Voya Financial, Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Voya is a U.S. financial-services company providing retirement, annuity, investment-management, life-insurance and employee-benefit products. Financial amounts below are in millions unless stated otherwise; comparative income figures are for 2014 and are adjusted where applicable.
Financial performance and position
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Total revenues | $2,993.9 | $2,700.1 | $5,624.9 | $5,375.0 |
| Income before income taxes | $486.2 | $421.0 | $747.5 | $727.3 |
| Net income | $367.1 | $414.9 | $582.8 | $690.5 |
| Net income available to common shareholders | $285.2 | $248.3 | $474.8 | $510.4 |
| Diluted earnings per share | $1.24 | $0.97 | $2.02 | $1.96 |
| Operating earnings before tax (non-GAAP) | $262.5 | $328.3 | $552.1 | $559.4 |
- Q2 revenue rose about 11% and pretax income about 15% year over year, while net income fell as income tax expense increased to $119.1 from $6.1. Common-shareholder income rose despite lower consolidated net income, in part reflecting lower income attributable to noncontrolling interests.
- Six-month operating cash flow was $1,483.2, versus $1,817.4 in 2014. Investing activities used $1,676.8; financing activities provided $158.2. Cash and cash equivalents ended the period at $2,495.5, down from $2,530.9 at year-end 2014.
- At June 30, total assets were $226,585.1, total liabilities $209,036.2 and shareholders’ equity $17,548.9. Long-term debt was $3,486.0; no short-term debt borrowings were outstanding. The company reported compliance with debt covenants.
- Investment portfolio total was $88,446.4. Fixed maturities had a weighted-average quality rating of A; 6.6% were rated BB or below by agency ratings. Gross unrealized fixed-maturity losses increased to $751.9 from $323.6 at year-end, primarily due to rising interest rates.
- Quarterly common dividend was $0.01 per share. The company repurchased shares for $740.8 in the first half, including the $600.0 direct repurchase from ING Group.
Material changes and operating trends
- Q2 operating earnings before tax fell $65.8 year over year; first-half operating earnings fell $7.3. Management attributed pressure to lower alternative-investment and prepayment income, low-rate reinvestment yields, higher strategic-program costs and unfavorable mortality results, partly offset by stronger annuity margins and favorable first-half prepayment income.
- Q2 GAAP results were strongly affected by variable-annuity hedge and guarantee valuation movements: net realized capital losses improved to $0.3 from $364.5, while the closed-block variable-annuity segment reported pretax income of $180.5 versus a loss of $82.1. Management cautions that this segment’s hedging is primarily designed to protect regulatory and rating-agency capital, not smooth U.S. GAAP earnings.
- Ongoing-business operating earnings were $311.8 in Q2, down from $356.1; first-half earnings were $635.8, up from $623.6. Employee Benefits first-half operating earnings rose to $78.3 from $54.7, while Individual Life fell to $81.1 from $94.5 and Investment Management to $93.9 from $104.7.
- Total AUM and AUA were $484.3 billion at June 30, down from $524.5 billion a year earlier. The filing attributes much of the difference to lower AUA and declines in closed blocks; the Investment Management segment reported first-half net outflows of $1.1 billion.
- On April 20, the company reorganized its presentation into two ongoing businesses—Retirement and Investment Solutions, and Insurance Solutions—without changing its five ongoing operating segments.
Outlook, risks and unusual items
- Management said low interest rates may pressure sales, product profitability and investment spreads; it expected remaining-2015 reinvestments in fixed-income investments to yield 4.25%–4.50%, below yields on maturing assets. The filing does not provide consolidated earnings guidance.
- Management announced a $350 million strategic investment program over four years, covering IT simplification, digital and analytics, and cross-enterprise initiatives; expected 2015 spending was $50 million–$70 million. Alternative-investment income is volatile; management’s long-term expected return range for the specified assets was 8%–9%.
- A model-input error affecting fair value estimates for certain closed-block GMWBL embedded derivatives led to revisions of prior-period financial information. Management concluded the errors were not material to previously filed statements and did not affect regulatory or rating-agency capital or policyholders. Adjusted Q2 2014 common-shareholder income was $248.3, $2.0 above originally reported.
- Effective April 1, the company reinsured retained group reinsurance policies to Enstar for $304.5 million. It recorded a $39.2 million pretax non-operating loss, including transaction costs and asset impairments; $4.2 million was recorded in Q1. The June 30 reinsurance recoverable related to this transaction was $282.7 million.
- On June 30, Voya Holdings repurchased $30.6 million principal of 7.63% debentures, recording a $9.9 million extinguishment loss. A $500 million put-option arrangement for potential 3.976% senior-note issuance carries a 1.875% annual premium on the unexercised amount and includes mandatory exercise triggers, including a specified equity threshold.
- Liquidity and capital risks include dependence of the parent on subsidiary dividends, which are subject to insurance regulation; $4.75 billion of credit-facility utilization, principally supporting reinsurance collateral; and possible collateral demands after ratings downgrades. A two-notch subsidiary downgrade was estimated to add $24.7 million of reinsurance collateral requirements; derivative collateral sensitivities were also disclosed.
- Management identified low rates, market volatility, lapse and mortality experience, competition, regulatory and tax changes, and policyholder behavior as key uncertainties. A proposed Department of Labor fiduciary rule could change retirement-product distribution and compensation arrangements. The company reported stable outlooks following rating upgrades by Fitch, Moody’s and S&P earlier in 2015.
- Management estimated aggregate reasonably possible litigation and regulatory losses in excess of accruals of up to approximately $100 million. In the Beeson matter, a court entered a $36.8 million award for plaintiffs; an appeal is being pursued and execution is stayed by an appellate bond. The court denied Fireman’s Fund’s punitive-damages request.
Most important facts for investors to verify
- Reconcile GAAP net income, non-GAAP operating earnings and the large quarter-to-quarter impact of closed-block annuity guarantees, hedges and nonperformance-risk assumptions.
- Assess the rising fixed-maturity unrealized losses, interest-rate sensitivity, portfolio credit quality and ability to maintain investment spreads as assets mature.
- Review the $1.0 billion deferred-tax valuation allowance and the factors that could affect realization of deferred tax assets and future tax expense.
- Confirm the ultimate cost, timing and accounting of the Enstar reinsurance transaction, and the effect of reinsurance and captive-support obligations on liquidity and capital.
- Track share repurchases, subsidiary dividend capacity, credit-facility usage, Aetna-note reduction commitments and the conditions attached to the $500 million put option.
- Monitor mortality and claims experience, AUM/AUA flows, legal exposures and the effect of any final fiduciary rule; interim results are not necessarily indicative of full-year performance.