Earnings Call Transcript - VOYA Q2 2022

Operator, Operator

Good morning, ladies and gentlemen, and welcome to Voya's Second Quarter 2022 Conference Call. Please note that this conference is being recorded. I will now turn the conference over to our host, Hima Inguva, Senior Vice President, Head of Investor Relations. Thank you. You may begin.

Hima Inguva, Senior Vice President, Head of Investor Relations

Thank you, and good morning. Welcome to Voya Financial's second 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 2. 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 this slide for more information. We'll 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, investors.voya.com. 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 Vice Chairman and Chief Financial Officer. After their prepared remarks, we will take your questions. For the Q&A session, we have also invited Vice Chairman and Chief Growth Officer, Charlie Nelson; as well as heads of our businesses, specifically Christine Hurtsellers, Investment Management; and Rob Grubka, Health Solutions. With that, let's turn to Slide 3 as I turn the call over to Rod.

Rodney Martin, Chairman and Chief Executive Officer

Good morning. Let's begin on Slide 4 with some key themes. Our results during the second quarter reflect the continued execution of our strategy and long-term growth plans. This resulted in a number of positive outcomes, including strong adjusted operating EPS, continued momentum across our businesses, as well as disciplined and opportunistic capital deployment. As a result, we generated second quarter adjusted operating EPS of $1.67. Excluding notable items, EPS grew 18% year-over-year. We're pleased with the strong year-over-year growth. This is a result of the diligent execution of our plans, strong relationships with our distribution partners and a shared focus on client needs. Our client-centric focus can be seen in organic growth across our businesses. In Wealth Solutions, Full Service recurring deposits for the trailing 12 months grew 11.2% compared with the prior year period. During the second quarter, we generated positive Full Service net flows of $1 billion. In Health Solutions, annualized in-force premiums grew 9.3% compared with the prior year period. This was driven by growth across all product lines, including a 24% increase in Voluntary. In Investment Management, we generated $559 million of positive net flows during the second quarter. Net flows over the last 12 months were nearly $10 billion, representing organic growth of 4.6%. Voya is meeting the complex and increasing needs of our clients, as they face challenges and changes in the macroeconomic environment. Despite inflationary pressures and volatility in both the equity and interest rate markets, Voya remains well positioned. At a time when many are seeking help to navigate challenging economic times, both at home and in the workplace, our digital capabilities, insights, and focus on client needs enable Voya to remain a trusted partner to our customers. This, along with our continued focus and commitment to execution, has us well positioned to generate double-digit EPS growth in 2022. In addition to our commercial growth, we're excited about the additive inorganic growth that will result from our recently completed transaction with AllianzGI. This transaction is a great inorganic opportunity that will complement the already strong organic growth plans that we've shared with all of you. Specifically, it adds significant scale and diversified revenues to our Asset Management business, combining new investment capabilities with a major expansion of our international and domestic retail reach. It also provides global distribution for our existing Asset Management expertise and strategies with a leading international partner. Along with our continued investments in technologies and capabilities that will meet the broad health, wealth, and investment needs of our clients, this transaction enables us to drive even greater positive outcomes for our customers, our employees, and our shareholders. It will also provide financial benefits for Voya, including immediate cash accretion to the company's adjusted operating EPS estimated at 6% to 8% for 2023. And it required no external financing or use of Voya's excess capital, fully aligning with our company's future flexibility and opportunities as we continue to remain focused on our long-term growth and EPS plans. Notably, this transaction was completed in just two short months. This is a terrific example of the hard work and dedication of our people. Thank you to everyone across Voya for your continued hard work and support. In addition to the revenue and EPS growth, we continue to demonstrate our focus on being good stewards of shareholder capital. During the second quarter, we deployed approximately $300 million in excess capital through a combination of share repurchases, debt redemption, and common stock dividends. This now brings our total excess capital deployed for the first half of 2022 to approximately $1 billion. Over the trailing 12 months, we have deployed $1.7 billion and concluded the quarter with approximately $700 million of excess capital. Moving forward, we will continue to be both disciplined and opportunistic with capital deployment. Turning to Slide 5. Our focus on our brand and culture continues to differentiate Voya. We have once again earned several recognitions for our strong culture and commitment to clients. Recently, Voya earned recognition as the Best Place to Work for Disability Inclusion for the fifth consecutive year. Voya earned a score of 100% on the 2022 Disability Equality Index. And in May, we once again celebrated Voya's National Days of Service. Voya employees volunteered more than 10,000 hours to numerous nonprofits across the country. Voya has been recognized as a top five retirement plan provider in the first-ever National Association of Plan Advisors' Advisor Choice Awards. And our company earned DALBAR's ESG Retirement Plan Certification, along with a five-star rating for the second year in a row. The actions of our people and our company reflect the strength of our culture and how that carries through in all that we do. Turning to Slide 6, we announced last month our leadership succession plan, with Heather Lavallee becoming our President and Voya's next CEO. As President, Heather has joined our Board and is now overseeing all of our businesses. She has distinguished herself as an extraordinary executive focused on growth, innovation, and our culture. Working closely with me and our Board and our entire management team, Heather has played a vital role in shaping and driving Voya's enterprise growth strategy and is well prepared to lead this continued execution and evolution going forward. At the same time, I'm delighted to have the opportunity to continue as Executive Chairman through early 2024. It's been an honor and a privilege serving as Voya's CEO, and I'm both excited and optimistic about our company's growth opportunities and prospects. With that, let me ask Heather to say a few words.

Heather Lavallee, President and Chief Executive Officer-elect

Thank you, Rod. Based on the performance of the great team we have at Voya, our company is well positioned for continued growth across each of our businesses as we deliver greater value for all of our stakeholders. We will do so through purposeful steps to continue to provide solutions that meet the growing needs of our clients and customers. The corporate responsibility that we demonstrate and the positive impact that we make in the communities in which we live and work. During my 14 years at Voya, I've had the opportunity to lead our Health Solutions business as well as our Wealth Solutions business, and to work closely with our Investment Management team and enterprise leaders in shaping and driving Voya's growth strategy. Rod has clearly set the bar high for what success looks like at Voya, and our management team looks forward to building on Voya's strong momentum. We remain committed to our strategy and the three-year growth plan that we shared with you at Investor Day last year. This includes delivering organic growth, disciplined and opportunistic excess capital deployment, and strong EPS growth. Our strategy puts the needs of employers, employees, and intermediaries at the center of all that we do. We help employers optimize their workplace benefits and savings. We partner with intermediaries to work together to enable employees to make the right financial decisions. And we provide investment capabilities that meet the long-term needs of investors and retirement plan participants. I look forward to working closely with all of our talented people as we execute the strategy we have shared, advance our growth plans, and deliver greater outcomes for all of our stakeholders. With that, let me turn it over to Mike to provide you more details on our financial performance and results.

Michael Smith, Vice Chairman and Chief Financial Officer

Thank you, Heather. The leadership team is excited to see you stepping into your new role, and is confident Voya will continue to see great success under your leadership. Let's turn to our results on Slide 8. Despite the ongoing macro headwinds facing our industry, we delivered strong results this quarter, with adjusted operating earnings of $1.67 per share. This includes two notable items. First, $0.06 of net alternative and prepayment investment income below long-term expectations. And second, $0.03 of unfavorable DAC unlocking. Excluding these notable items, we grew our adjusted operating earnings per share by 18% year-over-year despite the equity market headwinds. This result reflects the diversification of our revenue sources, coupled with disciplined expense and capital management. We remain confident in achieving double-digit EPS growth in 2022 before the accretive impacts from AllianzGI. Second quarter GAAP net income of $64 million reflects strong operating earnings, offset by an impairment on owned real estate, investment losses associated with higher rates and wider spreads, and the legal accrual related to businesses we have exited. Roughly half of the differences between GAAP net income and adjusted operating earnings impacted capital generation for the quarter. Moving to Slide 9, Wealth Solutions continues to deliver strong earnings and operating margin given its diversified revenue streams. For the second quarter, the business generated adjusted operating earnings of $186 million. Second quarter adjusted operating margin was at the top end of our target range of 34% to 36%. Net revenue, excluding notable items, has grown nearly 8% over the last 12 months. Our spread-based income is benefiting from the higher rate environment, largely offsetting the impact of equity markets on fee-based income. Third quarter spread income is expected to be slightly above Q1 levels, given investment income one-timers in the second quarter and higher credited interest next quarter. The continued earnings strength of this business highlights the benefit of our diversified revenue mix as well as our proven ability to effectively manage spend. Turning to deposits and flows, full service recurring deposits grew by over 11% on a trailing 12-month basis as we continue to see favorable trends in employee and employer contributions across both corporate and tax-exempt markets. To the extent that inflation continues to drive higher wages, we should expect to see a benefit to recurring deposits given deferral rates off of higher salaries. Second quarter Full Service net inflows were strong at $1 billion, driven by solid new plan sales and strong plan retention well above historical averages. This quarter, we generated positive net flows in both recordkeeping and stable value, with $224 million and $549 million of net inflows, respectively. Looking ahead, while we expect some moderation inflows relative to second quarter levels for the rest of the year, we are very pleased by the overall picture, which reflects continued strong plan sales and the likely return of plan retention to historical levels. Our Wealth Solutions business is well diversified across plan sizes, industries, and tax codes with a strong national distribution footprint. When we consider this, along with our leading brand and differentiated value proposition, we are confident we can continue to successfully navigate the current environment while positioning us for long-term success. Turning to Slide 10. During the second quarter, Health Solutions once again saw meaningful growth in revenue with net revenue excluding notables growing nearly 13% year-over-year on a trailing 12-month basis. In addition, we continue to deliver annualized in-force premium growth at the top end of our 7% to 10% target range, with second quarter in-force premiums 9.3% higher than the prior year quarter. Our continued momentum reflects growth across all product lines. Adjusted operating earnings were $47 million for the second quarter as strong revenue growth was partially offset by higher expenses related to the growth of the business. Margins remained within our targeted 27% to 33% range. Our total aggregate loss ratio was at the top end of our target range, driven by a higher Group Life loss ratio. Our second quarter Group Life loss ratio was elevated on an ex COVID basis as we saw elevated non-COVID claims. This was primarily due to a higher prevalence of large claims. Taking a step back and looking at the entirety of the pandemic, non-COVID mortality has been in line with our pricing expectations since the start of the pandemic. Overall, we remain confident in our pricing levels, and we'll continue to be disciplined in our pricing decisions. Due to the sharp decline in U.S. COVID-related deaths, COVID claims were not material during the quarter and thus were not viewed as a notable item. COVID claims for the quarter were in line with expectations. Loss ratios on Voluntary and Stop Loss were favorable and in line, respectively, demonstrating the value of diversification within the health business. Looking ahead, we remain confident in our ability to grow revenue and maintain margin, supported by diversified revenue and earnings streams, pricing discipline, and expense management. Moving to Slide 11. Investment Management continues to grow AUM in privates and alternatives, improving our revenue yield and supporting our path to margin expansion. We expect the transformative AllianzGI acquisition, which we closed last week, to be an additional engine driving future growth in our investment management business. Through the new strategies we've added, the diversification of our revenues across international markets and in retail, and the global distribution capacity, we can now access for Voya IM products. More on AllianzGI in a moment, but returning to the quarter's results. IM's trailing 12 months net revenue grew over 7% year-over-year on an ex notables basis, with the strength in private I just mentioned, helping to offset equity and fixed income market volatility. Second quarter adjusted operating earnings were $40 million. This reflects continued action from management to drive expense efficiencies and translates to a trailing 12-month's adjusted operating margin of 25%, excluding notables. Turning to flows, we generated another quarter of net inflows at $559 million, driven by continued strength in institutional net flows as a result of private and alternative fund closings. This quarter's flows contributed to nearly $10 billion in net flows over the last 12 months, representing a 4.6% organic growth over that time. Looking ahead, while we see some near-term headwinds as we transition from existing international distribution channels to our new AllianzGI partnership, we remain quite bullish about our prospects. Investment performance remains strong across a broad array of fixed income strategies, with 89% of our fixed income funds outperforming on a 5- and 10-year basis. Before we turn to capital, I do want to give a brief update on our transaction with AllianzGI. We are very pleased to share that we have received consents and approvals for the transaction with respect to 95% of in-scope client assets. As a result, we have acquired approximately $93 billion of assets under management through the transaction, with most of the decline in AUM compared to the original $120 billion in-scope reflecting adverse market conditions over the second quarter. In addition, as we have previously described, we are protected against any AUM outflows for the balance of 2022 through the first quarter of 2023. We have also refreshed our projection of operating margin for the entire IM business to reflect macro pressures through the end of June. We now expect margins to be in the range of 29% to 31% in 2023 and grow to between 30% and 32% by 2024. For Voya Financial on a consolidated basis, we continue to expect immediate 6% to 8% cash EPS accretion, with GAAP accretion more to the lower end of that range. Lower GAAP accretion relative to cash is due to $5 million to $10 million of annual amortization of an intangible emerging from the transaction. Yesterday's announcement about our acquisition of Czech Asset Management is yet another example of an accretive inorganic opportunity that we've been able to execute on to help drive future growth in Voya IM. Czech is a boutique private credit manager focused on middle-market direct lending with several billion in committed capital in private funds. We view this as another example of executing on our Investor Day strategy to grow the contribution of private and alternative assets to revenue growth and margin expansion. We expect to close the acquisition of Czech Asset Management in the fourth quarter. While our IM business, like other asset managers, continues to see impacts from equity and fixed income market volatility, we are energized by the benefits of increased scale, revenue diversification, international distribution, and margin support that the AllianzGI transaction will deliver. This increased strength will complement continued growth in privates and alternatives, and effective expense management as primary drivers of future financial performance. Turning to Slide 12. With the challenges in the equity market, capital management continues to be a key lever in ensuring we hit our EPS growth targets. Through the first half of the year, we have deployed approximately $1 billion of capital through share repurchases, debt extinguishment, and dividends. This contributed to the $1.7 billion of capital we've deployed over the past 12 months. In late June, we entered into a $250 million ASR, which we will complete in the third quarter. In addition to share repurchases, we extinguished $22 million of debt and paid $20 million in common dividends. The second quarter financial leverage ratio was 36.9%, reflecting a decrease in AOCI due to an increase in rates and wider spreads. Despite this impact, a prolonged steady path of higher rates will continue to help short-run earnings with building long-run benefits, which is a clear credit positive for Voya. Moving forward, we will continue to balance debt extinguishment with share repurchase activity to achieve acceptable levels of financial leverage consistent with our targeted credit and financial strength ratings. Overall, our balance sheet and capital position remains strong. We have a well-diversified portfolio built to deliver attractive risk and capital-adjusted returns through the business cycle. Our ending excess capital position was approximately $700 million, reflecting capital generation of approximately $100 million during the quarter, with some offset due to the one-time net income impacts I mentioned earlier. Going forward, we remain confident in our projected 90% to 100% free cash flow conversion, giving us continued flexibility as we look for opportunities to invest in the growth of our businesses. In summary, we are pleased with another quarter of strong earnings and positive commercial momentum as we make further progress in support of our long-term plan to drive organic growth. We continue to manage our capital the same way we always have, with an eye toward delivering shareholder value. And we are encouraged that the AllianzGI transaction will accelerate the organic growth our team is already driving, reaffirming our confidence as we look to the rest of 2022 and beyond. With that, I will turn the call back to the operator so that we can take your questions.

Operator, Operator

Thank you. Our first question comes from Ryan Krueger with KBW. Please state your question.

Ryan Krueger, Analyst

Hi, thanks. Good morning. My first question was, could you comment a little bit more on your flow expectations in Investment Management, I guess, in the second half of the year and how to think about potential disruption within Allianz and the shift in the international distribution?

Rodney Martin, Chairman and Chief Executive Officer

Ryan, good morning. It's Rod. Christine, do you want to start?

Christine Hurtsellers, Head of Investment Management

Certainly. Thank you. So how to think about second half of the year flows? I would say, what we see - the pipeline that we have in our core business of opportunities on unfunded wins continues to be strong. And as you know, certainly, it's been a challenging environment year-to-date for asset managers generally, and yet we continue to deliver positive net cash flows including this quarter, so very excited about that. Now looking forward and how to think about AGI and some possible headwinds to our flows, I would say really is in the international business that we currently have. So as you know, we have a long-standing distribution partner NNIP, which is now part of GSAM. And it's natural as far as new opportunity introductions and things that they normally do have slowed down. So think about this as a bit of a ramp, right, where we have somewhat of an off-ramp with our existing distribution partnership and certainly a very strong on-ramp with AGI. So how to think about this? The second half of the year, that part of our business, a little less certain, if you will, than what we normally have. But what we see going forward and we're so excited. So think about this as a point in time that when we look at AGI, we've already had conversations amongst distribution and product of what use its platform to launch at the beginning of the year. We're doing training on our product. And so when you think about them, just their brand, their global reach, they have 500 salespeople. They're #1 in Taiwan, #3 in Japan, so a really formidable market share in many, many countries. So again, we're super excited about the growth possibilities and what we're going to be able to do on a strategic basis with their partnership.

Ryan Krueger, Analyst

Thanks. And a quick follow-up. Could you help us think about the pro forma fee rate in Investment Management relative to the roughly 25 basis points has been historically?

Christine Hurtsellers, Head of Investment Management

Sure. So on a pro forma basis with the new teams and the assets coming over, think about it with that measure of not changing dramatically. Because essentially, the calculation is revenues divided by AUM. And as part of the partnership with Allianz Global Investors, we do have a revenue share on some of the existing products that are coming over. So how to think about the revenue yield or the margin expansion going forward? I would say, number one, the strategies or the teams and the assets that they acquire, when you look at sort of the fund level basis, they are higher than the existing basis points of assets under management. So a way to think about it is as we're already introducing them to our institutional and our consultant relations relationships here in North America, we're already in conversation about new capabilities of mutual funds to launch that our intermediary distribution can really get behind. So when you think about it in that way, the basis points of those assets are higher. So that, coupled with our focus and strength in private asset classes, which tend to garner higher fees, think about this, Ryan, on a path to expand the basis points of assets under management. And one of the key things we're focusing on top line growth as well, expense management. So a lot of ways and a lot of energy behind the margin expansion that we're going to deliver in the months and quarters to come.

Operator, Operator

Thank you. Our next question comes from Tom Gallagher with Evercore ISI. Please go ahead.

Tom Gallagher, Analyst

Thanks. First question is just can you talk about the sustainability of the earnings run rate in wealth, whether there were any onetime benefits to baseline net investment income? And if so, how much would you expect that to fade as we roll into 3Q and beyond?

Rodney Martin, Chairman and Chief Executive Officer

Sure, Tom. Heather will begin.

Heather Lavallee, President and Chief Executive Officer-elect

Good morning, Tom. Thank you for your question. As Mike mentioned, we do anticipate some one-time items in the investment income for the quarter that we do not expect to see again in the third quarter. However, when you examine the trend in investment spread revenue over the past several quarters, we have certainly benefited from higher rates, and we expect this to continue. Additionally, in the second quarter, we noted an increase in transfers from variable to fixed accounts among our participants, which positively impacted our revenue. We anticipate this trend will persist due to a larger general account asset base. Looking ahead, we expect to continue experiencing advantages from rising rates. I would also like to highlight that at Voya, particularly within Wealth Solutions, we benefit from diversification in our business model and sources of revenue. We have observed strong growth in spread income and also have diversified fee-based revenue from participant transactions. Regarding sustainability, we have proven to be effective in expense management, maintaining our operating margin within the range of 34% to 36%. In summary, while there may be some one-time items, we expect strong revenue momentum to continue moving forward.

Tom Gallagher, Analyst

Thanks, Heather. Just anything you can give us more specifically. Are we looking at a $10 million or $15 million step down in baseline NII, if you're able to just quantify the level of the favorability?

Michael Smith, Vice Chairman and Chief Financial Officer

Yes. Thank you for the question, Tom. To frame it simply, the spread for the third quarter is expected to be slightly higher than the investment spread from the first quarter. The credited interest will also be a bit higher in the next quarter due to conditions and the longer duration of the quarter. Additionally, as Heather mentioned, there were some one-time items in the investment yield that we do not anticipate will occur again.

Operator, Operator

Thank you. Our next question comes from John Barnidge with Piper Sandler. Please state your question.

John Barnidge, Analyst

Thank you very much for the opportunity. My question is on withdrawal activity and behavior. Given the market volatility, I was somewhat surprised that Wealth Solutions didn't really see an increase in withdrawal activity. And so one of these things is given that the market volatility is being driven by inflationary concerns, are you actually seeing your institutional business partners continue to try and save more?

Heather Lavallee, President and Chief Executive Officer-elect

John, happy to - it's Heather, happy to take your question. So there are a couple of factors that are really driving participant behavior. And we see that's both showing up in terms of flows as well as recurring deposits. So if I kind of take a macro step and look at participant behavior, I mentioned, first, the fact that in the market volatility, we saw greater transfers from variable to fixed. So there's a little bit of that flight to conservative investments. But in terms of participant behavior, we are seeing the benefits of both inflation and higher wage growth within the Wealth Solutions business. And what do I mean by that is specifically, we saw higher employer contributions. That is something a trend we have continued as we're seeing the war on talent continue. And we also saw increased savings rates from our participants, both in terms of their actual contribution rates and that the increase in the number of net participant savings. So absolutely seeing some positive behaviors there. One of the other things that you mentioned about withdrawals, and we have not necessarily seen an increase in withdrawal activity from participants. If anything, participants are really staying the course and generating good savings behavior. So all totaled, we have not seen any type of a negative impact on participant behavior within the Wealth Solutions business. But really just benefiting from some of those tailwinds in the macro market I mentioned.

Rodney Martin, Chairman and Chief Executive Officer

John, I'm going to ask Charlie to just add a little more dimension to that also. Thank you, Heather.

Charles Nelson, Vice Chairman and Chief Growth Officer

Yes. Thanks, Rod and Heather. We've been very pleased with our growth office sales and retention effort in the Wealth area, in particular. The value prop is very strong and resonating, and the brand is strong. And how we see the brand resonating in the market is in our strong retention numbers. We've had very, very strong sales retention of our business in the Wealth side. On the other side of that, though, certainly, market churn is down. In other words, churn being what employers are - are they changing from provider A to provider B. But that's where I see our brand resonating and being strong because in difficult times, as we saw even in COVID, our brand range strong and helped in a lot of ways. So as we go through recessionary times, I think our brand will be a key part to help our retention as well as our sales. And we're seeing that right now. Year-to-date, our planned sales are up quite significantly year-to-date, year-over-year, but they've been even down with the market. And the equity markets impacted that, and we see very strong RFP activity. And that makes us feel good about the latter part of this year and going into next year because, in particular, we've got double-digit percentage of new plans and takeover plans in the process of implementation, which will help us go through the third and fourth quarter. Now I would note that the market - equity market activity is going to mute some of that. But we also think that there will be some fuel for future growth as the equity markets rebound in the future. So we feel good about both the activity, our retention in the market, as we drive towards strong revenue growth and achieving our target margins within the Wealth business.

John Barnidge, Analyst

Thank you very much. Best of luck in the quarter ahead.

Charles Nelson, Vice Chairman and Chief Growth Officer

Thank you, John.

Operator, Operator

Thank you. Our next question comes from Alex Scott with Goldman Sachs. Please state your question.

Alex Scott, Analyst

Hi, good morning. First one I had is on expenses. You touched on it some in the remarks already, but I just wanted to see if there was any additional commentary specifically for Wealth Solutions that you can provide. I mean just given the combination of top line pressure from AUM and inflationary pressure on expenses, I was expecting that sort of similar to a lot of the asset managers, we've seen that there'd be a little more margin pressure. Could you give us color around like some of the things you're doing to mitigate it? Were there any one-time items in the quarter? Anything else we should note?

Heather Lavallee, President and Chief Executive Officer-elect

Yeah, Alex, it's Heather. Thank you for the question. So second quarter expenses in Wealth were favorable to first quarter really due to some payroll seasonality, and there were some favorable timing benefits in the quarter that we don't necessarily expect to continue going forward. However, we've often pointed, too, in a macro environment, we continue to be good operators and very disciplined in our expense management, which you should expect to see us continue going into the second half of the year. We continue to be very balanced in both investing in our businesses to support growth, both in terms of technology to drive innovation and really support some of that brand and the differentiation of the value proposition that Charlie talked about, as well as investing in our people to make sure that we are providing the service levels and the commitments that we make to our customers. So for us, it really is focusing on doing what is needed to make sure we maintain the operating margin guidance of 34% to 36%, and we will continue to be good stewards of expense management going forward.

Alex Scott, Analyst

Got it. Thank you. And second question I had is on the Stop Loss business within Health Solutions. Just noticing that the growth is slowing down to a greater degree. I know this can be a little cyclical too. Can you just describe what you're seeing that's causing me to dial back there? And if we should expect any impact to earnings as we think through the next handful of quarters?

Rodney Martin, Chairman and Chief Executive Officer

Rob?

Robert Grubka, Head of Health Solutions

Yes. Thanks. Alex. So Stop Loss sort of did a little bit of playback to last quarter. We talked about strong sales on the top line side of things. A little bit different than the retention story across both the Health and Wealth business, where we really benefited in most of our product areas. Stop Loss is a little bit different in the renewal season. For 1/1, it was just a little bit more competitive than it had been in the previous few years. As we like to talk about, being disciplined on pricing in that business, you got to know when to walk away. And so we didn't fight tooth and nail for everything that we were trying to renew. But again, as I think about the forward path from here, from a growth perspective, still a lot of confidence in what we're doing in that space. As Charlie was alluding to RFP activity, I'd say that story is the same in the Health business. In particular, with Stop Loss, we feel good about what we're going to do with 7/1 which is, obviously, we'll talk about next quarter. So we've got good eyes on what that looks like and feel like we go and get that growing as we think about moving forward. We had talked at Investor Day about stretching down market a bit. Across the business, we've been pretty consistent with our focus on middle market and up. We see opportunity in just growth in the Stop Loss market that's unique to it. Are a little bit different of smaller employers continuing to seek out self-funding of their health risk. And so there's work underway and spend underway to invest and broaden our capabilities there and again, contribute to growth as we look forward. But again, overall, confidence in that space and a little bit episodic, I would say, on what we saw this last 1/1 cycle is driving, to your question.

Operator, Operator

Thank you. Our next question comes from Nigel Dally with Morgan Stanley. Please state your question.

Nigel Dally, Analyst

Thanks, good morning. I wanted to ask a couple of questions about capital. First, on financial leverage, it looks to be a little on the high side. Does that lead you to consider potentially allocating more of your excess capital deployment to debt reduction going forward? Also, you have been drawing down your excess capital, should we expect a further drawdown? Or does it perhaps make sense to hold on to a little higher buffer given the uncertain environment?

Michael Smith, Vice Chairman and Chief Financial Officer

Thank you for the question, Nigel. This is Mike. Let's begin with the leverage ratio. It's important to clarify that the recent rise in our reported leverage ratio includes AOCI and the denominator. The increase in rates and the widening of spreads at the end of the quarter largely contributed to this rise. However, it's crucial to recognize that higher interest rates and wider spreads are ultimately a long-term benefit for Voya from a credit standpoint. We entered the quarter in a strong position, with solid excess capital and an improving economic outlook regarding interest rates. Therefore, we feel confident about our current situation. Regarding capital management and allocation, there will be no changes due to the changing environment. We remain focused on enhancing shareholder value. Both Rod and I have previously mentioned our share repurchase activities over the last year and the ongoing efforts in 2022. This remains a priority for us. Moving forward, we've consistently stated that as we buy back shares, we will address debt reduction in proportion to our share repurchase, around 30%. In the third quarter, given that we executed a $250 million ASR at the end of the second quarter and incurred $22 million in debt extinguishment in the same quarter, we will likely increase our emphasis on debt extinguishment this quarter to catch up. This will not be a strict dollar-for-dollar approach and may be uneven due to tactical considerations around debt repurchases. However, our commitment to share repurchase as a strategy for enhancing EPS growth remains unchanged, as we have consistently demonstrated. The second quarter exemplified this when we took advantage of favorable market conditions to buy back shares.

Rodney Martin, Chairman and Chief Executive Officer

Nigel, it's Rod, I'd just add one piece. The combination of what you're hearing from the team is, again, leading to our confidence in achieving the North Star of 12% to 17% EPS growth rate. We signaled at the end of Q1, double-digit growth. We're reaffirming that. When you add the AGI transaction to that, we've got a great deal of confidence in spite of the market, based on market conditions that we can see today, that we will be on a path and a track to accomplish that objective. And I think when you step back and look at the marketplace and the levers and the controllables that we have, it's a very good outcome for our shareholders.

Michael Smith, Vice Chairman and Chief Financial Officer

Nigel, you asked about the excess and the buffer, and I apologize for needing to revisit that. There has been no change on that front. We still believe that excess remains excess, and if there is a beneficial use for it, we will utilize it. We feel quite positive and confident about the credit situation we're observing in the marketplace and in our portfolio. That will be an indicator to monitor, and if our perspective begins to shift, that would be the time to consider pulling back. However, at this moment, we are not seeing anything that would prompt such action. Apologies for any confusion.

Operator, Operator

Our next question comes from Elyse Greenspan with Wells Fargo. Please go ahead.

Elyse Greenspan, Analyst

Hi, thanks. Good morning. My first question, you guys mentioned some large losses impacting the group Life Loss ratio in Health. Can you talk about how you think about your outlook for the elevated non-COVID claims for the remainder of the year? And as you look forward to your annual assumption review, do you expect any mortality-related impacts to have a one-time or ongoing impact on the Health segment?

Rodney Martin, Chairman and Chief Executive Officer

Rob will start and then Mike will jump in also. Rob?

Robert Grubka, Head of Health Solutions

Thank you, Elyse. As Mike mentioned, the severity of claims was the main factor in our quarter's experience. Specifically, when we analyze the data we've become proficient at over recent years regarding life experience, it really comes down to severity. We saw a notable increase in claims exceeding $250,000, which are considerable in the workplace market. Typically, average severity hovers around $40,000 to $50,000, but we observed about 30% more claims activity in that higher range. While this might not seem alarming at first glance, it significantly increases the average, leading to the impact we experienced. This was a key reason for the shortfall. Looking ahead, we believe we will remain within our projected margin and loss ratio range based on current information. We will keep a close watch on the situation. We are optimistic about our margins moving forward and have strong confidence in maintaining the targets we set during Investor Day. As Rod and others have shared, our growth story remains robust despite recent challenges, and we are committed to maintaining effective pricing discipline. Thank you.

Michael Smith, Vice Chairman and Chief Financial Officer

Can you repeat the second part, Elyse, please sorry?

Elyse Greenspan, Analyst

Yes. The second part was to storm. As you guys look forward to the annual assumption review, are you expecting any mortality-related impact to have a one-time ongoing impact on the Health segment?

Michael Smith, Vice Chairman and Chief Financial Officer

No. I mean, nothing material would come from that. And even more broadly, I think our assumption review process should be, just given the nature of the changes we've made through our business portfolio and certainly, on the ongoing business, you should expect that to be pretty benign. It won't be zero, but it's not going to be anything like some of the numbers that you can see with peers or with us way back in the past. There could be some noise on the reinsured portion of the Life business that we've exited, but that's a noncash accounting kind of impact and nothing that I think should cause concern for investors.

Elyse Greenspan, Analyst

Thanks. For my follow-up regarding Heather, as you take on this role in addition to implementing the three-year plan, could you share what your main strategic priorities are or where you would like to concentrate our efforts to bring about change at Voya?

Heather Lavallee, President and Chief Executive Officer-elect

Good morning, Elyse. Thank you for the question. There are really no changes. I've been part of this management team for 14 years and helped co-create our Investor Day strategy that we shared last fall. I am very proud to lead a purpose-driven organization like Voya, which has many talented and diverse leaders aligned with our strategy. My priority as we move forward is to execute on the growth strategy shared at Investor Day, remain balanced and disciplined in managing capital, enhance our culture, and continue the legacy that Rod has built over the last decade. Our teams take great pride in showcasing this legacy every day, which has become a key differentiator for us both in our businesses and how we engage with our communities. Lastly, I want to remind you that EPS will continue to be our guiding focus moving forward.

Operator, Operator

Thank you. Our next question comes from Andrew Kligerman with Credit Suisse. Please state your question.

Andrew Kligerman, Analyst

Hey, good morning. First, on Health Solutions. The administrative expenses look a little elevated in the last few quarters. Could you provide a little color on that and what we should think about going forward?

Robert Grubka, Head of Health Solutions

Yes, sure. Thanks, Andrew. So on the expense side, we've obviously highlighted the growth in the business. That's a big part of the driver. Keep in mind also the benefit strategies acquisition happened sort of 7/1 a year ago. And so when you start looking at the numbers, keep that in mind, that's a few million from a quarterly perspective that will show up there. And when you look at 1Q to 2Q, it did what we guide the market towards from a perspective of coming down because of seasonality of the numbers. As we think about the next couple of quarters, it will be in and around where we're at today. Obviously, just when we think about the targets that we set, the margin expectations that we set, we're firmly on track to deliver what we expected to that support the guidance that we gave you from a margin standpoint. So hopefully, that's helpful to your question.

Andrew Kligerman, Analyst

That's definitely very helpful. Mike, since you've completed the Allianz transaction in Investment Management, do you have any thoughts on the activity in other business areas regarding M&A?

Rodney Martin, Chairman and Chief Executive Officer

Let me jump in, it's Rod. A great example, we announced a small transaction just yesterday that Mike spoke about on the call. And if I can just go back to kind of the broad guidance that we've given, we're going to continue to, first, organically invest in our businesses, as Mike and I and Heather and the business leaders have talked about. And we remain open to things that would be additive from a capability perspective, from enhancing the customer experience and the intermediary experience that we go through. But we're going to measure that against, as we have for a decade, the share repurchase and stewardship of the capital that we've done. So the areas that we talked about at Investor Day that we will continue to review have not changed. And the discipline and approach that we're going to take coequally has not changed. That said, we're proud of what we just announced with Allianz and the contribution that that's going to make, which gives us a very high level of confidence in the 12% to 17% EPS growth, combination of organic and inorganic growth. And I think it's demonstrating to the market that we have the ability to both source and execute on a timely basis, those tools and capabilities or properties that add value in pursuing again that outcome.

Operator, Operator

Thank you. Our next question comes from Erik Bass with Autonomous Research. Please state your question.

Erik Bass, Analyst

Hi, thanks. I want to come back to the international sales opportunity in the AGI partnership. I was just hoping to see if there's any way to gauge how big this opportunity could be over time? And maybe it would be helpful to think about it in context of how international sales have been historically? And is it right to think the AGI sort of distribution pipes being larger than what you had historically through NNIP?

Rodney Martin, Chairman and Chief Executive Officer

I'm going to throw it to Christine, Erik, but if we're on a Zoom call, you see a big smile on my face. It's huge. And we've got a significant footprint, as Christine has talked about, to partner with and a partner that's fully aligned with both our and their ambitions. But, Christine?

Christine Hurtsellers, Head of Investment Management

Thank you, Rod, and thank you, Erik, for the questions. When we look at projections related to margin expansion, we become very excited about the assumptions we are making. We are modeling the continued distribution of the AGI U.S. teams we've recently added to Voya and expanding that distribution globally. This gives us significant upside potential, particularly due to Allianz's strong international distribution network and its relationships with banks and intermediaries, which enhance our product credibility. In North America, Allianz lacked the scale in global fixed income that we provide, along with our capabilities like private credit. This presents an opportunity to leverage their strong global brand and collaborate in Europe and Asia on credit and equity strategies, including our successful machine learning initiatives. We're actively working with Allianz to prioritize product launches and educate them on our strategies. Additionally, we will also be involved in distributing their Allianz Capital Partner private strategies in North America and Canada, including their infrastructure debt capabilities, which we believe will appeal to our insurance clients. Overall, we see numerous opportunities ahead, and as Rod mentioned, we couldn't be happier with the partnership we've formed to drive our international growth.

Erik Bass, Analyst

Yes. Thank you. That's really helpful color. And then just one quick one maybe. Do you have any view on kind of what you'd expect for alternatives returns in the second half of the year?

Rodney Martin, Chairman and Chief Executive Officer

Mike?

Michael Smith, Vice Chairman and Chief Financial Officer

Thank you for the question, Erik. To recap, before the second quarter began, we set our expectations for performance within a range of minus 3% to plus 3%, and we landed around 2%. While I hesitate to express strong confidence in predicting how alternatives will do, based on our current insights, we anticipate that the third quarter results will be lower than the second quarter. We're estimating that the return could range from 0% at the high end to minus 6% at the low end. This figure represents the total return for the quarter, not an annualized figure. Therefore, we could either see no growth in the alternatives, which would still fall short of our expectations, or a potential loss of $100 million in this area. That said, it's important to consider this in the context of our overall earnings and capital generation. While this may offset a significant portion of our earnings, it won't eliminate them entirely, all else being equal. We still expect to generate capital this quarter unless unexpected events occur. Additionally, as noted in the analyst presentation, we've provided historical context on our alternatives portfolio. Since our IPO, we have achieved over 14% returns on alternatives. Consequently, despite the volatility from quarter to quarter, we believe our shareholders, and our policyholders and customers, have benefited from these returns. Although we are not satisfied with the challenges of this quarter, we are pleased with our overall investment performance and recognize the nature of this business. We are satisfied with our current position.

Operator, Operator

Thank you. That's all the time we have for questions today. I'll turn the floor back to management for any closing remarks.

Rodney Martin, Chairman and Chief Executive Officer

Thank you. Our success continues to reflect the purposeful decisions that we've made as a company as well as the commitment and dedication of our people. As we look forward, we remain confident in our long-term strategy, and we'll continue to execute on a number of organic, capital, and margin initiatives to achieve our plans. At the same time, we're excited about the additive inorganic growth that will result from our recently completed transaction with AllianzGI. This transaction fully aligns with our company's focus on growth and delivering greater value for all of our stakeholders. We look forward to updating you on our progress. Thank you, and good day.

Operator, Operator

Thank you. This concludes today's conference. All parties may disconnect. Have a great day.