Voya Financial, Inc. (VOYA) Earnings Call Transcript

Welcome back to the BofA Financial Service Conference. I guess I keep calling this, the insurance sleeve. And we're really pleased to have Voya, be the company presenting today, mostly Q&A format. I'd like to introduce the people here on this riser with me right now I guess that's -- first of all, we have CEO, Heather Lavallee, who started just this past year, a veteran at Voya for a very long time. Just want to read a few things. So first of all, she worked at the CEO of the Wealth Solutions business, prior to this, and she was the President of the company's Tax Exempt Markets previously. Also the President of the Employee Benefits business now called Health Solutions of the company. Before joining the company, she was at Mutual of Omaha and Sun Life, New York. Last year, she was named the Hartford Business Journal's top 25 women in business. And she's on the Board of the National Down Syndrome Society and Junior Achievement of Southwest New England. I want to point out also that we have Don Templin here, CFO since mid-November, joining from Marathon Petroleum, and obviously bringing very different set of eyes to an investment management insurance business. And longtime veteran, Mike Katz, who was instrumental in getting the IPO underway, 2013, severed roles in various positions doing CFO roles and various rating agency, pretty much everything Mike has done with this company. So I mean, there's no getting around it. And so we're pleased to have them here. Just I want to make a note, I calculated last night, a 24% compounded EPS growth over the past 5 years and the company has a commitment to a 12% to 17% continued growth over at least the next 2 years. I'm not sure that any of the other companies might coverage universe have that same EPS CAGR. I could go check it out, but I think it's #1. Maybe you guys know that already, that's #1. And so it's really been an impressive journey that's not over with in any way. And so let's begin. I want to encourage everyone at any time just to raise your hand. I don't stand in any ceremony, I have questions, but I'd like to hear your questions, if possible.

So my first question, I call it bringing the whole firm. I sometimes think about Voya as being 4 businesses, I guess. It's articulated as 3 businesses. In my mind, the medical Stop Loss business and the group benefits business aren't exactly the same, as though they're in one hierarchy investment management and, of course, group retirement. Can you talk about how these pieces of these businesses fit together into one seamless sort of enterprise? And how Voya when it's selling brings the whole firm to the clients?

Yes. Maybe I'll start, and thank you for the kind introduction. So when we think about the alignment of our businesses, if I should take a step back and I think about where we've come from. So over the past 10 years, since our IPO, we had first had one major phase, which was an ROE improvement story and we had the divestiture story where we divested our life and annuity businesses, our high capital intensive businesses and those focused on the retail. And that really shifted our strategy to focus on the workplace, on institutions and our capital-light, high-growth businesses. So when you think about today, the businesses we're in, with our wealth, which is our retirement business, the health business, which is our former employee benefit, our asset management business, and then the newest addition of Benefits Administration. These are really the core businesses that we have, and we're equally excited to be in all of them. And to more specifically answer your question, I would say the alignment fits under 3 different dimensions. First, from a strategic perspective, it goes back to what I talked about, it'd be focusing on the workplace. We have a path to be able to help people invest, protect and plan. And so you think about all those different components, retirement hits the planning, the benefit hits the protection element of it and then, of course, investing, thinking about helping people to be able to accumulate and generate returns. From a cultural perspective, we have a purpose as an organization where we talk about together, we fight for everyone's opportunity for a better financial future. And there isn't a day that goes by where we don't think about the businesses we're in, where we're investing of how we are helping our customers grow and achieve all of them. So strategically, very, very much like the businesses that we're in. Economically, they're all capital light. They have diversification of revenue, some are spread based, some are fee-based. Some are equity market sensitive, others are not. So there's a really nice diversification. And then the last bit of your question, which is how do we think about going to market? Well, in each of these businesses, they have to stand on their own. So when we're working with intermediaries or distribution, we think about we've got to win the RFP that's coming in, whether it's the investment mandate, the retirement, the health or the Ben Admin. But over time, as we develop a relationship and do a good job with those clients, we have a philosophy around landing the client, expanding the relationship, which is bringing in additional solutions and then deepening the relationship at the participant level. So that's really kind of the mantra that we take and we think that the best client for us to target is an existing satisfied client. And that's really kind of how we think about this overall interlock between those businesses. Anything you want to add?

Perfectly said.

One thing I just want to understand, like, obviously, the businesses stand on their own. But between group retirement, group benefits and medical Stop Loss, if you're going to an educational institution or you're going to an employer, is the contact point for that sale, oftentimes the same person? Is it -- are there different -- does each of the businesses require different fingers into the organization or to make that relationship in broad net?

Yes. It's a great question. So on the workplace, on the employer side of it, we're typically talking to the same buyer. And the buyers are going to be the CHRO and the CFO of a company. And that even includes Stop Loss. So Stop Loss may be more of a financial decision but it's usually going to be made between the CFO and the Benefits team. And so maybe a couple of stats that I would give to kind of talk about the intersection between these businesses. Within our retirement business, roughly 40% of the assets are somehow tied to our investment management, whether that is underlying funds we have through our Voya Investment Management business, or assets that are invested in our general account. And so there is a significant connectivity from the economics. Within our health business, roughly 30% to 40% of our health clients have more than 3 lines of health products with that same employer. So we're essentially -- we may win the client on the Stop Loss and you do a good job with that client. And over time, they're interested in other solutions that we bring to bear. And again, it really comes down to the relationship and the service over time. And then where we've been most excited recently is this connection between the wealth business and the health business and the solution that sits squarely in the middle is HSA. And so HSA is a solution. You think about a health account savings where we've embedded that into our retirement experience to our clients when they have multiple products with us. They see their 401(k) accounts, they see their non-qual accounts. They see their HSA all into one. And so our teams are really both people who are winning the new deals as well as those the account management teams. They're working and supporting that client more holistically, but we're bringing in the right level of specialization from each business line.

Focusing a little bit on group retirement. I mean there's quite a lot of markets. We can make the markets more narrowed by 3 names, 401(k), 403(b), 457, I think Voya punches definitely above its weight through the 457. What are the different challenges in each of those marketplaces? In my mind, I think about corporate America is maybe more free enterprise, I think government as very controlling. Maybe that's the wrong way to think about it. Is the same skill set, the same for all 3 of those things and how can Voya be successful in each of the markets?

Yes. So we really like the mix of business we're in on the retirement side of it. So the fact that we're serving clients of all sizes from start-ups up to mega clients and across all the different sectors that you served. So corporate, government, education, health care. And what's important, it goes back to just simply, you've got to know your clients and you've got know their needs. So whether it's a corporate client or a government client, our ability to understand their unique need and be able to service them has really made the difference. Now what we like about those sectors and where they're very complementary is, take some of the questions we've been getting around the layoffs in different industries. And one of the things we talk about is, more of the layoffs we've all been reading in the headlines are in the technology sector, large financial services institutions. We don't have a lot of those clients in our mix. So the corporate sector are more of service, transportation, oil and gas, legal, smaller employers, very, very stable. But half of our retirement business is in what we call tax exempt. So the government, education, health care, these are the sectors with very, very stable employment populations, frankly, growing in health care and education. So they act as a really nice ballast across our book of business. And in the Tax Exempt client base, the average tenure of those clients is roughly 25-plus years. So you win a client and maybe the needs are a little bit more complex. We're going to keep that client for a long period of time. Corporate clients are going to tend to be with us for 10 to 12 years. So again, we like that dynamic. And the third and final piece that's a little bit different is within the tax exempt space, roughly 20% to 25% of their assets in those plans are usually going to be in the general account or spread-based products. There's a bit more conservative nature of how they're investing. So when you think about a revenue diversification, that's opposite. Corporate markets is probably going to be more like 5% of assets in those products. So they serve really nicely. Again, it goes to the revenue diversification, the tenure of the clients. And If we're able to bring a new solution to market for government or client, believe it or not, we're actually able to leverage those in other sectors quite nicely.

So shifting gears a little bit to health. And I think about, again, dividing it into one side Stop Loss, other side group benefits. I mean, you have a nice sized health business, but if I break them up I think about juggernauts like MetLife with huge health business. And Voya smaller by size in that group benefits category. Are there barriers to competing at your size? Are you at the right scale? Do you need more scale over time to deliver on the corporate goals?

Yes. So as we look at our health business, and this has been one of our fastest-growing businesses inside of Voya. So you look at our guidance, and we've talked about 7% to 10% both premium and revenue growth, and we've actually exceeded our targets. So first, we like our organic growth within those businesses. Some of the companies that you mentioned within our health business, we tend to compete in the middle market space. And so -- while we have capabilities that can serve up market, we think we're squarely in that. We're not a small market provider where within the employee benefit arena if different competitors serve different market segment. So we have been to compete, we've been able to grow revenues, grow premiums. And if we look at our operating margins, we've been right within the guidance. So coming in right around low 30% which we think is a very healthy margin. So we have managed expenses, invested in the business to grow and so to get specifics our Stop Loss, we're a top 3 direct writer. We have been. We've been very consistent in our approach to underwriting. We don't need to lean in very heavily to continue to grow that business because there is a medical inflation trend that helps to grow revenues of that business. So our focus there is play our game, focus on underwriting, be disciplined, voluntary. This is something we've been continuing to innovate in that product space for a number of years, and we have been a top 5 grower in that space. And it's both innovating on the product end but also around our claims experience. And one of the other things you may see less of, but their newer capabilities is our broad health account savings as well as lead management. So at the end of the day, we feel like we've got our ear to what the customers need, both from the end consumer and the employer. We think there is always going to continue to be a really healthy market for us to continue the growth that we have delivered in the past several years.

In that 7% to 10% target, I mean, in my mind, if we just assume that health care costs grow at GDP. So there's both unit and rate in that target over time. So I'll just call it 3%, 4% rate annually. I don't know if that's the right number, but let's say, 3% to 5% unit, how much of that unit growth is better penetration within customers you already have? And how much is taking share from people who already -- or for competitors who are in the market, I don't need any names, but who are you taking share from?

So if I take a step back and kind of think about the question. So if I go back to that 30% to 40% of our health clients are -- we have more than 3 lines of health products with them. You can imagine that there's quite a bit of additional cross-selling we're doing within our health blocks. We have an established client. We're adding additional solutions on. So that's currently something that's quite important for us. If you look at our competitors' by product segment, we're competing with different folks from the Stop Loss than we are from the Voluntary and Life and Disability. We're not chasing the large disability providers, you think like a MetLife or Prudential. And we think that's actually quite healthy given the fact that we talk about the capital-light nature of the business, the high free cash flow generation, we don't have tail liability in our benefits business. And when you think about the penetration we have, a lot of the success we've had in the voluntary has come from -- we work with 90-plus benefit administration partners and the penetration and the participation there comes from the ability to make sure that our product is appropriately placed at the time of enrollment to be able to get that participation in and then to do ongoing work and support. So there isn't necessarily one client that one competitor that we're targeting. It's just that overall discipline in terms of how we manage businesses that I think has continued to have us resonate and compete across the markets we serve.

And I think if you break it up into the products, Josh, the GDP growth product line is probably Group Life. But we're essentially growing that product line roughly at that rate. If you think about the Stop Loss business, as Heather talked about earlier, like we don't need to go out and win market share. We're going to be very disciplined in how we approach that from an underwriting perspective and medical trend or medical inflation is really what's driving that high single-digit revenue growth. And as long as we're consistent on underwriting, you're going to get the same thing from a bottom line perspective. And then where there's been tailwind is really in the Voluntary side. And that's -- I think that's an industry trend. I think most -- we're talking about like half of the Voluntary we write are with companies that don't offer these products. And so we still see upside not only in new companies that are looking to offer products like this because they worked quite well with high deductible health care plans, but also just the attachment rate. So as we do a better job and as the industry does a better job of making sure that these policies are set up beside high deductible health care plans and drive more money to the bottom line for employees, we think the attachment rates can grow there with the existing companies we have Voluntary products with. So I would kind of think about it through those 3 wins as you think about the growth going forward. All of that collectively gets to the 7% to 10% top line and bottom line that Heather was talking about.

And then just on the Stop Loss, right? And again, I kind of think of it as a slightly different business in some ways. That's a mature business where you are a scale competitor and kind of oligopoly a little bit, there's maybe about, I don't know, 7 to 10 competitors in that market, and each one of you has your own niches and positioning of that? Am I -- is that...

I mean it's a workplace benefit but it's focused on the employer. And to your point, where I must quote, top 5 player. And generally, the intermediators don't want to spread this around. They don't want to have all the risk with one particular player. We stay in our lane to Heather's point. We feel good about the underwriting, and that served us well. I mean it's been a consistent -- it's been a consistent grower for us, both from a top line and bottom line perspective. But I think you're thinking about it right, Josh.

Yes. And the piece that I would add to it is, well it may feel separate because it is focused on the employer how that leads to additional sales of other products comes through in terms of how we show up and follow through. So at Voya, we talk a lot about the ethics and our commitment. We've had 9 years recognized by Ethisphere. We show up, we do what we say we're going to do. We make sure we're under-promising and over-delivering. And when we do right by our clients and our intermediary partners and they have stable underwriting year in, year out, stable pricing that leads to build a tremendous amount of confidence and reputation, which creates opportunities for us to expand the relationship with both the clients and the intermediary partners.

Well, I want to talk about AGI and Benefitfocus, but I also want to get Don, involved. So I'm going to shake up order a little bit.

Perfect. That's great.

But if anyone has a question, please don't be shy, just raise those hands up. Come on. You can do it. I'll support you. So capital return, cash flow conversion. I mean the company has returned a lot of cash to investors over the years, reduced the share count dramatically. A lot of that has been -- I sort of feel like archeology in some ways. You inherited a lot of these businesses that didn't necessarily fit with the full view of what Voya would become, collapse those structures, take the cash out and return. We're kind of getting into a steady [ state here ] I've always said, oh, this is a company whose free cash flow conversion was up above 100%. Well, it's not going to be above 100% forever. Where is the cash flow conversion right now? Where is it, I guess, let's say, 3 years out in a normal steady state? And how should we think about it?

Yes, Josh, I think you're right. There were some unique transactions that provided us the opportunity to maybe to return outsized percentages of cash flow because we had a transaction that contributed. We've guided and feel very comfortable with the 90% to 100% cash conversion ratio. You saw that we delivered that in 2022 in an environment where there were a number of macro headwinds, and there were other things that were maybe a little unusual in the business. As we look forward to 2023, we don't see anything that would cause us to move off of that percentage. And I think the same would hold true for sort of '24 and beyond. So we're in a sort of low capital, high cash generation conversion type of mode right now. We're very focused on making sure that we appropriately manage the balance sheet. I mean prudently managed balance sheet, prudently manage leverage, invest in growing the business organically because we did some strategic acquisitions last year. And then we see a pathway to generating significant amounts of excess cash or free cash flow and we're very committed to returning that capital to our shareholders.

And where does deferred tax assets stand on the balance sheet right now?

So if we think about that asset, it's a very significant asset. It's probably on a present value basis over $1 billion right now. We don't expect to be a cash taxpayer for maybe 4 to 6 more years than we had originally guided, I think, last year to 5 to 7. So we're 1 year deeper into that. Obviously, we're watching closely what's happening with the regulations around alternative minimum tax. We haven't gotten a lot of clarity around what is going to be required and how those rules will manifest themselves. So we're closely monitoring that. But as it relates to regular cash taxes, we're in a very good position for the next 4 to 6 years.

And along those similar lines, does the stock buyback tax affect you in particular way that changes how you think about capital return?

No. I mean, obviously, we -- that tax exists but we will manage through that. It won't meaningfully impact how we're thinking about capital return.

I'm going to throw out numbers here. They run the risk of being wrong, so you'll correct me. All right. So debt leverage and interest coverage is about 30% to 32% and 5x when Voya announced the sale of the Fixed Annuity business at the end of '17. At least that's what my research says. About 33% to 36% and also 5x when you announced the sale of the Life business at the beginning of '21. Currently, the debt to capital to leverage about 25% to 27% and interest coverage is about 8x. Is that the right mix? Are we at a steady state here at this point?