Voya Financial, Inc. (NYSE: VOYA), a U.S. provider of retirement income solutions, asset management, employee benefits and life insurance products, recently announced the acquisition of the U.S. equity and income investment teams Allianz Global Investors (“AGI”) fixed-line, professional customer service and sales, as well as ~$120 billion of assets under management. The transaction appears strategically and financially favorable as VOYA opportunistically adds investment management capabilities and distribution scale on accretive terms without sacrificing capital flexibility.
In the near term, the deal should also help VOYA balance EPS headwinds from any stock market weakness, providing a good tailwind to its EPS growth target of 12-17%. Having also taken steps to reduce P&L risks and improve its return profile through mergers and acquisitions, VOYA’s
Puts and Takes of the AGI Deal Announcement
According to VOYA’s press release, the definitive agreement with AGI will allow it to integrate approximately $120 billion of AGI’s U.S. assets in exchange for Allianz’s approximately 24% stake in the combined entity. Asset Management – consistent with the
According to VOYA, combined assets under management (“AUM”) will be ~$373 billion on a pro forma basis in Q1 2022, with the transaction expected to significantly diversify the investment management division’s AUMs. In particular, the deal will increase the non-US contribution to ~27% (from ~9% previously), with retail expansion to ~41% of AUM (from ~28% currently). By asset class, VOYA’s fixed income concentration will reduce to ~59% of AUM (from ~69% currently), with equities dropping to ~31% (from the current ~23% ), alternatives at ~10% (up from ~8% currently), and the remaining ~1% in money markets. Assuming there are no unforeseen regulatory hurdles, the deal is expected to close by the expected closing in July 2022.
A net positive financial impact
VOYA has guided a benchmark 6-8% “cash” EPS increase in 2023, although operating EPS profit is likely to be slightly lower (all things being equal) given the GAAP impact of the intangible amortization. The accretion target makes sense, in my view – AGI’s margins are higher, so VOYA’s investment margin profile will see an immediate increase to >30%. Additionally, the earnings boost comes on top of the 12-17% annual EPS growth range target provided at last year’s Investor Day, so upward revisions seem inevitable. – recall that at VOYA’s 2021 Investor Day, management had guided investment management margins of around 27% in 2022, improving ~1% pt per annum to ~29% in 2024. Finally, the transaction could also result in an increase in VOYA’s free cash flow conversion target range from 90% to 100%, as the investment management business typically experiences higher than average FCF conversions.
One of the main reasons for AGI’s higher margin profile is its higher commission rate on an AUM basis more geared towards equities and retail assets (compared to VOYA’s fixed income tilt) . While the margin differential is a bit closer than many expected following the MoU released last month, VOYA still has leverage to improve the margin. By direction, VOYA could derive 4-6% immediate margin improvement, bringing the overall margin profile to 30-32% (vs. ~26%). Much of the delta will come from operational efficiency, as VOYA can spread the overhead of acquired AGI assets/teams on a broader basis. Since VOYA will also pay for acquired AUMs using the combined entity’s equity, it will maintain its excess capital position and, by extension, the capital deployment option. Given the negotiations that took place during the second quarter of 2022, however, expect a temporary pause in share buybacks before an acceleration in the second half.
Cover the strategic bases
The assets acquired from AGI fit perfectly on paper – they further diversify VOYA’s base into equities, retail and non-US exposure. The acquired teams also have an excellent track record, generating >$20 billion in net inflows last year (equivalent to >20% organic growth) and even breaking even on fund flow since the start of the year. ‘year. In addition, the new structure adds capital flexibility as no down payment is required and allows VOYA to leverage Allianz’s global distribution (500 relationship managers in Europe/Asia-Pacific) through a partnership long-term. The most important part of the deal, however, is to limit downside risk – VOYA not only negotiated protections against legacy AGI litigation issues (i.e. the >$6 billion in penalties DOJ/SEC regulations for its “Structured Alpha” funds), but also has arrangements in place to mitigate post-transaction AUM revenue and attrition through early 2023.
Taking another positive step forward with the accretive AGI deal
With the addition of AGI’s approximately $120 billion assets under management on financially accretive terms, VOYA has once again shown its astonishing opportunism by adding investment management capabilities and international distribution through mergers and purchases. The move follows VOYA’s previous steps to de-risk its portfolio and improve its financial profile, more than justifying its