Q3 2020 Voya Financial Inc Earnings Call
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Good morning, and welcome to the Voya financial third quarter 2020, <unk> earnings Conference call.
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I would now like to turn the conference over to Michael Katz Senior Vice President of Investor Relations. Please go ahead.
Thank you and good morning, welcome to Voya Financial's third quarter 2020 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 website at investors Dot <unk> dot com or via the webcast.
Turning to slide two.
One of the comments made during this conference call may contain forward looking statements within the meaning of federal Securities Law. This includes potential impacts related to COVID-19.
I refer you to the slide for more information.
We will also be referring today to certain non-GAAP financial measures GAAP.
GAAP reconciliations are available in our press release and financial supplement found on our web site investors, Doug aware Dot com.
Joining me on the call are Rod Martin Voya financials, Chairman and Chief Executive Officer, as well as like Smith, Voya as Chief Financial Officer. After their prepared remarks, we will take your questions.
Or that you any session. We had also invited the heads of our businesses specifically.
Charlie Nelson retirement Christy.
Christine Hurts sellers investment management, Rob BRCA 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.
Navigated through this year and continue to be in a position of strength.
As a result of the purposeful strategic decisions that we've made.
On a normalized basis, our third quarter EPS was a dollar a 19 cents.
We once again demonstrated the earnings power of our company and the benefit of our diverse mix of high free cash flow businesses.
We continue to see robust demand for our products and services.
We are tracking new clients and retaining existing clients, who value our expertise in serving the workplace and institutions.
For retirement.
Full service recurring deposits grew 8.4% year over year, reaching $10.9 billion.
We saw strong inflows in both corporate and tax exempt markets.
In investment management, we generated $1.8 billion of net inflows during the third quarter.
Institutional inflows continues to be very strong as we attracted new mandates in our specialty asset classes.
And in employee benefits in force premiums grew 5.7% year over year.
We continue to see strong demand for workplace benefit products, particularly in our voluntary business.
As it pertains to the completion of the individual life transaction, we have completed all of the operational and financial requirements needed to close the sale.
We continue to make good progress on the remaining regulatory approvals and we are confident.
These reviews will be completed before the end of 2020.
We also continue to expect to generate approximately $1.5 billion of deployable capital from the transaction.
Our balance sheet and capital position remains strong we had approximately $642 million of excess capital as of September 30.
And we will continue to be good stewards of shareholder capital.
We also maintained our common stock dividend at 15 cents per share for the third quarter.
In addition to the status of the life transaction, we will continue to monitor the economic outlook.
And the impacts from the election in determining what it may be appropriate to resume share repurchases.
We have also further strengthened our board and I'm pleased to share that last week, we welcome Alan Lewis as a new independent director.
Oh wouldn't brings extensive experience leading several well known brands to achieve improved financial and operational results, while delivering superior customer outcomes. We're delighted to have Oh would join us.
Turning to slide five.
We have maintained a strong focus on our values and culture.
During October we partnered with a national down syndrome Society to launch our goal Orange campaign.
Which awarded for entrepreneurs, who have down syndrome with grants totaling $55000 and highlight the need for greater employment of people with disabilities. We.
We also collaborated with disability ended a call to action for greater inclusion of people with disability and special needs in the workforce.
We continue to take action in support of racial equity with two of our leaders representing boy.
And focused efforts that include.
The Ethisphere Institute Advisory Council on equity and social Justice initiative.
And the CEO action for diversity and inclusion racial equity Fellowship program.
Also earlier this month, we expanded various efforts to help Americans address the financial challenges of COVID-19, with the launch of our just right advantage program to support minority women veterans disability and the LGBTQ owned.
Businesses.
Externally as a testament to our E. S.G. efforts boy that was recognized.
On just the capital's 2021 rankings of America's most just companies earnings the number two spot in the capital markets sector.
Our work to advance our culture. During this particularly unique year was validated by our recent recognition as a great place to work for the fifth consecutive year, which aligns with the positive feedback that we've heard from our people throughout the year.
These actions by our people and our company continue to distinguish bore you with all of our stakeholders 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 seven we.
We delivered normalized after tax adjusted operating earnings of one dollar and 19 cents per share in the third quarter of 2020.
This excludes three items.
First 37 cents, a prepayment and alternative income above our long term expectations, reflecting an improvement in alternative performance based on the second quarter equity market rebound. This.
This provided a meaningful recovery in value for our alternatives portfolio such that year to date returns are positive.
Long term performance continues to exceed our 9% target.
Second one dollar in five cents of unfavorable DAC voba and other intangibles unlocking this.
This reflected the results of our annual actuarial assumption update which I will cover in more detail in a few slides.
Third or 21 cents of stranded costs associated with individual life and other closed blocks, we will normalize for these stranded costs until the life transaction closes.
On a reported basis adjusted operating earnings were 30 cents per share for the quarter.
Our third quarter GAAP net loss was 333 million this.
This includes the non operating impact of our annual actuarial assumptions update on individual life and results from our individual life business, which will be reported in discontinued operations until close.
This quarter individual life experienced unfavorable mortality, mostly explained by coated related losses, which were inline with our expectations.
More broadly as we look forward, we continue to expect a gain at close from the life sale and have updated our estimate for total GAAP loss on sale to now be between zero to 500 million.
We have done this as it would now take a significant increase in interest rates or spreads for us to reach the high end of our previous range. The.
Deployable capital remains 1.5 billion.
Moving to slide eight.
Retirement delivered 197 million of adjusted operating earnings in the third quarter, excluding unlocking and trailing 12 month return on capital was 11.8%.
Third quarter unlocking was a 172 million unfavorable impact driven mostly by a reduction in both our long term interest rate and equity market return assumptions.
As a result of the assumption update we experienced a pre tax impact to adjusted operating earnings of three to 4 million in the quarter from higher DAC amortization, which we expect to continue.
Third quarter adjusted operating earnings included alternative income that was 45 million above long term expectations.
Revenue was increased year over year, primarily due to higher fees, which benefited from higher average equity markets and record keeping wins.
Investment spread was in line year over year, we have seen higher transfers into fixed account options with lower crediting rates that has helped to alleviate some of the spread compression associated with lower rates.
Administrative expenses improved year over year, primarily due to an adjustment to a prior period expense deferral that did not repeat this quarter.
We also had a 5 million benefit from a partial legal recovery in the quarter turn.
Turning to deposits inflows there.
Third quarter full service recurring deposits grew by 8.4% on a trailing 12 month basis, we expect full year 2020 recurring deposit growth to be in the range of 3% to 6% consistent with our comments last quarter.
Net flows were strong in the third quarter full service net inflows were 3.5 billion comprising 933 million of corporate market net inflows and 2.6 billion of tax exempt net inflows.
We continued to see positive stable value net flows in third quarter at 574 million following a record first half.
Record keeping flows reflected a $20 billion government plan funding in the quarter.
As part of this plan, we onboarded over 330000 participants, which we expect will boost our position in the government market to number one based on assets and participant tell.
As of the end of third quarter, we exceeded 6 million total defined contribution participants, which is a 13% increase year over year.
This participant count includes over 3.2 million record, keeping participants, which is a 21% increase year over year.
Looking ahead, the strong third quarter net flows we generated will be partly offset by some expected fourth quarter outflows, including a large case tax exempts client some corporate plans due to M&A activity and some record keeping departures.
We expect full year 2020 full service and record keeping net flows will be between one and 2 billion and over 24 billion respectively.
We are encouraged by the success and momentum in winning plans across all markets, which highlights the benefits of a well diversified business, particularly in the current environment and positions us for long term success.
On slide nine.
Investment management delivered $47 million of adjusted operating earnings in the third quarter and our adjusted operating margin, including investment capital was 24.9% on a trailing 12 month basis.
Investment capital was 11 million favorable to our long term expectations this quarter.
Fee revenues were modestly lower year over year.
Higher institutional fees were offset by higher margin equity retail outflows.
Administrative expenses were higher year over year in large part due to higher variable compensation associated with a favorable investment capital results.
No that when we present results on a normalized basis, we adjust for investment capital results above or below expectation, but we do not make a corresponding adjustment for the associated change in variable compensation expense.
Our overall fixed income performance remains strong we saw a return to top quartile performance for a certain flagship products that were affected by the market dynamics in March and April which contributed to the improvement this quarter.
89% of our fixed income fund outperformed the benchmark on a three year basis and more than 90% did so on a five and 10 year basis.
Our strong investment performance remains a hallmark of the differentiated value, we bring to our clients, which is increasingly being sought in this interest rate environment.
Turning to third quarter flows we generated 1.8 billion in institutional net inflows following a record second quarter.
This brings year to date institutional net flows to 12 billion as of September 30.
We continue to generate net flows from diverse sources across a range of investment strategies.
We continued to see progress in insurance as companies continue to tap our team to manage their general account assets.
International clients showed demand for core fixed income and investment grade credit.
We also saw strong success in private assets and see yellows.
We closed our third celo this year and we expect additional issuances to close in the fourth quarter.
Our retail inflows and outflows roughly offset this quarter improved from net outflows in the volatile second quarter.
The improvement in retail was driven by strong mutual fund sales led by intermediate bond, while we experienced fewer redemptions throughout the quarter.
Looking ahead, we expect overall net flows through first quarter 2021 to be roughly neutral due to timing of unfunded wins and known redemptions.
That said, we continue to expect full year 2020 organic growth to exceed our 2% to 4% target in a challenging year.
We also expect to realize higher performance fees in the fourth quarter, reflecting favorable year to date performance on our mortgage investment fund.
Our strong long run investment performance and diversity of strategies continues to drive our robust pipeline heading into 2021.
Turning to slide 10.
Employee benefits delivered $56 million of adjusted operating earnings in the third quarter, including alternative income that was $6 million above long term expectations.
The trailing 12 month return on capital was 31%.
Adjusted operating earnings were roughly in line with prior year quarter. Despite COVID-19 related claims and were supported by strong year over year growth in voluntary.
Overall annualized enforced premiums grew approximately 6% year over year in line with second quarter.
We still expect some covert related premium headwind going into 2021, but so far we have yet to see any material impacts.
Total aggregate loss ratio was at the low end of our 70% to 73% target range.
The group life loss ratio includes Kogan related claims, which explains the elevated loss ratio relative to our target.
Third quarter identified Kobin related claims were 9 million at the low end of our expectations.
Year to date identify kobin related claims have been 17 million.
Loss ratios for stop loss have not been materially impacted by Kelvin.
And while the loss ratio for voluntary was slightly higher than prior year quarter utilization remains low.
This quarter, we introduced my health money a guidance oriented participant tool ahead of enrollment season to help participants with annual benefits selection.
Early indications show that this new tool increased engagement with participants more.
More broadly our longstanding distribution partnerships and differentiated service capabilities sets us up well for continued success heading into the 2021 enrollment season.
Turning to slide 11, we.
We conducted our annual review of actuarial assumptions during the third quarter.
As part of the review, we lowered our long term interest rate assumption for the 10 year treasury rate to 2%.
175 basis points lower from our prior assumption of 3.75%.
This drove the majority of the unlocking impact in the third quarter, a sizable portion of which is associated with our individual life business that will be exited via reinsurance.
We did not change our expected grading period portfolio yields will grade to our long term expectation over a period of at least 10 years, but will vary depending on the characteristics of each underlying asset portfolio.
We also lowered our long term equity market assumption for the S&P, 500% to 8% down from 9%, which drove the majority of the remaining impact for retirement.
Additional impacts included adjustments made reflect lower yields due to the current interest rate environment higher persistency on certain individual life policies and other policyholder behavior assumptions.
On slide 12, we provide items to consider for the fourth quarter of 2020.
In the fourth quarter, we expect the following beneficial items.
First higher investment management performance fees net of variable compensation.
Second lower investment management variable compensation related to more normal alternatives performance.
Third higher retirement revenues, primarily from successive record keeping plan wins.
Fourth seasonally lower preferred stock dividends, and finally, lower intangibles amortization in corporate due to the now full amortization of an intangible that was related to a pre IPO strategic investment.
Offsetting these items, we expect the partial recovery of a prior retirement legal reserve will not recur in the fourth quarter.
Well, we have provided some items to consider there will of course be other factors that affect fourth quarter results, including changes in our average share count market impacts business growth and the potential for additional COVID-19 impacts.
Turning to slide 13.
Our diversified investment portfolio continues to perform well in the current environment.
This quarter, we updated our view of potential capital impact under our two stress scenarios through year end 2021.
We continue to show 300 million and stress case, one and now show 450 million in stress case to reduced from 600 million. This.
This reflects $61 million of actual net credit impairments and rating migrations that we incurred in Twoq and Threeq, you and a prospective impact of roughly 250 million and $400 million, respectively under scenario, one and two.
The prospective impact assumes no active management, which could reduce the impact.
We view this update is favorable as we have maintained or lowered the stress impacts despite extending the timeframe six months.
Importantly, we view both scenarios as manageable given our beginning excess capital position and contemplating future free cash flow generation.
We continue to spotlight certain investments in our portfolio, including our commercial mortgage loans in the appendix.
As of October 31, there were three loans that remain in forbearance, which represents less than 1% of the overall unpaid principal balance of our commercial mortgage loan portfolio.
The vast majority of loans the requested forbearance have resumed repayments and only a small number of loans have undergone modification.
Overall, we remain comfortable with the quality of our commercial mortgage portfolio, which is more than 87% cm. One rated and has a weighted average loan to value ratio of 46%.
Slide 14.
Our estimated RBC ratio was 455% at the end of the third quarter above our target of 400% and our ending excess capital was $642 million.
Excess capital was slightly down in the quarter as cash generation from our operating segments was more than offset by interest expense dividends and higher required capital due to customers moving assets from variable to fixed.
Additionally, we realized derivative losses, some of which is timing related and expected to reverse over future quarters.
We did not repurchase any shares in the third quarter.
We continue to monitor the progression of the overall economy from the COVID-19 pandemic impacts from the election as well as the status of the individual life transaction.
These factors will determine when and how much we repurchase.
As Rod highlighted earlier, we expect the individual life regulatory process to conclude by the end of December.
We in resolution or operationally ready to close pending final approvals.
Our debt to capital ratio is 33.7%.
However, we expect this to be below our target leverage ratio at transaction close when we book and offsetting reinsurance gain.
Finally, we maintained our third quarter common stock dividend at 15 cents per share and 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.
Well COVID-19 related headwinds remain in the near term, we believe our strong worksite, an institutional franchises have performed well and are poised to benefit over the long term.
We expect to conclude the regulatory process related to the life transaction by the end of the fourth quarter and we have a strong excess capital position and 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.
Thank you.
We will now begin the question and answer session.
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Our first question comes from Elise Greenspan with Wells Fargo. Please state your question.
Hi, Thanks. Good morning, My first question I wanted to continue the conversation around capital and just thoughts surrounding returns of buying back your stock on.
The impairment and migrations that you're seeing within your investment portfolio are trending better than you had an update on but it sounds like you're still being conservative when it comes to buyback in advance of the lifestyle closing so fucking high yield returns you're buying back your shares sooner than that transaction closing.
Our next year.
At least good morning, its rod I'll begin, Mike and I as usual will toggle back and forth.
Your read of our response is correct, we are maintaining our optionality as Mike has discussed and we discussed on the second quarter call.
The three factors that we've discussed are in no particular order the macro business environment.
Kogut, which is trending worse at this moment and obviously just waiting to see the outcome of the business environment and the election.
Which will play out here in this in this period of time.
At least maintaining the optionality means just that that we reserve the right to.
Engage in that in the fourth quarter or.
Push that to the beginning of 2021.
And we.
We will continue to use this the judgment we have used in the preservation of capital for our shareholders through the entire seven plus years, we've been a public company.
We will end this year, you will hear from our business people the great momentum that we've got.
In the best position the company has been in and we're just wanting to be exceedingly prudent given.
What we think is an uncertain environment and looking for clarity as we go through this period of time, but I'm very pleased about the progress we've made as a business.
Where the balance sheet and liquidity position will be at year end and all of those factors will impact our decision about exercising.
Judgment in the fourth quarter or we defer to the first quarter.
Okay. That's helpful. And then my follow up would that human capital. Obviously, you mentioned wholly transaction closed on when you would basically both.
That's the capital target.
Offsetting gain according to that my transaction so.
Are there any changes.
I would probably be the debt component that Paul that you kind of earmarked for buyback or debt management action, given where they'll be from a leverage perspective. When this deal does close next year sure.
Sure. Good question, Mike do you want to start.
Absolutely. Thanks for the question good to hear from you.
As I said in the remarks, we do expect the ultimate gain to be we originally guided the ultimate I, sorry that gain loss on sale from the whole transaction to be between 250, and 750 million, that's what we had announced.
We have now think does that will be in the range of zero to 500 million. So we had been guiding to the low end of the range now I think it's at the low end of the original range or even a little bit below that obviously will need to see how spreads and rates evolve over the balance of the fourth quarter or whenever we alton.
We closed the transaction if that range holds then the debt buyback that we had guided to was in the 600 to 800 range.
I think that will likely be toward the low end or possibly even lower but.
Modestly below that 600 800.
What will.
What we'll be doing as we get to the other side of the close and again, you'll pending whatever we decide to do between now and then.
We'll be.
Likely entering into if there are no other better uses of the capital we'd be entering into a broadly systematic approach to repurchase and then the debt would be brought.
Brought down accordingly to the extent that thats the path we take.
Okay. Thank you for the color.
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Our next question comes from Josh Shanker with Deutsche Bank. Please state your question.
Yes. Thank you very much I wanted to hear a little bit about what's going to happen in the first quarter with medical stop loss for Newell and potentially how cold it might change or maybe it won't change our purchasing behaviors assumption employers given changes in employment turtle Unemploy.
Women or whatnot.
Sure Rob you want to take that I can do that thanks for the question Josh Yes. So as we're sitting here today, we're in the throes of one one activity and.
As we've seen things thus far.
Good about what we're seeing in both from a volume perspective, certainly you hear this across the industry of sort of the ebbs and flows of how activity looks I I'd say, we feel very good about what we've seen to this point as we think about next year and the pricing dynamic.
Thanks.
Certainly there is a there is a co head overhang and our thoughts and thinking but at the same point and we've talked about this in prior calls where we play in the marketplace tends to be that middle and larger employer size.
You translate that into deductibles at an individual level that are in the 200 300000 plus range.
Those are obviously sizable numbers that someone's got to meet and so what we've seen in our book thus far is relatively minor to low to no activity or if or if the impact from cove. It in our results there.
Theres certainly been some but it's not been been big at this stage as I think Mike said in his comments as well so as we sit here now there is a bit of just caution, but also you know weve gotten off of good at this over the last few years. So just getting the renewal activity in the pricing, where we want it to be sometimes.
Its hard dollar pricing, sometimes that's just employers rethink and where they want the deductible to be and what they're comfortable from a risk standpoint, and manage and sort of their overall medical claims cost and just where they position that but at this stage I'd say, we just we feel good activity wise, we've seen good.
Sort of discipline in the market overall always pockets of act.
Activity, where we question what's going on on competition wise, but at this stage. So net net good momentum as Roger said across our business and then on stop loss, we feel good at this stage about what we're seeing in the current book and then also as we think about moving forward from a pricing standpoint.
And related when do you know what the elections are for the coming year in terms of voluntary benefits.
For large employers we we do this in October we you know for the end of the year, how the sales for for those voluntary benefits.
Well have.
Indications of what it looks like but with voluntary and again, we probably talked about this in the past.
Participant activity election activity. It can go both ways right. So there isn't.
What it I'll, let you know.
Well, then you start to see those things manifest sub sell sometimes and.
People dropping coverage so there's an in and out movement that we tend to think about by end of first quarter that noise works its way through the product set.
So at this stage certainly too early to call right now, but as we get into January obviously, we're going to have more information than and then it takes a couple of cycles. A few cycles are much to have that settle itself out but this is going to be a really interesting time does that probably under club.
Interest in the products, we think is going to be different this year. The certainly the data that we see and what we hear from customers and employers.
Just the interest in better understanding benefits and taken the time to do that hopefully as just gone up.
So we think you know whether one one looks a little bit more volatile than we've seen in prior years I think the long term dynamics. So this is only going to help what we do not only within the employee benefit business, but obviously, Charlie it's Christine businesses as well I think the momentum drivers around what we do.
It's going to really resonate and continue to do so over a long period of time.
Thank you for very complete answers.
[noise] production.
Our next question comes from Jeremy Campbell with Barclays. Please state your question.
Hey, thanks.
Looking within asset management, you guys continue to execute well, but obviously, there's lots of M&A going on in the space right. Now do you guys feel confident and comfortable continuing to execute as you have or would there be opportunities to explore inorganic growth or something like potentially the sale.
Christine do you want to start.
Certainly thank you Rod and Jeremy I, you know it you're absolutely right Jeremy quite a bit of Oh. This activity has been going on in asset management and you know, but how we how we think about it specifically is is number one I you know, we're achieving strong organic growth.
Awesome product set that we currently have and that continues to be sought after if you know, particularly in such a yield low yield environment.
Clients offshore as well I really looking to put money to work in the U.S. and in our strategy. So when you think about that what would be looking for to build out our strategy Inorganically. If we were to go that direction you know certainly look.
Looking for a partner or someone that could bring us expanded distribution in offshore markets, notably Asia is a is one where we're seeing quite a bit of interest.
Well as we do have specialty capabilities, but there are areas, where we would like or would consider doing tuck ins, whether its private credit or commercial real estate tour already existing team. So we're excited about the businesses, we have ice opana judiciously to add when it makes sense and overall you know very can.
Justin with Ah you know the message at least giving you and other shareholders as far as what would the hurdle speed to do something inorganic.
And Jeremy Thanks for the question just it just to maybe build on that Christine we.
Obviously, we're very pleased and proud of the results that have happened year to date in terms of the flows and Christine maybe you could speak to again our outlook for organic growth on a prospective basis is basically reaffirming what weve previously committed but I'll, let you speak to that.
[noise] I certainly rod yeah. So when you think about the organic growth targets that we put forth in Investor day. It was organic growth of 2% to 4% of beginning are you and so year to date was in investment management. We've had 10.8 billion of net cash flows. This year. So you know beyond.
The high end of that target [noise].
We did communicate and in Mike's comments, you know some slow down in the next quarter or two projecting flat ish in terms of flows really that's that's just idiosyncratic timing as far as larger redemptions versus unfunded wins [laughter], but again when we look at the.
Our organic expectations, we continue to see good interest in private asset classes.
Overall fixed income and so here. We are we are committed and have no reason to not believe we're going to come well well.
Well inside our target of 2% to 4% organic growth next year, just seeing just the strength of the unfunded wins in the pipeline that we do have so again on track to continue to hit those targets and again, we've we've had a great year. This year, we're thankful for that coming well well over that the top side of our normal Andy.
Well estimates for organic growth.
[music].
Great and thanks for that color around products and channels Youd look to augment I guess, just kind of one quick final wrap up on that one.
Is on the inorganic side is there any preference for somebody a tuck in or a larger scale type of play or are you guys kind of open for business the to figure out what makes sense now and if anything cuts in either of those channels.
I would say Jeremy Rod speaking the latter part I mean, we we.
We tried to be very consistent with our answer for a number of years that [noise].
Extending the reach of our existing capabilities.
Internationally from a distribution has been something that we've been very open to and frankly, Christine and the team have done a really good job.
Without adding that at this point, but we think that could add some velocity to what we're doing and we have we have added.
Very adequately some teams to strengthen or add capabilities to an already exceptional group of men and women that are on christine's steam and we remain open to that and as you pointed out in your opening there is activity happening in the marketplace. There is movement into and that does cause teams to become either dislodge.
Or open to perhaps joining another firm with a different culture and so we remain open to that concept and ideals.
Great. Thanks, So much you got.
Our next question comes from Tim Tom Gallagher with Evercore. Please state your question.
Thanks, Ron just a follow up on that question do you should we think about if you are open to doing asset management M&A that you'd be willing to use a sizable portion of the delay shell proceeds for that or should we still thinking about you know a billion being.
Mark for buybacks.
Good question, we what we communicated go into 20 was the anticipation of doing a billion dollars of buybacks and 20 as you as you recall, we did a little north of 400 and some million in the first quarter.
Good emerged the world paused, we paused like many and and and that's where we were and if you look back at the previous two years, we've done a billion dollars over the previous two years and those 6 billion in total so that number is not a four number to us and others. Tom then timing given the optionality.
And just.
The experience that you know.
We bring to let's just be a little cautious there's a quarter or to make a difference in the long term view of voice that would be a number that we would be thinking about pro spec in a range, we would be thinking about prospectively, but we haven't given those targets for 21 and on we will be updating that in the fourth quarter, but.
That's not a number that would be unfamiliar to US you are correct.
Got it and rod so even if there were to be an asset management acquisition.
You wouldn't necessarily.
The show really I guess it would depend on the size, but the you know based on what I'm hearing you say you don't you don't foresee a very large type.
Type of asset management deal that would you share a lot of the the life sale proceeds is that a fair way to think about it we're not going to speculate on on on on that part.
What I'm, saying is we've got a track record as you're well aware of buying back a healthy amount of shares and we're approaching 21, our next Investor day, which we will of course update our thinking on not just sources of capital but uses of capital so thinking about share buyback think about dividend.
And either investment in our business or inorganic activity, we'll update that but nothing has changed in terms of our approach at this point.
Okay, and then just a final follow up Mike the comment on leverage coming down based on the final loss on sale adjustment I think that would imply a very big a bigger net income gain when the deal closes can you just update us on how how big of a net income adjustment, we're now going to.
That's because there's been some movement and adjustments to the transaction price along the way here.
Hey, Tom its a good question I don't have that number right in front of me, so I want to be a little bit careful but you know the gain on the the underlying assets.
There is going to be I think the primary driver of that is in the neighborhood of a 1.1 billion.
Yes give or take and that's what gets you to the net the net loss of Ah in that business around mid point to 50.
Got you Okay. That's helpful. Thanks.
Uh huh.
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Our next question comes from Erik Bass with Autonomous Research. Please state your question.
Hi, Thank you just hoping for a little bit more color on your outlook for retirement flows and hear you on the guidance. It sounds like in Fourq you on there's going to be some noise with some larger plans, leaving but want to get some more detailed in terms of what you're seeing in terms of recurring deposits.
And any policyholder withdrawal trends. Thank you bet. Thank you Charlie.
Yes. Thank you.
Eric appreciate it.
From a flows flow perspective, obviously you saw here in the quarter three and a half billion a full service net flows were really pleased with the 28 consecutive quarters and our full service corporate business as well as the strong tax exempt had solid results largely driven from a large planned transition that was referenced.
But you also look at it yeah, we've had almost a little bit over a half a billion and net flows and stable value on the 20 billion and record keeping and I think what that shows is really diversified growth across many multiple markets.
When when we looked at the part of your question around fourth quarters.
Surrenders and things there.
It was mentioned in the call the large tactics Suresh.
Under and I think our team is doing a good job maintaining pricing discipline on renewals up you know to make sure they need our thresholds.
The M&A the mergers and acquisitions of our clients. These are clients the activity the business volume with our clients and our full service business.
It does fluctuate over time.
When you lose on net net we believe were winter long term on many of them, but in the full service corporate yeah. We do expect about a little over two times, what we did in 2019, so it'll be that's what's driving that but when we when we look at our recurring deposits across to that.
To your question the 8.4%, we expected and I think Mike said it. So we expect it to go down to excuse me grade down to the high end of that 3% to 6% range that we previously communicated and that's being driven like we saw in the fourth quarter excuse me the third quarter.
A 4% increase in recurring deposits in the third quarter of this year relative to last year. So you started applying that in the third quarter and and what we would expect in the fourth quarter. That's how we get to that 3% to 6% range and probably be in at the upper end of that range on a trailing 12 month basis for the full year.
Now, what's driving a little bit of that.
Lower growth on recurring deposits, but I would still underlying the growth.
Is it the employer contributions we seen total employer contributions in the third quarter decreased by a little over 1% and that's being driven by a about a 6% decline in the average contribution per plan so per employer their employer its average contract.
Fusion, but offset by our growth, which I talked about which we've had a 5% increase year over year in the total number of plan that that had an employer contribution.
Throw on top of that the terms are recurring deposits. The employee contributions and you know we've seen an increase in the number of participants.
And our full service business, Yeah, I think it was mentioned in the earlier.
Earlier that we have Oh excuse me you had a 13% total participant growth a 21% and recordkeeping, but in full service. It was a 6% increase in full service record keeping year over year and we saw an increase in total.
Participant contributions so you know when I look at that in total you know what GE is on a trailing 12 month basis. Yeah. We were actually clock in about $89 billion and total deposits and that will give us back to back 50 billion plus year total deposits the growth and participants really kind of a strong diversified growth.
So I think it it shows that our value proposition is resonating that were ready winning and retaining and growing our business. Despite the macroeconomic headwinds and you know I would say that I think we're very well positioned to weather the financial impacts both through and beyond cold it. So.
And I think that really shows through in our value proposition resonating both with our customers our distribution partners and employees because they know that boy, it's got a fight for everyone's opportunity for a better financial future during and beyond some of these uncertain and challenging times.
Thank you.
Follow up just still want so if you can provide an update on how quickly you expect to be able to get the stranded costs out once the life transaction closes and do you think you can still get to kind of a normalized EPS and run rate by 2022 or will this take a little bit longer and given delays in closing the transaction.
Mike you want to start.
Yeah.
And Erika, we we've been getting ready for the process of taking out the stranded costs since late summer. So there. So we've got a a slew of initiatives already in line. Yes bottom line is will there be some delay you know.
Yes, I think it's more on the terms of a couple of months is not in terms of quarters. So overall I feel I feel pretty good that that over the next two years, we'll be able to take out the vast majority if not all of the remaining stranded cost so more to come on when we get to the other side of the closing we get a little more specific.
But.
I think thats the way to think about it is we're still largely on track I don't think that the delays to up to this point are going oh amount to much.
Got it thank you.
Our next question comes from Ryan Krueger with KBW. Please state your question.
Hi, good morning, with interest rates at current levels is there anything material, we should be thinking about in terms of higher pension costs that go into next year.
But thanks for the question Ryan I'd look I think it's a little early.
But and there are sensitivities in the K that you can you can go to that will give you a sense of what's happening with with the the underlying pension liabilities.
The the discount rates have dropped you know I.
I think you know meaningfully but not maybe as much as you might think I think right now we're looking at the end of the third quarter. The drop is about 60 basis points and you can apply that to the sensitivities that are in the K that are per hundred on the flip side. The asset portfolio. Obviously, we'll have something to say about that as well how the how the underlying assets or before.
Timing.
And I think the bottom line is at least right now we're looking at the overall pension cost is being possibly somewhat favorable but we've got a long way to go.
Nothing that is that going to move the needle in a dramatically, but it could be a modestly favorable in 2021, depending on how things go over the next 60.
Six to seven weeks.
Thanks, and then I have one more on consolidation yeah, like we've seen a fair amount of retirement consolidation, but more in the four one k. market and you've talked about your your view there.
Do you have it does does your view on on your participation in consolidation does it differ at all between the corporate market and and tax exempt market I guess, how do you think about it.
Big Dan M&A.
Let me begin its rod.
The first piece that we look at is is it strategic it doesn't fit.
Our overall narrative.
Around.
The workplace and the institutional focus and obviously that example would sit there and the second piece as we've discussed over a long period of time.
From an EPS perspective over.
Approximately a two year period that needs to be accretive to share buyback.
And then we need to look at our relative position in the marketplace and we've given this example in a previous question to the previous time with a different company acquired an asset.
<unk> record, keeping example, where weve been in the record keeping business a long time that we didnt need to acquire that capability and and therefore, maybe made a decision to not to to not engage in that.
And so again it would it would be property specific it would need to meet both [noise].
Our strategic criteria fits to the workplace and financial institution focus or adjacent sees and obviously and critically important the.
The financial outcome from an EPS perspective, as we've discussed Mike.
Mike feel free to add.
No I think you answered it well rod I don't I don't maybe just kind of summer summarizes there's no incoming bias one way or the other I think it really.
Is the question of fit and value as we're looking at the properties.
Understood. Thank you.
Our next question comes from John Barnidge with Piper Sandler. Please state your question.
Hi, Thank you for the opportunity to ask one can you talk given how work has changed where and.
Where it's done how you thought through and quantify maybe potential real estate savings and emerge.
As you start to move some of these costs. Thank you, yes happily John Good afternoon, now I guess is the longer morning.
[noise] I'm happy to begin.
We move like most firms the mid of March from a Friday to a Monday to a virtual environment Weve got approximately 6000 employees U.S., what we perhaps haven't talked about as much pre cove. It was.
[noise], John 20, 20% of our workforce was something that we called virtually orange in other words. They were virtual previously and we've had that model in place for a long time, well over a decade and it's been a very effective model not that percentage has increased.
What.
As we've gone through this and had the experience that we've had we see a number of things emerging.
As we go into 21.
I fully expect when the science permits they.
There will be some number of our employees will which which will naturally want to when we would welcome them to return to office there'll be another group that that will be in a in a model that many are talking about using using the theme of hybrids.
They may be in office, a day, a week or two days a week and a is working you know virtually over the balance of the time and I do expect or.
Our virtually orange employee group that is presently 20% I think that number will grow significantly.
And how were looking at this is we are so we spent a lot of time with our employees to make sure. That's a first their health and safety as is Paramount and then the health and safety of both or advisers consultants and contractors in the same way and I think this model will change dramatically I think our virtual.
Virtually Orange group will go up I think our hybrid will go up and they'll be some amount that will naturally want to return to offer. Some we would welcome that getting to the end of the question. We're focused on this more on both employee satisfaction retention and attracting talent to fuel our growth perspectively and when.
You net that all the way through the equation there will be and it's a it's a little early for us to forecast this yet, but there will be a day.
Different decisions that will be made as an outcome are a consequence of.
That stream of offense that I just described and.
We will we will reflect that as or thinking evolves into in Q1, and Q2, but I do believe operationally there will be real estate savings that is not in our forecast at this point, we haven't discussed it but we're coming at it from exactly the other direction that but yet I think it will be a net.
Prudent in the expense picture and the real estate that we need as an outcome of the world changing in the world changing in my view in a in a pretty significant way.
Thank you very much for the answer best of luck.
Thank you.
Our next question comes from Andrew Hagerman with Credit Suisse. Please state your question.
Hey.
Afternoon.
No just want to get a little more clarity into.
Your commentary around monitoring on buybacks.
Let's assume we can get through co vivid and hopefully the election.
You had talked about in the second quarter.
On that on the conference call that is about a pathway to completing a billion dollars for the year and you cited earlier that would be another 600 million. So if we get if we roll into 2021. The deal gets completed you get the clarity that you need around these.
Economic and Clover These shoes would.
Would that mean that you could get back to your 90% to 100% of earnings pace, and then and then a catch up on the 600 million and if you were to do that 600 million could you do it very quickly.
So two parts and Michael I'm going to I'm going to ask you to jump in here too but.
Andrew first good to hear your voice is good too is very very fair question.
Free cash flow conversion, particularly post the life sale will be in the.
In the 85% to 95% range and again that really completes the transformation piece for what we inherited from my energy group to what we've chosen to move forward with strategically around our workplace and institutional focus. So we feel really good about those decisions and the and the higher growth free cash flow.
Components of the outcome of those decisions the the consequence or outcome of that will be.
Lets say its beginning of year, we're going to be a week is we ended the third quarter here with the 670 something million of excess capital billion and a half that Mike spoke about with the life transaction capital that will come from the fourth quarter.
Andrew This is part of what I've referred to is the the balance sheet and frankly, the liquidity position has never been stronger and frankly the momentum in the business strong we just want to be judicious and thoughtful about the next.
A few months as we go through this.
And from there we could accelerate.
The pace and we could accelerate Oh, we have a lot of options of how to do that but Mike I'll, let you I'll, let you add.
Yes, maybe just summarize I think one of the top with a you know I think over the course of a few quarters. After we close the life. So we wind up in the same place. He would have been had the sale closed in the third quarter right I think will.
We'll we'll probably lean in a little bit more heavily than we might have otherwise I think the plan would have been to be.
No systematic will continue to be systematic, but but we may be a little more lean in a bit again that'll depend too on what's happening with the stock price what's happening in the world around us right. So.
I think we still view buybacks as an attractive opportunity for for shareholders.
And we'll we'll we'll be very mindful of taking advantage of that opportunity when it presents itself.
In terms of can we do 600, a quarter I I think mechanically we can I think you know im not saying, we will or won't I don't want to get too far ahead, because I think it just depends too much on what's going on in the world.
To say that we would lean and but we have leaned in before and I'd point to the first quarter as well.
As one example, where we did we did 400 and that was that was without the benefit of a large stockpile of capital coming from a transaction.
Got it that was very helpful. Just kind of curious quickly the 8% equity market down from 9%.
It seems a bit high to me, maybe a little color on on on that say can you to an 80% equity market assumption.
Well, maybe I, maybe I just put it in the context of the two big assumptions that we made.
The changes we made eight first we lowered the long term interest rate to 2%.
Which as I think a couple of you've noticed in your overnight notes I think that puts us at the conservative if not the most conservative and I think it's just a recognition that yes.
We have been looking at history as a guide and that's an important thing to think about as we talk about equity.
And we look at history as a guide and the question is then how much utility how much importance to put on some of the history pre crisis and I think we concluded that.
Given the pandemic given the change in fed policy given that we're now 10 years pass the financial crisis and then it seems like we're in this this new regime. It just makes sense to take to take that expectation down and I think importantly, as I think about it in our communications with shareholders.
And and other stakeholders is simply I think we've taken the interest rate question off the table for quite a while as it relates to the GAAP balance sheet. So equity markets similar logic right I think when we look at history.
You don't have the last 10 years to support that you should lower your expectations and also as you look over the last 30 years or more 50 years for that matter equity markets over that long period of time has generated I think meaningfully actually in excess of of 9%. So we lowered.
<unk> largely because we lowered the base interest rate and so there is a I think a good theoretical connection between lowering our expectations for the risk rate and then.
While lowering equity market returns I.
I think it's in the eye of the Beholder as to what's what's conservative on what's not we believe this puts us right at the middle of the industry practice. There are some lower there are some higher but what's important is that this only goes to establishing the effectively the intangible and the rate at which we add.
Amortizable intangible on our GAAP balance sheet.
And it will be used in our some of our forecasting assumptions, but for for AUD outside audiences. You can use whatever assumption you think is appropriate as you project forward our growth in a in accounts at the last thing I'd leave you with is just to be clear.
We work for our own growth rates in our models, we assume a mix of bond rate Bond fund and equity fund. So so the it's a that number is is we use an 80 20 mix and so you wind up with an with an overall return that's more like in the six and a half to seven range on account value over.
Hi, Paul.
Thank you.
Ladies and gentlemen, this concludes our question and answer session I would like to turn the conference call back to Rod Martin for any closing remarks.
Thank you all.
Our success. Despite the many challenges presented in 2020 reflects the commitment of our employees and our focus on helping our clients navigate the many financial challenges that they are facing we.
We remain confident in our three complimentary businesses, which are enabling us to expand voice presence in the workplace and with institutional clients. 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.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.