between non-life and life, getting a whole smattering today. Next presenter is Voya Financial. I'm pleased to introduce Rod Martin, Voya's CEO, and Mike Smith, Chief Financial Officer. Rod joined Voya in 2011, and I would say is the architect of the dramatic and positive changes that have occurred at Voya over the past nine years. He had some help, no doubt.
It's a team sport.
Rod has more than 40 years of experience in the industry. I think he hit 40 a couple years ago. I hadn't updated that number, but it's more than 40.
Wow. You're right. I'm the old guy. You're right.
Mike became CFO in November of 2016 and held several other leadership roles prior to his current position, including CEO of the Insurance Solutions segment and Chief Risk Officer. He's been with the company for a decade.
Oh, man.
You're an experienced individual as well.
Now that you put it that way, yeah, that seems like a long time.
This is my 25th year at Merrill Lynch.
Oh, really? Congratulations.
I know what it feels like. Let me start with Rod. This is a little bit of a reflective type question, but I think it's appropriate. Since you became CEO, talk about maybe two or three things that you are most proud of. There's a lot going on, but in your mind, what really stands out? Then separately, sorry for the two-parter, two or three things that you're looking for you and your team to improve upon going forward.
Sure. Jay, thank you, and again, it's great for Mike and I to be here with you. Looking back on the time that I spent at Voya, it's really the from-to story. We inherited what you inherit when you prepare a business to go public and take a company public a couple of years later. As you well know, we had a closed block of variable annuity business, so we had five other businesses, and we've now evolved with the recent transaction announced in December to a retirement asset management and employee benefit business, really a workplace and financial institution-focused business. I'm very proud about that transition. We've made some hard choices, and most importantly, I think executed really well against those choices. With what we announced on the earnings call this year, we've been very active in returning capital to shareholders.
We talked about $7 billion in seven years, inclusive of 2020. We only had a $5 billion market cap when we went public, and that's probably $8.5 billion today. The culture that we've built, I'm really proud of that. We made it a point, it was an objective of Mike and mine and the board that we were building to get to parity on our board, men and women, and we did that in 2.5 years. We've been very focused on sustainability. I'm really proud of something that we announced on the earnings call. Barron's Rates and Ranks. Barron's Rates and Ranks, as you know, the top 100 companies on that basis. We were not on that list four years ago. Two years ago, we were 46th. A year ago, we were sixth.
This year, we were third, for two years in a row, the highest-ranked financial services company. Again, these are attributes. This is something that the organizations need to live and breathe, and it needs to be authentic, and it's measured in that way by independent people that measure those things. That matters in our marketplace, and we're happy to get into that later on. I think we've really become really good operators. I put that in the category of something I'm proud about and something on the second part of your question, Jay, that Mike and I are really focused on. We announced the life insurance transaction. We said at our Investor Day that we'd return $1 billion of capital within five years in the life insurance business.
We're actually doing that faster with the close of this life insurance transaction. We're getting to the endpoint, what we communicated just yesterday on our earnings call, the $1.80-$1.90 EPS growth rate by the end of 2021. No change in date, we're getting there without the life insurance earnings at that point in time. Again, we've been focused on really improving being good operators and focused on growing this business organically. None of that has changed.
Investing in businesses and exiting businesses is obviously a critical role for you and your team.
Correct.
What went into the decision to sell the individual life business?
When we announced the transaction 2 years ago with Apollo, that we did in the standing up of Venerable, the exiting of the CBVA business, we also announced at that time, we made a strategic decision that we weren't going to continue writing new retail life insurance, and that we would be good stewards of the capital we had backing that business, and we would return, as I just mentioned, at least $1 billion of capital within a 5-year period of time. Much like Mike and I did on the Venerable transaction that took four or five years in conversations with a countless number of parties, we've been having similar conversations for many years on the life insurance piece.
Part of it was an alignment of a partner and a party that had aligned interests, and we felt we had an appropriate value for shareholders. An appropriate total value. What do I mean by that? We're standing up a new company, and all of the employees of this new company are our employees. So it matters in a culture. Venerable, good example, 350 people who are our former employees stood up, and they've got a big, bright future at Venerable. Now literally across the hall, they can see what an example of good looks like. We're standing up a new company with Resolution, and all of our employees are going to be given an opportunity. It matters not only to the employees that are leaving, it matters to the 6,000 men and women that are staying, how we treat those people.
We felt we had the right value for shareholders. We could accelerate capital faster, and we had a very good outcome for employees, the employees that are leaving, and the observation of all that in terms of how we treat people, which are fundamentally part of the culture and the DNA that we build. Full stop.
When a company sells a business, people like me and our model, we just put a zero by that business.
Yes.
We always forget there are expenses associated with it.
Right.
You do have these stranded costs. I know you talked a little bit about this, but if you could talk about how you're planning on addressing those stranded costs.
Sure. I'll start, and then we'll toggle to Mike. I'd really point to look what we said we would do and now have done with the stranded costs associated with the CBVA transaction. We announced on the earnings call $250 million or more. We announced on the earnings call, that was the third quarter call. On the fourth quarter call, we announced that we've eliminated all of the stranded costs associated with the variable annuity transaction. We've got the experience and a model to do so. What we're really guiding to is the $1.80 to $1.90 EPS by the end of 2021, same place without the earnings benefit from the life piece. We will reduce the stranded costs associated with that to enable that outcome.
I think if you just look at what we've done in the last year, what we said we would do and what we've done, gives me a lot of confidence in our ability to do so. Look, the movie is real time. We announced this transaction December 20, whatever it was. We truly don't mean to do this a week before Christmas every time we do something like that. It just worked out that way. We are building out this with Resolution Life, we said we'd close this in third quarter. We will know more at the end of the first quarter, certainly know most by the end of the second quarter about what the transition service agreements and the administrative service agreements will be and the duration of those. Then we will eliminate the rest of the stranded costs.
Big picture I'd leave you with, five legal entities are leaving, 15 administrative systems are going, and one wholesale broker-dealer. Voya will be an extraordinarily more simplified organization. I'll let Mike take it from there.
I think the way to think about this is we have the playbook. When we were taking out stranded costs related to the annuities business, we deliberately built a structure that we could reuse thinking ahead that there was likely to be a transaction at some point, also it'd be just a great capability to have to continue to manage down our costs as the business evolves. It was a very deliberate choice we made to invest in creating this infrastructure that allows us to realize that, right? I think we've got a lot of work to do in order to pull together the plans to give you and others and shareholders kind of a clear idea of the path. What'll happen in the near term is once we close the sale, there will be revenue from the buyer to help offset some of the stranded costs. We will then know the delta, we'll start working on the delta, as well as the transition services start to terminate, we'll eliminate those costs as well.
We'll give a pretty clear picture, I think, in a couple of quarters. We've got some work to do, including agreeing with the other party on the exact structure of that.
With the revenues going away, you're taking down the cost. Should we think about some of these cost savings being reinvested, or are you just getting these costs out because the revenues are gone?
When we introduced the 1920/21 plan, Investor Day, November 15th of 2018, we anticipated as best one can at that time the amount of investment we would need in what we knew to be the three ongoing businesses that we were going to retain. That's built into our plan.
Okay.
You always evaluate are there other opportunities to further grow the businesses that you have, and we do that on an ongoing basis. We've got a big operating budget, and we look at that very critically. We're going to have a lot of capital post this. Look, we've announced already $1 billion in 2020. That's the $7 billion, seven years. Mike, we're going to free up a billion and a half dollars or so for this capital, some of which needs to pay down debt. We generate 85%-95% free cash flow. We've guided that we're going to be on the higher end of that range. Post the close of the life transaction, our ROE is now going to be 15%-16%. Kind of all of those things weigh into this.
Yeah, Jay, I think you can kind of drive yourself crazy trying to decide whether this cost save is being used for that investment. We live in a very dynamic world, right? I think of it in terms of delivering to the bottom line, right?
Right.
We're very focused on getting the earnings per share at the end of 2021 back to where they would've been had we not done the life transaction without the risk that comes with the life transaction.
Returning that capital to you faster.
We'll do that through expense saves. We'll do that through organic growth. We'll do that through capital management. We've got plenty of flexibility around all of those to lean in one way or the other, depending on how the world ultimately unfolds.
Analysts love to drive ourselves crazy. We do it for sport.
Yes
as you know. Let me bring up the question of M&A, right? If you have this capital, arguably, you could spend it buying something else. Are there types of deals, not a business, but a type of deal that really could fit in and you could execute on it?
We've used these examples previously, so this is not going to be new, but it's a fair question, and we'll answer it similarly. By way of example, with our Investment Management business, particularly our specialty categories that we've begun to market to other insurance companies, and that's got great momentum. We've also done that domestically and internationally, and we've used as an example, if we could find a capability, and by the way, they're not easy to find, that could be an extension of taking these existing domestic capabilities but distributing them internationally. Would that be something of interest? Yes. I've used that example before, Mike and I have. That would be an example. We've used this example within the retirement business. Top 10 players, a statistic you'd be well familiar with, 401(k) assets, top 10 players, 75% of the AUM today. There's 50 other players.
It's a little bit like the political environment. At some point, candidates need to drop out. Those 50 other players, a reasonable question could be, is that really core part of their business, and would those books of business become available, and would we look at those blocks of business? We would look at those blocks of business, but we would do that through the lens of, is that the best use of this capital? That would be another example. One last one I'd do with IM. We've done this. We've added here and there some small investment teams to strengthen or add capabilities. That remains open. There's a lot of change in that world as you know more than we. We've been viewed as a place that is attractive to be. Adding some capabilities on teams could be another useful outcome.
You have these three main businesses, people like me think about them separately. We model them separately. There is obviously some cross-pollination, if you will, between them. Can you talk about that, what the opportunity is for you to expand on those?
The most natural one, obviously, is in the retirement and investment management relationship, right? The degree to which we're able to achieve a proprietary share of the assets under management. For us, right now, in terms of funds, we're about 20% of the funds, of mutual funds in retirement plans are home team. If you add in the general account, which is part of retirement, that gets us up to about 40%. We think there's opportunity to continue with good performance to increase that up. There are obvious pressures in the marketplace about fiduciary responsibility and optics and so on, but we think that we can do better than that. There's also, I think, a lot of opportunity to work together between employee benefits and retirement. Employee benefits actually reports up to our head of retirement.
That creates just by in and of itself, a degree of interaction internally, and they share resources, but they also work together as a distribution team, sharing leads, working collectively with key distribution partners. We usually sell through intermediaries. We're able to leverage our presence on say the Willis Towers Watson platform or the AM platform or the Gallagher, and not to leave anybody out, but as examples. That is a way that we're able to drive value. We've also introduced Health Savings Accounts, it's actually being driven out of our employee benefits division. There's increasingly, I think, a realization amongst employers and employees that Health Savings Accounts, not flexible spending accounts, but the long-term healthcare savings account where you can put in significant dollars every year and save it essentially forever. That is an alternative to retirement plan savings.
There's an interesting connection there. We're able to get that up and running at very low cost, working with a third party as an experiment. It's still early, but I think there are opportunities for us to continue to build connectivity there to create a more holistic experience. You saw, I think, others after we announced we were getting in, a few other competitors in the retirement space started jumping into the HSA space, too. It's not going to be just the healthcare carriers providing Health Savings Accounts. It's actually more natural, I think, for us to do that.
That's helpful. I want to talk about retirement. Any questions, though? If you've questions, just raise your hand, and we'll get a mic to you. Let's talk about retirement. For you, it does span a number of customer segments. You have small, medium, large. Looking forward, where's the focus? What products or areas are you most zeroing in on?
Let me start, and I'll have Mike jump in. I want to leave you with a theme. We are in what we refer to as market of markets, so small, mid, large corporate record keeping, K to 12, higher ed, government. Largely the entire time we've been public, six plus years at this point in time, if you think back macroeconomically, this has been a pretty good period of time. All of those markets have grown very nicely. It is my view, Jay, that the strength and resiliency of the diversity of our platform hasn't fully been appreciated until we go through a market cycle. What do I mean? I'm not wishing for a market cycle, but Life will happen at some point, and this will merge. Particularly our presence in K to 12 higher ed and government.
Those markets in a market cycle really stay very stable, if not grow. We are market leaders there. We've been enjoying very, very robust growth in our small, mid, and large corporate. If, obviously, the economy slows down a little bit, would that be effective? Of course, it would be for us and everyone else. I think the stability of the other isn't fully appreciated, and if it's not fully appreciated, it's probably not fully valued. It's far more about our markets, our market presence, the relationship we have with advisors, than it is specifically about product. Let Mike talk about product.
Look, it really is about service.
Yeah.
Right? That's what ultimately distinguishes us and the capabilities we're able to deliver. It's not a product solution. I think our platform gives us the ability to lean in where there's opportunity. Right now, the opportunity is Full Service Corporate.
That's where we see the most growth. That's where we've got the most current traction. We've made meaningful investments in distribution to help penetrate further in that market. We're getting onto new platforms. I think there's real opportunity for us to continue to grow that to the extent the economy moves in a different direction. We've still got the tax-exempt markets and government markets that we can maybe lean in a little bit more at that time. We'll be in a much better position than if we were solely focused and only had the one market.
Again, if you think about the breadth of this distribution platform and the customers we serve, the $10-plus billion of recurring deposits that happen, and really picture, we serve truly middle America in that these are firemen, policemen, teachers. Just everyday Americans that are putting away $500 a month, $400 a month, $700 a month. That money, they're not people, and I'm not trying to overgeneralize, that are watching CNBC and rebalancing in the afternoon. They're living their lives, and they're trying to save for retirement, and live their families like we all are. That $10 billion-plus recurring deposits is a significant momentum that just continues to grow and grow rapidly. That's why one of the things we point to as a health indicator is the, Mike, the 10%-12% growth in trailing 12 months recurring deposits.
We were squarely in the middle of that metric this last year, as an example.
Yeah. How do you see the needs of plan sponsors changing? If you look forward, what are some of the structural changes that could happen to the retirement business, say, next five to 10 years?
This one?
Look, I think plan sponsors, and what we're seeing is there's an increasing understanding of the value of these plans and the need to ensure that employees are going to leave in a good position, in the right position, that they've been well-served by this. I think, in the past it was kind of a well, check the box, I've got a 401, I'm going to have a 4% match. I don't have to look at that anymore. I think now there is a real interest, and increasingly so, in ensuring that employees have access to the right tools to make the right kind of investment decisions, to have the right kind of planning capabilities attached to that. I think also increasingly, you're going to see penetration of tools that help people make better decisions in the annual enrollment process, including the retirement plan.
The retirement plan tends to be kind of a set it and forget it. You do it once. What we're seeing is tools evolving that are allowing folks to, when they're making a choice between buying more life insurance or putting their money into a voluntary plan or taking a higher deductible health plan, they also should think about what their retirement savings are, where they should lean in there. There are actually tools that are, I think, increasingly available electronically to help people make better decisions. I think you're going to see increasing adoption of that as well, and we're well-positioned to, and we're partnering with firms that do this actually right now.
You want people who, I've used this example, it may sound silly, but people spend more time choosing their Netflix selection for the week than they do in their benefit selection on these pieces. Some of that's on the industry, some of that's on the employer. Couldn't agree more strongly with the point Mike's making that there has been a huge difference, and part of it is with the employment environment and the need to retain top talent. You just need to have a very attractive and frankly, effective set of benefit tools. We're increasingly being asked for proof of progress on how this is helping our people stay with the firm as opposed to leaving firm A to go to firm B.
Speaking of Netflix, No, I'm just kidding. True though, right?
Yeah.
Yeah.
I agonize over what the hell we're going to watch for TV when I sign off on my benefits. I'm guilty as well.
Just think about it for the next time you're enrolling in benefits, and maybe you spend a little bit more time on that decision that week than Netflix.
Great advice. It's a Netflix reminder. I want to just ask you about the SECURE Act, the passage there. How could that impact the business? Most people seem to think, oh, yeah, it's going to be good, but not everyone. What do you think about this?
I think it's going to be very helpful and attractive to us, partly because of our market for markets, but it's going to be attractive slowly. This is phased in over time. I know people want to just say, okay, this happened, and so this happens tomorrow morning. Part of this is being phased in over a period of time. We've been playing in this space, in the multiple employer space, for a while. We've got the tools and capabilities. There are some things that we and others are going to have to add and adjust to the regulation that's happening. I would say, over the long term, this is a very good thing for the industry, and frankly, for a retirement player of the size and scale Voya is, it's a very good thing for Voya.
Mm-hmm. You see any risks associated with it? Downside, potential downside?
I wouldn't put it in the risk category. It's an execution issue. You think about, you have plans that have been hardwired into retirement age of X, and now it's of Y, and you've got to go back in and rewire everything to accommodate to.
Yeah
this is not just Voya, to the regulatory environment, which is, by the way, the reason it's being phased in over time. It's not a risk as much as it's just something that has to be.
Yeah
Paid attention to, like we have to every time there's a regulatory change.
Any questions out there? I must be hitting all the key issues. I wanted to move to employee benefits. Talk about the competitive environment in the medical stop-loss business, and how it's looking from a renewal standpoint.
I'll let Mike do it. He used to run the business.
Thank you. We just completed our January 1st renewal cycle. About two-thirds to three-quarters of the business is on a January 1st effective date. We're very busy in the underwriting area for stop-loss from about July through November, as we're working through quotes and making final offers. I think the market overall was rational. We felt like we were getting the rate that we needed. If you think back to Voya over the last five or six years, we've kind of gone through the full cycle. We had a couple years in 2013, 2014, 2015, where we had really good experience. 2016, 2017, a little bit off, although just a little above our target range. We've taken the steps to manage the block back to a level where we're now very confident that we'll be within our target loss ratio range.
Everything that we see so far for the renewal cycle is that we're going to be able to maintain that. We're very comfortable with it.
In fact, Jay, on the earnings call, we increased our guidance of growth from our employee benefit business broadly, inclusive of, obviously, stop-loss.
Right. From 2018 to 2021, we had given a range of a three-year CAGR of earnings and employee benefits. We said it would be between 7% and 10%, pretty sporty, but now we've raised it to 11%-14%, starting from the 2018 base. Largely, that's because 2019 was up 20% in terms of earnings growth, both from just fundamental growth as well as strong underwriting performance. No, we're not going to do level 20 from here, but we'll still do pretty well, and get to that end point of around 12%, 13%.
I'd add one other point that we talked about on Investor Day, and I think some progress has been made on this. At Investor Day, I shared, and I think Mike shared, that it was our view that if you look at Voya on the sum of the parts basis, and you looked at the last four or five commercial transactions in the group benefit space, I'm not sure our value was being fully appreciated in relation to what those transactions were. Just another transaction just a month ago, and that was just life and LTD. We've only grown the business and increased the earnings guidance from there.
I think we are closing the gap, but I still think there's room for fuller appreciation of the value of what this business, it generates a 28% or 29% ROC, and earnings growth in this category is as it relates to Voya's overall contribution.
That's a fair point. The voluntary market, Voya plans to grow there. You're not alone. There's a lot of other players that have this goal as well. How do you attack this market knowing that it's somewhat crowded, potentially?
Let me start because I'm going to brag about Mike for a minute. Four, five, six years ago, we were in early stages of this, and we've gone from there to, Mike, the seventh largest or so player in the voluntary space. I think we've made material progress. We've gone from being not in the top 10 or perhaps not even top 15 or 20 to being in the top 10 and growing at a rate that enabled us, candidly, to increase the guidance from this segment at this point in time. There's a couple of reasons for that. You're absolutely right, Jay, that there's a lot of people focused on this. We think the fact that we're in the stop-loss business in the voluntary space is a nice combination.
One of the things that we learned, observed, and frankly have responded to is we do business with employers of all sizes, as you know, but it's generally 500 lives and above. Guess what? They keep their data in a lot of different ways. I've overused this example, but sometimes it comes in a shoebox with a whole bunch of stuff. The company that can take the data the way they have it and produce something quickly back has been one of the pain points of how do people make more or less progress in this business. Mike and the team figured that out six or seven years ago, and we've been working at improving that. Candidly, that's been one of the things that has really stimulated the growth.
We're not perfect, not in any way trying to describe that, but we've really made material progress in our ability to take data in the way they have it, because they have it the way they have it, and turn it around in a way that's the least intrusive from the standpoint of an employer and all the discussions that they don't want to have about why they've got to reformat all their employment data and reformat everything to your perfectly structured blueprint that they could care less about. They just want the benefit. The other thing that's happened with the voluntary space is, with the advent of Obamacare and the higher deductible medical plans, many of us have chosen higher deductible plans to manage family budgets. They realize increasingly, employer, employee, and advisor, there are gaps created by that.
These products help overlay and frankly solve some of those gaps, not as an entirety. That's been an increasing reason for the adoption of this. We see that in the small mid space and frankly, the large corporate space. The last time we talked about this, over half of the new coverage we put in place in 2019 was brand-new cover in the marketplace. In a mature market like the U.S., that's not something we talk about very frequently. It's usually Company A is replacing Company B as opposed to brand-new coverage that's being considered in the marketplace by an employer.
Yeah, I don't have a lot to add other than-
You built it, you can talk.
I don't have a lot to add other than, I just leave it with this. We're taking share in an expanding market.
Right.
Our in-force premium grew 25% last year, that's actually probably a little bit down from the growth we'd had before. I think we're going to continue to see 20%+ growth going forward in voluntary. It's going to be quite strong for us. All the things that Rod talked about, our advantages in terms of how we're able to work with clients and the benefits administrators that they hire, our ability to continue to evolve our product designs and reflect the market needs, our ability to bring to bear new tools to help people make better decisions and bettering the enrollment process. All that's going to add up to, I think, a really attractive future. The whole market's doing well. It's a great place to be. That's why a lot of folks are rushing there. It's not easy to break in.
There are intermediaries that you have to have relationships with. You have to be able to deliver the goods. We've got the track record. I think it gives us a head start.
Being now in the top 10, you clearly have arrived and have appropriate scale.
Stay tuned.
Yeah. We've only got about a minute and a half left. All my questions are five-minute questions. If we've got a quick one out there, we can field one more question, if there is any. If not, why don't we end it here? Guys, once again-
Thank you all.
Thank you very much for being here.