Voya Financial Inc

NYSE:VOYA

Earnings Call Transcript 2020-Q2

[Operator]

Good morning and welcome to the Voya Financial Second Quarter 2020 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded.

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

[Michael Katz, executive]

Thank you, and good morning. Welcome to Voya Financial's Second Quarter 2020 Earnings Conference Call. We appreciate all of you who have joined us for this call. As a reminder, materials for today's call are available on our website at investors.voya.com or via the webcast.

Turning to Slide 2. Some of the comments made during this conference call may contain forward-looking statements within the meaning of federal securities law. This includes potential impacts related to COVID-19. I'll refer you to this slide for more information.

We will also be referring today to certain non-GAAP financial measures. GAAP reconciliations are available in our press release and financial supplement found on our website at investors.voya.com. Joining me on the call are Rod Martin, Voya Financial's Chairman and Chief Executive Officer; as well as Mike Smith, Voya's Chief Financial Officer. After their prepared remarks, we will take your questions. For that Q&A session, we have also invited the heads of our businesses, specifically, Charlie Nelson, Retirement; Christine Hurtsellers, investment management; and Rob Grubka, Employee Benefits.

With that, let's turn to Slide 3 as I would like to turn the call over to Rod.

[Rodney Martin, executive]

Good morning. Before we begin, I want to recognize Voya Board member, Barry Griswell, who passed away on June 5 for his significant contributions to our Board. Barry, who was 71, joined Voya's Board of Directors as part of our IPO in 2013, bringing with him an extraordinary reputation in the financial services industry, which established over 4 decades, including serving as Chairman and CEO of Principal Financial Group. Barry was a passionate proponent of our commitment to diversity and inclusion as well as our focus on serving the communities in which we live and work. His support of philanthropic causes that positively impacted people and communities across the country are 2 numerous dimension and have made a lasting impact. Barry's wife, Michele, and the Griswell family continue to be in our thoughts and prayers.

Let's begin on Slide 4. As COVID-19 evolves, our team continues to closely monitor the situation across the country and here at Voya. We hope that everyone participating in this call and your families are safe and healthy. Our commitment to protecting our employees and their loved ones and our customers remains our top priority. Our management team is extremely proud of the dedication and commitment demonstrated by our 6,000 employees across the nation. They have enabled Voya to remain open for business, while more than 95% of our people are working remotely. As we shared with you during our last call, we've also taken action to support our customers and clients and our communities. This included being the first major retirement company to win fees in response to the Cares Act and providing financial counseling and educational resources for customers impacted by COVID-19 and granting free access to our financial advisers. We will continue to take appropriate actions to support our employees, customers and communities as the COVID-19 situation evolves.

Turning to Slide 5. I want to address the important subject of racial injustice. As we have shared on previous earnings calls, diversity, inclusion and equality are foundational elements of the Voya culture. Internally, we have actively engaged with our employees at all levels of the organization. We have hosted employee open forum discussions, conducted focus groups and created a video series that featured Voya leaders sharing their thoughts and personal experiences with racial injustice. The response to our video series was so positive that we shared it externally on social media, where it's been viewed more than 20,000 times. We're also partnering with organizations such as the CEO action for diversity and inclusion, and the Ethisphere Institute to help drive meaningful change. At a time when the societal challenges can seem daunting, we have an obligation to help, and we will.

Let's move to Slide 6 on our key themes. We've navigated this year in a position of strength as a result of the purposeful strategic decisions that we made to simplify our company and to streamline our businesses. On a normalized basis, our second quarter EPS was $1.09. We saw solid results during the quarter. We continue to see demand for our products and services given the compelling value proposition that we provide for our workplace and institutional clients. Combined, retirement and investment management generated $26.8 billion in total deposits and inflows during the second quarter. And in employee benefits, in-force premiums grew 5.4% year-over-year. We remain on track and are close to finalizing the sale of the individual life in our legacy annuity businesses. We continue to make great progress with resolution life and our regulators, giving us confidence that we will close the transaction in the third quarter. We expect to generate approximately $1.5 billion of deployable capital from the transaction. We also continue to deliver on the cost savings that we previously announced. We have now achieved the $250 million in savings that we were targeting by year-end 2020. We expect further savings and have a strong track record in managing spend, which gives us momentum as we begin to address the stranded costs associated with the sale of individual life.

Finally, our balance sheet and capital position remains strong. We had approximately $668 million of excess capital as of June 30. And while we have paused our share repurchases earlier this year, we feel good about our capital strength, and we will continue to closely monitor developments through the third quarter. We also maintained our dividend at $0.15 a share for the second quarter.

Turning to Slide 7. As we have shared with you previously, our culture and the character of our brand, our commitment to corporate responsibility and our leading ESG practices are differentiators for our company. We regularly share this slide with investors to highlight our ongoing commitment to ESG. A recent example of this commitment is the comment letter that we sent to the Department of Labor concerning the DOL's proposed amendments to the investment regulations under ERISA as it pertains to ESG investments. We urge the DOL to pull back on their proposal or develop a new one that recognizes and supports the important role that ESG factors can have in identifying appropriate investments and promoting participation in workplace retirement savings plans.

Recent Voya research found that more than 76% of individuals felt it was important for their employer to apply ESG principles to workplace benefits and 60% would likely contribute more to an ESG aligned retirement plan if it were available.

Turning to Slide 8. In recognition of our ESG efforts for the third year, Voya has maintained its listing on the FTSE4Good Index. This index series is derived from the FTSE Global Index series. And as a tool for investors seeking to invest in companies that demonstrate good, sustainable practices. Also, for the third year in a row, Voya was honored as a best place to work for Disability Inclusion on the Disability Equality Index. Our brand marketing efforts also earned recent recognition as Voya earned the 2020 Marketplace Innovator award from Disability In.

With that, let me ask Mike to provide more details on our performance and results.

[Michael Smith, executive]

Thank you, Rod. Let's turn to our financial results on Slide 10. We delivered normalized after-tax adjusted operating earnings of $1.09 per share in the second quarter of 2020. This excludes $0.05 of favorable DAC, VOBA and other intangibles unlocking, $0.79 of prepayment and alternative income below our long-term expectations. The majority of our alternatives portfolio is marked to market on a quarter lag and was impacted by first quarter equity market performance. We expect to see a meaningful third quarter recovery based on the second quarter equity market rebound. I will discuss our alternative results in more detail in a few minutes. $0.20 of stranded costs associated with the individual life and other closed blocks. We will continue to normalize for these stranded costs until the close of the life transaction. We have confidence the transaction will be closed by the end of the third quarter.

On a reported basis, adjusted operating earnings were $0.15 per share for the quarter. Our second quarter GAAP net loss was $71 million. This reflects favorable results for our stable value block in retirement, which partly reversed the GAAP loss experienced in the first quarter. An update of the estimated loss on sale related to our individual life transaction, we continue to expect to gain at close that will result in a total GAAP loss on sale at the lower end of our $250 million to $750 million range. We also continue to expect total deployable capital of approximately $1.5 billion from the transaction. As a reminder, GAAP net income also includes Individual Life earnings as it is a discontinued operation. Individual Life experienced unfavorable mortality this quarter, partly driven by COVID-related losses. Going forward, we expect a $1 million to $3 million impact for every incremental 10,000 total U.S. population deaths until we close.

Moving to Slide 11. Retirement delivered $28 million of adjusted operating earnings in the second quarter, excluding unlocking, and trailing 12-month return on capital was10.9%. As I mentioned before, first quarter equity markets negatively impacted alternative income, which was below long-term expectations by $92 million. Favorable investment spread year-over-year was offset by lower fee income, which was affected by several items, including lower sweep fee revenues within our retail wealth management business due to the level of short-term interest rates, which we highlighted last quarter, a roughly $6 million contra-revenue accrual associated with our record-keeping business that we do not expect to recur and the waiver of certain fees associated with hardship distributions and loans. By waiving these fees, we continue to support plan sponsors and help participants navigate the financial challenges presented by COVID-19.

Administrative expenses were higher year-over-year due to a legal accrual, increased spend to onboard additional plans and higher allocated expenses, which we mentioned last quarter. Offsetting this increased allocation is of benefit in the corporate segment. Overall Voya's spend is in line with our expectations. For Retirement, we now expect our full year administrative expenses to be in the range of $840 million to $850 million.

Turning to deposits and inflows. First quarter Full Service recurring deposits grew by 10.4% on a trailing 12-month basis, in line with our 10% to 12% recurring deposit growth goal. Full Service recurring deposit growth was driven by an increase in plans. Growth in employer and employee contributions began to slow in the quarter though contributions exceeded second quarter 2019 levels. Our expectation is for second half 2020 recurring deposits to be generally in line with second half of 2019. Planned growth is expected to be offset by slowing employer and employee contributions through the balance of 2020. As a consequence, we now expect full year 2020 recurring deposits to grow between 3% to 6%.

Net flows for the quarter were $73 million for our Full Service business, reflecting $616 million of corporate market inflows offset by $543 million of tax-exempt outflows. Tax-exempt net flows include a large client outflow of approximately $700 million, which we mentioned last quarter. The majority of that plan's assets were in higher guaranteed interest rate accounts. Stable value net flows were positive for the second consecutive quarter at $362 million, following a record first quarter. We also generated $4.5 billion of recordkeeping net inflows in the quarter. Given the rebound in equity markets, we expect full year record-keeping net flows of above $20 billion. With this, we expect to add over 350,000 additional record-keeping participants in the year, representing a more than 10% increase year-over-year. As a reminder, record-keeping fees are more closely tied to the number of participants than to AUA. Our Retirement business is well diversified across plan sizes, industries and tax codes with a balanced national footprint. This will help us navigate the current environment and positions us for our long-term success.

On Slide 12. Investment management delivered $20 billion of adjusted operating earnings in the second quarter, largely reflecting unfavorable investment capital results of $27 million. Fee revenues were lower year-over-year primarily due to lower average retail assets as well as outflows from certain higher fee equity strategies. This was more than offset by lower administrative expenses over the period from lower variable costs and reduced travel expenditure. Our second quarter adjusted operating margin was 24.9%, including investment capital on a trailing 12-month basis. We continue to target a 30% to 32% operating margin over the long term. Our fixed income performance improved markedly in the second quarter following a challenging first quarter. Specifically, 85% of our fixed income funds outperformed the benchmark on a 3-year basis, and 98% did so on a 5- and 10-year basis. Our strong investment performance highlights our ability to deliver differentiated returns.

Turning to flows. Second quarter was a record quarter for institutional and overall net inflows, which were $7.1 billion and $6.8 billion, respectively. Second quarter Institutional Net Flows included a $6 billion institutional insurance channel win that we discussed on our last quarter earnings call. This win highlights the growing appreciation for our expertise in managing general account assets for insurance companies. Our International channel also helped bring in sizable assets in the second quarter. Our retail net outflows were $288 million in the quarter. Retail outflows moderated in the latter part of the second quarter from the elevated level seen across the industry in March and April. Our first half net flows put us on track to reach or potentially exceed our 2% to 4% organic growth target for full year 2020. While we do expect some moderation in the pace of sales in the second half of 2020, we have a strong pipeline of unfunded wins as well as the planned launch of additional strategies that will further diversify our private and specialty investment capabilities.

Turning to Slide 13. Employee benefits delivered $36 million of adjusted operating earnings in the second quarter, excluding unlocking, and trailing 12-month return on capital remained above 30%. Second quarter results included alternative income that was $10 million below long-term expectations. Second quarter 2019 results also benefited from favorable items of approximately $6 million on a pretax basis, which did not repeat. Overall annualized in-force premiums grew 5% year-over-year, given better-than-expected participant persistency despite rising unemployment. We expect some premium headwind in the second half of 2020 and into 2021, but are pleased with the stability of our revenue to this point.

Through June 30, total identified COVID-related claims have been approximately $8 million, meaningfully better than our original estimate as general population deaths have not directly translated to our insured lives. Going forward, we now expect a pretax impact of $1 million to $2 million for every 10,000 incremental COVID-related deaths. Voluntary and stop-loss were minimally impacted by COVID, and we do not expect this to change. Our focus on larger employers, exposure to working-age population and diversity across geography has and will continue to benefit our results in the near term. Our long-standing distribution partnerships and differentiated service capabilities will drive continued success in the long term.

On Slide 14, we provide items to consider for the third quarter of 2020. In the third quarter, we expect the following beneficial items. First, retirement, legal and contra-revenue accruals are not expected to recur in the third quarter. Second, higher fee revenues from higher average equity markets, assuming end of July market levels are maintained through the balance of the third quarter; and third, improved employee benefits results due to sequential improvement in quarterly loss ratios. Offsetting this, we expect spread revenues to feel the impact of the tax-exempt departure I mentioned earlier and lower new money yields. We will also pay seasonally higher preferred stock dividends in the third quarter. While we have provided some items to consider, there will, of course, be other factors that affect third quarter results, including changes in our average share count, business growth, and the potential for additional COVID-19 impacts.

Turning to Slide 15. Here, we provide an update on the long-term performance and composition of our alternatives portfolio. As you can see, our alternatives portfolio has delivered investment performance broadly in line with our long-term expectation of 9%. Second quarter investment results were primarily driven by the mark-to-market of private equity investments related to first quarter equity market performance. As a reminder, this asset class is reported on a one-quarter lag. On the right, you can see the composition of our alternatives portfolio, which is diversified across private equity, credit, real estate, infrastructure and hedge funds. It is comprised of commitments to over 150 funds, managed by 85 distinct general partners. 9% of the total portfolio and 15% of the private equity portfolio is invested in secondary funds and other funds of funds, providing further diversification.

At present, we only have insight on third quarter returns for a relatively small portion of our portfolio. Results for that book have largely reversed the decline we experienced in the second quarter, and we do expect to see a meaningful recovery in value for the alternatives portfolio overall.

Turning to Slide 16. Last quarter, we provided greater detail on our investment portfolio, including 2 stress scenarios highlighting the potential impact of ratings migration and credit impairments on required capital. The analysis showed an impact to excess capital of $300 million in stress case 1 and $600 million in stress case 2 before contemplating active management mitigation efforts. Ratings migration accounts for over 75% of the capital impact in each case. Year-to-date, we have incurred $58 million in gross credit impairments and ratings migration. However, our active management mitigation efforts reduced the net impact to $13 million. While the impact of the pandemic is still unfolding, our experience so far on a gross basis has been close to or better than stress case 1. The impacts have been fully manageable, considering our current excess capital position and future free cash flow generation. The appendix contains additional information on certain investments in our portfolio including our commercial mortgage loans. As of July 31, we have granted forbearance on roughly 7.5% of the overall unpaid principal balance of our commercial mortgage loan portfolio. This balance may increase, but we expect it to ultimately be in the range of 7% to 10% of the portfolio.

Of note, we have made no loan modifications associated with the forbearance granted to date. Overall, we are comfortable with the quality of our commercial mortgage portfolio. Over 85% of this portfolio is rated CM1. Our weighted average loan-to-value ratio is 46%, and our debt service coverage ratio is 2.3x.

Slide 17. Our estimated RBC ratio was 468% at the end of the second quarter, above our target of 400%. And our ending excess capital was $668 million. We indicated last quarter that we paused share repurchases in March due to emerging uncertainties surrounding the effects of the pandemic. We still see a path to $1 billion of share repurchases for the full year, given $406 million of shares repurchased year-to-date, our strong excess capital position and the expected receipt of proceeds upon the close of the individual life transaction. Having said that, we will continue closely monitoring developments through the third quarter. Debt-to-capital was 32.4%. This is above our 30% target due to the book value impact of our life transaction. The impact is temporary as it does not reflect the anticipated gain at transaction close.

As a reminder, we have no debt maturities upcoming in the next 3 years and have ample liquidity resources. Finally, we maintained our second quarter common stock dividend at $0.15 per share at a dividend yield of over 1%. In summary, we continue to serve all of our stakeholders during this time and are proud of our employees for their resilience and adaptability. While COVID-19-related headwinds remain in the near term, we believe our strong worksite and institutional franchises are poised to benefit over the long term. We continue to have high confidence in our ability to close the individual life transaction by the end of the third quarter. And we have a strong excess capital position, and we'll continue to act as good stewards of capital.

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

[Operator]

[Operator Instructions] Our first question comes from Erik Bass with Autonomous Research.

[Erik Bass, analyst]

I just wanted to start on your comments on the buyback. And when you're talking about closely monitoring kind of developments through the third quarter, does that suggest that you would plan to remain paused for this quarter? Or if things develop favorably, could you resume sooner? And I guess, are there any restrictions on you resuming buybacks prior to the deal closing?

[Rodney Martin, executive]

Erik, it's Rod. I'll start. And as usual, Mike and I will toggle back and forth. Number one, Erik, there are no restrictions but what Mike said and what I'd like to further reinforce, there are 3 themes that we're absolutely focused on in the third quarter. And one is, as we communicated on the prepared remarks, we are close and confident that we will close the transaction in the third quarter, but as we announced when we announced the transaction, this will close by September 30. So one will be the closing of the transaction. The second will be our assessment of the economy. We're happy to talk about that a little bit further. And then the continued development and emergence of COVID in certain areas of the country. So those 3 factors or factors the reason why we're pausing through the third quarter. And as Mike said, we see a clear path to accomplishing the $1 billion of share buyback this year. We've done 40%, as you know, and when you look at the totality of the financial position that Voya is in, $668 million of excess capital, the $1.5 billion that will come from the life transaction, our RBC position, the fact that we completed our expense targets 4 months ahead of schedule in the pandemic and our free cash flow conversion, we will continue to be very good stewards of capital and continue to move forward with a high level of confidence. Mike, do you need to add?

[Michael Smith, executive]

Maybe just briefly, I think in terms of the transaction, I think the easiest way to think about it is we're pretty much where we would have expected to be. We're making good progress with -- on the regulatory front. I think operationally, we're in excellent shape to pull the trigger and then in terms of just deal mechanics, I think we're well along. And so feeling like there's no surprises or nothing that was unexpected along the way. So we're feeling very good about that. And as Rod mentioned, that's an important part of what we're looking at in terms of share repurchases.

[Erik Bass, analyst]

And then could you help us think about the earnings run rate for the retirement business, given some of the moving pieces around new business coming on, interest rate pressures and your updated expense guidance. And maybe how should we think about growth relative to your Investor Day outlook, given the changes in the environment?

[Rodney Martin, executive]

Charlie?

[Charles Nelson, executive]

Yes. Sure. As Mike said in his comments, in terms of our expense guidance, on a full year basis, that $840 million to $850 million. There was the kind of onetime accrual for the legal matter and then just generally, the unplanned shift in expenses in the corporate segment. So as I think about those, obviously, not necessarily expecting those can be recurring. And then I kind of think about how we're going forward with that. We also have had some saves relative to COVID, obviously, from travel and conferences and maybe some delayed hires, but we've also seen some -- a bit higher volumes in our call center and operations on some assets. Having said that though, you got to put it in context to kind of what we've experienced and what we have in our pipeline coming in. In our record-keeping business, as Mike said, we're expecting the end of the year to be roughly about 10% more participants than we started the year with. And our unit cost differential as I think of our total retirement, we're expecting a solid improvement in 2020. So as we go forward, we think that positions us well. So as I think, Erik, about the business growth, our business growth is being impacted a bit by COVID, but we still are seeing some growth across our businesses. And it does take a bit and your -- part of your question there is in terms of how does that materialize over time. Certainly, revenues on new business don't always just come in and hit in the very first month, they will materialize over a year, sometimes over 2 years, depending upon the types of fee revenues that are coming in. So it can take a bit of time to materialize those, if you will. We do see the business environment as being a bit challenging. Although advisers and plan sponsors are still issuing new RFPS. And we have seen some fewer than we've seen in 2019. I'd tell you that I think RFP volume is down in the fourth -- excuse me, in the second quarter by about 40%. But in July, it was only down about 30%. So we saw some improvement, but to put it in context, that's closer to what the levels of what we saw in 2018. So our experience through the first half of the year is kind of more similar to RFP volumes of 2018. So still not bad in that regard, but we're able to kind of translate a lot of those because of our distribution footprint and our deep and long-standing relationships really into some new business. I think you've seen that in our new business growth as well. So as I think about -- while there may be some slowdown, we've got some onetime expenses that impacted this year, as I think as we go forward, obviously, I'm very -- feeling very good about our results in this COVID environment, even though they've been a bit muted by some of the impacts from COVID so we feel like our value prop is resonating. But as the business in the market really kind of moves, we think we're going to benefit in Voya as people move to a flight of strength and stability.

[Operator]

Our next question comes from Suneet Kamath with Citi.

[Suneet Kamath, analyst]

I wanted to go back to retirement. On these record-keeping wins, can you just help us think through what's really behind that? Is it sort of competitors in transition, doing integration? Or what's causing this pickup? And relatedly, in the past, as you brought in record-keeping business, has there been a path to having some of those assets actually migrating to either the full-service business or Voya Investment management mandates?

[Rodney Martin, executive]

Charlie?

[Charles Nelson, executive]

Yes. Thank you. Great question because, first of all, I'd have to say the record-keeping the large to mega plan size business. First, you've got to kind of accept it as a bit of a lumpy business. So maybe our plans -- the volume of the number of plans that come to bid, it can change from year-to-year. So that's why I think in the marketplace. Sales, if you will, in record-keeping can change from year-to-year. Our experience, and I think what you're -- and I appreciate you recognizing our strong growth and record-keeping, both in our tax-exempt, we've had some nice wins in our tax-exempt as well as in our corporate business over the last couple of years and as we go forward, and our pipeline remains good. Why do we think we're winning in this? I think it goes back to our value proposition resonating in the market. We have very strong digital solutions. I think our culture, our people and how we do business and our capabilities from a technology perspective are being very much recognized in the marketplace. And yes, there are some competitors that I think have had some more challenging times and then we've been able to take advantage of some of those situations when maybe someone becomes dissatisfied, they're looking for a new provider. In these times, as I've said, when there's kind of some uncertainty, plan sponsors, whether that's small or large or mega, they look for kind of stability and strength, and we're going to benefit in that flight to movement. Now your other part of your question relative to, is there opportunities for more Full Service? I think what you're getting at in some of that on a record-keeping, do they go from recordkeeping to Full Service? Yes, we do see business in record-keeping, have opportunity for asset management. I think what you've seen in our stable value fund sales, just a good example of that in the first half, geez, we're at about $4.4 billion in deposits. Now that's not necessarily associated with our record-keeping per se, but I think it shows strength in our stable value and our ability to be able to have some opportunities for investment management or even in our employee benefits. We've had a number of sales this year in record-keeping where we've had -- they've either been an employee benefits customer or also, we've been able to have an HSA alongside the 401(k) so those kind of start to kind of have dimensions of full-service and the extent that it's not just record-keeping only, that there's asset management or some other type of product solutions along with it. So yes, the latter part of your question, I think there is some opportunity to take those record-keeping and have additional services as clients grow as well.

[Suneet Kamath, analyst]

Got it. And then just for Mike, on the $1.5 billion of proceeds. Can you just remind us, has any of that money been earmarked for anything else other than just capital deployment? I know your debt-to-capital ratio is elevated, but my understanding is it's going to come down given the -- once the transaction closes to maybe at 30% or even lower. So is there anything that $1.5 billion is earmarked for that we should think about?

[Michael Smith, executive]

I think the way to think about it is they'll be -- let's assume share repurchases as a primary use, then there would be alongside corresponding debt reduction as well to maintain the leverage as we work our way through the share buyback. But no other specific uses. I mean, I think as we get to close, we'll be able to give a little more details on exactly how that's going to play out. It does depend at least a little bit on the closing balance sheet. As I said in the remarks, there will be a GAAP gain at close, and we do expect the overall loss to be around $250 million on a GAAP basis, which, as you said, we'll get the leverage ratio back, but there could be a little bit of movement, and then they'll have some bearing on the ultimate disposition.

[Operator]

Our next question comes from Andrew Kligerman with Crédit Suisse.

[Andrew Kligerman, analyst]

I'd like to ask about the credit scenarios that you've cited at $300 million to $600 million, especially in light of the fact that you had an impact of only $58 million, and then it netted out it's $13 million with further actions. So when I look at stress scenarios 1 and 2 at $300 million to $600 million, do you think that the $300 million may be just too conservative and that it should come in a lot lower?

[Rodney Martin, executive]

Mike?

[Michael Smith, executive]

Andrew, thanks for the question. So I think the way to think about the $300 million is -- and the $58 million is first of all, the $300 million was a 12-month look, right? So over the course of 12 months, starting from last quarter, what do we think one possible outcome could be and so we shared that. That's the gross impact of migration and impairments does not give any effect for what we were able to offset, as we mentioned in this quarter. So we're a quarter of the way through that 12-month period. We're at -- we've seen 58 so far. I think, as Rod said, there remains a fair amount of uncertainty. And so while we're pleased that what we've seen so far has been, I would say, consistent with the levels that would have been anticipated in stress case 1. We've got a ways to go. We need to see how the pandemic continues to unfold. We need to see how the government fiscal policy reacts to that and how we address it. I think we've got an election coming up. We've got questions about how the pandemic will emerge in the fall and at least some thought about another wave to come. So I think there's a lot yet to be seen. As I said, we're encouraged, though, by what we've seen so far, I think it'd be a mistake to just take one quarter and extrapolate it, given all the uncertainties. But so far, so good.

[Andrew Kligerman, analyst]

Makes sense. A lot of variables. And then maybe shifting over to investment management. The net flows were particularly robust in institutional with the $6 billion mandate, and there was some weakness in retail. So I'm wondering what the outlook is for net flows in each area. And then with that, maybe why that insurance mandate might be scalable into a lot more like type transactions?

[Rodney Martin, executive]

Sure. Andrew, Christine?

[Christine Hurtsellers, executive]

Yes. Thank you, Andrew. As far as how to think about net flows, as you said, we had a very strong quarter in the second quarter at $6.8 billion. And just to kind of answer first, what are we seeing the evolution on the retail side. We did have modest net outflows in the second quarter. But the last 2 months June and July, our retail net flows have pivoted positive. And you've seen a strong rebound in our fixed income, notably, our fixed income performance. And so that is on a firm foundation for improvement. And then on the institutional side, we continue to see -- we have a strong pipeline, diverse products in the pipeline. And so let me just talk a little bit about insurance and how to think about that. We did have a large insurance mandate settle in the second quarter, continue to see strong demand overall from insurance companies, but the thing with this one is think of this insurance company mandate as a core mandate, so more traditional asset classes, highly scalable, margin accretive business. Over time, with that particular client relationship as well as is other insurance clients, we would expect opportunities to actually fund with them some of our differentiated, more specialty asset classes. So overall, net flow picture very solid in institutional. We're on track. We set forth on Investor Day organic, when you think about growth as a percentage of AUM, our targets are 2% to 4%, and we fully expect to exceed that organic growth target in 2020.

[Operator]

Our next question comes from Ryan Krueger with KBW.

[Ryan Krueger, analyst]

I also had a question on investment management. Could you talk about the drivers of the decline in the fee rate this quarter and what you'd expect going forward there?

[Rodney Martin, executive]

Sure, Ryan. Christine and Mike?

[Christine Hurtsellers, executive]

Sure. Yes. So as far as thinking about the revenue decline, it did decline 2 basis it and there are a couple of ways to think about that. I mean, certainly, we did see continued retail outflows in our equity performance in the second quarter. That affected it. But predominantly, when you think about our business model, it's more a mix of business. And we really have 2 ways to grow, improve our margins and grow our business. And one certainly is through selling more private markets, secondary private equity, things that we're seeing more and more client demand. So think about higher fee business, but also notably, it really the scale side of the equation. And we've seen quite a bit of what I'd call more scale growth in the first part of the year. And that insurance mandate was core and we priced it aggressively. But again, just when you think about the incremental expense is very limited. So this type of business, given our strength and foundation and fixed income is margin accretive as well as some other flows year-to-date in terms of stable value, which again, tend to be more core. So as we see that trend in yield evolving, certainly, as the world can turn uncertain, as Mike was earlier referencing around the macro environment, but what we see right now is strong pipeline. I would expect we're absolutely on track for our private fund launches. Just given the demand that we see out of clients, but I would expect for the remainder of the year, lower basis points, more scale funding, notably, where we're seeing a lot of demand right now is out of international clients into credit in multi-sector but the private fund should really start taking effect in the latter part of the year. So you're going to -- I would expect you're going to see an improvement or a pivot in 2021 in terms of the fees overall that we earn.

[Operator]

Our next question comes from Tom Gallagher with Evercore ISI.

[Thomas Gallagher, analyst]

Question is on the 3Q EPS walk. It shows the $0.06 headwind from interest rates and the loss of one large retirement plan. I guess I was surprised to see how big of an impact that was. Do you see a similar continued headwind level if interest rates remain low? Or is there anything unusual about the size of the impact in that -- in the quarter?

[Rodney Martin, executive]

Mike, do you want to take that?

[Michael Smith, executive]

Yes. Thanks, Tom. Look, I think the way to think about the $0.06 is, as we mentioned in the 2 pieces, the largest single piece, and I would view it as roughly half to a little bit more is just the sensitivity of new money yields changing as spreads came down from -- over the balance of the quarter, right? I think in late first, early second, we were able to take advantage of some of the market dislocation, and I think new money yields were actually pretty attractive. However, spreads have come in a lot. And so the $0.03 to $0.04 that I'm suggesting of the $0.06 is consistent with the sensitivities we've given for roughly 100 basis point drop, and I think that's more or less what we've seen over the last several months. So I think that's -- to the extent those rate levels continue, I think there would be a continued drag again along -- consistent with the sensitivity we gave. The individual client that we referred to is a relatively small piece, but not insignificant. And then just the last other piece is there were, in both first and second quarter, some variable items that hit investment income. They're still relatively small, but we don't expect those to continue to repeat. And so that kind of gets you to the balance of the $0.06.

[Thomas Gallagher, analyst]

Got you. And Mike, just to be clear, if rates remain where they are today, each quarter, when we think about this walk, you should get a $0.03 to $0.04 sequential impact going forward over the balance of the next, we'll call it, year or so.

[Michael Smith, executive]

Think of that as the annual drag is for a 100 basis point drop is in the neighborhood of $25 million, I think, is the way to think about it. So yes, that would be -- it will continue to be an ongoing drag. Does it get -- I think we're at the rate now. So it doesn't continue to get worse, maybe if I'm trying to understand your question better. Right? We stay at that new level and it sort of gradually goes down, but it's not at the same -- I don't think it's quite the same slope.

[Thomas Gallagher, analyst]

And I guess just relatedly, just with that as a backdrop, I mean, are we looking at 2021 retirement earnings, being more flat with 2020 levels? Or would you still expect to get to call it, mid-single-digit growth? Or any clarity there?

[Michael Smith, executive]

I think, Tom, I'll just -- right now, I think we're really only comfortable giving guidance, if you will, on how to get from the second quarter to the third quarter via the bridge that we've shared in the presentation. I think there's remain a lot of uncertainties, both in terms of underlying market performance as well as what will happen in the credit environment and top line. I think we're going to avoid giving any, at least at this point, while we're still in this, I think, relatively foggy condition about how the future is going to unfold. We're going to resist trying to give any meaningful or specific guidance on any of the segments or boy in total for '21.

[Operator]

Our next question comes from Jimmy Bhullar with JPMorgan.

[Jamminder Bhullar, analyst]

I just wanted to follow-up on the discussion on buybacks. And I think you're implying no buybacks until the deal closes, and maybe that's because your leverage, which is already high, would go up even higher. But is that a correct assumption? And then how do you think about the interplay between the things that you're waiting for, such as the deal closing and credit visibility and COVID visibility, when you get visibility into those, obviously, the stock price won't be as cheap or would most likely value. So how do you think about the trade-off between using the cash you've got right now versus sort of being conservative given the environment and given your higher overall leverage ratio?

[Rodney Martin, executive]

Jimmy, it's Rod. I'll start. Mike and I will share this. Sure. We -- as we communicated, we are waiting until the close of the transaction. And through the third quarter in an abundance of prudence. Jim, maybe, as you're well aware, we've repurchased over 6 billion shares since we've been a public company. And I think we've got a track record that speaks strongly about our commitment to returning capital to shareholders in a very effective on a consistent basis. And that's over $3 billion. With $1 billion this year, $3 billion in the last 3 years alone. We've made the transition from to a capital-light company. The $668 million of excess capital, the $1.5 billion, 85% to 95% free cash flow. Jimmy, we're just using the experience and judgment to make sure we see as clearly as we can going into the fourth quarter. There's an absolutely clear path to accomplishing the $1 billion. We've done 40% of it now. Voya will have never been in a better financial position from a balance sheet and liquidity perspective. We simply want to close the transaction, have a little more clarity on the market and COVID and then resume activities in the manner that we've already communicated. Mike?

[Michael Smith, executive]

Rod, I think you said it well. I guess I'd only reemphasize that we are saying, we do see a path to $1 billion plus. And so I think you've identified -- Rod identified in the prior comments, we've identified the things we're watching. I'd say as a short-term measure, leverage is a consideration, I wouldn't call it a driving one. It's really more of the broader macro issues, but it's certainly one of the many things that we're thinking about.

[Jamminder Bhullar, analyst]

And in your benefits business on voluntary benefits, your margins were actually very good. I'm assuming that you're seeing lower utilization because of just the environment and people maybe being reluctant to with the doctors, hospitals and stuff, but is that true? And if that is, are you expecting that to abate as the year goes on and we return to sort of a little bit more of a normal environment?

[Rodney Martin, executive]

Jimmy, I'm referring it to Rob, but we're thrilled with the progress we've made with the benefit business. I'll let Rob speak to where we are, what the pipeline looks like and what you should expect. Rob?

[Rob Grubka, executive]

Yes. Thanks for the question, Jimmy. So from a claims activity perspective, we actually saw a cross stop while I send the voluntary products. Let me talk about it that way, really pretty consistent utilization, severity in line with what we would expect. Those are certainly product sets within VB so accident, critical illness, hospital indemnity. So you've got a little bit of a tale of different things that just worked out in aggregate. Obviously, people may have been sort of not going for voluntary or sort of optional things, but when accidents happen or they've got something critical that's going on, obviously, we're in a pandemic year. You're going to see ebbs and flows as we break the products apart. But in aggregate, it was really in line with what we would expect. And then just you're talking about the growth in margin across VB. Obviously, that starts top line. We had a really nice quarter across the business and continuing to grow and drive growth. We've had great momentum coming into this crisis. We see that continuing as we move forward, but it was a little bit product dependent to the fundamental of your question. We'll see how that plays out. There's obviously still plenty of uncertainty and the pandemic is moving around as we speak. So we'll see how that moves forward. But we feel like we're in a really good spot to continue growing this business.

[Operator]

Our next question comes from Humphrey Lee with Dowling & Partners.

[Humphrey Lee, analyst]

I guess just a quick follow-up on Retirements earnings. I think in the past, when you talked about record-keeping fees, you expect kind of marginal earnings and fee kind of benefit. But given the size of the increase and also the low unit cost that you alluded to earlier, how should we think about the earnings and fees impact in retirement when you -- when the balance of that $20 billion record-keeping come through in the balance of the year?

[Michael Katz, executive]

Charlie and Mike?

[Charles Nelson, executive]

Sure. I maybe start, and Mike can chime in as well. I think the way to think about the growth and the difference between recordkeeping and Full Service is you can see in the fees and the kind of fees of recordkeeping kind of compared to the total revenues and Full Service. In our supplement, there's a fairly significant difference between the 2. So recordkeeping being more per participant and larger total participant counts, larger plants. While it's not 100% based on participants, it's largely there, as Mike has said, I think he said in his comments as well. So I guess, to think about the earnings emergent -- excuse me, emerging, it's probably not going to be material or significant initially. It will emerge over time as we continue to grow and to build it. The benefits of our recordkeeping business provide us scale and contribution margin covering fixed costs and other types of things from technology and development. That enhance our overall competitive position and our entire retirement business. But Mike, I don't know if you have anything you want to add on top of that? Or...

[Michael Smith, executive]

No, I think you covered it pretty well, Charlie. I don't have anything to add there.

[Charles Nelson, executive]

Okay.

[Humphrey Lee, analyst]

Got it. And then a question for Christine. I think talking about investment management. There's some discussion about the opportunities internationally for the layer. Just maybe your thought on the kind of the potential there and what you're doing in order to achieve those potential opportunities?

[Michael Katz, executive]

Christine?

[Christine Hurtsellers, executive]

Sure. Thank you, Humphrey. Yes, really, it's been a notable change in terms of client demand from overseas. As you know, it actually was a headwind for us over the last few years, and it really was driven by just changes in the dollar and short-term interest rates in the U.S. has been a real sea change. And as a result of that, we have a great distribution partnership with an asset manager and an IP that we work with. And so we have a very large investment-grade C cab as an example, it's top decile, near-term and long-term performance that's garnering a lot of flows. Really, as I mentioned quite a bit year-to-date as well as some interest out of Asia. So I don't see that demand changing. And in fact, what we're really excited is we just hired a head of EMEA sales out of our London office. Because we anticipate what we're hearing and seeing is that insurance companies in Europe who tended to have real sort of euro or sovereign bias and didn't outsource as much, we think now under Solvency II, they're definitely -- we've already seen a building pipeline and interest out of Europe. And so we added some distribution to capitalize on that. So just kind of looking out in the longer term, I'm very optimistic of what we're going to see in some of our differentiated strategies out of that part of the world as well. So overall, it kind of speaks to -- we've got quite a few angles of distribution. When you look at our overall business and franchise as well as some very differentiated products, notably in specialty and private credit is of great interest in terms of insurance companies right now. So again, overall, it's going to be an important part of our growth story.

[Humphrey Lee, analyst]

Got it. So that's why you're feeling pretty optimistic about the institutional pipeline for your business?

[Christine Hurtsellers, executive]

Yes. Yes, Humphrey. And then really, again, it's -- we -- you saw we had very strong quarters and strong flows, bucking the industry trend in the first quarter as well. And really, what you've seen, again, it just speaks to the strength of both the product array that our private equity is -- well, as an example, our private credit or commercial real estate. So it's really capabilities as well as strong investment performance. And again, having both the insurance channel has been very strong. And continues to be as well as now being able to tap into international client demand through distribution has been important as well.

[Operator]

Our next question comes from Brian Meredith with UBS.

[Michael Ward, analyst]

This is Mike on for Brian. Just wondering quickly on the corporate segment. If you exclude the stranded costs, it just looked like corporate expenses were a little bit lighter than usual. So I was wondering if you could maybe comment on some of those drivers and if you expect them to continue?

[Michael Smith, executive]

This is Mike. I'll take that. Nothing, in particular, to point out. I think there is a little bit of quarter-to-quarter movement. But the range we gave, I think, certainly, we were basically right in the middle of the range when you adjust for the stranded. So I think next quarter, you can expect corporate to be more or less the same ex stranded. It save for the preferred stock dividend that we pay every other quarter, and that's roughly $10 million. So I wouldn't try to get too fine on small movements in corporate.

[Michael Ward, analyst]

Great. And then just back to benefits, quickly. So I was just wondering, I know your book is a little bit different than some of your peers, but people saw other -- some of your peers saw favorability in lines like voluntary. And I was just kind of curious on why you're expecting that to improve a little bit in 3Q given some others are expecting it to little revert back to kind of more normalized levels?

[Rob Grubka, executive]

Yes, Mike, this is Rob. I'll jump in on that, as you were alluding to, our product mix is a little bit different. So as we think about the accident, critical one is hospital indemnity product set versus a number of companies I know have been talking about their dental business or their vision business. And those really went low from a benefit payout perspective, just obviously, they just institutions weren't open to go visit to dentist and have your eyes checked. Those things were pretty easy to just put off and delay. And so there will be, as I would expect, you would expect a bounce back on that side. I think, again, the product mix that we've got, things behaved as we would have expected in second quarter. As we move into third quarter, in aggregate, we're talking about improvement movement within the loss ratio, but we're not expecting dramatic changes quarter-over-quarter, really driven by the mix of what we sell and service every day.

[Operator]

This concludes our question-and-answer session. I would like to turn the conference call back over to Rod Martin for any closing remarks.

[Rodney Martin, executive]

Thank you, operator. The purposeful decisions that we've made as a company have enabled us to enter the second half of this year in a position of strength. More broadly, we continue to benefit from the emphasis that we've -- that we have placed on our core values, which help set us apart in the industry. Our efforts to advance diversity, inclusion and equality throughout our company, and in the communities that we serve are part of our commitment to creating a stronger and better Voya. Our focus on caring for employees, clients and communities is unwavering. I hope that you and your families remain healthy and safe. And 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.

[Operator]

Ladies and gentlemen, this concludes today's web conference. You may now disconnect your lines at this time. Thank you for your participation, and have a great day.