VOYA - NYSE

Good morning. And welcome to Voya Financial's First Quarter 2023 Earnings Conference Call. All participants will be in a listen-only mode. [Operator instructions] Please note, this event is being recorded. I'd now like to turn the conference over to Mike Katz, EVP of Finance. Please go ahead.

Thank you, and good morning. Welcome to Voya Financial's first quarter 2023 earnings 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. Turning to Slide 2; some of the comments made during this call may contain forward-looking statements or refer to certain non-GAAP financials measures within the meaning of Federal Securities law. GAAP reconciliations are available in our press release and financial supplement found on our website. Additionally, prior period comparisons have be recast for LDTI and include refinements to adjusted operating earnings incorporate. I refer you to the slide for information. Additionally, beginning this quarter, Benefitfocus will be reported as part of the Health Solutions segment. 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, Christine Hurtsellers, Investment Management and Rob Grubka, Workplace Solutions. With that, let's turn to Slide 3 as I'd like to turn the call over to Heather.

Good morning. Voya Financial delivered strong results in the first quarter of 2023 as we continue to meet or exceed our earnings and revenue growth targets. We continue to expect to meet our 12% to 17% EPS annual compound growth target over the three year investor day period ending in 2024. Our focus remains squarely on executing our plan, and on successfully integrating the businesses that we acquired last year to ensure that we maximize their strategic and financial benefits. As we will discuss, we are already seeing these benefits in our results. Let's move to Slide 4 with some key themes. For the first quarter, we delivered adjusted operating EPS of $1.44, demonstrating Voya’s profitable revenue growth across our businesses and strong margins. These results reflect the execution of our plans, and commercial momentum across all of our businesses. For Wealth Solutions, we grew full service, recurring deposits nearly 10%. In0 Health Solutions, annualized enforced premiums and fees grew 22%. In Investment Management, net outflows for the quarter largely reflect to the continuation of challenging market conditions. However, our diversified mix of investment strategies and strength in global markets, once again allowed us to outperform much of the competition. We concluded the quarter with approximately $500 million of excess capital and our free cash flow conversion rate remains strong at more than 90%. As a reflection of the confidence in our capital strength, and further capital generation of our business, we plan to increase our dividend yield to approximately 2% in the second half of 2023, subject to board approval, and continued constructive macro conditions. We also intend to resume share repurchases in the second quarter. In addition, this month we will refinance about $400 million of debt with lower cost financing that will save us approximately $20 million of annualized interest expense. We will continue to execute on our key investor day targets of net revenue growth, margin expansion and prudent capital management while we deliver valuable solutions for our clients, and strong returns for our shareholders. Because of our relentless focus on execution, we remain on track to achieve our adjusted operating EPS growth target of 12% to 17% over the three year period ending in 2024. In a few moments, Don will share more on our results and performance. Turning to Slide 5, our recent acquisitions have delivered immediate revenue and earnings accretion while delivering essential components of the strategy that will drive Voya’s growth well into the future. We continue to see significant benefits from last year's acquisition of investment strategies and assets formerly with AllianzGI, which have been a powerful source of positive net flows and revenue growth. This business is proving highly resilient even in a challenging macroenvironment, and it will be a catalyst for Voya investment management's further growth and margin improvement. Our distribution partnership with AllianzGI provides Voya Investment Management with a world class international distribution capability that we are already capitalizing on, with several international fund launches planned for 2023. Turning to Slide 6, we completed our acquisition of Benefitfocus in January, and have made great progress with its integration and remains fully on track with our financial and strategic objectives. Benefitfocus is a critical accelerant for workplace benefits and savings strategy. Because it provides a strong connection point across our businesses. Benefitfocus is an essential building block as we develop a market leading workplace benefits and savings experience which is already being brought to life with our, myVoyage app. The Benefitfocus, Voya can engage customers at decisive moments, providing guidance as they enroll in and use their workplace benefits while enhancing the support we provide as they grow their workplace savings. AllianzGI and Benefitfocus together represent a transformative strategic acquisition that we've executed on in less than a year, putting in place the key components, we need to drive Voya strategy in future years. Turning to Slide 7, by living our purpose and vision together, our culture continues to help us stand apart in the marketplace, and drive measurable outcomes that are benefiting all of our stakeholders. We're doing this by addressing the growing health, wealth and investment needs of our clients and customers, while also supporting our colleagues and communities. For example, we helped one of our clients, the City of Milwaukee, increase retirement plan participation rates for black and Hispanic employees by 40% and 25%, respectively. We also earned several notable recognitions during the quarter, including being recognized as one of the world's most ethical companies for the 10th consecutive year, every year we have been eligible. With that, let me ask Don to provide more details on our performance and results. Don?

Thank you, Heather. Now let's turn to our results on slide 9.We delivered $1.44 of adjusted operating earnings per share in the first quarter. This compares to $1.55 in the prior year quarter. Excluding notable impacts, first quarter 2023 adjusted operating earnings per share was $1.69. Our adjusted operating results reflect profitable growth in all our businesses highlighted by favorable net underwriting experience in health solutions, higher investment spread in wealth solutions, and favorable AllianzGI impacts on Investment Management. First quarter GAAP net income was $69 million. This included approximately $50 million of cash impacts from our recent acquisition of Benefitfocus and continued integration of AllianzGI. Overall, our results continue to illustrate how our diverse revenue streams and complementary businesses enable us to navigate through challenging economic conditions. Turning to Wealth Solutions on slide 10. We are continuing to improve outcomes and deliver value for our customers and clients consistent with our vision and values. In turn, this is supporting our ability to generate positive net cash flows and grow assets over the long term. As shown here, we have generated nearly $9 billion of full service net inflows over the past five years. While first quarter full service inflows were impacted by a large case departure and higher participants surrenders, we continue to feel good about our pipeline for the remainder of 2023. Full service recurring deposits grew 9.6% on a trailing 12-month basis, and we expect full year deposit growth to be above 10%. Moving to slide 11, Wealth Solutions generated $132 million of adjusted operating earnings in the first quarter. Excluding unfavorable alternative income, adjusted operating earnings were $166 million. Net revenues, ex notables grew 2.3% on a trailing 12-month basis. This reflected the benefit of higher interest rates on are spread based revenues, which more than offset the impact of lower average equity markets. In the quarter, we raised crediting rates on part of our enforce block. We anticipate further rate actions to pass on the benefits of the higher rate environment to our customers. Going forward, we expect second quarter net investment spread to be consistent with the first quarter. Adjusted operating margin was 38.6% on a trailing 12-month basis ex notables. While administrative expenses were elevated in the quarter due to seasonal and timing related spend, our full year expense outlook remains unchanged. Our Wealth Solutions business is well diversified across plan sizes, industries and tax codes. This diversification gives us confidence in our forward looking revenue and margin targets. Turning to slide 12. We remain focused on pricing discipline and excellent service across our Health Solutions business. This has enabled us to grow annualized enforce premiums above our target of 7% to 10% over the long term. Excluding Benefitfocus, annualized enforced premiums in the first quarter were 15%. higher year-over-year. We saw growth across all product lines supported by favorable retention. Our total aggregate loss ratio was 66% on a trailing 12-month basis. This was primarily due to favorable net underwriting in stop loss and voluntary. Group Life returning to pre-COVID levels will be a further tailwind. We expect full year loss ratios to be lower than our long term target range of 72% to 73%. Moving to slide 13. Health Solutions delivered exceptional results in the first quarter, generating $94 million of adjusted operating earnings. net revenues ex notables grew 25.9% on a trailing 12- month basis. This resulted from core business growth and the addition of Benefitfocus’s fee based revenues. Adjusted operating margin was 33.5% on a trailing 12-month basis ex notables. Looking ahead, we expect full year margins to be within our 27% to 33% target range. Together with our wealth business, our leading brand and differentiated workplace value proposition gives us confidence in our long term growth. Moving to slide 14. Investment Management has a multi decade track record of generating significant value for our clients across different market cycles. We have continued to invest in our platform, and have significantly expanded our capabilities to become a global player. Our total assets under management increased nearly 30% from a year ago, reflecting the onboarding of AllianzGI assets. We have generated meaningful net cash flows over the long term. And our organic growth has consistently outpaced the industry, including the first quarter of this year. While we did experience net outflows in the first quarter, we generated positive net flows and retail supported by our international distribution. Additionally, the institutional business continues to see strong insurance channel demand. Although, the challenging backdrop has resulted in a slower start to first quarter flows, we continue to expect 2% to 4% organic growth in 2023. Looking beyond this year, we are excited about the growth opportunities in international distribution and the continued expansion in our private and alternative capabilities. Turning to slide 15. Investment Management delivered adjusted operating earnings of $33 million in the first quarter, net of AllianzGI’s non-controlling interest. Net revenues grew 16.8% ex notables on a trailing 12-month basis. The benefit from the addition of AllianzGI assets was partly offset by macro impacts on fees. On a trailing 12-month basis, first quarter adjusted operating margin ex notables was 25.4%. In the quarter, expenses were elevated due to timing and higher seasonal impacts. However, there is no change to our full year expectations on expenses. We continue to expect full year 2023 margins to improve by at least 100 basis points on a market neutral basis. Turning to slide 16. We have a strong balance sheet that supports our capital light, high free cash flow business model. It provides us with financial flexibility and facilitates the return of capital to shareholders. Key highlights include a robust excess capital position, which is replenished each quarter by our capital light, high free cash flow model. A strong liquidity position with healthy leverage and cash coverage ratios and a high quality well diversified investment portfolio that will continue to deliver attractive through the cycle risk adjusted returns. Turning to slide 17. Our well diversified general account should perform well across market cycles. Our investment team has decades of deep sector specific expertise. And our disciplined investment process is focused on balancing required capital and risk adjusted returns through the business cycle. Our portfolio skews high quality, with 96% of fixed maturities being investment grade. It is diversified across asset classes and industries with over 3,000 issuers. In response to the greater level of interest in commercial real estate, we have provided additional details in the appendix illustrating the significant diversification across our high quality book. As we look out, our fundamental credit watch list signals limited credit tail risk, and we remain confident in our current excess capital position, free cash flow generation and capital plan. Turning to slide 18. We continue to take a disciplined approach to returning capital to our shareholders. Over the last 12 months, we generated capital in line with our 90% plus free cash flow guidance and deployed $1.1 billion of capital. In May, we will redeem approximately $400 million of hybrid debt. We will utilize our P-Cap facility to fund this redemption. As a result, we expect to save nearly $20 million of annualized interest expense. And additionally, we plan to increase our common stock dividend to an annual yield of approximately 2% in the second half of 2023 subject to board approval and continued constructive macro conditions. We are looking to do so given our confidence in our free cash flow generation. Finally, we plan to resume share repurchase activity in the second quarter of 2023. Turning to slide 19. We have generated $5.7 billion of capital since 2018 including capital released from divesting capital intensive businesses in both 2018 and 2020. Of the $5.7 billion we generated, we've deployed $5.5 billion, including $4.5 billion in the form of share repurchases. Our ability to generate consistent cash flow above 90% has been supported by the diversity of our revenue sources, and the transition to more capital light businesses over time. Turning to slide 20. In terms of our outlook, the expectations we communicated earlier this year, about our full year 2023 growth, adjusted operating earnings, cash generation and capital plan have not changed. In addition, we remain on track to achieve our adjusted operating EPS growth target of 12% to 17% over the three year period, ending in 2024. Our focus is squarely on continued execution of our plans, driving further commercial momentum across all our businesses, and continuing to integrate the businesses that we acquired over the last year. And our confidence in our capital generation enables us to resume share repurchase activity in the second quarter, and target a dividend increase in the second half of 2023. With that, I will turn the call back to the operator so that we can take your questions.

[Operator Instructions] Suneet Kamath with Jefferies.

Thanks. Good morning, just on capital management. I don’t want to get too technical. But you've used this phrase, assuming market conditions remain constructive a few times in the deck and I just wanted to unpack that a little bit. You're looking at resume buybacks in 2Q so I guess the question is what would you need to see for that not to happen? Is it on the equity market side? Is it on the credit side, just want to make sure we're all level setting expectations. Thanks.

Good morning, Suneet. Don will take your question.

Sure. I guess we would say during the quarter, we generated $150 million of excess capital in an environment where there were some macro headwinds, we feel really, really confident in our, one, our ability to generate capital. And we feel really, really confident in our statement about resuming share repurchase in the second quarter.

And any size in terms of the buyback that we should expect for 2Q?

So at the beginning of the year, we had guided or provided sort of a forecast for the year and that included in sort of earnings guidance, it also included EPS guidance, embedded in that EPS guidance was an assumption around share repurchase. Our expectations around share repurchase have not changed since we provided that original guidance. We continue to generate capital; our capital light business is performing very well in markets as we expected it would do. And that's what really gives us the confidence about resuming share repurchase and also actually targeting a dividend increase in the second half of the year.

That it makes sense. And then just the second one is just on the full service business. I think, Don, in your comments you had mentioned that surrenders were a little bit elevated. Just curious what the driver there was. And are there actions that you're taking? I think you talked about credit rates going up but actions that you're taking to limit that going forward.

Yes, thank you, Suneet. Rob, we'll take your question.

Yes. So on the full service side, as you noted, it's, we feel good about the story overall, what I'd say, in full service from a corporate perspective, as you'll look in the numbers that we provide really strong flow story there as you look at tax exempt, which is really the call out a particular plan that left during the year that really explains most of the delta between ‘22 and ’23 from a flow perspective. And just as a reminder, within tax exempt, you're going to more often see full service even in the larger end of the marketplace. And so it's just something to keep in mind that there is an element of lumpiness within tax exempt. That's a little bit different. But when you do the step back and you think about our flow stories in the last five year has been tremendous. Last year, a record year, the last five years call it $9 billion of flows, the long term momentum that I see you can look back. But obviously, as I have accountability for running it forward, I feel really good about what we're seeing where we've got activity is been good. And again the balance and item here is sort of what part of the market, corporate is very much an indicator of think about the smaller and mid part of the market. Really good story there, as I said, and then as we move forward tax exempt, some of the larger cases, will have lumpiness, they're great when they come and they hurt a little bit when they go. But the long term view and why we continue to talk about trailing 12 months is quarter-to-quarter, there's just going to be noise. That's just the way it's going to be. But our momentum, our confidence in where we're going, and the activity that we're seeing, has us feeling good about the full year.

Our next questions come from the line of John Barnidge with Piper Sandler.

Thank you very much. Appreciate and good morning. Can you maybe talk about the pipeline for investment management? I know you talked about earlier four new usage products being anticipated the launch in ’23 in areas where it's better and worse from a distribution perspective. Thank you.

Thanks, John. Christine, will very happily take your question.

Certainly, John, love to talk about the pipeline. So starting with that strong diverse. And you see, despite what I would call a very challenging macroenvironment right now, we're still affirming our 2% to 4%, organic growth rate for 2023. And so where are we seeing notable examples of strength, like we're really delivering for clients, I would say, notably, private credit investment grade, strong production. And when you think about the covenant protection, the quality of the underwriting that we do, our clients want, when the macroenvironment gets a little rockier to have the assurance of really being able to manage with borrowers and take advantage of those opportunities, as well as, as we do see is as negative as some of the things going on in the banking industry right now can be, we do see it as a long run opportunity to provide credit and expand our product offerings. So that would just be one example of where we're seeing momentum. Also our retail cash flows strengthen this year, you saw we were positive in the first quarter. And again, that really is the result of the diversification our global reach and retail, Asia demand is much stronger than we're seeing currently domestically, although certainly we're seeing green shoots and 16 comes in domestically as an opportunity for the rest of the year. So when you think about really the strength of our product offerings, the diversification now that we have globally, remember that 500 salespeople we like to talk about in 19 countries from our partners, AllianzGI, we just feel really confident that despite a lot of turmoil in the market, clients sediment will be impacted as well. And we were in the first quarter. But overall, we just see a lot of opportunity to deliver this year with our organic growth targets that we said.

Thank you very much. And then a question on capital generation seemed really strong in light of some of the near term challenging market impacts that were experienced. Can you maybe talk about the sustainability of that? Is that enhanced by those interest expense savings? You're talking about near term? Thank you.

Don?

Yes, sure, John. I think what we wanted to do, we have internally been very, very confident in our capital generation capability. We've been talking about the actions; the management team has taken over a number of years to position us where we are currently. I think what we wanted to do, and hopefully we provided information in the deck that gave you some real confidence about during different market cycles, under various scenarios, we have consistently delivered in that 90% plus cash generation. And so that historical perspective with the new capital light business gives us the really strong confidence in our ability to do that going forward. Now, I think you also asked about interest expense. So let me just kind of hit on that point, if I could, you'll recall so we had some hybrid debt, that hybrid debt, the interest on that hybrid debt was going to reset this month, and that resetting was going to take that interest expense number to over 8.5% or approximately 8.5% interest. So we felt it was really prudent to do something to try to minimize the impact of that very significant increase in interest expense. We had a facility available to us, that was put into place in 2015 for to really support a business in a different type of scenario. But we use that P-Cap facility, we will essentially issue senior debt that will have a 4% interest rate, replacing the hybrid debt that was going to be in the 8.5% interest rate, zip code. So that we think was really a prudent move to make sure that we were managing our expenses. I might also just observe that it doesn't change our outstanding debt at all, all we're doing is replacing the hybrid debt with this new senior debt. So there's no reduction of debt, there's no deployment of capital to reduce debt this quarter. It's really just the facility of funding the new debt, or funding the reduction with the new debt.

And maybe if I can John, if I can just add on as Don was talking about that the immediacy of the $20 million save and interest expense is important. But I think to me, the bigger voice over is our confidence in our 90% to 100%, free cash flow conversion, hopefully evidenced by our announcement of our intent to increase the dividend to give investors’ confidence in our ability to drive both commercial momentum, but really in our cash flow generation, and capital deployment.

Our next question comes from the line of Jimmy Bhullar with JPMorgan.

Hi. First, the question may be for Don or someone else on just if you could give us a little bit more color on the expenses this quarter. What exactly drove the uptick? And what gives you the confidence that they'll decline in future periods? Because I assume there should be some sort of level of consistency in expenses, but you're implying a significant decline in 2Q versus 1Q?

Yes, Jimmy, thank you for that question. So we always experience seasonal expenses. This quarter was obviously first quarter was no exception, but the magnitude of the increase was impacted by a number of things. So let me just kind of point two things that I think are important. One, we are growing our business, and we're proud of being in a position that we're growing our business, but that increased growth in the business also impacts the increase in the seasonality of the expenses. So a really good example would be AllianzGI, I mean, obviously, that's been a fantastic transaction for us. We're really excited about what it offers. But it did bring some increased seasonality to expenses in the first quarter of 2023, when compared to the first quarter of 2022. The other thing that happened this quarter is we're being very, very intentional about front loading are expenses that are focused on customers, both Christine and Rob, were talking about sort of our confidence in building the pipeline, where we get a confidence in building the pipeline, by being out in front of customers, and really marketing ourselves. So some of our expenses that we incurred this quarter were very intentional, so that we could gain confidence about what's going to happen in the remainder of 2023 and in 2024. In the materials that we provided in the earnings deck, there's guidance, then for the second quarter around both wealth solutions and investment management. So we were guiding that expenses would be about $25 million to $30 million less in the second quarter for wealth solutions, and about $15 million to $20 million less for the second quarter for investment management. You should assume that reduction will basically continue on through the remainder of the year, we probably could have said those reductions would be for the second quarter and beyond as opposed to what we've included in that. So I think you should assume that expenses will be reduced, significantly reduced in the second quarter, and then relatively flat for the remainder of the year.

Okay. And then go ahead.

I'm just going to ask you, do you have the follow up question, Jimmy.

Yes, I was just going to ask on the pipeline and asset management, so your comments have been positive and I think going forward, they're positive as well. But is there about, you had negative flows into institutional this quarter and I'm assuming part of that is just the environment overall, is there a possibility that given the uncertain environment that some of the sort of mandates do not fund, just trying to get an idea on your confidence in the 2% to 4% guidance for organic growth?

Thank you, Christine will take that.

Certainly, thank you. Yes, so let's first talk about what happened in the first quarter. Because so in the first quarter, when you look at institutional flows, they were negative. And in addition to the overall macroenvironment, we do have a bit of a unique situation that we've talked about, which we call the off ramp and the on ramp of international distribution, and let me explain is that a reasonable portion of our institutional outflows in the first quarter were related to existing clients in relationships that we had, that were either in Japan or Europe. So I think that we have this natural headwind coming from the evolution away from NNIP, if you will, is our strategic distribution partner to Allianz. And the thing with Allianz is that the on ramp is more likely to really manifest itself for new product when you think of the second half of ‘23, and certainly into 2024. So I'd call that sort of unique to Voya. But something that we expect, and it's built into our 2% to 4%, organic growth rate. But then beyond that, the confidence we have seen some slowdown in commercial real estate demand and production, it would be another headwind to institutional again, that factored into our institutional flows. But overall, you've seen, we've outperformed competitors, we're seeing increasing demand in our credit strategies, just given the attractiveness of the yield environment and the exceptional quality of what we deliver as well as when you think about our onboarded new strategies that we got from the AllianzGI transaction, a lot of potential there, I mean, just as a reference point, the income and growth franchise is formidable. And it is a five star morning rated funds within North America, just to give you a sense of the performance that particular strategy is delivering, which also goes to the strengths of some of our retail cash flows as well.

Our next question comes from the line of Andrew Kligerman with Credit Suisse.

Hey, good morning. First question is around the nice move in the dividend up to 2%. I'm curious as to what made you frame it at 2%, as opposed to 3% or 1.5%? Like, what was the thinking there? And then how are you going to think about the dividend going forward?

Yes, Andrew, good morning. And maybe I'll start and let Don follow on. I mean a part of it was getting it to a level that we believe put us more on equal footing with our peer companies and others in the sector, and also to a level that we believe would attract new investors really looking for value and growth. But let me ask, Don, to elaborate.

Yes, so I think that the backdrop and what we are trying to accomplish Heather is articulated that I think you then ask the question about what are we thinking about going forward. So we want to make sure our biases to have a competitive dividend. And we think that an increase to that 2% level gets us to that level, then what we want to do is make sure that we are appropriately increasing that dividend over time, but that, those increases need to be affordable and not put incremental stress on the organization. So we are going to fund future dividend increases in two ways, one by the natural growth of the firm. And then secondly, we're going to fund it by the capacity that we acquired, by reducing the share count through share repurchases. So we want to make sure that we are able to have a competitive dividend that grows over time, but that the increases in the dividend don't put undue stress on the organization. So we are going to fund it through organic growth, and we're going to fund it through a reduction in the number of shares that are outstanding.

Makes a lot of sense. And then you have some really good slides in the appendix. In particular, looking at the commercial loan portfolio and you've got an average weighted LTV of 45%, the commercial office looks like it's only 2% of that portfolio. I mean, just good numbers. But the one question I've been having, and this is even beyond Voya is, how accurate are these LTVs? I suspect you mark them at the end of the first quarter. But is there enough discovery in those portfolios to be really comfortable with those LTVs? I get that question a lot from clients. So I'm curious as to what Voya’s thinking is around that.

Yes, thanks, Andrew. Great question. And Christine will address it.

Yes, absolutely. So when you look at the LTVs for their commercial loan portfolio, you see 45%. Right. So very high quality, very competitive. Now to your question, as far as NII and external appraisals, we do not go out and get those on a regular basis. And if you take a look at our portfolio, you see it, it's a lot more diverse in terms of number of loans, we have no loan above $100 million. So think lots and lots of loans, very diversified, just isn't practical, be very expensive to go and get external ratings every year. So we do get them at the time of origination. We do get at a minimum annual cash flows and for office quarterly cash flows. And so the team is re underwriting internally, the loans with great vigor. So overall we feel really great about it, another thing to mention we do not include, we have a lot of amortizing loans. So when you think about that, relative to LTV, you're not capturing the fact that the properties are naturally delivering. And I would say about commercial real estate. The last thing I want to leave you with, I feel so confident about this is that 99% of our portfolio is debt. So think about no matter what your LTV, equity gets hit first, if a property goes dark, or something happens, and we are a debt lender. So I think the power of the story of our commercial real estate portfolio goes well beyond the statistics, when you think about where we are in the capital stack. And then I'm going to thank you for the question so much, I'm going to give the final plug, forgive me everyone on the call about our clients. When you manage assets for external clients, and remember, we have over 60 insurance companies that we manage assets for. We can't really disclose to you in a very clean way the performance of our private asset classes and what we're delivering, but no, we tell them, we eat our own cooking, we invest along beside them. And you really gain clients trust and momentum when the world gets rough. And we're a great partner, one more club, no delinquencies and our commercial real estate loan portfolio today. And so you can see when you look at Voya, and how we're delivering for the general account, I think that is the relationship we're building with our clients. And we are confident that that's going to pay dividends in market share and flows for years to come.

Our next question is coming from the line of Erik Bass with Autonomous Research.

Hi. Thank you. First one on your EPS outlook. In the starting point for your ‘21 to ‘24, EPS growth outlook moved down from $5.99 to $5.75. Given the impact of LDTI, but you're still guiding to a 12% to 17% growth CAGR. Is the movement and the starting point does have a material impact on what it implies for 2024 EPS. So should we now think about the higher end of the growth range as being more your goal and given the lower starting point?

Yes, so Erik, it's unfortunate that we have to deal with LDTI. And it's sort of a recasting prior periods, and then the measurements are from new numbers. So maybe if you just sort of allow me, let's focus sort of from here going forward, and we can give you some real confidence in how we feel about the business. But at the beginning of the year before the LDTI recast, we were guiding to that 12% to 17% EPS increase, and reconfirming it for that three year period as well. Nothing in our outlook around the absolute performance has changed. So our view around adjusted operating earnings that we were going to deliver in 2023 has not changed. Our view around the adjusted operating earnings that we were going to deliver in 2024 has not changed. Our view around the capital plan, repurchase of shares that we were going to do in 2023 has not changed. Our view around that in 2024 has not changed. So we feel really, really good about the underlying business. There's been some noise because of LDTI. And there's also a little bit of noise because of the warrants, you know that they expire this month. And one of the things that's happened is there is dilution as a result of sort of the warrant expiration, those were priced in the mid-40s. And so it's impacted by our stock price, you'll recall that we gave some sensitivities historically, a mid-60s stock price would have had about 7 million shares of dilution. A mid-70s share price has about 10 million shares of dilution, our share price has improved. We think that's really good. We think that's good for our investors. But it is having an impact because it's increasing the denominator in our EPS calculation. But as it relates to the core business, nothing has changed. We remain very confident in the guidance and forecasts that we provided at the beginning of the year.

Thank you. It's helpful color, and then maybe just asked about the benefits ratio outlook for the health business. Is that just I guess is your guidance to exceed or come in below the 70% to 73%? That just related to the strong 1Q experience? Or do you think margins are going to continue running favorable to expectations near term? And if so, what's driving that?

Yes, thanks for the question, Erik. Rob will take that.

No, the guide, the below what we would have expected is absolutely driven by what we saw on 1Q. I think if you just step back and look at the products. Just as a reminder, stop loss, we're going to every year we get to practice a lot underwriting and see what the experiences look like, the market, the competition in the market, all those things will put pressure on where the loss ratio ends up in the future. As we sit here today, obviously, great first quarter, we'll see how the rest of the year plays itself out. We feel good about the foundation of it. But there's nothing there that says okay, now we shouldn't think about for stop loss, in particular 77 bn to 80 bn, our long term view. That's just where we would continue to think about it at. In the life and disability world, and obviously, as a reminder, again, we don't keep the disability risk, we reinsure the bulk of that, from a life perspective again, I'd give you a similar answer. 77 to 80 is sort of what we think of as the right long term answer. First quarter, as we've experienced here, a bit on the higher end of that, or above 80. But typical of a more normalized life, mortality environment. Maybe typical is not exactly the right word. But as we think about the long term forward view, again, we still think where we play 77 to 80 makes sense, a little bit more nuanced on the supplemental health side of things, voluntary products, again, have performed well for us over the last handful of years. We've done a really good job maturing and growing that business. And continue to think that we will put upward momentum to the loss ratio, just as cases come up to renewal given that good experience, you'd expect there to be competition there. And then things that we're trying to do from a customer value perspective from a claims and claims integration process and trying to improve that and just make the usage of those benefits easier, simpler, for the end consumer is a big part of where we want to just continue to improve what we're doing in market and the value that those products provide. But yes, to come back to where you started. 1Q is going to be a driver as we think about the full year view, and then would expect it to revert back into the range that we established.

Our next questions come from the line of Joshua Shanker with Bank of America.

Yes. I just wanted to clarify that I'm sorry, joining the conference late, a lot of calls today. Jimmy was asking about the investment management expenses. And you talked about the Allianz frontload expense in the quarter is going down. [Inaudible] what were those expenses? And do we need to think about them in 1Q ‘24? Or are they one time in nature for the transaction?

Thanks, Josh. Don will start and Christine, offer some follow on.

Yes, so in our adjusted operating earnings, those would be really -- those are generally recurring expenses. That's sort of the onetime expenses related to both AllianzGI and the Benefitfocus acquisition are actually in the nonoperating expenses. So our base is bigger. Our base next year when you're comparing 1Q, 2024 to 1Q, 2023 that same increase in size will manifest itself. So the stuff around the integration and the acquisitions are below the line or in nonoperating, the stuff that relates to our normal operations are adjusted operating earnings.

And so we shouldn't anticipate the seasonality will be a recurring feature of your investment management results over time.

Right, correct.

Yes. Josh, this is Christine. And let me just add a little bit more color, if you will, to investment management specifically. And so just as Don covered certainly seasonal impacts, transactions, et cetera. But when we think about expenses, I just want you to know, I mean, we, it's rather reflect to say, front hands are firmly on the wheel. And what do I mean by this is that we continue to be very vigorous in managing expenses. And there are some expense synergies that have occurred as a result of the Allianz transaction in terms of where's the business scaled? Where can we consolidate some of the investment capabilities, and therefore reduce our overall investment staff? So we're working very hard, we continue to really evaluate products, where does it make sense given, we've gone from very domestic to now globally focused, to really streamline some of the products that we offer. So I just wanted you to know that we're affirming our operating margin target expansion, we're affirming our organic growth. And of course, a very important part of that story is also being very prudent with our expenses. And looking for opportunities there, as we continue to also free up capacity to put our money behind our highest growth strategies such as private markets.

Josh, maybe I'll just add one point, and then toss it back to Don for a second, we're right on track with where we expect it to be with our integrations both with AllianzGI as well as Benefitfocus, but I'll toss it to Don, just to give a little bit of a forward look on the integration costs.

Yes, so we talked about seasonal expenses in core operations those will be there. We had about $56 million, this is nonoperating expenses this quarter, primarily attributable to the closing of the Benefitfocus transaction, and integration of both Benefitfocus and AllianzGI. We would expect that next quarter that number would be less than half of the current number. So those sort of one off cost related to the integrations, those are and transaction closings, those will be reducing meaningfully, but the seasonal costs, they will recur annually.

Our next question comes from the line of Ryan Krueger with KBW.

Hey, thanks. Good morning. I had a question on spread income within. Well, I know you talked about that being flat in the second quarter. I guess in general, from here, should we think about it being pretty flat with additional upside from higher interest rates largely being passed through to your customers?

Yes. I think again, to just level set on the 1Q to 2Q, you've got that or heard that right. We'd expect to be in that zip code from a dollar of spread income. As we look forward there's certainly some implied view on what crediting rate movement will be in the future. And those are decisions we get to make when we have more information. We started the year with a move that we put into place, one, one, we're adding another move that will be effective for five, one. We're just as much as we can control what we can control around those decisions, but also making it a point in time where we've got better insight and understanding of where the market has tended to go and how our portfolio is behaving. And the movement of money in and out of the fixed account obviously plays a role in the decision making and competitor feedback and those sorts of things all get factored in. So look, I think we're trying to strike that balance of margin preservation and customer value, the age old thing to do and feel good about, again the movement from 1Q to 2Q is clear, will continue to share information and thinking as we have further calls in the future.

Our next question is come from the line of Tom Gallagher with Evercore.

Good morning. I just had a question on the investment side, and about capital allocation. If I look at your disclosure, the one thing that Voya stands out a little bit on is your allocation to LP and equities assuming most of that's private equity is on the high side, it's 6% of your total investment portfolio. I guess my question is this, to me, that probably made a lot of sense when rates were low. But when I consider the much higher capital charge in some cases north of 20% that you have for that asset class, and I believe your assumed return is 9%. And I compare it to what you can get on certain, let’s say relatively low risk, fixed income investments, where you can maybe get 6% or 7% today, it's just not that much of a spread. And you can get it with like a 2% to 3% capital charge. So my question, I'm sorry, for the long winded lead into the question. But when you think about that, does it make sense to pivot down and shrink the allocation to alternatives? Like right now, from a new money perspective, just considering that difference in risk charge relative to return?

We'll have Christine elaborate. But overall, we're actually very comfortable with our private allocation in the general account. Christine?

Yes, I mean, just taking a step back when you look at the percentage of investment grade assets that our overall portfolio has is it's incredibly strong when you think about the level of investment grade. And so 4% of the book, so let's talk about that, within private equity allocations certainly we have primary allocations, as well as secondary, highly diversified book, and you invest in this strategy. Number one, we're underweight relative to the industry. Number two, you invest for the long run and value creation. And so money is drawn down and deployed, not at one point in time, but over time, particularly when you think about Pomona that invest money for us on the secondary side. So again, it's diversification, and listen, there's just a pricing and adjustment in terms of where private asset classes priced relative to public, because public, so if you think about last year, duration sold off so quickly, but private asset classes demand value creation, access to great opportunities, as well as over time handily outperform typically public asset classes. So we don't see that is changing. So we're very comfortable, we have a very clean, good portfolio, high investment grade quality. And we were saying, and it filters into all the thoughts about capital planning scenario analysis, we just want to reaffirm our confidence that we are very happy with our asset allocation.

Okay, so no change to lower, the allocation to alternatives is what I hear, Christine, is that fair?

That's fair. I mean, I would say when you think of the context of the overall portfolio, I would almost put us generally, in terms of having dry powder overall, in terms of where we could deploy and this is a good thing. As an investor, you love going into cycles with a really clean balance sheet as an investor in Portfolio opportunities.

And that just my follow up, I know you were asked about commercial mortgage loans before, but that's kind of a tiny percent of your portfolio. The much larger exposure to CRE is on CMBS. And the one thing that I guess stands out a little bit for Voya, is you have more BBB, and I look at where spreads have gone in BBB and they flown out pretty wide. Just curious what your outlook is there? Is that something we should be watching for? Do you have any expectation of losses on that portfolio? Any help or perspective on that would be appreciated?

Yes, certainly. So you've got a couple really good questions embedded in there. So let me start off with the CMBS portfolio. So when you take a look at it, we've got on slide 33 in the presentation some detail for you so you can see what we really, we have, and you can see very strong investment quality now, when you think about BBB as a company, and what are our concerns there, I would say the BBB exposure that we have is predominantly in our credit portfolio, and it's very intentional, and it's, there's a real tilt to private credit in BBB's. And when you think about BBB’s overall, our BBB exposure, only a quarter of that would be towards BBB minus so think higher quality BBB. Why is this not concerning us when we're looking at our downgrade risk and capital management, we love BBB private credit, because you're going to get debt service coverage ratios, all kinds of covenant protection, I would tell you with our history, we've had better credit performance when the world gets dark on BBB's due to that covenant protection than a quality corporate because you want to be there first. Right? When the world gets dark and negotiate and you have a lot of way home. So overall, when we think about that, we're very confident with our overall level of risk. And within our CMBS portfolios, specifically, when you look at that, a lot of that is actually agency backed and we broke that out for you. So again, we view the portfolio overall as high quality, certainly you can have some idiosyncratic things that go bump in the night, whether it's in that portfolio or generally, but overall, we're very confident for where we stand.

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.

Looking ahead, we will continue to execute on our strategy, integrate our acquisitions, and focus on achieving our growth objectives. The focus on the needs of our customers and clients will drive our commercial momentum. And our continued prudent capital management, including our plans to increase our dividend yield, and resume share repurchases will also support our focus on creating further shareholder value. We look forward to updating you on our progress. Thank you and good day.