Voya Financial, Inc. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. Unaudited U.S. GAAP financial statements. Voya provides retirement, investment management and insurance products; reported results include five ongoing segments, Corporate and run-off Closed Blocks. Dollar amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Total revenues | $3,191.1 | $2,435.3 | $8,560.1 | $6,394.5 |
| Income before income taxes | $554.8 | $420.0 | $1,276.1 | $130.5 |
| Net income | $517.4 | $447.7 | $1,201.9 | $136.9 |
| Net income available to common shareholders | $400.8 | $346.6 | $905.2 | $52.4 |
| Diluted earnings per share | $1.58 | $1.32 | $3.51 | $0.21 |
| Operating earnings before tax (non-GAAP) | $294.3 | $435.0 | $853.7 | $963.7 |
| Operating earnings before tax, ongoing businesses (non-GAAP) | $330.9 | $484.2 | $954.5 | $1,076.4 |
Revenue and GAAP pretax income increased sharply year over year, while operating earnings declined. GAAP results include volatile realized investment and derivative marks, closed-block variable annuity (CBVA) results, and noncontrolling interests; operating earnings exclude or adjust for several of these items and are not a GAAP measure. No formal consolidated profit-margin target is provided.
- Revenue mix: Q3 net investment income was $1,163.6 (down from $1,221.6); fee income $908.9 (down from $920.8); premiums $595.1 (up from $494.2); net realized capital gains were $181.0 versus a $517.1 loss. For nine months, net realized capital losses were $376.1 versus $1,957.8.
- Expenses and benefits: Q3 policyholder benefits were $1,234.7 versus $570.7; operating expenses were $767.3 versus $762.8. For nine months, benefits were $2,910.9 versus $1,822.2 and operating expenses $2,315.1 versus $2,292.1.
- Cash flow: Nine-month operating cash flow was $2,916.2 versus $2,942.1; investing activities used $3,053.2 versus $2,823.7; financing activities used $795.3 versus $188.6. Cash and cash equivalents ended at $1,908.5, down from $2,840.8 at year-end 2013.
- Balance sheet and debt: Total assets were $224,303.8, liabilities $207,159.6 and shareholders’ equity $17,144.2. Long-term debt was $3,515.5; no short-term debt borrowings were outstanding. The company reported compliance with debt covenants.
- Liquidity: Credit facilities had $9,977.9 capacity, $5,674.4 utilized and $4,298.2 unused commitment; utilization primarily supports reinsurance collateral. The $3.0 billion revolving facility had no revolving borrowings and $684.9 of letters of credit outstanding. Insurance-subsidiary dividends are subject to regulatory limits.
- Assets under management and administration: Total AUM and AUA were $519.8 billion at September 30, 2014, versus $494.1 billion a year earlier.
Material changes and management commentary
- Q3 operating earnings before tax fell to $294.3 from $435.0; nine-month operating earnings fell to $853.7 from $963.7. Management attributed much of the decline to the absence of the prior-year Lehman recovery/low-income-housing-tax-credit gain and less favorable DAC/VOBA and other intangible unlocking. The annual assumption review produced a net unfavorable $19.3 impact on Q3 operating earnings, versus a favorable $84.8 in Q3 2013.
- Among ongoing businesses, Q3 operating earnings declined in Retirement ($117.2 versus $187.3), Annuities ($78.3 versus $96.8) and Individual Life ($39.8 versus $117.0); they increased in Investment Management ($58.6 versus $54.0) and Employee Benefits ($37.0 versus $29.1). Management cited stronger Employee Benefits volumes, improved Annuities and Investment Management margins, and higher AUM-related fees, partly offset by mortality experience, low reinvestment yields and higher costs.
- CBVA reported Q3 pretax income of $131.0 versus a $167.4 loss, and nine-month pretax income of $67.1 versus a $982.9 loss. The change reflected market and hedge marks, nonperformance-risk effects and updated assumptions; management emphasizes that CBVA hedging is designed primarily to protect regulatory and rating-agency capital, not smooth GAAP earnings.
- Fixed-maturity gross unrealized losses declined to $349.1 from $1,136.5 at year-end 2013, primarily due to lower interest rates. The portfolio’s weighted-average quality rating was A; 6.8% of fair value was rated BB and below by rating agencies. Credit-related impairments were $5.9 for the nine-month period.
- Voya repurchased $614.4 of common stock during the first nine months, including transactions with ING Group. ING’s ownership fell to approximately 32.5% after the September 2014 transactions; ING was required to divest its remaining stake by the end of 2016.
Outlook, risks and unusual items
- Outlook: The filing gives no formal consolidated earnings or revenue guidance. Management said the general-account portfolio yield was approximately 5.0%, and expected fixed-income reinvestments for the remainder of 2014 to yield 3.75%–4.00%. It warned that persistently low rates can pressure product demand, investment spreads, guarantees and hedging costs. Management expects alternative investments to earn 8%–9% over the long term, while noting their income is volatile.
- Term-life reinsurance: An August 2014 agreement to reinsure an in-force term-life block was expected to close in Q4, subject to regulatory approval, and to generate approximately $200 of excess regulatory and rating-agency capital. Management expected a non-operating pretax loss of $100–$120 at closing; $18 was recorded in Q3, primarily for impairments on assets to be transferred. It also expected approximately $10 of annual non-operating pretax losses over the following 20 years.
- Other subsequent events: In Q4, certain yearly-renewable-term treaty changes were expected to generate a $20 operating gain. Termination of a $140 FHLB funding agreement on October 24 was expected to result in $12 of expense. Voya also began an orderly transition out of defined-benefit plan recordkeeping over 18–24 months, which management said was not expected to be material.
- Assumptions and market risks: CBVA results depend on policyholder lapse, annuitization, withdrawal and mortality assumptions; the company has limited experience for some guarantees, and future changes could materially affect reserves, capital and earnings. Other risks include low or changing interest rates, equity and credit-market volatility, investment impairments, counterparty and collateral demands, and possible regulatory changes to captive reinsurance financing.
- Contingencies: The company estimated reasonably possible litigation and regulatory losses above accrued amounts of up to approximately $100, while saying some matters could not be estimated. A class settlement in an ERISA revenue-sharing case, for approximately $15, was approved September 25, 2014. After quarter-end, a court issued a tentative damages ruling totaling $44.3 in the Beeson matter and planned a hearing on possible punitive damages; Voya disputed the ruling.
Important facts for investors to verify
- How much of the GAAP earnings improvement came from CBVA, derivative and nonperformance-risk marks, versus recurring operating performance; compare these with the non-GAAP reconciliation.
- Whether the expected term-life reinsurance closing, $100–$120 loss, and approximately $200 capital release occurred as described, and whether subsequent treaty and funding-agreement items were recorded as expected.
- Trends in CBVA policyholder behavior, reserve requirements, hedge effectiveness and collateral needs, particularly as more contracts reach annuitization or withdrawal dates.
- Operating performance and flows in the Retirement, Annuities and Individual Life businesses, including the effects of low reinvestment yields, mortality, and the planned exit from defined-benefit recordkeeping.
- Liquidity and capital available at the holding company versus insurance subsidiaries, including regulatory limits on subsidiary dividends, credit-facility utilization and any rating-related collateral triggers.
- Developments in the Beeson litigation, the estimated litigation exposure, and potential changes to captive reinsurance rules and tax-asset valuation allowances.