Voya Financial, Inc. quarterly report, Q1 FY2014

Voya Financial, Inc. — Q1 2014 Form 10-Q

Reporting period: Three months ended March 31, 2014; balance-sheet comparisons are with December 31, 2013. The company changed its name from ING U.S., Inc. to Voya Financial, Inc. on April 7, 2014. It provides retirement, investment management, annuity, life insurance and employee-benefit products and services. Amounts below are in millions unless stated otherwise.

Financial results and key metrics

Metric	Q1 2014	Q1 2013 / prior balance date
Total revenues	$2,670.9	$1,818.6
Income (loss) before income taxes	$302.3	$(214.3)
Net income (loss)	$271.6	$(225.5)
Net income (loss) attributable to common shareholders	$258.1; diluted EPS $0.98	$(212.0); diluted EPS $(0.92)
Operating earnings before tax, management measure	$231.1	$256.7
Operating cash flow	$786.6	$(28.4)
Cash and cash equivalents	$2,499.8	$2,840.8 at Dec. 31, 2013
Total assets / total shareholders’ equity	$223,510.7 / $16,368.0	$221,023.2 / $15,514.0 at Dec. 31, 2013

• Revenue included net realized capital losses of $190.6, substantially less than the $874.8 loss a year earlier. Net investment income declined 4.4% to $1,145.6; fee income rose 4.5% to $931.8; premiums rose 27.3% to $600.9.
• Total benefits and expenses were $2,368.6 versus $2,032.9. Interest credited and other policyholder benefits increased to $1,358.1 from $1,061.4, including higher Closed Block Variable Annuity (CBVA) reserves.
• Operating earnings before tax declined about 10% to $231.1. This management-defined, non-GAAP measure excludes specified items, including investment and guarantee-hedging effects; it is not a substitute for GAAP earnings.
• Other comprehensive income after tax was $728.4, versus a loss of $257.9, largely reflecting unrealized gains on securities. AOCI ended the quarter at $2,577.5, up from $1,849.1.
• Long-term debt was $3,515.0, essentially unchanged from year-end; no short-term debt was outstanding. The company reported compliance with debt covenants. Total cash declined $341.0 during the quarter, including $1,043.9 of net investing cash outflow and $83.7 of net financing cash outflow.

Material changes and segment performance

• GAAP pretax results improved by $516.6 from a year-earlier loss, mainly because CBVA guarantee and hedge results were less adverse, including a $1,162.4 improvement in CBVA liability-hedge derivative results, and because fair-value effects were less negative. These market-sensitive items make the headline earnings comparison volatile.
• Ongoing-business operating earnings before tax fell to $267.5 from $285.4. Retirement declined to $114.9 from $137.8; Annuities was broadly stable at $54.8; Investment Management rose to $49.8 from $30.1; Individual Life declined to $31.1 from $50.8; and Employee Benefits increased to $16.9 from $12.4.
• Investment Management fee growth reflected higher assets and positive net flows. Total segment net flows were $4,884.2, versus $3,177.5 a year earlier. Employee Benefits sales increased, particularly group stop-loss products; reported loss ratios improved for group life and group stop loss.
• At March 31, total AUM and AUA were $513.8 billion, up from $481.2 billion a year earlier. Retirement AUM and AUA were $342.4 billion; Investment Management AUM and AUA were $260.5 billion. These segment figures include overlap and eliminations, so they should not be summed as independent totals.
• On March 25, ING Group sold shares and Voya repurchased 7.26 million shares for $250.0; ING’s ownership fell to approximately 43%. The company authorized up to $300.0 of repurchases and had $41.1 of authorization remaining at March 31. It paid a $0.01-per-share dividend during the quarter.

Liquidity, outlook, risks and unusual items

• Management identifies product charges, investment income and maturities, contract deposits, debt and borrowing facilities, securities lending and repurchase agreements as liquidity sources. Uses include benefits, expenses, investment purchases, and contract withdrawals and maturities. Parent-company liquidity depends substantially on subsidiary distributions, which are subject to insurance regulation.
• Credit facilities totaled approximately $10.0 billion in stated capacity, with $5.6 billion utilized and $4.4 billion unused at quarter-end. Facilities support collateral and reserve-financing needs as well as general purposes; availability is not equivalent to unrestricted holding-company cash. The revolving agreement was extended to February 2018, and its letter-of-credit limit was reduced to $3.0 billion.
• No formal earnings guidance is presented in the supplied filing text. Management said reinvested fixed-income proceeds in the remainder of 2014 were expected to earn an average 4.25%–4.50%; the general-account portfolio yield was approximately 5.0%. Management also cited an expected long-term return of 8%–9% on certain alternative investments, while noting their income can be volatile.
• Management highlighted persistent low interest rates and possible market volatility as pressures on reinvestment yields, product demand, guarantees, hedging costs and fee revenue. It also cited competition, policyholder lapse and annuitization behavior, and potential changes in tax and retirement policy.
• CBVA hedging is primarily designed to protect regulatory and rating-agency capital, not to eliminate GAAP earnings volatility. Filing sensitivities show that specified market shocks could affect both earnings and capital; actual outcomes may differ due to basis risk, policyholder behavior, market movements and other assumptions.
• Regulators are reviewing captive reinsurance structures, including a Missouri review and pending NAIC proposals. Restrictions or higher requirements could increase reserves or costs, reduce sales, or affect capital. The filing says the impact is uncertain.
• Deferred-tax valuation allowances were approximately $2.8 billion. Management estimated that a Section 382 ownership change could expose $200–$240 of deferred tax assets to potential limitation, while stating that it did not then expect an additional valuation allowance; the estimate remained subject to final calculations and IRS review.
• The company estimated reasonably possible litigation and regulatory losses in excess of accruals of up to approximately $100. A proposed class settlement in an ERISA revenue-sharing case would require an approximately $15 payment and changes to disclosure practices, subject to court approval. Management stated pending matters were not expected to materially affect financial position, but adverse outcomes could affect results or cash flow in a period.
• Other notable items include unfavorable DAC/VOBA unlocking of $19.8, compared with favorable unlocking of $7.3 a year earlier; the quarter’s $3.3 of impairment losses recognized in earnings; and a $690.0 aggregate ordinary dividend declared by principal insurance subsidiaries on May 2, 2014, payable after the quarter-end.

Important facts for investors to verify

• Reconcile GAAP earnings improvement with the weaker operating-earnings measure and assess the sensitivity of results to CBVA reserves, hedges and derivative fair values.
• Review segment-level earnings drivers, especially Retirement and Individual Life declines, DAC/VOBA unlocking, and the sustainability of Investment Management fee growth and flows.
• Assess liquidity and capital at the holding-company and insurance-subsidiary levels, including facility conditions, collateral needs, dividend restrictions and future reserve financing requirements.
• Track captive-reinsurance regulatory developments, the Section 382 tax analysis, litigation exposure and any final approval or terms of the proposed settlement.
• Confirm the effect of ING Group’s reduced ownership, remaining repurchase authorization, the subsequent subsidiary dividends and any later changes to debt, ratings or capital plans.