Voya Financial, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. All amounts are U.S. dollars in millions, except per-share data. Voya provides retirement, investment management, employee benefits and individual life products. It had ceased new Individual Life sales effective December 31, 2018. The 2018 sale and reinsurance transaction covering substantially all annuity businesses makes year-over-year comparisons of some results less directly comparable.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $2,237 | $2,252 | $6,780 | $6,332 |
| Continuing income before tax | $143 | $186 | $618 | $448 |
| Continuing income | $139 | $165 | $545 | $378 |
| Net income (loss) | $139 | $165 | $463 | $835 |
| Net income available to common shareholders | $106 | $142 | $396 | $754 |
| Diluted EPS from continuing operations | $0.74 | $0.87 | $3.22 | $1.73 |
| Adjusted operating earnings before tax (non-GAAP) | $125 | $163 | $597 | $564 |
Q3 revenue was broadly flat, while continuing income and adjusted operating earnings declined. For the first nine months, continuing income and adjusted operating earnings increased, but total net income fell because 2019 included an $82 discontinued-operations charge for the 2018 transaction purchase-price true-up, whereas 2018 included a $457 discontinued-operations gain. Adjusted operating earnings is management’s non-GAAP segment measure and should be considered alongside GAAP results. The filing does not present a single consolidated operating-margin measure.
- Segment adjusted operating earnings before tax, Q3 / nine months: Retirement $117 / $426 (down from $253 / $531); Investment Management $46 / $121 (down from $48 / $161); Employee Benefits $57 / $144 (up from $50 / $117); Individual Life loss of $33 / income of $62 (versus losses of $134 / $76); Corporate losses of $62 / $156 (versus $54 / $169).
- Employee Benefits premiums and business growth supported results; its trailing-12-month total loss ratio was 71.0%, compared with 73.1% in 2018. Retirement earnings were pressured by assumption updates, expenses and lower alternative investment income. Investment Management cited lower average general-account assets and investment returns.
Cash flow, balance sheet and capital
- Cash flow for nine months: Operating cash flow from continuing operations was $851, versus $172 in 2018. Total operating cash flow in 2018 was $1,634, including $1,462 from discontinued operations. Investing cash flow was a use of $881 (versus $51 provided); financing cash flow was a use of $132 (versus $1,612 used). Cash and cash equivalents declined $162 to $1,376.
- September 30 balance sheet: Total assets were $166,850, including $80,134 of separate-account assets matched by separate-account liabilities. Total investments were $69,177; shareholders’ equity was $11,211, including $3,497 of accumulated other comprehensive income, compared with $8,941 and $607, respectively, at year-end 2018. The substantial AOCI increase reflected market-related unrealized gains on securities.
- Debt and liquidity: Long-term debt was $3,041, down from $3,136 at year-end; short-term debt was $1. The company redeemed the remaining $97 of 5.5% notes due 2022 and recorded a $9 extinguishment loss. No borrowings or letters of credit were outstanding under the $1.0 billion unsecured credit facility at September 30. A November 1 amendment extended the facility to November 2024 and set total capacity at $500, with a $6.15 billion minimum-net-worth covenant; the filing reports no amounts drawn as of November 6.
- Voya repurchased $936 of common stock and paid $23 in common dividends in the first nine months. It issued $293 net proceeds of Series B preferred stock and paid $24 in preferred dividends. The board authorized a further $800 of repurchases on October 31, after quarter-end.
Outlook, commentary and risks
- Management said lower interest rates may compress investment spreads as yields on new investments fall below yields on maturing assets, while guaranteed rates can limit the ability to reduce policyholder costs. Its estimate was that a 100-basis-point rate increase or decrease, relative to the start-of-year environment and sustained over three years, would generally increase or decrease future adjusted operating earnings by approximately 2%–4%.
- Third-quarter annual assumption reviews reduced adjusted operating earnings by $98: principally a 50-basis-point reduction in the long-term interest-rate assumption and changes to Individual Life persistency, margins and policyholder behavior assumptions. Management reported an aggregate $101 loss from assumption changes, including items outside adjusted operating earnings.
- Management targeted an additional $100 of cost savings by the end of 2020, on top of previously announced targets. Organizational restructuring expense was $164 for the first nine months; expected total costs were $200–$300 through at least the end of 2020. The filing also expects $10–$20 of remaining costs under the older restructuring program.
- Risks include interest-rate, equity-market and credit exposure; policyholder mortality, persistency and lapse experience; investment performance; and legal, regulatory and execution risks. The company estimated reasonably possible litigation and regulatory losses above accrued amounts of up to approximately $50, while noting some matters could not yet be estimated. It disclosed several disputed lawsuits, including class actions involving retirement-plan fees and universal-life policy administration/cost-of-insurance claims.
- Approximately $79 of previously accrued carried interest could be reversed if relevant private-equity fund performance hurdles are not maintained. The company also recognized a $38 litigation-related insurance recovery in Q3; the cash was received in October. Insurers’ dividend capacity is subject to regulatory restrictions, and two principal insurance subsidiaries did not then have ordinary dividend capacity.
- No specific earnings guidance was provided. The filing warns that actual results may differ materially from forward-looking statements. Management said adoption of the long-duration insurance-contract accounting standard could significantly affect equity and future earnings patterns; the impact was still being evaluated.
Most important facts for investors to verify
- Whether the $98 unfavorable assumption-review impact, particularly the Individual Life and Retirement components, signals persistent pressure on future earnings.
- Whether lower rates, reinvestment yields and guarantees lead to sustained spread compression, and how actual results compare with management’s stated rate sensitivity.
- Whether Employee Benefits growth and loss ratios remain favorable, and whether Retirement and Investment Management earnings stabilize.
- Whether restructuring achieves the targeted savings and remains within the expected $200–$300 cost range through 2020.
- Developments in litigation, the possible-loss estimate, carried-interest reversals, subsidiary dividend capacity, and collateral or credit-support commitments.
- The terms and use of the amended credit facility, repurchase authorization and capital returns, alongside the company’s liquidity and debt-covenant position.