Q3 2019 Earnings Call
Holdings third quarter earnings call at this time, all participants are in I listen only mode. After the speaker presentation. There will be a question answer session to ask a question. During this session you would need to press star one on your telephone if you require any further assistance. Please press star Zero I would now my hand.
Brent over to your speaker today, just good bear head of Investor Relations. Thank you. Please go ahead ma'am.
Thank you good morning, and welcome to access Equitable Holdings third quarter 2019 earnings call.
Materials for today's call can be found in our website at <unk> IR Dot Axa equitable holding dotcom.
Before we begin I would like to know that somebody information we present today its forward looking and subject to certain FCC rules and regulations regarding disclosure.
Our results may materially differ from those expressed in or indicated by such forward looking statements.
So I'd like to point out the Safe Harbor language on slide two of our presentation.
You can also find our safe Harbor language in our 10-Q.
Joining me on today's call is marked Pearson, President and Chief Executive officer accessible holding.
An honor his mouth from.
Our Chief Financial Officer.
Also on the line is John Weisenseel, a life burst skews Chief Financial Officer.
During this call we will be discussing certain financial measures that are not based on generally accepted accounting principles.
Also known as non-GAAP measure.
Reconciliations of these non-GAAP measure to the most directly comparable GAAP measures I related definition, maybe found in the Investor Relations portion of our website in our earnings release slide presentation and financial supplement.
I would now like to turn the call over to Mark in order for their prepared remarks.
Thank you Jessica good morning, everyone. Thank you for joining the call today.
I'd like to begin by sharing for key highlights for the quarter.
Firstly third quarter non-GAAP operating earnings was strong.
Why strong flows and positive equity markets.
I told it to deliver 160 million annualized benefit from the realized a rebalancing about general account has been achieved one year ahead of schedule.
Well to also saw record sales in our structured annuity product issue yes.
All new sales of course, Saudi insurance segment, so up 7% year over year.
With over 85% of sales from my life subsidiary coming from products like yes, yes without interest rate guarantees.
Obviously interest rates dominate the macro economic picture.
10 year Treasury was down 100 basis points through the first nine months with you.
Including a 30 basis point decline in the third quarter.
We have completed a annual actuarial assumption review.
Taking a prudent approach to strengthen our U.S. GAAP accounting, which is principally on our legacy the April saudia.
Reflect changes in policy holder utilization, which should be magnified by low interest rates.
However, the way, which you manage the business is not to U.S. gap, but to a fully mark to market economic framework, where economic liabilities, Ohio, U.S. GAAP reserves.
We believe that our economic swayed <unk> best protect shareholders and best reflects the performance of the business.
This is most evident in our hedging program, which protects us from declines in interest rates.
As such we have a stable balance sheet capitalization levels remain strong in excess of C.T. nakae <unk> be a business and then obviously talking to 350 to 400, the said well known VIP business.
And we reaffirm our commitment to meet our target payout ratio.
50% to 60% of non-GAAP operating earnings.
Supported by the new any I see standards, which we will early adult and which will give full credit for economic hedges.
In addition, E QH board that's approved an additional share buyback authorization.
400 million on November six.
Turning now to slide four and a summary of our financial performance in the third quarter 2009 cheap.
Third quarter U.S. GAAP net loss was 384 million.
Included in this number is the strengthening of U.S. get leases.
Couching impact the four in short term rates, which was offset by economic interest rate hedging gains.
And this will go into this in more detail.
non-GAAP operating earnings were $677 million or $1.38 per share.
Excluding the impact of actuarial assumption updates earnings per share for the quarter was $1.26 cents.
We remain on track to deliver a 5% to 7% operating earnings Kagan Todd.
And on a consolidated basis assets under management stood at $701 billion as of September the study.
Good by very strong AB net inflows of $8.1 billion for the quarter.
This resulted in a non-GAAP operating although we have 16% well in line with a mid teens.
And finally.
Supported by the strength of stability about balance sheet and strong operating results.
Our board authorized an additional 400 million dollar share buyback program accelerating our 2020 capital management program.
Given the falling interest rates.
Management of risk and protection of the balance sheet is critical for insurance companies.
I'd like to take a moment you explained how we manage risk and why we can be confident that our cash flows and balance sheet or secure even under stress and yes.
So.
Turning to slide five.
At equitable we of course have regard for U.S. GAAP results and our statutory framework as they form the basis for payment of dividends.
However, our north star the way in which we managed the business.
And most importantly, the basis for hedging program.
<unk> economic framework.
We moved to the economic basis in 2017, just try to the IPO.
At that time, we also increased the balance sheet of a life business by $2.3 billion to provide a buffer above the required RBC levels.
A key proposition of IPO was our ability to generate significant cash flows.
We used to economic model to ensure protect these cash flows from market movements and deviations policyholder behavior experience.
Interest rates, so good way to show the benefits of economic risk management.
Right just cost have a profound effect on reserving for long term liabilities, which often exists for 30 to 40 years formal.
Economic model is more realistic as it is based on current market rates, which we can hedge and as such but if a tech shareholders and our future cash flows.
My comment market rates, we mean, the forward curve and wish neutral scenarios, which include possible negatively.
As of the quarter in this manner, 1.7% for the 10 year Treasury and 1.9% for the 20 a treasury.
We make no predictions of future interest rates and we have no flow on these interest rates.
This is true for all our assets and what our liabilities without exception.
On this slide we show how the current U.S. GAAP and statutory will deviate from market based standards and how new rules begin to converge towards more economic view, which we believe essentially.
Interest rates behind Us GAAP reserves are not consistent.
Great Sperry markedly across product lines that across companies.
Yes, so Pete we won use system stochastic scenarios that management discretion.
Fas 157 is in fact marketplace.
It is a hodgepodge.
The statutory framework is also not mark to market.
As you can see from the slide Colin statutory practice use version to mean assumptions with rates vary significantly across the industry up to 5.5% and above.
Although the new any I see standard coming in 2020 people harmonize rates across the industry.
They still take a revision to me I'll talk averages, which today calculates out to 3.5 to six significantly higher than the covenant 20 hearing.
The new any I see standard will also test for different scenarios, but effectively as a long term flow of 1.9 per se as.
99.8% of scenarios project that long term interest rates will rise relative to September thirtyth levels.
Not testing capital adequacy for interest rates below these levels can create a full census, acuity, especially now that you've seen interest rates below this level and of course that could even go negative.
The second profound impact on reserves and cash flows is the extent to which policyholders utilize options embedded in the context if I.
We used the term policyholder behavior as an abbreviation for utilization of auctions.
Oh economic model also deviates from public financials in considering these complex long term actuarial assumption.
You us gap and statutory reserves based on aggregate cost experience.
Our economic model uses risk weight weight to the assumptions, including stress scenarios.
Such economic model liabilities, Ohio, and U.S. GAAP and statutory reserves.
Simply liabilities, we place under the economic model, a prudent and include a true margin.
With regard to our capitalization, we hold economic surface to withstand very severe scenarios defined is 40% equity shop, and a 50% dropping rates well in excess of the required RBC.
Finally hedging.
Well if differences also exist across the industry on hedging we use the higher economic liabilities as the basis for hedging program that is this neutral scenarios and highly economic reserves to reflect risk weighted policy holder assumption.
Net result of all as well this is that investors and other stakeholders have greater confidence that asset purchases is secure and will be distributable in the future regardless of the part of the markets or policyholder behavior deviates from best Guesstimate.
In summary.
Equitable is a mark to market business. This reflects a true economics and enables timely prudent decision making.
This economic view is not reflected in U.S. GAAP and statutory results and we eagerly anticipate an advocate for the reforms enacted by the FASB and the any I see that will move the county, and statutory bases closer to an economic frame.
We look forward to sharing further details about economic framework over the next year or so as we approach adoption of the feds be targeted improvements.
With that I will turn the call over two Andas to review our quarterly financials in more detail.
Thank you Mark and good morning, everyone.
On slide six I will briefly review our consolidated results for the third quarter before providing more detail on the outcome of our actuarial assumption update second results and our capital management program.
As Mark noted non-GAAP operating earnings were $677 million for the third quarter or $1.38 per share.
Excluding the impact from assumption updates in the current and prior year quarter non-GAAP operating earnings increased by 18% and improved by 35% on a per share basis to one dollar and 26 cents per share.
On a GAAP basis, we reported a net loss for the quarter of $384 million.
I think the variance between operating earnings and net income was the outcome of our annual actuarial assumption review, which I review in detail on the following page.
And U.S. GAAP accounting impacts driven by our hedging program, which again performed well and it's falling right delivering a 97% hedge effectiveness.
Turning to slide seven I'd like to provide additional detail, what our economic hedging and the outcome of our annual actuarial assumption review.
Well background, we completed our comprehensive under the assumption and model update process in the third quarter, reviewing all material assumptions across our business, making updates you have warranted.
As a result of to review, we made several uptake with the most material impacts related to fixed rate gxp policyholder behavior assumptions and interest rate, which I will review on this page.
Together these items resulted in a year to date negative foreign and 20 million post tax impact to net income primarily driven by four main components of course, the economic benefit of fully hedging interest rates I mean, the declining interest rate environment.
Specifically, because our economic hatching resulted in us being over hedged on the U.S. GAAP basis, we recognized a year to date favorable impact of $655 million.
Importantly by design these gains more than offset the unfavorable $265 million impact of Tcs review of economic assumptions, which resulted in an updates to our short term Esso p. interest rate assumption to reflect Karen right grading back to our long term assumption of three point.
Four or 5%.
Next we made updates to certain policyholder behavior assumptions to reflect emerging experience. That's a result, we updated withdrawal assumptions and reduce our lapse floor, 1% 2.8%.
These updates resulted in unfavorable $472 million U.S. GAAP impact.
Finally, further magnifying to policyholder behavior update what's the impact of interest rates falling from approximately 3% over the last year, coupled with a shift for certain gxp features from S&P to fair value, which together enhanced the liability cost of these features by approximately 330.
$38 million.
As a result of the accounting treatment of these updates. We also recognized a favorable 60 million dollar impact to non-GAAP operating earnings primarily driven by Dr. benefit.
Translating these changes to a statutory basis. These updates resulted in the strengthening of reserves by approximately $500 million the economic hedging for it. It we will receive from the adoption of NFC via reform with more than offset this impact.
Assessing these items holistically I'd like to reiterate some of Mark's earlier points.
He take away within the context of this year's assumption review on slide eight.
First the year to date economic benefits afforded hedging interest rates more than offsets the cumulative gap impact directly related to interest rate declines.
Second early adoption of the new NFC standards will fully reflect our economic hedging and statutory reserves and will more than offset the totally statutory impact of these updates.
Lastly, the strength and stability of our balance sheet.
I will be a capitalization remains in excess of C.T. 98, and the RBC ratio for our with non via businesses inline with our target 352, 400%.
Taken together with managing to an economic framework gives us confidence in our capital position and our ability to lead to deliver on that were target payout ratio of 50% to 60% of non-GAAP operating earnings.
Moving to the business segments I will begin with individual retirement on slide nine.
Excluding assumption updates in the current and prior year quarter operating earnings of $375 million were down slightly versus the prior year quarter.
That's an increase in net investment income on higher SCS account balances and improvements in G. makes the results were offset primarily by lower fee type revenue as a result of lower separate account balances.
We continued to drive sales momentum into Quadro with first year premiums up 9% year over year more than three quarters of sales came from products without living benefits.
Including another quarter of record sales in our structured capital strategies product.
Here, we continue to drive traction.
Good breadth and depth of our distribution, enabling us to continue de risking.
Inforce I ask you replace fixed rate gxp business with newer more capital light solutions.
This is demonstrated in our net flows which improved year over year as anticipated outflows from the mature fixed rate locks were partially offset by $802 million of net inflows.
On our current product offering.
Compared to the prior year quarter account values declined by approximately $1.3 billion due to the aforementioned flows dynamic and the combined impact of market performance and policy charges.
Moving to the group retirement segment on slide 10, excluding the impact of assumption updates in the current and prior year period operating earnings improved 2% to $101 billion, primarily due to higher net investment income driven by higher average account values and our G.A. rebalance as well.
It's ongoing efficiency gains.
Account values increased to approximately $500 million year over year due to market appreciation and continued net inflows over the trailing 12 months.
Net flows which are seasonally low into third quarter due to the K 12 summers to break improved versus the prior year quarter due to stronger premiums and lower surrenders.
Gross premiums improved on a year over year basis from 744 million to $770 million due to 10% growth in renewal contributions driven by success in client engagement programs linked to our workplace advice Morgan.
Now turning to investment management than research or Airlines Bernstein on slide 11.
Operating earnings decreased to $93 million from 96 million into Friday at quarter, primarily driven by higher compensation and Gionee expenses and lower performance fees, partially offset by higher base fees.
$8.1 billion of inflows marks the fifth straight quarter of positive net flows and helped drive our you added to its highest levels since the financial crisis.
Active net inflows were $9.3 billion for the quarter.
$21.6 billion on a year to date basis, which translates to a 6.3% annualized organic growth rate.
And despite industry wide fee rates contraction.
ABS overall portfolio fee rate continues to remain stable.
Across the business AB continues to drive solid underlying momentum in retail gross sales reached their highest levels in history and net flows exceeded $5 billion for the third straight quarter.
Right across a diverse array of funds attracting assets. In addition, Avi continues to diversify and grow its institutional pipeline and drive momentum in active equities.
Finally, abies adjusted operating margin was 27.5% down from the prior year quarter due to flat revenue and higher expenses as a b continues to scale and commercialize is offering and execute an expense actions such as the relocation to Nashville, we remain confident.
That's a 30% plus margin target isn't attainable long term goal.
Moving to protection solutions on slide 12.
We have reported another quarter of strong operating earnings.
Excluding the impact of assumption updates in the current and prior year quarter operating earnings improved from 50 million $217 million.
We recognize that these results may again be stronger than expected, but similar to last quarter, we have a number of items moving in a positive direction.
Excluding assumption updates driving operating earnings growth. This quarter was an increase in fee type revenue higher net investment income from higher asset balances and our chief rebalance.
Productivity improvements and the meaningfully decrease in policyholder benefits.
This decrease to policyholders benefits was driven by a onetime reserve adjustment of 23 million as well as favorable life claims reserve development.
This contributed to the improvement in our benefit ratio to 60.5%, which was also aided by a year over year increase in revenue driven by higher premiums and net investment income.
Computing resale underlies premiums increased 9% year over year from 56 million to $61 million driven by strong sales growth and positive momentum we are driving in our employee benefits business.
Before turning to call it back to Mark for his closing comments I would like to highlight our capital management program outlined on slide 13.
Since our IPO, just 18 months ago, we've returned $1.8 billion to shareholders, including 74 million in quarterly dividend.
And $37 million in open market share purchases during the third quarter.
This pace keeps us well on track to continue delivering.
On our target payout ratio of 50% to 60% of non-GAAP operating earnings and 2019 and beyond.
That's left quadrant, we had approximately hundreds and $63 million remaining on our 800 million 2019 share repurchase program.
Looking ahead, our board of directors as authorized an additional 400 million share repurchase program.
This authorization is an acceleration of our 2020 repurchase program and provides US with addition of capital flexibility for repurchases in the short term.
Keeping me Friday, the guidance, maybe aim to primarily repurchase shares from Axa as it continues to execute on it stated intention to sell down by continuing to be opportunistic in the open market.
Supporting this capital management program are of a robust operating cash flows year to date, we have received $1.9 billion of cash distributions from our operating subsidiaries.
Enhancing our financial flexibility and providing more than sufficient cash to support the cash needs through the first half of 2020 .
And as we move to early adopt the new any I see standards statutory cash flows we'd be better aligned with economics, and our economic hedging we'd be fully reflected in statutory reserves.
And finally with capitalization levels in excess of Cdnineteen, hateful liaise and 352, 400% RBC for our non VIP business, our balance sheet remains strong and very protected through our economic framework. If that have returned to called back to mark for closing remarks.
Thanks, and this before taking your questions I'd like to close by reiterating the key messages from the quarter.
First.
Operating earnings remain strong.
We are delivering on our strategic priorities, including the completion of our GA rebalance over one year ahead of time.
And we are driving strong momentum across the business in sales and that for us.
We continue to benefit from actions, we've taken to change our new business mix towards less capital intensive products and build out our distribution franchise.
These results keep us firmly on track to achieve our 2020 commitments.
Next.
Our balance sheet and capital position remains strong and well protected.
We are managing the business on an economic basis.
Which again represents actual interest rates and positions us well as accounting standards converge towards a more market based framework.
And as we move to early adult the any I see standards are economic hedging will be fully reflected.
This means we have the strength to deal with the headwind of low interest rates.
Overall, our businesses are generating sustainable cash flows and attractive returns.
Enabling us to continue delivering on our target payout ratio of 50% to 60%.
And along with the additional share repurchase authorization of $400 million. We believe this should continue to provide you with confidence in the strength and stability of our balance sheet and our ability to protect and enhance economic value for shareholders.
With that.
I'd like to open the lines for questions.
As a reminder to ask a question you any depressed star one and your telephone to address your question press the pound or hatch key please standby finally, coupled to Q and a roster.
And your first question comes from Andrew Kagermann with Credit Suisse.
Hey, good morning.
So maybe just a little color around your interest rate sensitivity could you talked about the new money yield.
The portfolio yield and maybe some sensitivity factor, let's say we see.
A drop in interest rates around 50 basis points, what would that due to.
Yes.
Good morning, running under smokers and thanks very much for joining I'll post two andas two to handle that.
And the questions on the yield on you you portfolio right. So good morning, Andrew look I think from an interest rate sensitivity before I go I gave you some of the numbers I think it's really important if it. If you said, we think about asset and liability management, because really matching matching assets and liabilities from interest rate sensitivity so from a balance sheet.
From a cash perspective, we're pretty insensitive, which means if rates go down yet your liabilities go up but you assets go up as and.
Pretty much the same way so so the impact even though you might see it on the under the accounting is pretty limited now of course, what is really the.
Let's see if you're in that position, we'll just wait important they see new money yield because the new money then eat. It also then translates into what can you put into your pricing going forward because you have to adjust your your product for men and because of that have to your lower unit, so the and the new money yields.
This roughly I would say hundred 120, bips above the risk free that's what you can expect anything thats. What then well it is reasonable so you're just obviously then pricing according to that so that we can maintain our marching well the in force just to complete your question I think right now it's about 350.
What we 383.
Three idea I think thats, what we had on the I'm dealing on them and they need.
I'll just remind Andrew it's Mark again, just to and his point, if you're looking at new business, 85% of our new sales or not interest rate sensitive.
Principally through that I see as product, which is dynamically priced and as as a anda said fully managed.
And the sensitivity component if we saw like a 50 or another 100 basis point drop in interest rates would it would it have a.
Right impact on earnings you. So the sensitivity I want them confirmed the sensitivity. We gave you im probably a year ago.
Which is still going through the 50 50, Bips has a 10 million earnings impact.
Okay.
And God I think that yeah doesn't I think thats really the impact from an earnings perspective, taking out the accounting mismatch.
Great and then just shifting over to group retirement, you had some pretty.
Solid sales growth renewal premium you know year over year gruesome renewal premiums was about 10% and you mentioned on the call workplace advice programs could you give a little color on that and then with that you know why your confidence in your business with regard to these investigations into a four three forks freebie books might.
Might be a concern.
Android smartphone group retirement, it's really out for Threed business, where we all the number one a provider of supplement to retirement income for teachers in the K through 12 market. So by Worksite marketing. We mean, we have a school districts who took the preferred.
Deal with us and if we have an advisor for solve a thousand also advisors actually go into the schools to talk to a teachers and the a and the administrators. So it's a it's a terrific business. We have there and you know we see you see funds under management growing no question study.
You have to you.
I think the.
Chris Article you you referred to.
Refers to an FCC.
Investigation with phallic, we honestly don't know any more than you know.
We would not part of that.
And we just know what you you know through the us into the newspapers, we have had inquiries from DFS in this area, but we don't see anything unusual there and we we maintain a very strong relationship with the D. So yeah, it's a very strong business for us and we provide.
Very proud of it we have something about 1.1 billion teaches now in that in that in that particular segment.
Hi, Thank you.
Your next question comes from Ryan Krueger with KBW.
Hi, Thanks, Good morning, I had a couple of questions on the policy holder behavior update I guess first the 500 million dollar.
The impact that you saw do you view that as representing the full economic impact of this change or would you also anticipate an ongoing effect to future cash flows.
Yeah. Good morning, wanting Ryan yes, so look I think the as I've said in the call I think the 500 million impact that's the real impact from the assumption change and that's what's will also impact our cash flows to customers. We we presented them in after him off the Q2 earnings. So that's that's really the impact I don't see any.
Impact off two words.
Coming from the assumption change I mean, very little because if you stick around longer you actually get more fees, but I don't think that hasn't materially impact here for the vehicle.
Thanks down the on the lapses anything you lowered your floor to 80% to 0.8% can you give us a sense of how that compares to.
What is required under any I see reform.
Yes, so you're absolutely right, we lowered that we'll lap slow from 1%, 2.8% and I think the any I see a requirement is around 1.2%.
Percentto. So we are we are below and what the N.S. Yoo requires correct.
Alright, great. Thanks.
Your next question comes from Tom Gallagher with Evercore.
Good morning, just just a follow up to Ryan's question there.
Andrew is the 80 basis point assumption, you're now using on ultimate lapses.
Can you comment on is that is that consistent with the current experience you're seeing emerge on some of these older age policyholders.
So are you just taking it to the trend you're seeing or does that have some cushion and I ask simply because you know if that trend where to worsen would you have to shrink them reserves further.
Yes. So good question Tom So good morning look I think what we did is really based on emerging experience, we and to give you.
Due to basically reflect what would be currently see and then we put that into our assumptions because we think one once we see something we have to reflect it. So I wouldn't say that this is a trend that we see right now that goes further but then it's really rich.
Reflecting our current experience in our.
Turning to assumptions.
Got it and then.
And he would you be able to quantify now I take this would would be the.
The major final piece is a pause all for determining your capital adequacy posed to be a reform any.
Can you provide some quantification of how much access you think you might have within the operating companies or some waves dimensioning that even if it's a plus or minus some some level.
Yeah, I can give you I can walk you through kind of what what goes in and what goes out remember when we.
I mean, obviously on even today I mean, it's very clear we are above our city 98, I'm target for a full views and three safety to 401 on the Ace. So now taking into account Diviya reform that reflect better our hedging we actually get the benefit of $1.5 billion that was already reflected in the cash flows.
He presented to you in Q2, so that's from the adoption of the via reform and that's I told you in the call I'd be going to early adopt that fee.
Now.
The update of the and the assumptions at the negative point 5 billion dollar to this and the this.
And benefit so the next positive is a billion dollar.
By early adoption adopting DMC NSC via reform and and updating de assumption. So that's really the net net change after I'm done before.
And would it be fair to assume then that you have at least a billion nowhere.
You know are there other offsets could it be less than that much greater than that just on a consolidated basis. Okay look I mean, we usually we don't and give you the and the RBC numbers and that the cash Indian companies a station at Q3, but you can assume that even before all of that we were above are we talking capitalization. So these comes now on top.
Oh. So this is Scott it's that's incremental yeah, it's incremental and this is really also what gives us confidence that we can actually accelerate the M.D. and the buyback authority from next year into this year.
Okay. Thanks, and just one final one if I could sneak it and be Andrew's did you say a billion nine of cash distributions from the subs to the holdco year to date.
Yes, that's correct. So we had them at early into here I think in March we had the to surface note repayment, which was I think 572, then we had to dividend over a billion dollar in July and then we had aligns Bernstein I'm contributions they sold to every quarter and that this brings you to $1.9 billion.
Okay. Thanks.
Right.
Your next question comes from Ian Rights with Bank of America.
Thanks for taking my questions I want to go back to what Andrew is talking about a permit earnings rate.
Sensitivity.
When you guys did your sensitivity back in December or basically suggested for 100 basis points.
Quite simply would be a 1% growth impact, it's probably fair not to extrapolate that or.
Because some of your peers that have or less general count expose you're looking at kind of a 1%.
Incremental earnings impact per year. So I guess my question, it's fair to say that the incremental growth impact for say 2020, and 2021 would be greater than an additional 1%.
Yes so.
Maybe lets lets lets him on fax is this a little bit I think we from a growth perspective, we believe we can meet the 5% to 7% earnings growth I'm going forward and then and we stated I think we seem to believe that this is and this is a fair assumption would be feel very confident.
Doing that now D intrastate impact of that I gave the sensitivity has an impact that's really the 10 million of fees for 50 Bips. So this isn't a small headwind, but I think it if I take everything together with each year rebalancing and all of that I think we feel pretty confident that you'd actually shouldn't.
Too much of an impact them and going forward for earnings growth.
Your next question comes from Alan Scott with Goldman Sachs.
[noise].
Yeah Alex.
[noise] [noise], Alex your line open.
Hi, I think I was having trouble with my headset sorry about that my first question was just on the statutory capital and if you could provide an update on total adjusted capital where you might expect that to be once some of the adoption is considered.
Yeah. Good morning, Alex you know, we don't engine Q3, we don't and updated to statutory capital I think I can repeat what I said before religion that should get comfort you know we're targeting capitalization is really above the city 98, and and 350 before on the RBC fund on the age. So that's that's there.
We are and [noise].
Based on the V. every form of <unk> updates to the too deep into the assumptions. We strengthened that then that's capitalization by about a billion dollars.
But you may see the defined is that numbers too we will publish them at the adherence we don't do them at that Q3.
Okay.
And then maybe just some protection could you talk about what's sort of driving earnings a upwards, there and how you see that sort of trending over time I mean.
Yeah, how much of this feel sustainable verse.
You know maybe something more onetime I know you guys got a loss recognition recently, so I'm just interested or any color there.
Thanks, very much Alex.
Yeah. It was good quota for protection hundred 17 million I think a couple of things, which help help boost that firstly.
There was a credit on underwriting mortality. It was a good underwriting quota and I think there was a one off reserve release of 23 million and perhaps end as if you can give some color on a reasonable run rate going forward, yes, So I mean.
As Mark said is supposed to really good good quarter and well do you really see here is the GE a rebalancing at the expense actions coming through so that's really what's driving the M.D. The earnings so if I take this onetime.
It's kind of benefits and outdoor folks to $117 million I get to around $75 million and I think that's it that's a good run rate going forward that you can expect from dumped in that segment, obviously mortality as some volatility, but if I if I adjust for that I would say you can expect and kind of 50 to 75.
In dollars going forward, so really strong performance and what we see released as also the employee benefits.
It is now coming coming through enhanced assisting.
Well, maybe won't one last quick one can you guys update where holdco cash is relative to the 500 million dollar a liquidity minimum I think it probably was like over <unk> billion or around a billion July one two is just interested you know to to understand where that sits today.
Right so.
At healthy everywhere slightly north of 500 million, then we got to dividend, which brought it to 1.5 and then we obviously had said will be gains at the holdco like paying interest which bit growth is flat to down, but that's that's where we all right now.
Okay. Thank you.
Your next question comes from Sunny came in with Citi.
Hi, Thanks, I wanted to go back to group retirement, if I can I.
I get that your model is different but if I just look at your fee rate in that business and I compare it to other companies it it just.
Sort of jumps out at significantly higher. So my question is given all of the focus on fees across that after gathering segments.
What gives you confidence that you're not going to see that fee rates start to come down at some point.
Thanks, very much need look I think this is not a for one k. service I think it's so important to understand what we provide to that teaches firstly.
They have a complex situation they have.
Defined benefit schemes with the state would show inadequate they need a need help to supplement their retirement income. So there's a very big component of advice.
You know a in a margin.
Secondly, a and what we offer is a strategic asset allocation to to those teachers.
Which is very important for them going forward. So.
This is not a four one k. product.
It does have high margins in it but we work hard for those margins, so well, we're comfortable with where we all.
Okay, and then I just to come back to the consolidated results you're hitting your mid teens are we target I think youve consistently done that but I think one of the consequences of your model of the sizable below the line charges and.
You're at a 16% or are we even buying back stock below book value like your book value per share is actually down year to date. So my question is at what point do we start to see growth in book value per share.
I mean, maybe I'll take that you know I think Suneet, you know the and the biggest them.
I'd say obstacle or the.
Issue you have in this is aspect is really the mismatch the accounting side with our hedging program.
As Mark alluded into beginning is really and tailored towards the economics and whenever we have positive markets you see a negative full clarity development and then you have negative market you see positive book value development.
So that a year ago in Q4, where you have a book value drew tremendously, but not because we we had the underlying business goes it's really just because of the hedging program. So as long as this isn't fix I think you always see this and this mismatch on the book value, but that book, but is that I think that's one area there.
Really look forward to d. and to the fast be change.
Even though I mean, there would be many other things changing I think the fast the after the fast be you're going to have a accounting regime that truly reflects the economics and if the business gross you're going to see book, let it go to the business shrinks you see book value reduction.
So much better reflection done then today I mean, it's an answer for that but I think thats, where we feel strongly that we need to more economic and multi two to reflect the business.
And so if we move away from an environment with these below the line charges, you're confident that you can still be at mid teens, our lease because I think he's cumulative charges of certainly help that ratio.
Right. So I think you look I mean, it's too early to give you give you didn't it just to fully number into <unk> and indications because book, where they're going to change earnings going to change what I can tell you is you really glad to take everything above the line that that makes sense and not tough does adjustments we have today.
So so I'm very confident that that's even show positive on that new framer, giving you the exact numbers I think it's too early.
Okay. Thanks.
Your next question comes from Jamelia JP Morgan.
Hi, good morning.
First I just had a clarification I think I thought your long term rate assumption was 3.4 or five but it seems like you mentioned something else on the call could you clarify what are what you along from rate assumption.
Yeah. Good morning, Jamie No you're absolutely correct that long term rate assumption on the U.S. GAAP 87, 3.4 or five correct.
And what's the trading period for them and be great. There over five years yeah.
And if it is lower it isn't more conservative than other companies, but in an absolute sense. It still seems somewhat optimistic relative to where rates are right now so like what.
What was the reasoning to keep it where it was versus maybe adjusting it down a little but I do recognize that others are even higher than that.
Right look I think I mean first of all this is really onto the GAAP standard, but we feel very comfortable with this assumption and as you say, it's more conservative than others, but again I mean from a management perspective really look at they can only said we take the straight forward rate.
And then because that's what we know right now and nothing else is taking a view on interest rate. It's not it's not the way we manage the business you now having said that.
It would be on wise to take to forward rate on the got because on the asset side right. Now I also don't I'm fair value My assistant for my P. in there right.
Right now I think about $1.5 billion in AOCI I. Just this year, we had to unrealized gains of 500 million dollar. So if I really want to go to a two economic model I have to fair value both sides and that's that's what will come but that's why I'm very confident that that that assumption.
And then on the theme this came up a little a few times on the call already on fees and retirement, even other than any regulatory pressure. It seems like fees in the four LTB market are coming under a little bit of pressure, maybe not as much as the portal one key market, but it seems like the trend is lower and I'm wondering if you're seeing that.
And your business as well and whether you feel that you can sort of maintain your margins, even if he's come down if they're not going to come down to 41, good levels, but like many companies have seen.
Drift a little bit lower over the last few years.
Yeah, Thanks, Jimmy I, what I won't repeat what I said earlier about the advice and the strategic US allocations I guess the other thing we have going for us is.
We are scaling this business.
So there was really nice operating leverage in there so when we are attracting.
Funds under management you know it is it is helping move the margin.
Up as well so that gives us a little bit of room. If there is pressure on there we have them because we were at scale and then secondly, we would respond on or on the.
<unk> expenses side, if needs to I think the other thing in the Jimmy is is that the group a time if businesses as benefited by the general account a rebalancing. So if you take the combination of scale general account rebalancing and the productivity before you see that coming through that margin.
It's not that we charging the teachers anymore, it's just operating leverage.
And that gives us room, if there was pressure.
Going forward.
And then just lastly on your protection Division, obviously, a majority of that is just individual life, but are you had talked about growing the group of business a little bit within that division and you're getting good growth. It's a small business. So if you could just talk about what it is that you're doing in the group market and.
Sort of the expected ramp up of group benefits earnings over the next several years.
Yes so.
So look I think the group business is an area, where we see maybe see growth and so we invested heavily into it we mostly into into small to medium enterprise areas of into below 500 million employees we have.
I really state of the art Frontend.
Infrastructure here that and it's very very appealing to two brokers in that area and we get very positive feedback I think right now we have about 350000.
Kind of lifes. Obviously this is still very small for for this kind of business, but we see a a really good growth.
The basis, it's almost breakeven on so it's been ready to ramp up over the next five six years and become a a big big component of the protection solution business. So that's that's that's our plan and I think we work hard to to get there, but so far we see really good progress.
And really and.
See that's an attractive.
[noise] infrastructure.
For distributors.
Thank you.
Your next question comes from Josh Shanker with Deutsche Bank.
Thank you for taking my question.
The risk of between my own ignorance, you gave a lot of detail more than others on your assumption review on a GAAP basis. There is a large charge on a adjusted basis. It was a slight benefit I'm a step base. There's a charge was come to reverse when your top I mean I see reform.
Tell me, what the major take away, which numbers I'd be focusing on trying to be focusing on none of them are they all non cash in the end I'm just trying to trying to line up which thing I should be looking at and taking the most a serious look at.
Josh Yes. It is confusing we understand it than we did Troy.
Food the presentation to show you and compare side side by side from gap and stat.
The fundamental point here is in a gap and stat. They always version to mean assumptions on interest rates.
And for US is 3.453 0.5.
We are at the conservative end of that revision to me, that's why and it says when we're looking at the business. We are looking at the economic position I using the forward like which tops out at about 225 today.
And when we have analysts like yourself, we steer you towards the cash we're generating because it is it is confusing looking at them.
The good news is with both he and I see reform and with the feds be.
Targeted improvement changes coming in.
Both of those regimes are going to move closer to a two or more fair value.
Oh, that's in a in a nutshell why they different and what we look at and why we manage very importantly, a Josh is is a hedging program.
Which of course, protecting the balance sheet and protects.
Youre the cash flows we can distribute is based on the economic position and that's why in addition to the actuarial assumption you see a very big credit from a hedging because we all hedging more than the reserves on the gap will step.
And the benefit that's coming from the adoption of the and I see them to the staff numbers with pets Immaterially changed five years. Some purview would that have been approximate same mount whether or not the numbers change over the past nine months surface at 12 months or.
The assumptions are it was materially different either way.
Yes, So maybe just let me walk through again, you know I think the E.
Mark just was talking about on the stuff outside the reflection of the hedging I understand that's what has to is that this billion five.
Benefit under the statutory framework, it's really important basically before and the hedging positions. We took were not fully reflected in the requirements. So that's why.
<unk> DCCT 98 is coming down $1.5 billion at the same time, we updated for the actuarial assumptions.
Which had an impact of roughly $500 million and that's that's a real cash impact that's a really impact that's was reduced to 1.5 to still a billion dollar and benefit if you take everything together. So what we tried to do here is who basically take everything apart and you really get to the essence.
Oh of what's the impact of the changes and then.
In the end do you see that everything else equal, we actually got a billion dollar benefit under the statutory framework.
Well. Thank you for the answers appreciate the clarity.
Thanks.
Your next question is a follow up question from <unk> with Bank of America.
Thanks for I, let me take a follow up just wanted to go to the for 72 on several withdrawal experience. The charge you took.
I just want to know if you didn't see any of that last year. When you get your view in other words, because it's something that's developed recently and I only asked that because it wasn't largest component of the assumption review at least the largest impact and it isn't reason for your stat charge.
Yeah, absolutely I take that D. and look I think we [noise].
As you know once a year, we update our our assumptions based on recent experience and I think we have one more year experience and based on from that experience. We see we decided to take that charge because we actually.
Happy merchant experience that debt that we want to have fully reflected and we think it's prudent to fully reflect if you see emerging experience.
I hope describe us.
Thank you.
Your next question, it's a follow up from Ryan Krueger with KBW.
Hi, Thanks, I just had a quick question the corporate another segment, excluding the assumption or view of the last of 69 million, which is.
A fair amount more favorable than you had previously discussed can you give us a sense of how you're thinking about the run rate there going forward.
Yeah. So the run rate you know what you see some seasonality in it but I think so as a run rate for the full year, you can expect about $350 million negative.
For the for the full year I think that's what we can confirm.
Okay, great. Thank you.
Okay.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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