Q1 2020 Earnings Call
Welcome to equitable Holdings first quarter 2020 earnings call.
At this time all participants are in a listen only mode.
The speakers presentation, there will be a question answer session.
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Thank you.
Dan the converts over to your speaker for today, Jessica Baron head of Investor Relations. Please go ahead. Thank you.
Welcome to Actable Holdings first quarter 2020 earnings call.
Materials for today's call can be found at our website at <unk> are.
Equitable holding dotcom.
Before we begin I'd like to note 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 did or indicated by such forward looking statements.
So I'd like to point out the Safe Harbor language on slide two about presentation.
You can also find our safe Harbor language in our 10-Q.
Joining me on today's call is Mark Pearson, President and Chief Executive Officer.
Well holding.
Honors Malmstrom, our Chief Financial Officer.
And nicolaides president of equitable life.
Also on the line is John Weisenseel, Eliasberg speeds Chief Financial Officer.
During this call we'll be discussing certain financial measures that are not based on generally accepted accounting principles also known as non-GAAP measures.
Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures.
And we'll need a definition, maybe Bob on 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.
There's been Nick for their prepared remarks, good morning, everyone and thank you for joining the cool.
Obviously, a difficult time for most people so first and most importantly, I hope that you and your families all safe and well.
We're going to try to do three things today I'm going to give an overview then and this will take you through our balance sheet and results and lossy nickel give an update and what we're sitting in April and talk about the robustness of our business model.
Now turning to slide three.
During this terrible pandemic and its tremendous human an economic challenges equitable has a special loan to play.
This conference like this that we equitable show a role in society.
Oh purpose is to protect families and secure the financial well being about clients. So they can live long unfulfilling lot.
And I'm, so proud of the ingenuity and commitment about people and delivering exactly.
98% until the equitable workforce is working remotely today.
And of course, we're supporting all people with a comprehensive stay well program.
They've done a remarkable job at accelerating digital outreach.
Launching new planning tools, and keeping the highest levels of service and advice to our clients.
We recognize also that we are part of the wider community and that many in society need an extra 10 now.
Who the equitable foundation, we had been providing financial support, particularly geared towards feeding and educating children.
Today, we'll talk about earnings for the first quarter, but its most important now that we cover the strength of our balance sheet and how our business model will fit and these volatile times.
Equitable has a resilient balance sheet.
Oh RBC ratio is approximately 450% to 475%.
We have over $1 billion of liquidity at equitable holdings.
Nearly $7 billion at equitable.
Oh strong position today is the result of a decade long list management program.
This includes strategies to remove basis risk exposure pioneering volatility management tools and introducing new categories for products like buffeted annuities.
And at all times, we've maintained a high quality fixed income portfolio with strong emphasis on diversification.
Most importantly hedged to a full economic liabilities.
This means that we immunized balance sheet to interest rates.
We managed to a near zero duration gap.
Despite typically like to frame what got a slow to we have to show pools of interest rates.
And today.
Oh permits reverting to a 3.5% higher interest rate.
I was really its comes not from what we've done in the post quarter.
Well, what we've done over the past decade.
Looking at the first quarter results.
Second quarter.
Non-GAAP operating earnings per common share amounted to $1.88 cents up 10% year over year.
Reflecting higher a U M.
And deliberate about productivity and GE a rebalancing strategies.
In Q1, and two the end of April.
Seeing limited adverse experience from cobot 19 mortality.
And minimal increase in lapses well with tools.
Recurring premium flows will shortly.
April the first month of significant disruption and social distances.
[music] business activity across the board was about 70% of normal levels.
That's what the quarter end, how are you in across both equitable and a lunch Bernstein.
Excluding any double count.
$646 billion.
12% from December 31, 2000, and non cheap.
Despite this we remain on track.
In detail stated capitalization payout ratio and $75 million net savings too.
Now looking forward.
Economic outlook is of course uncertain, even I'm not.
We will not be providing today economic full cost, but what has to happen we done that.
We will however.
Reaffirm market sensitivity about earnings in line with prior guidance, although hundred and $50 million per annum.
Well at 10% equity market decline.
We see no advantage and trying to anchor to once you know we know however, it is important today.
We could get comfort about a balance sheet, but also to show you why we believe equitable's business model.
He was able to adapt to create value.
Across a broad range of future scenarios.
We can adapt and create value for three reasons.
Firstly.
Remember that a large enforce portfolio gives us ability.
Well the 2020, 95% until the operating revenues will come from our policies in force on January the first.
Second.
There were three features unique about our business model.
One.
We have a history of developing economically sound products, which are even more into them on today.
Consumers reaction to this virus is translating to hide them onto financial advice from soundly protection.
Obviously people of heightened awareness of the need to look after they families for known events like retirement.
And unknown events I tend to I'm excited illnesses.
True.
Our affiliated distribution and broad range of third party partnerships.
It's a stability and privileged access to in clients.
We also benefited from the ability to change.
Got it makes cost.
And to me.
We all trusted leader in resilient sectors.
We all the number one provide allbritton and solutions to the K through 12 public sector educators market.
And our variable annuity products provide added attraction for retirement plan is in this volatile environment.
We alone can provide a secure income for retirement.
Oh subsidiary Alliance Bernstein.
Continues to perform well in that sector.
And office us portfolio diversification nonregulated cash flows.
Finally.
Equitable has benefited from our recent IPO.
Hope close Gysle setting up the company for my this policy, establishing the initial balance sheet to see T. 98 asset bubbles.
I'm putting in place.
Hedging program no longer lines on the phone payment.
That's really caused us to think deeply about how we deliver value to both clients and shareholders.
So despite the significant dislocation.
The uncertain short term future I'm confident that I robust business model.
Fantastic people, who make up this organization.
<unk> equitable will continue as a strong and meaningful player.
So in summary, a truly unprecedented quarter a pandemic the lack of which we've never seen and we certainly know the planful, but what we had equitable had planful is total immunization about balance sheet.
Falls in interest rates and equity markets and this has proven extremely valuable.
Hedging program is working as design.
And today, we find ourselves with over $7 billion of liquidity and a lot company.
No the alliance on a future revision to mean interest rate.
On a business model, which is proving its robustness at a time extreme disruption.
Let me hand over now to end is to go into more detail.
And does.
Thank you Mark now turning to slide four.
As Mark discussed or economic model is to cornerstone.
And risk management protecting our balance sheet from declines in interest rates in equity markets and this quoted perfect. It demonstrated why monitoring to an economic framework you some critical.
Those who follow I've seen elements of this page before.
Slide shows regression to meet interest rate assumptions on the U.S. GAAP and statutory framework I read across the industry and provide the coupons and sense of security in terms of reserving requirements.
Alright, economic balance sheet is protected from interest rate as we used the forward curve enriched mutually scenarios, including negative.
I'm not to make predictions about future interest right now if we didn't match and duration matched ensuring or we can only go to match, our economic liabilities protecting our balance sheet and future cash flows.
Wisconsin's stuff you turn frameworks bone currently remain reversing to lean assumptions to calculate nurse.
I'm insurers and using don't come right, Hi, it's 5%.
This is completely disconnected from the reality of current right.
It is simply do not know where interest rates are headed and be do not believe it is prudent what clients are shareholders to take a position here can expose our balance sheet honestly families.
As you can see on slide how do we manage to our liabilities on the GAAP or stuff, we wouldn't have been under hedged to ever true economic liability approximately 7 billion and to be didn't respectively.
However, U.S. GAAP financial results perfectly highlights this disconnect between the accounting treatment and they actually movement over the underlying assets and liabilities.
Since we hedge tremor economic liabilities.
I would tell you hedge gain you realized this quarter I'm not in fact really good instead reflect an increase in our economic assets to match a record on these liabilities.
We believe it is important to move away from rushing to meet them.
Andy I strongly advocating for the reforms that meets GAAP accounting and started to rebase he's closer to an economic.
Yeah, I'm pleased to talk to be targeted improvements nor should address you see on economic accounting mismatch of assets and liabilities.
<unk> implementation, you wouldn't have to make GAAP accounting more transparent.
Mr and more relevant for the insurance sector.
Moving onto slide five Oh.
Our balance sheet strength and continued resilience is the result of intention and prudent management action, that's taking place over the past decade.
The next door locks financial crises, we successfully shifted could risk profile, a former enforced and be business.
Notably eager walnuts to first in the industry to develop our own proprietary volatility much from.
We see original transactions that increased activity and volatility management called Rich Obama guarantee that's it and eliminated I'm had you been asset classes.
<unk> base is reduced by between 80, 590%.
How do you know taking these actions losses would have accrete into hundreds of millions of dollars.
Over the past quarter, Oh volatility and manage me to not only protected our balance sheet. They also protected client assets from the severe market decline.
That's all the tenant despite.
Volatility my next from Threeq or anything to preserve client assets.
Hi, My name there.
Trucks are broken also initiated moving guaranteed assets under management into fixed income allocation funds.
But prudent risk management is not zero some gain.
Challenging times also present opportunities to either way and the March stronger.
History demonstrates.
Following the law financial crisis, we launched the industry, it's worth noting right Bourbon annuities returning cornerstone.
That's was comprised of 100% Patsy and 100% volatility manageable.
Enabling 100% Hatchability.
In 2010, you also designed the industry's first buffered annuity.
Doctorate capital strategies.
Introducing it's yes, you have steadily field diversified distribution partnerships that have proven difficult to replicate I've never felt we continue to have the leading position into buckets annuity market despite increased competition.
I have you done from the actions outlined above.
Our prudent risk come true that's being in place long before I feel that how sure that's the foundation for economic model.
Right and we took additional measures to strengthen our balance sheet prior to the I feel.
We think securing an injection of $2.3 billion from accident and establishing Tc 98.
Very Utica African standards.
In regards time for Q2 and conviction to achieve this level organizational transformation.
However, we recognize that the or stewards of the business and have a responsibility to deliver on our promises to clients.
And to optimize value for shareholders.
Thanks to the prudent management actions taken over the last decade, you have the utmost confidence in our ability to continue delivering these promises for the long term.
On slide six I was just provide a brief summary of our first quarter operating performance.
Additional details on that segment and total company base. It can be found in the appendix and in our press release.
Overall, we are pleased with how the business performed in the first quarter non-GAAP operating earnings of $515 million translating to a dollar an eight cents per common share an increase of 10% versus the first quarter 29 team.
Net income was $5.4 billion in the quarter.
Driven primarily by significant hedge gain which I will review in deep are detailed on the following page.
We maintain solid momentum in each of our segment, even not too faced headwinds due the latter 32 quoted.
Operating earnings were up at a D. And then a retirement segment, primarily driven by higher fee type revenues, a new basins activity across the business most wanted.
It's yesterday and improved 11% year over year.
Group retirement increased inflows by 20% driven by growth in both first year country you ingredients.
Maybe had its strongest retail growth since quarter Edward.
Oh were $24 billion.
And then protection solutions, we continued to drive gross premium growth you never employee benefit.
All in all it was another strong quarter for equitable.
Invited to current social and economic environment, I mean, certainly present challenges going forward you are navigating the uncertainty on strong hooting, thanks to the resilience of our balance sheet and business model.
Turning now to slide seven.
I'd like to reviewed the walk from net income to non-GAAP operating earnings.
This slide perfectly illustrates the disconnect between the accounting treatment of insurance assets.
Liabilities under U.S. GAAP.
As I previously mentioned the hedge gains of $20 billion simply reflects an increase in our economic assets to covert economic viability and should not be computer excess cash.
Included in the first quarter net income results.
$5.4 billion were significant noneconomic items related to be a product features driven by Jim XP hatching reimbursement interest rate assumptions and nonperformance risk.
In light of the decline in interest rates this quarter, we realigned our long term GAAP interest rate assumptions to grades from the current spot rate to two in the quarter percent over 10 years. Following the five year historic average for the 10 year Treasury.
This change resulted in on the favorable impact to net income 1.9 billion donors more than offset a year to date economic interest rate hedge gain.
<unk>.
Resulting in a net impact proximity to food won't be Oh stocks this quarter.
I, reflecting the interest rate accounting impact today, our GAAP financial results.
No too fast be targeted improvements implementation and importantly, more closely aligns with our economic model.
Additionally, we saw a significant impact this quarter related to nonperformance risk due to widening credit spreads.
This measure which considers our credit agrees impacts the calculation the estimated fair value of liabilities.
Additional context shred it spread tomorrow, we would expect the opposite impact.
To reiterate this impacts during the quarter Hello to illustrate precisely why we believe operating earnings it's the best proxy for underlying outperformance.
Equity sharply declines in interest rates fed into first quarter, our adjustment was positive in line with our expectations and previously communicated guidance.
Finally, although treatments to net income this quarter primarily include impacts related to the realignment GAAP interest rate assumptions in our protection solutions group retirement segment on taxes.
I wouldn't I like to highlight our capital and liquidity position outlined on slide.
As Mark mentioned earlier, the challenging economic environment. This quarter has truly allowed us to demonstrate the strength and resiliency.
<unk>.
Last quarter, you announced a renewed minimum capitalization target, 375% to 400% RBC this quarter, despite the S&P falling 20% and U.S. treasury rates, reaching historic lows, we closed the quarter with an RBC ratio for 52 for 75% continuing to.
Remain well in excess of I want minimum target.
Do you think Tc 98.
Oh Retching talk if the economic liability.
She wants to forwards girl <unk> interest rates compared to the statutory framework, which relies on a 3.5% reversing to mean assumption.
Because you have fully hedged on interest rates year over hedged on the statutory basis.
This does not imply that to be have more exits copy rather the increase in assets matched the movement you never economic liabilities.
The results the interest rate hedge gains protected that were RBC during this highly volatile quarter.
In terms of liquidity.
Well diversified source it has to further fortified our balance sheet.
That's the end of the first quarter cash and liquid assets approximately $1 billion at the holding company above our 500 million minimum target.
I've got reinsurance company cash and liquid assets are nearly 7 billion as the result of hedging to economic liabilities.
This is not 50 because of competition I think the stocking economic liability.
Between ongoing quarterly distributions from Milan Bernstein, and the ongoing life company to Imogen, we anticipate mid year, you know better position to continue generating strong cash flow from our operating entities.
Our strong position is further enhanced by the addition of liquidity levers to be already happened plays including 4.4 billion dollar itself credit lines, and 1 billion contingent capital pickups.
The first quarter, we returned $274 million to shareholders, including $69 million to Coulton big cash dividend and doing on 5 million share buyback.
In addition, we intend to increase our quarterly dividend by 2017 cents per share payable in the second quarter.
As a result of our financial strength and catch rate generation, Our company management program remains on target.
<unk> <unk> equity markets, our sustained at current levels through year end expects to continue to de lever on the 50% to 60% target and Rachel.
Moving to every investment portfolio on page nine.
Want to continue to illustrate how a risk management framework has placed us in a strong position to extend a wide range of adverse unsecured credit scenarios like did maintaining a robust copy position.
We take a conservative approach to managing a return to account.
Typically managing risk and investing in a diversified mix of high quality assets.
[laughter] quarter end over 70% apparel portfolio look invested incorporate some treasuries.
98% of our fixed maturities are investment grade.
In average portfolio, writing off a too.
Our corporate bond portfolio, how can I bridge credit rating and three and it's very diversified across geography and industry.
Leaving us with limited exposure to challenged sectors, such as energy and transportation.
Our commercial mortgage loans are characterized by high quality cannot treat located in major metro area with very complex borrowers, representing approximately 11% and fiber over unfortunately.
You also have limited exposure to alternative.
Proximity to present, the sovereign Miss Unfortunately, which are highly diversified across strategies geography vintage is.
Finally, we have limited investment in structured securities, including approximately 1.5% books, you know exposure and zero percent in CMBS.
And I'd be comp no deployed depth magnitude well duration of impact the current tried to 3%.
You can say that looking out to portfolio keep the length of historically I see my then we feel confident that to get ready to parents.
To illustrate this point you show here to stress scenario wrong on that investment portfolio, reflecting people, great and ratings migration observed during the 2008 financial crisis.
Leveraging two different methodologies.
Run against these estimates that you called losses in a 2008 type scenario, assuming no offsetting management actions could result in up 250 million in losses in the first year.
And up to 430 million over three years.
Hi, most industries scenario is June 2008 stress levels resulted <unk> to evaluate a deep stress scenario that assumes impact that got two times more severe than 2000.
On the this deep stress scenario, what country losses would be 300 million, the first year and up to 860 million over three years.
Why did it triggers almost insignificant it's important to contextualize them with respect to the company's balance sheet cash flow and earnings problem.
Evaluating the impact of both default and migration on recurrence copies can be estimate accumulative, you're 77 points impact to our RBC ratio onto the stress scenario.
And 144.3 year impact on the deep stressed scenario.
Even assuming no equity market recovery from April 11, we would still expect the business to generate cash flows translating to 60 RBC points in year two three.
Totaling an additional 120 RBC points before David them to deal with them.
Given our current RBC ratio for approximately 52 for 75 consent.
<unk> April former RBC was approximately 392, 520% onto these told the range of stress scenario.
Painting, I would deem it didn't capability and capitalization mix, that's off the companys, 375% to 400% minimum RBC targets.
Also as a reminder, weaver and early adopter off the N.S. you'd be a reform, which utilize you see more conservative RBC calculation referenced here versus those who have not adopted.
Well, we recognize that no two crisis or shocks or the same industry or certainly not immune to losses.
Yes, defensively positioned drone makeup is like and very prepared to both protect our balance sheet and capitalize on unique investment opportunities within our risk framework.
And then I'll have to called over to Nick to shed more light on how the businesses operating in the current landscape.
Thank you honors.
You saw we had strong momentum in the first quarter, but we now face very different environment.
We remain steadfast focus on three areas outlined here on page to.
Guiding our clients through these volatile times and adapting our business is to support them.
Magnifying our outreach to the communities, we proudly serve and as always taking care of our employees ensure either well be.
On the first pillar, we've been pivoting or business processes, leveraging our remote capabilities to serve our clients.
Our affiliated sales force 4300 advisors nationwide <unk>, providing advice directly to roughly 3 million Americans.
That helps pandemic has generated increased interest in protection products.
We have implemented refined coal bid 19 underwriting policies modifying the need for a base of bloody fluid requirements, while deploying new national and state policy guidelines on premium forbearance.
On our second pillar magnifying or outreach to the communities we serve.
Americans daily lives and fundamentally changed and we have launched several programs to help.
The loss of peace of mind, social connectivity and increased family demands are taking a toll on people's mental well be rapidly such as our plan. What you can program. We are helping people pull through this difficult period by planning new norms and rituals. In addition, as a firm.
Active in direct release Ashland's donating supplies, the local medical facilities and committing $1 million to help community activities, which keep kids learning detail hungry and support center for disease control activities finally, ensuring our employees can delay.
Well on our mission, while remaining say is a critical priority, we see advisors and clients working remotely using our full suite of digital engagement processing and servicing tools to ensure access to their financial assets awareness of the policy benefits and relief Act.
Yes, we expect this digital amplification to open up new opportunities for the future.
As Mark mentioned this is what our mission to help American secure long selling lives comes to the for fun and I'm very proud of the way our teams have responded.
Our business model remains robust and adaptable driven by the three factors outlined here on page 11.
First our products remain profitable and in demand.
Over the past decade innovation in designing Brazilian products anchored in economic realities has been a core.
Today, we are the market leader structure to new games, providing upside potential downside protection, helping clients in these volatile markets.
Well in the protection side, we have a robust product portfolio focused on capital light sectors like you well to address enhance mortality concerns.
As Andreas highlighted we have been a pioneer in taking meaningful product and enforce actions drives better risk adjusted returns for our shareholders thing clients.
Next our distribution size and routes provides privileged ways to access clients.
Equitable advisors are affiliated sales force gives us direct access to end client needs and behaviors.
Many volatile times, just provided stable profitable growth as an anchor tenant in driving new commercial solutions and pivoting or product mix.
In parallel we have the deep third party distribution partner network of over 1100 flow.
With leading positions in key channels, which cannot be quickly replicated.
Finally, we have leadership scale in Brazilian segments.
We have built scale and focused market segments. We're the number one provider of public sector with firemen solutions for kindergarten to Twelveth grade educators, which we believe is more immune to economic downturns and as a leader in the retirement market as the number two variable annuity player we are well.
Position to help people prepare for their next likes chapters, especially in these volatile times.
Well, a b given its global footprint and broad investment offers provides seed investment expertise.
For the discrete month of April or work activity indicators remain solid.
Correct portable lights demand for advice remained strong.
We've seen a 20% increase in client engagement activities, while new business flows in April are running at roughly 70% of normal levels.
Net flows are stable supported by the recurring premium aspects of a business lines, while our in force, which represents 95% of our revenues has not experienced meaningful outflows.
Sadly we have seen initial kobin related claims which through April were approximately 40 million gross for accounting for any offsets for our subsidiary A.D.. We saw positive net flows through April following first quarter outflows concentrated in March.
In summary, our business remains resilient.
Our commercial teams will continue to pivot to ensure we deliver for clients and communities. During this period.
With that said I'd like to hand, the call back to Mark for closing comments.
Thank you Nick Thank you and as.
Before opening two questions I'd, just like to close.
By expressing my pride in these results.
I'm proud of how the people of equitable have rallied together during these challenging times, but most of all I'm proud of what the team has done over the past decade.
To build a resilient balance sheet and robust business model, ensuring that equitable continues to be a force for good.
Providing American families with advice and solutions.
Help them secure their financial futures.
Whilst providing all shareholders with attractive return.
On their investments.
Now I'd like to hand, it back to the operator for questions and answers.
Certainly at this time, if you'd like to ask a question. Please press star one on your telephone keypad at least Greenspan with Wells Fargo. Your line is open.
Hi, Thanks, good morning.
First question on mentioned.
40 million.
Equal from Jose can you just provide a little bit more color.
Where you're seeing the losses on and how we should think about hitting your segments I'm assuming.
The being protection and then just how we should think about modeling that you know for both April and then going forward for the balance the here.
Thanks for your question a at least a Anders will you deal with that one please.
Yeah, No of course, Mark. Thanks, Eddie is good morning, So and as Nick said, you saw about 14 million drops Clinton.
Through April.
We take decide she's can only the lower end of consumption or about 200000. Thanks.
Oh, good U.S. and translate with what we know today to save a lot of uncertainty, we would probably get to somewhere between a 100 230 million net impact and guarantees that that's kind of range I can give you right now, but that's getting a lot of uncertainty around.
Okay. That's helpful and then my second question.
You guys mentioned.
New business was around 70% of normal I'm, just hoping for you know if there's any more color you can get in terms of thinking about.
Yes trends going forward beyond April and then can you give us off like a williston.
Right, that's new business, how much capital that could potentially free out.
At least wanted to talk just a set the context selloffs, Nick just to talk quickly about the segments, and then and as Ken and I got it and obviously.
It would not be prudent all this at this stage to give any full cost going forward. We it's just too much money going on.
Come from Nicks.
Comments in the when looking at new business, obviously, it's important over the long term.
But in the short term certainly for 2020, 95% of revenues will come from policies. We had in force at the first of January the book is.
Behaving well recurring premium so strong we're not seeing any outflows or anything like that so in short term revenues look.
Okay running at about 70% as Nick said, we think that's absolutely remarkable because this was the first month of social distancing huge up people to help people normally operates so we're very very happy with what we've seen enough for this month and the adaptability and the ability to pick.
Nick Oh spoke about is very very evident as a as we say, Nick just give us a little bit the color across the across the.
Segments, something that will help.
Sure.
First for individual retirement.
85% of or sales are coming from product lines like us see us sort of structure to annuity nodes.
As you saw we were up 11% last quarter.
So we've got confidence given the upside potential in downside protection that it's right for these volatile times.
Overall equitable advisors are affiliated sales force continues to give us access directly to clients needs and their behaviors. So for IR, we're running about 70% of a total capacity for.
Global business flows in the group retirement space or the public sector remains immune teachers are fully employed an extremely active they're doing to heroics things and distance learning is as I can tell us with three kids are not surprisingly, we did see a decline in new teacher applications.
As we continue to focus on or existing billion educators through this period.
And given as was mentioned given the the renewals and recurring nature of retirement solutions.
Flows remain solid.
On protection, we are seeing in a enhance interest in protection type products, we have pivoted towards our express our underwriting for term and modified our.
Some of our policies capping the face amounts.
That we will provide a without plugs in fluids I'm. So the range is within that 70 would be.
You know down 60% in certain lines.
And to about 10%, but it's still unknown, we continue to focus on our clients and we believe that given or our remote outreach and magnified or voice Ah that's going to.
Presents and position us well to emerge stronger on the other side.
I understand you want to.
Ship in there.
Yeah, just quickly on your question about the impact from saying something about as we said before I mean, the balance sheet is very strong and I don't think think that that that the sales and obviously, we want me to say a different have no impact on the on the balance sheet disappeared.
Okay. Thank you for the color.
Tom Gallagher with Evercore Your line is open.
Good morning.
Question on.
Hi, Andrew if you're over hedged.
On the new statutory framework, because that using mean reversion and you're not.
Shouldn't your RBC ratio have gone up in a quarter where rates plunge like they did.
And and and because it didn't is the difference due to the use of treasuries as part of the hedging program.
Yes, so Tony.
Look I think there the obviously as you said I mean I'm uses the newly versions. They then going back between office and can be hedged with this will recur Toby overhedged tutorial on interest rates, but that's you say news.
And I were treasuries really to hedge about about 20, 25% of it. So it's about 2 billion dollar against that we have that didn't flowing through the statutory and embedded in some people coming to the RBC.
And then as you know I mean, we don't hedge to base product will be up exposure on the phone debates. He said that that that's available I think the but she's very strong them RBC. He doesn't reflect the and pitches that go to the general account.
That doesn't mean that makes sense so.
What would happen if rates continue to go down and it would it.
Negatively impacted your RBC.
With the plan B to.
The shell and Rebuy Treasury Securities to book the gain.
Or how should I think about that.
So first of all I mean, as we said you know we hedged to the economic and liabilities and I think that's that's foremost stuff that's our target.
Then I said a poor she goes through the channel.
So I don't expect that this win them.
This will change I think that's that's a very strong.
We have I don't give you that projections.
If you see that that can guarantee you that we manage felt them to make sure that.
If I were target.
Got it and.
I know New York has implemented their own variable annuity standard.
Just in light of what what they've announced are you still confident in getting dividends out of your New York subsidiary on on a consistent basis.
Despite that rule change thanks.
Yeah, right look as we discussed and getting to the laws pulling them a quarter ago I mean in New York House, If you read out it's it's a nuclear war you.
We discussed at that time assets, where that I think in the short term, it's not that impact way, but they do.
Can become problematic in particularly if markets go up and right now we think it said the opposite so we like them to short term, but it's something you have to work with New York and to make sure that you have sustainable and dividends even into long term.
Okay. Thanks, and then just if I could sneak one more in the regarding your <unk> reduction in future interest rate assumptions for GAAP accounting is that going to have a depressing impact on baseline earnings.
From this point forward I know, there's probably some offsetting items there because there's a lower DAC asset but.
Probably a lower the lower roll forward, if discount rate I presume would placing pressure on non-GAAP earnings.
Right. So maybe first and foremost I think it's important that we have prudent assumptions and <unk> you know in our in our accounting claim or even though I mean, as we've said before we managed to the forward right, but the and it's got there's no. The fair value Kramer. That's why we I think we used to very prudent and interest rate assumption going forward and this is just couldn't <unk>.
And reflecting reality now the biggest impact is really on protection solutions because it goes up the accounting change protection true solutions pulls back into loss recognition that makes protection solutions more wallet tight.
But I think that's really be the issue.
What is important here as well I mean, it really brings us just closely superfast be targeting.
Framework, which we and support than as you know.
Okay. Thanks.
[noise] Suneet Tonight with Citi. Your line is open.
Thanks, I wanted to go to the 50% to 60% payout ratio just to make sure I heard the prepared remarks correctly. So I think it said something along the lines of that assumes equity markets are stable to April. So if we go back to say March 30, onest equity market levels, which.
Perfect and impact on that payout ratio.
Hi, syndicates, Mark let me.
Let me deal with that one yes, as you said, we expect to achieve our target payout ratio for the but you know to two conditions firstly.
As always that we can maintain strong management of the capital and liquidity in particularly that we can.
Let me come true economic liabilities and so it's also good debt portfolio continues to produce strong cash flows hedgings working very well and actually that's in the hands as capital ratio so healthy.
And secondly, obviously, we've got all clicks somewhat normal economic conditions and a.
For the past several weeks and certainly back in a in March time, it certainly wasn't normal conditions, but markets is slowly come back.
And we've adapted and under current conditions, we should be able to meet that target cool pool.
2020 on the on the payout ratio.
Right I'm, just trying to get a sense of is that if we do go back to March 31st equity market levels, how much of an impact could that have on that payout ratio.
I think the only thing we can give you is that sensitivity of what we said to earnings and that is if markets are down 10% for full year that would hit earnings 550.
You can make you on the assumptions format.
Okay and then the second question was on the AB stake I think honors earlier in the are you talked about a review of the stake and getting back to investors at some point in 2020 is that still underway and just curious if the impact of Covidien all the uncertainty that's causing is.
Going to change the timing of any announcement that you guys make might make on that.
Certainly yeah.
You'll memories correct. We didn't we did in did say that but as you indicated your question in quarter. One has been really focused on.
Maintaining the strength of the balance sheet secondly, supporting our people are now an appliance and then as as Nick outlined.
Adapting the business model. So I think as we've said before and they'd be looked like what we're comfortable with 65% et cetera.
We will we'll get to look at it but you're right. We haven't done anything in this quarter one it it's certainly not out poverty.
Okay got it thank you.
Thanks.
Ryan Krueger with KBW Your line is open.
Hi, good morning.
As you mentioned that and your your advocating for for the NFC too to change the mean reversion interest rate assumptions.
I understand I guess can you just give us any update on.
If you if you think there's a chance that that would happen and that they do they do kind of change the current methodology.
Yeah, I would love to do so Ryan good morning, but then I think this is Jim hotels with my Harrison Street to predict then with regulators are doing but look I again, I think what features advocate here and making sure that we [noise].
Appropriately.
By the way, our liabilities and make sure that on both sides of the bottom she'd be have a fair value approach I think that's the only way.
Fair representation.
Liability can be connection.
Okay, so going forward and that's really want to be advocating for is it understand is it under GAAP and that's why the news our economic model, which is.
I cannot predict floods regulators are doing I consistent.
[noise] advocating on direct.
Got it that on a 100 to 130 million dollar potential Kobe claims for 100000 depth that seems kind of high I guess is that that because you have a higher market share in the and the New York Metro area and you you adjusted yes, it to account for that.
No, but what they did right and it's really we just talked it took home data that you see coming out so.
Oh.
Oh, it's in Ukraine. So.
He just try to meet that back to two hour.
Worked Julio you did very hard right now to do.
To do that because you know this many factors that have to go in here no. It's the you'd see a cheap it's the reaching its just the ocean.
Environment people, losing so that's why the gift is range I can to complement the range, but I I look I'd tell you. This is not a concert.
Okay and can deadly.
Got it thank you.
Again, if you'd like to ask a question. Please press star one on your telephone keypad once again that star one on your telephone keypad.
I like Scott Goldman Sachs. Your line is open.
Hi, good morning [noise].
My question is just on the liquidity position in the operating company I mean, it sounds like that went up pretty substantially. So I was just interested if you could talk about that and you.
You know if it if it's related ought to reallocation if there's a if we should expect sort of a a drag on the yoder, earning or if it if it's kind of incremental assets related to the hedge program. If there's some extra income it will be produce there just just help us think about that liquidity position, how it'll affect things.
Hi, good morning, Alex and [noise].
Yeah, right, absolutely think we seem to be happy in the hedging program in <unk>.
And in place you had another penny closing in March and so this additional liquidity is really coming from the.
Hedging programs like additional liquidity.
It's really from the cash settlement with most of them are with this and we want to keep that flexibility right.
Let's see minimum of uncertainty that's why do you have a much higher than.
And then usually so it is incrementally it smells because when they could they did that.
Got it to no no go forward drag from that.
Right Okay.
Okay and then next question I had it's just when I think about loss recognition in protection and the comments that were made around just increased volatility with protect you know I understand.
You know will that.
Sort of changed the way that the Kobin 19 impacts impact your financial statement and what I mean by that as you get your range in terms of like what the incremental claims could be but is there anything about being in loss recognition in that volatility that that occurs from that that they could you know caught caused the swings related to the cobot 19 claims.
To kind of coming through in an abnormal away.
Yeah. So as we've said I mean, we have been back into lots recognitions really driven by the interest rate assumption change that's the main driver.
Going forward, so that's what it's going to create them and volatility.
The future and just just to remind you know this volatility to go away on the entity I had the most recognition clinically change and he won't be in that that's claim looking anymore and look at volatility in volatility is gonna be impacted them anything mortality is one of them, but I wouldn't see but that's the biggest glenn.
Got it and maybe figure that's one last one on dividend timing I think you guys usually take that out mid year any plans to make that more consistent over the course of the year.
Yes, as we told you I mean, usually that's Uh huh.
The June July framework, that's and you can say something.
That's going to crack.
Okay all right. Thank you.
Thank you Jimmy Buehler with JP Morgan your line.
Hi, Good morning, So first I just had a question on.
Your assumption review and you took down interest rate assumptions by almost 120 basis points to a fairly conservative level I'm, assuming you're not lending on adjusting again as you go through your annual review process and CQ, but obviously as we get to 2020 do based on currently.
With you'll have to have another adjustment, but should we assume that if you were to bring that down further the impact on your results would be fairly proportional than what it was or does it increase overdue says you're going to lower and lower levels.
Yeah. So so so Jamie as we said I mean, you adjusted the assumption so.
Pretty significant it did this quarter and I think we probably the most conservative and company right now when it comes to interest rate assumptions.
The <unk> the way, we do if we actually take the five year average the low interest rate curve and.
Take that after long term assumptions grade to the over 10 years, I don't see too much and volatility in that.
But you're right I mean, there if rates stay where they aren't they need has to come down to two current level.
End of today, so that's that's.
Yeah, I know, there's a lot the come down or I'm, just trying to see if someone were to guess the impact on your results would it be fairly consistent with what you like 100 basis points from the 45 to you brought it down to 25, if you weren't to bring it down another hundred would it be some somewhat similar or does the impact into these as it.
Declines as the assumption declines to lower and lower levels.
Yeah, I'm not I'm not sure it's going in in right you have to differentiate between the the protection solutions piece, and then I'm glad I think the rest becoming more linear protection solutions.
Mainly because you're going to loss recognition for that shouldn't be writing down back.
So [noise].
But I think there's of course as the first good stuff.
But we haven't done notice that called confirmed.
<unk> normalize activity littering d. or do you expect to see weakness in your sales because other companies have similar products or not really.
Jimmy it's more <unk>. So we've had competition here for quite a few corners now maybe if I had to make to explain <unk> top line is not just product is on its distribution, but let's Austin Nick to give some colors the distribution power we've got behind this product.
Great. Thank you, yes as marks a book, we've where the innovator the product where the market leader.
We've got insurance distribution and we believe.
Which provides upside potential downside protection.
Is really notice during these volatile times.
Okay. Thank you.
This concludes acuity.
As well as the equitable holdings first quarter 2020 earnings call. We thank you for your participation humane now disconnect.