Voya Financial (NYSE:VOYA) Q2 2020 Earnings Call

0:01 Good morning and welcome to the VOYA Financial second quarter 2020 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. To withdraw your question, please press star two. Participants are limited to one question and one follow-up only. Please note this event is being recorded. I would now like to turn the conference over to Michael Katz, Senior Vice President of Investor Relations. Please go ahead.

0:48 Thank you and good morning. Welcome to Voya Financial's second quarter 2020 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 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. This includes potential impacts related to COVID-19. I refer you to this slide for more information. We will also be referring today to certain non-GAAP financial measures.

1:34 GAAP reconciliations are available in our press release and financial supplement found on our website, investors.ca.com. Joining me on the call are Rod Martin, FOIA Financial's Chairman and Chief Executive Officer, as well as Mike Smith, FOIA's Chief Financial Officer. After their prepared remarks, we will take your questions. For that Q&A session, we have also invited the heads of our businesses, specifically Charlie Nelson, Retirement, Christine Hertzellers, Investment Management, and Rob Gruka, Employee Benefits. With that, let's turn to slide three, as I would like to turn the call over to Rod.

2:22 Good morning.

2:24 Before we begin, I want to recognize Boya board member Barry Griswold, who passed away on June 5th for his significant contributions to our board. Barry, who was 71, joined Boya's board of directors as part of our IPO in 2013, bringing with him an extraordinary reputation in the financial services industry, which he established over four decades, including serving as chairman and CEO of Principal Financial Group. Barry was a passionate proponent Thank you. Let's begin on slide four. As COVID-19 evolves, our team continues to closely monitor the situation across the country and here at Voya. We hope that everyone participating in this call and your families are safe and healthy.

3:43 Our commitment to protecting our employees and their loved ones and our customers remains our top priority. Our management team is extremely proud of the dedication and commitment demonstrated by our 6,000 employees They have enabled Voya to remain open for business while more than 95% of our people are working remotely. As we shared with you during our last call, we've also taken action to support our customers and clients and our communities. This included being the first major retirement company to waive fees in response to the CARES Act and providing financial counseling and educational resources for customers impacted by COVID-19 and granting free access to our financial advisors.

4:34 We will continue to take appropriate actions to support our employees, customers and communities as the COVID-19 situation evolves. Turning to slide five, I want to address the important subject of racial injustice. As we have shared on previous earnings calls, diversity, inclusion, and equality are foundational elements of the Voya culture. Internally, we have actively engaged with our employees at all levels of the organization. We have hosted employee open forum discussions, conducted focus groups, and created a video series that featured Voya leaders sharing their thoughts and personal experiences with racial injustice.

5:21 The response to our video series was so positive that we shared it externally on social media where it's been viewed more than 20,000 times. We're also partnering with organizations such as the CEO Action for Diversity and Inclusion and the Ethisphere Institute to help drive meaningful change. At a time when the societal challenges can seem daunting, we have an obligation to help and we will. Let's move to slide six in our key themes. We have navigated this year in a position of strength as a result of the purposeful strategic decisions that we made to simplify our company and to streamline our businesses. On a normalized basis, our second quarter EPS was $1.09.

6:15 We saw solid results during the quarter. We continue to see demand for our products and services Thank you for joining us. and are close to finalizing the sale of the individual life in our legacy annuity businesses. We continue to make great progress with Resolution Life and our regulators, giving us confidence that we will close the transaction in the third quarter.

7:06 We expect to generate approximately $1.5 billion of deployable capital from the transaction. We also continue to deliver on the cost savings that we previously announced. We have now achieved the $250 million in savings that we were targeting by year-end 2020. We expect further savings and have a strong track record in managing spend, which gives us momentum as we begin to address the stranded costs associated with the sale of individual life. Finally, our balance sheet and capital position remain strong. We had approximately $668 million of excess capital as of June 30.

7:55 And while we have paused our share repurchases earlier this year, we feel good about our capital strength, and we will continue to closely monitor developments through the third quarter. We also maintained our dividend at 15 cents a share for the second quarter. Turning to slide seven. As we have shared with you previously, our culture and the character of our brand, our commitment to corporate responsibility, and our leading ESG practices are differentiators for our company. We regularly share this slide with investors to highlight our ongoing commitment to ESG. A recent example of this commitment is the comment letter that we sent to the Department of Labor concerning the DOL's proposed amendments Thank you very much.

9:12 Recent Voya research found that more than 76% of individuals felt it was important for their employer to apply ESG principles to workplace benefits, and 60% would likely contribute more to an ESG-aligned retirement plan if it were available. Turning to slide eight. In recognition of our ESG efforts, for the third year, Voya has maintained its listing on the FTSE for Good Index. This index series is derived from the FTSE Global Index Series and is a tool for investors seeking to invest in companies that demonstrate good, sustainable practices.

10:00 Also, for the third year in a row, Voya was honored as a Best Place to Work for Disability Inclusion on the Disability Equality Index. Our brand marketing efforts also earned Thank you, Rod. Let's turn to our financial results on slide 10. We delivered normalized after-tax adjusted operating earnings of $1.09 per share in the second quarter of 2020.

10:41 This excludes 5 cents of favorable DAC, VOBA, and other intangibles unlocking. 79 cents of prepayment and alternative income below our long-term expectations. The majority of our alternatives portfolio is marked to market on a quarter lag and was impacted by first quarter equity market performance. We expect to see a meaningful third quarter recovery based on the second quarter equity market rebound. I will discuss our alternative results in more detail in a few minutes. 20 cents of stranded costs associated with the individual life and other closed blocks. We will continue to normalize for these stranded costs until the close of the life transaction.

11:27 We have confidence the transaction will be closed by the end of the third quarter. On a reported basis, adjusted operating earnings were 15 cents per share for the quarter. Our second quarter gap net loss was $71 million. This reflects favorable results for our stable value block in retirement, which partly reversed the gap loss experienced in the first quarter. An update of the estimated loss on sale related to our individual life transaction. We continue to expect a gain at close that will result in a total gap loss on sale at the lower end We also continue to expect total deployable capital of approximately $1.5 billion from the transaction.

12:21 As a reminder, GapNet income also includes individual life earnings, as it is a discontinued operation. Individual life experienced unfavorable mortality this quarter, partly driven by COVID-related losses. Going forward, we expect a $1 to $3 million impact for every incremental 10,000 total U.S. population deaths until we close. Moving to slide 11. Retirement delivered $28 million of adjusted operating earnings in the second quarter, excluding unlocking, and trailing 12-month return on capital was 10.9%. As I mentioned before, first quarter equity markets negatively impacted alternative income, which was below long-term expectations by $92 million.

13:12 Favorable investment spread year over year was offset by lower fee income, which was affected by several items, including lower suite fee revenues within our retail wealth management business due to the level of short-term interest rates, which we highlighted last quarter. A roughly $6 million contra-revenue accrual associated with our record-keeping business that we do not expect to recur, and the waiver of certain fees associated with hardship distributions and loans. By waiving these fees, we continue to support plan sponsors and help participants navigate the financial challenges presented by COVID-19. Administrative expenses were higher year over year due to illegal accrual, Increased spend to onboard additional plans and higher allocated expenses, which we mentioned last quarter. Offsetting this increased allocation is a benefit in the corporate segment. Overall, Voya's spend is in line with our expectations.

14:16 For retirement, we now expect our full-year administrative expenses to be in the range of $840 to $850 million. Turning to deposits and flows. First quarter full service recurring deposits grew by 10.4% on a trailing 12-month basis, in line with our 10-12% recurring deposit growth goal. Full service recurring deposit growth was driven by an increase in plans. Growth in employer and employee contributions began to slow in the quarter, though contributions exceeded second quarter 2019 levels. Our expectation is for second half 2020 recurring deposits to be generally in line with second half of 2019.

15:07 Plan growth is expected to be offset by slowing employer and employee contributions through the balance of 2020. As a consequence, we now expect full year 2020 recurring deposits to grow between 3% to 6%. Net flows for the quarter were $73 million for our full-service business, reflecting $616 million of corporate market inflows offset by $543 million of tax-exempt outflows. Tax-exempt net flows include a large client outflow of approximately $700 million, which we mentioned last quarter. The majority of that plan's assets were in higher guaranteed interest rate accounts.

15:53 Stable value net flows were positive for the second consecutive quarter at $362 million following a record first quarter. We also generated $4.5 billion of record keeping net inflows in the quarter. Given the rebound in equity markets, we expect full year record keeping net flows of above $20 billion. With this, we expect to add over 350,000 additional record keeping participants in the year. representing a more than 10% increase year over year. As a reminder, record keeping fees are more closely tied to the number of participants than to AUA. Our retirement business is well diversified across plan sizes, industries, and tax codes with a balanced national footprint.

16:44 This will help us navigate the current environment and positions us for long-term success. On slide 12, Inventive management delivered $20 million of adjusted operating earnings in the second quarter, largely reflecting unfavorable investment capital results of $27 million. Fee revenues were lower year over year, primarily due to lower average retail assets, as well as outflows from certain higher fee equity strategies. This was more than offset by lower administrative expenses over the period from lower variable costs and reduced travel expenditure. Our second quarter adjusted operating margin was 24.9%, including investment capital, on a trailing 12-month basis.

17:33 We continue to target a 30 to 32% operating margin over the long term. Our fixed income performance improved markedly in the second quarter, following a challenging first quarter. Specifically, 85% of our fixed income funds outperformed the benchmark on a three-year basis, and 98% did so on a 5 and 10 year basis. Our strong investment performance highlights our ability to deliver differentiated returns. Turning to flows, second quarter was a record quarter for institutional and overall net inflows, which were $7.1 billion and $6.8 billion respectively. Second quarter institutional net flows included a $6 billion institutional insurance channel win that we discussed on our last quarter earnings call.

18:28 This win highlights the growing appreciation for our expertise in managing general account assets for insurance companies. Our international channel also helped bring in sizable assets in the second quarter. Our retail net outflows were $288 million in the quarter. Retail outflows moderated in the latter part of the second quarter from the elevated level seen across the industry in March and April. Our first half net flows put us on track to reach or potentially exceed our 2-4% organic growth target for full year 2020. While we do expect some moderation in the pace of sales in the second half of 2020, we have a strong pipeline of unfunded wins, as well as the planned launch of additional strategies that will further diversify our private and specialty investment capabilities.

19:26 Turning to slide 13, employee benefits delivered 36 million of adjusted operating earnings in the second quarter, excluding unlocking and trailing 12 months return on capital remained above 30%. Second quarter results included alternative income that was 10 million below long-term expectations. Second quarter 2019 results also benefited from favorable items of approximately $6 million on a pre-tax basis, which did not repeat. Overall annualized in-force premiums grew 5% year over year, given better-than-expected participant persistency despite rising unemployment. We expect some premium headwind in the second half of 2020 and into 2021.

20:14 but are pleased with the stability of our revenue to this point. Through June 30, total identified COVID-related claims have been approximately $8 million, meaningfully better than our original estimate as general population deaths have not directly translated to our insured lives. Going forward, we now expect a pre-tax impact of $1 to $2 million For every 10,000 incremental COVID-related deaths. Voluntary and stop loss were minimally impacted by COVID, and we do not expect this to change. Our focus on larger employers, exposure to working age population, and diversity across geography has and will continue to benefit our results in the near term. Our longstanding distribution partnerships and differentiated service capabilities will drive continued success in the long term.

21:15 On slide 14, we provide items to consider for the third quarter of 2020. In the third quarter, we expect the following beneficial items. First, retirement legal and contra-revenue accruals are not expected to recur in the third quarter. Second, Higher fee revenues from higher average equity markets, assuming end of July market levels are maintained through the balance of the third quarter. And third, improved employee benefits results due to sequential improvement in quarterly loss ratios. Offsetting this, we expect spread revenues to feel the impact of the tax-exempt departure I mentioned earlier and lower new money yields.

22:03 We will also pay seasonally higher preferred stock dividends in the third quarter. While we have provided some items to consider, there will, of course, be other factors that affect third quarter results, including changes in our average share count, business growth, and the potential for additional COVID-19 impacts. Turning to slide 15. Here we provide an update on the long-term performance and composition of our alternatives portfolio. As you can see, our alternatives portfolio has delivered investment performance broadly in line with our long-term expectation of 9%. Second quarter investment results were primarily driven by the mark-to-market of private equity investments related to first quarter equity market performance.

22:55 As a reminder, this asset class is reported on a one-quarter lag. On the right, you can see the composition of our alternatives portfolio, which is diversified across private equity, credit, real estate, infrastructure, and hedge funds. It is comprised of commitments to over 150 funds, managed by 85 distinct general partners. 9% of the total portfolio and 15% of the private equity portfolio is invested in secondary funds and other funds of funds, Providing further diversification. At present, we only have insight on third quarter returns for a relatively small portion of our portfolio.

23:41 Results for that book have largely reversed the decline we experienced in the second quarter, and we do expect to see a meaningful recovery in value for the alternatives portfolio overall. Turning to slide 16. Last quarter, we provided greater detail on our investment portfolio, including two stress scenarios highlighting the potential impact of ratings migration and credit impairments on required capital. The analyses showed an impact to excess capital of $300 million in Stress Case 1 and $600 million in Stress Case 2, before contemplating active management mitigation efforts. Ratings migration accounts for over 75% of the capital impact in each case.

24:32 Year to date, we have incurred $58 million in gross credit impairments and ratings migration. However, our active management mitigation efforts reduce the net impact to $13 million. While the impact of the pandemic is still unfolding, our experience so far on a gross basis has been close to or better than stress case one. The impacts have been fully manageable considering our current excess capital position and future free cash flow generation. The appendix contains additional information on certain investments in our portfolio, including our commercial mortgage loans. As of July 31st, we have granted forbearance on roughly 7.5% of the overall unpaid principal balance of our commercial mortgage loan portfolio.

25:26 This balance may increase, but we expect it to ultimately be in the range of 7% to 10% of the portfolio. Of note, we have made no loan modifications associated with the forbearance granted to date. Overall, we are comfortable with the quality of our commercial mortgage portfolio. Over 85% of this portfolio is rated CM1. Our weighted average loan-to-value ratio is 46%, and our debt service coverage ratio is 2.3 times. Slide 17. Our estimated RBC ratio was 468% at the end of the second quarter, above our target of 400%, and our ending excess capital was $668 million. We indicated last quarter that we paused share repurchases in March due to emerging uncertainty surrounding the effects of the pandemic.

26:27 We still see a path to $1 billion of share repurchases for the full year, given $406 million of shares repurchased year-to-date, our strong excess capital position, and the expected receipt of proceeds upon the close of the individual life transaction. Having said that, We will continue closely monitoring developments through the third quarter. Debt to capital was 32.4%. This is above our 30% target due to the book value impact of our live transaction. The impact is temporary as it does not reflect the anticipated gain at transaction close. As a reminder, we have no debt maturities upcoming in the next three years and have ample liquidity resources.

27:18 Finally, we maintained our second quarter common stock dividend at 15 cents per share at a dividend yield of over 1%. In summary, we continue to serve all of our stakeholders during this time and are proud of our employees for their resilience and adaptability. While COVID-19 related headwinds remain in the near term, We believe our strong worksite and institutional franchises are poised to benefit over the long term. We continue to have high confidence in our ability to close the individual life transaction by the end of the third quarter. And we have a strong excess capital position and will continue to act as good stewards of capital.

28:03 With that, I will turn the call back to the operator so that we can take your questions. We will now begin the question and answer session. To ask a question, you may press star 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the star keys. To withdraw your question, please press star 2. As a reminder, participants are limited to one question and one follow-up. Please hold while we now poll for questions. Our first question comes from Eric Bass with Autonomous Research. Please proceed with your question.

28:48 Thank you. I just wanted to start on your comments on the buyback. And when you're talking about closely monitoring kind of developments through the third quarters, does that suggest that you would plan to remain paused for this quarter? Or if things develop favorably, could you resume sooner? And I guess, are there any restrictions on you resuming buybacks prior to the deal closing?

29:14 Eric, good morning. It's Rod. I'll start, and as usual, Mike and I will toggle back and forth. Number one, Eric, there are no restrictions. But what Mike said and what I'd like to further reinforce, there are three things that we're absolutely focused on in the third quarter. And one is, as we communicated on the prepared remarks, we are close to The second will be our assessment of the economy. We're happy to talk about that a little bit further. And then the continued development and emergence of COVID in certain areas of the country. So those three factors are factors that are the reason why we're pausing through the third quarter. And as Mike said, we see a clear path to accomplishing the billion dollars of share buyback this year. We've done 40%, as you know. And when you look at the totality of the financial position that Voya is in, the $668 million of excess capital, the billion and a half that will come from the life transaction or RBC position, The fact that we completed our expense

30:46 targets four months ahead of schedule in the pandemic and our free cash flow conversion, we will continue to be very good stewards of capital and continue to move forward with a high level of confidence.

30:59 All right. Maybe just briefly, I think in terms of the transaction, I think the easiest way to think about it is we're pretty much where we would have expected to be. We're making... Good progress on the regulatory front. I think operationally we're in excellent shape to pull the trigger. And then in terms of just deal mechanics, I think we're well along. And so feeling like there's no surprises or nothing that was unexpected along the way. So we're feeling very good about that. And as Rod mentioned, that's an important part of what we're looking at in terms of share repurchases.

31:42 Thank you. And then could you help us think about the earnings run rate for the retirement business, given some of the moving pieces around new business coming on, interest rate pressures, and your updated expense guidance? And maybe how should we think about growth relative to your investor day outlook, given the changes in the environment? Sure. Good morning.

32:08 You know, as Mike said in his comments, in terms of our expense guidance, you know, on a full year basis at 840 to 850, you know, there would be kind of one-time accrual for the legal matter, and then just generally the unplanned shift in expenses from the corporate segment. So, as I think about those, obviously, not, you know, necessarily expecting those to be recurring, and then I kind of think about how we're going forward with that. We also... have had some saves relative to COVID, obviously from travel and conferences and maybe some delayed hires, but we've also seen a bit higher volumes in our call center and operations on some aspects. Having said that, though, you've got to put it in context to kind of what we've experienced and what we have in our pipeline coming in.

32:59 In our record-keeping businesses, like I said, you're expecting –

33:02 Thank you so much for joining us. It does take a bit. Part of your question there is in terms of how does that materialize over time? Certainly, revenues on new business don't always just come in and hit in the very first month. They will materialize over a year, sometimes over two years, depending upon the types of fee revenues that are coming in. So it can take a bit of time to materialize those, if you will.

33:57 You know, we do see the business environment as being a bit challenging, although advisors and plan sponsors are still issuing new RFPs. And we have seen some fewer than we've seen in 2019. You know, I tell you that I think RFP volume is down. Thank you for joining us. Really into some new business. I think you've seen that in our new business growth as well. So, you know, as I think about while there may be some slowdown, we've got some one-time expenses that, you know, impacted this year as I think as we go forward.

34:56 Obviously, I'm feeling very good about our results in this COVID environment, even though they've been a bit muted by some of the impacts from COVID. So, you know, we feel like our value crops are resonating, but As the business and the market really kind of moves, we think we're going to benefit in Voya as people move to a flight strength and stability. Thank you. Thank you. Our next question comes from Sunit Kamath with Citi. Please proceed with your question.

35:31 Thanks. Good morning. I wanted to go back to retirement. On these record keeping wins, can you just help us think through what's really behind that? Is it Yes, thank you.

36:06 Great question because, you know, first of all, I'd have to say the record keeping the large to mega plan size business. First, you've got to kind of accept it as a bit of a lumpy business. So, you know, plans, the volume of the number of plans that come to bid, it can change from year to year. So that's why I think in the marketplace, you know, sales, if you will, and record keeping can change from year to year. Our experience, and I appreciate you recognizing our strong growth and record keeping, both in our tax exempt, we've had some nice wins in our tax exempt, as well as in our corporate business over the last couple of years and as we go forward, and our pipeline remains good. Why do we think we're winning in this? I think it goes back to our value proposition resonating in the markets.

36:55 We have very strong digital solutions.

36:58 I think our culture, our people, and how we do business and our capabilities from a technology perspective are being very much recognized in the marketplace. And yes, there are some competitors that I think have had some more challenging times, and we've been able to take advantage of some of those situations when maybe someone becomes dissatisfied and they're looking for a new provider. In these times, as I've said, You know, when there's a kind of uncertainty, plan sponsors, whether they're small or large or mega, they look for, you know, kind of stability and strength. And we're going to benefit in that flight to movement. Now, your other part of your question relative to is there opportunities for more full service? I think what you're getting at in some of that on a record keeping, you know, do they go from record keeping to full service?

37:51 Yes, we do see business. In record keeping, you know, have opportunity for asset management. I think what you've seen in our stable value fund sales, you know, just, you know, a good example of that in the first half, geez, we're about $4.4 billion in deposits. Now, that's not necessarily associated with our record keeping per se, but I think it shows strength in our stable value and our ability to be able to have some opportunities for investment management. or even in our employee benefits. We've had a number of sales this year in record keeping where we've had, they've either been an employee benefits customer or also we've been able to have an HSA alongside the 401k.

38:39 So those kind of start to kind of have dimensions of full service in the sense that it's not just record keeping only, that there's asset management or some other type of product solution along with it. So, yes, to the latter part of your question, I think there is some opportunity to take those record keeping and have additional services as clients grow as well.

39:01 Got it. And then just for Mike, on the $1.5 billion of proceeds, Can you just remind us, has any of that money been earmarked for anything else other than just capital deployment? I know your debt-to-capital ratio is elevated, but my understanding is it's going to come down given what the transaction closes to maybe at 30% or even lower. So is there anything that $1.5 billion is earmarked for that we should think about?

39:27 I think the way to think about it is there'll be, you know, let's assume share repurchases as a primary use, then there would be alongside, you know, corresponding, you know, debt reduction as well to maintain the leverage as we work our way through the share buyback. But no other, you know, specific uses. I mean, I think as we get to close, we'll be able to give A little more details on exactly how that's going to play out. It does depend at least a little bit on the closing balance sheet. As I said in the remarks, there will be a gap gain at close, and we do expect the overall loss to be around $250 million on a gap basis.

40:15 which, as you said, will get the leverage ratio back. But there could be a little bit of movement, and that will have some bearing on the ultimate disposition. All right. Thank you. Thank you. Our next question comes from Andrew Klagerman with Credit Suisse. Please proceed with your question.

40:37 Hey, good morning. I'd like to ask about the – You know, the credit scenarios that you've cited at $300 million to $600 million, especially in light of the fact that you had an impact of only $58 million and then it netted out $13 million with further action. So, when I look at stress scenarios one and two at $300 million to $600 million, do you think that the $300 million may be just too conservative and that it should come in a lot lower?

41:13 Mike, good morning, Andrew. Good morning, Andrew. Thanks for the question. So I think the way to think about the 300 and the 58 is, first of all, the 300 was a 12-month look. So over the course of 12 months starting from last quarter, what do we think one possible outcome could be? And so we shared that. That's the gross... We're a quarter of the way through that 12-month period. We've seen 58 so far. I think, as Rod said, there remains... A fair amount of uncertainty. And so while we're pleased that what we've seen so far has been, I would say, consistent with the levels that would have been anticipated in stress case one, we've got a ways to go.

42:24 We need to see how the pandemic continues to unfold. We need to see how the government fiscal policy reacts to that and how we address it. And then we've got an election coming up. We've got questions about how the pandemic will emerge in the fall and at least some thought about another wave to come. So I think there's a lot yet to be seen. As I said, we're encouraged, though, by what we've seen so far. I think it'd be a mistake to just take one quarter and extrapolate it given all the uncertainties. But so far, so good.

43:02 A lot of variables. So then maybe shifting over to investment management, the net flows were particularly robust in institutional with the $6 billion mandate, and there was some weakness in retail. So I'm wondering what the outlook is for net flows in each area. And then with that, maybe, you know, why that insurance mandate might be scalable into a lot more like type transactions.

43:33 Sure. Andrew, Christine?

43:37 Yeah, thank you, Andrew. You know, as far as how to think about net flows, as you said, we had a very strong quarter in the second quarter at $6.8 billion. And just to kind of answer first, what are we seeing? The evolution on the retail side. You know, we did have modest net outflows in the second quarter, but the last two months, June and July, our retail net flows have pivoted positively. And you've seen a strong rebound in our fixed income, notably our fixed income performance. So that is on a firm foundation for improvement. And then on the institutional side, we continue to see we have a strong pipeline, diverse products in the pipeline. And so let me just talk a little bit about insurance and how to think about that. You know, we did have a large insurance mandate settle in the second quarter. Continue to see strong demands overall from insurance companies.

44:39 But, you know, the thing with this one is think of this insurance company mandate as a core mandate, so more traditional asset classes, highly scalable, margin accretive business. You know, over time with that particular client relationship as well as other insurance clients, We would expect opportunities to actually fund with them some of our differentiated, more specialty asset classes. So overall, net flow picture, very solid and institutional. We're on track. We set forth on Investor Day organic. When you think about growth as a percentage of AUM, our targets are 2% to 4%. And we fully expect to exceed that organic growth target in 2020.

45:30 Thanks. Very helpful. Thank you. Our next question comes from Brian Kruger with ADW. Please proceed with your question.

45:41 Hi. Good morning. I also had a question on investment management. Could you talk about the drivers of the decline in the fee rate? This quarter and what you'd expect going forward there?

45:54 Sure, Ron. Good morning. Christine and Mike?

45:59 Sure. Yeah. So as far as thinking about the revenue decline, you know, it did decline two basis points. And there are a couple of ways to think about that. I mean, certainly we did see continued retail outflows in our equity performance in the second quarter. That affected it. But predominantly, when you think about our business model, it's more a mix of business. And we really have two ways to grow, improve our margins and grow our business. And one certainly is through selling more private markets, secondary private equity, things that we're seeing more and more client demand. So think about higher fee business. But also notably, it's really the scale side of the equation. And We've seen quite a bit of what I'd call more scale growth in the first part of the year. And that insurance mandate was core, and we priced it aggressively. But again, just when you think about the incremental expenses, very limited. So this type of business, given our strength and foundation in fixed income, is margin accretive. As well as some other flows year-to-date in terms of stable value, which again tend to be more core. So As we see that trend in yield evolving, certainly the world can turn uncertain, as Mike was earlier referencing around the macro environment. But what we see right now is strong pipeline.

47:28 I would expect we're absolutely on track for our private fund launches, just given the demand that we see out of clients. But I would expect for the remainder of the year, you know, Lower basis points, more scale funding, notably where we're seeing a lot of demand right now is out of international clients into credit and multi-sector. But the private funds should really start taking effect in the latter part of the year. So I would expect you're going to see an improvement or a pivot in 2021 in terms of the fees overall that we earn.

48:06 Great. Thank you very much. Thank you. Our next question comes from Tom Gallagher with Evercore ISI. Please proceed with your question. Good morning. The question is on the 3Q EPS walk. It shows the six cent headwind from interest rates and the loss of one large retirement plan. I guess I was surprised to see how big of an impact that was. Do you see a similar continued headwind level If interest rates remain low, or is there anything unusual about the size of the impact in the quarter?

48:48 Tom, good morning. Mike, do you want to take that?

48:50 Yeah, thanks, Tom. Look, I think the way to think about the six cents is, as we mentioned in the two pieces, the largest single piece, and I would view it as roughly half to a little bit more, is just the sensitivity of new money yields. Thank you for joining us. is consistent with the sensitivities we've given for roughly 100 basis point drop, and I think that's more or less what we've seen over the last several months. So I think that's, to the extent those rate levels continue, I think there would be continued drag again along, consistent with the sensitivity we gave.

49:51 The individual client that we referred to as a relatively small piece, but not insignificant, and then Just the last other piece is there were in both first and second quarters some variable items that hit investment income. They're still relatively small, but we don't expect those to continue to repeat. And so that kind of gets you to the balance of the six. Gotcha. And, Mike, just to be clear, if rates remain where they are today, each quarter when we think about this walk, you should get a 3% to 4%. Sequential impact going forward over the balance of the next, we'll call it, year or so?

50:30 Think of that as, you know, the annual drag is, you know, for a 100 basis point drop is in the neighborhood of 25 million, I think is the way to think about it. So, yeah, that would be, you know, it'll continue to be an ongoing drag. Does it get, I think we're at the rate now, so it doesn't continue to get worse, maybe if I'm trying to understand your question better. We stay at that new level, and it gradually goes down, but it's not at the same, I don't think it's quite the same slope. And I guess just relatedly, just with that as a backdrop, I mean, are we looking at 2021 retirement earnings being more flat with 2020 levels, or would you still expect to get to Call it mid-single-digit growth or any clarity there.

51:28 I think, Tom, right now, I think we're really only comfortable giving guidance, if you will, on how to get from the second quarter to the third quarter via the bridge that we've shared in the presentation. I think there's Remain a lot of uncertainties both in terms of underlying market performance as well as what will happen in the credit environment and top line. I think we're going to avoid giving any, at least at this point, while we're still in this relatively foggy condition about how the future is going to unfold, we're going to resist trying to give any meaningful information. or specific guidance on any of the segments or VOIA in total for 21.

52:17 Okay, thanks. Thank you. Our next question comes from Jimmy Buehler with J.P. Morgan. Please proceed with your question.

52:30 Hi. I just wanted to follow up on the discussion on buybacks. I think you're implying no buybacks until the deal closes, and maybe that's because your leverage, which is already high, would go up even higher. But is that a correct assumption? And then how do you think about the interplay between the things that you're waiting for, such as the deal closing and credit visibility and COVID visibility? When you get visibility into those, obviously the stock price won't be as cheap or would most likely rally. So what do you think about that? The trade-off between using the cash you've got right now versus sort of being conservative given the environment and given your higher overall leverage ratio.

53:18 Jimmy, it's Ron. I'll start. Mike and I will share this. Sure. As we communicated, we are waiting until the close of the transaction and through the third quarter. In an abundance of prudence, Jimmy, as you're well aware, we've repurchased over 6 billion shares since we've been a public company. And I think we've got a track record that speaks strongly about our commitment to returning capital to shareholders that are very effective in a consistent basis. And that's over 3 billion. With a billion this year, 3 billion in the last three years alone. We've made the transition from to a capital-like company.

54:09 The $668 million of excess capital, the billion and a half, the 85% to 95% free cash flow. Jimmy, we're just using the experience and judgment to make sure we see as clearly as we can going into the fourth quarter. There's an absolutely clear path to accomplishing the billion dollars. We've done 40% of it now. Boya We'll have never been in a better financial position from a balance sheet and liquidity perspective. We simply want to close the transaction, have a little more clarity on the market and COVID, and then resume activities in the manner that we've already communicated. Mike?

54:50 Right. I think you said it well. I guess I'd only reemphasize that we are saying we do see a path to a billion plus. And so... I think you've identified, Rod identified, and in prior comments, we've identified the things we're watching. I'd say as a short-term measure, leverage is a consideration. I wouldn't call it a driving one. It's really more the broader macro issues, but it's certainly one of the many things that we're thinking about.

55:22 Okay. And in your benefits business, on voluntary benefits, your margins were actually very good. I'm assuming that you're seeing lower utilization because of just the environment and people maybe being reluctant to visit doctors, hospitals, and stuff. But is that true? And if that is, are you expecting that to abate as the year goes on and we return to sort of a little bit more of a normal environment?

55:49 I'm going to throw it to Rob, but we're thrilled with the progress we've made with the benefit business. I'll let Rob speak to where we are, what the pipeline looks like, and what you should expect. Rob?

56:02 Yeah, thanks for the question, Jimmy. So from a claims activity perspective, we actually saw – Across stop-loss and the voluntary products, let me talk about it that way, really pretty consistent utilization, severity in line with what we would expect. Those are certainly, you know, product sets within VB, so accident, critical illness, hospital indemnity. So you've got a little bit of a tale of different things that just worked out in aggregate. Obviously, you know, people may have been sort of not going for voluntary or... You know, sort of optional things, but when accidents happen or they've got something critical that's going on, obviously we're in a pandemic year, you're going to see ebbs and flows as we break the products apart, but in aggregate it was really in line with what we would expect.

56:57 And then, you know, just you're talking about the growth and margin across VB. Obviously that starts top line. We had a really nice quarter across the business and continuing to grow and Thank you. Thank you. Our next question comes from Humphrey Lee with Dowling and Partners.

57:44 Please proceed. Thank you for taking my questions. I guess just a quick follow-up on retirement earnings. I think in the past when you talked about record-keeping fees, you explained marginal earnings and fees and benefits. But given the size of the increase and also the low unit cost that you alluded to earlier, How should we think about the earnings and fees impact in retirement when the balance of that $20 billion plus record keeping comes through in the balance of the year?

58:21 Charlie and Mike? Sure. I'll maybe start, and Mike can chime in as well. You know, I think the way to think about the growth and, you know, the difference between record keeping and full service is, You can see in the fees and the kind of fees of record keeping kind of compared to the total revenues and full service. In our supplement, there's a fairly significant difference between the two. So record keeping being more per participant and larger total participant counts, larger plans. While it's not 100% based on participants, it's largely there, as Mike has said. I think he said in his comments as well. So I guess to think about the earnings emerging, it's probably not going to be material or significant initially.

59:16 It will emerge over time as we continue to grow and to build it. The benefits of our record-keeping business provide us scale and contribution margin covering fixed costs and other types of things from technology and development. that enhance our overall competitive position and our entire retirement business. Mike, I don't know if you have anything you want to add on top of that. No, I think you covered it pretty well.

59:43 I don't have anything to add there. Okay.

59:47 Okay, got it. And then a question from Christine. I think talking about investment management, there's some discussion about the opportunities internationally for lawyers. Just kind of maybe your thought on the potential there and what you're doing in order to achieve those potential opportunities.

1:00:08 Sure. Thank you, Humphrey. Yeah, you know what? Really, it's been a notable change in the client demand from overseas. As you know, it actually was a headwind for us over the last few years, and it really was driven by just changes in the dollar market. Thank you so much for having me. As I mentioned, quite a bit year to date, as well as some interest out of Asia. So I don't see that demand changing.

1:01:00 And in fact, you know, where we're really excited is we just hired a head of EMEA sales out of our London office because we anticipate what we're hearing and seeing is that insurance companies in Europe who tended to have real sort of euro or sovereign bias and didn't outsource as much We think that now under Solvency II, definitely we've already seen a building pipeline and interest out of Europe, and so we added some distribution to capitalize on that. So just kind of looking out in the longer term, I'm very optimistic of what we're going to see and some of our differentiated strategies out of that part of the world as well. You know, it kind of speaks to, you know, we've got quite a few angles of distribution, you know, when you look at our overall business and franchise as well as some very differentiated products, notably in specialty and, you know, private credit is of great interest in terms of insurance companies right now.

1:01:59 So, again, overall, it's going to be an important part of our growth story.

1:02:05 Got it. So that's why you're feeling pretty optimistic about the institutional pipeline for your business.

1:02:11 Yes, yes, Humphrey. And really, again, you saw we had very strong quarters and very strong flows bucking the industry trend in the first quarter as well. And really what you've seen, again, it just speaks to the strength of both the product array that our private equity is – well, as an example, our private credit or commercial real estate. So it's really capabilities as well as strong investment performance and, again – Having both the insurance channel has been very strong and continues to be as well as now being able to tap into international client demand through distribution has been important as well. Thank you. Thank you. Our next question comes from Brian Meredith with UBS.

1:02:59 Please proceed with your questions. Hi, thanks. Good morning. This is Mike on for Brian. Just wondering quickly on the corporate segment, if you exclude the stranded costs, it just looked like corporate expenses were a little bit lighter than usual. So I was wondering if you could maybe comment on some of those drivers and if you expect them to continue.

1:03:21 Mike, I'll take that. Nothing in particular to point at. I think there is a little bit of quarter-to-quarter movement, but the range we gave, I think certainly we were basically right in the middle of the range when you adjust for the stranded. So I think next quarter you can expect corporate to be more or less the same. X-Granded, you know, it's saved for the preferred stock dividend that we pay every other quarter, and that's roughly $10 million. So I wouldn't try to get too fine on, you know, small movements in corporate. Great, thanks. And then just back to benefits quickly. So I was just wondering, you know, I know your book is a little bit different than some of your peers, but People saw other, you know, some of your peers saw favorability in lines like voluntary. And I was just kind of curious on why you're expecting that to improve a little bit in 3Q, given some others are expecting it to revert back to kind of more normalized levels.

1:04:29 Yeah, Mike, this is Rob. I'll jump in on that. As you were alluding to, our product mix is a little bit different. So as we think about, you know, the accident critical illness hospital indemnity product set versus the number of companies I know have been talking about their dental business or their vision business, and those really, you know, went low from a benefit payout perspective. Just obviously they just, institutions weren't open to go visit the dentist and have your eyes checked. Those things were pretty easy to just put off and delay. And so there will be, you know, as I would expect, you would expect, A bounce back on that side. I think, again, the product mix that we've got, you know, things behaved as we would have expected in second quarter.

1:05:17 As we move into third quarter, you know, in aggregate, we're talking about some improvement movement within the loss ratio, you know, but we're not expecting dramatic changes quarter over quarter. Really driven by the mix of what we sell and service every day. Thanks, guys. Thank you. This concludes our question and answer session. I would like to turn the conference call back over to Rob Martin for any closing remarks.

1:05:52 Thank you, Operator. The purposeful decisions that we've made as a company have enabled us to enter the second half of this year in a position of strength. More broadly, we continue to benefit from the emphasis that we have placed on our core values, which help set us apart in the industry. Our efforts to advance diversity, inclusion, and equality throughout our company and in the communities that we serve are part of our commitment to creating a stronger and better Voya. Our focus on caring for our employees, clients, and communities is unwavering. I hope that you and your families remain healthy and safe and we look forward to updating you on our progress as we pursue our vision to be America's retirement company.

1:06:40 Thank you and good day. Ladies and gentlemen, this concludes today's web conference. You may now disconnect your lines at this time. Thank you for your participation and have a great day.