Not all research is for securities currently held. Any securities for which research is provided herein may be reduced, completely closed out, or not purchased at all without notice of any kind.
March 19, 2016
We’ve owned Voya Financial since its IPO in 2013 and believe it represents an extraordinary opportunity at current prices around $31. Voya Financial is the old U.S. subsidiary of ING, the Dutch insurance company. ING needed a bailout from the Dutch government during the financial crisis. One of the conditions of the bailout was ING had to divest its US operations. So, after renaming the subsidiary Voya, ING sold a stake through an IPO in 2013 and sold off the rest of its stake through a series of secondary offerings in 2013-2015. ING no longer owns shares in Voya.
Voya has been undergoing a transformation for the last several years and management has already made significant progress. Rod Martin joined Voya in 2012 from AIG. At AIG, he ran the life insurance operation and helped to exit several lines of business to improve returns. His mission at Voya has been similar, and he has made significant progress. He has refocused Voya on higher return businesses. He has raised return thresholds in capital intensive businesses. He has also showed a commitment to returning capital to shareholders instead of expanding low return insurance businesses such as term life.
Management has focused on improving returns by reducing capital intensity and cutting costs. At the company’s IPO, management set the goal of improving the company’s return on equity (ROE) from 8.3% in 2012 to 12% to 13% by 2016. One of the main tools Voya’s management has used to improve returns is to change the company’s focus from top-line growth and market share ranking towards measuring risk-adjusted returns, growth in distributable earnings, and sales with above target returns.
Management was able to hit their 2016 ROE goal two years early by posting a 12.1% ROE in 2014. At the company’s 2015 Analyst Meeting, management raised the bar by setting a 2018 ROE target of 13.5% to 14.5%. To hit the 2018 ROE target, management has begun focusing on reducing costs by reducing the complexity of Voya’s operations. We believe this improvement in ROE is important for driving the company’s stock price and valuation higher.
Voya’s valuation is very cheap. If you look at the graph below, you can see Voya currently trades at just under 0.6x book value. For the majority of the time since its IPO, Voya’s stock has traded 80% to 90% of book value. Voya would have to increase 40% just to get back to this valuation range. Voya has steadily increased its book value since coming public through retained earnings and repurchasing stock at a discount to book value. The large step up in book value at the end of 2014 was due to reversing the valuation allowance for its deferred tax asset. In the graph, we see that Voya’s stock price peaked last summer but its book value per share continues to grow.
Source: Company reports, Bloomberg.
As mentioned, Voya management has had a strong commitment to returning capital to shareholders. In less than 3 years since its IPO, Voya‘s management has repurchased 20% of the company’s shares. For example in 2015, the company spent almost $1.5 billion to repurchase 12% of shares. We expect the company to repurchase a similar dollar amount in 2016. With the stock at its current discount to book value, we expect the repurchases this year to help drive book value higher.
We believe as Voya reports increasing returns on capital, continues to run-off of the closed block of variable annuity policies, and continues to repurchase shares that Voya’s stock price will approach its $58 book value.
Disclaimer: The discussion of any security is meant solely as an illustration of our investment and thought process and should NOT be considered as a recommendation or suggestion to buy or sell any securities. Before you make any investment, do your own research and talk to your own financial adviser. Information in this report is received from external sources. Therefore, we can make no guarantee as to the completeness or accuracy of the information provided.