Earnings Call Transcript - VOYA Q4 2020

Operator, Operator

Good morning. And welcome to the Voya Financial Fourth Quarter 2020 Earnings Conference Call. All participants will be in a listen-only mode. Operator Instructions: 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. Mr. Katz, please go ahead.

Michael Katz, Senior Vice President, Investor Relations

Thank you. And good morning. Welcome to Voya Financial’s fourth quarter and full year 2020 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 laws. 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 supplement found on our website, investors.voya.com. Joining me on the call are: Rod Martin, Voya Financial's Chairman and Chief Executive Officer; as well as Mike Smith, Voya's Chief Financial Officer. After their prepared remarks, we will take your questions. For that Q&A session, we have also invited the heads of our businesses, specifically, Charlie Nelson, Retirement; Christine Hurtsellers, Investment Management; and Rob Grubka, Employee Benefits. With that, let's turn to Slide 3 as I would like to turn the call over to Rod.

Rod Martin, Chairman and Chief Executive Officer

Good morning. Let's begin on Slide 4 with some key themes. Despite the many challenges of 2020, our Q4 and full year results reflect strong financial performance and the power of our unique culture. We leveraged the strength of our brand and our long-standing distribution relationships to attract and retain clients. We provided resources, free credits in the new workplace programs to help our customers address the impacts of COVID-19 on their health and wealth needs. And we had candid conversations inside and outside our company about the racial inequity in our country, and how Voya can do even better to address these issues. All of this would not have been possible without our people. Despite every challenge, they focused on the needs of our clients with extraordinary professionalism and care. Voya stands apart in our industry because of our people, our unique portfolio of workplace and institutional businesses, and our commitment to our customers. This has enabled us to deliver strong bottom-line results, top line growth and capital returns that reflect the benefits of our diverse business mix of high free cash flow businesses. Turning to earnings performance, fourth quarter normalized EPS was $1.44, growing 21% year-over-year. Our full year normalized EPS was $4.81, representing a 14% increase compared with 2019. Included in these results was significant organic growth in our businesses. We continue to see robust demand for our products and services. We are attracting new clients and retaining existing clients who value our expertise and capabilities. On Retirement full year 2020 Full Service recurring deposits grew nearly 7% year-over-year reaching $11.1 billion. In Investment Management, we generated $8.4 billion of net inflows during 2020 representing 5% organic growth and exceeding our target of 2% to 4%. And in Employee Benefits, in-force premiums grew approximately 7% year-over-year, reflecting growth in our Voluntary business. We began 2021 by completing the sale of our Individual Life business on January 4. This transaction provides Voya with $1.4 billion of deployable capital with up to $100 million of additional proceeds by 2025. We expect to eliminate all stranded costs associated with the transaction by year end 2022. More recently, as we announced on Monday, we have entered into a definitive agreement with Cetera Financial, in which they will acquire the independent financial planning channel of Voya Financial Advisors. Importantly, the transaction preserves our ability to support our workplace clients with their financial wellness needs as 600 field and phone-based advisors remain part of Voya Financial Advisors. This transaction will provide us with over $300 million of deployable proceeds upon closing, which we expect to occur in the second or third quarter. Each of these transactions mark important milestones in our transformation to focus on serving workplace and institutional clients. They are also additive to our already strong balance sheet and capital position. Combined with the proceeds we will receive from the Individual Life transaction, we will have approximately $1.8 billion in excess capital. Going forward, we’ll continue to demonstrate our commitment to being good stewards of shareholder capital. We remain confident in our ability to return capital, despite the low interest rate environment. We continue to view share repurchases as our primary usage of excess capital. And we intend to utilize the new $1 billion repurchase authorization that we received from our Board over the course of 2021. This will enable us to build upon the more than $6.5 billion in excess capital that we have returned to shareholders through share repurchases. Over time, we expect that dividends will continue to be a larger contributor to returns. At the same time, we are open to opportunities to use capital in a way that will further advance our strategy and our plans to expand our services and reach among the workplace and with institutional clients. Turning to Slide 5, we have maintained a strong focus on our values and culture throughout the year. Most recently, we were honored to earn the following recognition: being named to the Human Rights Campaign 2021 Corporate Equality Index with a perfect score for the 16th consecutive year, becoming a 2020 Best Places to Work by Pensions & Investments for the sixth consecutive year, earning inclusion on the Bloomberg Gender-Equality Index for the fifth consecutive year and once again being named to Newsweek's list of America's Most Responsible Companies, which was established last year. Additionally, in recognition of our Voya Cares efforts, we received the 2020 Caregiving Organization of the Year award from caregiving.com for our comprehensive set of benefits and policies that support caregivers. This year, the actions of our people validated that our values are genuine and authentic, and continue to distinguish Voya with all of our stakeholders. With that, let me ask Mike to provide more details on our performance and results.

Mike Smith, Chief Financial Officer

Thank you, Rod. Despite a very challenging environment in 2020, we delivered strong top and bottom-line growth, returned significant cash to shareholders, closed the Life transaction, and we entered this year with robust pipelines, setting ourselves up for a terrific 2021. I'm very proud of all that our team accomplished and look forward to continued success in 2021 and beyond. Turning to Slide 7, we delivered normalized after-tax adjusted operating earnings of $1.44 per share in the fourth quarter of 2020. This excludes three items. First, $0.49 of prepayment and alternative income above our long-term expectations. Third quarter equity markets supported alternative results and helped drive full year performance back above our 9% long-term expectation. Second, $0.18 of favorable DAC/VOBA and other intangibles unlocking. And third, $0.21 of stranded costs associated with the Individual Life business and other closed blocks. With the closing of the Life transaction stranded costs net of ASA/TSA revenues will be included in normalized adjusted operating earnings going forward. On a full year basis, normalized after-tax adjusted operating earnings grew 14% to $4.81 in 2020, largely reflecting growth in investment management and employee benefit earnings and lower average share count. On a reported basis, adjusted operating earnings were $1.90 per share for the quarter, and $3.22 for the full year. GAAP net income was $341 million for the fourth quarter of 2020. This includes results from our Individual Life business for a final quarter. In the fourth quarter, Individual Life COVID-related losses were in line with our expectations, which drove unfavorable mortality. Moving to Slide 8, Retirement delivered $228 million of adjusted operating earnings, excluding unlocking in the fourth quarter, contributing to full year earnings of $592 million. Return on capital was 13% in 2020, in line with 2019. Fourth quarter adjusted operating earnings included alternative income that was $64 million above our long-term expectations. Full year results reflect higher fee income and investment spread than 2019 but was more than offset by higher administrative expenses. 2020 full-service fee-based revenue was higher year-over-year, driven by strong net inflows and favorable equity markets. Full year record keeping and other fee-based revenues were in line with prior year. Increased fees from significantly higher record keeping assets and record stable value inflows were mostly offset by a decline in suite fee revenues within our retail wealth management business due to very low short-end rates. We also waived certain fees to help participants navigate COVID-19 during the year. Full year investment spread increased year-over-year as higher transfers into fixed account options with lower crediting rates helped to alleviate some of the spread compression associated with lower rates. Our full year administrative expenses were higher year-over-year. Expenses in the year were generated by strong business growth and included investments in our business to better capitalize on workplace opportunities. We also incurred expenses onboarding a large number of participants throughout the year, and there were some notable items, including a legal accrual and an expense accrual true-up. Turning to deposits and flows, 2020 full service recurring deposits grew to over $11 billion, almost 7% higher year-over-year. For the year, Retirement generated Full Service net inflows of $1.6 billion, largely reflecting strength in corporate markets. As anticipated, we experienced fourth quarter outflows of $2.3 billion, largely due to the departure of a large case tax-exempt client. We had a record year-end stable value flows. Net flow momentum continued into the fourth quarter, adding $761 million in net inflows to drive the full year total to $4.3 billion. Record keeping flows exceeded $24 billion in the year, including $1.9 billion of outflows in the fourth quarter, driven by known departures from clients that had given notification earlier in the year. This increased record keeping participants 15% to 3.3 million. In 2020, we added 30 new government plans and nearly 350,000 participants. With those wins, Voya is now the number one retirement plan provider in the government space. We were excited by our commercial momentum going into 2021. 2020 was a year which illuminated new ways to efficiently win business across all the markets we operate in. We have a robust pipeline and continue to make the right investments to accelerate our workplace strategy to drive long-term success. On Slide 9, Investment Management delivered a record fourth quarter with $90 million of adjusted operating earnings. This contributed to full year earnings of $197 million exceeding our 2019 results primarily reflecting strong fee growth from higher institutional AUM year-over-year. We realized exceptionally strong performance fees in the fourth quarter related to our mortgage investment fund. This was driven by strong full year 2020 investment performance. Our full year 2020 adjusted operating margin, including investment capital was 28%, an increase from 26.6% in 2019. Turning to flows. In the fourth quarter, we experienced $2.4 billion in net outflows, primarily driven by known redemptions, including a large client withdrawal in the affiliated channel and year-end profit taking in funds with strong fixed income performance. We saw strength in our insurance channel. We issued two CLOs including a Euro denominated CLO, and we closed on several private mandates. Despite the fourth quarter outflows, we still delivered full year 2020 net flows of $8.4 billion, representing organic growth of 5% exceeding the high end of our 2% to 4% target range. Our fixed income performance remains strong. Ninety percent of our fixed income funds outperform the benchmark on a three-year basis and more than 96% did so on a five- and 10-year basis. Looking ahead, while we see a few redemptions in the first quarter, we are starting 2021 with the strongest pipeline of unfunded wins ever, and see opportunities across multiple strategies. With a track record of five consecutive years of positive flows, we are confident we can achieve our 2% to 4% organic growth target in 2021. Turning to Slide 10. Employee benefits delivered $50 million of adjusted operating earnings in the fourth quarter. Full year adjusted operating earnings were $204 million slightly higher than the 2019 results of $199 million, despite approximately $30 million in COVID-related headwinds. The trailing 12-month return on capital remained over 30%. Full year annualized in-force premiums grew nearly 7% year-over-year. Total aggregate loss ratio for the year was 70% at the low end of our targeted range. Group Life loss ratios were elevated as they include COVID-related claims. These claims were approximately $10 million in the fourth quarter, which is consistent with our expectation of $1 million to $2 million per 10,000 incremental deaths. We expect first quarter 2021 Group Life claims to be elevated relative to fourth quarter, due to typical seasonality and continued COVID claims. We are encouraged by the outcomes seen so far in our year-end renewal season. Looking further ahead, we remain confident in our ability to continue to drive strong top line growth while maintaining pricing discipline, leveraging longstanding distribution partnerships and differentiated service capabilities to accelerate our workplace strategy. Turning to Slide 11. Our deferred tax asset remains a key source of value. The net present value of the deferred tax asset is $1.05 billion as of December 31 or over $8 per share. The change in NPV reflects our utilization over the year. If enacted by the new administration a higher corporate tax rate would help increase the value of our DTA. Under current tax rates, we now expect to utilize approximately 40% to 50% of our DTA within the next five years. And we continue to expect to pay essentially no net cash taxes for the next five to eight years. And the DTA contributes to our 90% plus free cash flow generation. On Slide 12, we provide items to consider for the first quarter of 2021. First quarter of 2021 will benefit from lower incentive compensation expense in corporate. Fourth quarter incentive compensation was primarily related to strong fourth quarter alternatives and performance fees. The latter of which is not expected to recur in first quarter. Offsetting first quarter items include Investment Management performance fees, net of variable compensation are not expected to recur in the first quarter. Corporate segment results will include net realized stranded costs, now that the Life transaction has closed. Higher seasonal Group Life loss ratios and employee benefits combined with elevated claims driven by COVID. We continue to expect our sensitivity range of $1 million to $2 million for 10,000 U.S. COVID-related deaths to hold. And other seasonal items such as higher preferred stock dividends and administrative expenses related primarily to payroll taxes. While we have provided some items to consider, there will of course be other factors that affect first quarter results, including changes in our average share count, market impacts, business growth and the potential for additional COVID-19 impacts. On Slide 13, we are re-introducing guidance items for 2021. Now that we have better line of sight on longer term results. The results include impacts from both the Life transaction and the recently announced financial planning channel transaction. We expect 2021 earnings per share to grow 8% to 12% supported by growth across all businesses. We expect retirement to grow earnings at a commensurate 8% to 12%. Within Investment Management, we will overcome the impact from the Life transaction to have consistent earnings in 2021. That said, adjusting for the exceptional performance fees in fourth quarter, we expect growth of 8% to 12%. In employee benefits, earnings are projected to increase modestly in part due to the continuing impact of COVID claims, but also due to an expectation that the favorable loss ratios in 2020 will moderate from the low end to the middle of our 70% to 73% range. Also included on the slide are the assumptions underlying these growth expectations and earning sensitivities to macroeconomic factors and the pandemic. We believe the earnings growth expectations shown here present a compelling investment opportunity and demonstrate continued strong performance. Turning to Slide 14. Our diversified investment portfolio continues to perform well in the current environment. Our estimated impact to excess capital in each stress case are unchanged. We have incurred a cumulative impact of approximately $100 million from a combination of net negative ratings migration and credit impairments. We expect the prospective impact through year end 2021 to be roughly $200 million and $350 million in cases one and two respectively. And this is before any active management. Importantly, we view these potential impacts as manageable, given our excess capital and continued free cash flow generation. We continue to spotlight certain investments in our portfolio, including our commercial mortgage loans in the appendix. As of December 31, there are no outstanding loans in forbearance. Overall, we remain comfortable with the quality of our commercial mortgage portfolio, which is more than 87% CM1 rated and has a weighted average loan-to-value ratio of 46%. Slide 15. Giving pro forma effect to the Life transaction, our estimated RBC ratio is 498% above our target of 400% and excess capital is $1.8 billion. As Rod mentioned, we expect the sale of the independent financial planning channel to provide over $300 million of deployable proceeds when it closes later this year. This amount is not included in the pro forma amount I just mentioned. We resumed share repurchases in the fourth quarter via an accelerated share repurchase agreement for $150 million, of which $120 million was executed in the quarter. The remaining $30 million of repurchases was completed last month. We deployed over $500 million on share buybacks in 2020, despite uncertainty around COVID-19 and its impacts. Going forward, we expect to deploy our $1 billion authorization ratably over the course of 2021, while balancing investments we are making in the business to accelerate long-term growth. Our financial leverage is roughly 30% in line with our target. This is pro forma for the estimated gain on sale realized on the reinsurance portion of the Life transaction. This quarter we are also introducing a new financial leverage ratio that more closely aligns with the assessments of the rating agencies. The new leverage ratio eliminates equity credit for hybrids and preferreds and now includes AOCI and non-controlling interest. Going forward, our target will be to manage this new financial leverage ratio to be below 30%. We continue to expect $600 million to $800 million of debt extinguishment this year, which we anticipate will occur in the second half of the year. Finally, we increased our quarterly common stock dividend by 10% to $0.165 per share. This affirms our confidence in the stability of our cash flows and over 90% free cash flow conversion. The higher dividend keeps our yield at over 1% even if our share price were to increase meaningfully from current levels. In summary, we are pleased to have closed the Life transaction, leaving behind significant interest rate and tail liabilities with it. We believe our strong workplace and institutional franchises have proved resilient in challenging times and are poised for strong growth in 2021 and for long-term success. We generate high free cash flow and have a significant excess capital position. 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. Operator Instructions: Our first question today is coming from Ryan Krueger with KBW. Your line is now live.

Ryan Krueger, Analyst, KBW

Hi, good morning. I had a question on M&A. I know this is the potential to do M&A is not exactly a new topic. But it did seem a little bit more prominent in your language on it this quarter. So wanted to understand if it's more of a priority now, or if it's just something that you would consider doing if there were opportunistic properties that emerge?

Rod Martin, Chairman and Chief Executive Officer

Ryan, good morning, it's Rod. Mike and I and the team will toggle as usual. Ryan, our philosophy on capital management remains the same. We're going to be disciplined on shareholder value and that very much includes M&A. We're excited about what Mike and I just talked about in terms of deploying $1 billion of share buybacks this year. As Mike has shared, we will have $1.8 billion in excess capital. And we are looking to both invest in our business and work at inorganic opportunities to focus on the growth in our business. And this is really to improve outcomes and the experience for our customers. So we will consider this. We are looking at ways that we can enhance the experience for our customers. And we aren't prepared to speculate on size or preference other than to say it's highly reinforcing of our workplace and institutional focus.

Christine Hurtsellers, Head of Investment Management

Sure, Ryan. So Ryan as you think about it, when you look at our guidance, we're forecasting flattish flows in the first quarter, other than a few known redemptions, but also uncertain timing in terms of unfunded wins. So how do we see the pipeline? Well, number one, we're starting the year with the largest level of unfunded wins that we've had at $4.7 billion, and that doesn't include the pipeline we call when we're either in finals or semi-finals. And the exciting thing about the unfunded wins Ryan, is that we have over 10 strategies represented in nearly 40 different clients. So think of it as being diverse and robust. So when you look at our guidance, we're guiding to 2% to 4% organic growth, we're going to continue to leverage our exceptionally strong investment performance. The products that we have both in public and private asset classes, as well as we've got a great distribution team. So overall, very confident that we're going to hit that range. And so again, recognizing we've had just think about negative outflows as far as life happens episodic, because when you look at our history, we've delivered five years of positive cash flows, five straight years. And so I'm confident we're going to be delivering six.

Ryan Krueger, Analyst, KBW

Thank you.

Operator, Operator

Thank you. Our next question today coming from Suneet Kamath from Citi. Your line is now live.

Suneet Kamath, Analyst, Citi

Thanks. Good morning. I wanted to start with Retirement if I could. Maybe a similar question to Ryan's on Investment Management. Charlie, can you give us a sense of maybe what the pipeline looks like there in terms of transfer deposits and then maybe how today compares to prior years?

Rod Martin, Chairman and Chief Executive Officer

Charlie?

Charlie Nelson, Head of Retirement

Sure. Thank you. Yes, transfer deposits and the activities and our total deposits are looking very, very strong. We saw an increase in RFPs in the fourth quarter. And even in January, we saw an increase in RFPs year-over-year, and that's leading to higher notifications. We continue to see improved notifications similar to what Christine was just referring to. These are notifications where we are awarded the plan and it awaits to be funded. So from a transfer deposit perspective, and it's not just in our corporate markets where we've had 29 quarters of full service net positive net flows, but it's also coming in our tax-exempt business in the first quarter and then early part of 2021. So that's kind of underpinning a fair bit of the confidence in our net flows and outlook for 2021.

Suneet Kamath, Analyst, Citi

Got it. And then I guess if I could shift over to capital, I guess Rod, if we sit here and think about the $1.8 billion going to $2.1 billion, once you close the independent financial planner sale — yes, that's a pretty sizable amount of excess capital. And I know if I think back to the years around the time of the IPO, you guys used to commit to deploying 100% of the excess capital sort of over the subsequent 12 months. And I know the world is different today with COVID, but if we assume that there's no major negative shocks or new surprises, is that still a reasonable expectation for investors that you would deploy kind of the full $2.1 billion over the next 12 months?

Rod Martin, Chairman and Chief Executive Officer

Suneet, what we just communicated was, for 2021, we are committing $1 billion of the excess capital in the form of share buybacks principally ratably. You've seen us generally lean in and out depending on market conditions, but we're highly confident in communicating that which I do realize leaves a balance and that balance will be used in the same judgment and experience that we've used in creating the $6.7 billion of capital that we've returned to date. And what do I mean by that? We're going to continue to look for ways to invest in our business organically. We will look for opportunities inorganically that makes sense in furthering and strengthening the solutions around workplace and on health and wealth. And of course we're going to continue to have an eye toward returning capital in a very constructive way to shareholders. So we tried to frame it around that. It gives us an enormous amount of flexibility. We're in an enviable position in my view to play offense as we move into 2021, you've heard from Charlie and Christine this morning. The momentum that we have as we finished 2020 and go into 2021. We're highly encouraged about and we are going to let the year play out. I will remind you all that we still are facing COVID. And we're encouraged about the vaccines. We're encouraged — there's a light at the end of this period of time, but this will be with us certainly for the first half of this year, which is why we're going to be prudent as we approach these decisions.

Mike Smith, Chief Financial Officer

Suneet, this is Mike. Maybe if I could just add, and I think I fully agree with everything Rod just said. I just wanted to add a little color around the financial planning channel proceeds. We just signed the transaction a couple of days ago. And so I think in terms of the use of those proceeds, the same philosophy will apply. There's nothing different there. But I'd probably stop short of saying we would put those necessarily to work by the end of the year. We may not close it until sometime in the third quarter. So just a little caution on that, but the discipline and the focus and the commitment to delivering shareholder value remains. The commitment to focusing on growth creation through investments in our business is just as strong as it's been.

Suneet Kamath, Analyst, Citi

Okay. Thanks.

Operator, Operator

Thank you. Our next question today is coming from Jimmy Bhullar from JPMorgan. Your line is now live.

Jimmy Bhullar, Analyst, JPMorgan

Hi, good morning. So maybe first, just following up on the discussion so far. If you could maybe Rod and/or Mike talk about where you feel that you would like to add through organic and inorganic investments in your business and what sort of the market environment is in competition is for deals in those areas?

Rod Martin, Chairman and Chief Executive Officer

Jimmy, good morning, I'll start. And obviously we'll toggle back and forth. We've talked about looking for opportunities to improve the outcome and experience for our participants and our companies built again around health and wealth. So think about that as an example in terms of our participant engagement and the data and the technology that will support those other growth initiatives. So improving that experience and outcome would be an example. We talked about historically Jimmy, the consideration of adding a block of business to our retirement if it met our financial targets. We talked about expanding our distribution reach with our existing strategies within our asset management business internationally — that has been growing. We've got great momentum in the insurance channel with Christine's team over the last five years, that would be an area where we continue to want to make sure we're making the proper investments. And certainly we've had terrific momentum particularly in our group benefits business. And that would be another area that would make sense to add capabilities as we perceive them as we move forward.

Mike Smith, Chief Financial Officer

I'd just add, again, the focus Jimmy will be on shareholder value and delivering that and that can come in many forms, but accretion/dilution remains an important consideration. Growth remains an important consideration, shifting our business mix to be more fee oriented and less risk oriented with the rerating potential that creates — all of those are important factors as we think about the opportunities that could be ahead for us.

Jimmy Bhullar, Analyst, JPMorgan

Okay. And then just on the outflows in the Retirement business in the fourth quarter, was it just a matter of timing of case wins and losses, because for the year you had a pretty strong year overall, but what drove the outflows in 4Q and especially in the record keeping business and any comments on trends that you're seeing in terms of employee deferrals and employer matching contributions or stability or a little bit of a recovery that we've seen in the economy?

Rod Martin, Chairman and Chief Executive Officer

Sure Jimmy. Charlie?

Charlie Nelson, Head of Retirement

Okay. Jimmy, you had a couple of things in there. So I'm going to try to tick away at them; if I miss one, circle back on me. Specific to your question around some outflows in the fourth quarter, we did have a small number of larger plans that did not renew, in particular in our tax-exempt business. And I'm very proud of our team. I think we've been maintaining good pricing discipline and not renewing plans generally with higher guaranteed rates. I think it's the right thing to do, but we've also been able to have some very strong growth in our tax-exempt business. I don't think you see some of the things that we see on the net flows in our tax-exempt business, because it's actually better than what you might see there because rollovers out of our tax-exempt business actually show up in our retail assets. So we've been able to retain a fair number of assets there. So we've got some good growth there. Over the last five years, our CAGR in growth of assets in tax-exempt has been 20% a year for the last five years. And then we moved to that number one position in the government market. So that's kind of a commentary both on record keeping as well as our full service businesses. As I look at both of those and adding 0.5 million participants, it was really a significant net net 0.5 million participants — a significant achievement with the total net flows between recordkeeping and full service. I think we're about $26 billion for full year 2020. And so that creates some tremendous momentum. In particular, when you look at where we gained that share, we gained the largest portion of it from top five DC competitors. So we're winning, not just from mid and smaller, but we took a meaningful share from top five DC providers. In terms of recurring deposits and employer contributions, in the fourth quarter, we actually saw an improvement in employer contributions year-over-year in recurring deposits. And that was measurable and that gives us some confidence going into 2021 that employer contributions will continue. As Rod says, there's still some uncertainty around COVID. But we're starting to see a bit of a rebound there — employer contributions went pretty significantly positive in a higher growth rate than what we saw in the second and third quarters.

Jimmy Bhullar, Analyst, JPMorgan

No, you did well. Thank you.

Operator, Operator

Our next question today is coming from Erik Bass from Autonomous Research. Your line is now live.

Erik Bass, Analyst, Autonomous Research

Hi, thank you. Can you provide some more detail on the drivers of the 8% to 12% expected normalized growth for Retirement earnings in 2021? And also help us think about the revenue and expense implications from the sale of the IFP business. Mike, Charlie, do you want to start? Mike and then Charlie?

Charlie Nelson, Head of Retirement

Okay. Sure. The drivers for us, obviously, have been largely driven by our growth. I think you've seen the growth that we've talked about both in our record keeping business. There is, I think as I mentioned, we have some spread revenue pressure that's a challenge. When I look on the expense side of things, where we did come in a bit above range last year, we think we'll have a modest increase next year. The driver I would say is really just some investments we're doing in our IT infrastructure, data, digital automation which we believe are really going to give us some longer-term benefits. But we've also seen growth and we're expecting and continue to expect onboarding of plans both last year and this year. Even with that growth and some of the higher expenses, I would note that we drove our unit costs down — a measure of some leverage in our business — by 6% in 2020. And we expect to have continued improvement in our unit cost in Retirement in 2021 as a driver of our earnings going forward. So we're expecting continued growth on recurring deposits, strong net flows, recurring in tax-exempt and corporate as well as record keeping are going to be the main drivers with a little bit of headwind coming on the spread revenue.

Mike Smith, Chief Financial Officer

And Erik, the only thing I'd add is in addition to the really good underlying momentum in the growth of the business, there were a couple of one-timers last year that were adverse that we wouldn't expect to occur. So that's a little bit of a growth as well. So they're not part of the normalization.

Erik Bass, Analyst, Autonomous Research

Got you. And on the IFP sale, I think that's reported within Retirement. Was that business generating anything material from earnings at this point and I assume that that's where some of the sweep account volatility was coming from? And the last one on that is I think you're retaining $20 billion of assets. Can you talk about what those are?

Rod Martin, Chairman and Chief Executive Officer

Let me start on the impacts from the financial planning transaction. The earnings are a bit volatile, but you should think of it in terms of $20 million to $25 million is the earnings impact there, pre-tax. The impact of the sweep account was particularly pronounced in 2020. I think that low amount of volatility will abate — it didn't come through in spread revenue though; it came through in fee, so it showed up in a different line item. In terms of the $20 billion you're referring to, just to be clear, there's no impact to assets under management here. We're already on the Cetera platform as the financial planners move over to Cetera. We'll continue to have those relationships with them. And in fact, we wind up in a stronger position going forward with Cetera. So the economics of that, as it relates to the management by the advisors, go to Cetera, but the rest of it is unaffected.

Erik Bass, Analyst, Autonomous Research

Got it. Thank you. That's helpful.

Operator, Operator

The question is coming from Humphrey Lee from Dowling & Partners. Your line is now live.

Humphrey Lee, Analyst, Dowling & Partners

Good morning, and thank you for taking my questions. Regarding the pipeline especially for the unfunded mandates, any color that you can share in terms of the strategies and also how should we think about the fees for those inflows?

Rod Martin, Chairman and Chief Executive Officer

Christine?

Christine Hurtsellers, Head of Investment Management

Sure, Humphrey. A couple of things. So let's start with a little more detail on the pipeline and then I'll address how to think about fees as the year evolves. When you think about the pipeline, it is across 10 different strategies, so quite a bit of diversity. We continue to see strong client interest in private credit and private asset classes generally, as well as commercial real estate. In this low return world, those are very attractive to long-term investors given the spread and returns. On the public side, we've seen quite a bit of interest in our global fixed income mandates and global unconstrained. So across the board, we're seeing diversity in flows. We also have a very strong securitized group, which is getting interest as well. Our mortgage investment fund was closed and we reopened it, so expect some modest inflows there. Overall, lots of diversity across product types. In terms of fees, 2021 will be a little confusing at the beginning of the year because of the Life sale. The basis points we earned on those assets when we managed them for the company are not included in external client AUM. So you'll see a natural headwind to reported basis points under management. But looking forward, with private asset classes and other strategies, we expect a pretty steady basis point level overall on assets under management. Given organic growth, we're expecting to grow our earnings in the 8% to 12% range, excluding the exceptional performance fees in Q4. Our fixed income strategies tend to have lower fees but are highly scalable, which benefits the bottom line and will help us hit the earnings target.

Humphrey Lee, Analyst, Dowling & Partners

That's helpful. Shifting gears, I want to touch back on Retirement and earnings a little bit. You talked about the 8% to 12% growth for 2021. But if we take that earnings based on the normalized earnings in 2020, and then comparing to the Q4 2020 normalized number, it seems like the quarterly run rate for 2021 will be 5% lower than the Q4 2020 normalized number. I believe Charlie and Mike talked about some of the headwinds running in the numbers. But at the same time, 2020 is supposed to have some negative impact from one-offs, whereas the COVID-related waivers and legal accruals. How should we think about some of the headwinds going into 2021?

Rod Martin, Chairman and Chief Executive Officer

Mike or Charlie, do you want to take that?

Charlie Nelson, Head of Retirement

Maybe I'll start. In terms of headwinds going into 2021, certainly the spread-based revenues are going to be pressured and continue to be pressured. I think that is something we're dealing with. Offsetting that is our strong growth that we had last year and the growth that we see coming into 2021, both in record keeping and in our Full Service corporate and tax-exempt markets. I think those are some things that are helping us tremendously. On the expense side, we do expect to be modestly above on expenses in 2021, but we're also expecting continued improvement in our unit cost. We're expecting benefits from investments we're making around data, digital automation and automating onboarding processes. For example, we have tools going live in Q1 to automate parts of our implementation process for Full Service corporate plans. These things all start coming together to help drive unit cost down over time. We don't anticipate as high COVID hardship loan activity as in 2020, which were particularly high in Q2 and Q3, and a bit in Q4. But they'll probably still be higher than our average run rate. All in all, these drivers give us confidence in our 8% to 12% guidance.

Humphrey Lee, Analyst, Dowling & Partners

Got it. Thank you.

Operator, Operator

Thank you. Our next question today is coming from Andrew Kligerman from Credit Suisse. Your line is now live.

Andrew Kligerman, Analyst, Credit Suisse

Hey, good morning. I want to take another crack at the M&A question. Rod, you mentioned earlier investments in data and technology, blocks of business for Retirement, expanding strategies for distribution and investment management. All of that sounds similar to what another company calls a buy-to-build strategy where they write checks of $50 million to $200 million to help build their business but not do anything outsized. Am I reading that properly? Does that sort of seem more like the Voya bias?

Rod Martin, Chairman and Chief Executive Officer

Andrew, good question. I'd overlay that with the discipline we've demonstrated over the entire period we've been a public company on driving shareholder value. Mike and I've been very clear on thresholds for that. I think we've worked really hard, the team has executed in my view, to put the company in the position we're in to have the privilege of excess capital. We invested $1 billion in share buybacks this year and we're going to use the same discipline. I am going to fall short of saying there's a size cap beyond which we won't go other than that we're going to be disciplined about it. We're focused on growth. We've done a number of smaller bolt-on pieces to date. But we will continue to look at opportunities that ultimately will drive shareholder value.

Mike Smith, Chief Financial Officer

I think you covered it really well Rod. I don't have anything to add to that.

Andrew Kligerman, Analyst, Credit Suisse

Okay, thanks. And then just shifting over to Employee Benefits. You've got a pretty nice annualized in-force premium growth projection of 7% to 10%. We're still in a tough economy. How are you able to project out 7% to 10% in-force premium growth? Maybe a little color around that would be helpful.

Rod Martin, Chairman and Chief Executive Officer

Rob, do you want to lead on this?

Rob Grubka, Head of Employee Benefits

Yes, sure. Thanks, Rod, and Andrew. What we've demonstrated over the last several years is our market focus on middle and larger employers has helped us through the latest environment. Our product mix is tighter relative to competition — focusing on Stop Loss, the Voluntary benefit business and Group Life. Voluntary had exceptional growth on our book of business this year — grew 20 plus percent even in the COVID environment. The sequence of sales and case flow gives us a pretty good view into those cases coming on board. We feel good about where we are in terms of volume and pricing. We'll continue to be disciplined. The long-term trend for the business and the focus on workplace benefits remains favorable. There may be differences in product mix or case sizes, but the foundational investments across Voya have kept us nimble and agile in capturing growth. Having said that, there are always surprises as we experienced last year, and we'll adapt and innovate.

Andrew Kligerman, Analyst, Credit Suisse

Thank you.

Operator, Operator

Thank you. Our next question is coming from John Barnidge from Piper Sandler. Your line is now live.

John Barnidge, Analyst, Piper Sandler

Yes, you've done a number of divestitures over the last number of years, and then you did the financial planning channel sale this week. Can you talk about any similar, smaller businesses that maybe we on the outside might not be thinking that could potentially be divested?

Rod Martin, Chairman and Chief Executive Officer

What we have done is executed to enable the company to be capital-light, with high returns and high free cash flow businesses. We've largely exited our retail businesses and capital-intensive businesses and businesses with tail liabilities, particularly those impacted by a lower-for-longer interest rate environment. I feel very good about where we are and the execution, not just the ideation but the implementation. The outcome is enabling us to be on the high end of our 85% to 95% free cash flow conversion range and absolutely capital-light. In terms of other potential divestitures, I think that pretty well covers the waterfront for now.

Mike Smith, Chief Financial Officer

No, you haven't missed anything. I think the focus is pretty clear now for us on workplace and institutional. I think all the significant pieces we have aligned with that. So it really is more of a focus on growth from here. Could there be on the margins little things to do? Maybe. But broadly speaking, I think, we're comfortable with what we have.

John Barnidge, Analyst, Piper Sandler

That's very helpful. And maybe my follow-up — there have been a number of asset managers creating products to give investors exposure to Bitcoin and other cryptocurrencies. Are you working on a similar product for the institutional asset management segment that you can speak to?

Rod Martin, Chairman and Chief Executive Officer

Christine, do you want to speak to that?

Christine Hurtsellers, Head of Investment Management

Certainly, Rod. A quick answer: no, we're not. We watch cryptocurrencies and their evolving role, but they still tend to be somewhat opaque at times in terms of valuation drivers. Our focus is on specialty products, expanding our credit franchise, evolving active equity strategies with our machine learning acquisition to incorporate more concentrated strategies and to incorporate ESG into what we do. We are strategically adding to our distribution teams and have expanded into Europe and have Asian clients. There are opportunities to step into Asia a bit more. Our product development focus will remain on exceptional client service, specialty products, and expanding distribution reach.

John Barnidge, Analyst, Piper Sandler

Thank you very much for the answer.

Operator, Operator

Thank you. Our next question is coming from Jeremy Campbell from Barclays. Your line is now live.

Jeremy Campbell, Analyst, Barclays

Hey, thanks. Christine, maybe one more for you. Are there any of the equity or other strategies that are showing improving flow momentum either from fewer outflows or a pivot from outflows to inflows that will either yield less of a headwind or maybe a positive tailwind to the organization?

Christine Hurtsellers, Head of Investment Management

Yes, certainly. In active equity, we had some challenges in 2020, particularly in some smaller growth strategies like small cap. But we have very strong performance in mid cap and value, handily outperforming benchmarks and competitive peers. We're seeing inflows into large cap growth, a marquee franchise. We expect the outflow headwinds to abate in 2021. We've been spending a lot of time working on ESG and analytics, and with the acquisition of the machine learning team, we're seeing strong performance in concentrated quantitative strategies, which is starting to generate pipeline interest. Overall, we expect a better year in active equity and continued strength in fixed income.

Michael Katz, Senior Vice President, Investor Relations

Thank you. In the interest of time, our final question today is coming from Tom Gallagher from Evercore. Your line is now live.

Tom Gallagher, Analyst, Evercore

Good morning. A few quick ones from me. Rob, do you plan on exercising the option to extend your employment contract into 2022?

Rob Grubka, Head of Employee Benefits

Tom, thanks for the question. We are intending to communicate, as we've discussed from time to time, our plans by the end of the first quarter. I am very excited and encouraged about the growth and development of the team. Our Board is looking at this in a very comprehensive way. By the end of the first quarter, we will be communicating the plans in a manner that I think will be thoughtful and very orderly. Stay tuned — we will be communicating that shortly.

Tom Gallagher, Analyst, Evercore

Okay. Thanks, Rob. Mike, a question on excess capital and leverage. You had mentioned you're planning on using $600 million to $800 million to pay down debt. I think previously you had said it's probably going to be close to the low end of the range. Is that still the expectation? And just to confirm, we should be taking the $600 million to $800 million out of the $1.8 billion of excess capital, because you've not yet earmarked that. I just want to confirm that.

Mike Smith, Chief Financial Officer

So on the second part, yes, that is a use of excess capital. To be clear, the $600 million to $800 million was a pro forma target to get us back to the leverage levels at the time of the announcement. Ultimately how much we buy will depend on how the year unfolds. But we'll be managing the new leverage ratio to likely something a little bit under 30% to give us some room, and that'll be how it ultimately plays out. We think it will be in the range of $600 million to $800 million. If things go well, it'll be closer to the lower end of that. If the world throws us a curveball on asset impairments or something, then it may not be. But broadly speaking, that's my expectation: it will be toward the lower end.

Michael Katz, Senior Vice President, Investor Relations

Thank you. We've reached the end of our question-and-answer session. I'd like to turn the floor back over to management for any further or closing comments.

Rod Martin, Chairman and Chief Executive Officer

Thank you. Our success throughout 2020 reflects the resilience and agility of our people and our commitment to helping our clients navigate difficult times. As we look ahead, we recognize the challenges related to COVID-19 will continue to impact both the U.S. and the broader economy. That said, we remain optimistic about our ability to build on our track record and to continue to welcome new clients to Voya as we make further investments in our workplace capabilities and expertise. We see continued client interest in supporting their employees’ needs as they navigate the many health and wealth challenges they are facing. We believe that Voya continues to stand apart for our solutions and expertise in solving those needs. We look forward to updating you on our progress as we pursue our vision to be America's retirement company. Thank you, and good day.

Operator, Operator

Thank you. That does conclude today's teleconference. You may disconnect your line at this time. And have a wonderful day. We thank you for your participation today.