Voya Financial, Inc. quarterly report, Q2 FY2013

Voya Financial, Inc. (then ING U.S., Inc.) — Q2 2013 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2013; unaudited. The company announced plans to rebrand as Voya Financial, and its shares began NYSE trading under VOYA on May 2, 2013. It completed its IPO on May 7; ING retained 71% ownership after the underwriters’ option exercise.

Financial results and condition

Metric	Q2 2013	Q2 2012	Six months 2013	Six months 2012
Total revenue	$2,140.6 million	$3,361.9 million	$3,959.2 million	$4,847.2 million
Net income (loss) available to common shareholders	$(82.2) million	$634.4 million	$(294.2) million	$129.2 million
Operating earnings before tax, company-defined non-GAAP	$272.0 million	$198.8 million	$528.7 million	$438.6 million
Net cash from operating activities	Not stated by quarter	$1,289.9 million	$1,347.0 million

• Quarterly revenue and earnings swung sharply year over year, principally reflecting realized investment and derivative losses, including volatility from the closed-block variable annuity (CBVA) guarantee hedge program. Q2 net realized capital losses were $565.9 million, versus gains of $485.7 million a year earlier; first-half losses were $1,440.7 million versus $764.2 million.
• Management’s operating earnings measure improved, but the comparison benefited from a $92.0 million loss on alternative-investment sales in Q2 2012. Ongoing-business operating earnings before tax were $306.8 million for Q2 and $592.2 million for the first half, up from $191.7 million and $455.6 million, respectively.
• Fee income rose to $909.7 million in Q2 from $862.9 million, while net investment income declined to $1,112.2 million from $1,138.9 million. Management cited higher asset-based fees and lower investment income, including from CMO-B and alternative-investment portfolios.
• After-tax other comprehensive loss was $1,365.0 million in Q2 and $1,622.9 million for the first half, largely reflecting lower unrealized gains on securities as interest rates rose. Shareholders’ equity fell to $14.65 billion from $16.06 billion at year-end 2012; AOCI fell to $2.09 billion from $3.71 billion.
• At June 30, total assets were $217.12 billion and cash and cash equivalents were $1.55 billion. First-half cash decreased $237.0 million. Operating cash inflow was outweighed by $1.90 billion of investing outflow, partly offset by $374.3 million of financing inflow. The filing provides no consolidated margin guidance or explicit full-year earnings guidance.
• Total short- and long-term debt was $3.40 billion at June 30, down from $4.24 billion at December 31, 2012. Short-term debt fell to $138.6 million from $1.06 billion; long-term debt was $3.27 billion. The company issued $1.0 billion of 2018 notes and $750 million of junior subordinated 2053 notes and repaid term loans and surplus notes. It issued an additional $400 million of 2043 notes in July, after quarter-end.
• Management reported a combined estimated risk-based capital ratio of 454% at June 30. It also reported $9.7 billion of credit-facility capacity, $7.3 billion utilized and approximately $2.4 billion unused commitment.

Material changes and operating trends

• CBVA reported a pretax loss of $338.4 million in Q2, compared with income of $381.9 million in Q2 2012; the first-half loss widened to $815.5 million from $525.8 million. Management said hedging is primarily intended to protect regulatory and rating-agency capital, not to eliminate GAAP earnings volatility.
• Retirement operating earnings increased, supported by higher fees and AUM; Investment Management earnings also improved with positive net flows and higher fee income. Annuities benefited from lower credited costs and favorable DAC/VOBA unlocking, while its investment income and sales of immediate annuities declined.
• Total AUM and AUA reached $481.7 billion, up from $442.0 billion a year earlier. First-half Retirement net flows were positive; Annuities had net outflows, while Investment Management reported $6.3 billion of net flows.
• The IPO generated $572 million of net proceeds for the company; proceeds were used in capital-management activities, including capital support for its reinsurance subsidiary. The board declared a $0.01 per-share quarterly dividend, payable October 1, 2013.

Outlook, risks and contingencies

• Management cited low interest rates and market volatility as ongoing pressures on product demand, investment spreads, reinvestment yields, hedging costs and guarantee reserves. Rising rates can reduce fixed-income fair values; lower rates can compress margins on products with guaranteed crediting rates.
• The investment portfolio had $1.00 billion of gross unrealized losses on fixed maturities at June 30, versus $292.7 million at year-end, primarily attributed to rising rates and wider spreads. The company said it did not consider remaining loss-position securities other-than-temporarily impaired.
• Potential litigation and regulatory losses in excess of recorded accruals were estimated at up to approximately $100 million, though some matters could not be reasonably estimated. A class action concerning ERISA revenue-sharing practices covers approximately 15,000 plan sponsors. The company also faces multistate scrutiny over death-benefit claims, use of the Social Security Death Master File and unclaimed property; a Global Resolution Agreement became effective July 26, 2013.
• A one-notch downgrade of the company’s ratings was estimated to increase collateral requirements by approximately $1.3 billion based on June 30 exposures. Management also identified rate, equity-market, credit, counterparty, policyholder-behavior, regulatory and tax risks. No material changes to previously disclosed risk factors were reported.
• The filing gives no specific full-year financial forecast. Management cautions that interim results are not necessarily indicative of full-year performance.

Important facts for investors to verify

• How much of the GAAP loss and earnings volatility is attributable to CBVA hedging and market-driven fair-value changes, and how well the hedges protect statutory and rating-agency capital.
• Whether operating earnings gains persist after removing prior-year alternative-investment sale losses and other nonrecurring items; review the company’s non-GAAP reconciliations.
• Developments in interest rates, unrealized investment losses, CMO-B performance, guarantee costs and policyholder lapses or withdrawals.
• Progress and eventual costs of the unclaimed-property resolution, death-benefit reviews, ERISA litigation and other contingencies.
• Post-IPO capital, liquidity, debt and collateral needs, including the effects of rating changes, and the company’s ability to receive regulated dividends from insurance subsidiaries.