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VOYA FINANCIAL : Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollar amounts in millions, unless otherwise stated) (form 10-Q)

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11/01/2017 | 09:23pm CET

For the purposes of the discussion in this Quarterly Report on Form 10-Q, the term Voya Financial, Inc. refers to Voya Financial, Inc. and the terms "Company," "we," "our," and "us" refer to Voya Financial, Inc. and its subsidiaries.

The following discussion and analysis presents a review of our consolidated results of operations for the three and nine months ended September 30, 2017 and 2016 and financial condition as of September 30, 2017 and December 31, 2016. This item should be read in its entirety and in conjunction with the Condensed Consolidated Financial Statements and related notes contained in Part I, Item 1. of this Quarterly Report on Form 10-Q, as well as "Management's Discussion and Analysis of Financial Condition and Results of Operations" section contained in our Annual Report on Form 10-K for the year ended December 31, 2016 ("Annual Report on Form 10-K").

In addition to historical data, this discussion contains forward-looking statements about our business, operations and financial performance based on current expectations that involve risks, uncertainties and assumptions. Actual results may differ materially from those discussed in the forward-looking statements as a result of various factors. See the Note Concerning Forward-Looking Statements. Investors are directed to consider the risks and uncertainties discussed in Part II, Item 1A. of this Quarterly Report on Form 10-Q, as well as in other documents we have filed with the Securities and Exchange Commission ("SEC").

Overview

We provide our principal products and services through five segments: Retirement, Investment Management, Annuities, Individual Life and Employee Benefits. In addition, we have a Closed Block Variable Annuity ("CBVA") segment. Activities not directly related to our segments such as our corporate operations, corporate level assets and financial obligations are included in Corporate. Effective the fourth quarter of 2016, certain activities related to a run-off block of guaranteed investment contracts ("GICs") and funding agreements as well as residual activity on closed or divested business, including our group reinsurance and individual reinsurance businesses, are also included in Corporate.

Beginning in the fourth quarter of 2016, we accelerated the run-off of a block of GICs and funding agreements including the termination of certain Federal Home Loan Bank ("FHLB") funding agreements. The last GIC and funding agreements supporting this block matured or were terminated by June 30, 2017.

Trends and Uncertainties
Throughout this Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A"), we discuss a number of trends and uncertainties
that we believe may materially affect our future liquidity, financial condition
or results of operations. Where these trends or uncertainties are specific to a
particular aspect of our business, we often include such a discussion under the
relevant caption of this MD&A, as part of our broader analysis of that area of
our business. In addition, the following factors represent some of the key
general trends and uncertainties that have influenced the development of our
business and our historical financial performance and that we believe will
continue to influence our business and financial performance in the future.
Market Conditions
While extraordinary monetary accommodation has suppressed volatility in rate,
credit and domestic equity markets for an extended period, global capital
markets may now be past peak accommodation as the U.S. Federal Reserve continues
its gradual pace of policy normalization. As global monetary policy becomes less
accommodative, an increase in market volatility could affect our business,
including through effects on the yields we earn on invested assets, changes in
required reserves and capital, and fluctuations in the value of our assets under
management ("AUM") or administration ("AUA"). These effects could be exacerbated
by uncertainty about future fiscal policy, changes in tax policy, the scope of
potential deregulation, and levels of global trade. In the short- to
medium-term, the potential for increased volatility, coupled with prevailing
interest rates below historical averages, can pressure sales and reduce demand
as consumers hesitate to make financial decisions. In addition, this environment
could make it difficult to manufacture products that are consistently both
attractive to customers and profitable. Financial performance can be adversely
affected by market volatility as fees driven by AUM fluctuate, hedging costs
increase and revenue declines due to reduced sales and increased outflows. As a
company with strong retirement, investment management and insurance
capabilities, however, we believe the market conditions noted above may, over
the long term, enhance the attractiveness of our broad portfolio of products and
services. We will need to continue to monitor the behavior of our customers and
other factors, including mortality rates, morbidity rates, annuitization rates
and lapse rates, which adjust in response to changes in market conditions in
order to ensure that our products and services remain attractive as well as
profitable. For additional information on our sensitivity to interest rates

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and equity market prices, see Quantitative and Qualitative Disclosures About Market Risk in Part I, Item 3. of this Quarterly Report on Form 10-Q. Interest Rate Environment

While interest rates moved higher after the 2016 presidential election, 2017 has been characterized by a lower and notably flatter yield curve. Front end rates have been driven higher by 25 basis points Fed Funds rate increases in both March and June. The longer-end of the yield curve has remained subdued by domestic policy uncertainty and stubbornly low inflation expectations. Late in the third quarter, we saw a modest increase in rates and a steepening of the term structure of interest rates driven by solid global growth data, renewed hopes of stimulative tax reform, and the Fed's fledgling efforts to unwind extraordinary monetary accommodation through a measured reduction of their balance sheet. The Federal Reserve has begun execution of its plan for gradually reducing its holdings of Treasury and agency securities. The timing and impact of any further increases in the Federal Funds rate, or deviations in the expected pace of Federal Reserve balance sheet normalization are uncertain and dependent on the Federal Reserve Board's assessment of economic growth, labor market developments, inflation outlook, fiscal policy developments and other risks that will impact the level and volatility of rates.

The continued low interest rate environment has affected, and may continue to affect, the demand for our products in various ways. While interest rates continue to remain low by historical standards, we may experience lower sales and reduced demand as it is more difficult to manufacture products that are consistently attractive to customers and meet our economic targets. Our financial performance may be adversely affected by the current low interest rate environment, or by rapidly increasing rates.

We believe the interest rate environment will continue to influence our business and financial performance in the future for several reasons, including the following:

•      Our general account investment portfolio, which was approximately $93.8
       billion as of September 30, 2017, consists predominantly of fixed income
       investments and had an annualized average yield of approximately 4.8% in
       the third quarter of 2017. In the near term and absent further material
       change in yields available on fixed income investments, we expect the
       yield we earn on new investments will be lower than the yields we earn on
       maturing investments, which were generally purchased in environments where
       interest rates were higher than current levels. We currently anticipate
       that proceeds that are reinvested in fixed income investments in the
       remainder of 2017 will earn an average yield in the range of 3.75% to
       4.25%. If interest rates were to rise, we expect the yield on our new
       money investments would also rise and gradually converge toward the yield
       of those maturing assets. In addition, while less material to financial
       results than new money investment rates, movements in prevailing interest
       rates also influence the prices of fixed income investments that we sell
       on the secondary market rather than holding until maturity or repayment,
       with rising interest rates generally leading to lower prices in the
       secondary market, and falling interest rates generally leading to higher
       prices.



•      Certain of our products pay guaranteed minimum rates. For example, fixed
       accounts and a portion of the stable value accounts included within
       defined contribution retirement plans, universal life ("UL") policies and
       individual fixed annuities include guaranteed minimum credited rates. We
       are required to pay these guaranteed minimum rates even if earnings on our
       investment portfolio decline, with the resulting investment margin
       compression negatively impacting earnings. In addition, we expect more
       policyholders to hold policies (lower lapses) with comparatively high
       guaranteed rates longer in a low interest rate environment. Conversely, a
       rise in average yield on our investment portfolio would positively impact
       earnings if the average interest rate we pay on our products does not rise
       correspondingly. Similarly, we expect policyholders would be less likely
       to hold policies (higher lapses) with existing guarantees as interest
       rates rise.



•      Our CBVA segment provides certain guaranteed minimum benefits. A prolonged
       low interest rate environment may subject us to increased hedging costs or
       an increase in the amount of statutory reserves that our insurance
       subsidiaries are required to hold for these variable annuity guarantees,
       lowering their statutory surplus, which would adversely affect their
       ability to pay dividends to us. A prolonged low interest rate environment
       may also affect the perceived value of guaranteed minimum income benefits,
       which in turn may lead to a higher rate of annuitization of those products
       over time.


For additional information on the impact of the interest rate environment, see Risk Factors - The level of interest rates may adversely affect our profitability, particularly in the event of a continuation of the current low interest rate environment or a period of rapidly increasing interest rates in Part I, Item 1A. of our Annual Report on Form 10-K. Also, for additional information on our sensitivity to interest rates, see Quantitative and Qualitative Disclosures About Market Risk in Part I, Item 3. of this Quarterly Report on Form 10-Q.


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The Impact of our CBVA Segment on U.S. GAAP Earnings

We manage our CBVA segment to focus on protecting regulatory and rating agency capital through risk management and hedging. Because U.S. GAAP accounting differs from the methods used to determine regulatory and rating agency capital measures, our CBVA segment tends to create earnings volatility in our U.S. GAAP financial statements. In particular, the amount of capital we have allocated to our CBVA segment for U.S. GAAP purposes includes certain intangible assets that are subject to periodic impairment testing and loss recognition, and U.S. GAAP reserves in our CBVA segment are in some cases based on assumptions that differ from those we use to determine statutory and rating agency capital. To the extent that macroeconomic conditions adversely deviate from our assumptions, or if market conditions or other developments require us to write-down these intangible assets or increase U.S. GAAP reserves, we may recognize U.S. GAAP losses in our CBVA segment. For additional information on our hedging program within the CBVA segment, see Quantitative and Qualitative Disclosures About Market Risk in Part I, Item 3. of this Quarterly Report on Form 10-Q.

Seasonality and Other Matters

Our business results can vary from quarter to quarter as a result of seasonal factors. For all of our segments, the first quarter of each year typically has elevated operating expenses, reflecting higher payroll taxes, equity compensation grants, and certain other expenses that tend to be concentrated in the first quarters. Additionally, alternative investment income tends to be lower in the first quarters. Other seasonal factors that affect our business include:

Retirement

•      The first quarters tend to have the highest level of recurring deposits in
       Corporate Markets, due to the increase in participant contributions from
       the receipt of annual bonus award payments or annual lump sum matches and
       profit sharing contributions made by many employers. Corporate Market
       withdrawals also tend to increase in the first quarters as departing
       sponsors change providers at the start of a new year.



•      In the third quarters, education tax-exempt markets typically have the
       lowest recurring deposits, due to the timing of vacation schedules in the
       academic calendar.



•      The fourth quarters tend to have the highest level of single/transfer
       deposits due to new Corporate Market plan sales as sponsors transfer from
       other providers when contracts expire at the fiscal or calendar year-end.
       Recurring deposits in the Corporate Market may be lower in the fourth
       quarters as higher paid participants scale back or halt their
       contributions upon reaching the annual maximums allowed for the year.
       Finally, Corporate Market withdrawals tend to increase in the fourth
       quarters, as in the first quarters, due to departing sponsors.


Investment Management

•      In the fourth quarters, performance fees are typically higher due to
       certain performance fees being associated with calendar-year performance
       against established benchmarks and hurdle rates.


Individual Life

•      The fourth quarters tend to have the highest levels of universal life
       insurance sales. This seasonal pattern is typical for the industry.



•      The first and fourth quarters tend to have the highest levels of net
       underwriting income.


Employee Benefits

•      The first quarters tend to have the highest Group Life loss ratio. Sales
       for Group Life and Stop Loss also tend to be the highest in the first
       quarters, as most of our contracts have January start dates in alignment
       with the start of our clients' fiscal years.



•      The third quarters tend to have the second highest Group Life and Stop
       Loss sales, as a large number of our contracts have July start dates in
       alignment with the start of our clients' fiscal years.




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In addition to these seasonal factors, our results are impacted by the annual review of assumptions related to future policy benefits and deferred policy acquisition costs ("DAC"), value of business acquired ("VOBA") (collectively, "DAC/VOBA") and other intangibles, which we generally complete in the third quarter of each year, and annual remeasurement related to our employee benefit plans, which we generally complete in the fourth quarter of each year.

Carried Interest

Net investment income and net realized gains (losses), within our Investment Management segment, includes, for this and previous periods performance fees related to sponsored private equity funds ("carried interest") that are subject to later reversal based on subsequent fund performance, to the extent that cumulative rates of investment return fall below specified investment hurdle rates. Should the market value of a portfolio increase in future periods, reversals of carried interest could be fully or partially recovered. For the three months ended September 30, 2017, our carried interest total net results were a gain of $0.8 million, including the reversal of $2.0 million in previously accrued carried interest for one private equity fund. For the nine months ended September 30, 2017, our carried interest total net results were a gain of $32.6 million, including the recovery of $26.4 million of previously accrued carried interest for one private equity fund. For the three and nine months ended September 30, 2016, our carried interest total net results were a gain of $1.3 million and a loss of $26.7 million, respectively, including the reversal of approximately $30.2 million in previously accrued carried interest for the nine months ended September 30, 2016 related to a private equity fund which experienced significant declines in the market value of its investment portfolio. No such amounts for this private equity fund were reversed for the three months ended September 30, 2016. As of September 30, 2017, approximately $63.6 million of previously accrued carried interest would be subject to full or partial reversal in future periods if cumulative fund performance hurdle rates are not maintained throughout the remaining life of the funds.

Restructuring

In 2016, we began implementing a series of initiatives designed to make us a simpler, more agile company able to deliver an enhanced customer experience ("2016 Restructuring"). We expect that these initiatives, combined with the impact of the Strategic Investment Program, will allow us to increase our annual run rate cost savings target to at least $100 million in 2018 and subsequent years. These initiatives include an increasing emphasis on less capital-intensive products and the achievement of operational synergies from the combination of our Annuities and Individual Life businesses.

For the three and nine months ended September 30, 2017, these initiatives resulted in restructuring expenses of $48.4 million and $65.7 million, which are reflected in Operating expenses in the Condensed Consolidated Statements of Operations, but excluded from Operating earnings before income taxes. These expenses are classified as a component of Other adjustments to operating earnings and consequently are not included in the operating results of our segments.

On July 31, 2017, we executed a 5-year information technology services agreement with a third-party service provider at an expected annualized cost of $70 - $90 million per year, with a total cumulative 5-year cost of approximately $400 million. Included in these costs are approximately $35 million of transition costs. This initiative, which is a component of our 2016 Restructuring program, improves expense efficiency and upgrades our technology capabilities. Entry into this agreement resulted in severance, asset write-off, transition and other implementation costs. Consequently, in addition to the costs incurred during the third quarter of 2017, which are included in the amounts disclosed in the previous paragraph, we will incur additional restructuring expenses of approximately $15 - $20 million in the fourth quarter of 2017. Beyond 2017, we anticipate additional restructuring expenses related to this initiative of approximately $25 - $30 million for the year ended December 31, 2018 and an immaterial amount of restructuring expenses thereafter. The restructuring expenses to be incurred in the fourth quarter of 2017 and for the year ended December 31, 2018 will mainly reflect the transition costs to implement this information technology services agreement as all anticipated asset write-off costs were incurred in the third quarter of 2017.

In addition to the restructuring costs incurred above, the reduction in employees from the execution of the contract described above casued the aggregate reduction in employees under our 2016 Restructuring program to trigger an immaterial curtailment and related remeasurement of our qualified defined benefit pension plan and active non-qualified defined benefit plan.

As we develop and approve additional restructuring plans, we will incur additional restructuring expenses in one or more periods through the end of 2018. These costs, which include severance and other costs, cannot currently be estimated but could be material and are not reflected in our run-rate cost savings estimates for 2018.

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Operating Measures

This MD&A includes a discussion of Operating earnings before income taxes and Operating revenues, each of which is a measure used by management to evaluate segment performance. We believe that Operating earnings before income taxes provides a meaningful measure of our business performance and enhances the understanding of our financial results by focusing on the operating performance and trends of the underlying business segments and excluding items that tend to be highly variable from period to period based on capital market conditions or other factors. Operating earnings before income taxes does not replace Net income (loss) as the U.S. GAAP measure of our consolidated results of operations. Therefore, we believe that it is useful to evaluate both Net income (loss) and Operating earnings before income taxes when reviewing our financial and operating performance. See the Segments Note in our Condensed Consolidated Financial Statements in Part I, Item 1. of this Quarterly Report on Form 10-Q for a description of the adjustments made to reconcile Income (loss) before income taxes to Total operating earnings before income taxes and the adjustments made to reconcile Total revenues to Total operating revenues.

© Edgar Online, source Glimpses

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EBIT 2017 769 M
Net income 2017 321 M
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Average target price 48,4 $
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NameTitle
Rodney Owen Martin Chairman & Chief Executive Officer
Alain M. Karaoglan Chief Operating Officer & Executive Vice President
Michael S. Smith Chief Financial Officer
Maggie Parent EVP-Technology, Innovation & Operations
Santhosh Keshavan Chief Information Officer
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