Voya Financial, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Unaudited U.S. GAAP results; dollar amounts are in millions unless stated otherwise. Voya provides retirement, investment management, employee benefits, and related financial services. Results reflect continuing operations separately from businesses classified as discontinued operations.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue from continuing operations | $2,071 | $1,875 | $5,419 | $5,666 |
| Income (loss) from continuing operations before tax | $(145) | $149 | $(149) | $494 |
| Income (loss) from continuing operations | $(73) | $144 | $(76) | $447 |
| Discontinued operations, net of tax | $(140) | $(4) | $(361) | $18 |
| Net income (loss) attributable to common shareholders | $(333) | $107 | $(502) | $397 |
| Basic and diluted EPS | $(2.64) | $0.77 basic | $(3.93) | $2.77 basic |
| Adjusted operating earnings before tax (non-GAAP) | $40 | $122 | $190 | $413 |
| Adjusted operating revenues (non-GAAP) | $1,434 | $1,365 | $4,056 | $4,089 |
Q3 revenue growth was supported by higher investment income, premiums and fee income, while net realized investment losses, higher benefits and a substantial increase in DAC/VOBA amortization weighed on GAAP results. Adjusted operating earnings declined year over year, principally because of unfavorable assumption updates and DAC unlocking, higher benefit costs, and lower transition-services revenue. No consolidated operating margin is presented in the supplied filing text.
Segments and operating measures
- Retirement: Adjusted pretax operating earnings were $25 in Q3 versus $117 a year earlier, and $185 for nine months versus $426. The Q3 annual assumption review drove $172 of unfavorable DAC/VOBA and other-intangible unlocking in the segment.
- Investment Management: Adjusted pretax operating earnings were $47 in Q3 versus $46 and $106 for nine months versus $121. Management cited stronger Q3 investment-capital returns, but weaker year-to-date investment-capital returns.
- Employee Benefits: Adjusted pretax operating earnings were $56 in Q3 versus $57 and $154 for nine months versus $144. Premiums grew, while COVID-related group-life claims and business growth increased benefits and expenses.
- Corporate: Adjusted pretax operating loss was $88 in Q3 versus $98 and $254 for nine months versus $278, with lower stranded costs and favorable compensation and pension items partly offset by lower transition-services revenue.
These adjusted measures are non-GAAP measures and exclude specified items; they do not replace GAAP results. Voya reported $657.5 billion in AUM and AUA at September 30, 2020, compared with $568.3 billion a year earlier.
Cash flow, balance sheet and debt
- For the first nine months, operating cash flow was $1,045 from continuing operations and $(257) from discontinued operations, or $788 total, versus $851 total in 2019. Investing activities used $1,825; financing activities provided $1,114.
- Cash and cash equivalents at September 30 were $1,549 including discontinued operations; continuing-operations cash was $1,052. Total assets were $171,466, including $20,180 held for sale. Total shareholders’ equity was $10,645.
- Long-term debt was $3,043, little changed from $3,042 at year-end 2019. The $500 senior unsecured credit facility had no borrowings or letters of credit outstanding; the company reported compliance with debt covenants.
- Estimated combined risk-based capital ratio was 455%, above management’s 400% target. Management said capital remained strong and, absent another significant and prolonged market shock, it did not anticipate a material effect on balance-sheet, statutory-capital or liquidity position.
- Voya repurchased approximately $400 of common shares during the first nine months and paused repurchases later in Q1 as a precaution. It reported $284 of remaining authorization at September 30; the authorization was scheduled to expire December 31, 2020 unless extended. Management did not anticipate reducing the dividend.
Material changes, outlook and risks
- Individual Life Transaction: Voya agreed to sell specified subsidiaries and businesses to Resolution Life US for approximately $1.25 billion, subject to closing adjustments and regulatory approvals; closing was expected by January 4, 2021. The consideration includes approximately $902 cash, a $225 equity interest in Resolution Life Group Holdings, and $123 principal amount of surplus notes retained by Voya. The transaction also includes reinsurance of certain policies; reserves expected to be ceded were approximately $10.3 billion based on September 30 values.
- The estimated after-tax loss on sale was $1,339 at September 30, including an additional $231 loss recorded during the first nine months. The estimate must be remeasured through closing and may change with market conditions, business performance, transaction terms and other factors. Management estimated a $0–$500 net reduction in shareholders’ equity, excluding AOCI, from the transaction and expected to be toward the lower end. It also estimated future annual after-tax amortization of transaction-related deferred intangibles of $100–$150.
- Assumption changes: The Q3 annual review produced $383 of unfavorable unlocking across continuing and discontinued operations; $165 affected adjusted operating earnings before tax. Separate loss recognition was $171 in continuing operations and $26 in discontinued operations. Changes were driven principally by lower long-term interest and equity-return assumptions.
- COVID-19: Management identified potential pressure on fee income, investment income, claims, credit quality, capital and sales. Group-life mortality claims were expected to remain elevated through 2020 and into early 2021. Voya estimated Employee Benefits operating earnings could decline $1–$2 for each 10,000 incremental U.S. deaths and Individual Life earnings $2.5–$5, pending sale. Management’s hypothetical capital stress scenarios were $300 and $450 through year-end 2021; actual effects could be worse.
- Interest rates: Management expected reinvestment yields below the existing portfolio yield in the near term. It estimated a 100-basis-point change in corporate bond yields could increase or decrease adjusted operating earnings by approximately $10–$60 over three years, depending on persistence.
- Credit and portfolio risks: Commercial mortgage loan allowance for credit losses was $55 at September 30; approximately 8% of outstanding principal had payment forbearance, and management continued to observe hotel-sector distress. Fixed maturities in sectors considered especially exposed to COVID-19 totaled $6.36 billion, or 13.8% of the portfolio. The estimated weighted-average mortgage loan LTV was 45.1% and DSC was 2.2x.
- Other matters: Management estimated reasonably possible litigation and regulatory losses above amounts accrued of up to approximately $50. An SEC inquiry concerns mutual-fund share-class disclosures and 12b-1 fees. Approximately $81 of previously accrued carried interest could be subject to partial or full reversal if fund-performance hurdles are not maintained. Additional restructuring costs tied to the Individual Life Transaction were not yet estimable and could be material.
- COVID-19 effects, investment-market movements, interest rates, credit losses, mortality and morbidity, lapse behavior, regulation, transaction approvals and closing terms were identified as factors that could cause results to differ from expectations. The filing provides no formal earnings guidance.
Important facts for investors to verify
- Whether the Individual Life Transaction closes on the expected timeline and final purchase-price, reinsurance, collateral and equity impacts.
- How much of the reported loss reflects recurring operations versus assumption updates, investment marks, discontinued operations and transaction-related items; reconcile GAAP results with non-GAAP adjusted measures.
- Trends in commercial mortgage delinquencies, forbearance, hotel exposure, credit-loss allowances and fixed-income impairments or rating downgrades.
- Actual COVID-related claims, fee and premium trends, and the impact of persistently low interest rates on investment spreads, capital and liquidity.
- Insurance-subsidiary dividend capacity and the status of the facility-related net-worth waiver noted for a total-return swap; confirm that credit-facility availability and transaction-related guarantees remain intact.
- Developments in the SEC inquiry, other litigation and the potential reversal of carried interest, as well as the cost and execution of restructuring plans.