Voya Financial Inc

NYSE:VOYA

Earnings Call Transcript 2018-Q1

[Operator]

Good morning and welcome to the Voya Financial First Quarter 2018 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note, this call is being recorded.

I would now like to turn the conference over to Michael Katz, Senior Vice President of Investor Relations. Please go ahead.

[Michael Katz, SVP and Head, IR and Enterprise FP&A]

Thank you, Jennifer and good morning. Welcome to Voya Financial's first quarter 2018 conference call. Materials for today's call are available on our web site at investors.voya.com via the webcast.

Turning to slide two. Some of the comments made during this conference call may be forward-looking statements within the meaning of federal securities law. The company does not revise or update them to reflect new information, subsequent events for changes in strategy.

Risks and uncertainties that could cause actual results to differ materially from those expressed or implied are discussed in the company's most recent Form 10-Q filed by the company with the U.S. Securities and Exchange Commission.

Additionally, some of the comments made during this conference call may refer to non-GAAP financial measures. Reconciliation of these measures to the most directly comparable U.S. GAAP financial measures can be found in the press release and financial supplements found on our website, investors.voya.com.

Joining me on the call are Rod Martin, Voya's Chairman and Chief Executive Officer as well as Mike Smith, Voya's Chief Financial Officer. After their prepared remarks, we will take your questions.

For a Q&A session, we have also invited the Heads of our businesses. Specifically, Charlie Nelson, Retirement; Christine Hurtsellers, Investment Management; Rob Grubka, Employee Benefits; and Carolyn Johnson; Individual Life.

With that, let's turn to slide three as I would like will turn the call over to Rod.

[Rod Martin, Chairman and CEO]

Good morning. Let's begin on slide four with our key themes for the quarter. These themes reflect our execution on the 2018 priorities that we shared with you in February. Specifically, we generated attractive growth based progress on our the sales of our Annuities business and maintained a strong capital position.

We grew adjusted operating earnings 12% year-over-year at our targeted returns. This included record first quarter adjusted operating earnings, excluding DAC and global unlocking for Retirement and Investment Management as well as a strong quarter for Employee Benefits.

As I said before, we are committed to increasing our earnings per share, while maintaining a top quartile ROE. During the quarter, we made progress towards significantly reducing risk as we focused on closing the Annuities transaction. This will transform Voya into a simpler, more focused company that is position for accelerated growth and better equipped to meet our customer needs.

We're making good progress with the regulatory reviews and were on target to close the sale in the second or third quarter of this year. We also continue to advance our guaranteed minimum interest rate or GMIR initiative. As a reminder, this initiative demonstrates our commitment to helping customer save for retirement, while making adjustments that reflect the challenges presented by low interest rates. Our discussion with our clients as we make these changes have been positive and Mike will share more details on our expectations going forward.

Finally, our capital position remains strong. At the end of the quarter, we had $548 million of excess capital. In the quarter, we completed the previously announced $500 million accelerated share repurchase agreement. And we're executing on our ratios to repurchase an additional $500 million of shares by the end of the second quarter.

Turning to slide five. We are focused on our priorities for this year, which is going to be a transformative one for our company. First, we're progressing towards the close of the Annuities sale. Our teams have been working in partnership with Apollo and Athene to carefully separate these businesses from Voya.

Following the completion of the transaction, our business mix will continue to be diverse and largely focused on high growth, higher return capital like businesses. This transaction will be a catalyst towards achieving improved efficiency for our businesses to support profitable growth.

We remain committed to achieving $110 million to $130 million in expense savings within 12 months of closing the transaction. We also continue to be good stewards of our capital. As I just described, we're on track to deliver the $1 billion in stock buybacks that we announced in December by the end of the second quarter.

We are well-positioned as a growth company as you can see in the results announced yesterday and in the path forward for each of our businesses. As we move forward this year, we will continue to share examples of how we're executing on these four priorities. And we'll share the details of our long-term strategy at an Investor Day later this year.

Turning to slide six. Today, we're celebrating Voya's five-year anniversary as a publicly-traded company. It's worth recognizing that we've made significant strides as we've demonstrated through our first quarter results and the character of our brand. Our many achievements and milestones have enabled us to build the brand that is now one of the most recognized names in retirement.

Our brand awareness now exceeds most of our peers, including brands that have been around for decades. We've created a culture of transparency, accountability, and a commitment to do the right thing. We're investing in our business, simplifying our company, and better positioning Voya to meet our customer needs.

One of the things that I'm most proud of is the transformation of our culture. Voya aims to be one of the most ethical and most admired companies in the world. In fact, we are one of only two financial services companies that and as part as one of the world's most admired companies, one of the world's most ethical companies and on the Bloomberg Gender-Equality Index at the same time.

This recognition demonstrates the strength of our culture and the commitment of our employees to both what we do and how we do it. And we're increasingly hearing from our clients that the culture that has enabled us to earn these accolades distinguishes us from other companies.

We're proud of all we've achieved for our customers, our shareholders, and our employees over the last five years. Voya's transformation to a more focused, more customer-centric, and more profitable company will continue. As proud as we are of what we've achieved, we're really excited about what comes next.

With that, I'll ask Mike to provide more details on our performance this quarter.

[Mike Smith, CFO]

Thank you, Rod. On slide eight, our results were strong this quarter as we reported our highest ever first quarter adjusted operating earnings, excluding unlocking. Our reported fourth quarter adjusted operating earnings per share was $0.77. This included $0.31 of negative DAC/VOBA and other intangibles unlocking, primarily in our Retirement and Individual Life segments. I'll provide more details when we turn to those business lines.

Favorable investment performance from our alternatives portfolio supported investment results. We generated $0.05 of combined prepayment and alternative income above our long-term expectations. Our first quarter operating results compare favorably to those of first quarter 2017 when we reported $0.51. Excluding DAC unlocking, we reported $0.49 in first quarter 2017.

Within our adjusted operating results, we realized favorable performance from our retained annuities, which lifted corporate results. We expect retained annuities performance to moderate slightly in future quarters. Insurance results were mixed. While we reported improved stock loss and better than expected Group Life rate results, we experienced unfavorable Individual Life mortality.

Our first quarter GAAP net income results were supported by a favorable adjustment to the estimated loss on the annuities transaction, which is reported within discontinued operation.

We are required to re-measure the estimated loss on sale at the end of each quarter until transaction closing. The favorable adjustment was partially offset by fair value accounting of some of our mortgage securities positioned due to rising rates, as reported in the net realized gains and other category. Importantly, we remain on track to achieve our quarterly adjusted operating earnings target of $1.30 to $1.40 per share within 12 months of closing the Annuities sale.

Moving to slide nine. Retirement adjusted operating earnings reached an all-time first quarter high, excluding unlocking. This is primarily driven by a 9% year-over-year increase in both retirement assets under management and defined contribution plan participants, which in turn, generated higher underlying fee income. This growth reflects strong commercial momentum and across markets driven by higher distributed productivity and benefits from our strategic investments.

Beginning this quarter, Retirement results now include our Select Advantage investment only product. This product had been part of the Annuities business but is not included in the transaction.

Select Advantage results were reported in corporate in 4Q 2017. This product currently includes roughly $6 billion of assets and will continue to be available for sale to customers.

The shift had a minimal impact in Retirement's first quarter operating earnings. As we grow assets and the impact of first quarter seasonality rolls off, we expect a larger earnings contribution from Select Advantage in upcoming quarters.

Administrative expenses, which are seasonally higher in the first quarter, also included $5 million of strategic investment spending previously reported in corporate. Our unit cost has declined by 9% year-over-year driven by disciplined expense management and the growth that I discussed earlier. As mentioned on the previous slide, we incurred $41 million of DAC/VOBA unlocking, almost all of which related to our guaranteed minimum interest rate initiative.

As we have shared over the last several quarters, we have been working with many of our clients to accomplish the following. First, preserve the guaranteed minimum interest rate on existing fixed account balances; second, to new deposits and transfers to a new fixed account with a lower guaranteed minimum interest rate that better aligns with market rates. The accelerated amortization this quarter was driven by a higher level of consent than previously expected, which demonstrates the strength of our customer relationships.

Using our new best estimates, we now expect the cumulative and will impact of lower DAC amortization as a result of the GMIR initiative to be $25 million to $30 million annually. This is revised from the previous range of $20 million to $25 million.

We have realized to the majority of our run rate benefit from previous GMIR actions. The incremental amortization benefit will emerge over the course of the year as consents go affective. Should future consents exceed our best estimates, more accelerated amortization could emerge, but the majority of this behind us.

Turning to net flows. Our small mid-corporate business generated its 18th consecutive quarter of positive flows, despite the merger-driven surrenders, while tax-exempt and stable value experienced some outflows. We expect the second quarter net flows to be in line with those in the first quarter and then improve in the second half of the year.

On slide 10, Investment Management produced $61 million of adjusted operating earnings, also our best ever first quarter results for the segment. This growth reflects our expertise in core fixed income and specialty asset classes and solutions, which represent over 50% of our third-party assets under management.

Our Investment advisory fees benefited from additional commitments to a new private equity fund that we are raising. Our Investment capital results were favorable, reported by higher carried interest on funds for which we are the general partner and earnings on certain collateralized loan obligations. We earn better than expected performance fees from our collateralized loan obligations as well.

Our trailing 12-month operating margin, which 29.1%, excluding investment capital results, which was driven by higher operating scale and continued discretionary expense discipline.

Our first quarter net flows, excluding our variable annuity outflows, were affected by redemptions from a non-proprietary real estate retail fund, stable value surrenders and timing of a number of third-party institutional mandates.

In the second quarter, for example, we have already closed $660 million CLO, secured a $150 million specialty mortgage fund mandate, and marketed a 400 million euro-denominated CLO that should price shortly. We also plan to close on additional private equity commitments.

This activity demonstrates continued strong demand for specialty asset classes and solutions that supports fee margins in our core to our value proposition. Over the last 12 months, about 85% of our institutional sales have been from core fixed income and specialty asset classes and solutions.

The fees on inflows have consistently exceeded those for outflows. In the first quarter, the fee differential was six basis points favorable. Strong investment performance is critical to demand for our products and solutions.

We continue to excel on this front as approximately 80% of our assets under management outperform benchmark or peer median returns on a five-year basis as of the end of March 2018. Further, the combination of our strong performance and our increased number of consultant ratings will help to build our institutional pipeline of opportunities.

As a reminder, the Annuities transaction will lower our net assets by approximately $18 billion, translating into a $35 million annualized pretax earnings impact. However, we'll be the preferred partner for managing the general account assets for Venerable, which will own the variable annuities block posts transaction. As the Venerable team grows their portfolio, we are well-positioned to participate.

Turning to slide 11. Employee Benefits reported a 28.3% return on capital, underscoring the high return and capital light nature of this attractive business. First quarter results benefited from improvement in the loss ratio for Stop Loss and better than expected loss ratio for Group Life.

Our in-force premium growth was modest as we took additional pricing actions for our Stop Loss business. We continue to believe that pricing action taken over the last several quarters will help return the loss ratio for Stop Loss to our 77% to 80% target range by year end.

For example, our underwriting discipline resulted in annual premium increases double those of the prior year. The market, while competitive, remains rational as demonstrated by relatively stable annual premium levels. Our voluntary offerings continue to represent an important growth driver. Voluntary sales rose by 41% year-over-year.

On slide 12, Individual Life results were affected by higher mortality following three quarters of favorable mortality. This quarter's mortality results were attributable to both higher frequency and severity.

As a result, we incurred $29 million of DAC/VOBA unlocking. We continue to see demand for our Indexed Universal Life policies as we work towards separating the Individual Life business from Annuities. We will have more to share later in the year regarding our strategic review of Individual Life.

On slide 13, we provide additional items to consider. Looking ahead to second quarter 2018, we expect lower administrative expenses due to realized net cost savings and the roll-off of seasonally high first quarter items. The impact of lower expenses could be partially offset by certain items not recurring in corporate, which could lead to higher sequential operating loss in that segment.

We also point out that market volatility in the first quarter will dampen beginning asset balances for Retirement and Investment Management. While we have provided some items to consider, there will, of course, be other factors that affect second quarter results.

Turning to our balance sheet on slide 14, our capital position is strong. Our estimated RBC ratio was 463% at the end of March. Our excess capital, which consists of estimated statutory surplus and holding company liquidity above target was $548 million at the end of the first quarter. We'll be using a portion of that excess capital to execute additional share repurchases in the second quarter.

Our quarter end debt to capital ratio was below our 30% target. We repaid maturing five-year senior notes in the first quarter using proceeds from our hybrid debt offering for which rating agency allow us to take partial equity credit.

Turning to slide 15. As we celebrate our fifth anniversary of the public company, we're steadfast in our commitment to being good stewards of shareholder capital. As Rod mentioned, we completed the previously announced $500 million accelerated share repurchase in the first quarter. We plan to repurchase another $500 million of shares by the end of the second quarter, which will bring our cumulative share repurchases since our IPO to $4.4 billion.

We plan to use the expected proceeds from the sale of our Annuities business towards additional share repurchases. Our expectation remains that proceeds will support $500 million of share repurchases. Since the IPO, our market value has risen by over 70% and we expect to have returned approximately $5 billion of excess capital to shareholders by year end 2018.

In summary, our business continued to generate strong operating earnings and targeted returns. We continue to reduce risk and our capital position and balance sheet are strong.

With that, I'll turn the call back to the operator so that we can take your questions.

[Operator]

Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions]

Your first question will come from Ryan Krueger with KBW.

[Ryan Krueger, KBW]

Hi, thanks. Good morning. My first question is on corporate and the $65 million to $75 million loss guidance for the second quarter. Does that include all of the original annuities stranded overhead that you expected? Or have you already started to see improvement as you've been undertaking the cost-cutting actions?

[Mike Smith, CFO]

Ryan, thanks for the question. This is Mike. We had taken a few early steps toward addressing stranded costs, but I'd say, fairly minimal effect that has run through the quarter other than the previously announced cost saves that we've talked about and guided too.

I think you'll see that momentum really pickup in the third quarter and beyond. We are still confident in our ability to address and meet the $110 million to $130 million of cost saves that we expect 12-month after close. But kind of in the main format modeling perspective, the annuities stranded costs are more or less of what we anticipated. That reduction in that is not really reflected in the guidance.

[Ryan Krueger, KBW]

Okay. Thanks. And then on Retirement could you give some additional color on what's driving the expected outflows in the second quarter? And then what gives you confidence that it will improve in the second half of the year?

[Rod Martin, Chairman and CEO]

Yes, good morning and thanks for the question. Despite some short-term headwinds, we are really pleased with the underlying fundamentals and long-term positive trends we're seen both on the sales as well as relative to retention.

The biggest driver over the last number of quarters this quarter and as we look forward a little bit has been in our Stable Value fund business. In this quarter, it was primarily driven by two factors, a little bit of participant activity just movement between equity and fixed, but also some from a multi-manager, non-proprietary investment manager where we use our Stable Value fund in others non-proprietary Stable Value pool and they're bringing that in-house.

We're seeing that trend of last year and that's projected to continue through the remaining of this year. That's allowed us to kind of reposition and de-emphasize that block and move more into some other Stable Value.

If we think about the remainder of the year, we remain quite positive. This is our 18th consecutive quarter of positive net flows. We've added approximately two times more plans than we've had leave us. Although relative quarter-over-quarter from last year, the average plan size has changed a little bit, but that fluctuates over time.

And as we look forward, we have a really strong pipeline. We're selling this quarter about 11% more advisors. We've got an increase in our pipeline in terms of quotes of about 10% for planned over $10 million. So, that gives us a lot of and encouragement.

And we have an aspiration through the remainder of the year to add about 25% more wholesalers to our team to work with those advisors. So, when you look at those fundamentals, we have more quotes, we're selling with more advisors, and we have more people selling throughout the remainder of the year. So, that's what leaves me optimistic I think for the remainder of this year.

[Ryan Krueger, KBW]

Understood. Thanks a lot.

[Operator]

Your next question is from Suneet Kamath with Citi.

[Suneet Kamath, Citi]

Thanks. Good morning. Wanted to start with excess capital. It looks like quarter-over-quarter, may be the nominal amount of excess capital came down a little bit. I know you bought back stock, but I would assume you also generated some capital, so any color there in terms of what the drivers were?

[Mike Smith, CFO]

Yes, Suneet, thanks for the question. The liquidity picture there is really a snapshot of where we are as of 3/31. There are occasionally loans back and forth from the holding company to some of our non-insurance subsidiaries. And while those are usually short-term in nature, this time they happened across the quarter. And so, there is a temporary what I'll call a timing difference that is reflected here.

And so, if you -- that timing differences since reversed and so the way to think about our excess capital that it's probably closer to where we were at the end of last quarter, which is in the neighborhood of $700 million.

[Suneet Kamath, Citi]

Got it. And then, Mike, could you provide -- I got on the call a little bit late. I don't know if you talked about earlier, but any color in terms of what happened related to the below the line adjustment related to the Annuity business?

[Mike Smith, CFO]

Yes. The remeasurement of the loss on sale.

[Suneet Kamath, Citi]

Yes.

[Mike Smith, CFO]

Well, if you think about how CBVA has acted throughout the history with us, we've been very focused on targeting the statutory and regulatory -- statutory and rating agency capital levels, the hedge has been tuned to that. It's been very effective. But the GAAP balance sheet and GAAP income statement has been volatile.

I'm happy to say that our hedges continue to perform well. The proceeds that we expect from the VA sale are still where we expect them to be as of the time of the transaction, which is $500 million.

But as you would have seen in the past, there has been some movement in the GAAP balance sheet and that has of and a corresponding effect on the GAAP loss on sales. So, effectively on a GAAP basis, the value of CBVA have gone down, which means that on sale, on disposal, the loss that we incur at the time of sale has also gone down. So -- go ahead Suneet.

[Suneet Kamath, Citi]

Well, I was going to say, this is sort of just almost like noise as oppose to -- there is no cash impacts or anything like that. It's just kind of adjustment?

[Mike Smith, CFO]

Exactly. The proceeds are exactly what we expected them to be. The hedges performed well. We continue to be focused on the cash aspects and has been said all along the GAAP noise from CBVA is truly non-economic. It simply a function of the rules we have to follow in computing GAAP reserves and frankly, they're a bit disconnected from our debt to economics are.

[Suneet Kamath, Citi]

Got it. Okay. Thanks.

[Operator]

Your next question is from Nigel Dally with Morgan Stanley.

[Nigel Dally, Morgan Stanley]

Great. Thanks. Good morning. Just had a question on the retained annuities in corporate. If I can get a little more color there? How much did it contribute to earnings this quarter? What should we expect going forward? And just some details on the assets under management of that retained annuity block?

[Mike Smith, CFO]

Sure Nigel. Let's start with the assets under management. There is about -- on the CBVA side, there is about $2 billion of account value that is retained, about a third of that has guaranteed living benefits. It's very well reserved, the NAR is essentially negligible on that block. It's a relatively conservatively reserved and priced block.

On the fixed annuity side, I believe that account value is about $4 billion that we're retaining and that's ex the Select Advantage Custodial Mutual Fund account that we had reported in corporate in fourth quarter, but $4 billion give or take is what we have in the corporate block now that's some payout annuities and also some fixed multi-year guarantee annuities. The earnings in the quarter were in the 15 to 20 range. I think we're expecting them going forward to be more in the 10 to 15 range, per quarter, pretax.

[Nigel Dally, Morgan Stanley]

Very good. Thanks a lot.

[Operator]

Your next question is from John Barnidge with Sandler O'Neill.

[John Barnidge, Sandler O'Neill Partners, L.P.]

Thanks. Can you update me on the pricing actions in your Stop Loss business? It really seems like that business' loss ratio is improving a bit faster than expected?

[Mike Smith, CFO]

Yes, Rob will take that.

[Robert Grubka, President, Employee Benefits]

Yes. Thank you, John. Appreciate the question on that. We message the last year being focused on the discipline around that business. And what we're going to do from a pricing standpoint I think both new flows and then Mike's comments around the pricing impact that we had on the renewals for the [1-1] season will sort of take it that it's faster than may be anticipated from yourself and ourselves, but feel really good about the path we're on for the year and being in that 77 to 80 range as we finish up.

[John Barnidge, Sandler O'Neill Partners, L.P.]

Great. And then could you talk maybe what you're saying as it relates to MiFID II impact to your Investment Management business? Thanks for the answers.

[Mike Smith, CFO]

Christine will take that.

[Christine Hurtsellers, CEO, Investment Management]

Yes, John. As far as MiFID II goes, we have a small operation in the U.K. that we work to get MiFID compliant. But overall, we're predominantly a U.S. domiciled asset manager. And so the cost that you are seeing are some of the large global competitors, we are not experiencing.

That being said, we continue to be very judicious in our own investment research outside the company as well as continue to view this as an advantage just given the in-house proprietary research investors that we have.

[John Barnidge, Sandler O'Neill Partners, L.P.]

Thank you very much.

[Operator]

The next question is from Tom Gallagher with Evercore.

[Tom Gallagher, Evercore ISI]

Good morning. First question is just on the Asset Management side, kind of a higher level question. I know you guys rattled off some various mandates you expect to be funded which sounded like the pipeline looks pretty good.

All in all, what do you think that means for third-party flows? They've been positive. They moved lower this quarter, but they still remain positive. Do you expect those to get better? Still stay positive?

And also, when CBVA goes away, that's been the main source of our outflows, do you think we might say total Asset Management flows turning positive at some point driven by that?

[Rod Martin, Chairman and CEO]

Tom, Christine will provide some details, but you are absolutely correct in your interpretation from Mike that we are bullish about our pipeline and I'll let her fill in the details.

[Christine Hurtsellers, CEO, Investment Management]

Yes. Thank you. As far as the institutional flows -- third-party flows we had in the first quarter, we came in slightly positive. And a couple of things to consider. Certainly, in terms of net outflows, there were some asset allocation rebalancing that's very natural in the beginning of the year.

Plus last first quarter -- and normally, we price the CLO and we price the CLO at a little over $600 million that did not price or settled in the first quarter that hit the second quarter. So, we've also priced -- or we're in the process of getting ready to price our first ever European CLO, its slightly over $400 million. And why this is notable? This is our first entry to grow our CLO franchise into the European market.

So, that being said, when you think about our flows, active manager flows. And when you look at competitors and we're watching what the industry kind of have done, active flows have been negative, ours are positive.

Also notable are fees that we have earned, not only this quarter, our fees on what we earned on inflows is above the fees of the outflows. That's not really this quarter. We actually have that for a 12-month trailing basis. So, just again, think strong long pipeline, confident, specialty asset classes that we manufacture are in demand and also less susceptible to some of the pricing pressure you're seeing from competitors that they're experiencing.

[Tom Gallagher, Evercore ISI]

Got you. And Christine, is it -- the pickup in revenue yield, is that really driven by CLOs would you say, overall?

[Christine Hurtsellers, CEO, Investment Management]

No. It's actually very broad-based. So, when you think about what we're selling and CLOs, also private equity our Pomona fund, some of our commercial real estate, and specialty mortgage strategies. We have a mortgage hedge fund.

Mike mentioned, we had a good inflow in the first quarter. So, again, it's not just one strategy. It's actually really the book of business. And again, this goes back to what is in demand, what we manufacture relative to what people are reading from the competitors, which would be core bond or liquid equity strategy.

[Tom Gallagher, Evercore ISI]

Got you. And then I guess for Rod or Mike, the -- just a question on the common dividend, I mean it's a very low sort of nominal amount. And with the improvement you expect to get in cash flow post the sale of the CBVA, would you anticipate any real change there? Or do you think it's still going to mainly be about buybacks given the valuation of your stock?

[Rod Martin, Chairman and CEO]

Tom, great question. What we are guiding to is post-close of the Apollo and Athene transaction, we will be announcing the date of our Investor Day. And what we intend to cover among other things and other things being our 2019, 2020, 2021 plans are certainly discussing around sources and uses of capital prospectively like we did at the last Investor Day.

And that will include an updated conversation that we've been having with the management team and our Board around exactly your question, where we think the dividend approach philosophy and strategy will be, how our approach will be towards share buyback as in addition to what we may be looking at in terms of some inorganic activity on bolt-on acquisitions that could be quite useful to the various platforms that we own. So, we think that's a natural place to have that conversation and we look forward to doing so when we've advanced that considerably with our management team and the Board and stay tuned.

[Tom Gallagher, Evercore ISI]

Great. Thanks Rod.

[Operator]

Your next question is from Sean Dargan with Wells Fargo Securities.

[Sean Dargan, Wells Fargo Securities]

Hi. Thanks. Yes, just wanted to follow up on this Investor Day. So, it sounds like you -- your management time and attention is focused on closing the CBVA and Annuity transaction, so we won't get any update on the Life [Indiscernible] view until after that's done. But is there any chance that we would get new financial targets and metrics that are more in line with what may be analysts, investors are used to in the industry at that Investor Day?

[Rod Martin, Chairman and CEO]

So, I'll deal with the first part and I'll let Mike deal with the second part. I think you essentially summarized it well, but let me walk through the pieces. Priority one is executing our 2018 business plan. We're very pleased with the results we're seeing in the first quarter.

Second focus has been closing the Apollo and Athene transaction as fast as we can. We're working in great partnership with Apollo and Athene and we've guided to a second to third quarter close and we made excellent progress on all fronts in relation with that.

Recall a couple of years ago, we put together our Life and Annuity businesses, and so we're having to separate those businesses that Carolyn Johnson is doing an incredible job. The Annuity businesses are going with the Apollo and Athene and the strategic life review is a natural outgrowth of we are separating that, let's take a look at what kind of the choices and options are. And I think it would be very premature to draw a conclusion that we've made any decision other than we are again going to examine every single thoughtful option and update you appropriately.

And we're using Investor Day as a guide point to give you the best update that we can, but we will continue to be very good stewards of capital in making those decisions as it relates to Life business and I'll let Mike to speak to the metrics.

[Mike Smith, CFO]

Sure. Sean, I think, in short, the answer is we want to continue to increase our comparability with our peers. We want to become more normalized. I think there were really good reasons for why we presented our results the way we did, particularly as it related to the closed block variable annuity and the complications that produced. We think that it served us well to help illustrate the improvement that we did make in the returns over the past five years. But we do think going forward, we will shift to more of a focus on EPS, growth in that, a more normalized approach to calculating ROE.

You saw in this quarter, even the way we do tax rate is more like the way our peers do it. We moved to a tax rate that can float from period-to-period as opposed to one that we predetermine. So, I think we're trying to become more and more comparable to make it easier for investors to understand how our performance stacks up and we think it stacks up pretty well.

[Sean Dargan, Wells Fargo Securities]

All right. Thanks. And so, would I be right to interpret that there will be more of an emphasis on growth as opposed to expanding returns going forward when CBVA and the annuity block has closed and you've come to whatever conclusion you're going to come to with Individual Life?

[Rod Martin, Chairman and CEO]

In a word, yes. And to expand on the word, we've moved, as you know, we were punching below our weight when we began. We've gone from the bottom quartile to the top quartile ROE. We want to write as much business as we can at these attractive targeted returns and we are. And it is very much focused on growth. And we think you see that -- we hope you see that as a result of the first quarter and our outlook for the second.

[Sean Dargan, Wells Fargo Securities]

Great. Thank you.

[Operator]

Your next question is from Erik Bass with Autonomous Research.

[Erik Bass, Autonomous Research]

Hi. Thank you. I had a couple of follow-up questions on Investment Management. I guess, first on the affiliate sourced flows, we have seen some outflows there in addition to just from the CBVA. And I guess, is to try to think that's just to read-over pressure from Stable Value outflows you're seeing in Retirement?

And then secondly, on the fee rates, just wondering broadly, what you're seeing in the industry? [Indiscernible] commented yesterday about potentially bringing down fee rates on some of its products and more retail-oriented, but have you seen in response to tax reform any changes in fee rates from competitors as people are looking to either gain or retain market share?

[Christine Hurtsellers, CEO, Investment Management]

Yes, thank you. So, to start-off with affiliates net cash flows, you're right. Predominantly, what we saw there were outflows related to Stable Value. So from that, what Charlie referenced earlier come to cross our financials outflows.

As you think about Stable Value again, it's a combination of a couple of things. Number one, as Charlie referenced, some of the multi-manager platforms we are in some sub-advisory on.

And as fee pressures have happened, which you're referencing in the industry, what we're seeing is that these managers due to fee pressures they are experiencing are trying more and more to take assets away from sub-advisors, bring them in-house in order to protect their own revenues enlargement. So, that was a prominent contributor to the outflows that we saw there.

And we expect that to dissipate going forward, but again, that is an outside manager's decision. And Charlie and I are working on a lot of other important things, including a Retail Target Date, marketing campaign in the first quarter, which we distribute through Charlie's organization. So, we have some good things going on in terms of the category of affiliate sourced flows.

And then when you pivot to fee pressures overall in the industry, as you can see, we're really bucking the trend, if you will, because of our actual fees are going up in the context of all that.

That being said, we have a very diverse platform of investing capabilities when you think about active equity, fixed income, and various private capabilities. And so, in the liquid strategies, we do see fee pressure like other competitors, but we have such a diverse strong book of business that we're able to do that in scale and grow our margin despite some of the pressures that you do see in the liquid strategies.

And then, finally, also to mention to you, periodically, we do as [Indiscernible] mentioned, we have lower fees on some of our funds, including our Retail Target Date that I just referenced in order to stay competitive. But again, we have such a great product range that I expect our margins continue to expand.

[Erik Bass, Autonomous Research]

Thank you. That's helpful color. And then Mike, just one follow-up for you. You mentioned the move to letting the tax rate float a bit and it looks like it came a little bit lower than you expected for the full year of this quarter. I guess, any change to your full year guidance? And anything in particular that drove the variance this quarter?

[Mike Smith, CFO]

Yes, Erik, the tax rate will float going forward as you said. The way to think about the 18 to 20 is it was based on a normalized income level and the relative proportion of which is affected by the DRD. The DRD is kind of a constant -- think of it as a constant amount and as income goes up and down.

So, in this quarter, for example, income was affected by the DAC unlock, which lowered overall income. That meant that proportion of DRD was higher and that resulted in a lower overall tax rate.

To the extent that there is positive unlocking will be toward the upper end of the range. If you just normalized our quarterly results and exclude DAC unlocking, we would have been right at the bottom of the range of 18 to 20.

[Erik Bass, Autonomous Research]

Got it. Thank you. That's helpful.

[Operator]

Your next question is from Josh Shanker with Deutsche Bank.

[Josh Shanker, Deutsche Bank]

Thank you. I want to understand a little about the flux advantage move out of corporate. What was the income statement impact in 4Q from that? And how much earnings got moved from corporate to Retirement?

[Mike Smith, CFO]

So, just to give you a little more color on that choice, I think, the Select Advantage is a custodial mutual fund product that's been part of our Annuities business. As I mentioned in the comments that it was retained, it is not part of the transaction.

In the fourth quarter, we ran it through the corporate line along with the rest of the retained Annuities business. Having that really made a decision about what it was going to -- where it was going to reside and if it was even going to be an ongoing business for us.

So, during the quarter, we made a determination that it would continue to be an ongoing business and that it best fit with our Retirement business. And so, that led to the movement from the corporate to Retirement.

In terms of income impact in the quarter, it's really negligible. The $6 billion of assets, but because of the seasonality of expenses, the overall amount of income that was transferred into Retirement is deminimus. It will be a little bit higher. It will be in the low millions per quarter going forward, but it's not going to transform the income statement of Retirement.

[Josh Shanker, Deutsche Bank]

And has it change the aggregate fee rate at all of the overall fund complex?

[Mike Smith, CFO]

I don't think it has changed materially, no.

[Josh Shanker, Deutsche Bank]

Okay. Thank you.

[Operator]

Your next question is from Alex Scott with Goldman Sachs.

[Alex Scott, Goldman Sachs]

Hi, good morning. I just wanted to ask hell of a question about fees and Retirement. I think one of your peers on the 401(k) side cut their fees a bit earlier this year and then I think some of the commentary from asset managers suggest maybe there are some that are cutting fees partly attributed to sort of using tax benefits to grow business more aggressively. Are you seeing any of that when you go out to compete? Any kind of contemplating doing some of that yourself?

[Charlie Nelson, CEO, Retirement]

Relative to tax reform, I don't think we've seen any material impact on market prices as a result of tax reform. The market continues to be competitive. Certainly, price compression are downward price pressure on fees is nothing new in our industry. We've been dealing with this for many years.

But Voya -- our Retirement business is very, very well-positioned for four reasons to be able to manage kind of the ongoing price pressure in the industry. I'll give you a kind of four key things to think about.

One, the scale and the size of our business and the multiple segments in which we operate, we're not relying on any one particular segment. Two, is our disciplined expense management as evidenced by our 9% reduction in our unit cost in Q1 this year versus last year.

Three, our growth. As you can see, we had a really strong growth in the number of advisors, number of our repeat advisors over the last number of years and we continue to grow that really strong growth prospect.

And four, and this is really important as I think, about reasons to be able to kind of manage price compression going forward is our enterprise value. As Christine talked about Investment Management with Rob with Employee Benefits and our Retirement Services. Our combination of businesses and how we deliver to the market with our distribution footprint really is a differentiator.

And so, this is how we think we can differentiate on the price compression. And obviously, all these things have led to record profitability for the first quarter this year and we feel strong as we go forward.

[Alex Scott, Goldman Sachs]

That's really helpful. And then may be following up, I guess, comment on potential bolt-on M&A, could you give us any kind of color on where may be that will be focused just in terms of would it be about product capabilities, geographies, scale, any color you can provide?

[Rod Martin, Chairman and CEO]

Sure. Alex, this is Rod. I'll do this at a high level. Let me first build on a point that Charlie just made. If you think about the last 10 years, with DC providers, defined contribution providers, and this includes Voya. The market share has gone for the leading providers from 50% to about 75% of the market, as measured by assets, which is what gives us optimism that this will be a further consolidating industry and we intend to participate in that post to the close of the Athene, Apollo transaction.

So, one of the answers to your question would be, as people make the judgment on whether or not this is a core business for them, it will be a logical extension to be a participant in that way.

Another example would be either in our Employee Benefits business or Asset Management business in terms of additional distribution or product capabilities that could be added to what we have.

As I mentioned, in terms of the reference to the Investor Day, this will be a broader part of the conversation that we'll have in terms of sources and uses of capital and we will address a question, the share buyback question, and also the capacity to using good judgment to being good stewards of capital, how this may fit in our prospective clients, but we intend to be a growth company and continue to invest in our businesses.

[Alex Scott, Goldman Sachs]

Thank you very much.

[Operator]

Your next question is from Andrew Kligerman with Credit Suisse.

[Andrew Kligerman, Credit Suisse]

Great. Good morning. Want to start on the specialty benefits business. It looks like you have done quite well in meeting your benefits ratio objectives, but the premiums as a result of being more disciplined in pricing as you wrote in the release. It seemed very modest in terms of growth in sales. So, two parts on this one. What -- give a little color please on your pricing? In Stop Loss and Group, how much is it up?

And then, what do you see as a project of a premium growth in those two areas for the balance of the year?

[Mike Smith, CFO]

Andrew, I'll have Rob jump in for this, but two things to maybe frame as Rob jumps into it. One was we had discussed and guided the intention of getting the business back in the range of our loss ratio targets that is happening at a little bit faster pace than we expected. We thought that would be year end, we're very pleased with the outcome. Give you some dimensions of that. So, that has been an overarching objective, more important than sales.

The other thing I'd point to is the growth in the in-force premium and the growth in our voluntary business. And with that, I'll let Rod add the color.

[Robert Grubka, President, Employee Benefits]

Yes, great. Thanks, Rod. Thanks for the question, Andrew. May be break it up a couple pieces. From a Stop Loss perspective, I think, Rod hit it really well. We are pleased in what we got from the renewal standpoint. I won't get overly precise on exactly how much that is, but we certainly moved it in the right direction.

And then, we had a mindset coming in to the year on how much new business do we want to sell relative to the size of the book, as you can imagine like any other business, acquisition pricing and what we're going to do there. We didn't want to compound our problem and so we just took a very methodical thoughtful approach to how much new business we write.

As you can think about going forward, Stop Loss is a business with Momentum and sort of wind in the sales of being driven by medical cost and the trends there. And so we certainly expect to get back to growth. Is it going to be a nice clean path every quarter-over-quarter-over-quarter? I won't say that. But long-term, the trajectory of that business is certainly be a double-digit growth as we think about it moving forward.

From a voluntary business perspective, certainly, in the numbers you see, we've had good success there and really speaks to the point of the diversity of the business and where we can drive growth, Stop Loss, an important piece of that, voluntary certainly is the other leg of the stool that we see is good momentum to it and also long-term trajectory to it. So, we feel good about where we're at with that business.

And the leveraging of the relationships that we've had in the Stop Loss phase has certainly translated into where we want to have success. The market segment we plan being more upmarket, we see a lot of runway there as well.

[Rod Martin, Chairman and CEO]

I would guide you to look at our in-force premium growth over a period of time in this business that's been encouraging and reinforce the point that Charlie made. If you think about what Voya is becoming prospectively after the close of the Apollo, Athene transaction, fundamentally work side and institutionally focused business.

And we think we've got great leverage between our Employee Benefit business, our Asset Management business, and our Retirement businesses in approaching this market in a way that will become more contemporary over time.

[Andrew Kligerman, Credit Suisse]

Got it. Okay. And then just a follow-up on the Retirement segment. So, you had outflows I think about 370-ish -- net outflows of $370-ish million. I think the guidance was somewhere around outflow -- net outflows of $500 million to $600 million. You did a little better. I think it was -- as it was described last quarter, maybe one big account or something to that affect. But now you're saying that next quarter, your net flows will be in line with this quarter and then, you expect to pick up towards the end of the year. I had sort of expected a pickup right after the first quarter. So, maybe a little color around where these net flows are going for the balance of the year?

[Mike Smith, CFO]

Sure. As I mentioned, a large contributor has been the Stable Value and in particular, this non-proprietary multi-manager that Christine and I has been speaking about. And that probably has been the biggest contributor as we looked forward towards the second, third, and fourth quarter. And we are de-emphasizing that and introducing some new products in the 403(b), 401(k) for Stable Value that we are optimistic are going to gain some market traction as well.

As I just may be a little more color for you on the retention side of the equation. It is interesting, you look at it, we had a 10% improvement in fewer plans leading this quarter than we did first quarter of last year. So, our retention has really improved. And it's a little bit different in terms of kind of sometimes you get a few bigger plans, they go from first quarter, second quarter. But we have a pretty good line of sight in terms of the next number of quarters and we feel really strong about our retention, but equally strong on our growth prospects.

As we look at our pipeline, relative to sales, the number of advisors that we're quoting with, the number of repeat advisors, those types of things. And, in particular, as we think about if it's going to be a little bit of a hockey stick in the third and fourth quarter on net flows, because I think all these things will start to kind of build on themselves as we go through the year compounded by the fact that we're adding significantly to our distribution sales team that will begin to contribute as the year progresses.

So, all in all, it's going to be a little bit bumpy in the second quarter, but we think we're going to rebound strong later in the year.

[Andrew Kligerman, Credit Suisse]

Okay. So, sort of, you get everything kind of lined up as we get to the third quarter, but not in the second?

[Mike Smith, CFO]

Yes.

[Andrew Kligerman, Credit Suisse]

Okay. Thank you.

[Operator]

Your next question is from John Nadel with UBS.

[John Nadel, UBS]

Hey, good morning everybody. So, back on the M&A side. So, Rod, as you get closer to the closing of the VA sale, I was just wondering with all the additional bandwidth you've got an organization and far less complicated organization, would you may be look at long-term care and strength as an area given how well it's affecting the rest of your peers and that is just a joke.

The real question I've got for you is--

[Rod Martin, Chairman and CEO]

If I do, come back and shoot me in the foot.

[John Nadel, UBS]

On a run rate basis, Mike, coming out of the first quarter, how much of the targeted $110 million to $130 million of expense saves is now in the results?

[Mike Smith, CFO]

I'd say fairly minimal at this point, single-digits is the way to think of it.

[John Nadel, UBS]

Okay.

[Rod Martin, Chairman and CEO]

Let me just build on that. As Mike has said -- and I think if you look at our track record, we said we would accomplish that 12 months post-close. We've been exceedingly disciplined since we've been a public company.

In fact, one of the things that I would point to with great confidence is we have met or exceeded our cost reduction targets each and every time we've laid them out. So, we're well advanced in our thinking. But again, when you execute this, the first thing a separating Life and Annuity, the second place is we're standing up a company with Apollo and Athene; that is no small task, but we're doing it in daily record time. And that's not only just the Voya contribution, that's the Apollo and Athene contribution. So, we're moving forward with that and we will be in full execution mode once we close.

[John Nadel, UBS]

And then -- and so -- I just want to make sure I understand this, the $110 million to $130 million of saves, is that lined up directly against the stranded overhead? Or is there some additional amount of expense saves that we should expect after you're able to remove the stranded overhead cost?

[Mike Smith, CFO]

I think, generally we'll be looking to reduce our overall expenses where we can and still be able to grow at the levels that we've set. So--

[John Nadel, UBS]

But the big chunk is the overhead.

[Mike Smith, CFO]

Yes, and I think will do what we can to line of the savings with the stranded cost, but there will be some initiatives that include the businesses as well as we seek to become -- take advantage of our simpler structure.

So, I think the key though is we’ll try to make it as easy to follow as possible as it relates to where the cost saves are coming and then how -- what it's going to look like on the other side of -- some point, the stranded costs come out, whatever is left to the extent there are any. And we'll try to make sure that that's clear as to how that's going to unfold as we get closer.

[John Nadel, UBS]

Okay, that's really helpful. And then the last question I have is a bit more technical. From a legal entity perspective, is there -- is any of the deferred tax assets residing in Life Insurance business entity? And is that something that we should be considering as you go through this strategic review?

[Mike Smith, CFO]

John, certainly taxes are an important part of our consideration as we think through what implication of any potential transaction could be. As Rod said, you or others should not assume that we've made decisions on that front. So, I think we'll -- as we get closer to making whatever decision we make, to the extent that there are tax implications, that are driving that, we'll certainly do our best to illuminate how that's going to affect the transaction.

I think at this point though, John, it's kind of early to try and model that from your perspective because there are any number of variables that could affect how the taxes are run through on the other side of a transaction.

[John Nadel, UBS]

Yes, understood. Listen I'm just thinking and I'm sure you guys are thinking this way too. I just want to see you get value for the [DPA] that's all.

[Mike Smith, CFO]

I think that's an excellent point, John. And I think it's a key part of our consideration as we're thinking about what to do next is making sure that the value is commensurate with what we think it's truly worth and holding it could possibly be the way to maximize shareholder value. So, we're focused exclusively on that, which is maximizing shareholder value.

[John Nadel, UBS]

Perfect. Thank you.

[Operator]

Thank you, ladies and gentlemen. We have reached the allotted time for questions. I would like to turn the call back over to Mr. Rod Martin for closing remarks.

[Rod Martin, Chairman and CEO]

Thank you. In closing, we've continued to improve our business results and drive profitable growth. We've reached our five-year anniversary, well-positioned to grow Retirement, Investment Management, and Employee Benefit businesses, achieve operational excellence, and complete the Annuities transaction.

We're very proud of what we've accomplished during the first five years of Voya's existence and we look forward to building upon all of our financial and operational improvements supported by the cultural transformation of Voya. We're advancing on our journey, we're excited about our future. Thank you and good day.

[Operator]

Thank you. Ladies and gentlemen, this does conclude today's conference call. You may now disconnect.