Good morning. Welcome to the Voya Financial Sale of Individual Life Conference. All participants are on a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star followed by the zero key. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touch-tone phone. To withdraw your question, you may press star two. Participants are limited to one question and one follow-up. Please note this event is being recorded. I will now turn the conference over to Michael Katz, Senior Vice President of Investor Relations. Please go ahead.
Thank you. Good morning. Welcome to Voya Financial's Sale of Individual Life conference call. We appreciate all of you who have joined us for this call. As a reminder, materials for today's call are available on our website at investors.voya.com or via the webcast. Turning to slide two. Some of the comments made during this conference call may contain forward-looking statements within the meaning of Federal Securities Law. I refer you to the slide for more information. We will also be referring today to certain non-GAAP financial measures. GAAP reconciliations are available in our press release and financial supplement found on our website, investors.voya.com. Joining me on the call are Rod Martin, Voya Financial's Chairman and Chief Executive Officer, as well as Mike Smith, Voya's Chief Financial Officer. After their prepared remarks, we will take your questions.
With that, let's turn to slide three, as I would like to turn the call over to Rod.
Good morning. Let's begin on slide three. This morning, we announced a value-enhancing transaction that will position Voya for higher long-term earnings growth. Our transaction with Resolution Life to divest our non-core Individual Life and legacy annuity businesses will provide several benefits to all of our stakeholders. Most notably, it accelerates our Free Cash Flow generation. Specifically, we will realize $1.7 billion in expected value for our Individual Life and other legacy businesses. This is both sooner and higher than our Investor Day target of at least $1 billion of Free Cash Flow over five to six years. The transaction also improves our risk profile with reduced interest rate, credit, and mortality exposures. It will also further streamline Voya by removing five regulated insurance companies, a broker-dealer, and 15 administrative systems, creating significant opportunities to become even more efficient.
Going forward, our exclusive focus will be to drive growth in our high return capital-light businesses, creating value for our customers through the workplace and with institutions. In addition, this transaction will enhance several of our key financial metrics. First, we remain committed to growing our normalized adjusted operating EPS by at least 10% through 2021. Beyond 2021, we believe that selling Voya's Individual Life business will improve the long-term earnings growth profile. Second, we now expect to be at the high end of the 85%-95% Free Cash Flow Conversion. Third, our long-term return on equity target will increase to 14%-16% ex-AOCI, even as we include the value of our deferred tax assets. The new company being established will be staffed almost entirely by the employees who currently run the business for Voya.
This gives us confidence in both the ability to execute the transaction and the future of Resolution Life US. The transaction completes the restructuring efforts that began with our initial public offering in 2013. It will improve Voya's path to future growth and further distinguish Voya from its peers. I will now ask Mike to walk through some more details on the transaction.
Thank you, Rod. Slide four provides more details on the transaction. The transaction results in the sale of Voya's Security Life of Denver, Security Life of Denver International, and its subsidiaries to a new holding company, Resolution Life US. Voya will also take a $225 million interest in Resolution Life Holdings, which will own the business we are selling and other life insurance companies. Additionally, we will reinsure certain life insurance policies, pension risk transfer business, and non-retirement annuities to Security Life of Denver. Voya will receive approximately $1.5 billion of net proceeds, of which $600 million-$800 million will be used to retire existing debt to maintain our debt to capital ratio below 30%. We expect the remaining capital to be used for share repurchases unless more value-enhancing investment opportunities present themselves.
As you know, we have proven to be good stewards of capital by returning roughly $6 billion of capital to shareholders since our IPO and will continue to maintain the same discipline with this excess capital. We are also establishing a long-term relationship between Resolution Life and Voya Investment Management, with Voya Investment Management being a preferred investment provider. We will retain a significant portion of assets, which speaks to our strong investment performance and expertise in managing assets for institutional investors, particularly insurance companies. Today's announced transaction has been unanimously approved by our board and will be subject to customary regulatory approval. We have a successful track record of working with regulators to complete transactions and expect to close the transaction by the third quarter of 2020.
Last, but importantly, we believe that our policyholders will continue to be served well as we and Resolution Life have a rich history of fulfilling our policyholder obligations. Turning to slide five. This transaction delivers shareholder value by accelerating cash flows from the Individual Life segment. At Investor Day, we expected to generate at least $1 billion of free cash flow from the segment over five to six years through 2024. This transaction, along with the $200 million reserve financing transaction completed early in the fourth quarter, brings the total value to $1.7 billion realized from the segment on an accelerated timeline. The board and our management team are confident this is the best outcome for our shareholders. On slide six, we illustrate a path to earnings per share growth.
We are targeting a quarterly operating EPS of $1.80 to $1.90 by the end of 2021, just over 12 months post-transaction closing. Let's begin on the left with the previously shared fourth quarter 2019 EPS of $1.57 per share. Moving left to right, the first bar shows the impact of the Individual Life and non-Retirement annuities earnings sold. Second, we will incur stranded costs, which will be reported in our corporate segment. Third, we expect to address our stranded costs in part by leveraging some cost savings in excess of our existing $250 million target, and from further simplification, this transaction brings to Voya. We have a strong track record of addressing stranded costs. Fourth, reducing debt and deploying proceeds into share repurchases at an even quarterly pace following the close of this transaction will increase earnings per share.
As we have noted, we continue to view share repurchases as the most value-enhancing use of proceeds today. Finally, the other drivers of earnings per share growth will include normal course share repurchase activity assumed through 2021 and continued organic growth in our businesses. In addition, our earnings per share beyond 2021 will grow at an even higher rate given the divestiture of Individual Life earnings. We also remain committed to the 2019 to 2021 earnings growth targets for Retirement, Investment Management, and Employee Benefits, including Investment Management's targeted operating margin of 30%-32%. Our commitment to these targets reinforces our value proposition, our ability to attract and retain clients, and our confidence in executing the plans we shared at Investor Day. With that, I'll pass it back to Rod.
Thank you, Mike. Let's turn to slide seven. Since the IPO, we've made deliberate choices to streamline our business and focus on three complementary high-growth, high-return capital-light businesses. We expect to generate at least 10% normalized adjusted operating EPS growth through 2021. Across our businesses, we have generated significant growth and profitability, supported by our investments. We've done this while being disciplined with our expenses. We are well-positioned to continue serving the workplace and institutional customers, helped by our Voya brand, which continues to be the most recognized name in Retirement. Finally, we intend to build upon the capital management track record that we've demonstrated by having returned $6 billion of capital to shareholders since our IPO. With the Individual Life business sold, we now expect to be on the higher end of our 85%-95% free cash flow guidance. Turning to slide eight.
We're very excited about the opportunities ahead for Voya Financial. This transaction allows us to exclusively focus on investing in our leading Retirement, Investment Management, and Employee Benefits franchises. We see significant future opportunities to grow these attractive, high cash flow-generating businesses. As we've demonstrated already in 2019, our clear strategy, market-leading positions, and our commitment to providing the solutions designed to improve client outcomes gives us confidence we can continue to grow. Equally important is our investment in our people and culture, which has been and will continue to be a major driver of our performance going forward. We are excited about the future as a company with high growth, high return capital-light businesses that are well-positioned to help us achieve our vision to be America's retirement company. With that, I will turn the call back over to the operator so we can take your questions.
Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the star keys. To withdraw your question, please press star two. As a reminder, participants are limited to one question and one follow-up. Our first question is coming from Andrew Kligerman of Credit Suisse. Please go ahead.
Hey, good morning and congrats. It looks great. Wanted to ask about the $225 million interest in the parent investment fund and the $123 million surplus note. Are you required to hold those two, I guess I'll call them investments, over the long term or at some point could you divest of them?
Andrew, thanks for the question. This is Mike. We're not required to hold them. I think it's safe to say we have no plans to divest ourselves of them. Over time, if that opportunity availed itself and it made economic sense to do so, I presume we would. I think we're pretty comfortable with the investment. We have great confidence in the team. To be clear, certainly the equity interest was not a requirement of the deal. We had a choice to make, and we think that there's value in the life block, confidence in not just our team, but the Resolution team broadly. We just thought it made a lot of sense for us to take a position there.
Andrew, I'd build on what Mike said. This is Rod. That is also capped at that level. There's no further capital call on top of the $225.
Got it. Just in terms, I see that the buyback has been enhanced very nicely. Any thoughts on deploying that capital potentially from the proceeds potentially for acquisitions? If so, what might be of interest?
Andrew, it's Rod. We've signaled on this call, we're going to be on the higher end of the range of free cash flow, the 85%-95%, continuing to grow normalized earnings 10+% over the period, and $1 billion-plus in share repurchase in 2020. We're going to update our thinking, as we indicated on the last call at the fourth quarter, and give a little more clarity around that evolving picture. I'd look at the $6 billion of share repurchase that we've done as a firm, $3 billion, $1 billion in 2018, $1 billion-ish in 2019, and we're signaling here $1 billion-plus in 2020. We continue to say repeatedly for the entire time we've been a public company, we're going to be good stewards of capital. When we introduced this plan at Investor Day, it was with the anticipation of investing in our businesses.
Nothing has changed on that front, we'll continue to be good stewards of that capital going forward. Stay tuned.
Yeah, Andrew, I'd only add.
Okay
just to reinforce the point we've made, which is we're going to compare the opportunities in the M&A space to alternative uses of capital, namely share buyback. As those opportunities reveal themselves, as our stock price journey unfolds, and as our ongoing prospects change, then we'll continue to evaluate that. I think we've consistently said the things that we're looking for in the M&A space are in the Retirement world, a bolt-on, potentially Investment Management with some distribution enhancement for international. Nothing changes as a consequence of this transaction.
I think the one piece it does is completes the transformation and really puts us on a path for accelerated growth.
Thanks a lot.
Thank you.
Thank you.
Thank you. Our next question is coming from Ryan Krueger of KBW. Please go ahead.
Hi. Thanks. Good morning and congrats. My first question was, can you provide some additional detail on the preferred asset manager, I guess, relationship you have going forward with Resolution? Would that include non-U.S. assets as well as U.S. assets? And I guess just looking for when they do deals, how should we think about your potential slice of that? Or how many asset managers would you be among that could be gathering new assets there?
Ryan, I think the way to think about it for now is that we're going to be the manager of over 80% of the assets that transfer for the next two years. It'll grade off over the following five for a total of seven years. In terms of future acquisitions that Resolution does, there's no guarantees in the deal. However, we think we've got, particularly as they get to know us and they see the performance, I think we've got a fighting chance to go in and win that business from Resolution. I think we've got a preferred position simply building those relationships, demonstrating the value we can add, and our expertise in managing fixed income portfolios, especially for insurance companies.
Got it. Thanks. This is probably less important than the long-term EPS, certainly, but can you help us think about how this will impact your, I guess, nearer term EPS just in the next few quarters?
Yeah. I can give you a start, I think we'll give more color in the fourth quarter because it's fairly difficult to talk about in a hypothetical framework. If you look at the slide that has the waterfall chart, if you take the guidance for 4Q you subtract those first two bars. That's pretty much what, on a run rate basis, you should think about as the fourth quarter result after the adjustments. Obviously, the underlying effects of the fourth quarter results will be driving that, we don't include share buyback, we don't include equity markets. I think that gets you most of what you need for 4Q. How it will unfold after that, I think we'll try to give some more clarity in the fourth-quarter call.
It'll be incumbent on us to help you all understand what we would look like, sort of on an apples-to-apples basis, ex the transaction. We'll do some level of normalization just to give you a clearer sense of the trend, because the stranded costs will come through above the line. The earnings for the blocks, even though we will still be owning them, they'll be in Discontinued Operations below the line.
Got it. That's helpful. Thank you.
Thank you. Our next question is coming from Suneet Kamath of Citi. Please go ahead.
Thanks. My first question is on the $0.20, roughly, of cost savings in the same waterfall. Can you give us a sense of how much of that is kind of within the 250+ number that you've talked about versus how much of that could be incremental cost savings associated with this transaction?
Look, I think the first thing I'd say is our track record supports our ability to address these stranded costs, and I think we're very confident in our ability to do so. We'll give more color on the fourth quarter call on exactly how that's going to play out. I think we do have excess cost savings that we can use to apply to this stranded cost issue. I'd also remind everybody, and I think this will be important for us, is the simplification of Voya. Eliminating those legal entities, the broker-dealer-
15 administrative systems
The complicated administrative environment we operate in on the life side, and all the downstream effects that that creates, I think gives us ample opportunity to make additional headway. We'll give you more color as we go forward, both in the fourth quarter and as we go on down this journey.
Yeah. That was my thought, is that there would be some more cost savings given all the simplification. I guess we'll wait.
Yeah. I think we're not quite ready to give you a number there yet. It will reveal itself, I think, fairly quickly for us as we enter into the untangling that we're going to have to do over the next six to nine months.
Got it. My follow-up is just on the timing of the close. If macro is very volatile, interest rates could move around, credit spreads could widen out or Is what you've negotiated at this point sort of locked in? Are there any potential contingencies based on year-end finalization of statutory results or anything like that could impact the proceeds?
Look, I think there's nothing that I would say that will prevent us from closing the deal. I think the terms will evolve a little bit if the macro environment changes a lot. I would say that has to be pretty significant, and we've got alternative ways to get to close. We're feeling pretty good about our ability to get this done.
We've got a very experienced partner in with Resolution. This has been a very thoughtful series of conversations over a considerable period of time. We feel very good about the partner that we've got. Again, much like what we did in the creation of Venerable, this is creating a similar opportunity for our employees and how our present customers will be served now from them, which is why we were happy to take a position with the company. Frankly, very happy to retain, back to a prior question, the asset management piece. Again, now two years into that relationship with Venerable, we see that positioning only strengthening in terms of their understanding of where our unique capabilities are and how that may serve them prospectively and in a like-mannered way as it relates to Resolution in this way too.
Thanks, Rod.
Thank you. Our next question is coming from Thomas Gallagher of Evercore ISI. Please go ahead.
Good morning. A few questions. Rod, when you decided to retain the Individual Life insurance business about a year ago, was this kind of offer available in terms of the quantity of how much you're getting for it? Or is this something that recently emerged? I ask that simply because if you just look at what's happened to macro, obviously equity markets are strong, but interest rates, I think, are down about 100 basis points since you announced that, and your mortality results have been a bit mixed. Just curious if this is something that more recently emerged and if you can comment on price.
Tom, really good question. I would point to, it's similar and different from the discussions Michael Smith and team and I had on the VA book, which were probably 50 to 100 different conversations over multiple years. We've had many, many conversations over a period of time here. When one's making a decision to do this, candidly, the aperture of how you look at interest rates is well beyond a year's period of time. Mortality, as we've talked about, is viewed in a much broader context than a few quarters, and I'm not in any way diminishing that issue, but really over, again, a 5 or 10-year period of time. There were ample parties then, Tom, there have been ample parties now, and part of what we've been looking for is really the outcome we found.
That's a transaction that advances something north of the $1 billion to the $1.7 billion from a financial perspective. We're delighted and happy to take an interest in that. I'm really pleased for our employees. This is an excellent outcome. They are assuming our employee base, which has served this customer base and Voya capably, and I'm very happy to be partnered with them. Part of it is just getting those things lined up, Tom, that just takes time. We were happy to take the time, if you recall back to a year ago, we felt we could be better managers of that asset and frankly, find ways to return capital faster. I think that's exactly what we've done.
Yeah, I guess patience was a virtue in this instance.
Well, we've got a very virtuous board and a great team that's been in supporting this. Look, I really do think it puts an explanation point on the transformation piece. The front two part, the two part with the capital-light businesses, the 10-plus % normalized EPS growth rate, higher free cash flow. You've heard us tell the story a lot, that's really what we're so excited about moving into 2020.
Got you. My follow-up is just the $1 billion buyback expected in 2020. Since the deal won't close until the end of 3Q 2020, is the plan to front-load some of the buybacks with the planned proceeds here? Or should we expect that this could actually be a bigger impact for buybacks into 2021?
Tom, I think our approach is, as we've demonstrated across the years now, is more of a steady, deliberate pace. We'll generate a significant amount of excess capital through the balance of this year and into next year, then we'll have the proceeds available sometime no later than the third quarter. The $1 billion, I think is representative of the ongoing excess capital generation and a first installment of the use of the proceeds. I think you should think of it after that as being, and we certainly modeled it that way, the numbers on the slide represents a level usage of the proceeds over the remaining quarters.
Got you. If I could just sneak one more in. The Resolution Life holding, the $225 million investment, that's going to be a relatively large single position versus what'll be, what, a $38 billion general account. Have you thought about concentration risk charge, et cetera, related to that?
Yeah, absolutely. We factored that into the proceed calculation. The way to think about this is it'll replace some of our existing alternative exposure. That cash ultimately becomes available for us to use. That amount was decremented for the additional capital we'll have to hold because of that new position.
Tom, the thing I'd add is it's part of the Holdco fund. It's a diversified set of investments. I think if you look at their press release on their capital raise and look at the investors that are part of that, it's a very sophisticated group and well diversified by geography and experience that we're partnering with.
Got you. Thanks.
Thank you. Our next question is coming from Humphrey Lee of Dowling & Partners. Please go ahead.
Good morning, and thank you for taking my questions, and also congratulations on getting the transaction. Just thinking about the DTA. Clearly, the transaction was an impact on that, but it seems like you still anticipate to be a non-cash taxpayer. Can you kind of maybe help us think about what is the DTA left, and how should we think about that?
Humphrey, in terms of the specific question of what the DTA is, I think we'll give you more color when we complete the final accounting for this in the fourth quarter. We'll also update you on the net present value of DTA. I think you said it, right? This doesn't change the part of the story that really matters, I should say, in that we don't expect to be a cash taxpayer for the next five to seven years. I don't think there's going to be meaningful loss of value. I think you've got to think about this not only in terms of a smaller DTA, but also smaller earnings and a lower share count. When you put all that together, I think the value's still going to be pretty meaningful for Voya overall, and especially in distinguishing us from a cash flow conversion perspective.
That makes sense. Taking a bigger picture question, with this transaction and the CBVA transaction a couple years back, it appears that you've already executed the obvious strategic alternatives. Are there anything else on the table that you could contemplate? I guess, looking at another announcement today, there's a big transaction. How committed are you to the Employee Benefits business that you have?
Very. It's a terrific business. I think the transaction you're referring to, it really underscores that. We have, I think, a unique position in the marketplace. We like the combination of our Stop Loss, our voluntary, and our group life mix. You are well familiar with the attributes and the return characteristics of that. It's a substantial cash generator for us, and a very important part of the three businesses that we're intending to grow. We are very excited about being able to put all of our attention on and with the investments we're making in these businesses to grow as fast as we can. Frankly, that's just not a trivial point. Any time any company has a legacy business, it requires time and attention from management and board.
This really completes, which is why I've said this probably twice or three times on the call, the transformation process. I think it does it with a great statement of execution and certainty and outcome, and with a great partner in Resolution. We're excited about it. We're not interested in any way changing our course with that business.
That makes sense. Again, congratulations.
Thank you.
Thank you. Our next question is coming from Alex Scott of Goldman Sachs. Please go ahead.
Hey, thanks for taking the question. The first one I had is on risk-based capital. I saw that you're retaining the 400% target. This transaction, I think, does reduce a pretty significant amount of risk. I think SGOL was probably the one riskier area that you still had. Shedding that, I would think, would cause you to assess these RBC targets. Is that something you've done already and you kind of concluded that 400's the right level, or is that something that you'll still be working on?
Alex, thanks for the question. We would expect to continue to evaluate our target RBC level over time, all the time. We'll continue to monitor that, see where our peers are, see where rating agency expectations are, get a sense for our own level of comfort. For the short term, I think we felt like this was a large transaction. We've got to successfully navigate it. We've got a fair amount of debt to retire. There's a number of moving pieces. I think from my perspective, it would be prudent not to introduce yet another moving piece.
As the, for lack of a better term, as the dust settles on the transaction, and we get to a point near the end of 2021 where we've addressed the stranded costs, where we're growing, as I expect, in our remaining three businesses, and as we lay out our vision going forward into 2022 and beyond, that'll be a time that would be a natural point to consider that. I'm not predicting a change. I'm just saying that that would be one place to evaluate that.
As we've discussed, and Mike just, I think, nicely summarized, that is a lever available. I think the bigger, broader picture is the consideration and outcome, once complete, that it dramatically improves our risk profile with reduced interest rate risk, credit risk, and mortality exposure. That's what we're particularly excited about.
I guess one follow-up I had was on the rate exposure. You guys have quantified, I think, changes to interest rates and how that'd impact your EPS. Do you have any update to that? I think it was a relatively benign impact you were already calling out. Does this even more meaningfully reduce that?
Yeah. Alex, over the short run, the exposure that we've given in terms of from here, think of it as if rates stay where they are, it's another 1% headwind in 2020 and another 1% after that in 2021, if they stay at this level through 2021. On a percentage basis, that guidance isn't going to change. It's not materially affected by this. However, you should think of our longer-term interest rate exposure very differently. The life business is longer tailed and longer duration assets. I think we've taken a significant bite out of the interest rate risk that we'd have otherwise had.
Got it. If I could sneak one last one in. On excess capital, I think you gave us most of the building blocks to be able to sort of calculate where it would be pro forma in the transaction. Is there anything else in terms of friction costs we should be considering there, diversification benefit or anything like that?
The number we gave is all in. It is what we expect, given all we know right now for us to be able to deploy at the time of close. Maybe the way to think about this is just out of the $1.7, $200 is available at the end of the fourth quarter. There is an earnings that we will accrue on the block while we continue to own it. Between now and close, there are earnings that will also generate additional capital, and then the balance becomes available at close.
Got it. Thank you.
Thank you. Our next question is coming from Ian Ryave of Bank of America Merrill Lynch. Please go ahead.
Ian. Just real quick on the debt retirement. Is this just right-sizing your debt to equity after the transaction and you take kind of the hits to equity? Basically, after this, when you think about your earnings mix, how would you view your cost of debt going forward?
I don't think it's going to be meaningfully different on the other side. I think it'll depend on where we see the opportunities in the market as we seek to retire, but I don't think it's going to change. On a percentage basis, it won't be any different. Obviously, the debt load will be meaningfully reduced. The overall interest cost will be also meaningfully reduced, which is built into some of the pro formas.
Got it. Basically, the debt retire was just a function of the equity market hits you're going to take and potential loss on the sale of the subsidiaries, right? You're just trying to-
Yeah
get it to be under-
There's a GAAP book value loss that we identified in the press release. That'll reduce our overall GAAP equity. We're simply pro rata reducing our debt load.
Got it. Thanks a lot.
Thank you. At this time, this concludes our question and answer session. I'd like to turn the conference back over to Rod Martin for closing comments.
Thank you. We appreciate your participation this morning. We're excited about our future. We believe there are tremendous opportunities to expand and grow our market leading positions. We will have more to share with you on the fourth quarter earnings call in February. Thank you, and very happy holidays to all. Good day.
Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for attending today's presentation. Have a wonderful day.