Voya Financial, Inc. — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. This is an annual report; the figures below are for the full year unless stated otherwise, not Q4 alone. Voya provides retirement, investment management, annuity, life and employee-benefit products, and manages a closed-block variable annuity business. It reported approximately 13.6 million customers and $484.4 billion of consolidated AUM and AUA at year-end.
Financial performance and condition
| Metric | 2016 | 2015 |
|---|---|---|
| Total revenue | $10.782 billion | $11.242 billion |
| Income (loss) before tax | $(613.4) million | $584.5 million |
| Net income (loss) available to common shareholders | $(428.0) million; $(2.13) per diluted share | $408.3 million; $1.80 per diluted share |
| Operating earnings before tax (non-GAAP) | $777.3 million | $977.5 million |
| Operating cash flow | $3.586 billion | $3.246 billion |
| Cash and cash equivalents, year-end | $2.911 billion | $2.513 billion |
| Total investments, year-end | $92.638 billion | $88.492 billion |
| Long-term debt, year-end | $3.550 billion | $3.460 billion |
| Shareholders’ equity, excluding AOCI | $10.972 billion | $12.011 billion |
- Revenue declined 4.1%. Premiums rose to $3.515 billion from $3.025 billion, while fee income fell to $3.360 billion from $3.481 billion. Net realized capital losses widened to $1.263 billion from $733.3 million.
- Operating earnings before tax fell 20.5%. Segment results were mixed: Annuities increased to $321.2 million; Retirement declined to $449.8 million; Investment Management to $170.8 million; Individual Life to $58.6 million; and Employee Benefits to $126.3 million. Corporate’s operating loss widened to $349.4 million.
- The CBVA segment reported a $955.0 million pretax loss, versus a $173.3 million loss in 2015. Consolidated operating earnings exclude CBVA and are a non-GAAP measure; they should be considered alongside GAAP results.
- Cash flow from operations exceeded investing cash outflow of $3.683 billion; financing activities provided $495.4 million. The filing does not provide a single consolidated operating margin figure.
- Year-end total assets were $214.235 billion and total liabilities $200.268 billion. Separate-account assets and matching liabilities were each $97.119 billion. No short-term debt borrowings were outstanding; the company reported compliance with debt covenants.
Material changes versus prior year
- GAAP pretax results swung from $584.5 million income to a $613.4 million loss. The main contributor was the sharp increase in CBVA losses, including $321.0 million of loss recognition and $1.502 billion of losses related to incurred guarantees and the variable-annuity hedge program, excluding nonperformance risk.
- Operating earnings declined, reflecting unfavorable DAC/VOBA and other-intangible assumption unlocking (a net $144.9 million unfavorable impact), higher Corporate expenses, low reinvestment yields and higher Employee Benefits claims. Annuities improved on more favorable product mix and assumption unlocking.
- Voya issued $800 million of 2026 and 2046 notes and used proceeds to repurchase $659.8 million face amount of 2018 and 2022 notes, plus $43.7 million of Aetna notes. Debt-extinguishment losses were $104.2 million in the year.
- Share repurchases totaled $487.0 million during 2016, with an additional $200 million paid in November for shares delivered in February 2017. Common dividends declared were $0.04 per share for the year.
- Adoption of consolidation guidance led to deconsolidation of investment entities, reducing reported assets and liabilities at adoption by approximately $7.5 billion and $5.9 billion, respectively, without an impact on net income available to common shareholders.
Outlook, risks and unusual items
- Management expects continued pressure from low interest rates: it projected 2017 reinvestment yields of 3.75%–4.25% on proceeds reinvested in fixed income. Under a specified scenario in which the 10-year Treasury falls to 1.8% and remains there through 2020, the company estimated pretax operating earnings in five segments could be 3%–7% lower in each of 2017–2019, with a cumulative decline of about 30 percentage points in combined RBC by 2020. This is a sensitivity scenario, not formal earnings guidance.
- The company expects $80–$100 million of Strategic Investment Program expense in 2017. It targets at least $100 million of annual run-rate cost savings in 2018 and later from strategic investments and restructuring; further restructuring costs through 2018 were not yet estimable and could be material.
- Key risks include market and interest-rate movements, policyholder behavior and reserve assumptions, hedging effectiveness and collateral needs, credit and counterparty exposure, reinsurance collectability, regulatory changes to captive reinsurance and variable-annuity capital rules, ratings, and limits on dividends from insurance subsidiaries. Minnesota-domiciled ReliaStar had negative earned surplus and no ordinary dividend capacity at year-end.
- Other notable items: 2016 CBVA loss recognition included a $217.2 million premium-deficiency reserve related to payout contracts; $33.8 million of restructuring expense; $117.4 million of Strategic Investment Program expense; and a $30.2 million reversal of previously accrued carried interest. The company estimated up to approximately $75 million of reasonably possible litigation losses above accruals at year-end; other matters could not be reasonably estimated.
- Management reported an estimated combined RBC ratio of 493% for principal insurance subsidiaries and said each insurance subsidiary exceeded minimum RBC levels requiring corrective action. Captive-reinsurance rulemaking remained uncertain. The filing also describes the DOL fiduciary rule and new New York cybersecurity requirements as potential sources of cost or business impact.
Important facts for investors to verify
- Review the GAAP-to-non-GAAP reconciliation and determine how much of the 2016 loss reflects CBVA hedge and reserve accounting versus underlying segment operations.
- Track CBVA reserve adequacy, policyholder utilization and lapse experience, hedge performance, and assets available to support guarantees; the filing notes that future assumption changes may be material.
- Confirm statutory capital, RBC and dividend capacity by insurer, especially ReliaStar’s earned-surplus position, and assess the impact of captive-reinsurance regulatory changes.
- Assess the sustainability of cash generation and parent-company liquidity, including subsidiary dividend restrictions, debt maturities, credit-facility utilization and collateral requirements.
- Monitor investment portfolio credit quality, illiquid assets, CMO-B exposure, reinsurance recoverables, and the $2.1 billion net deferred tax asset for changes in recoverability assumptions.
- Check subsequent developments in litigation, the fiduciary rule, cybersecurity compliance, restructuring costs, and the 2017 GMIB surrender-value offer.