Voya Financial, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Unless noted otherwise, dollar amounts are in millions. Results are unaudited.
Business context and reporting period
Voya provides retirement, investment management, employee benefits and individual life products and services. On June 1, 2018, Venerable acquired subsidiaries VIAC and DSL, disposing of substantially all of Voya’s Closed Block Variable Annuity and Annuities businesses. Those businesses are presented as discontinued operations for all periods, so reported results and balance-sheet totals differ substantially from the prior year.
Key financial metrics
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue | $2,252 | $2,184 | $6,332 | $6,432 |
| Continuing-operations pretax income | $186 | $40 | $448 | $308 |
| Continuing-operations income | $165 | $80 | $378 | $255 |
| Net income attributable to Voya | $142 | $149 | $754 | $173 |
| Diluted EPS from continuing operations | $0.87 | $0.08 | $1.73 | $0.73 |
| Adjusted operating earnings before tax (non-GAAP) | $163 | $43 | $564 | $295 |
Q3 2018 continuing-operations pretax margin was approximately 8.3% of revenue; this is a simple calculation from reported figures. The company reported a $0.01 common dividend per share for the quarter.
- Revenue drivers: Q3 net investment income rose $60 to $855, fee income rose $20 to $704, and premiums rose $17 to $550 year over year. For the nine months, realized capital losses increased to $347 from $164, weighing on reported revenue.
- Cash flow: Nine-month operating cash flow was $1,634, including $1,462 from discontinued operations; continuing-operations operating cash flow was $172, versus $510 in the prior year. Investing cash flow was $51; financing cash outflow was $1,612. Cash and equivalents ended at $1,789.
- Balance sheet and debt: Total assets were $165,036 and shareholders’ equity $9,200 at September 30, versus $222,532 and $11,039 at year-end 2017. The prior-year assets included $59,052 held for sale. Long-term debt was $3,459; short-term debt was $1. The $750 revolving credit sublimit had no borrowings outstanding, and the company reported compliance with debt covenants.
- Investment and liquidity indicators: General-account investments totaled $63,873. Fixed-income gross unrealized losses rose to $856 from $243 at year-end, primarily due to higher interest rates. Cash and short-term investments are not a complete measure of insurance-subsidiary liquidity; assets are subject to restrictions and policyholder obligations.
Material changes versus the prior comparable period
- Q3 continuing-operations pretax income increased to $186 from $40; adjusted operating pretax earnings increased to $163 from $43. Management cited higher alternative investment income, favorable Retirement assumption updates, lower DAC/VOBA amortization and transaction-related transition-services revenue, among other factors.
- Nine-month adjusted operating pretax earnings rose to $564 from $295. Retirement improved to $531 from $288; Investment Management declined to $161 from $188; Employee Benefits improved to $117 from $96; Individual Life moved to a $76 loss from $28 income; and Corporate’s loss narrowed to $169 from $305.
- Q3 2017 included $134 of discontinued-operations income, while Q3 2018 had none. Nine-month 2018 discontinued-operations income was $457, including a favorable $505 after-tax adjustment to the estimated sale loss. Accordingly, total net income comparisons are affected by the divestiture and are not directly comparable.
- Accumulated other comprehensive income fell to $777 from $2,731 at year-end, reflecting large unrealized investment losses, particularly on fixed maturities. The company repurchased $750 of common stock during the first nine months and issued preferred stock for net proceeds of $319.
Outlook, management commentary, risks and unusual items
- Business actions: On October 30, Voya announced it would stop selling new Individual Life business effective December 31, 2018, while continuing to manage in-force policies as a separate segment. It expects a $10–$15 restructuring charge in Q4 2018 and further 2019 costs that cannot yet be estimated.
- Restructuring: Continuing-operations organizational restructuring expenses were $13 in Q3 and $25 for nine months. The company expects further costs through at least 2020; amounts are uncertain and could be material. Its 2016 restructuring program also carries expected additional costs of $10–$20.
- Assumptions and earnings quality: The annual actuarial assumption review reduced Q3 adjusted operating pretax earnings by $153, versus $189 in Q3 2017. Individual Life’s Q3 adjusted operating loss was $134, including $207 of unfavorable annual assumption impacts, mainly related to expected reinsurance premium increases. Net mortality and policyholder behavior also affect estimates and results.
- Interest rates and markets: Management noted gradual Federal Reserve tightening and a flatter yield curve. It expects reinvestment yields on 2018 fixed-income purchases to be below the existing portfolio yield absent further material yield changes. Persistently low rates or rapidly rising rates, market volatility, investment spreads, policyholder lapses and hedging costs may affect earnings, reserves, sales and liquidity. Management’s stated long-term expected return on certain alternative investments is 8%–9%, not a near-term earnings forecast.
- Transaction and financing: The estimated after-tax loss on the sale stood at $1,918 at September 30 and may change following buyer review of closing capital and book-value calculations. October debt tender/redemption transactions are expected to cause an approximately $37 Q4 2018 debt-extinguishment loss. The company issued $350 principal of 2048 junior subordinated notes and $319 net proceeds of Series A preferred stock.
- Contingencies: The company estimated reasonably possible litigation and regulatory losses above accruals of up to approximately $50; it could not estimate a range for some matters. It faced ERISA fee, stop-loss coverage and cost-of-insurance lawsuits, among others, and stated it intends to defend them. Approximately $76 of previously accrued carried interest could be partly or fully reversed if fund hurdles are not maintained.
- Other risks: Credit-rating downgrades could increase borrowing costs or collateral needs and affect product competitiveness. A two-notch downgrade of insurance subsidiaries was estimated to add $18 of collateral requirements based on balances at quarter-end. The filing also identifies exposure to mortality, morbidity, persistency, credit, interest-rate and equity-market risks. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Most important facts an investor should verify
- Reconcile reported GAAP income with adjusted operating earnings, and distinguish continuing operations from discontinued operations and the $505 sale-loss adjustment.
- Review the final purchase-price and closing-capital adjustments for the divested annuity businesses, including any resulting change to the $1,918 estimated after-tax sale loss.
- Assess whether Individual Life’s unfavorable assumptions and mortality experience persist, and track the planned sales exit and related restructuring costs.
- Evaluate the quality and sustainability of cash generation, particularly continuing-operations operating cash flow of $172, separately from discontinued-operations cash flow.
- Monitor fixed-income unrealized losses, interest-rate sensitivity, credit quality, collateral requirements, debt transactions and the effect of share repurchases and preferred dividends on capital.
- Track litigation developments, potential losses beyond accruals, carried-interest reversal exposure and any additional restructuring or transition-service costs.