Earnings Call Transcript - VOYA Q4 2023

Operator, Call Operator

Good morning. Welcome to Voya Financial's Fourth Quarter 2023 Earnings Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the call over to Mike Katz, EVP of Finance. Please go ahead.

Michael Katz, EVP of Finance

Thank you, and good morning. Welcome to Voya Financial's Fourth Quarter 2023 Earnings Conference Call. We appreciate all of you who have joined us this morning. As a reminder, materials for today's call are available on our website at investors.voya.com. Turning to Slide 2. Some of the comments made on the call may contain forward-looking statements or 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 on our website. Now joining me on the call are Heather Lavallee, our Chief Executive Officer; and Don Templin, our Chief Financial Officer. After their prepared remarks, we will take your questions. For the Q&A session, we have also invited the heads of our businesses, specifically, Matt Toms, Investment Management; and Rob Grubka, Workplace Solutions. With that, let's turn to Slide 3 as I would like to turn the call over to Heather.

Heather Lavallee, CEO

Thanks, Mike. Before we turn to our key themes, I'd like to take a moment to recognize Rod Martin, who will begin his retirement at the end of the month. I speak for everyone at Voya when I say we are all thankful for Rod's vision, optimism, and wisdom over the past 13 years and we wish him the very best as he transitions to retirement. I'd also like to acknowledge Christine Hurtsellers, who after more than seven years leading Voya Investment Management announced her retirement several weeks ago. Christine has been a transformational leader for Voya IM as it has undergone profound changes in its business, becoming a diversified international asset manager it is today. As she hands the reins over, I couldn't be more confident in Matt Toms and the team's ability to continue to deliver exceptional client service and superior investment performance for our customers. Now let's turn to Slide 4 with some key themes. Our results for the fourth quarter and for the full year demonstrate execution in the face of challenging headwinds, discipline in managing expenses, and the benefit of Voya's diversified capital-light business mix. For 2023, we generated $7.02 per share of adjusted operating earnings including $1.63 in the fourth quarter. These results reflected a record year in Health Solutions. Although the fourth quarter was affected by elevated voluntary claims, our aggregate loss ratio remained well within expectations. Strong earnings in Health helped offset lower earnings in Wealth Solutions, which primarily related to alternative results well below our long-term expectations. Fourth quarter results were also affected by flows in investment management that were weaker than anticipated as broader industry headwinds continued. Looking ahead into 2024, we are reaffirming our EPS CAGR target of 12% to 17% for the three-year period ending in 2024. We intend to remain vigilant on spending, protecting margins in Workplace Solutions and expanding them in Investment Management. Our longer-term outlook is for annual EPS growth that exceeds 10% beginning in 2025. Our ability to deliver profitable growth is driven by our compelling strategic positioning and capital-light businesses, our track record for generating and deploying excess capital to maximize shareholder returns, and our focus on providing outstanding experience for our customers. As we head into the balance of 2024, our commercial momentum is strong with robust pipelines in Wealth and Investment Management, and the record-setting start to the year in Health. In Wealth Solutions, the pipeline includes $15 billion of plans and implementation for 2024, diversified across all markets. In Health Solutions, annualized in-force premiums and fees grew 20% in 2023 and we expect growth of at least 15% in 2024. And in Investment Management, we have a robust unfunded pipeline of over $10 billion for 2024. Strong investment performance will allow us to capitalize on cash moving off the sidelines as macro conditions normalize. Turning to capital. In 2023, we generated $800 million of excess capital and ended the year with excess capital of approximately $400 million. We expect to generate at least $800 million of excess capital in 2024 and to deploy it through share repurchases and dividends. Don will cover our financial results in more detail shortly. Turning to Slide 5. Voya's scale and reach across workplace benefits and savings distinguishes Voya in the marketplace and provides a compelling value proposition for our customers. Our strategy enables us to land new customers and increase retention. It provides us with an expanded solutions set to grow business with our customers and create new revenue opportunities and allows us to deepen our relationships with employers and employees as we provide tools and guidance to maximize the value of benefits and optimized savings. With the distribution reach, few can match our workplace solutions businesses operate across virtually every market and industry. Our compelling solutions set is driving new sales. Within Wealth Solutions, for example, we are adding managed accounts and non-qualified plans to our recordkeeping customers. Within Health Solutions, we are increasingly selling voluntary benefits alongside Group Life & Disability. We spent much of 2023 integrating Benefitfocus, which provides us with an important new workplace capability and opportunity to drive expansion. We recently concluded our first open enrollment season with Benefitfocus customers and the results have been a resounding success. Benefitfocus' Net Promoter Score considered the gold standard for measuring customer experience and loyalty, rose an unprecedented 40 points in 2023 over the prior year. We had 100% of customer service standards over the open enrollment season. Those statistics reflect a lead performance among benefits administration providers. They will drive improved customer retention, a significantly larger base of referenceable clients, and ultimately greater revenues and earnings. We deepen our customer relationships when we help employers optimize the benefits spend and employees build a more secure financial future. Our ability to connect workplace benefits and workplace savings drives better outcomes for our participants and their employers. Our market-leading benefits enrollment guidance and our MyVoyage integrated benefits and savings app are just two examples of our ability to drive better financial outcomes for employers and employees alike. Turning to Slide 6. We've transformed our Investment Management business into a diversified international asset manager with a broad array of investment strategies across institutional and retail markets. Voya IM enters 2024 positioned for long-term sustainable growth with strong fundamentals, diversification across markets, a well-established presence in attractive asset classes, and a robust sales pipeline. Success begins with strong investment performance. More than three-quarters of our AUM is in strategies that exceed the benchmark or peer median on a five or ten-year basis, and our performance in 2023 was exceptional. This positions us well to capture flows in 2024 as cash comes off the sidelines. We possess critical investment capabilities in high-growth strategies. A private and alternative business continues to expand with our strengths in private fixed-income and private-equity secondaries increasingly supported by additional strategies, including infrastructure debt and renewables. And we continue to be a leader in the insurance channel with a top 10 market position in North America and top three in private fixed-income strategies. Our distribution reach extends to more than 20 international markets including high-growth Asia-Pacific markets with robust demand for US credit and US dollar-denominated assets. In 2023, our retail net flows in these markets were almost $4 billion with opportunity for further expansion as we add new strategies and markets to this channel. International markets have also catalyzed a turnaround in our retail franchise, further diversifying our business, and creating opportunities to drive higher-fee business. Turning to Slide 7. Voya's purpose and vision continue to drive positive outcomes for our clients, our colleagues, and the communities in which we live and work. Our customers remain at the center of all that we do. We are committed to continuously improving our customer experience through enhanced digital tools, research, and education. And we continue to win recognition for our strong culture and support of communities. With that, Don will now provide more detail on our performance and results. Don?

Donald Templin, CFO

Thank you, Heather. Now let's turn to our financial results on Slide 9. For the quarter, we delivered $1.63 of adjusted operating earnings per share. This included $0.34 of alternative and prepayment income, below our long-term expectations. It also included higher-than-anticipated loss ratios in voluntary claims and $0.15 of favorable compensation accrual adjustments in Corporate. Full year adjusted operating earnings per share excluding the impact of alternative and prepayment income increased 7%. This reflects record earnings in Health Solutions and net revenue growth in all of our businesses. Cash generation for the quarter and year were approximately $200 million and $800 million respectively. And we expect to generate over $800 million of capital in 2024. This will build on our consistent track record of generating cash above our 90% target. While we faced headwinds in part of our business, our financial results in the fourth quarter and for the full year demonstrate the benefits of our diverse revenue streams and the significant cash we can generate from our capital-light businesses. We continue to be disciplined with spending as we integrate new capabilities and invest for growth. Turning to Wealth Solutions. This year demonstrated again the benefit of our diversified revenue sources, which supported strong capital generation. We continue to execute on our workplace benefits and savings strategy with a relentless focus on our customers. We ended the year with $544 billion of total client assets. This includes $185 billion in full-service AUM that benefited from recurring deposits approaching $15 billion annually. For the full year 2023, we have full-service net outflows of $2.9 billion, which included an expected large planned surrender in the fourth quarter. In Recordkeeping, we generated over $7 billion of flows in 2023. Looking forward, commercial momentum is robust. We have a $15 billion pipeline of plans that are won and in implementation. We expect approximately $5 billion of the pipeline to be implemented in the first half of the year with the remaining $10 billion to fund in the second half. Turning to Slide 11. Wealth Solutions generated $187 million of adjusted operating earnings in the fourth quarter and $742 million for the full year. Net revenues were higher year-over-year, driven by fee-based revenues. We expanded our participant base, generated recordkeeping net inflows, and benefited from favorable equity markets. Spread-based revenues were broadly consistent year-over-year. Higher crediting rates and lower spread-based assets offset improved net investment yields. We expect spread-based assets to trend lower in 2024. Fee-based revenues should favorably offset spread income trends, such that overall net revenues will be 1% to 2% higher year-over-year. This is supported by our strong pipeline. Finally, we continue to be disciplined with our spending and have taken actions to maintain healthy margins while still investing in growth and delivering for our customers. Turning to Health Solutions. 2023 was a record year for the Health Solutions business. We continue to grow our core business, expand into adjacent markets, and drive greater adoption and utilization of our solutions within the workplace. In 2023 annualized in-force premium and fee growth exceeded our 7% to 10% target, driven by strong sales and favorable retention across all product lines. In the fourth quarter, we experienced favorable loss ratios in Stop Loss due to continued favorability in our 2022 business and 2023 experience that remains consistent with our long-term expectations. We also experienced higher-than-anticipated seasonal claims activity in Voluntary. This was due to our continued efforts to further drive customer value and increased utilization of our products. Overall, we met our pricing targets for our January first business and we affirm our 69% to 72% aggregate loss ratio guidance for the overall health book. Turning to Slide 13. Adjusted operating earnings of $341 million were a record, including $48 million generated in the fourth quarter. Net revenues grew nearly 36% year-over-year, reflecting strong sales, favorable retention, and added fee-based revenues. Adjusted operating margins were approximately 28% for the year. As planned, our adjusted operating margins were lower year-over-year due to business mix. Our business now includes our strategic benefits administration capability that we added in 2023, which has a lower-margin profile consistent with benefits administration peers. As Heather mentioned, Benefitfocus recently completed a successful open enrollment and experienced significantly improved net promoter scores. We expect overall 2024 adjusted operating margins to be in the range of 24% to 30%. And we expect margins to improve longer-term as we integrate new capabilities and continue to deliver on exceptional service. 2024 is off to a strong start. And our expectation is for a second consecutive year of annualized in-force premium growth of at least 15%. Turning to Slide 14. 2023 has been a transformational year for Investment Management. We strengthened our global distribution and enhanced our Investment Solutions. We continue to serve our clients with excellence in what was a challenging year for the industry. Full year net outflows represented organic attrition of 4.9%. Consistent with the broader industry, we experienced pressure on our Institutional business. Importantly, approximately one-third of the net outflows in 2023 are one-time and are now behind us. Specific to the fourth quarter, net outflows of $5.4 billion were higher than our expectation due to the timing of two client mandates, which are now expected to fund in the first half of 2024. It was also impacted by year-end profit-taking in Japan, following a strong year in global AI and tech. Looking forward, we expect to return to positive flows in 2024. Our confidence is driven by several factors including, first, we continue to build on our long-term track record of investment performance in 2023 which was strong across a broad array of asset classes. Notably, our leading one-year performance in fixed income puts us in a position of strength to capture assets as clients rotate back into fixed income strategies. Second, we are seeing client confidence start to return as market volatility has improved. This has led to an increase in insurance client commitments, including commercial real estate and private credit. And finally, our international retail distribution partnership continues to benefit from demand in the Asia-Pacific region for US dollar-denominated Solutions. Turning to Slide 15. Investment Management delivered adjusted operating earnings of $47 million in the fourth quarter and $180 million in full year 2023. Net revenues grew approximately 17% in full year 2023, driven by higher management fees from favorable equity markets and higher international retail AUM, partially offset by the impact of lower institutional assets. 2023 adjusted operating margin was 24.9% which was lower year-over-year. We took significant expense actions in 2023 to adapt to changing environments while we integrated new teams and created greater investment capacity. We are taking further expense actions in 2024 and continue to prioritize investment in growth initiatives. Looking ahead, our high probability pipeline remained steady from last quarter at $10 billion. This is diversified across all US channels including Institutional and Insurance, and includes unfunded client commitments expected to fund in 2024. And the $10 billion is nearly 70% higher compared to the same time last year. Turning to Slide 16. Our strong capital generation continues to differentiate us from peers. We generated approximately $800 million of excess capital in the year, including approximately $200 million in the fourth quarter. And we expect to generate over $800 million of capital in 2024, which builds on our track record of generating free cash at over 90%. Our focus in 2024 will be on deploying capital to shareholders via share repurchases and dividends, given the actions taken to reduce debt in 2023. We will continue the practice of deploying in the current quarter that capital we generated in the prior quarter. And we expect to maintain our excess capital position until macro conditions become more constructive. Turning to Slide 17. In 2023, we focused on integrating key acquired capabilities and executing on our workplace strategy. We also managed our spending to create additional capacity to invest in areas with the greatest opportunity for net revenue and earnings growth in 2024 and beyond. For 2024, we expect EPS to be in the range of $8.25 to $8.45. In 2025 and beyond, we expect EPS growth of 10% plus, consistent with our historical track record. This is supported by profitable revenue growth, improving operating margins, and strong capital return driven by our diversified and capital-light businesses, which continue to generate significant free cash flow. With that, let's turn to question and answers.

Operator, Call Operator

We will now begin the question-and-answer session. Our first question comes from the line of John Barnidge with Piper Sandler. Please proceed with your question.

John Barnidge, Analyst

Good morning, thank you very much for the opportunity. Can you talk about the increased strategic spend in Corporate? What's the focus there? Is any of it on standing up the Voya India operation that was completed last year?

Heather Lavallee, CEO

Thanks, John. Good morning, it's Heather. I'll start. So what's driving the increase in some of our strategic spend is a couple of different things. And I'll give the reminder that we continue to be focused on being disciplined at expense management. But we're really focused in on a few key areas. First, within our Asset Management business, we are making investments in technology to support our client growth as we grow our private and alternative franchise as well as international distribution and expand our client base. Second, in Health, you've heard us talk about the record growth and the start to the year and record results. We have invested in growing our distribution teams and our underwriting team to support our Stop Loss mid-market expansion which has shown up in our one-one results in terms of the very, very strong sales growth as well as within our Wealth business, we have strategically made investments to build out our mid-market sales and client-facing teams to drive revenue growth and improved retention, as well as making investments in our field phone-based advisers and our managed account team to be able to drive deeper integration and all of those are really focused on driving the revenue growth. To your comment about Voya India. We continue to remain focused on leveraging Voya India to help us innovate, but also to focus on delivering on the strong margins we have across our business and that will continue to be a focus is how do we simplify our IT environment and footprint, continue to find ways that we can drive efficiencies across our business.

John Barnidge, Analyst

Thank you for that. And my follow-up question. You talked about an Investment Management pipeline. It called out the US business. There is a component of international, I think that's not captured, but I think distribution has been improved through some M&A there. So could you maybe talk about how you think about the international opportunity for the pipeline there?

Matt Toms, Head of Investment Management

Absolutely. Thanks, John. This is Matt Toms. I'll give you some background and color on that. So we're extremely excited about the partnership that we have globally with AGI, continue to build upon that in 2024 as we've really created that over the last year-plus. Importantly there, if we look at what we've achieved in the international channel, $4 billion of flows coming from overseas is really a game-changer for us. It's expanded our capability to reach internationally. And we only continue to build upon that product array that we have. So you're right to call out the pipeline in the US is something that we have had historically and we're really happy with the turn. But it's only building internationally, and we're very excited as we move through this year.

Operator, Call Operator

Thank you. Our next question comes from the line of Tom Gallagher with Evercore ISI. Please proceed with your questions.

Tom Gallagher, Analyst

Good morning. First question is just on the lower health earnings. What drove the weaker supplemental health margins this quarter from a product perspective? And it looks like your guide is assuming that that gets better. Can you talk about your confidence level that that's going to improve heading into '24?

Donald Templin, CFO

Hey guys, you might be muted. I'm sorry.

Rob Grubka, Head of Workplace Solutions

Can you hear me now?

Donald Templin, CFO

We could hear you now. Yes.

Rob Grubka, Head of Workplace Solutions

Okay, great. So, this is Rob Grubka. Sorry, I'll start over, Tom. Thanks for your question there. We had some technical difficulties. So, fourth quarter is where we typically see seasonality in the Voluntary results. What I would say was different this quarter is just the number of incidents that were recorded in the fourth quarter but actually occurred in the first, second, or third. And so that seasonality element looks more elevated this year than in prior years. So as we've talked about in the past and Don highlighted in his comments around trying to strive for the right customer value, this is a business that we have grown dramatically over a long period of time at this point. We service this business really well, and that balancing act of margin for customer value is something I think across the industry. We aren't alone in this, trying to always strive for doing the right thing and making sure that we're putting processes in place. We're doing things from a customer service perspective that help support them and we've talked in the past about medical claim integration as an innovation that we've put in place and we'll continue to focus on making it easier, being able to anticipate claims activity for our customers, and again, strike that right balance. I close with 69% to 72% for the business is where we expect to come in. As you do the step-back and you look at the full year. I know results have felt a little bit choppy in Health, but the full-year results, record earnings, 67% loss ratio, well below what we think is sustainable, which is why we're guiding back end of the 69% to 72% range.

Tom Gallagher, Analyst

So Rob, there's nothing in the fourth quarter results regarding a trend. You see that as more seasonal, and I assume that means you expect there to be a bit more consistency in results throughout 2024. It sounds like you also had some favorable developments in 2022, particularly in the Stop Loss business, but do you anticipate that the results on Health will be more consistent throughout 2024?

Rob Grubka, Head of Workplace Solutions

Yeah, so talking in totality, yeah, look, I think it was quarter-to-quarter more volatility than we would ultimately expect to see in '24. I think I can say that with a lot of confidence. But look, these are products and Stop Loss. In particular, where there can be volatility period-to-period. But as we look at it, understand what was going on with the book of business that drove the results quarter-by-quarter, we see ahead a more consistent pattern to '24.

Heather Lavallee, CEO

And Tom, it's Heather. If I can just add maybe one other point. I think it's important to do as Rob kind of concluded with a broader step-back on Health, is that we have continued to drive and outpaced organic growth in this business while managing loss ratios very effectively. Rob and his team have a tremendous track record of doing that and we've got the confidence that we'll be able to do that going forward as proven by the one-one start we already have to the year. So we feel very, very good about the continued growth and ability to manage the loss ratio in Health.

Operator, Call Operator

Thank you. Our next question comes from the line of Ryan Krueger with KBW. Please proceed with your questions.

Ryan Krueger, Analyst

Hey, thanks, good morning. My first question was a higher-level one on the EPS guidance. I think last quarter you had pointed more towards the midpoint of the 12% to 17% EPS CAGR and had said there could be potential upside if the equity market rebounded, which ended up happening, but ultimately, I think that '24 guidance points more towards the lower half of the EPS CAGR. It seems like there were a few different things impacting that, but I guess, I was just trying to understand, maybe at a high level, kind of what you attribute the change to in your EPS outlook for '24, maybe versus what you were thinking in the last couple of quarters?

Donald Templin, CFO

Hey, Ryan, this is Don. I want to start by mentioning that we anticipate profitable growth across all our businesses in 2024, and as I mentioned, we expect to generate significant cash from our capital-light operations. However, the growth rate in our businesses for 2024 is slightly less than we had expected last quarter and also below our expectations for 2025 and beyond. This slowdown is influenced by three main factors. First, in Health, we experienced record results, but we project that this will normalize to loss ratios between 69% and 72%. In Wealth, we are still seeing participants surrender, and as we look ahead to 2024, we are projecting surrenders that will align with the trends from the second half of 2023, which will affect our results. In Investment Management, we faced negative flows in the fourth quarter, resulting in starting asset levels that are slightly lower than expected. Regarding corporate expenses, there is a notable increase anticipated. For the full year 2023, our expenses were just over $200 million, and our forecast for 2024 is between $240 million and $260 million. This increase can be attributed to three key factors. First, related to incentive compensation, based on our performance in 2023, we recorded bookings that will result in incentive compensation below target. For 2024, we expect this to return to target levels, which is factored into our guidance. Additionally, we are expecting about $10 million more in pension expenses due to service costs, which are noncash and mainly linked to our growing employee population after the addition of Benefitfocus. We also have some corporate spending related to strategic investments, particularly in technology, as Heather mentioned earlier. In summary, the increase in corporate expenses is driven by higher incentive compensation, an additional $10 million in pension costs, and around $10 million for strategic investments.

Ryan Krueger, Analyst

Great, thanks. I appreciate the color. That was helpful. And then just a follow-up. Investment Management, do you still think the margins can trend higher over time or do you think at this point 25% to 27% is kind of the right range for that business?

Matt Toms, Head of Investment Management

Yes, thanks, Tom. I believe that the 25% to 27% margin range reflects our current performance and growth trajectory, and we are very confident in achieving it. This represents an increase compared to last year. Looking ahead, we see strong growth potential behind that margin, both domestically and internationally, as our partnership with AGI develops. We are focused on identifying more areas of growth. Our pipeline is solid, with over $10 billion set to drive our results this year and into the future, enhancing our domestic and global reach. We are prioritizing growth and will work on expanding that margin further. We also expect to see the margin recover as we enter 2024.

Operator, Call Operator

Thank you. Our next question comes from the line of Jimmy Bhullar with JPMorgan. Please proceed with your questions.

Jimmy Bhullar, Analyst

Hey, good morning. I had a question on Asset Management and just your comments on the pipeline. I think you've been fairly upbeat about the pipeline for the past year, yet flows have been consistently negative. So what gives you the comfort that the pipeline will actually end up translating into net flows and what's different this year versus maybe last year?

Matt Toms, Head of Investment Management

Yeah. Thanks, Jimmy. This is Matt. I'll take that. I think the key here is that we're really through the transformation of the partnership with NNIP through to AGI. We knew this would create headwinds in the short term, but really provides amazing opportunity longer term and really confident with the year, plus we have got behind us, the building of products, and the developing of channels to be able to deliver upon that. And I think that's really the game changer. We step back and look at that pipeline. There's also the diversity of the pipeline domestically and internationally. So we have the ability to deliver solutions in the US market as well as the global market. There's a lot of demand for dollar-based assets. There's also a pivot back into fixed income that we have very strong performance, as Don referenced in his remarks. Performance is what opens the door and we have that and look forward to delivering both domestically and globally with a very strong partnership for many years to come.

Jimmy Bhullar, Analyst

Are the NNIP withdrawals, are those already gone, or is there some more to go?

Matt Toms, Head of Investment Management

So the NNIP withdrawals are a 2023 event. So while a headwind for 2023 is, we put them into 2024 and our confidence in that $10 billion-plus pipeline is because that's behind us. And while never fun to go through that transition, we're much more confident and excited about the growth trajectory with HDI over the years and decades to come. And that's behind us now as far as NN.

Operator, Call Operator

Thank you. Our next question comes from the line of Suneet Kamath with Jefferies. Please proceed with your questions.

Suneet Kamath, Analyst

Thanks. Good morning, Don, on the cash generation, I think you said around $800 million for 2023 and maybe a bit above that in 2024. As we look out maybe beyond this year, do you feel like that cash generation should be pretty stable or are you anticipating any kind of bigger moves as we kind of go into the out years?

Donald Templin, CFO

Well, the cash generation is really reflective of sort of our 90% plus cash generation capabilities. We've had that in the past and we expect that in the future. As we look forward, and you saw in our guidance, for 2024, we're expecting that the businesses are going to grow at sort of 2% to 4%. I mean, I obviously talked about what was happening in Corporate, but the businesses are, we expect them to grow. In the years 2025 and beyond, we expect them to grow at a more accelerated pace. So we're guiding to 4% to 6%. We expect that that growth will then contribute to incremental cash generation because we're very comfortable with that 90% plus conversion ratio. So I would expect that over time that cash generation will grow in proportion to the growth in our business.

Suneet Kamath, Analyst

Okay, that makes sense. And then, I guess somewhat related. When I'm looking at Slide 17 and I'm looking at your adjusted operating margin targets for '24 and then '25, it seems sort of flattish to me, like kind of in that low 30% range. And I would have thought just given the scale that you have in some of the businesses, we'd see some sort of positive operating leverage. I acknowledge that it's 30% plus, which means there could be some upside, but maybe just some color around, are we kind of flattish margins over the near term, or should we expect some sort of inflection at some point? Thanks.

Heather Lavallee, CEO

Yeah, thanks. This is Heather. Maybe I'll start with that. Yeah, I think as you look at the operating margins we've generated across our business, and particularly within Wealth, we're very proud of that margin. And we've talked about the fact that we've delivered in that high 30% range since we've been a public company. And for us to be able to continue to drive revenue growth in that business and still deliver exceptionally strong operating margins, we're very proud of that. In Don's comment, when we talked about the Health Insurance and providing the slightly lower guidance in Health with the addition of Benefitfocus, and again, highly strategic, but a lower operating margin for that specific be in admin business, we see an opportunity to continue to improve that margin over time. So what I would say is we certainly think that in '24 for Health, you've got the moderation of the loss ratios, but we see opportunity to continue to leverage our expense discipline, our focus in on innovation, our focus in on just driving the integrations across workplace to be able to see some improvement in the operating margins. And then Matt already talked about in Investment Management is we do see a steady path. So I would think about that as a bit of a baseline, but we're always going to be focusing in on how we can continue to grow margins across our businesses.

Operator, Call Operator

Thank you. Our next question comes from the line of Elyse Greenspan with Wells Fargo. Please proceed with your questions.

Elyse Greenspan, Analyst

Hi, thanks. My first question is on Investment Management. So you guys called out two mandates, I guess, in the fourth quarter that you said, we're moving to the Q1. Can you just give us the size of those? And then how would you expect that $10 billion pipeline that you're talking about to come online during 2024?

Matt Toms, Head of Investment Management

Hi, Elyse. This is Matt. I'll answer that for you. So as far as timing of mandates, always a lot of moving parts around clients and markets. So we're very confident about the pipeline we have moving forward in the timing. First quarter, fourth quarter, you've got really the peak in rates. If you think about it, was the middle of last quarter. So client behavior in and around year-end can be variables. It's always hard to be extremely precise, but the size of the pipeline and the breadth of the pipeline continues to develop. So I can't put a precise number on any client funding when and where. But the importance of that is the diversity of that pipeline growing across fixed income, equities, and international and domestic demand. And as far as timing through the year, again, likely to build some of this to the client behavior and a market stability comment. But we are very confident in that $10 billion-plus number. And also, per the prior questions, we look internationally, the time we've had to build the relationship with AGI and the product array will continue to benefit as we move through the year. So look for some increase as we move through the year. It's always impossible to be perfectly precise with market volatility and client behavior, but it's a building trajectory. And we're very confident with the break we have out of the gate to start in 2024.

Elyse Greenspan, Analyst

And the size of those two mandates that moved?

Matt Toms, Head of Investment Management

The size of the two mandates is significant, with an estimated pipeline around $10 billion. However, it won't be distributed evenly throughout the year, so we don't have exact figures. Client demands are constantly changing as well. Nevertheless, we are very confident in the overall size of the pipeline for the year, and we anticipate it will grow steadily each quarter.

Operator, Call Operator

Thank you. Our next question comes from the line of Wilma Burdis with Raymond James. Please proceed with your questions.

Wilma Burdis, Analyst

Good morning. Can you discuss the outlook for capital return? Is the fourth quarter of 2023 a good benchmark?

Donald Templin, CFO

We want to ensure that we remain focused on the strategies we've been implementing throughout 2023. It has been wise for us to position ourselves to deploy capital this quarter that we earned in the previous quarter. In the fourth quarter, we generated approximately $200 million in capital, and I anticipate that we will deploy a similar amount in the first quarter of 2024. We believe that 2024 will be a strong year for cash generation, and our focus will be on returning that capital through share buybacks and dividends. We are looking at around $800 million of excess capital directed toward those activities.

Wilma Burdis, Analyst

Thank you. And then anything to note in terms of alternative investment returns heading into 2024? I know your outlook assumes, I think, a 9% rate, but maybe just give us some color on what you're seeing so far this year and how that will progress.

Donald Templin, CFO

Yes, you're correct, Wilma. Our long-term guidance remains at the 9% rate. We believe that this has accurately reflected our historical performance. Therefore, we have not made any adjustments to that figure. We are confident in this outlook over the long term. Of course, individual periods may vary, but I’ll hand it over to Matt to share more details. We had extensive discussions around this topic, and we felt very confident when we incorporated it into our guidance. Matt can provide additional insight into how we reached this conclusion or reaffirmed it.

Matt Toms, Head of Investment Management

Right, Don. No, thanks. And look, precisely forecasting the return of any market is a difficult thing to do. The long-term assumption, I think, is conservative. And something, if you look at our historical track record, we're very confident in delivering. And if we look at market volatility, where we stand right now, and how markets perform across equity, fixed income, and into privates and alts, there's been a lot of transition over the last year and a half. So as we step back and we look at the quality of our portfolio, what it's delivered over time, and the area that it's oriented towards, those are the areas of strength and of resilience. So I think we're extremely confident because of the underlying asset quality within that portfolio.

Operator, Call Operator

Thank you. Our next question comes from the line of Joel Hurwitz with Dowling & Partners. Please proceed with your question.

Joel Hurwitz, Analyst

Hey, good morning. So in Health, you highlighted the 15% plus enforced premium growth. Can you just talk about your outlook across the product lines and what you saw with one-one renewals?

Rob Grubka, Head of Workplace Solutions

Yes, Joel. This is Rob. At a high level, I'll start with our guidance and discuss each product as we analyze the one-one renewals. There are some nuances that will impact our numbers, such as re-enrollment activity and amendments within the book, which can change the figures more than expected. However, you should note that we experienced 15% growth, which shows momentum across all products. The Stop Loss season was particularly strong, as was the supplemental health season, and life insurance also performed reasonably well. Achieving that 15% was a collective effort, with the team working diligently. Overall, we feel positive about the total number and will provide more detailed information during our 1Q reporting.

Joel Hurwitz, Analyst

Okay. And then when I look at tax exempt flows, it was almost $5 billion of outflows for the full year. I know you called out the one large mandate redeeming in Q4, but just what's going on there? And then, does that business have the majority of the concentration of the spread-based AUM and are you seeing some of these outflows pressuring the spread asset levels?

Rob Grubka, Head of Workplace Solutions

Yes, we've been in the TM business for a long time and have been quite successful, holding a leading position in the market. In this area, the general account is more significant compared to the corporate segment. As a reminder, we mentioned what occurred in the fourth quarter, but I want to highlight that we also experienced a large case in the first quarter. These two large general accounts combined account for nearly $4 billion. This has been an important aspect of our performance. Additionally, the participant behavior, as Don pointed out, has been influenced by changes in interest rates in this unique environment. Looking ahead to 2024, we anticipate this trend will continue, but we will provide updates on our insights quarter by quarter. We believe our guidance is cautious and aligns with our previous indications regarding margins and growth, which are all reflected in our current outlook. Heather, do you want to add anything?

Heather Lavallee, CEO

I view the broader picture of our Wealth business as one that has diversified across various markets, from large clients to smaller ones. We've been able to tap into different growth trends over time, which is reflected in our consistent revenue growth, robust margins, and significant free cash flow. For instance, last week's job report highlighted government as one of the fastest-growing sectors, and we're the leading provider in that market segment. While market dynamics may shift, we believe our established retirement franchise will continue to drive steady growth across all segments, not just in tax-exempt areas but also in the corporate market.

Operator, Call Operator

Thank you. Our next question comes from the line of Alex Scott with Goldman Sachs. Please proceed with your questions.

Alex Scott, Analyst

Hi. First one I had is on Wealth Solutions and wanted to know if you could just help us think through sensitivity to the shorter end of the curve on interest rates. And I know you guys use the forward curve in your guide, so that's helpful. But just help us think about sensitivity, particularly to rate cuts and if they're greater than expected or if it ends up being fewer rate cuts this year.

Rob Grubka, Head of Workplace Solutions

Certainly, Alex. To start, the participant behavior we've observed has largely been influenced by market alternatives that may have highlighted different values they perceive or are being promoted outside of our plan. It's important to note that participants aren't necessarily focused on how their actions might change in response to adjustments in interest rates or Federal Reserve decisions. We believe we've reached a point where we can provide our best insight into participant behavior, given the current environment. As you pointed out, this environment will evolve, and measuring sensitivity is quite challenging. Our goal, as Heather mentioned regarding our business diversity and the steps we are taking, is that we feel we're at a pivotal moment. The changes in yields and market conditions have affected the general account, positioning us to grow fee-based income at a faster pace. As we do this, we aim to enhance the diversity of our revenue streams and continue to support our dividend strategy and free cash flow. All these factors relate to our general account mix and the new solutions and services we plan to offer. Heather highlighted retail wealth as an ongoing investment area. We have numerous avenues through which we can foster growth and effectively serve participants. However, I must admit that your question is quite complex, making it difficult to provide specific answers right now. As these dynamics unfold, we will be able to share more insights each quarter.

Alex Scott, Analyst

And just, sensitivity on like the specific net investment income and exposure to floaters. I mean, we can see sort of the gross exposure to floaters, but it's a little hard to tell on the crediting rate side, like how much of it actually flows through to earnings.

Rob Grubka, Head of Workplace Solutions

We've been tactical in our investment strategy, considering the current rate environment as participants exit the general account. We're mindful of the available cash in the general account. Taking advantage of floaters and focusing on the shorter end of the yield curve has been financially prudent and wise from a risk standpoint. We have implemented some of this strategy, but does this address your question?

Donald Templin, CFO

Well, Alex, I might add that the sensitivity to floating rates is included in our analyses regarding changes in interest rates. So in our 2023 guidance and assumptions slide, it's incorporated there.

Alex Scott, Analyst

Understood. And if I could maybe sneak one more in. I just wanted to see if you could update us on the commercial real estate portfolio. And I know you provided the slide, which is very helpful. Is there any other color you can give to us just around how much is maturing in 2024 and progress or comments on how that will unfold and if you expect any headwinds to cash flow?

Matt Toms, Head of Investment Management

Yeah, no. And thanks for the question. Actually a real pillar strength in our opinion, as far as our positioning within our balance sheet broadly, but within commercial real estate very specifically. When we step back and look at our positioning in office relative to peers, 14% in office relative to the ACLI peers at 21%. And also the diversity of that portfolio, $12 million average loan size across 450 loans. We start from a position of strength and we also start from a position of strength from CM1 to CM2 to go into detail, 71% CM1. This is a differentiated portfolio relative to the market. It's very diversified. I think the stats speak for themselves. We provided more detail in the materials. You'll see that I think will drive to the point specifically. But overall, we feel very confident in our commercial real estate portfolio. Clearly a difficult environment for office. We think we're well positioned.

Operator, Call Operator

Thank you. Our next question comes from the line of Michael Ward with Citi. Please proceed with your questions.

Michael Ward, Analyst

Thanks. Maybe just quick color on that last question. Curious about the deed in lieu that you mentioned, where it sounds like that's like kind of when you take the keys back. Any comment on like how much of that you've done and maybe the capital impact of it?

Matt Toms, Head of Investment Management

Yeah, no, let me maybe build on a little bit. And we put a call out in the presentation. I think you're referencing a $16 million unpaid balance. And just to put that in the context of our balance sheet of $37 billion, that's meant to be a statement of strength. If we look at the guide forward as far as losses, and you look historically as far as our loss rates, very low, mid-single digits loss rate. We feel very confident with the portfolio even going through the CML component of office, that we will continue to likely under deliver what the market does as far as losses and what our long-term planning assumption is. So that $16 million is a non-accrual, as you referenced, but really don't anticipate any meaningful losses.

Michael Ward, Analyst

Got it. Thank you. That's helpful. And then maybe just on the Health guidance. Curious if you can speak to Benefitfocus and if you can kind of call out the contribution from that within Health. Just kind of want to try and figure out the organic sort of guide there.

Rob Grubka, Head of Workplace Solutions

Yeah, this is Rob. I’m really excited about the strategic opportunities with Benefitfocus that we're discussing. As mentioned last quarter, we adjusted our expectations for operating earnings, and that turned out to be a bit lower in the fourth quarter. If we take a step back, it's important to focus on the fee revenue within the health business, as it captures much of the revenue momentum we are witnessing. We’ve also noted the need for patience due to the longer sales cycle in this area. The strategic aspect here involves expanding our presence in the health market more broadly. We will continue to discuss how we can influence healthcare spending, making it more efficient and effective for participants and employers alike. We believe we are in a prime position to integrate these aspects within our health business, while also finding ways to connect with the wealth segment to combine benefits and savings. We are genuinely excited about the potential outcomes. Referring back to your question, we are not quite where we wanted to be, but we are optimistic about the direction we are heading and how it will translate into growth. As Don and Heather mentioned regarding the net promoter score, the effectiveness of open enrollment has been a significant reason for our ongoing investments in this area, despite revenue fluctuations. We are focused on strategically navigating the future.

Operator, Call Operator

Thank you. This concludes our question-and-answer session. I would now like to turn the conference back over to Heather Lavallee for any closing remarks.

Heather Lavallee, CEO

To summarize a few key messages. We remain focused on executing our plan, profitably growing each capital-light business, and delivering an outstanding experience for our customers. Our commercial strengths continue to grow, supported by our robust pipelines across Workplace Solutions and Investment Management. We are confident in achieving our EPS growth and cash flow generation targets in 2024 and beyond. Thank you and we look forward to updating you on our progress throughout the year.

Operator, Call Operator

Thank you. That does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.