Good morning, and welcome to the Voya Financial Third Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to Michael Katz, Senior Vice President of Investor Relations. Please go ahead, sir.
Thank you, good morning. Welcome to Voya Financial's third quarter conference call. Materials for today's call are available on our website at investors.voya.com or via the webcast. Turning to slide two. Some of the comments made during this conference call may contain forward-looking statements within the meaning of federal securities law. The company does not revise or update them to reflect new information, subsequent events, or changes in strategy. Risk and uncertainties that could cause actual results to differ materially from these expressed or implied are discussed in the company's most recent Form 10-Q filed by the company with the U.S. Securities and Exchange Commission. Additionally, some of the comments made during this conference call may refer to non-GAAP financial measures. Reconciliation of these measures to the most directly comparable U.S. GAAP financial measure can be found in our press release and financial supplement found on our website, investors.voya.com.
Joining me on the call are Rod Martin, Voya Financial's Chairman and Chief Executive Officer, as well as Mike Smith, Voya's Chief Financial Officer. After their prepared remarks, we will take your questions. For that Q&A session, we have also invited the heads of our businesses, specifically Charlie Nelson, Retirement, Christine Hurtsellers, Investment Management, Rob Grubka, Employee Benefits, and Carolyn Johnson, Individual Life. With that, let's turn to slide 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 third quarter, we demonstrated our commitment to growth, operational excellence, and capital management. Normalized for DAC unlocking and prepayment fees and alternative income above our long-term expectations, our adjusted operating earnings grew 17% year-over-year. On that basis, our adjusted operating EPS was $1.34 per share. This is within our target range of $1.30-$1.40 earnings per share that we had aimed to achieve by the end of the second quarter of 2019. At Investor Day on November 13th, we'll be sharing details on our updated plans for achieving further organic growth, cost savings, and capital management. These plans will enable us to continue to improve our earnings per share. Our performance throughout the quarter demonstrated continued momentum across our businesses.
We achieved another quarter of record adjusted operating earnings for Retirement, with increased full-service recurring deposits by 10% for the trailing 12 months. In Investment Management, we delivered our 11th consecutive quarter of IM-sourced positive net flows, a sign of commercial momentum with our institutional clients. In Employee Benefits, we had strong improvement in stop-loss underwriting driven by our disciplined pricing actions. Within the segment, we continue to increase our annualized in-force premiums, largely due to our voluntary business growth. We continue to have a strong capital position with approximately $813 million of excess capital as of September 30. We repurchased $250 million of shares during the third quarter, and we plan to repurchase $250 million of shares in the fourth quarter as well. In addition, we received a $500 million share repurchase authorization from the board, which gives us the opportunity to create additional value for shareholders.
Since our IPO in May of 2013, we have repurchased more than 100 million shares. We also made further progress in the third quarter on our plans to reduce leverage. At the beginning of the fourth quarter, we paid down $325 million of outstanding debt, which was funded by a new preferred equity issue. Turning to slide five. As we announced yesterday, we have concluded the strategic review of our Individual Life business. Following the close of our annuities transaction June 1st, we felt it was important to look at the best path forward for the Individual Life business, given it had been closely aligned with annuities. After a thorough review, we have decided to cease new sales at the end of this year while retaining the block. There are several important reasons why we've chosen this path.
First, the decision aligns with our strategy of focusing on higher growth, higher return, capital-light businesses. These businesses are largely focused on serving customers through the workplace and within institutions. Second, this path will deliver greater shareholder value by improving cash flows while reducing costs. We expect to generate at least $1 billion of free cash flow from the Individual Life segment over the next five to six years. Third, Individual Life will continue to provide earnings and capital diversification with minimal correlation to equity markets. Additionally, as we close the business to new sales, we retain future optionality to find strategic solutions to accelerate capital release. As many of you know, we have a strong track record of improving in-force blocks and driving efficiencies. We are retaining a talented team to manage this in-force block who will continue to help us realize the value that we've identified.
I want to take a moment to thank Carolyn Johnson, our leadership team, and the many employees in our Individual Life business who helped bring this strategic review to a successful conclusion. Turning to slide six. Our people have driven our success over the past several years, enabling us to earn external recognition that highlights our strong culture. For the third consecutive year, Voya was named to the 2018 Dow Jones Sustainability Index. 35 companies in the financial services industry were invited to apply, and we were one of just seven to become a member. Additionally, we were once again certified as a Great Place to Work by the Great Place to Work Institute for the third year. Earlier this month, Voya was named one of the world's best employers by Forbes. We ranked 194th on the list of 500 selected companies.
During September, we held our annual employee giving campaign. We had our highest employee participation ever at 71%, with more than 4,000 employees donating or volunteering their time in the communities that we do business in. As a reference point, the average workplace campaign participation rate at U.S. companies is 30%. Together, with matching contributions from the Voya Foundation, we donated roughly $1.9 million to charities around the country, positively impacting the communities where our employees and customers live and work. This effort, along with our external recognition, demonstrates Voya's strong culture and dedication of our people, which helps to attract and retain top talent. Mike will provide more details on our performance for the quarter.
Thank you, Rod. On slide eight, our third quarter operating results demonstrated strong momentum. We delivered third quarter adjusted operating earnings of $1.34 per share, excluding unlocking and prepayment fees and alternative income above our long-term expectations. On a reported basis, adjusted operating earnings were $0.84. This quarter's result is in the range of our quarterly adjusted operating earnings target of $1.30 to $1.40 per share. Our strong earnings growth over the last several quarters has been driven by rising fee income, favorable net underwriting, realized cost savings, and share repurchases. We look forward to sharing our next set of financial targets with you at our Investor Day on November 13th. During the quarter, we had $0.70 of unfavorable DAC unlocking, which was mostly a result of our annual assumptions update. As we disclosed in September, we increased reinsurance premium assumptions for certain Individual Life blocks.
The impact of this change was near the high end of the estimated $150 million-$200 million range and was partially offset by favorable assumption changes in Retirement. Combined prepayment and alternative income was $0.20 above our long-term expectations. This was primarily driven by a one-time distribution related to the sale of a private equity holding in our alternatives portfolio. Moving to slide nine. Retirement achieved another record quarter of adjusted operating earnings. This was driven by strong fee income that was supported by 12% growth in assets under management year-over-year. Our trailing 12-month return on capital also grew, reaching 13.4%. During the quarter, Retirement benefited from strong investment performance from our alternatives portfolio. The previously mentioned favorable DAC unlock was $15 million, primarily driven by mean reversion adjustments to our equity return assumptions.
Retirement generated positive net flows in the quarter, largely driven by full service corporate markets and stable value. Full service corporate markets generated another quarter of positive flows, marking 20 consecutive quarters of inflows. This was supported by 12% growth in trailing 12 months recurring deposits year-over-year. Our second half guidance of $600 million-$800 million Retirement net outflows remains unchanged. As we highlighted on our second quarter call, this largely reflects the impact of stable value surrenders, which we now expect to occur in the fourth quarter. As a reminder, the net earnings impact of these surrenders will not be meaningful to our Retirement segment. As you may have seen, we have provided additional disclosures in our investor supplement to better reflect the economics of our business. First, the new stable value disclosures better depict the earnings impact from net flows.
Previously, we classified the loss of management of the underlying stable value assets as an outflow for Retirement, even when we retained the wrap guarantee. Going forward, while this will continue to be considered an outflow for Investment Management, it will no longer be recorded as an outflow for Retirement. Second, we provide greater transparency into our record-keeping business by providing a roll-forward of assets under administration. In the fourth quarter, we expect a large record-keeping plan termination of approximately $40 billion of plan assets. The annualized pre-tax operating earnings impact to Retirement is expected to be in the low single-digit millions. Though activity can be lumpy in any given quarter, we are encouraged by the 2019 pipeline of new sales. Third, we provide new disclosures on the fee income generated by our full-service business.
Finally, we provide a more holistic view of our business by including total client assets. On slide 10, Investment Management delivered $48 million of adjusted operating earnings. We generated strong commercial fee growth from higher Investment Management-sourced AUM. Investment capital results were also favorable in the quarter. As expected, this was offset by the full quarter run rate earnings impact of the annuities transaction. The trailing 12-month operating margin was 31.3%, including Investment capital. We expect the trailing 12-month operating margin to decline over the next several quarters as the effect of the annuities transaction becomes fully incorporated. Over time, we do expect to return our operating margin to the low 30s as we rebuild our asset levels. As you can see on the slide, we have provided a new view of retail and institutional source net flows. This aligns more closely to how we manage the business.
Institutional client demand for our solutions led to our 11th consecutive quarter of positive Investment Management-sourced net flows. We had several institutional wins, including a sizable short-duration mandate, commercial mortgage loans, and a securitized credit portfolio funding. The fees on inflows were lower than those for outflows by nine basis points in the third quarter. On a trailing 12-month basis, fees on our inflows exceeded our outflows by three basis points. This will vary each quarter, depending on asset mix. Looking ahead, we have a healthy commercial pipeline that we expect to fund in the fourth quarter of 2018 or early 2019. This includes several items, including a sizable senior bank loan mandate with a notable Asian savings plan, highlighting the growing global demand for our solutions. Several mandates across our fixed income strategies within our growing insurance asset management channel, a large sub-advisory mandate, and new CLO issuances.
Turning to slide 11. Employee Benefits adjusted operating earnings were $50 million, and our trailing 12-month return on capital was 26.9%. As we signaled last quarter, loss ratios for stop-loss returned to our target range, driven by the impact of pricing actions taken on 2018 business. We remain confident the full-year loss ratios will also be in range. Our group life loss ratio also returned to our target range. Strong momentum in voluntary continued into the third quarter. Voluntary annualized in-force premiums grew 20% year-over-year, supported by sales across all our supplemental health products. Our voluntary offerings continue to represent an important growth driver for our business. This quarter, we have started to provide our total aggregate loss ratio in our investor supplement. We expect the total aggregate loss ratio to be between 71%-74% on a trailing 12-month basis.
On slide 12, Individual Life-adjusted operating earnings were $66 million in the third quarter. In the quarter, mortality was in line with expectations. Our annual assumption update resulted in a negative $200 million DAC unlock, mainly driven by increased expected reinsurance costs. Our assumptions now reflect reinsurance premium increases or recaptures related to all of our significant reinsurance partners. We don't expect additional significant reinsurance rate actions in the foreseeable future. Our trailing 12-month return on capital was 9.8%, lower sequentially as average GAAP capital increased with the impact of tax reform. Turning to the financial implications of our strategic review decision. We will incur an approximately $15 million restructuring charge in the fourth quarter. We expect $20 million of annual pre-tax cost savings in 2019 as we wind down new business activity. Our run rate free cash flow conversion will improve to 70%-80%.
Factoring in other one-time actions, we expect to generate at least $1 billion in free cash flow over the next five to six years. On slide 13, we provide additional items to consider for the quarter. Specifically, we expect expenses in the fourth quarter to be higher due to the timing of project spend and variable compensation, primarily in our Retirement segment. While not explicitly quantified, share repurchases will have a meaningful positive impact on fourth quarter EPS. We plan to repurchase $250 million of shares in the fourth quarter. We have slightly revised our estimated annualized pre-tax earnings impact of a 1% move in equity markets to approximately $4 million-$5 million. While we have provided some items to consider, there will of course, be other factors that affect fourth quarter results. On slide 14, our capital position is strong.
Our estimated RBC ratio was 474% at the end of September. We expect our RBC ratio to decline in the fourth quarter as tax-driven changes to the RBC formula go into effect at year-end. As mentioned last quarter, this estimated impact to our RBC ratio is approximately 35 points. In the third quarter, we strengthened our balance sheet with an attractively priced $325 million preferred equity offering. The proceeds helped fund a debt paydown, which will reduce our debt-to-capital ratio in the fourth quarter of 2018. You can see the pro forma impacts on this slide to both our excess capital and debt-to-capital ratio. Specifically, our pro forma excess capital, which consists of estimated statutory surplus and holding company liquidity above target, increased to $813 million at the end of the third quarter. Additionally, our pro forma debt-to-capital ratio was 26.3%, below our 30% target. Turning to slide 15.
As depicted in the graph on the left, if we adjust Voya's closing share price on October 29 by our estimated value of our deferred tax assets, Voya trades at approximately six times 2019 consensus earnings. At these trading levels, we continue to view share repurchases as value enhancing for shareholders, particularly given our high-quality earnings, our high free cash flow generation, and the growth opportunities ahead of us, which we look forward to sharing with you at our upcoming Investor Day. As Rod mentioned, we repurchased $250 million of shares in the third quarter. We plan to repurchase an additional $250 million in the fourth quarter at these attractive levels. In addition, the board approved a new $500 million share repurchase authorization. In summary, we generated earnings per share within our targeted quarterly EPS range ahead of schedule.
Our businesses continue to see strong momentum. Our capital position and balance sheet are strong. With that, I will turn the call back to the operator so that we can take your questions.
Thank you. Ladies and gentlemen, at this time, we will be conducting a question-and-answer session. If you would like to ask a question, please press *1 on your telephone keypad. The confirmation tone will indicate that your line is in the question queue. You may press *2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question is coming from the line of Ryan Krueger with KBW. Please proceed with your question.
Hi, thanks. Good morning. Can you provide some additional color on the decision to retain Individual Life rather than sell or reinsure it?
Yes, Ryan. Good morning. It's Rod. Mike and I and Carolyn will toggle with that. The first step, Ryan, I know you're very familiar, but maybe we've got some new listeners on the call. I want to just step back a moment and then get into the specifics. I think all of you are fully aware that we've been on a journey of ROE improvement and capital return to shareholders. We're finishing phase II of our plan, and we're about to introduce, we're very excited about it, in two weeks, phase III at our Investor Day. As I cued up on the call, we're talking about our higher growth, higher return capital light businesses, focused on the workplace and with financial institutions. We announced earlier this year the Apollo Athene transaction. We closed that on June 1st. The other piece of the portfolio rationalization was the life review.
We have brought the same rigor, review, and thoroughness to that that we did with the CBVA piece. It was our conclusion, as we've announced, that the best outcome for shareholders from a capital perspective was what we announced. You'll hear from Mike in just a moment, but we're talking about returning to shareholders over the next five or six years, a $1 billion plus. Much of that will happen in the first two or three years. It also provides us the non-correlation benefit to the equity market. We continue to be able to manage those assets, and all options remain on the table for either a reinsurance transaction or other alternatives that could present themselves. With that, I'll throw it to Mike to add any color.
Sure. Thanks, Rod. Maybe I'll just jump in on the cash flow guidance that we had given and maybe clarify it a bit based on some of the pre-calls that we'd had. The way to think of the cash flow, the $1 billion-plus of cash flow we'll have over the next five to six years, is really in two pieces. The first is, as we said, the 70%-80% cash flow conversion. Think of that as a normalized run rate that year in, year out, we would expect the free cash flow to be in that range relative to GAAP earnings.
In addition, and what will ultimately be the solve to the $1 billion plus, is a couple of different capital initiatives that we intend to pursue over the next year or two, largely related to financing of redundant reserves and much similar to the kind of things we've done in the past that were part of our ROC improvement story. We'll be doing those over the next few years. We expect that to be seen sometime in 2019 or 2020, finishing up in 2021. The other element to add on the cash flow picture, which I want to be sure people understand, is when we talk about five to six years of cash flow, we don't intend to say that that's it.
There is significant business left after that period. We simply chose that to frame the level of return that one could expect over the relatively near term. Life insurance blocks can last a long time, and certainly longer than, say, the typical annuity block. The lapse rates are far lower, and the liabilities can stretch for decades. We expect there to be significant value after the five to six years, assuming we continue to hold the block.
Ryan, one piece I would add, we have an attractive in-force block. We have considerable experience in managing in-force blocks. There were no surprises or nothing unexpected that came out of the review other than our judgment that this is the most expeditious way to return capital to shareholders during this period of time.
Great. Thanks. Then just one separate question. I think this would suggest this based on the equity market sensitivity, but just to clarify, the $1.29 fourth quarter EPS guidance before share repurchase, would you still expect to do the 1.29 when you incorporate both share repurchase and equity market impacts in the fourth quarter?
Yeah. Ryan, this is Mike. We didn't reflect the latest and greatest version of the equity market guidance in the 1.29. I think, though, if you do the math, you'll see that, let's say the S&P is down 9%, which is where it's been. That's applying the guidance for the quarter. You wind up at about an $8 million after tax, which you can translate into a per share. I think when you think about that 1.29 baseline plus the benefit of repurchases plus any other organic growth, then you adjust for the equity, I think we're probably still in pretty much that range. Of course, that depends on what happens for the rest of the quarter. I guess time will tell on that.
Ryan, maybe one piece just to add to what Mike has shared. We've talked about previously the 110 to 130 expected 12 months post-close, so think about June of 2019. With the Individual Life decision, there's another $20 million of pre-tax cost savings that'll start in 2019. Add $20 million to the 110 to 130, that will give you and others a good point of reference.
Got it. Thank you.
Thank you. Our next question is coming from the line of Nigel Dally with Morgan Stanley. Please proceed with your question.
Great. Thanks. Another question on the life segment runoff. Can you talk about the total amount of statutory capital that's backing the Individual Life block? Also, just to be clear on the $20 million of cost saves in 2019, will there be any additional upside beyond 2019, or is that the ultimate level of saves that you expect to get from this decision?
Yeah. Nigel, this is Mike. We don't have a number to give on the statutory capital. We've typically not given the amounts of statutory capital for each of the businesses. You can certainly see what's in Security Life of Denver. That's a separate statutory entity. It's a little more difficult with ReliaStar and ReliaStar of New York, where the rest of our life business is. Obviously, you can see the GAAP capital number. In terms of cost saves in potential, I think there is potential beyond the $20 million. This is just from the rationalization of the new business-related activities. I think as we manage the block going forward, there will be additional rationalization opportunities that we can explore. We're not ready to give numbers on that yet. It'll depend on the sorts of solutions we're ultimately able to pursue.
It will be important, though, for us to maintain this very talented team that we have supporting the life block, and they'll be very important in terms of our realizing the value that we've talked about.
Very helpful. Thanks, Mike.
Thank you. The next question is coming from the line of Suneet Kamath with Citi. Please proceed with your question.
Yeah, thanks. Just going back to the life deal. Could you give us a sense of how you'd expect the earnings from the life business to track over the next couple of years? Just wondering how quickly should we expect the base to run off?
Suneet, thanks for the question. In short, there won't be a discernible degradation of earnings over the near future. This is a long-tailed block. Particularly given the benefits that we'll have from the cost reductions that we've already mentioned, there is a degree of GAAP strain that comes from new business. When you add those beneficial effects, I think you'll see pretty much level-ish kind of earnings. Obviously, it depends on other external events that occur, but we don't anticipate any meaningful degradation over the foreseeable horizon.
Got it. For the Retirement business, just if I think about the $176 of normalized earnings in the quarter, you'd mentioned that record keep fee business will take that down a little bit. Ex that, is that a decent run rate to think about going forward, because that $176 came in quite a bit above what we were expecting?
I think so. Keep in mind the fourth quarter expense increase that we talked about, but other than that, I think it's a pretty good run rate.
Got it. Okay, thanks.
Thank you. The next question is coming from the line of Thomas Gallagher with Evercore. Please proceed with your question.
Good morning. Mike, was there a negative impact on a go-forward basis from the increased reinsurance pricing for Individual Life?
Tom, yes, there is. It's factored into the guidance we gave on the quarter. Rather than break out all the little chunks and pieces, we just left it as it'll be basically netted out. There is a modest impact to the life earnings.
Got you. Rod, just back on what went into the decision to retain the life block. Can you just give us a little bit of color, what kind of dynamic were there in terms of the process and what you learned in terms of the buyers on the other side, the reinsurers on the other side? Did you find that the bids were fairly low? Is that what surprised you or what you thought about the other side? Or did you end up just being positively surprised by the benefit to retaining it for lack of a better way of describing it?
Tom, fair question. I'm going to talk a little bit more about outcomes than process, but I would say there's a robust market. I say that because I mentioned at the concluding remarks that we retain optionality here. There's a robust market. There are also a number of life blocks in the market at this point, I would say an above average number. That factored into our decision. The other piece, we looked at it as we did with the CBVA lens, how do we maximize the asset that we own and know the best for our shareholders? Our conclusion was what we've announced. We're bullish about where we are, the path we've identified, and frankly, our ability to manage that. We've done two significant reinsurance transactions previously. That remains on the table, and we'll follow what the market journey is in terms of the external market.
I think the takeaway, Tom, for you and for all of the people on the call is what we're focused on is returning the maximum shareholder value. I think that's reflected in the $5 billion of share buyback that we've done, and it's no different here. We're really looking forward to Investor Day, where we talk about our ongoing businesses in phase three of our strategy.
That's helpful perspective. Thanks. Final question, just the $40 billion recordkeeping outflow. Can you just remind us the remaining recordkeeping assets? Mike, I think you said it was only low single-digit millions negative earnings impact. I assume that means that was a pure recordkeeping only and nothing else is outflowing related to that in terms of AUM or other fees you might earn.
Yeah. You've got that right. It's a low single-digit earnings impact. It's purely assets under administration. The total assets under administration now are in 235. That's in the sub, $235 billion. It's pure recordkeeping relative to kind of full service. The fees as a % of assets are going to be significantly lower, and that's how you understand the earnings impact.
Okay, thanks.
Thank you. Our next question is coming from the line of John Barnidge with Sandler O'Neill. Please proceed with your question.
There's been meaningful improvement in the Employee Benefits business stop-loss loss ratio this year. Clearly, some of these repricing actions have helped. How sustainable do you see the 77% achieved in the third quarter, and should we think of that as a run rate?
This is Rob Grubka. As we've said the last several quarters, we've been very focused on what we were doing around the 1:1 business, both from a renewal standpoint and the volume of new business that we wrote. As we think about it from a quarter-to-quarter perspective, I think we've learned and shown over a pretty long track record of having periods where we did much better than our range, and we've had periods where we've done not our range. We feel good, as we said the last several quarters, about where we came in from a pricing standpoint. We needed to give that time to sort of show itself and continue to convince ourselves that it was where we expected it to be. That's certainly what emerged in third quarter.
We expect to be in the range, as Mike said in his comments, that we're confident about it.
John, it's Rod. I'd add one other piece that we call out in the slide, and Mike and I and others have talked about on the various meetings and calls we've been on. I think our employee, and I'm very proud about what's happened. That improvement was what we expected, and I think the team has done a good job. I'd also call to your attention the progress we've made on the voluntary benefits business, the in-force premium growth, and that's in the stat supplement. This is something that I've shared with various investors and at meetings that I think is an underappreciated value as it relates to Voya's overall value. If you look at the last
Three or four commercial transactions and what was paid and how those properties are contributing to those companies. We feel every bit as good about the value of this property as part of our ongoing mix as reflected in the market value of those properties.
Okay, sticking with Employee Benefits a little bit. I know there's quarter to quarter, it can be wonky, if I look at the group life loss ratio, it actually improved in the first quarter year-over-year, it's deteriorated in the last two quarters, second and third quarter. Is there anything going on there or is it just quarterly wonkiness?
Yeah, I'll use your word. It's just been wonkiness. We talked in the first quarter, we ended up having sort of better than usual from a seasonality standpoint. As we moved into the second quarter, we saw things emerge in April, but then May and June ended up. I would just say the timing of things this year has been a little bit outside the standard. Again, to go back to it, wonkiness is probably a fair description of it, but it doesn't impact the confidence of being in the range.
Great. Thank you very much.
You bet.
Thank you. Our next question is coming from the line of Andrew Kligerman with Credit Suisse. Please proceed with your question.
Good morning. Thank you for taking my question. First one is on this RBC target of 425%. You've divested of the variable annuity block. You've now put the life business in runoff. Is 425 the right number? Could you get that lower to maybe 375 or 350?
Andrew, thanks for the question. Right now, we're comfortable with 425. As we've discussed in prior calls with the impact of tax reform and the subsequent effect that's having on the formula, I think there is a question as to what the right approach is post those new factors. We're still gaining information from conversations with rating agencies and observing what peers do. As you correctly noted, our business mix is changing. I would say there's nothing about the decision that we announced last night on the life business that changes that target. Overall, we'll continue to evaluate our RBC targets and manage that in accord with where we think we need to be from a ratings perspective, and aligning that with our business objectives.
I think you mentioned a 35-point impact from the tax legislation last year. Once you kind of assess that, do you think you could make a decision on RBC relatively soon, or is this something that's going to take time?
Look, I think just right now, we have a decision, and that's that we're holding it at 425. I think there's an opportunity for us to consider a change sometime over the next quarter or so. We're hoping to reach a conclusion by the end of the year, and we'll run it from there.
Got it. Lastly, there's a lot of potential legislation out there in Congress, there's an executive order on Multiple Employer Plans, then there's another one on extending the Required Minimum Distributions age past 70 and a half. How is Voya thinking about the potential of that legislation passing, and even more importantly, how would that impact your business?
Good morning. It's Charles Nelson. Thanks. We are very supportive of both the legislation and any regulatory actions that I think certainly address the coverage gap in America in the workplace retirement plans. There's a number of proposals as you've identified, things kind of moving at differing paces through, whether it's regulatory or legislative branches. It's a bit early to respond to kind of specific legislation. I don't really think the impact is going to be significant in 2019. It's probably going to be beyond that. We're really encouraged. It appears to be evolving in a way that I think really plays to our strength. If you think about our strength in the small, mid-corporate, this is a coverage issue that that's the area it's trying to address.
Secondly, they're talking about the Multiple Employer Plans or these Professional Employer Organizations, MEP or PEOs, you may hear those terms. We have those capabilities today. We do these types of plans today, so it fits really well with us. I think as you know, we operate in a market of markets we speak about in Voya and Retirement and all the various sub-segments that we go through. With our expansive distribution, we think we're really well poised to take advantage of those and really optimize and help address the coverage issue in America. When you address the issue that you bring up in terms of extending the retirement withdrawal age or the minimum distribution age, that too is another great opportunity, we're very supportive of it.
Anything that helps people save and invest and protect their retirement and ultimately keep assets in the plan is a good thing. We think that that's good, they'll have more benefits long term as well. On your comment on electronic delivery. Electronic delivery is an interesting one. We need the regulations to catch up to our capabilities. We're actually further ahead, the regulations limit us a little bit in terms of how much we can actually do. We're very supportive of all these legislative and regulatory actions that will drive both coverage, help people save more, and
Ultimately, I think improve the operational efficiency and experience for customers through electronic delivery.
Thank you. Our next question is coming from the line of Erik Bass with Autonomous Research. Please proceed with your question.
Hi. For Investment Management, can you provide a little bit more color on the drivers to get to a 30% pretax margin by 2020? Is that reliant on markets and flows, or are there other levers that you can pull to get there as well?
Christine?
Certainly. When you look at Investment Management, and you've seen we've had 11 consecutive quarters of positive IM-sourced cash flows. Our organic growth is strong, our pipeline is strong. Just the diversity of what we do and the space we play in asset management, active asset management is, again, we have a lot of differentiated strategies. Think commercial real estate, think private equity, think about just the strength of our fixed income performance. Overall, it's organic growth that we're relying on to get back to the low 30s operating margin over the next two to three years.
Got it. Thank you. On capital management, should we interpret the $500 million buyback authorization as your baseline plan for 2019? If so, can you just talk about how you arrived at that level in the context of the $800 million of excess capital and the strong free cash flow generation for the company?
Yes, it's Rod. You should interpret it as the most current authorization we just secured from the board, period. We've got authorizations previously, all of which have contributed to the $5 billion of share buyback by the end of the year. We're going to utilize what's remaining, the $250 million that we're doing in the fourth quarter, the $500 million that we have that brings us into 2019, and we will go back to the board and have discussions with them once we've utilized that. Beyond that, we're not going to be more specific at this point.
Got it. Thank you.
Thank you. Our next question is coming from the line of Alex Scott with Goldman Sachs. Please proceed with your question.
Hi, good morning. I just had one more question on the life insurance strategic review. Just having gone through this process, I was wondering if you could share any color on just what you see as being the driver around some of these reinsurance recaptures and, I guess, some of the pressure that's led to runoffs and so forth around the industry, I guess, more specifically for you. What were some of the things that kind of led it to this point from sort of the pricing assumptions?
Alex, I'm not quite clear on what you're referring to, but in general, let's talk about the reinsurance increases that we've seen and that others in the industry have seen, and that have either led to reinsurance premium increases or, in other cases, recaptures. That relates pretty specifically to a block of business that was underwritten 15 to 20 years ago, where the industry, I'd say, generally overestimated the rate of improvement that we would see in mortality for people aged at the time then 65 and above. What's happened is that over time, as those reinsurance arrangements and those products have aged, it's turned out that the actual observed mortality has been meaningfully higher than what was expected back then. That's led to the repricing activity and the subsequent actions that seeding companies have taken.
I'll reiterate, we're now through all of the significant reinsurers that would be affected by this particular block. For us, we think it's done for the foreseeable future. We can offer no guarantees, but we're pretty comfortable that we've seen the most significant chunk of it for the foreseeable future.
In terms of the, I guess, the cash flows you've highlighted for this business, is there any impact expected from pricing action from your side, meaning are there any anticipated cost of insurance increases or anything like that as part of that guide, or is it assuming that doing those sorts of actions will be more difficult with some of the attention that's been focused on that recently?
We have taken in the past some actions on a fairly limited part of the block, but we have done some COI and other fee increases. Going forward, there's nothing explicitly in the cash flow projections that assumes that we'll get a cost of insurance increase. That option remains viable for us, and it's something that we'll continue to pursue as we seek to maximize the value of the block while attending to our need to satisfy the promises we've made to our policyholders.
All right. Thanks very much.
Thank you. The next question is coming from the line of John Nadel with UBS. Please proceed with your question.
Hey, good morning, everybody. I have a couple of housekeeping items and then maybe one bigger picture one for you, Rod. Mike, coming out of the third quarter relative to that $110 million-$130 million of expense saves target, where are you in the third quarter of 2018?
Yeah. John, we're making really good progress. I think you can see that mainly in the corporate segment, where I would attribute about $10 million of saves on a quarterly basis. That's a $40 million run rate.
Yeah.
On top of what we had talked about last quarter, which was an additional $20 million annualized. There was a $5 million save. We're well on our way. I have great confidence that we will achieve that. We'll talk more about what may be ahead of us at Investor Day.
Got you. Second one is just the $40 billion of recordkeeping outflows and the low single-digit millions impact on pre-tax earnings. It would appear, just doing the math, that the fee rate on that particular piece of the business is pretty significantly below the seven or seven and a half basis points for your recordkeeping business in general. Should we be expecting the fee rate on what's left after this outflow to be actually slightly higher?
Charlie?
Yeah. Good morning. The recordkeeping business is an important business. As you look at that for us, across and in those fees, we see plans are good success from a sales side and a retention side. In particular, this one happens to be leaving at the first of the year. We tend to manage it over a longer time period, not necessarily quarter to quarter. As these larger plans, you kind of see a little bit of the noise, if you will, from quarter to quarter.
Okay. Third one, Mike, just the 70%-80% free cash flow for the Individual Life is in runoff now. Why isn't that 100%? Is it just the difference between statutory earnings and GAAP earnings?
In short, yes. It is just the difference between GAAP and stat. The reserve buildup is on a different, to be actuarial for a second, a different slope, right? The reserves in stat are building up faster than GAAP. Eventually, over time, that should reverse, and you'll see, presumably, stat cash flow should actually exceed GAAP earnings.
Yeah.
That's not going to happen anytime soon on this block. It's going to be a number of years before that actually happens, I think.
Okay. That's helpful. The last one, the bigger picture one for you, Rod. I clearly agree with you with respect to the valuation of the stock and the attractiveness of buybacks. You've been hinting, I think, ahead of phase three, maybe spending a little bit more money to normalize the common dividend, relative to where it's been here the last several years. As you look at the valuation of the stock, is there any real reason other than maybe to attract a new kind of shareholder to divert funds away from buybacks at these levels?
Yeah, it's a great question and a fair question. The high-level answer is stay tuned for two weeks at the Investor Day. Let me leave you with a theme. We will continue to be thoughtful repurchasers of our shares. The $250 million in the fourth quarter, the $500 million authorization that we just secured, that is going to continue to be a significant source of our uses of excess capital. We have talked about, and we're not prepared on this call, we will in two weeks' time, to address because we've been asked, and I think quite appropriately asked, what we will do with the dividend, and we'll give you an update all at the Investor Day. Particularly at these levels, we think our repurchasing the stock is a great value for our shareholders, and I think the track record speaks for itself.
$5 billion is co-equal to what our market cap was when we went public, and that's a pretty significant accomplishment.
Appreciate the comment. Thank you.
I don't understand.
Thank you. Our next question is coming from the line of Humphrey Lee with Dowling & Partners. Please proceed with your question.
Good morning. Thank you for taking my questions. Before that, congratulations on a good quarter.
Thank you.
Looking at Retirement, the G&A expenses continue to come down sequentially. I was just wondering, how much benefits did you pick up from your expense initiatives as opposed to some of the spending for these expense initiatives coming off? Do you expect more room for further improvement in the coming quarters?
Charlie?
Yeah. Thanks for noticing. Our team has done a fabulous job, I think, in the transformation that we've been on, in particular since last Investor Day, as we've done a lot of system consolidation on our operating system. Also put ourselves in a position operationally to drive greater efficiency. I think you've seen we've increased participants by about 11% since 2015, and our unit costs are down about 5%. We believe in our size that there's a lot more room to drive and power more scale from the size that we have. That's, I think, been delivered through some of our digital initiatives that we talked about before, as well as some future opportunities in automation and other areas. We'll be spending some time talking about those opportunities at Investor Day in a few weeks.
Our teams continue to do a good job, both operationally and technologically. I think our initiatives have paid well to us to date, and we think we've got some continued room to improve as we go forward.
Got it. Then shifting gear to Investment Management. I'm glad to hear that the fee rates for the inflows are better than the outflows. That's definitely encouraging sign. Looking at some of the kind of metrics for the kind of assets. Obviously, revenue yield picked up sequentially, but Investment Management saw fee rates kind of dropped. My understanding is there's some kind of reclassification of assets, kind of in the quarter. I was just wondering if you can provide some color in terms of what happened in the quarter, and how should we think about the investment fee rates going forward?
Christine?
Yes. During this quarter, as a result of the sale of the annuity business, we reclassified Venerable's general account portfolio that we manage on their behalf from the GA line that you see in the supplement to the Investment Management or external client-sourced portfolio. Just that natural shift made the external client business revenue yield go down. In the context of how to think about it going forward, you can see it's been incredibly stable, our external client fee business. Again, it is going to vary quarter to quarter. Actually, in the fourth quarter, the inflow fees were slightly below the outflows. However, again, as you point out, on a 12-month trailing basis, it was above. We expect it to be above in the fourth quarter. Just think about quarter to quarter does not a trend make.
There's going to be some volatility based on what we sell, like high quality versus something like commercial real estate. Again, when you think about the portfolio, we're well-positioned to regrow our operating margin back to the low 30s.
Just to follow on that point about the reclassification. When I look at the supplement, the General Account assets didn't change quarter-over-quarter. I'm trying to see where the reclassification took place.
Hey, Humphrey, let's take that one offline because I think it'll be better if we can walk you through it step by step.
Okay, good. Thanks.
Thank you. Mr. Martin, there are no additional questions at this time. Do you have any closing comments?
Yes, I do. Thank you. In summary, during the third quarter, we continued to position Voya for future success. We remain focused on our higher growth, high return capital-light businesses, leveraging our strong foothold in the workplace and with institutions to deliver solutions that the customers are seeking. We operate with a favorable risk profile with no long-term care and minimal variable annuity exposure. We look forward to updating you on our new financial targets and growth plans at our Investor Day on November 13th. We hope to see you there. Thank you and good day.
Ladies and gentlemen, this concludes today's conference. Thank you for your participation.