VOYA Continued

Despite reaching a ~8% return on equity and its 3rd year of profitability, Voya Financial (NYSE:VOYA) still trades at the same discount to book (0.7x book) as three years ago. Most of its revenues and income come from fee-based businesses that are recurring and sticky, allowing current purchasers to buy a reasonable business at a great price ~12x ttm earnings or less.

Voya has many positives:

1) Three segments that are well-positioned for future business:

• Retirement Services: 401(k) plans are fee-based and sticky, generating recurring revenue (2/3 of operating income, 2014 10-K ,http://www.sec.gov/Archives/edgar/data/1535929/000119312515069733/d877740d10k.htm , page 120)
• Investment management: a steady business moderately levered to growing financial markets
• Insurance solutions: life insurer that benefits from steadily increasing interest rates

For the full year 2014, operating earnings were ~800mm against a current market cap of ~10bln. (http://www.sec.gov/Archives/edgar/data/1535929/000119312515042830/d867605dex991.htm), the current quarter's earnings were even better at a ~1bln annualized net income.

2) Strong capitalization due to regulation that simultaneously provides potential runoff profits.

Voya's financial leverage (liabilities/equity) at ~15 is the lowest compared to peers such Prudential (PRU, 18), Lincoln National (LNC, 17).


The Closed Block Variable Annuity segment is a pre-financial crisis artifact that due to regulatory pressure is highly hedged and overcapitalized:

(source: 2014 10-k, page 222)

Basically, if the equity markets rally Voya will actually make money while being hedged on the downside; interest rates hedges naturally complement the business as increased rates help the life insurance side of the business while lower ones result in profit for this side of the business.

3) Alignment of incentives: of the insiders who bought in the spin-off/ipo in 2013, many including officers have not sold a share (even after a 100% gain in 3 years). There is little hurry to unload shares.



Risks:

• Market declines: This is a financial company, so overall market declines do impact results in terms of outflows (to cash), declining aum balances. However, given the fee-based nature of the business I believe the business will continue running. It is not a bank, so it is not direct affected by bank runs.
• AUM losses: more for the relatively minor investment management division, outflows from poor performance is possible; retirement services are less so given the sticky nature of institutional retirement programs. It is simply easier to stay put unless there is a significant misstep.

Nonetheless, given the extreme cheapness of the stock even an average business would suffice. A reasonably competitive business such as Voya is a bargain at current prices and in my opinion should trade at or even above book value ~ 1.15x or 75$/share.