Voya Financial (then ING U.S., Inc.) — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. The company provides retirement, annuity, investment management, life insurance and employee-benefit products. Its stock began trading as VOYA in May 2013; it announced plans to rebrand as Voya Financial. ING Group reduced its ownership to 57% in a secondary offering completed after quarter-end, on October 29, 2013.
Financial performance and position
Amounts below are in millions of dollars unless stated otherwise. Results are unaudited.
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Total revenue | $2,435.3 | $2,564.3 | $6,394.5 | $7,411.5 |
| Income before taxes | $420.0 | $373.9 | $130.5 | $714.1 |
| Net income | $447.7 | $386.8 | $136.9 | $718.1 |
| Net income available to common shareholders | $346.6 | $366.5 | $52.4 | $495.7 |
| Operating earnings before taxes (non-GAAP) | $435.0 | $270.6 | $963.7 | $709.2 |
| Net realized capital losses | $(517.1) | $(132.4) | $(1,957.8) | $(896.6) |
Reported pretax margin, calculated as income before taxes divided by total revenue, was 17.2% in Q3 2013 versus 14.6% in Q3 2012; for the nine months it was 2.0% versus 9.6%. These reported margins are substantially affected by volatile investment and guarantee-related marks. Q3 diluted earnings per share were $1.32 versus $1.59; nine-month diluted EPS was $0.21 versus $2.16.
- Cash flow: Nine-month operating cash flow was $2,942.1, compared with $2,422.0 a year earlier. Investing activities used $2,823.7, versus $1,208.8; financing activities used $188.6, versus providing $227.5. Cash and cash equivalents ended September at $1,716.6, down from $1,786.8 at year-end 2012.
- Balance sheet and liquidity: Total assets were $217.7 billion and total shareholders’ equity was $14.9 billion at September 30. General-account investments totaled $89.0 billion, down from $95.5 billion at year-end; separate-account assets were $103.9 billion. Short-term debt was zero and long-term debt was $3.5 billion. Credit facilities had $9.4 billion of capacity, $7.4 billion utilized and approximately $2.0 billion unused. The estimated combined insurance-subsidiary RBC ratio was 470%.
- Investment position: Fixed maturities were $73.4 billion at fair value. Gross unrealized losses on fixed maturities increased to $1.069 billion from $292.7 million at year-end, primarily due to rising interest rates. The weighted-average fixed-maturity quality rating was A. Commercial mortgage loans totaled $9.0 billion; no mortgage-loan impairment charges were reported for the periods shown.
Material changes versus prior periods
- Q3 revenue declined 5% year over year, while pretax income rose to $420.0 million. Common-shareholder income fell to $346.6 million from $366.5 million, partly reflecting higher income attributable to noncontrolling interests.
- Nine-month revenue fell 14% and pretax income fell to $130.5 million from $714.1 million. The deterioration chiefly reflects larger realized losses from variable-annuity hedges and other investment marks, including the closed-block variable annuity segment (CBVA), alongside lower investment income.
- Non-GAAP operating earnings increased to $435.0 million for Q3 and $963.7 million for the first nine months. Management cited improved results in several ongoing businesses, favorable DAC/VOBA and other-intangible unlocking, and the Lehman recovery/low-income-housing-tax-credit item. The measure excludes or adjusts for significant market-driven and other items and is not GAAP net income.
- After-tax other comprehensive loss was $1.761 billion for the nine months, largely reflecting lower unrealized gains on securities; accumulated other comprehensive income declined to $1.950 billion from $3.711 billion at year-end.
- The company issued $1.0 billion of 2.9% senior notes due 2018, $750 million of 5.65% junior subordinated notes due 2053, and $400 million of 5.7% senior notes due 2043, while repaying term-loan, affiliated and surplus-note borrowings. No short-term debt remained at quarter-end.
Outlook, management commentary, risks and unusual items
- Management said rates remained low by historical standards and noted that yields on new investments were expected to be below yields on maturing assets. It anticipated that reinvestments in fixed income for the remainder of 2013 would earn an average 4.25%–4.50%. This is an expectation, not formal earnings guidance.
- Management identified low rates and market volatility as risks to product demand, investment spreads, fee income, hedge costs and guarantee liabilities. It also highlighted sensitivity to equity markets, customer lapses and annuitization, mortality and morbidity, credit performance, competition, regulation, tax policy and rating changes. A rating downgrade could increase collateral needs; a one-notch downgrade of the company’s ratings was estimated to increase collateral requirements by about $550 million based on quarter-end exposure.
- Q3 annual assumption reviews produced a favorable $84.8 million impact to ongoing-business operating earnings before taxes. Separately, CBVA annual assumption changes generated a $185.3 million loss, including unfavorable mortality and policyholder-behavior changes. These illustrate the sensitivity of earnings to actuarial assumptions.
- A Lehman Brothers bankruptcy settlement distributed cash and securities; the company recognized $120.0 million above the assets’ book value. The company also recorded $26.7 million of losses on planned sales of low-income-housing-tax-credit partnerships. Together with related effects, the reported net gain from Lehman recovery/LIHTC was $78.1 million for the nine months.
- CBVA reported a pretax loss of $982.9 million for the nine months, versus a $525.0 million loss a year earlier. Management said its hedging program is designed primarily to protect regulatory and rating-agency capital, not to eliminate GAAP earnings volatility.
- Litigation and regulatory matters include a class-action ERISA revenue-sharing case, with the liability trial concluded October 3, 2013 and the decision pending, and multistate inquiries into death-benefit and unclaimed-property practices. The company estimated reasonably possible losses above recorded accruals of up to approximately $100 million, while noting it could not estimate losses for all matters. It entered into multistate agreements establishing processes for reviewing, locating and paying certain beneficiaries and owners.
- The filing provides no specific full-year earnings guidance. Management’s long-term expected return for certain alternative investments was 8%–9%, but those returns can be volatile and are not assured.
Important facts for investors to verify
- Reconcile GAAP earnings with non-GAAP operating earnings, particularly the impact of CBVA hedging, nonperformance-risk marks, annual assumption changes and DAC/VOBA unlocking.
- Track statutory capital, the 470% estimated RBC ratio, available credit and letter-of-credit capacity, and potential collateral demands if ratings or markets weaken.
- Assess investment portfolio sensitivity to interest rates, unrealized losses, CMO-B prepayment and extension risk, and the credit quality of mortgage-backed and other structured securities.
- Monitor litigation, unclaimed-property remediation, potential assessments and the outcome of the ERISA class action; the disclosed loss estimate does not cover every matter.
- Review debt-service costs, guarantees and restrictions on insurance-subsidiary dividends, as well as the company’s post-IPO ownership and capital structure.