Voya Financial, Inc. annual report, FY2014

Voya Financial, Inc. — 2014 Form 10-K

Reporting period: Fiscal year ended December 31, 2014. This is an annual filing, not a standalone fourth-quarter report; fourth-quarter figures are noted where available. Voya is a U.S. retirement, investment management and insurance company serving approximately 13 million customers. It changed its name from ING U.S. in April 2014 and completed its rebrand across businesses in September. ING Group owned 19% at year-end.

Financial performance and key metrics

Metric	2014	2013
Total revenue (GAAP)	$11.071 billion	$8.759 billion
Income before income taxes	$785.2 million	$758.1 million
Net income attributable to Voya common shareholders	$2.300 billion	$600.5 million
Diluted EPS	$9.02	$2.38
Operating earnings before tax (non-GAAP)	$1.231 billion	$1.269 billion
Net cash from operating activities	$3.629 billion	$3.263 billion
Total assets	$226.951 billion	$221.023 billion
Long-term debt	$3.516 billion	$3.515 billion

Tax-driven net income: The 2014 income tax benefit was $1.752 billion, principally reflecting release of $1.85 billion in valuation allowances. The release followed management’s assessment that positive evidence supported realization of certain deferred tax assets; it is not a measure of recurring operating performance.
Revenue and earnings quality: GAAP revenue rose substantially as net realized capital losses narrowed. Operating earnings before tax, which excludes several volatile and unusual items and excludes the closed-block variable annuity segment, fell 3.0%. Voya does not provide a clear consolidated operating-margin measure in the filing.
Cash flow and liquidity: Investing activities used $3.314 billion and financing activities used $624.6 million. Cash and cash equivalents declined $309.9 million to $2.531 billion. Voya Financial, Inc., the parent, ended the year with $682.1 million of cash. The company reported $3.0 billion capacity under its revolving facility, with $1.467 billion of letters of credit outstanding and $1.533 billion unused; total committed credit facilities were $7.822 billion, of which $5.224 billion was utilized.
Capital and balance sheet: Shareholders’ equity excluding AOCI was $13.0 billion, versus $11.4 billion. The estimated combined RBC ratio for principal insurance subsidiaries was 538%, up from 503%; all insurance subsidiaries exceeded statutory minimums requiring corrective action. No short-term debt was outstanding.
Scale and flows: Year-end AUM and AUA totaled $523.8 billion, up from $510.5 billion. Ongoing-business AUM/AUA was $478.4 billion; closed blocks totaled $45.3 billion. Retirement segment AUM/AUA was $354.5 billion. Investment Management reported $3.0 billion of net flows, versus $8.8 billion in 2013.

Material changes versus prior period

GAAP revenue increased 26.4%, while pretax income increased 3.6%. Net realized capital losses improved to $894.4 million from $2.535 billion, including significant valuation and hedging effects in the closed-block variable annuity business.
Operating earnings before tax decreased from $1.269 billion to $1.231 billion. The prior year included a $87.0 million net gain related to Lehman recovery and Low Income Housing Tax Credit investments; 2014 included less favorable DAC/VOBA unlocking and higher expenses.
Operating expenses increased $875.0 million, primarily due to a $777.9 million year-over-year swing in pension expense from an actuarial gain in 2013 to an actuarial loss in 2014, as well as business investment, public-company, rebranding and restructuring costs.
Segment operating earnings: Retirement $517.8 million (down from $595.8 million); Annuities $262.0 million (down from $293.8 million); Investment Management $210.3 million (up from $178.1 million); Individual Life $237.3 million (down from $254.8 million); Employee Benefits $148.9 million (up from $106.1 million).
Fourth-quarter GAAP results included a $490.9 million pretax loss but $1.395 billion of net income attributable to common shareholders, reflecting the substantial tax benefit. Quarterly figures should not be mistaken for recurring earnings.
Voya repurchased approximately 20.6 million shares during 2014 for an aggregate $789.4 million, including $725.0 million repurchased directly from ING Group. The board authorized an additional $750 million of repurchases in February 2015.

Outlook, management commentary and risks

Management cited persistently low interest rates as a pressure on reinvestment yields, product margins and demand. The general account investment portfolio was approximately $88.7 billion with an average yield near 5.0%; management expected 2015 reinvestments to earn 4.00%–4.25%. No specific consolidated earnings guidance is provided.
Management emphasized growth in retirement plans, participant relationships and Investment Management’s commercial business, while maintaining capital and cost discipline. It expects the runoff of fixed annuities with older guarantees to continue; it also launched a new collared annuity in January 2015.
The closed-block variable annuity portfolio remains a major source of earnings, reserve, capital and liquidity volatility. It had $43.2 billion of AUM, approximately 415,000 policyholders, and $4.0 billion of statutory reserves supporting guarantees. Hedging is primarily designed to protect regulatory and rating-agency capital, not stabilize GAAP earnings; hedge mismatch, market shocks and policyholder behavior can still cause losses.
Captive reinsurance regulation is an important uncertainty. New NAIC guidance and proposals could constrain captive arrangements, increase required statutory reserves or financing costs, or affect product sales. Voya also relies on financing and collateral facilities that may need renewal before related reserves run off.
Insurance subsidiaries’ dividends are subject to statutory and regulatory limits, so parent-company liquidity depends on subsidiary distributions. Other material risks include low or rapidly rising rates, market and credit volatility, counterparty and reinsurance credit risk, collateral calls, investment valuation uncertainty, competition, cybersecurity, and regulatory change.
Voya estimated reasonably possible litigation losses above accrued amounts of up to approximately $100 million. In the Beeson matter, a court awarded $36.8 million to plaintiffs and $7.5 million to Fireman’s Fund; Voya disputed the decision and pursued post-trial relief and appeal, with a punitive-damages hearing also noted.
Rebranding was expected to be completed by October 2015 at a cost of $40 million–$50 million; the company also planned to invest approximately $100 million in brand advertising over the brand’s first two-and-a-half years.
After year-end, S&P raised ratings for Voya and its operating subsidiaries on February 17, 2015 and assigned a stable outlook. The filing reports effective disclosure controls and an unqualified audit opinion on the financial statements and internal control over financial reporting.

Important facts for investors to verify

How much of the $2.300 billion of common-shareholder net income and $9.02 diluted EPS came from the valuation-allowance release, and how sustainable taxable income is under the Section 382 limits.
Whether ongoing-business operating earnings, segment trends and investment-management flows improve, and how much 2014 performance depended on nonrecurring gains, assumption changes or market movements.
Changes in variable-annuity guarantee exposure, hedge effectiveness, policyholder utilization assumptions, statutory reserves and capital needs—especially as GMIB contracts become eligible for annuitization.
Availability, cost and regulatory treatment of captive-reinsurance and reserve-financing arrangements, including upcoming facility renewals and the effect of any change in collateral requirements.
Parent-level cash, subsidiary dividend capacity, credit-facility headroom and the cash demands of share repurchases, debt service and collateral posting.
Developments in the Beeson litigation, other legal and regulatory matters, and the timing and cost of completing the Voya rebrand.