Voya Financial, Inc.

Good morning, ladies and gentlemen, and welcome to Voya's second quarter 2022 conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow a formal presentation. If anyone should require operator assistance during this conference, please press star zero on your telephone keypad. Please note that this conference is being recorded. I will now turn the conference over to our host, Hema Nguva, Senior Vice President, Head of Investor Relations. Thank you. You may begin.

Thank you and good morning. Welcome to VOIA Financial's second quarter 2022 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.voia.com or via the webcast. Turning to slide two, some of the comments made during this conference call may contain forward-looking statements within the meaning of federal securities law. I refer you to the slide for more information. We'll also be referring today to certain non-GAAP financial measures. GAAP reconciliations are available in our press release and financial supplement found on our website, investors.boyer.com. Joining me on the call are Rod Martin, our Chairman and Chief Executive Officer, Heather LaVallee, our President and Chief Executive Officer-elect, and Mike Smith, our Vice Chairman and Chief Financial Officer. After their prepared remarks, we'll take your questions. For the Q&A session, we have also invited Vice Chairman and Chief Growth Officer Charlie Nelson, SLS heads of our businesses, specifically Christine Herzeller, Investment Management, and Rob Grubka, Health Solutions. With that, let's turn to slide three as I turn the call over to Rod.

Good morning. Let's begin on slide four with some key themes. Our results during the second quarter reflect the continued execution of our strategy, and long-term growth plans. This resulted in a number of positive outcomes, including strong adjusted operating EPS, continued momentum across our businesses, as well as disciplined and opportunistic capital deployment. As a result, we generated second quarter adjusted operating EPS of $1.67. Excluding notable items, EPS grew 18% year over year. We're pleased with the strong year-over-year growth. This is a result of the diligent execution of our plans, strong relationships with our distribution partners, and a shared focus on client needs. Our client-centric focus can be seen in organic growth across our businesses. In Wealth Solutions, full-service recurring deposits for the trailing 12 months grew 11.2% compared with the prior year period. During the second quarter, we generated positive full-service net flows of $1 billion. In health solutions, annualized in-force premiums grew 9.3% compared with the prior year period. This was driven by growth across all product lines, including a 24% increase in voluntary. In investment management, we generated $559 million of positive net flows during the second quarter. Net flows over the last 12 months were nearly $10 billion, which represent organic growth of 4.6%. Voya is meeting the complex and increasing needs of our clients as they face challenges and changes in the macroeconomic environment. Despite inflationary pressures and volatility in both the equity and interest rate markets, Voya remains well-positioned. At a time when many are seeking help to navigate challenging economic times, both at home and in the workplace, our digital capabilities, insights, and focus on client needs enable Voya to remain a trusted partner to our customers. This, along with our continued focus and commitment to execution, has us well positioned to generate double-digit EPS growth in 2022. In addition to our commercial growth, we're excited about the additive inorganic growth that will result from our recently completed transaction with Allianz GI. This transaction is a great inorganic opportunity that will complement the already strong organic growth plans that we've shared with all of you. Specifically, it adds significant scale and diversified revenues to our asset management business. combining new investment capabilities with a major expansion of our international and domestic retail reach. It also provides global distribution for our existing asset management expertise and strategies with a leading international partner. Along with our continued investments in technologies and capabilities that will meet the broad health, wealth, and investment needs of our clients, This transaction enables us to drive even greater positive outcomes for our customers, our employees, and our shareholders. It will also provide financial benefits for Voya, including immediate cash accretion to the company's adjusted operating EPS, estimated at 6% to 8% for 2023. And it required no external financing or use of Voya's excess capital, fully aligning with our company's future flexibility and opportunities as we continue to remain focused on our long-term growth and EPS plans. Notably, this transaction was completed in just two short months. This is a terrific example of the hard work and dedication of our people. Thank you to everyone across Voya for your continued hard work and support. In addition to the revenue and EPS growth, we continue to demonstrate our focus on being good stewards of shareholder capital. During the second quarter, we deployed approximately $300 million in excess capital through a combination of share repurchases, debt redemption, and common stock dividends. This now brings our total excess capital deployed for the first half of 2022 to approximately $1 billion. Over the trailing 12 months, we've deployed $1.7 billion and concluded the quarter with approximately $700 million of excess capital. Moving forward, we will continue to be both disciplined and opportunistic with capital deployment. Turning to slide five, our focus on our brand and culture continue to differentiate Boya. We have once again earned several recognitions for our strong culture and commitment to clients. Recently, Voya earned recognition as a best place to work for disability inclusion for the fifth consecutive year. Voya earned a score of 100% on the 2022 Disability Equality Index. And in May, we once again celebrated Voya's National Days of Service. Voya employees volunteered more than 10,000 hours to numerous nonprofits across the country. Boya has been recognized as a top five retirement plan provider in the first ever National Association of Planned Advisors Advisor Choice Awards. And our company earned Delbar's ESG retirement plan certification along with a five-star rating for the second year in a row. The actions of our people and our company reflect the strength of our culture and how that carries through in all that we do. Turning to slide six. We announced last month our leadership succession plan with Heather Lavallee becoming our president and Voya's next CEO. As president, Heather has joined our board and is now overseeing all of our businesses. She has distinguished herself as an extraordinary executive focused on growth, innovation, and our culture. Working closely with me and our board and our entire management team, Heather has played a vital role in shaping and driving Voya's enterprise growth strategy and is well-prepared to lead its continued execution and evolution going forward. At the same time, I'm delighted to have the opportunity to continue as executive chairman through early 2024. It's been an honor and a privilege serving as Voya's CEO, and I'm both excited and optimistic about our company's growth opportunities and prospects. With that, Let me ask Heather to say a few words.

Heather? Thank you, Rod. Based on the performance of the great team we have at Voya, our company is well positioned for continued growth across each of our businesses as we deliver greater value for all of our stakeholders. We will do so through purposeful steps to continue to provide solutions that meet the growing needs of our clients and customers. The corporate responsibility that we demonstrate and the positive impact that we make in the communities in which we live and work. During my 14 years at Voya, I've had the opportunity to lead our health solutions business, as well as our wealth solutions business, and to work closely with our investment management team and enterprise leaders in shaping and driving Voya's growth strategy. Rod has clearly set the bar high for what success looks like at Voya, and our management team looks forward to building on Voya's strong momentum We remain committed to our strategy and the three-year growth plan that we shared with you at Investor Day last year. This includes delivering organic growth, discipline and opportunistic excess capital deployment, and strong EPS growth. Our strategy puts the needs of employers, employees, and intermediaries at the center of all that we do. We help employers optimize their workplace benefits and savings. We partner with intermediaries to work together to enable employees to make the right financial decisions. And we provide investment capabilities that meet the long-term needs of investors and retirement plan participants. I look forward to working closely with all of our talented people as we execute the strategy we have shared, advance our growth plans, and deliver greater outcomes for all of our stakeholders. With that, let me turn it over to Mike to provide you more details on our financial performance and results.

Thank you, Heather. The leadership team is excited to see you stepping into your new role and is confident Voya will continue to see great success under your leadership. Let's turn to our results on slide eight. Despite the ongoing macro headwinds facing our industry, we delivered strong results this quarter with adjusted operating earnings of $1.67 per share, This includes two notable items. First, $0.06 of net alternative and prepayment investment income below long-term expectations. And second, $0.03 of unfavorable DAC unlocking. Excluding these notable items, we grew our adjusted operating earnings per share by 18% year over year, despite the equity market headwinds. This result reflects the diversification of our revenue sources coupled with disciplined expense and capital management. We remain confident in achieving double-digit EPS growth in 2022 before the accretive impacts from Allianz GI. Second quarter gap net income of 64 million reflects strong operating earnings offset by an impairment on owned real estate, investment losses associated with higher rates and wider spreads, and the legal accrual related to businesses we have exited. Roughly half of the differences between gap net income and adjusted operating earnings impacted capital generation for the quarter. Moving to slide nine. Wealth Solutions continues to deliver strong earnings and operating margin given its diversified revenue streams. For second quarter, the business generated adjusted operating earnings of $186 million. Second quarter adjusted operating margin was at the top end of our target range of 34% to 36%. Net revenue, excluding notable items, has grown nearly 8% over the last 12 months. Our spread-based income is benefiting from the higher rate environment, largely offsetting the impact of equity markets on fee-based income. Third quarter spread income is expected to be slightly above Q1 levels, given investment income one-timers in the second quarter and higher credited interest next quarter. The continued earning strength of this business highlights the benefit of our diversified revenue mix as well as our proven ability to effectively manage spend. Turning to deposits and flows. Full-service recurring deposits grew by over 11% on a trailing 12-month basis as we continue to see favorable trends in employee and employer contributions across both corporate and tax-exempt markets. To the extent that inflation continues to drive higher wages, we should expect to see a benefit to recurring deposits given deferral rates off of higher salaries. Second quarter full-service net inflows were strong at $1 billion, driven by solid new plan sales and strong plan retention well above historical averages. This quarter, we generated positive net flows in both recordkeeping and stable value, with $224 million and $549 million of net inflows, respectively. Looking ahead, while we expect some moderation in flows relative to second quarter levels for the rest of the year, we are very pleased by the overall picture, which reflects continued strong plan sales and the likely return of plan retention to historical levels. Our wealth solutions business is well diversified across plan sizes, industries, and tax codes with a strong national distribution footprint. When we consider this, along with our leading brand and differentiated value proposition, we are confident we can continue to successfully navigate the current environment while positioning us for long-term success. Turning to slide 10. During the second quarter, Health Solutions once again saw meaningful growth in revenue, with net revenue excluding notables growing nearly 13% year-over-year on a trailing 12-month basis. In addition, we continue to deliver annualized in-force premium growth at the top end of our 7% to 10% target range, with second quarter in-force premiums 9.3% higher than the prior year quarter. Our continued momentum reflects growth across all product lines. Adjusted operating earnings were $47 million per second quarter, as strong revenue growth was partially offset by higher expenses related to the growth of the business. Margins remained within our targeted 27 to 33% range. Our total aggregate loss ratio was at the top end of our target range, driven by a higher group life loss ratio. Our second quarter group life loss ratio was elevated on an ex-COVID basis as we saw elevated non-COVID claims. This was primarily due to a higher prevalence of large claims. Taking a step back and looking at the entirety of the pandemic, Non-COVID mortality has been in line with our pricing expectations since the start of the pandemic. Overall, we remain confident in our pricing levels and will continue to be disciplined in our pricing decisions. Due to the sharp decline in U.S. COVID-related deaths, COVID claims were not material during the quarter and thus were not viewed as a notable item. COVID claims for the quarter were in line with expectations. Loss ratios on voluntary and stop loss were favorable and in line, respectively, demonstrating the value of diversification within the health business. Looking ahead, we remain confident in our ability to grow revenue and maintain margin, supported by diversified revenue and earnings streams, pricing discipline, and expense management. Moving to slide 11, investment management continues to grow AUM in privates and alternatives, improving our revenue yield and supporting our path to margin expansion. We expect the transformative Allianz GI acquisition, which we closed last week, to be an additional engine driving future growth in our investment management business. Through the new strategies we've added, the diversification of our revenues across international markets and in retail, and the global distribution capacity we can now access for Voya IM products. More on Allianz GI in a moment, but returning to the quarter's results, IM's trailing 12-month net revenue grew over 7% year-over-year on an ex-notables basis, with the strength in privates I just mentioned helping to offset equity and fixed income market volatility. Second quarter adjusted operating earnings were $40 million. This reflects continued action from management to drive expense efficiencies and translates to a trailing 12-month adjusted operating margin of of 25%, excluding notables. Turning to flows, we generated another quarter of net inflows at $559 million, driven by continued strength in institutional net flows as a result of private and alternative fund closings. This quarter's flows contributed to nearly $10 billion in net flows over the last 12 months, representing a 4.6% organic growth over that time. Looking ahead, While we see some near-term headwinds as we transition from existing international distribution channels to our new Allianz GI partnership, we remain quite bullish about our prospects. Investment performance remains strong across a broad array of fixed income strategies, with 89% of our fixed income funds outperforming on a 5- and 10-year basis. Before we turn to capital, I do want to give a brief update on our transaction with Allianz GI. We are very pleased to share that we have received consents and approvals for the transaction with respect to 95% of in-scope client assets. As a result, we have acquired approximately $93 billion of assets under management through the transaction, with most of the decline in AUM compared to the original $120 billion in scope, reflecting adverse market conditions over the second quarter. In addition, as we have previously described, we are protected against any AUM outflows for the balance of 2022 through the first quarter of 2023. We have also refreshed our projection of operating margin for the entire IM business to reflect macro pressures through the end of June. We now expect margins to be in the range of 29 to 31% in 2023 and grow to between 30 and 32% by 2024. for Voya Financial on a consolidated basis, continue to expect immediate 6% to 8% cash EPS accretion, with gap accretion more to the lower end of that range. Lower gap accretion relative to cash is due to $5 million to $10 million of annual amortization of an intangible emerging from the transaction. Yesterday's announcement about our acquisition of Check Asset Management is yet another example of an accretive inorganic opportunity that we've been able to execute on to help drive future growth in Voya IM. Check is a boutique private credit manager focused on middle market direct lending with several billion in committed capital in private funds. We view this as another example of executing on our investor day strategy to grow the contribution of private and alternative assets to revenue growth and margin expansion. We expect to close the acquisition of check asset management in the fourth quarter. While our IM business, like other asset managers, continues to see impacts from equity and fixed income market volatility, we are energized by the benefits of increased scale, revenue diversification, international distribution, and margin support that the Allianz GI transaction will deliver. This increased strength will complement continued growth in privates and alternatives, and effective expense management as primary drivers of future financial performance. Turning to slide 12, with the challenges in the equity market, capital management continues to be a key lever in ensuring we hit our EPS growth targets. Through the first half of the year, we have deployed approximately $1 billion of capital through share repurchases, debt extinguishment, and dividends. This contributed to the $1.7 billion of capital we've deployed over the past 12 months. In late June, we entered into a $250 million ASR, which we will complete in third quarter. In addition to share repurchases, we extinguished $22 million of debt and paid $20 million in common dividends. The second quarter financial leverage ratio was 36.9%, reflecting a decrease in AOCI due to an increase in rates and wider spreads. Despite this impact, a prolonged steady path of higher rates will continue to help short-run earnings with building long-run benefits, which is a clear credit positive for Voya. Moving forward, we will continue to balance debt extinguishment with share repurchase activity to achieve acceptable levels of financial leverage consistent with our targeted credit and financial strength ratings. Overall, our balance sheet and capital position remain strong. We have a well-diversified portfolio built to deliver attractive risk and capital-adjusted returns through the business cycle. Our ending excess capital position was approximately $700 million, reflecting capital generation of approximately $100 million during the quarter, with some offset due to the one-time net income impacts I mentioned earlier. Going forward, we remain confident in our projected 90% to 100% free cash flow conversion giving us continued flexibility as we look for opportunities to invest in the growth of our businesses. In summary, we are pleased with another quarter of strong earnings and positive commercial momentum as we make further progress in support of our long-term plan to drive organic growth. We continue to manage our capital the same way we always have, with an eye toward delivering shareholder value. And we are encouraged that the Allianz GI transaction will accelerate the organic growth our team is already driving, reaffirming our confidence as we look to the rest of 2022 and beyond. With that, I will turn the call back to the operator so that we can take your questions.

Thank you. And ladies and gentlemen, at this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press the star key followed by the number two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Once again, to ask a question, press star one on your telephone keypad. Our first question comes from Ryan Kruger with KBW. Please state your question.

Hi, thanks. Good morning. My first question was, could you comment a little bit more on your flow expectations in investment management, I guess, in the second half of the year and how to think about potential disruption within Allianz and the shift in the international distribution?

Ryan, good morning. It's Rod.

Christine, you want to start? Certainly. Thank you. So how to think about second half of the year flows? I would say what we see, the pipeline that we have in our core business of opportunities and unfunded wins continues to be strong. And as you know, certainly it's been a challenging environment year to date for asset managers generally, and yet we continue to deliver positive net cash flows, including this quarter. So very excited about that. Now, looking forward and how to think about AGI and some possible headwinds to our flows, I would say really is in the international business that we currently have. So as you know, we have a longstanding distribution partner, NNIP, which is now part of GSAM. And it's natural as far as new opportunity introductions and things that they normally do have slowed down. So think about this as as a bit of a ramp, right, where we have somewhat of an off-ramp with our existing distribution partnership and certainly a very strong on-ramp with AGI. So how to think about this? You know, the second half of the year, that part of our business a little less, you know, certain, if you will, than what we normally have, but what we see going forward, and we're so excited. So think about this as a point in time. But when we look at AGI today, We've already had conversations amongst distribution and product of what uses platforms to launch at the beginning of the year. We're doing training on our product. And so when you think about them, just their brand, their global reach, you know, they have 500 salespeople. They're number one in Taiwan. So, you know, number three in Japan. So really formidable market share in many, many countries. So again, we're super excited about the the growth possibilities and what we're going to be able to do on a strategic basis with their partnership.

Thanks. And quick follow-up. Could you help us think about the pro forma fee rate in investment management relative to the roughly 25 basis points it's been historically?

Sure. So on a pro forma basis with the new teams and the assets coming over, Think about it with that measure of not changing dramatically because essentially, you know, the calculation is revenues divided by AUM. And as part of the partnership with Allianz Global Investors, you know, we do have a revenue share on some of the existing products that are coming over. So how to think about the revenue yield or the margin expansion going forward? You know, I would say, number one, the strategies or the teams and the assets that they acquire are when you look at sort of the fund level basis, they are higher than the existing basis points of assets under management. So a way to think about it is as we're already introducing them to our institutional, our consultant relationships here in North America, we're already in conversation about new capabilities of mutual funds to launch that our intermediary distribution can really get behind. When you think about it in that way, the basis points of those assets are higher, so that coupled with our focus and strength in private asset classes, which tend to garner higher fees. Think about us, Ryan, on a path to expand the basis points of assets under management, and one of the key things we're focusing on, top line growth as well, expense management. A lot of ways and a lot of energy behind the margin expansion that we're going to deliver in the months and quarters to come.

Thank you. Our next question comes from Tom Gallagher with Evercore ISI. Please go ahead.

Thanks. First question is, can you talk about the sustainability of the earnings run rate in wealth, whether there were any one-time benefits to baseline net investment income? And if so, how much would you expect that to fade as we roll into 3Q and beyond? Sure, Tom.

Heather will begin.

Good morning, Tom, and thank you for the question. So as you heard Mike talk about in his comments, we do expect there were some one-time items in the investment income in the quarter that we don't expect to repeat in the third quarter. However, when you look at the trend in investment spread revenue over the last several quarters, we have absolutely benefited from the higher, you know, the increase in rates. And we expect that will continue going forward. Now, one of the other items that you saw in the second quarter and that we often see in volatile markets is that we did see an increase in transfers from variable to fixed from our participants. And that is something that also had some positive in revenue that we would expect to continue because you're just basically seeing higher general account asset base. So going forward, we expect that we're going to continue to see some tailwinds from the rise in rates. And the other thing that I would point out, Tom, is Avoya, and particularly within Wealth Solutions, we're really the beneficiaries of diversification around business mix as well as different sources of revenue. So here we've seen some nice growth in the spread income. We have also diversification in terms of fee, participant, transaction-based revenue. And to your point about sustainability, we've also demonstrated that we're very good operators in terms of expense management to be able to maintain our operating margin of 34% to 36%. So all totaled, we think that while there are just one-time items here, we expect strong momentum in revenue going forward.

Thanks, Heather. Anything you can give us more specifically? Are we looking at a $10 or $15 million step down in baseline NII, you know, if you're able to just quantify the level of the favorability?

Yeah, Tom, I'll take that. Thanks for the question. I think if you think of it in terms of 3Q spread being a little bit higher than the 1Q investment spread, I think that'll be the best way to get at it. Credited interest will be a little higher next quarter. because of A, conditions, and B, the length of the quarter. And as I said, as Heather was saying, there were a couple of one-time items in the investment yield that will not repeat or we don't expect them to repeat.

Thank you. Our next question comes from John Barnage with Piper Sandler. Please state your question.

Thank you very much for the opportunity. My question's on withdrawal activity and behavior. Given the market volatility, I was somewhat surprised that Wealth Solutions didn't really see an increased withdrawal activity. Is it one of these things that, given that the market volatility is being driven by inflationary concerns, that you're actually seeing your institutional business partners continue to try and save more?

John, happy to, Heather, happy to take your question. So there are a couple of factors that are really driving participant behavior. And we see this both showing up in terms of flows as well as recurring deposits. So if I kind of take a macro step and look at participant behavior, I mentioned first the fact that in the market volatility, we saw greater transfers from variable to fixed. So there's a little bit of that flight to conservative investment. But in terms of participant behavior, we are seeing the benefits of both inflation and higher wage growth within the wealth solutions business. And what do I mean by that is specifically we saw higher employer contributions. That is something, a trend we have continued as we're seeing the war on talent continue. And we also saw increased savings rates from our participants, both in terms of their actual contribution rates and the increase in the number of net participant savings. So absolutely seeing some positive behaviors there. One of the other things that you mentioned about withdrawals, and we have not necessarily seen an increase in withdrawal activity from participants. If anything, participants are really staying the course and generating good savings behaviors. So all totaled, we have not seen any type of a negative impact on participant behavior within the wealth solutions business, but really just benefiting from some of those tailwinds in the macro market I mentioned.

John, I'm going to ask Charlie to just add a little more dimension to that also. Thank you, Heather.

Yeah, thanks, Rod and Heather. You know, we've been very pleased with our growth office sales and retention effort in the wealth area in particular. The value prop is very strong and resonating, and the brand is strong. And how we see the brand resonating in the market is in our strong retention numbers. We've had very, very strong sales retention of our business in the wealth side. On the other side of that though, certainly market churn is down. In other words, churn being what employers are changing from provider A to provider B. But that's where I see our brand resonating and being strong because in difficult times, as we saw even in COVID, our brand rang strong and helped in a lot of ways. So as we go through recessionary times, I think our brand will be a key part to help our retention as well as our sales. And we're seeing that right now. Year to date, our plan sales are up quite significantly year to date, year over year. But they've been even down with the market as the equity markets impacted that. And we see very strong RFP activity. And that makes us feel good about, you know, the latter part of this year and going into next year because, in particular, we've got double-digit percentage of new plans and takeover plans in the process of implementation. which will help us go through the third and fourth quarter. Now, I would note that the equity market activity is going to mute some of that, but we also think that that will be some fuel for future growth as the equity markets rebound in the future. So we feel good about both the activity, our retention in the market, as we drive towards strong revenue growth and achieving our target margins within, in particular, the wealth business. Thank you very much.

Best of luck on the quarter end. Thank you, Jim.

Our next question comes from Alex Scott with Goldman Sachs. Please state your question.

Hi. Good morning. The first one I had is on expenses. You touched on it some in the remarks already, but I just wanted to see if there was any additional commentary specifically for wealth solutions that you could provide. I mean, just Given the combination of top line pressure from AUM and inflationary pressure on expenses, I was expecting that similar to a lot of the asset managers, we've seen that there'd be a little more margin pressure. Could you give us color around some of the things you're doing to mitigate it? Were there any one-time items in the quarter? Anything else we should note?

Alex, it's Heather. Thank you for the question. Second quarter expenses and wealth were favorable to first quarter really due to some payroll seasonality and there were some favorable timing benefits in the quarter that we don't necessarily expect to continue going forward. However, we've often pointed to in a macro environment we continue to be good operators and very disciplined in our expense management which you should expect to see us continue going into the second half of the year. We continue to be very balanced in both investing in our businesses to support growth, both in terms of technology to drive innovation and really support some of that brand and the differentiation of the value proposition that Charlie talked about, as well as investing in our people to make sure that we are providing the service levels and the commitments that we make to our customers. For us, it really is focusing in on doing what is needed to make sure we maintain the operating margin guidance of 34% to 36%, and we will continue to be good stewards of expense management going forward.

Got it. Thank you. And the second question I had is on the stop-loss business within health solutions. Just noticing that the growth is slowing down to a greater degree, I know this can be a little cyclical too. Can you just describe, you know, what you're seeing that's causing you to dial back there and, you know, if we should expect any impact to earnings as we think through the next handful of quarters?

Well, yeah, thanks, Alex. So I stop loss sort of do a little bit of playback to last quarter. We talked about, you know, strong sales on the top line side of things a little bit different than the, retention story across both the health and wealth business where we really benefited in most of our product areas. Stop-loss was a little bit different in the renewal season. For 1.1, it was just, you know, a little bit more competitive than it had been the previous few years. You know, as we like to talk about being disciplined on pricing in that business, you got to know when to walk away. And so we didn't, you know, fight tooth and nail for everything that we were trying to renew. But, again, as I think about the forward path from here, from a growth perspective, you know, still a lot of confidence in what we're doing in that space. As Charlie was alluding to, RFP activity, I'd say that story is the same in the health business. In particular with stop loss, we feel good about what we're going to do with 7-1, which is obviously we'll talk about next quarter, so we've got good eyes on what that looks like. and feel like we're going to get that growing as we think about moving forward. We talked at Investor Day about stretching down market a bit across the business. We've been pretty consistent with our focus in middle market and up. We see opportunity and just growth in the stop-loss market that's unique to it. We're a little bit different of smaller employers continuing to seek out self-funding of their health risk. And so there's work underway and spend underway to invest in broadening our capabilities there and, again, contribute to growth as we look forward. But, again, overall confidence in that space and a little bit, you know, episodic, I would say, on what we saw this last 1-1 cycle is driving to your question.

Thank you. Our next question comes from Nidal Deli with Morgan Stanley. Please state your question.

Great. Thanks. Good morning. I wanted to ask a couple of questions about capital. First, on financial leverage, it looks to be a little on the high side. Does that lead you to consider potentially allocating more of your excess capital to deployments to debt reduction going forward? Also, you have been drawing down your excess capital. Should we expect further drawdown, or does it perhaps make sense to hold on to a little higher buffer given the uncertain environment?

Nigel, thanks for the question. This is Mike. Maybe we'll start with just the leverage ratio and make sure it's clear that the recent increase in the leverage ratio that we report includes AOCI in the denominator, and given the increase in rates and the widening of spreads that we saw effective at the end of the quarter, that drove almost all of the increase in the leverage ratio. The important thing to remember, though, is that improved interest rates, increased interest rates, and wider spreads, and we just talked about this earlier with the wealth business, is unquestionably a long-term positive from a credit perspective for Voya. So we enter the quarter in a position of strength. We've got solid excess capital. We've got an improving economic picture from an interest rate perspective. And so we feel very good about where we are. As it relates to capital management and allocation, nothing is changing as a result of the change in environment. We remain very focused on shareholder value and driving that. We talked, both Rod and I mentioned the amount of share repurchase we've done over the last 12 months and for the balance of so far in 2022. That continues to be a key focus of ours. As we look ahead, one of the things we've said consistently over the last couple of years now is that as we buy back shares, we will have to attend to debt, and we will buy down debt in roughly proportionate to the share repurchase. And you think of that as in the neighborhood of 30%. So very tactically, in the third quarter, given that we did $250 million in ASR at the end of 2Q, and we did $22 million of debt extinguishment in 2Q. We will likely lean in a bit on debt extinguishment in the third quarter just to catch up, if you will. So that won't be dollar for dollar or 30 cents for every dollar. It'll be a little bit lumpy. There are tactical factors that affect when you can do debt repurchase and so on. So That said, though, no change in our posture. We're very focused on the use of share repurchase as a lever to improve EPS growth. We've, I think, demonstrated that consistently. Second quarter was another example of us leaning in when share price gave us an opportunity, driven by the overall market conditions.

That's where I think we're going. Rod, I just had one piece. The combination of what you're hearing from the team, is again leading to our confidence in achieving the North Star of 12 to 17% EPS growth rate. We signaled at the end of Q1 double digit growth. We're reaffirming that when you add the AGI transaction to that, we've got a great deal of confidence in spite of the market based on market conditions that we can see today that we will be on a path and a track to accomplish that objective. And I think when you step back and look at the marketplace and the levers and the controllables that we have, it's a very good outcome for our shareholders.

That's great. Thanks.

Our next question. You did ask about the excess and the buffer. I apologize. I need to come back to that. No change there either. We continue to believe that excess is excess. And so if there is a good use for it, we will put it to use. We remain pretty sanguine and confident in the credit position that we're seeing in the marketplace in our portfolio. That would be the sort of bellwether to keep an eye on to the extent that that view starts to change. That would be a time to potentially pull back. But we're not seeing anything at this point that would cause us to do that. Sorry for that. Thanks.

Our next question comes from Elise Greenspan with Wells Fargo. Please go ahead.

Hi, thanks. Good morning. My first question, you guys mentioned some large losses impacting the group life loss ratio in health. Can you talk about how you think about your outlook for the elevated non-COVID claims for the remainder of the year? And as you look forward to your annual assumption review, do you expect any mortality-related impacts to have a one-time or ongoing impact on the health segment?

Rob will start, and then Mike will jump in also.

Yeah, thanks, Elise. Yeah, so as Mike alluded to, severity was the driving explanation around the experience in the quarter. I'll say a bit more on that. So within the business way, we sort of sliced the data, which we've all gotten really good at across the industry over the last couple years on life experience really boiled down to severity and so think about claims in excess of 250,000 which in you know the workplace market is those are sizable you know on average you'd think about something in the 40 to 50 thousand range is sort of being a typical average severity within the business and we saw about 30% more claims activity in that larger part of the spectrum of benefits and so you know, as we peel that back, maybe that doesn't sound dramatic, but it drives up the average sufficiently such that you saw the impact that we're getting there. That was a predominant driver of the miss. As we think about things moving forward, and we've, you know, tried to make it very clear that what we're thinking about from a margin perspective and where we expect loss ratios to end up from a trailing 12-month perspective for the year, we feel like we're going to still be within range. So we're confident on that based on what we know here today. We'll obviously continue to monitor it closely and, you know, be on top of the experience that we're seeing. But we feel good about the margin that we're achieving as we look forward and have a lot of confidence in continuing to hit what we laid out at investor day. As Rod and others have said, the growth story is incredibly strong, given what we've been through the last couple years and we continue to post it. And then it's about the discipline from a pricing perspective, which I feel really good about.

Thank you. We're going to add on the second part of the question.

Could you repeat the second part, Elise, please? Sorry.

Yeah, the second part was just as you guys look forward to the annual assumption review, are you expecting any mortality-related impacts to have a one-time or ongoing impact on the health segment?

No. I mean, nothing material would come from that. And even more broadly, I think our assumption review process should be just given the nature of the changes we've made to our business portfolio, Certainly on the ongoing business, you should expect that to be pretty benign. It won't be zero, but it's not going to be anything like some of the numbers that you can see with peers or with us way back in the past. There could be some noise on the reinsured portion of the life business that we've exited, but that's a non-cash accounting kind of impact and nothing that I think should cause concern for investors.

Thanks, and then my follow-up, Heather, as you take the reins, in addition to executing on the three-year plan, can you just tell us what your largest strategic priorities are or where you would like to focus your energy to drive change at Voya?

Good morning, Elise. Thanks for the question. And I'll give you an answer is really no changes. I've had the benefit, as Roz mentioned, of being part of this management team for 14 years. helped to co-create our Investor Day strategy we shared last fall. Very, very proud to lead a purpose-driven organization like Voya that is just, we have so much talented and diverse leaders across our organization who are aligned on the strategy we set out. So really my priorities as we move forward are executing on our growth strategy that we shared at Investor Day, continuing to be balanced and disciplined in how we manage capital, advancing our culture and continuing on the legacy that Rod has built over the last decade that our teams are unbelievably proud to showcase every day and that has become a differentiator for us, not only in our businesses, but just in terms of how we show up in our communities. And the last piece, Elise, is just that reminder that EPS will continue to be the North Star for us going forward.

Thank you. Our next question comes from Andrew Kligerman with Credit Suisse. Please state your question.

Hey, good morning. First on health solutions, the administrative expenses look a little elevated in the last few quarters. Could you provide a little color on that and what we should think about going forward?

Yeah, sure. Thanks, Andrew. So on the expense side, You know, we obviously highlight the growth in the business. That's a big part of the driver. Keep in mind also that the benefit strategies acquisition happened sort of 7-1 a year ago. And so when you start looking at the numbers, keep that in mind. That's a few million from a quarterly perspective that will show up there. And, you know, when you look at 1Q to 2Q, it did what we guide the market towards from a perspective of coming down because of seasonality of the numbers. As we think about the next couple quarters, it'll be in and around where we're at today. You know, obviously just when we think about the targets that we set, the margin expectations that we set, we're firmly on track to deliver what we expected to that supports the guidance that we gave you from a margin standpoint. So hopefully that's helpful to your question.

That's definitely very helpful. And maybe, Mike, you've closed out the Allianz transaction in investment management. Any thoughts in the other business about activity there for M&A?

Let me jump in. It's Rod. By way of example, we announced a small transaction just yesterday that Mike spoke about on the call. And if I can just go back to kind of the broad guidance that we've given, we're going to continue to first organically invest in our businesses, as Mike and I and Heather and the business leaders have talked about. And we remain open to things that would be additive from a capability perspective and from enhancing the customer experience and the intermediary experience that we go through, but we're going to measure that against, as we have for a decade, the share repurchase and stewardship of the capital that we've done. So the areas that we talked about at Investor Day that we've continued to review have not changed, and the discipline and approach that we're going to take co-equally has not changed. That said, we're proud of what we just announced with Allianz and the contribution that that's going to make, which gives us a very high level of confidence in the 12% to 17% APS growth, combination of organic and inorganic growth. And I think it's demonstrating to the market that we have the ability to both source and execute on a timely basis those tools and capabilities or properties that add value in pursuing, again, that outcome.

Thank you. Our next question comes from Eric Bass with Autonomous Research. Please, to your question.

Hi, thank you. I want to come back to the international sales opportunity and the HEI partnership. I was just hoping to see if there's any way to gauge how big this opportunity could be over time, and maybe it'd be helpful to think of it in context of how big international sales have been historically, and is it right to think the AGI sort of distribution pipes being larger than what you had historically through NNIP?

I'm going to throw it to Christine, Eric, but if we were on a Zoom call, you'd see a big smile on my face. It's huge. And we've got a significant footprint, as Christine has talked about, to partner with and a partner that's fully aligned with both are and their ambitions. But Christine?

Yeah, thank you, Rod, and thank you, Eric, for the question. So how to gauge it? So let me just start with, you know, when we're looking at projections and we're talking about margin expansion and everything, you know, what are in those assumptions and what aren't in those assumptions? And that's where I get really, really excited is You know, we basically were modeling, you know, continuing to distribute the AGI-US teams that we've just added to Voya and continuing to distribute those globally. So that was kind of the assumption. So when you start to think about, well, where is some of the upside? You know, certainly the upside is pretty tremendous in a couple of key ways. And So when you think about their international distribution footprint, with just Allianz's overall relationships with banks and intermediaries, it's just an incredible credibility and door opener for our product lineup. And one of the things that they're very excited about as well is is that within North America, they didn't really have the scale, if you will, of global fixed income that we delivered to them, as well as some of our capabilities like private credit. So think about the opportunities to really leverage, you know, that top, you know, global brand recognition and partner both in Europe and Asia with, with credit, with some of our equity strategies as well, such as machine learning, which has just tremendous performance. So overall, I would say we couldn't be more excited. We're in the background really working with them about prioritizing product launches, starting to educate them in our strategies. And one final thing that also isn't in the model per se is that, Seth, we will be representing or distributing their Allianz Capital Partner private strategies in North America and Canada. So they have some capabilities such as infrastructure debt that we think are really going to resonate with our insurance clients. So, again, we just see a lot of opportunities here. And so, again, as Rod said, not only does Rod have a smile on his face, if you could see him, hopefully you can hear the smile in my voice of just the energy that of how we just truly could not have picked a better global partner to really accelerate our international growth.

Thank you. That's a really helpful caller. And then just one quick one. Do you have any view on kind of what you'd expect for alternatives returns in the second half of the year?

Eric, thanks for the question. So just as a refresher, we were asked coming into this quarter, second quarter, what our expectations would be And we range bound that as minus 3% to plus 3%. And we came in roughly 2%, give or take. So, you know, while I would not express enormous confidence in our ability to predict how alternatives will perform, based on our best visibility today, we do think third quarter will be not as good as second. We're currently bounding that at 0% on the upper end to minus 6% on the lower end. That's the total return in the quarter. It's not an annualized number or anything like that. So think of that as anywhere from no gain on the alternatives, which would still be below our expectations, to a potential loss of $100 million on the alternatives. Now, that all said, and we put that into context, right, First, think about that in the context of overall earnings and capital generation. That would offset a lot of the earnings but not all, all else being equal in terms of our expectations. So we would still be able to generate capital in the quarter barring some other event. Second, and we did add this in the back of the analyst presentation, I'm sure you've noticed it, just a historical perspective on our alternatives portfolio. Since IPO, we've earned over 14% on the alternatives. And so while there is quarter-to-quarter volatility, we think our shareholders have been very well served, and our policyholders and customers too, by our ability to generate those kind of returns. So we're very pleased with the overall. We're not pleased with a tough quarter, but pleased with the overall investment. We recognize that comes with it, and we're happy with where we are.

Thank you. And that's all the time we have for questions today. I'll turn the floor back to management for any closing remarks.

Thank you. Our success continues to reflect the purposeful decisions that we've made as a company, as well as the commitment and dedication of our people. As we look forward, we remain confident in our long-term strategy and will continue to execute on a number of organic capital and margin initiatives to achieve our plans. At the same time, We're excited about the additive inorganic growth that will result from our recently completed transaction with Allianz GI. This transaction fully aligns with our company's focus on growth and delivering greater value for all of our stakeholders. We look forward to updating you on our progress. Thank you, and good day.

Thank you. This concludes today's conference. All parties may disconnect. Have a great day.