Voya Financial Inc

NYSE:VOYA

Earnings Call Transcript 2020-Q3

[Operator]

Good morning, and welcome to the Voya Financial Third 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 Third 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 laws. This includes potential impacts related to COVID-19. I 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, 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. Let's begin on Slide 4 with some key themes. We have navigated through this year and continue to be in a position of strength as a result of the purposeful, strategic decisions that we have made. On a normalized basis, our third quarter EPS was $1.19. We once again demonstrated the earnings power of our company and the benefit of our diverse mix of high free cash flow businesses.

We continue to see robust demand for our products and services. We are attracting new clients and retaining existing clients who value our expertise in serving the workplace and institutions. For Retirement, full service recurring deposits grew 8.4% year-over-year, reaching $10.9 billion. We saw strong inflows in both corporate and tax-exempt markets. In Investment Management, we generated $1.8 billion of net inflows during the third quarter. Institutional inflows continue to be very strong as we attracted new mandates in our specialty asset classes. And in Employee Benefits, in-force premiums grew 5.7% year-over-year. We continue to see strong demand for workplace benefit products, particularly in our Voluntary business.

As it pertains to the completion of the Individual Life transaction, we have completed all of the operational and financial requirements needed to close the sale. We continue to make good progress on the remaining regulatory approvals, and we are confident that these reviews will be completed before the end of 2020. We also continue to expect to generate approximately $1.5 billion of deployable capital from the transaction.

Our balance sheet and capital position remains strong. We had approximately $642 million of excess capital as of September 30, and we will continue to be good stewards of shareholder capital. We also maintained our common stock dividend at $0.15 per share for the third quarter. In addition to the status of the Life transaction, we will continue to monitor the economic outlook and the impacts from the election in determining when it may be appropriate to resume share repurchases.

We have also further strengthened our Board, and I'm pleased to share that last week, we welcomed Aylwin Lewis as a new independent director. Aylwin brings extensive experience, leading several well-known brands to achieve improved financial and operational results, while delivering superior customer outcomes. We are delighted to have Aylwin join us.

Turning to Slide 5. We've maintained a strong focus on our values and culture. During October, we partnered with the National Down Syndrome Society to launch our Go Orange Campaign, which awarded 4 entrepreneurs who have Down syndrome with grants totaling $55,000 and highlighted the need for greater employment of people with disabilities. We also collaborated with Disability:IN in a call to action for greater inclusion of people with disability and special needs in the workforce. We continue to take action in support of racial equity with 2 of our leaders representing Voya in focused efforts that include: the Ethisphere Institute's Advisory Council on Equity and Social Justice Initiative and the CEO Action for Diversity & Inclusion Racial Equity fellowship program.

Also, earlier this month, we expanded Voya's efforts to help Americans address the financial challenges of COVID-19 with the launch of our Just Right Advantage program to support minority, women, veteran, disability and the LGBTQ-owned businesses. Externally, as a testament to our ESG efforts, Voya was recognized on JUST Capital's 2021 rankings of America's Most JUST Companies, earning the #2 spot in the capital market sector.

Our work to advance our culture during this particularly unique year was validated by our recent recognition as a Great Place to Work for the fifth consecutive year, which aligns with the positive feedback that we've heard from our people throughout the year. These actions by our people and our company continue to distinguish Voya with all of our stakeholders.

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 7. We delivered normalized after-tax adjusted operating earnings of $1.19 per share in the third quarter of 2020. This excludes 3 items. First, $0.37 of prepayment and alternative income above our long-term expectations, reflecting an improvement in alternative performance based on the second quarter equity market rebound. This provided a meaningful recovery in value for our alternatives portfolio such that year-to-date returns are positive. Long-term performance continues to exceed our 9% target.

Second, $1.05 of unfavorable DAC/VOBA and other intangibles unlocking. This reflected the results of our annual actuarial assumptions update, which I will cover in more detail in a few slides. Third, $0.21 of stranded costs associated with Individual Life and other closed blocks. We will normalize these stranded costs until the Life transaction closes.

On a reported basis, adjusted operating earnings were $0.30 per share for the quarter. Our third quarter GAAP net loss was $333 million. This includes the nonoperating impact of our annual actuarial assumptions update on Individual Life and results from our Individual Life business, which will be recorded in discontinued operations until close.

This quarter, Individual Life experienced unfavorable mortality, mostly explained by COVID-related losses, which were in line with our expectations. More broadly, as we look forward, we continue to expect a gain at close from the Life sale and have updated our estimate for total GAAP loss on sale to now be between $0 to $500 million. We have done this as it would now take a significant increase in interest rates or spreads for us to reach the high end of our previous range. Deployable capital remains $1.5 billion.

Moving to Slide 8. Retirement delivered $197 million of adjusted operating earnings in the third quarter, excluding unlocking and trailing 12-month return on capital was 11.8%. Third quarter unlocking was a $172 million unfavorable impact, driven mostly by a reduction in both our long-term interest rate and equity market return assumptions. As a result of the assumption update, we experienced a pretax impact to adjusted operating earnings of $3 million to $4 million in the quarter from higher DAC amortization, which we expect to continue.

Third quarter adjusted operating earnings included alternative income that was $45 million above long-term expectations. Revenues increased year-over-year, primarily due to higher fees, which benefited from higher average equity markets and recordkeeping wins. Investment spread was in line year-over-year. We have seen higher transfers into fixed account options with lower crediting rates that has helped to alleviate some of the spread compression associated with lower rates. Administrative expenses improved year-over-year, primarily due to an adjustment to a prior period expense deferral that did not repeat this quarter. We also had a $5 million benefit from a partial legal recovery in the quarter.

Turning to deposits and flows. Third quarter Full Service recurring deposits grew by 8.4% on a trailing 12-month basis. We expect full year 2020 recurring deposit growth to be in the range of 3% to 6%, consistent with our comments last quarter. Net flows were strong in the third quarter. Full Service net inflows were $3.5 billion, comprising $933 million of corporate market net inflows and $2.6 billion of tax-exempt net inflows. We continue to see positive stable value net flows in third quarter at $574 million, following a record first half. Recordkeeping flows reflected a $20 billion government plan funding in the quarter. As part of this plan, we onboarded over 330,000 participants, which we expect will boost our position in the government market to #1 based on assets and participant count.

As of the end of third quarter, we exceeded 6 million total defined contribution participants, which is a 13% increase year-over-year. This participant count includes over 3.2 million recordkeeping participants, which is a 21% increase year-over-year. Looking ahead, the strong third quarter net flows we generated will be partly offset by some expected fourth quarter outflows, including a large case tax-exempt client, some corporate plans due to M&A activity and some recordkeeping departures. We expect full year 2020 Full Service and recordkeeping net flows will be between $1 billion and $2 billion and over $24 billion, respectively. We are encouraged by the success and momentum in winning plans across all markets, which highlights the benefits of a well-diversified business, particularly in the current environment, and positions us for long-term success.

On Slide 9. Investment Management delivered $47 million of adjusted operating earnings in the third quarter. And our adjusted operating margin, including investment capital, was 24.9% on a trailing 12-month basis. Investment capital was $11 million favorable to our long-term expectations this quarter. Fee revenues were modestly lower year-over-year. Higher institutional fees were offset by higher-margin equity retail upflows.

Administrative expenses were higher year-over-year, in large part due to higher variable compensation associated with a favorable investment capital result. Note that when we present results on a normalized basis, we adjust for investment capital results above or below expectation, but we do not make a corresponding adjustment for the associated change in variable compensation expense. Our overall fixed income performance remained strong. We saw a return to top quartile performance for a certain flagship products that were affected by the market dynamics in March and April, which contributed to the improvement this quarter. 89% of our fixed income funds outperformed the benchmark on a 3-year basis and more than 90% did so on a 5- and 10-year basis. Our strong investment performance remains a hallmark of the differentiated value we bring to our clients, which is increasingly being sought in this interest rate environment.

Turning to third quarter flows. We generated $1.8 billion in institutional net inflows, following a record second quarter. This brings year-to-date institutional net flows to $12 billion as of September 30. We continue to generate net flows from diverse sources across a range of investment strategies. We continue to see progress in insurance as companies continue to tap our team to manage their general account assets.

International clients showed demand for core fixed income and investment-grade credit. We also saw a strong success in private assets and CLOs. We closed our third CLO this year, and we expect additional issuances to close in the fourth quarter. Our retail inflows and outflows roughly offset this quarter, improved from net outflows in the volatile second quarter. The improvement in retail was driven by strong mutual fund sales, led by intermediate bonds, while we experienced fewer redemptions throughout the quarter.

Looking ahead, we expect overall net flows through first quarter 2021 to be roughly neutral due to timing of unfunded wins and known redemptions. That said, we continue to expect full year 2020 organic growth to exceed our 2% to 4% target in a challenging year. We also expect to realize higher performance fees in the fourth quarter, reflecting favorable year-to-date performance on our mortgage investment fund. Our strong long-run investment performance and diversity of strategies continues to drive our robust pipeline heading into 2021.

Turning to Slide 10. Employee Benefits delivered $56 million of adjusted operating earnings in the third quarter, including alternative income that was $6 million above long-term expectations. The trailing 12-month return on capital was 31%. Adjusted operating earnings were roughly in line with prior year quarter despite COVID-19-related claims and were supported by strong year-over-year growth in Voluntary.

Overall annualized in-force premiums grew approximately 6% year-over-year, in line with second quarter. We still expect some COVID-related premium headwind going into 2021, but so far, we have yet to see any material impacts. Total aggregate loss ratio was at the low end of our 70% to 73% target range. The Group Life's loss ratio includes COVID-related claims, which explains the elevated loss ratio relative to our target. Third quarter identified COVID-related claims were $9 million, at the low end of our expectations. Year-to-date identified COVID-related claims have been $17 million.

Loss ratios for Stop Loss have not been materially impacted by COVID. And while the loss ratio for Voluntary was slightly higher than prior year quarter, utilization remains low. This quarter, we introduced My Health Money, a guidance-oriented participant tool ahead of enrollment season to help participants with annual benefit selection. Early indications show that this new tool increased engagement with participants. More broadly, our long-standing distribution partnerships and differentiated service capabilities sets us up well for continued success heading into the 2021 enrollment season.

Turning to Slide 11. We conducted our annual review of actuarial assumptions during the third quarter. As part of the review, we lowered our long-term interest rate assumption for the 10-year treasury rate to 2%, 175 basis points lower from our prior assumption of 3.75%. This drove the majority of the unlocking impact in the third quarter, a sizable portion of which is associated with our Individual Life business that will be exited via reinsurance.

We did not change our expected grading period. Portfolio yields will grade to our long-term expectation over a period of at least 10 years, but will vary depending on the characteristics of each underlying asset portfolio. We also lowered our long-term equity market assumption for the S&P 500 to 8%, down from 9%, which drove the majority of the remaining impact for Retirement. Additional impacts included adjustments made to reflect lower yields due to the current interest rate environment, higher persistency on certain Individual Life policies and other policyholder behavior assumptions.

On Slide 12, we provide items to consider for the fourth quarter of 2020. In the fourth quarter, we expect the following beneficial items: first, higher Investment Management performance fees net of variable compensation; second, lower Investment Management variable compensation related to more normal alternatives performance; third, higher Retirement revenues primarily from successive recordkeeping plan wins; fourth, seasonally lower preferred stock dividends; and finally, lower intangibles amortization in corporate due to the now full amortization of an intangible that was related to a pre-IPO strategic investment.

Offsetting these items, we expect the partial recovery of a prior retirement legal reserve will not recur in the fourth quarter. While we have provided some items to consider, there will, of course, be other factors that affect fourth quarter results, including changes in our average share count, market impacts, business growth and the potential for additional COVID-19 impacts.

Turning to Slide 13. Our diversified investment portfolio continues to perform well in the current environment. This quarter, we updated our view of potential capital impact under our 2 stress scenarios through year-end 2021. We continue to show $300 million in Stress Case One and now show $450 million in Stress Case Two, reduced from $600 million. This reflects $61 million of actual net credit impairments and rating migrations that we incurred in 2Q and 3Q and a prospective impact of roughly $250 million and $400 million, respectively, under scenario 1 and 2.

The prospective impact assumes no active management, which could reduce the impact. We view this update as favorable as we have maintained or lowered the stress impacts despite extending the time frame 6 months. Importantly, we view both scenarios as manageable, given our beginning excess capital position and contemplating future free cash flow generation. We continue to spotlight certain investments in our portfolio, including our commercial mortgage loans in the appendix.

As of October 31, there were 3 loans that remain in forbearance, which represents less than 1% of the overall unpaid principal balance of our commercial mortgage loan portfolio. The vast majority of loans that requested forbearance have resumed repayments and only a small number of loans have undergone modification. Overall, we remain comfortable with the quality of our commercial mortgage portfolio, which is more than 87% CM 1 rated and has a weighted average loan-to-value ratio of 46%.

Slide 14. Our estimated RBC ratio was 455% at the end of the third quarter, above our target of 400%; and our ending excess capital was $642 million. Excess capital was slightly down in the quarter as cash generation from our operating segments was more than offset by interest expense, dividends and higher required capital due to customers moving assets from variable to fixed. Additionally, we realized derivative losses, some of which is timing-related and expected to reverse over future quarters. We did not repurchase any shares in the third quarter. We continue to monitor the progression of the overall economy from the COVID-19 pandemic, impacts from the election as well as the status of the Individual Life transaction. These factors will determine when and how much we repurchase.

As Rod highlighted earlier, we expect the Individual Life regulatory process to conclude by the end of December. We and Resolution are operationally ready to close pending final approvals. Our debt-to-capital ratio is 33.7%. However, we expect this to be below our target leverage ratio at transaction close when we book an offsetting reinsurance gain. Finally, we maintained our third 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 have performed well and are poised to benefit over the long term. We expect to conclude the regulatory process related to the Life transaction by the end of the fourth quarter, and we have a strong excess capital position and will 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 Elyse Greenspan with Wells Fargo.

[Elyse Greenspan, analyst]

My first question, I wanted to continue the conversation around capital and just thoughts surrounding return to buying back your stock. The impairments and migrations that you're seeing within your investment portfolio are trending better than you had expected. But it sounds like you're still being conservative when it comes to buybacks in advance of the Life sale closing. So what could cause you to return to buying back your shares sooner than that transaction closing at the start of next year?

[Rodney Martin, executive]

Elyse, it's Rod. I'll begin. Mike and I, as usual, will toggle back and forth. Your read of our response is correct. We are maintaining our optionality, as Mike has discussed and we discussed on the second quarter call. The 3 factors that we've discussed are, in no particular order, the macro business environment; COVID, which is trending worse at this moment; and obviously, just waiting to see the outcome of the business environment and the election, which will play out here in this period of time.

Elyse, maintaining the optionality means just that, that we reserve the right to engage in that in the fourth quarter or push that to the beginning of 2021. And we will continue to use this -- the judgment we have used in the preservation of capital for our shareholders through the entire 7-plus years we've been a public company. We will end this year, you'll hear from our business people, the great momentum that we've got in the best position the company has been in, and we're just wanting to be exceedingly prudent given what we think is an uncertain environment and looking for clarity as we go through this period of time. But I'm very pleased about the progress we've made as a business, where the balance sheet and liquidity position will be at year-end and all of those factors will impact our decision about exercising that judgment in the fourth quarter or if we defer to the first quarter.

[Elyse Greenspan, analyst]

Okay. That's helpful. And then my follow-up would be sticking with capital. So you mentioned at the close -- transaction close that you would basically be below your debt-to-capital targets due to the offsetting gain at close of that Life transaction. So are there any changes with the proceeds that you get from the components of both that you've kind of earmarked for buyback or debt management actions just given where you'll be from a leverage perspective when this deal does close next year?

[Rodney Martin, executive]

Sure. Good question. Mike, do you want to start?

[Michael Smith, executive]

Absolutely. Elyse, thanks for the question. As I said in the remarks, we do expect the ultimate gain to be -- we had originally guided the ultimate -- sorry, not gain -- loss on sale from the whole transaction to be between $250 million and $750 million. That's what we had announced. We now think that, that will be in the range of $0 to $500 million. So we had been guiding to the low end of the range. Now I think it's at the low end of the original range or even a little bit below that. Obviously, we'll need to see how spreads and rates evolve over the balance of the fourth quarter or whenever we ultimately close the transaction.

If that range holds, then the debt buyback that we had guided to was in the $600 million to $800 million range, I think that will likely be toward the low end or possibly even lower, modestly below that $600 million to $800 million. What we'll be doing as we get to the other side of the close and again, pending whatever we decide to do between now and then, we'll be likely entering into -- if there are no other better uses of the capital, we'd be entering into a broadly systematic approach to repurchase. And then the debt would be brought down accordingly to the extent that that's the path we take.

[Operator]

Our next question comes from Josh Shanker with Deutsche Bank.

[Unknown Analyst]

I wanted to hear a little bit about what's going to happen in the first quarter with medical Stop Loss renewals and potentially how COVID might change or maybe it won't change our purchasing behaviors of South Shore employers given changes in employment or unemployment or whatnot?

[Rodney Martin, executive]

Sure. Rob, do you want to take that?

[Rob Grubka, executive]

I could do that. Thanks for the question, Josh. Yes, so as we're sitting here today, we're in the throes of 1/1 activity. And as we've seen things thus far, feel good about what we're seeing both from a volume perspective. Certainly, you hear this across the industry of sort of the ebbs and flows of how activity looks. I'd say, we feel very good about what we've seen to this point. As we think about next year and the pricing dynamics, certainly, there's a COVID overhang in our thoughts and thinking. But at the same point, and we've talked about this in prior calls, where we play in the marketplace tends to be that middle and larger employer size.

You translate that into deductibles at an individual level that are in the $200,000, $300,000-plus range. Those are obviously sizable numbers that someone's got to meet. And so what we've seen in our book thus far is relatively minor to low to no activity or impact from COVID in our results. There's certainly been some, but it's not been big at this stage, as I think Mike said in his comments as well. So as we sit here now, there's a bit of just caution, but also we've gotten awful good at this over the last few years of just getting the renewal activity and the pricing where we want it to be. Sometimes that's higher dollar pricing. Sometimes that's just employers rethinking where they want the deductible to be and what they're comfortable from a risk standpoint and managing sort of their overall medical claims cost and just where they position that.

But at this stage, I'd say we just -- we feel good. Activity-wise, we've seen good sort of discipline in the market overall, all these pockets of activity where we question what's going on competition-wise. But at this stage, net-net, good momentum, as Rod has said, across our business and then on Stop Loss, we feel good at the stage about what we're seeing in the current book and then also as we think about moving forward from a pricing standpoint.

[Unknown Analyst]

And related, when do you know what the elections are for the coming year in terms of Voluntary benefits? For large employers, we -- when we do this in October. Will you know before the end of the year how the sales for those Voluntary benefits come on?

[Rob Grubka, executive]

We'll have indications of what it looks like. But with Voluntary, again, we probably talked about this in the past, participant activity, election activity, it can go both ways, right? So there's the, what did I elect? Then you start to see those things manifest themselves. Sometimes people drop in coverage. So there's an in-and-out movement that we tend to think about by end of first quarter, that noise works its way through the product set. So at this stage, certainly too early to call right now. But as we get into January, obviously, we're going to have more information then. And then it takes a couple of cycles, a few cycles or months to have that settle itself out.

But this is going to be a really interesting time to probably underclub it. The interest in the products, we think, is going to be different this year. The -- certainly, the data that we see and what we hear from customers and employers, just the interest in better understanding benefits and taking the time to do that, hopefully, has just gone up. So we think whether -- when one looks a little bit more volatile than we've seen in prior years, I think the long-term dynamics of this is only going to help what we do, not only within the Employee Benefit business, but obviously, Charlie's and Christine's businesses as well. I think the momentum drivers around what we do is going to really resonate and continue to do so over a long period of time.

[Operator]

Our next question comes from Jeremy Campbell with Barclays.

[Jeremy Campbell, analyst]

Just kind of looking within asset management, you guys continue to execute well. But obviously, there's lots of M&A going on in the space right now. Do you guys feel confident and comfortable continuing to execute as you have? Or would there be opportunities to explore inorganic growth or something like potentially a sale?

[Rodney Martin, executive]

Christine, do you want to start?

[Christine Hurtsellers, executive]

Certainly. Thank you, Rod and Jeremy. You're absolutely right, Jeremy, quite a bit of activity has been going on in asset management. And -- but how we think about it specifically is, number one, we're achieving strong organic growth off of the product set that we currently have, and that continues to be sought after. Particularly in such a low-yield environment, clients offshore as well are really looking to put money to work in the U.S. and in our strategy. So when you think about that, what we'd be looking for to build out our strategy. Inorganically, if we were to go that direction, certainly, looking for a partner or someone that could bring us expanded distribution in offshore markets, notably Asia is one where we're seeing quite a bit of interest, as well as we do have specialty capabilities, but there are areas where we would like -- or would consider doing tuck-ins, whether it's private credit or commercial real estate to our already existing team. So we're excited about the businesses we have. Eyes open in a judicious way to add when it makes sense. And overall, very consistent with the message that we've given you and other shareholders as far as what would the hurdle be to do something inorganic.

[Rodney Martin, executive]

And Jeremy, thanks for the question. Just to maybe build on that, Christine, we -- obviously, we're very pleased and proud of the results that have happened year-to-date in terms of the flows. And Christine, maybe you could speak to, again, our outlook for our organic growth on a prospective basis is basically reaffirming what we've previously committed, but I'll let you speak to that.

[Christine Hurtsellers, executive]

Certainly, Rod. Yes, so when you think about the organic growth targets that we put forth in Investor Day, it was organic growth of 2% to 4% of beginning AUM. And so year-to-date, within Investment Management, we've had $10.8 billion of net cash flows this year, so beyond the high end of that target. We did communicate in Mike's comments, some slowdown in the next quarter or 2, projecting flattish in terms of flows. Really, that's just idiosyncratic timing as far as larger redemptions versus unfunded wins. But again, when we look at the -- our organic expectations, we continue to see good interest in private asset classes, overall fixed income. And so we are committed and have no reason to not believe we're going to come well inside our target of 2% to 4% organic growth next year, just seeing just the strength of the unfunded wins in the pipeline that we do have. So again, on track to continue to hit those targets. And again, we've had a great year this year. We're thankful for that coming well over the top side of our normal annual estimates for organic growth.

[Jeremy Campbell, analyst]

Great. And thanks for the color around products and channels you'd look to augment. I guess just kind of one quick final wrap up on that one. Is -- on the inorganic side, is there any preference for something, a tuck-in or a larger scale type of play? Or are you guys kind of open for business to figure out what makes sense if anything hits in either of those channels?

[Rodney Martin, executive]

I would say, Jeremy, Rod taking the large part. I mean, we've I think, tried to be very consistent with our answer for a number of years that extending the reach of our existing capabilities internationally from a distribution has been something that we've been very open to. And frankly, Christine and the team have done a really good job without adding that at this point, but we think that could add some velocity to what we're doing.

And we have added periodically some teams to strengthen or add capabilities to an already exceptional group of men and women that are on Christine's team, and we remain open to that. And as you pointed out in your opening, there is activity happening in the marketplace, there is movement, and that does cause teams to become either dislodged or open to perhaps joining another firm with a different culture. And so we remain open to that concept and idea also.

[Operator]

Our next question comes from Tom Gallagher with Evercore.

[Thomas Gallagher, analyst]

Rod, just a follow-up on that question. Should we think about, if you are open to doing asset management M&A that you'd be willing to use a sizable portion of the Life sale proceeds for that? Or should we still thinking about $1 billion being earmarked for buybacks?

[Rodney Martin, executive]

Tom, good question. We -- what we've communicated going into '20 was the anticipation of doing $1 billion of buybacks in '20. As you recall, we did a little north of $400-and-some million in the first quarter. COVID emerged, the world paused, we paused like many, and that's where we were. And if you look back at the previous 2 years, we've done $1 billion over the previous 2 years and $6 billion in total. So that number is not a foreign number to us. And other, Tom, than timing, given the optionality and just the experience that we bring to -- let's just be a little cautious. Does a quarter or 2, make a difference in the long-term view of Voya, that would be a number that we would be thinking about prospect -- in the range we would be thinking about prospectively. But we haven't given those targets for '21 and on. We will be updating that in the fourth quarter, but that's not a number that would be unfamiliar to us, you're correct.

[Thomas Gallagher, analyst]

Got it. And Rod, so even if there were to be an asset management acquisition, you wouldn't necessarily -- I guess, it would depend on the size, but the -- based on what I'm hearing you say, you don't foresee a very large type of asset management deal that would use up a lot of the Life sale proceeds. Is that a fair way to think about it?

[Rodney Martin, executive]

We're not going to speculate on that part. What I am saying is we've got a track record, as you well are aware, of buying back a healthy amount of shares. And we're approaching in '21, our next Investor Day, which we will, of course, update our thinking on not just sources of capital, but uses of capital. So think about share buyback, think about dividend and either investment in our business or inorganic activity, and we'll update that. But nothing has changed in terms of our approach at this point.

[Thomas Gallagher, analyst]

Okay. And then just a final follow-up. Mike, the comment on leverage coming down based on the final loss on sale adjustment, I think that would imply a very big -- a bigger net income gain when the deal closes. Could you just update us on how big of a net income adjustment we're now going to get? Because there's been some movement in adjustments to the transaction price along the way here.

[Michael Smith, executive]

Tom, it's a good question. I don't have that number right in front of me, so I want to be a little bit careful. But the gain on the underlying assets, which is going to be, I think, the primary driver of that, is in the neighborhood of $1.1 billion, give or take. And that's what gets you to the net loss of in -- around like midpoint $250 million.

[Operator]

Our next question comes from Erik Bass with Autonomous Research.

[Erik Bass, analyst]

So I was just hoping for a little bit more color on your outlook for Retirement flows. And hear you in the guidance, it sounds like in 4Q, there's going to be some noise with some larger plans leaving. But I wanted to get some more details in terms of what you're seeing in terms of recurring deposits and any policyholder withdrawal trends?

[Rodney Martin, executive]

You bet. Thank you. Charlie?

[Charles Nelson, executive]

Yes. Thank you. Erik, appreciate it. From a net flows perspective, obviously, you saw here in the quarter, $3.5 billion of Full Service net flows. We're really pleased with the 28 consecutive quarters in our Full Service corporate business as well as the strong tax-exempt had solid results, largely driven from a large plan transition that was referenced. But you also look at it, we've had almost a little bit over $0.5 billion in net flows and stable value and the $20 billion in recordkeeping. And I think what that shows is really diversified growth across many multiple markets. When we look at the part of your question around fourth quarter's surrenders and things there, it was mentioned in the call, the large tax-exempt surrender. And I think our team is doing a good job of maintaining pricing discipline on renewals to make sure they meet our thresholds. The M&A, the mergers and acquisitions of our clients, these are clients' activity, the business volume with our clients in our Full Service business. It does fluctuate over time. You win, you lose. Net-net, we believe we're a winner long term on many of them.

But in the Full Service corporate, we do expect about a little over 2x what we did in 2019. So it'll be -- that's what's driving that. But when we look at our recurring deposits across to that part of your question, the 8.4% we expected, and I think Mike said, it's -- we expect it to grade down to the high end of that 3% to 6% range that we previously communicated. And that's being driven, like we saw in the fourth quarter -- excuse me, the third quarter a 4% increase in recurring deposits in the third quarter of this year relative to last year. So you start applying that in the third quarter and what we would expect in the fourth quarter, that's how we get to that 3% to 6% range and probably being at the upper end of that range on a trailing 12-month basis for the full year.

Now what's driving a little bit of that slower growth on recurring deposits, but I would still underline the growth, is that employer contributions. We've seen total employer contributions in the third quarter decreased by a little over 1%. And that's being driven by a -- about a 6% decline in the average contribution per plan. So per employer, their employer's average contribution. But it's offset by our growth, which I've talked about, which we've had a 5% increase year-over-year in the total number of plans that had an employer contribution. You throw on top of that, the -- in terms of recurring deposits, the employee contributions and we've seen an increase in the number of participants in our Full Service business, I think it was mentioned in the -- earlier that we have -- we had a 13% total participant growth, a 21% in record keeping. But in Full Service, it was a 6% increase in Full Service recordkeeping year-over-year, and we saw an increase in total participant contributions.

So when I look at it in total, boy, geez, on a trailing 12-month basis, we were actually clocking about $89 billion in total deposits, and that will give us back-to-back $50 billion-plus year total deposits. The growth in participants, really kind of a strong diversified growth. So I think it shows that our value proposition is resonating, that we're winning and retaining and growing our business despite some of these macroeconomic headwinds. And I would say that I think we're very well positioned to weather the financial impacts book through and beyond COVID. So I think that really shows through in our value proposition resonating both with our customers, our distribution partners and employees because they know that Voya is going to fight for everyone's opportunity for a better financial future during and beyond some of these uncertain and challenging times.

[Erik Bass, analyst]

And then a follow-up, just one. So if you can provide an update on how quickly you'd expect to be able to get the stranded costs once the Life transaction closes? And do you think you can still get to kind of a normalized EPS run rate by 2022? Or will this take a little bit longer given the delays in closing the transaction?

[Rodney Martin, executive]

Mike, do you want to start?

[Michael Smith, executive]

Yes. And Erik, look, we've been getting ready for the process of taking out the stranded cost since late summer. So there -- so we've got a slew of initiatives already in line. Bottom line is, will there be some delay? Yes, I think it's more in the terms of a couple of months. It's not in terms of quarters. So overall, I feel pretty good that over the next 2 years, we'll be able to take out the vast majority, if not all, of the remaining stranded cost. So more to come when we get to the other side of the close and we can get a little more specific, but I think that's the way to think about it is we're still largely on track. I don't think the delays up to this point are going to amount too much.

[Operator]

Our next question comes from Ryan Krueger with KBW.

[Ryan Krueger, analyst]

With interest rates at current levels, is there anything material we should be thinking about in terms of higher pension costs as you go into next year?

[Michael Smith, executive]

Thanks for the question, Ryan. Look, I think it's a little early, but -- and there are sensitivities in the K that you can go to that will give you a sense of what's happening with the underlying pension liabilities. The discount rates have dropped, I think, meaningfully, but not maybe as much as you might think. I think right now, we're looking at the end of the third quarter, the drop is about 60 basis points, and you can apply that to the sensitivities that are in the K that are per 100. On the flip side, the asset portfolio, obviously, we'll have something to say about that as well, how the underlying assets are performing. And I think bottom line is, at least right now, we're looking at the overall pension cost as being possibly somewhat favorable, but we've got a long way to go. And it's not going to move the needle in a dramatic way, but it could be modestly favorable in 2021, depending on how things go over the next 6 to 7 weeks.

[Ryan Krueger, analyst]

And then I have one more on consolidation. I feel like we've seen a fair amount of retirement consolidation, but more in the 401(k) market, and you talked about your view there. Do you have -- does your view on your participation in consolidation, does it differ at all between the corporate market and tax-exempt market? I guess, how do you think about tax-exempt M&A?

[Rodney Martin, executive]

Let me begin. It's Rod. The first piece that we look at is, is it strategic, and does it fit our overall narrative around the workplace and the institutional focused? And obviously, that example would fit there. And the second piece, as we've discussed over a long period of time, from an EPS perspective, over approximately a 2-year period, it needs to be accretive to share buyback. And then we need to look at our relative position in the marketplace. And we've given this example in a previous question in a previous time when a different company acquired an asset in a recordkeeping example. Well, we've been in the recordkeeping business a long time, and we didn't need to acquire that capability, and therefore, made a decision to not engage in that. And so again, it would be property specific, and it would need to meet both the strategic criteria, the fit to the workplace and financial institution focus or adjacencies. And obviously, and critically important, the financial outcome from an EPS perspective, as we've discussed. Mike, feel free to add.

[Michael Smith, executive]

I think you answered it well, Rod. I don't -- maybe just kind of summarize and say, there's no incoming bias one way or the other. I think it really is the question of fit and value as we're looking at the properties.

[Operator]

Our next question comes from John Barnidge with Piper Sandler.

[John Barnidge, analyst]

Can you talk given how work has changed, where it's done, how do you thought through and quantify maybe potential real estate savings that emerge as you start to remove some of these costs?

[Rodney Martin, executive]

Yes, happily, John. I'm happy to begin. We moved, like most firms the mid of March,from a Friday to a Monday to a virtual environment. We've got approximately 6,000 employees U.S. What we perhaps haven't talked about as much pre-COVID was, John, 20% of our workforce was something that we called Virtually Orange. In other words, they were virtual previously. And we've had that model in place for a long time, well over a decade, and it's been a very effective model, and that percentage has increased.

What -- as we've gone through this and had the experience that we've had, we see a number of things emerging as we go into '21. I fully expect when the science permits, there will be some number of our employees which will naturally want to, and we would welcome them to return to office. There'll be another group that will be in a model that many are talking about using the theme of hybrid. They may be in office a day a week or 2 days a week and working virtually the balance of the time. And I do expect our Virtually Orange employee group that is presently 20%, I think that number will grow significantly.

And how we're looking at this is we spend a lot of time with our employees to make sure that their health and safety is paramount. And then the health and safety of both our advisers, consultants and contractors in the same way. And I think this model will change dramatically. I think our Virtually Orange group will go up. I think our hybrid will go up. And there'll be some amount that we'll naturally want to return to office, and we would welcome that.

Getting to the end of the question, we're focused on this more on both employee satisfaction, retention and attracting talent to fuel our growth prospectively. And when you net that all the way through the equation, there will be -- and it's a little early for us to forecast this yet, but there will be different decisions that will be made as an outcome or a consequence of that stream of events that I just described. And we will reflect that as our thinking evolves in Q1 and Q2. But I do believe, operationally, there will be real estate savings that is not in our forecast at this point, and we haven't discussed it. But we're coming at it from exactly the other direction that I -- but yet, I think there will be a net improvement in the expense picture and the real estate that we need as an outcome of the world-changing, in my view, in a pretty significant way.

[Operator]

Our next question comes from Andrew Kligerman with Crédit Suisse.

[Andrew Kligerman, analyst]

I just want to get a little more clarity into your commentary around monitoring on the buybacks. Let's assume we can get through COVID, and hopefully, the election. You had talked about in the second quarter on the conference call that is about a pathway to completing $1 billion for the year, and as you cited earlier, that would mean another $600 million. So if we get -- if we roll into 2021, the deal gets completed, you get the clarity that you need around these economic and COVID issues, would that mean that you could get back to your 90% to 100% of earnings pace and then a catch-up on the $600 million? And if you were to do that $600 million, could you do it very quickly?

[Rodney Martin, executive]

So 2 parts. And Mike, I'm going to ask you to jump in here, too. But Andrew, first, good to hear your voice and good to -- and a very fair question. Our free cash flow conversion, particularly post the Life sale, will be in the 85% to 95% range. And again, that really completes the transformation piece from what we inherited from ING Group to what we've chosen to move forward with strategically around our workplace and institutional focus. So we feel really good about those decisions and the higher growth free cash flow components of the outcome of those decisions.

The consequence or outcome of that will be, let's say, it's the beginning of the year. We're going to -- as we ended the third quarter here with $670-something million of excess capital, the $1.5 billion that Mike spoke about with the Life transaction capital that will come from the fourth quarter, Andrew, this is part of what I referred to is the balance sheet and frankly, the liquidity position has never been stronger and frankly, the momentum of the business is strong. We just want to be judicious and thoughtful about the next few months as we go through this. And from there, we could accelerate the pace, and we could accelerate -- we have a lot of options of how to do that. But Mike, I'll let you add.

[Michael Smith, executive]

Yes. Maybe I'd just summarize, I think more over the top with -- I think over the course of a few quarters after we close the Life sale, we wind up in the same place we would have been had the sale closed in the third quarter, right? I think we'll probably lean in a little bit more heavily than we might have otherwise. I think the plan would have been to be systematic. We'll continue to be systematic, but we may be a little more leaning a bit. Again, that will depend too on what's happening with the stock price, what's happening in the world around us, right?

So I think we still view buybacks as an attractive opportunity for shareholders, and we'll be very mindful of taking advantage of that opportunity when it presents itself. In terms of can we do $600 million in a quarter, I think mechanically, we can. I think -- I'm not saying we will or won't. I don't want to get too far ahead because I think it just depends too much on what's going on in the world to say that we would lean in. But we have leaned in before, and I'd point to the first quarter as one example, where we did we did $400 million, and that was without the benefit of a large stockpile of capital coming from a transaction.

[Andrew Kligerman, analyst]

Got it. That was very helpful. Just kind of curious, quickly, the 8% equity market down from 9%, it seemed a bit high to me. Maybe a little color on that -- on the thinking into an 8% equity market assumption?

[Rodney Martin, executive]

Mike?

[Michael Smith, executive]

Maybe I'd put it in the context of the 2 big assumptions that we -- assumption changes we made. First, we lowered the long-term interest rate to 2%, which I think a couple of you have noticed in your overnight notes. I think that puts us at the conservative, if not the most conservative. And then I think it's just a recognition that we have been looking at history as a guide, and that's an important thing to think about as we talk about equity. We look at history as a guide and the question has been how much utility, how much importance to put on some of the history pre crisis. And I think we concluded that given the pandemic, given the change in Fed policy, given that we're now 10 years past the financial crisis and it seems like we're in this new regime, it just makes sense to take that expectation down. And I think importantly, as I think about it, in our communications with shareholders and other stakeholders is simply, I think we've taken the interest rate question off the table for quite a while as it relates to the balance sheet.

So equity markets, similar logic, right? I think we look at history, you don't have the last 10 years to support that you should lower your expectations. And also, as you look over the last 30 years or 50 years, for that matter, equity markets over that long period of time have generated, I think, meaningfully actually in excess of of 9%.

So we lowered it largely because we lowered the base interest rate. And so there is a -- I think, a good theoretical connection between lowering our expectations for the risk rate and then lowering equity market returns. I think it's in the eye of the beholder as to what's conservative and what's not. We believe this puts us right at the middle of industry practice. There are some lower. There are some higher. But what's important is that this only goes to establishing the -- effectively the intangible and the rate at which we amortize the intangible on our GAAP balance sheet, and it will be used in some of our forecasting assumptions. But for outside audiences, you can use whatever assumption you think is appropriate as you project forward our growth in accounts. The last thing I'd leave you with is just to be clear, we -- for our own growth rates in our models, we assume a mix of bond fund and equity funds. So it's -- that number is -- we use an 80-20 mix. And so you wind up with an overall return that's more like in the 6.5 to 7 range on account value overall.

[Operator]

And ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference call back to Rod Martin for any closing remarks.

[Rodney Martin, executive]

Thank you. Our success, despite the many challenges presented in 2020, reflects the commitment of our employees and our focus on helping our clients navigate the many financial challenges that they are facing. We remain confident in our 3 complementary businesses, which are enabling us to expand Voya's presence in the workplace and with institutional clients. We look forward to updating you on our progress as we pursue our vision to be America's retirement company. Thank you, and good day.

[Operator]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.