Voya Financial, Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; filed February 22, 2019. This is an annual report, not a standalone fourth-quarter filing. Unless stated otherwise, financial amounts below are in U.S. dollars.
Business context
Voya provides retirement, investment management, employee benefits and individual life products, serving approximately 13.8 million customers, workplace participants and institutions. On June 1, 2018, it sold substantially all of its closed-block variable annuity and fixed and fixed-indexed annuity businesses to Venerable/Athene. Those businesses are reported as discontinued operations. Voya retained a 9.99% interest in VA Capital and asset-management relationships with Venerable.
In October 2018, Voya also announced it would stop new individual life sales and manage the existing block. Its stated strategy is to focus on higher-growth, higher-return, capital-light workplace and institutional businesses.
Key financial metrics
| Metric | FY2018 / Dec. 31, 2018 | Prior comparable period |
|---|---|---|
| Total revenue | $8.514 billion | $8.618 billion in 2017 |
| Income from continuing operations before tax | $610 million | $528 million in 2017 |
| Income from continuing operations | $555 million | Loss of $212 million in 2017 |
| Adjusted operating earnings before tax, non-GAAP | $802 million | $528 million in 2017 |
| Net income available to Voya Financial, Inc. | $875 million | Loss of $2.992 billion in 2017 |
| Net cash provided by operating activities | $1.868 billion, including $1.462 billion from discontinued operations | $1.582 billion |
| Cash and cash equivalents | $1.538 billion | $1.218 billion of continuing-operations cash in 2017 |
| Long-term debt; short-term debt | $3.136 billion; $1 million | $3.123 billion; $337 million |
| Shareholders’ equity, excluding AOCI | $7.606 billion | $7.278 billion |
| Consolidated AUM and AUA | $467.3 billion | $554.5 billion |
Continuing-operations operating cash flow was approximately $406 million, derived by subtracting the disclosed discontinued-operations amount from consolidated operating cash flow. Voya’s 2018 cash flow and earnings therefore include significant effects from the business sale; continuing and discontinued results should be considered separately.
Net realized capital losses were $399 million, versus $227 million in 2017. Other comprehensive income was a loss of $2.096 billion after tax, principally reflecting unrealized investment losses; AOCI fell to $607 million from $2.731 billion.
Segment performance and changes
- Retirement: Adjusted operating earnings before tax rose to $701 million from $456 million. Adjusted operating revenue was $2.727 billion. Year-end segment AUM/AUA was $316.5 billion, down from $382.7 billion, substantially reflecting the annuity transaction and related presentation changes.
- Investment Management: Adjusted operating earnings fell to $205 million from $248 million; adjusted operating revenue was $683 million. The decline primarily reflected lower alternative investment income, lower average general-account assets following the transaction and prior-year carried-interest recovery.
- Employee Benefits: Adjusted operating earnings increased to $160 million from $127 million; adjusted operating revenue was $1.849 billion. Annualized in-force premiums rose to $1.939 billion from $1.849 billion. The total loss ratio improved to 72.5% from 74.0%, while the group-life loss ratio increased to 79.5% from 76.0%.
- Individual Life: Adjusted operating earnings were a loss of $33 million, versus earnings of $92 million. Unfavorable assumption updates, reinsurance-cost expectations and adverse mortality weighed on results. New sales ceased after 2018; the company reported approximately 813,000 in-force policies.
- Corporate: Adjusted operating loss narrowed to $231 million from $395 million, helped by lower restructuring-program, compensation, stranded and compliance costs.
Liquidity, capital and shareholder returns
- Voya reported $63.6 billion of total investments and $154.7 billion of total assets at year-end; 2017 total assets were $222.5 billion, including assets held for sale before the transaction closed.
- Parent-company cash was $209 million. The parent received $1.207 billion in dividends and returns of capital from subsidiaries in 2018. Insurance-subsidiary dividends are subject to regulatory limits.
- The $1.0 billion senior unsecured revolving credit facility had no borrowings or letters of credit outstanding at year-end. Voya reported compliance with debt covenants.
- The combined risk-based capital ratio for principal insurance subsidiaries was approximately 478% at year-end, compared with 476% at year-end 2017; Voya established a 400% RBC target.
- Voya repurchased $1.025 billion of common stock during 2018 and paid $6 million in common dividends. It issued $319 million of Series A preferred stock net proceeds, carrying a 6.125% fixed-rate-reset, non-cumulative dividend.
Outlook, commentary and risks
- Management targeted an additional $100 million of cost savings by the end of 2020, on top of previously announced $110–$130 million of savings by mid-2019 and about $20 million expected from ceasing individual life sales. It expected $200–$300 million of additional organizational restructuring expenses through at least 2020; $49 million of such expenses were incurred in continuing operations in 2018.
- Management said reinvestment yields on maturing fixed-income assets were expected to be below the portfolio yield in 2019. The continuing-operations general-account portfolio was approximately $62 billion and had a fourth-quarter annualized earned yield of about 5.2%. Low rates may compress spreads and affect sales; rising rates could prompt withdrawals and increase collateral needs.
- The Venerable sale’s final purchase-price adjustment remained disputed. Voya objected to the buyer’s proposed adjustments and estimated a reasonably possible loss of $0–$100 million; resolution was expected in the first or second quarter of 2019. The company recognized a favorable $505 million after-tax adjustment to the prior estimated sale loss in 2018.
- Annual assumption updates reduced adjusted operating earnings by $153 million in 2018. Investment-market volatility, credit losses, policyholder behavior, reinsurance availability and recoverability, and the valuation of complex or illiquid assets remain material risks. Fixed-maturity gross unrealized losses increased to $1.084 billion from $243 million, attributed primarily to higher interest rates and wider credit spreads.
- Other exposures include insurance-subsidiary dividend restrictions, captive-reserve financing and refinancing risk, litigation and regulatory matters, and cybersecurity. Voya disclosed a $1 million SEC fine and independent review related to alleged deficiencies in customer-information safeguards at its broker-dealer. Management reported effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions.
Important facts for investors to verify
- How the final Venerable transaction true-up, including the disclosed $0–$100 million possible loss, was resolved and what proceeds or obligations ultimately resulted.
- Whether reported growth in adjusted operating earnings is sustained in continuing operations, and how the non-GAAP measure reconciles to GAAP earnings and cash generation.
- Progress against cost-saving targets, total restructuring charges, and remaining stranded costs after the annuity divestiture.
- Effects of interest rates, investment losses, mortality and reinsurance assumptions on Individual Life results, reserves and statutory capital.
- Insurance-subsidiary dividend capacity and holding-company liquidity, particularly given that Colorado and Minnesota subsidiaries lacked ordinary dividend capacity at year-end.
- Capital allocation after the 2018 share repurchases, including the impact of the preferred-stock terms and any subsequent repurchases.