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

Okay. Well, it is a pleasured -- I didn't want that part to get caught online, but my catch over there, EVP of Finance is also a Varsity ping pong player. So you heard it here. I also have with me here CEO, Heather Lavallee; and Executive Chairman, Rod Martin. It's a pleasure to have you all here. I'm going to kick off with a few questions and then open it up to our listeners.

So Heather, you've officially been CEO for a long 2 months. Maybe you can specify your near-term priorities, including any potential reviews, changes to the current strategy? What do you envision the earnings mix to be looking like in 5 or 10 years?

Yes. So thank you for the question. Good day to be here with everyone. So our priority is -- and I'll take a step back and kind of talk a little bit about why our priorities are unchanged is while I may be the new CEO, I'm not new to Voya. This is my 15th year with the firm, used to lead our Retirement Business. I led our Employee Benefit business. So I've got a lot of tenure working with this team. And as we think about our priorities going into '23 to really focus on 3 things. The first is around execution of our organic growth goals that aligns with what we talked about at Investor Day of driving revenue growth, operating margin improvement and capital management. Second is focus on integrations of the acquisitions that we announced last year, specifically AllianzGI and Benefitfocus. And third is around capital management, and we announced last week on our earnings call, our intention to resume share repurchases in the second quarter, and we believe capital management is going to continue to be an important lever for us to be able to drive EPS growth into the future. So that's really the focus, execution, integration and capital management.

Great. And Rod, you -- over a number of years dating -- when did you join 2011? Was it...

April 11.

April 11. The company went public in 2013. And -- and I mean the derisking, the transforming of the company over the past decade, maybe you could talk about now your new role moving forward and maybe what you envision for the company's future?

[Technical Difficulty] as a strategic adviser to Heather, which is probably the biggest single part of the role, and I continue as Chairman of the Board through fundamentally the end of this year. And in visioning company, we laid out in the most recent Investor Day, what Heather just talked about. We delivered results in excess of those targets in 2022. And I think after the derisking the ROE improvement and the growth initiatives that we laid out last year, it really is just about, as Heather says, execution and focus on the integrations of these things. The intersection of Health and Wealth is a big part of that growth initiative. Our ability to expand through the Allianz piece is a huge piece of Heather speak about. And I think Voya is just beginning on what can be.

And maybe kind of shifting over a little bit to the Benefitfocus acquisition. Definitely a key area of focus among investors. Maybe you could talk about the reaction from distribution partners, both Health and Wealth clients, clients in general? And just what the product manufacturers are saying about the platform?

Yes. So the reaction from the marketplace has been very, very positive. And one of the reasons why we think it's been so positive is we have been clearly communicating our intention to be open architecture, product agnostic and intermediary centric. And so let me just break down what do we mean by that. So if you take our Health business today, we currently sell our Voluntary products to up to 100 different Ben Admin partners. And we're going to continue to work with all of those different Ben Admin partners. So that kind of gets to the open architecture component. The product agnostic benefit focus today works with a variety of number of Voluntary providers, including Voya. And so we think that product agnostic approach is important because at the end of the day, we realize that it's the benefit brokers and consultants who are going to make the recommendations, they're driving the RFPs and the employer clients at the end of the day are the ones who are going to make the decisions. And so the market has really liked that approach that we're taking. We also are seeing really positive reactions from the employer clients who are excited about the ability over time for us to be able to reduce their administrative burden by really helping to simplify both kind of that health ecosystem as well as the retirement ecosystem. And then we think that as we continue to evolve Benefitfocus' capabilities, we're going to help brokers and consultants bring even new innovation to the market, which, at the end of the day, makes them look good to their clients and creates a differentiated value proposition. So all in all, it's been quite favorably received in the marketplace.

That's good to hear. And with respect to capital real briefly, maybe Heather talk about the philosophy moving forward. I guess you've cited that you can resume buybacks starting in the second quarter. As of year-end pro forma, you were sitting on about $300 million of liquidity there. Do you think you could get back on the 90% to 100% trajectory of payout ratio? How did dividends factor in? That's been a big question.

Yes. So specifics to capital management, again, our philosophy has remained unchanged. And you go back to since Rod started when we became public as we've returned over $8.7 billion to shareholders during that time period. And that's something we're proud of, and it's something -- again, it's continued to be a very important lever for us. But specifically, when you think about the businesses, so first, let me talk about the free cash flow nature of the business. You think about in 2022, we generated $600 million of excess capital for the organization and achieved our 90% to 100% free cash flow conversion that we've talked about. We today, with our business mix, including the addition of Benefitfocus, we have very capital-light businesses, high free cash flow generating. I think it makes us a bit unique in the marketplace and real strong diversification of revenue. So we feel first very, very good with our ability to continue that 90% to 100% free cash flow conversion. And as we talked about resuming share repurchases in the second quarter, when you think about our ability to access -- to generate excess capital, we think that's a very logical place for us to use that capital as in the form of share buybacks. I talked about my priorities with integration, that's really going to be our theme. So we do expect to have excess capital to be able to deploy a back to shareholders this year. You can also think about the dividend as we see us currently sitting at about a 1% dividend. We have been doing a lot of work and having discussions around the ability to increase that dividend thoughtfully. So that's one of the things that we have -- as we've been doing or listening with shareholders over the last, call it, 8, 9 months, we have heard that loud and clear. And so that's something, again, we are -- it is our intention to be able to do that. And the other thing you would expect is as we think about debt, we have continued to think about paying down debt as we have done share repurchases. And you can expect us to also be leaning into a bit of debt extinguishment as we think move into '23.

Got it. And I guess with that, you did some really good fits in terms of M&A this year -- last year. Do you need to do more M&A? And if so, how big would that be?

Yes. So great question. As we talk about M&A, and this is something that we've gotten the question a lot as we've kind of leaned in, in the middle of CEO succession doing these transactions, how do we think about that? Well, first, we feel as though our approach to M&A, our philosophy around M&A is it's got to be strategic. It's got to be accretive or makes sense for the long term for shareholders and make sense for customers. And we have been very, very selective in our approach of M&A. And so at Investor Day last year, we talked about really needing 4 different capabilities from an inorganic perspective that we think would accelerate our growth strategy. We talked about capabilities that would lean in on the customer experience and improve outcomes with the intersection of Health and Wealth. We talked about technology and data capabilities. And then in our asset management business, we talked about growth in private alternatives as well as global distribution. And so when you think about the transactions we announced last year with Allianz Global Investors, we have added 500 relationship managers in 19 geographies through AllianzGI, so tremendous global reach. So that's kind of a check the box. We did our acquisition of Czech Asset Management, which is a smaller lift and shift, which is expanding our privates and alternatives capabilities. And then Benefitfocus fits squarely in that intersect around the customer experience and technology and data. So at this point, we feel as though we've got all the right capabilities we need to be able to now drive our growth organically. So while we'll always have an eye on are there different things we need to be thinking about over the long term, we're going to be doing it from a lens of, is it in the best interest of shareholders and is it in the best interest of customers? But again, think of us in '23 as execution on the organic growth and the integrations of these properties.

Got it. And now I'm just talking about consolidated EPS outlook. At the 2021 Investor Day, you outlined 12% to 17% annual EPS growth through 2024. You blew right by that with 24% growth last year. And yet this year, you've guided to 10% plus EPS growth. And that's before factoring in any benefit from Benefitfocus. So maybe you could talk about this 10-plus why it's achievable? And then whether you can get back on the 12% to 17% run rate?

Yes. So -- and if you go back to our Investor Day last year, when we laid out 12% to 17% EPS growth at our Investor Day, that was on the high end of many of our peer companies. And we think a lot of people looked at us and said, that doesn't seem quite realistic. So we want you to prove it. And I think we did that in '22 with a 24% EPS growth rate. And so the fact that -- and that was even navigating the macro markets that we all had to operate through. So we believe that we've got really strong resiliency of the mix of businesses. We've got a leadership team that knows how to navigate and deliver and has managed through a different macro environment. So what gives us confidence going forward is you look at how we finished the year, we've got very strong commercial momentum. Revenue is up in our core businesses. We've improved operating margins, which are 2 of the important levers and contributors to EPS growth. And then we also talk about capital management, which is the third lever and the fact that we're intending to resume share buybacks in the second quarter. All of those combined give us confidence. And the way to think about it is, with Benefitfocus, that probably adds about 2% of EPS growth is the way we sort of were thinking about it, which brings us in the low end of the range. But to have -- even 10% to 12%, on top of 24%, we think is quite an impressive accomplishment.

Maybe to add a little bit here, Andrew, too. If you think about some of the themes that we talked about in '22 that continue to reveal themselves in '23 across our businesses. So on the Wealth side, we talk a lot about diversity of revenue. Certainly, the equity markets were a headwind to that business, but we still performed very well. Why is that? Because of the interest rate environment. That will continue to be a tailwind as we move into '23. In the Health business, and it seems like a long time ago because we were all sitting outside last year at this conference, COVID was a headwind. Not a headwind for our Health business as we head into '23. So that's a foundation that we're growing off of. And then finally, for Investment Management, we had the AllianzGI business for 5 months in 2022. We're going to get that for a full year. So when you look at the revenue growth that we expect out of the Investment Management business, we get the full benefit of AllianzGI next year. So the themes that we talked about in 2022, just that piece also gives us a lot of confidence about where we're going in '23 on top of just the piece that we talked about at the top our ability to generate cash in these businesses, which gives us further confidence as capital management being a balance to make sure that we grow EPS as we suggested we could.

That makes a lot of sense. And maybe drilling into the operating entities a little bit, the Wealth Solutions segment, how do you think about the long-term growth of wealth solutions and maybe touch on how SECURE Act 2.0 plays into it?

Sure. Well, I'll maybe piggyback a little bit off Mike's comment is, within Wealth, we talk about the revenue diversification is something that's been a tailwind. So exactly to Mike's point, where -- in a year where we're seeing rising interest rates and we saw pressures on equities, we were able to manage through that quite effectively, and we've also had strong discipline around how we've managed expenses. But as we think about the growth of the Wealth Solutions business and the benefits of Secure Act, we have -- at Investor Day, we talked about leaning in on the mid-market space, which is a space we have not been in historically, which creates some nice growth opportunities for us. We've been able to leverage our leadership business within the tax exempt space, #1 in the government market, leadership position in corporate markets in the small end or the large end to be able to create commercial momentum in those market segments. And Secure 2.0 is going to create tailwinds for us because we're seeing changes with auto features. So I think auto escalate, auto enroll, which is going to have some favorability on recurring deposits, we also see benefits of SECURE Act of really mandating that people need to have access to coverage. So we're seeing a lot of start-up plans, which is an area you think about very small employers, which has grown for us between 20% and 30% in the last couple of years of just a rapid rise in new plan growth. And then some emerging places in wealth are things like multiple employer plans and pooled employer plans, we have been one of the early adopters in that space for a number of years. We actually, with some of our clients, have already been well established. So we feel very, very good. And the last piece that gives me, frankly, a lot of excitement goes to something Rod talked about of the Benefitfocus acquisition. Our value proposition for our Wealth clients is quite different from our peers. The fact that we're leaning in holistically at the workplace across Health and Wealth is serving clients in a very differentiated way. It's not just around the rollover retail. And that value proposition, combined with our culture and our ability to deliver on our promises, is one that we think is going to continue some strong commercial momentum in that business.

And then maybe shifting gears to the Health benefits segment. Again, you outperformed your guided target of 7% to 10% annual revenue. And in-force premium growth, it was up 11% last year. Thoughts going forward?

Yes. So we feel confident in our ability to hit the targets that we set out the 7% to 10%. And I'll point to a few different elements of that business. So number one, about half the business is in the Stop Loss space. And you think about what are the drivers of Stop Loss, it's annually renewable and is able to take advantage of medical trends. So you think about levered trend that there is always an increase in the health cost. So we don't need to aggressively grow our Stop Loss book of business to drive revenue growth, right? We know we're going to renew it. We're going to be disciplined with our underwriting margin, and that's going to continue to be a tailwind for revenues. We have expanded our Stop Loss down into the mid-market space, which we think is create some growth opportunities for us. But just think about Stop Losses, there's kind of a natural growth trajectory. In our Voluntary business, this has been one of the fastest-growing sectors for us, and we continue to innovate around a product perspective as well as around our claims and some of our client experiences. We have been 1 of the top 5 growers in the Voluntary space and for a number of years, and we see that trajectory continuing. The other pieces that I would point to in our Health are there are some new adjacent revenue areas that we're growing that are more kind of show up over a number of years, but think about our health account savings, leave management. These are really important capabilities for clients that are going to begin to contribute over time into that book of business. So all in all, we -- and then lastly is we've got a really strong distribution footprint that the team is extremely well respected. So we feel confident.

And just maybe the piece I would add, Andrew, is that, as we think about growing that business, to your point, we grew at 11% top line last year. We continue to believe that we'll grow at 7% to 10% in '23 and beyond. It's really the discipline around underwriting, like we fully understand that earnings can move meaningfully. If you don't get that right, we're not trying to get over our skis and going out and winning new business for all the reasons Heather just called out. And so it's really underwriting, underwriting, underwriting. And we talked about it on the call, Jan 1 is an important time. 75% of the business gets written off a Jan 1, and we feel really good about what we got done at the beginning of this year. So I think it's just -- it's a continuation of a story that we've been telling for a long time. But the big takeaway is it's not just about the top line. 7% to 10%, it's the bottom line, 7% to 10%.

Maybe shifting gears again to Investment Management, and then I'd like to open it up to everybody to ask questions. The AGI acquisition, we had written about it. It was -- it just seemed like an obvious home run. Maybe you could share with us your views around the impact of how material international distribution will be to your top line outlook? And then also what are some of the expense and revenue synergies of that business? .

Sure. So when we think about our asset management business, there are a number of reasons of why we're quite excited to be able to grow that business and improve margins. So if we start with AGI, and I'll go back to the comment around global distribution, 500 relationship managers, 19 countries, that access to distribution -- I've been kind of using the analogy, it's like a 4-lane highway. It just creates a huge opportunity for distribution of our products into those countries. We think about the ability for us to leverage the strong performing income and growth product that's manufactured out of our San Diego team, which was part of the acquisition, generating $1.4 billion in flows in the first 5 months of the year. We've got a lot of excitement there. We are going to be launching 4 new UCITS later this year. 2 of them are on the traditional Voya IM platform, 2 on Allianz. So it's the ability to broaden the product set and expand the distribution that have us significantly excited for growth. A couple of other areas in Investment Management, we're excited about is our insurance business. You think about in 2018, we had about 20 insurance partners. Now if you look at 2022, we have over 60 partners. We're able to leverage our expertise in fixed income and managing the general account to be able to bring those to insurance partners. And then finally is some of the capabilities we've invested in privates and alternatives, we've expanded some of our equity capabilities. So again, that just goes to the breadth of the products. And we have committed to expanding margin by 1% in '23. We think that Allianz gives us that opportunity with some of the higher-margin products. And then lastly, your question around expense synergies, we certainly had some as part of the deal, which we are on track to be able to take out. But we also think there's additional things we can do to drive expenses. And we really focus in on is aligning expenses with the revenue so that we really achieve that margin expansion that we have been targeting.

And just remind us, what percent of the Investment Management business is Allianz own now?

So Allianz owns 24% of the Investment Management business.

And it's the definite vested interest in your success.