Voya Financial, Inc. — Q3 2015 Form 10-Q
Business context and reporting period
Unaudited quarterly report for the three and nine months ended September 30, 2015. Voya provides retirement, annuity, investment management, life insurance and employee-benefit products. Results include ongoing businesses and closed, run-off blocks; the company reorganized its reporting into two business groupings in April without changing its five ongoing operating segments. Amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Total revenue | $3,719.5 | $3,196.1 | $9,344.4 | $8,571.1 |
| Income before tax | $80.3 | $559.8 | $827.8 | $1,287.1 |
| Net income | $116.2 | $522.4 | $699.0 | $1,212.9 |
| Net income attributable to common shareholders | $40.3 | $405.8 | $515.1 | $916.2 |
| Diluted EPS | $0.18 | $1.59 | $2.23 | $3.55 |
| Operating earnings before tax (non-GAAP) | $137.0 | $294.3 | $689.1 | $853.7 |
Approximate consolidated GAAP pretax margin was 2.2% in Q3 2015 versus 17.5% in Q3 2014, and 8.9% for the first nine months of 2015 versus 15.0% in 2014. These ratios are calculated from reported revenue and pretax income and are affected by market-related items.
- Revenue mix: Q3 premiums rose to $1,128.8 from $595.1, mainly reflecting pension risk-transfer contracts, CBVA annuitizations and Employee Benefits growth. Net realized capital gains were $299.1 versus $186.0. Fee income fell to $871.8 from $908.9. For the nine months, premiums increased to $2,404.8 from $1,825.4, while fee income declined to $2,644.0 from $2,738.0.
- Cash flow: Nine-month operating cash flow was $2,686.4 versus $2,916.2. Investing activities used $3,744.9; financing activities provided $1,038.7. Cash and cash equivalents ended at $2,511.1, down $19.8 from the start of the year.
- Balance sheet and debt: Total assets were $218,711.2, down from $226,930.7 at year-end 2014; total shareholders’ equity was $17,248.6, down from $18,561.5. Long-term debt was $3,485.6, compared with $3,515.7; the company reported compliance with debt covenants and no short-term debt borrowings. Separate-account assets of $94,721.5 are matched by separate-account liabilities and should not be viewed as freely available liquidity.
- Liquidity and capital actions: Credit facilities had $2,832.3 utilized and $4,625.1 of unused commitment at September 30. Nine-month share repurchases totaled $1,340.5; $170.4 of authorization remained after accounting for a $100.0 payment under a repurchase arrangement pending fourth-quarter settlement. The quarterly dividend was $0.01 per share.
Material changes versus prior comparable periods
- Q3 common-shareholder earnings fell to $40.3 from $405.8, despite higher reported revenue. Higher policyholder benefits and DAC/VOBA amortization, as well as unfavorable assumption updates, drove the decline; gains and losses on derivatives and guarantees also made GAAP results volatile.
- Operating earnings before tax fell 53% in Q3 and 19% for the nine-month period. The annual assumption review produced an $82.0 unfavorable impact on operating earnings, versus $19.3 unfavorable in Q3 2014.
- Ongoing-business operating earnings were $210.0 in Q3 versus $330.9; for nine months they were $845.8 versus $954.5. Employee Benefits improved, while Retirement, Annuities, Investment Management and Individual Life generally weakened over the nine-month comparison. Individual Life recorded a Q3 operating loss of $10.8.
- Other comprehensive income after tax was a loss of $1,058.0 for the nine months, versus income of $971.1 in 2014, principally reflecting a $1,575.6 after-tax decline in unrealized fixed-maturity gains. Gross unrealized fixed-maturity losses rose to $1,051.9 from $323.6 at year-end 2014, primarily due to wider credit spreads.
- Voya repurchased 28.1 million shares during the first nine months, increasing treasury shares and reducing outstanding shares. ING Group completed its exit from Voya’s common stock in March 2015, although it retained warrants.
Outlook, management commentary, risks and unusual items
- Management cited persistent low interest rates, market volatility, lower alternative-investment income, lower reinvestment yields, fees pressured by AUM and flows, and mortality experience as performance risks. It estimated reinvested fixed-income proceeds for the remainder of 2015 would earn 4.00%–4.25%; the general-account portfolio yield was approximately 5.0%. Management said alternative investments were expected to earn 8%–9% over the long term, while noting their income is volatile.
- The company announced a $350 million, four-year Strategic Investment Program for IT simplification, digital and analytics, and cross-enterprise initiatives. It had incurred $44.8 million through September and expected $25–$35 million of program expense in Q4 2015.
- A September agreement to reinsure an in-force term-life block to RGA was expected to close in Q4, subject to regulatory approval. Voya expected approximately $230 million of excess regulatory and rating-agency capital, a non-operating pretax loss of approximately $100–$110 million on closing (including $10 million recorded in Q3), and approximately $12 million of annual pretax losses over the following 15 years.
- A Hannover Re financing arrangement replaced specified collateral supporting reinsurance reserves with a $2.9 billion senior unsecured floating-rate note held in a reserve credit trust. Voya disclosed contingent reimbursement and guarantee obligations related to the arrangement.
- Management revised previously issued figures after identifying improper actuarial-model inputs for certain closed-block variable-annuity guarantees. It concluded the errors were not material to prior filings and did not affect regulatory or rating-agency capital or policyholders; comparative periods in this filing were adjusted. The revision increased 2014 nine-month net income by $11 million.
- Legal and regulatory exposures include an estimated aggregate reasonably possible loss range of up to approximately $100 million in excess of accruals, while management said pending matters were not likely to materially affect financial position. A California court had awarded $36.8 million to plaintiffs and $7.5 million to Fireman’s Fund in a case under appeal; punitive damages for Fireman’s Fund were denied.
- Potential regulatory changes include the proposed DOL fiduciary rule and NAIC scrutiny of captive reinsurance and variable-annuity capital rules. Outcomes and effects were uncertain. Rating downgrades could increase collateral demands and affect liquidity; management also highlighted customer behavior, mortality, lapse, annuitization and guarantee assumptions as material uncertainties.
Important facts for investors to verify
- Whether the sharp Q3 earnings decline persists after separating recurring operating performance from market-sensitive derivative, guarantee, reserve and DAC/VOBA effects.
- Whether the unfavorable actuarial assumptions and model revisions are fully reflected, and how future policyholder behavior and mortality experience compare with management’s estimates.
- Completion, capital benefit, accounting loss and ongoing economics of the RGA term-life reinsurance transaction, plus the obligations and collateral mechanics under the Hannover Re arrangement.
- Whether low reinvestment yields, AUM outflows, market volatility and wider credit spreads further pressure earnings, unrealized gains and liquidity.
- Available parent-company liquidity after repurchases and dividends, including restrictions on insurance-subsidiary distributions, remaining repurchase authorization, and potential collateral needs following ratings or regulatory changes.