Q2 2020 Voya Financial Inc Earnings Call
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Good morning, and welcome to the Voya financial second quarter 2020 earnings Conference call.
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I would now like to turn the conference over to Michael catch Senior Vice President of Investor Relations. Please go ahead.
Thank you and good morning.
Welcome to Voya Financial's second quarter 2020 earnings conference call.
We appreciate all of you have joined us for this call.
As a reminder, materials for today's call or available on our web site at investors Dr. <unk> dot com whereby 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 concludes potential impacts related to co that 19.
I refer you to the 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 Dot dot com.
Joining me on the call our Rod Martin Voya financials, Chairman and Chief Executive Officer, as well as Mike Smith has.
Financial Officer.
After their prepared remarks, we will take your question.
For that Q1 any session. We have also invited the heads of our businesses specifically.
Charlie Nelson retirement.
Justine Herc sellers investment management, and Rob group employee benefits.
With that let's turn to slide three.
I would like to turn the call over to Rod.
Good morning.
Before we begin I want to recognize.
Oil Board member Bairactaris wall, who passed away on June 5th for his significant contributions to our board.
Very who was 71 joint voices board of directors as part of our IPO in 2013.
Bringing with him an extraordinary reputation in the financial services industry, which established over four decades, including serving as chairman and CEO of principal financial group.
Barry was a passionate proponent of our commitment to diversity and inclusion as well as our focus on serving the communities in which we live and work. This support of philanthropic causes that positively impacted people and communities across the country or to numerous dimension.
And it made a lasting impact.
His wife with shell and the Griswell family continue to be in our thoughts and prayers.
Let's begin on slide four.
As covert 19.
Evolves our team continues to closely monitored situation across the country and here at voice.
We hope it everyone participating in this call and your families are safe and healthy.
Our commitment to protecting your employees and their loved ones and our customers remains our top priority.
Our management team is extremely proud of the dedication and commitment demonstrated by our 6000 employees across the nation.
They have enabled voice to remain open for business, while more than 95% of where people are working remotely.
As we shared with you during our last call. We've also taken action to support our customers and clients and or communities.
This included being the first major retirement company to waive fees in response to the cares Act.
And providing financial counseling and educational resources for customers impacted by covert 19, and granting free access to our financial advisors.
We will continue to take appropriate actions to support our employees customers and communities as the covert 19 situation evolves.
Turning to slide five I want to address the important subject of racial and justice.
As we have shared on previous earnings calls diversity inclusion and a quality our foundational elements of the Voya culture.
Internally, we have actively engaged with our employees at all levels of the organization.
We have posted employee open forum discussions conducted focus groups and created a video series that featured oil leaders sharing their thoughts and personal experiences with racial and justice.
The response to our video series was so positive that we shared it externally on social media, where it's been viewed more than 20000 times.
We're also partnering with organizations such as the CEO action for diversity and inclusion in the Ethisphere Institute to help drive meaningful change.
At a time when the societal challenges can seem daunting.
We have an obligation to help.
And we will.
Let's move to slide six in our key themes.
We have navigated this year in a position of strength.
As a result of the purposeful strategic decisions that we made to simplify our company and to streamline our businesses on a normalized basis, our second quarter EPS was a dollar and nine cents.
We saw solid results during the quarter, we continue to see demand for our products and services given the compelling value proposition that we provide for our workplace and institutional clients.
Combined retirement and investment management generated $26.8 billion in total deposits and inflows during the second quarter.
And an employee benefits inforce premiums grew 5.4% year over year.
We remain on track and are close to finalizing the sale of the individual life in our legacy annuity businesses.
We continue to make great progress with resolution life, and our regulators, giving us confidence that we will close the transaction in the third quarter.
We expect to generate approximately $1.5 billion up deployable capital from the transaction.
We also continue to deliver on the cost savings that we previously announced we have now achieved the $250 million in savings that we were targeting by year end 2020.
We expect further savings and have a strong track record in managing spent which gives us momentum as we begin to address the stranded costs associated with the sale of individual life.
Finally, our balance sheet and capital position remained strong.
We had approximately $668 million of excess capital as of June 30.
And while we have paused our share repurchases earlier this year, we feel good about our capital strength.
And we will continue to closely monitor developments through the third quarter.
We also maintained our dividend at 15 cents this year for the second quarter.
Turning to slide seven.
As we have shared with you previously our culture and the character of our brand our commitment to corporate responsibility in our leading industry practices are differentiators for our company.
We regularly share this slide with investors to highlight our ongoing commitment to SG.
A recent example of this commitment is the comment letter that we sent to the department of Labor concerning the D. Wells proposed amendments to the investment regulations under a risk.
As it pertains to equity investments.
We urge the deal well to pull back on their proposal or develop a new one.
That recognizes and supports the important role that yes, you factors.
Can have an identifying appropriate investments and promoting participation in workplace retirement savings plans.
Recent Voya research found that more than 76% of individuals felt it was important for their employer to apply SG principles to workplace benefits.
And 60%.
Would likely contribute more to NSG aligned retirement plan if it were available.
Turning to slide eight.
In recognition of our SC efforts for the third year Voya has maintained its listing on the foot see for good index.
This index series is derived from the foot see global Index series.
And as a tool for investors seeking to invest in companies that demonstrate good sustainable practices also for the third year to roll Voya was honored as a best place to work for disability inclusion on the disability equality index.
Our brand marketing efforts also word recent recognition as voice earned the 2020 marketplace Innovator award from disability in.
With that let me ask Mike to provide more details on our performance and results.
Thank you Rod, let's turn to our financial results on slide 10.
We delivered normalized after tax adjusted operating earnings of one dollar and nine cents per share in the second quarter 2020.
This excludes five cents, a favorable DAC voba and other intangibles unlocking.
79 cents of prepayment and alternative income below our long term expectations.
The majority of our alternatives portfolio is marks to market on a quarter lag and was impacted by first quarter equity market performance, we expect to see a meaningful third quarter recovery based on the second quarter equity market rebound I will discuss our alternative results in more detail in a few minutes.
20 cents of stranded costs associated with the individual life and other closed blocks. We will continue to normalize for these stranded cost until the close of the life transaction.
We have confidence the transaction will be closed by the end of the third quarter.
On a reported basis adjusted operating earnings were 15 cents per share for the quarter.
Our second quarter GAAP net loss was 71 million.
This reflects favorable results for our stable value block in retirement, which partly reverse the GAAP loss experienced in the first quarter.
And update of the estimated loss on sale related to our individual life transaction.
We continue to expect to gain at close that will result in a total GAAP loss on sale at the lower end of our 250 to 750 million range. We also continue to expect total deployable capital of approximately 1.5 billion from the transaction.
As a reminder, GAAP net income also includes individual life earnings as it as a discontinued operation.
Individual life experienced unfavorable mortality this quarter, partly driven by Kobin related losses going forward, we expect a one to 3 million dollar impact for every incremental 10000 total us population deaths until we close.
Moving to slide 11.
Retirement delivered 28 million of adjusted operating earnings in the second quarter, excluding unlocking and trailing 12 month return on capital was 10.9%.
As I mentioned before first quarter equity markets negatively impacted alternative income, which was below long term expectations by 92 million.
Favorable investment spread year over year was offset by lower fee income, which was affected by several items, including lower sweep fee revenues within our retail wealth management business due to the level of short term interest rates, which we highlighted last quarter.
A roughly 6 million contra revenue accrual associated with our recordkeeping business that we do not expect to recur and the waiver of certain fees associated with hardship distributions and loans.
By waving these fees, we continue to support plan sponsors and help participant navigate the financial challenges presented by Cobot 19.
Administrative expenses were higher year over year due to a legal accrual increased spend to onboard additional plans and higher allocated expenses, which we mentioned last quarter.
Offsetting this increased allocation is a benefit in the corporate segment overall boy if spend is inline with our expectations.
For retirement, we now expect our full year administrative expenses to be in the range of 840 to 850 million.
Turning to deposits inflows first quarter full service recurring deposits grew by 10.4% on a trailing 12 month basis inline with our 10% to 12% recurring deposit growth goal.
Full service recurring deposit growth was driven by an increase in plans.
Growth in employer and employee contributions began to slow in the quarter, though contributions exceeded second quarter 2019 levels.
Our expectation is for second half 2020 recurring deposits to be generally in line with second half of 2019.
Planned growth is expected to be offset by slowing employer and employee contributions through the balance of 2020.
As a consequence, we now expect full year 2020 recurring deposits to grow between 3% to 6%.
Net flows for the quarter were 73 million for our full service business, reflecting $616 million of corporate market inflows offset by 543 million of tax exempt outflows.
Tax exempt net flows include a large client outflow of approximately 700 million, which we mentioned last quarter.
The majority of that plans assets were in higher guaranteed interest rate accounts.
Stable value net flows were positive for the second consecutive quarter at 362 million following a record first quarter.
We also generated 4.5 billion a record keeping net inflows in the quarter.
Given the rebound in equity markets, we expect full year record keeping net flows of above 20 billion.
With this we expect to add over 350000 additional record keeping participants in the year, representing a more than 10% increase year over year.
As a reminder, recordkeeping fees are more closely tied to the number of participants than to a USA.
Our retirement business is well diversified across plan sizes industries and tax codes with up balance to national footprint.
This will help us navigate the current environment and positions us for long term success.
On slide 12.
Investment management delivered 20 million of adjusted operating earnings in the second quarter, largely reflecting unfavorable investment capital results of 27 million.
Revenues were lower year over year, primarily due to lower average retail assets as well as outflows from certain higher fee equity strategies. This was more than offset by lower administrative expenses over the period from lower variable costs and reduced travel expenditure.
Our second quarter, adjusted operating margin was 24.9%, including investment capital on a trailing 12 month basis, we continue to target a 30% to 32% operating margin over the long term.
Our fixed income performance improved markedly in the second quarter following a challenging first quarter.
Specifically, 85% of our fixed income fund outperformed the benchmark on a three year basis, and 98% did so on a five and 10 year basis.
Our strong investment performance highlights our ability to deliver differentiated returns.
Turning to flows second quarter was a record quarter for institutional and overall net inflows, which were 7.1 billion and 6.8 billion respectively.
Second quarter institutional net flows included a 6 billion institutional insurance channel win that we discussed on our last quarter earnings call.
This win highlights the growing appreciation for our expertise in managing general account assets for insurance companies.
Our international Channel also helped bring in sizable assets and the second quarter.
Our retail net outflows were 288 million in the quarter.
Retail outflows moderated in the latter part of the second quarter from the elevated level seen across the industry in March and April.
Our first half net flows put us on track to reach or potentially exceed our 2% to 4% organic growth target for full year 2020.
While we do expect to some moderation in the pace of sales in the second half of 2020, we have a strong pipeline of unfunded wins as well as the planned launch of additional strategies that will further diversify our private and specialty investment capabilities.
Turning to slide 13 employee benefits delivered 36 million of adjusted operating earnings in the second quarter, excluding unlocking and trailing 12 month return on capital remained above 30%.
Second quarter results included alternative income that was 10 million below long term expectations second quarter 2019 results also benefited from favorable items of approximately 6 million on a pre tax basis, which did not repeat.
Overall annualized enforce premiums grew 5% year over year, given better than expected participant persistency despite rising unemployment.
We expect some premium headwind in the second half of 2020 and into 2021, but are pleased with the stability of our revenue to this point.
Through June 30, total identified Kobin related claims have been approximately $8 million meaningfully better than our original estimate as general population deaths have not directly translate it to our insured lives.
Going forward, we now expect a pre tax impact of $1 million to $2 million for every 10000 incremental cobot related deaths.
Voluntary and stop loss, where minimally impacted by Covance and we do not expect this to change.
Our focus on larger employers exposure to working age population and diversity across geography has and will continue to benefit our results in the near term.
Our longstanding distribution partnerships and differentiated service capabilities will drive continued success in the long term.
On slide 14, we provide items to consider for the third quarter of 2020.
In the third quarter, we expect the following beneficial items.
First retirement legal and Contra revenue accruals are not expected to recur in the third quarter.
Second higher fee revenues from higher average equity markets, assuming end of July market levels are maintained through the balance of the third quarter and third improved employee benefits results due to sequential improvement in quarterly loss ratios.
Offsetting this we expect spread revenues to feel the impact of the tax exempt departure, I mentioned earlier and lower new money yields.
We will also pay seasonally higher preferred stock dividends in the third quarter.
While we have provided some items to consider there will of course speak other factors that affect third quarter results, including changes in our average share count business growth and the potential for additional cobot 19 impacts.
Turning to slide 15 here, we provide an update on a long term performance and composition of our alternatives portfolio.
As you can see our alternatives portfolio has deliberate investment performance broadly inline with our long term expectation of 9%.
Second quarter investment results were primarily driven by the mark to market of private equity investments related to first quarter equity market performance.
As a reminder, this asset class is reported on a one quarter lag.
On the right you can see the composition of our alternatives portfolio, which is diversified across private equity credit real estate infrastructure and hedge funds.
It is comprised of commitments to over 150 funds managed by 85 distinct general partners.
9% of the total portfolio and 15% of the private equity portfolio is invested in secondary funds and other funds of funds providing further diversification.
At present, we only have insight on third quarter returns for a relatively small portion of our portfolio.
Results for that book have largely reversed the decline we experienced in the second quarter and we do expect to see a meaningful recovery in value for the alternatives portfolio overall.
Turning to slide 16.
Last quarter, we provide a greater detail on our investment portfolio, including to stress scenarios, highlighting the potential impact of ratings migration and credit impairments on required capital.
The analyses showed an impact to excess capital of 300 million in stress case, one and 600 million and stress case to before contemplating active management mitigation efforts.
Ratings migration accounts for over 75% of the capital impact in each case.
Year to date, we have incurred 58 million in gross credit impairments and ratings migration.
However, our active management mitigation efforts reduced the net impact to 13 million.
While the impact of the pandemic is still unfolding our experience so far on a gross basis has been close to or better than stress case one.
The impacts have been fully manageable, considering our current excess capital position and future free cash flow generation.
The appendix contains additional information on certain investments in our portfolio, including our commercial mortgage loans.
As of July 30, Onest, we have granted forbearance on roughly 7.5% of the overall unpaid principal balance of our commercial mortgage loan portfolio.
This balance may increase, but we expected to ultimately be in the range of 7% to 10% of the portfolio.
Of note, we have made no loan modifications associated with the forbearance granted to date.
Overall, we are comfortable where the quality of our commercial mortgage portfolio.
Over 85% of this portfolio is rated cm one.
Our weighted average loan to value ratio is 46%.
And our debt service coverage ratio is 2.3 times.
Slide 17.
Our estimated RBC ratio was 468% at the end of the second quarter above our target of 400% at our ending excess capital was 668 million.
We indicated last quarter that we paused share repurchases in March due to emerging uncertainties surrounding the effects of the pandemic.
We still see a path to 1 billion or share repurchases for the full year, given $406 million of shares repurchased year to date, our strong excess capital position and the expected receipt of proceeds upon the close of the individual life transaction.
Having said that we will continue closely monitoring developments through the third quarter.
Debt to capital was 32.4% this is above our 30% target due to the book value impact of our life transaction.
The impact is temporary as it does not reflect the anticipated gain at transaction close.
As a reminder, we have no debt maturities upcoming in the next three years and have ample liquidity resources.
Finally, we maintained our second quarter common stock dividend at 15 cents per share at a dividend yield of over 1%.
In summary, we continue to serve all of our stakeholders. During this time and are proud of our employees for their resilience and adaptability.
While cobot 19 related headwinds remain in the near term, we believe our strong worksite and institutional franchises are poised to benefit over the long term.
We continue to have high confidence in our ability to close the individual life transaction by the end of the third quarter.
And we have a strong excess capital position and we'll continue to act as good stewards of capital.
With that I will turn the call back to the operator, so that we can take your questions.
We'll now begin the question answer session.
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Please hold while we now poll for questions.
Our first question comes from Erik bass with Autonomous Research. Please proceed with your question.
Q.
I wanted to start on your comments on the buyback.
When you're talking about closely monitoring.
Developments through the third quarters is that suggest that you would plan to remain paused for this quarter.
Or things develop favorably could you resumed sooner and I guess are there any restrictions on you resuming buybacks prior to the deal closes.
Good morning, it's Rob I'll start and as usual Lincoln I will.
We will toggle back and forth.
We are winning our two or no restrictions.
But what Mike said and what I'd like to further reinforce.
There are three themes that were.
Absolutely focused on in the third quarter and one is as we communicated.
On the prepared remarks.
We are close and confident that we will close the transaction in the third quarter, but as we announced when we announced the transaction. This will close by September 30.
So one will be the closing of the transaction.
Second we will be.
Our assessment of the economy.
Happy to talk about that a little bit further and then the continued development of the emergence of covered in the certain areas of the country. So those three factors or factors.
The reason why were pausing through the third quarter and as Mike said, we see a clear path to accomplishing the $1 billion of share buyback.
This year, we've done 40% as you know and when you look at the totality of the financial position that is in.
The $668 million of excess capital 1 billion and a half that will come from the life transaction or RBC position.
The fact that we completed our expense targets for months ahead of schedule in the pandemic and our free cash flow conversion.
We will continue to be very good stewards of capital.
Continue to move forward to the high level of confidence.
Larry.
Maybe just briefly I think in terms of the transaction I think the easiest way to think about it is we're pretty much where we would have expected to be we're making good progress with or on the regulatory front I think operationally, we're in excellent shape to to pull the trigger and.
Then in terms of just deal mechanics, I think we're well along and so feeling like there is there is.
No no surprises or nothing that was unexpected along the way. So we're feeling very good about that and as Rod mentioned, that's that's an important part of what we're looking at in terms of share repurchases.
Thank you and then could you help us think about the earnings run rate for the retirement business given some of the moving pieces around new business coming on interest rate pressures in Europe updated expense guidance.
Maybe how should we think about growth relative to your investor day outlook, given the changes in the environment.
Kelly.
Yes, Sir good morning.
As Mike said in his comments in terms of barge then.
Full year basis that equal you need 50, yes, there would be one time accrual needle model.
This is generally the unplanned shipped an extensive corporate segment. So if I think about those obviously not.
Necessarily second notes.
Recurring.
Think about how we're going forward with that.
Yes, we also.
I have had some savings relative decoded.
Obviously from travel and tourism and maybe some delayed hires that we Baltic seeking a bit higher volumes in our culture and operations on some asking.
Said that though you got to put it in contracts to kind of what we what we've experienced in what we have in our pipeline coming in.
In in our Recordkeeping business as Mike said, we're expecting the ended the year to be roughly about 10% more participants on we started the year with.
Our unit cost differential is I think our goal is high and we're expecting a solid improvement in 2020. So as we go forward, we think that positions us well so as I think Eric about the business growth.
Our business growth is being impacted the bit by by cold It, but we still are seeing some growth across our businesses and it does take a bit you're quite part of your question. There is in terms of how does that materialized over time.
Certainly revenues on new business don't always just coming in hit in the very first month, they will materialize over a year and sometimes over two years, depending upon the types of fee revenues that are coming in so it can take a bit of time to materialize. Those if you will.
We do see the business environment as being a bit challenging although advisors and plant authors are still issuing new RFP. Then we have seen some fewer than we've seen in 2019.
Tell you that I think RFP volume is down.
Assuming the second quarter by about 40%, but in July it.
Was only down about 30%. So we saw some improvement but to put it in content that's closer to what the levels of what we saw in 2018, so our experience through the first half the year as kind of more similar to RFP volumes of 2018, so still not bad in that regard, we're able to kind of translate a lot of those because of our distribution.
And footprint and our deepened long standing relationships.
Really into some new business I think you've seen that in our new business growth as well so.
I think about while there may be some slow down we've got some onetime expenses that impacted this year as I as I think as we go forward.
Obviously, I'm very a feeling very good about our results in this coven environment, even though they've been a bit muted by.
Some of the impact from coal that so we feel like our value props resonating, but as the business in the market.
Really kind of moves we think we're going to benefit in Boise as people move to a flight shrinking stability.
Thank you.
Thank you.
Our next question comes from Suneet Kamath with Citi. Please proceed with your question.
Thanks, Good morning wanted to go back to retirement.
On these record keeping wins can you just.
Help us think through what's really behind that is it to the competitors in transition doing integration or whats, causing this this pickup and related leaders in the past as you brought in recordkeeping business has there been a path to having some of those assets actually migrate into either the full service.
Business or Voya investment management mandates.
Charlie.
Yes. Thank you.
Great question, because first of all I'd have to say the record keeping the large large to may get plan sides business first you've got to kind of accepted as a bit of a lumpy business. So.
Plan the volume of the number of plans that come to bid it can change from year to year. So that that's why I think in.
In the marketplace sales, if you will and record keeping Ken can change from year to year, our experience and I think what your and appreciate your recognizing our strong growth and record keeping both NR our tax exempt we've had some nice wins and our tax exempt as well as in our corporate business over the last couple of years and as.
We go forward in our pipeline remains good why do we why do we think we're winning in this I think it goes back to our value proposition resonating in the market, yes, very strong digital solutions.
I think our culture, our people and how we do business and our capabilities algae perspective.
Our being very much recognized in the marketplace and yes. There are some competitors that I think more challenging times and you've been able to take advantage of some of those situations when maybe someone becomes dissatisfied and they are looking for a new provider.
In these times as I've said, when there is that kind of.
Uncertainty plan sponsors was small lot larger media, they look for kind of stability and strength, we're going to benefit in that flight to movement.
Now your other part of your question relative to is their opportunities for more full service I think what you're getting that in some of that on a record keeping do they go from record keeping to pull service, yes, we do see business.
In recordkeeping.
I have opportunity for asset management, I think what you've seen in our stable value fund sales.
Good example of that in the first half these works.
4.4 billion in deposits now that's not necessarily associated with our record keeping per se, but I think it shows strengthen our stable value and our ability to be able to into.
Add some opportunities for investment management or even in our employee benefits. We've had a number of sales this year and record keeping where we've had a well they have either been an employee benefits customer or also we've been able to have.
And HSH alongside the floral one cat so those kind of start to kind of have dimensions of full service management and it's not just record keeping only that theres asset management or some other type of chronic solution along with it. So yes. The latter part of your question I think there is some opportunity to take both record keeping in.
Have additional services as clients grow as well.
Got it and then just for Mike on the 1.5 billion of proceeds can you just remind us has any of that money been earmarked for anything else other than just capital deployment I know your debt to capital ratios elevated but my understanding is it's going to come down given the.
What the transaction closes to maybe at 30% or even lower so is there anything that that 1.5 billion is earmarked for that we should think about it I think the way to think about it is they'll be.
Now.
Let's assume share repurchases as a primary use than there would be alongside corresponding debt reduction as well to admit to maintain the leverage as we work our way through the share buyback but.
No. Other specific uses segment as I guess as we get to close we'll be able to give a little more details on exactly how that's going to play out it does depend.
At least a little bit on on the on on the closing balance sheet as I said in the remarks.
There will be a.
GAAP gain at close and we do expect the overall loss to be.
Around 250 million on a GAAP basis.
Which as you said, we'll get the leverage ratio back, but there could be a little bit of movement in that will have they'll have some bearing on on the ultimate disposition.
Alright, thank you.
Thank you.
Our next question comes from Andrew Quail women with Credit Suisse. Please proceed with your question.
Yes.
Hey, good morning.
I'd like to asked about the.
The credit.
Scenarios that you cited $3 million to $600 million.
Especially in light of the fact that you had an impact of only $58 million and then it netted out.
Our team million dollars with for further action. So when I look at stress scenarios wanted to at three to 600 million.
Do you think that the 300 million, maybe just too conservative and that it should come in a lot lower.
Mike Good morning, yet.
Good morning, Andrew Thanks for the question.
So I think the way to think about the 300 isn't and the 58 is.
First of all the 300 was a 12 month look right. So over the course of.
12 months, starting from last quarter, what do we think one possible outcome could be and so we shared that that's the gross impact of migration.
And and impairments.
Does not give any effect for what we were able to offset as we mentioned that in this quarter. So we're a quarter of the way through that that 12 month period.
We're at we've seen 58, so far I think as Rod said there remains.
A fair amount of uncertainty and so while we're pleased that what we've seen so far has been.
I would say consistent with the levels that would have been anticipated in stress case one.
We got to ways to go.
We need to see how the endemic continues to unfold, we need to see how the government FIS fiscal policy reacts to that and how we address it I think we've got an election coming up.
We've got a you know.
Questions about how the pandemic will emerge in the fall and at least dumb.
Some for some thought about another wave to come so I think there's a lot yet to be seen as I said, we are encouraged though by what we've seen so far I think it'd be a mistake to just take one quarter and extrapolate it.
Given all the uncertainties, but so far so good.
Thanks, a lot of variables and then maybe shifting over to investment management.
The net flows were particularly robust in.
Institutional with the 6 billion dollar mandate there was some weakness.
In retail so I'm wondering what the outlook is for net flows in each area and then with that maybe why that insurance that might be.
Global into a lot more like type transactions.
Sure Andrew Christie.
Yes, Thank you Andrew.
How to think about the net flows as you said, we had a very strong quarter in the second quarter at 6.8 billion and just kind of answer first but are we seeing the evolution on the retail side. You know we did have modest net outflows in the second quarter, but the last two months.
June and July our retail net flows pivoted positive and you've seen a strong rebound in our fixed income, notably our fixed income performance and so so so that is on.
A firm foundation for improvement and then on the institutional side.
We continue to see we have it at strong pipeline.
Covers your products in the pipeline and so let me just talk a little bit about insurance and how to think about that yeah. We did have a large insurance mandate settle in the second quarter continue to see strong demand overall from insurance companies that you know the thing with this one is think of this insurance company.
Mandate as that as a core mandate, so more traditional asset classes highly scalable.
Margin accretive business over time with that particular client relationship as well as its other insurance clients, we would expect opportunities to two actually fund with them in some of our differentiated more specialty asset classes. So.
Overall net flow picture very solid in institutional.
We're on track we set forth on Investor Day is organic when you think about growth as the percentage of eight you landmark our targets or 2% to 4% and we fully expect to exceed that organic growth target in 2020.
Thanks very helpful.
Thank you.
Our next question comes from Brian Krueger with ADW. Please proceed with your question.
Hi, Good morning, I also had a question on investment management.
Could you talk about ER the drivers of the decline in E rate this quarter and what you'd expect going forward there.
Sure Ryan Good morning Christie Mike.
Sure.
So we fired so thinking about the revenue decline you know it declined two basis points and there are couple of weeks to think about that I mean, certainly we did see continued retail outflows in our equity performance in the second quarter that that affected the but predominantly when you think about you know our business.
This model, it's more on mix business, and we really have two ways to grow improve our margins and grow our business and in one certainly is through selling more private market secondary private equity things that we're seeing more and more client demand. So think about higher fee business, but also notably it's it's really.
The scale side of the equation and we've seen quite a bit of what I call more scale growth a in the first part of the here and that insurance mandate.
Its core and we price did aggressively but again just just when you think about the incremental expenses very limited. So this type of business given our our strengthened foundation and fixed income is margin accretive I suppose another flows year to date in terms of staple value, which again tend to be the more core so.
As we see see that trend in yield casino evolving into certainly as you know the world concern on certain you know, it's Mike was earlier referencing around the macro environment that what we see right now is strong pipeline I would expect where we're absolutely on track for ARPU.
Hi that fund launches.
Given the demand that we see out of course and spec, but would expect for the remainder of the year, you know lower basis points more scale fundings, notably where we're seeing a lot of demand right now is that the international clients into credit and multi sector, but the private funds should really start taking effect in the latter part of the year, So you're going to.
I would expect you're gonna see an improvement or a pivot in 2021 in terms of the at the fees overall that we earned.
Great. Thank you very much.
Thank you. Our next question comes from Tom Gallagher with Evercore ISI. Please proceed with your question.
Hi, good morning.
Question.
Is on the three to EPS walk it shows the six cents headwind on the interest rates in the loss of one large retirement plan I guess I was surprised to see how big an impact that was do you see a similar.
Continued headwind level, if interest rates remain low or is there anything unusual about the size of the impact in that cool in the quarter.
Sounds good morning, Mike will take them yeah. Thanks, Tom.
Look I think the way to think about the six cents is as we mentioned in the two pieces the largest single piece and I would I would view it as.
Roughly half to little bit more.
Just a sensitivity of new money yields.
Changing as spreads came down from over the balance of the quarter right I think in in late first early second we were able to take advantage of some of the market dislocation and I think new money yields were actually pretty attractive. However spreads have come in a lot and so the three to four cents at him.
Suggesting a of the six.
It's consistent with the sensitivities, we've given for roughly 100 basis point drop and I think thats more or less way, what we've seen over the last.
Several months, so I think Thats, you know to the extent those those rate levels continue I think there would be continued drag again.
So along a consistent with a sensitivity we gave.
The individual client that we referred to as a relatively small piece, but not insignificant and then just the last other piece or is there were in both first and second quarter. Some.
Variable items that hit investment income there is still relatively small, but but we don't expect those to continue to repeat and so that kind of gets you to the balance of the six.
Got you and Mike just to be clear if rates remain where they are today each quarter. We think about this walk you should get a three to four said yes.
Sequential impact going forward over the balance of the next we'll call. It year. So think of that as you know the annual the annual drag is for 100 basis point drop is in the neighborhood of 25 million I think is the way to think about it so yes that would be.
It'll continue to be a an ongoing drag does it get.
I think we're at the rate now so so it doesnt continue to get worse me if I'm not trying to understand your question better.
Right, we stay at that new level and that areas are gradually goes down but it's not at the same.
I don't think is quite the same slow.
And I guess just related Lee just with with that as a backdrop I mean, we are we looking at 2021 retirement earnings.
Oh, the more flat with 2020 levels, where we still expect to get to call. It mid single digit growth or any any any clarity there I think Tom I'll just.
Right now I think we're really only comfortable giving.
Guidance, if you will on on how to get from the second quarter to the third quarter via the bridge that we've shared in the presentation I think theres remain a lot of uncertainties. Both in terms of underlying market performance as well as you know what will happen in the credit environment and topline I think.
We're going to avoid giving any at least at this point, while we're still in this I think relatively foggy condition about how the future is going to unfold or we're going to resist trying to give any meaningful.
Or specific guidance on any of the segments or voya in total for 21.
Okay. Thanks.
Thank you.
Our next question comes from Jimmy Buehler with JP Morgan. Please proceed with your question.
Hi, I'm I just wanted to follow up on the discussion on buybacks and I think you're implying no buybacks until the deal closes and maybe that's because your leverage which is already high would go up even higher but is that correct assumption and then how do you think about the interplay between.
The things that you were waiting for such as the deal closing and credit visibility and little bit visibility.
When you get visibility into those obviously the stock price won't be as cheap or would most likely bally's or do you think about the tradeoff between using the cash you have got right now versus sort of being conservative given the environment and given or higher.
Overall leverage ratio.
Jimmy It's Ron I'll start, Mike and I will we'll we'll share this sure we.
As we communicated we are we're waiting until the close of the transaction.
And through the third quarter in abundance of Prudence, Jim maybe as you well aware, we've we've repurchased over 6 billion shares since we've been Republican Party and I think we've got to.
Track record that speaks.
Grown strongly about our commitment to returning.
Capital to shareholders have a very effective in the consistent basis and that's over 3 billion.
With 1 billion. This year 3 billion in the last three years alone.
We've made the transition from two a capital light company.
The 668 billion of excess capital of 1 billion and a half.
The 85% to 95% free cash flow Jimmy we're just using the experience in judgment to make sure we see as clearly as we can doing in the fourth quarter, there's an absolutely clear path.
To accomplishing a billion dollars, we've done 40% of it now.
[music].
We will have never been in a better financial position from a balance sheet liquidity perspective.
We simply want to close the transaction have a little more clarity on the market and cobot and then presume activities in the manner that we've already communicated Mike.
Right I think you said it well I guess I'd only.
Reemphasize that we are saying, we do see a path to billion plus and so I think you've identified in right identified in prior comp comments, we've identified the things were watching.
I'd say as a short term measure leverages, a consideration I wouldn't call. It a driving one it's really more the broader macro issues, but it certainly one of the many things that we're we're thinking about.
Well.
And in your benefits business on voluntary benefit Youre.
Margins were actually very good I'm, assuming that you're seeing lower utilization because of just the environment can people, maybe being the looked into with the doctors hospitals and stuff, but is that true and if that is are you expecting that there will be it does the or goes on and we return to sort of a little bit more of a normal in March.
It move through to Rob, but we're thrilled with the progress we've made with the benefit business [noise].
Well, let Rob speak to where we are what the pipeline looks like and and what you should expect Rob.
Thanks for the question, Jamie So from a claims activity perspective.
Excuse me, we actually saw.
Across stop loss and the voluntary buyout products, let me talk about it that way really pretty consistent utilization severity inline with what we would expect.
Those are certainly product sets within VB, so accident critical illness hospital indemnity, so you've got a little bit of.
Tale of different things that just worked out in aggregate.
Mostly people may have been sorta, not going for voluntary or.
Optional things, but when you know accidents happen or or.
They got something critical that's going on obviously, we're in a pandemic gear.
Youre going to see ebbs and flows as we break the products apart, but in aggregate. It was really in line with what we would expect.
And then just you're you're talking about the growth and margin across VB, obviously about starts topline.
We had a really nice quarter across the business and continuing to grow and drive growth we've had great momentum coming into this this crisis.
We see that continuing as we move forward, but.
It was a little bit product dependent to the fundamental of your question.
We'll see how that plays out there is obviously still plenty of uncertainty and and the other pandemic as moving around as we speak so we'll see how that moves forward, but we feel like we're we're in a really good spot to continue growing this business.
Thanks.
Thank you.
Our next question comes from Humphrey Lee with Dowling and partners. Please proceed.
Thank you for taking my questions.
Yes, it's just a quick follow on retirement earnings.
I think in the past when you talk about recordkeeping fees, you explain a from a margin, though earnings and see benefits, but given the size of the entries and also the them lower unit cost that you alluded to earlier, how should we think about the earnings and fees.
Impacts when we touched on when you intent when when do you didn't the balance at that 20 billion pounds recordkeeping come through in the balance of the year.
Charlie and Mike.
Sure I'll, maybe start and Mike can chime in as well.
Yeah I think.
The way to think about the growth in the difference between recordkeeping pull services you can see in the fees and that kind of fees of record keeping kind of compared to the total revenues and full service.
In our supplement there's a there's a fairly significant difference between the two so recordkeeping being more per participant in larger larger total participant cows larger plants, while it's not 100% based on participants it's largely there as Mike has said I think he said in his comments as well.
So I guess the to think about the earnings emerge, but excuse me emerging it's it's probably not going to be material or significant initially will emerge over time as we continue to grow and to build it the benefits of our recordkeeping business provide us.
Scale and contribution margin covering fixed cost and other types of things from technology and development that enhance our overall competitive position and our entire retirement business.
But Mike I don't know if you have anything you want to add on top of that or not I think you covered it pretty well early I don't I don't have anything bad there.
Okay.
Okay got it and then a question for Christine.
I think we're talking about nothing management based on discussions about the opportunities internationally for the lawyer just kind of maybe your thought on the tended to potential there and what you're doing all the to achieve those potential opportunity.
We're seeing sure. Thank you Humphrey up yes, yes, you know what really it's been a notable change in client demand from overseas as you know it actually was a headwind for us.
The last few years and it really was driven by just changes in the dollar and short term interest rates in the last Saturday.
Has been a real sea change and then to resolve the that you know we haven't had great distribution partnership with that and an asset manager and an IP.
That we work with and so we have a very large investment grade Sicad as an example, its top decile near term and long term performance. That's garnering a lot of flat, let's really as I mentioned, a quite a bit year to date as well is that from an interest out of Asia. So I don't see that.
Man's changing and in fact, you know we're really excited is we just hired a head isn't Nina sales out of our London Office I.
Because we anticipate what we're hearing and seeing you said insurance companies in Europe.
Who tend to have real sort of the eurozone sovereign bias that and it didnt outsourced as much we think that now under solvency. Two there there are definitely we've already seen a building pipeline in interest stuff out of Europe, and so we added some distribution to capitalize on that so just kind of looking out into longer term I'm very optimistic of what we're going.
And then we're going to see incentives are differentiated strategies, you know as that part of the world as well. So overall you know kind of speaks to we've got quite a few angles of distribution you know when you look at our overall business and franchise as well in fact, some very differentiated products, notably in specialty and private.
Credit is of great interest in terms of insurance companies right now so again overall like it's it's gonna be an important part of our growth story.
Got it so that's why you're feeling pretty optimistic about the institutional pipeline phone for your business.
Yes, yes, some free and it really again, it's you know we you saw we had very strong quarter isn't very strong flows so bucking the industry trend in the first quarter as well.
And really what you've seen again it just speaks to the strength of both the product array that you know you know our private.
Equity as well as an example, or private credit to our commercial real estate. So it's really capabilities as well as strong investment performance and again you know having both the insurance channel has been very strong and continues to be as well is now in being able to tap into international client demand through distribution, it's been input.
And as well.
That makes sense. Thank you.
Thank you.
Next question comes from Brian Meredith, you'll be yes. Please proceed with your question.
Hi, Thanks. Good morning. This is Mike on for Brian I'm, just wondering quickly on the corporate segment. If you exclude the stranded cost. It just looks like corporate expenses were a little bit lighter than usual. So I was wondering if you could maybe comment on some of those drivers and if you expect them to continue.
Sure.
This Mike I'll take that is nothing in particular to point at I think there there is a little bit of quarter to quarter movement, but you know the range. We gave a I think certainly we are basically right in the middle of the range. When you adjust for the stranded so I think next quarter you.
Can expected corporate to be more or less the same.
Next stranded save for the preferred stock dividends that we pay every other quarter and that's that's roughly 10 million. So.
I I wouldnt try to get to fine on on a.
Small movements in corporate.
Great. Thanks, and then just back to benefit.
So I was just wondering you know I know your your book is a little bit different than some of your peers, but.
People saw other some of your peers.
Favorability in lines like voluntary and I was just kind of curious on why you're expecting that to improve a little bit in threeq you given some of them. Some others are expecting it to low revert back to.
Got it more normalized levels.
Yes, Mike This is Rob I'll jump in on that.
As you were alluding to our product mix is a little bit different.
As we think about.
The accident critical illness hospital indemnity product set versus a number of companies I know I've been talking about their dental business or their vision business and in those really what low from a benefit payout perspective, just obviously they just.
Institutions, where an open to go visit to Dennis then and have your eyes check those things were pretty easy to just put off and delay and so there will be I was I would expect you would expect a bounce back on that side I think again the product mix that we've got.
Things behaved as we would have expected in second quarter.
As we move into third quarter.
In aggregate, we're talking about some improvement movement within the loss ratio, but we're not expecting dramatic changes quarter over quarter.
Really driven by the mix of what we sell and and service every day.
Thanks, guys.
Thank you.
This concludes our question answer session I would like to turn the conference call back over to Rob Martin for any closing remarks.
Thank you operator, operator, the purposeful decisions that we've made as a company have enabled us to enter the second half of this year in a position of strength more broadly we continue to benefit from the emphasis that weve.
We have placed on our core values.
Which help set us apart in the industry, our efforts to advance diversity inclusion into quality throughout our company.
And in the communities, we serve or part of our commitment to creating a stronger and better for you are focused on carry for our employees clients and communities is unwavering.
I hope that you and your family's remain healthy and safe we look forward to updating you on our progress as we pursue our vision to be America's retirement company. Thank you and good day.
Ladies and gentlemen. This concludes today's web conference you May now disconnect. Your lines at this time. Thank you for your participation and have a great day.
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