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

It's Suneet Kamath. I cover the insurance space at Citi, and it's my pleasure to introduce Voya for this fireside chat. We have CFO, Mike Smith as well as Mike Katz and Josh Smith. So a lot of Mikes and a lot of Smiths. And what I thought I'd do is just kind of go through some questions at the outset. And then we'll open it up to the audience, to the extent that you have some.

So I thought, I'd start maybe high level and then work our way through the businesses. So you guys have given guidance for 10% EPS growth over the next couple of years. And obviously, there's different factors that can cause that number to be achieved. So how do you think about sort of top line versus margin versus buyback, maybe this year and as we kind of think through the next couple of years?

Yes. So good morning, everyone, and thanks for joining me. And Suneet, thanks for organizing this. Look, I think the way to think of our 10% growth is going back to our Investor Day in 2018, where we announced a plan -- and frankly, including our Life business that we've recently announced our transaction, but our intent then and our conviction was that we could grow earnings per share at 10% plus from 2018 levels. Now fast-forward us a year or so, and we've announced a sale of our Life and some other closed blocks that will reduce earnings. And what we're now saying is that by the end of '21, we'll be back where we would have been, had we not done the Life transaction. So the earnings per share that we will have in the fourth quarter of 2021 will be in the range of $1.80 to $1.90, which reflects a 10%-plus growth rate from the baseline that we had in 2018. So as an exit rate. '21 itself will not achieve that because of the effects of the transaction. So when we announced the -- when we talked at Investor Day, we talked about 3 sources of earnings growth. The first was capital management. Now including the $1 billion plus that we expect to purchase in 2020, we'll have repurchased $7 billion in shares, over a little more than 7 years since our IPO. Our original IPO market cap was about $5 billion. So we will have repurchased more than our original market cap in the time since our IPO in 2013. So that was one source of EPS growth. The second was expense management. We were, in 2018, in the process of removing stranded costs related to the sale of our Annuity business at the end of 2017 and closed in 2018. We achieved -- we've achieved that. We've removed all the stranded costs, and we announced additional cost saves that would further accelerate our earnings trajectory. And then finally, we pointed to organic growth, driven by flows and driven by growth in in-force premium. And we said at the time and we continue to believe, that the growth in earnings would emerge more in the second half of that 2019 to 2021 period. So you've got capital management, you've got expense growth and you've got organic growth driving earnings in the latter part of '20 and then into '21. Now you include the effects of the Life transaction, right, which will, on top of the organic growth that was already expected, drive further earnings growth as we take out stranded costs that have to be removed from the Life transaction, we'll be a far simpler company in the absence of a Life business. We're removing 5 legal entities. We're removing 15 administrative systems. We're selling a broker dealer. That gives us a range of possibilities to think about our overall overhead and frankly, corporate structure. So things that we can do to remove cost. In addition, the proceeds from the Life transaction will be $1.5 billion. We guided to about $700 million of debt repurchase. So that gives us $800 million of capital, plus an existing excess capital position of $900 million, plus the capital we'll generate in 2020 and in 2021, all of which can be applied then to either to share repurchase from a modeling perspective. So you add all that up, and while our current run rate earnings in the quarter are -- show -- would show a pretty steep path to get from where we are to the $1.80 to $1.90. Think of it as already in place organic growth manifesting, kind of turbocharged, if you will, by further expense saves and an even greater pace of capital management actions.

Got it. And then so if we unpack that a little bit, the broker dealers, the simplification of legal entities. I mean, is that a meaningful expense reduction opportunity incremental to the $250 million plus?

Yes. I think we guided to -- we've said the stranded costs related to the Life business is $130 million, give or take, and that we're going to -- we plan to address that by the end of the year. And while we don't have clear visibility into all the steps we're taking, what we can say is that, we have the track record. We have the machinery, if you will. I mean we went through a very, I think, robust process in identifying cost savings opportunities the first time around when we sold the Annuity business. The way we went at that will be just as applicable this time. And so I think -- and we've maintained that machinery in place. So that can be used and spun up pretty quickly. So we've got work to do. At time of close, there will be transition service fees coming from the buyer that will help offset some of that stranded cost immediately. And in the meantime, we're -- we don't have that. And the earnings from the Life business are in net income below the line, but the stranded costs are above, and we can talk about that more in a minute. But that'll create some degree of offset immediately. And then as those transition services are terminated, we'll have opportunities to remove the cost, remove the activities that are driving those transition services and also think about other overhead restructuring that we can do.

Got it. And then, I guess, the other thing that's changed, obviously, relative to when you first laid out the 10% plus is the rate environment, which based on your most recent guidance for retirement, has slowed the underlying earnings growth there. So maybe give a sense of how you're thinking about, I guess, where rates are now and what that could mean and what the offsets are?

Yes. So the guidance we've given is that 100 basis point decline in rates from, basically, the level that they were at, at Investor Day, which think of that as in the high 2s and the 10-year treasury. A 100 basis point decline would have produced, in 2019, a 2% drag on earnings, which is basically what we saw. If -- to the extent that rate environment were to stay there, then you see another 1% decline in earnings in 2020. And then further, if the rate environment persisted even more another 1%. So a total of a 4% drag from where we thought we'd be. Suneet, you mentioned the change in retirement guidance. We had originally guided to an overall 3-year CAGR of 4% to 7% for retirement. Now I've just kind of laid out the -- there's about a 4% to 4.5% drag, particularly given where rates are now. So we're going from 4% to 7% to a CAGR of 1% to 4%, over the 3-year period, from 2018 to 2021. So that's internally consistent, at least, in terms of the overall rate drag. Look, obviously, there's a lot of new news being adjust -- being absorbed and reflected in the marketplace. And so it’s hard to tell where it's all going to go out. Certainly, the rates being down in the $1.30s, I think, where we're at in the 10-year at close yesterday, I haven't looked today, will add to the pressure. It's not geometric. It doesn't change dramatically. It just, simply, moderately accelerates the rate at which the book yield will decline. To the extent that they persist, we may need to refresh that guidance, if we stay down in the $1.30, $1.20 range. But right now, it's not -- I think, probably the best thing I could say is, it's not meaningfully more. It'll be kind of -- think of it as an extrapolation from the existing guidance.

And then, I guess, going the other way, I think, you took up your guidance for a couple of segments, and maybe give us a sense of what's going on there? And how that could be an offset?

Yes. In particular, we increased the guidance for employee benefits. We had originally said that, that over the 3-year period, it would grow at a rate somewhere between 7% to 10%. We increased that to 11% to 14%. That simply reflects the fact that last year was a fabulous year for employee benefits, earnings grew 20%. And so if you just do the math on the CAGR from 2018 levels to 2021 levels. 11% to 14% is a reflective of a high single-digit growth in employee benefits going forward. That growth has been driven by growth in our Voluntary Products, in particular, they grew 25%, the in-force premium grew 25% last year. We can come back to that. Stop loss held in nicely, despite us taking some fairly meaningful underwriting actions to ensure that we were going to get the target loss ratios that we expected, and we did. But -- and we had very favorable experience in both Group Life and in Voluntary last year. So all of that added up to a -- we just kind of hit on all cylinders in employee benefits. I still think the high single-digit growth in that business is very attractive, and that's what gets you to the 11% to 14%.

And in Investment Management, was there anything that you guys changed there?

Nothing really changed. And we're saying that the earnings over the 3-year period will grow 5% to 8% on a 3-year CAGR basis. Feel very good about that. The pipeline is strong. And from a net flows, we've been generating strong institutional net flows for several years now, based on strong performance and our ability to craft solutions for institutional clients. Also in the second half of the year, you saw a turnaround on our retail side, where we are in positive net flows there. And we're exclusively an active manager. There's no -- there's not any meaningful passive money in our shop. And that's been driven by a couple of really strong performing funds, our strategic income opportunity fund. On the retail side, basically tripled. It grew from about $1 billion at the beginning of the year to over $3 billion now. And has gained access to a number of pretty robust fund platforms, and we're pretty excited about where that can go.

So you hit on this earlier, but I want to give you the opportunity to talk about a little bit more just to make sure everyone's on the same page, in terms of the above the line, below the line noise associated with the Life. Because I think, there's probably some moving pieces there that people need to understand.

Yes. So thanks for the opportunity to clarify. So the fundamental issue here is that upon announcement of the sale of the Life business. The Life earnings go below the line. They're going to discontinued ops or businesses to be exited via reinsurance, right? Because we intend to no longer be in those businesses. But we still get the economic benefit until close. So it's coming through net income, it's not coming through operating. However, GAAP would cause us to put the overhead costs that were otherwise allocated to the Life business. Those remain above the line, and that's about $30 million a quarter. And so that is coming through as stranded cost and reducing the otherwise -- what would otherwise be the operating run rate. So we're going to normalize, in our presentation of operating results, by removing those stranded cost to give a sense of the true run rate. And that'll be -- because we're already getting -- we currently get the earnings. And so it's kind of a -- it's a strange geography issue, I think, in GAAP reporting that causes a bit of a distortion. But also at close, and I mentioned this earlier, we'll get fees that will help offset a meaningful portion of that stranded cost. Once we have a clear visibility into that, and we know the fees, and we're reporting the fees that we're getting that offset those costs, then we'll stop normalizing for any excess, and we'll just let it flow accordingly.

Okay. Then one more on the high level, and we'll get into the segments. So you've done the Annuity deal, you've done the Life deal. It feels like you're pretty happy with what you have, the hand that you're playing with today. But are there any other blocks or businesses that you'd consider -- that you think about as noncore that you'd consider exiting?

Look, I think this has been a very deliberate strategy for us, since IPO, is to get to the businesses that we want to be in, and that's Retirement, Employee Benefits, Investment Management. So I think, we're very focused on making those businesses the best they can be. We're very -- one question we get is around the retail broker dealer, and what are the plans for that. And look, I -- we think advice is a critical part of the Retirement equation. And it's a very important part of our Retirement business. The retail wealth management and our Voya Financial Advisors is our top distributor for tax-exempt markets. It's one of our largest corporate 401(k) sources. So it remains a very critical part of our ongoing strategy. And so we're very bullish on the sectors we're in. We think they're -- they all create an opportunity for us to generate high returns, strong cash flow conversion. They're capital light and we think present a very compelling profile for us.

Okay. So then just maybe walking through the segments. In terms of Retirement, we talked about this a little bit earlier. So we don't have to dwell on it. But the guide down to the 1% to 4% growth. Is that just all rates? And is there anything that you can do on the crediting rate side to help offset that? Or do you already factor that in?

It's predominantly rates. It's a combination of things. But I think, you should think about it as really the rate-driven. And I think the other thing to think about is, 2018 was just a year where things just hit on all cylinders, right? We had a really strong year, where if -- to the extent things broke one way, they tended to break to the good. So 2018 was a tough comp. You did see us step back in 2019. But in order to get to 1% to 4% 3-year growth from that 2018 level is actually going to require high single-digit growth in Retirement, going forward. That's just -- it's just math. And so to, specifically, to the question of, can we do things on interest rates? Yes, there's some room. Over the last couple 3 years, we took significant action in discontinuing our -- the -- reducing, I should say, the amount of new flow into existing high-guarantee products. We have a meaningful amount of our fixed account product, that has minimum guarantees of 3%, 3.5% or 4%. And until a couple of years ago, we were still accepting new flow into that. And that was accelerating the rate of compression. We've since, basically, just stopped that flow and moved those customers' new flow into products with lower guarantees, say, 1%. The existing assets to the extent the customers left it in those older accounts are still there at the 3%, but it's not getting any bigger. There's no new money going that way. That will, over time, create some room in the crediting rate.

So then maybe talking about the competitive dynamics in Retirement. So one of the things that we're used to hearing about the Retirement business, in general, is fee compression. And I just don't recall that being an issue for you guys not -- certainly not to the same extent it is for others. So maybe some sense in terms of, is it mix? Or is there something that you're doing differently? Are you feeling it? Is it just not as big of a pressure?

Look, I think if you look at our gross fee rate over the last couple of years, it's gone down about 1 basis point a quarter. So that's the fee income divided by the assets under management has come in about 1 basis point a quarter. That's largely mix. Yes, it's competitive. Fees have been competitive for as long as I've been in or around the 401(k) business, and that goes back, in my case, to the late '90s at a competitor, right? So it's always been competitive. Fees have always mattered. It will continue to be that way. But what matters more than the gross fee is the bottom line, the net, right? And so bringing in a big case at a rate that's lower than your gross fee rate will naturally put it -- it will naturally just lower the water level, if you will. But we're -- if we're able to do that in a way that's margin-accretive, and I think if you look at our profitability and Retirement over the last 3 or 4 years, the broader arc, we've gone from a like high single-digit ROC to a 12%, 13%, 14% ROC. We've done that by removing cost, by making good decisions around which clients to keep and which clients to allow to move on to other carriers. We've gotten better rates where appropriate, or we've let business walk out the door. So I think we've been far more disciplined about our approach to profitability. We think that, that can continue. It will continue to be competitive. The gross fee will likely come down over time on 1 basis point level, but we think the margins will still be strong, and we'll be able to deliver the kinds of returns that we've come to expect.

So it's interesting because even though you're seeing some fee compression. The other thing that's happening is you're growing. And the other theme that we see a lot of times with 401(k) related companies is the industries and outflows, the demographics suggest that, that will likely continue as baby boomers age. But again, you seem to be moving in the opposite direction in terms of better sort of deposits, better flow performance. So what -- I guess, what's the secret sauce there?

Look, I -- a couple of thoughts to leave you with because I don't think there is a secret sauce. I think we're just really good at managing Retirement assets and working -- providing services to retirement customers. I'd say, it's a combination of our capabilities, and we compete from the very largest plans to some of the very smallest plans. And we take the capabilities that we build for these big recordkeeping clients, some of the largest companies in America. And we use those capabilities to spread across our business, both in the corporate space and in our tax-exempt client base. So I think, when you think about the capabilities that we're able to bring to bear. In addition, we've made, since IPO and even before, a very conscious effort to invest in our culture, invest in sustainability, thinking about ESG, thinking about how to provide services to folks with special needs through our Voya Cares program. Those are all things that we talk about with clients and ultimately, show to clients in a way that we think differentiates us. So do we win on price? No. We're competitive. If we're up in a situation where the lowest price by 1 basis point wins, we may or may not win that case. But what we hear from our clients a lot is that our approach to doing the way we do business. Our approach to helping those with either with special needs or who have family members with special needs, providing the kind of the know-how and the resources to help them do that, our commitment to sustainability and doing things the right way. I -- just today, we were announced by Ethisphere, as a world's most ethical company for the seventh year in a row. That's as long as we've been eligible for that. A couple of weeks ago we were a top -- we were #3 on the Barron's list of sustainable companies. So all of those things come together into a company that -- a provider that customers want to do business with. And we think it shows in the results.

So certainly, some commercial benefits from some of these accolades that you guys are...

Clearly. We believe -- it's hard to tell, but we think, 20% or more of our Retirement sales are influenced by that.

And then last one on Retirement, maybe just some thoughts on the SECURE Act. It seems like it's rare when we have something that both sides of the aisle actually agree on. So how much of this is an opportunity? And then, kind of over what sort of time frame?

Yes. It's clearly a good thing for the industry. I think it reflects a recognition amongst policymakers, as you say, on both sides of the aisle, that we need to do more to encourage Americans to save for their retirement. So over time, we think it'll be beneficial. I -- we're not viewing it as an overnight change, or a sudden accelerator. I think it'll be gradual. We're already in. One of the things that gets talked about a lot are multiple employer plans. We're already in that space. We have those capabilities to the extent that those become more prevalent or popular than we're certainly more than able to serve those very, very well. But it's a slow build. This is not going to dramatically show up in earnings. I think it's a -- as I said at the beginning, it's a good thing for the industry. It will result in, I think, increased use of retirement plans by both companies as we sponsor them as well as the participants within.

Then shifting gears to Investment Management. I guess your margin target is 30% to 32% by 2021. So I think you're tracking below that, although obviously, performance fees in the fourth quarter health. So maybe just give us a sense of how you expect to get there? Maybe flow assumptions, you market assumptions?

So the -- let's step back and think about where we've come over the last couple of years with Investment Management. We were pretty much right there at the 30% to 32% before the Annuity transaction in 2018. That resulted in a fairly significant loss of assets and the associated revenue. And so we took a step back in terms of margin as a consequence of that transaction. Our plan has been, from that time, and we continue to execute on that, to address it through flows, address it through the removal of stranded cost and the additional expense savings that we had flagged at Investor Day and continued strong performance as well as -- you'll see this in the back half of '20 and '21. We have a private equity firm, Pomona, that is going to be back in the market with their tenth fund. That will produce some fairly significant ramp up in fee revenue at a -- relative to existing basis points levels will be at a higher level of basis points, and that will provide a lot of extra momentum to the back half of '21 for earnings to get us, we think, to the 30% to 32%. The other question that you may have is, well, that's great, but you just announced the Life transaction and you're going to lose some assets from that. Yes. But we're going to retain 80% roughly of the assets that are affected, at least initially, and we'll have that for at least 2 years, and then it will grade off over the 5 to follow. So we'll have assets under management for at least 7 years related to the Life transaction. So that is not an impediment. We still expect to be able to achieve the 30% to 32%, even in light of the Life transaction.

Got it. And then you gave us some good color on fee compression in Retirement. So if we were asked the same question about Investment Management. What does it look like? What are you feeling? How do you think it plays out over the next few years?

The answer is pretty similar. The -- and again, I think the gross fee yield does not equal margin. And so I think what you'll see in terms of the fee rate that we're getting on inflows versus outflows, that will bounce from quarter-to-quarter. If we get a $5 billion mandate in a core bond fund, that will certainly lower our gross fee, but I promise you, it's accretive to margin because we won't have to add much, if any, expense. And so that fee just drops basically right through to the bottom line. So pay attention to margin and our track record to -- of growing it and our continued progress along those lines. As I alluded to earlier, it's going to be, for us, more about business mix. And as Pomona comes online, that's going to drive the gross fee margin up, as we have more and more success. But look, it's competitive, just like Retirement, it's going to continue to be competitive. We think, we've got the performance and the track record to be able to continue to collect appropriate fees. We've got specialty capabilities, where it's just difficult to replicate. It's not subject to being put into an ETF format. These are very distinct capabilities with long track records that we think will continue to perform very well.

Have you said how big the Pomona fund is going to be, the one that's launching?

It'll be larger than the last one, but we haven't said the exact number. No.

And have you said what the last one was?