Good morning. Welcome to the Voya Financial second quarter 2019 earnings conference call. All participants will be in a 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 touch-tone phone. To withdraw a question, please press star then 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 Mike Katz, Senior Vice President, Investor Relations. Please go ahead.
Thank you. Good morning. Welcome to Voya Financial's second quarter 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. 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 three as I would like to turn the call over to Rod.
Good morning. Let's begin on slide four with some key themes. During the second quarter, we delivered strong bottom-line growth in support of our long-term plan. Our normalized adjusted operating EPS for the second quarter was $1.30, up 11% compared with the second quarter of 2018, despite adverse mortality in our individual life segment. As we've previously shared, our EPS growth will be achieved through a combination of organic growth, cost savings, and optimal capital deployment. As planned, cost savings and capital deployment are the largest drivers of our EPS growth in 2019, giving us confidence that we will achieve 10+% normalized EPS growth for the full year 2019. As it pertains to cost savings, we remain on track to achieve $230 million-$250 million in annual run rate savings by the end of 2020.
As of the second quarter, we've reached our initial target of $150 million in cost saves, putting us well on our way to achieving the overall goal. Our performance during the second quarter continued to reflect organic growth in each of our core businesses. For Retirement, we grew full service recurring deposits 9% year-over-year. In Investment Management, we generated $1.1 billion of positive net flows, contributing to $4 billion of positive institutional net flows over the last 12 months. In Employee Benefits, total in-force premiums increased 12% compared with the second quarter of 2018. We also continue to maintain a strong capital position with approximately $540 million of excess capital as of June 30. During the quarter, we repurchased $446 million of shares. Mike will share more details on the specifics of those repurchases during his remarks.
Since our IPO, we've returned nearly $5.7 billion of capital to our shareholders, which amounts to more than half of our original outstanding shares. In addition to using excess capital to repurchase shares, we also increased our quarterly common stock dividend to $0.15 a share in the third quarter, achieving our plans to increase our dividend yield to at least 1%. Our strong free cash flow generation and business mix give us the confidence necessary to make this increase in our dividend. Overall, our results during the quarter demonstrate solid growth in our businesses and focused execution of our plans. Turning to slide five. How we do business continues to help drive our success and support our ability to deliver strong financial performance. In May, we held our sixth annual National Day of Service.
Once again, we had outstanding employee participation and partnered with more than 200 non-profit organizations across the country. Last month, Voya was recognized at the Disability:IN Conference as a Best Place to Work for Disability Inclusion for the second consecutive year. During the quarter, we also earned recognition for Voya's continued ESG efforts from the investment community. In addition to maintaining our position on the MSCI ESG Leaders Index for 2019, our ESG rating increased to an A, up from triple B. For the second year, we've been included on the FTSE4Good Index Series created by Russell. We are increasingly hearing from our clients that our culture, values, and mission make a meaningful difference when they're evaluating and selecting providers. It's benefiting our business performance and our pipelines. With that, let me ask Mike to provide more details on our financial performance.
Thank you, Rod. Let's begin on slide seven. In the second quarter, we grew normalized after-tax adjusted operating earnings to $1.30 per share, 11% higher than the prior year quarter of $1.17 per share. This excludes $0.23 of prepayment and alternative income above our long-term expectations, as well as $0.01 of unfavorable DAC and other intangibles unlocking. Alternative income improved due to mark-to-market adjustments on private equity investments related to first quarter equity market performance. As a reminder, investment performance on these assets is reported on a three-month lag. On a reported basis, after-tax adjusted operating earnings were $1.52 per share for the second quarter. Our second quarter GAAP net income was consistent with adjusted operating earnings, as favorable net investment gains were offset primarily by restructuring charges. Moving to slide eight.
Retirement delivered $175 million of adjusted operating earnings in the second quarter, $9 million higher than second quarter of 2018, excluding unlocking. Trailing 12-month return on capital improved to 13.9%. There were several notable items that affected adjusted operating earnings in the second quarter. First, prepayment and alternative income was $22 million above our long-term expectations. Second, full-service fee-based revenues were higher year-over-year due to improved average client account balances. Third, record-keeping fees improved as we continue to win new mandates. Finally, administrative expenses increased year-over-year. We continue to invest in the business to expand distribution, improve plan sponsor and participant experiences, and prepare to onboard new plans that will drive higher flows in the second half of this year. We also incurred higher pension costs, which will persist for the rest of 2019.
Looking ahead, we continue to expect our quarterly administrative expense run rate will be roughly $190 million-$200 million for the remainder of 2019. Turning to flows. In full-service, we realized $309 million of corporate market net inflows in the second quarter, which were offset by tax-exempt net outflows. Over the last 12 months, we have generated almost $2 billion of overall full-service net inflows. As we look out to the remainder of 2019, we expect approximately $1 billion of overall full-service net inflows in the second half of the year. This would bring full year 2019 full-service net inflows to approximately $1.5 billion. Trailing 12-months full-service recurring deposits grew over 9% to almost $10 billion in the second quarter, with notable strength in corporate markets.
Strength in flows expected in the second half of 2019 give us confidence that we will generate 2019 annual growth in recurring deposits within our target range of 10%-12%. Total client assets finished higher sequentially, helped by favorable equity markets. Assets were lower compared with a year ago due to a late 2018 record-keeping plan termination of approximately $40 billion of plan assets, which we have discussed the last couple of quarters. We have had great success building the record-keeping pipeline and expect over $20 billion of record-keeping net inflows, largely to occur in the fourth quarter of 2019. We remain very encouraged by our pipeline, which we believe reinforces that our value proposition is resonating in the market. On slide nine, Investment Management delivered $41 million of adjusted operating earnings in the second quarter, $5 million lower than second quarter of 2018.
The trailing 12-month operating margin was 26.2%. There were several notable items that affected adjusted operating earnings in the second quarter. First, investment capital results were $2 million above long-term expectations. Second, fees were lower year-over-year, largely due to private equity fund closings in 2018 that did not repeat. Fees did improve sequentially, mainly driven by the impact of cumulative net inflows as well as strong equity markets. We expect our positive inflow momentum to continue into future quarters. Finally, administrative expenses increased $3 million year-over-year due to the timing of certain strategic investments as well as higher pension costs. Moving to flows. We generated $772 million of institutional net inflows in the second quarter, marking 14 consecutive quarters of net inflows.
This quarter's inflows contributed to nearly $4 billion of net inflows into our institutional business over the last 12 months, representing robust organic growth of over 4.5%. In the quarter, we had wins in core fixed income, private credit, mortgage loans, and global bonds. Our private credit and mortgage loan wins demonstrate continued insurance channel demand. We also closed our second European CLO. Retail net outflows continued in the second quarter. Excluding a $600 million outflow that was due to a sub-advised placement being taken in-house, retail net flows would have been positive. We expect retail net flows to improve in the second half of 2019, benefiting in part from our Voya Strategic Income Opportunities Fund. This fund has grown to over $2 billion of assets and is the top net flows fund in its Morningstar category, both year to date and over the last year.
This fund was recently featured in Barron's for its strong investment performance. Rounding out the remainder of net flows, there were nearly $900 million of inflows from a favorable sub-adviser replacement. We expect second half 2019 operating margin and earnings to improve due to continued asset growth, expense discipline, and higher performance fees in the fourth quarter. We expect this momentum to continue into 2020, giving us confidence we will improve our operating margin to 30%-32% by 2021. Turning to slide 10. Voya Employee Benefits delivered $49 million of adjusted operating earnings in the second quarter, excluding unlocking, with an improved return on capital of 29.4% on a trailing 12-month basis.
Excluding the impact of one-time favorable items, adjusted operating earnings grew 23% year-over-year, driven by 12% growth in total in-force premiums and total aggregate loss ratios at the lower end of our 71%-74% target range. Second quarter results benefited from one-time favorable items of approximately $6 million on a pre-tax basis, including a Voluntary Benefits reserve release of $4 million. We do not expect these one-time favorable items to recur in the third quarter. Despite that, we do expect that second quarter-adjusted operating earnings represent the approximate quarterly run rate for the rest of the year. Specifically, we expect loss ratios and Stop Loss to return to our target range below 80% for the remainder of the year. In the second quarter, we generated strong year-over-year growth across all product lines, particularly Voluntary Benefits and Stop Loss.
Voluntary Benefits in-force premiums grew approximately 25%, reflecting our success with both employers initiating new lines of coverage and those replacing their existing coverage. This boosts our confidence that our simplified administrative capabilities and value proposition are resonating in the market. Stop Loss grew 11%, reflecting our strong market position and solid distribution partnerships. Additionally, group life and disability in-force premiums grew 8% year-over-year. We are very pleased with Voya Employee Benefits' continued success and feel confident our capabilities will enable us to continue to drive strong future earnings growth. On slide 11, individual life-adjusted operating earnings were $53 million in the second quarter, excluding unlocking, $19 million lower than the second quarter of 2018. Return on capital was 8.6% on a trailing 12-month basis.
While mortality experience fluctuates over time, over the last 10 years, our overall experience has been consistent with expectations in the aggregate. We expect third quarter mortality to return to levels more consistent with our long-term expectations. We have achieved our plan to reduce sales-related annual costs by $20 million. As expected, this contributed to us achieving our overall run rate saves of $150 million so far, as Rod mentioned earlier. We continue to expect at least $1 billion of free cash flow to come from this block over the next five to six years, including a significant one-time release of capital related to redundant reserve financing by the end of 2019. On slide 12, we provide additional items to consider for the third quarter. Share repurchases will have a positive impact on EPS. We also expect both individual life mortality and Investment Management operating margin to improve.
There are two items that partially offset these favorable items. First, lower net investment income due to impacts from the low interest rate environment. Second, corporate losses will be higher due to expenses related to our semi-annual preferred dividend, as well as quarterly preferred dividends from our second quarter issuance. We also note that we now expect similar quarter-over-quarter earnings in Retirement given current market conditions and current trends in spread-based account growth. As a reminder, our quarterly earnings per diluted share may include increased shares from the warrants, depending on share price levels. In the appendix, we have included a sensitivity table to help you calculate the impact of the warrants. The table incorporates exercise price adjustments related to our new quarterly $0.15 dividend. While we have provided some items to consider, there will, of course, be other factors that affect third quarter EPS results.
Turning to slide 13. Given recent changes in interest rates, investors have asked for an update on some of our macroeconomic sensitivities. We have taken deliberate actions over the last several years to lower the risk of our business, and as a result, are less sensitive to significant changes in market levels or interest rates than we had been in the past. We believe our exposure to macroeconomic factors is manageable, and we remain solidly on track to hit our 10%+ annual growth target. As a reminder, our equity market sensitivity is roughly $4 million-$5 million pre-tax operating earnings impact for every 1% move versus our annual assumptions. Additionally, our sensitivity to interest rates is an estimated 2%-4% impact to pre-tax operating earnings for a 100 basis point change in interest rates.
The lower end of the range represents the expected impact of current rates for 2019, as rates are down roughly 100 basis points since we announced our Investor Day targets. The higher end of the range reflects the likely impact in 2021 if low interest rates were to persist for the duration of our three-year plan. The interest rate exposure is driven by the reinvestment of our portfolio at lower new money yields, as well as a more immediate impact from floating rate securities. The majority of the interest rate impact would be felt in our Retirement segment. The effect of current market interest levels is incorporated in my comments on the prior slide about quarterly Retirement earnings expectations. That said, we have a demonstrated track record of delivering strong results through macroeconomic challenges, including low interest rates. Turning to slide 14. We have a strong capital position.
Our estimated RBC ratio was 429% at the end of June, comfortably above our target of 400%. Our second quarter ending excess capital of $540 million includes an approximate $100 million pro forma adjustment for a senior debt paydown completed early in the third quarter. Our pro forma debt to capital ratio was 27% on June 30, below our 30% target. We continue to see value in share repurchases given our current valuation levels. Year to date, we have repurchased almost $650 million of shares. This includes the $446 million of repurchases in the second quarter. We have included further detail on second quarter share repurchases in the appendix. In addition, as Rod shared earlier, we announced a third quarter common stock dividend of $0.15 per share. This represents an annual yield of over 1% as of market close on August 2nd.
The introduction of a higher dividend reflects our confidence in generating sustainable free cash flow and will help to further expand our shareholder base. Turning to slide 15. We remind you that our business mix today is much simpler and generates a higher free cash flow conversion than pre-transaction levels and our peers' average. Our free cash flow conversion is 85%-95%, supporting our projected free cash flow yield of over 10%. This yield compares favorably to our peers. In summary, we remain confident in our ability to grow normalized EPS by at least 10%, despite lower interest rates and elevated mortality in the quarter. Our business mix is focused on high cash conversion, has no long-term care, and minimal VA exposure, and our capital position and balance sheet remain strong. With that, I will turn the call back to the operator so that we can take your questions.
We will now begin the question and answer session. To ask a question, you may press star then one on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. As a reminder, participants are limited to one question and one follow-up. Our first question comes from Nigel Dally of Morgan Stanley. Please proceed with your question.
Great. Thanks. Good morning. Had a question on retirement. Stripping out the alternatives, core earnings are now running around the $150 million level. That's quite a substantial decline from the $170s that you were achieving in the back half of last year. Just hoping you can flesh out a little more detail as to the key factors behind that decline. Is it purely interest rates, or are there some other factors also at play?
Good morning, Nigel. Charlie will take that. We may toggle back and forth a bit. Charlie?
All right. Thanks, Rod. Thanks, Nigel. We did think that our earnings would be in line year-over-year, but given certainly some developments since last quarter, we now think, as Mike said, that the run rate for Q3 and four will be closer to Q2. Why? I think is a key question, obviously, relative to some lower than expected spread-based margin, which Mike can speak to as well. We spoke to our expenses being higher for some reasons we discussed in the first quarter. Really, that is really being focused also a lot on the growth that we've had in the business and the investments that we are making to onboard the new sales as we gain share in the market.
I would point out that we've got expected $1 billion in full service net flows and very solid retention rates expected in the last half of the year in full service. In addition, in our record keeping, we have $38 billion and over 535,000 participants in implementation. That's in the process of being set up, none of any known surrenders. Now, roughly, we expect to see about half of that in the fourth quarter of this year and the remainder throughout next year, but mostly in the fourth quarter of 2020. Really, when I think of the key developments since last quarter and how to think about this, with rates being down roughly about 75 basis points since our last call on the 10-year.
Also, our spread-based general account assets are down in quarter. We are expecting those to be relatively flat for the remainder of 2019. Obviously, business mix and participant behavior can emerge differently than expected, but that's what we're currently expecting. Then also, the equity markets, interestingly enough, are also contributing a bit of a drag with the S&P essentially roughly the same as it was in our last call. We do have a number of levers that we're managing to mitigate the lower rates, as much as possible, and these will emerge over time along with our growth. We've been through some volatile equity and interest rate environments in the past.
We think our strong market of markets business and Retirement drives a revenue diversification, which is experiencing that solid growth in our business and will serve us well in the remaining two and a half years of our three-year plan.
Mike will add a little more dimension on the interest rate piece. Mike?
Sure. Look, I think the way to think about this is in two pieces. One is the impact in the most recently finished quarter, there was an element of floating rate assets in there that caused a little bit of pressure, as well as the natural evolution of the underlying portfolio. As Charlie mentioned, the assets themselves, the underlying separate account or general account balances were basically flat. Going forward, we gave the additional sensitivity guidance, 2%-4% over the next three years of drag, for a 100 basis point drop. That's more or less where we are now. That drop is front-ended because of the floating rates. There's an immediate impact from that, and then there's a more gradual effect as the impact of reinvestment and again, the continued evolution of some higher yielding assets coming out and some lower yielding assets coming in.
That said, it's a fairly slow process from here once you get past that immediate jump from the floaters. Because our assets are fairly long, there's not a lot of turnover quarter by quarter. So there's a little bit of an abrupt jump that gets you to the 2% and then a much slower buildup to the potential four, if rates stay where they are. It also does not give effect for other levers that we can pull. What's built into that sensitivity is sort of the natural crediting rate actions that we might take. High crediting rates, as we've shown in the past, that will allow us to, we think, continue to deliver the 10%+ EPS growth that we've shared.
Nigel, let me just add one other dimension for you and our other participants, reinforcing really the last point Mike made. We are reaffirming our 10-plus% EPS growth rate for the balance of the plan that was primarily driven in 2019 and 2020, as we've previously discussed, by both our expense actions and capital management, as we planned and as we expected. The other piece I'd remind us all is in the most recent plan period ended for 2016, 2017, and 2018, we brought out, because of the environment, three different occasions, our low-for-longer slides. This is not a movie that we're unfamiliar with, and this is not unique to Voya, and we found a way to accomplish our plans during that period, and that gives me a lot of confidence that we collectively can with the levers that we have available to us here.
We're simply giving the best guidance forward on interest rate sensitivity, and you have to make an assumption that it is what it is right now. The only thing I know for certain over all these years of having our hands firmly on the steering wheel is it will change.
That's very helpful. Thanks.
Our next question comes from Alex Scott of Goldman Sachs. Please proceed with your question.
Hi. First question I had was just on Voya Retirement, and the net flow outlook. A little bit weaker this quarter, and I know you mentioned the record keeping that's coming on in 4Q. Can you talk about the full service pipeline and what you're expecting there?
Yeah. Charlie will jump in. We want to make sure you just heard, we do have $1 billion plus coming in the second half of this year in full service, plus the $38 billion in record keeping. Charlie?
Yeah. Thanks. Obviously, we're expecting a strong second half in net flows in our full service, as well as our record keeping that we've talked about. We have solid visibility in what to expect in sales in the upcoming quarters from plans that are in the implementation process. We distinguish that, and I think you should distinguish when it's often we speak in the industry about pipeline. Sometimes that's referring to RFP activity. What we're talking about is translating that RFP activity to outcomes to sales that will materialize and ultimately deposits in the upcoming quarters. We're really translating that, and I think it speaks volumes of how we're translating the activity into outcomes.
Primarily, obviously in our full service, the $1 billion, just to give you a little color underneath that, we have about 25% more plans in implementation today than we did a year ago at this time. That's contributing to that $1 billion in full service flow. That gives us good confidence. Now, it's primarily driven by our corporate market, but we're also expecting positive flows in our tax-exempt market in the second half of the year. Just to quickly wrap it up on this one, I think our ability to turn some of the increased RFP activity into outcomes or wins, if you will, is really solid. We're experiencing some positive retention trends as well. That's been a help.
I think it speaks volumes about how our value proposition is resonating in the market that we're built for retirement, financial wellness, our digital, the customer experience that Mike spoke about. I think all these things contribute to our confidence in net flows in the second half, as well as our confidence in achieving our recurring deposit growth as we set out on Investor Day.
Got it. The follow-up I had, a little bit more of a housekeeping item, when you guys are adjusting for alternatives and the mortality when you give us that run rate, are you accounting for the DAC effect? Because there is some offset from DAC amortization, I would think. If you weren't, can you quantify that for us? Because I think, just this quarter, because alternatives and mortality were such big pieces, I think it actually might be material to the assessment of what the underlying earnings power was.
Alex, thanks for the question. No, we do not adjust for DAC. We have not historically. I don't think we should give it now because it won't be comparable to past results. What's important for us and the goals that we've set is to grow normalized operating earnings per share 10%+ year-over-year. The 488 that we posted for 2018 uses the exact same methods that we're using this year. I think it's important for us to maintain consistency. You're correct. There is a DAC offset. It will vary quarter-to-quarter and from business to business, depending on whether it's hitting FAS 97, where the DAC affects versus FAS 60 versus the various blocks of business may have different particular K-factors. That's kind of the weedy answer.
Big picture is we think we're doing it consistently, it's probably the easiest way for people to understand the quarter-to-quarter changes.
We've never adjusted for mortality.
Right.
Got it. Okay. That's helpful. I just wanted the clarification for thinking about normalization in the next quarter as well. I think it's worth considering anyway.
Yep. Thank you.
Thank you.
Our next question comes from John Nadel of UBS. Please proceed with your question.
Hey, good morning. First wanted to, maybe Mike, if you could give us a little bit of color on the individual life redundant reserve financing. Sounds like you have more confidence that that's going to get completed before the end of this year as opposed to maybe falling over into or lagging into 2020. Maybe you can give us a sense for where things stand and any update on what you think in terms of capital freed up.
Yeah. We meant to give the impression that we have more confidence. We do expect it to occur by the end of the year. I think you should think of that as a fourth quarter event. The range in terms of capital release from that specific action will be between $150 million and $200 million. It's never over till it's over, and all the docs are signed.
The ink is dry, but we're pretty comfortable that that's going to happen.
Will that transaction have any meaningful impact on the pace that you expect in terms of the runoff or pace of decline in earnings from the individual life business over the next year or two?
It has a modest impact on earnings in life, but it's really, in the big picture, relatively nominal because we're releasing the assets that are otherwise holding it, and therefore, we lose the income on that. There's also a modest amount of ongoing fee. That's a bit of a detriment. The overall steer on life earnings is it's going to erode very slowly. Over the near term, any natural erosion from the block declining, I think is largely going to be offset by our expense actions.
Got it.
Earnings barring fluctuations in mortality, should be fairly stable year in, year out for the next couple at least, I think.
Okay. That sounds good. The follow-up question would just be on capital and capital management. Obviously, we've hit a bit of a rough patch here in the market. Who knows if this is the beginning of something more significant? Clearly providing an opportunity that we haven't seen in the shares of your stock or many other stocks in quite a bit of time. How do we think about, you're already sort of above in the first half what I think would be a more normalized pace of buybacks. How should we think about your willingness and maybe capacity to continue at a pretty elevated pace for the remainder of the year to take advantage of these lower prices?
John, I think the way to think about it is, we've got $200 that actually just closed yesterday in the ASR that we talked about. You can expect, I think, a similar amount for the late third, early fourth quarter. As we get further clarity on the life capital release as well as some other items, I think there's further upside. Keep in mind our overall authorization is, while our authorization right now is $300 remaining, our practice has been and will continue to be to bite that off in chunks. We will talk to the board as we get to the exhaustion of that authorization. If we think it's the right thing to do, we'll seek more, and I think our board has a pretty strong track record of being very supportive in that direction.
We are intentional in communicating to you, as Mike just has, the $646 that's been accomplished, the roughly $200 per quarter, as well as the life release. When you look at the math, I think that further supports and strengthens our conviction in our plan and our ability to accomplish our 10+% growth target over this period.
Appreciate the responses. Thank you.
Ladies and gentlemen, as a reminder, in the interest of time, we ask that you please limit yourself to one question and one follow-up. Our next question comes from John Barnidge of Sandler O'Neill. Please proceed with your question.
Thanks. Employee Benefits seeing real nice growth in premiums for both group life and Stop Loss, largely has had pretty good loss experience recently. Can you talk about the market landscape, where you're maybe seeing demand coming from and the next opportunity for growth within that market, please?
Rob Grubka will take this.
Yeah, thanks, Rod. Thanks, John. Our story is a simple one, which is a big reason we like it, is we're focused from a product perspective. We're focused from a market perspective. On the product side, obviously, you see the three core segments of VB, Stop Loss, and life. We're executing that well. We expect to continue doing that. We also focus on the middle and upper end of the market. The call-out on that, I would say in particular with voluntary, we mentioned this last quarter, our groups that we're adding, over 50% of them are new to the space. They didn't have voluntary coverage at the time. I think that's a dynamic, again, especially where we focus and play, that we continue to see a lot of runway.
The other aspect of it is frankly, I think just better educating the consumer and the value of the protection of those solutions when you think about higher deductible health plan and the trends there. Their responsibility is only continuing to grow. We think participation within the cases that we've written, that combination of new opportunity as well as just growing the book and more opportunity to be efficient and effective there gives us plenty of room and confidence to continue to grow. We're certainly on a path to exceed 10% as we look forward for 2019, and working hard to continue to do that year-over-year.
How is the price competitiveness of the market? Is it rational or are new players trying to gain share by going after price? Anything you can elaborate on there?
Overall, the high-level comment I would say, we've got a lot of smart competitors. We try to be smart, too. We see it as a rational marketplace at this point. You're going to run into the case-by-case story if I walk the hall and bump into salespeople and underwriters. Net-net, we view it as disciplined sufficiently, and we intend to play that way as well.
I think it reinforces, which Rob and Charlie have talked about as well as Christine for that matter, the breadth of the distribution reach that we have. Rob can elaborate on it, but we have really expanded our distribution reach in his business, both on a national basis and a regional basis. We are one of the top four, five-ish players in those segments, and I think it's just reinforcing of that as well as it's been broadly in our retirement business.
Great. Thanks for the answers.
Our next question comes from Ryan Krueger of KBW. Please proceed with your question.
Thanks. Good morning. I wanted to clarify something on the interest rate sensitivity guidance. Is that a cumulative number? In other words, there would be a 2% impact in 2019, and then assuming rates remain similar in 2021, there would be a 4% impact total relative to what you would have otherwise expected. Am I thinking about that correctly?
I guess I'm not quite sure how you're thinking about it. I guess the way I'd position it as we gave a 10%-plus EPS growth year-over-year. I think of that as a 2% headwind growing to a 4% headwind by the end of the period if rates stay low and if we aren't able to find other attenuating actions. It's more like 4% less than we would have been had we not had the interest rate headwind is the way to think about it. Just to frame that even a little more broadly, remember that from the bottom, we gave three components. Cost saves, capital management, organic growth. Each of those three had a range associated with it.
When you added up the top and the bottom of each of those ranges, we saw EPS growth that could be anywhere between 8% and 18%. We think there was meaningful upside to the 10% in some positive scenarios and even in kind of the base case. While 4% may seem like a lot, you've got to put it in the broader context of that big range. What we see is the various levers we have to still be able to deliver the 10% plus over the three-year period.
Understood. Thanks. Then, I guess, what about in terms of balance sheet sensitivity? Can you give us any sense of the sensitivity in your GAAP balance sheet if you choose to reduce your long-term interest rate assumption, and then would you anticipate any statutory impacts?
The short answer is we plan to update that as we complete our third quarter assumption update. We'll give you refreshed guidance then. I think that's probably rather than give you something now and then change it in a quarter, potentially, we'll give it to you then. If we do change the long-term assumption, we'd have a decision to make whether we change both on a GAAP and a stat basis. If we change both, then there would be an impact on both. At this point, look, this is a fairly short-lived phenomenon. These are assumptions we're making literally over the course of the next five decades in our models. I don't think we want to overreact to a few weeks of interest rate pressure and market worry about trade balances and things like that. We'll take the big picture.
We look historically at where rates have been, and we'll make an informed judgment and go forward from there.
Ryan, I think as you know, the third quarter is our normal cycle of when we do that review.
Understood. Thank you.
Our next question comes from Erik Bass of Autonomous Research. Please proceed with your question.
Hi, thank you. Question for investment management. It sounds like your outlook for net flows there continues to be quite positive. I was just hoping you could maybe give a little more color on the pipeline that you're looking at in the second half of the year. Talk about how declines in interest rates are affecting demand, and I would think given your business mix, that you may be benefiting a bit from that, but I would appreciate any comments.
Christine will take that. Thank you for asking. It's a terrific question.
Thank you, Erik. As far as the pipeline in the second half of the year, we really do see continued strength, and it's broad-based across multiple asset classes. We're seeing increased demand for some of our specialty asset classes. Think commercial real estate, securitized credit, CLOs as an example. To your point, with the decline in interest rates and sort of the accommodation around the world, we see increasingly institutional and retail investors looking for income, high-quality income, for which our product base is very well poised to meet that need. I think notably, when we think about Investment Management, where we are, I would really think about in terms of our operating margin. We see this as an inflection point because we continue to see very strong organic growth.
Notably, we're also seeing a nice pickup on the retail side of our business. Mike referenced in the call our retail flows, had it not been for a $600 million sub-advisory replacement that had nothing to do with investment performance, we would have been positive. We're seeing that pipeline continue. We have a Strategic Income Opportunities Fund as an example. That fund alone has garnered an additional $1.3 billion of assets just year-to-date. Again, we see really strong momentum, broad-based, and we remain confident that this is an inflection point, and we're well on our way to achieving our Investor Day operating margin target.
Thank you. Just one follow-up. Given what you're talking about with the mix, more inflows into specialized asset classes and retail, should we think that that would be net neutral to positive for the overall fee rate? Kind of offsetting some of the kind of industry-wide compression?
Yes. As we look out, when we think about our fees, we think about it on a trailing 12-month basis, we do expect the fees to stay stable, to improve throughout the second half of the year and in 2020. I think as well, one other notable thing in terms of 2020, Erik, as you know, we have a private equity firm that is branded as Pomona, they have not been in the market this year with a fund, we expect to be launching a private equity fund in 2020. Again, that should contribute not only to revenues, but also the mix of fees on our inflows.
Great. Thank you very much.
Our next question comes from Andrew Kligerman of Credit Suisse. Please proceed with your question.
Hey, good morning. A little clarification on the Life Block. Mike, you mentioned redundant reserve financing, how about the timing of just Life Block sales In and of themselves. Also there, the life insurance mortality, you've indicated that you think mortality will normalize next quarter, hence the $0.14 come back. Should we take that to not be concerned about an assumption review? For example, Prudential reported a $208 million charge in their assumption review, in the second quarter, of course, yours is in the third quarter. Should we be thinking not to read anything through and that you're feeling pretty good about mortality?
I'll take the second half of that first and then come back to the question on reinsurance. There's no read-through from the second quarter result to third quarter assumption changes. It's a data point, along with a lot of other data points that we use to assess the mortality. We're in the early stages of that review. I think we'll do that along with every other assumption in the life block and in our Retirement business and to the extent it matters in our Employee Benefits business. We'll complete that process over the next few months. There's nothing in the result that we saw this quarter. As we said, it was all driven by severity. I think just broadly based, we just had higher average claims.
It wasn't just that we had a few big claims, it was even in the smaller claims, they were just higher than usual. That will happen in a life insurance block from time to time. It's random noise. Overall, the experience we have shows that we should be comfortable with our assumptions, and feeling like we'll have more information to share when we get through the review. As it relates to reinsurance and block sales, nothing new to share there other than we continue to, as we've said from the beginning, monitor the markets and assess our opportunities to accelerate cash release where it makes sense and is in the best interest of shareholders. That work goes on. It will continue to go on, as we get to a point where there's something we need to talk about, we'll share that at the right time.
Andrew, I think the only other thing I'd add to what Mike said, it was covered in his beginning remarks. We said in terms of the expense reduction from the enterprise perspective, by the first half of this year, $110 million-$130 million for the enterprise plus $20 million for life. Both of those numbers have been accomplished. The $20 million for life has been accomplished. The progress that Mike has shared on the reinsurance transaction. You should expect, and the listeners, we are actively managing this block of business, and all options remain on the table. We're going to keep you posted. We believe we're the best managers of the capital behind that block, and we are highly aligned to release this as fast as we can in a smart and effective way.
Our next question comes from Thomas Gallagher of Evercore ISI. Please proceed with your question.
Good morning. I just wanted to come back on spreads in retirement. The change there seemed pretty abrupt to me. I just wanted to get a better sense for what happened on the portfolio yield side. Mike, I heard you reference the floating rate, I think that's a little less than $2 billion. I get that'll impact it, were there other high-yielding assets maturing large prepays? Can you talk a little bit about the portfolio yield side and then also crediting rate, which I think actually went up a little bit, I'm not quite sure on that.
Let me talk a little bit about on the income side, I can maybe let Charlie weigh in a little bit on crediting rate. The floating rate is a meaningful contributor. It's not the only contributor. There were also just the, as I mentioned earlier in one of the responses, kind of the natural evolution of some of the assets. Some of the asset categories, the yield can vary a little bit from period to period. Overall, that's the driver. I think it's also that trend is part of what's causing us to give the guide we are on the third quarter and beyond. Charlie, on crediting rates.
On crediting rates, I think what you have observed there is we did have a larger surrender at a lower rate that moved up the average rate. I think of it a bit as a business mix that impacted that crediting rate change there.
That makes sense. I know, I think during part of last year, you all had some renegotiation of guaranteed contractual minimums, we had some DAC charges, some earnings relief. Is there anything else like that out there that you're planning on? Is that kind of embedded in guidance, or is that an opportunity as it was last year?
Thanks. Tom, I'd say it's embedded in our guidance. I kind of think of our interest rate mitigation plan a couple of ways. We've got about 20% of our spread-based assets that we have the ability to modify crediting rates on. We're going to continually manage that crediting rate balancing the economic environment and the competitive environment.
On the 80% that are at the GMIR, that are currently at the crediting rate of the GMIR, as you point out, we were proactive in that. That GMIR, you shouldn't think of necessarily as a constant per se, because what we did is we froze the assets at the GMIR level on a large portion of that business, so that new participants, deposits, and transfers will come in at a lower GMIR rate. That will, over time, continually help us to slowly see that GMIR average rate come down. We've got some mitigation factors there, as well as our overall revenue mix between spread and fee-based.
We've got some levers on our fee-based side, and then just our continued discipline and maintaining our disciplined eye, I should say, on expenses that Rod and Mike were speaking to will drive the efficiency in our ongoing unit cost improvement.
Our next question comes from Suneet Kamath of Citi. Please proceed with your question.
Thanks. Just first question on capital. I think you guys recently issued some preferred. How does that factor into your thoughts on post-quarter excess capital or RBC?
Well, it's included in the excess capital results. We did about a $300 million raise. We have now, in the third quarter, retired about $100 million of debt. That's included in the excess capital amount and is part of the overall capital management approach we're going to take, and it helps inform the steer we gave earlier in terms of our future thinking on repurchases.
Okay. Just to come back to Voya Retirement one more time, it's good on a consolidated basis to hear that you're reiterating the 10%+ EPS growth, clearly the Voya Retirement segment earnings power is less than we thought given the rate environment. With respect to the mitigating factors, it seems like a lot of these will play out over time. As we think about for the balance of the year, is the single biggest lever you have incremental expense reduction? It seems like you're already doing quite a lot of that, but you still have room to do more, I guess is the question.
Suneet, it's Rod. Yes. I would say as planned. The primary driver from Investor Day in 2019 and 2020 were both of those levers, as planned and as is playing out. This door on even the crediting rate, all these are very appropriate questions, that door swings both ways. We could find ourselves in a position in three months' time or two months' time that interest rates go in a different direction. My point that I brought up earlier on our having to bring out low for longer slides three times in this 2016, 2017, 2018 period was just that. The answer is yes, we have levers as expected, and that's why we are reaffirming our target as we have on this call.
If I could just follow up real quick just on that target. I don't want to get too cute in terms of timing, but is the rate environment that was predicated in that reiteration kind of where we are more currently, or was it where we were at the end of the second quarter?
I don't think the guidance is so precise that a few basis points one way or the other makes a difference. I would say, look, it's moving even today.
Yeah.
If rates stay where they are, it's certainly going to be a little bit of additional headwind, but I don't know that it doesn't take you outside the range of guidance that we've given, in my view.
Okay, thanks.
This concludes our question and answer session. I would like to turn the conference call back over to Rod Martin for any closing remarks.
Thank you, operator. As you've heard this management team say before, including when we set our targets at the most recent Investor Day, there will be challenges along the way, but we remain confident that we will grow our normalized EPS by at least 10%. Our process during the second quarter demonstrates our continued commitment to deliver on these targets through organic growth, cost savings, and optimal capital deployment. We have a clear strategy with three complementary businesses that are enabling us to expand our presence in the workplace and with institutional clients. These businesses generate strong free cash flows, which we expect will continue to support excess capital generation. 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.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.