Voya Financial (NYSE:VOYA) Q3 2020 Earnings Call

0:00 Good morning and welcome to the Voya Financial third 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 followed by the number two. Participants are limited to one question and one follow-up. 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.

0:43 Thank you, and good morning. Welcome to Voya Financial's third 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.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. 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. Gap Reconciliations are available in our press release and financial supplement found on our website, investors.voya.com.

1:32 Joining me on the call are Rod Martin, Voya Financial's Chairman and Chief Executive Officer, as well as Mike Smith, Voya'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 Grubka, Employee Benefits. With that, let's turn to slide three, as I would like to turn the call over to Rod.

2:08 Good morning. Let's begin on slide four with some key themes. We have navigated through this year and continue to be in a position of strength. As a result of the purposeful strategic decisions that we have made on a normalized basis, our third quarter EPS was $1.19. We once again demonstrated the earnings power of our company and the benefit of our diverse mix of high free cash flow businesses. We continue to see robust demand for our products and services. We are attracting new clients and retaining existing clients who value our expertise in serving the workplace and institutions.

2:58 For retirement, full-service recurring deposits grew 8.4% year over year, reaching $10.9 billion. We saw strong inflows in both corporate and tax-exempt markets. In investment management, We generated $1.8 billion of net inflows during the third quarter. Institutional inflows continued to be very strong as we attracted new mandates in our specialty asset classes. And in employee benefits, in-force premiums grew 5.7% year over year. We continue to see strong demand for workplace benefit products, particularly We continue to make good progress on the remaining regulatory approvals, and we are confident that these reviews will be completed before the end of 2020.

4:15 We also continue to expect to generate approximately $1.5 billion of deployable capital from the transaction. Our balance sheet and capital position remains strong. We had approximately $642 million of excess capital as of September 30, and we will continue to be good stewards of shareholder capital. We also maintained our common stock dividend at 15 cents per share for the third quarter. In addition to the status of the life transaction, we will continue to monitor the economic outlook and the impacts from the election in determining when it may be appropriate to resume share repurchases.

5:05 We have also further strengthened our board, and I'm pleased to share that last week we welcomed Alwyn Lewis as a new independent director. Alwyn brings extensive experience leading several well-known brands to achieve improved financial and operational results while delivering superior customer outcomes. We are delighted to have Alwyn join us. Turning to slide five. We've maintained a strong focus on our values and culture. During October, we partnered with the National Down Syndrome Society to launch our Go Orange campaign, which awarded four entrepreneurs who have Down syndrome with grants totaling $55,000 and highlighted the need for greater employment of people with disabilities.

6:02 We also collaborated with Disability IN! in a call to action for greater inclusion of people with disability and special needs in the workforce. We continue to take action in support of racial equity with two of our leaders representing Voya in focused efforts that include the Ethisphere Institute's Advisory Council on Equity and Social Justice Initiative and the CEO Action for Diversity and Inclusion Racial Equity Also, earlier this month, we expanded Voya's efforts to help Americans address the financial challenges of COVID-19 with the launch of our Just Right Advantage program to support minority, women, veteran disability, and the LGBTQ-owned businesses.

7:02 Externally, as a testament to our ESG efforts, Voya was recognized on Just Capital's 2021 rankings of America's most just companies, earning the number two spot in the capital markets sector. Our work to advance our culture during this particularly unique year was validated by our recent recognition as a great place to work for the fifth consecutive year, which aligns with the positive feedback that we've heard Thank you, Rod. Let's turn to our financial results on slide seven.

7:59 We delivered normalized after-tax adjusted operating earnings of $1.19 per share in the third quarter of 2020. This excludes three items. First, $0.37 of prepayment and alternative income above our long-term expectations, reflecting an improvement in alternative performance based on the second quarter equity market rebound. This provided a meaningful recovery in value for our alternatives portfolio, such that year-to-date returns are positive. Long-term performance continues to exceed our 9% target. Second, $1.05 of unfavorable DAC, VOBA, and other intangibles unlocking.

8:45 This reflected the results of our annual actuarial assumptions update, which I will cover in more detail in a few slides. 21 cents of stranded costs associated with individual life and other closed blocks. We will normalize for these stranded costs until the life transaction closes. On a reported basis, adjusted operating earnings were 30 cents per share for the quarter. Our third quarter gap net loss was $333 million. This includes the non-operating impact of our annual actuarial assumptions update on individual life, and results from our individual life business, which will be reported in discontinued operations until close.

9:33 This quarter, individual life experienced unfavorable mortality, mostly explained by COVID-related losses, which were in line with our expectations. More broadly, as we look forward, we continue to expect a gain at close from the life sale and have updated our estimate for total gap loss on sale to now be between zero to 500 million. We have done this as it would now take a significant increase in interest rates or spreads for us to reach the high end of our previous range. Deployable capital remains 1.5 billion. Moving to slide eight. Retirement delivered 197 million of adjusted operating earnings in the third quarter, excluding unlocking, and trailing 12-month return on capital was 11.8%. Third quarter unlocking was a 172 million unfavorable impact, driven mostly by a reduction in both our long-term interest rate and equity market return assumptions.

10:39 As a result of the assumption update, we experienced a pre-tax impact to adjusted operating earnings of $3 to $4 million in the quarter from higher DAC amortization, which we expect to continue. Third quarter adjusted operating earnings included alternative income that was $45 million above long-term expectations. Revenues increased year over year primarily due to higher fees which benefited from higher average equity markets and record keeping wins. Investment spread was in line year over year. We have seen higher transfers into fixed account options with lower crediting rates that has helped to alleviate some of the spread compression associated with lower rates.

11:27 Administrative expenses improved year over year, primarily due to an adjustment to a prior period expense deferral that did not repeat this quarter. We also had a $5 million benefit from a partial legal recovery in the quarter. Turning to deposits and flows. Third quarter full service recurring deposits grew by 8.4% on a trailing 12-month basis. We expect full year 2020 recurring deposit growth to be in the range of 3% to 6% consistent with our comments last quarter. Net flows were strong in the third quarter. Full service net inflows were $3.5 billion, comprising $933 million of corporate market net inflows and $2.6 billion of tax-exempt net inflows.

12:17 We continued to see positive stable value net flows in third quarter at $574 million following a record first half. Recordkeeping flows reflected a $20 billion government plan funding in the quarter. As part of this plan, we onboarded over 330,000 participants, which we expect will boost our position in the government market to number one based on assets and participant count. As of the end of third quarter, we exceeded 6 million total defined contribution participants, which is a 13% increase year over year. This participant count includes over 3.2 million record keeping participants, which is a 21% increase year over year.

13:07 Looking ahead, the strong third quarter net flows we generated will be partly offset by some expected fourth quarter outflows, including a large case tax exempt client, some corporate plans due to M&A activity, and some record keeping departures. We expect full-year 2020 full-service and record-keeping net flows will be between $1 and $2 billion and over $24 billion, respectively. We are encouraged by the success and momentum and winning plans across all markets, which highlights the benefits of a well-diversified business, particularly in the current environment and positions us for long-term success. On slide nine. Investment Management delivered $47 million of adjusted operating earnings in the third quarter, and our adjusted operating margin, including investment capital, was 24.9% on a trailing 12-month basis.

14:07 Investment capital was $11 million favorable to our long-term expectations this quarter. Fee revenues were modestly lower year over year. Higher institutional fees were offset by higher margin equity retail outflows. Administrative expenses were higher year over year, in large part due to higher variable compensation associated with a favorable investment capital result. Note that when we present results on a normalized basis, we adjust for investment capital results above or below expectation, but we do not make a corresponding adjustment for the associated change in variable compensation expense.

14:52 Our overall fixed income performance remains strong. We saw a return to top quartile performance for a certain flagship products that were affected by the market dynamics in March and April, which contributed to the improvement this quarter. Eighty-nine percent of our fixed income funds outperformed the benchmark on a three-year basis, and more than 90 percent did so on a five- and ten-year basis. Our strong investment performance remains a hallmark of the differentiated value we bring to our clients, which is increasingly being sought in this interest rate environment. Turning to third quarter flows, we generated $1.8 billion in institutional net inflows following a record second quarter.

15:37 This brings year-to-date institutional net flows to $12 billion as of September 30th. We continued to generate net flows from diverse sources across a range of investment strategies. We continued to see progress in insurance as companies continue to tap our team to manage their general account assets. International clients showed demand for core fixed income and investment grade credit. We also saw strong success in private assets and CLOs. We closed our third CLO this year, and we expect additional issuances to close in the fourth quarter. Our retail inflows and outflows roughly offset this quarter, improved from net outflows in the volatile second quarter.

16:27 The improvement in retail was driven by strong mutual fund sales led by intermediate bonds, while we experienced fewer redemptions throughout the quarter. Looking ahead, We expect overall net flows through first quarter 2021 to be roughly neutral due to timing of unfunded wins and known redemptions. That said, we continue to expect full year 2020 organic growth to exceed our 2% to 4% target in a challenging year. We also expect to realize higher performance fees in the fourth quarter, reflecting favorable year-to-date performance on our mortgage investment funds. Our strong long-run investment performance and diversity of strategies continues to drive our robust pipeline heading into 2021. Turning to slide 10, employee benefits delivered 56 million of adjusted operating earnings in the third quarter, including alternative income that was 6 million above long-term expectations.

17:31 The trailing 12-month return on capital was 31%. Adjusted operating earnings were roughly in line with prior year quarter, despite COVID-19 related claims, and were supported by strong year-over-year growth in voluntary. Overall annualized in-force premiums grew approximately 6% year-over-year, in line with second quarter. We still expect some COVID-related premium headwind going into 2021, but so far we have yet to see any material impact. Total aggregate loss ratio was at the low end of our 70% to 73% target range. The group life loss ratio includes COVID-related claims, which explains the elevated loss ratio relative to our target.

18:19 Third quarter identified COVID-related claims were 9 million at the low end of our expectations. Year-to-date identified COVID-related claims have been 17 million. Loss ratios for stop loss have not been materially impacted by COVID. And while the loss ratio for voluntary was slightly higher than prior year quarter, utilization remains low. This quarter, we introduced My Health Money, a guidance-oriented participant tool ahead of enrollment season to help participants with annual benefits selection. Early indications show that this new tool increased engagement with participants. More broadly, our longstanding distribution partnerships and differentiated service capabilities sets us up well for continued success heading into the 2021 enrollment season.

19:16 Turning to slide 11, we conducted our annual review of actuarial assumptions during the third quarter. As part of the review, we lowered our long-term interest rate assumption for the 10-year Treasury rate to 2%. 175 basis points lower from our prior assumption of 3.75%. This drove the majority of the unlocking impact in the third quarter, a sizable portion of which is associated with our individual life business that will be exited via reinsurance. We did not change our expected grading period. Portfolio yields will grade to our long-term expectation over a period of at least 10 years, but will vary depending on the characteristics of each underlying asset portfolio.

20:04 We also lowered our long-term equity market assumption for the S&P 500 to 8%, down from 9%, which drove the majority of the remaining impact for retirement. Additional impacts included adjustments made to reflect lower yields due to the current interest rate environment, Higher persistency on certain individual life policies and other policyholder behavior assumptions. On slide 12, we provide items to consider for the fourth quarter of 2020. In the fourth quarter, we expect the following beneficial items. First, higher investment management performance fees, net of variable compensation. Second, lower investment management variable compensation related to more normal alternatives performance.

20:55 Third, higher retirement revenues primarily from successive recordkeeping plan wins. Fourth, seasonally lower preferred stock dividends. And finally, Lower intangibles amortization in corporate due to the now full amortization of an intangible that was related to a pre-IPO strategic investment. While setting these items, we expect the partial recovery of a prior retirement legal reserve will not recur in the fourth quarter. While we have provided some items to consider, there will of course be other factors that affect fourth quarter results, including changes in our average share count, Market Impacts, Business Growth, and the Potential for Additional COVID-19 Impacts.

21:45 Turning to slide 13, our diversified investment portfolio continues to perform well in the current environment. This quarter, we updated our view of potential capital impact under our two stress scenarios through year-end 2021. We continue to show $300 million in stress case one, and now show $450 million in stress case two, reduced from $600 million. This reflects $61 million of actual net credit impairments and rating migrations that we incurred in 2Q and 3Q and a prospective impact of roughly $250 million and $400 million, respectively, under scenario one and two.

22:30 The prospective impact assumes no active management, which could reduce the impact. We view this update as favorable, as we have maintained or lowered the stress impacts despite extending the timeframe six months. Importantly, we view both scenarios as manageable, given our beginning excess capital position and contemplating future free cash flow generation. We continue to spotlight certain investments in our portfolio, including our commercial mortgage loans in the appendix. As of October 31, there were three loans that remain in forbearance, which represents less than 1% of the overall unpaid principal balance of our commercial mortgage loan portfolio.

23:17 The vast majority of loans that requested forbearance have resumed repayments, and only a small number of loans have undergone modification. Overall, we remain comfortable with the quality of our commercial mortgage portfolio. which is more than 87% CM1 rated and has a weighted average loan to value ratio of 46%. Slide 14. Our estimated RBC ratio was 455% at the end of the third quarter above our target of 400% and our ending excess capital was 642 million. Excess capital was slightly down in the quarter as cash generation from our operating segments was more than offset by interest expense, dividends, and higher required capital due to customers moving assets from variable to fixed.

24:08 Additionally, we realized derivative losses, some of which is timing related and expected to reverse over future quarters. We did not repurchase any shares in the third quarter. We continue to monitor the progression of the overall economy from the COVID-19 pandemic, impacts from the election, as well as the status of the individual life transaction. These factors will determine when and how much we repurchase. As Rod highlighted earlier, we expect the individual life regulatory process to conclude by the end of December. We in resolution are operationally ready to close pending final approvals. Our debt-to-capital ratio is 33.7%.

24:53 However, we expect this to be below our target leverage ratio at transaction close when we book an offsetting reinsurance gain. Finally, we maintained our third 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 have performed well and are poised to benefit over the long term. We expect to conclude the regulatory process related to the LIFE transaction by the end of the fourth quarter, and we have a strong excess capital position and will continue to act as good stewards of capital.

25:46 With that, I will turn the call back to the operator so that we can take your questions. Thank you. We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchstone 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 on your touchstone phone. As a reminder, participants are limited to one question and one follow-up. Our first question comes from Elise Greenspan with Wells Fargo. Please state your question.

26:29 Elise Greenspan Hi, thanks. Good morning. My first question, I wanted to continue the conversation around capital and just thoughts surrounding return to buying back your stock. The impairments and migrations that you're seeing within your investment portfolio are trending. Thank you for joining us.

27:11 Your read of our response is correct. We are maintaining our optionality as Mike has discussed and we discussed on the second quarter call. The three factors that we've discussed are in no particular order, the macro business environment, COVID, which is trending worse at this moment, and obviously just waiting to see the outcome of the business environment and the election, which will play out here in this period of time. Elise, maintaining the actionality means just that, that we reserve the right to engage in that in the fourth quarter or push that to the beginning of 2021. And we will continue to use the judgment we have used in the preservation of capital for our shareholders through the entire seven plus years we've been a public company.

28:09 We will end this year. You'll hear from our business people the great momentum that we've got in the best position the company's been in, and we're just wanting to be exceedingly prudent given what we think is an uncertain environment and looking for clarity as we go through this period of time. But I'm very pleased about the progress we've made as a business, where the balance sheet and liquidity position will be at year end, and all of those factors will impact our decision about exercising that judgment in the fourth quarter or if we defer to the first quarter?

28:50 Okay, that's helpful. And then my follow-up would be sticking with capital. So you mentioned at the closed transaction close that you would basically be below your debt to capital targets due to the offsetting gain at close of that live transaction. So Are there any changes with the proceeds that you get from the components of both that you've kind of earmarked for buyback or debt management actions, just given where you'll be from a leverage perspective when this deal does close next year?

29:21 Sure. Good question. Mike, do you want to start?

29:24 Absolutely. Elise, thanks for the question. Good to hear from you. As I said in the remarks, we do expect the ultimate gain to be – we had originally guided the ultimate – sorry, not gain, loss on sale from the whole transaction to be between $250 and $750 million. That's what we had announced. We now think that that will be in the range of zero to 500 million. So we had been guiding to the low end of the range. Now I think it's at the low end of the original range or even a little bit below that. Obviously, we'll need to see how spreads and rates evolve over the balance of the fourth quarter or whenever we ultimately close the transaction. If that range holds, then the debt buyback that we had guided to was in the 600 to 800 range.

30:16 I think that will likely be toward the low end or possibly even lower, modestly below that 600 to 800. What we'll be doing as we get to the other side of the close, and again, pending whatever we decide to do between now and then, we'll be likely entering into, if there are no other better uses of the capital, we'd be entering into a broadly systematic approach to repurchase, and then the debt would be brought down accordingly to the extent that that's the path we take.

30:55 Okay, thank you for the color. Our next question comes from Josh Shanker with Deutsche Bank. Please state your question.

31:06 Yeah, thank you very much. I wanted to hear a little bit about what's going to happen in the first quarter with medical stop-loss renewals and potentially how COVID might change or maybe it won't change purchasing behaviors of self-sure employers. Given changes in employment or unemployment or whatnot.

31:27 Sure. Rob, do you want to take that?

31:29 I can do that. Thanks for the question, Josh. Yeah, so as we're sitting here today, we're in the throes of 1-1 activity. And as we've seen things thus far, you know, feel good about what we're seeing both from a volume perspective. Certainly, you hear this across the industry of sort of the ebbs and flows of, How activity looks, I'd say we feel very good about what we've seen to this point. As we think about next year and the pricing dynamics, certainly there's a COVID overhang in our thoughts and thinking. But at the same point, and we've talked about this in prior calls, where we play in the marketplace tends to be that middle and larger employer size.

32:17 You translate that into deductibles at an individual level that are in the $200,000, $300,000 plus range. Those are obviously sizable numbers that someone's got to meet. And so, you know, what we've seen in our book thus far is relatively minor to low to no activity or impact from COVID in our results. There's certainly been some, but it's not been big at this stage, as I think Mike said in his comments as well. So as we sit here now, there's a bit of just caution, but also we've gotten awful good at this over the last few years of just getting the renewal activity and the pricing where we want it to be. Sometimes that's hard dollar pricing.

33:04 Sometimes that's just employers rethinking where they want the deductible to be and what they're comfortable with. from a risk standpoint in managing sort of their overall medical claims cost and just where they position that. But at this stage, I'd say we feel good activity-wise. We've seen good sort of discipline in the market overall, always pockets of activity where we question what's going on competition-wise. But at this stage, net-net, good momentum, as Rod has said, across our business. And then on stop loss, you know, we feel good at this stage about what we're seeing in the current book and then also as we think about moving forward from the pricing standpoint.

33:48 And related, when do you know what the elections are for the coming year in terms of voluntary benefits? You know, for large employers, we do this in October. Will you know before the end of the year how the sales for those voluntary benefits have gone?

34:07 We'll have, you know, indications of what it looks like, but with voluntary, you know, again, we probably talked about this in the past, you know, participant activity, election activity, it can go both ways, right? So there's the, what did I elect? You know, then you start to see those things manifest themselves sometimes in, you know, people dropping coverage. So there's an in and out movement that we tend to think about You know, by end of first quarter, that noise works its way through the product set. So at this stage, you know, certainly too early to call right now. But as we get into, you know, January, obviously we're going to have more information then. And then it takes a couple cycles, a few cycles or months to have that settle itself out. But this is going to be a really interesting time to, you know, to probably under club it.

35:02 The interest in the products we think is going to be different this year. Certainly the data that we see and what we hear from customers and employers, just the interest in better understanding benefits and taking the time to do that hopefully has just gone up. So we think whether 1-1 looks a little bit more volatile than we've seen in prior years, I think the long-term dynamics of this is only going to help You know, what we do, not only within the employee benefit business, but obviously Charlene's, Christine's businesses as well. I think the momentum drivers around what we do is going to really resonate and continue to do so over a long period of time.

35:46 Thank you for very complete answers. Our next question comes from Jeremy Campbell with Barclays. Please state your question.

35:58 Hey, thanks. Just kind of looking within asset management, you guys continue to execute well, but obviously there's lots of M&A going on in the space right now. Do you guys feel confident and comfortable continuing to execute as you have, or would there be opportunities to explore inorganic growth or something like potentially a sale? Christine, do you want to start?

36:24 Certainly. Thank you, Rod and Jeremy. You're absolutely right, Jeremy. Quite a bit of activity has been going on in asset management. But how we think about it specifically is, number one, we're achieving strong organic growth off of the product set that we currently have. And that continues to be sought after, particularly in such a low-yield environment. Clients offshore as well are really looking to put money to work in the U.S. and in our strategy. So when you think about that, what would we be looking for to build out our strategy inorganically if we were to go that direction? You know, certainly looking for a partner or someone that could bring us expanded distribution in offshore markets, notably Asia, is one where we're seeing quite a bit of interest. As well as we do have specialty capabilities, but there are areas where we would like or would consider doing tuck-ins, whether it's private credit or commercial real estate, to our already existing team.

37:33 So we're excited about the businesses we have, eyes open in a judicious way to add when it makes sense, and overall very consistent with the message that we've given you and other shareholders as far as what would the hurdles be to do something inorganic.

37:49 And Jeremy, thanks for the question. Just to maybe build on that, Christine, obviously we're very pleased and proud of the results that have happened year to date in terms of the flows. And Christine, maybe you could speak to, again, our outlook for our organic growth on a prospective basis is basically reaffirming what we've previously committed, but I'll let you speak to that.

38:14 Certainly, Rod. Yeah, so when you think about the Organic growth targets that we put forth in Investor Day was organic growth of 2% to 4% of beginning AUM. And so year to date within investment management, we've had $10.8 billion of net cash flows this year, so beyond the high end of that target. We did communicate in Mike's comments some slowdown in the next quarter or two, projecting flat-ish in terms of flows. Really, that's just idiosyncratic timing as far as larger redemptions versus unfunded wins. But again, when we look at our organic expectations, we continue to see good interest in private asset classes, overall fixed income. And so we are committed and have no reason to not believe we're going to come well Well inside our target of 2% to 4% organic growth. Next year, just seeing just the strength of the unfunded winds in the pipeline that we do have.

39:21 So again, on track to continue to hit those targets. And again, we've had a great year this year. We're thankful for that coming well over the top side of our normal annual estimates for organic growth.

39:36 Great, and thanks for the color around products and channels you'd look to augment. I guess just kind of one quick final wrap-up on that one. On the inorganic side, is there any preference for something to tuck in or a larger scale type of play, or are you guys kind of open for business to figure out what makes sense if anything hits in either of those channels?

39:57 I would say, Jeremy Rod speaking, the latter part. I mean, we've, I think, tried to be very consistent with our answer for a number of years that extending the reach of our existing capabilities internationally from a distribution has been something that we've been very open to. And frankly, Christine and the team have done a really good job without adding that at this point, but we think that could add some velocity to what we're doing. And we have added periodically some teams to strengthen or add capabilities to Great. Thanks so much. You bet. Our next question comes from Tom Gallagher with Evercore.

41:08 Please state your question.

41:10 Thanks. Rod, just to follow up on that question, should we think about if you are open to doing asset management M&A that you'd be willing to use a sizable portion of the lifestyle proceeds for that, or should we still thinking about a billion being earmarked for buybacks?

41:35 Tom, good question. What we communicated going into 20 was the anticipation of doing a billion dollars of buybacks in 20. As you recall, we did a little north of 400 and some million in the first quarter. COVID emerged, the world paused, we paused like many, and that's where we were. And if you look back at the previous two years, we've done a billion dollars over the previous two years and six billion in total. So that number is not a foreign number to us, and other than timing, given the optionality and just the experience that we bring to, let's just be a little cautious. Does a quarter or two make a difference in the long-term view of Voya?

42:23 That would be a number that we would be thinking about, in the range we would be thinking about prospectively. But we haven't given those targets for 21 and on. We will be updating that in the fourth quarter, but that's not a number that would be unfamiliar to us. You're correct.

42:40 Got it. And, Rod, so even if there were to be an asset management acquisition, you wouldn't necessarily – I guess it would depend on the size, but based on what I'm hearing you say, you don't foresee a very large – type of asset management deal that would usurp a lot of the life sale proceeds. Is that a fair way to think about it?

43:08 We're not going to speculate on that part. What I am saying is we've got a track record, as you well are aware, of buying back a healthy amount of shares. And we're approaching in 21 our next investor day, which we will, of course, update our thinking on Mike, the comment on leverage...

43:51 Coming down based on the final loss on sale adjustment, I think that would imply a bigger net income gain when the deal closes. Can you just update us on how big of a net income adjustment we're now going to get? Because there's been some movement in adjustments to the transaction price along the way here.

44:13 Tom, good question. I don't have that number right in front of me, so I want to be a little bit careful, but the gain on the underlying assets, which is going to be, I think, the primary driver of that, is in the neighborhood of $1.1 billion, give or take, and that's what gets you to the net loss in that, that's around mid-point $2.50.

44:44 Gotcha. Okay, that's helpful. Thanks. Our next question comes from Eric Bass with Autonomous Research. Please state your question.

44:57 Hi, thank you. I was just hoping for a little bit more color on your outlook for retirement flows. And I hear you in the guidance, it sounds like in 4Q there's going to be some noise with some larger plans leaving. But I wanted to get some more details in terms of what you're seeing in terms of recurring deposits and any policyholder withdrawal trends. Thank you.

45:18 You bet. Thank you. Charlie?

45:22 Yes, thank you, Eric.

45:24 Appreciate it. You know, from a net flows perspective, obviously you saw it here in the quarter, $3.5 billion of full service net flows. We're really pleased with the 28 consecutive quarters in our full service corporate business. as well as the strong tax exempt had solid results largely driven from a large plan transition that was referenced. You know, but you also look at it, you know, we've had almost a little bit over a half a billion in net flows and stable value and the 20 billion in record keeping. And I think what that shows is really diversified growth across many multiple markets. When we look at the part of your question around fourth quarters, surrenders and things there, You know, it was mentioned in the call, the large tax exempt surrender, and I think our team's doing a good job maintaining pricing discipline on renewals, you know, to make sure they meet our thresholds.

46:18 The M&A, the mergers and acquisitions of our clients, these are clients' activity, you know, the business following with our clients in our full-service business, you know, it does fluctuate over time. You know, you win, you lose. Net-net, we believe we're a winner long-term on many of them. But in the full service corporate, you know, we do expect about a little over two times what we did in 2019. So that's what's driving that. But, you know, when we look at our recurring deposits, you know, across to that part of your question, the 8.4% we expected, you know, and I think Mike said it, so we expect it to drop. Thank you for joining us today.

47:28 on a trailing 12-month basis for the full year. Now, what's driving a little bit of that slower growth on recurring deposits, but I would still underline the growth, is that employer contributions, you know, we've seen total employer contributions in the third quarter decrease by a little over 1%. That's being driven by about a 6% decline in the average contribution per plan, so per employer, their employer's average contribution, but it's offset by our growth, which I've talked about, which we've had a 5% increase year over year in the total number of plans that had an employer contribution.

48:13 You throw on top of that, in terms of recurring deposits, the employee contributions, and You know, we've seen an increase in the number of participants in our full service business. I think it was mentioned in the, you know, earlier that, you know, we have, excuse me, we had a 13% total participant growth, a 21% in record keeping, but in full service, it was a 6% increase in full service record keeping year over year. And we saw an increase in total participant contributions. So, you know, when I look at that in total, you know, Boy, geez, on a trailing 12-month basis, you know, we're actually clocking about $89 billion in total deposits, and that'll give us back-to-back $50 billion-plus a year total deposits.

49:00 The growth in participants, really kind of a strong diversified growth. So I think it shows that our value proposition is resonating, that we're winning and retaining and growing our business despite some of this macroeconomic headwinds. And, you know, I would say that I think we're very well positioned to weather, you know, the financial impacts both through and beyond COVID. So, you know, and I think that really shows through in our value proposition resonating both with our customers, our distribution partners, and employees, because they know that Voya is going to fight for everyone's opportunity for a better financial future during and beyond some of these uncertain and challenging times.

49:45 Thank you. And then follow-up, just one, so if you could provide an update on how quickly you'd expect to be able to get the stranded costs out once the life transaction closes. Do you think you can still get to kind of a normalized BPS run rate by 2022, or will this take a little bit longer given delays in closing the transaction?

50:05 Mike, do you want to start?

50:07 Yeah, and Eric, look, we've been getting ready for the process of taking out the stranded costs since late summer. So we've got a slew of initiatives already in line. Bottom line is, will there be some delay? Yes. I think it's more in the terms of a couple of months. It's not in terms of quarters. So overall, I feel pretty good that over the next two years, we'll be able to take out the vast majority, if not all, of the remaining stranded costs. More to come when we get to the other side of the close and we can get a little more specific. I think that's the way to think about it is we're still largely on track.

50:53 I don't think the delays up to this point are going to amount to much. Got it. Thank you. Our next question comes from Ryan Kruger with KBW. Please state your question.

51:09 Hi. Good morning. With interest rates at current levels, is there anything material we should be thinking about in terms of higher pension costs as we go into next year?

51:24 Thanks for the question, Ryan. Look, I think it's a little early, and there are sensitivities in the K that you can go to that'll give you a sense of what's happening with the underlying pension liabilities. The discount rates have dropped, I think, meaningfully, but not maybe as much as you might I think right now we're looking at the end of the third quarter. The drop is about 60 basis points, and you can apply that to the sensitivities that are in the K that are per hundred. On the flip side, the asset portfolio obviously will have something to say about that as well, how the underlying assets are performing. And I think bottom line is, at least right now, we're looking at the overall pension cost as being We've got a long way to go. And it's not going to move the needle in a dramatic way, but it could be modestly favorable in 2021, depending on how things go over the next six to seven weeks.

52:36 Thanks. And then I have one more on consolidation. We've seen a fair amount of retirement consolidation, but more in the 401k market. And you talked about your view there. Does your view on your participation in consolidation, does it differ at all between the corporate market and tax exempt market? I guess, how do you think about tax exempt M&A?

53:06 Let me begin. It's Rod. The first piece that we look at is, is it strategic? And does it fit Our overall narrative around the workplace and the institutional focus, and obviously that example would fit there. And the second piece, as we've discussed over a long period of time, from an EPS perspective, over approximately a two-year period, it needs to be accretive to share buyback. And then we need to look at our relative position in the marketplace. And we've given this example in a previous question at a previous time with a different company acquired an asset in a record keeping example. Well, we've been in the record keeping business a long time and we didn't need to acquire that capability and therefore made a decision to not engage in that.

54:03 And so again, it would be property specific and it would need to meet both the strategic criteria, the fit to the workplace, and Financial Institution Focus or Adjacencies and obviously and critically important, the financial outcome from an EPS perspective as we've discussed. Mike, feel free to add.

54:30 I think you answered it well, Rod. I don't maybe just kind of summarize and say there's no incoming bias one way or the other. I think it really is a question of fit and value as we're looking at the properties.

54:45 Understood. Thank you. Our next question comes from John Barnage with Biper Sandler. Please state your question.

54:56 Thank you for the opportunity to ask one. Can you talk, given how work has changed, where it's done, how have you thought through and quantified maybe potential real estate savings that emerge as you start to remove some of these costs? Thank you.

55:12 Happily. John, good afternoon now. I guess it's no longer morning. I'm happy to begin. We moved like most firms the mid of March. from a Friday to a Monday to a virtual environment. We've got approximately 6,000 employees, US. What we perhaps haven't talked about as much pre-COVID was 20% of our workforce was something that we call virtually orange. In other words, they were virtual previously. And we've had that model in place for a long time, well over a decade. And it's been a very effective model. And that percentage has increased. As we've gone through this and had the experience that we've had, we see a number of things emerging as we go into 21.

56:02 I fully expect when the science permits, there will be some number of our employees which will naturally want to and we would welcome them to return to office. There'll be another group that will be in a model that many are talking about using the theme of hybrid. They may be in office a day a week or two days a week and working virtually the balance of the time. And I do expect our virtually orange employee group that is presently 20%, I think that number will grow significantly. And how we're looking at this is we spend a lot of time with our employees to make sure that first their health and safety is paramount.

56:50 And then the health and safety of both are Advisors, consultants, and contractors in the same way. And I think this model will change dramatically. I think our virtually orange group will go up. I think our hybrid will go up, and there'll be some amount that will naturally want to return to office, and we would welcome that. Getting to the end of the question, we're focused on this more on both employee satisfaction, retention, and attracting talent to fuel our growth prospectively. And when you net that all the way through the equation, there will be, and it's a little early for us to forecast this yet, but there will be different decisions that will be made as an outcome or a consequence of that stream of events that I just described.

57:38 And we will reflect that as our thinking evolves in Q1 and Q2. But I do believe Thank you very much for the answer. Best of luck. Thank you. Our next question comes from Andrew Kligerman with Credit Suisse. Please state your question.

58:23 Hey, good afternoon. You know, we just want to get a little more clarity into your commentary around monitoring on the buybacks. Let's assume we can get through COVID and hopefully the election. You had talked about in the second quarter on the conference call that is about a pathway to completing a billion dollars for the year. And as you cited earlier, that would mean another 600 million. So if we roll into 2021, the deal gets completed, you get the clarity that you need around these economic and COVID issues, would that mean that you could get back to your 90% to 100% of earnings pace, and then a catch-up on the $600 million.

59:20 And if you were to do that $600 million, could you do it very quickly?

59:26 So two parts, and Mike, I'm going to ask you to jump in here too. But Andrew, first, good to hear your voice and a very fair question. Our free cash flow conversion, particularly post the life sale, will be in the in the 85% to 95% range. And again, that really completes the transformation piece from what we inherited from ING Group to what we've chosen to move forward with strategically around our workplace and institutional focus. So we feel really good about those decisions and the higher growth free cash flow components of the outcome of those decisions. The consequence or outcome of that will be Let's say it's beginning of year.

1:00:13 We ended the third quarter here with 670-something million of excess capital, the billion and a half that Mike spoke about with the life transaction capital that will come from the fourth quarter. Andrew, this is part of what I've referred to is the balance sheet and, frankly, the liquidity position has never been stronger, and, frankly, the momentum of the business strong. We just want to be strong. We have a lot of options of how to do that, but Mike, I'll let you add.

1:00:58 Yeah, maybe I just summarize it more to the top. I think over the course of a few quarters after we close the lifestyle, we wind up in the same place we would have been had the sale closed in the third quarter. I think we'll probably lean in a little bit more heavily than we might have otherwise. I think the plan would have been to be We'll continue to be systematic, but we may be a little more lean in a bit. Again, that'll depend too on what's happening with the stock price, what's happening in the world around us. I think we still view buybacks as an attractive opportunity for shareholders, and we'll be very mindful of taking advantage of that opportunity when it presents itself.

1:01:43 In terms of can we do 600 and a quarter, I think mechanically we can. I'm not saying we will or won't. I don't want to get too far ahead because I think it just depends too much on what's going on in the world to say that we would lean in. But we have leaned in before, and I'd point to the first quarter as one example where we did 400, and that was without the benefit of a large stockpile of capital coming from a transaction.

1:02:14 Just kind of curious quickly, the 8% equity market down from 9%, it seemed a bit high to me. Maybe a little color on that, on the thinking into an 8% equity market assumption.

1:02:32 Well, maybe I'd put it in the context of the two big assumption changes we made. First, we lowered the long-term interest rate to 2%, which I think a couple of you have noticed in your overnight notes. I think that puts us at the conservative, if not the most conservative end, and I think it's just a recognition that We have been looking at history as a guide, and that's an important thing to think about as we talk about equity. We look at history as a guide, and the question has been how much utility, how much importance to put on some of the history pre-crisis, and I think we concluded that Given the pandemic, given the change in Fed policy, given that we're now 10 years past the financial crisis and it seems like we're in this new regime, it just makes sense to take that expectation down. And I think, you know, importantly, as I think about it in our communications with shareholders and other stakeholders is simply I think we've taken the interest rate question off the table for quite a while as it relates to the gap balance sheet.

1:03:47 Equity markets, similar logic, right? I think we look at history. You don't have the last 10 years to support that you should lower your expectations. And also, as you look over the last 30 years or 50 years, for that matter, equity markets over that long period of time have generated, I think, meaningfully actually in excess of 9%. And we lowered it largely because we lowered the base interest rate. And so there is, I think, a good theoretical connection between lowering our expectations for the risk rate and then lowering equity market returns. I think it's in the eye of the beholder as to what's conservative and what's not. We believe this puts us right at the middle of industry practice.

1:04:35 There are some lower, there are some higher. But what's important is that this only goes to establishing effectively the intangible and the rate at which we amortize the intangible in our GAAP balance sheet. And it will be used in some of our forecasting assumptions. But for outside audiences, you can use whatever assumption you think is appropriate as you project forward our growth in accounts. The last thing I'd leave you with is just to be clear. For our own growth rates in our models, we assume a mix of bond fund and equity funds. So that number is, we use an 80-20 mix. And so you wind up with an overall return that's more like in the six and a half to seven range on account value overall.

1:05:31 Thank you. Ladies and gentlemen, this concludes our question and answer session. I would like to turn the conference call back to Rod Martin for any closing remarks.

1:05:42 Thank you. Our success, despite the many challenges presented in 2020, reflects the commitment of our employees and our focus on helping our clients navigate the many financial challenges that they are facing. We remain confident in our three complementary businesses, The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.