Business context and reporting period
This is ING U.S., Inc.’s audited Form 10-K for the fiscal year ended December 31, 2013, comparing results primarily with 2012. The company, which said it served approximately 13 million U.S. customers, operated retirement, investment management and insurance businesses, alongside run-off closed blocks. ING Group owned approximately 57% after the 2013 IPO and secondary offering. The company planned to adopt the Voya Financial name in 2014; the filing is not a quarterly report.
Financial performance and position
Amounts below are in millions of dollars unless stated otherwise. Operating earnings are a non-GAAP measure; they exclude the closed-block variable annuity segment and other specified items.
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Total revenue | $8,758.5 | $9,615.3 | Down $856.8 |
| Income before income taxes | $758.1 | $606.0 | Up $152.1 |
| Net income available to common shareholders | $600.5 | $473.0 | Up $127.5 |
| Operating earnings before tax, non-GAAP | $1,268.6 | $918.3 | Up $350.3 |
| Net cash from operating activities | $3,263.4 | $3,282.1 | Down $18.7 |
- Net realized capital losses were $2,534.8, versus $1,280.8 in 2012. Total revenue fell despite higher fee income and premiums, largely because of these losses, including volatile variable-annuity hedge and guarantee accounting.
- Ongoing-business operating earnings rose to $1,428.6 from $990.9. Retirement Solutions benefited from fee growth and improved annuity margins; Investment Management earnings increased to $178.1 from $134.5, with positive net flows of $8.8 billion.
- The closed-block variable annuity segment reported a $1,209.3 pretax loss, compared with a $692.3 loss in 2012. This segment is excluded from operating earnings and remains a major source of reported earnings volatility.
- Year-end assets were $221.0 billion; total investments were $87.1 billion, down from $95.5 billion. Shareholders’ equity was $13.3 billion, or $11.4 billion excluding AOCI. AOCI fell to $1.8 billion from $3.7 billion, primarily reflecting the year’s decline in unrealized investment gains.
- Consolidated cash and cash equivalents were $2.8 billion at year-end. Investing activities used $1.9 billion and financing activities used $0.3 billion. Cash flow is affected by insurance and investment-contract deposits, withdrawals and maturities.
- Year-end short-term debt was zero and long-term debt was $3.5 billion, versus $1.1 billion and $3.2 billion, respectively, in 2012. The company issued senior and junior subordinated notes and repaid bank and other borrowings during 2013.
- Assets under management and administration reached $510.5 billion, up from $461.0 billion. The combined RBC ratio for principal insurance subsidiaries was 503%, down from 526%; each subsidiary remained above statutory minimum RBC levels requiring corrective action.
- For context, the company reported a simple GAAP net-income-to-revenue ratio of about 6.9% for 2013. This is not a standard insurance profitability measure.
Material changes, outlook and risks
- Management said interest rates rose during 2013 but remained low by historical standards. The general-account portfolio yield was approximately 5.0%; management anticipated that fixed-income investments made in 2014 would yield 4.25%–4.50%, absent a material further change in market yields.
- Third-quarter 2013 actuarial assumption changes produced a $185.3 million loss in the closed-block variable annuity segment. A $405.2 million pension actuarial gain benefited reported results. The 2013 results also included an $87.0 million operating-earnings gain from a Lehman recovery, net of losses on exiting low-income housing tax-credit partnerships; these items are not necessarily recurring.
- Variable-annuity hedge programs prioritize regulatory and rating-agency capital protection over GAAP earnings stability. Policyholder behavior, mortality, equity markets, interest rates, volatility, hedge effectiveness and collateral requirements could cause materially different reserve, earnings, capital or liquidity outcomes. The filing notes limited experience for key annuitization and withdrawal assumptions.
- Further risks include restrictions on dividends from regulated insurance subsidiaries, the availability and cost of captive-reinsurance financing, possible regulatory changes to captive reinsurers, ratings downgrades, and ING Group’s continuing control and required divestment. Low rates may compress investment spreads; rising rates may increase surrenders, investment losses or collateral needs.
- The company estimated up to approximately $100 million of reasonably possible litigation and regulatory losses in excess of accrued amounts at year-end; it could not estimate losses for some matters. Multi-state reviews concerning unclaimed benefits and use of the Social Security Administration’s Death Master File resulted in 2013 settlement agreements establishing processes for identifying, locating and paying beneficiaries or escheating benefits.
- Management expected the Voya rebrand to take approximately 24 months and cost $40 million–$50 million, excluding incremental advertising. No specific consolidated earnings guidance was provided in the filing.
Important facts for investors to verify
- Reconcile the $1,268.6 million non-GAAP operating-earnings figure to GAAP pretax income of $758.1 million, including the closed-block variable annuity loss and other adjustments.
- Review the drivers of the $2.5 billion net realized capital loss and the closed-block variable annuity’s $1.2 billion pretax loss, and assess the sensitivity to markets and policyholder behavior.
- Confirm the sustainability of operating earnings growth, particularly the effects of one-off Lehman recovery/LIHTC items, favorable pension remeasurement and DAC/VOBA assumption changes.
- Assess insurance-subsidiary capital, dividend capacity, reinsurance collateral and financing needs, including regulatory developments affecting captive reinsurers.
- Monitor investment yields versus credited rates, asset quality and liquidity, debt costs and maturities, and potential collateral calls under stress or ratings downgrades.
- Track ING Group’s remaining ownership and divestment timetable, the execution and cost of the Voya rebrand, and any changes to ratings, litigation or regulatory exposures.