All right, let's get going on the next session here. I have Voya Financial, and let me first say thank you for being here, and thank you to everybody in the audience. I've got Heather Lavallee, CEO; Don Templin, CFO; and Mike Katz, VP of Finance. So, you know, before we jump into it, I'm gonna do a bunch of Q&A, but I think first I'll turn it over to Heather to make some opening remarks.
Yeah. Thanks, Alex. So, a couple opening remarks about Voya, if you're less familiar with us, is we've been on a, interesting journey over the last decade, and we have gone and transformed from a capital-intensive business life and annuity to a capital-light, high-growth business. Back in 2018, we divested our life and annuity businesses, and now, we are really focused in on workplace benefits and savings and our asset management business. Second key point I would mention is the high free cash flow, generation of our businesses. Those three businesses, combined are a 90%+ free cash flow conversion. And, you know, we think we over that time period, we've demonstrated our ability to return a significant amount of capital to shareholders, over that time period.
Third piece I would mention is, back in our Investor Day, we talked about specific growth targets, and those were around revenue growth, around operating margin, disciplined capital management, and all of those pointed to EPS growth of a 12%-17% EPS CAGR over that planning period. Final piece that I would mention is we've been talking recently in our, our calls around our positive commercial momentum, heading into 2024. So really thinking about us as a capital-light, high-growth business is a leader in the space we play in, with a significant opportunity for growth going forward.
So you touched on some of it there, but I did want to start with the first, a more broad strategy update type question. What of these strategic objectives are you most focused on over the next, call it, 12-18 months?
Yeah. So a couple things. The first thing I would talk about is integration. So in the last year, we had done two very important strategic acquisitions. The first was the acquisition of Allianz GI asset management business, really transforming our Investment Management business. And then we also acquired Benefitfocus, benefits administration company. So really, the first bit is integrating those strategic properties and driving full value from those. Second is around execution, and we talk about executing on our financial targets around those, the planning period I talked about. Third is a continued focus on discipline expense management. Fourth, I talked about the capital management and being balanced, and how do we think about both capital allocation and return to shareholders.
And fifth, and one that is, you know, equally of importance, is a relentless focus on the customer, and that's really how we win and retain business across all of the businesses we play in.
So next, I want to move into Wealth Solutions a bit deeper. On the last earnings call, there was a good amount of optimism expressed about the pipeline you see there. So I was hoping you could walk us through some of that. What are the underlying drivers of that optimism?
Yeah. So, you know, if you think about our retirement business, we talk about the fact that we're a market of markets. We play in all sizes plans, all sizes tax codes, from corporate to government to education, healthcare. And one of the things we pointed to was that we have a $12 billion pipeline of plans and implementation. These are plans that are won, and they're across all sizes tax code, full service into record keeping. So that gives us a lot of optimism. We see our FP volume is up. We've got strong client retention. And so I think at the end of the day, it really goes to why we're winning the business, and that goes back to the service and our ability to deliver for our clients in a leadership position.
So just lots of optimism in the wealth business.
So during 2023, you know, one of the things investors did focus on a bit was just, you have these higher interest rates, but, you know, sort of how much of that needs to be given back through credited rates and the timing around some of those adjustments. How much of that work is behind you at this point? Is there anything around year-end that we should think through, just in, you know, kind of considering the trajectory of spreads?
Yeah, I think you're. You know, Alex, I think the point about interest rates did move up quickly, and we thought it was important that participants benefited from those interest rate movements. We took three or four meaningful crediting actions during the back half, last part of 2022 and during 2023. So we're at a place right now where we feel comfortable that the sort of material crediting actions are behind us, absent something happening, obviously, in the interest rate environment. But, you know, we've gotten to a place where I think those, those spreads now have normalized, and we believe we're in a good position.
Maybe isolating the net investment income a little bit there. I mean, what does the trajectory look like when we think through portfolio yield versus new money yield and maybe also considering, you know, whatever allocation you have to floating rate?
Well, let me take sort of the investment income piece, and I'll have maybe Mike talk a little bit, you know, about floating rate interest. But, you know, as I said, we think that the principal key crediting actions are behind us. So, you know, for the fourth quarter, we guided basically the same investment spread income in the fourth quarter of 2023 as we experienced in the third quarter of 2023, really because we believe that those crediting actions were behind us.
Got it.
Yeah, maybe just two pieces. First, I think it's worth putting some context around the spread income, too. If you look at where we were coming out of 2021 versus spread income levels now in 2023, $150 million more in spread income. So we're now, you know, moving off a base that's much higher than where we were. And as Don just mentioned, you know, credited rates are going to be more in sync with where yields wind up being, as we're just passing on that benefit to policyholders. You also asked about floaters. I mean, that's part of what we do, Alex, like, as we're thinking about how we match asset liability for that book of business and also thinking about just liquidity, you know, as things are ebbing and flowing with the book.
But the nice thing's been, on the floater side, is we've been able to do that and not sacrifice yield. Now, we'll obviously manage through that as we move into 2024, but that's a portion of what, you know, what we leverage to match the liabilities.
Got it. Okay, next, maybe a high-level question on the competitive environment, 401(k), 403(b), you know, sort of always been a competitive market, so nothing new there. But was just interested if you're seeing any kind of shifts from the key players and, you know, yeah, what the outlook is there for You know, how much do you have to do to compete on price?
Yeah, I'll jump in and take that. And so number one, first, we're not seeing a lot of shift from the competitive environment. You know, certainly we've seen consolidation in the space.
The consolidation that we've seen has actually created opportunities for us to grow. 'Cause when you see, you know, some competitors that they get acquired, it sort of takes out some people who we, you know, might have gone up against in 401 or 403. But, you know, why we stand out in the retirement business is really a couple things, when you talk about whether it's the 401, the 403. In the retirement business, your leadership position in a certain market space matters. So it's not just a matter of where do you sit in the overall defined contribution, but are you a leader in government market? Are you a leader in the education space or in the large end of the market of 401?
The fact that we have been in those leadership positions, so number one in the government market, number three in 403, that really matters with clients when they're thinking about going to RFP. And then do we have the right capabilities and the right earnings profile to be able to reinvest in the businesses, to bring new capabilities to market? And I think one of the things that's been a strength for us as we think about how do we compete in the market, is the fact that we have demonstrated an operating margin of 35%-40% over the last decade. So it really shows the ability. We've grown organically, we've delivered solid margins, and we've been able to continue to invest our capabilities.
The very final thing I'd mention, Alex, around retirement is, we have a different value proposition than our competitors. So we've been talking a lot about this intersection, thinking across workplace benefits and savings, and helping the employers think very, very broadly about their benefit portfolio, and that's been something that is, I think, giving us a leg up in the market.
Got it. Maybe sticking to Wealth Solutions for another one. You know, I know this, this consolidation that you talked about, I think, has been a tailwind for your flows, just in that, you know, some of the smaller players without the kind of capabilities that you've invested in have, have, you know, gotten squeezed out of the market. Where are we with that? Is that, is that still an ongoing trend? Are you still seeing, you know, a benefit where maybe, you know, even if 401 flows overall are a tough situation, that there's enough of that dynamic that it, that it doesn't pressure you?
Well, the way that I would think about it is, you know, the industry. Again, if you look at the retirement market, 10 years ago, the top 10 providers controlled 50% of the assets, and today they control 75% of the assets. So being in a leadership position matters, and I think it's really around, are you in a top 10 position? We've been focusing in a lot on organic growth, the ability to win new business, to be able to retain the business, to be able to expand those relationships. And so to me, I think it's something we think about the retirement industry as kind of a steady grower.
What's important about the business for us is the fact that when you look at our free cash flow generation, this is a business that is giving off 90%+ of free cash flow. So for us, it is a market where we can both compete, service clients, but I think gives us a lot of ability to generate value for shareholders.
One more on Wealth Solutions. SECURE Act 2.0, SECURE Act, and I guess also SECURE Act 2.0, they sort of came when we knew that there were potential benefits, but we knew it would take time. I mean, where, where does all that stand? What, what have you seen, or what have you done that's actually beginning to take shape at this point?
Yeah. So, you know, SECURE Act, we were incredibly supportive of that because we definitely see that there still is a need in the United States to be able to help more Americans save for retirement. And it just resonates with who we are as a company and why we exist. And couple of ways that we've seen SECURE Act emerge is, several of those provisions, they went into act in different time periods. One of the first bits of how this has shown up for us is around the emergence of startup plans and the fast growth.
So if one of the components of the Secure Act was that requiring small employers to be able to offer retirement plans or provide incentives to do so, we've seen a growth in our startup plans in the small 401 market by anywhere from 10%-20% over the last several years. So that's probably the biggest area that we've seen, we've seen that show up. The other piece is, we see a lot more awareness from plan sponsors on the importance of putting in place auto plan features. So think about auto escalation, auto enrollment as a means to get more people into plans. And so that's been a positive trend.
I think those are probably the two biggest pieces that we've seen as a trend, and, you know, we'll sort of see how this emerges in the coming years.
You know, while we're on regulatory items, I wanted to ask about the Department of Labor proposed rules. I know probably less of a direct impact, as you all don't do, you know, individual annuities anymore. Y ou know, are there any areas of your business it does impact? Any considerations we should have there?
Yeah. So right now, as the DOL regs are proposed, we don't really see a real impact to our book of business. And what I would point to is when the first DOL regs were proposed in 2017, we made sure that our advisors were already acting in best interest. And so this showed up in terms of our transparency or our fee disclosures, our processes for how our advisors were ensuring best interest for the participant. And so for us, we already have those. Bless you. We already have those processes in place. I think as proposed, as you said, Alex, it's probably gonna have a greater impact on the fixed annuity providers. So we see very little impact at this point.
Got it. Okay. Let's pivot over to Investment Management. You know, similarly to the optimism you expressed around the Wealth Solutions pipeline, I think there was a lot of optimism around the wealth or Investment Management, I should say, pipeline. I think you mentioned $10 billion for the U.S. pipeline, which was, I think, 3x above normal. What is it that you're doing that's driving that pipeline? Is there anything idiosyncratic about that, or, you know, is it a culmination of different pieces of what you're doing? I'd just be interested in unpacking that.
Yeah. I think it's a couple things. And you're right, we've got a lot of optimism about the Investment Management pipeline, and the 3x is really thinking about, you know, number one, where was our pipeline a year ago? So trying to give that comparison. So the first bit that I would point to is the diversification of the pipeline. It's not in any one asset class or any one channel. The way that I would break out that $10 billion pipeline is in a couple different areas. First is in our fixed income, and as we see money begin to move off the sidelines from sort of sitting in money market, we think our fixed income portfolio is well positioned to take advantage of that. Second is around private credit.
We have a lot of unfunded mandates within the institutional space that gives us a lot of optimism. And third is our secondary private equity, and this is one really thinking about more of reups. So these are not necessarily, you know, brand-new asset classes. These are relaunch of very successful asset classes. So it's really that combination of things that gives us a lot of confidence.
So one of the things I thought was most interesting about the $10 billion being 3x above normal was I think you mentioned it didn't even include the potential pipeline from what you're doing with AllianzGI, particularly, you know, with geographic expansion. So could you dig into that opportunity a bit? Any way to help us out and think about the potential size of that opportunity?
Yeah, you're absolutely right, and one of the reasons we didn't is because we wanted to have more of an apples-to-apples comparison of how to think about the pipeline year-over-year. But as we think about AGI and why we are so incredibly optimistic about this ongoing partnership is, since inception, since July of last year, the AGI partnership has brought in $6.5 billion of retail flows during that time period. So, you know, really, really positive trend, allowing us to turn around kind of outflows in retail over a number of years. And the other thing I would point to is the fact that, you know, we see really strong demand for U.S. dollar-denominated products. We're seeing a lot of growth in Asian markets, and we think about AGI and just what that distribution brings to us.
You're talking about 500 relationship managers, 19 countries, very well entrenched. So, you know, if we think about that trend continuing into 2024, it has a very successful income and growth franchise. So that really gives us a lot of confidence. And the final thing I'd point to is the fact that AGI has a 24% ownership stake in our asset management business, so our teams are incredibly aligned to be able to grow the business together. We're focused in on top-line growth and continuing to grow margin in a really strong way.
Great. While we're on investment, I wanted to ask you a bit about your own general account investment portfolio as well. Could you give us an overview of, you know, how the credit performance is going there? Any allocations that are changing, any pivots within that portfolio?
Yeah. So just for context, our general account is just under $40 billion, so $39 billion. And, you know, I, I think of sort of the construction of that general account is it's intended to have risk-adjusted good risk-adjusted returns through cycle, and that's what we've been experiencing, not only this year but, but in, in prior years. You know, and I think the team has been very thoughtful and prudent in how they've positioned that those investments. So just to take some perspective, 96% of our fixed income portfolio there is investment grade or higher. We have more than 3,000 names, so, you know, there's really good diversification around that. And so the, I think the team has been, you know, very thoughtful about how it's constructed.
With respect to changes, you know, there's some tweaks here and there, Alex, but there haven't been any really meaningful changes in how we've allocated or how we think about allocation there, because it's held up well in prior years, it's held up well in 2023, and we expect it to hold up well in 2024.
Got it. If we could drill a little more into the commercial real estate and some of the mortgage loan exposure, can you talk a bit about, you know, both the whole loan portfolio, but also the CMBS exposure? Are there, you know, potential losses we should consider in there, just in terms of cash flow generation and, you know, the conversion headed into 2024?
Yeah. So let's unpack those as well. So commercial loan represents about, you know, 14% or so of our general account, and of that, office represents about 15% of that 14%, so about 2% of general account. You know, given the size of our general account, we haven't had to participate in, you know, really chunky investments. We haven't had to do it in sort of big metropolitan areas. We've been a lot. We've had the capability of making, I'd say, smaller investments, more thoughtful investments around geographies that are in flyover states. So our average loan size is about $11 million. We have no loans that are over $100 million. So we feel really good about, about office, and it's, I think, underweight compared to a, a, our peer, our peer group.
So on the office side, feel really good about that. On the CMBS side, I think you asked about that as well, Alex, right?
Yep.
So CMBS, I would say that 97% of that portfolio is NAIC 1 or NAIC 2 . The tranches in which we participate, we think that we have really good credit enhancements around those. So, you know, we feel it's diversified and well protected. And then we get the question sometimes about sort of our triple-B exposure there. More than half of our triple-B exposure is to multifamily. So once again, I think that makes us feel like that's a lower risk area than maybe some of the other other, you know, exposures that others are experiencing. So we feel. Once again, we feel really good about it. We're risk aware. We understand that there's pressure in the market. There will be situations where we experience credit losses as well. But for now, our experience has been relatively benign.
We don't see anything that's on the market that's causing us to be, you know, uncomfortable, but we will continue to obviously be really risk aware. There's nothing. You know, our confidence, I think one of the things that we've tried to articulate is, we've had a high degree of confidence in our return of capital to shareholders, and I think, you know, we signaled that for the fourth quarter, that we would return $200 million through dividends and share repurchases. Once again, that's a reflection of how we feel about that portfolio and the confidence we have in that portfolio.
Understood. Okay. Let's shift gears over to Health Solutions. Can you give a brief update just on the acquisition that you've done, Benefitfocus, and the integration process?
Yeah, absolutely. Yeah, we're right on track where we expected to be at this point. And as a reminder, when we announced the Benefitfocus transaction last fall, we closed in January, we really had a few main objectives for the first year. The first one was to make sure we brought in some new capabilities to be able to hit the selling season running in January, which we did that. We incorporated our guidance capabilities into their platform, which was able to give them some enhanced capabilities to bring to market. So, we were pleased with that. We also focused in on stabilizing the service and really making sure we could focus in on referenceable clients and growing those.
And then the third item was around for the clients that we won in the first half of the year, was really making sure we could deliver on open enrollment, and we're right at the close of that right now. And what that means is that we've got these clients ready to go. We've got smooth implementation. We're helping them through that open enrollment period. And how we're measuring the results of this is actually by feedback.
We're hearing directly from clients and key advisors, that we've done client advisory board meetings and meetings with our key distribution partners that: "Hey, look, we're viewing you as more of a go-to benefit admin provider." We've got a lot of confidence in our ability to deliver, and so we think all of that is gonna help set us up well for a strong selling season in the first half of 2024. Which we think this will really start to emerge from a revenue growth perspective in 2025 and beyond.
Got it. Next on the pricing environment, can you discuss how that's shaping up for employee benefits? I know these are multiyear contracts, but, you know, I would be particularly interested in, you know, what you're seeing around Stop Loss and some of the products that have, you know, performed quite well from a margin standpoint recently.
We feel really good, Alex, on how 1/1 shaping up. I know there's been a bit of volatility in the loss ratios in second quarter and third quarter, but that hasn't shaken, you know, how we feel about where we're getting the pricing. And just as a reminder, like, we're not out there trying to win a bunch of market share and Stop Loss. This is a business where we feel good about maintaining market share and just taking advantage of the medical inflation to be really the tailwind to grow in force premium because at the end of the day, it's earnings what makes this, you know, makes the health business go. So, you know, where we sit right now and when 1/1 finishing up right now, we feel really good about the pricing we've got on that side of the house.
Okay. And I guess, in health solutions in general, you've seen good growth. You mentioned stop loss in the medical piece that propels that. But even in things like supplemental products, there's been ongoing penetration and growth that's really come together there. You know, where does that stand in terms of the initiatives, like the HSAs as well? I mean, is there still a pretty strong glide path there, or, you know, that strategy maturing in coming?
We think so. I mean, look, it's, it's I mean, we've had years where that's grown 20% plus. Is that going to happen in perpetuity? Of course not. But double-digit growth, we feel really good about it. I mean, that's a business too, where almost half of the new sales are to companies that have never offered these products before. And so it's not just in where we're getting new employers, it's also the penetration within the employers that we currently have. And that's why we're spending a lot of time, you know, with the Benefitfocus piece that Heather just talked about.
A lot of this is just, you know, waking up the employees to the benefits of supp health and how that can complement really well with a high deductible healthcare plan, for example, and ultimately lead to less dollars spent, more money in paycheck to do other things with. And frankly, that's a benefit not just to the employee, it's also a benefit to the employer, because if they get high deductible healthcare plans, it's less cost from a premium perspective.
Yeah.
Go ahead, Heather.
Yeah, I was going to say, I think, I think the build that I would have is, you know, knowing that our business is very one, one heavy. We already have a great visibility into our 2024 pipeline. So we talked about in our last call, the fact that our voluntary sales are up 50% year-over-year. Our life insurance sales are up 40% year-over-year. So, you know, to Mike's point, you know, we, we do see this double-digit growth rate as something that can continue within that business.
Got it. Next, on the expense management, clearly, there's inflationary pressures that are out there. You know, what are the things that you're doing to keep that in check? You know, does all that fully offset it? Is there still some pressure that will come through? Anyone to help us think through that?
Yeah, I mean, there's certainly inflationary pressure, but I would say, Alex, one of the muscles and one of the capabilities that Voya has demonstrated over the years is being really, really good at managing expenses. You see what our historical margins have been. They've been very strong in health, they've been very strong in wealth, and they're growing in Investment Management. And, you know, so as we look forward to 2024 and beyond, what we want to do is make sure that we're investing in the business. That's organic growth, so making sure that we're continuing to grow the business, but also protecting the margin.
So as we think about 2024, you know, we want to protect the margin in, in wealth, we want to protect the margin in health, and we're targeting a 1 percentage point, at least, increase in margin in Investment Management. That's not easy, but, but the whole team is kind of pulling towards that. We're continue to optimize the model. So I can't point to one thing that says, "Wow, this was something that is going to allow us to get there." And you should say shame on us. If we say we have a really good muscle at expense control, there shouldn't be any big levers to pull. What we have is a lot of small levers, and that's not being driven by the management team, it's being driven by the folks that do the day-to-day work, that identify the opportunities to optimize what they do.
Our goal is to protect margin, and our goal is to continue to invest in the business, particularly from an organic perspective.
Helpful. Over in capital management, can you give us a refresher just about how you prioritize your uses of capital? You know, in recent years, it's maybe leaned a little bit toward more towards M&A, and debt reduction even more recently. Where do we go from here? Are there still areas where you're building out capabilities, or do you anticipate it would be more of a, you know, return to the focus on return capital?
Yeah, so it's probably good to kind of level set again, how we think about. The first priority is to make sure that we have a prudently positioned balance sheet that allows us to operate through cycle without, without sort of undue pressure or undue strain on the organization. So a couple things that we do. We want to make sure that we target an RBC of at least 375, and we want to make sure that we have a leverage metric that makes sense, and our target for our leverage metric is 25%-30%, excluding AOCI. So over. You talked a little bit about some, you know, inorganic or M&A activity.
In 2021, at our Investor Day, we highlighted a couple areas where we felt that there were gaps in sort of our portfolio and where we felt that we needed to strategically strengthen that portfolio. So one was around international distribution, and the other one was, you know, around what benefits, you know, benefit admin. So, you know, the AllianzGI transaction allows us to address the issue around international distribution. The Benefitfocus acquisition allows us to take care of that sort of strategic area. We feel like we're really well situated right now. So for this year, you know, we have excess capital of about $400 million. We've been holding that throughout the year. And that's really because we wanna make sure that we're prudent and thoughtful about the uncertainty that lies ahead.
So what we've been doing is we've been deploying, in the current quarter, the capital that we generated in the prior quarter. And we're not trying to build up excess capital because we're signaling there's gonna be some M&A transaction or whatnot. We're signaling that we wanna be thoughtful and prudent, and over time, we would expect that excess capital, roughly $400 million or so, to work its way down so that, you know, we get so that it's no longer excess. We have good targets right now. On the leverage side, we're right in the middle of that 25%-30% leverage metric. We don't feel like there's any pressure on us from the rating agencies. We talk to them regularly. I think the business is operating really well. We had a debt reduction.
There was some debt that was maturing in August, so we retired that debt. We don't have any debt maturities till 2025, so our bias right now, fourth quarter, was on dividend and returning capital to shareholders. We signaled $200 million for the fourth quarter, and our bias for 2024 will once again be on dividends and returning capital to shareholders through share repurchases.
One of the topics I wanted to circle back on was stopping your private debt. And I think you mentioned it when you were talking about the pipeline for your own investment manager. You know, it's also becoming a bigger allocation, you know, certainly for some of the private equity-backed companies, but even for the industry more broadly. What do you what is your point of view on that, the performance you expect that kind of credit to have, if we do get into a trickier part of the credit cycle here?
Yeah, look, it's a big part of what we do. Heather mentioned at the top, just like you said, Alex, it's, you know, roughly $50 billion of assets under management, roughly $15 billion within the general account. But it's not anything new for us. I mean, it's something we've been doing for over a decade, whether it's investment grade, high yield, middle market. It's not a fad for us. And the thing that gives us some confidence going into 2024, because, as you mentioned, there's absolutely energy heading in that direction, is top decile performance. So the performance is there for us. It's something that we've been able to move through our insurance channel and something that gives us a lot of confidence in that pipeline that Heather mentioned heading into 2024.
And so again, you know, I think that's gonna be a—it's gonna be a part of the puzzle in hitting that $10 billion-$12 billion pipeline next year, and one that we're excited about for sure.
Maybe one final comment from me on this one is the fact that, you know, it's not just what we say, but it's what those say about us, and we have been ranked as the number one private credit provider for a third party in North America. So we think that goes to Mike's point. It's not a new capability. It's something we've done, and we've got a track record, and we wanna be able to take advantage of some of these market trends to be able to continue that growth.
Got it. Well, look, we're just about at time, so I think I'll stop it there. But, you know, thank you, everybody, for being here. Thanks very much for attending.
Thanks, Alex.
Thanks.