Voya Financial Inc

NYSE:VOYA

Earnings Call Transcript 2018-Q3

[Operator]

Good morning, and welcome to the Voya Financial Third Quarter 2018 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

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

[Michael Katz, SVP of IR]

Thank you and good morning. Welcome to Voya Financial's third quarter conference call. 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. The company does not revise or update them to reflect new information, subsequent events or changes in strategy.

Risks and uncertainties that could cause actual results to differ materially from these 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 measure can be found in our press release and financial supplement found on our website, 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; Rob Grubka, Employee Benefits; and Carolyn Johnson, Individual Life.

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

[Rod Martin, Chairman and CEO]

Good morning. Let’s begin on Slide 4 with some key themes.

During the third quarter, we’ve demonstrated our commitment to growth, operational excellence and capital management. Normalized for DAC unlocking and prepayment fees and alternative income above our long-term expectations, our adjusted operating earnings grew 17% year-over-year. On net basis our adjusted operating EPS was $1.34 per share. This is within our target range with $1.30 to $1.40 earnings per share that we had aim to achieve by the end of the second quarter of 2019.

At Investor Day on November 13, we'll be sharing details on our updated plans for achieving further organic growth, cost savings and capital management. These plans will enable us to continue to improve our earnings per share.

Our performance throughout the quarter demonstrates continued momentum across our businesses. We achieved another quarter of record adjusted operating earnings for retirement with increased full service recurring deposits by 10% for the trailing 12 months.

In investment management, we delivered our 11 consecutive quarter of IM source positive net flows, a sign of commercial momentum with our institutional clients. And in employee benefits, we had strong improvement in StopLoss underwriting driven by our disciplined pricing actions. Within the segment we continue to increase our annualized in-force premiums largely due to our voluntary business growth.

We continue to have a strong capital position with approximately $813 million of excess capital as of September 30. We repurchased $250 million of shares during the third quarter and we plan to repurchase $250 million of shares in the fourth quarter as well. In addition, we received a $500 million share repurchase authorization from the board, which gives us the opportunity to create additional value for shareholders.

Since our IPO in May of 2013, we have repurchased more than 100 million shares. We also made for their progress in the third quarter on our plans to reduce leverage. At the beginning of the fourth quarter, we paid them $325 million of outstanding debt, which was funded by a new preferred equity issue.

Turning to Slide 5, as we announced yesterday, we have concluded the strategic review of our Individual Life Business. Following the close of our annuities transaction June 1, we felt it was important to look at the best path forward for the Individual Life Business given it had been closely aligned with annuities. And after a thorough review, we have decided to cease these sales at the end of this year, while retaining the block.

There are several important reasons why we’ve chosen this path. First, the decision aligns with our strategy of focusing on higher growth, higher return, capital like businesses. These businesses are largely focused on serving customers to the workplace and within institutions.

Second, this path will deliver greater shareholder value by improving cash flows while reducing costs. We expect to generate at least $1 billion free cash flow from the Individual Life segment over the next five to six years. And third, Individual Life will continue to provide earnings and capital diversification with minimal correlation to equity markets.

Additionally, as we close the business to new sales, we retain future optionality to find strategic solutions to accelerate capital release. As many of you know, we have a strong track record of improving in-force blocks and driving efficiencies. We are retaining a talented team to manage this in-force block, who will continue to help us realize the value that we've identified.

We want to take a moment to thank Carolyn Johnson, our leadership team and the many employees in our Individual Life business who helped bring this strategic review to a successful conclusion.

Turning to Slide 6. Our people have driven our success over the past several years, enabling us to earn external recognition that highlights our strong culture. For the third consecutive year, Voya was named to the 2018 Dow Jones Sustainability Index, 35 companies in the financial services industry were invited to apply and we’re one of just seven to become a member.

Additionally, we were once again certified as a great place to work by the Great Place to Work Institute for the third year. And earlier this month, Voya was named one of the World's Best Employers by Forbes. We rank 194th on the list of 500 selected companies.

During September, we held our annual employee giving campaign. We had our highest employee participation ever at 71% with more than 4,000 employees donating or volunteering their time in the communities that we do businesses.

As a reference point, the average workplace campaign participation rate at U.S. companies is 30%. Together with matching contributions from the Voya Foundation, we donated roughly $1.9 million to charities around the country, positively impacting the communities where our employees and customers live and work. This effort along with our external recognition demonstrates Voya’s strong culture and dedication of our people, which helps to attract and retain top talent.

Now, Mike will provide more details on our performance for the quarter.

[Mike Smith, CFO]

Thank you, Rod.

On Slide 8, our third quarter operating results demonstrated strong momentum. We delivered third quarter adjusted operating earnings of $1.34 per share excluding unlocking and prepayment fees and alternative income above our long-term expectations. On a reported basis, adjusted operating earnings were $0.84. This quarter's result is in the range of our quarterly adjusted operating earnings target of $1.30 to $1.40 per share.

Our strong earnings growth over the last several quarters has been driven by rising fee income, favorable net underwriting, realized cost savings, and share repurchases. We look forward to sharing our next set of financial targets with you at our Investor Day on November 13th. During the quarter, we had $0.70 of unfavorable deck unlocking which was mostly a result of our annual assumptions update.

As we disclosed in September we increased reinsurance premium assumptions for certain Individual Life blocks. The impact of this change was near the high-end of the estimated $150 million to $200 million range and was partially offset by favorable assumption changes in retirement. Combined prepayment and alternative income was $0.20 above our long-term expectations. This was primarily driven by a one-time distribution related to the sale of a private equity holding in our alternatives portfolio.

Moving to Slide 9, Retirement achieved another record quarter of adjusted operating earnings. This was driven by strong fee income that was supported by 12% growth in assets under management year-over-year. Our trailing 12 months return on capital also grew reaching 13.4%.

During the quarter Retirement benefited from strong investment performance from our alternatives portfolio. The previously mentioned favorable DAC unlock was $50 million, primarily driven by mean reversion adjustments to our equity return assumptions.

Retirement generated positive net flows in the quarter, largely driven by full service corporate markets and stable value. Full service corporate markets generated another quarter of positive flows marking 20 consecutive quarters of inflows. This was supported by 12% growth in trailing 12 months recurring deposits year-over-year.

Our second half guidance was $600 million to $800 million Retirement net outflows remains unchanged. As we highlighted on our second quarter call, this largely reflects the impact of stable value surrenders, which we now expect to occur in the fourth quarter.

As a reminder, the net earnings impact of these surrenders will not be meaningful to our Retirement segment. As you may have seen, we have provided additional disclosures in our investor supplement to better reflect the economics of our business. First, the new stable value disclosures better depicts the earnings impact from net flows.

Previously, we classified the loss of management of the underlying stable value assets as an outflow for retirement even when we retain the rep guarantee. Going forward while this will continue to be considered an outflow for investment management, it will no longer be recorded as an outflow for retirement.

Second, we provide greater transparency into our record-keeping business by providing a roll forward of assets under administration. In the fourth quarter, we expect a large record-keeping plan termination of approximately $40 billion of planned assets. The annualized pre-tax operating earnings impact to retirement is expected to be in the low single digit millions. Though activity can be lumpy in any given quarter, we are encouraged by the 2019 pipeline of new sales.

Third, we provide new disclosures on the fee income generated by our full service business. And finally, we provide a more holistic view of our business by including total client assets.

On Slide 10, Investment Management delivered $48 million of adjusted operating earnings. We generated strong commercial fee growth from higher investment management source AUM. Investment capital results were also favorable in the quarter. As expected, this was offset by the full quarter run rate earnings impact of the annuities transaction.

The trailing 12 months operating margin was 31.3% including investment capital. We expect the trailing 12-month operating margin to decline over the next several quarters as the effect of the annuities transaction becomes fully incorporated. Over time, we do expect to return our operating margin to the low 30s as we rebuild our asset levels. As you can see on the slide, we provided

As you can see on the slide, we provided a new view of retail and institutional source net flows. This aligns more closely to how we manage the business. Institutional client demand for our solutions led to our 11th consecutive quarter of positive investment management source net flows.

We had several institutional wins including a sizable short duration mandate, commercial mortgage loans and a securitized credit portfolio funding. The fees on inflows were lower than those for outflows by 9 basis points in the third quarter. On a trailing 12-month basis, fees on our inflows exceeded our outflows by 3 basis points. This will vary each quarter depending on asset mix.

Looking ahead, we have a healthy commercial pipeline that we expect to fund in the fourth quarter of 2018 or early 2019. This includes several items including a sizable senior bank loan mandate with a notable Asian savings plan, highlighting the growing global demand for our solutions. Several mandates across our fixed income strategies within our growing insurance asset management channel, a large sub-advisory mandate and new CLO issuances.

Turning to Slide 11. Employee benefits adjusted operating earnings were $50 million and our trailing 12-month return on capital was 26.9%. As we signaled last quarter, loss ratios for stop loss return to our target range driven by the impact of pricing actions taken on 2018 business. We remain confident the full year loss ratios will also be in range. Our Group Life loss ratio also returned to our target range.

Strong momentum and voluntary continued into the third quarter. Voluntary annualized in-force premiums grew 20% year over year supported by sales across all our supplemental health products.

Our voluntary offerings continue to represent an important growth driver for our business. This quarter, we have started to provide our total aggregate loss ratio in our Investor supplement. We expect the total aggregate loss ratio to be between 71% to 74%, on a trailing 12-month basis.

On Slide 12, Individual Life adjusted operating earnings were $66 million in the third quarter. In the quarter, mortality was in line with expectations. Our annual assumption update resulted in a negative $200 million DAC unlock mainly driven by increased expected reinsurance costs.

Our assumptions now reflect reinsurance premium increases or recaptures related to all of our significant reinsurance partners. We don't expect additional significant reinsurance rate actions in the foreseeable future.

Our trailing 12-month return on capital was 9.8% lower sequentially as average gap capital increased with the impact of tax reform. Turning to the financial implications of our strategic review decision, we will incur an approximately $15 million restructuring charge in the fourth quarter.

We expect $20 million of annual pre-tax cost savings in 2019 as we wind down new business activity. And our run rate free cash flow conversion will improve to 70% to 80% factoring in other onetime actions we expect to generate at least $1 billion in free cash flow over the next five to six years.

On Slide 13, we provide additional items to consider for the quarter. Specifically, we expect expenses in the fourth quarter to be higher due to the timing of project spend and variable compensation primarily in our retirement sector. While not explicitly quantified share repurchases will have a meaningful positive impact on fourth quarter EPS, we plan to repurchase $250 million of shares in the fourth quarter.

Also, we have slightly revised our estimated annualized pretax earnings impact of a 1% move in equity market to approximately $4 million to $5 million while we have provided some items to consider there will of course be other factors that affect fourth quarter results.

On Slide 14, our capital position is strong. Our estimated RBC ratio was 474% at the end of September. We expect our RBC ratio to decline in the fourth quarter as tax-driven changes to the RBC formula go into effect at year end. As mentioned last quarter, this estimated impact to our RBC ratio is approximately 35 points.

In the quarter, we strengthened our balance sheet with an attractively priced $325 million preferred equity offering. The proceeds help to fund a debt pay down which will reduce our debt-to-capital ratio in the fourth quarter of 2018. You can see the pro forma impact on this slide to both our excess capital and debt-to-capital ratio.

Specifically, our pro forma excess capital, which consists of estimated statutory surplus and holding company liquidity above target increased to $813 million at the end of the third quarter. Additionally, our pro forma debt-to-capital ratio was 26.3% below our 30% target.

Turning to Slide 15. As depicted in the graph on the left, if we adjust Voya’s closing share price on October 29th by our estimated value of our deferred tax assets, Voya trades at approximately six times 2019 consensus earnings. At these trading levels, we continue to view share repurchases as value enhancing for shareholders particularly given our high quality earnings, our high free cash flow generation and the growth opportunities ahead of us, which we look forward to sharing with you at our upcoming Investor Day.

As Rod mentioned, we repurchased $250 million of shares in the third quarter. We plan to repurchase an additional $250 million in the fourth quarter at these attractive levels. In addition, the board approved a new $500 million share repurchase authorization. In summary, we generate earnings per share within our targeted quarterly EPS range ahead of schedule. Our businesses continue to see strong momentum and our capital position and balance sheet are strong.

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

[Operator]

[Operator Instructions] Our first question is coming from the line of Ryan Krueger with KBW. Please proceed with your question.

[Ryan Krueger, KBW]

Can you provide some additional color on the decision to retain individual life rather than sell it or reinsure it?

[RodMartin]

It’s Rod. Mike and I, and Carolyn will toggle with that. The first step, Ryan, and I know you're very familiar, but maybe we've got some new listeners on the call. I want to just step back a moment and then get into the specifics.

I think all of you are fully aware that we've been on a journey of ROE improvement and capital return to shareholders. We're finishing Phase 2 of our plan and we are about to introduce, we're very excited about it in two weeks, Phase 3 at our Investor Day.

As I queued up on the call, we're talking about our higher growth, higher return capital like businesses focused on the workplace and with financial institutions. We announced earlier this year, the Apollo-Athene transaction, we closed that on June 1.

The other piece of the portfolio rationalization was the life review. We have brought the same rigor review and thoroughness to that - that we did with the CBVA piece. It was our conclusion as we've announced that the best outcome for shareholders from a capital perspective was what we announced.

You'll hear from Mike in just a moment, but we're talking about returning to shareholders over the next five years or six years $1 billion plus. Much of that will happen in the first two or three years. It also provides us the non-correlation benefit to the equity market. We continue to be able to manage those assets, and all options remain on the table for either a reinsurance transaction or other alternatives that could present themselves.

And with that, I'll throw it to Mike to add any color.

[Mike Smith, CFO]

And maybe I'll just jump in on the cash flow guidance that we had given and maybe clarify it a bit based on some of the pre calls that we've had. So, the way to think of the cash flow, the $1 billion plus of cash flow we'll have over the next five years to six years is really in two pieces. The first is as we said the 70% to 80% cash flow conversion. So, think of that as a normalized run rate that year-in, year-out, we would expect that the free cash flow to be in that range relative to GAAP earnings.

In addition and what will ultimately be resolved to the billion plus is a couple of different capital initiatives that we intend to pursue over the next year or two largely related to the financing of redundant reserves and much similar to the kind of things we've done in the past that were part of our ROC improvement story. So we'll be doing those over the next few years. We expect that to be seen sometime in 2019 or 2020 finishing up in 2021.

The other element to add on the cash flow picture which I want to be sure people understand is when we talk about five years to six years of cash flow, we don't intend to say that that's it. There is significant business left after that period. That's the - we simply chose that to frame the level of return that one could expect over the relatively near term.

Life insurance blocks can last a long time and certainly longer than say the typical annuity block, the lapse rates are far lower and the liabilities can stretch for decades. So we expect there to be significant value after the five years to six years, assuming we continue to hold the block.

[Rod Martin, Chairman and CEO]

Ryan, one piece I would add. We have an attractive in-force block. We have considerable experience in managing in-force blocks. There were no surprises or nothing unexpected that came out of the review other than our judgment that this is the most expeditious way to return capital to shareholders during this period of time.

[Ryan Krueger, KBW]

And then just one separate question. Just in terms of, I think this was suggested based on the equity market sensitivity. But just to clarify the $1.29 for the fourth quarter EPS guidance before share repurchase, would you - you would still expect to do the $1.29 when you incorporate both share repurchase and equity market impact in the fourth quarter?

[Mike Smith, CFO]

So Ryan, this is Mike. We didn't reflect to the current - the latest and greatest version of equity market guidance in the $1.29. So I think though if you - if you do the math, you'll see that, let's say the S&P is down 9%, which is where it's been. That's applying the guidance for the quarter you wind up at about $8 million after tax, which you can translate into a per share.

I think when you think about that $1.29 baseline plus the benefit of repurchases plus any other organic growth and then you adjust for the equity, I think you’re probably still in pretty much that range of course that depends on what happens for the rest of the quarter. And I guess time will tell on that.

[Rod Martin, Chairman and CEO]

And Ryan, maybe one piece just to add to what Mike has shared, we've talked about previously the $1.10 to $1.30, expected 12 months post close. So think about June of 2019. With the life decision, there's another $20 million of pretax cost savings that will start in 2019. So add $20 million to the $1.10 to $1.30 and that will give you and others a good point of reference.

[Operator]

Our next question is coming from the line of Nigel Dally with Morgan Stanley. Please proceed with your question.

[Nigel Dally, Morgan Stanley]

Another question on the last segment run-off. Can you talk about the total amount of statutory capital that backing the Individual Life block? And also just to be a bit clear on the $20 million of cost saves in 2019. Will there be any additional upside beyond 2019 or is it that the ultimate level of phase that you expect to get from this business?

[Mike Smith, CFO]

Nigel, this is Mike. We don't have a number to give on the statutory capital, we've typically not given the amounts of statutory capital for each of the businesses. You can certainly see what's in Security Life of Denver, that's a separate statutory entity. It's a little more difficult with ReliaStar and ReliaStar of New York where the rest of our Life business is and obviously you can see the GAAP capital number.

In terms of cost saves in potential, I think there is potential beyond the $20 million. This is just from the rationalization of the new business related activities. I think as we manage the block going forward, there will be additional rationalization opportunities that we can explore.

We're not ready to give numbers on that yet, it'll kind of depend on the sorts of solutions we're ultimately able to pursue. It will be important though for us to maintain a very - this very talented team that we have supporting the Life block and they'll be very important in terms of our realizing the value that we've talked about.

[Operator]

The next question is coming from the line of Suneet Kamath with Citi. Please proceed with your question.

[Suneet Kamath, Citi]

Just going back to the Life deal, can you give us a sense of how you'd expect the earnings from that the Life business to sort of track over the next couple of years? Just wondering how quickly should we expect the base to sort of runoff?

[Rod Martin, Chairman and CEO]

Kind of in short, there won't be a discernible degradation of earnings over the near future. We expect that this is a long-tailed degradation of earnings over the near future. We expect that - this is a long tailed block.

So, when you particularly given the benefits that we'll have from the cost reductions that we've already mentioned, there is a degree of GAAP strain that comes from new business. And so when you add those beneficial effects, I think you'll see pretty much level-ish kind of earnings. Obviously, depends on other external events that occur, but we don't anticipate any meaningful degradation over the foreseeable horizon.

[Suneet Kamath, Citi]

And then for the retirement business just if I think about 176 of normalized earnings in the quarter. You’d mentioned that record keeping business will take that down a little bit. But ex-that, is that a decent run rate to think about going forward to that 176 came in quite a bit above what we were expecting?

[Rod Martin, Chairman and CEO]

I think so. I keep in mind the fourth quarter expense increase that we talked about. But other than that it's - I think it's a pretty good run rate.

[Operator]

The next question is coming from the line of Tom Gallagher with Evercore. Please proceed with your question.

[Tom Gallagher, Evercore]

Mike, was there - was there a negative impact from on a go-forward basis from the increased reinsurance pricing for individual life?

[Mike Smith, CFO]

Tom. Yes, there is. It's factored into the guidance we gave on the quarter. So rather than breakout all the little chunks and pieces, we just left it as it will be basically netted out. There is a - there is a modest impact to the life earnings.

[Tom Gallagher, Evercore]

And then and Rod, just back on what went into the decision retain in the life block. Can you just give us a little bit of color what kind of dynamic were there you know in terms of the process and what you learned in terms of the buyers on the other side, the reinsurers on the other side. Was it - did you find that the bids were fairly low? Is that what surprised you or what you thought about the other side or did you end up just being positively surprised by the benefits of retaining it for lack of a better way of describing it?

[Rod Martin, Chairman and CEO]

Tom, fair question. I'm going to talk a little bit more about outcomes than process. But I would say there is a robust market and I say that because I mentioned at the concluding remarks that we retain optionality here. There is a robust market.

There are also a number of Life blocks in the market at this point, I would say, an above average number that factored into our decision. And the other piece we look at it as we did with the CBVA lens, how do we maximize the asset that we own and know the best for our shareholders. And our conclusion was what we've announced.

We're bullish about where we are, the path we've identified and frankly, our ability to manage that. We've done two significant reinsurance transactions previously that remains on the table and we'll follow what the market journey is in terms of the external market.

I think the takeaway time for you and for all of the people on the call is, what we're focused on is returning the maximum shareholder value. I think that's reflected in the $5 billion of share buyback that we've done. And it's no different here and we're really looking forward to Investor Day where we talk about our ongoing businesses in Phase 3 of our strategy.

[Tom Gallagher, Evercore]

And then final question just the $40 billion record keeping outflow. You know, can you just remind us the remaining record keeping assets. And Mike, I think you said, it was only low single digit millions negative earnings impact. So, I assume that means not - that was a pure recordkeeping only and nothing else is outflowing related to that in terms of AUM or other - other fees you might earn?

[Mike Smith, CFO]

You've got there, right. It’s low single digit earnings impact. It's purely assets under administration. And that - it’s the total assets under administration now are in $235 billion. So and that's the - that's in the stock, $235 billion. But pure recordkeeping relative to kind of full service, the fees as a percent of assets are going to be significantly lower and that's how you understand the earnings impact.

[Operator]

Our next question is coming from the line of John Barnidge with Sandler O'Neill. Please proceed with your question.

[John Barnidge, Sandler O'Neill]

There has been meaningful improvement in the Employee Benefit business top loss ratio this year. Clearly, some of these repricing actions have helped. How sustainable do you see the 77% achieved in the third quarter and should we think of that as a run rate?

[Rob Grubka, Employee Benefits]

This is Rob Grubka. As we've said the last several quarters, we've been very focused on what we were doing around the 101 business both from a renewal standpoint and the volume of new business that we wrote.

As we've said the last several quarters, we've been very focused on what we were doing around the 1:1 business both from a renewal standpoint and the volume of new business that we wrote.

So, as we think about it from a quarter-to-quarter perspective, I think we've learned and shown over a pretty long track record of having periods, where we did much better than our range and we've had periods where we've done not our range.

We feel good as we said in the last several quarters about where we came in from a pricing standpoint. We needed to give that time to sort of show itself and continue to convince ourselves it was where we expected it to be. That certainly what emerged in third quarter, we expect to be in the range as Mike said in his comments that we're confident about it.

[Rod Martin, Chairman and CEO]

John. It’s Rod, I’ll add one other piece that we call out in the slide and Mike and I and others have talked about on the various meetings and calls we've been on. I think our employee - and I'm very proud about what's happened, so that improvement was what we expected and I think the team has done a good job. I’d also call your attention the progress we've made on the voluntary benefit business.

The in-force premium growth and that's in the stat supplement. This is something that I've shared with various investors and at meetings that I think is an underappreciated value as it relates to Voya’s overall value.

And if you look at the last three or four commercial transactions and what was paid and how those properties are contributing those companies, we feel every bit as good about the value of this property as part of our ongoing mix as reflected in the market value of those properties.

[John Barnidge, Sandler O'Neill]

And then sticking with employee benefits a little bit, I know there's quarter-to-quarter, it can be wonky, but if I look at the Group Life loss ratio, it actually improved in the first quarter year-over-year, but it's deteriorated in the last two quarters, second and third quarter. Is there anything going on there or is it just a quarterly wonkiness?

[Rod Martin, Chairman and CEO]

I’ll use the word that’s just been wonkiness. We talked in the first quarter. We ended up having sort of better than usual from a seasonality standpoint. As we moved into second quarter, we saw things emerge in April, but then May and June. And so, I would just say the timing of things this year has been a little bit outside the standard. But again to go back to wonkiness is probably a fair description of it, but it doesn't impact the confidence of being in the range.

[Operator]

Our next question is coming from the line of Andrew Kligerman with Credit Suisse. Please proceed with your question.

[Andrew Kligerman, Credit Suisse]

Thank you for taking my question. First one is on this RBC target of 425%. So, you've divested of the variable annuity block. You've now put the Life business in run-off, so is 425% the right number, I mean could you get that lower to maybe 375% or 350%?

[Mike Smith, CFO]

Andrew, thanks for the question. Right now, we're comfortable with 425%. As we've discussed in prior calls with the impact of tax reform and the subsequent effect that’s having on the formula, I think there is a question as to what the right approach is post the new - those new factors. We’re still gaining information from conversations with rating agencies and observing what peers do.

And as you correctly noted, our business mix is changing. I would say there is nothing about the decision that we announced last night on the Life business that changes that target, but business that changes their target, but overall, we’ll continue to evaluate our RBC targets and manage that in accord with where we think we need to be from a ratings perspective. And you know aligning that with our business objectives.

[Andrew Kligerman, Credit Suisse]

I mean I think you mentioned 35 point impact from the tax legislation last year. I mean once you kind of assess that I mean do you think you could make a decision on RBC relatively soon or is this something that's going to take time?

[Mike Smith, CFO]

Well, look, I think, just right now every - we have a decision and that's what we're holding it at 425. I think there's an opportunity for us to consider a change sometime or the next quarter or so. We're hoping to reach a conclusion by the end of the year and we'll decide from - we'll run it from there.

[Andrew Kligerman, Credit Suisse]

And lastly, so there's a lot of potential legislation out there in Congress and there's an executive order on multiple employer plans. And then there's another one on extending the required minimum distribution age past 70.5. How is Voya is thinking about the potential of that legislation passing and even more importantly would that - you know how would that impact your business?

[Charlie Nelson, Retirement]

This is Charlie Nelson, and thanks. We are very supportive of both the legislation and any regulatory actions that I think certainly address the coverage gap in America in the workplace retirement plan. There's a number of proposals as you've identified and things kind of moving at differing paces through whether it's regulatory or legislative branches.

It's a bit early to respond to kind of specific legislation and I don't really think the impact is going to be significant in 2019 is probably going to be beyond that. But we’re really encouraged. It appears to be evolving in a way that I think really pleased to our strength. If you think about our strength in the small-mid corporate, this is a coverage issue that’s the areas trying to address.

Secondly, they're talking about the multiple employer plans or these professional employment organizations, MAP or PEO as you may hear those terms. We have those capabilities today. We do these types of plans today, so it fits really, really well with us.

I think as you know, we operate in a market of markets we speak about in Voya, in retirement and all the various sub-segments that we go through. And with our expansive distribution, we think we are really well poised to take advantage of those and really optimize and help address the coverage issue in America.

Now, when you - when you address the issue that you bring up in terms of extending the retirement withdrawal age or the minimum distribution age, that too is another great opportunity and we're very supportive of it anything that helps people save and invest and protect their retirement and ultimately keep assets in the plan is a good thing. So, we think that that's good and they'll have more benefits long-termed as well.

And then on your comment on electronic delivery, electronic delivery is an interesting one. We need the regulations to catch up to our capabilities. We're actually further ahead and the regulations limit us a little bit in terms of how much we can actually do.

So we're very supportive of all of these legislative and regulatory actions that will drive both coverage, help people save more and ultimately I think improve the operational efficiency and experience for customers through electronic delivery.

[Operator]

Our next question is coming from the line of Eric Bass with Autonomous Research. Please proceed with your question.

[Eric Bass, Autonomous Research]

For investment management, can you provide a little bit more color on the drivers to get to a 30% pre-tax margin by 2020? And is that relying on markets and flows or are there other levers that you can pull to get there as well?

[Christine Hurtsellers, Investment Management]

Certainly, when you look at investment management and you’ve seen we’ve had 11 consecutive quarters of positive high interest cash flows. So, our organic growth is strong. Our pipeline is strong. Just the diversity of what we do in the space we play in asset management, active asset management is again we have a lot of differentiated strategies.

Think commercial real estate, think private equity, think about just the strength of our fixed income performance, so overall it’s organic growth that we’re relying on to get back to the 30s - the low 30s operating margin over the next two to three years.

[Eric Bass, Autonomous Research]

And then on capital management, should we interpret the $500 million buyback authorization as your baseline plan for 2019? I mean if so, can you talk about how you arrived at that level in the context of the $800 million of excess capital in the strong free cash flow generation for the company?

[Rod Martin, Chairman and CEO]

Yes, it’s Rod. You should interpret it as the most current authorization we just secured from the board. We’ve got authorizations previously, all of which have contributed to the $5 billion of share buyback by the end of the year. We’re going to utilize what’s remaining the $250 million that we’re doing in the fourth quarter. The $500 million that we have that brings us into 2019 and we will go back to the board and have discussions with them once we’ve utilized that. And we’re beyond that we’re not going to be more specific at this point.

[Operator]

Our next question is coming from the line of Alex Scott with Goldman Sachs. Please proceed with your question.

[Alex Scott, Goldman Sachs]

I just had one more question on the Life Insurance strategic review. I guess, just having gone through this process, I was wondering if you could share any - any color on just sort of what you see is as being sort of the driver around some of these re-insurance, recaptures? And I guess some of the pressure that's led to runoffs and so forth around the industry? And I guess you know more specifically for you, like what were some of the things that kind of led it to this - to this point from sort of the pricing assumptions?

[Rod Martin, Chairman and CEO]

So Alex, if you're referring - I'm not quite clear on what you're referring to, but in general, let's talk about the reinsurance increases that we've seen and that others in the industry have seen and that have either led to price increase - reinsurance premium increases or in other cases recaptures, right.

That relates pretty specifically to a block of business that was underwritten 15 years to 20 years ago, where the industry I'd say generally overestimated the rate of improvement that we would see in mortality for people aged at the time then 65 and above.

And so what's happened is that over time as those reinsurance arrangements and those products have aged, it's turned out that the actual observed mortality has been meaningfully higher than what was expected back then.

And so that's led to the repricing activity and the subsequent actions that seeding companies have taken. I'll reiterate we're now through all of the significant reinsurers that are - that would be affected by this particular block. And so for us, we think it’s done for the foreseeable future. We can offer no guarantees, but we’re pretty comfortable that we’ve seen the most significant chunk of it for the foreseeable future.

[Alex Scott, Goldman Sachs]

And in terms of the, I guess the cash flows you've highlighted for this business, I mean is there any impact expected from pricing action from your side, meaning are there any anticipated cost of insurance increases or anything like that sort of as part of that guide or is it assuming that doing those sorts of actions will be more difficult with some of the attention that's been focused on that recently?

[Rod Martin, Chairman and CEO]

So we have taken in the past some actions on a fairly limited part of the block, but we have done some COI and other fee increases. Going forward, there's nothing explicitly in the cash flow projections that assumes that we'll get a cost of insurance increase. That option remains viable for us and it's something that we'll continue to pursue as we seek to maximize the value of the block, while attending to our need to satisfy the promises we've made to our policyholders.

[Operator]

The next question is coming from the line of John Nadel with UBS. Please proceed with your question.

[John Nadel, UBS]

I have a couple of housekeeping items and then maybe one bigger picture one for you, Rod. Mike, coming out of the third quarter relative to that $110 million to $130 million of expensive target, where are you in the third quarter of 2018?

[Mike Smith, CFO]

John, we’re making a really good progress. I think you can see that mainly in the corporate segment where I would attribute about $10 million of the - of sales on a quarterly basis, $10 million of sales on a quarterly basis, so that’s a $40 million run rate on top of what we had talked about last quarter, which was an additional $20 million annualized, there was $5 million save. So, we're well on our way. I have great confidence that we will achieve that, and then we'll talk more about what may be ahead of us at Investor Day.

[John Nadel, UBS]

And then, second one is just the $40 billion of record keeping outflows and the low single-digit millions impact on pre-tax earnings. It would appear just doing the math that the fee rate on that particular piece of the business is pretty significantly below 7 basis points or 7.5 basis points for your record keeping business in general. So, should we be expecting the fee rate on what's left after this outflow to be actually slightly higher?

[Charlie Nelson, Retirement]

The record keeping business is an important business. And as you look at that for us across in those fees, we see plans are good success from a sales side and the retention side. And in particular, this one is - it happens to be leading at the first of the year. So, we tend to kind of manage it over a longer time period, not necessarily quarter-to-quarter as these larger plans, you kind of see a little bit of the noise if you will from quarter-to-quarter.

[John Nadel, UBS]

And then third one, Mike, just the 70% to 80% free cash flow for the life business in runoff now, why isn't that 100%? Is it just the difference between statutory earnings and GAAP earnings?

[Mike Smith, CFO]

In short, yes. It is just the difference between GAAP and stat. The reverse build up is on a different - to be actuarial for a second a different slope, right. So, the reserves and stat are building up faster than GAAP.

Eventually, over time, that should reverse and you’ll see presumably stat and its cash flow should actually exceed GAAP earnings. I don't think that’s not going to happen any time soon on this block. It's going to be a number of years before that actually happens, I think.

[John Nadel, UBS]

And then the last one, the bigger picture one for you Rod. So, I clearly agree with you with respect to the valuation of the stock and the attractiveness of buyback. You've been hinting I think ahead of Phase 3, it may be spending a little bit more money to normalize the common dividend relative to where it's been here in the last several years.

But as you look at the valuation of the stock, is there any real reason other than maybe to attract a new kind of shareholder to divert funds away from buybacks at these levels?

[Rod Martin, Chairman and CEO]

It’s a great question and a fair question. So, the high level answer is stay tuned for two weeks at the Investor Day. But let me leave you with a theme. We will continue to be thoughtful repurchases of our shares. The $250 million in the fourth quarter, the $500 million authorization that we just secured that is going to continue to be a significant source of our uses of excess capital.

We have talked about and we're not prepared on this call. We will in two weeks’ time to address because we've been asked and I think quite appropriately asked what we will do with the dividend and we'll give you an update all at the Investor Day.

But particularly at these levels, we think our repurchasing this stock is a great value for our shareholders and I think the track record speaks for itself. $5 billion is equal to what our market cap was when we went public and that's a pretty significant accomplishment.

[Operator]

Our next question comes from the line of Humphrey Lee with Dowling & Partners. Please proceed with your questions.

[Humphrey Lee, Dowling & Partners]

Looking at retirement, the G&A expenses continue to come down sequentially. I was just wondering like how much benefits did you pick up from your expense initiatives as opposed to some of the spending for these expense initiatives coming off? And then do you expect more room for further improvement in the coming quarters?

[Charles Nelson]

Thanks for noticing. Our team has done a fabulous job I think in the transformation that we've been on in particular since last Investor Day. As we have done a lot of system consolidation on our operating system and also put ourselves in a position operationally to drive the kind of greater efficiency. I think you've seen, we've increased participants by about 11% since 2015 and our unit costs are down about 5%.

We believe in our size that there's a lot more room to drive and power more scale from the size that we have. And that's I think then delivered through some of our digital initiatives that we talked about before, as well as some future opportunities in automation and other areas and we'll be spending some time talking about those opportunities at Investor Day in a few weeks. So, our teams continued to do a good job both operationally and technologically. And I think our initiatives have paid well to us to-date and we think we’ve got some continued room to improve as we go forward.

[Humphrey Lee, Dowling & Partners]

And then shifting gear to investment management, I’m glad to hear that the fee rates for the inflows are better than the outflows. So that's definitely encouraging sign. But looking at kind of some of the kind of metrics for the assets, obviously revenue yield picked up sequentially, but Investment Management saw few rates kind of drop. My understanding is there is some kind of reclassification of assets in the quarter. I was just wondering if you can provide some color in terms of what happened in the quarter and how should we think about the investment fee range going forward?

[Christine Hurtsellers, Investment Management]

Yes, during this quarter as a result of the sale of the annuity business, we reclassified venerables general account portfolio that we manage on their behalf from the GA line that you see in the supplement to the Investment Management or external client sourced portfolio.

So just that natural shift made the external client business revenue yield go down. So, in the context of how to think about it going forward, you can see it's been incredibly stable, our external client fee business and again it is going to vary quarter-to-quarter.

So actually in the fourth quarter, the inflow fees were slightly below the outflows. However, again as you point out on a 12-month trailing basis, it was about we expected to be above in the fourth quarter.

So just think about quarter-to-quarter does not a trend make, there is going to be some volatility based on what we sell like high quality versus something like commercial real estate. So, again when you think about the portfolio, we're well positioned to regrow our operating margin back to the low 30s.

[Humphrey Lee, Dowling & Partners]

Just a follow up on that point about the reclassification. So when I look at the supplement, the general assets didn’t change quarter-over-quarter but then so I’m trying to see where is the reclassification took place?

[Rod Martin, Chairman and CEO]

Humphrey let's take that one offline because I think it'll be better if we can walk you through it step-by-step.

[Operator]

Thank you. Mr. Martin there are no additional questions at this time. Do you have any closing comments?

[Rod Martin, Chairman and CEO]

Yes. I do. Thank you.

In summary, during the third quarter we continued to position Voya for future success. We remain focused on our higher growth high return capital light businesses leveraging our strong foothold in the workplace and with institutions to deliver solutions that the customers are seeking. We operate with a favorable risk profile with no long-term care and minimal variable annuity exposure. We look forward to updating you on our new financial targets and growth plans at our Investor Day on November 13. We hope to see you there. Thank you and good day.

[Operator]

Ladies and gentlemen, this concludes today's conference. Thank you for your participation.