- By Mark Yu
The $6.9 billion asset management company provided its first quarter 2017 results in May and is expected to report second quarter results early next month.
The New York-based Voya Financial (VOYA) registered a 26.4% drop in total revenue to $2.21 billion and losses of $143.5 million compared to $191.6 million in profits in the same period last year.
In review, the financial company recorded $505.6 million in net realized capital losses in the recent quarter compared to $10.7 million in gains in the prior-year period.
According to filings, its net realized capital gains (losses) comprise the difference between the amortized cost of investments and proceeds from sale and redemption, as well as losses incurred due to the credit-related and intent-related, other-than-temporary impairment of investments.
Voya Financial stated that its capital losses were a result of both unfavorable changes in fair value of guaranteed benefit derivatives due to nonperformance risk, and losses from market value changes associated with business reinsured.
"Our first-quarter 2017 results demonstrate a very good start to the year as we continue to execute on our plans and make progress toward achieving our 2018 financial targets.
"During the quarter, we once again generated positive net flows in Retirement, Investment Management and Annuities' fixed indexed and investment-only products. Sales in Employee Benefits and Individual Life also increased compared with the first quarter of 2016. Equally important, our hedge program once again effectively protected our CBVA capital. We also further successfully reduced the size of and risk associated with the CBVA block this quarter, while ensuring we provide options and value to our customers.
"In addition, we repurchased $247 million of our common stock in the first quarter and we entered into an agreement to buyback an additional $150 million of shares.
"We continue to take actions to achieve more profitable growth, better optimize capital, improve margins and create greater value for our customers and our shareholders."
Rodney O. Martin, Jr., chairman and chief executive officer, Voya Financial
Valuations
Voya Financial is undervalued compared to its peers and its book value. According to GuruFocus data, the company had a trailing P/E ratio 11 times vs. industry median 13.4 times, P/B ratio 0.57 times vs. 1, and P/S ratio 0.76 times vs. 6 times.
The company also had trailing dividend yield 0.11% with 0% payout ratio.
Average 2017 sales and earnings-per-share estimates indicated forward multiples 5.5 times and 10.6 times.
Total returns
Voya Financial returned (-)4.39% so far this year compared to the S&P 500 index's 9.49% (Morningstar).
Voya Financial
Voya began as ING U.S., the U.S. operating subsidiary of ING Group, which was spun off in 2013 and established independent financial backing through an initial public offering. The company operated as a subsidiary of ING since 1991.
According to filings, Voya Financial is a premier retirement, investment and insurance company serving the financial needs of approximately 13.6 million individual and institutional customers in the U.S. as of December 2016 (vs. 13 million in December 2015).
The company's vision is to be America's Retirement Company(TM).
Voya Financial offers its products and services through a broad group of financial intermediaries, independent producers, affiliated advisors and dedicated sales specialists throughout the U.S. (1).
Voya Financial provides its principal products and services through five segments: Retirement, Investment Management, Annuities, Individual Life and Employee Benefits. The company also has a Closed Block Variable Annuity (CBVA) segment.
Retirement
Voya Financial's retirement segment sources its market segment leadership positions within the retirement industry from market surveys conducted by LIMRA, an insurance and financial services industry organization, and industry-recognized publications such as Pensions & Investments and InvestmentNews.com.
The retirement segment had assets under management (AUM) or assets under administration (AUA) of $335.8 billion compared to $295.9 billion in prior-year quarter.
Despite the higher AUM, operating revenue in the retirement segment fell 33% year over year to $625.2 million (29% of total unadjusted sales) in the first quarter 2017, and generated operating earnings before tax margin of 24% compared to 11% in first quarter 2016.
Investment Management
The Investment Management segment sources Voya's market segment leadership positions within the investment management industry from Morningstar fund data and industry-recognized publications such as Pension & Investments.
Investment Management AUM rose to $263.4 billion in the recent quarter from $251.7 billion in the last year period.
Revenue in the quarter also rose by 30% year over year to $171 million (8% of total unadjusted sales) and registered a margin of 29% vs. 17% in the same period last year.
Annuities
Annuities segment sources the firm's market segment leadership positions within the annuities industry primarily from LIMRA market surveys. Annuities tracks market segment leadership positions by assets under management.
AUM in annuities rose to $28.14 billion from $27.2 billion year over year.
Revenue, meanwhile, fell (-)0.5% year over year to $301.4 million (14% of total unadjusted sales) and had a margin of 21% vs. 17% in the same period last year.
Individual Life
The Individual Life segment sources the firm's market segment leadership positions within the individual life insurance industry primarily from LIMRA market surveys. Individual Life tracks market segment leadership positions by premiums sold.
AUM in the individual life segment rose to $15.34 billion from $15.24 billion year over year.
Revenue in the segment grew 1% year over year to $630 million (29% of total unadjusted sales) and had a margin of 5% vs. 7% in the prior year period.
Employee Benefits
The Employee Benefits segment sources Voya's market segment leadership positions within the employee benefits industry from LIMRA market surveys and MyHealthguide newsletter rankings (2).
AUM in the employee benefits segment rose to $1.8 billion compared to $1.78 billion year over year.
Revenue in the employee benefits grew 12% year over year to $446.2 million (21% of total unadjusted sales) and registered a margin of 2% vs. 5% in the same period last year.
Sales and profits
In the past two fiscal years, Voya Financial recorded an average revenue decline of (-)1.25%. The firm also had (-)$428 million in losses in its recent fiscal year.
Cash, debt and book value
As of March, Voya Financial had $2.3 billion in cash and cash equivalents and $3.46 billion in debt with a debt-equity ratio of 0.25 times vs. 0.22 times in the same period a year ago. Shareholder equity fell by $1.82 billion while debt increased by $5.3 million year over year.
Goodwill and intangible assets were negligible as part of the company's $217 billion assets. Book value has dropped by 11.6% year over year to $13.9 billion.
Cash flow
In the recent first quarter, Voya Financial recorded cash (out)flow from operations of (-)$49.8 million compared to $656.7 million in the prior year period. Capital expenditures were $10.4 million leaving the firm with (-)$60.2 million in free cash outflow compared to $638.8 million in first quarter 2016.
Despite having negative free cash flow, Voya Financial provided $192.2 million in shareholder payouts (mostly spent on share buybacks) while also allotting $129.7 million in distributions to consolidated investment entities, net any contributions received.
According to filings, the company repurchased about 6.4 million of its shares in the quarter at an average price of $38.67 a share -- 3.2% higher than the share price of $37.48 at the time of writing. In the past three years, Voya Financial allocated 29.6%, on average, of its free cash flow in dividends and share repurchases.
The company also allocated $4.44 billion in acquisition of equity and fixed maturities, mortgage loans and limited partnerships, while receiving proceeds of $4.47 billion from the said investment instruments.
Voya Financial also netted $335.7 million cash outflow in relation to its investment contracts.
Conclusion
Voya Financial demonstrated weak operational results in its recent quarter and its recent years of operations post spin-off from its parent company. Nonetheless, the firm's AUM seemed to be increasing despite the hardships.
The firm's retirement and annuities business, 43% of total unadjusted sales, experienced falling revenue in the recent quarter. As observed, the annuities segment is the most profitable.
Despite the weakening sales, Voya Financial has maintained a strong balance sheet -- lacking leverage and intangible elements -- albeit having demonstrated a decline in book value. In addition, the company exhibited prudent cash flow allocation and conservative payouts to shareholders.
Twelve analysts have an average price target of $46.75 a share -- 24.7% higher than the share price of $37.48 at the time of writing. Applying two-year sales growth and P/S multiple averages followed by a 25% margin indicated a value of $35.8 a share.
Meanwhile, there could be a potential 39% upside should Voya Financial trade 0.7 times its book resulting in $52.2 a share value.
In summary, Voya Financial is a speculative buy with a $46.8 a share target price.
Notes
(1) Company filings:
We believe that we help our customers achieve three essential financial goals, as they plan for, invest for and protect their retirement years.
Plan. Our products enable our customers to save for retirement by establishing investment accounts through their employers or individually
Invest. We provide advisory programs, individual retirement accounts ("IRAs"), fixed annuities, brokerage accounts, mutual funds and accumulation insurance products to help ourcustomers achieve their financial objectives. Our income products such as target date funds, guaranteed income funds, fixed annuities, IRAs, mutual funds and accumulation insurance products enable our customers to meet income needs through retirement and achieve wealth transfer objectives.
Protect. Our specialized retirement and insurance products, such as universal life ("UL"), indexed universal life ("IUL"), variable life, and stable value products, allow our customers to protect against unforeseen life events and mitigate market risk.
(2) Company filings
Stop loss market rankings are derived from MyHealthguide, which does not include most managed healthcare providers in their market positions survey. The MyHealthguide survey is a recurring publication that compiles a ranking of medical stop loss providers and their most recently sourced annual premium data. Employee Benefits tracks market segment leadership positions by new premiums and in-force premiums.
Disclosure: I do not have shares in any of the companies mentioned.
This article first appeared on GuruFocus.
