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

Good morning. Welcome to Voya Financial's Second Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the call over to Mei Ni Chu, Head of Investor Relations. Please go ahead.

Good morning. And thank you for joining our second quarter earnings conference call. We will begin with prepared remarks by Heather Lavallee, our Chief Executive Officer; and Mike Katz, our Chief Financial Officer. Following their prepared remarks, we will take your questions. Also joining the call are Jay Kaduson, CEO of Workplace Solutions; and Matt Toms, our CEO of Investment Management. . As a reminder, materials for today's call are available on our website at investors.voya.com. As noted on Slide 2 of our analyst presentation, some of the comments during today's discussion may contain forward-looking statements and refer to certain non-GAAP financial measures within the meaning of federal securities law. GAAP reconciliations are available in our press release and financial supplement found in our Investor Relations website. And now I will turn the call over to Heather.

Thank you, Mei Ni. Good morning, and thank you for joining us today. Let's turn to Slide 4. Our businesses performed well in the second quarter. Strong underlying results were affected by lower alternative investment performance and by severance costs we incurred to reduce our expense base. For the quarter, we delivered adjusted operating earnings of $1.51 per share, generated approximately $150 million of excess capital and returned approximately $200 million to shareholders through repurchases and dividends. As Mike will cover in more detail, fundamental performance trends and the immediate payback from these expense actions gives us a clear line of sight to increase earnings and cash generation in the second half. Our performance this quarter highlighted continued execution of our strategic priorities. We delivered strong commercial results in Retirement and Investment Management. We're stabilizing and growing margins and employee benefits, and we are expanding wealth management capabilities to drive future revenue growth. Turning to our business results. In Retirement, we generated over $8 billion of defined contribution net inflows in the quarter supported by continued high client retention and large plan implementations in government and corporate markets. In government markets where Voya leads the industry, we've added more than $30 billion in assets and approximately 1 million participants in the past 18 months through organic growth. We're also driving strong full service growth in key segments with emerging market sales up over 30% year-over-year. We completed the final phase of our One America integration during the quarter, marking the conclusion of a highly successful acquisition and integration effort that has significantly exceeded the financial goals we set. We continue to build momentum in Wealth Management with year-over-year revenue growth of approximately 12%. Our retirement franchise now exceeds 10 million participant accounts, and wealth management allows us to deepen those participant relationships and serve customers in a more comprehensive way. Our results this quarter demonstrate Voya's leadership position in the retirement market. Our business is delivering consistent flows high client retention and significant growth in participant accounts. Our presence across markets and expansive distribution footprint provides a durable foundation for sustainable growth. As we further develop our wealth management capabilities, we are building a platform that can serve an expanding customer base with the solutions they need for a confident financial future. In Investment Management, we generated positive net flows for both the quarter and the year, supported by client demand across a broad range of investment strategies and distribution channels. We expanded our product offerings during the quarter, including the launch of 2 multi-manager collective investment trust that enhance the private and alternative asset solutions we bring to retirement plan clients. Our investment performance remains a clear strength with 83% of assets outperforming peers or benchmarks over 3 years and 85% outperforming over 10 years. The strong outcomes we deliver for clients are driving continued commercial success and strengthen the role investment management plays in Voya's broader workplace and wealth management strategy. In Employee Benefits, we continue to improve and strengthen the business. In stock loss, we have stabilized loss ratios and margins across the entire book while maintaining the strength of our reserves. Early 2026 experience reinforces our confidence that the actions we've taken will continue to drive higher margins and restore the business to its historical earnings power. Across the portfolio, disciplined pricing, underwriting and risk selection are improving margins and allowing us to focus on business that meets our return expectations. I'll now turn it over to Mike to walk through the financials in more detail. Mike?

Thank you, Heather. Turning to Slide 6. In the quarter, adjusted operating earnings were $140 million or $1.51 per diluted share. That result includes an approximate $0.90 per share impact from alternative investment performance below expectations as well as severance actions. The alternative investment impact was driven primarily by macro market conditions affecting our private equity portfolio, which are reported on a 1-quarter lag. Year-to-date returns remain positive, and we expect results to improve in the third quarter. On severance, we expect the resulting expense savings to fully offset the upfront costs by year-end. These actions improve efficiency, reduce ongoing expenses and allow us to invest in long-term growth. While these items affected second quarter EPS, the underlying business trends remain strong, continued commercial momentum in retirement and investment management, along with improving margins and employee benefits support our confidence in meaningfully higher earnings in the second half. With that, let me turn to the segment results. Starting with Retirement on Slide 7. Adjusted operating earnings were $190 million in the quarter, results were impacted by lower spread income, reflecting alternative investment performance below expectations. Excluding the alternative investment impact, core spread income remained resilient, supported by reinvestment at higher rates. On a trailing 12-month basis, adjusted operating earnings increased 6%. Fee-based revenue increased 10% year-over-year, now representing over 60% of revenue and margins remained healthy at 38%. Defined contribution net flows were $8.1 billion in the quarter, supported by continued high client retention and large plan implementations in both government and corporate markets. Our platform now serves more than 10 million participant accounts, providing meaningful scale to drive future fee-based revenue growth. Stepping back, robust flows, high client retention and growth in participant accounts reinforced the strength of our retirement franchise. Turning to Investment Management on Slide 8. Adjusted operating earnings increased 12% year-over-year to $57 million, driven by higher advisory fees across institutional and retail channels. On a trailing 12-month basis, adjusted operating earnings increased 11%, reflecting both those higher advisory fees as well as disciplined expense management. Net inflows were $1.2 billion in the quarter and now $6.3 billion over the last 12 months. Looking ahead, we continue to see healthy client demand for our differentiated investment capabilities and robust investment performance. At the same time, the second half will include the wind-down of a legacy relationship, which will modestly offset momentum in actively distributed products. Importantly, the revenue impacts from this are expected to be immaterial in 2026. Overall, Investment Management delivered solid earnings growth supported by positive flows healthy client demand and strong investment performance. Turning to Employee Benefits on Slide 9. Adjusted operating earnings were $22 million in the quarter and $122 million over the last 12 months. In the quarter, we released $8 million of reserves and stop loss while continuing to hold reserves at the high end of our best estimate range. Early claims experience on 2026 business is encouraging and is emerging favorably relative to both 2024 and 2025 business. We also continue to see favorable underwriting conditions as we complete the non-January 2026 selling season and begin pricing for January 2027. In group life, results continue to benefit from favorable mortality consistent with broader industry trends. This helped to offset higher voluntary loss ratios in the quarter, which were elevated in part due to nonrecurring items. For voluntary, while onetime items contributed to higher loss ratios in the quarter, the broader trend remains consistent with our expectations as expense actions are supporting our plan to maintain net margins. Stepping back, the underlying fundamentals across the portfolio remains strong, highlighted by the 5-point improvement in aggregate loss ratios over the last 12 months. Our disciplined approach to risk selection, pricing and expense management reinforces our ability to deliver further margin expansion and earnings growth and employee benefits. Turning to Slide 10. We generated approximately $150 million of excess capital in the second quarter and $350 million year-to-date, with cash conversion above 100% in the quarter. We remain on track for 2026 cash generation to exceed 2025 levels, supported by strong cash conversion, second half earnings outlook and the expense actions we've discussed. On capital deployment, we repurchased $150 million of shares in the second quarter and $300 million year-to-date. We ended the quarter with approximately $200 million of excess capital preserving flexibility while continuing to return capital to shareholders. For the third quarter, we expect to deploy at least $100 million towards share repurchases and the second half cash generation outlook gives us flexibility to deploy additional capital in the fourth. Return on equity was impacted by alternative investment and severance items, which is why we are explicitly calling them out rather than leaving investors to reconcile the effect on their own. Stepping back, the second half outlook is supported by business momentum, expense discipline and improving fundamentals. Most importantly, cash generation remains strong, and we remain on track for 2026 to exceed 2025 levels. With that, I'll turn it back to Heather.

Let me close on Slide 11, which brings together the key points from today's discussion. We're carrying strong commercial momentum into the second half, particularly in Retirement and Investment Management. We continue to improve margins and employee benefits, supported by the pricing and underwriting actions we've taken across the portfolio. The expense actions we took in the second quarter alongside a more constructive macro environment provided a tailwind for increased earnings in the second half. Our cash generation remains strong with 2026 on track to exceed 2025 levels and conversion rates above our 90% target. We continue to be disciplined in deploying capital. We returned more than $380 million to shareholders in the first half of 2026. We are maintaining our commitment to return capital to shareholders in the second half with our repurchase program active in the market and at least $100 million of buybacks planned for the third quarter. Together, these actions reinforce our confidence in our strategy and position Voya to deliver continued earnings growth strong test generation and shareholder value. Before we go to questions, I want to thank our employees across Voya. Every day, they help our customers navigate some of life's most important financial decisions with greater confidence. Their focus and commitment continue to drive our success. With that, I'll turn it over to the operator so we can take your questions.

[Operator Instructions] Our first question is from Ken Lee with RBC Capital.

Just one on the investment management side, the institutional net inflows in the quarter. Wonder if you could talk a little bit more about some of the drivers there and perhaps also the -- any kind of color or composition of the pipeline?

Ken. Matt, we'll take your question. .

Yes. Happy to unpack that for you, Ken. So first quarter -- sorry, second quarter strong, that $1.2 billion, we're happy with. That's an annualized growth rate of about 1.6%. And Importantly, within that, the revenue yield was up as well. I think that's a counter industry trend, and that's supporting the broader fee revenue growth, and it shows the quality of those flows. You referenced institutional specifically, that's $1.6 billion, so providing the flows for the quarter. I would continue to call out the insurance strength we have that's backed by both our fixed income and our private credit capabilities that continue to resonate in the marketplace. That's both backward-looking and forward-looking to your question about the forward look. Overall, our demand for institutional retail products remains intact. And look, we like the competitive position in those fixed income international markets, which we believe are poised for continued growth, and that's what drives that long-term expectation of 2-plus percent.

Great. Very helpful there. And one follow-up, if I may. Any color around what you're seeing in terms of planned RFP activity within the retirement business there?

Yes, Ken, Jay will take your question.

Ken, yes, if you think about RFP volumes themselves, and they do differ across markets. If you think about our emerging market, you should think in terms of that mid-single digits, that 6% or 7% growth double-digit growth in mid-market where we're seeing a lot of activity and finding a lot of success. In that large mega, it's been very consistent in prior years, low single digit. Very healthy. And overall, we're really, really pleased with the RFP volumes that are really helping us through our commercial momentum.

And I think the broader step back, Ken, is that we continue to be very pleased with the commercial momentum in Retirement and the overall performance in our largest and highest margin business.

Our next question is from Tom Gallagher with Evercore ISI.

A few on Stop Loss. Heather, I know you mentioned the early '26 experience gives you confidence that margins will improve in Stop Loss. Any sort of quantification that you can share on how we should think about that the -- and is 3Q at all a possibility to change your 87 loss pick for '26? Or is it more likely need to be more seasoned that we would have to expect that to come through and have enough evidence to wait until Q4.

Tom, I'll let Mike start on the question.

Tom, yes, look, I think it's remotely possible in the third quarter, but I would circle the fourth quarter as really the more likely opportunity for that. Why is that we're 1/3 complete coming out of the third quarter, we're 2/3 complete coming out of the fourth, and we just really have 0 interest in trying to accelerate outcomes. That said, when we look at what we're seeing in the 26 business so far, it's running meaningfully better than what we saw in both '24 and '25 coming out of August. Now to get to completion here, we're about 15% to 20% complete coming out of the second quarter. But we're still going to think about this at the high end of best estimate reserve ranges. I think we've been very consistent about that. But what's important here is the work we did last year when you look at the underwriting team that we put in place, the leadership we put in place, which has really been all about how we quote, how we review and select risk. The other thing is just our ability to get rate. We got 21% rate increase coming into '25. We got 24% rate increase coming into '26. And frankly, we're getting even more rate in what we're pricing in '26. So I think the step back here is we feel really good but we don't want to accelerate any outcomes here, Tom.

Yes. Tom, it's Heather. And if I can just add a little more explicit points on the '26 book. Not only are we seeing better claims experience than the '24 and '25, again, it's early -- we're also seeing a lower number of high severity claims and we're seeing a lower number of frequency. So it's a combination of those in addition to the pricing, the reserve level. So that's just a little more color on the '26 book.

That's really helpful color. And just a follow-up and just if you don't mind bearing with me to follow my logic on this question. So the interesting thing to me was the '24 accident year, which I would have thought had no juice left in it at all. Actually had favorable development of 2 points between mid-25s to now. So that seemed favorable but then the '25 accident year has only improved 1 point versus your reset 90% loss ratio versus Q4 '25. So I guess my question is, I would have thought these would evolve seasoned by now, but it seems like it's taking longer. Is there something about these claims pattern that are stretching out the development for longer -- is that actually a trend? And what should we infer from that if that is, in fact, happening.

Yes. Tom, we'll let Mike hit more of the technical aspects of the question. I'll let Jay build a little bit more what are you seeing in the marketplace?

Yes, Tom, look, following the logic, I think what we talked about last quarter was there was a pending reserve cleanup that affected the reserve release in the first quarter. So when you think about how much reserve release was happening from the 25 book in Q1. It was about $7 million. And so the big balance of that was that pending reserve cleanup in '24 and '23. And so I think you're thinking about that right. I think we did see an acceleration of when claims were being reported. That's why we were careful at the end of last year. But there's not a new normal where it's taking over 2 years for this season. I think what we talked about with respect to '25, I see that as 90% to 95% complete at this point. So it's getting pretty firmed up. and we expect a similar pattern for the '26 business. Jay?

Tom, yes, I think if you take a step back and you think about -- since Q1 of '25, we've made real substantive changes to the stop loss leadership team and really the operating model itself. So we've got seasoned leaders and risk and pricing, underwriting, distribution and they've been focused on advancing this risk and operating model improvement with a clear focus. We've been very consistent on this margin over growth. And we're seeing the early results come through in our '26 book. We're pricing every piece of business to get back to our target loss ratios. Right now, the market demand is up over 13%. And quite frankly, the supply time isn't keeping up with the pace and so more employers are looking for stop-loss solutions. And with the market starting continuously hardening, we're confident in achieving the desired rate actions and importantly, the persistency targets that we've set for all this speaks to the strength right now of our clients and intermediary relationships, very active dialogue with them. And we remain focused right now on that disciplined pricing and risk selection and underwriting as we look to grow the business.

Our next question is from Joel Hurwitz with Dowling.

I wanted to touch base first on the expense actions. How much of the improvement in expenses in your back half outlook is driven by those. And do you think those are sustainable as we move into 2027?

Michael will take your question.

Joel, yes. No, as we were getting across in some of the prepared remarks that we do expect a 6-month payback and for this to drop to the bottom line, we talked about very early in the year that we, Heather, myself, the team, we're very much focused on self-funding growth investments. And so you're seeing these actions is why we had so much confidence around that. We do give a sense in the appendix of the materials on how to think about the split between retirement and employee benefits. To your question around looking beyond this year, we view the actions that we took here is resetting the baseline heading into 2027. We're just entering in the planning season here as we think about everything that we want to accomplish in 207 and beyond. And really the mindset that Heather, myself and the team has is operating leverage, full stop. And so it's also why we have so much confidence in the cash generation outlook. When we look at the actions this year, including severance, we still expect cash generation to increase and we expect it to increase again next year, and that's partly due to these actions on expenses, but also the commercial momentum that we've talked about as well as the margin expansion within employee benefits.

Got it. That's helpful. And then just shifting to voluntary, -- can you unpack the experience you saw in the quarter, just quantify the unusual items that you had? And I guess, where do you expect the loss ratio to go from here on that business? Is it still low 50%? Or are we creeping more towards like the mid-50s?

Joe, we'll let Mike speak to the loss ratio and then Jay can speak a little bit more to what we're seeing commercially in the market on voluntary.

Yes, sure, Joel. So just first, we did -- there were a couple of unusual items in the quarter. There were some billing true-ups that came out of the first quarter into the second quarter. So there's some normalization between those 2 quarters as well as some reserve adjustments through legacy products that get reported in that line because we have voluntary disability and other all in the same line. If I cut through all of that to your question, I would think of those having about a 2.5 point effect in the quarter. And so a more normalized number for voluntary in the 54% range year-to-date, 53%. So that's kind of what I would expect in the second half of the year. Now remember, we're putting up IBNR with those loss ratios as well and the fourth quarter is really important for voluntary. So we'll see how this ultimately shakes out, but I think that's a reasonable starting point. And I think the broader message that and we talked about this even earlier in the year and late last year was that we did expect higher loss ratios because we're getting after customer value here with these products. But we expect to do that while maintaining very stable net margins. And again, I think this is a nod to the expense actions we took in the quarter.

Yes. Just to build. If you think about right now, our position, Joel, as a top 3 voluntary provider, the strength sits in our distribution really enhanced service model, which matters in the market right now and our deep product expertise. And so the market demand is up year-over-year across all size segments for us and sales are up 7% on a trailing 12-month basis. So the commercial [ amenimum ] results are there. In addition, our voluntary persistency over the last 12 months that we really focus on has been extremely solid. It's really a strong persistency business for us. And so the overall business fundamentals remain strong. And we really like our market position as we continue to grow the voluntary sales. I appreciate the question here.

Our next question is from Ryan Krueger with KBW.

One question on stop loss. Just when you put everything together on the trends that you've seen -- do you feel like you can get back to your target margins in that business in 2027 at this point?

Yes, Ryan, it's Heather. Maybe I'll start, and then Mike can build is that's absolutely what our plan is. And as you've heard us talk about all the pricing actions we've taken, the discipline around underwriting, when we're pricing business, we are pricing it to be within the target range in '27. So certainly, the ambition, right, early, we like what we're seeing on '26. We still have the reserves set at the high end of the range, but that is absolutely our objective, Bryan.

Yes. The only thing I would add, Heather, like if you step back and look at the big picture here, Ryan, when you look at late 2024, we came in to get as much rate as we possibly could. 2025, as Jay talked about, we put our teams in place, we were able to get more premium -- or get more rate and still hold premium flat. That's really that Jan '26 business. what we're seeing in the middle of this year is getting even more rate. And that's just, I think, a nod to the market coming to us. We've seen that margins are deteriorating in the industry. That's a calendar year '25 to '24 comparison, and that's what's really allowing us to go get that rate. We got a lot of confidence in what we're seeing early as we head into the fall and price Jan '27, but every piece of business to Heather's point, that we've been pricing this year, last year was with the goal of getting this back to target margins.

And then just a quick one on record-keeping fees. They were flat sequentially despite the strong flows you had this quarter. I was just curious, is that more timing related on when the flows came in. And as a result, should we see some tailwind there in the second half of the year?

Yes. Thanks,. We'll let Mike start and Jay can add some color.

Yes. You alluded to it, Ryan. It's just timing. We -- when you look at kind of the timing of when flows came in and when flows came out in the first quarter, so we expect really healthy fee-based margins in the second half of the year, and part of that is due to the organic commercial momentum in the second quarter. And then obviously, we feel really good about the macro heading into third quarter from second quarter much different than what it was from second to first.

Yes. And Ryan, as we expected and we kind of shared last quarter, we expected to have strong commercial momentum in Q2, and we did. We generated over $8 billion of total defined contribution net inflows. And given the visibility we have in the pipeline, we remain positive on the second half of '26. While the flows do matter on this commercial momentum and -- we're also focused on our continued revenue growth. And so if you look at a trailing 12-month revenue being up 10%, high 38% margin, fee income is up 16% as Mike referenced, and that fee income continues to be an important part of our growth story. It now represents, as you heard, 60% of our operating revenue. We also completed the final phase of the One America integration during the quarter -- not only did that provide additional first service flows, but it enhanced our distribution scale and overall capabilities in certain product areas. And so as I think about our position as the top 5 defined contribution provider, if you look at it by participant accounts, we exceeded $10 million in -- that reflects the strength of the distribution, as I referenced. Our service model enhancements we've been making and overall, the ability to deliver consistent growth in our largest business.

Our next question is from [indiscernible] with Morgan Stanley.

I'm calling for Bob. Just wanted to ask about the retirement flows. So if we look at the quarter, record-keeping flows are quite strong and full service flows are improving from 1Q. So just curious, is that like still like the One America integration still impacting the surrenders? And are you expecting the surrenders to trend down in the second half?

For the question. I'll let Jay add color, but it's really 2 primary things. You are still seeing the effect of on America flows in the second half, which we expect to moderate and we do see the impact on higher participant account balances from equity markets. But Jay, please add more color.

Yes, that's right. I mean if you think about the broader industry, there is this equity market effect of full-service flows in Q2. I mean participants or renders are really common in this high equity market environment. And as you heard in Heather's opening, all first service sales in a really important market for us, emerging markets is up 30%. And kind of that broader step back is pretty clear. This was another quarter, another example of delivering strong results, as I said, in our largest business. We do -- again, that visibility into the pipeline we do remain highly positive on the second half of the year. Just to kind of answer your One America question, that integration is complete, right? So we completed the final phase during the quarter, and that transaction has really validated I would say, is our disciplined acquisition strategy and is establishing us really as a strategic acquirer in the retirement space. The benefits of that transaction continue to materialize. We've added new capabilities as I referenced, broader distribution opportunities and right now, incremental sales momentum we're getting from that acquisition, supported by strategic relationships -- those capabilities are in areas should think of like ESOP and self-directed accounts and tax-exempt capabilities. So really happy with both the talent we acquired, the financial results and the new capabilities that are driving additional commercial momentum.