Q3 2019 Earnings Call
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Good morning.
And welcome to the Voya financial third quarter 2019 earnings Conference call.
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I would now like to turn the conference over to Michael Cats, Senior Vice President of Investor Relations. Please go ahead.
Thank you and good morning, welcome to Voya Financial's third quarter earnings Conference call. We appreciate all of you have joined US for this call as a reminder, materials for today's call are available on our web site at investors God, we dot com or via the webcast.
Turning to slide to some of the <unk>. It's made during this conference call may contain forward looking statements within the meaning of federal Securities Law I refer you to this slide for more information.
We will also be referring today to certain non-GAAP financial measures GAAP reconciliations are available in our press release and financial supplement found on our website investors Dod Voya dot com.
Joining me on the call our.
Rod Martin Voya financials, Chairman and Chief Executive Officer, as well as Mike Smith Boy as Chief Financial Officer. After their prepared remarks, we will take your question.
For that QNX session. We have also invited the heads of our businesses, specifically, Charlie Nelson retirement, Kristine hurt sellers investment management, and Rob Group got employee benefits with that let's turn to slide three as I would like to turn the call over to Rod.
Good morning, let's begin on slide four with some key themes.
Earnings were $3, an 87 cents, which is up 11% compared with the prior period.
We discussed at our Investor day, a year ago that we recognize that markets will shift.
Rates will change and claims experience can fluctuate.
We also shared last November that we're committed to the plan that we outlined including ensuring that we actively manage the levers that are within our control.
In the six plus years that we've been a public company, we've seen markets and interest rates swing.
Each time, we have stayed nimble and agile to ensure that we find a way to meet the challenges and overcome them to deliver on our commitments.
Our track record combined with the strong business profile and fundamentals that voya possesses gives us confidence in achieving at least 10% normalized EPS growth for the full year 2019.
Specifically our results for the first nine months of the year combined with our expectations for the fourth quarter means we fully expect to achieve our target of at least 10% normalized EPS growth in 2019.
As we've previously shared our EPS growth objective will be achieved through a combination of organic growth cost savings and capital management.
We've made strong progress in all of these areas during the third quarter.
As it pertains to savings, we now expect to achieve run rate cost savings of at least $250 million by the end of 2020 exceeding our original goal due to the strong progress that we've made.
We're also driving organic growth in each of our businesses for retirement full service recurring deposits grew 9% and exceeded $10 billion, we expect to be within our target range of 10% to 12% full service recurring deposits growth in 2000.
Isn't 19th.
And investment management.
We generated $1.3 billion of net flows in the quarter, including positive institutional and retail flows. We also saw improvement in our operating margin.
At an employee benefits total enforce premiums increased 12% compared to the third quarter of 2018, helping achieve a record quarter of operating earnings.
Turning to capital management, we had $471 million of excess capital as of September 30.
During the quarter, we repurchased $290 million of shares, bringing the total shares repurchased in 2000 $19 million to $936 million.
We're also now paying a higher quarterly common stock dividend of 15 cents per share.
Since our IPO, we have returned approximately $6 billion of excess capital to our shareholders, which amounts to more than half of our original outstanding shares.
Additionally, in the fourth quarter.
We completed a significant reserve financing that will free up $200 million in excess capital. This is part of our plan to generate at least $1 billion in free cash flow from our individual life business between 2019 in 2024.
Further as we announced yesterday our board has authorized the repurchase of an additional $800 million of common stock. We will continue to repurchase our shares to deliver value for our shareholders in support of our EPS growth targets.
Speaking of our board last week, we welcomed Kathalene trained our de rose as a new director.
Kathleen brings significant leadership and expertise from were more than 30 years of accomplishments in asset and wealth management.
We're pleased to have Kathleen on our board.
Who along with all of our directors provide valuable perspectives that helps us ensure we're thinking broadly and diversely as we advance our growth plans.
Turning to slide five.
We've achieved further recognition of our culture and our people.
With Voya his vision to be America's retirement company Voya has a noble purpose that emphasizes both what we do and how we do it.
Most recently.
We were once again recognized by the great place to work Institute and we're also named as one of the 2000 1900 best companies by working mother magazine.
Additionally, boy was named to the 2019, Dow Jones sustainable index for the fourth year.
35 companies in the financial services industry were invited to apply.
And we were one of only eight to become a member.
Finally during September we held our annual employee, giving campaign was 69% of our employees, helping us support more than 2100 charities.
As a reference point the average workplace campaign as a 32% participation rate.
Our normal purpose is demonstrated through our ongoing investment in our people and our communities.
And is differentiating us with both our current and prospective customers.
We continue to see a strong correlation between our focus on doing the right thing.
And our financial performance in summary, we've made great progress on a number of fronts during the third quarter and we're on track to achieve the annual growth goals that we shared with you last November with that let me ask Mike to provide more details on our performance and results.
Thank you Rob.
Let's begin on slide seven.
We grew in third quarter normalized after tax adjusted operating earnings to $1.36 cents per share.
This is above the second quarter result of $1.30 cents per share and is also above the prior year quarter result of one dollar and 34 cents per share.
In the third quarter, we recorded 63 cents of unfavorable DAC voba and other intangibles unlocking largely reflecting the results of our annual actuarial assumptions update I will cover the assumption update in more detail in a few slides.
Prepayments and alternative income were eight cents above our long term expectations.
On a reported basis after tax adjusted operating earnings were 81 cents per share for the third quarter.
Our third quarter GAAP net income was generally consistent with adjusted operating earnings as favorable net investment gains were primarily offset by restructuring charges.
Importantly, we remain on track to achieve at least 10% normalized EPS growth this year.
Moving to slide eight.
In the third quarter retirement delivered 146 million of adjusted operating earnings excluding unlocking.
Trailing 12 month return on capital was 13.2%.
Compared to our record quarterly adjusted operating earnings a year ago prepayments and alternative income were less favorable although still 5 million above long term expectations.
Investment spread and other investment income were lower this quarter included a gain of approximately 5 million on a fixed income investment that we do not expect to repeat in the fourth quarter.
Administrative expenses were higher for several reasons the three most significant of which were as follows.
First we recognized a onetime adjustment to a prior period expense deferral that increase to the quarters expenses by $11 million.
Second as we've shared in previous calls we continue to incur higher pension costs in 2019.
Recall this was approximately 7 million per quarter pre tax for the total company, which roughly half is reflected in retirement.
Third we realized increased volume related expenses as we continue to grow our business.
For the fourth quarter, we expect or administrative expenses to return to the high end of the $190 million to $200 million range and we expect adjusted operating earnings to be consistent with our earlier guidance of roughly 150 to 155 million.
Turning to flows in full service, we generated 1.3 billion of net inflows during the quarter with positive net flows across both full service corporate and tax exempt markets.
Over the last 12 months, we have generated over 3 billion of full service net inflows.
Trailing 12 month full service recurring deposits exceeded 10 billion in the third quarter. We're proud of this accomplishment and continue to expect 2019 annual growth in recurring deposits to be within our target range of 10% to 12%.
Total client assets finished higher sequentially helped by favorable equity markets and continued client wins, our pipeline of full service and record keeping plans in implementation continues to grow.
Within record keeping we continue to expect over 38 billion of net inflows by the end of 2020, including nearly 20 billion in the fourth quarter of 2019.
We encourage you to follow our developments on the Investor Relations Web site.
We remain very encouraged by our pipeline, which reinforces our view that our value proposition is resonating in the market.
On slide nine investment management delivered 46 million of adjusted operating earnings in the third quarter.
This is 2 million lower than prior year quarter as favorable prior year investment capital results did not repeat.
These were higher year over year, driven by institutional fee revenues generated by cumulative positive net inflows.
Please also improved sequentially benefiting from net institutional and retail inflows and favorable equity markets.
Administrative expenses were consistent year over year.
Sequentially expenses were lower as planned as technology investments in the prior quarter did not repeat.
In the third quarter, our adjusted operating margin, including investment capital improved to 27.4%, marking the second quarter as an inflection point for margin growth.
On a trailing 12 month basis, the operating margin was 25.9%.
We continue to expect our operating margin to reach 30% to 32% by 2021.
Third quarter institutional net inflows were $332 million, marking 15 consecutive quarters of positive flows.
Of note in the quarter, we had continued success gathering insurance channel assets and we closed another COO over.
Over the last 12 months, our institutional business has garnered almost 3 billion of net inflows representing close to 3.5% organic growth.
We continue to build on the success of our institutional franchise and our expanding our suite of investment capabilities, particularly in the specialty category. As an example, we recently launched a real estate debt fund and closed on our first committed raised in early fourth quarter.
Turning to retail excluding variable annuity outflows in a positive sub advisor replacement. This quarter, we generated 791 million of net inflows. The retail flows were driven by continued success in our strategic income opportunity securitize credit and intermediate bond funds.
The strategic income opportunity fund was recently added to a large wealth management distribution platform, helping to drive continued strong flows as a top asset gatherer in its Morningstar category.
This fund has more than doubled from beginning of year assets growing to almost 2.5 billion and continues to deliver strong investment performance.
Rounding out the net flows picture, we recorded an inflow of over $200 million from a sub advisor replacement.
Looking ahead, we expect further margin improvement in the fourth quarter due to continued asset growth and higher performance fees.
Turning to slide 10.
Third quarter marked a record earnings quarter for employee benefits delivering 57 million of adjusted operating earnings excluding unlocking.
Return on capital improved to almost 30% on a trailing 12 month basis.
Adjusted operating earnings grew 16% year over year, driven by 12% growth in total enforce premiums and total aggregate loss ratio at the low end of our 71% to 74% target range.
We continue to realize strong year over year growth across all product lines, particularly voluntary and stop loss.
Voluntary enforce premiums grew 27%.
We continue to see more than half our sales coming from employers who previously had not offer these products to their employees.
Stop loss grew 9%, we remain a must quote stop loss provider with solid distribution partnerships with top national firms.
Additionally group life and disability enforce premiums grew 9% year over year.
We expect fourth quarter adjusted operating earnings consistent with last quarter guidance of approximately $50 million as favorable third quarter loss ratios will likely moderate in the fourth quarter.
We feel confident our capabilities will enable us to continue to drive strong future earnings growth.
On slide 11.
Individual life adjusted operating earnings were 55 million in the third quarter, excluding unlocking 11 million lower than the third quarter 2018.
Return on capital was 8.1% on a trailing 12 month basis.
Third quarter results were affected by unfavorable mortality driven by severity.
Average net claims were approximately 20% higher than expectations.
The adverse severity was concentrated in our interest sensitive block, which was partially offset by reduced intangible amortization.
Frequency of claims was inline with expectations.
As we have said mortality experience does fluctuate over time and the last 10 years experience remains consistent with expectations in the aggregate.
We expect fourth quarter mortality to return to levels more consistent with our long term expectations.
Additionally, we continue to expect at least 1 billion of free cash flow to come from this block between 2019 and 2024.
Early in the fourth quarter as Rod highlighted we completed a significant reserve financing transaction that will release approximately $200 million of capital.
This amount will be reflected in fourth quarter excess capital.
Turning to slide 12 as is our practice, we conducted our annual review of actuarial assumptions during the third quarter.
Overall, the review had a modest GAAP impact and importantly, no excess capital impact.
We lowered our long term interest rate assumption for the 10 year treasury rate to 3.75% of 50 basis point reduction from the prior assumption of 4.25%.
This resulted in an unfavorable unlocking of $52 million, which was inline with our expectations.
Portfolio yields 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.
The remaining unfavorable unlocking included modest adjustments to persistency interest margins and other refinements to our policyholder behavior assumptions.
On slide 13, we provide additional items to consider for the fourth quarter.
Looking ahead, we expect to benefit from normalized individual life net underwriting higher investment management performance fees, lower corporate losses, reflecting seasonally lower preferred dividends and continued progress on cost savings.
Lower retirement administrative expenses with the onetime adjustment to deferrals, not repeating and higher revenue due to recent retirement plan wins.
These beneficial factors will be partially offset by the following third quarter items, we do not expect to repeat.
A onetime gain on a fixed income investment unusually favorable employee benefits voluntary experience and a favorable onetime tax adjustment primarily due to true ups of prior period estimates.
As a reminder, our quarterly earnings per diluted share count can include increased shares from outstanding warrants depending on share price levels.
In the appendix we've included a sensitivity table to help you calculate the impact of the warrants.
The table incorporates exercise price adjustments related to our third quarter dividends.
While we have provided some items to consider there of course other factors that may affect fourth quarter EPS results.
Turning to slide 14.
We shared this slide on our second quarter call to highlight the diversification of our revenues due to our business mix.
Relative to peers with long term care and variable annuity exposure the low interest rate environment has limited potential to impact our balance sheet.
Based on Investor feedback, we believe will be helpful to reiterate and clarify our interest rate sensitivity.
The headwind from our current interest rate environment has now been fully reflected in our 2019 operating results to date and the expectations for the fourth quarter that I just discussed.
Relative to the plan, we laid out at our Investor day in November of 2018, when rates were more than 100 basis points higher than today. This headwind would represent the lower end of the 2% to 4% sensitivity range. We have previously disclosed for a 100 basis point change in interest rates.
If interest rates were to stay at current levels through the end of 2020.
Our 2020 operating earnings would face and additional headwind of 1% relative to 2019 results.
And if they were to stay at current levels through the end of 2021, our 2021 operating earnings would face a further incremental 1% headwind relative to 2020 results.
We have a demonstrated track record of delivering strong results through macroeconomic challenges, including low interest rates.
We believe our exposure to macroeconomic factors is manageable and we fully expect to hit our 10% plus annual earnings growth target.
Turning to slide 15, we continue to have a strong capital position.
Our estimated RBC ratio was 450% at the end of September above our target of 400% and excess capital was 471 million.
While third quarter share repurchases lowered our excess capital from second quarter. This was largely offset by the increase in RBC in our insurance subsidiaries.
Our debt to capital ratio was 27.4%.
During the quarter, we continued to repurchase shares at attractive valuations, we repurchased $290 million of shares in the third quarter, bringing our year to date share repurchase level to $936 million.
The board also provided authorization for an additional $800 million, increasing our total existing share repurchase authorization to 850 million.
In addition, as ride shared earlier, we paid a third quarter common stock dividend of 15 cents per share.
This represents an annual yield of over 1%.
The introduction of a higher dividend reflects our confidence in generating sustainable free cash flow and will help to further expand our shareholder base.
Turning to slide 16.
Our diverse business mix today generates a higher free cash flow conversion than the average of our peers. Our free cash flow conversion is 85% to 95%, which supports our projected free cash flow yield of almost 10%.
In summary.
We expect to grow normalized EPS by at least 10%. Despite continued headwinds from persistently lower interest rates and unfavorable individual life mortality.
Our business mix is focused on high cash conversion has no long term care and minimal V.A. exposure.
And our capital position and balance sheet remains strong.
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.
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As a reminder, participants are limited to one question and one follow up.
Our first question comes from Nigel Dally with Morgan Stanley . Please state your question.
Great. Thanks, and good morning, and a question on the fourth Freebie market missing press reports, stating the fccs looking into that market say couple of questions. First if you can I mentioned, just how large that marketing Savoy and second do you see any impact today's investigations on your operations going forward.
Nodule good morning, its rod Charlie will take the first part of that.
Thank you Nigel.
Our K 12 business in our full service represents about 15% of our total full service assets and just about 6% of our recurring deposits.
And I certainly understand that the the the interest stuff in the FCC and the DFS inquiries has been top of mind for for a number of people and given the recent headlines and im sure youre going to understand that as a matter of policy, we don't confirm or deny specific regulatory inquiries.
However, let me just say that we really value. The service we provide to our educators and are confident that that our business practices in that market had been entirely appropriate.
I'd also say that I'm not concerned that incurred inquiries into this market or our practices and it would have a significant impact on our earnings or require any material changes to our business practices.
That's helpful. Thank you second question. It gets we as capital to review the 850 million current authorization as a good indication as to what you expect to execute between now and you in 2020, no sizable portion of excess capital is at the sub level to Greg I'm, hoping to get some details as to.
When you should be out to expect to dividends that out to the holding company yes.
Nigel Thanks as Mike.
Our practice has been to regularly seek $500 million increments in share repurchase authorizations from our board and we've consistently over the years I think demonstrated.
A very strong track record of of exercising good judgment and prudence in managing our overall capital. So I think as you think about the 800 million I think for fourth quarter, I think a reasonable place to start for expectations is 200 million.
But obviously events will unfold as they do.
The reason for the 800 this time as opposed to 500 is simply a recognition that we've got this excess capital coming from the life business.
We will see how how events unfold and you can expect us to continue to exercise the good judgment in philosophy that we have shown up to this point.
Nigel I'd I'd add to if you look back as last year by way of example, we repurchased about 1 billion hundred $50 million of shares if you take the 936 and the guidance. Mike just gave add 200, we're going to win a very similar place and certainly part of what we're trying to convey in our.
Our guidance up in the fourth quarter overall is further confidence in our momentum by the 800 million and the increase in the dividend as we as we push up and Nigel I did Miss one part of your question, which was the dividends from the operating companies site. The practice that we followed his.
We'll we'll have opportunity to seek those dividends in the second and third quarter of next year in the meantime, we do have an intercompany loan facility that we can do use to manage the cash levels between operating and Holdco.
So I think we'll we'll seek to manage and maintain a relatively stable level of share repurchase as we go forward.
That's great. Thanks, a lot.
Our next question comes from Ryan Krueger with KBW. Please state your question.
Hi, Thanks, good morning.
Some additional detail on their retirement pipeline and where it stands at this point.
And to the comments you made on the recordkeeping fees.
Charlie.
Sure.
We remain very.
Very happy with the commercial momentum that we have I think when you look at our our net our net flows through the first three quarters of this year, we're roughly at about 3.2 billion.
And.
That is really quite an accomplishment when you think in respect to both what's occurring in our corporate as well as in our tax exempt business and and I think.
In that we talked I think it was recognized in the comments. So that we had our 24th consecutive quarter of positive net flows in the full service business for our corporate market and in over that time period in that streak. It's also been over $10 billion and flows so as I think about the kind of where we are in our.
Our pipeline.
For ACA plans at our and implementation today as of the end of 930, I should say we have about.
One over 20%, 25% of plans more than we had at 930 last year in the process of implementation. So we've got really good strong momentum there.
And we expect it thats kind of help contribute to the fourth quarter and into 2020, having said that when we think about the Rick the record keeping business edge. As you noted we did guide last quarter that we've got $38 billion and over a half a million participants coming on between the floors.
Quarter of this year and through the fourth quarter of next year, and we have a number of large.
Implementations that are occurring almost literally as we speak and uncurved early in this quarter. So we're really quite pleased about both the our ability to take the the additional activity in the market turn that activity into growth and that ultimately starts to roll through in our financials.
Thank you and then on the performance fees from investment management in the fourth quarter can you give an indication of of how far above your typical expectation that might be.
Okay.
Christine.
Yes.
We are.
We do have chunk performance fees and it.
Relation to you and mortgage investments on that we have.
When we think about going into the normalized performance fees and have an expectation now.
So as you know these are tied to excellent investment returns that were delivering for our clients. So the way to think about it I in the fourth quarter very strong performance share for our clients.
This particular strategy the returns and performance are tied more to us securitize market.
Got to equities, so were confident that so we're going to be earning these fees as we put forward even if the market gets a little bit more volatile from here.
Thank you.
Thank you. Our next question comes from Suneet Kamath with Citi. Please state your question.
Thanks. Good morning, just wanted to circle back on capital first themes that with your excess capital pro forma for the 200 million from the life business.
Thanks, 71 could fund the majority of your 50 authorization without dipping into free cash flow that you'll generate between now and year end 2020. So.
Just wanted to get a sense are there any capital need that you guys are contemplating either at year end year in 2020 that could utilize next year's free cash flow be it.
He reserves or anything along those lines.
Steve This is Mike I'll take that there's nothing on the horizon that we see I think you may be hinting at cash flow testing.
You know that work is underway, but at this point given current interest rate levels and the work that's been done so far I, there's nothing that we see of any significance on the horizon.
And there are no other planned capital needs. So I think it.
It may be the easiest way to describe it as we're in the same position we've been for the last several years is that we've built up.
On a nice level of excess we have a fair amount of flexibility in how we choose to deploy it.
You can expect us to continue to focus on share repurchase as as we have in the path.
Going forward and.
We will look stay tuned.
So the only thing I'd add is in that fully contemplates the investments we have been making in our businesses.
And that's in our investment management business, our group benefit business and our retirement businesses.
To fuel the growth that you are seeing revealed in the outcomes that we're talking about on the call.
Okay. That's helpful. And then just one more on the slide 13 that bridge to fourth quarter.
The one line item that jumped out at me here was the revenues from retirement plan wins of benefit of four cents.
I don't recall seeing something like that in the past. So I just wanted to get some color on that but the.
Is this wins that you've already booked or is this stuff that you expect I'm just trying to understand we should be thinking about this is sort of a core growth component, which is typically excluded from this slide.
Cidade good observation.
I'm going to hand, this to Charlie we havent provided that level before.
You and others have been asking questions appropriate questions on.
We have made investments in anticipation of Onboarding. This half a million new customers in the 38 billion a record keeping that Charlie talked about part this year part next year and you naturally all at one of the say when does that begin to reveal itself and we've given an update Q1 Q2, now Q3 and why.
We called that out specifically was it is beginning to reveal itself if theres a deferred nature of this and I'll, let Charlie take it from there.
Yes, thanks Rod.
It really is just that it's the building sales momentum really across all parts of our retirement business I would point that it's not just the record keeping we've had good momentum in our full service and other aspects of our retirement business that is really when you kind of look at it in total it's kind of the key.
Combination of this growth in hitting really on all the cylinders that I think is is driving that kind of fourth quarter. Four cents guide if you will.
As Rod mentioned, we've got some notable record keeping implementations, which have gone live late in the third quarter and some in the fourth quarter and certainly those will contribute but I also go back to your like we had 4.8 billion in total deposits in the third quarter.
Which is 30% over 30% more than we had third quarter last year. So it's kind of that just building momentum and I think it yet it represents that our brand is strong.
I think as demonstrated by how our value proposition is resonating in the market along with our ability to be able to take this activity and drive it into true growth.
Hi, Thanks.
Our next question comes from Tom Gallagher with Evercore ISI. Please state your question.
Good morning.
Mike just wanted to follow up in the way you guys, you're thinking about interest rate.
Drag from if.
Rates remain low the you know in and this might not be considered explicitly in interest rate expense, but I know in 2019 you flagged.
Higher Ics pension expenses.
As as being a pretty meaningful earnings headwind.
That is that likely to also increase in 2020.
If rates remain where they are today.
I guess, the favorable equity markets might be a partial offset to that can you.
Can you elaborate a bit on on how you see that impact for for next year, Yes, and we'll we'll certainly give more color in the fourth quarter, Tom, but but kind of the early read is the the equity market performance that we've seen so far will largely offset.
The drag coming from asset returns that are supporting the portfolio.
There's also a question of the the Mark that comes in valuing the liability and that will be very dependent on exactly where rates are as of 12 31.
So a little hard to give very specific guidance, but I think in terms of the ongoing expense.
So long as equity markets hold up at a level like where we've been I don't think there'll be any meaningful impact from here.
Okay. That's that's helpful. And then my follow up is just on the individual life insurance business I know its second quarter in a row, you've had adverse mortality.
I think we'd seen.
A number of companies across the industry.
Now has.
Now I'd say increasing.
Numbers of quarters, where you've seen this adverse mortality just curious if you've done a deeper dive into into your block and.
Are you still confident that you're up.
Your reserve are in good shape there. Thanks.
Thanks, Tom Yes, we've done a lot of work to try and get under what is led to these two consecutive quarters of adverse severity and I want to really emphasize the fact that what we're seeing is just average claims are higher than you would otherwise expect there I think as everyone.
Listening to the call probably knows you you make a frequency assumption you know how many claims will you pay.
The last couple of quarters, it's that number has been basically right on top of our expectation and that's really the assumption. We make is how many claims will we pay and then the random part of it is which which policies are the ones you pay and there's a wide range of policy amounts that that we have in our 800000 pollo.
Ladies.
And so of of the very few policies, where we paid claims. This year. There was a higher average claim amount and in this quarter it happened to be 20% higher than normal in some past quarters, you've seen where it's been concentrated in blocks of the block where the policies are over 1 million or high.
Higher.
In this particular quarter there was no special specific pattern. It was broad based the claims just skewed to higher amounts.
So what gives me confidence is that the number of claims was right on top of our assumption I.
I'm also confident because over the last 10 years as I said in the remarks, our expectations and actual experience over that whole period are right on top of one another.
Now that said it's still.
We're in the risk business random noise does emerge sometimes you flip a coin five times and it comes up five heads.
It's possible, we could get a six in next quarter, but I feel pretty good that thats unlikely to sustain.
Okay. Thanks.
Our next question comes from Erik Bass with Autonomous Research. Please state your question.
Hi, Thank you. Its first just wanted to follow up on Smedes question on the kind of the retirement earnings and revenue build so I'm, assuming the four cents state you get in the fourth quarter is something that was just think of as a new baseline that would annualize, but is it right to think of that continuing to build up as you add new business and the rest of the pipeline comes through.
Through in the fourth quarter and throughout next year.
The short answer is yes, you should consider that is something that we will continue to build upon and I think its hopefully you get a sense from my comments on both our pipeline the plans and implementation is too.
Those are the reasons why we give it we have confidence that it's going to continue to build on that basis.
Got it. Thank you and then in talking about the expense saves you're clearly emphasizing that you expect to get at least the 250 million by the end of 2020, where are you finding incremental opportunities and can you help us think about where these could show up in your financials as you move to showing more of the savings in the business units.
It's Rod let me let me begin.
The.
Discipline that the organization has brought to this we've had over 300 different singular initiatives that has been very much grounds up not top down driven.
That every one of the people on this call are intimately familiar with the glide path to get there.
What's giving us confidence is the kind of the muscle building as we've gone through this in terms of the programs in the problem solving.
Has just demonstrated further ability to.
To execute against a against the target. So we gave the range. Originally as you know of 230 to 50 by the end of 2020. If you are correctly hearing us say at least 250, and we will naturally update you as we get to the fourth quarter and beyond.
I think it's important also to state this is not.
Primarily driven by people. This is about technology. This is about procurement. This is about being smarter in doing business with vendors.
Theres a whole bunch of things that are driving this and it's something that.
The the payments in the room with me right now literally sits in a meeting once a week and we have a very clear path of where we are.
On the on the progress of this end to end the execution and I, I think what which particularly notable and the message. We're trying to send US. This is something that as we move forward of course, all businesses have pressures to find ways to compete more effectively and this is a skill set on a competency that will.
I'll be able to use and execute against in.
Mitigating margin pressure and finding ways to provides the appropriate solutions for customers in a competitive manner.
And then Erika in terms of geography, I think as as you know weve when we completed the sale of the annuity and CBVA business. We moved the stranded costs that were associated with that and kept that incorporate rather than reallocating into the businesses.
And ever sense as we've reduced costs, we've applied it up against that ongoing stranded costs. So we redirected savings into corporate.
No at this point new this stranded cost is.
Likely to be zero or close to zero. The remaining stranded costs is likely be close to zero at the end of the year.
So, we'll we'll stop that mechanism that we've been using to redirect saves and we'll give you a little clear picture of what that will do to the geography of saves relative the business units in the fourth quarter as we start to such going forward expectations for 2020.
Got it thank you.
Our next question comes from Humphrey Lee with Dowling and partners. Please state your question.
Good morning, and thanks for taking my questions have a question in investment management. Obviously the results were very good this quarter, especially on a net flows.
In the items such as retail funds were seen to higher sales level and the lowest redemption in recent quarters I believe Kristine talked about I'm hitting an inflection point last quarter. So I was just wondering is this quarter's results in line with your expectation and how do you think about sales and redemptions going forward.
I'm, sorry, yes that you're right, we did reference inflection point and the strength that we saw is within our expectations and so.
What do we what do we think about this going forward and like loudly confident this strength is going to continue just just a couple of key things we number one our investment performance Herb and when you look at just some of the fixed income funds, notably a very strong flows like referenced in his comments strategic income opportunity fund.
For example, in the third quarter that fund Scott placed on a very large broker dealer.
And it also gotten is to the recommended list, which is highly valuable at a very large broker dealer in the third quarter. So thats just one item that's done a really support the ongoing focus for that and we've a very strong securitized sign. So in addition to the strength that you're seeing in retail sales are you're also actually seeing the basis points start to news.
A little bit because again, you know last year and market generally the story is active equity and going out we're certainly not immune to that that what you're really seeing is that we're starting to sell some of the higher priced higher margin retail sites, such as ESI endlessly call, it and and securitize. So again.
A lot of momentum lot strength, and then on the redemption side that is slowing down.
Notably we've had some higher redemptions due to performance and real estate science, which has stabilized as well as it's another headwind on Silverdale Humphrey expected in the mentioned that shifting to continue well into 2000 flooding.
Got it appreciate the color.
Shifting gears to employee benefits underwriting results continued to be strong, especially in the voluntary and visibility product line. How should we think about that particularly line seems you don't really break out the I guess the underwriting metrics for that particular product at the.
Side of business continued growth how should we think about that.
Rob Yes. Thanks.
Humphrey I think just stepping back from an underwriting perspective across all the products, we're really happy with where we're at obviously, we had to get the whole book of business moving in the right direction to hit record earnings.
As we think about it by product segment.
We've talked a lot about stop loss in the past I won't repeat that story, but we really like the trend line that we're seeing there from a life and disability perspective.
Again, good results this quarter and the end throughout the year really it's Ben Ben performing well as we think about voluntary as Mike mentioned in his comments, we'd expect some moderation as we go quarter.
In the next quarter as we think about the longer term view and the 2020.
As we been explicit unclear about 7% to 10% growth, both topline and bottomline voluntary as can be important part of driving that growth.
As we think about the in force book of business.
Year over year were up 27%, we expect that may moderate as well as that gets more scale.
But the way, it's operating our ability compete in the market.
Do it not just on price I think is going to give us sustainability to the performance.
Got it thank you.
Our next question comes from John NADL would you be speaks to your question.
Hi, Good morning, I have a couple of quick ones I think.
If we if we can characterize investment management margin core margin.
Threeq you as a reasonable baseline it looks like you need about 300 to 500 basis points of improvement to hit your target in the next couple of years could you sort of break down what them with the two or three most important drivers of that margin improvement will be.
Pristine [noise].
Certainly John So you know first Effortlessness important driver is organic growth.
And organic growth and in Q farms, I mean, certainly very strong investment performance as well if when you think about.
Got it fleet that we haven't and taking a step back 14 trillion dollars in the world or a negative rates and so what we have a differentiated income oriented strategies such as commercial real estate are highly valued and so we're seeing a pickup in offshore demand for some of the strategies.
As you know, we just talked about retail and that's including chunk starting an inflection point. So when you think about it growth is paramount and we're very confident we had a strong pipeline we have strong unfunded wins across the business. So that's the growth side and how to rebuild margin.
Other things that we're working on certainly expanding our product.
Got it development and creating new new both products.
That that appeal to investors as well as thinking about expanding.
New channels. So the example that we talked about this quarter, let's we did launch our first commercial real estate that so that's an example of taking a core capability, putting a new vehicle that can penetrate into smaller insurance companies. As an example, and then finally expense management.
We have flat year over year expenses.
Very discipline, there, but you know what is rod just talked about we're pretty scrappy in the second is a key and does not all about expense management reduction we are investing in our business and one of the things that I didn't mention on the retail side is an addition to strong signs in performance. We've also seen great results out of data segment.
Jason and technology and investments in the talent in our distribution. So again, yes, we're keeping expenses flat, it's an important part of achieving the margins, but I don't think for a minute that we are not very effectively investing to support overall growth hit that margin at 30% to 32%.
That's very helpful. Thank you and then a question on expense saves.
With that with an expectation of at least 250 million by the end of 2020 can you just put in some perspective, Mike where you stand.
Or explore maybe you expect to stand coming out of the year end 2019 relative to that to 50.
John I look I think will be.
Maybe in the neighborhood well I think we said last quarter. We are at 150 right as what we had saved and we've made some progress from that point, it's going to be.
Not quite linear, but I think if you model that is linear progress, it's probably good enough for for the for the purposes that you're going to be trying to use it for it in reality be it'll it'll be a little back ended but but not overwhelmingly so.
And if theres a chance I can sneak just a third one in just a question related to in particular related stop loss.
We're in November does a really important time for both renewal and new sales.
In group insurance generally, but just wanted to get a sense for what you're seeing in the stop loss competitive environment.
Yes, I'll take that.
Well you hit it right that were in the heart of it now.
It's probably also means that's too early to declare anything one way or the other.
Yes, I think we we've built muscle up over the last couple of years and the focus on.
Renewal activity as well as new business.
We've talked about before we took a step back to make sure. Our book was moving in the right direction and held back on sales a little bit we changed course in 2019, and you're seeing that come through you know as the book has grown at roughly 9%.
As we think about moving forward, we expect to continue to deliver and we're going to be very focused on doing a in a margin positive way.
At this stage I wouldn't say I see anything surprising.
That's a business where you only close a few percent of what you see.
So we lose a lot and we'd get over it really quickly and focus on the cases, we want to web.
Thank you very much yeah.
Ladies and gentlemen, just a reminder, please limit yourself to one question and one follow up question. Thank you.
Our next question comes from Alec Scott with Goldman Sachs. Please state your question.
Hi, good morning.
First question I had was just a follow up on life insurance.
I was interested if.
There is any impacts from either the actuarial review or the reinsurance transaction and I know you said there is no impact on cash flow, which I know is the most important thing, but just wanted to make sure I was on top of if anything was going to change from a GAAP earnings perspective as a result.
So just to parse that into a couple pieces I in terms of ongoing impact earnings from the assumption review nothing of note that the number the numbers there were relatively small.
And certainly wouldn't be detectable in the ongoing earnings stream.
As it relates to the transaction.
There are additional financing costs. So so that that is an ongoing costs.
There is the loss of the assets that ultimately be distributed and so you lose the income on that however, and this is important.
We would we would still expect life earnings to suffer no meaningful degradation from normalized for mortality 2019 levels and that's because there are we see offsets in terms of expense saves.
Emergence of GAAP profits in patterns that we expect so overall, while there will be drag from the transaction.
Total earnings you should think of as being basically level with the normalized 2019.
Got it Okay and then my follow up was on retirement.
Yes, I guess just on the crediting rate side in the guaranteed minimum interest rates and some of the group annuities can you talk about anything you are doing there any action, maybe you've taken or any action Thats plan. I know you guys have done some of that in the past and just be interested if any of that is kind of incorporated and.
Thank you to the one 1% year over year headwind.
Sorry.
Well.
Everything that we're doing is incorporated in the in the guidance that we've provided first of all and I would say that we do manage our retirement business on our overall revenue as you know I talk about this from time to time, both the for the spread and the fee based on that revenue mix that diversified revenue mix and gives us a lot a tool.
Sales to to manage the interest rate challenges or headwinds potentially.
So one the GM IR initiative has provided benefits and continues to provide benefit. So it will emerge over time too we do manage crediting rates on on our business where appropriate given the market in kind of where things where things are three.
Our overall plan pricing and fee revenue growth plans, we have an ability to adjust on plans for depending on the market environment and where rates are and then certainly as we've talked about what we're doing with expenses in our growth. So we have a number of levers from which weekend.
Certainly.
Pull from and work to manage the interest rate environment as we go forward.
Thank you.
Thank you next question comes from.
And your Klinsmann with credit Suisse. Please state your question.
Wow last but not least.
[laughter] question on.
The.
Financing in the.
Life insurance area.
It.
It it would appear to me that you could do so many more transactions, whether they're block sales.
Maybe they're more reserves financings, what's the possibility that you could get done much sooner than.
2024.
Andrew Thank you. So the the financing transaction is something that we signaled back at Investor Day, I think it's been a have a longtime coming or represents accumulated a redundant reserves from sales that we started in 2015 through the end of 2018 so.
That was kind of a onetime opportunity.
That said, we'll continue to look at the block for other opportunities to accelerate the cash flows where they make sense from a shareholder value perspective.
We're not going to do something just just to accelerate cash flows if it doesn't make broader economic sense and that was.
The rationale for the decision we made to begin with was the thing that made the most sense from shareholder value at that time was to run it off but but rest assured we are looking constantly and consistently for opportunities to accelerate that in a way that makes the will create the most value for shareholders.
Are you seeing interest out there Mike.
Look I think it's well understood that there's there's lots of interest for long dated liabilities a across the industry I'm not going to comment on whether there is interest or not in our block that that wouldnt be appropriate, but I don't think theres anything about our block that makes it different in general.
Got it Okay, Mike and then with regard to you were talking about the.
Interest rate sensitivity is just in a little more detail could you give us a sense of the new money yields you are getting.
Today and what Youre.
Where that compares with your portfolio yield.
I think the the portfolio yield is in the high fours right now give or take and it varies from business to business, but.
If you think of new money yields broadly as Treasury plus 150 to 160, I mean, that's across all of the asset categories that we invest in that's that's a reasonable assumption for the quarter because of where we happened to be investing in the timing of flows.
We were probably closer to 4% for the new money that we put to work in the quarter.
But so thats a little bit more than the 150 I talked about that's.
The production of investment opportunities for the general account is lumpy.
And it is a little bit timing dependent.
Excellent Thanks, a lot.
Thank you ladies and gentlemen, this concludes our question and answer session I would back to turn the conference call back over to Rod Martin for closing remarks.
Thank you our plans to drive organic growth.
Effectively deploy capital and execute on cost savings are delivering results and we will enable us to achieve the targets that we set at our most recent investor day.
We fully expect to achieve at least 10% normalized EPS growth in 2019.
Validated by our results during the first nine months of the year and our expectations for the fourth quarter.
Further we remain confident that we will continue to grow normalized Cps.
Well I at least 10% in 2020.
And the 2021.
We have a clear strategy three complementary businesses that are enabling us to expand our presence in the workplace.
And with institutional clients.
We look forward to updating you on our progress in 2020.
As we pursue our vision to be America's retirement company.
Thank you and good day.
Thank you. The conference has now concluded. Thank you for attending today's presentation you may now disconnect.