Voya Financial, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Unaudited results; dollar amounts below are in millions unless otherwise stated. Voya provides retirement, investment management, employee benefits and related financial services. The filing presents Individual Life and certain annuity businesses as discontinued operations and held for sale.
Key financial results
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenue | $1,663 | $1,969 | $3,348 | $3,791 |
| Continuing pretax income (loss) | $(48) | $243 | $(4) | $345 |
| Net income (loss) attributable to common shareholders | $(71) | $226 | $(169) | $290 |
| Diluted EPS, total company | $(0.55) | $1.51 | $(1.27) | $1.93 |
| Adjusted operating revenues | $1,225 | $1,395 | $2,622 | $2,724 |
| Adjusted operating earnings before tax | $17 | $190 | $151 | $291 |
Q2 adjusted operating earnings margin was approximately 1.4% of adjusted operating revenues, versus 13.6% a year earlier. The company reported a consolidated continuing-operations loss in Q2, but continuing-operations EPS attributable to common shareholders was $0.17; the difference reflects losses attributed to noncontrolling interests. For the first half, continuing-operations EPS attributable to common shareholders was $0.40 despite a small consolidated continuing-operations loss.
- Revenue and earnings: Q2 revenue fell about 16% year over year. Net investment income declined $126 to $586 and fee income fell $25 to $458; premiums increased $30 to $607. First-half adjusted operating earnings fell to $151 from $291.
- Segment adjusted pretax earnings, Q2: Retirement $37 versus $180; Investment Management $20 versus $41; Employee Benefits $36 versus $49; Corporate loss of $75 versus loss of $80. For the first half, the respective results were $160, $59, $98 and a Corporate loss of $166.
- Cash flow: First-half operating cash flow was $432 overall, including $784 from continuing operations and $(352) from discontinued operations. Investing activities used $950; financing activities provided $569. Ending cash and cash equivalents were $1,523, including $1,110 in continuing operations.
- Balance sheet and debt: Total assets were $166.9 billion and total shareholders’ equity $10.3 billion at June 30. Long-term debt was $3.043 billion and short-term debt $1 million. Cash is not directly comparable to policyholder obligations; the filing does not provide a conventional corporate current ratio.
- Capital and liquidity: Management estimated a combined risk-based capital ratio of 468%, above its 400% target, and said liquidity was ample. A $500 million revolving credit facility was undrawn; no debt maturities were expected before 2023. Continuing-operations cash was $1.110 billion.
- Investment and credit metrics: Mortgage loans were $6.830 billion net of a $74 allowance for credit losses; the filing attributes the allowance increase to COVID-19 assumptions. About 8% of commercial mortgage loan principal was under payment forbearance. Fixed maturities had fair value of $45.2 billion; gross unrealized losses increased to $417 from $91 at year-end, which Voya primarily attributed to non-credit market factors.
Material changes and unusual items
- Voya recorded an additional $240 million after-tax estimated loss on the pending Individual Life Transaction in the first half. The cumulative estimated loss on sale was $1.348 billion at June 30; the transaction remained subject to regulatory approvals and other closing conditions.
- The proposed sale price was approximately $1.25 billion, subject to adjustment. Related reinsurance was expected to cede approximately $10.3 billion of U.S. GAAP reserves. At closing, management estimated a $250 million–$750 million reduction in shareholders’ equity excluding AOCI, expected toward the lower end of the range, and annual after-tax amortization of deferred intangibles of approximately $100 million–$150 million.
- COVID-19, market volatility, lower interest rates and weaker alternative investment and prepayment income weighed on results. Q2 net realized capital losses were $1, versus gains of $25 a year earlier; first-half losses were $234, versus gains of $13, including $70 of impairments. Q2 included $50 of intent impairments on securities expected to support the transaction’s reinsurance structure.
- After-tax other comprehensive income was $2.198 billion in Q2, largely from unrealized gains on securities; AOCI rose to $4.039 billion from $3.331 billion at year-end. This materially boosted equity but is distinct from earnings and may fluctuate with markets.
- Voya adopted the CECL credit-loss standard on January 1, 2020, recording a $33 million after-tax reduction to retained earnings. Management said the forthcoming long-duration insurance accounting standard could significantly affect equity and future earnings patterns; impact had not yet been estimated.
Outlook, risks and contingencies
- Management expected the Individual Life Transaction to close by September 30, 2020, subject to required approvals. The estimated sale loss and related transaction effects could change before closing.
- Management cited near-term pressure on Retirement net flows and earnings and estimated that lower interest rates would reduce Retirement spread-based income by about $15 million on a run-rate basis over 2020. For each 1% decline in the average daily S&P 500 level, it estimated annual adjusted operating earnings would decline by approximately $4 million–$5 million.
- Management expected COVID-related group life mortality claims to remain elevated into early 2021, while stating that the effect on Employee Benefits results in 2020 was expected to be significant but not material absent mortality substantially above epidemiological expectations. A deeper or longer recession could hurt fee income, premiums, investment returns, capital and liquidity.
- Voya said it had paused share repurchases later in Q1 as a precaution, did not anticipate reducing its dividend at the time of filing, and could reduce or eliminate buybacks or dividends if capital or liquidity came under pressure. First-half cash returned to common shareholders was $445 million, including $406 million of repurchases and $39 million of dividends.
- Other exposures include litigation and regulatory matters, including an SEC inquiry into mutual-fund share-class disclosures. The company estimated reasonably possible losses above amounts accrued of up to approximately $50 million, excluding matters for which it could not estimate a range. It also disclosed approximately $75 million of previously accrued carried interest potentially subject to reversal if fund return hurdles are not maintained.
- Management warned of possible operational disruption from remote work, cybersecurity threats and service-provider or India-based operations. It reported no significant cybersecurity incident or material operational disruption through the filing date.
Important facts for investors to verify
- Closing status, final price adjustments, regulatory approvals and final accounting/equity impact of the Individual Life sale and related reinsurance.
- Whether commercial mortgage forbearances, COVID-related credit allowances, impairments or rating downgrades increase, particularly in hotel, retail and other stressed exposures.
- Trends in adjusted operating earnings, Retirement flows, Investment Management performance fees and assets under management, and Employee Benefits claims and premium retention.
- Actual capital and liquidity after the transaction, including insurance-subsidiary dividend capacity, credit-facility covenant headroom and the sustainability of shareholder returns.
- Developments in the SEC inquiry, other litigation and the potential effect of the upcoming long-duration insurance accounting standard.