Voya Financial, Inc. (NYSE:VOYA) Q1 2024 Earnings Call Transcript

Voya Financial, Inc. (NYSE:VOYA) Q1 2024 Earnings Call Transcript May 1, 2024

Voya Financial, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning. Welcome to Voya Financial’s First Quarter 2024 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the call over to Mike Katz, Executive Vice President of Finance. Please go ahead.

Mike Katz: Thank you, and good morning. Welcome to Voya Financial’s first quarter 2024 earnings conference call. We appreciate all of you who have joined us this morning. As a reminder, materials for today’s call are available on our website at investors.voya.com. Turning to Slide 2. Some of the comments made during the call may contain forward-looking statements or refer to certain non-GAAP financial measures within the meaning of federal securities law. GAAP reconciliations are available in our press release and financial supplement found on our website. Now, joining me on the call are Heather Lavallee, our Chief Executive Officer; and Don Templin, our Chief Financial Officer. After their prepared remarks, we will take your questions.

For the Q&A session, we have also invited the heads of our businesses, specifically Matt Toms, Investment Management; and Rob Grubka, Workplace Solutions. With that, let’s turn to Slide 3, as I would like to turn the call over to Heather.

Heather Lavallee: Good morning, and thank you for joining us today. As you can see from our first quarter highlights on Slide 4, we delivered on our financial targets. Adjusted operating EPS was $1.77, up 23% year-over-year, and we remain on track to deliver our full year 2024 EPS target of $8.25 to $8.45. We generated excess capital of approximately $200 million, and returned more than that amount to shareholders in the form of share repurchases and dividends. Our Board has approved an additional $500 million share repurchase authorization that will allow us to execute on our capital return plan. That capital plan includes the generation and return to our shareholders of $800 million of excess capital in 2024. Strong sales momentum and positive flows this quarter have us well on track to achieve our commercial and revenue targets for 2024.

We are maintaining strong discipline on spend to enhance margins while preserving the investments that will sustain our long-term growth. And we continue to deliver an attractive return on equity, reflecting the achievement of our earnings targets and the capital efficiency of our businesses. Turning to Slide 5, we are executing our strategy with competitive advantages that establish our clear right to win. As one of the few players in the market with leading positions in both retirement and group benefits, we have a distinct ability to succeed with our workplace benefits and savings strategy. We have scale and credibility across markets, tax codes, and employer sizes. We have distribution through virtually every intermediary channel, providing a diversified platform to grow revenues and add participants.

And we have a leading brand in the marketplace with a reputation for putting the customer first and for a culture of service. I will mention just a few examples of how our workplace strategy is landing new clients, expanding our revenue base, and deepening our relationships with customers. In retirement, we’ve evolved the way we approach the mid-market, where customers have different needs and expectations from those in smaller or larger market segments. Our efforts are yielding results with mid-market sales up almost 300% over the same time last year. In stop-loss, we’ve added new quoting capabilities and expanded our distribution reach to smaller employers, who are increasingly self-funding their medical plans. This has contributed to the 17% growth of in-force premiums and fees we’ve achieved in Health Solutions as compared to last year.

And we’re deepening our relationships with our participants, creating new opportunities to drive revenues from our rapidly increasing participant base. As we surpassed 7 million participant accounts on a retirement platform, we are strengthening our field-based retail advisory team to capture a greater share of economics out of plan. We are also growing our managed account business with managed account revenues up 27% in the first quarter of 2024. Our workplace strategy is building deeper relationships with our customers and creating new sources of growth for our business. Moving to Slide 6. In Investment Management, our competitive advantage begins with a well-established foundation in institutional fixed income and leading market positions in third-party insurance asset management and income solutions.

Our strength in private assets and our global distribution reach create expansion opportunities that build upon this platform for growth. With scaled presence in international markets, our investment strategies meet the increasing demand for US-denominated assets. With strong investment performance and an established market presence, we are well-positioned to capture flows as asset rotations increase. We are seeing these flows begin to emerge with $1.3 billion in insurance channel net flows in the first quarter. In privates and alts, we’re executing our expansion strategy with three private fund launches planned this year. We’ve also strengthened our distribution team with further private markets expertise to help us meet new client demand.

And our growth in international markets continues, with international retail flows of $1.3 billion for the quarter. Turning to Slide 7. Voya’s purpose and vision continue to drive positive outcomes for our clients, our colleagues, and the communities in which we live and work. For our customers, we continue to roll out our myVoyage guidance tool to help employees choose the right benefits and savings options to meet their personal circumstances and improve their financial outcomes. Customers who use myVoyage are 50% more likely to choose a less expensive health plan option and 50% more likely to elect to save funds in a health savings account while increasing their retirement savings rates. For our communities, we are working to advance financial literacy among young people.

Through a partnership with the Council for Economic Education, we are sponsoring the National Personal Finance Challenge and continue to support advocacy for positive legislative change in this area. With respect to our colleagues, I’d like to highlight a recent achievement that involved almost 2,000 Voya employees, those who work at Voya India. In April, we completed the final step in our operational separation from our joint-venture partner, creating powerful new opportunities for greater innovation and collaboration among our teams. With that, Don will now provide more details on our performance and results. Don?

Don Templin: Thank you, Heather. Now, let’s turn to our results on Slide 9. We delivered $1.77 of adjusted operating earnings per share in the first quarter compared with $1.44 a year ago. Our first quarter results reflect the benefit of diverse revenue sources and strong expense discipline. Fee revenues were higher across all businesses, which more than offset lower underwriting income in health as loss ratios normalized from exceptionally favorable levels. First quarter GAAP net income was $234 million. Net income exceeded adjusted operating earnings in the quarter due to the impact of several non-cash items, including a $38 million tax benefit. Robust cash generation and a strong capital position supported the return of capital to shareholders.

Excess capital generation for the quarter was approximately $200 million, consistent with our track record of generating capital above our 90% target. We remain on track to deliver $8.25 to $8.45 of adjusted operating EPS in 2024. And we also remain on track to generate and return $800 million of excess capital to shareholders. Turning to Wealth Solutions on Slide 10. We continue to improve outcomes and deliver value for our customers, consistent with our vision and values. This is supporting our ability to consistently grow assets and our participant base. Full service net inflows were $22 million in the first quarter, a significant improvement quarter-over-quarter. We expect momentum to build in the second half of the year, resulting in full service net inflows of over $1 billion for 2024.

In recordkeeping, net outflows were $312 million in the quarter, following a year in which net inflows were over $7 billion. Larger plan activity can drive variability in quarterly net cash flows. Our full year outlook is over $3 billion in recordkeeping net inflows. Moving to Slide 11. Wealth Solutions generated $186 million of adjusted operating earnings in the first quarter, a more than 40% increase year-over-year. Higher fee-based revenues and alternative investment income more than offset lower spread-based revenues. And our continued focus on expense discipline, balanced with investing in the business, resulted in administrative expenses which were $17 million or 7% lower than the prior-year quarter. Looking ahead, we expect full year net revenues in 2024 ex notables to be 1% to 2% higher than 2023.

While we took actions in the first quarter to enhance portfolio yields and improve interest income on cash balances, second quarter spread income is expected to be between $220 million and $230 million as spread-based assets continue to trend lower. And we also introduced new money products that we expect will increase inflows into the general account and stable value products over time. Turning to Slide 12, on Health Solutions, we continued to grow our core business, expand into adjacent markets, and drive greater adoption and utilization of our solutions within the workplace. Growth in the first quarter was driven by a record sales season and favorable retention across all product lines. Annualized in-force premiums and fees grew 17% to $3.9 billion, well above our target.

Premium growth was largely driven by stop-loss where we improved capabilities to quote new plans as well as enhanced our distribution in the down market. In the first quarter, our total aggregate loss ratio was 74%. In stop-loss, results reflect updated experience for our 2023 block, which is nearing completion and is expected to finish at the high end of our 77% to 80% target loss ratio range. Looking forward, updated results from our 2023 block and pricing metrics related to the strong in-force premium growth suggest it is prudent to expect we will finish the year on the high end of our 69% to 72% aggregate loss ratio range. Moving to Slide 13, Health Solutions adjusted operating earnings of $59 million reflect strong book growth offset by loss ratios normalizing from historically favorable levels in 2023.

Net revenue growth year-over-year reflects strong sales, favorable retention and diversification into fee-based revenue. The adjusted operating margin ex notables was 25.4% on a trailing 12-month basis, and we expect it to be at the lower end of the 24% to 30% target range for the full year. This reflects both our full year underwriting expectations as well as continued discipline in managing expenses while investing in growth. Growth examples include investing in lead management. This capability is of increasing importance to employers and often influences decisions to bundle supplemental, life, and disability products. Additionally, we are continuing to enhance key capabilities within benefits administration to support growth in 2025 and beyond.

Moving to Investment Management on Slide 14. With the international transition now behind us, we are seeing the results of Investment Management’s reach as a diversified global investment manager with an enhanced platform of investment solutions emerging. The diversity of our business across client type, client region, and asset class provides multiple paths to scale and grow. Our leading positions in institutional fixed-income and third-party insurance asset management serve as competitive advantages, which will support continued client and asset growth. We generated positive net inflows of $574 million in the first quarter. First quarter included approximately $2 billion of flows generated in US and international intermediary channels, reflecting demand for income and growth solutions, our retail private equity fund, and core fixed income.

In institutional, the industry headwinds in CLOs and softer demand for fundamental and thematic equities were partly offset by strong demand for core fixed income in the insurance channel. Overall, we expect our positive net flows momentum to build throughout the year, driven by strengthening investment performance, improving client sentiment across domestic insurance and retail channels and increasing demand in the Asia Pacific region for US-dollar-denominated solutions. Turning to Slide 15, Investment Management delivered adjusted operating earnings of $42 million in the first quarter, net of AllianzGI’s non-controlling interest. Higher net revenue year-over-year reflects strong sales in intermediary and insurance markets and benefits from favorable equity markets.

Adjusted operating margin ex notables improved meaningfully to 26.1%. The improvement reflects higher net revenue and the result of significant expense actions in 2023 and continued discipline this year. We are encouraged by the momentum early in the year, and we expect our diverse pipeline will support continued growth in flows and a return to 2% organic growth. Turning to Slide 16, our strong capital generation differentiates us from peers. We continue to build on our track record of generating excess capital above 90% of earnings while still investing for growth. In the first quarter, we generated approximately $200 million of excess capital and returned over $200 million to shareholders, including $172 million via share repurchases. We remain on track to generate over $800 million of excess capital in 2024, and longer term, we expect excess capital generation will grow in line with business growth.

Turning to Slide 17, we are focused on executing our strategy and meeting our financial targets for 2024. We continue to generate excess capital in line with our 90%-plus free cash conversion, supported by our diverse and capital-light businesses. We expect to return over $800 million to shareholders in the form of share repurchases and dividends. First quarter earnings put us on track to meet our full year adjusted operating EPS target of $8.25 to $8.45. And the significant improvement in first quarter net flows supports the momentum we expect through the balance of the year. With that, I will turn the call back to the operator, so that we can take your questions.

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Q&A Session

Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question is from Mike Ward with Citigroup. Please proceed.

Michael Ward: Right there is fine. Hi, sorry about that. I was just wondering if you could maybe comment on the really strong sales growth that we saw in Health. It just seemed like a very — I think it was up 50% excluding Benefitfocus.

Rob Grubka: Yeah, sure, Mike. So, we clearly had a really strong year to start. And then, as you do the comparable to last year, I’d say we felt like we were a little bit light. So, the year-over-year percentage is impressive nonetheless. But look, I think it’s really a testament to the work the team does from an execution standpoint across all of our products. I think the distribution depth and breadth has just continued to build. I would also say as we think about bringing Benefitfocus into the mix, that’s only gotten better. Our relevance at the workplace, our relevance with distribution partners has only increased, the touches has only increased, and I think the ability to bring credibility to everything we’re doing across the workplace, we’re as in good a position as anybody to take advantage of what we think is a really unique opportunity to solve problems in a different way.

But look, we — obviously, you do the step back and you want to make sure it was disciplined growth. I’m sure we’ll talk more about that as we go, but we feel good about how we started the year and we’ll continue to be disciplined as we think about moving forward.

Heather Lavallee: And Mike, this is Heather. If I can just build a finer point on the stop-loss sales and very strong growth. Two key points there is that we had expanded down-market and so we saw that contributing to the very favorable stop-loss sales. And we’ve also done some things to leverage AI and machine learning to be able to expand our quoting capabilities. Historically, we typically would have to decline about 50% of the [one-one] (ph) business that came in, and through this new capability, it’s allowed us to be able to bid on a larger percentage of opportunities, which has contributed to the favorable sales.

Michael Ward: Got it. Super helpful. Thank you. And then maybe on the outlook for flows and I guess more towards Investment Management, but retail fairly solid. Curious if maybe in 2Q to-date, you’re seeing any indication that some of the institutional players might be looking to, I don’t know, put some excess cash to work that could be maybe bolstering the outlook for inflows.

Matt Toms: Yeah, Mike, thanks for the question. Certainly encouraged by the turn and flows in the first quarter. We talked about an inflection point last — at the end of last year, and we’ve seen that inflection point in flows. And as you referenced, strong internationally and in the retail markets domestically, we are seeing with the market environment, let me just categorize the market environment a bit, the lower rate volatility, even a higher rate, that lower volatility and the narrative around how persistent is growth as opposed to has the Fed already killed growth, that’s an environment where institutions are more likely to act. So, when we look at our investment performance, which continues to be strong and we look at the pipeline, which we referenced last quarter again still in place that $10 billion-plus pipeline, we are quite confident on that organic growth rate 2%-plus, and we have seen as we move into the second quarter, institutional activity improve.

And we’ve used the word build in the past and that visibility into 2Q builds our confidence around achieving a 2%-plus growth rate.

Heather Lavallee: And maybe two builds from me for Matt’s comment is to emphasize the point that the transition year is behind us. We recognize we still have work to do, but we do feel very good about the full year outlook. And secondly is that if you look at the strong results we delivered in the quarter and the visibility we have into 2Q, we did that during a very successful leadership transition within asset management with both Matt and Eric, and that speaks to really strong client confidence in Matt and the team.

Operator: Our next question is from Ryan Krueger with KBW. Please proceed.

Ryan Krueger: Hey, thanks. Good morning. I had a follow-up on stop-loss. I guess, first, can you provide some additional detail on what you think is driving the higher stop-loss claims? And then just as a follow-up to the very strong sales, to what extent are you concerned that you may have underestimated the medical trend in your 2024 stop-loss pricing?

Rob Grubka: Yeah, I’ll start with the first one. From a 1Q perspective, what we saw driving the loss ratio there was really the more complete nature of the ’23 cohort of business. As you’ll recall, last year, we had — excuse me, we started the year focused in and talking about — during the year about the ’22 block of business. And that cohort ran incredibly well sort of start of the year was showing good results and then it continued on into the second quarter and impacted what we were showing then. The 23 — ’22 block, easy for me to say here is, run — ran at low 70%. So, as we look at the ’23 block and how that is finishing and how that impacted the quarter, we’re ending up at the higher end of the range. And so, to connect to the second part of your question, we — and Don said this in his comments, feel it’s prudent to be at the higher end of the range.