Voya Financial (NYSE:VOYA) Q1 2020 Earnings Call

0:00 Good morning and welcome to the Voya Financial first quarter 2020 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. To withdraw your question, press star two. Participants are limited to one question and one follow-up. 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.

0:38 Thank you and good morning. Welcome to Voya Financial's first 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 two, some of the comments made during this conference call may contain forward-looking statements within the meaning of federal securities law. This includes potential impacts related to COVID-19. I 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.goea.com.

1:30 Joining me on the call are Rod Martin, FOIA Financial's Chairman and Chief Executive Officer, as well as Mike Smith, FOIA'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 Hertzellers, Investment Management, and Rob Grupka, Employee Benefits. With that, let's turn to slide three. as I would like to turn the call over to Rod.

2:04 Good morning. Let's begin on slide four. As the world confronts the many challenges related to COVID-19, we at Voya are incredibly grateful to all who are working on the front lines to address this global pandemic. As we navigate this crisis, the safety of our employees, their families, and our customers remains our top priority. I am extremely proud of our 6,000 employees and the dedication and commitment that they have shown for our advisors and customers. We have quickly pivoted to having more than 95% of our employees working remotely, and we're seeing great resilience among our teams.

2:52 This would not have been possible without the significant dedication of our employees To support them, we have enhanced several benefits, including fully covering COVID-19 medical testing and providing care coordinators to assist employees who are caring for someone with COVID-19. When we do return to our offices, we will do so thoughtfully and gradually, and we will continue to make decisions based on the best interest of our people. We are also taking actions to address our customer needs. As we shared last month, we were the first major retirement plan provider to waive fees in response to the CARES Act to help our customers and all Americans manage through this difficult time.

3:43 We did this just four days after the economic relief package was implemented. Specifically, we are crediting hardship distribution and loan initiation fees. Associated with COVID-19 related distributions. In total, we expect to credit back approximately $10 to $20 million to our participants through September 30, 2020. We are proud to serve many customers and clients who are directly serving others during this time, and we're incredibly grateful to all who are working on the front lines. We're also supporting our broader communities, including but not limited to providing all Americans with free online resources and phone access to our financial advisors.

4:36 And through our partnership with AmeriCares, we're supporting the shipment of more than 23 tons of personal protective equipment to partners across the United States. COVID-19 has, of course, had important effects on our business. And Mike will update you shortly on the impact to our financial results and outlook. While this situation will continue to evolve, we are confident in how Voya is positioned and the team that we have to navigate through it. We will get through this together. Let's move to slide five and our key themes. We entered the first quarter in a position of strength as a result of the purposeful strategic decisions We saw strong results during the quarter, including March.

5:51 and we continue to see demand for our products and services given the compelling value proposition that we provide for our workplace and institutional clients. In retirement, full service recurring deposits increased 10.6% compared to the trailing 12 months ended March 31, 2019. In investment management, we generated $2.2 billion in positive net flows. and in Employee Benefits we saw another quarter of record earnings. Additionally, in-force premiums grew 5% year over year. We continue to deliver on the cost savings that we previously announced.

6:36 We remain on track to achieve runway cost savings of at least $250 million by the end of 2020. We also remain on track to complete the sale of our individual life and legacy annuity businesses. We continue to make great progress with resolution life and our regulators and expect to close the sale by September 30, 2020. Finally, our balance sheet and capital position remains strong. We had approximately $612 million of excess capital as of March 31st. Thank you for joining us. During the past year and quarter, we have demonstrated our ability to increase EPS and improve value for all of our stakeholders.

7:54 And we will continue to execute on what we can control. This includes achieving our targeted cost savings, completing the individual life sale, and maintaining our proactive dialogue and engagement with clients. These actions, combined with our strong balance sheet, and Lower Risk Business Profile position us well for these uncertain times. Turning to slide six. During the quarter, Foyer was named as one of the world's most ethical companies for the seventh consecutive year. Foyer was one of 132 companies to be recognized and one of only five companies in the financial services category.

8:41 and others like it reflect our culture and the character of our brand. I am confident that Voya will stand apart in our industry, both for our commitment to doing the right thing and because of our strong business profile. The proactive attitude and commitment of our management team remains as fully in force as it has been in the past. With that, let me ask Mike to provide more details on our performance and results.

9:14 Thank you, Rod. Before we get to the numbers, I want to echo what Rod mentioned earlier about our recent efforts here at Voya. I'm very proud of how our employees have adapted to this new environment and continue to serve our advisors and customers. Because of these successful efforts, we remain confident in our ability to withstand this challenge. Now, let's turn to our financial results on slide eight. We delivered normalized after-tax adjusted operating earnings of $1.10 per share in the first quarter of 2020. This excludes $0.04 of prepayment and alternative income above our long-term expectations. This relates to favorable fourth quarter equity market performance.

10:01 $0.09 of unfavorable DAC, VOBA, and other intangibles unlocking. And $0.21 of stranded costs associated with individual life and other closed blocks. As a reminder, we will continue to normalize for these costs until the transaction closes, which is expected by September 30th of this year. On a reported basis, adjusted operating earnings were 83 cents per share for the quarter. Our first quarter gap net loss was affected by two items. The first item related to hedging results for our stable value block in retirement. Our stable value hedges are constructed to balance protection of gap net income with preservation of statutory capital. For these products, gap income is much more sensitive to interest rate and credit spread movements.

10:56 The move in rates and credit spreads during the quarter generated a gap loss. However, results had a favorable impact on statutory income, which increased our excess capital. The second item is related to our regular quarterly update to the estimated loss on sale associated with our individual life transaction. We refined our allocation of proceeds between the legal entities to be sold and the reinsured portion. We continue to expect a significant gain from the reinsurance component when it is booked at close and that the ultimate gap loss on sale for the overall transaction will be in a range of $250 to $750 million. Under today's rate and spread environment, we expect to be on the lower end of that range.

11:49 Importantly, our expected proceeds at closing have not changed. As a reminder and consistent with prior periods, GAAP net income includes individual life earnings as a discontinued operation. Individual life experienced unfavorable mortality this quarter, driven by frequency and severity. We had a strong first quarter 2020 operating result, driven by favorable employee benefits results and the consistent use of excess capital to repurchase shares. Moving to slide nine, retirement delivered $140 million of adjusted operating earnings in the first quarter. Excluding unlocking and trailing 12-month return on capital was 13.6%.

12:36 In the quarter, we had $16 million of unfavorable DAC unlocking, largely reflecting lower equity markets at the end of the quarter. First quarter adjusted operating earnings, excluding unlocking, were higher year over year. Higher fee income reflects the impact on full-service AUM from higher average equity markets year over year and ongoing success with winning new clients, including record keeping. Offsetting higher fee income was lower investment margin, which was affected by lower interest rates. Administrative expenses were higher due to a reallocation of certain expenses from corporate to retirement and higher volume-related costs related to announced plan wins.

13:23 We previously guided administrative expense for the first quarter and full year 2020 to be in the range of $205 to $215 million and $800 to $820 million, respectively. While first quarter expenses ended above our expected range, we expect to be at the upper end of our full year guidance. Turning deposits and flows. First quarter full service recurring deposits grew by 10.6% Retirement generated positive full-service net flows across both corporate and tax-exempt markets, totaling $329 million for the quarter. Over the last 12 months, we have generated $1.8 billion of full-service net inflows.

14:14 Looking to the second quarter, we expect a tax-exempt client outflow of approximately $700 million. However, the majority of assets in this plan are in higher guaranteed interest rate accounts. First quarter stable value net inflows were a record 2.6 billion, largely driven by sales of new stable value mandates supported by participants increasing allocations of products that help preserve the value of their retirement savings. We recorded 1.5 billion of record keeping net inflows in the quarter. Representing part of the $26 billion we had anticipated for 2020 as we guided to on our fourth quarter call.

14:59 However, we now expect this to be approximately $20 billion due to the impact of equity market declines on asset values. Record-keeping fees are mostly driven by the number of plan participants, which remains largely unchanged. We entered the quarter with strong commercial momentum, which is continuing in the second quarter, where we expect more than $3 billion of full-service deposits. We have confidence that our diversified retirement business is well-positioned to weather the current environment and is poised for long-term success. On slide 10, investment management delivered $40 million of adjusted operating earnings in the first quarter. This was higher than first quarter 2019 due to more favorable investment capital results and increased fee revenue from higher average asset levels and continued client wins. This was partially offset by higher expenses in the quarter. First quarter 2019 benefited from a legal expense recovery that did not repeat in 2020.

16:07 Our first quarter adjusted operating margin was 23.9%, including investment capital. On a trailing 12-month basis, this margin was 26.8%. We continue to target a long-run operating margin of 30% to 32%, although current macro conditions may make it difficult to achieve this target range by the end of 2021. Turning to flows, overall net inflows were $2.2 billion in the first quarter, with inflows seen across strategies and distribution channels. Our first quarter net flows included more than $3 billion of institutional net inflows in the quarter, where our organic growth was 5.3% on a trailing 12-month basis.

16:56 This was primarily driven by fixed income mandates within our growing insurance and international channels. We also closed on our third European CLO and saw sizable stable value inflows. Our retail net outflows were $900 million in the quarter. Momentum in retail flows seen in the second half of 2019 carried into the start of this year. January and February flows totaled one of the strongest starts to a year we have seen. However, similar to industry trends, outflows in March more than offset this as investors sought liquidity and safety from the volatile market. Our fixed income performance was tested by the dislocations we experienced in credit markets during the first quarter. However, our longer run performance remains strong.

17:49 80% of our fixed income funds outperformed the benchmark on a five-year basis, and 98% did so on a ten-year basis. We remain confident in our ability to generate strong investment performance. And we are encouraged by our commercial momentum in several areas, For example, we will benefit from a new $6 billion insurance mandate that's funded in April. We recently launched our tenth private equity fund, Pomona 10, for which we expect the first commitments to occur in the second half of 2020 as originally planned. We expect Pomona 10 to be our largest capital raise so far at approximately $2 billion.

18:34 Also in the second half of the year, the launch of our infrastructure debt fund will further diversify our private specialty investment capabilities. We expect demand for these capabilities to increase as investors seek yield in a low interest rate environment. We believe our diverse platform of investment capabilities and distribution channels, as well as our track record in managing specialty strategies, are differentiating factors for our investment management business that will drive our long-term success. Turning to slide 11, first quarter was another record for employee benefits, delivering $61 million of adjusted operating earnings, excluding unlocking. This represents more than 60% growth over first quarter 2019 results, while return on capital expanded to 34.1%, up from 28%.

19:31 First quarter results were driven by favorable underwriting results across all product lines. The total aggregate loss ratio was 69.1%, an improvement of 320 basis points year over year. This quarter's loss ratio result was favorable relative to our target range of 70 to 73%. Annualized in-force premiums grew more than 5% over the same time period. Supportive by strong growth and voluntary. Stock loss-enforced premium grew modestly as we maintained pricing discipline through the January sales and renewal season. We are very pleased with employee benefits growth and financial results, and we believe our longstanding distribution partnerships and differentiated service capabilities will drive continued success in the long term.

20:27 On slide 12, we provide items to consider for the second quarter of 2020. In the second quarter, we expect seasonally higher first quarter administrative expenses to not repeat and preferred stock dividends to be lower. Offsetting these favorable items are several factors, including first, lower employee benefits results from loss ratios returning to our targeted range and an increase in claims and lower revenue Second, lower spread revenues due to continued low interest rates. Third, a favorable investment income item that is not expected to recur in the second quarter.

21:12 Fourth, lower suite fee revenues in retirement. This relates to brokerage accounts within our retail wealth management business that can earn short-term interest rate linked fees on assets. Fifth, Impact to fee revenues from lower average equity markets, assuming average 2Q levels based on the actual trading in April and no market appreciation from the end of April. While we have provided some items to consider, there will, of course, be other factors that affect second quarter results, including changes in our average share count, business growth, and the potential for additional COVID-19 impacts that we have not specifically mentioned here.

21:58 Turning to slide 13, our earnings growth outlook, as with others in the industry, is affected by the uncertainties created by COVID-19, such as the magnitude of claims, changes to employment levels, and the ultimate shape of a future economic recovery. This uncertainty makes it very difficult to confidently provide medium and long-term earnings growth guidance. We will revisit our earnings growth guidance ranges including our previously shared $1.80 to $1.90 EPS guidance for 4Q21 as we gain improved visibility. What we can say is that our previously shared earning sensitivities to equity markets and interest rates have largely held.

22:45 Regarding our equity market sensitivity, note that the 4 to 5 million pre-tax impact applies to the change in daily average equity market levels. As a consequence, the full effect of the decline in markets seen in March will not be felt until the second quarter. Based on the current rate environment and consistent with our second quarter EPS walk, we expect lower spread income of approximately $4 million in the second quarter. We also include a new interest rate sensitivity to adjust for the current rate environment. This sensitivity applies to a parallel shift of interest rates and spreads, where the impact is larger for the uprate shock given the impact on floating rate assets with floors.

23:33 Turning to business impacts from COVID-19, we expect a slowdown in sales across our three businesses as fewer opportunities will come to market. However, we should see some offset from higher retention. Specific to retirement, we expect to see pressure on recurring deposits due to lower contributions, and reduced employer matching. Within investment management, net flows will be pressured to the extent investors continue to seek safety in cash and lower risk investments. And employee benefits premiums will likely be reduced as a result of increased unemployment. This effect is mitigated somewhat for 2020 by the fact that the majority of our in-force premium is driven by sales and renewals that become effective in January.

24:25 From a claims perspective, we estimate that 100,000 COVID-19 related deaths in the U.S. would have an impact to employee benefits of approximately $25 to $45 million. This would primarily affect group life, although our estimate also reflects expected increased voluntary claims from COVID-19 related hospitalizations. For individual life claims, Again, assuming 100,000 overall U.S. COVID-19 related deaths, we expect an impact in the range of 10 to 30 million, though this would be seen only in net income with the rest of individual life's financial results. We will continue to assess our estimates of COVID-19 impacts as data emerges surrounding the spread of the pandemic overall, as well as the emergence of effective treatments and or vaccines.

25:23 Turning to slide 14, we provide more detail on our investment portfolio. Our disciplined investment process is focused on balancing required capital and risk-adjusted returns. Our investment team has decades of deep sector-specific expertise. Approximately 95% of our fixed maturity securities are rated NAIC 1 or 2. On the left side of the slide, we have provided a view of our portfolio as of the end of the first quarter. On the right side, we show a pro forma view after the life transaction closes. Post-close, we maintain a highly rated fixed maturity portfolio with a reduced allocation to public corporates with corresponding increases in other asset classes. We believe the pro forma portfolio presents a more balanced risk profile.

26:20 On slide 15, we have provided additional detail on securities held in our general account that may be particularly impacted by COVID-19 related stress. With respect to the COVID-19 exposures, approximately 12% of our investments are in the areas most directly impacted by the pandemic. In the appendix, we include more details on some of these exposures, but I wanted to highlight a few things. Our energy holdings are 86% investment grade, with two-thirds of it private and over 40% in the less commodity price sensitive midstream sector. Second, over 99% of our commercial mortgage loan, or CML, portfolio is rated CM1 or 2. The entire CML portfolio has a weighted average loan-to-value of 46% and debt service coverage ratio of 2.3 times.

27:19 Just 2% of the CMO portfolio has exposure to hotels. Third, our CLO exposure is 97% investment grade with an average credit enhancement of over 20%. We have also provided the results of two stress test scenarios. We've used stress case one as a moderate scenario and stress case two as a severe but not worst case scenario. For the stress scenarios, we have performed a detailed security-by-security analysis to determine the potential impact of ratings migration and credit impairments on required capital. The analyses showed an impact to excess capital of $300 million in stress case one and $600 million in stress case two.

28:11 Ratings migration accounts for over 75% of the capital impact in each case, Stress Case 1 reflects downgrades of at least one NAIC notch on more than $2 billion of the general account. 60% of the downgrades are to NAIC 3 or below. This level of downgrades represents nearly 70% of the historical peak downgrade experienced over the last two decades for an investment-grade credit portfolio. Stress Case 2 reflects downgrades of at least one NAIC notch on over $3.3 billion of the general account. Nearly half of these downgrades are to NAIC 3 or below. This level of downgrades is 15% higher than the historical peak downgrade experienced in the last two decades for an investment-grade credit portfolio.

29:09 Note that neither scenario incorporates possible benefits from any active management we might undertake to mitigate these adverse effects. Importantly, we believe that capital impacts from these stress scenarios are manageable, considering our current excess capital position, future free cash flow, and the expected proceeds from the close of the life insurance transaction. Slide 16. We entered into the first quarter with a strong capital position and remain well positioned going forward. Our estimated RBC ratio was 455% at the end of the first quarter, above our target of 400%. And our excess capital was $612 million. Our strong excess capital position enabled us to take advantage of the market dislocations in the quarter.

30:02 We completed over $400 million of share repurchases Taking advantage of our attractive valuation. Given uncertainties with a broader credit environment, we paused share repurchases in March. We continue to believe it is prudent to preserve some capital and will closely monitor developments through the second quarter. We will continue to be good stewards of capital, balancing opportunities to repurchase shares while maintaining a strong balance sheet. Debt to capital was 32.1%. This is above our 30% target due to the greater estimated loss on sale this quarter. However, the impact is temporary as it does not reflect the anticipated gain on reinsurance at transaction close or our planned utilization of a portion of the transaction proceeds to retire existing debt issuances.

31:01 We have no debt maturities upcoming in the next three years and have ample liquidity resources. Finally, we have maintained our first quarter common stock dividend at 15 cents per share. The dividend reflects confidence in our ability to generate sustainable free cash flow. In summary, we've been a market leader in serving all of our stakeholders during this time and are proud of our employees for their resilience and adaptability. While there will be COVID-19 related headwinds in meeting our growth targets, we believe our strong worksite and institutional franchises are poised to benefit over the long term. We continue to have high confidence in our ability to close the individual life transaction by the end of the third quarter. And we have a strong excess capital position and will continue to exercise prudence and remain good stewards of capital.

32:00 With that, I will turn the call back to the operator so that we can take your questions. Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star 2. As a reminder, participants are limited to one question and one follow-up. Thank you. Our first question comes from Tom Freedly with Dowling and Partners. Please proceed with your question.

32:39 Good morning, and thank you for taking my question. In terms of the business impacts that you cited in retirement and employee benefits, have you seen any kind of impact in terms of behavior change from time sponsors or participants to date? And also, how should we think about the premium growth for employee benefits in the near term?

33:02 Humphrey, good morning. It's Rod. I'll have Charlie start and then hand the baton to Rob on employee benefits. Charlie?

33:11 Yeah, good morning, Humphrey, and thank you for the question. You know, in terms of behaviors, we've not seen significant change in volumes year-to-date on hardships and loans. In the month of April alone, hardships and loans, the volume, the numbers changed. are down pretty significantly, but the total asset number is up in our record-keeping business, but basically flat and full service. Record-keeping is more per participant, so the full service is the same. What you might see there, I think as you think about hardships and loans, let's say we saw a 25% increase in hardships and loans, that would only equate to, over what we previously have seen, Thank you for joining us.

34:20 We have had, as you saw, a very strong first quarter in sales, our recurring deposits and our net flows up 330 and the net flows on record-keeping and strong stable value fund sales as well. But when we look at April, we have seen fewer RFPs in the month of April versus April 2019. And those fewer RFPs are things that would materialize probably in the fourth quarter or first quarter of next year. and yet at the same time, we've also been notified on more full-service corporate wins in the month of April of 2020 than we did in 2019, significantly more. And so we look at these and these are wins that will likely fund more in the third or fourth quarter of this year. So we've seen employers and advisors proceed with their RFPs and making buying decisions And we're doing a lot of finalist presentations, both in our tax exams and our corporate business through Zoom and continuing to move forward with benefit design changes. You know, one of the more interesting ones in some ways, you know, Humphrey, is we've actually saw in the month of April, 75% more startup 401ks than we did last year in April.

35:35 So a startup 401k being an employer that never had a 401k before, presumably smaller business, Thank you for joining us. You know, we do expect the COVID-related business activities to be much less impactful, I think, in the 2020 earnings versus the equity market and interest rate impact. So, you know, I just wrap and say, you know, I think the brand is shining bright.

36:23 We're being recognized. There's lots of market activity. And, you know, we certainly believe that it will benefit us as advisors and employers, you know, have a flight to quality. You know, I think they will certainly look, you know, for certainty in their retirement provider in some uncertain times. So with that, Rod, I'll maybe turn it back to you.

36:46 Yeah, hey, Humphrey, this is Rod Gripka. So on the first point, from an employer standpoint, certainly part of, you know, what we've been watching closely is just the pace of things coming to market and then the pace of decision-making. And so... At this point, I think it's a little early to declare too hard one way or another, but initial things that we're seeing, it's been positive. Things are continuing to be decided upon as we think about not only the sales that we already got in the door with a good 1-1 activity, as Mike had already alluded to. We've continued to see decisions made throughout this time period, and as we think about What we see in April, we're actually sort of ahead of the pace of play that we would have expected just given this environment. And as a reminder, we focus in on that middle to larger end of the marketplace.

37:46 And so our ability to continue to both be interacting with brokers as well as the customer, we're not as reliant upon as some other firms might be on sort of the financial Thank you for joining us. And even in an area where you'd think, boy, decisions would have really slowed down, we're actually ahead of pace on sort of 1-1-21 decisions at this point.

38:35 Again, we've got a lot to unfold in front of us as the year evolves and the pandemic continues to run its course. But sort of at this point in time as we sit here today, feel pretty good about those things. Probably the biggest wild card that we'll continue to monitor and stay close to is around Just employee impacts. And so, obviously, we're all hearing plenty about furloughs and layoffs and how does that evolve through the book and the pace of that. And then, obviously, how does that unwind itself and improve over time will be an important part of what we monitor and assess as things move forward. That's a piece of the impact that Mike talked about from COVID. And so, we'll see how that plays forward and And as Charlie said, you know, the value of what we do has probably never been more apparent, and so we continue to be optimistic in sort of the long-term view.

39:33 Obviously, this is a big divot to work our way through, but we're certainly continuing to work hard at it.

39:41 Appreciate it, Carla. Shifting gears, so, Mike, you mentioned that you have temporarily paused buybacks in March. Given the expected proceeds to come from the individualized transaction, I guess what factors would you have to see before you start resuming BADAC? Thanks, Humphrey.

40:05 Look, I think the way to think about this is there's a lot of uncertainty in the credit environment, and we shared the way we're thinking about some of the potential impacts in the stress testing. As you mentioned, when the life transaction closes, we should have significant capital that would be available to be potentially used for share repurchases. We'll also continue to generate cash flow, free cash flow and excess capital, I think, over the The period as we go forward. So the way we're thinking about the decisions we have about the pause is we're going to continue to monitor the environment. We'll have a natural opportunity to assess where we are around the end of the second quarter.

40:54 And then even more so, a very logical opportunity to think about it when the life transaction closes. And given what we did in the first quarter, with $400 million and related to the overall guidance that we had given as an expectation of a billion plus. I think so long as the stress test cases that we've got in our view as to defining what reasonable outcomes could be, there's certainly a path to achieving that billion plus. So it's really going to be the credit environment, how we're seeing how the economy is unfolding, How the pandemic is, you know, continuing to, you know, either spread or be under further control.

41:41 Those are the kind of things we'll be thinking about. But it's very much a pause. And it's very much in line with the way that we have operated, you know, over the years. You know, we've said consistently, you know, the way we approach capital management is through disciplined, consistent assessment of the environment. Some quarters we lean in. You saw us lean in in the first quarter. Other quarters, because of the environment or where the stock price is or other factors, we will lean back, and that's what we're doing now. But it's in no way anything other than a temporary consideration of the uncertainty we're facing.

42:18 And, Humphrey, the only thing I'd add to what Mike said, and I think he framed it beautifully, is if you think about the purposeful decisions we've made about our portfolio, We've been preparing the business and the balance sheet for this kind of flexibility. Our free cash flow, the $900 million of excess capital we brought into the year, the $600 million that we have today, the proceeds from the life transaction, there's a lot of flexibility that we've got. And I'd point to the fact that we've purchased, since we've been a public company, $6.4 billion of shares. I think it's a very strong track record to... look forward to in terms of our energy and thinking. Thank you. Our next question comes from the line of John Barnage with Sandler O'Neill.

43:08 Please proceed with your question.

43:11 Yeah, thanks. You said 95% of your employees are working from home. Do you envision all 100% going back into an office going forward, or could you see real estate savings emerging?

43:23 John, good morning. It's Rod. A couple of pieces. One is, as I know you're aware, but for the listeners, part of the legacy of the acquired companies that now make up Voya, our geography footprint is in multiple locations. So by way of example, we've got a substantial footprint in Windsor, which is largely our retirement business, in Atlanta, in Minneapolis. We're building up a very significant facility in Phoenix for call center and operations and so on. We've got a facility outside of Boston. We will be returning to work on a very gradual basis based on facts and circumstances in those locations. The other thesis I'd add is approximately 20% of our employees today are what we call virtually orange. Said differently, what virtually orange employees are are people that permanently work from home.

44:30 That, on top of what we've been able to do, I think this is a moment that we will, in fact, rethink how much of our workforce can and should work from home or might have a desire to work from home as we go back. So we haven't made any firm decisions. We want to offer that flexibility where it makes sense to do so. And, of course, the downstream effect of that, it well could have some real estate pieces. But first and foremost is our employee safety and, frankly, our customer-facing safety as we do this. But I do think, given that we already had 20% working virtually orange, it's a moment that Voya and probably many other companies are going to relook at What that future state business model will be, and we, in fact, are doing that ourselves.

45:22 Great. And then maybe my follow-up question, and I apologize if you mentioned it, but can you talk about the average age of employee benefits customers? Just trying to mention that, and thanks for the answers.

45:34 Rob? Yeah, sure. John, you know, again, everybody's got sort of different business models. What we do within the employee benefit business here is, is very much focused in on working age population. So if you think about 30 to 65-year-olds, that's going to be 90% of our sort of enforced block that we're reinsuring. So look, it's going to be a young age. I won't put an exact number on it, but again, that range of 30 to 65, you think about when people are going to, Thank you. Thank you. Our next question comes from Nigel Valley with Morgan Stanley. Pleased to see with your question. Great. Thanks, and good morning, everyone.

46:34 So I had a question on leverage. Given we had a modest net income loss this quarter and you mentioned the reinsurance gain is now likely to be at the lower end of the range, is it likely that more of the $1.5 billion of deployable capital from the life insurance sale will need to be applied to leverage reduction? I'm guessing that's not going to be a big change but just wanted to clarify that with you. And then second, Eddie, read into the level of pressure on alternative investment income in the second quarter.

47:01 Okay, so I'll come back to the second one to give us some clarification. But on leverage, so let's just step back and make sure that we've communicated clearly what is going to happen. So the loss on sale that we've booked so far, the estimated loss on sale, which relates to about half of the transaction, was increased to a little bit less than $1.3 billion. And that's an increase of about $160 million from where we were at the fourth quarter. We expect a significant gain at time of close as it relates to the reinsured portion of the transaction that will get the net gap impact to be 250 to 750 loss overall.

47:48 And that under current spreads and rates, we expect to be at the lower end of that, so that actually frees up more capital that reduces The impact to the gap book value and reduces the leverage that would come because the gap book value will be higher than it had originally been anticipated. If things hold, we'd actually have fractionally more available for potential share repurchase or other purposes and we would be doing less debt repurchase. Somewhere, I think, in the last call, we had guided to debt repurchase between 600 to 800. I think we're definitely at the lower end of that range and could potentially even be below that range, depending on how things unfold.

48:44 And so, we will naturally, first of all, at close, with the impact of the reinsurance gain, we will fall below our leverage target. likely in the 2829 range, again, assuming that the current conditions hold. And then as we repurchase shares, we would need to then lever down the debt to maintain that leverage. And then, Nigel, just on the question on alternatives and rating agencies, you know, could you just give me a little bit more of what you're looking for there?

49:16 I just see some of the other companies have provided an indication as to the level of loss which they expect in the second quarter on their alternative investments. I'm just wondering whether you have a ballpark as to where that number may fall out.

49:29 Not at this point, no. I mean, I think you could probably look to the first quarter is probably not – the first quarter of last year, I think. Am I remembering that correctly? Yeah. That was a quarter lag off of the fourth quarter of 2018, which was, I think we all recall, a fairly challenged quarter for alternatives and equities. That's probably not far off, but we don't have a number specifically. We haven't worked up a number specifically yet. It's just too early.

50:00 Okay. Many thanks. I appreciate the color and clearing up what's happening with leverage in particular. Thank you. Thank you. Our next question comes from the line of Jimmy Voller with J.P. Morgan. Please proceed with your question.

50:14 Hi, good morning. I just had a question first on the group benefit business and specifically medical stop loss. Your margins are pretty strong, so wondering what is maybe whether this is more of an aberration than just normal volatility in claims trends or just or something related to people's reluctance to Thank you, Jimmy. Rob, you want to take that?

50:41 Yeah, sure. Thanks. Yeah, Jimmy, as we looked at stop loss, even, you know, sort of call it pre-COVID, as we were finishing up 2019, you know, we felt good about what we were seeing in the underlying data and the claims activity and Thank you so much for joining us. You know, we talk about middle and up market focus.

51:32 You can think about deductibles at an individual level between, you know, 200 or 300,000, you know, sort of is the middle of the curve, so to speak, of where most of our exposure would sit. And so, look, those aren't, oh, boy, I've got cancer. I don't think I'm going to the hospital sort of moments. It's, you know, they've got something serious going on. If they're in treatment, On a program, you know, whatever the diagnosis may be, you know, those are generally not going to be voluntary sorts of decisions that people just sort of opt out of and I'll go later moments. So, look, this is a real combination of, I think, just discipline around the business, a continuing of the trend that we've seen and the results moving in the direction that we want them to. Now, look, as you play this forward, can there be some, you know, knock-on impacts or delay things on the edges?

52:26 Again, sure, on the edges, but as Mike talked about, sort of the range estimate around, you know, second quarter as well as the longer term view of that, you know, broader range of COVID impact. We don't really anticipate a lot of noise to any noise within stop loss. Again, just given where we fit in the market, the types of cases we sell, how we position our product, I think it's going to be very modest to not at all.

52:55 Okay, and then just on the asset management business, you had pretty strong flows in your international or institutional business, sorry. Any comments on sort of what asset classes are driving that and how the pipeline in that business looks and whether that momentum sort of sustained into Tokyo as well? Christine?

53:17 Certainly. Thank you, Jimmy. Yes, as far as the strong flows that we had in the first quarter, really it was from a variety of sources. And I think that it just really speaks to one of the competitive advantages that we have. It's just a diversified client base. And so, you know, through the first quarter, the insurance channel that we have was particularly strong. We closed a European CLO. As well as had strong stable value flows as a few examples. And so when you look out into how does the pipeline look into the second quarter, very strong. Mike referenced in the beginning, we funded approximately a $6 billion multi-sector insurance mandate in early April. So those assets are already in the door and invested and being invested.

54:10 As well as with... Some of the crises come opportunity, so to speak, Jimmy. And what I mean is we have a very strong specialty fixed income franchise, very strong securitized. And so we are in the market with the TALS Fund as an example. and continue to see strong client demand for some of these specialty asset classes that we manage, such as real estate, just given the overall low-rate environment that, quite frankly, given where interest rates are, we're likely to be at for quite some time. So low rates isn't going to take away the need for income. It's only going to strengthen it. So overall, we see a lot of diversification, strong second quarter, and good confidence for the remainder of the year.

54:58 Thank you. Our next question comes from Alex Scott with Goldman Sachs. Please proceed with your question.

55:02 Hi. Good morning. First question I had is just on the commercial mortgage portfolio. I appreciated the additional disclosure in the presentation, but, you know, I was just interested if you could provide some color on what you're seeing so far in April in terms of, like, forbearance And what you expect there, and maybe if you have any commentary on sort of the NAIC's approach to, you know, allowing a little more leniency there. Mike?

55:34 Thank you, Alex. So, you know, so far we've received forbearance requests on about 20% of the unpaid principal on the CML portfolio. As you'd expect, you know, the hotels, which is a very small portion of our commercial mortgage, but, you know, that's been pretty much universal within that space, and about half of our retail. And as we've shared in the past, I should just point out, a lot of our retail exposure is more the grocery store-centered area. retail community shopping centers that I think are actually going to continue to do reasonably well through this period. So of that 20% that have sought forbearance, there have been a few that we've concluded aren't where the requests were withdrawn, but we're about halfway through that, that we've granted it.

56:30 We're working through the remainder of those requests. So I think the terms will be specific to each deal, but broadly speaking, think of it as a three-month forbearance with principal carried over to the unpaid balance. In terms of NEIC, and softening there or at least relaxation, I think it's appropriate and welcome. I don't have a whole lot of specific comments. I think the idea here is that this is a temporary phenomenon and that we will hopefully, in relatively short order, get back to a more normal level of commerce that will enable these properties to continue to function.

57:19 But overall, we're pretty pleased with our commercial mortgage portfolio. We think we've taken a really strong approach to the underwriting, and it shows up in some The statistics about the portfolio that I mentioned. So we're working through it, but pretty comfortable with where we are right now.

57:38 Got it. And then maybe my second question on retirement. You know, I guess when I think about the last few years, I think you guys have benefited a decent amount from just sort of consolidation of the retirement industry among like the top players and some of the smaller players getting squeezed out. We'd just be interested to hear if, you know, if you think, Thanks, Alex. In short, I think it is going to accelerate things. When we look at even just kind of the growth in sales that we've had, as you've pointed out, we've done well in attracting wins from kind of call it

58:29 Providers number 10 through 60 plus, 60 plus record keepers. But we've done equally well in winning net growth from a number of the top 10 D.C. providers. And during this time, we certainly think that there is going to be more of a flight to kind of quality as both advisors and consultants and plan sponsors look for providers that can invest in the business and advance their offerings. You may have noted during this last quarter, we announced our new student debt service, Admin Portal, a partnership with Vault, and recently announced a financial wellness collaboration with our employee benefits business, the My Healthy Money. So these are all kind of tools that we continue to invest in.

59:19 Got it. Thank you. Thank you. Our next question comes from the line of Tom Gallagher with Evercore. Please proceed with your question.

59:55 Good morning. Just a follow-up question to that commercial mortgage loan forbearance request. You know, 20% sounds like a big number in terms of the percent of the total portfolio. How do you, in your stress test, how are you thinking about how that plays out in terms of Losses, you know, delinquencies, potential losses, impairments on that. And then I guess another investment question, pro forma, the life sale, you're showing 20% of your portfolio is going to be in private placements. And how are you thinking about that portfolio broadly? Because I guess my concern is that that's predominantly small to mid-sized businesses.

1:00:43 And while the covenants may be good, I would imagine that they that portfolio will fail worse, you know, broadly speaking. But anyway, if you could take a shot at both of those things.

1:00:55 Okay. Why don't I start and then and then Christine, surely you can add some color if that's okay. So, so Tom, you know, in terms of the the forbearance and I think the way to think about the stress cases is that we went through each mortgage loan and assessed it, you know, relative to the place it sits. We could certainly consider The level of forbearance that either we knew about or were likely to receive or the requests we were likely to receive. And then we factored that into the overall, you know, the potential for migration and or potential impairment. So, you know, that was an explicit consideration in pulling together the stress test. So, I don't have specifics to give you in terms of exactly how many of those forbearance The overall approach to the stress test was truly CUSIP by CUSIP or investment by investment with our credit experts assessing given the scenarios that we had put forth where to go and how we thought that would ultimately unfold.

1:02:18 In terms of the overall portfolio on the other side, and certainly welcome Christine's view here, but I think we actually are pleased with where we're going to be on the other side. It's not at all clear to me, and I don't have statistics that I can share, but there's been a lot of private issuance at a lot of levels and not just small to mid. So I think we can certainly look to add some level of disclosure there. But again, that was considered in the stress test analysis. We're pleased with the outcome of the new allocation. It takes us in a direction that we were already trying to head, which was to reduce our exposure to public corporates and get a more balanced approach. So I think we're actually pretty happy with where that's coming out. Christine, anything you want to add on the privates?

1:03:14 Yes, Mike, I agree. We're very happy and confident with where we are. And, Tom, when you think about privates, you're spot on. It's a big market and it can mean a lot of things to a lot of people. But our business model really isn't that middle market lending sort of half a billion kind of top line revenue and below company model. While we do have some of that in the portfolio, a lot of the reasons that companies go to the private debt markets is they're offshore and they simply don't want to go through all of the filings. So companies like BMW, Mars Candy is just a few examples. And so, again, we tend to be a little bit up the food chain, if you will, as far as the companies that we lend to. But certainly, you know, we can provide more disclosure potentially and work with Mike on that.

1:04:04 Okay, thanks. Appreciate it. Thank you. Our next question comes from Andrew Kleigerman with Credit Suisse. Please proceed with your question.

1:04:13 Hey, good morning. So the first question I'd like to ask is around the divestiture of individual life. As we sit here and, you know, the talk on the call has been focused on credit and the potential for defaults and low interest rates affecting earnings. And then, you know, I think you cited in the individual 10 to 30 million of COVID-19 related impact on the mortality. So, clearly, as resolution looks at this transaction, it may not be as attractive as it was upon the announcement. So, what I'm hoping for is a little clarity around why you're so confident It will close at September 30th, maybe two or three reasons why it should close.

1:05:09 Good morning, it's Rod. Good morning, Rod. Mike and I will go back and forth. Part of the reason we continue to convey our confidence is the active communication that we're having with both resolution and with the regulators. Resolution has been looking for both a platform, people, and a book of business for a long period of time. We spent a considerable amount of time together in doing this. We are exactly where we thought we would be at this point in standing up this new company. The regulators have been absolutely fabulous in They're working with us on a virtual basis.

1:06:03 And so all signs are pointing to an on-schedule close at this point in time. There's been active engagement. And Andrew, this is a model that you all would be familiar with because we did something quite similar when we stood up venerable in the Apollo transaction. And so that was just two years ago. And fundamentally... Our team went from that project to this project. We're dealing with a very sophisticated group of investors in terms of both the equity commitments and debt commitments. And we're seeing no signal or sign at all other than wanting to do this as fast as we can collectively. And if you think about it from Resolution's perspective, and I'm not speaking for them, but just my point of view in the dialogue with them, if we can stand up this company and move through the regulatory approval on an on-schedule basis in a very complex environment, they're certainly intending to take this platform to do other similar roll-up types of transactions prospectively.

1:07:14 And what better way to point to look what we got done collectively is standing up this company. But Mike, I'd ask you to jump in and add anything. Mike is leading this.

1:07:27 Yeah, just a couple of things. I completely agree, especially on the regulator piece. I think when the pandemic and the severity of it became more evident and people moved to home work, I was concerned about our ability to make progress, but I've been impressed. By the continued pace at which the regulators are engaging in this. So I don't think there's any reason to think that that's going to cause a delay. And then from the standpoint of just the day-to-day interaction with the resolution team and the work that they are doing to prepare for separation, there has been no slackening in any way of their engagement with the team. I mean, they host town halls. They're hiring people from outside to come in and take over roles that we need the staff for the separated company. So there is every sign that they're just as committed. And I think for the reasons that Rob mentioned is it's really important to them strategically to take this step.

1:08:41 I think they're fully committed. And then finally, just look, the terms of the agreement are such that, you know, it's fairly difficult for them not to close if we meet all the closing conditions, right? So I think we feel very good about the way the agreement was structured as well as all the signs we're seeing so far. Thank you. Our next question comes from Ryan Kruger with KVW. Please proceed with your question.

1:09:08 Hi, good morning. On the COVID claims impact that you expect, and you gave the overall a potential amount, I'm not sure if I missed it, but can you clarify how much of that is assumed to occur in your second quarter ECS walk? Mike?

1:09:29 Yeah. Ryan, thanks for the question. So the way to understand the walk, is as follows. About a third of the change is from the normalization of the loss ratio and the normalization of results. The balance is a combination of claims effects and potential revenue impacts from unemployment or other effects like that. I think there's a fair amount of uncertainty in those estimates, both in terms of, you know, you can see from the width of the range, there's a lot of uncertainty there, as well as the timing. And particularly as it relates to timing, you know, what we're seeing so far is, you know, despite the, you know, that we're at roughly, what, 70,000 deaths officially from COVID, we've only received in the group business You know, a few dozen claims. Under a million dollars of claims is what we've seen so far.

1:10:36 And that's through, I think, yesterday. That's not first quarter. That's what we've seen to date. And so when you compare that to a base of insured that's in the neighborhood of 3 million people, we should be seeing a lot more. So reporting lags is one question that we just don't have good answers to. Second is how will the general population mortality translate to an insured population mortality and then even more so for group, a working insured population. And so we've taken a rough estimate. I think it's a fair approach to get us into the ballpark, but it's There's a great deal of uncertainty in terms of what exactly will happen in COVID.

1:11:21 So I do think there will be an impact in the second quarter. We will make some estimate on how to handle IBNR or incurred but not reported for the second quarter result. But I think there'll probably be a fairly meaningful tail in the third quarter. We shouldn't think of this as just a second quarter event. And then it depends on what happens after that in terms of the overall progression of the pandemic.

1:11:49 Got it. That's helpful. Thank you. Thank you. This concludes our question and answer session, so I'd like to turn the floor back over to Rod Martin for any closing remarks.

1:12:02 Thank you. The purposeful decisions that we've made as a company have enabled us to enter this period in a position of strength. As we move through the remainder of the year, we fully recognize there will be a number of challenges that we will need to address. I am confident in the talent that we have at Voya to enable us to execute on our plans and adapt as needed to continue to serve our advisors and customers and position Voya for long-term success. The heartfelt gratitude that all of us at Voya have for the everyday heroes that are enabling our nation to navigate through these challenging times. I hope that you and your families remain healthy and safe.

1:12:49 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. Ladies and gentlemen, the conference has now concluded. Thank you for attending today's presentation. You may now disconnect.