Q1 2023 Voya Financial Inc Earnings Call
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Now I'd like to turn the conference over to Mike Katz EVP EVP of Finance. Please go ahead.
Thank you and good morning, welcome to Voya financials first 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 Dot com.
Turning to slide two 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.
Additionally, prior period comparisons have been recast for L. DTI and include refinements to adjusted operating earnings incorporate I refer you to this slide for more information.
Additionally, beginning this quarter benefit focus will be reported as part of the health solutions segment.
Now joining me on the call are Hello Valley, 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 Kristine hurt sellers investment management, and Rob <unk> workplace solutions with that let's turn to slide three as I would like to turn the call.
Over to Heather.
Good morning.
Voya financial delivered strong results in the first quarter of 2023, as we continue to meet or exceed our earnings and our revenue growth targets.
We continue to expect to meet our 12% to 17% EPS annual compound growth target over the three year Investor day period, ending in 2024.
Our focus remains squarely on executing our plan and on successfully integrating the businesses that we acquired last year.
To ensure that we maximize their strategic and financial benefits.
We will discuss we are already seeing these benefits in our results.
Let's move to slide four with some key themes.
For the first quarter, we delivered adjusted operating EPS of $1 44, demonstrating boy is profitable revenue growth across our businesses and strong margins.
These results reflect the execution of our plans and commercial momentum across all of our businesses.
For wealth solutions, we grew full service recurring deposits nearly 10%.
In health solutions annualized in force premiums and fees grew 22%.
In investment management net outflows for the quarter largely reflected the continuation of challenging market conditions. However, our diversified mix of investment strategies and strengths in global markets. Once again allowed us to outperform much of the competition.
We concluded the quarter with approximately $500 million of excess capital and our free cash flow conversion rate remained strong at more than 90%.
As a reflection of our confidence in our capital strength and further capital generation of our business, we plan to increase our dividend yield to approximately 2% in the second half of 2020 three.
Subject to board approval and continued constructive macro conditions.
We also intend to resume share repurchases in the second quarter.
In addition, this month, we will refinance about $400 million of debt with lower cost financing that will save us approximately $20 million of annualized interest expense.
We will continue to execute on our key investor day targets.
Net revenue growth margin expansion and prudent capital management, while we deliver valuable solutions for our clients and strong returns for our shareholders.
Because of our relentless focus on execution, we remain on track to achieve our adjusted operating EPS growth target of 12% to 17% over the three year period ending in 2024.
In a few moments Don will share more on our results and performance.
Turning to slide five our.
Our recent acquisitions have delivered immediate revenue and earnings accretion well delivering essential components of the strategy that will drive volume growth well into the future.
We continue to see significant benefits from last year's acquisition of investment strategies and asset formerly with Ali on Ci, which had been a powerful source of positive net flows and revenue growth.
This business is proving highly resilient, even in a challenging macro environment and it will be a catalyst for voya investment management further growth and margin improvement.
Our distribution partnership with <unk> G. I provides voya investment management with a world class International distribution capability that we are already capitalizing on with several international fund launches planned for 2023.
Turning to slide six.
We completed our acquisition of benefit focus in January and have made great progress with its integration and remain fully on track with our financial and strategic objectives.
Benefit focus is a critical accelerant for workplace benefits and savings strategy because it provides a strong connection point across our businesses.
Benefit focus is an essential building block as we develop a market leading workplace benefits and savings experience, which is already being brought to life with our my voyage App.
With benefit focus boy it can engage customers at decisive moment, providing guidance as they enroll in and use their workplace benefits.
Enhancing the support we provide as they grow their workplace savings.
Ali on Ci and benefit focus together represent a transformative strategic acquisitions that we've executed on in less than a year putting in place. The key components, we need to drive voice strategy in future years.
Turning to slide seven.
Living our purpose and vision together.
Our culture continues to help us stand apart in the marketplace and drive measurable outcomes that are benefiting all of our stakeholders.
We are doing this by addressing the growing health wealth and investment needs of our clients and customers, while also supporting our colleagues and communities.
For example, we helped one of our clients the city of Milwaukee increase retirement plan participation rates for black and Hispanic employees by 40 and 25% respectively.
We also earned several notable recognition during the quarter <unk>.
Including being recognized as one of the world's most ethical companies for the 10th consecutive year every year, we have been eligible with that let me ask Don to provide more details on our performance and results Don.
Thank you Heather now, let's turn to our results on slide nine.
We delivered $1 44 of adjusted operating earnings per share in the first quarter.
This compares to $1 55 in the prior year quarter.
Excluding notable impacts first quarter 2023, adjusted operating earnings per share was $1 69.
Our adjusted operating results reflect profitable growth in all our businesses.
Highlighted by favorable net underwriting experience in health solutions.
Your investment spread in wealth solutions.
And favorable all Yonce Gi impacts on investment management.
First quarter GAAP net income was $69 million.
This included approximately $50 million of cash impacts from our recent acquisition of benefit focus and continued integration of all he owns G. I.
Overall, our results continues to illustrate how our diverse revenue streams and complementary businesses enable us to navigate through challenging economic conditions.
Turning to wealth solutions on slide 10.
We are continuing to improve outcomes and deliver value for our customers and clients consistent with our vision and values.
In turn this is supporting our ability to generate positive net cash flows and grow assets over the long term.
As shown here, we have generated nearly $9 billion of full service net inflows over the past five years.
While first quarter full service inflows were impacted by a large case departure and higher participants surrenders weakened.
We continue to feel good about our pipeline for the remainder of 2023.
Full service recurring deposits grew nine 6% on a trailing 12 month basis, and we expect full year deposit growth to be above 10%.
Moving to slide 11.
Wealth solutions generated $132 million of adjusted operating earnings in the first quarter.
Excluding unfavorable alternative income adjusted operating earnings were $166 million.
Net revenues ex notables grew two 3% on a trailing 12 month basis.
This reflected the benefit of higher interest rates on our spread based revenues, which more than offset the impact of lower average equity markets.
In the quarter, we raised crediting rates on part of our in force block.
We anticipate further rate actions to pass on the benefits of the higher rate environment to our customers.
Going forward, we expect second quarter net investment spread to be consistent with the first quarter.
Adjusted operating margin was 38, 6% on a trailing 12 month basis ex notables.
While administrative expenses were elevated in the quarter due to seasonal and timing related spend our full year expense outlook remains unchanged.
Our wealth solutions business is well diversified across plan sizes industries and tax codes.
This diversification gives us confidence in our forward looking revenue and margin targets.
Turning to slide 12.
We remain focused on pricing discipline and excellent service across our health solutions business.
This has enabled us to grow annualized in force premiums above our target of 7% to 10% over the long term.
Excluding benefit focus annualized in force premiums in the first quarter were 15% higher year over year.
We saw growth across all product lines supported by favorable retention.
Our total aggregate loss ratio was 66% on a trailing 12 month basis.
This was primarily due to favorable net underwriting in stop loss and voluntary.
Group life, returning to pre Covid levels will be a further tailwind.
We expect full year loss ratios to be lower than our long term target range of 70% to 73%.
Moving to slide 13.
Health solutions delivered exceptional results in the first quarter generating $94 million of adjusted operating earnings.
Net revenues ex notables grew 25, 9% on a trailing 12 month basis.
This resulted from core business growth and the addition of benefit focused fee based revenues.
Adjusted operating margin was 33, 5% on a trailing 12 month basis ex notables.
Looking ahead, we expect full year margins to be within our 27% to 33% target range.
Together with our wealth business.
Our leading brand and differentiated workplace value proposition gives us confidence in our long term growth.
Moving to slide 14.
Investment management has a multi decade track record of generating significant value for our clients across different market cycles.
We have continued to invest in our platform and have significantly expanded our capabilities to become a global player.
Our total assets under management increased nearly 30% from a year ago, reflecting the onboarding of all Yonce Gi assets.
We have generated meaningful net cash flows over the long term.
And our organic growth has consistently outpaced the industry, including the first quarter of this year.
While we did experienced net outflows in the first quarter, we generated positive net flows in retail supported by our international distribution.
Additionally, the institutional business continues to see strong insurance channel demand.
Although the challenging backdrop has resulted in a slower start to first quarter flows.
We continue to expect 2% to 4% organic growth in 2023.
Looking beyond this year, we are excited about the growth opportunities in international distribution and the continued expansion in our private and alternative capabilities.
Turning to slide 15.
Investment management delivered adjusted operating earnings of $33 million in the first quarter net of all the <unk> Gi as Noncontrolling interest.
Net revenues grew 16, 8% ex notables on a trailing 12 month basis.
The benefit from the addition of <unk> assets was partly offset by macro impacts on fees.
On a trailing 12 month basis.
First quarter adjusted operating margin ex notables was 25, 4%.
In the quarter expenses were elevated due to timing and higher seasonal impacts.
However, there is no change to our full year expectations on expenses.
We continue to expect full year 2023 margins to improve by at least 100 basis points on a market neutral basis.
Turning to slide 16.
We have a strong balance sheet that supports our capital light high free cash flow business model.
It provides us with financial flexibility and facilitate the return of capital to shareholders.
Key highlights include a robust excess capital position, which is replenished each quarter by our capital light high free cash flow model.
Our strong liquidity position with healthy leverage and cash coverage ratios.
And a high quality well diversified investment portfolio that will continue to deliver attractive through the cycle risk adjusted returns.
Turning to slide 17.
Our well diversified general count should perform well across market cycles.
Our investment team has decades of deep sector specific expertise.
And our disciplined investment process is focused on balancing required capital and risk adjusted returns through the business cycle.
Our portfolio skews high quality with 96% of fixed maturities being investment grade.
It is diversified across asset classes and industries with over 3000 issuers.
In response to the greater level of interest in commercial real estate.
We have provided additional details in the appendix illustrating the significant diversification across our high quality book.
As we look out our fundamental credit watch list signals limited credit tail risk.
And we remain confident in our current excess capital position free cash flow generation and capital plan.
Turning to slide 18.
We continue to take a disciplined approach to returning capital to our shareholders.
Over the last 12 months, we generated capital in line with our 90% plus free cash flow guidance and deployed $1 $1 billion of capital.
In May we will redeem approximately $400 million of hybrid debt.
We will utilize our <unk> facility to fund this redemption.
As a result, we expect to save nearly $20 million of annualized interest expense.
Additionally, we plan to increase our common stock dividend to an annual yield of approximately 2% in the second half of 2023 subject to board approval and continued constructive macro conditions.
We are looking to do so given our confidence in our free cash flow generation.
Finally, we plan to resume share repurchase activity in the second quarter of 2023.
Turning to slide 19.
We have generated $5 $7 billion of capital since 2018, including capital released from divesting capital intensive businesses in both 2018 and 2020.
Of the $5 $7 billion, we generated we've deployed $5 $5 billion, including $4 $5 billion in the form of share repurchases.
Our ability to generate consistent cash flow above 90%.
Has been supported by the diversity of our revenue sources and the transition to more capital light businesses over time.
Turning.
To slide 20.
In terms of our outlook the expectations, we communicated earlier this year about our full year 2023 growth adjusted operating earnings cash generation and capital plan have not changed.
In addition, we remain on track to achieve our adjusted operating EPS growth target of 12% to 17% over the three year period ending in 2024.
Our focus is squarely on continued execution of our plans.
Driving further commercial momentum across all of our businesses.
And continuing to integrate the businesses that we acquired over the last year.
And our confidence in our capital generation enables us to resume share repurchase activity in the second quarter and target a dividend increase in the second half of 2023.
With that I will turn the call back to the operator, so that we can take your questions.
We will now begin the question and answer session.
Ask a question you May press Star then one on your Touchtone phone.
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Withdraw your question. Please press Star then two.
As a reminder, participants are limited to one question and one follow up.
Mark <unk> with Jefferies. Please proceed with your questions.
Thanks, Good morning, just on capital management.
I want to get too technical but you have used this phrase assuming market conditions remain constructive a few times in the deck and I just wanted to unpack that a little bit.
Youre looking at resume buybacks in <unk>. So I guess the question is what would you need to see.
For that not to happen is it on the equity market side is on the credit side, just want to make sure. We're all level setting expectations. Thanks.
Good morning, Don I'll take your question sure.
Yes, we would say during the quarter, we generated $150 million of excess capital in an environment, where there were some macro headwinds we feel really really confident in our one our ability to generate capital and we feel really really confident in our statement about resuming share repurchases in the second quarter.
And any any size in terms of the buyback that we should expect for.
<unk> so.
At the beginning of the year, we had we had.
Guided or provided sort of a forecast for the year that included in sort of earnings guidance. It also include included EPS guidance embedded in that EPS guidance was.
On the assumption around share repurchase.
Our expectations around share repurchase have not changed since we provided that original guidance, we continue to generate capital our capital light business is performing very well in markets as we expected it would do and Thats, what really gives us the confidence about resuming share repurchase and also actually targeting a dividend any.
<unk> in the second half of the year.
Got it makes sense and then just the second one is just on the full service business I think Don in your comments you had mentioned that surrenders were a little bit elevated just curious what the driver there was in <unk>.
Their actions that Youre, taking I think you talked about crediting rates going up but actions that you're taking to.
To limit that going forward.
Yes. Thank you Rob will take your question, yes, so on the full service side as you noted.
We feel good about the story overall, what I'd say.
Excuse me and full service from a corporate perspective as you look in the numbers that we provide really strong flow story.
There as you look at tax exempt, which is really to call out a particular plan that left during the year that really explains most of the delta between 22 and 23 from a from a flow perspective, and just as a reminder, within tax exempt youre going to more often see full service even in.
In the larger end of the marketplace and so.
It's just something to keep in mind that there is an element of lumpiness within taxes.
That's a little bit different but when you do the step back and you think about our flow story for the last five years has been tremendous last year a record year. The last five years call it $9 billion of flows.
Long term momentum that I see you can look back, but obviously as I have accountability for running it forward feel really good about what we're seeing where we've got activity has been good.
And again the balancing item here is sort of what part of the market corporate is very much an indicator of think about the smaller mid part of the market really good story, there as I said and then as we move forward.
Taxes some of the larger cases will have lumpiness, they're great when they come in they heard a little bit when they go but the long term view and why we continue to talk about.
Trailing 12 month is quarter to quarter, there's just going to be noise. That's just the way, it's going to be but our momentum our confidence in where we're going and the activity that we're seeing has us feeling good about the full year.
Thank you our next questions come from the line of John Barnidge with Piper Sandler. Please proceed with your questions.
Thank you very much I appreciate and good morning can.
Can you maybe talk about the pipeline for investment management.
I know you had talked about earlier for new use hit product being anticipated to launch in 'twenty three.
In areas, where it's better and worse from a distribution perspective. Thank you.
Thanks, John Christine will very happily take your questions.
Certainly John let's talk about the pipeline.
With that.
<unk> diverse and you see despite what I would call a very challenging macro environment right now, we're still affirming our 2% to 4% organic growth rate for 2023, and so where are we seeing notable examples of strength like like we are.
Really delivering for clients I would say, notably private credit investment grade.
Strong production and when you think about the covenant protection the quality of the underwriting that we do our clients want when the macro environment gets a little rock here to have the assurance of really being able to manage with borrowers and take advantage of those opportunities as long as we do see is as negative as some of the things going on.
In the banking industry right now can be we do see it as a long run opportunity to provide credit and expand our product offerings. So that would just be one example of where we're seeing momentum also our retail cash flows strengthened this year you saw we flipped positive in the first quarter and again that really is the result of that.
Diversification, our global reach and retail Asia demand is much stronger than were seeing currently domestically. Although certainly we're seeing green shoots in fixed income the next domestically.
As an opportunity for the rest of the year. So when you think about.
Really the strength of our product offerings. The diversification now that we have globally. The number the 500 salespeople, we like to talk about in 19 countries spend our partners Allianz Gi, we just feel really confident that despite a lot of turmoil in the market client sentiment.
We will be impacted as well and we burned in the first quarter, but it will probably just see a lot of opportunity to deliver this year with our organic growth target that we said.
Thank you very much and then a question on capital generation seemed very strong in light of some of the near term challenging market impact that we'll experience can you maybe talk about the sustainability of that and is enhanced by the interest expense savings.
Talking about near term thank you.
Yes sure John .
I think what we wanted to do we have internally then very very confident in our capital generation capability.
We've been talking about the actions the management team has taken over a number of years to position us where we are currently.
I think what we wanted to do and hopefully we provided information in the deck that gave us some real confidence about during different market cycles under various scenarios. We have consistently delivered in that 90% plus cash generation and so that.
Co perspective, with the new capital light business gives us a really strong confidence in our ability to do that going forward. Now I think you also asked about interest expense. So let me just kind of hit on that point, if I could youll.
Youll recall, so we had some hybrid debt.
Hybrid debt the interest on that hybrid that was going to reset this month and that resetting was going to take that interest.
<unk>.
Expense number to over 85% or approximately eight 5% interest.
So we felt it was really prudent to do something to try to minimize the impact of that very significant increase in interest expense. We had that we had a facility available to us that was put into place in 2015 for to really to support our business in a different type of scenario.
But we use that peak cap facility, we will essentially issue senior debt that will have a 4% interest rate, replacing the hybrid debt that was going to be in the eight 5% interest rate ZIP code. So that we think was really a prudent.
Move to make sure that we're managing our expenses I might also just observe but it doesn't change our outstanding debt at all all we're doing is replacing the hybrid debt with this new senior debt. So there's no reduction of debt, there's no deployment of capital to reduce debt this quarter.
Really just.
The facility of funding the new debt.
Funding the redemption with the new debt.
And maybe if I can John if I can just add on.
As Don was talking about that the immediacy of the $20 million save and interest expense is important but I think to me the bigger voiceover is our confidence in our 90% to 100% free cash flow conversion hopefully evidenced by our announcement of our intent to increase the dividend to give investors confidence.
<unk> and our ability to drive both commercial momentum really in our our cash flow generation and capital deployment.
Thank you. Our next question comes from the line of Jimmy <unk> with J P. Morgan. Please proceed with your questions.
First the question, maybe for Don or someone else on.
Give us a little bit more color on the expenses this quarter.
What exactly drove the uptick and.
What gives you the confidence that they will decline in future periods, because I'd assume there should be some sort of level of consistency.
That makes sense, but you're implying a significant decline in <unk> versus <unk>.
Yes, Jimmy Thank you for that question so.
We always experienced seasonal expenses.
This quarter was obviously first quarter was no exception, but.
The magnitude of the increase was impacted by a number of things. So let me just kind of two things that I think are important one we are growing our business and we're proud of being in a position that we're growing our business, but that increased growth in the business also impacts the increase in the seasonality of the expenses.
So a really good example would be <unk> Gi I mean, obviously that's been a.
A fantastic transaction for us we're really excited about what it offers.
But it did bring some increased seasonality to expenses in the first quarter of 2023, when compared to the first quarter of 2022. The other thing that happened. This quarter is we're being very very intentional intentional about front loading our expenses that are focused on customers, both Christine and <unk>.
<unk>, we're talking about sort of our confidence in building the pipeline, while we get our confidence in building the pipeline by being out in front of customers and really marketing ourselves. So some of our expenses that we incurred this quarter. We're very intentional so that we could gain confidence about what's going to happen in the remainder of 2023 and in <unk>.
<unk> thousand 24.
In the materials that we provided in the earnings deck Theres guidance, then for the second quarter around both wealth solutions and investment management. So we were guiding that expenses would be about $25 million to $30 million less in the second quarter for wealth solutions and about 15 to 20 million.
Less for the second quarter for investment management, you should assume that that reduction will basically continue on through the remainder of the year, we probably could've said.
Those reductions would be for the first quarter and beyond as opposed to just our second quarter and beyond as opposed to what we've included in that so I think you should assume that expenses will be reduced significantly reduced in the second quarter, and then relatively flat for the remainder of the year.
Okay noted.
And then.
Please go ahead.
So I'm just going to ask if you had a follow up question Jimmy Yeah. I was just going to ask on the pipeline in asset management. So your comments have been positive and I think going forward there positive as well.
But is there a pause you had negative flows in institutional this quarter and I'm, assuming part of that is just the environment. Overall is there a possibility that given the uncertain environment that some of the sort of mandates do not fund.
Just trying to get an idea on your confidence in the 2% to 4% guidance for organic growth.
Yeah. Thank you Cristina I'll take that.
Certainly thank you, yes. So so let's first talk about what happened in the first quarter.
Because.
So in the first quarter when you look at institutional flows they were negative.
And in addition to the overall macro environment, we do have a bit of a unique situation that we've talked about which which we called the off ramp and the on ramp is international distribution and let me explain is that.
A reasonable portion of our institutional outflows in the first quarter were related to existing clients and relationships that we had that were either in Japan or Europe . So I think that we have this natural headwind coming from into the evolution away from N and IP. If you will is our strategic distribution partner to all.
And the thing with Allianz is that the on ramp is more likely kind of really manifest itself for new product. When you think of the second half of 'twenty three.
And certainly into 2024, so I would call that sort of unique to <unk>, but something that we expect and it's built into our 2% to 4% organic growth rate, but but then beyond that the confidence we have.
<unk> seen some slowdown in commercial real estate demand in production it would be another headwind to institutional again, that's factored into our institutional flows but overall you've seen we've outperformed competitors, we're seeing increasing demand in our credit strategies, just given the attractiveness of the yield environment and the exceptional quality.
Of what we deliver as well as when you think about our Onboarding new strategies that we got from the Allianz Gi transaction a lot of potential there I mean, just just as a reference point the income and growth franchise is formidable.
And it is a five star rated funds within North America, just to give you a sense of the performance that particular strategy is delivering which also goes to the strength of some of our retail cash flows as well.
Thank you. Our next question comes from the line of Andrew <unk> with Credit Suisse. Please proceed with your questions.
Hey, good morning.
First question is around the <unk>.
A nice move in the dividend up to 2%.
Curious as to.
What made you framed it at 2% as opposed to three or one and a half like what was the thinking there and then how are you going to think about the dividend going forward.
Yeah, Andrew Good morning, and maybe I'll start and let Don follow on I mean, a part.
Part of it was getting into a level that we believe put us more on equal.
Equal footing with our peer companies and others in the sector and also to a level that we believe would attract new investors.
Really looking for value and growth, but let me ask Don to elaborate yes.
<unk>.
The backdrop and what we're trying to accomplish heather's articulated that I think you then asked the question about.
What are we thinking about going forward. So we want to make sure. Our bias is to have a competitive dividend and we think that.
Increase to that 2% level gets us to that level than what we want to do is make sure that we are appropriately.
Increasing that dividend over time, but that those increases need to be affordable and not put incremental stress on the organization. So we are going to fund future dividend increases in two ways one by the natural growth of the.
The firm and then secondly, we're going to fund it by the by the capacity that we acquired by reducing the share count through share repurchases. So we want to make sure that we are able to have a competitive dividend that grows over time, but the increases in the dividend don't.
Put undue stress on the organization. So we are going to fund it through rep through organic growth and we're going to fund it through a reduction in the number of shares that are outstanding.
Thanks, a lot of sense and then you had some really good slides in the appendix.
Particular looking at the commercial loan portfolio.
Got an average.
Weighted LTV of 45%.
The commercial office looks like it's only 2% of that portfolio.
Good numbers.
One question I've been having and this is even.
Beyond <unk>.
How accurate are these ltvs I suspect you mark them at the end of the first quarter, but is there enough discovery.
In those portfolios to be really comfortable with those ltvs I get that question a lot from clients.
I'm curious as to what.
Voya is thinking is around that.
Yes, Thanks, Andrew.
Question, and Christine will allow us will address it.
Yeah, absolutely. So when you when you look at the Ltvs as our commercial loan portfolio, you see 45% alright. So.
Very high quality very competitive now now to your question as far as NII and external appraisals, we do not go out and get those.
<unk> basis, if you take a look at our portfolio you see that as a lot more diverse in terms of number of loans, we have no alone above $100 million still think lots and lots of alone very diversified.
Isn't practical to be very expensive to go and get external ratings no every year. So we do get them at the time of origination.
We do get at a minimum on the annual cash flows and for office quarterly cash flows and so the team is re underwriting internally.
<unk>.
With great vigor. So so overall, we feel really great about it you know another thing to mention.
We do not include we had a lot of amortizing loans. So when you think about that relative to LTV, you're not capturing the fact that properties are naturally delevering and I would say about commercial real estate. The last thing I want to leave you with <unk>.
So I feel confident about this is that 99% of our portfolio debt.
So think about no matter, what your LTV equity gets hit first.
Property going to start with something happens and weird lenders. So I think the power of the story of our commercial real estate portfolio goes well beyond the statistics. When you think about where we are in the capital stack and then I'm going to thank you for the question is how much I'm going to give the final plan forgive me everyone on the call about our clients.
When you manage assets for external clients and remember we have over 60 insurance companies that we manage assets.
We can't really disclose to you in a very clean way the performance of our private asset classes on what we're delivering but no. We tell them, we eat our own cooking, we invest along beside them and you really gain client trust momentum.
World gets Ralph.
<unk> partner, one more club no delinquencies in our commercial real estate loan portfolio today, and so you can see when you look at Voya and how we're delivering for the general account.
That is the relationship we're building with our clients and we are confident that that's going to pay dividends and market share in flows for years to come.
Thank you. Our next question is coming from the line of Erik bass with Autonomous Research. Please proceed with your questions.
Hi, Thank you first one on your EPS outlook and the starting point for your 'twenty one to 'twenty four.
EPS growth outlook move down from $5 99 to $5 75.
Given the impact of <unk>, but you're still guiding to a 12% to 17% growth CAGR.
The movement in the starting point does have a material impact on what it implies for 2024 EPS. So should we now think about the higher end of that growth range as being more your goals given the lower starting point.
Yeah, So Eric it's unfortunate that we have to deal with with <unk> and it sort of a recasting prior periods and then the measurements are from new numbers. So.
Maybe if.
If you just sort of a lobby, let's focus sort of from here going forward.
We can give you some real confidence in how we feel about the business, but at the beginning of the year before the <unk> recast. We were we were guiding to that 12% to 17% in the 12 to 17.
17% EPS increase and Reconfirming it for that three year period as well nothing in our outlook around the absolute performance has changed so our view around adjusted operating earnings that we were going to deliver in 2023 has not.
<unk> our view around the adjusted operating earnings that we were going to deliver in 2024 has not changed our view around the capital plan. We purchase of shares that we were going to do in 2023 has not changed our view around that in 2024 has not changed.
So we feel really really good about the underlying business, there's been some noise because of El DTI and Theres also a little bit of noise because of the of the warrants you know that they expire this month.
And.
One of the things. That's happened is there is dilution as a result of sort of the warrant exploration those were priced in the mid <unk> and so it's impacted by our stock price you'll recall that we gave some sensitivities historically a mid sixties stock price would have.
Had about 7 million shares of dilution a mid 70 share price has about 10 million shares of dilution our share price has improved we think that's really good we think that's good for our investors, but it is having an impact because it's increasing the denominator in our EPS.
Calculation, but as it relates to the core business.
Nothing nothing has changed we remain very confident in the guidance and forecast that we provided at the beginning of the year.
Okay. Thank you that's helpful color.
Asking about the benefits ratio outlook for the health business.
Is that just I guess as.
Is your guidance to exceed or come in below the 70 to 73.
3% that just related to the strong <unk> experience or do you think margins are going to continue running favorable.
The expectations near term and if so what's driving that.
Yes, Thanks for the question, Eric Rob I'll take that yes no.
The guide below what we would would've expected is absolutely driven by what we saw in <unk> I think as you step back and look at the products.
Just as a reminder, stop loss, we're going to every year, we get a practice a lot of underwriting and see what the experiences look like the market the competition in the market all of those things will put pressure.
On where the loss ratio ends up in the future as we sit here today, obviously, a great first quarter, we will see how the rest of the year plays itself out we feel good about the foundation of it but there is nothing there that says okay. Now we shouldnt think about for stop loss in particular 77 to 80 being our long term view.
That's just where we would continue to think about it at.
In the life and disability World and obviously as a reminder, again, we don't keep the disability risk we reinsure the bulk of that from a life perspective again I'd give you a similar answer 77 to 80 is sort of what we think of as the right long term answer.
First quarter as we've experienced here a bit on the higher end of that are above the 80, but typical of a more normalized life mortality environment, maybe typical it's not exactly the right word, but as we think about the long term forward view again, we still think where we play seven.
780 makes sense, a little bit more nuanced on the supplemental health side of things voluntary products again performed well for us over the last handful of years, we've done a really good job maturing and growing that business.
And continue to think that we will put upward momentum to the loss ratio just as cases come up to renewal given that good experience you would expect there to be competition there.
And then things that we're trying to do from a customer value perspective from a claims and claims integration process and trying to improve that and just make the usage of those benefits easier simpler for the end consumer is a big part of where we want to just continue to improve what we're doing in market and the value that those products provide.
But yes.
Come back to where you started.
<unk> is going to be a driver as we think about the full year view.
And then we would expect it to revert back into the range that we established.
Thank you. Our next question comes from the line of Josh Shanker with Bank of America. Please proceed with your questions.
Yes, I just wanted to clarify and I'm sorry, I joined the conference late a lot of calls today, Jimmy was asking about the investment management expenses and you talked about gallium frontload expense in the quarter going down all principle, where those expenses and do we need to think about them Q1<unk> four.
Are they onetime in nature.
And for the transaction.
Thanks, Josh Dan will start and Christina for some follow on.
So so in our adjusted operating earnings those would be those are generally recurring expenses that sort of a one time expenses related to both <unk> Gi and the benefit focus acquisition are actually in the non in the non operating expenses.
So our base is bigger or base next year. When you are comparing one Q2 thousand 24 to <unk> 2023 that same increase in size will be will be it will manifest itself. So the stuff around the integration and the acquisitions are below the line.
<unk> nor in nonoperating the stuff that relates to our normal operations are in adjusted operating earnings.
And so we should anticipate the seasonality will be a recurring feature of your investment management results overtime.
Correct.
Yes, Josh this is Christine and let me just add a little bit more color. If you will to investment management, specifically and so just as Don covered certainly seasonal impacts.
Transactions et cetera, but when we think about expenses I just want you to know what I mean.
It's rather we'd like to say firm for enhance it firmly on the wheel and what do I mean by this is that we continue to be very vigorous in managing expenses and there are some expense synergies.
That's.
I have occurred as a result of the <unk> transaction in terms of Where's the business scaled where can we consolidate some of the investment capabilities and therefore reduce our overall investment staff. So so.
Working very hard we continue to really evaluate products, where does it make sense given we've gone from very domestic to now globally focus to really streamline some of the products that we offer. So I. Just wanted you to know that we are affirming our operating margin target expansion, we're affirming our organic growth and of course, a very important part of that.
<unk> is also being very prudent with our expenses.
Looking for opportunities there as we continue to also free up capacity to put our money behind our highest growth strategies such as private market.
Josh maybe I'll just add one point and then toss it back to Don for a second we're right on track with where we expect it to be with our integrations, both with with only on Ci as well as benefit focus, but I'll pass it to Don just to give a little bit of a forward look on the integration costs. Yes. So we've talked about seasonal expenses in core operations those will be there.
Had about $56 million this as non operating expenses this quarter, primarily attributable to the closing of the benefit focus transaction and integration of both benefit focus at <unk> Gi. We would expect next quarter that that number would be less than half of that.
Of the current numbers so.
Those sort of one off costs related to the integrations, those and transaction closing those will be reducing meaningfully, but the seasonal cost they will recur.
Annually.
Yeah.
Thank you. Our next question comes from the line of Ryan Krueger with <unk>. Please proceed with your questions.
Hey, Thanks, Good morning, I had a question on spread income within wealth I know you've talked about.
That being flat in the second quarter.
In general from here should we think about it being pretty flat with additional upside from higher interest rates largely being passed through to your customers.
Okay.
I think again to just level set on the <unk>, you got that or heard that right.
Expect to be in that ZIP code from a $1.
Spread income.
We look forward there is certainly some imply view on what credit and rate movement will be in the future.
And those are decisions, we get when we have more information.
We started the year with a <unk>.
Move that we put into place 101.
We're adding another moves that will be effective for five one.
We're just as much as we can control what we can control around those decisions, but also make them at a point in time, where we've got better insight and understanding of where the market has tended to go and how our portfolio is behaving in the movement of money in and out of the fixed account, obviously plays a role in the decision making.
Sure.
And competitor feedback and those sorts of things all get factored in so look I think we're trying to strike that balance of.
Margin preservation, but in customer value.
The age old thing to do and feel good about again the movement from <unk> is clear we will continue to share information and thinking is is as we have further calls in the future.
Got it thank you.
Thank you. Our next question is coming from the line of Tom Gallagher with Evercore. Please proceed with your questions.
Good morning.
Just had a question on the investment side and about.
Capital allocation, if I look at your disclosure the one thing that Voya stands out a little bit on is your allocation to LP in equities, assuming most of that's private equity is on the high side, it's 6% of your total investment portfolio.
I guess my question is this I.
To me that probably made a lot of sense when rates were low.
But when I consider the much higher capital charge.
In some cases north of 20% that you have for that asset class and I believe you are assume return is 9% and I compare it to what you can get on certain.
I'll say relatively low risk fixed income investments, where you can maybe get six or seven today, it's just not that much of a spread and you can get it with like a 2% to 3% capital charge. So my.
Question I'm, sorry for the long winded.
Lead into the question, but when you think about that does it makes sense.
To pivot down and shrink the allocation to alternatives like right now from a new money perspective, just considering that difference in risk charge relative to.
Return.
And Tom excuse me will have Cristina elaborate but.
Overall, we're actually very comfortable with our private allocation in the general Kevin Christie.
Yes, I mean, just taking a step back.
When you look at the percentage of investment grade assets that our overall portfolio has incredibly strong when you think about below investment grade.
So 4% of the book, so, let's let's talk about that within private equity allocations certainly we have primary <unk>.
Allocations as those secondary highly diversified book and you invest in this strategy number one we're underweight relative to the industry and number two if you invest for the long run and value creation and so money is drawn down and deployed not at one point in time, but over time, particularly when you think about Pomona that invest money for.
Sure.
On the secondary side, so again, it's diversification and listen there is there is just a pricing and an adjustment in terms of where our private asset classes price relative to publix.
Because public so if you think about last year durations fill it up so quickly, but private asset classes demand value creation.
Access to great opportunities as well as overtime handily outperformed typically public asset classes. So we don't see that as changing so we're very comfortable we have a very clean good portfolio high investment grade quality industry, you were saying and it filters into all the thoughts about capital planning scenario.
<unk> analysis, we just wanted to reaffirm our confidence that we are very happy with our asset allocation.
Okay. So no so no change to lower the allocation to alternatives is what I hear Kristine is that fair.
Yes.
There I mean, I would say you know what when you think of the context of the overall portfolio I would almost put it generally.
Terms of having dry powder overall in terms of where we could deploy and this is a good thing as an investor you love going into cycles with a really clean balance sheet.
You know as an investor in portfolio opportunities.
And then just my follow up I know you were asked about commercial mortgage loans before but that's kind of a tiny percentage of your portfolio. The much larger exposure to CRE is on <unk>.
And the one the one thing that.
I guess stands out a little bit for Voya as you have more triple B and I look at where spreads have gone and triple b and they've blown out pretty wide.
Just curious what your outlook is there is that is that something we should be watching for is do you have any expectation of losses on that portfolio.
Any any help or perspective on that would be appreciated.
Yes, yes, certainly.
So <unk> got it.
A couple of really good questions embedded in there. So let me start off with the <unk> portfolio. So when you take a look at it we've got on slide 33 in the presentation. Some detailed for you. So you can see what we really we have and you can see very strong investment quality now when you think about triple B.
As a company.
And what are our concerns there I would say the triple B exposure that we have is predominantly in our credit portfolio and its very intentional and it's there is a real.
Will tilt to private credit and Triple These and when you think about triple BS overall, our triple B exposure only a quarter of that would be towards triple b minus so think higher quality triple B why why is this not concerning us when we're looking at our downgrade risk and capital management.
We love ship of the private credit because youre going to get debt service coverage ratios all kinds of Covenant protection I would tell you with our history, we've had better credit performance when the world gets dark on triple fees due to that covenant protections than a quality corporate because you want to be there first right.
When the world gets dark and negotiate and you have a lot of way home. So overall, when we think about that.
We're very confident with our overall level of risk and within our <unk> portfolio, specifically when you look at that.
Lot of that is actually agency backed and we broke that out for you. So again, we view the portfolio overall is as high quality certainly you can have some idiosyncratic things that go bump in the night, whether it is in that portfolio are generally but overall, we're very confident from where we stand. Thanks, Tim Great question.
This concludes our question and answer session I would now like to turn the conference call back over to Heather let Ali for any closing remarks.
Looking ahead, we will continue to execute on our strategy integrate our acquisitions and focus on achieving our growth objectives.
The focus on the needs of our customers and clients will drive our commercial momentum.
And our continued prudent capital management, including our plans to increase our dividend yield.
And resumed share repurchases will also support our focus on creating further shareholder value. We look forward to updating you on our progress. Thank you and good day.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.