Hello everyone, good afternoon. Thanks for joining us at the Wells Fargo Virtual Financial Conference. This is Elyse Greenspan. I'm the senior insurance equity analyst at Wells Fargo. It's our pleasure today to have with us the management team of Voya. On for the webcast with us is Rod Martin, CEO, Mike Smith, CFO, and Rob Grubka, head of Group Benefits. This is going to be a fireside chat where I will be asking them a series of questions. For anyone on the line listening in that wants to make sure you can get your questions answered, just feel free to send me an email, elyse.greenspan@wellsfargo.com. I will incorporate your questions into the list. To get things started here, what we've been addressing throughout the conference today has been the impact of COVID-19 on everyone's businesses. It's been obviously ongoing and very topical.
I thought we can start things off there. If you guys, Rod maybe kick things off, talk about the impact that COVID is having on your businesses and kind of the steps that Voya is taking to navigate through the market turmoil.
Elyse, thank you. It's Rod. I'll begin. We will move back and forth. We moved, like many companies, quickly to about 98% virtual. All companies plan for these events. You are never certain it's 100% going to be effective. In our case, in many others, I think it has been. We've been operating in this way since roughly the middle of March. I've been really pleased with the team's agility and ability to move virtually and serve our consultants, advisors, customers, and all stakeholders in a very effective way. One of the outcomes among many that we talk about as a result of the learning through this journey, for the first three months of this year, we did 3,000 Zoom meetings. In the month of April, we did 6,000.
I think that demonstrates, again, the variety of stakeholders that we serve and their willingness to do that. Recognize that we're fundamentally a B2B organization. We're focused on the retirement, investment management, and Group Benefit business. That really enables that outcome to occur, I think, in a more effective way. In terms of what we've learned, we had a very solid first quarter. Although we, like all companies, have been affected by the macroeconomic environment and the lack of clarity of the return-to-office environment, it's going to be different in different parts of the country, we are continuing to operate, and frankly, operate quite effectively. We've had strong results continuing in April, which has been very encouraging. We're not trying to extrapolate that for a full year yet, other than we've been encouraged about what has happened so far.
With that, Mike, I'll throw it to you, then to Rob.
Yeah, look, I think the overall operating environment has been almost a little bit surprisingly seamless. We've had earnings calls virtually. We've had board meetings virtually. We operate quite effectively. I think obviously we're monitoring the outside environment for the potential impacts on our future financials. Some of the uncertainty that we see ahead led us to pull back on guidance temporarily. It's led us to pause, not suspend share repurchases. We're monitoring events carefully to see when we can comfortably resume that. Overall, I think we're operating pretty well. Just keeping a close eye on outside events. Rob?
Yeah. Thank you. I'll hit a couple of things high level, I know we'll have plenty other questions come. From an activity sales standpoint, when you think about peeling the back end of the business, have been really pretty pleased with the way the business has sort of just been resilient. In a typical year, this year being no different, 80% of our sales would occur within the first quarter timeframe focused in on 1-1 enrollment business. We are in the middle and upper end of the marketplace, I think 500 employees and up, have been really pleased with how across Stop Loss, the voluntary benefit business, then the life business has maybe been a little bit more disrupted, just I think sort of the frequency and pace of shopping from employers will be a little bit different there.
As Rod was saying, we came into things with good top line, really strong, as you said, record results in 1Q from a margin claim perspective. Obviously we're paying plenty of attention to how does the claim activity evolve through our book of business. We can get into that further as the questions come in. Feeling pretty good as we look at it today.
Yeah, I think Rod, you kind of hit on what was one of my next questions on just how we think about the impact of lower sales throughout your businesses. Maybe this is 2020 and 2021 question, as you kind of mentioned, most of your business comes on very early in the year. How can we think about COVID and the impact it can have on your sales, whether that's in 2020 or also into 2021, obviously realizing that the environment is very fluid right now?
Sure.
Yeah. I'll start and then if Rod or others want to chime in off of it, just with EB. Look, Stop Loss is a product that's going to go to market every year. That's just the nature of the contract term. That we expect sort of the pace of play throughout the rest of 2020 and even into 2021 to hang into a range that feels normal. On the voluntary benefit side of business, we just continue to see strong growth and demand around. I think this environment we're going through right now will only drive more demand and more interest and potentially new sales at a group level, but also even just deeper penetration with participants as they better understand what they're being asked to take care of on their own, in a different sort of way, given what we're going through.
On the life side, again, I think that one is going to take a little bit longer to play out and recover. I do view that as a bit more of a 2020 and 2021 impact. As we think about how we've been trying to strategically grow this business and where we're intent on driving growth with Stop Loss and VB, we see it as a divot, not a big bump in the road as we move ahead longer term. I'll stop there.
Elyse, on our retirement and asset management business, remind the listeners, we're fundamentally a workplace and financial institution-focused company as opposed to a face-to-face distribution model. Although the slowdown macroeconomically will affect everyone, and we're all trying to determine in what way, so far, we've seen a limited effect, and we think that's likely to continue. It's hard to calibrate, which is part of why Michael and I chose to pause right now fully. It may well be in terms of a perspective, a year like 2018 or 2017, which are pretty robust years for the company. It may not be our biggest year ever, but a lot of this business is in fact continuing.
Okay. That's helpful. My next question, you guys reaffirmed your cost save and expense targets. Is there a way we can think about the benefits that Voya is getting on the expense side of things from COVID? Just as we hear about lower T&E costs, et cetera, and how that could ultimately impact the bottom line.
Sure. I'll start and Mike can jump in. Mike and I did reaffirm the greater than $250 million expense save by the end of 2020. We feel very confident about that and the progress that we've made over a period of time. We've been focused on this for some time, Elyse. The short term on the reduced T&E, we are looking at this moment, as I suspect other companies are, as potentially a fundamental shift in what the business and operating model could be prospectively. We're not going to rush to that outcome, but it might be useful for the people listening. We previously had 20% of our workforce, so we have 6,000 men and women that were something we call Virtually Orange. They were 100% virtual employees already. It's not a model that we're unfamiliar with.
We've all learned how effective we are being as we speak, our company and others. I suspect we will make a determination over the coming quarters on what that operating model will look like. Naturally, there's a reduced T&E at this point in time just because we're all sheltered in place. We are going to be looking at this at Voya on both from an employee perspective, and what roles, probably in 3 categories. How many are virtual today? How many could be a hybrid model? How many need to or choose to work in office? I suspect the outcome is going to be different, and there will be a natural expense component to that. Mike?
No, I agree. Look, I know it feels like we've been operating this way forever, but we're still only two months into this. I think there's still more to learn as the experience unfolds, and we're going to take advantage of those learnings to continue to evolve our thinking. It's clear there will be T&E benefits, clear there will be other conference support and so on, things that we would've otherwise spent. They're not going to be profoundly changing to the balance sheet or the income statement, but they're going to have a noticeable effect. Longer term, I think as we get clearer pictures around how we're going to evolve our business model, then we'll translate that into a financial effect. I think it will allow us to do a combination of improving margin or improve competitiveness where needed.
I think it's going to be beneficial for us and our customers and our shareholders.
That's helpful. My next question goes back to Group Benefits. You guys have kind of pointed to the margin rising from the exceptional Q1 levels, which back to kind of what you guys view as a normalized base, which I think is kind of what we've heard from everyone, and we also heard thoughts about how that's a business that technically does see some strain during a recession. Rob Grubka, could you just maybe give us some color on how we can think about the margin profile of the Employee Benefits business both in the Q2 and then also just thinking a bit beyond that as well into the end of 2020 and into 2021?
Yeah. I'll get us started, and then if Mike wants to add anything on the end here to align to the conversation from the earnings call. We tried hard to frame up second quarter, and obviously at that point in time, we didn't know what we know today, and we still feel like we'd like to know a lot more. I think we're just trying to be balanced in both sort of the top-line disruption that can emerge from furlough activity, layoff activity, again, being in the larger end of the marketplace versus some peer companies, they may be talking a lot more about just business closure and those sorts of things down market. I think we're a little bit insulated, but we'll have that challenge of furlough and layoff for sure.
As we think about and try to size mortality impact, we shared and we'll share again that we don't see a lot of impact on the Stop Loss business as we think about the activities that are going on and just where we attach from a risk standpoint, larger end of the marketplace, think higher deductible at the individual level being in that $200,000-$300,000 range as a typical number. Expect modest impact there. On the Voluntary Benefit side of things, you would certainly think about with products like Critical Illness and Hospital Indemnity, there'd be some elevation. You potentially offset that with lower activity on the accident side as just people are in place and doing less moving around than they might otherwise be. Some noise from that was built into our range.
We're going to continue to assess that as we go. The fundamentals of the businesses, as you sort of cast the view towards 2021, we certainly had incredibly strong results in Stop Loss in first quarter. We talked about that being a 77%-80% area for a loss ratio perspective. On the life side, again, had really good results. We'll see how that plays out. That's a piece of the noise we tried to size as we talked about first quarter and moving into second. That's also a business as you see what happens and what evolves, then you adjust pricing appropriately. Finally, from a margin and perspective as we think about voluntary, again, it's been performing well.
It's a business that frankly can absorb some impact on the claims side, that's built into some of our plans or our plans as we move forward and think forward. We've been targeting in aggregate sort of a different range of our aggregate loss ratio as you look at the mix of business and how that's evolved in that sort of 70%-73% loss ratio range. Even as we looked at noise from the current activity from a COVID perspective and what that might do, we still think the aggregate target makes sense to us.
Hopefully that gives a little bit of color and confidence to there could be noise quarter to quarter, as we think about it over a 12-month period of time and how we started the year, how we expect to work through the year, we still think that's in a very solid and defensible sort of range. I don't know, Mike, if you want to add anything?
Yeah. Rob, just the only thing I'd add is just for the folks listening to this, there will be a kind of an overarching read-through on the Group Benefits segments across the industry that recessionary times lead to compression of loss ratio or to higher loss ratios, let's put it that way, right? Lower margins. That historically has been driven by performance and disability in recessionary environments. What you didn't hear Rob talk about is disability or our exposure to that's because it's 100% pass-through for us. We do not retain any of the disability risk. That will differentiate us from many other carriers if the historical experience of worse performance on disability in a recessionary environment is repeated. Just something to keep in mind as you're thinking about us versus other group carriers.
Okay. That's helpful. Shifting gears towards the capital side of things. I think if we can get some color just how you guys are thinking about a potential return to buying back your shares. If kind of in a discussion here, if you could just kind of opine on whether return to buyback is just dependent upon when you close on the life insurance sale.
Sure, Elyse. I'll start and then toggle with Michael. May be useful for listeners, we've been very aggressively buying back shares since we've been a public company. We've done, through the first quarter, $6.4 billion since, again, we've been a public company. We've done over $1 billion a year in 2018 and 2019. We targeted doing $1 billion in 2020. We said we'd do that ratably, so $250 million a quarter, and we actually did $406 million in the first quarter. I think the muscle and the discipline for doing that, nothing has changed in the thinking. What we did was simply pause out of an abundance of prudence, as many others did, given the uncertainty at the end of Q1 about the economy. As Elyse, as you point out, we are anticipating closing the life transaction in Q3.
That is a factor, but frankly, it was more the factor of just the macroeconomic environment and being careful. We entered the year, as I think many of you know, in probably one of the best positions the company's ever been in from a balance sheet and a liquidity position. We had $900-plus million of excess capital going into the quarter. We bought back $406 million, as I just mentioned, ended Q1 with north of $600 million. We have free cash flow conversion of our business of 85%-95%, and the life transaction will create an additional $1 billion and a half dollars, some of which will retire some debt, others will be available to deploy for other purposes, certainly including share buyback. We're in, candidly, a fantastic position, and we simply paused out of prudence as we went into this.
We look forward to providing more clarity as the quarter unfolds. It doesn't preclude us from doing something in Q2, but certainly having done 40% of what we said we were going to do in Q1, we've got more than enough time in this year to pivot and respond as circumstances warrant and the picture becomes more clear. Michael?
Yeah. The only thing I'd add, Rod, is just simply the things we're watching most right now besides working feverishly to close the life transaction, which we remain confident will close in the third quarter. We're simply monitoring the rating agencies' activities in terms of the kinds of downgrades. We're looking for downgrades that could affect capital levels under the RBC formula, looking for signs of early impairment. As that environment unfolds, that'll be an important contributor as to what we want to do with the excess capital. We laid out some stress scenarios, a moderate and a more severe case that bracketed the potential exposure as $300 in one case, $600 million in another case.
I think as we get a sense for whether we're on one of those paths or something perhaps a little bit different, that'll give us a good opportunity to think as we approach the end of the quarter if we feel like we have enough clarity to consider what we might do next. As Rod said, I think an important milepost is going to be closing the life transaction, but it's not the only one along the road.
Okay. That's helpful. I think that ties up to one of my other questions, which was just kind of around the life insurance sale. You guys did reaffirm that it will close sometime in the third quarter. Are there specific regulators or I guess what's kind of the final pieces that you're waiting for in advance of closing that deal? Do you have a sense of how long the rest of the process will take, or is it just the best guess is sometime in the third quarter?
Mike is leading this and doing a great job with his team. Mike why don't you take that?
The key point, Elyse, as you mentioned, is the regulatory approval. We're working with two states in particular are the focus of attention, although there are a couple others involved. Colorado and Arizona are the ones that we're most focused on. Through the pandemic quarantine work from home limitations, I can't say enough about how good they've been at continuing to be engaged, at continuing to work through the issues with us and with Resolution. That continues to proceed nicely, but that is, I think, largely the long pole in the tent. We continue with other negotiating ongoing service arrangements, finalizing the assets to be transferred, and so on, and finalizing the staff that we're going to be transferring over to them as we stand up a new company. Overall, I think we're in good shape.
We feel like within the third quarter is a pretty clear path to that. We're hoping that it can be toward the earlier part of the quarter if possible, but if not, we'll address that accordingly.
Okay, great. Kind of keeping with, I guess, the theme on the life insurance sale, you guys are obviously going to get a good amount of capital when that deal closes. Can you provide us just some current M&A thoughts? Whether it's using the proceeds from the life insurance sale or maybe it's just longer term, just areas of M&A that you might consider and just kind of size of potential deals or anything that's top of mind to you guys as you consider M&A for the future?
Elyse, I'll begin. It's Rod. Examples we've used historically when asked a similar question, we'll use again, and that's would we consider a block of business in our retirement business, for example, assuming it met our financial targets that Mike laid out at Investor Day. We have a pretty high bar of that because it needs to be quite similar in macroeconomic outcomes to share buyback for us, would be an example of something we would consider. We've used the example of a distribution agreement or arrangement or structure, taking some of the domestic specialized strategies that we have and to allow us to further expand and extend those strategies internationally with investment management. And certainly, adding some capabilities within Rob's business would be another example. All of those things are similar. They're tied to our workplace and financial institution focus.
Typically, macroeconomic events like this create dislocation and potentially opportunities, and we will look at them accordingly. We feel good about the businesses we have, and frankly, our organic ability to accomplish our plan that we laid out two years ago. Mike?
Not much to add other than just the continued focus on financial discipline and focus on delivering shareholder value in considering the uses of excess capital as we shared earlier. I think that's been a key focus for this management team. The philosophy, pause notwithstanding, continues to be a great degree of focus on delivering the best shareholder value we can and managing excess capital prudently and efficiently.
That's helpful. In my next topic, you guys have said you would revisit your Q4 2021 EPS guide, the $1.80-$1.90, just kind of given the uncertainties in the market. As we think about that guidepost, what variable should we be thinking about as you're being most dependent upon? I guess is there a time frame when you expect to provide an updated EPS view, or is it just maybe kind of wait for the COVID uncertainty to settle down before you guys come back with a updated guide?
Mike, why don't you start?
Thank you. I think the key driver is, and we've given sensitivities on this, right? It's the changes in the equity market and trying to get a fix on what the right level is for the equity markets and the underlying revenue flows. The sensitivity we have is between $4 million to $5 million of annual impact for a 1% change in S&P. When we're seeing full days of 1% to 2% to 4% moves both directions, it makes it pretty difficult to get a fix on where your starting point should be. I think one thing we'll be watching for is just a degree of stability in the stock market, and that may be very well dependent on some clarity that we, a consensus emerging as to the path of the pandemic.
The other key driver is the share count and timing and amount of shares repurchased. Assuming things stay relatively constructive and we stay on kind of toward the more moderate case, then I think we should be kind of on the same path that we were to the extent it starts to deviate, the credit losses start to deviate higher, then that could possibly slow the pace to some extent. That's the other thing to be mindful of, is just what's happening in that credit environment. Certainly, interest rates have a role to play. The impact of unemployment on in-force premiums for Employee Benefits and to some extent deposits in retirement is also a factor. It's really those first two that I'm primarily focused on.
When we have a sense of a little more stability or at least a clarity of path, then I think that would be a logical time for us to come back with a refined view or a very qualified view of, if you assume this, here is what it could be, and then probably give a wider range of outcomes. More to come. I think we need to see events unfold for a few more weeks before we can kind of set a path there.
That's helpful. I think we have time for one more question. You guys have pointed to $25 million-$45 million of losses from COVID within your Employee Benefits business. Just from a timing perspective, at this point is the expectation that these losses would be mostly confined to the second and the third quarter?
Rob, you want to take that? Maybe frame what we've seen so far.
Yes. Excuse me. The way to think about that sizing that we put out there was over a 12-month sort of time period and view. Also thinking about mortality related to COVID, certainly at that point in time was sort of unclear, uncertain. We tried to sort of put it as an increment of 100,000 deaths, then that way, depending on your views of things, the market's views of things, they had a way to try to swing the number around a little bit. When we think about top-line activity from furloughs and layoffs and those sorts of things, again, at that point in time, a lot of uncertainty there. I would say as we sit here today, that's probably a bit better than we fear that could be, but that will play out over time.
As we think about the claims activity, and we shared this on the earnings call, it's been modest, and not seen as something certainly not disruptive to second quarter at this point. Lots of things to come, but that framing of the 25 to 45 was a longer-term view of things, and obviously we'll have a quarterly call coming up here in not too long, and we'll be rethinking how we try to align people to our thinking and what we're seeing better. Mike?
Yeah, look, I think the key point is simply how the effect of the pandemic is going to translate from population into insured populations. That's probably been the most challenging thing for us to estimate. So far, we've seen fairly light claims, and well below what we might have otherwise expected. Whether that trend will continue or it'll be just a manifestation of a reporting lag, we'll continue to monitor and share results when it makes sense.
Okay, that's helpful. This has been a real helpful dialogue today. Kind of running against the top of the time period, do you guys, Rod, do you have any concluding comments that you want to leave everyone with?
Well, A, to thank you and the firm for hosting this. We are actively communicating with all stakeholders as events unfold. Look, this is as dynamic for Voya as it is for everyone else. I hope you can tell from the tonality of what we're saying, we remain optimistic but cautious as we look at the macroeconomic events. Certainly the April trends that we're seeing and the early May trends continue to be quite encouraging that, as Rob and I, and Mike have tried to convey. With that, Elyse, I want to thank you and the firm.
Yes, I want to thank you guys. This will kind of end the conversation, thanks to Rod, Mike, and Rob, and Voya for joining us today. Thank you guys very much.