreads, mortality and morbidity, policyholder lapses and benefit utilization, and derivative counterparty performance. The CBVA hedge program prioritizes regulatory and rating-agency capital protection over reducing GAAP earnings volatility.
- Regulatory risk: A proposed Department of Labor fiduciary rule could affect retirement advice, distribution practices, compensation, and operating costs. Regulators were also reviewing captive reinsurance practices.
- Contingencies: Voya estimated reasonably possible litigation and regulatory losses above accrued amounts of up to approximately $100 million. In the Beeson matter, a court finalized a $36.8 million award to plaintiffs; Voya appealed and had posted a bond. A proposed decision denied Fireman’s Fund’s request for punitive damages.
- Capital and liquidity arrangements: A new $500 million put-option structure can provide liquidity through potential issuance of senior notes, but carries a 1.875% annual premium on the unexercised amount and mandatory exercise triggers, including specified equity, default, or bankruptcy conditions.
- Controls: Management concluded disclosure controls were effective. Voya completed the transition of certain CBVA actuarial, modeling, and hedging functions to an outside provider during the quarter.
Most important facts for investors to verify
- Whether recurring operating earnings continue to strengthen and how they reconcile to GAAP earnings, especially the impact of CBVA and guaranteed-benefit marks.
- Whether low rates, reinvestment yields, product mix, and policyholder behavior are affecting spreads, sales, lapses, and guarantees as management described.
- The sustainability of cash generation and liquidity after substantial share repurchases, including the availability and regulatory approval of subsidiary dividends.
- Developments in the Beeson appeal, other litigation, the estimated loss range, and proposed insurance and fiduciary regulations.
- Changes in credit ratings, collateral requirements, credit-facility utilization, and the terms or exercise triggers of the $500 million put option.
- Whether AUM/AUA trends and segment-level flows improve, and whether the portfolio’s credit quality and fair-value assumptions remain sound.