Voya Financial, Inc.
Q1 2015 Earnings Call Transcript

Published: 6 May 2015

[Operator:]

Good morning and welcome to the Voya Financial First Quarter 2015 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Darin Arita, Senior Vice President, Investor Relations. Please go ahead.

[Darin Arita:]

Thank you, Emily, and good morning, everyone. Welcome to Voya Financial’s first quarter 2015 conference call. A slide presentation for this call is available on our website at investors.voya.com or via the webcast. Turning to Slide 2, on today’s call, we will be making forward-looking statements. Except with respect to historical information, statements made in this conference call constitutes forward-looking statements within the meaning of federal securities laws, including statements relating to trends in the company’s operations and financial results, and the business and the products of the company and its subsidiaries. Voya Financial’s actual results may differ materially from the results anticipated in the forward-looking statements as a result of risks and uncertainties, including those from time-to-time in Voya Financial’s filings with the U.S. Securities and Exchange Commission. Slide 2 also notes that the call today includes non-GAAP financial measures. In particular, all references on this call to ROE, return on equity; ROC, return on capital; or other measures containing those terms are to ongoing business adjusted operating return on equity or return on capital as applicable, which are each non-GAAP financial measures. An explanation of how we calculate these and other non-GAAP financial measures and reconciliations to the most directly comparable GAAP measures can be found in the press release and the quarterly investor supplement available on our website at investors.voya.com Joining me this morning on the call are Rod Martin, Chairman and Chief Executive Officer of Voya Financial; Alain Karaoglan, Chief Operating Officer; and Ewout Steenbergen, Chief Financial Officer. After their prepared remarks, we will take your questions. With that, let’s go to Slide 3, and I will turn the call over to Rod.

[Rod Martin:]

Thank you, Darin and good morning. We had a strong first quarter and we're pleased to share our results with you today. Let’s begin on Slide 4 with some key developments. We increased our ROE to 12.6% for the 12 months ended March 31. This improvement reflects the continued execution of our plans. Next the liquidity of our stock increased as ING Group exited its stake in Voya almost two years earlier then it was required. This was a significant milestone in our progress. Voya we’ve made a number of cultural, operational and financial improvements over the past few years with a clear vision and an exciting new brand we will continue to execute on our plans to deliver even greater value for our shareholders and customers. Speaking of value we utilized $631 million in excess capital to repurchase stock during the quarter. Of this $600 million was repurchased directly from ING Group. We continued to believe the share repurchase is an attractive use of our excess capital. With regard to ratings, S&P, Moody's and Fitch, have all upgraded Voya in its operating subsidiaries. We’re pleased that they've recognized the progress we’ve made in strengthening Voya’s financial position. We’ve improved the ongoing business earnings, driven excess capital generation, ensured strong liquidity and strengthened our balance sheet. On May 1, we welcomed Charlie Nelson, to our Leadership Team as our new CEO of Retirement. Charlie has a strong track record of developing and executing profitable growth strategies for retirement businesses. He is well respected across our industry and I’m very pleased to have him on our team. Finally, we continue to build and establish our new brand. As you may have seen, we’ve introduced two new commercials as part of our Orange Money Advertising Campaign. These spots can be seen no our website. Also, in March we were once again recognized by Ethisphere Institute as one of the world's most ethical companies. Voya was one of only a 132 companies around the globe to receive this impressive recognition. I along with all of our employees are very proud to have received such a great distinction in verification of our strong culture at Voya. Moving to Slide 5, you can see an overview of our first quarter financial highlights. We generated a $197 million or $0.82 per diluted share in after-tax operating earnings. Excluding that and other intangibles unlocking, results were $0.80 per diluted share. Operating earnings growth this quarter was driven by strong earnings in our ongoing business and is reflected in our net income as well. As I mentioned our ROE increased to 12.6% for the 12 months ended March 31. This is up from 12.1% for the 2014. As you know we launched our second GMIB enhanced annuitization offer during the quarter. The offer concludes on May 15. The enhancement rate we offered was half of what we offered last year and the take up rate thus far has been about half of the previous offer. We continue to view these offers as pilot programs. We're learning from these efforts. Collectively they're helping us identify steps that we can take to accelerate the runoff of this block. As we learn, we will continue to focus on actions that are good for our customers, good for our shareholders and good for Voya. Moving to Slide 6, our Leadership positions in retirement, investments and insurance help generate approximately $1.4 billion in pretax adjusted operating income earnings in the 12 months ended March 31. As we announced last month, we’ve made organizational changes to ensure that our businesses were cohesively to help our customers with a retirement readiness. We’ve aligned retirement and investment management to help sharpen our customer centric focus and drive profitable growth. To achieve this, these businesses will collectively be overseen by Alain as our new CEO of Retirement and Investment Solutions. We look forward to discussing our plans and the strategic investments we’re making in all of our businesses during our Investor Day on June 2. Moving to Slide 7, our ongoing business is just one of the Voya Financial's key sources of value. The others are potential value in our Closed Block Variable Annuity segment are tax benefits in our excess capital. We're focused on leveraging our strength in the marketplace and equally focused on external factors that could affect us including the regulatory environment. As you know, the Department of Labor recently released a proposal to broaden the definition of fiduciary under ERISA and the tax code. We along with others in the industry are closely reviewing the proposal. A number of open questions remain in the proposal, will continue to evolve. We expect to see much discussion about this over the coming months and we plan to be actively engaged in the dialogue. We want to ensure there is a broad understanding of all aspects of the proposal. We intend to leverage our resources as well as we're closely with those across the industry to advocate for outcomes that help Americans become retirement ready. With that let me turn it over to Alain for further details on the performance of our ongoing business.

[Alain Karaoglan:]

Thank you, Rod and good morning. As Rod mentioned, the organizational changes we recently made will help our customers and reinforce our value proposition. We have strong businesses, talented leaders and with one a Voya approach, we can bring greater value to our customers and to our shareholders. Our approach will require us to bring the same level of focus that we have demonstrated over the past several years. As you can see on Slide 9, the execution of our margin, growth and capital initiatives continue to drive further improvement in our return on equity and return on capital through the first quarter. Our return on equity was 12.6% for the 12 months ended March 31. That is up 50 basis points from 12.1% for 2014. When you remove items that we do not expect to recur at the same level, our return on equity improved 40 basis points to 12.1% from 11.7%. Our return on capital reached 10.4% for the 12 month ended March 31 and showed improvement similar to the growth we had in return on equity compared with yearend 2014. Moving to retirement on Slide 10, the return on capital was 9.3% for the 12-month ended March 31 or 9% when you adjust for items that we do not expect to recur at the same level. During the first quarter, our record keeping assets under administration declined due to nonrenewal of certain plants. As we noted on previous earnings call, our exit from the defined benefit business and certain nonrenewals will reduce our record keeping fees. This combined with initiatives to spur future earnings growth would likely cause our retirement's return on capital to remain roughly flat in 2015. That said, we have also won and renewed several clients in the large institutional market. In our record keeping business, we recently retained two Fortune 500 clients and are adding two new large clients as well. In addition, we have also expanded our relationship with a large state government client resulting in a large transfer deposit and in Voya now providing full services for this plants sponsor. We also have grown our distribution footprint. During the quarter we expanded our small to mid corporate market sales and service team. This will enable us to target future sales expansion and increase participant's education. These new hires also will help us build on the positive momentum we've generated in this market over the past four years. We also achieved the strongest ever quarterly results for recruiting new Voya financial adviser representative. Focus on increasing individual customer engagement and driving enrolment in tax exempt markets. The personalized practice builder model that I mentioned last quarter which will roll out to support sales activities is helping to attract new representatives to Voya. Finally, we continue to enhance our digital capabilities to further encourage participant engagement and actions. Last week, we ruled out retirement healthcare cost mumbling to my Orange Money to help individual better understand retirement saving and income needs. At our Investor Day you will have the opportunity to have a hands-on experience with my Orange Money. This will allow you to appreciate the simplicity and power of our tool, which is available to more than three million of our retirement plan participants. On Slide 11, the return on capital of annuities improved to 9.5% or 8.9% when you adjust for items that we do not expect to recur at the same level. We continue to leverage our strong distribution network while also introducing new products to continue to profitably grow the business. The combination of these efforts is enabling us to reach more customers with annuities such as potential plus and more recently our wealth builder plus products that are designed around customer needs. We've also introduced a unique and innovative web-based resource that enhances the new business experience. It allows our distribution partners to track the status of applications online and to address those applications that are not in good order status on a real time basis. This streamlines the new business process and aligns with our focus on delivering industry leading customer and distributor satisfaction through digital solutions. Moving to Slide 12, Investment Management operating margin was 31.5% over 29.5% when you exclude results from investment capital. A key driver of our success has been our strong investment performance. As of March 31, 2015, 92% of our fixed income assets outperformed, benchmark or peer median returns on a five-year basis. Our fixed income performance in the quarter led to solid quarterly net cash flows in the intermediate bond and senior bank loan strategies. In addition, 64% of our equity assets and 99% or our multi-assets strategy assets outperformed their benchmark or peer median returns on a five-year basis. The breadth and quality of our platform was again confirmed during the quarter as we received an additional 15 consultants by ratings for 11 different investment strategies. As of March 31, we now have a total of 135 by rating across 17 different strategies. We also continue to see robust RFP activity in a number of strategies across the platform. As we have mentioned before, we are continuing to reinvest in the business, making investments in distribution and in sales force productivity tool. We expect these actions will cause expenses to grow slightly faster than our revenues in 2015, but we expect our margins to stay at healthy level. Enhancing our distribution and our sales force productivity should help us accelerate our earnings growth and expand our operating margin after 2015. Turning to Slide 13, Individual Life return on capital grew to 5.7% or 5.3% when you adjust for items that we do not expect to recur at the same level. Our sale of a block of Term Life polices to reinsurance to RGA was effective October 1, 2014. For the 12-months ended March 31, this transaction has benefited Individual Life's return on capital by 35 basis points. We expect the transaction will provide its full 70 basis points benefit to Individual Life's return on capital by September 30, 2015. As we have previously mentioned, this transaction will also provide 35 basis points of improvement in the ongoing business return on capital. We continue to execute on an aligned distribution strategy to expand relationships with agents and brokers that are aligned with our value proposition. To support this distribution strategy, we launched our life journey at this quarter. This tablet based app facilitates an interactive experience for agents and customers and is designed to enhance customer understanding of the use of life insurance in retirement planning. It is available only to those agents who are part of our aligned distribution. While the app has just launched, we've already begun to receive some very positive feedback on it. In addition during the quarter, we continued to shift sales towards index life products, which accounted for 66% or total Individual Life sales compared to its 42% in the first quarter of 2014. Turning to Slide 14, the return on capital of employee benefits increased to 32.2%. During the quarter, we continue to position employee benefits in terms of both products offering and distribution capabilities for further profitable growth and we're seeing the benefits of our efforts. In the first quarter we enhanced our underwriting sales and service capabilities to support growth in the midsize employer market. In addition, stop loss sales increased 11% over the first quarter of 2014. This is on top of 103% increase in stop loss sales that we achieved in the first quarter of 2014, when compared with the first quarter of '13. Most importantly we're remaining very disciplined with our underwriting and pricing. Overall, we're very pleased with the progress we're making both in terms of improving the value of our business and investing for the future. Now I’ll turn it over to Ewout who will provide more detail on our financing results. Ewout?

[Ewout Steenbergen:]

Thank you, Alain and good morning, everyone. Today I will discuss our financial performance for the first quarter of 2015 and key drivers. Slide 16, you can see the items that affected our first quarter results relative to the fourth quarter where [indiscernible] was impacted by lower record keeping fee income, reflecting our decision to exit the defined benefits administration business and to not renew certain plans. Annuities was affected by lower alternative income. In Investment Management, higher investment capital results offset lower seasonal performance fees. Individual Life benefitted from higher prepayment income, but encountered slightly elevated mortality relative to expectations. And Employee Benefits, the loss ratios for Group Life and Stop Loss continue to benefit from favorable claims development relative to expectations. Also Stop Loss sales were seasonally higher due to the January renewal cycle. Prepayment income was higher than expected and was lower sequentially for retirement and annuities. Looking ahead we would like to discuss administrative expenses for our ongoing business. We expect a slight decrease for the remaining quarters of the year relative to the first quarter of 2015. The decrease in seasonal expenses will be partially offset by expenses that will continue to support new business growth. We still expect to maintain our ongoing business ROE in 2015 at a level generally consistent with 2014 based on incremental investment spend of $50 million this year as we announced in February. We will provide a further update at our Investor Day in June as we explore accelerating the initial timing of our investment projects in 2015. As we incur expenses related to our $300 million to $350 million investment program, we will report this progress to you and we plan to do so in our corporate segment to simplify the presentation of our financial reporting. The ongoing business ROE excluding this investment spend will be higher relative to 2014. Then moving to Slide 17, we had positive loss in all of our retirement markets. As mentioned in tax exempt markets, we expanded our relationship with a large state government client resulting in a large transfer deposit this quarter. This does highlight a large institutional client can affect our net flows. We do anticipate two large cases not renewing in the second half of the year and that will affect our future net flows. Turning to the corporate markets, we've seen continued net inflows for 14 of the last 15 quarters. In stable value we had some positive inflows this quarter and flows can be lumpy from period to period. As always we remain disciplined with our pricing and risk tolerance across our major markets. Then Slide 18, we continued to generate positive net flows in our custodial product and had outflows of capital intensive products such as the multi-year guaranteed annuities, which is a positive from an ROC perspective. We anticipate the runoff of the multi-year guaranteed annuities to continue and the net outflows to taper off as the size of this book becomes smaller. For the fixed indexed annuities, net flows were slightly negative as the industry faced a declining interest rate environment. We're maintaining pricing discipline while proactively adjusting caps and rates on existing products. It's worth noting that this quarter's net flow have minimal impact on our overall 13 billion fixed indexed annuity book. Overall, we will continue to explore expanding our product suite to address a broader range of customer needs. Then Slide 19, Investment Management’s sourced net flows were strong this quarter at $700 million. Strong interest in our senior loan strategy and intermediate bond funds drove this result. Variable annuity outflows for the funds that are managed by Investment Management were $800 million. Then Slide 20, you can see the continued progress we've made in shifting our sales focus to index indexed universal life which aligns with our focus on less capital intensive products. The chart on the right illustrates the normal mortality fluctuations on an actual to expected basis. This quarter we had slightly elevated mortality. In normal mortality ratio, would be approximately 90%, excuse me, 90% on an actual to expected basis. Then moving to Slide 12, we've strong sales and amply benefits in the seasonally favorable first quarter, led by our stop loss products. We continue to drive profitable growth by increasing sales while maintaining our pricing and underwriting standards. Similar trends can be seen in our loss ratios for Group Life and Stop Loss, both continue to come in better than our expected range of 77% to 80%. Expected seasonally higher loss ratio for Group Life did not materialize this quarter due to favorable severity. Then Slide 22, in the Closed Block Variable Annuity segment, our hedge program performed within expectations as hedges offset the effects of market movements. The living benefit net amounted risk increased to $4.1 billion during the quarter, driven by the decline in interest rates. We've estimated available resources of $5.5 billion, which compares favorably to the living benefit net amount at risk. Our available resources exceeded this required statutory reserve by $1.3 billion and these are all hard assets and no LOCs were needed. The annualized net outflow rate was 11.6%. During the quarter, we also successfully implemented the outsourcing of the actuarial valuation, modeling and hedging functions for the Closed Block Variable Annuity segment to Milliman. This initiative which we announced last June, represents a proactive approach in creating a more variable cost structure while preserving a secure and stable control environment. By working with Milliman, we will benefit from their sophisticated hedging expertise and state of the art modeling capabilities. Note that we will retain full responsibility for assumptions and methodologies as well as the setting of hedge objectives and execution of hedge possessions. Slide 23, this slide updates the impact of various market sensitivity scenarios on CBVA's 50-year cash flows on a present value basis. The net present value of cash flows consists of two components. First, the available resources backing the block and second, the resources needed. The latter includes, the present value of fees, claims and the cash flow impact of our hedges. Relative to a year ago, the net present values have generally declined due to a downward shift in interest rates, particularly at the long end of the curve. Results do remain positive, except under scenario one, which is an extreme stress scenario. As you know our philosophy is to be one of the most transparent companies in the industry. In that spirit, we think Slide 24 will help to put the $450 million cash flow scenarios in perspective. The graph illustrates the distribution of net present values of cash flows using 1,000. So cash tax scenarios and discounted at swap rates, the X-axis represents the net present values of the cash flows the Y-axis represents the distribution of results. We overlaid the four deterministic scenarios on this graph to provide some perspective about where those scenarios would fall on the distribution. Please note that the distribution of results does not represent the probability of outcomes. As soon on the far left of the graph, scenario one is an out layer as it aligns with a very small distribution of results under these scenarios. The other three scenarios are closer to the center of the distribution. Then Slide 25, our estimated combined risk based capital ratio improved in the first quarter to 547%. On the right side of the slide, the debt-to-capital ratio at the end of the first quarter increased slightly from the fourth quarter to 21.9% and remained better that our target of 25%. The increase was largely due to 631 million of share repurchases during the period. The room below our 25% targeted ratio provides us with additional strategic flexibility. In Slide 26, our holding company liquidity stood at $462 million at the end of the first quarter and this figure reflects share repurchases in the quarter and remains above our 24 months liquidity targets of $450 million. Our estimated statutory surplus in excess of our target RBC ratio of 425% at the end of the first quarter was $1.7 billion and that’s before adjusting for intercompany borrowings. The middle chart shows our current excess capital position at quarter end and that is net of intercompany borrowings. To affect the share repurchase, the holding company borrowed a net $499 million from intercompany credit lines on a temporary basis. The $1.2 billion of estimated statutory surplus in net of this intercompany debt. The outstanding intercompany borrowings owed by the holding company will be repaid using ordinary dividends from the operating entities and we expect this to occur later in May. After the repayment of holding company, intercompany credit lines, the excess of ordinary dividends from the operating entities will increase the holding company liquidity. This will not affect the overall access capital amount in the middle chart. Adding to potential liquidity is $500 million of pre-capitalized trust securities issued during the first quarter. We issue these securities to provide a source of continued capital and we believe this transaction represents a prudent and cost effective way to enhance our balance sheet strength. The chart on the right shows the $631 million we spend on share repurchases in the first quarter and the remaining balance on our share repurchase authorization. So in summary, we delivered strong financial results for the first quarter of the year. We continued to expand our high return businesses. We solidified our balance sheet. We returned capital to shareholders and we took proactive steps to manage our Closed Block Variable Annuity segment. And with that, I will turn the call back to the operator Emily, so we can take your questions.

[Operator:]

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question is from Ryan Krueger of KBW. Please go ahead.

[Ryan Krueger:]

Thanks, good morning. I wanted to follow-up on something Ewout said in the prepared remarks just to make sure, I have this correct. So you’re going to allocate the incremental investment spending cost to the corporate segment, but your comment about the ongoing business ROE still being flat year-over-year would incorporate that impact that it's going to be actually in the corporate segment it includes those expenses, is that accurate?

[Ewout Steenbergen:]

Good morning, Ryan. Indeed that is accurate. What we've tried to say in the prepared remarks is compared to the guidance we’ve provided in February, the guidance is still the same. As we remember we said that the ROE in 2015 according to our expectations would remain more or less flat with 2014 with two particular affects we’ll see the benefit of the lower effective tax rate and that is offset by those investments according to the new strategic plans. Now we're saying that most likely we’re going to report those investments the $300 million to $350 million over the next four years in the corporate segments, which means that the ROE of the ongoing business will go up based on the effect of the effective tax rate and that’s approximately 50 basis points. But on apples-to-apples comparison with the guidance we’ve provided in February it's still the same as what we told you few months ago. I just would like also to point out one other element, what we will report in terms of investments in the corporate line are those start of investments and developments, investments on the particular initiatives. All the additional expenses with respect to volume, expansion of the organization is staffing and other elements will be reported as operating expenses within our segments, in our business.

[Ryan Krueger:]

Thanks. And then in terms of the -- I guess a related question, would you expect the amount of capital that's allocated to your ongoing businesses to be fairly flat relative to the first quarter amount as we go through the year?

[Ewout Steenbergen:]

Ryan, that is probably a good thing we can discuss during the Investor Day in June. We're certainly ready to provide more details at that point in time what the plans with respect to our new initiatives will do for the capital position of the ongoing business. As you understand, the whole focus is here on growing the businesses in the healthy way going forward. So that will have a positive effect on the capital base of our businesses. So there will be new business strain to support the growth of the businesses. And we are planning in June to provide you more details on that.

[Ryan Krueger:]

Okay, understood. Thank you.

[Operator:]

Our next question is from Suneet Kamath of UBS. Please go ahead.

[Suneet Kamath:]

Hi good morning. I want to go to Slide 23, if I could on the CBVA scenarios, so if I look at scenario 1, minus $1.8 billion as you noted that's a little bit worse than what you showed as last time, but I also noticed that the lapse rate assumption changed. It had been down 10% I think and now it’s down 5%. So if we just held everything apples-to-apples meaning the lap 3 down 10% assumption was used in this analysis, what was the $1.8 billion loss be?

[Ewout Steenbergen:]

Suneet, thank you very much for pointing that out. We believe that with these assumptions underneath the scenarios provide on Slide 23 we're comparing the outcomes of the scenarios in a similar way as the way how the scenarios have been constructed in previous years. And the reason is that as you might recall in the past, the lapse assumption we have in our models, we're looking at an experienced base of multiple years. Last year in the third quarter of 2014, we updated our lapse assumption and we trued it up to more recent experience. So under these four scenarios we apply Management's best estimate assumptions as we have those assumptions today after all of the updates and because we have a true-up done with respect to lapse assumptions in the third quarter of last year we think a 5% additional stress on top of that is more comparable with the 10% stress we did over the assumptions we used before and again that was more based on the average of the experience over a much longer period of time. So we believe that this is a fair and reasonable comparable year-over-year.

[Suneet Kamath:]

Okay, that makes sense.

[Ewout Steenbergen:]

I would like to point maybe one thing further out Suneet is if you go to Slide 24 you see that scenario 1 is located completely on the left hand side of the distribution of those sarcastic scenario. In fact if you would look at the sarcastic scenarios, there are only four scenarios out of 1,000. So 0.4% of the distribution that are worse than this particular scenario one. I thought that was maybe an additional piece of information that could be helpful to point out.

[Suneet Kamath:]

No, that’s helpful. Unfortunately it's that scenario that we're Ewout but wanted to move to capital in a different way, can you just remind us about your plans for ordinary dividends for this year and then any updated thoughts on extraordinary dividends in the second half?

[Ewout Steenbergen:]

Let me get you the total overview of our capital plan and dividend plan. What we are intending to do in the next few weeks is to request ordinary dividends in three of our entities at a level of $819 million, which we expect to receive through the holding company later in May. Then we have one of our entities where we will declare ordinary dividends beginning of June that is at a level of $111 million and then we have still remaining $90 million ordinary dividend capacity, which we can take out in December. So in other words, a little bit over $900 million we expect in terms of ordinary dividends over the next few weeks. $500 million of that will be used to repay those intercompany borrowings and then $400 million will become excess liquidity at the holding company. If you look at the excess RBC we had at yearend, we were approximately over $1.5 billion. So you could say a $1 billion of that is capacity in terms of ordinary dividends as I just explained and $500 million is then available that we will try to take out on the basis of extraordinary dividend distributions. What we're planning to do is after we receive the ordinary dividends in May and June to engage in conversations with the regulators to apply for the extraordinary distributions we go through a very constructive process with the regulators. In the past we've always received approval for extraordinary distributions, but this requires discussions with the regulators. So we're planning to do that after the May and June periods and the intention is that we request for extraordinary distributions at the level of $500 million then which we hope to receive in the second half of this year as well.

[Suneet Kamath:]

All right. Got it. Thank you very much.

[Operator:]

Our next question is from Thomas Gallagher of Credit Suisse. Please go ahead.

[Tom Gallagher:]

Good morning. Just a follow-up on this unique question. So in terms of the extraordinary dividend, can you comment on whether or not the proposed changes in variable annuity captives potentially throws a ranch into that in terms of what's being proposed, what your view of it and how that might influence an extraordinary dividend?

[Ewout Steenbergen:]

Good morning, Tom and thank you for this question. Let me first make a few comments about captive accreditation process and then I can specifically answer your question about what will we do with respect to the capital plan for the company. First as you're aware, the NAIC has established a fee issues working group led by Commissioner Gerhart of Iowa and they're going to follow and they are going to follow as we understand a similar process as what the NAIC has done with the AXXX captives working group last year and they will also hire a consultant in a similar way, which we consider a very positive development. We're actively involved by the ACLI and what we expect this is a rational, constructive and thoughtful process and I also would like to comment that it's very rare in the history of the NAIC to introduce new regulation with a retroactive application. The close block variable annuity is already closed for 5.5 years as you know. We're not selling for the last 5.5 years VAs with living benefits. Then with respect to the capital position of the closed block variable annuity, we hold full AG43 reserves, cash flow testing reserves and in fact we have $1.3 billion of additional hard assets. So no LOCs, hard assets over and above that and we also meet the CTE95 requirements for the rating agencies. If we look at the developments with respect to this draft for VA captives and the accreditation, there are lot of uncertainties about the process, timing and implementation, but overall, we believe that the capital position about the close block is strong and it will not influence our plans with respect to our capital distribution going forward. So we will remain focused as Management to generate free cash free flow and to distribute that to our shareholders in the most effective way and we believe that the capital position about the VA block is strong and we're not changing our course with respect to this development.

[Tom Gallagher:]

That's helpful, thanks Ewout. In the unlikely event that it is not grandfathered, I would agree with you based on everything I have seen historically, I can't think of any instances of where in a situation like this it wasn’t grandfathered, but given that there is some uncertainty there, is there a way of thinking through what that would mean? Are we talking about a material capital issue? Was it just a change in hedge program? I just -- it's not clear to me exactly what that would mean?

[Ewout Steenbergen:]

From the way you can think about this is the following. Overall again in the framework of what I just explained, the capital position in support of CBVA is strong and we believe we have sufficient flexibility to mange through the potential implications of VA captive accreditation what potential we're capturing of this block. We believe that the effects and the impacts could impact our RBC ratio, but overall that would be manageable given the resources we have available. Our concern is not so much about the one time impact on the RBC ratio. Again that is manageable. The impact is that under very extreme economic environment and scenarios, the standard scenario under C3 Phase 2 can become dominant and lead to results and outcomes that do not make sense and what that will mean is a very volatile environment going forward with respect to the RBC ratio and very volatile environment with respect to our hedging program and as you know it's very important for us to be able to run a steady and stable and predictable hedge program on this block. So in another words we are not concerned about the impact of recapturing of the already accreditation itself on our captive, there will be some impact on RBC ratio, but we think it's manageable. The real concern is the full ability that this will bring in the future with respect to our RBC ratio and our hedge program. Again we believe that similarly as what we've done in the past with the NAIC that we're able to entertain a rational and constructive process and that we would be able to find mutual outcomes that work for the regulators and for the industry as well.

[Tom Gallagher:]

That makes sense. Thanks for that answer and then just one follow-up for CBVA, did the updated scenario analysis, the $1.8 billion in the worst case scenario, does this change your view of the timing of release of capital from the CBVA at all? I think Rod when you all at IPO, you talked about five years out is when you could practically expect to start to releasing capital from that block, is that still the case despite the updated analysis?

[Rod Martin:]

Tom, yes. Good morning. So the original guidance we gave at the time of the IPO for those new listeners was do not expect a release. So this was kind of a management position of capital from the closed block of our annuity business, sooner than five years. And that was our prudent guidance at that time and that guidance remains in force today. So no change. And if I can just go back to just one other piece of what Ewout said, what he was describing is an industry issue, not a Voya specific issue in terms of the hedging and volatility piece where our concern is. I think you understood that, but for the other listeners I want to just clarify that point.

[Tom Gallagher:]

Yes, thanks for that. And then just one last one if I could. Ewout, did I hear you correctly, you said of the new planned expense initiatives, the $350 million over four years, $50 million should be expected this year, but then it may be accelerated this year. Did I hear you correctly on that?

[Ewout Steenbergen:]

Tom, that's correct. That's what I said in the prepared remarks and we will provide you an update on this during the June Investor Day.

[Tom Gallagher:]

Okay. Thanks.

[Operator:]

Our next question is from Yaron Kinar of Deutsche Bank. Please go ahead.

[Yaron Kinar:]

Good morning, everybody and thanks for taking my questions. first on the ROE path, so I realize that you will hopefully provide more color on the June Investor Day, but if we're talking about some acceleration of the strategic investments into this year, should we also expect an acceleration of the ROE target of 13% to 14% by the end of '18 maybe move that forward as well?

[Rod Martin:]

Good morning. It's Rod. We will again as Ewout spoke about giving and others a broad update of the detailed parts of our plan and our overall guidance that we gave in the February call fourth quarter earnings call. We're not prepared to update any further guidance today.

[Yaron Kinar:]

Okay. And maybe one clarification on that, if the strategic expenses are in the corporate and if I understand correctly corporate is not included in the company methodology for reporting ROE then at the end of the day, if we look at the ongoing businesses excluding corporate, should we see I guess what should we think of ROE’s moving to?

[Ewout Steenbergen:]

Yaron just do you mean for 2015 or do you mean…

[Yaron Kinar:]

Yeah 2015.

[Ewout Steenbergen:]

So for 2015, what we are expecting as I said before is an ROE that is materially flat and consistent with 2014 which too offsetting elements what we said in the past, but with the expenses and investments for the strategic initiatives in the corporate line. You will see, now the full effect of the effective tax rate on the ROE for the ongoing business. So that is a positive 50 basis points that is now not being offset by those investments anymore because they fall in the corporate line, but again that is just a reporting difference in terms of the economics the results is still the same.

[Yaron Kinar:]

Okay. And then my follow-up question is on the DOL proposal. We’ve heard commentary from few companies on potential impact. I was just curious if you could offer maybe a little additional color on top of what Rod had talked about in the prepared comments, specifically as it would relate to the retirement segment and the potential for either challenges or opportunities that would arise from it?

[Rod Martin:]

Sure. Two parts of that, just to maybe reiterate a little bit of what I talked about, this is Rod speaking in the opening comments. I think as you all understand, it is early in the process of reviewing a very highly complex raft and naturally at this point difficult to forecast the structure of the final rules. That’s said, we're confident that our cumulative experience knowhow that we bring to the market will able us to respond quickly to changes in that landscape. We’ve got a long history of innovation and expertise among across all the tax codes and certainly with large institutional experience. In terms of the challenges and opportunities, the challenges as they've been discussed by others, this potential increase in compliance and documentation and reporting are to forecast and predict exactly what there would be. There could be challenges and some opportunities in the sale of rollover products that could be affected. To put that in perspective for us we have $7 billion of AUM relative to the $280 billion of AUM total in this segment. In terms of opportunities, we think we have significant resources and experience to adapt and adapt quickly. We’ve got a potential to engage more directly with customers which is consistent with wanting to serve customers how and where they want to be served. And what you’ll hear much more about at the Investor Meeting in June 2 is the digital experiences that we’re going to be talking about for both customers and distributors. And we think largely as best we can understand the proposal today our full service corporate markets are already aligned largely with proposal that's being introduced and recommend. So I think it's similar to what you’re hearing. It's of high importance to us as it is for the rest of the industry. We’re actively engaged as I spoke about earlier. We think, we've got the right talent on these issues and we will naturally keep you posted and very much give you and others and update on the June 2 meeting.

[Yaron Kinar:]

Okay. Good. I look forward to hearing more about it on June 2 then. Thank you

[Operator:]

Our next question is from Eric Berg of RBC. Please go ahead.

[Eric Berg:]

Thanks very much. My first question is actually a follow on to Yaron question, the immediately preceding question regarding return on equity because return on equity is by nature an accounting concept and because you have announced today, what I think please correct me if I don’t have this right, is a change in your financial reporting policy moving the corporate -- moving into the corporate expense area or moving into the corporate area expenses that would otherwise have been booked at the operating units. Wouldn’t it be right to say that you are going to be reporting out not a flat ROE this year from your ongoing businesses, but an increased ROE owing to the lower tax rate this year than last year?

[Ewout Steenbergen:]

Eric, good morning. Let me try to clarify this particular point a bit further. So my first comment would be that this is not a change in our accounting policy or practice. What we're trying to do here is to separate very discreet investment initiatives that do not show a good reflection of the underlying performance of the businesses. If you would allocate those investments to the business segments themselves, then you would see a impact on returns and it will be very hard for you, the analyst community to look through what is really happening with the underlying performance of the businesses. So that’s we're separating out those investments. Again they’re one-time investments. They're only start-up investments and development investments. Everything related to ongoing normalized operational expenses will be in the businesses themselves. So to separate this out, we are able to show you specifically how we're tracking with respect to that overall budget of $300 million to $350 million so that you can use that in your models and allocate it back in a way you think is right and appropriate to reflect the actual performance of the business. So this is just in order to be more transparent, more clear to better show the underlying actual performance of the businesses and in order for you to keep track of how we are progressing with the overall investment at that level of $300 million to $350 million. But this is only for very short period of time. This is only temporary and we're not going to do a permanent accommodation of the corporate segment for these kind of investments. So this is only for that three to four year window.

[Eric Berg:]

Thank you. My follow up relates to the CBVA block to management of your capital. You made the decision to bring in Milliman to manage the hedge program and related activities, this management related activities. Well I heard Rod’s comments that there has been no change in the guidance regarding when investor should expect capital to be released from the closed block. What about the possibility that you could accelerate your withdrawal from the variable annuity business by say selling the business or reinsuring part of the business what’s happening with efforts by your team to try to do that and move that presumably would bring the capital closer in time than five years out.

[Rod Martin:]

Eric, Rod, good morning, excellent question. All of the activity that has happened and will continue to happen in relation to other potential outcomes for the block are very much still in play. I’ve said in various different ways don’t assume closed block means passive management. We have a significant amount of capital hard assets as Ewout has talked about repeatedly associated with this block. Mike Smith and Christine Dugan and their team are doing a terrific job managing this. We're actively engaged with player in the marketplace with a variety of conversations. As you would expect interest rates and market conditions affect those outcomes. So depending on one's view of where interest rates are going and market conditions that will affect the engagement of those kinds of alternatives. We have said and I'll repeat that we’ve put a substantial amount of hard assets against this and we’re going to do things that make sense economically for all of our stakeholders; our customers, our shareholders are naturally Voya. But that’s said, that wouldn’t in any way Eric be tied to the five years. If we found a solution that was acceptable prior to that point of time, we could make a decision that would correspond with that outcome and we continue to actively look at those pieces and we will update all naturally from time to time in that process.

[Eric Berg:]

Thank you.

[Operator:]

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

[Rod Martin:]

Emily, thank you and thanks to all of you for joining us today. We’re pleased with the results we’ve achieved in the first quarter and we're excited about our plans for future growth. We’ve got a talented team, a clear vision and exciting opportunities before us. We look forward to all of you joining us on June 2 to discuss our plans for further growth in more detail. Thank you and good day.

[Operator:]

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