Voya Financial Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 1, 2023

There are 14 speakers on the call.

Operator

Good morning. Welcome to Voya Financial's Third 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.

Operator

I would now like to turn the call over to Mike Katz, Executive Vice President of Finance. Please go ahead, sir.

Speaker 1

Thank you, and good morning. Welcome to Voya Financial's 3rd quarter 2023 Earnings Conference Call.

Speaker 2

We appreciate all of you who have

Speaker 1

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.

Speaker 1

GAAP reconciliations are available in our press release and financial supplement found on our website. Now joining me on the call are Heather LaValle, our Chief Executive Officer and Dawn Templin, our Chief Financial Officer. After their prepared remarks, we will take your questions. For the Q and A session, we have also invited the heads of our businesses, specifically Christine Hertzelers, 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.

Speaker 3

Thanks, Mike. Let's begin on Slide 4 with some key themes. Our results reflect the underlying strength 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 Q3, 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 3 year period ending in 2024.

Speaker 3

We've taken the steps necessary to protect margins and will continue to be disciplined on spend as a key lever to manage our businesses. As we look ahead, robust pipelines across all three businesses will power our growth into 2024 and beyond. Our commercial momentum continued to build in the 3rd quarter. In Wealth Solutions, full service recurring deposits 10% with positive net flows in both full service and record keeping. In Health Solutions, Annualized in force premiums and fees were up 21% with growth across all product lines.

Speaker 3

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 4th quarter With most transition related outflows now behind us and the expectation of even greater benefits from our new international distribution relationship with Allianz GI. The benefits of that relationship continue to emerge With international retail contributing more than $1,000,000,000 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.

Speaker 3

In Wealth, we already have $12,000,000,000 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 in 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.

Speaker 3

With its preeminence in fixed income and strong investment performance, Avoya 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 excess capital position at quarter end of approximately $400,000,000 We deployed nearly $300,000,000 of capital in the Q3 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.

Speaker 3

We generated an additional $200,000,000 of excess capital this quarter, contributing to over $800,000,000 over the past 12 months, Exceeding our 90% free cash flow conversion target, Don will share more on our results and performance shortly. 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.

Speaker 3

S. Business of Allianz GI 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. Ascent Focus provides Voya with new capabilities in benefits administration, access to new employer markets And a platform to advance our strategic vision for workplace benefits and savings.

Speaker 3

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 benefit focused 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 Q3, 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 4 years and today encompasses almost 2,000 Voya employees.

Speaker 3

Through Voya India, we are further building our capabilities and technology and customer experience and enhancing the value of our workplace And Investment Management Businesses, we are bringing innovative solutions to our customers, while also driving technology It 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 1900 Charitable causes.

Speaker 3

With that, Don will now provide more details on our performance and results. Don?

Speaker 4

Thank you, Heather. Now let's turn to our results on Slide 8. We delivered $1.74 of adjusted operating EPS in the 3rd quarter. This includes $0.21 of alternative and prepayment income below our long term expectations and $0.12 Excluding notable impacts, Q3 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.

Speaker 4

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. 3rd quarter GAAP net income was 2 $8,000,000 reflecting the favorable impact of certain non cash items. Free cash flow generation was over $200,000,000

Speaker 5

in the

Speaker 4

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 $174,000,000,000 of full service AUM And $510,000,000,000 of total client assets. Our total client assets have increased meaningfully over the last 12 months.

Speaker 4

This includes a combined $3,000,000,000 in record keeping and full service net flows in the 3rd quarter And $7,500,000,000 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 $14,000,000,000 over the last 12 months. Turning to Slide 10. We continue to drive profitable growth and maintain healthy operating margins.

Speaker 4

Wealth Solutions generated $179,000,000 of adjusted operating earnings in the quarter and $630,000,000 over the last 12 months. Net revenues were higher year over year and continue 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 4th quarter spread income to be consistent with the 3rd 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%.

Speaker 4

Administrative expenses were $12,000,000 lower than the 2nd quarter. We expect 4th quarter expenses to increase back to 2nd 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 $2,000,000,000 to $3,000,000,000 next quarter, This is mostly driven by one large case departure. We have a robust pipeline, which includes 12 $1,000,000,000 of plans and implementation for 2024.

Speaker 4

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.

Speaker 4

Our total aggregate loss ratio was 66% on a trailing 12 month basis. While some of the 2nd 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 is driven by strong underwriting and substantial growth in our voluntary block.

Speaker 4

Turning to Slide 12. Our significant growth and favorable underwriting experience over the last year resulted in approximately $350,000,000 of adjusted Operating earnings over the trailing 12 month period. Adjusted operating earnings in the quarter were $53,000,000 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 $71,000,000 3rd 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 percent illustrating prudent expense management while investing for growth.

Speaker 4

Looking ahead, we expect administrative expenses to increase by $10,000,000 to $15,000,000 in the 4th quarter, reflecting seasonality and our first open enrollment season with Benefitfocus. We have had a strong start to the 2024 renewal sales season and remain 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.

Speaker 4

Specifically, The transition away from our former international distribution partnership to Allianz GI contributed $3,300,000,000 Of the overall $4,300,000,000 of net outflows in the 3rd quarter. With this transition now largely behind us, We can build on the momentum with our Allianz GI partnership, which has added $3,000,000,000 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 $10,000,000,000 from a diverse source of strategies and Expect to return to our organic growth target of over 2% next year.

Speaker 4

Turning to Slide 14. Investment Management delivered adjusted operating earnings of $49,000,000 in the 3rd quarter, net of AllianzGI's non controlling interest And $174,000,000 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 Allianz GI. 3rd quarter adjusted operating margin, Excluding notables was 25.5 percent on a trailing 12 month basis. We continue to manage spend to position us for further margin expansion heading into 2024.

Speaker 4

Looking ahead, we are well positioned to benefit from a rotation back 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 Approximately $400,000,000 We generated $200,000,000 of capital in the 3rd quarter and $800,000,000 over the last 12 months, Consistent with our 90% free cash flow conversion target. In the Q3, we deployed approximately $300,000,000 of capital. This included nearly $100,000,000 of share repurchases and dividends.

Speaker 4

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 $200,000,000 in the 4th quarter. Looking ahead, We will continue to prudently manage our balance sheet and deploy capital as we generate it. Turning to Slide 16.

Speaker 4

We remain on track to achieve our targeted EPS CAGR target of 12% to 17% for the 3 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.

Operator

We will now begin the question and answer session. As a reminder, participants are limited to one question and one follow-up. One moment please while we poll for questions. Our first question goes to Elyse Greenspan with Wells Fargo. Please proceed with your question.

Operator

Elyse, are you there?

Speaker 6

Sorry, I was on mute. My first question is on Investment Management. I was just hoping to get some additional color. I know you guys spoke about the pipeline that you have in that business around $10,000,000,000 If you can compare that to Historical levels? And then second of all, how much more on outflows are you expecting from the NNIP relationship?

Speaker 6

And should that all

Speaker 7

Thanks, Elyse. Christine will jump in and talk about our Yes, absolutely. Thank you, Elyse. And so let me actually start with the second question, then I'll pivot to the pipeline itself. So NNIP, Yes, we are expecting outflows in the Q4 of $500,000,000 to $1,000,000,000 and that will Largely, we really put NNIP behind us.

Speaker 7

So think of that as a 2023 event for VIM. Now moving then to the pipeline as we shared over $10,000,000,000 Let me contextualize that for you as far as history. So Compared to a year ago, we're over 3x the size of the pipeline entering 2024 versus 2023. And so really seeing a real pickup in momentum here. And one of the things too, Elyse, That we've done for consistency is we're keeping that discussion and that view more on what the traditional pipeline view of them is.

Speaker 7

And what I mean by that That's U. S. Distribution. And what that doesn't include is Allianz. And so again, that And so obviously the opportunity when you think about their distribution reach, the global demand for fixed income that we Notably out of Asia.

Speaker 7

We've got a lot of opportunities there. So again, wanted to keep it consistent. What is that $10,000,000,000 Unfunded wins and very high probability institutional wins where we are a finalist. So again, the opportunity pipeline is growing every day. It's bigger.

Speaker 7

We have a lot of excitement and confidence to move into 2024 and Remain confident about our 2 plus organic growth next year.

Speaker 6

Thanks. And then my second question, you guys gave a Target for capital return to $200,000,000 for the 4th quarter. And you also mentioned, right, you're within your target debt leverage. So should we Spectrum capital return to improve from that $200,000,000 level in 2024 as we think about

Speaker 4

Yes, Elyse, this is Don. Because we had a debt retirement that came up in the Q3, so we had to deal with that. We've historically been maybe a little bit more balanced around Share repurchase and debt retirement quarter to quarter, this year was a little bit different. We had $162,000,000 of share repurchase in the 1st quarter. We had some debt retirement in the 2nd quarter that limited a little bit, the amount of share repurchase.

Speaker 4

And now we're guiding around The $200,000,000 of share repurchase and dividends in the Q4, we are comfortably in our leverage metric Range right now. So you should expect obviously Q4 what we've guided to, but you should expect that in 2024, Our bias given where we are in our leverage metric right now, our bias will be to share repurchase and return of capital to shareholders.

Speaker 3

And maybe simply put, Elyse, as you think about going into 2024, our focus is on integrations of the strategic acquisitions, driving organic growth And as Don mentioned, the focus in on returning capital to shareholders in the form of share buybacks and dividends.

Speaker 6

Thank you.

Operator

Our next question comes from Ryan Krueger with KBW. Please proceed with your question.

Speaker 8

Hey, good morning. My first question was just on the 12% to 17% EPS CAGR through 2024. I think in last call you had talked about Expecting to get the higher end of that range. And I'm curious if that's still your expectation at this point?

Speaker 4

Yes. Thanks, Ryan. So we are confident in being in that 12% to 17% 3 year EPS growth guidance. The incremental macro headwinds since the Q2 and the moderating of the stop loss favorability that occurred Makes it, I think, a little bit more difficult to get to the top end of that range. To get us to the top end of that range, we'd likely need some combination of A reversal of the recent equity market declines, a more normal yield curve that's not inverted and loss ratios at the bottom end of But having said that, our confidence around being in that 12% to 17% range is driven by really A couple of things.

Speaker 4

1, the commercial momentum that we're experiencing in all three business segments, as Heather alluded to, the disciplined underwriting that we're experiencing And health and the strong the really strong year to date results that we've had there and then our continued focus on expense management.

Speaker 8

Got it. Thank you. And my second question was on investment management, just on the fee rate. Went up a fair amount this quarter. I think there might be some impacts from NN IT and revenue guarantees and whatnot.

Speaker 8

So Can you give any more color on just how to think about the fee rate as we move into 2024 there?

Speaker 7

Sure, Ryan. This is Christine. So when you think about the basis points or the fees, you're absolutely right, it has been going up. And And Billy, I want you to think about it as far as outflows have been lower basis point, little bit lower margin business. And then behind the Some of the things that we're winning in like international retail as well as private debt, those tend to have higher basis points under management.

Speaker 7

So think about that as How to think about going forward? I mean, certainly given our strategy around growing and leveraging international retail, Private and alternatives growth. We would over time expect to continue to see progress there. But I want to note, we don't really manage the business to that metric. What we think about really is operating margin and growth.

Speaker 7

And I just want to let you know that we may see some Pressure to that number next year for great reasons. And why I'm saying that is, we are seeing real interest, particularly out of Asia. When you think about Fixed income, and I think that I want to say the first time in my career, but a long time China's short rates are actually lower than U. S. And so I think that the demand for high quality fixed income, not only are we seeing it in the U.

Speaker 7

S, but we're also seeing it in the world. And so sometimes, these Sovereign Wealth Funds is an example. They bring a lot of assets at aggressive fees, but we're super excited. It's margin accretive. And again, what we're managing to is organic growth and we see great opportunities in 2024.

Speaker 5

Great. Thank you.

Operator

Our next question comes from Alex Scott with Goldman Sachs. Please proceed with your question.

Speaker 9

Hi, good morning. First one I had for you is just on the health the Benefitfocus Business and comments that I'm pretty optimistic around the year end and was just interested if you could opine more Yes. How the cross selling is going? I mean, are you expecting that this could potentially get a bigger bump in growth this year because of some of the cross selling efforts in your Across your different clients and is that something we should be thinking about heading into next quarter?

Speaker 2

Hey, Alex, this is Rob. I'll start and then I guess Heather may want to chime in on the back end of this one. Look, we're really excited about the conversations that are going on. But I want to be clear that this is a business where sort of the cycle of sales And we talked about this at acquisition, it's just longer, right? So it's a technology driven sale.

Speaker 2

Those are big decisions. Generally, you're unseating some prior technology provider. And so it tends to be more of a 12 to 15 months sort of sales cycle. So I wouldn't think about things from sort of, hey, we're going through annual enrollment now as we talked about, and then you're going to see some sort of major change in what you've Same quarter to quarter. It's really about, as we think about it, how are we building momentum into 2015?

Speaker 2

And that may sound like a long time away, but again, when you factor in that 25, I should say, you should factor in just that Sales cycle that's going on there. And so the conversations that we're having are different. Importantly, they all sort of lead into this Confidence around bringing together benefits and savings, simplifying an environment for HR teams that is incredibly complex, Thinking about leveraging, again, a technology decision with product decisions over time, again, those things may not all happen at once, The build over a long period of time is what we get really excited about and we have optimism around. We just Had people in front of our Board from our sales distribution team sharing live examples of the conversations and They're different today than they would have been 12 months ago. So that leaves us in a really strong position from Strategic alignment with where we're going, and I'll let Heather chime in.

Speaker 3

Yes. Thanks, Rob. And I'll really emphasize a few key points. You think about it's been a year since we announced the acquisition. And this has been a highly strategic acquisition for us to be able to bring on top benefit Administration platform, so that's point one.

Speaker 3

Secondly, you think about the benefits of Voya as the owner of this entity, We have been able to accelerate bringing new capabilities to market for Benefitfocus. We did so on time to be able to hit the sales cycle. 3rd point is we've stabilized the service heading into open enrollment. And 4th, as Rob mentioned, we've got a strong pipeline with intermediaries, which is where we see The biggest growth. So we could not be more excited about what Benefitfocus will bring for us.

Speaker 3

As Rob mentioned, really thinking about it in terms of 'twenty five and beyond, but We are super excited about this strategic acquisition.

Speaker 9

Got it. Second question I had is on the Department of Labor future rule. I know it's early, but just any thoughts on how it could impact your business? And I guess I'm Particularly interested in if you have any views on if it would have any impact on sort of proprietary funds in the Wealth Solutions business Or if any impact around like IRA rollovers, that kind of thing? Thanks.

Speaker 3

Yes. Alex, I'll take it. And just to say, it's super early. With it just coming out, our teams are certainly paying attention to it. We continue to focus in on delivering for Vince and doing right in the best interest.

Speaker 3

So again, early days and stay tuned, more to come once we get our arms around it.

Speaker 9

Okay. Thank you.

Operator

Our next question comes from Suneet Math with Jefferies. Please proceed with your question.

Speaker 8

Thanks. Good morning. A couple on Wealth Solutions. I think you talked about a $12,000,000,000 pipeline. Should we think about that as essentially in flight in terms of onboarding or is there still some Is there still like a risk that you don't get that like you're in final negotiations or final contests with other players?

Speaker 8

I just when we talk about these pipelines, I just want to understand how we're sort of defining them, like how confident can we be in closing on the pipeline?

Speaker 2

Yes, sure. Suneet, this is Rob again. So this we feel very confident in. We've got people sweating over Implementation as we speak. So these will obviously come in over the full year period, but the way to think about them There's clients in implementation and so the level of uncertainty is very unlikely that those things change.

Speaker 2

We feel really confident in what we're doing there and what we're seeing. And I would just add, look, this is a broad based Conversation not just all from one segment of our business. So whether you think about tax codes, you think about sizes, This represents a 15% jump over prior year and we really like the and it's Consistent with our book of business, but the mix of the business and the strength that implies about the pipeline broadly speaking.

Speaker 8

Got it. Okay. And then I guess for Don, as we think about capital deployment going forward, maybe a follow-up to Elyse's question. Should we think about the capital deployment really being a function of the free cash flow you generate? Or would you be contemplating drawing down Some of that $400,000,000 of excess capital that you have at the end of the quarter?

Speaker 4

Yes. Cindy, great question there. We've been particularly, I think, thoughtful and prudent this year given some of the uncertainty around the macro environment. So we've been very intentional about basically deploying in the current quarter the capital that we generated in the prior quarter. I would expect that that will continue for some period of time till we get a little bit more clarity on the macro.

Speaker 4

But we define that as excess and it's called excess for a reason and our goal over the long term will be to return excess To our shareholders. So there's going to be some period of time where we're probably having a bit of excess. So we're right now in the 400,000,000 dollars ish range, but you should expect that as things crystallize a little bit more, some of the uncertainty goes away that that access will be Trended down.

Speaker 3

Yes. And my only build on Don's point is the fact that we've got a long term track record of returning capital to shareholders. And you think about What we've done in the last year alone, we talked about resuming share repurchases in the Q2. We did that. We talked about increasing the dividend.

Speaker 3

We doubled the dividend. We brought down our leverage ratio. So you can certainly expect us to have that focus to continue on returning capital to shareholders into 2024 And our confidence in that 90 plus percent free cash flow.

Speaker 8

Got it. That's helpful. Thanks.

Operator

Our next question comes from John Barnidge with Piper Sandler. Please proceed with your question.

Speaker 10

Good morning. Thanks for the opportunity. You've talked about Voya India and talked about expense and admin expense specifically discipline. Maybe as we think about the fee based business in Investment Management and Wealth Solutions, can you talk about leveraging Voya India within that and human capital? Is there some dynamic you can talk about like hiring X percent of for new positions in that business or Some framing would be helpful for that look there.

Speaker 10

Thank you.

Speaker 3

Yes, John, I'll take the question. Thank you. 1st, as we think about expense discipline, we've talked about this is not a new muscle. This is something that we have done for a decade. And you think about what we talked about earlier this year, very proud of our teams that we brought down expenses sequentially, particularly within Asset Management and within the Wealth businesses.

Speaker 3

And much of those just really reflecting some opportunities we had within integrations, within AGI and As we think about our expense actions we can take going forward, our focus is really around maintaining our Margins Within Wealth and Health and that 1% margin improvement in Investment Management that Christine mentioned. So Maybe John, to dimensionalize it for you a little bit, to think about the opportunities we have within Voya India, specifically within Investment Management As well as Benefitfocus and then across the organization that has been a tremendous asset for us. Also think about A year ago, we purposely brought together our workplace teams and Benefitfocus. And so we continue to see some opportunities there to continue to Optimize that organization to best serve our clients, as well as just levers we have around discretionary spend. And then finally, We see continued opportunities that will emerge in savings in automation, in AI and in continuing to Simplify our IT footprint.

Speaker 3

So hopefully that gives you some color.

Speaker 10

That is very helpful. Thank you very much. And then my follow-up question around the new disclosure around alternative or variable investment income performance. Can you provide a look forward and given the 1 quarter lag there and maybe talk about performance specifically in the Q3? Thank you.

Speaker 4

I'm sorry, John, repeat that question. This is on the alternatives?

Speaker 10

Yes. So on alternatives, you're now going

Speaker 5

to Sounds like you're going

Speaker 10

to pre release it going forward. Can you talk about your performance In the Q3 specifically, it changed from the Q2 and within that given it's a 1 quarter lag asset. Is there a look forward you can provide at all into the 4th? Thank you.

Speaker 4

No, I think really what we're planning to do, we had we give the information around The ALT's performance below our long term expectations, right? So that's a 9% general expectation We call that out as a notable item. And what we'd like to do is a few days after the end of the quarter, We will actually as part of our 8 ks process when we publish some other information, we will provide What we achieved in the current quarter so that you all can build that into sort of your So what's happening now is you take a view around that We publish as part of our earnings and there's a 30 day period there that we may be misaligned on prepayment or the alternative below or above expectations. So our goal here really is to give you that information early

Operator

Our next question comes from Wilma Burtis with Raymond James. Please proceed with your question.

Speaker 3

Hey, good morning. Could you guys provide a few additional details on the legal reserve in the quarter?

Speaker 2

Yes, this is Rob. It sits within the Health business. We won't get into details. It's not at that Stage of things, but we don't have enough to size it and adjusted it in the results this quarter.

Speaker 7

And the

Speaker 3

only thing I'd add Wilma is that we do consider it a non repeatable item. Okay. Thank you. And could you give a little bit more color on the improved outlook

Speaker 2

Yes. So, as you look at our business mix, So the primary driver of bringing it down 1%, so 69% to 72% versus what was 70% to 73% It's really the mix of business. So as we've successfully grown for a number of years now at a really fast rate, our voluntary business, It's really a reflection of that shift. And obviously, this is a range we'll continue to look at over time As the mix shifts around further, and what we're trying to do is grow, grow responsibly, do it in a way, and I think you're seeing that show up That is going to lead to good bottom line.

Speaker 3

And if I can just add, we're incredibly proud of the results that Rob and team have delivered in health this Steer, if you just think about annualized in force premium growth 15%, well above our 7% to 10% target, The 36% growth in revenues and then to still on top of that deliver a loss ratio that's below our target, We'll take that all day long. And as Don mentioned, as we mentioned in our comments, we're excited about the pipeline that the team has in front of us. Thank you.

Operator

Our next question comes from Tom Gallagher with Evercore ISI.

Speaker 11

A follow-up for Christine on I'm The $10,000,000,000 pipeline was related to the U. S. You said. Can you talk a little bit about what you're thinking about Europe ex NNIP, yes, how has it been performing excluding NNIP? And based on what you're Seeing winding up there, would you also expect that to be an inflow contributor for 2024?

Speaker 7

Yes. Thanks, Tom. So as far as what we're seeing in the international flows from Allianz since closing The deal, they've delivered a $6,500,000,000 and that's predominantly our income and growth franchise as well as some of our thematic equities. Pointing out that income and growth, that's a $70,000,000,000 platform. It has brand recognition and scale and credibility in Asia, where a lot of the flows are coming, As well as Europe.

Speaker 7

So pivoting to the path forward, we have launched some funds, specifically The source of the outflows, the largest outflows within NIP was investment grade credit and we launched that usage with Allianz. So As you know, we're having conversations. Some really important things are happening with that fund. Listen, its performance, it's a Top decile performer for 5 years, so very competitive. We're also early in this year, it will be something called Title 8 For ESG, so we're upgrading that.

Speaker 7

And as you know in Europe, that designation for ESG is very important in order to compete. So again, and finally, last quarter, we were able to port our long term track record over to the new fund. So there are a lot of things, lots of great conversations happening. That's just one fund. And then broadly, I would say, we're definitely seeing opportunities not only in credit, but in a number of strategies, Suratize is another example, institutional mandates through Allianz.

Speaker 7

And not to go on and on, but I just want to make one final point here around this. What I'm really excited about, This is a transitional year. And when you think about our partnership with NNIT, they only represented 3 products of ours globally, To Credit and our mortgage hedge fund. Allianz, it's a fulsome big funnel distribution relationship. They own a little over 24% of them.

Speaker 7

They are leaning in. I mean, they are a long run strategic partner. And so I'm really excited about the opportunities with them as we move into 2024 and beyond. And maybe

Speaker 3

just a quick build as a reminder of the 24% ownership stake. We have spent an immense amount of time together between teams And are incredibly aligned in terms of the growth of this business and that's including even at the top of the house, I spent time with Oliver over In Germany, the teams are constantly back and forth and we just couldn't be more excited about what this joint franchise can deliver going forward.

Speaker 11

Appreciate the color on all of that. Just want to shift gears to medical stop loss, The volatility there. Can you peel back the onion a little bit? Was it several large claims? Was it more concentrated, maybe the cause of claims, any sign of that continuing?

Speaker 11

Obviously, your guide is improved longer term, but just want to understand near term what's going on with that business?

Speaker 2

Yes, sure. Tom, this is Rob again. Look, the way to think about stop loss I know it's a little bit hard and maybe lost on us. The last few years have been extremely good results. Look, It's a volatile business.

Speaker 2

It's a tail based sort of risk business and I know you understand that. So it's a big part of why we focus And so I just redirect you and make sure that we understand we had tremendously strong results. We've got a 72% loss ratio in that business over the trailing 12 months. If you go back another year, it's 77%, which is at the very bottom edge of our 77% to 80% view. As we said, 77% to 80% is how we feel about that business looking forward, Which is really important.

Speaker 2

It's based on exactly what you're talking about, like what are you seeing in claims and how does this compare to what you would have assumed you were going to be seeing in claims. So all those things are getting triangulated around, tell us at this point in time, 77 to 80 is how we feel about that business moving forward. And again, reminder, we get to underwrite we underwrite this business on an annual basis. We've got a really strong Track record of running this in a disciplined way at the same time that we're growing the business and we'll keep both hands on the wheel and continue to do that as best we can.

Speaker 3

And I would just add that between Rob and I, we have a collective 12 years of running this business successfully with the team and We're very confident to continue to do that going forward.

Speaker 11

Thanks. And just one more if I could sneak it in. Just Is there more of a recency bias if I think about the way pricing and renewals are going to work heading into year end on the stop loss business? Just given that, Grant, I completely agree that trailing results have been great. This quarter was more elevated.

Speaker 11

Would you take a little bit of a recency bias in terms of the way that gets repriced? Or what would you expect from a pricing dynamic?

Speaker 2

Yes. So, great question. So, as we think about what we turn underwriters' list To do is assess the risk and put fresh eyes on each case every year. And so whether it's new business coming in the door or Existing business, we've got good line of sight and the drivers of claims activity and experience. Sometimes that's over shorter periods of time, but when we think about the manual and what we sort of calibrate to, Those are at least a 3 year view of what's been going on in market, what have we experienced, what are we seeing as the drivers of Claims and therefore ultimately loss ratio.

Speaker 2

So look as best we can, we don't sort of get fallen in love with the last 12 months. But at the same point, it's a piece of how we assess things and what we look at. But there's a balance, as you would expect, between sort of near term results,

Operator

Our next question comes from Kenneth Lee with RBC Capital Markets. Please proceed with your question.

Speaker 12

Hi, good morning. Thanks for taking my question. Just one follow-up on the $10,000,000,000 investment management pipeline there. What's been the historical Experience in terms of timeframes for funding those kind of mandates? And would you expect a similar timeframe for funding the mandates over the near term?

Speaker 7

Thanks. Yes. Sure, Ken. This is Christine. So as far as The pipeline that we see or sharing with you, we have great confidence those will fund in the calendar year.

Speaker 7

Now obviously, There are some things that we don't include in there, what we would call from our insurance clients Committed but unfunded wins. A portion is in there, but why aren't we including all of it? Well, insurance companies Specifically, have been a little slower to deploy capital this year given the macro environment and everything. And so, how to think about that What we're putting in the pipeline is stuff that we see as a calendar year. Again, the opportunity holistically when you think about beyond That number, we see it as big for all the reasons we talked about.

Speaker 7

So again, we feel very confident about delivering that. And also I would say just a couple more positives real quick. We're seeing we flipped positive in U. S. Retail flows.

Speaker 7

We're seeing redemption rates go down markedly, which we've kind of faced really in the beginning of this year. It was A tough market, I think, for all my competitors as well. And we're actually seeing real green shoots in terms of retail interest start Starting to move into our high performing fixed income strategy. So I think there are I'm feeling really excited. There are a lot of things, a lot of energy, a lot of good things.

Speaker 7

Just want to get 2023, the transitional year over and stay focused on growing this business.

Speaker 12

Got you. Very helpful there. And just one quick follow-up to your color you put in terms of the net inflows there. The retail net inflows in the quarter, fair to say that it was largely driven by fixed income or just want to get a better Sense of the complexion around the net flows there that you saw? Thanks.

Speaker 7

Yes. The flows in retail continue to be dominated from Sure, Mani, predominantly into income and growth. And again, some of our global tech with tech performing well, We're getting flows there too. But inside of that actually, we're starting to see positive inflows within sort of the traditional U. S.

Speaker 7

Market, which I think we really stand out and this is the beauty of our JV is Asia didn't go through the sort of bump and The domestic market said, and so you really saw the power of us having not only our U. S. Business that was more challenged in retail, but The power of really Asia dominating our flow. So overall, I'm just excited because we see Asia is continuing and growing. Europe is improving in retail and also we're really starting to see green shoots and stability in U.

Speaker 7

S.

Speaker 12

Got you. Very helpful. Thanks again.

Operator

Our next question comes from Josh Shanker with Bank of America. Please proceed with your question.

Speaker 13

Yes. Well, I don't mean to belabor the point, but a little more on medical stop loss. A lot of health Care providers are seeing medical cost inflation. I realize we should look at a trailing 12 month basis and it's very good. But can you give us any Confidence that what we're seeing in the Q3 isn't a result of the medical cost inflation we're seeing overall.

Speaker 13

And If it is in that sum of sense, to what extent do we need to wait 12 months for re pricing of the business to occur to capture that?

Speaker 2

Yes, Josh, look, there's obviously a lot of dynamics around the inflation question. What I would say we've seen, It's really more the traditional, what does the incidents look like. And then obviously, to your point, there can be noise in the actual Claim cost piece of it, but we're not seeing that as an unusual driver in our data. Now could it change and evolve as we move forward? Absolutely, it Good.

Speaker 2

What I would say though, this is a business predicated on a long history of inflation, right? So this has been A product set that you think about core inflation of medical costs sort of first dollar of 6%, 7% is not an unusual range, right? So at a minimum, those sorts of things are always factored in, how we think about the claims Moving forward, could the experience be driven a little bit better because well, okay, there's a blip waiting to come. Again, maybe, but the core fundamentals of the product, the long term health of the product, we think the data is going to be there to For what we assess the risk at and what we need to price at and then the market long term will absolutely be rational on this particular issue. But we're not seeing it today in the data that we've got.

Speaker 2

But again, this is why we keep both hands on the wheel And pay close attention to the actual experience that we're seeing and how we think about pricing moving forward.

Speaker 3

And the build I'd mentioned, Josh, is that as you think about Cost of higher medical costs on consumers and on our participants. It's why we've got a strong demand for our supplemental health products as well as our HSA. These products are so important now to be able to help protect in time of need. And so we're Certainly seeing that demand and see that show up in our 2024 sales.

Speaker 13

And only because it's the most popular topic in markets today, What should we think about the impact of GLP-one drugs on the medical stop loss industry? Is it a one that should reduce The cost of extreme healthcare intervention for employees in the future, is it a non event? How are you guys thinking about it?

Speaker 2

Yes. Look, it's a technical issue, so we'll acknowledge that upfront. Look, these are going to be high cost Drug delivery, when you get into the whole genetic side of what's going on, and this is an area where the team actually for the last Couple of years has been trying to as best as able without much experience like what do we think usage is going to look like and How do we think about usage not just within a particular plan or a client, but how do we think about it across our book of business. And so there's a lot of benefit to what we've done the last few years in growing scale in this space. I think the story will be written into the future for sure, but it's a topic that the team from an underwriting And pricing perspective is anticipating and making a smarter decisions as we possibly can, getting outside That feeds into how we think about layering in this pricing to the underwriting manual and those sorts of things.

Speaker 2

So I think we're doing our best and we're paying attention to it. To your point, it's a hot topic in the space, just Because of the size of the cost that comes with it. But again, this is something we're paying close attention to and getting both hands on the wheel. Thank

Speaker 7

you.

Operator

Our next question comes from Joel Hirsch With Dowling and Partners, please proceed with your question.

Speaker 5

Hey, good morning. Just a follow-up on the $12,000,000,000 wealth pipeline. How much of that is full service versus record keeping and sort of how does the pipeline in both of those businesses compare year over year?

Speaker 2

Yes. Look, I would just think about it as consistent with our book. The thing I keep coming back to with this is, it's A powerful data point for sure. We're not done writing new business. We're not going to sit around and wait for this thing to refill.

Speaker 2

You always just keep Showing the front of the funnel. And we're not talking about things we know about for 2025 and 2026, but we've got A lot of optimism is what we're seeing from in those cases more from a record keeping perspective, but the $12,000,000,000 that we're talking about again year over year it's up to 15%. We feel great about that. In this sort of environment we've gone through, we were seeing a little bit Slower to develop in the tax exempt side of the marketplace. We're seeing some of the negative effects of that This year, but as we look forward, we're starting to see a much better trajectory on activity.

Speaker 2

I would tell you in the middle part of the market, Really strong performance year over year is emerging there, building confidence and importantly enabling us to connect across Health Business, Wealth Business and Benefit Focus, where both Health and Benefit Focus have been much more home base has been middle market And we're really excited about that again being a leverage point for talking about how we drive benefits and savings Strategically and driving learning for the organization as we continue to get experience in that space Collectively across all three businesses. But look, a lot of optimism, you can hear that coming through. And again, this isn't all we're going to be doing.

Speaker 3

And simply put, just keep in mind that we serve multiple markets across tax codes, and we're a leader in the space. And so that our value prop is resonating with our clients. And As Rob mentioned, we're quite excited about what we're seeing.

Speaker 5

Great, very helpful. And then just staying on Walt, If I look at expenses for the full year, they look like they'll be up mid to high single digits. Can you just talk about actions you're taking as you head into 'twenty four on expenses and how we should think about overall growth in expenses in wealth in 2024?

Speaker 2

Yes. Look, Heather, I think hit A lot of the big drivers from a corporate perspective, how we're thinking about things, whether it's continued leverage of Voya India, the technology side of things, we've got A lot of work that the team is doing to continue to simplify our technology environment, that will continue into next year. Importantly, as we I think have all said, margin is what we're focused in on. And so we want to be at the same time we're managing the Spence numbers be driving the growth numbers. And in this environment, there's pressure from spread and what's going on there because we We've certainly benefited prior year to this year on what has emerged there.

Speaker 2

We're going to continue to manage that in a balanced way, but I just Come back to the operating margin focus that we've got and we're going to again have both hands on the wheel and driving both top line and expenses.

Speaker 3

And I just want to reiterate that point and this isn't just for wealth, it's across the organization, it's what we've done for years. And as Rob said, we've got hands on the wheel in terms of expenses and we'll lean in as needed to manage margins.

Speaker 5

Okay. Thank you.

Operator

We have reached the end of our question and answer session. And I would now like to turn the conference call back over to Heather Lavelle for any closing comments.

Speaker 3

To summarize a few key messages, our results reflect the underlying strength 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. We remain on track to achieve our EPS CAGR target of 12% to 17% for the 3 year period ending in 2024. As we look ahead, robust pipelines across all three businesses will power our growth into 2024 and beyond. We look forward to updating you on our progress. Thank you for joining us today.

Operator

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.

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Earnings Conference Call
Voya Financial Q3 2023
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