Earnings Call Transcript - VOYA Q3 2022

Operator, Operator

Good morning, and welcome to Voya Financial's Third Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note this conference is being recorded. I will now turn the conference over to our host, Mike Katz, Executive Vice-President of Finance. Thank you. You may begin.

Michael Katz, Executive Vice-President of Finance

Thank you, and good morning. Welcome to Voya Financial's third quarter 2022 earnings conference call. We appreciate all of you who have joined us for this call. As a reminder, materials for today's call are available on our website at investors.voya.com or via the webcast. Turning to slide two. Some of the comments made during this conference call may contain forward-looking statements within the meaning of federal securities law. I refer you to the slide for more information. We will also be referring today to certain non-GAAP financial measures; GAAP reconciliations are available in our press release and financial supplement found on our website. Joining me on the call are Rod Martin, our Chairman and Chief Executive Officer; Heather Lavallee, our President and Chief Executive Officer-elect; and Mike Smith, our Chief Financial Officer. After their prepared remarks, we will take your questions. For that Q&A session, we have also invited Vice Chairman and Chief Growth Officer, Charlie Nelson; as well as the heads of our businesses, specifically Christine Hurtsellers, Investment Management, and Rob Grubka, Health Solutions. With that, let's turn to slide three as I turn the call over to Rod.

Rodney Martin, Chairman and Chief Executive Officer

Good morning. Let's begin on slide four with some key things. We delivered exceptional results during the third quarter, particularly given the challenging macroeconomic environment. We grew adjusted operating EPS excluding notables by approximately 28% year-over-year to $2.19. This strong performance reflects our continued execution of the organic growth, margin, and capital components of our EPS growth points. As a result, we now believe we will achieve our original 12% to 17% EPS target for 2022, despite the macroeconomic challenges we've experienced this year. Our confidence in achieving this target is driven by several factors: the diversity of our revenue streams and the markets we serve, including the positive impact of interest rates on our wealth business, the continued decline of COVID-related claims, the benefits we have already realized from the Allianz GI transaction including revenue on assets onboarded during the third quarter, and the removal of all stranded costs associated with our prior divestitures, which we achieved ahead of schedule. Looking more closely at our performance this quarter and over the trailing 12 months, all of our businesses achieved organic growth in line with our annual targets. During the third quarter, we generated positive full-service net flows of $555 million in Wealth Solutions, contributing to net flows of $1.1 billion over the trailing 12 months. Full-service recurring deposits grew 10.4% compared with the prior year period to $13 billion. In health solutions, annualized in-force premiums grew 9.7% compared with the prior year period to $2.8 billion. This was driven by growth across all of our product lines, including a 22% increase in our voluntary product line. In Investment Management, net flows over the last 12 months were nearly $10 billion. This represents strong organic growth and the initial benefits from our transaction with Allianz GI. We concluded the third quarter with approximately $700 million of excess capital. In the third quarter, we deployed $172 million to extinguish debt and pay common stock dividends. This brings our total excess capital deployed over the trailing 12 months ended September 30 to approximately $1.9 billion. Finally, we announced our acquisition of Benefitfocus yesterday. This transaction represents an immediate and long-term growth opportunity for Voya. We believe this acquisition is both highly strategic and financially compelling. It accelerates a key priority of our strategy that enables us to further integrate our health and wealth solutions, leading to improved outcomes for our customers, intermediaries, and our shareholders. This transaction is also highly strategic and an attractive form of capital deployment given the immediate cash accretion and the long-term revenue growth opportunities it brings while accelerating our strategy. We continue to build on our track record of delivering strong value and returns for our shareholders. In a moment, Heather will share more details on how this strategic acquisition accelerates our health and wealth strategy.

Heather Lavallee, President and Chief Executive Officer-elect

Thank you, Rod. As Rod shared, our execution of the strategy that we shared with you at Investor Day continues to result in strong outcomes across our businesses and exceptional financial results. In addition to organic growth, we continue to demonstrate the successful outcomes of the investments we have made in our business, as well as the additive growth potential of inorganic opportunities that we have been able to pursue. Let's move to slide seven to begin with a new inorganic opportunity that we announced yesterday, the definitive agreement to acquire Benefitfocus. This acquisition is an exciting opportunity to accelerate Voya's strategy in Health and Wealth Solutions, adding broad-based benefits administration capabilities that extend our reach across workplace benefits and savings. At the same time, Benefitfocus presents a strong foundation for our customer-centered growth. Importantly, we were attracted to the significant transformation that Benefitfocus has executed, and we believe that as part of Voya, it will be able to leverage our scale, technology, digital capabilities, and operational expertise. This will add further value to Benefitfocus and ultimately, Voya's clients as well. We spent meaningful time with Matt Levin, who joined Benefitfocus as CEO last year, and the experienced team that he has assembled. We've been impressed by their exceptional talent, strong capabilities, and extensive reach across the Benefits industry. We believe this transaction will expand our ability to deliver innovative solutions for employers and health plans, and help improve the financial, physical, and emotional well-being of their employees and members. Finally, and just as important, the transaction will be immediately cash accretive relative to buybacks, even before future revenue synergies. Turning to slide eight, I'd like to share more about how this transaction supports and accelerates our strategy while also driving revenue growth. At our Investor Day last year, we shared our revenue growth levers with you. Benefitfocus will play a valuable and important role. First, we will continue to deepen relationships, both with our employer clients and intermediary partners. We will do so by helping to make the connections across workplace savings and benefits so that our customers can optimize their benefit spend and generate positive outcomes for their employees. In doing so, we will remain committed to an open-architecture product-agnostic approach. Second, we are growing and will grow our customer base. We have demonstrated our ability to drive organic growth at Voya through client retention, adding new customers, and expanding the solutions we provide to existing customers. With Benefitfocus, our reach will be even broader to continue this momentum. Benefitfocus serves leading brokerage and consulting firms in the Health and Benefits industry, touching more than 25 million lives on its platform. Combined with our workplace customers, Voya will serve approximately 38 million individuals or roughly one in 10 Americans following the completion of this acquisition. Our intermediary partners play a valuable and important role in helping customers achieve their workplace savings and benefits goals, and they will play a key role in both expanding our capabilities to more clients and in bringing new clients to Voya. Finally, we will continue to expand our offerings by meeting the growing demand for comprehensive benefits and savings solutions at the workplace. A key aspect is the innovative solutions we are introducing, which will enable us to further grow our revenue streams and expand into adjacencies. This includes our new digital capabilities, such as our myVoyage mobile app that improves experiences and leads to better outcomes. In a moment, I'll give you an example of how our work here is leading to positive results for our clients and for Voya. In summary, Benefitfocus represents a compelling and exciting inorganic growth opportunity that aligns with our strategy, will enable us to deepen and expand relationships with our customers, and deliver greater value for all of our stakeholders, including clients, intermediaries, and shareholders.

Mike Smith, Chief Financial Officer

Thank you, Heather. Let's turn to our results on slide 12. In the third quarter, we delivered very strong results with adjusted operating earnings of $2.30 per share. This includes three notable items. First, $0.70 of net alternative income below long-term expectations; second, $0.37 of favorable DAC unlocking related to our annual assumption review; and third, $0.44 of favorable non-cash reserve release in Health Solutions, also driven by our assumption review. Excluding these items, we grew adjusted operating earnings per share by 28% year-over-year to $2.19. Both reflect higher net investment spread revenue and wealth, strong underwriting results in Health, and earnings in investment management from the close of the AllianzGI transaction. Third quarter GAAP net income was $193 million. Strong operating earnings were modestly offset by AllianzGI transaction costs, investment losses driven by increases in rates and spreads, and modest losses related to businesses we have exited. We are very pleased with our third quarter results, which exemplify how our diverse revenue streams and complementary businesses enable us to effectively navigate through the rapidly changing economic landscape. Moving to slide 13, Wealth Solutions delivered strong results for the quarter demonstrating the strength of our diversified business mix and revenue sources. Third quarter adjusted operating earnings were $168 million. This included $70 million of alternative income below our long-term expectations and $50 million of favorable DAC unlocking. Adjusted operating earnings excluding notables were higher than the prior year period despite unfavorable equity markets. Net revenues ex notables grew over 4% on a trailing 12 month basis. Our spread-based revenues benefited from higher interest rates, which more than offset the impact of equity markets on our fee-based margin. We expect fourth quarter spread income to be between second and third quarter levels as third quarter favorability in yields and credited interest is not expected to repeat. Third quarter adjusted operating margin was 36.4% on a trailing 12 month basis. This was above our target range of 34% to 36%, demonstrating our ability to manage spend through challenging macro cycles. Turning to deposits and inflows. Full-service recurring deposits grew by approximately 10% on a trailing 12 month basis with expectations for full-year deposit growth of 10% to 12%. We continue to see favorable year-over-year trends. The number of employees deferring has increased 5% while average participant deferrals have increased 4%. As employment trends remain healthy, the number of employees receiving an employer match has increased 8%. Full-service net inflows were $555 million this quarter, reflecting strong plan sales and favorable retention. This builds upon the strong second quarter flows generated in full service. Record keeping net inflows were $2 billion, due to a new large case and favorable participant withdrawals. Looking ahead, we expect a favorable trend in full-service net cash flows to continue and we have a significant pipeline coming in 2023. Our wealth solutions business is well diversified across markets supported by a strong national distribution footprint. When we consider this along with our leading brand and differentiated value proposition we are well positioned for long-term success.

Rodney Martin, Chairman and Chief Executive Officer

Thank you, Heather. We continue to make great progress in Investment Management due to our existing capabilities and the added momentum of the AllianzGI transaction. After completing the transaction in July, we are already seeing the benefits of this acquisition, including the emerging value from our new strategic distribution partnership with AllianzGI. This partnership, along with the retention of 95% of the assets associated with the business, will enable us to add value to both our customers and our shareholders. For example, we continue to estimate cash accretion to the company's adjusted operating EPS at 6% to 8% for 2023. We are excited about new opportunities resulting from this transaction, including significant scale and diversified revenues for our asset management business and global distribution with a leading international partner for existing asset management expertise and strategies. Overall, we are executing on the strategy that we have shared with all of you. We are delivering great outcomes for all of our stakeholders, and we are excited about the additive benefits that both AllianzGI and Benefitfocus transactions will bring to all of our stakeholders.

Operator, Operator

Thank you. And ladies and gentlemen at this time, we will conduct a question-and-answer session. Our first question comes from Suneet Kamath with Jefferies. Please state your question.

Suneet Kamath, Analyst

Thanks everyone. Good morning Mike, it's great working with you. Best of luck in the future. I wanted to start with Benefitfocus, if you could, just curious what's the sort of earnings baseline we should be thinking about sort of out of the gate and then if you could talk about any numbers around near-term expense synergies as well as opportunities on the revenue side?

Rodney Martin, Chairman and Chief Executive Officer

Sure Suneet, Heather will take this.

Heather Lavallee, President and Chief Executive Officer-elect

Good morning, Suneet, and thank you so much for the question. And I'll start by saying we couldn't be more excited about the opportunity to bring Benefitfocus' capabilities into the broad solutions that Voya offers. And before I address your question, I thought it might be helpful just to give a little more of the strategic rationale of why our benefit administration capability is important to Voya. When you think about the employer clients that we serve at the workplace, we have already offered very broad solutions. So if you think in the retirement space, we have the record keeping capabilities, we have the user experience, the guidance engines, and then the breadth of investment solutions that we offer both within our asset management company as well as partner asset management companies. In our health solutions, we've got a breadth of voluntary solutions that we offer for employers to help meet protection needs, but we did not have the benefits administration or the front-end user experience. This capability allows us to have both that benefits administration capability on the health side to connect with all of the different partners, the health providers, and the benefit providers while leveraging our myVoyage front-end user experience to really connect what has typically been unconnected. So, I wanted to start with that just to make sure that we've got a good grounding in the strategic rationale. Now to get to your question specifically around the run-rate, why is this accretive immediately? When you think about Benefitfocus as a publicly traded organization, you can see that they've got a revenue run rate of about $250 million on an annual basis that's recurring revenue. We're able to take advantage of immediate expense synergies from some corporate expenses. Think about the elimination of public company expenses, as well as taking advantage of our tax asset. All of this is before synergies that we see on the horizon and it's before synergies that we see in our ability to help Benefitfocus accelerate their growth plan and improve their margin by leveraging our technology, digital, and operational experience. So let me pause; I may have talked through a lot. Let me just see if I answered your question.

Suneet Kamath, Analyst

You did and that was helpful. I guess I just want to be clear that we have a good launching point in terms of the earnings base that we should be assuming again. I hear the $250 revenue and some benefits. I just wonder if we can get a little bit more clarity just so we're all starting at the right point.

Heather Lavallee, President and Chief Executive Officer-elect

Yes, I'll say we're going to come back with more specifics. As you can see, Benefitfocus is a public company today and their information is clear. We've included some information in our presentation around their current margin, their current revenue, so expect we're going to come back with a bit more specifics on the accretion as we get closer to close.

Mike Smith, Chief Financial Officer

Sure. Look, I think let's do them each in turn. We'll start with Wealth side. The strong performance in the quarter was largely driven by investment spread. We gave a sense that fourth quarter, you should see a little bit of a pullback there, all else equal to a level that will be between second and third quarter. And I think that continues to be sustainable, so long as the macro environment continues to support that. Our reinvestment rate is now, and it's hard to believe I'm even saying this, substantially higher than our portfolio yield. It's been probably 10 years since that was true. That should continue to be a good tailwind. Obviously, equity markets will have a role to play in that as well. But I think we've demonstrated consistently year in and year out an ability to manage to a consistent margin and the current margin is very solid. On the Health side, what we saw was, if you take out the noise from that reserve release, still really strong underwriting results. I think a return to normalcy for the life business or the Group Life block; very good voluntary results. I think you could see a little pullback on that in the fourth quarter. There's a normal seasonality that you see in the Voluntary business in the fourth quarter as people are reminded through the enrollment process that they have these benefits. Stop Loss continues to be very strong, and we're very pleased with the results across the board. So particularly in the Group Life business, there we've been through a couple of tough quarters. Ex-COVID, we viewed that as noise, and I think this quarter supports that thesis. On Investment Management, continued expense discipline in the face of really adverse market conditions, I think, is the watchword there, plus the benefit of the growth that we're going to see from the AllianzGI relationship; the new not only investment capabilities but also new distribution horizons for us to explore. All of that goes to a very sustainable and I think a very strong picture for Voya going forward.

Wilma Burdiss, Analyst

Thanks. Hi, good morning. Just following up on Suneet's question, could you help us quantify some of the expense synergies? They seem like they could be pretty material given I think the company has public company costs and other things.

Heather Lavallee, President and Chief Executive Officer-elect

Wilma, this is Heather. I'll take the question. So if you think about it, Benefitfocus is a small-cap company. So we're able to achieve a relatively small amount of expense synergies and have an immediate cash accretion. So we'll come back with more specifics. But really, just think about it in terms of small amount of expense synergies; it does have a meaningful impact on the accretion.

Mike Smith, Chief Financial Officer

Sure, well I could you just repeat that it was a little garbled. I didn't quite catch it, but it had to do with excess capital.

Wilma Burdiss, Analyst

Yes, if you could just walk us through the expected excess capital position after the deal closes in 1Q.

Mike Smith, Chief Financial Officer

Okay. I'll share some things to consider. I’m unsure if we will project what the excess capital will be in the second quarter of 2023 because there's much to assess. The transaction is expected to close in the first quarter of 2023. We finished the third quarter with about $700 million in excess capital. This transaction will use around $550 million of that. However, we will generate capital from earnings in the fourth quarter and again in the first quarter. Depending on what we see during those quarters, we should still have significant excess capital above the 375% RBC level by the end of the first quarter. Time will tell. We remain optimistic about the credit environment in the near term. The longer-term outlook is still uncertain. That's just the way to approach it. The cash we mentioned for the transaction is potentially four to six months away.

Heather Lavallee, President and Chief Executive Officer-elect

And Wilma, it's Heather, one more point I would add to it is that you can expect that our strategy around capital deployment and being disciplined with capital is going to remain going into '23. We're going to continue to be good stewards of shareholder capital as we always have been and we'll continue that into '23.

Erik Bass, Analyst

Hi, thank you. It looks like Benefitfocus expects relatively flat revenues in 2020 versus 2021. So I was just hoping you could talk about what's been weighing on growth recently and what gives you confidence that this can accelerate going forward.

Heather Lavallee, President and Chief Executive Officer-elect

Hey, good morning, Eric, it's Heather again, I'm happy to take your question. First, let me start with what gives us confidence going forward; Benefitfocus has a new management team, but very seasoned with a combined over 300 years' experience in the Benefit administration space. They've got a very clear but achievable path forward to drive revenue growth as well as a clear path around the road map to enhance capability. Now when you look at why they have been largely flat revenues over the past few years, they had some stumbling blocks that were really not attributed to this new management team, and that's what gives us tremendous confidence with Matt and with his team. One of the other items that I would point to is that both Benefitfocus and Voya are absolutely committed to an intermediary-centric focus. In our business, the brokers, consultants, advisers are the ones that are really making recommendations around benefits administration, product placement, retirement, and we're committed to an open architecture and product-agnostic approach in terms of this partnership. So we do feel very confident with the achievable plan going forward.

Erik Bass, Analyst

Thank you. And maybe a follow-up is just as you think about the financial benefits over time, is it going to come mostly from growing their revenue base on existing products? Or is it ultimately also going to be revenue synergies and distribution opportunities for Voya-produced products as well?

Heather Lavallee, President and Chief Executive Officer-elect

Yes. I'll begin and then ask Charlie to provide some insights on the growth potential. Our valuation of Benefitfocus was based on their current plan and their ability to achieve it, which we consider quite reasonable. We did not factor in any assistance Voya could offer to accelerate their plan through our scale, distribution, technology, and other resources. We are enthusiastic about the opportunities to enhance revenue growth moving forward, although this is not about immediate accretion. Now, I'll pass it to Charlie for further thoughts.

Charles Nelson, Vice Chairman and Chief Growth Officer

Thanks, Heather. I want to take a moment to discuss the benefit administration market. Benefit administration is central to workplace benefits decisions and usage. It involves understanding which benefits people are eligible for, enrolling them in various benefits, and handling billing for those service providers. Typically, employers offer around 17 different benefits, so managing eligibility and enrollment is crucial. The core benefit administration market is growing significantly with a substantial total addressable market nationally. There are also additional solutions, such as benefit guidance, data insights, claims analytics, and recovery services, that complement this core market. Overall, the benefit administration market presents significant growth opportunities.

Heather Lavallee, President and Chief Executive Officer-elect

I’d like to add that our ongoing revenue diversification specific to our Wealth business remains a significant strength. We've observed our ability to grow spread income, which helps counterbalance the decline in equity markets, all while keeping a disciplined focus on expenses and diversifying our business mix. Being involved in multiple sectors with various dynamics among participants, particularly with a combination of equity and more spread-based products, continues to bolster our overall strength.

Alex Scott, Analyst

Hi. The next question I had is on the Wealth Solutions business. I just wanted to see if you could provide any color on how you're shaping up and switching activity of different customers. And if you're sort of more of a net beneficiary or if that hurts going into the end of the year? Any kind of color you can give on the pipeline.

Heather Lavallee, President and Chief Executive Officer-elect

Yes. Happy to do so. It's Heather, I'll chime in. So as you saw in the quarter, very strong flows with $555 million, bringing us to $2 billion of full-service flows year-to-date, recurring deposits right within the wheelhouse. What's driving it is we do have strong sales, but we have favorable plan and participant retention and a really healthy pipeline. We are planning for another quarter of positive flows looking into the fourth quarter. So we feel very good about the momentum in the Full Service business. If I turn quickly to recordkeeping, we've talked about in the past that recordkeeping business, we have to take a longer-term horizon because there's much longer lead times. Again, pleased with the $2 billion in flows that we had in the quarter for recordkeeping. Over the last three years, we've generated $32.4 billion in net flows in recordkeeping. We have one of the healthiest pipelines we've had in a number of years and a significant number of unfunded wins that will fund within '23. We feel very good about commercial momentum across both Full Service and recordkeeping.

Rodney Martin, Chairman and Chief Executive Officer

Thank you, Heather. I'd like to share a heartfelt thank you to Mike Smith for his significant leadership contributions to Voya during the past 13 years. Mike, we are and I am deeply grateful for your service to Voya and we wish you and your family the very best. Our success continues to reflect our clear strategy, diverse businesses, and focus on execution, as well as the commitment and dedication of our people. We remain confident in our long-term strategy as we continue to execute on our organic growth, capital, and margin initiatives. We will continue to take purposeful actions to advance our strategy and expand our ability to address the health, wealth, and investment needs of our customers. We look forward to updating you on our progress. Thank you and good day.

Operator, Operator

Thank you. That concludes today's conference. All parties may disconnect. Have a good day.