Voya Financial, Inc. (NYSE:VOYA) Q3 2023 Earnings Call Transcript November 1, 2023
Operator: Good morning. Welcome to Voya Financial’s Third Quarter 2023 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the call over to Mike Katz, Executive Vice President of Finance. Please go ahead, sir.
Michael Katz: Thank you and good morning. Welcome to Voya Financial’s third quarter 2023 earnings conference call. We appreciate all of you 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 during 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, Christine Hurtsellers, Investment Management; 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: Thanks, Mike. Let’s begin on slide 4 with some key themes. Our results reflect the underlying strengths of our businesses, the benefits of our diversified revenues and our strong track record of executing on our targets, while continuing to invest for future growth. In the third quarter, we generated $1.74 per share of adjusted operating earnings, including notable items. We remain on track to achieve our EPS target of 12% to 17% for the three-year period ending in 2024. We’ve taken the steps necessary to protect margins and we’ll continue to be disciplined on spend as a key lever to manage our businesses. As we look ahead, the robust pipelines across all three businesses will power our growth into 2024 and beyond.
Our commercial momentum continued to build in the third quarter; in Wealth Solutions, full-service recurring deposits for 10% with positive net flows in both full service and recordkeeping. In Health Solutions, annualized in-force premiums and fees were up 21% with growth across all product lines. And while investment management flows continue to reflect a difficult market for asset management, as well as the ongoing transition of our international distribution channels, the underlying business is strong. Importantly, we head into the fourth quarter with most transition-related outflows now behind us and the expectation of even greater benefits from our new international distribution relationship with AllianzGI. The benefits of that relationship continue to emerge with international retail contributing more than $1 billion of positive net flows in the quarter.
As we look ahead to 2024, we’re seeing a strong pipeline of growth across all of our businesses. A few examples in Wealth, we already have 12 billion of plans and implementation for 2024. In Health, our outlook includes premium growth at the high end of our 7% to 10% target range with a strong sales pipeline for 2024. This includes known sales and life and disability, up more than 40% and voluntary sales up almost 50% year-over-year. In Investment Management, with the transition headwinds we experienced in 2023, now largely behind us, we are confident that our strong pipeline will support our return to at least 2% organic growth. That pipeline includes unfunded private credit commitments in the institutional channel, robust projected flows in secondary private equity and continued growth opportunities in international markets.
With its preeminence and fixed income, and strong investment performance, the Voya Investment Management is well positioned to benefit as cash that is currently on the sideline moves back into longer duration assets. The combination of our strong pipelines and robust expense discipline will allow us to protect margins and deliver on our financial goals. Turning to capital management. we maintained a strong exit capital position at quarter end of approximately $400 million. We deployed nearly $300 million of capital in the third quarter across debt extinguishment, share buybacks, dividends and the completion of the transaction to take full ownership of Voya India. More on that in a moment. We generated an additional $200 million of excess capital this quarter, contributing to over $800 million over the past 12 months, exceeding our 90% free cash flow conversion targets.
Don will share more on our results in performance, certainly. Turning to slide 5. After the strategic acquisitions we’ve made over the past year, we continue to keep our focus squarely on successful business integration. These acquisitions have diversified our revenues, helped us establish a strategic foothold in new markets, and positioned us to capitalize on strong growth opportunities. Our acquisition of the U.S. business of AllianzGI has reshaped Voya Investment Management, providing access to high-growth international markets, and revitalizing our retail capabilities. With its international focus and retail-oriented business, AllianzGI has diversified our revenue and earnings at a time when institutional demand for fixed income continues to adjust to last year’s market dislocations.
Our international distribution partnership will continue to drive growth in investment management. Benefitfocus provides Voya with new capabilities and benefits administration, access to new employer markets, and a platform to advance our strategic vision for workplace benefits and savings. With open enrollment season currently underway, we’re focused on delivering outstanding service to our customers, which we see as a key driver of growth that will help us both retain and expand our customer base. And even beyond our current base of Benefitfocus’ clients, the acquisition is bringing Voya’s workplace benefits and savings strategy into sharper focus for customers. It helps define our presence in the market with a message that is resonating with customers and supporting our strong sales pipeline.
In the third quarter, we took full ownership of our global technology and operations subsidiary, which we have rebranded as Voya India. By deploying capital in this manner, we’ve gained a significant strategic flexibility that will allow us to maximize the value of the Voya India organization, which we’ve built from scratch in only four years and today encompasses almost 2,000 Voya employees. Through Voya India, we are further building our capabilities and technology and customer experience in enhancing the value of our workplace and investment management businesses. We are bringing innovative solutions to our customers while also driving technology that is leading to greater automation, faster speed to market, improved performance and a more efficient cost structure.
Turning to slide 6. Voya’s purpose and vision continue to drive positive outcomes for our clients, our colleagues and the communities, in which we live and work. To support employer and employee needs and recognizing the increasing importance of mental health to our customers, we recently introduced new mental health offerings through our critical illness and accident insurance products. To support our communities, we once again, held our annual employee giving campaign in September. The campaign was a resounding success with approximately 75% of Voya colleagues participating in programs that collectively supported more than 1,900 charitable causes. With that, Don will now provide more details on our performance and results. Don?
Donald Templin: Thank you, Heather. Now, let’s turn to our results on slide 8. We delivered $1.74 of adjusted operating EPS in the third quarter. This includes $0.21 of alternative and prepayment income below our long-term expectations and $0.12 of other unfavorable impacts within Health Solutions. Beginning next quarter, we expect to pre-release our alternative and prepayment income experience to better inform consensus estimates. Excluding notable impacts, third quarter 2023 adjusted operating EPS was $2.07, compared to $2.24 in the prior-year quarter. Favorable loss ratios in Health Solutions moderated somewhat from exceptional levels in the prior year. Current year results also reflect growth in fee-based revenues in wealth and investment management.
This was further supported by disciplined spend and prudent capital management. Third quarter GAAP net income was $248 million, reflecting the favorable impact of certain non-cash items. Free cash flow generation was over $200 million in the quarter, demonstrating another quarter above our 90% target. Turning to Wealth Solutions. we continue to make progress on our workplace benefits and savings strategy, which differentiates us in the marketplace and builds on our leading retirement franchise. We ended the quarter with $174 billion of full-service AUM and $510 billion of total client assets. Our total client assets have increased meaningfully over the last 12 months. This includes a combined $3 billion in recordkeeping and full-service net flows in the third quarter and $7.5 billion over the last 12 months.
Our relentless focus on maximizing customer outcomes in the workplace has helped us win new business and retain key clients in both the corporate and tax-exempt markets. This focus on our customers has supported growth in full-service recurring deposits, which exceeded $14 billion over the last 12 months. Turning to slide 10. we continue to drive profitable growth and maintain healthy operating margins. Wealth solutions generated $179 million of adjusted operating earnings in the quarter and $630 million over the last 12 months. Net revenues were higher year-over-year and continued to reflect the benefit of our diverse revenue streams. In the quarter, we continue to see elevated fixed surrenders and lower transfers from variable investments to fixed accounts from our participants.
While we expect fourth quarter spread income to be consistent with the third quarter, participant behavior is uncertain due to the macro environment, which will drive trends heading into 2024. We continue to maintain margins within our target range of 36% to 40%. Administrative expenses were $12 million lower than the second quarter. We expect fourth quarter expenses to increase back to second quarter levels given the impact of seasonal spending. Heading into 2024, we have taken additional actions to ensure expenses support our target operating margins. While we expect full-service net outflows of $2 billion to $3 billion next quarter, this is mostly driven by one large case departure. We have a robust pipeline, which includes $12 billion of plans and implementation for 2024.
This is nearly 15% higher, compared to the same time last year. Turning to Health Solutions. our excellent year-to-date results reflect our significant growth and favorable underwriting experience in the year. annualized in-force premium and fee growth was approximately 15% excluding Benefitfocus. This was substantially better than our 7% to 10% growth target and was driven by strong sales and favorable retention across all product lines. Our total aggregate loss ratio was 66% on a trailing 12-month basis. While some of the second quarter favorability and stop loss reversed this quarter, results remain favorable. We expect stop loss ratios will trend towards our long-term target range of 77% to 80% in 2024. We are lowering our long-term total aggregate loss ratio target to 69% to 72%, down from 70% to 73%.
This was driven by strong underwriting and substantial growth in our voluntary block. Turning to slide 12. our significant growth and favorable underwriting experience over the last year resulted in approximately $350 million of adjusted operating earnings over the trailing 12-month period. Adjusted operating earnings in the quarter were $53 million. Results in the quarter include one-time unfavorable impacts from our annual assumption review and a non-recurring legal reserve. Excluding these impacts, adjusted operating earnings were $71 million. Third quarter revenues grew 36% year-over-year, reflecting strong in-force premium growth and the addition of Benefitfocus revenues. Adjusted operating margins were 32.2%, illustrating prudent expense management while investing for growth.
Looking ahead, we expect administrative expenses to increase by $10 million to $15 million in the fourth quarter, reflecting seasonality and our first open enrollment season with Benefitfocus. We have had a strong start to the 2024 renewal sales season and remained confident in growing our book and bringing solutions to our customers that improve financial outcomes in the workplace. Turning to slide 13. Investment management has a multi-decade track record of generating significant value for our clients across different market cycles. As Heather mentioned earlier, our flows this year have been affected by challenging market dynamics and strategic decisions made to modernize and streamline our platform. Specifically, the transition away from our former international distribution partnership to AllianzGI contributed $3.3 billion of the overall $4.3 billion of net outflows in the third quarter.
With this transition now largely behind us, we can build on the momentum with our AllianzGI partnership, which has added $3 billion of net flows since inception. Additionally, a majority of the general account assets have now transitioned back to Venerable. The remaining general account and variable portfolio assets will transfer over time, and is included in our margin and revenue guidance. Looking forward, we have a strong unfunded pipeline of over $10 billion from a diverse source of strategies and expect to return to our organic growth target of over 2% next year. Turning to slide 14. Investment Management delivered adjusted operating earnings of $49 million in the third quarter, net of AllianzGI’s non-controlling interest and $174 million on a trailing 12-month basis.
Net revenues grew 21.8% excluding notables on a trailing 12-month basis as we added AUM and revenues from AllianzGI. Third quarter adjusted operating margin excluding notables was 25.5% on a trailing 12-month basis. We continue to manage spend to position us for further margin expansion heading into 2024. Looking ahead, we are well positioned to benefit from a rotation back into higher yielding fixed income strategies. Further, our diversified and differentiated product pipeline, and international distribution position us well for future growth. Turning to slide 15. we ended the quarter with excess capital of approximately $400 million. We generated $200 million of capital in the third quarter and $800 million over the last 12 months, consistent with our 90% free cash flow conversion target.
In the third quarter, we deployed approximately $300 million of capital. This included nearly $100 million of share repurchases and dividends. With the recent debt maturity behind us, our leverage ratio is now in the middle of our long-term range. Given this, near-term capital deployment will be focused on share repurchases and dividends. Our baseline expectations are to return approximately $200 million in the fourth quarter. Looking ahead, we will continue to prudently manage our balance sheet and deploy capital as we generated. Turning to slide 16. we remain on track to achieve our targeted EPS CAGR target of 12% to 17% for the three-year period that will end in 2024. We have taken additional expense action to ensure we protect margins and achieve our financial targets.
We continue to generate commercial momentum. Our strong pipelines across all three segments support our outlook for growth and we will remain prudent with our capital.
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