Voya Financial - Q2 2024

Transcript

Operator (participant)

Good morning. Welcome to Voya Financial's Second Quarter 2024 Earnings Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. 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, please press star, two. Participants are limited to one question and one follow-up question. Please note this event is being recorded. I would now like to turn the call over to Mike Katz, Executive Vice President of Finance. Please go ahead.

Mike Katz (EVP of Finance)

Thank you and good morning. Welcome to Voya Financial's Second Quarter 2024 Earnings Conference Call. We appreciate all of you who have joined us this morning. As a reminder, materials for today's call are available on our website at investors.voya.com. Turning to slide two, some of the comments made during the call may contain forward-looking statements or refer to certain non-GAAP financial measures within the meaning of federal securities law. GAAP reconciliations are available in our press release and financial supplement found on our website. Now, joining me on the call are Heather Lavallee, our Chief Executive Officer, and Don Templin, our Chief Financial Officer. After their prepared remarks, we will take your questions. For the Q&A session, we have also invited the heads of our businesses, specifically Matt Toms, Investment Management, and Rob Grubka, Workplace Solutions.

With that, let's turn to slide three, as I would like to turn the call over to Heather.

Heather Lavallee (CEO)

Good morning and thank you for joining us today. Our second quarter results reflect our success in strategic execution and sound capital management. We achieved our financial targets in the second quarter and remain on track to achieve our targeted full-year results for 2024. We are executing our strategy, driving robust growth and commercial momentum in both workplace solutions and in Investment Management. We continue to demonstrate strong excess capital generation and high free cash flow conversion in line with our targets for 2024. Turning to slide five, our second quarter adjusted operating EPS was $2.18. We generated strong fee-based revenues and Wealth and Investment Management, offsetting higher-than-target aggregate loss ratios in Health. As Don will discuss in more detail, we are actively addressing loss ratios by adjusting pricing on new business and renewals in order to return to our target range in 2025.

While loss ratios have presented a headwind, we remain on track to deliver our full-year EPS target of $8.25-$8.45. This is the result of the strong actions we have taken throughout the year to drive revenue growth and control spend while continuing to invest in the business. We have grown net revenues in line with our targets and maintained strong margins, driving higher earnings in Investment Management and Wealth. These results reflect the transformation of our workplace solutions and Investment Management businesses over the past several years. Diversified revenues and robust commercial momentum across a breadth of markets and distribution channels are driving profitable growth and resiliency. Our capital-light and high free cash flow businesses continue to demonstrate their capacity to generate excess capital, which has allowed us to further increase our dividend this quarter.

Turning to slide six, with market-leading presence across Retirement and Employee Benefits, our Workplace Solutions business is uniquely positioned to help employers optimize their investments in workplace benefits and savings while providing their employees with comprehensive Health and Wealth solutions. Our strategy enables multiple paths for growth in the workplace by landing and retaining customers, by expanding our solution set, and by deepening our engagement. Across Workplace Solutions, we are landing new business driven by the scale and breadth of our solutions and distribution across markets, tax codes, and employer sizes. We continue to grow in Full-Service Retirement with a strengthening presence in the mid-market, continued momentum in the emerging market, and high retention rates. We expect positive full-service flows throughout the second half of 2024 and into 2025. We are expanding our reach with customers through the solutions and capabilities we provide.

We continue to build on expansion opportunities through Benefitfocus. Benefits administration customers now represent our largest channel for HSA sales. We are also delivering on the customer service enhancements needed to maximize the value of this platform with Net Promoter Scores of 26 points year-over-year for our most recent renewal cycle. And to enhance our solution set in Group Life and Voluntary, we are investing in Leave Management to meet employers' growing needs for a differentiated solution in this space. Our deepening engagement with customers is shown through the increased adoption of Managed Accounts and growth in our Retail Wealth Management platform. Managed account revenues are up 30% year-over-year, and Retail Wealth Management continues to grow as a key distribution channel. We are investing in our advisor platform and our retail presence with plans to further expand our team of field and phone-based professionals.

Voya has over $100 billion in total client assets with our advisors serving both the in-plan and out-of-plan Wealth needs for our customers. Turning to slide seven, Voya Investment Management's diversified and globally distributed investment strategies position us for continued growth across institutional and retail markets. With institutional fixed income as our strategic anchor, we are focused on delivering exceptional solutions that are grounded in strong investment performance. Our clients are responding with greater demand, driving strong net inflows and growth expectations, supporting our outlook for 2% organic growth for the year. Strong flows in insurance for the first half of 2024 were driven by the breadth of our institutional client relationships while our income and growth franchise continues to support robust international retail flows.

With a refined intermediary channel strategy and new distribution leadership, we continue to scale and strengthen our distribution of investment products and services globally in the institutional, sub-advisory, and intermediary channels. We also continue to expand into adjacent private and alternative strategies by delivering differentiated solutions and continued growth in our private funds, including plans to launch three funds during the second half of 2024. Voya Investment Management enters the second half of 2024 focused on execution and position for long-term sustainable growth. Turning to slide eight, at Voya, we are living our purpose and vision to drive positive outcomes for our clients, colleagues, and the communities in which we live and work. For example, by improving access to comprehensive financial guidance and education, we are having a positive influence on the decisions our customers are making about their savings and benefits.

We are also expanding the solutions available to our customers that support caregiving, mental health, and emotional well-being. In May, we celebrated our 11th annual National Days of Service with over 70% of Voya employees participating in events that benefited a diverse set of charitable organizations across the country. With that, Don will now provide more details on our performance and results. Don?

Don Templin (CFO)

Thank you, Heather. Now let's turn to our results on slide 10. We delivered $2.18 of adjusted operating earnings per share in the second quarter compared with $2.21 a year ago. Our results reflect higher fee-based margins in Wealth and Investment Management offset by lower underwriting in Health. We expect higher loss ratios in Health to persist this year. That said, we are actively incorporating the elevated claims data into the January 2025 pricing to return loss ratios to our target range next year. Our focus on management actions, including diligence on spend, is helping us remain on track to achieve $8.25-$8.45 of adjusted operating EPS in 2024. Second quarter GAAP net income was $201 million compared to $154 million in the prior year quarter due to more favorable investment gains and lower acquisition and integration costs.

Excess capital generation in the quarter remains robust at approximately $200 million, consistent with our track record of generating above our 90% target. We remain on track to generate $800 million for the full year. Turning to Wealth on slide 11, we continue to improve outcomes and deliver value for our customers, driving growth in both assets and participants. Our participant count exceeds 7 million, representing a 6% CAGR growth since 2019. Defined contribution client assets have grown to over $519 billion as of June 30. Full service and record-keeping net outflows were $597 million and $1 billion, respectively, in the second quarter. While improved equity markets are a net positive for retirement, they do have a counterintuitive effect on net flows by increasing the average account values of each participant surrender, even though our surrender rates have improved.

We continue to retain 98% of all full-service plans, and sales are up, powered by the mid-market, where sales in the quarter are 3x higher year-over-year. Looking forward, we continue to build a strong pipeline and expect positive net flows in full service for the second half of the year. Moving to slide 12, Wealth generated $214 million of adjusted operating earnings in the second quarter. This was meaningfully higher than the prior year due to strong fees and expense discipline. Net revenues were 3% higher year-over-year, driven by strong management actions and favorable markets. Fee-based revenues reflect consistent growth in our participants and strong equity markets in 2024. For spread income, our actions to drive higher margin in the current rate environment have helped to offset the effect of lower spread-based assets.

The spread income guidance we have provided assumes rates follow the forward curve prospectively. Our adjusted operating margin of 39.7% is an outcome of the net revenue growth and discipline on spend. The second quarter did include some timing benefits for administrative expenses, which contributes to the higher expense guidance we are providing for next quarter. We continue to be disciplined with our spend and have taken actions to further integrate our business while still investing for growth. This includes capabilities in the mid-market and Retail Wealth Management. Turning to slide 13 on Health, our immediate focus is to return aggregate loss ratios to within our 69%-72% targeted range. In the second quarter, the total aggregate loss ratio was 72.9%, primarily driven by loss ratios for Stop Loss, which were above our 77%-80% target range.

While we feel good about the rate increases achieved on the non-January 2024 business, the impact on this year's results will be modest. Voya has a strong track record in Stop Loss. We also have an experienced team that helped correct the book in 2018 when our 2017 loss ratios were above target. As a result, we are confident in our ability to achieve target loss ratios in 2025. We continue to find the fundamentals of the Stop Loss business attractive as it can be repriced annually, has a natural tailwind for growth due to medical inflation, and is a growing market as companies move to self-fund their employee healthcare plans. Enforced premium growth remains robust and is supported by expanded quoting capabilities, success in the mid-market, and greater adoption of voluntary solutions. Moving to slide 14, Health adjusted operating earnings were $60 million in the second quarter.

This compares to exceptionally favorable results in 2023 when loss ratios were well below target ranges. Looking ahead, we feel confident with our ability to restore loss ratios back to our target range in 2025 while continuing to profitably grow our Health business. Moving to Investment Management on slide 15, the successful transformation of our business into a diversified global investment manager with an enhanced platform of investment solutions is allowing us to deliver strong results today and enabling opportunities to scale in new growth markets. We generated positive net inflows of $4.8 billion in the second quarter, putting us on track to meet our 2% organic growth expectation for the full year. In institutional, we saw significant improvement and a return to positive net cash flows of approximately $3 billion. This was led by strong demand for core fixed income in the insurance channel.

In retail, positive net cash flows of approximately $2 billion reflect continued momentum in both U.S. and international intermediary channels, including demand for our income and growth solutions, retail private equity fund, and core fixed income. As a reminder, management of the remaining legacy assets connected to our annuity divestiture in 2018 is expected to transfer to Venerable over the next 12 months starting this September. These transfers will complete the runoff of approximately $14 billion in assets under management and an additional $4 billion in assets under administration. These assets were generally in lower fee indexed-oriented solutions. These flows have no impact on our general account and continue to be reflected in current guidance, which remains unchanged. Our leading positions in institutional fixed income and third-party insurance asset management serve as competitive advantages and will support continued client and asset growth.

Turning to slide 16, Investment Management delivered adjusted operating earnings of $50 million in the second quarter, net of Allianz GI's non-controlling interest. Second quarter net revenues were 5% higher year-over-year, reflecting strong growth in intermediary and insurance assets under management and favorable equity markets. Adjusted operating margin was 26% on a trailing 12-month basis, reflecting continued expense discipline while investing for growth. We remain on track to achieve our goal of expanding operating margins by at least 100 basis points on a full-year basis in 2024. We are encouraged by our commercial momentum, and we expect our diverse pipeline and strong investment performance will support our outlook for 2% organic growth for the year. Turning to slide 17, our strong capital generation differentiates us from peers. We continue to build on our track record of generating excess capital above 90% of earnings while still investing for growth.

In the second quarter, we returned $214 million of capital to shareholders, including $174 million of share repurchases and $40 million of dividends. As Heather mentioned, we increased our quarterly dividend by $0.05 or 12.5%. Raising the dividend is driven by confidence in our business mix and our track record of consistent high free cash generation. It is also another step to regularly grow our dividend over time. Our leverage ratio sits comfortably in our targeted range of 25%-30% today. Looking ahead, we have $400 million of debt maturing in 2025, which we intend to refinance subject to market conditions. Turning to slide 18, management actions are keeping us on track to meet our full-year adjusted operating EPS target of $8.25-$8.45. Wealth delivered strong revenue growth and profitability in the second quarter. In Health, we have a clear plan to address lower-than-expected underwriting performance.

In Investment Management, we have transformed the business into a diversified global asset manager, and we remain confident in our ability to achieve 2% organic growth with expanded margins. Finally, we are on track to generate and return over $800 million of excess capital to shareholders in the form of share repurchases and dividends in 2024. With that, I will turn the call back to the operator so that we can take your questions.

Operator (participant)

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're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star two. As a reminder, participants are limited to one question and one follow-up question. Our first question is from John Barnidge with Piper Sandler. Please proceed.

John Barnidge (Managing Director)

Good morning.

Thank you for the opportunity. Can you talk about the investment in Leave Management for Health that was called out, maybe the opportunity set and the path to delivery there? Thank you.

Rob Grubka (CEO of Workplace Solutions)

Yeah, sure. Good morning, John. So Leave Management is an area where we've had a partnership approach to the solution we provide. What we've learned, seen, and then I'll give you market context, is it's just the experience around that is a real pain point for employers. So when you think about sort of the frequency of activity that goes on versus short-term disability, long-term disability leave is much higher frequency than both of those, for sure. And so from an employer standpoint, it's an area where communication and handoffs and clarity and needing to stay aligned with what the employee's experience is, who goes out on leave, their manager, the HR team.

There's a lot of communication and opportunity for things to not be communicated well. So what we're calling out here is really building our own capability, have it completely ingrained and embedded in our platforms, in our experience, in such a way that we can be ever more important to the employer ultimately, and then deliver a good experience for them and the employee throughout. For us, we look at this as certainly a long-term decision and investment, but a really important one in where the market is going to more and more bundling of solutions. HR teams wanted to get to fewer providers. We think it's a really smart investment, and we're really excited about the opportunity that will emerge from it.

Heather Lavallee (CEO)

John, the only build I would have on Rob's comments is that this is really a critical part of our workplace strategy to ensure that we're best serving the employers and then helping to drive better outcomes for their employees across the workplace spectrum.

John Barnidge (Managing Director)

My related follow-up, thank you for that, would be, what's the timeframe for this investment for Leave Management, and when do you think it'll be up and running? Thank you.

Rob Grubka (CEO of Workplace Solutions)

Yeah, we're going to be in a position to transition things actually next year, but then more fully the following year. So we'll do some work throughout the coming 12+ months, and then we'll have technology work that does what technology does, takes a little time to implement, and continue to invest in the experience.

We'll get most of it right the first time out, but there's always refinement and things that we're doing, just like any other investment we make.

Operator (participant)

Our next question is from Elyse Greenspan with Wells Fargo. Please proceed.

Elyse Greenspan (Managing Director)

Hi, thanks. Good morning. My first question is on just the flows within Wealth. In your prepared remarks, you pointed to positive flows in the back half of the year. Can you just comment on the pipeline and how you would expect that to transpire in the third and the fourth quarter?

Rob Grubka (CEO of Workplace Solutions)

Yeah, sure. So as we talked about, even last quarter was all about focusing on the second half of the year. So just want to make sure that's a point of consistency for us. And let me talk about full-service record keeping, but I'll start with record keeping. And the big thing here, actually across both, we see it.

We see what's coming at us, which is why we're reinforcing the guidance around the $1 billion for full service and $3 billion for record keeping. But in record keeping, obviously the timeline to implement or deconvert is long and lengthy. And so those we have really strong insight, perspective, and knowing that those things are going to come to fruition both on the ins and the outs, but obviously more in than out. And on a full-service perspective, I hit a few points here, and we called it out in the material. RFP activity is up 7%, so the front door is certainly moving well. On the emerging side of it, it's a more fluid market, obviously, versus record keeping. So that tends to ebb and flow a little bit more, but as you build momentum, obviously we can see that coming at us.

And what I'd call out broadly around full service is known sales are up 30%. And within that, we called out mid-market being 4x what it was the prior year. And then I'd also call out government, which is 3x the prior year. So we've got a really good view into what's in motion and coming in the front door. And then we talked about in the material, participant lapses or case lapses being around 2%. So feel really good about the case-level activity. And again, as we're at this point in the year, we know a lot. And then finally, as we think about the continued activity, the momentum as we move forward, we've talked about participants as an area where participant lapses has been elevated. We continue to expect it to be. So that's built into the numbers that we're giving you and the guidance.

So I'll pause there.

Heather Lavallee (CEO)

Yeah, and I think the only point I'd build on, Elyse, or just to emphasize is the point that Rob made about known sales up 30% across all markets. So we continue to have a leadership position in the market and confidence in that second-half flow guidance.

Elyse Greenspan (Managing Director)

And then my second question is on the Investment Management flow guidance, right? The 2% target for the year. If we look at the flows in the second quarter, that does imply somewhat of a slowdown in the back half. I just want to see maybe there's some level of conservatism there. Are you expecting a slowdown within net flows in the second half of the year within the 2% full-year IM guide?

Matt Toms (CEO of Investment Management)

Yes. Thanks, Elyse. Obviously, very happy with the $4.8 billion in the quarter and $5.3 billion for the year.

As we look forward, we're also pleased by both the backward look on the diversity of those flows and the forward look. The 2%, we're trying to give a number that's repeatable. Quarter-to-quarter flows are very difficult to forecast. We want a sustainable flow rate and growth rate for the business. And if we look forward for the rest of this year and the momentum we have across both the institutional channels, where $2.5 billion for the quarter in insurance is a big mover, there's also some meaningful momentum on our pension side. Those are lumpy. We pointed that out in prior quarters. But beyond that, the breadth of that retail flows, both U.S. and international, of nearly $1 billion each, really builds our confidence around that 2% growth target longer term.

And then lastly, we've mentioned multiple times, and Don mentioned in his prepared remarks, the private fund launches in the second half of the year. We still expect those to come. And that breadth of activity is what builds that confidence.

Heather Lavallee (CEO)

I would just add, really proud of the transformation that Matt and team have delivered. Really, really pleased with the quarterly results and the guide for the full year. And the other point I would add on Matt's comment is the strength of the investment performance. So it really goes to the breadth of the solutions, the demand we have, and the investment performance really giving us confidence in that full-year outlook.

Operator (participant)

Our next question is from Tom Gallagher with Evercore ISI. Please proceed.

Tom Gallagher (Senior Managing Director)

Good morning. A few questions on the Health business.

First one is, what kind of rate increases are you planning on Stop Loss when you think about 25 renewals? And what would you expect that to do to top line? I presume we're not going to see 20%+ top line when you think about how this plays out into 2025, but curious how you see the interplay between those variables.

Rob Grubka (CEO of Workplace Solutions)

Yeah, sure. Thanks, Tom. So on Stop Loss, we've laid out, we're sort of guiding to that higher end of the loss ratio and what we expect to see. So you can imagine that's going to put pressure on, as to your question, what we're going to go out and get from a renewal perspective. What I do is really just, without giving you an exact number, take you back to 2017 and the transition into 2018, we're targeting a very similar overall increase in rate.

What you saw at that point in time was basically flat growth in Stop Loss. But what I think about in this environment, given the size of our business is obviously very different overall, we've started, and well, we have been reinforcing the growth of 7%-10% overall. And so will it be less than that? Probably, as we push on rate, but at the same point, we don't expect it to be zero. So as we think about the book of business, we still expect to grow it. We'll see how that plays itself out in the third and fourth quarter as we go get the rate. And we're going to completely prioritize getting the margin where we want it to be, as you would imagine, expect us to say. But we'll see how it plays out.

We'll be able to come back and give you perspective as we get through third and fourth quarter, obviously, and dial that in a little bit more deliberately.

Tom Gallagher (Senior Managing Director)

That's helpful. Call it, Rob. Appreciate it. My follow-up is just on the fee margin in the Health business. I noticed that was down a little bit year-over-year. And I'm assuming that's mainly Benefitfocus. But maybe can you comment on maybe overall how Benefitfocus is playing out? Heather, I think you mentioned 20%+ growth in net promoter scores, but how is that translating into revenue and margin growth? Thanks.

Rob Grubka (CEO of Workplace Solutions)

So let me start with the quick one on the fee level. Within Benefitfocus, there's a service they provide around Affordable Care Act and IRS reporting that needs to be done. And so there's a blip in fees in first quarter.

So I wouldn't read into that as anything other than normal seasonality. And I'll let maybe Heather just hit the high level on Benefitfocus and the excitement we've got around that business.

Heather Lavallee (CEO)

Yeah, Tom, maybe I'll build on as we've been talking about for a good year and a half now is we really like the strategic capabilities that Benefitfocus brings to our broader workplace solutions. And it's beyond just the fee revenues we're able to drive in Benefitfocus. But you heard in my prepared remarks, it is going to be a significant driver of our HSA sales. It's also a driver in Supp Health sales. Really gets us at the center of participant engagement more broadly across the, particularly within the Health ecosystem, but across all of workplace.

So I really go back to beyond just the fee revenues that show up within Health, it's the bigger strategic capabilities that will emerge in the coming years from these capabilities.

Operator (participant)

Our next question is from Jimmy Bhullar with J.P. Morgan. Please proceed.

Jimmy Bhullar (Equity Research Analyst)

Hi. First, just a question on Medical Stop Loss. Could you go into a little bit more detail on what are the cohorts by year that are actually driving the bad performance? Because I think we've been talking about Medical Stop Loss for almost a year now. And then I have a couple of follow-ups on that.

Rob Grubka (CEO of Workplace Solutions)

Yeah, sure. I'll give the high level, and you can certainly pull me deeper where it's helpful.

So Jimmy, as we look at and talked about things sort of as the year finished, we got into first quarter, and then again this quarter, the biggest driver has been our change from what we had expected was 2023. So that's still the case. So you can think about that being in that 80%-83% range, but at the lower end of it is we're seeing the results really firm up and finish up. There's always a sort of 15-ish plus month timeline for the business. And so that's really getting close to completion at this point and won't be a surprise as we move forward.

And then you connect that to 2024 and what we saw happen before we set the targets and the renewal expectations was really the 2023 performance and how that heated up at the end given the deductible levels that we use in our business. And so that influences our view then of 2024 and where that's running. The guide that we've given you of the 80%-83% is really that's our best guess at this point. It's very early in the 2024 experience. So you're really talking about 20% of the experience has emerged. So you got another 80% to go. So we'll learn some more in third quarter. Fourth quarter, it'll really show itself, and then we'll have more completion as we get into first quarter. So hopefully that's helpful on sort of the underlying pieces of it.

But again, I think about that 80%-83% as we think about the full year. I then step back and think more broadly about the Health business. We talked about the 69%-72% aggregate loss ratio being north of. And so I would think about that being between 72% and 73% is our best view at this point.

Jimmy Bhullar (Equity Research Analyst)

And then is it reasonable to assume that assuming that you're repricing in 2025, and that's like I think almost 80% of the business will renew at 1/1 that in 2025, assuming you price at a normal margin, your reported margin might still not be normal given what happens with 2024, and 2026 might be the first year where you get to a priced-for margin on a reported basis.

Rob Grubka (CEO of Workplace Solutions)

Yeah, no, appreciate the push on that, Jimmy.

As I would think about it, and our plans and expectation is to get back into the target loss ratio range. So as we think about that 77%-80%, that is absolutely the marching orders, the goal, and the expectation. Now it's a market. It's competitive. We'll see how things ultimately play out over the next quarter or two quarters, and we'll continue to update as best we can. But the main point I want you to walk away with is we're going to strive very hard to get to the 77%-80%.

Heather Lavallee (CEO)

Yeah. And Jimmy, if I can build and just add a few more points is we've provided in the appendix that Rob and this team have a track record of managing this business, driving growth while managing the loss ratios within the 77%-80% range.

Many of those years, the loss ratios actually came below. And as we've talked about, the team also has a track record of being able to get rate increases in the one year that loss ratios were elevated. And so I have incredible confidence the team will be able to execute on that this year. But I think the broader step back for folks to take away is why do we like this business and why do we continue to like the business? And it really goes to the points that Don emphasized on the call, the fact that we have secular headwinds. We see more and more employers that are choosing to self-fund. There's a natural medical trend in terms of the Health trend increases. And we also have the protections on the book of business in terms of our ability to reprice it and reinsurance on the book.

And it has continued to be a positive net growth of earnings for us, and we expect it to be going forward.

Operator (participant)

Our next question is from Ryan Krueger with KBW. Please proceed.

Ryan Krueger (Managing Director of Equity Research)

Hey, thanks. Good morning. I had one more on Stop Loss, maybe just directly to ask. Can you just tell us, if you just remove 2023 development, what is the 2024 Stop Loss ratio year to date?

Rob Grubka (CEO of Workplace Solutions)

Well, look, you should think about it as in that 80%-83% range that we've given you. I won't say more at this point, just given the early nature of the actual experience. We're really looking at 2023, how that ultimately finished up. And so that's influencing what we see today. Again, as a reminder of the higher deductibles, you just don't see a lot of the actual experience develop until later in the year.

So that's the clearest answer I can give you at this point. But obviously, we'll be back in three months, and we'll be able to talk more about what we've seen and how it's evolved from there.

Ryan Krueger (Managing Director of Equity Research)

Okay, thanks. On the $14 billion of Venerable AUM that's expected to leave, can you give us some sense for what the fee rate is on that and anything on the margin, on kind of the pace of how that will come through over the next year?

Matt Toms (CEO of Investment Management)

Yeah, Ryan, thanks for the question. Venerable, of course, we've seen this come up for some time. This was the divestiture of our annuity business back in 2018 and largely passive quant equity-related lower fee products. So think of that as being meaningfully below our average fee rate as a blend of products. The total book, as Don mentioned, $14 billion AUM, $4 billion AUA.

We've been working closely with Venerable over the last six plus years to coordinate. We anticipate half of that, so $7 billion AUM in the second half of this year and half the AUA, so $2 billion AUA. The remainder will be in mid-2025. Now, importantly, these assets are legacy assets that have been in runoff, are not part of the primary growth initiative of the company. And as Don mentioned, the financial impact, both revenue and earnings, has been fully embedded in our guidance and continues to be fully embedded in the guidance. So again, something we planned for, well-coordinated. The growth areas are clearly more in the U.S. institutional, intermediary, international areas that we've referenced that are driving the growth currently.

Operator (participant)

Our next question is from Wilma Burdis with Raymond James. Please proceed.

Wilma Burdis (Director)

Hey, could you guys talk about the decision to refinance the $400 million in debt that was coming due in 2022, 2025? And will that have any impact on 2025 earnings? Thanks.

Don Templin (CFO)

Yeah, thanks, Wilma. So as you know, we have that $400 million that's coming due in early 2025. As I said, we expect to fully refinance the full amount. And really, that decision was based upon the fact that our balance sheet is really well positioned. We've been very prudent about how we position the balance sheet. Our leverage ratio is 28%, so it's comfortably in the range of that 25%-30%. And I think sometimes people ask the question about what could be a barrier. I see really no barriers at this point to refinancing that full amount.

Wilma Burdis (Director)

Thank you.

And then looking into 2025 EPS growth, should we expect any tailwinds from the improvements in the Stop Loss business? Thanks.

Don Templin (CFO)

I'm sorry. I missed a little bit of that.

Wilma Burdis (Director)

Oh, yeah. Into 2025 EPS growth, are there any possible tailwinds from Stop Loss starting to normalize? Thanks.

Don Templin (CFO)

Yeah, sure. Sure. The results that we've delivered this year have really been with that headwind that we've had around Stop Loss, we fully expect, and Rob and the team are committed to getting us in that target range, aggregate loss ratio, target range of 77%-80%. And when they're successful doing that, that will obviously be very beneficial and helpful to our EPS for 2025.

Heather Lavallee (CEO)

And I think one thing I would build on is if you look at what we're expecting for EPS growth, we're close to double digits over actual from prior years.

One of the things that I would say we're particularly proud of is the ability of this team to actively manage both our revenues and our spend, as well as our capital that is helping to drive the EPS growth within this year. We'll come back and, as we know more, give you more guidance going into 2025.

Operator (participant)

Our next question is from Wes Carmichael with Autonomous Research. Please proceed.

Wes Carmichael (Senior Analyst of US Insurance)

Hey, good morning. I had a question on the reiteration of the EPS guide. It seems to imply that there's a little bit of a sequential slowdown in the second half of the year, at least relative to the second quarter. I think there might be a little bit of earnings compression coming in Wealth, but are there any other drivers that you would kind of point to to get to maybe the midpoint of that range?

Don Templin (CFO)

Yeah, I guess there's a couple of questions that have come out since we actually put the deck out. One was, what is the starting point for that EPS guidance? So I want to make sure that people know the starting point for that EPS guidance is actuals for the first six months of 2024 and then the forward look for the remainder of the year. And the items that are impacting that look, I mean, I think we've tried to be very transparent around providing sort of the modeling considerations for both the third quarter. So a lot of that information is on page 21 of the deck, as well as the items that could potentially impact that guidance. So you think about, we have sensitivities on page 21. Health underwriting, obviously, is an item that we're watching closely.

Equity markets, they've been very favorable, but we're watching that closely. And then alternatives, they've been performing close to our long-term expectations, but we are monitoring that as well. So those are the things that I believe are impacting the view around the remainder of the year. But the team has done really, I think, an amazing job of taking management actions, managing expenses, still investing in growth, and delivering that $8.25-$8.45.

Wes Carmichael (Senior Analyst of US Insurance)

Got it, Don. So the first half of 2024, that's based on actuals, and then going forward, it'll be on a normalized basis, right? Is that the right way to think about it?

Don Templin (CFO)

Yeah. I mean, our long-term assumptions assume sort of the 9% for all, yeah, on a normalized basis. But the starting point is actual, not normalized. Actual for the first six months.

Wes Carmichael (Senior Analyst of US Insurance)

Understood. Thanks.

And then just my follow-up, just on Stop Loss, I just want to make sure I'm thinking about it mathematically correctly, right? The 80%-83%, I think in the first quarter, it was a little bit over 84%, and the second quarter, a little bit over 83%. Should we think, Rob, that it should come in below the 83% in the third and fourth quarter?

Rob Grubka (CEO of Workplace Solutions)

Yeah. To end up at the 80%-83%, yeah, you've got to have that help. And so the context I'd give you on first and second quarter is, again, back to the timing of how experience emerged. And so there's an element of catch-up that occurred in first and second quarter across the 2023 book, given the more data that came in on that, and then more tightly aligning what we were seeing initially emerge in 2024.

So that pushed up those numbers a bit. You can think about it within the quarters, but again, a big part of that was just getting the ending point right. And so the pace through the quarters showed itself a bit more in first and second. But again, the 80%-83% is what we'd orient you around.

Wes Carmichael (Senior Analyst of US Insurance)

Thanks.

Rob Grubka (CEO of Workplace Solutions)

Yeah.

Operator (participant)

Our next question is from Suneet Kamath with Jefferies. Please proceed.

Suneet Kamath (Senior Research Analyst)

Yeah, thanks. So I guess, Rob, on the Stop Loss, is what's happening now similar to what happened in 2017 when you had to correct? Because I'd imagine the book is much bigger. So I'm just trying to figure out if that's really the right precedent to use when we think about this business improving going forward.

Rob Grubka (CEO of Workplace Solutions)

Yeah. So look, I would think about it from the perspective of getting an achieving rate. We're going after a similar rate.

So we'll start there. Is the book a lot different? Is it a lot bigger? Absolutely. What is also a bit different from that point in time is just, and we talked about this a call ago, but 2023 ranks or 2022 ranks so well, and then you had 2023 that moved to the higher end of the range beyond the range at this point. And so there was a different dynamic in just the book and the market that I would call out. And so what do I mean by that? Well, when you've got your book running really, really well from the 2022 business, going and getting an achieving rate based on that is just different, right?

You've got a different set and mix of business that was cases running super well and cases running not great, but not as bad as we would tend to see in a normal kind of environment. So it was a bit more barbell than what a barbell business always is because those core holds look very different. As we sit here today, though, what I'd give you and what we view as a confidence point is we understand what we got to go get. We're very clear on that. We're aligned from underwriting to distribution. We've been very clear in market what we're trying to do and achieve and why. And then as we think about the execution, what we've seen around our 7/1 renewal business was we got significantly higher rate than we did for 1/1. We had decent retention.

And so those things start to give you the confidence, give me the confidence that we're moving. The market's also moving. We're hearing noise from other competitors. And so I don't think we're alone in going to get more rate than we might in a traditional year. But let me stop there. Or Heather, you want to?

Heather Lavallee (CEO)

Yeah, the only thing I want to add, Suneet, is that I think what is the same is this is the same management team that was able to execute on that rate action back in 2017 heading into 2018. And that gives Rob and I an incredible amount of confidence in our ability to do so now and the fact that we're already demonstrating that execution with the mid-year increases.

Suneet Kamath (Senior Research Analyst)

Okay. And then maybe just pivoting to Workplace Solutions, Don, I think you referenced a decline in spread-based assets in Wealth.

Can you just remind me kind of what's driving that?

Rob Grubka (CEO of Workplace Solutions)

Yeah, I'll go ahead and start if Don may want to add color, though, as well. But look, as we well, you look at the result and like, well, it's a great result. We've had two quarters of great results. I'd give Matt and team a lot of credit around what they've done to reposition the general account, reflecting what we've talked about over a number of quarters now around the participant lapses that we've been seeing and putting pressure on the overall level of AUM. We've gotten smarter and more disciplined around how we manage cash and float. So I think it's been a number of actions, and then we'll continue to seek out and take action as we move forward.

But the guidance, as we think about the forward view, factors in, as I alluded to before, the forward curve, and then a continuation of what we've been seeing from a participants-out perspective to get us back in that 220-230 range.

Suneet Kamath (Senior Research Analyst)

Okay. I just wanted to clarify one thing because I thought I swear our conversations last night that you guys were talking about the withdrawals being sort of driven by higher equity markets and that sort of drives up the nominal amount of withdrawals, but that wouldn't be affecting the spread-based asset thing. So I was a little confused by that commentary relative to the spread-based piece.

Heather Lavallee (CEO)

Yeah. And Suneet, I'll jump in and take that. So what we've been referring to there is that in elevated equity markets, you're going to see participant account balances that are higher.

So when they do a surrender, you're going to see higher participant surrenders. And so that was one of the things that we would point to for 2Q. I think to your point, which is that that's sort of separate from the general account, what we have been talking about for the first half of the year is seeing lower general account assets that were the result of participant surrenders being able to get higher crediting rates in other products. Now, what we would point to is we did start to see some marginal improvement in participant surrender rates in second quarter. But what we're giving you is our best guide on the second half is that we still expect to see participant surrenders a bit elevated on the general account. And then we'll begin to see what happens with interest rates normalizing.

But again, I go back to the point that Rob mentioned, which is our ability to drive really strong spread revenues and Matt's team being able to generate real strong returns on the general account. We're overall incredibly pleased with our Wealth results.

Operator (participant)

Our next question is from Joel Hurwitz with Dowling & Partners. Please proceed.

Joel Hurwitz (Lead Analyst of Life Insurance and Retirement Services Research)

Hey, good morning. Just to follow up on that question, can you actually give us a number of where you expect the Wealth spread assets to end the year? And then is there anything you could do to, I guess, drive higher retention or new business to the spread business there?

Rob Grubka (CEO of Workplace Solutions)

Yeah, I don't think we've given an absolute number on the AUM ending point. I think what we've tried to say is assume a pretty consistent level of activity to what you've seen over the last handful of quarters.

I think it'll get you to a reasonable number. I'm sure offline, the IR team could help validate the math with you. Look, from a drive and activity perspective, let me spend a little bit of time there. We've introduced new product here over the last number of months, both a fixed-rate product as well as also improvement or evolution of our stable value offering. We continue to remain focused on how do we help educate, guide, and help employees make a decision when they're facing decisions to either stay or go in plan. Something you may not necessarily think about, we talked about and highlighted the focus around managed account. What we've actually seen in the data is that influences people sticking around and staying within the product.

So once they get used to getting guidance and advice around the decisions they're making, they tend to be a bit stickier. So that's a lever. I think the important point here is there's no simple answer to this. We're taking a number of different actions. We study the data. We're going to study how different approaches to marketing and educating certainly help us. And then we've also talked about and highlighted the focus that we got on the Retail Wealth Management business. So that's a really important lever for us. As we called out in the material, they touch in one shape or form $100 million of our assets.

And so it's a really important lever for us, that 500 employees that we've got focused in on that and how they can, again, help educate, guide, and engage employees, not only at the time of decision to leave, but why they're in plan well before that, and then even the opportunity outside of plan. So it'll take a number of actions, but we're focused on executing around it and having an impact.

Joel Hurwitz (Lead Analyst of Life Insurance and Retirement Services Research)

Okay. Maybe sticking on that on the Retail Wealth Management, what are you seeing from ability to capture out-of-plan assets or even retain assets at retirement?

Rob Grubka (CEO of Workplace Solutions)

Yeah, sure. So it's a bit of a sort of two stories, I guess, as we've made the decision to keep the strategic part of the retail advisor business. That's a team that's long been focused in the workplace. They've long been focused around the tax-exempt market.

We would call our results around retention strong, too, certainly market comparable. When you get to the corporate side of the house, though, that's the area where we really think there's a ton of opportunity, not only within full service, but record-keeping as well. We see a lot of opportunity as we look at investment, both from a technology and a people perspective, that we've got a lot of room to grow the impact of that team. But let me see if Heather wants to add some more overarching comments.

Heather Lavallee (CEO)

Yeah. I mean, this is one of the areas that we've been talking about where we're investing for growth. As Rob mentioned, it's adding a field and phone-based advisor. It's improving the technology for them to have a better experience and drive a better outcome for customers.

But what I would point you to specifically is if you look in the investor stuff, we talk about retail assets, and you'll see year-over-year 10% growth in retail assets. And so that's one of the areas that it shows up. We also have IRA solutions that are sold to other retirement participants outside. We've got some competitive proprietary products. And then across our broker-dealer, we also offer other companies' products like life and annuities that allows our advisors to still participate in the growth where we're able to generate some additional fees, but we don't necessarily have to incur the tail risk of those products. So a lot of different levers for us to pull. And this is going to continue to be a focus for us.

It goes back to, at the end of the day, doing right to meet the needs of the end consumer, which are looking for more holistic education, advice, and guidance.

Operator (participant)

Our next question is from Mike Ward with Citi. Please proceed.

Mike Ward (Financial Analyst)

Thank you. Good morning. I was hoping we could maybe dig a little bit into the Investment Management inflows. Super strong rebound. Just, I guess, wondering if there's any more color around the composition of the assets that came in this quarter.

Matt Toms (CEO of Investment Management)

Yeah. Yeah, Mike, let me unpack that a little bit for you. So we mentioned the breadth. Obviously, very happy with the $4.8 billion flow for the quarter. Fixed income through the insurance and pension channel really stood out.

We have very strong performance at the right time in the fixed income cycle where we see demand quite strong on the institutional side, and we believe growing as we look forward on more of the intermediary retail side. So fixed income clearly a standout. Also, our privates and alts businesses continue to perform quite well. We have more fund launches coming at the end of the year, and we continue to grow new capabilities there. That's a key underlying driver. And then really the change on the quarter was the bigger inclusion of our U.S. retail business. So international retail has been quite strong on the back of the broader array of strategies we acquired a couple of years ago. Within the U.S., we're seeing our model business, our fixed income business, and our private equity secondary interval fund business continue to have resonated in the marketplace.

So really, it's the breadth that's driving that. As we look forward, we see more of the same coming. The one mention that I'd have there is internationally, it's been retail-oriented. I'm excited in the future about that expanding into the institutional space as well through a broader array of products, both fixed income, privates, and equities. So quite excited about that.

Mike Ward (Financial Analyst)

Awesome. Thank you so much. And then I was hoping you guys could maybe discuss any update on what you're seeing in terms of your office commercial mortgage loan portfolio and any resolutions that you've executed in the quarter.

Matt Toms (CEO of Investment Management)

Yeah. So it continues to be a story of resilience. I think the overall market is finding a bit of a clearing level and a bottom. Equity valuation starting to stabilize there. You've actually seen, and REIT indexes, some bottoming. So the visibility has improved.

From our portfolio, it continues to be the same positioning: very well diversified, higher quality. Our CM scores and our ratings and our coverages continue to hold up very well. If we think about what our AVR experience over the quarter is, $6 million on the quarter, really not a lot of movement. There's always going to be individual properties that you manage through, but we just don't see a real delta or change in the direction of what is a high-quality portfolio performing well and well managed.

Operator (participant)

This concludes our question and answer session. I would now like to turn the conference call back over to Heather Lavallee for any closing remarks.

Heather Lavallee (CEO)

For the benefit of Voya, as diversified capital-light business mix, we are well positioned to achieve our financial targets and remain focused on strategic execution.

We are on track to deliver our full-year financial targets and are taking the necessary action in our Stop Loss business to improve our loss ratios in 2025. We have strong commercial momentum and are focused on spend discipline and prudent capital management while continuing to invest in growth. We will be relentless in our customer focus, exceeding service expectations, and innovating to meet their needs. Thank you, and we look forward to updating you on our progress.

Operator (participant)

Thank you. This does conclude today's conference. You may disconnect.