Vaya Con Voya: ING’s U.S. Management Biz Goes Public

The new name is dry, but its business is alluring

   

Starting in 2014, ING Groep’s (NYSE:ING) U.S. wealth management and insurance business will be independently owned and operated as Voya Financial, which just went public today under the temporary name of ING U.S. (NYSE:VOYA).

The Dutch financial-services group was required by the European Commission to divest its insurance and investment management businesses as part of its bailout in 2008-09. By the end of December 2016, ING Groep will cease to own any shares in Voya Financial.

So should you be buying what ING is selling?

First of all, let’s get the story behind its new name out of the way before launching into a full-on examination of its business model.

Apparently, Voya Financial was chosen from an original list of 5,230 potential names. All sorts of market research was done to ensure the name accurately reflects its business. Like so many big-business rebrandings, ING has chosen to go with the most generically bland name possible. But heck, we’re talking about financial services here, where creativity goes to die. Investors will just have to suck it up and get over the naming debacle.

As for the company, I was intrigued by the news of its impending IPO because it manages one of the best and simplest mutual funds of all time. You can read about the Corporate Leaders Trust Series B (MUTF:LEXCX) in my August 2012 article. Suffice it to say, any company that offers such a brilliant product deserves a once-over.

ING U.S. is in the middle of recapitalizing its business in order to stand alone, and the IPO proceeds will be used along with other funds to repay debt and strengthen the balance sheet. ING U.S. was looking to raise $600 million (the rest going to its parent) at a share price between $21 and $24. While it came up a little short at a pricing of $19.50, it did sell 65.2 million shares, which was a million more than originally planned. That kept the gross proceeds raised by the company at $600 million, and sets its market capitalization at $5 billion.

Its three operating segments — Retirement Solutions, Investment Management and Insurance Solutions — managed to generate total revenues in 2012 of $9.6 billion with pretax income of $606 million. This is a big business in its own right. ING U.S. is the No. 2 provider of defined contribution retirement plans in the U.S., the fourth largest writer of term insurance and the fifth largest provider of medical stop-loss insurance.

Retirement solutions account for 56% of its profits, followed by its insurance business at 31%, with investment management the remaining 14%. Its strategy moving forward is to improve the profitability of all three of its operating segments while focusing on growing its investment management and retirement solutions businesses, which are much less capital-intensive.

As I mentioned previously, its Corporate Leaders Trust Series B mutual fund is one spectacular investment. ING’s investment management business manages the passive grantor trust’s $1.2 billion in assets along with $20.8 billion in additional mutual fund assets. In total, the investment management segment has $181.8 billion in assets under management with another $54.7 billion that it administers for third-party managers. With 77% of its mutual funds beating their Morningstar category average, the growth potential of its mutual fund business is significant.

The difficult part of evaluating this stock is figuring out who to compare it with. You can look at pure-play asset managers like Invesco (NYSE:IVZ) and Franklin Resources (NYSE:BEN); there are retirement solution companies like Prudential Financial (NYSE:PRU) and Lincoln National (NYSE:LNC); and finally, insurance companies such as Manulife Financial (NYSE:MFC) and MetLife (NYSE:MET).

Really, there’s a whole cornucopia of businesses you could eyeball to get an idea for ING U.S.’s potential intrinsic value.

The enterprise value of the six companies mentioned above is 9.8 times EBITDA, ranging from a low of 4.2x for Lincoln National to 16.8x for Invesco. ING U.S.’s enterprise value is $6.7 billion, which is 7.9 times its EBITDA of $851 million. Given that its insurance business only accounts for 31% of its overall earnings, I am comfortable suggesting VOYA stock is undervalued at current prices.

Bottom Line

I rarely like IPOs after the first day of trading, but in this case I’ll make an exception.

Compared to some of the recent IPOs that have come down the pike in 2013, this is one of the more reasonably priced offerings. ING Groep had to make this deal happen sooner rather than later because if it rolled the dice on a fall IPO and the economy went up in smoke, it likely wouldn’t have been able to get the deal done by the end of 2013, breaching its bailout conditions with the EC.

The insurance business is a tough gig — Warren Buffett will tell you that — but it’s also one that generates gobs of cash. With the demographics of this country skewing older, retirement planning will continue to grow. So although I hate ING U.S.’s new name, I have to say it’s got a very attractive business.

As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.


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