Earnings Call Transcript - VOYA Q1 2021

Operator, Operator

Good morning, and welcome to the Voya Financial First Quarter 2021 Earnings Conference Call. All participants will be in a listen-only mode. (Operator provided instructions on how to ask questions during the Q&A.) After today’s presentation, there will be an opportunity to ask questions. (Operator provided instructions.) Please note this event is being recorded. I would now like to turn the conference over to Michael Katz, Executive Vice President, Finance, Strategy and Investor Relations. Please go ahead.

Michael Katz, Executive Vice President, Finance, Strategy and Investor Relations

Thank you, and good morning. Welcome to Voya Financial's first quarter 2021 earnings conference call. We appreciate all of you who have joined us for this call. As a reminder, materials for today's call are available on our website at investors.voya.com or via the webcast. Turning to Slide 2. Some of the comments made during this conference call may contain forward-looking statements within the meaning of federal securities law. This includes potential impacts related to COVID-19. I refer you to this slide for more information. We will also be referring today to certain non-GAAP financial measures. GAAP reconciliations are available in our press release and financial supplements found on our website, investors.voya.com. Joining me on the call are Rod Martin, our Chairman and Chief Executive Officer; as well as Mike Smith, our Vice Chairman and Chief Financial Officer. After their prepared remarks, we will take your questions. For that Q&A session, we have also invited our Vice Chairman and Chief Growth Officer, Charlie Nelson; as well as the heads of our businesses, specifically, Heather Lavallee, Wealth Solutions; Christine Hurtsellers, Investment Management; and Rob Grubka, Health Solutions. With that, let's turn to Slide 3 as I would like to turn the call over to Rod.

Rodney Martin, Chairman and Chief Executive Officer (CEO)

Good morning. Let's begin on Slide 4 with some key themes. Our results for the first quarter demonstrate that we continue to operate from a position of strength with a specific and clear strategy set on health, wealth and investment solutions. Voya has tremendous opportunities to expand and grow. Our businesses give us both the scale and the insight to help employers and their employees manage a variety of health and wealth needs, and we are seeing an increasing demand for what we offer. The pandemic has led to individuals becoming even more focused on their health and wealth needs. As a result, employees are increasingly looking to their employer for support, and employers are very much focused on this. Recent research by the Employee Benefit Research Institute indicates that employers overwhelmingly either have a strategy or are developing one to improve their employees’ financial well-being. We believe that Voya is well positioned to deliver on this demand, which will enable us to provide even greater value for all of our stakeholders. Turning to our results for the quarter. We delivered significant adjusted operating earnings per share growth. In addition to strong investment income and the execution of our share repurchase plans, our EPS growth reflects continued momentum across our businesses. In Wealth Solutions full service recurring deposits grew more than 5% compared with the trailing 12 months. This was driven completely by organic growth. We generated over $850 million in full service net flows and recordkeeping flows were also strong at $3.5 billion. Collectively, this reflects our strong results in both retention and the onboarding of new clients. In Investment Management, we saw continued institutional inflows and interest in a number of our fixed income strategies. While we experienced net outflows during the quarter, we expect to achieve our 2% to 4% net flow organic growth targets for 2021, due to a strong unfunded pipeline. In Health Solutions, annualized in-force premiums grew nearly 9% year-over-year. This strong increase reflects the growth across all product lines, but particularly in our Voluntary business. During the first quarter, we announced a new operating model to advance our growth plans and ensure a customer-centric focus on health, wealth and investment solutions. We are excited about the opportunities to meet the increasing needs of employers and their employees. We are focused on how we can expand the solution set that we offer to drive a more coordinated and integrated experience through the workplace. Our acquisition of Benefit Strategies, which we announced yesterday, is a good example of focusing on increasing our capabilities and reach in the workplace. Specifically, this acquisition will accelerate our expansion in the health savings and spending accounts markets. We look forward to continuing to update you during the year on our plans and at Investor Day later this year when we will provide details on the next phase of our growth strategy. Finally, our balance sheet and capital position remains strong. We continue to return capital to our shareholders by repurchasing $235 million of common stock during the quarter. As of March 31, we have returned $7 billion of capital to shareholders through both share buybacks and dividends since our IPO. As previously stated, we expect to repurchase $1 billion of our shares during 2021 and we had approximately $1.6 billion of excess capital as of March 31. Moving forward, we will continue to demonstrate the responsible stewardship of capital that has been a hallmark of Voya as a public company. We have also further strengthened our Board. I'm pleased to share that we have welcomed Yvette Butler as a new Independent Director. Yvette brings to our Board over 25 years of experience in financial services, where she has distinguished herself as a strategist and the leader in providing wealth advisory, banking and financial planning solutions. We are delighted to have Yvette join us. And at the same time, I want to acknowledge Lynne Biggar, who stepped down from the Board last month. Lynne served on our Board since 2014, and has provided valuable contributions to Voya's success. On a personal note, I am very grateful for her guidance and her perspective. Turning to Slide 5. We continue to earn further accolades for Voya's strong culture and commitment to ethical business practices during the quarter. Voya was named one of the World's Most Ethical Companies for the 8th consecutive year. We were one of only 135 companies to earn this recognition, and one of only six in the financial services category. This honor and others like it reflect our culture and the character of our brand. And these include being ranked 5th overall on Barron's 2021 100 Most Sustainable Companies list and earning the number one ranking in the financial services category for the 3rd consecutive year and earning inclusion on Fortune's lists of the 2021 Best Workplaces in Financial Services & Insurance. Our management team is extremely proud of our employees and all they have contributed for our clients and customers during the past year. Despite all this that occurred, our people have been steadfast in adapting and pivoting to ensure that Voya can be there for our customers when they need us the most. With that, let me ask Mike Smith to provide more details on our performance and results.

Michael Smith, Vice Chairman and Chief Financial Officer (CFO)

Thank you, Rod. Before we turn to the numbers, I want to echo Rod's comments about our employees. We have many stakeholders of Voya, including our clients and our shareholders, but it is our employees that have enabled us to execute everything you've seen from Voya over the past year. From completing the sale of our Individual Life business to responding to our customers when they needed us most, our employees have gone above and beyond while also managing health and work-life balance challenges. For this, we are all very grateful for their support. This quarter, we have changed the focus of our earnings discussion from normalized to adjusted operating earnings. In doing so, we hope to simplify the earnings presentation for investors. This is also consistent with our evolution toward being a less complicated company, especially with a Life Transaction now behind us. In order to assist with trend analysis, we will, of course, call out notable items and any one-time adjustments. Turning to Slide 7. We delivered after-tax adjusted operating earnings of $1.70 per share in the first quarter of 2021. This includes the following items. First, $0.66 of prepayment and alternative income above our long-term expectations. Alternative income was boosted by favorable fourth quarter equity markets. First quarter equity market strength is likely a positive for second quarter alternative performance, so roughly a quarter of our holdings are in sectors that were relatively flat in the first quarter. Second, $0.17 of unfavorable COVID-19-related claims impacting Health Solutions, and third, $0.03 of unfavorable other notable items in the quarter. With the Life Transaction now successfully behind us, we are focused on and confident in our ability to eliminate stranded costs by the end of 2022. GAAP net income was more than $1 billion for the first quarter of 2021. This was largely driven by a significant gain from the reinsurance component of the Individual Life Transaction booked at close. This gain reduced the ultimate GAAP loss on sale for the overall transaction to $633 million at the low-end of the guidance $600 million to $800 million range. Moving to Slide 8. Wealth Solutions delivered $255 million of adjusted operating earnings in the first quarter, significantly higher than $124 million in the first quarter of 2020. The year-over-year increase was largely driven by favorable alternative income, which was $81 million above our long-term expectations and $74 million higher than the first quarter of 2020, as well as a favorable DAC unlock relative to last year. Investment spread continued to benefit from the volume of transfers into our fixed account in 2020. In addition, we benefited from crediting rate actions that became effective this year, seasonally lower crediting days and income generated from discounted bonds that were called in the quarter. Equity markets along with consistently strong full service and recordkeeping net inflows, all combined to drive higher asset levels, which provided a tailwind for our fee-based business. Our administrative expenses were favorable compared to a year-ago, reflecting our expense discipline and continued drive toward lower unit costs. Turning to deposits and flows. Full Service recurring deposits grew 5.1% to over $11 billion on a trailing 12-month basis. We expect employer match and participant deferral trends to continue improving throughout the year such that full-year recurring deposit growth will be 6% to 8% as previously guided. We generated over $850 million of positive full service net flows and more than $2 billion over the last 12 months. Recordkeeping net flows were $3.5 billion in the first quarter, largely driven by a large client win. Stable value saw modest net outflows of $156 million following a record year for net inflows in 2020. Looking ahead, we expect full service net flows to remain positive and recordkeeping flows to moderate slightly in the second quarter. We have a robust pipeline, a strong and growing distribution, and we continue to invest in our customer-focused solutions through the workplace. Our diversified revenue streams from our top-tier presence across all markets will contribute to our ability to achieve long-term growth. On Slide 9. Investment Management delivered $52 million of adjusted operating earnings. This is higher than $40 million in the first quarter of 2020, primarily driven by investment capital results, which were higher year-over-year and significantly above our long-term target. We generated greater fee revenues from higher average asset levels and successive client wins. This was partly offset by waived fees on certain short-term money market products due to the current level of short-term rates. More materially, external client revenue yield is down in the quarter due to the Life Transaction, which produced an expected movement of assets from the general account to institutional. Administrative expenses were higher year-over-year, largely due to variable compensation associated with strong investment capital results in the quarter and continued investments in the business. Our adjusted operating margin, including investment capital improved 200 basis points to 28.8%, benefiting from strong investment capital results. Turning to flows. Overall net outflows were roughly $400 million in the quarter, primarily driven by the timing of expected redemptions and is in line with the guidance we shared in the prior quarter. In Institutional, we saw strong demand in private credit and commercial mortgage loans across domestic channels, including insurance. This was offset by outflows from longer duration investments by international clients as U.S. rates rose sharply in the first quarter. Having said that, we are seeing indications that trend is stabilizing. Additionally, we saw some short-term liquidity outflows related to client hedging activity. We are now separating these flows in our investor supplement to better represent the true growth of our business. This categorization change had an immaterial impact on historical organic growth and our outlook for 2021. Retail flows continued to improve sequentially, however, remain negative this quarter. Our fixed income performance remains strong. 94% of our fixed income funds outperformed the benchmark on a three-year basis and over 95% did so on a five and 10 years basis. Looking ahead, we expect to return to positive net flows in the second quarter and to achieve full-year organic growth of 2% to 4% driven by a strong unfunded pipeline of client wins. We have a diverse platform to meet client needs across market cycles. Our strong long-term investment performance, strength of distribution channels and diversity and solutions providing differentiated returns continues to drive long-term optimism in our pipeline. Turning to Slide 10. Health Solutions delivered adjusted operating earnings of $37 million in the first quarter compared to $61 million in the first quarter of 2020. We incurred $29 million of COVID-related claims driving most of the variance. Repayment and alternative income exceeded our long-term target by $6 million and was more favorable than first quarter of 2020 by $5 million. Annualized in-force premiums grew 8.6% year-over-year supported by growth in all product lines, highlighted by double-digit growth in voluntary and 9% growth in stop-loss following a successful January sales and renewal season. The total aggregate loss ratio was 71.8% on a trailing 12-month basis within our targeted range of 70% to 73%. Group Life loss ratios were elevated in the quarter due to COVID claims. Loss ratios for stop-loss and voluntary were in line with our expectations. As Rod mentioned, we are excited by our recently announced acquisition of Benefit Strategies. This acquisition accelerates our presence in the fast-growing HSA market that we entered in 2019. As we look out to the rest of the year, we remain optimistic that as COVID eases throughout the year, earnings growth should rebound given solid underlying commercial growth momentum across our entire book of business. On Slide 11. We provide EPS items to consider for the second quarter of 2021. Second quarter will benefit from several seasonal first quarter items not repeating at the same levels, including administrative expenses, Group Life loss ratios, and preferred stock dividends. In the second quarter, we also expect an earnings benefit from lower variable compensation and investment management associated with investment capital results and less severe COVID-related claims relative to first quarter levels. Considering claim submission lags, we expect $20 million of COVID-related claims impact in the second quarter and $10 million in the second half of this year, based on a full-year assumption of 300,000 total U.S. COVID-related deaths. Offsetting these items is the call bond investment gain in Wealth Solutions not expected to recur. We also experienced outsized alternative income in first quarter above our long-term expectations of 9%. While we have provided some items to consider, there will, of course, be other factors that affect second quarter results, including changes in our average share count, market impacts, business growth and the potential for additional COVID-19 impacts. Slide 12. Our robust capital position allowed us to continue our strong track record of returning capital to shareholders. This quarter, we returned $255 million to shareholders, including $20 million in common stock dividends and $235 million in share repurchases, the latter of which comprised $30 million of shares related to an ASR agreement that was entered into in the fourth quarter of 2020, $200 million of shares delivered as part of a new $250 million ASR agreement we entered into during the first quarter, and $5 million of shares repurchased through open market transactions. The total amount of capital returned to shareholders since our IPO is $7 billion, predominantly through shares repurchased. We continue to expect to deploy approximately $1 billion of capital towards share repurchases over the course of 2021 in a ratable manner, while continuing to balance investing in our business for the long-term. Our financial leverage ratio was above our 30% target, largely due to the impacts from the life-close and lower AOCI due to the move in interest rates at the end of the quarter. This does not change our plan to retire $600 million to $800 million of debt this year of which we retired $75 million in the quarter. We ended the quarter with strong excess capital of $1.6 billion. We continue to expect at least $300 million of additional excess capital upon the completed sale of our Independent Financial Planning channel. In summary, we are pleased to have closed the Life Insurance transaction, a huge step in our transition to our capital-light business and have shared our new operating model. We believe our strong workplace and institutional franchises are poised for long-term success. We generated high free cash flow and have a significant excess capital position as well as an increasingly valuable deferred tax asset should higher corporate tax rates become law. We will continue to act as good stewards of capital as we look to deploy proceeds in the best interest of shareholders. With that, I will turn the call back to the operator, so that we can take your questions.

Operator, Operator

Thank you. We will now begin the question-and-answer session. (Operator provided instructions on how to queue for questions.) Our first question comes from Elyse Greenspan with Wells Fargo. Please state your question.

Elyse Greenspan, Analyst, Wells Fargo

Hi. Thanks. Good morning. My first question just on the capital side of things. You guys reconfirmed $1 billion of buybacks for this year. I was just hoping we could get more color on how to think about just timing. I think you said it will still be ratably throughout the year, but given that there is more certainty on the economy and coming out of COVID where you perhaps look to pull forward some of the buybacks given that the worst is behind us.

Rodney Martin, Chairman and Chief Executive Officer (CEO)

Elyse, good morning. I'll begin, and as usual, Mike and I will toggle back and forth. And your assumption is correct or your understanding is correct. We have committed to $1 billion of buybacks this year. As Mike just shared, that is on top of the $7 billion that we've already done historically since the IPO. We're also retiring debt that you've heard Mike talk about between $600 million and $800 million and we'll probably be in the middle of that range. And if you look at how we've done this historically, Elyse, we've done it ratably and that has served us well. And so that philosophy and approach is how we're approaching it. And we'll always make some judgments based on market conditions, but that's generally been the approach. And Michael, please feel free to add.

Michael Smith, Vice Chairman and Chief Financial Officer (CFO)

I think you covered it really well, Rod. I would just reemphasize the point that we'll look for opportunities as the stock trades up and down or general market trades up or down to lean in or lean back with open market purchases where that makes sense. But the ratable part Elyse, just to be clear, it was less about COVID and uncertainty and more just the application of the discipline that we've shown consistently. I think as Rod said, it's served us well and we expect it to continue to serve us well.

Elyse Greenspan, Analyst, Wells Fargo

Okay, great. And then my second question on — you guys announced a deal, Benefit Strategies, yesterday, and I just — you guys didn't disclose the payment. So it sounds like it's more of a bolt-on deal. So as we think about additional M&A, would it more be on kind of similar bolt-ons? Or could you just kind of give us an update as you guys think about potential additional M&A transactions?

Rodney Martin, Chairman and Chief Executive Officer (CEO)

Elyse, thank you for mentioning it. We are very excited, and I'll let Rob comment in just a moment about Benefit Strategies. But in terms of our consideration, we've talked about considering opportunities that will help accelerate growth in the workplace by increasing integration and outcomes across the health and wealth focus with employees and employers from an engagement, data integration and technology perspective. So Elyse, it's extremely difficult to comment about size because these opportunities emerge as they emerge. But this is a good example of adding to a business that we started organically, and I think enabling us to accelerate this significantly. But let me ask Rob to jump in and just describe this a little more fully. Rob?

Robert Grubka, Head of Health Solutions

Yes. Sure. Thank you, Rod. Thanks for the question, Elyse. Yes. We're certainly excited about it from a strategic standpoint. I think it's probably super self-evident as to why we got excited about this particular opportunity. And to speak of them more particularly, they've been in this business for a long time. They're an East Coast-based company, so there's a broad mix of solutions that they cover and service and administer. HSA is certainly the headline story because we see it as such a great connector between our health and wealth businesses and trying to really bring together for consumers a more integrated decision framework and opportunity to provide guidance and think about even servicing the business in a more holistic way. So there's certainly that element of things. As a reminder, we talked about this actually back at Investor Day in 2018, and over the last couple of years have certainly learned a lot as we've entered that marketplace. We're excited about what we've learned. Again, I just reinforce the connectivity and the receptivity in the market to bringing together the wealth story as well as the HSA and notional account story and connecting all the way through. And then obviously it's an opportunity for our Investment Management team to play a role in this solution as well. So we're really excited about the cultural fit, the consumer fit and the capabilities they bring. We actually partnered with Benefit Strategies last year in a more meaningful way. So we got to sort of test ride with each other a little bit and just found it a really good match culturally and from an execution and delivery perspective for our customers. Could not be more excited about it.

Elyse Greenspan, Analyst, Wells Fargo

Okay. Thanks for the color.

Rodney Martin, Chairman and Chief Executive Officer (CEO)

Thank you.

Operator, Operator

Our next question comes from Nigel Dally with Morgan Stanley. Please state your question.

Nigel Dally, Analyst, Morgan Stanley

Great. Thanks, and good morning, everyone. Just wanted to circle back to capital management, understand that you could lean in or depending on market conditions, which makes a lot of sense. But as you also mentioned, it does seem like the uncertainty with regards to the pandemic, the economy is dissipated, your current capital position remains very strong, your free cash flow is amongst the best in the industry, then you also have the deal in the third quarter, which is going to free up some additional capital. So if things go right, it's a potential upside to the amount? Or should I be taking from your comments that $1 billion that you talked about we should view as being largely baked in at this point?

Rodney Martin, Chairman and Chief Executive Officer (CEO)

Nigel, I'll start with — again, Mike and I will toggle back and forth. Just maybe as — we believe the share repurchases are and have been a core part of the Voya story. In addition to that, we're carefully looking as we've discussed our opportunities to accelerate our worksite strategy; Benefit Strategies as an example of that. We're also retiring as we commented about just a moment ago, $600 million to $800 million of debt. And as a reminder, a number of these transactions closed later this year. So we will and have been opportunistic historically, but the guidance that we've given for 2021 is fully based on both organic growth and what we have in place now. With that, Mike?

Michael Smith, Vice Chairman and Chief Financial Officer (CFO)

Nigel, I think the only thing I'd say is that you shouldn't view the $1 billion as a ceiling. To the extent that opportunities present themselves, and it makes sense for us to do, I think we could lean in. I think we've said from the beginning it was at least $1 billion. We'll see how the balance of the year unfolds. We’ll need to close the Financial Planning Channel transaction, and we'll see how the balance of 2021 emerges. But to Rod’s point, focusing on delivering shareholder value and being conscious of that has been, I think, a hallmark of this management team, and I don't think that's in any way changing here.

Nigel Dally, Analyst, Morgan Stanley

Okay. That's great. I appreciate the color. And just one other one on Investment Management. You commented you have a strong unfunded pipeline of mandates, any color as to whether those business wins are likely becoming funded in the second quarter or just too tough to judge?

Rodney Martin, Chairman and Chief Executive Officer (CEO)

Christine?

Christine Hurtsellers, Head of Investment Management

Nigel, I would say, not to go as far as to say too tough to judge, but as you know, just quarter-to-quarter, some of these mandates in the pipeline can be a bit lumpy. That said, looking out at the full year and what we do see is very strong unfunded wins as well as progress through finals and semi-finals, so feeling really positive about it. What's driving some of this is our unfunded wins are across 10 strategies and are diverse by client type. A lot of the demand is for some of our private assets, like private credit, as an example, and also commercial real estate, which was held up a bit where the market pricing and the ability to underwrite properties last year was more challenging in COVID. So that headwind is starting to dissipate and will turn into a tailwind. Overall, we're very confident in forecasting 2% to 4% beginning of AUM growth. It's diversified and could be lumpy quarter-to-quarter, but overall the long run trajectory is very strong. We've delivered five consecutive years of positive net cash flows, and so we're on track for a sixth consecutive year of positive net flows.

Nigel Dally, Analyst, Morgan Stanley

Sounds great. Thanks a lot.

Operator, Operator

Our next question comes from Josh Shanker with Bank of America. Please state your question.

Joshua Shanker, Analyst, Bank of America

Yes. Thank you very much. I wonder if you could talk a little bit — I get the question a lot, but I can tell you that from my perspective, the fee margin on recordkeeping business has shrunk more quickly than I thought it would. I know you've had some big wins and those wins might be coming at a lower negotiated rate than the legacy portfolio. But can we talk about the trend? What we should expect going forward? And as you do put on new wins, the margins on those wins relative to the legacy margin of the portfolio?

Rodney Martin, Chairman and Chief Executive Officer (CEO)

Absolutely. Heather?

Heather Lavallee, Head of Wealth Solutions

Yes. Josh, thank you so much. Appreciate the question. First, I'll say we did have some one-time annual fees in the fourth quarter that did not repeat in the first quarter, which really drove the appearance of some accelerated fee compression between the quarters. We are very much focusing on positive and profitable sales growth. And while we do anticipate some revenue pressure across the industry, we're focused on growth in our full service, specifically within our mid-market space where we have expanded distribution. What we see there is we may sell larger plans with a lower average fee, but higher total net revenues and very much in line with our expectations. Second, we continue to be very focused on driving operational efficiencies and enhancements to our client experience that are helping to bring down expenses and helping to offset revenue pressure. And the final item I'd point you to is we're focused on driving alternative sources of revenue by expanding and enhancing our proprietary solutions that are resonating in the market. So while we recognize revenue pressures, we are confident in our ability to hit our 8% to 12% earnings growth that we forecasted for the year.

Joshua Shanker, Analyst, Bank of America

And the timing of the win that you had in the quarter, did that show up towards the end of the quarter skewing the average balances as opposed to the beginning and end balances?

Heather Lavallee, Head of Wealth Solutions

Sure. Let me address it this way talking about the flows in the quarter. We had very strong flows across full service and recordkeeping, totaling $4.4 billion and all organic growth. So very pleased. We did see a greater acceleration of funded wins coming in during the quarter. So I think that's a driver of any movements in average fee revenue, but again, very strong flows in the quarter and really driving our strong commercial momentum that we're anticipating throughout the year. Within recordkeeping, as you know, it can be a little lumpy. We're building off of an extremely strong 2020, so as I look forward into 2021, we expect flows to moderate a little bit, see continued strong revenue from our diversified portfolio, and just strong commercial momentum throughout the year.

Joshua Shanker, Analyst, Bank of America

Thank you.

Operator, Operator

Our next question comes from Tom Gallagher with Evercore ISI. Please state your question.

Thomas Gallagher, Analyst, Evercore ISI

Good morning. Rod, I heard your comment before about in reaction to M&A that it depends on opportunities that emerge, but just wanted to ask you about sort of directionally where your head's at with the types of deals you'd consider because as you guys probably heard Prudential maybe considering divesting their full service retirement business. And I'm not asking you specifically about Prudential, but would Voya consider a larger scale integration oriented deal in that space? Or is it really more bolt-ons smaller size deals that we should be thinking about with more consideration for not wanting to take on too much execution risk here?

Rodney Martin, Chairman and Chief Executive Officer (CEO)

Tom, thank you. Two comments. One, we have scale in that space with our 6 million plus participants and it's been growing nicely. The second piece, what we've really tried to signal is the focus of accelerating growth in the workplace. Benefit Strategies is an example of that, but by increasing the outcomes across health and wealth, the employee and employer engagement, data integration and technology, that's where our focus is. Tom, through the pandemic, the world in our view has really changed. You'll hear us and particularly Charlie with his focus on growth, talking about connecting the unconnected. There are more and more employees looking to their employer for help and support in this area. And we see that as our primary focus. I think Benefit Strategies is a good example of that. Beyond that it's hard to comment because it's hypothetical. But Mike, feel free to add.

Michael Smith, Vice Chairman and Chief Financial Officer (CFO)

Yes. Just maybe Tom, as Rod said, we have scale in retirement. Scale will always be important in retirement. So those opportunities — we've talked consistently about looking at bolt-ons and bringing on additional scale where it makes sense, but that'll be very much a numbers game and an execution risk assessment game. We're excited about opportunities to broaden our capabilities in integrating the experience for employers and employees, so that's also going to be a continued focus.

Rodney Martin, Chairman and Chief Executive Officer (CEO)

Maybe one other comment: if you go back to what we've done with our Voluntary benefit business, that was nascent and has grown organically. Over the last eight to ten years, all organically, we've gone from really being a non-significant player to being fourth or fifth in the marketplace. That experience and confidence about how the team has done that bolsters our confidence and focus on what other adjacencies we can do through something like Benefit Strategies to further expand our capabilities and respond to what we're hearing from employers and employees. I apologize if I interrupted you.

Thomas Gallagher, Analyst, Evercore ISI

No. That's really helpful. Appreciate the color from both of you. Just one follow-up, Mike, if I could, on the sharp drop in crediting rates in the Wealth Solutions business. Clearly, it looks like that was a pretty favorable earnings driver in the quarter. Can you expand a bit on what happened there? And whether or not there's more flexibility on the crediting rate side going forward? Or was this kind of a big lever that was pulled and what it means for future margins? Thanks.

Michael Smith, Vice Chairman and Chief Financial Officer (CFO)

Tom, I think I'll actually bounce that one over to Heather. I think she's in a better position to give you the color on that.

Heather Lavallee, Head of Wealth Solutions

Thanks, Mike. First, as Mike mentioned, we had a notable item in the quarter related to called bonds that will not repeat. But we've taken specific action to address some of the interest rate pressures. Let me point to three actions. First, we took some crediting rate actions last year and at the beginning of this year in line with a low interest rate environment that were reflected this quarter. Second, our GMIR initiative from several years ago has continued to help us on this front. Third, we had significant transfers from variable to fixed in 2020 into lower crediting rate product that helped our spread income. We recognize that recent rate increases have been a bit of a tailwind for us. We expect a prolonged low interest rate environment to continue. We are always looking for opportunities to further mitigate the risk from low rates while honoring commitments we've made to participants and plan sponsors. Overall, our earnings are well balanced between spread asset base and participant fees, and we are confident in our ability to deliver on the earnings targets we set for the year.

Thomas Gallagher, Analyst, Evercore ISI

Thanks, Heather. Any further flexibility in that and to continue to lower crediting rates?

Heather Lavallee, Head of Wealth Solutions

We are always looking for opportunities. I won't point to any specific actions, but the teams are always evaluating certain blocks of business and crediting rates. We want to balance opportunities to de-risk with the commitments we've made to clients, while being good stewards of capital for shareholders. We have a solid track record of adjusting crediting rates and taking appropriate action, and we'll continue to do that going forward.

Operator, Operator

Our next question comes from Andrew Kligerman with Credit Suisse. Please state your question.

Andrew Kligerman, Analyst, Credit Suisse

Hey. Good morning, everyone. I'm interested in Health Solutions and the sales outlook. As we look to the first quarter stop-loss sales were up 23% year-over-year, but Life sales were down 26% and we would have expected higher Life sales just given the increased attention to that product area. So could you touch on both product lines in Health Solutions?

Rodney Martin, Chairman and Chief Executive Officer (CEO)

Rob, do you want to begin?

Robert Grubka, Head of Health Solutions

I’d be happy to. Thanks, Andrew. On the Life side, the drop in sales year-over-year was driven by a mix shift. At the larger end of the market we saw less activity; overall activity was slower during 2020 for obvious reasons. However, recognition of the importance of Life Insurance has increased, and I view this as a longer-term trend that's intact or increasing. Our in-force book of Life and Disability grew close to 4%, so while sales were down, retention improved. On stop-loss, we had a very strong start to the year. Stop-loss is a business with inherent volatility; we saw strong sales and disciplined underwriting. On voluntary supplemental health, we wrote a significant number of new groups year-over-year, but those were more in the middle-market and smaller market segments than prior years. So it was a sales mix story — national accounts versus middle market. We're seeing activity open back up and this is a prime season for both Voluntary and Life, and we're optimistic about the pipeline.

Andrew Kligerman, Analyst, Credit Suisse

Very helpful. And then my second question is around the Wealth Solutions unit. I saw earlier last year you put together multiple employer plans tied to the SECURE Act. I'm wondering how that's going? And given SECURE Act 2.0 legislation in the House, what's the addressable market and how you're proceeding with respect to SECURE Act, how it's impacting sales and what SECURE 2.0 could do for you?

Rodney Martin, Chairman and Chief Executive Officer (CEO)

Heather?

Heather Lavallee, Head of Wealth Solutions

Happy to address it. We have been very supportive of both SECURE Act 1.0 and 2.0 and believe the SECURE Act provides a tremendous opportunity for more Americans to have greater access to retirement savings. Regarding multiple employer plans and pooled employer plans, Voya is well positioned. We've seen success in adoption of pooled employer plans and expect sales growth, particularly in our corporate markets. For SECURE Act 2.0, there are proposed components that would expand investment lineups for tax-exempt clients, specifically providing access to CITs, collective investment trusts, and opportunities for tax-exempt plan sponsors to enter into multiple employer plans. We're well positioned to support those changes. We've pivoted and responded quickly to SECURE Act adoption and believe Voya can help increase savings rates for participants and grow plan sponsors as a result.

Andrew Kligerman, Analyst, Credit Suisse

Thank you.

Operator, Operator

Our next question comes from Ryan Krueger with KBW. Please state your question.

Ryan Krueger, Analyst, KBW

Hi. Good morning. I was hoping you could discuss the divergence in recurring deposit growth that you're seeing in full service corporate, which has recovered pretty strong compared to tax-exempt, which seems to still be under some pressure?

Heather Lavallee, Head of Wealth Solutions

Thank you. First, as Mike stated in his comments, we're confident in our ability to achieve the 6% to 8% recurring deposit growth for the year, in line with 2020. Specifically, in 2020 our tax-exempt business was not as impacted by COVID in terms of recurring deposits, so we did not see the same rapid decline as in corporate markets. In the first quarter of 2021, corporate markets are seeing a faster recovery in employer and employee contributions. Overall, this reflects a balanced mix across corporate and tax-exempt businesses. We expect tax-exempt recurring deposits to improve as the year progresses and remain well positioned across markets.

Ryan Krueger, Analyst, KBW

That's helpful. Thank you.

Operator, Operator

Our next question comes from Erik Bass with Autonomous Research. Please state your question.

Erik Bass, Analyst, Autonomous Research

Hi. Thank you. To start on Wealth Solutions, can you just talk about the outlook for expenses for this year? And was there anything unusual in the admin expense this quarter? Or should we expect continued minimal year-over-year growth?

Heather Lavallee, Head of Wealth Solutions

On expenses, in the first quarter of 2020 we did have some one-time expenses related to some large sales in Recordkeeping. Going forward, we are disciplined on expense management. We've driven lower unit costs across our book of business, which continues to be a focus. There were no notable items in the quarter; we remain disciplined and will continue to focus on operational efficiency, client experience enhancements and managing expenses throughout 2021.

Erik Bass, Analyst, Autonomous Research

Thank you. And then I was hoping you could talk about your current distribution relationship with NN Investment Management and how that could be affected by their announced strategic review?

Rodney Martin, Chairman and Chief Executive Officer (CEO)

Christine?

Christine Hurtsellers, Head of Investment Management

Sure. Erik, NN has made an announcement about a potential strategic review. They've been a long-term strategic partner of ours. The capabilities they distribute on our behalf, notably investment-grade credit, are among the best performing investment-grade credit capabilities in the world. We would expect that strategic partnership to continue given the value produced. That said, we've been planting seeds for direct distribution offshore: those markets are growing rapidly, notably Asia. We added sales resources into EMEA last year and plan to add resources in APAC in the fourth quarter. We've been winning direct mandates in Asia based on the quality of our solutions and data, and we continue to grow our product set for offshore clients. So NN has been a great partner, but we're also enhancing our direct capabilities offshore.

Erik Bass, Analyst, Autonomous Research

Thank you. Do you have a rough breakdown of what your international distribution is that’s independent versus through that relationship?

Christine Hurtsellers, Head of Investment Management

We have a small direct team in EMEA, and we have onshore resources dedicated to servicing Asia. We don't yet have boots on the ground in Asia; we're planning to add a small team in the fourth quarter focused on insurance clients. There's a real global opportunity given the strength of our insurance asset management and our products to tap into offshore insurance demand.

Operator, Operator

Our next question comes from Jeremy Campbell with Barclays. Please state your question.

Jeremy Campbell, Analyst, Barclays

Hey. Thanks. Mike and Rob, I'm just hoping you could help us think about the sizing in Benefit Strategies. I think the release said 370,000 participant accounts across HSA, HRA and other offerings. I think the national average balance for HSA is about $1,800. Obviously everything else was probably lower. So any high-level color on account splits or total AUM onboard would be helpful as well as any opportunity to convert some of these HSA assets into Voya strategies would be helpful as well.

Rodney Martin, Chairman and Chief Executive Officer (CEO)

Rob, do you want to begin?

Robert Grubka, Head of Health Solutions

Sure. We're not going to provide a detailed breakdown pre-close. It's an appropriately sized, strategic bolt-on that expands capabilities, particularly in fee-based service for HSAs and related accounts. I wouldn't hang up solely on an AUM story — it's a fee-oriented business. There is upside to growing AUM as we scale, and there will be opportunities over time to integrate solutions and potentially convert assets to Voya strategies where appropriate. We'll provide more detail after close.

Operator, Operator

Our next question comes from Humphrey Lee with Dowling & Partners. Please state your question.

Humphrey Lee, Analyst, Dowling & Partners

Good morning, and thank you for taking my question. In Investment Management, accounting for the favorable investment capital return and the corresponding expenses, the normalized earnings would be around $34 million, which seems low relative to where it has been running. I think you talked about reinvestment and expenses going into the quarter. So how should we think about the earnings power for Investment Management, accounting for the variables in the quarter as well as the Individual Life Transaction?

Rodney Martin, Chairman and Chief Executive Officer (CEO)

Mike, do you want to start?

Michael Smith, Vice Chairman and Chief Financial Officer (CFO)

Humphrey, thanks for the question. There are a number of moving parts, but a practical way to think about second quarter is mid-40s for Investment Management adjusted operating earnings. That reflects expected reversion of variable compensation to more normal levels from the unusually strong investment capital results in the first quarter, typical seasonality in expenses, and some fee income growth. It also incorporates the impact of the Life Transaction, which we previously noted is roughly $10 million to $15 million annually.

Operator, Operator

Our next question comes from Suneet Kamath with Citi. Please state your question.

Suneet Kamath, Analyst, Citi

Thanks. The stop-loss loss ratio in the quarter at 75.6% was quite a bit lower than where it's been running over the past three quarters. Is there anything unusual going on in there? Is that just normal variance or are you seeing people putting off medical treatments because of COVID and unwillingness to go to hospitals, etc.?

Robert Grubka, Head of Health Solutions

The quick answer is it's a business about managing volatility for employers, and sometimes we'll see favorable or unfavorable volatility at different points. I wouldn't chalk it up purely to seasonality; it's how the block evolves and where claims fall. We're watching for delayed treatment trends, but at this point we haven't seen material deviation in coverage types. Reminder: our attachment points on stop-loss where we play are around $300,000 deductibles, so it would take severe events to trigger significant exposure. We'll monitor trends and re-price on the annual cycle if needed, but we're comfortable with where we sit.

Operator, Operator

Our next question comes from John Barnidge with Piper Sandler. Please state your question.

John Barnidge, Analyst, Piper Sandler

Thank you very much. As we think about the Health Savings Account initiative and potential increases in taxes, can you talk about the opportunity to get more of those accounts funded at a higher level as opposed to where they traditionally are, and how Voya's product suite helps that?

Robert Grubka, Head of Health Solutions

From a funding perspective, we see HSAs being used more as savings vehicles versus primarily spending accounts. Over time, that creates an opportunity to accumulate assets. Given the tax advantages and the rising cost of medical care in retirement, HSAs can play an important role in funding future medical expenses. For Voya, this acquisition helps us better understand individual situations across health and retirement, enabling us to provide guidance and support to help participants make good decisions. Integration across health and wealth is key to encouraging greater utilization and funding of these accounts.

Operator, Operator

This concludes our question-and-answer session. I would like to turn the call back over to Rod Martin for any closing remarks.

Rodney Martin, Chairman and Chief Executive Officer (CEO)

Thank you. The purposeful decisions that we've made as a company have enabled us to enter this period in a position of strength. With our new operating model, our clear focus on the workplace and institutions and our expanding capabilities to deliver solutions that our clients and customers value, Voya is well positioned for continued growth and success. We are excited about the opportunities before us and we look forward to continuing to update you during the year and at our Investor Day later this year. I hope you and your families remain healthy and safe. Thank you, and good day.

Operator, Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.