Voya Financial, Inc. (VOYA) Earnings Call Transcript & Summary

Switching between nonlife and life, getting a whole smattering today. Next presenter is Voya Financial, I'm pleased to introduce Rod Martin, Voya's CEO; and Mike Smith, Chief Financial Officer. Rod joined Voya in 2011 and, I would say, is the architect of the dramatic and positive changes that have occurred at Voya over the past 9 years. You had some help, no doubt?

It's a team sport.

Rod has more than 40 years of experience in the industry. I think you hit 40 a couple of years ago. I had an update of that number, but it's more than 40. Mike...

You're right. I'm the old guy.

Mike became CFO in November of 2016 and held several other leadership roles prior to his current position, including CEO of the Insurance Solutions segment and Chief Risk Officer, and he's been with the company for a decade.

Oh, man.

So you're an experienced individual as well.

You'll have to put it that way. Yes, that seems like a long time.

This is my 25th year at Merrill Lynch. So...

Oh, really? Congratulations.

Congratulations.

I know what it feels like.

Let me start with Rod. This is a little bit of a reflective-type question, but I think it's appropriate. So since you became CEO, talk about maybe 2 or 3 things that you are most proud of. And there's a lot going on, but in your mind, what really stands out? And then separately, sorry for the 2-parter, 2 or 3 things that you're looking for, for you and your team to improve upon going forward?

Sure. Jay, thank you. And again, it's great for Mike and I to be here with you. Look, looking back on the time that I've spent at Voya, it's really the from/to story. We inherited what you inherit when you prepare a business to go public and take a company public a couple of years later. And as you well know, we had a closed block of Variable Annuity business. So we had 5 other businesses, and we've now evolved with the recent transaction announced in December to a retirement asset management and employee benefit business, really a workplace and financial institution focused business. So I'm very proud about that transition. We've made some hard choices, and most importantly, I think, executed really well against those choices. With what we announced on the earnings call this year, we've been very active in returning capital to shareholders. We talked about $7 billion in 7 years, inclusive of 2020. We only had a $5 billion market cap when we went public, and that's probably $8.5 billion today. The culture that we built, I'm really proud of that. We made it a point, it was an objective of Mike and mine and the Board that we were building to get to parity on our Board, men and women. And we did that in 2.5 years. We've been very focused on sustainability. I'm really proud of something that we announced on the earnings call. Barron rates and ranks -- Barron's rates and ranks, as you know, the top 100 companies on that basis. We were not on that list 4 years ago. Two years ago, we were 46th. A year ago, we were 6th. This year, we were 3rd. And for 2 years in a row, the highest-ranked financial services company. And again, these are attributes. This is something that the organizations need to live and breathe, and it needs to be authentic, and it's measured in that way by independent people that measure those things. That matters in our marketplace, and we're happy to get into that later on. And I think we've really become really good operators. And I put that in the category of something I'm proud about and something, on the second part of your question, Jay, that Mike and I are really focused on. We announced the Life Insurance transaction. We said when -- at our Investor Day that we'd returned $1 billion of capital within 5 years in the Life Insurance business. We're actually doing that faster with the close of this Life Insurance transaction. And we're getting to the end point, what we communicated just yesterday on our earnings call, the $1.80 to $1.90 EPS growth rate by the end of 2021. So no change in date, and we're getting there without the Life Insurance earnings at that point in time. So again, we've been focused on really improving being good operators and focused on growing this business organically, and none of that has changed.

Investing in businesses and exiting businesses is obviously a critical role for you and your team. What went into the decision to sell the Individual Life business?

When we announced the transaction 2 years ago with Apollo that we did in the standing up of Venerable, the exiting of the CBVA business, we also announced at that time, we made a strategic decision that we weren't going to continue writing new retail life insurance, and that we would be good stewards of the capital we had backing that business, and we would return, as I just mentioned, at least $1 billion of capital within a 5-year period of time. And much like Mike and I did on the Venerable transaction that took 4 or 5 years in conversations with countless number of parties, we've been having similar conversations for many years on the Life Insurance piece. And part of it was an alignment of a partner and a party that had aligned interest, and we felt we had an appropriate value for shareholders and an appropriate total value. And what do I mean by that? We're standing up a new company, and all of the employees of this new company are our employees. And so it matters in a culture. Venerable, a good example, 300, 350 people, where our former employees stood up, and they've got a big, bright future at Venerable. And now literally, across the hall, they can see what an example of good looks like, and we're standing up a new company with resolution. And all of our employees are going to be given an opportunity. And it matters not only to the employees that are leaving, it matters to the 6,000 men and women that are staying how we treat those people. So we felt we had the right value for shareholders, we could accelerate capital faster, and we had a very good outcome for employees, the employees that are leaving and the observation of all that in terms of how we treat people, which are fundamentally part of the culture and the DNA that we build. Full stop.

When the company sells a business, people like me and our model, we just put a 0 by that business, but we always forget there are expenses associated with it.

Right.

You do have these stranded costs. I know you talked a little bit about this, but if you could talk about how you're planning on addressing the stranded costs.

Sure. I'll start and then will toggle to Mike, but I'd really point to look what we said we would do and now have done with the stranded costs associated with the CBVA transaction. We announced on the earnings call $250 million or more. And we announced on the earnings call -- that was the third quarter call. On the fourth quarter call, we announced that we've eliminated all of the stranded costs associated with the Variable Annuity transaction. We've got the experience and the model to do so. And what we're really guiding to is the $1.80 to $1.90 EPS by the end of '21, same place without the earnings benefit from the Life piece. And we will reduce the stranded costs associated with that to enable that outcome. And I think if you just look at what we've done in the last year, what we said we would do and what we've done gives me a lot of confidence in our ability to do so. And look, the movie is real-time. I mean we announced this transaction in December 20, whatever it was. We truly don't mean to do this a week before Christmas every time we do something like that. It just worked out that way. We are building out this with resolution, and we said we'd close this in third quarter. So we will know more at the end of the first quarter and certainly know most by the end of the second quarter about what the transition service agreements and the administrative service agreements will be and the duration of those, and then we will eliminate the rest of the stranded costs. Big picture I'd leave you with. With 5 legal entities are leaving, 15 administrative systems are going and 1 wholesale broker-dealer, Voya will be an extraordinarily more simplified organization. And I'll let Mike take it from there.

No. Look, I think the way to think about this is we have the playbook. We deliberately -- when we were taking out stranded costs related to the Annuities business, we deliberately built a structure that we could reuse thinking ahead that there was likely to be a transaction at some point, and also it'd be just a great capability to have to continue to manage down our costs as the business evolves. So it was a very deliberate choice we made to invest in creating this infrastructure that allows us to realize that, right? So I think we've got a lot of work to do in order to pull together the plans to give you and others and shareholders kind of a clear idea of the path. What will happen in the near term is once we close the sale, there will be revenue from the buyer to help offset some of the stranded costs. We will -- then know the delta, and we'll start working on the delta as well as the transition services start to terminate, we'll eliminate those costs as well. So we'll give a pretty clear picture, I think, in a couple of quarters, but we've got some work to do and -- including agreeing with the other party on the exact structure of that.

So with the revenues going away, you're taking down the cost. Should we think about some of these cost savings being reinvested? Or are you just getting these costs out because the revenues are gone?

So when we introduced the '19, '20, '21 plan Investor Day, so November 15, 2018, we anticipated as best one can at that time, the amount of investment we would need in what we knew to be the 3 ongoing businesses that we were going to retain. That's built into our plan, okay? You always evaluate are there other opportunities to further grow the businesses that you have, and we do that on an ongoing basis. We've got a big operating budget, and we look at that very critically. We're going to have a lot of capital post this. I mean look, we've announced already $1 billion in 2020. That's the $7 billion, 7 years. Mike, we're going to free up $1.5 billion or so for this capital, some of which needs to pay down debt. We generate 85% to 95% free cash flow. We've guided that we're going to be on the higher end of that range. Post the close of the Life transaction, our ROE is now going to be 15% to 16%. And kind of all of those things weigh into this.

Yes. Yes, Jay, I think it's -- look, I think you could kind of drive yourself crazy trying to decide whether this cost save is being used for that investment. I mean we live in a very dynamic world, right? And so I think of it in terms of delivering to the bottom line, right? And we're very focused on getting the earnings per share at the end of '21 back to where they would have been had we not done the Life transaction without the risk.

And returning that capital to you faster.

And we'll do that through expense saves. We'll do that through organic growth. We'll do that through capital management. And we've got plenty of flexibility around all of those to lean in one way or the other depending on how the world ultimately unfolds.

Analysts love to drive ourselves crazy. We do it for sports, as you know. Let me bring up the question of M&A, right? I mean you have this capital. Arguably, you could spend it buying something else. Are there types of deals -- not a business, but a type of deal that really could fit in and you can execute on it?

We've used these examples previously, so it's not going to be new, but it's a fair question, and we'll answer it similarly. By way of example, with our Investment Management business, particularly our specialty categories that we've begun the market to other insurance companies, and that's got great momentum. We've also done that domestically and internationally. And we've used as an example, if we could find a capability, and by the way, they're not easy to find, that could be an extension of taking these existing domestic capabilities but distributing them internationally. Would that be something of interest? Yes. I've used that example before. Mike and I have. That would be an example. We've used this example within the retirement business. Top 10 players, a statistic you'd be well familiar with, 401(k) assets, top 10 players, 75% of the AUM today. There's 50 other players. It's a little bit like the political environment. At some point, candidates need to drop out. Those 50 other players, a reasonable question could be, "Is that really a core part of their business? And would those books of business become available?" And would we look at those blocks of business? We would look at those blocks of business, but we would do that through the lens of is that the best use of this capital. So that would be another example. One last one I do with IM, and we've done this. I mean we've added here and there some small investment teams to strengthen or add capabilities, and that remains open. There's a lot of change in that world, as you know more than we, and we've been viewed as a place that is attractive to be. So adding some capabilities on teams could be another useful outcome.

You have these 3 main businesses, and people like me think about them separately. We model them separately. But there is obviously some cross-pollinization, if you will, between them. Can you talk about that? What the opportunity is for you to expand on those?

Yes. Well, the most natural one, obviously, is in the retirement and investment management relationship, right? And the degree to which we're able to achieve a proprietary share of the assets under management. And so for us, right now, in terms of like funds, we're about 20% of the funds -- of mutual funds and retirement plans, our home team. If you add in the general account, which is part of retirement, that gets us up to about 40%. We think there's opportunity to continue with good performance to increase that. There are obvious pressures in the marketplace about fiduciary responsibility and optics and so on, but we think that we can do better than that. There's also I think, a lot of opportunity to work together between employee benefits and retirement. Employee benefits actually reports up to our Head of Retirement, right? So that creates just by, in and of itself, a degree of interaction internally. And they share resources, but they also work together as a distribution team, sharing leads, working collectively with key distribution partners. I mean we usually sell through intermediaries, right? And so we're able to leverage our presence on, say, the Willis Towers Watson platform or the A.M. platform or the Gallagher and not to leave anybody out but as examples. And so that is a way that we're able to drive value. We've also introduced health care savings accounts, and it's actually being driven out of our Employee Benefits division. But there's increasingly, I think, a realization amongst employers and employees that health care savings accounts, not flexible spending accounts, but the long-term health care savings, kind of where you can put in significant dollars every year and save it essentially forever. That is an alternative to retirement plan savings, and so there's an interesting connection there. We're able to get that up and running at very low cost, working with a third-party as an experiment. It's still early, but I think there are opportunities for us to continue to build connectivity there to create a more holistic experience. And you saw, I think, others, after we announced we were getting in a few other competitors in the retirement space, started jumping into the HSA space, too. So it's not going to be just the health care carriers providing health care savings accounts. It's actually more natural, I think, for us to do that.

That's helpful. I want to talk about retirement. Any questions, though? A few questions, just raise your hand, we'll get a mic to you. Let's talk about retirement. For you, it does span a number of customer segments. You have small, medium, large. Looking forward, where is the focus? What products or areas are you most zeroing in on?

Let me start, and I'll have Mike jump in. But I want to leave you with a theme. We are in what we refer to as market to market. So small, mid, large corporate record keeping, K-12, higher ed, government. And largely, the entire time we've been public 6-plus years at this point in time, if you think back macroeconomically, we've all -- this has been a pretty good period of time. All of those markets have grown very nicely. It is my view, Jay, that the strength and resiliency of the diversity of our platform hasn't fully been appreciated until we go through a market cycle. What do I mean? I'm not wishing for a market cycle. But I just -- life will happen at some point, and this will merge. And particularly, our presence in K-12, higher ed and government, those markets in a market cycle really stayed very stable, if not grow. And we are market leaders there. We've been enjoying very, very robust growth in our small, mid, and large corporate. And if obviously the economy slows down a little bit, would that be effective? Of course, it would be for us and everyone else. But I think the stability of the other isn't fully appreciated. And if it's not fully appreciated, it's probably not fully valued. And it's far more about our markets, our market presence, the relationship we have with advisers than it is specifically about product, but let me -- let Mike talk about product.