Afternoon, everyone. I'm Ryan Krueger from KBW, and really pleased to have Voya Financial with us again this year, this year virtually. With us from the company, we have Rod Martin, Chairman and CEO, and Mike Smith, CFO. As a reminder, at the bottom of your screens, you have the ability to submit questions that I will see. I have quite a few myself, I will get going. Not surprising, the first question I have is on the individual life sale. Last week you announced that individual life sale to Resolution would be delayed from closing in the third quarter to closing in the fourth quarter. Can you provide some additional color on the reasons for that?
Sure, Ryan. I'll start. Quickly throw it to Mike. We communicated last week again that we are close and confident. Let me start off by reinforcing a couple of themes. One is that we are operationally ready in all aspects. We've made really significant progress on the regulatory front, to really underscore that, particularly against the backdrop of COVID. Mike and I have commented as we've been asked questions through the journey of this process, how pleased we've been and impressed we've been and just underscore that with the regulators operating in a COVID environment. We are largely complete, not fully complete. Mike has been leading this. He's done a really terrific job with his team. We've got a really talented group of men and women that are becoming Resolution USA employees, just like we did with Venerable in the Apollo/Athene transaction.
I'll let Mike speak to the specifics of where we are and what we see unfolding in the fourth quarter. Mike?
Yeah. Look, the delay came down basically to just a couple of regulators asking for some more time to complete their process, right? The way to think about this is there are no substantive objections or significant concerns that we're aware of. There's a process to be gone through. It's an important process. I don't mean to minimize it in any way. Nonetheless, they're going to need some more time, despite what, as Rod said, I think have been really heroic efforts to keep this moving despite the challenges that are inherent in trying to operate in this new environment, especially when you're not used to it, and in some cases, not super well equipped. We continue to work really well with the regulators. The Resolution team is also working well. As Rod said, we're ready.
I think once we get the green light from the regulatory process, we have most of the regulators have given us approval. Once we get those final couple, we'll be ready to go. Hit the button and off we'll be.
Great. Thanks. Related to that, you suspended the share repurchase following the 1st quarter of the year but have talked about a path towards completing $1 billion or more of buybacks still for the full year. Is that still the case with the life sale delay, and would you consider restarting the buyback before the life sale closes?
Mike?
We've paused the share repurchase program, and we chose that word very deliberately. The way to think about this is there are many factors we're watching as we're thinking about when we'll go back into the market. At the end of the 2nd quarter, we have $650 million of excess capital. We feel good about our capital position, and obviously, we'll have significant deployable capital coming from the transaction. That's the basis for ultimately the billion-plus that we expected for 2020. We're already at $400 million, we have a little less than $600 million to go to get to a flat billion.
Look, I think as we evaluate what's happening in the macro environment as it relates to the credit markets, rating agency actions, what we see in our portfolio as a potential for future credit migration, which to date has actually been pretty mild relative to some of our early fears. I think we've been fairly pleased with how that's emerged. As well as how the pandemic goes from here and how that's going to translate into the economy, as well as our view on the life transaction. We shouldn't be thinking of the life transaction as a gating factor for share repurchase. There is certainly an opportunity, potentially, for us to consider, with all those other factors in mind, consider share repurchases before the life transaction closes. We believe there is still a path to a $1 billion or a $1 billion-plus for 2020.
If the transaction were to be delayed beyond the fourth quarter, for example, or towards the end, that could push out the timing of that a little bit. That's a possibility, and I don't think that's likely to happen, certainly should recognize that that's something that's out there. We're pretty confident that the deal will close, and we feel good about the $1 billion-plus in 2020.
Thanks. I guess somewhat related but not just specific to 2020, when you had originally announced the life sale, you had talked about using $600 million to $800 million of the proceeds for debt retirement. What's your latest thinking now on the key priorities for uses of the $1.5 billion of capital that this will create? Do you want to maintain a larger than normal excess capital cushion in this type of environment?
The $600 million to $800 million in terms of debt repurchase remains the current guidance. I think we've been signaling, given where credit spreads have gone and interest rates have gone, that we would be expected to be toward the lower end of that range in terms of debt repurchase. In terms of priorities broadly and whether we're going to maintain a higher level of excess capital, nothing's really changed in our philosophy. I'm not going to suggest that there is a plan to keep above 400% RBC. We've always tried to manage our excess capital down to the target level. There's some timing issues that cause the excess to build up, especially when things are going well. By the time we are able to extract the capital from the entities and put it to work, more is built up.
If the conditions continue to be favorable, you could continue to see that's not a deliberate effort on our part to hold a buffer. 400 is the target, and we intend to continue to stick with that. In terms of other uses, I think of uses, repurchases, and/or things that are better than repurchase economically for shareholders are the things we're focused on.
Thanks. Shifting to business mix, you have made some very significant changes in recent years from the divestment of the annuity and individual life business. Are you content now with the current portfolio that you have? Are there any additional capabilities that you would like to add to the portfolio going forward?
Ryan, we are really pleased with the decisions that we've both announced and made and are implementing in terms of the really exiting the retail business in our case. We're fundamentally, as you have acknowledged, a workplace and financial institution-focused company built around retirement asset management and employee benefits, including the voluntary benefit suites. We are very bullish about the market opportunity there and our position in it as we go forward. Certainly, we're going to continue to be focused on making appropriate investments in the business in digital. COVID has been a really good example of that, where the investments we've made have paid large dividends, and we'll continue to want to make sure that we're being very responsive in that way in AI and certainly just supporting self-service as we go forward. We're really pleased with the from-to piece, as you well are aware.
We inherited what we inherited from ING Group with the closure of the life business. This is the last real fundamental piece in the transformation from what we inherited to what we've chosen. As Mike pointed out, we're very much a capital-light company. We've got an 85%-95% post the life sale free cash flow conversion rate, it's going to be in the higher end of that absent the life business. In really our decisions, we're spending as much time right now on we're finishing the second year of our third-year plan on the ideation around what our next three-year plan will be and the market focus of that. More to come there, Mike Smith, Mike Katz are leading that with our business leaders.
Our board is very actively engaged, as am I, in this process, we'll be very anxious to reveal that, it's going to be very much an extension of our capital-light focus. We're broadly pleased with the businesses that we've got and the opportunities are in progress.
Thanks. Consolidation within the Defined Contribution retirement space has been increasing, and we had another deal just yesterday with Great-West and Empower buying MassMutual's retirement business. How is Voya approaching this in terms of M&A in this business versus organic growth, and also potential market share gains as some of the consolidation has occurred?
Great question. I'll begin, but again, Mike and I will toggle. We are one of the market leaders in the retirement space. You hear Charlie and I and Mike talk about market of markets. We're in the small and medium-sized 401(k) business, the large and mega size, the K-12 and higher eds. Depending on which particular market, we're somewhere between fourth and seventh in the lead tables. There is consolidation happening. You saw that with Principal and the Wells transaction. You're now seeing that with Great-West and the MassMutual transaction. We think that you'll see that emerging in two ways. One way that it's been emerging, and we've been a beneficiary, has been simply the marketplace making decisions about where they're placing their business absent someone buying a company or a platform.
That's been part of our growth as we've gone forward. Mike and I have talked about would we be open to adding a block of retirement business to our portfolio, we would. The math for us would have to make sense, and I'm not judging the math for anybody else that does or does not make sense. As you know, these are complex transactions, both examples with Wells and with the MassMutual piece that you really need to look two or three years from now and look back at what were the assumptions that were made, and how did the execution and implementation and integration of that play out, and are you happy or sad with the outcome?
I think if you look at through a pure valuation standpoint, Ryan, you apply that to the sum of the parts of Voya, either the Wells and/or this most recent transaction, I would argue that Voya is undervalued at this point in time. Mike, I'll throw it to you to add any further color.
No, look, I think I'd just say, nothing has changed from the guidance we've given on our thoughts around M&A since Investor Day, which was a compelling strategic fit and that it's accretive relative to other uses of capital. That's been the discipline that we've applied throughout. We'll continue to apply that discipline. I think we've talked about Retirement. You mentioned the Empower MassMutual deal. We've also talked about capabilities in investment management that would broaden our international distribution footprint or potentially adjacent capabilities that fit well with our specialty and credit capabilities. Those are the kinds of things we're looking at. Retirement scale matters, but we have scale. We've invested in the platform to really drive scale.
We've talked about, those of you who followed our stock for a while, we had a $350 million investment program that was in large part aimed at improving our overall platforms and digital presence. That's not a race that's ever won. It's definitely more of a marathon, but it is certainly something that we feel like we have a very strong position in working to maintain. That translates into unit cost capabilities that don't necessarily have to require you to do a deal to achieve those.
A question related to this I received from the audience was, do you tend to see more or a difference in new business opportunities following consolidation that, I guess, does there tend to be much of a difference between larger case business versus smaller to mid-case business following consolidation?
Ryan, I'll begin, and I'll use Voya as an example when we went public. When a market event happens, the consultant community uses that event as a way to create a market. In the Wells Principal case, a good example, and I'm confident Principal, fine company, is going to retain a healthy amount of that business, but certainly some amount of that business has been shopped in the marketplace, and we've been one of the beneficiaries. There's no doubt in my mind the same thing will happen here. It's just a natural course and an outcome of this.
Thanks. Shifting to expenses. You recently achieved your latest $250 million cost save target and have also talked about being committed to eliminating the stranded costs over time from the Individual Life sale. What type of actions are you taking to drive these efficiencies, and where do you see additional opportunities going forward?
Again, Ryan, I'll begin. It's another thing Mike is intimately involved with in helping lead. First of all, we announced on the most recent call that we had accomplished the $250 million or we had exceeded $250 million in the prior program, and we did that four months earlier than we thought we would by the end of 2020. I point to that only in that we've really built a muscle and a discipline to do that. We've got the same team porting to, right now, the ideation on the cost savings associated with the Life transaction. They're both large and small things. I'll give you an example of, the number's not small, but a really interesting example that just came to our attention a few weeks ago.
Part of what we've been doing for some period of time is our Continuous Improvement Program, and that's really encouraging people to both identify and act on things that make sense to them. In this case, this is a cost-saving example. This example happened to be, we had a number of 800 numbers, and this person identified we didn't need this one. By the way, the cost of this was $20,000 a month or $250,000 a year. They acted, and they unplugged it. Other than it happened to be a number that Mike and I used occasionally, and that's kind of how I stumbled on the bloody thing. What they did was entirely appropriate and needed a little better communication on that. Short of that, these are $10,000 items and $200,000 items, and sometimes much bigger items.
By the time we close this, and we're really close to it now, the ideation is broadly done. We will be in implementation mode, not beginning to think about how do we do this. Some of this is, as Mike has talked about previously, we had 15 different administration systems associated with the Life business. We have five different legal entities. A whole bunch of things are going to simplify in our life. All of that, I've got a high level of confidence by the period of time that we will identify that needs to be done, which will broadly be similar to what we did before. We will have met or exceeded that number and then some. Mike, feel free to-
I just want to reemphasize, this is a playbook that we have.
Yep.
The steps that we've taken. We learned from what we did on the annuity transaction, and there's some things that we're going to do differently. We're already well into the, as Rod said, the ideation phase. I think we're seeing really encouraging signs that the stranded cost targets that we're going to be setting are achievable over a similar timeframe to that which we took the annuity costs out. It's large and small. There are some that'll come from the very top of the organization. As Rod said, there's some that come from very much frontline people and everything in between. I think it's really become, to some extent, part of the culture here is that people are able and willing to throw ideas on the table, and some of them get executed. We have a strong discipline.
This is where I think things can fall off. Having seen other cost savings initiatives over the years is really having the discipline to follow through step by step to be sure that you're on track, and to validate that in fact, you have realized those savings. That's been, I think, a real key part of our execution success here.
Technology has definitely been an increasing focus for all companies in the financial services industry. How do you feel about Voya's technological capabilities at this point, and where do you also feel like you need to improve?
Ryan, this falls in the category of something Mike used earlier, well thought number 1. It is a constant battle to make the judgments of where you need to invest, how much you need to invest. Somebody jumps ahead with a tool or a program, or we do, and they catch up. This is just, it's a constant piece. I feel good about where we are, and I think it's been really tested for us and for other companies through COVID. That said, we can't be passive about this. We're going to continue to need to invest in the business, and part of what Mike Smith, Mike Katz, and I have communicated is we're trying to have that revealed in the P&Ls of the business so people fully understand, and it's very transparent what we are investing and what the impact of that is in the businesses.
I do think, I suspect we'll come to this in one of your questions here, but if I can just jump to COVID for a moment. COVID has caused all companies to really test their business resilient plans, and we were no different. You put a lot of energy into those things, you test them, but it's one thing to test them in a theoretical environment or a test environment. It's another thing to send 6,000 people home on a Friday and hope like hell everything comes online on Monday morning. Fortunately for Voya and many other companies, it did. I think one of the things we're learning is life has changed. I think life has permanently changed. Part of what we're trying to do, Ryan, 20% of our workforce pre-COVID was virtual, something we call Virtually Orange.
I suspect that percentage is going to go up appreciably in terms of what some of our employees may choose to do. I think some may choose a hybrid model where they come back to work, meaning work in the office for a day a week or a day every other week or two days every other week or some example like that. Some can't wait to get back just because that's part of the oxygen they need, and they want the interaction and we're going to try to accommodate that. What Mike and I are really leaning into is, I think this is a moment to really redefine the nimbleness of a company and the ability to the extent we can accommodate this of our 6,000 employees on which model do they want to operate in.
Frankly, it's opened our eyes to our primary locations, as you know, are Windsor, Minneapolis, Atlanta, and Phoenix. We've got some other smaller locations, but there's a whole lot of talent that may not choose to want to live in any one of those places. I think our ability to operate in the way we've been operating for the last four or five months is really opening our eyes to being able to attract talent to fuel the growth that we're anticipating as we move forward. We're fundamentally a B2B company. We're not in the retail business anymore, and we found a way and have continued to grow and have recurring deposit growth and net flow growth in an outsized way during this period of time, which we're pretty proud of. I'm bullish about what the opportunities are going to present ourselves.
We're going to reveal some of this as the year unfolds and as our thinking evolves, but I think you'll hear much more about this in 2021 and beyond in terms of how Voya is thinking about changing its operating model perspective.
In terms of our customer-facing technology, Ryan, I just point to a couple proofs in the pudding kind of points. We've had positive net flows into the retirement business and the small to mid corporate space for something like 26 or 27 quarters in a row, right? You don't win business, you don't gain share without having a very solid technology capability in that space. We're also winning very large record-keeping clients. We're bringing on, we believe, a net 350,000 new participants into the record-keeping space, which is over 10% of the current record-keeping business. That is also intensely competitive from a technology standpoint.
Finally, the growth we've seen in voluntary over the last four or five years, growing at 20% plus consistently, has been driven by a technology capability that we've built to be flexible, to work with a wide variety of benefits administrator platforms, as well as with employers directly to be flexible in how we ingest the data and turn it into a solid offering for the plan and for their participants. Those are all areas that I think we've demonstrated a strong capability. As Rod said, we'll never be done, and we'll continue to invest in it. We feel like we're in a good position right now.
This is a fairly broad question, but can you discuss how COVID is affecting the near-term growth outlook for each of your three key businesses?
I'm happy to start, again, we'll jump back and forth. We've talked about and compared and used, for example, Ryan, RFP activity. The request for proposal activity in 2020 is down from our record high of 2019 and more at 2018 levels. The point I'd make about that is 2018 was one of our very best years. The RFP activity is down. Our recurring deposits in both our retirement business and our, are up. We've been very fortunate. To say that we haven't been impacted by COVID would be a misstatement. Mike and I, in no way intend to try to communicate that.
First of all, we had to learn how to be adaptable, and learn some of the best practices of how to do virtual meetings in terms of openings, case development, business maintenance, and persistency maintenance, by the way, the persistency has improved in this period of time, and then closing. We are figuring that out as we've gone through this. We feel really quite good. The last four months of the year in our business, we're in a B2B kind of business, generally are some of our best months from a momentum that carries over into the year and we're optimistic about that, but stay tuned and we'll see how it plays out. Right now, we feel very bullish about what we're seeing relative to the marketplace. Remember, there's a lot of questions in the marketplace. Mike?
Maybe just to put a little dimension around what we expect in retirement, then I can talk about investment management and employee benefits. The recurring deposit growth that we had signaled for retirement, we were targeting 10%-12% per year growth in recurring deposits. We're now seeing, and this is still an early estimate, but we have signs that suggest that the recurring deposits in the second half of this year will be about the same as they were in the second half of 2019. That's going to be a combination of slightly reduced plan growth, fewer participants and so on. That'll lead us to an overall growth in recurring deposits in 2020 of 3%-6%. Still growth. The business is still growing, but not quite as robustly.
I would view that as an easy way to try and gauge the impact of COVID on retirement. In investment management, we had a knockout first and second quarter from an institutional standpoint. We won a huge mandate with an insurance company where we've had a lot of success over the last several years. We do expect things to slow down a bit. What we're seeing is that RFP activity, just by virtue of the environment we're operating in, is slowing down somewhat. Particularly if you don't have an existing relationship, we see the folks that are looking to invest are somewhat less engaged in trying to find new relationships. They're pretty happy if they have decent performance, it's probably a little bit less likely that they're going to go out and seek a new opportunity.
We do think we have capabilities that play well in this space. We've got a really strong track record in fixed income and credit. We think we've got demonstrable capabilities to exceed benchmarks. I think it's 98% of our funds exceeded the benchmark for the last five and 10 years. We think that's really strong. On the benefits side, look, I think we've held our own. Premiums have grown 5% year-over-year, which is actually pretty good given everything that's happened over the last few months. I think the COVID claims have been far less significant and concerning than we might have originally thought. Overall, we think employee benefits has held up really well. Particularly, I think that's because our business is not the smaller in employee benefits. We are aimed at 1,000 employees and up, basically.
We have some under that, our primary focus is on larger employers, they've been less subject to the effects of COVID than the small market.
Thank you. Following the announcement of the individual life transaction, you had provided 4Q 2021 EPS guidance, you had pulled that due to COVID, given the uncertainty in the environment. When would you contemplate bringing back some form of forward-looking earnings guidance?
It's a good question. I don't have a great answer. The answer is when the environment becomes less uncertain. Look, I think so far, from a credit standpoint, we had dimensioned potential capital erosion from credit migration and defaults to be somewhere in the kind of gross basis, $300 million-$600 million. We're certainly tracking more toward the low end of that, we found management actions to help offset it. The overall capital impact has been relatively benign to date, we're pretty pleased with that. There still remains significant uncertainty, right? I think the equity markets have recovered, it's great to look at where we were a few days ago, suddenly you see what happened just over the last week, right? I think there's still a lot of choppiness to go.
I think the progress of the pandemic and the progress of vaccines and treatments is still a significant unknown and how that's going to translate into the economy as well as what the response of government's going to be to the extent there is a significant reemergence of the virus in the fall, as some are predicting. There have been some fairly dire forecasts of potential deaths by the end of the year that have recently come out, and I think those should give us pause. All of those things kind of go into the level of uncertainty around the inputs that we use to drive those projections, right? We're particularly focused on future equity growth, future interest rates, future commercial growth. All of those come into play. We do the modeling.
We have our own view of where things are going, given those assumptions, but I just think the level of uncertainty around some of those assumptions is enough that it probably isn't wise or necessarily beneficial for us to be sharing that publicly and saying that's where we think we're going to go, because there's just too much that isn't a far greater than normal level of uncertainty. There's always uncertainty, but as much as it's been since the financial crisis, I'd say.
That makes sense.
Ryan, I don't think that's materially different than most other firms. Look, we've got a firm hand on the wheel. We are focused on controlling what we can control, and that has generally served us very well as we've gone through periods of time where there's been uncertainty. None of us have been through this kind of uncertainty before, but many of us have been through others and we will get through this. We're very confident about managing what we, Voya, can control, and that's both on the activity perspective, the new business, and maintenance of business and relationship perspective as well as the expense side.
Thanks. Rod, last year you extended your employment contract through the end of 2021, and certainly no one wants you to retire, but was hoping you could discuss how you are thinking about succession planning for Voya at this point.
Sure, Ryan, and thank you for the comment. We are very focused on that. Look, I am really proud of where we are. Succession is a main event in our company, just given where I am in the journey. I've committed to stay through 2021. There's an option on 2022, as you're well aware. We are working really hard. I don't think COVID changes a lot of this other than it just makes life complicated, but it's not complicated because of COVID. It's just another level of complexity that we are going to very thoughtfully signal succession. We've got some fantastic candidates. Mike is a really good example, but there are others in the company, and what I've committed to the board and what I've committed to our shareholders is that we're going to do this in a thoughtful way, and stay tuned.
There's no real new news here. Right now it's through 2021. The board has the option and it is no different than before, by the way. It's all the same words. If I'm asked to stay, I will stay, but it will be staying to just assure as we introduce the next three-year plan, which Mike and I are as engaged in on that as we've been on any of the other three versions that we've done, the two prior and the one we're executing on right now, that we've got both the right message, the right commitment, and the right energy and the right capital behind the plan.
Thanks. We talked about consolidation in Defined Contribution space. There have been a number of individual business unit transactions within the life insurance industry, but there have been very limited whole company consolidation within the industry over the last decade following the financial crisis. What's your perspective on what the key impediments to that has been for the industry, and do you expect consolidation to return at some point on a whole company basis?
I think it could. Again, look, there's two sides to that trade. I'll use Voya as an example and as whoever the other company is. If we were acquiring a company, what are their businesses and are there parts of their business that you're interested in or not interested in, or frankly, the reverse of that? We believe in Voya, we've exited the things that were either highly capital intensive or we're simply not committed to given our strategy. There needs to be an alignment of strategy. Obviously, the economics need to make sense from an accretion perspective for shareholders over a reasonable period of time.
I think there well could be, and I think this environment is going to some of what Voya has done and some of what other companies are doing, in terms of coming to grips with, are you committed to that business or not? If you're not, how does one exit that? What's the market? What's the period of time that takes? These things are not easy to both even the ideation part, let alone the execution part. Happily, we're behind all of that, with the closure of the life business here in the fourth quarter. Could it be done? I think it could be done, and I suspect, particularly with COVID and some of the market issues, it likely will be over a period of time.
Ryan, I think the only thing I'd add is just, look, the interest rate environment has been probably less than conducive to convincing buyers that, and/or sellers, that we can get to a price that makes sense for the longer-term value. I think a more constructive longer-term interest rate picture would certainly help push that along, especially for those that still have a lot of longer-term interest rate guarantees on their balance sheet or interest rate dependent products. I think those are the things that are probably limiting some of the transactions. We were able to find a way with some pretty long-dated guarantees. That can be done, but I think it's definitely an impediment.
My final question was on ESG, which has been a big priority for Voya. Can you touch on some of the key things that the company has been focused on in that regard?
Sure, Ryan, I'm happy to start. Again, Mike will jump in. This was partly because of my and Mike's international exposure prior to even being at Voya. This was far more prevalent, relevant, and current in other parts of the world before it became as centric as it's becoming here in the U.S. We could see this coming. We needed to develop a point of view of this for Voya. This isn't simply about conveniently checking a box. We really needed to decide what our posture and position was going to be. What did we need to change to in fact change that? How does that filter through all of our businesses? As you know, we've been at this for some number of years now.
One of the things I'm particularly proud of from a firm perspective is, 3 years ago, Barron's started rating and ranking the top 100 firms in the U.S. 3 years ago, we were 46 out of the top 100, last year, sixth, this year, third. For the last 2 years, the highest-ranked financial services company. This is becoming increasingly important to investors, increasingly important to consultants, most importantly, increasingly important to customers. You need to walk the walk. You can't simply just say the words and assume that, but we are doing this. I put it in the category of another way to compete, where it isn't simply about how do I lower my cost per participant by $0.50 or $1? It's are you living this? Do the results bear out the differentiation, which in our view, they do and will over time.
All of that's happened. Now, we're still in early stages. There's a lot more we can and are doing with this. Mike, feel free to add some other dimension.
Just maybe a quick bit of color is simply, look, I think I inherited a lot of great things from ING Group, including a great team and the makings of some really good businesses. We also inherited fantastic governance processes, I think a strong commitment to the environment, and a strong commitment to community involvement with volunteer time, and a very active employee base with significant participation and all of that. That all goes to the culture, and I think it then flows through into a lot of the business activities that we follow. Really proud of the culture we've built and looking forward to continuing to take it to even the next level.
Great. Well, we are out of time, so we will wrap it up there. Thank you very much again to both Rod and Mike and Voya for your attendance again this year. That, I think, wraps up the virtual fireside chat for today.
Thank you, Ryan.
Thanks again.
Thanks, Ryan.