Voya Financial, Inc. quarterly report, Q2 FY2017

Voya Financial, Inc. — Q2 2017 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2017. Unaudited U.S. GAAP financial statements. Dollar amounts are in millions except per-share data. Voya provides retirement, investment management, annuity, individual life and employee-benefit products, plus a closed-block variable-annuity business.

Financial performance and position

Metric	Q2 2017	Q2 2016	Six months 2017	Six months 2016
Total revenue	$2,588.8	$2,696.0	$4,802.2	$5,705.3
Income before tax	$231.1	$153.1	$71.7	$394.4
Net income attributable to common shareholders	$167.2	$161.5	$23.7	$353.1
Diluted EPS	$0.89	$0.79	$0.12	$1.71
Operating earnings before tax (non-GAAP segment measure)	$184.1	$235.1	$415.2	$404.9

Q2 drivers: Revenue declined 4.0%; common-shareholder net income rose modestly. The increase in pretax income reflected lower prior-year debt-extinguishment losses and improved guarantee/hedging results, but operating earnings fell 21.7%, primarily because of a significant Retirement-segment DAC/VOBA charge.
First-half drivers: Revenue declined 15.8% and common-shareholder net income fell sharply. Net realized capital losses were $699.4 versus $90.6 a year earlier, and CBVA reported a $415.1 pretax loss versus $102.5 income. Operating earnings increased slightly, to $415.2.
Revenue mix: First-half premiums fell to $1,168.7 from $1,678.4, mainly after pension risk-transfer sales ended in 2016 and annuitization premiums declined. Fee income rose to $1,689.0 from $1,652.5; net investment income was $2,297.9 versus $2,269.3.
Cash flow: Six-month operating cash flow was $555.2, down from $1,663.1. Investing activities used $701.7 and financing activities used $196.8. Cash and cash equivalents ended June at $2,567.4, down from $2,910.7 at year-end 2016.
Balance sheet and debt: Total assets were $219.8 billion and shareholders’ equity $14.3 billion at June 30. Assets included $103.0 billion in separate accounts, substantially matched by separate-account liabilities. Short- and long-term debt totaled $3,462.1, including $735.9 classified as current; year-end long-term debt was $3,549.5 with no short-term debt reported. The company had no revolving borrowings and $346.7 of letters of credit under its senior unsecured facility.
Investment and business scale: Total investments were $93.9 billion. Fixed maturities had a fair value of $76.0 billion; gross unrealized losses declined to $345.4 from $739.6 at year-end. Total AUM and AUA reached $516.9 billion, up from $465.8 billion a year earlier.
Shareholder returns: Voya repurchased $622.7 of common shares in the first half and paid $3.8 in dividends; the remaining repurchase authorization was $210.6 at June 30.

Material changes and notable items

During Q2, Voya obtained customer consents to reduce guaranteed minimum interest rates on certain retirement-plan fixed options. The change produced $128.0 of unfavorable DAC/VOBA unlocking in Retirement; total unfavorable unlocking across segments was $109.0 for Q2 and $96.5 for the first half. This materially reduced operating earnings.
Net realized capital losses were driven substantially by derivative fair-value movements, including guaranteed-benefit derivatives and nonperformance-risk effects. These market-sensitive items contributed to the gap between GAAP and operating results.
The CBVA block incurred a first-half loss associated in part with an enhanced surrender-value offer, as well as nonperformance-risk movements and securities-sale results. Voya said the offer reduced block risk and was modestly positive for regulatory and rating-agency capital. A second GMIB offer was planned for Q3.
Investment Management operating earnings improved, supported by higher AUM-related fees and a $28.4 recovery of previously reversed carried interest. $62.8 of previously accrued carried interest remained subject to possible reversal if fund performance hurdles are not maintained.
Voya continued its 2016 restructuring, with $17.3 of first-half expense and $51.1 incurred cumulatively through June. On July 31, it entered a five-year IT-services agreement with expected annualized costs of $70–$90 and approximately $400 total cost; additional restructuring charges were anticipated through 2018.

Outlook, liquidity, risks and contingencies

Interest rates and investment income: Management described rates as low by historical standards and highlighted potential effects on reinvestment yields, product demand, guarantees and capital. The general-account portfolio’s annualized average yield was approximately 5.0% in Q2; management expected reinvested fixed-income proceeds in the remainder of 2017 to yield 3.75%–4.25%.
Efficiency target: Management expected restructuring and the Strategic Investment Program to support at least $100 of annual run-rate cost savings in 2018 and subsequent years. The filing cautions that further restructuring costs were not fully estimable.
Liquidity and refinancing: After quarter-end, Voya issued $400 of 3.125% senior notes due 2024 and planned to use proceeds and cash on hand to redeem $400 of 2018 notes, with redemption scheduled for August 11, 2017. It reported compliance with debt covenants at June 30. Insurance-subsidiary dividend capacity is subject to regulatory restrictions.
Capital and regulation: Voya reported CBVA assets sufficient at the S&P CTE95 standard at June 30. Potential NAIC variable-annuity reserve and capital reforms remained uncertain and could materially affect CBVA capital or captive collateral needs. The DOL fiduciary rule’s future scope and timing were also uncertain; Voya was preparing for the then-applicable January 2018 compliance date and warned of possible sales and cost impacts.
Legal matters: Management estimated aggregate reasonably possible losses in excess of accruals of up to approximately $75.0. It said an adverse outcome could affect results or cash flows in a particular period, although it did not believe pending matters were likely to materially affect financial position.
Other risks: Market volatility, interest and credit spreads, equity performance, policyholder behavior, mortality and morbidity, investment valuations, ratings downgrades and derivative collateral demands could affect earnings, liquidity or capital. A two-notch downgrade of insurance subsidiaries was estimated to increase collateral requirements by $23.8 based on outstanding amounts at June 30.

Important facts for investors to verify

Reconcile the $699.4 first-half realized capital loss and the $415.1 CBVA loss to derivative, nonperformance-risk, surrender-offer and securities-sale effects; assess what is recurring versus market-driven.
Track the effect of the $128.0 guaranteed-rate change and related DAC/VOBA unlocking on Retirement earnings, customer consents and future margins.
Compare operating earnings with GAAP results and review the company’s exclusions, particularly for CBVA, hedging, restructuring and investment gains or losses.
Monitor operating cash flow, debt maturities and refinancing, cash available at the parent, subsidiary dividend restrictions, and the post-quarter 2024-note issuance and 2018-note redemption.
Assess stop-loss claims and loss ratios in Employee Benefits, carried-interest reversals, restructuring costs and whether the stated savings target is achieved.
Follow NAIC variable-annuity reform, DOL fiduciary-rule developments, litigation exposure and any changes in ratings or collateral requirements.