Voya Financial, Inc.

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

Voya Financial, Inc. is a financial services company focused on providing a diverse range of retirement, investment, and insurance solutions primarily for U.S. employees, institutions and individuals.

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The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Voya’s Moat: 2 / 5.

Voya’s moat rating is 2 out of 5, indicating it has some competitive advantages, but they are neither particularly strong nor durable. It struggles with switching costs and network effects.

Intangible Assets: While Voya does have brand recognition in the retirement planning industry, its brand power isn’t as dominant or differentiated as those in other sectors. Their brand may help in customer acquisition, but it does not have strong pricing power or customer stickiness. They have built a fairly robust customer data base, this could be a small advantage in providing the most suitable products to their clients, but does not have the effect needed to create a durable moat.
Switching Costs: The switching costs for customers are relatively low, because the average customer has an account at a bank for around six to seven years. It is a more difficult process than switching a grocery store provider, but still an easy thing to do with enough incentive. This reduces the hold Voya has on its customers.
Network Effects: This is a market where network effects are not too visible. The company doesn’t directly benefit from an increased user base. While they do acquire more clients by attracting more financial advisors, that does not imply a network-related benefit. They are not a platform that generates value by increasing its customer base.
Cost Advantage: While Voya focuses on operational efficiencies, there’s no evidence of structural cost advantages stemming from processes, location, scale or unique assets, that are tough for competitors to match.

Risks to the Moat and Business Resilience:

Voya faces several risks that could erode its moat and affect its resilience:

Regulatory Changes: The financial industry is susceptible to swift and dramatic regulatory changes. Changes in laws and regulations can significantly affect operating practices, capital requirements, and profitability and could reduce returns on invested capital.
Interest Rate Risk: Voya’s reliance on stable interest rates, especially when paired with their investment policies can make the company very susceptible to interest rate fluctuation, or an environment with volatile rates.
Economic Downturns: Market volatility and economic downturns can significantly reduce the returns generated by their investments. Also, with their insurance products, increased unemployment and economic stress may limit sales, and increase defaults.
Competitive Pressures: The financial sector is intensely competitive with low barriers to entry. New entrants with better technology or service quality may diminish the company’s ability to retain clients, and increase pressure to lower pricing.
Technological Disruption: Rapid technological innovation could disrupt the company’s current business model and the need to adapt to these changes, could increase capital expenditure requirements, and increase risk of investment failures.
Brand Vulnerability: Brand strength isn’t always a guarantee. Negative PR or a major scandal could negatively impact the brand’s reputation and value, reducing market share and pricing power. The company also spends large amounts of money to maintain its brand and it can quickly erode.

Despite these risks, Voya has shown some resilience. Their diverse businesses can potentially help in the short-term, while it is undergoing the volatility. Their management has been trying to focus on areas that they can have an edge over their peers, which could result in value-add over the long run. The company has also been reducing its sensitivity to interest rates and its exposure to credit. Also, while they have been restructuring their operating procedures, they have also been trying to maintain a solid financial position. They had a strong 2023 and beat the consensus estimates, it should be seen how this trend would continue to determine their true business resilience.

Voya’s Business Description:

Voya operates through three main segments: Wealth Solutions, Health Solutions, and Investment Management.

Wealth Solutions: This segment primarily focuses on providing retirement and investment solutions. This segment contributes the most to the overall revenue, and offers a wide range of products designed to help individuals plan and save for retirement, including defined contribution plans, IRAs, and annuities. This is a very volatile market segment, as it is highly dependent on the market itself.
Health Solutions: This segment provides health and insurance products primarily for employers, such as employee benefits, health and life insurance, disability and absence management plans, stop-loss insurance, and risk-management services. These are usually long-term contracts, so this is a much more stable revenue generation, relative to wealth solutions, as they are locked-in for longer periods. This business also creates a high degree of switching costs.
Investment Management: This segment provides investment strategies across a range of asset classes, including equity, fixed income, and real estate. Their clients include both institutions and individual investors. This has a mixed bag of moats, as some segments are very attractive in creating moats, while some are in a very commodity business.

Voya has been focusing on these sectors and the performance results can vary depending on each part.

Financial Performance Analysis: Looking at the past years data and the latest earnings reports:

Total Revenues: The total revenues have been experiencing high volatility and can be seen as dependent on the overall financial market conditions. Voya’s revenues are down by 6.8% YoY.
Net Income: The net income has been volatile, as well, with the latest quarter being negative. They had a great 2023, so seeing how they can maintain those returns is important for this company. They posted a net income of $157 million, but had a loss in a previous quarter this year, 2023.
Adjusted operating earnings: The adjusted operating earnings were at $118 million, which is a 57% decline YoY. They had a good 2023 and it would be important to see if they can manage to achieve those levels again.
Return on Invested Capital (ROIC): The ROIC has been inconsistent over the past years. They do not explicitly state the ROIC, however, the earnings compared to the capital allocation suggests there could be wide difference in different industries. From 2004 to 2008, it decreased by 4.7 percentage points, and decreased to 11.9 percent in 2008. That was caused by their expansion in a less profitable segment. It did slightly improve in 2008 after their acquisition of Scottish & Newcastle. Since then, the rate of ROIC has been very erratic and varied in each year. The average for 2023 was at around 10.5%.

Recent concerns and controversies:

Interest Rate Sensitivity Voya is sensitive to interest rates. Historically, increases in interest rates have led to declines in the market value of its investments, and may also have an adverse effect on new investment yields. The company may see lower earnings if their investment strategies have not matched the current market conditions and it could negatively impact their financial position.
Increased Competition: The company is facing increasing competition from players in the financial industry, and also new emerging technologies. They are also seeing consolidation in the market, which may further increase competition intensity.
Inflation With the current high inflation, the cost of doing business is also increasing. Increased wages, supply chain issues, and increased operating expenses would negatively impact the company’s margins.

Understandability: 3 / 5. The rating of 3 for understandability means that the business is moderately easy to understand. While the core operations involve financial products, the company’s diverse segments across a very wide variety of markets and investments make the company’s overall picture complex. For someone well-versed in financial terminology, it would be relatively easy to understand, however, for a casual investor, it could be quite hard to assess its moats and future performance. A solid understanding of financial statements would be required to analyze the company fully.

Balance Sheet Health: 4 / 5 Voya has a solid balance sheet health, with a rating of 4 out of 5. While some aspects show stability, they do carry significant risk as well:

Adequate Liquidity: Voya’s cash and equivalents have been solid for most of the recent years. They have had $21 billion in cash in 2022, and $16 billion in 2023. They have significant credit and liquidity facilities, to handle any emergencies.
Moderate Leverage: Their debt to equity ratio is somewhat high, but it’s not exceptionally concerning, and in most cases they have enough cash to comfortably service the debts. They also have enough cash flow to pay all their obligations. They have a target debt-to-equity ratio of 0.3, and will continue to maintain the said level.
Reasonable Capital Levels: The company has been reporting total shareholder equity of more than $16 billion consistently, which is good for long term stability. Also, the company has been making large amounts of profit, for most years which will provide an added layer of safety to maintain their liquidity.
High Intangible Assets: They have significant amounts of Intangible assets including, goodwill which could be vulnerable, to impairments if the conditions change. They should ideally look for reducing these intangible assets for their long term survival.

Overall, the business is stable, but is still affected by external events.