Voya Financial, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; unaudited. Voya provides retirement, annuity, investment-management, life-insurance and employee-benefit products. Unless stated otherwise, dollar amounts below are in millions.
Financial performance and position
- Revenue: $3,009.3, up 15.5% from $2,604.4. Premiums rose to $966.8 from $608.8, primarily reflecting pension risk-transfer business and Employee Benefits persistency; reported revenue also reflects volatile investment and guarantee-related items.
- Earnings: Pretax income was $241.3, down from $261.3. Net income was $192.3 versus $215.7; net income available to common shareholders was $191.6 versus $189.6. Diluted EPS increased to $0.92 from $0.79. The effective tax rate was 20.3%, compared with 17.5%.
- Operating earnings: Management’s non-GAAP operating earnings before tax fell to $169.8 from $289.6; ongoing-business operating earnings fell to $239.0 from $324.0. These measures exclude specified items and are not GAAP results.
- Cash flow: Operating cash flow was $652.6, down from $1,053.7. Investing activities used $933.3; financing activities provided $294.4. Cash and cash equivalents ended the quarter at $2,526.4, up from $2,512.7 at year-end.
- Balance sheet and debt: Total assets were $214,007.7 and shareholders’ equity was $15,702.4 at March 31, compared with $218,223.5 and $16,275.8 at December 31. Long-term debt was $3,455.9; there were no short-term debt borrowings. The company reported covenant compliance.
- Liquidity facilities: The $750 revolving-credit sublimit had no borrowings; $207.6 of letters of credit were outstanding under the senior unsecured facility. Total listed facility capacity was $5,646.7, with $1,838.6 utilized.
- Capital returns: Voya repurchased 7.58 million shares for approximately $220.3 and paid $2.0 in dividends. The quarterly dividend declared was $0.01 per share.
Material changes versus Q1 2015
- Net investment income declined $53.9 and fee income declined $74.0, reflecting lower alternative-investment and prepayment-fee income, low reinvestment yields, lower assets under management and business runoff. Alternative-investment income for ongoing business was a loss of $31.0, versus income of $11.2, including a carried-interest reversal.
- Benefits and expenses increased, notably as pension risk-transfer contracts, higher reserves and Employee Benefits claims increased policyholder benefits. Operating expenses declined $22.0 to $720.2, but included $33.3 of Strategic Investment Program costs.
- Net realized capital results improved to a gain of $10.7 from a loss of $259.5. Guarantee-derivative fair-value effects, especially nonperformance-risk changes, were significant; the improvement should not be read as a comparable rise in underlying operating performance.
- Other comprehensive income after tax was $1,051.3, versus $427.5, largely reflecting unrealized gains on securities. Accumulated other comprehensive income increased to $2,476.2 from $1,424.9.
- Assets under management and administration totaled $458.3 billion, down from $485.5 billion a year earlier. The filing attributes the decline in part to market performance and runoff.
- Adoption of consolidation guidance led to deconsolidation of 10 CLOs and 19 limited partnerships at January 1, reducing reported assets by $7.5 billion and liabilities by $5.9 billion, with a $1.6 billion reduction in noncontrolling interest. The company said adoption did not affect net income available to common shareholders.
Outlook, commentary, risks and unusual items
- Management said low interest rates, a flattening yield curve and market volatility may pressure sales, investment spreads, asset-based fees and hedging costs. The general-account portfolio yield was approximately 5.0%; management expected reinvestments in the remainder of 2016 to yield 3.75%–4.25%, absent material changes in market yields.
- Management’s long-term expected return on certain alternative investments was 8%–9%, while warning that period-to-period results can be volatile. About $41.9 million of previously accrued carried interest remained subject to potential reversal; $17.7 million was reversed in Q1.
- The Closed Block Variable Annuity segment reported pretax income of $46.0 versus a loss of $29.4, but results included a $421.2 million gain from nonperformance risk. Losses on incurred guarantees and the guarantee-hedging program, excluding nonperformance risk, were $566.4 million. Management prioritizes protecting regulatory and rating-agency capital, not minimizing GAAP earnings volatility.
- The April 2016 Department of Labor fiduciary rule is expected to apply beginning April 2017. Voya identified potential effects on retail annuities and wealth management, including changes to sales and compensation practices, higher compliance costs and possible reduced sales.
- Litigation and regulatory matters remain subject to uncertainty. Management estimated reasonably possible losses in excess of accruals of up to approximately $100.0, while noting it cannot estimate losses for all matters. A California matter includes judgments of $36.8 million for plaintiffs and $12.5 million for Fireman’s Fund, both appealed by the company.
- Market, credit, interest-rate, equity, mortality, morbidity, persistency and lapse risks could materially affect results. A ratings downgrade could increase collateral needs; the filing estimated a one-notch insurance-subsidiary downgrade could add about $20 million of derivative collateral at quarter-end market values. Some guarantee liabilities rely on Level 3 assumptions, including policyholder behavior and market correlations.
- There were no mortgage-loan impairments in the quarter. Fixed-maturity unrealized losses fell to $824.7 million from $1,578.1 million, primarily as interest rates declined; energy securities remained an area of exposure, with $428.7 million of gross unrealized losses.
Key facts for investors to verify
- Reconcile the sharp decline in management-defined operating earnings with GAAP net income, particularly the contribution of derivative and nonperformance-risk movements.
- Track ongoing-business operating earnings, alternative-investment and carried-interest results, AUM/AUA flows, and the effects of low reinvestment yields.
- Assess the sustainability and capital impact of pension risk-transfer growth, Employee Benefits loss ratios, and Closed Block Variable Annuity guarantees and hedging.
- Review liquidity, facility utilization, collateral requirements, insurance-subsidiary dividend capacity and the remaining share-repurchase authorization.
- Monitor investment-credit quality, energy exposure, litigation developments and implementation of the DOL fiduciary rule.