Good morning. Welcome to the Voya Financial second quarter 2018 earnings conference call. All participants will be in listen only mode. Should you need assistance, please signal a conference specialist by pressing star followed by the 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 your question, press the pound key. Participants are limited to one question and one follow-up. Please note this event is being recorded. I would now like to turn the conference over to Michael Katz, Senior Vice President of Investor Relations. Please go ahead, sir.
Thank you. Good morning. Welcome to Voya Financial's second 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 those 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 Rodney Martin, Voya Financial's Chairman and Chief Executive Officer, as well as Michael 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, Charles Nelson, Retirement, Christine Hurtsellers, Investment Management, Rob Grubka, Employee Benefits, and Carolyn Johnson, Individual Life. 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 demonstrated our commitment to growth, operational excellence, and continued good stewardship of shareholder capital. We increased our second quarter adjusted operating earnings, excluding DAC unlocking, by 20% year-over-year while achieving a top quartile ROE. This included record adjusted operating earnings for Retirement. As Mike will share, our Investment Management, Employee Benefits, and Individual Life businesses all continued to deliver solid performance. We are pleased with our progress. We're excited about our plans for continued growth. We are tracking to the $1.30 to $1.40 quarterly earnings per share target that we aim to achieve by the end of the second quarter of 2019. We're making great progress on our 2018 priorities. On June 1st, we closed a transformational transaction that significantly reduced risk.
With the support of our employees, we successfully closed the transaction in just five months. This transaction has made Voya a simpler, more focused company that can leverage its strengths to drive improved customer outcomes. We're well positioned as a higher growth, higher return, and capital light business. We're on track to deliver the $110 million-$130 million in expense savings by the end of the second quarter of 2019. We also continued to execute on our growth priorities. During the quarter, we grew Full Service recurring deposits in Retirement at 14% year-over-year. Within Employee Benefits, we generated in-force annualized premium growth of 19% in our voluntary product line year-over-year and achieved 10 consecutive quarters of positive Investment Management sourced net flows. We continue to have a strong capital position with approximately $700 million of excess capital as of June 30.
Most recently, we repurchased $500 million of our shares in the second quarter, completing our plan to repurchase $1 billion of shares by June 30. We plan to repurchase a further $500 million of shares during the second half of this year. We're on track to have repurchased nearly $5 billion of our shares by the end of 2018, which is close to our original market cap at our IPO in 2013. Finally, we recently welcomed Curtis Arledge as a new independent director of our board. Curtis has significant experience and a strong background in asset management, having held several leadership roles in the industry. I am confident that our company, customers, and shareholders will benefit from Curtis's unique insight and skills, as well as his track record of helping financial institutions think differently to achieve their growth plans. Turning to slide five.
2018 is a pivotal year in the transformation of our company. Our commitment to operational excellence is reflected in the significant progress that we're making on our priorities. As I mentioned, we completed the annuities transaction. As I also noted, we're on track to deliver $110 million-$130 million in expense savings by the end of the second quarter of 2019. We are transforming our IT systems and processes. We're streamlining our operations. We are further simplifying our organization. We're also executing on our capital initiatives. Our growth plans continue to be a priority. We're investing in our businesses to continue to distinguish ourselves in the marketplace. Our focus on best serving our customer needs, combined with our scale and experience, will enable us to continue to grow. We're making good progress across our businesses, particularly as we deepen cross-enterprise relationships.
At our Investor Day in November, we look forward to discussing our long-term strategy. Moving to slide six. Our people have been key to our success, both operationally and culturally. In May, we held our fifth annual National Day of Service, and once again, we had record employee participation and partnered with more than 100 nonprofits across the country. Most recently, we received recognition for our Voya Cares program and our commitment to serving people with disabilities and special needs. We debuted as a best place to work for disability inclusion on the Disability Equality Index. We also earned the Employer of the Year Champion Award from Disability:IN, which unites businesses around disability inclusion in the workplace, supply chain, and marketplace. Additionally, we were named as a finalist for ESPN's Sports Humanitarian Award for our Invest in Something Special initiative with Special Olympics.
For the first time, we were included on the FTSE4Good Index, which recognizes companies that demonstrate strong ESG practices. This recognition also potentially makes us more attractive to ESG-focused investors and funds. These recent awards demonstrate just a few of our initiatives that sit at the intersection of doing good business and doing the right thing. They also demonstrate our strong culture and the character of our brand. Now I'll ask Mike to provide more details on our performance this quarter.
Thank you, Rod. On slide eight, our results were strong this quarter. We reported second quarter adjusted operating earnings per share of $1.13. Our second quarter results included $0.13 of negative DAC unlocking, primarily in our Individual Life segment. I will provide more detail later. Results also included favorable investment performance from our alternatives portfolio. Combined prepayment and alternative income was $0.06 above our long-term expectations. Our second quarter operating results were significantly higher than those of second quarter 2017, when we reported $0.39. Excluding DAC unlocking, we reported $0.81 in second quarter 2017. As a reminder, all historical figures have been adjusted to reflect the impact of discontinued operations due to the annuities and CBVA transaction. Cumulative asset growth, cost savings realization, tax reform, and share repurchases were the main drivers of EPS growth.
Individual Life mortality improved sequentially, while our loss ratios for Stop Loss and Group Life increased modestly. Our second quarter 2018 adjusted operating results also included the impact of the June 1st closing of the annuities transaction. Furthermore, without the closed block variable annuity results, our adjusted operating income will align more closely with reported GAAP net income. As Rod discussed, we feel good about our progress towards achieving our quarterly adjusted operating earnings target of $1.30-$1.40 per share by the end of second quarter 2019. Moving to slide nine. Adjusted quarterly operating earnings for Retirement reached an all-time high, driven by strong investment performance from our alternatives portfolio and a seasonal decline in expenses. Our trailing 12 months return on capital grew to 12%.
Turning to net flows, our Full Service corporate markets generated its 19th consecutive quarter of positive flows, while tax-exempt and stable value experienced outflows. Looking ahead to the second half of 2018, we expect net inflows to our higher margin Full Service corporate and tax-exempt markets to be roughly in line with 2017 second half levels, driven by higher recurring deposit growth. We have been able to grow Full Service recurring deposits sustainably over a long period of time. Since 2014, Full Service recurring deposits have grown at a compounded annual growth rate of 7%. We expect overall Retirement net outflows of approximately $600 million-$800 million in the second half of 2018, driven by a few large stable value surrenders. While we will no longer manage the underlying assets for stable value surrenders, for some, we retain the full wrap guarantee and that portion of the revenue.
The net earnings impact of these surrenders will not be meaningful for our Retirement segment. The financial contribution from higher margin flows will more than offset the stable value surrenders. Our ability to grow new Full Service business has been enhanced by our investments in distribution expansion and technology. We have also expanded our capabilities to offer nonqualified deferred compensation plans through our purchase of Pen-Cal, which will further enhance our solution set for clients. On slide 10, Investment Management produced $52 million of adjusted operating earnings. The June 1st closing of the annuities transaction led to a net $18 billion transfer of assets, translating into a $3 million pre-tax earnings impact in the quarter. The full quarter run rate earnings impact would have been approximately $9 million. Our trailing 12-month operating margin was 28.9%, excluding investment capital results.
This figure is expected to decline in the third quarter as the reduction in earnings related to the transferred assets is realized. Earnings on certain CLOs and seed capital investments supported positive investment capital results. As expected, we generated large positive institutional net flows in the quarter. This marks our 10th consecutive quarter of positive Investment Management sourced net flows. In specialty fixed income, we closed on three new CLOs totaling $1.6 billion and a $150 million specialty mortgage fund mandate. We also had institutional wins in our commercial mortgages, private credit, and unconstrained fixed income strategies. Furthermore, we closed on final commitments for our largest private equity fund that we have raised to date. The fees on inflows exceeded those for our outflows, particularly as CLO and private equity funds tend to earn higher fees relative to our other assets.
The fee differential was 10 basis points favorable in the second quarter but may vary in future quarters depending on asset mix. While Investment Management will be modestly affected by the second half stable value surrenders I mentioned earlier, we have good commercial momentum that will more than offset this development. Supported by our strong investment performance across a range of strategies, we are encouraged by our diverse sales pipeline for the back half of the year. Turning to slide 11. Employee Benefits adjusted operating earnings improved year-over-year and sequentially. At the end of the second quarter, our trailing return on capital reached 29%. Ongoing momentum in our voluntary business offset higher loss ratios for Group Life and Stop Loss. Voluntary premiums increased 19% year-over-year. We provide additional details regarding our voluntary premium growth in a new disclosure in our investor supplement.
Our Group Life loss ratio was affected by claims that materialized in April instead of the first quarter. Recall that we reported a loss ratio of 79.3% in the first quarter, which was favorable relative to seasonal expectations. We continue to believe our expected range of 77%-80% is appropriate for Group Life overall and expect to see a return to that range next quarter. For Stop Loss, we are confident that pricing action taken on 2018 business will move our loss ratios back into the 77%-80% targeted range. We expect to return to that range for Stop Loss in the third quarter. On slide 12, Individual Life adjusted operating earnings rose year-over-year and sequentially. We benefited from lower severity and frequency in the second quarter relative to first quarter. We incurred DAC unlocking of $31 million, mainly driven by reinsurance.
Our return on capital is expected to trend lower in upcoming quarters. As a reminder, GAAP capital for the Individual Life segment increased due to the impact of tax reform on the segment's deferred tax liability. As a result, average GAAP capital for Individual Life will continue to increase over the next two quarters. We remain active in the Index Universal Life market, generating second quarter sales consistent with first quarter levels. We will have more to share later in the year regarding our strategic review of Individual Life. On slide 13, we provide additional items to consider for the quarter. For the third quarter, we expect Individual Life net underwriting results to normalize and corporate operating loss to be in the $60 million-$70 million range. In the second quarter, our corporate results benefited from a $10 million reserve refinement related to our retained annuities.
This refinement was made following the close of the annuities transaction and is one time in nature. While not explicitly quantified, share repurchases will have a meaningful positive impact on third quarter EPS. We plan to repurchase $500 million of shares in the second half of the year, split roughly evenly between the third and fourth quarter. We note that our effective tax rate was 17.9% in the second quarter. Our dividends received deduction benefit has grown, thereby lowering our effective tax rate. We are consequently revising our effective tax rate guidance to 16%-19%. While we have provided some items to consider, there will of course be other factors that affect third quarter results. Turning to our balance sheet on slide 14. Our capital position is strong. Our estimated RBC ratio was 452% at the end of June.
During the second quarter, the NAIC approved industry-wide changes to the RBC formula to reflect revised tax rates. These changes, which will become effective at year-end, would lower our current estimated RBC ratio by roughly 35 points. This is about half of what we had initially expected. Our excess capital, which consists of estimated statutory surplus and holding company liquidity above target, was nearly $700 million at the end of the second quarter. Our quarter-end debt-to-capital ratio was below our 30% target. To further strengthen our balance sheet, we plan to reduce our outstanding debt by approximately $300 million in the second half of 2018. Turning to slide 15. As depicted in the graph on the left, if we adjust Voya's closing share price on July 31st by our estimated value of our deferred tax assets, Voya trades at approximately eight times 2019 consensus earnings.
We believe Voya shares trade at an attractive valuation, particularly given our high-quality earnings, our high free cash flow generation, and the growth opportunities ahead of us. At these trading levels, we continue to view share repurchases as value-enhancing for shareholders. As Rod mentioned, we repurchased $500 million of shares in the second quarter as part of the $1.5 billion share buyback plan announced last December. In summary, our businesses generated strong operating earnings at targeted returns. We reduced risk via the closing of the annuities transaction, 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.
Thank you. At this time, if you would like to ask a question, press star, then the number 1 on your telephone keypad. Your first question is from Nigel Dally with Morgan Stanley.
Great. Thanks. Good morning. First on capital, just hoping to get some color as to the various sources and uses of capital this quarter. Seemed like you're very aggressive with repurchasing stock, your capital still grew, which I'm guessing is a reflection of the annuity transaction, just hoping you can run through the specific details there.
Sure, Nigel. It's Mike. Thanks for the question and good morning. I think of it in four pieces, really. First, as you mentioned, the share repurchasing of $500 million, so that's part 1. Part 2 would be the proceeds from the annuities transaction, which were roughly $500 million, so that's basically a wash. Then, during the quarter, we generated income. That was statutory income. That was offset by the results of the transaction on our investment portfolio, let me just dig in on that for a second. Essentially, we retained some alternative assets that had been held in the Iowa company that we sold that led to us having a slightly increased allocation to alternatives. It's very much within our risk tolerances, it's not an overexposure or anything we're going to manage down. We're just going to manage into it over time.
We view it as more or less an acceleration of production of those kind of assets for our portfolio. That'll have a positive yield impact, assuming they perform well. It also had an RBC impact that basically offset the income. Net, there was no capital generation in total because of the offset of the proceeds and repurchases, the income, and the RBC. The only other piece to keep in mind is that we printed about $550 of excess at the end of first quarter. As you'll recall in the commentary, we said that there were some timing differences in excess liquidity, we really guided everyone to thinking about our excess capital as being about $700. We started the quarter at $700. We ended at $700. There were offsetting numbers that got us there.
Okay. Very helpful. Just one additional one on capital as well. Just the NAIC changes, you mentioned the 35-point impact. Should we expect your target level to kind of graduate down by the same amount of the 35? Just how you're kind of thinking about your target level post NAIC changes.
Yeah. I think we're in discussions with our various rating agencies as to how they're viewing it. This is still early in the game. We're also watching to see what our peers in the industry do. As I think I've said before, our ability to refill our capital bucket, if you will, is only improved by having lower tax rates, and this is as much an industry perspective as it is a Voya perspective. If you leave targets the same and you apply the math of the new factors adjusted for tax reform, that would actually imply an increase in the dollar amount of capital the industry holds, which I think is certainly counterintuitive when we've only got a better situation. I think we're watching to see what happens. We'll continue to talk with the rating agencies, and we'll have more to come as that situation evolves.
That's great. Thanks a lot.
Your next question is from Ryan Krueger of KBW.
Hi. Thanks. Good morning. Was hoping you could provide some additional color on how to think about the Investment Management margins going forward after the full impact of the annuity transaction, as well as the trajectory going forward over the next few quarters.
Good morning, Ryan. Christine will take that.
Yes. Good morning, Ryan. In thinking about the impact on earnings and margin for Investment Management, we had one month of revenue impact as a result of the annuity sale. That was approximately $3 million. When you think on a full quarter basis, what's the revenue impact associated with that sale? Think $9 million. On a pro forma basis, if we'd had factoring in that impact, think about the Investment Management operating margin. Think of it as 28%, which due to strong organic growth in our pipeline that we see, getting back on track, in the months ahead.
You had previously talked about a target of 33%-35%. This probably sets you back some on that. Is that still the ultimate target over at least a period of a couple of years?
Yeah. In terms of the overall target, certainly in the context of industry trends, fee compression, whatever happens to equity valuations, sort of given the volatility we see, it's difficult to say specifically what will our longer run margin be today. Certainly, we'll be coming out with more information later. Certainly, just in thinking in the context of what we do in terms of specialty asset classes, our scalable fixed income business, assume that we're going to continue to improve the margin and to compete very effectively relative to competitors, just given what our mix of business is.
Okay, thanks. Then one on Retirement. You talked about Full Service having higher margins than stable value. Could you give us any sense of magnitude between new business margins you're seeing on Full Service versus either stable value or tax exempt?
Charlie?
Sure. When you think of stable value, that's really one investment option inside of a retirement plan lineup. It's one single option. Typically might get 5% to maybe high 10% or 15% of the allocation of the plan. You compare that to the Full Service business, which has the record keeping, the administration, the other investment options, and assume that there's probably an average of 20 investment options in a plan. You've got a much fuller and richer service offering in the Full Service with all the advisory services and the things we have. We do talk about that not all flows are kind of created equal in terms of contributions to earnings. I guess I would guide that the Full Service tax exempt and corporate business really is the most significant and largest driver of our overall revenues.
Stable value is an important component of what we do because it's a big part of both. We participate both in the Investment Management as well as in the wrap side. It's an important part, but it's just very different relative to the Full Service.
Okay, thank you.
Your next question is from Suneet Kamath with Citi.
Thanks. Just a question on the expense reduction post the annuity sales. Mike, should we expect that to be even over the next several quarters as we move through the second quarter of next year? Or is there any lumpiness that we should be aware of?
Suneet, thanks for the question. I think it will increase over time. I don't know that I've got any specific lumpiness to point you to. I think it'll continue to accelerate. If you think about our corporate guidance for third quarter, we've taken that down about $5 million. The midpoint of the range moved from $70 million to $65 million. I think you just think of that as the savings that we're going to bring into the third quarter. If you annualize that's $20 million. We're well on our way. I think that pace will continue to grow. I don't think it's going to come in any big one chunk. It's going to come sort of ratably. If you do it on a slightly increasing scale, that's probably pretty good.
Okay. Then I get that you're going to give us more detail on the Life strategic review. Just given the amount of expenses that you guys have taken out over the past couple of years, post annuities, then there was another expense program before that. To the extent that you exit Life, is there still significant expense reduction to offset what would be operating earnings dilution?
Suneet, it's Rod. First on the Life piece. The team that focused on the executing of the Apollo Athene transaction in five months is now focused on the thorough review of Life. We have made no decisions on the strategic options there, you will hear that from us when we do. I think we've demonstrated, as you just pointed out, strong muscle in our ability to approach expenses in all of our businesses and functions, it is reflected in our guidance that Mike and I have talked about in our prepared remarks, that the $110 million-$130 million will be accomplished by the second quarter of 2019. We're going to continue to challenge the organization to accelerate that. I have a lot of confidence in our ability to do so.
In part, some of the new tools that we and others are employing, like robotics and automation, by way of example. Stay tuned, more to come, we're making very good progress on that front.
Understood. Okay, thanks.
Thank you. Your next question is from Humphrey Lee with Dowling & Partners.
Good morning, thank you for taking my questions. Just a question related to your Investment Management business. Obviously, there was some pressure on the asset managers yesterday, including yourself, following the Fidelity announcement of no-fee ETFs.
Can you sort of size your retail exposure that could be at risk, like your core equity or investment-grade fixed income strategies within your retail AUM? Then also can you size the level of retail product that is essentially a VIT?
Yes. In terms of what percentage are index funds of our overall assets under management, it's $18 billion in index assets. Think about that just below 9% of total assets, this is approximately 28% of our retail assets. That being said, the index assets that we manage are almost exclusively for our business partners. Think about mutual funds embedded inside of insurance contracts, of what we call variable portfolios. Again, in terms of pure retail index funds, we don't manage any of those. It is not at all core to our strategy. The revenue impact of managing those overall index funds is de minimis in terms of Investment Management revenues. Again, what's our value proposition? It really is not that. That is not where we're playing. These types of things don't unravel us at all or come unexpected.
We're competing in our specialized strategies that you can't replicate. We've had 10 consecutive quarters of positive Investment Management sourced cash flow. Again, good momentum, strong product capability, it is not going to impact us in a material way.
Humphrey, it's Rod. Let me just add to that. It's a terrific question, in no way does it change our thinking around hitting our current EPS targets or our growth prospects for 2019 and beyond, underscoring the point that Christine just made.
Great. That's very good color. I guess maybe shifting gears to Employee Benefits. It looks like your voluntary business continues to have extremely strong results from both top-line growth and underwriting results. Where are you seeing success in the line, how sustainable are the recent results in the voluntary benefit line?
I'm going to have Rob comment. Let me just make one general comment. Thank you for noticing that. We did provide some additional disclosure in this stat supplement. Mike and I have commented previously, we think our Employee Benefits business is one of the underappreciated values in our overall value proposition, we're trying to provide more disclosure so people can both see that and value it the same way we do. With that, I'm going to let Rob answer the question.
All right. Great. Yeah, thanks Rod and Humphrey, appreciate the question. Certainly the disclosure is all to reinforce what Rod said. There's a lot of good things happening in that segment of the business. When you look at our EB business, we're very clearly focused on VB as a core segment of it, and for us, strong distribution. We've got good product mix. We've got good partnership to execute that from a technology standpoint. It's a business where you've got to execute the service really well and do it consistently. For us, what we've grown, and over the last few years, 30%+ growth from a sales perspective. The book of business, as you can see, is close to 20% growth. We feel like we've got the right foundation as we grow.
We certainly expect to continue to grow, maybe not as that faster rate given the book of the business as it's picked up. That's a business as we look at over time, we certainly still expect to be a double-digit grower for us. Maybe moderating a bit as the scale of it gets bigger.
Got it. Thank you.
Thank you. Your next question is from Erik Bass with Autonomous Research.
Hi. Thank you. I was hoping you could provide some more color on the Retirement flows. I think it sounds from your comments like most of the growth is coming from increased recurring deposits. I was also hoping to just get your outlook for transfer deposits in the new business pipeline.
Yes. Thank you and good morning. As you pointed out, our net flows were significantly impacted by our sub-advised stable value business, but the real growth has been in our Full Service tax-exempt and corporate business, where we have seen some really strong performance. If you look at our net flows, they can be lumpy from quarter to quarter. On a trailing 12-month basis through the second quarter, our Full Service net flows have been roughly about $1 billion. Very strong. I think Rod and Mike had mentioned our 19 quarters in a row in the small/mid really has, in that 19 quarters, delivered $7.5 billion over that time period in net flows in our small/mid. That is, as you point out, significantly impacted by our recurring deposits, with the recurring deposits being up as significantly.
I think what's happening there is you're just seeing the compounded growth of the business, the investments in our distribution, the investments in our digital that's driving increased savings rates, which drives increased recurring contributions. Single deposits, yes, I think in quarter, we did see a reduction in single deposits. That was really driven by the ratio of new plans versus takeover plans that we
that we have seen relative to some historical ratios. In total, it's a good thing because you look economically in our economy, and you see a lot of new plan 401 growth, which will bode well for us in recurring deposits in the future. Also, we've seen a little bit of a step back in terms of the market number of provider, or excuse me, number of plans changing providers. While that is impacting the single deposits, it's helping us in the plan retention. Our plans retention is up. We've lost 13% fewer plans in the first half of this year versus last year. We're really seeing stronger retention, which is driving recurring deposits as well. When you bring all these things together, yes, strong recurring deposits results that we think we've had.
The ratio of new plans to takeover plans is impacting the single transfers that we have as there's fewer plans changing providers. It's helping us on the retention side. I think it's going to be a challenge to hit the full-year deposit goal that we have, but we haven't given up on that because that's mostly going to be contributed by the single deposits. There's still the last half of the year to continue to drive at that. We're just very pleased with our team progress and the results of the investments in distribution and digital.
Thanks.
All of that has led to the record earnings that we had in the quarter in Retirement.
Great. Well, thank you for the color there. Just one follow-up on stable value, and just curious about the outflow drivers there. Is it just that you're seeing more price competition in this market, or is it anything else that's driving that?
Hi, it's Christine. I'm going to go ahead and answer that because really when you think about the stable value drivers that we show, it comes across as affiliate source net cash flows as negative. Not the wrap portion of Charlie's business. What is driving that? A couple of things. When you think about it is in no way, shape, or form performance related. Our fixed income strategies are top decile performing strategies. Rather what it is as competitors are facing fee margin and as clients right after the crisis really valued what they called multi-manager, multi-wrap programs. The longer we get away from the crisis they don't remember the return dispersion and protection they were looking for in that. As a result, the managers that manage these programs are bringing it in-house. Again, that's the reason for the flows.
We do have some forecasts for continued outflows in the remainder of the year, but again it is not a systemic issue in any way, shape, or form related to performance.
Yeah. Just to add on that, to reinforce the point that where you see maybe in our stable value, the AUM outflow in Retirement, is just to reinforce the point that in a large portion of that, we are retaining the wrap and that revenue from that wrap. It's a significant portion of the revenue, so I think that's kind of hence why you're not seeing any material change in Retirement earnings. In fact, we're continuing to have the record earnings and strong ROC growth as Rod pointed out.
Great. Thank you for the color.
Thank you. Your next question is from Joshua Shanker of Deutsche Bank.
Yeah, thank you for taking my question. I was interested in the $500 million plan for the back half of the year. Can we talk about the various constraints and various generation capabilities? Why 500? Why can't it be more? When thinking about 2019 capital return, how should we think about what guides that?
Yeah. Thanks, Josh. This is Mike. I think as we look ahead over the next couple of quarters, and we look back over what we've done over the previous 12 months, by the end of the year, we'll have repurchased a billion and a half, basically all in 2018. We think that's a pretty robust return of value to shareholders. We're pretty comfortable with that overall level. As we go into 2019, we will see where we end up in the year. We're taking the proceeds as we had said back in December. We're taking the proceeds from the annuities business and applying that to share repurchase.
When we go into 2019, we'll have a good sense of how the year unfolded and a better view as to where we think we're going to be in overall 2019 in terms of deployment of capital to organic growth opportunities and so on. I think we're pretty comfortable right now with the guidance we're giving on $500.
Is that a conservative number because you know that it's easy to achieve, you're waiting to get to the other side of 2018 before you figure out what the longer-term plan is? I'm not complaining, it's a very robust return. I want to know how you guys get to that number.
I think while the number comes directly from the proceeds we got from the annuities transaction, that's where it comes from. I think as we look more broadly at the $700 million, look, I think we are continuing to demonstrate a track record of being good stewards of shareholder capital. I think we'll see how the year unfolds and make a decision at that point. The other thing I'd point out is our authorization right now is for $500 million more. That's what we have left. As we go into the third quarter, we'll certainly be talking to our board about what the 2019 looks like.
Let me just add one further dimension. As we've discussed, but I think worthy for the audience to hear again. By the end of this year, we will have repurchased $5 billion of shares since our IPO, which is nearly coequal to our market cap in 2013. We're very proud of that. Our shareholders have been very pleased with that outcome, and we will be updating you, as we said previously at our investor day, about our 2019, 2020, and 2021 plans and the sources and uses of capital associated with that. We look forward to seeing you there.
Okay, thank you very much.
Thank you. Your next question is from Thomas Gallagher of Evercore.
Morning. Just to follow up on the capital deployment question. Now that you have completed the variable annuity closed block transaction, is there an enterprise change in the amount of holdco cash capital buffer? That obviously was your biggest tail risk. I would assume on an enterprise basis, you could probably run with less excess or buffer, whatever you want to call it. Any thoughts on that point?
Tom, this is Mike. The liquidity target has been reduced over the last 12 months from what was originally 24 months of liquidity at the holdco to 12 months. At this point, I think we view 12 months as being right in the middle of where peers are and very much aligned with the risk profile we see. In really robust economic times, it'll probably prove to be a little more than we need, but if things get a little more difficult, it certainly seems like the right buffer to us. We're pretty comfortable with the 12 months.
That makes sense. Just a follow-up question on the Individual Life review broader question there. Can you remind me what's really the driver behind the review of the life business? Really what I mean by that is, can you talk through what is the potential opportunity here? Is it improving free cash flow, ROE, or the above? Is there, based on the pricing indications, I presume you're getting some indications, is it still possible you end up doing nothing here or is there a pretty good chance you end up doing something, whether it's reinsurance or a sale?
Tom, let me start. Carolyn and I can toggle on this. In an absolute abundance of transparency, we mentioned in December when we announced the Venerable transaction, the Apollo Athene transaction, that we were needing to separate the legal entity, the annuity business, and the life business that was co-managed by Carolyn, like many other companies have been. That activity had to come apart. It seemed like a very appropriate point to step back and say, how does life fit into our overall strategy, particularly as we're going into the third phase of Voya in our 2019, 2020, and 2021 plan. That's exactly what we're doing. Any conclusion that a sale or a reinsurance transaction or frankly continuing to do the business or running it as a closed look or another reinsurance block, all of those are on the table.
We just want that to be factored in and reflect our continued management of that capital every bit as seriously as we manage the ongoing businesses, the other ongoing businesses, and in just the same way that we managed the Closed Block of the Variable Annuity business previously. Unless and until you hear something from us differently, those options are on the table. We're working really hard. Carolyn has done a phenomenal job leading the team in the closing of that annuity transaction in five months. I know you didn't ask, but I'm going to remind the audience that we also don't have any long-term care exposure. The outcome of both that and the closing of that transaction, we think we're just terrifically positioned as we go forward.
Okay, thanks.
Thank you. Our next question is from John Barnidge of Sandler O'Neill.
Thank you. Are there any areas of Retirement Investment Management, either from a product or distribution angle that you'd want to enter either organically through partnership or M&A?
This is Rod. Let me start, and I'll let Charlie and Christine jump in. First on our Retirement platform, one of the things that I think we're most proud of and excited about and is leading to the record earnings performance that we have is we're in a market of markets. We're in the small mid-market with 19 consecutive quarters, the large corporate, the record keeping, the tax exempt, K-12, higher ed, and the government market. All of those markets have different characteristics. They grow differently, and we think that serves us and our customer base, our very diverse customer base well as we go forward. We've certainly talked about, particularly post the completion of the transaction with the Closed Block, a willingness to consider adding another block of Retirement business to our Retirement business should that present itself.
It would have to be financially the right thing to do for our shareholders. We would look at that. We further have talked about the extension of our terrific performance with Investment Management by way of example in adding some international distribution. Let me pause there and see if there's any further questions.
Sorry, I was on mute. There was improvement in the loss ratios in Employee Benefits in 1Q 2018. This reversed in 2Q 2018. Am I correct that first quarters are thought to be the high watermark of the year, or what is the driver? Thank you.
This is Rob. I'll touch on the pattern there a bit. As we talked about last quarter, certainly within the Group Life business, you expect that to be the peak from a loss ratio. We actually had really good results relative to what you would have expected. We had the good of that, and then in the second quarter, a little bit of that reversed. That was mostly isolated in April, so you can look at it as a bit of a timing perspective. As you think about the six months in total, we're just slightly above the 80% sort of the high end of our range. If you look back over a 12-month period of time, we're solidly in our range. We just think it's fluctuation.
We certainly took a hard look at it, but it's not anything that we're concerned about over a period of time. We expect the third quarter to settle back in. That's really where you've got the seasonality from a Stop Loss perspective, while above our range, as we said and Mike reiterated in his comments, we feel good about the trajectory of that and what we're seeing evolve over the first part of the year and how that'll play out over the rest of the year.
Great. Thanks for the answers.
You bet.
Your next question is from Andrew Kligerman with Credit Suisse.
Hey, thanks a lot. Just following up on that underwriting question. You indicated that confidence that you'll get into the 77%-80% range in Stop Loss benefits ratio. It's bounced around from the low 70s to the mid-80s. I'd like to get a little color on, one, why you're confident you can get into that range, and two, what you're seeing in pricing of that product area.
Yeah. Thanks, Andrew. I think the place I'll start is it's still Stop Loss, yes, there's going to be volatility. We're taking exposure and risk around low-frequency but high-severity events, you're going to get noise. Again, what we've had the opportunity to do to the pricing, what we saw from a renewal perspective at 1/1, double in what we've done historically, we feel good about that, obviously directionally. From a new business perspective, again, I think we talked about this on last quarter's call, we were very disciplined in the volume of new business we wrote. We wanted to take a harder line towards the mix of renewal, new business coming on, where obviously inevitably you're in a competitive situation there, and you may get squeezed by a point or two, and that's not unusual, and then make it up on renewal.
We wanted to balance those factors out. As we see another six months of experience from what we wrote new, what we renewed, and then what didn't renew, is what really drives that confidence around getting into range. I'll come back to it. It's still Stop Loss. There's going to be volatility, we like the fundamentals of what we're seeing.
Thank you. Your next question is from Alex Scott with Goldman Sachs.
Hi, good morning. The question I had was just around the illiquid assets that I think you'd mentioned would come later, following the closing of the Venerable transaction. Can you provide any update on when you'd expect to receive those assets?
Yeah. Thanks for the question, Alex. I think the way to think about it is over the next three quarters, we'll see about half of the remaining illiquid assets. Think of that as about $300 million will emerge. That comes in the form of some seed capital and some other sources. More broadly, the balance of the difference between the proceeds and the 1.1 and the 300, so another 300 would be something you'll see come out over the next four years or so in relatively equal chunks.
Okay, great. Thanks. The follow-up I had was just around statutory capital backing the life insurance business. Could you help us think about, like in aggregate, how much stat capital would be behind the life segment, the way we kind of think about it on a GAAP basis anyway? If you could help us at all with where it sort of lies in terms of legal entities and how I should think about that.
Yeah. Good morning. This is Carolyn Johnson. We don't disclose the stat capital behind the life business. I will say the majority of the life business, though, from that basis, is in our Security Life of Denver statutory company.
Okay. Thanks for the answers.
Thank you. Your final question is from John Nadel with UBS.
Hi. Hey, thanks. Good morning. Mike, I want to go through the capital one more time. I'm sorry. The $700 million of excess, give or take, at the end of Q2, is that already inclusive of the $500 million of proceeds? I assume it is. If we're going to spend in the back half of the year, $500 on buybacks and $300 on debt reduction, and you've also got some NAIC formula impacts to take. How do we think about what.
Free cash flow or excess, I should say really excess capital. What should excess capital look like by the end of the year given the.
Yeah. Thanks, John, you guys have a lot to digest today, so no need for apologies. Look, we start at $700. That includes the $500-ish of proceeds from the annuities transaction. That is in there.
Okay.
In terms of debt repurchase, I think that would likely happen in conjunction with some sort of subordinated offering, either a
Got you
or preferred stock. Don't view that as
Debt just
use of excess. I think we're trying to manage the leverage ratio there. We don't think we're going to have to do that if conditions don't allow, but I think we're feeling pretty good about where we are there. As I mentioned earlier, on the RBC, I think we need to wait and see, right? The impact, if you just apply the numbers and stay at 425 is north of $300 million. As I said, I don't view that as a real need for, no economic need for us to hold more capital. As we work through our discussions with the agencies, I'm not overly concerned about that right now.
Got you. Okay.
I think of it in terms of $700 minus the $500 plus whatever we generate during the quarter. Obviously timing and things drive our ability to use the cash to buy shares.
Got you. Housekeeping just on the expense initiatives. Can you just remind us where you guys are on a run rate coming out of the second quarter of 2018?
Yeah. If you think about the $5 million decrease in corporate guidance, think of that as annualized to $20 million. That's where we are in terms of making progress toward the $110, $130.
Got it. Last one for me, just thinking about the tax rate being a bit lower than your original outlook. It sounds like the driver there is really the relative impact of the DRD. Maybe I've got that wrong. If that's right, is there any reason why that shouldn't continue to have that kind of an impact into 2019 at this now somewhat lower level?
Well, things can change, John, largely our view is that the guidance we're giving of 16% to 19% is pretty much where we're going to be for a while.
Yeah.
It's wide enough to accommodate a little volatility, but I think the midpoint over the long term is where we think we're going to be.
Perfect. Thank you so much.
Thank you. With that, I'll turn the floor back over to management for any additional or closing remarks.
In summary, during the second quarter, we continued to position Voya for future success. We closed a transformational transaction. At the same time, each of our businesses continued to execute on our strategies to drive profitable growth. Our earnings are tracking to target. We're committed to operational excellence. Our capital position remains strong. We look forward to updating you on our progress as we advance on our journey to help Americans plan, invest, and protect their savings. Thank you and good day.
Thank you. This does conclude today's conference call. You may now disconnect.