Voya Financial, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; unaudited. Unless otherwise noted, financial amounts are in millions of dollars. Comparisons are with Q1 2019.
Business context and reporting period
Voya provides retirement services, investment management, group insurance and supplemental health products through its Retirement, Investment Management and Employee Benefits segments, with other activities in Corporate. Individual Life and certain annuity businesses are classified as discontinued operations or held for sale following the planned sale to Resolution Life. The filing reflects the market disruption and economic uncertainty associated with COVID-19.
Financial performance and position
| Metric | Q1 2020 / March 31, 2020 | Q1 2019 / December 31, 2019 |
|---|---|---|
| Total revenue | $1,685 | $1,822 |
| Income from continuing operations before tax | $44 | $102 |
| Income from continuing operations | $50 | $93 |
| Net income (loss) available to common shareholders | $(98); $(0.75) basic EPS | $64; $0.44 basic EPS |
| Adjusted operating revenue | $1,397 | $1,329 |
| Adjusted operating earnings before tax | $134 | $101 |
| Operating cash flow, continuing operations | $(100) | $59 |
| Cash and cash equivalents, continuing operations | $1,033 | $1,181 |
| Total assets / total shareholders’ equity | $155,732 / $8,265 | $169,051 / $10,230 |
| Long-term debt | $3,042 | $3,042 |
Continuing-operations pre-tax income as a share of revenue was approximately 2.6%, compared with 5.6% in Q1 2019. GAAP revenue and earnings were affected by significant market-related investment and guarantee valuation changes; adjusted operating earnings, a non-GAAP measure, increased year over year.
Net realized capital losses were $233 versus $12 of losses in Q1 2019. Other comprehensive loss after tax was $1,490, primarily reflecting unrealized security losses. These losses contributed to lower shareholders’ equity; total assets also declined, including a decrease in separate-account assets.
Total cash and cash equivalents decreased $160 during the quarter. Cash from operating activities was $(76) including discontinued operations, investing activities used $811, and financing activities provided $727. The company had a $500 undrawn senior unsecured credit facility and reported compliance with debt covenants. Its estimated combined risk-based capital ratio was 455%, above its 400% target.
Material changes versus the prior comparable period
- Adjusted operating earnings before tax rose to $134 from $101. Employee Benefits increased to $61 from $38 and Investment Management to $40 from $34; Retirement declined to $124 from $129. Corporate’s loss narrowed to $91 from $100.
- Continuing-operations pre-tax income fell to $44 from $102, and common shareholders’ results shifted to a loss. The filing attributes pressure in part to higher losses on guaranteed-benefit derivatives and investments, and to a pension-related gain in the prior-year period.
- Fee income rose to $505 from $482 and premiums to $608 from $575; operating expenses fell to $640 from $682. Net investment income increased to $698 from $658.
- Continuing cash from operations moved to an outflow of $100 from an inflow of $59. Common-stock repurchases were $366 in the cash-flow statement; repurchases were paused later in the quarter as a precaution amid market uncertainty.
- Total fixed-maturity unrealized losses increased substantially during the quarter, primarily due to non-credit market factors. The company reported $1,454 of gross unrealized losses at March 31, versus $91 at year-end 2019.
Outlook, risks and unusual items
- COVID-19 outlook: Management said the effects were highly uncertain. It anticipated pressure on fee income as market declines affect average assets under management, and possible impacts from lower interest rates, reduced sales and plan contributions, unemployment, and higher mortality or medical claims. Management estimated that each 1% decline in average daily S&P 500 levels could reduce annual operating earnings by approximately $4–$5. It also estimated a $15 run-rate reduction in Retirement spread income over 2020 from lower rates.
- Segment exposures: Management expected Investment Management fee income and margins to face pressure through the remainder of 2020 and potentially into 2021, while still expecting healthy year-over-year net flows for that segment in 2020. It expected elevated Employee Benefits group-life mortality claims into the second half of 2020 and early 2021, but assessed the likely 2020 impact as significant but not material absent mortality materially above prevailing epidemiological expectations. These are management estimates, not guarantees.
- Capital and liquidity: Management said liquidity was ample for the foreseeable future and no debt maturities were due until 2023. It cautioned that prolonged market stress, impairments, ratings downgrades, or lower subsidiary dividend capacity could require actions to preserve holding-company liquidity, including reducing buybacks or dividends. It did not anticipate a dividend reduction at the time of filing.
- Individual Life Transaction: The sale was expected to close by September 30, 2020, subject to regulatory approvals and other conditions. The stated purchase price was approximately $1.25 billion, subject to closing adjustments. The company recorded an additional estimated loss on sale of $163 after tax in Q1, bringing the cumulative estimated loss to $1,271 after tax. Management estimated a further $250–$750 reduction in shareholders’ equity, excluding AOCI, associated with the reinsurance component at closing; estimates could change with markets, asset selection and transaction structure.
- Other material exposures: The company was processing commercial mortgage borrower forbearance requests on approximately $1.5 billion of unpaid principal; about $200 million had been granted through early May. COVID-19-related portfolio stress scenarios were estimated to reduce excess capital by about $300 million in a moderate case and $600 million in a more severe case, excluding earnings and claims impacts.
- Restructuring and contingencies: Q1 restructuring expense was $19, versus $83 in Q1 2019; expected aggregate organizational restructuring costs were $250–$300 through at least the end of 2020. Additional transaction-related restructuring costs were not yet estimable and could be material. The company estimated reasonably possible litigation and regulatory losses above accrued amounts of up to approximately $75; some matters could not be reasonably estimated. Approximately $79 of previously accrued carried interest could be reversed if fund performance hurdles are not maintained.
- Accounting change: Adoption of the CECL credit-loss standard reduced opening retained earnings by $33, net of tax. Management stated that adoption of the long-duration insurance contract standard could significantly affect shareholders’ equity and future earnings patterns, but the impact had not been estimated.
Most important facts for investors to verify
- Whether the Resolution Life transaction closed on expected terms and how final consideration, sale losses, reinsurance structure and capital effects compared with Q1 estimates.
- Subsequent-quarter investment marks, credit impairments, mortgage-loan forbearance outcomes, and any changes in portfolio ratings or statutory capital.
- Whether lower markets, unemployment, withdrawals and reduced contributions affected fee income, net flows, premiums, claims and segment earnings as management anticipated.
- Holding-company liquidity, insurance-subsidiary dividend capacity, covenant headroom and any changes to the 455% estimated RBC ratio or 400% target.
- Whether repurchases and dividends resumed or changed, and the status of restructuring costs, litigation exposures and carried-interest reversals.