Voya Financial, Inc. — Q3 2016 Form 10-Q
Business context and reporting period
Unaudited results for the three and nine months ended September 30, 2016, compared with the corresponding 2015 periods. Voya provides retirement, investment management, annuity, life insurance and employee benefits products. In Q3, it simplified its management structure; its five ongoing-business segments are Retirement, Investment Management, Annuities, Individual Life and Employee Benefits. Dollar amounts below are in millions unless stated otherwise.
Financial results and position
- Q3 revenue: $2,528.5, down from $3,696.4. The comparison was heavily affected by net realized investment losses of $367.7 versus gains of $299.1 in Q3 2015, as well as lower premiums and income from consolidated investment entities.
- Q3 earnings: Pretax loss of $355.9 versus income of $80.3; net loss attributable to common shareholders was $248.1, or $1.24 per diluted share, versus income of $40.3, or $0.18 per share. Operating earnings before tax, a non-GAAP measure, were $108.4 versus $137.0.
- Nine-month results: Revenue was $8,233.8 versus $9,268.9; pretax income was $38.5 versus $827.8; and net income attributable to common shareholders was $105.0 versus $515.1. Operating earnings before tax were $513.3 versus $689.1.
- Revenue and expenses: Q3 net investment income increased to $1,163.4 from $1,103.6, while fee income declined to $857.9 from $871.8 and premiums fell to $726.7 from $1,128.8. Nine-month operating expenses declined to $2,160.2 from $2,215.2; nine-month net amortization of DAC/VOBA fell to $381.2 from $587.5.
- Cash flow: Operating cash flow for the first nine months was $2,478.4, versus $2,686.4. Investing activities used $2,514.2 and financing activities provided $289.8. Cash and cash equivalents ended the period at $2,766.7.
- Balance sheet and debt: Total assets were $218,622.2 and total shareholders’ equity was $16,155.4 at September 30. Long-term debt was $3,548.5, up from $3,459.8 at year-end 2015; no short-term debt borrowings were outstanding. The company reported no revolving borrowings and $30.7 of letters of credit under its senior credit facility.
- Capital and investment measures: Total AUM and AUA were $479.9 billion, up from $450.4 billion a year earlier. AOCI was $3,517.1, reflecting a substantial increase in unrealized investment gains. The declared common dividend was $0.01 per share for Q3.
Material changes versus prior comparable periods
- The GAAP loss was driven principally by the deterioration in realized investment and derivative results, including volatility in guaranteed-benefit and closed-block variable annuity (CBVA) items. Management cautions that CBVA hedging is primarily designed to protect regulatory and rating-agency capital, not to eliminate GAAP earnings volatility.
- Q3 operating earnings before tax decreased by $28.6; nine-month operating earnings declined by $175.8. Management cited unfavorable annual DAC/VOBA and other-intangible assumption unlocking, higher Employee Benefits claims, higher Corporate expenses and lower alternative investment income.
- Individual Life reported a Q3 operating loss of $76.2 versus a $10.8 loss a year earlier, including $122.1 of unfavorable DAC/VOBA and other-intangible unlocking. Annuities operating earnings rose to $113.3 from $50.5, aided by favorable unlocking and business mix. Retirement operating earnings declined to $62.9 from $80.5.
- Adoption of consolidation guidance effective January 1, 2016 deconsolidated investment entities, reducing reported assets by about $7.5 billion and liabilities by about $5.9 billion, with a related $1.6 billion reduction in noncontrolling interest. The adoption did not affect net income available to common shareholders.
- The company issued $500.0 of 3.65% notes due 2026 and $300.0 of 4.8% notes due 2046, using proceeds in part to repurchase existing debt. Debt-extinguishment losses were $104.2 for the first nine months. It repurchased $487.2 of common stock during that period.
Outlook, commentary, risks and contingencies
- Cost initiatives: Management expects annual run-rate savings of at least $100 million in 2018 and subsequent years. It expected at least $30 million of restructuring expense in Q4 2016; additional restructuring costs through 2018 were not yet estimable and could be material.
- Interest rates: Management described rates as historically low and warned of pressure on product demand, profitability and reinvestment yields. The general-account portfolio’s average yield was about 5.0%; reinvested fixed-income proceeds in the remainder of 2016 were expected to earn 3.25%–3.50% on average. These are stated expectations, not formal earnings guidance.
- Markets and assumptions: Volatility, equity and credit markets, mortality, morbidity, persistency and policyholder behavior can affect fees, hedging costs, reserves and results. The Q3 annual assumption review had a net unfavorable $144.9 impact on operating earnings before tax; total assumption changes caused a $226.5 loss. CBVA assumption updates alone resulted in a $95.5 loss.
- CBVA and regulation: CBVA pretax loss was $328.0 for Q3 and $225.5 for the first nine months. Future policyholder behavior and reserve assumptions remain uncertain. NAIC review of variable-annuity reserve and capital rules was ongoing, with timing and effects uncertain. In October, the company filed an enhanced surrender-value offer for certain GMIB policyholders but had not decided whether to proceed.
- Liquidity and capital access: Total listed credit-facility capacity was $5.2 billion, with $1.9 billion utilized and $3.2 billion unused. Insurance-subsidiary dividends are subject to regulatory restrictions; one principal subsidiary had negative earned surplus and lacked ordinary dividend capacity without regulatory approval. A ratings downgrade could increase collateral needs or borrowing costs.
- Legal and other contingencies: Management estimated aggregate reasonably possible litigation and regulatory losses in excess of accruals of up to approximately $75.0; some matters could not be estimated. Two putative ERISA class actions filed in 2016 alleged unreasonable fees; Voya denied the allegations and planned to defend them. About $28.1 of previously accrued private-equity carried interest remained subject to possible reversal.
Most important facts for investors to verify
- How much of the GAAP loss and the year-over-year decline reflects market-driven derivative and CBVA volatility versus underlying ongoing-business performance.
- Whether operating earnings, particularly in Individual Life and Employee Benefits, recover after the annual assumption changes and claims experience disclosed.
- Actual progress toward the $100 million-plus 2018 savings target, alongside restructuring costs and the planned Q4 2016 expense.
- Future CBVA policyholder behavior, reserve requirements, hedge performance and any eventual NAIC framework changes.
- Available holding-company liquidity, subsidiary dividend approvals, facility usage and potential collateral demands following rating or market changes.
- Developments in the disclosed litigation, the possible losses beyond accruals, and any reversal of carried-interest income.