Q2 2023 Equitable Holdings Inc Earnings Call
Ladies and gentlemen, thank you for standing by my name is Bob and I'll be your conference operator today.
This time I would like to welcome everyone to the equitable holdings second quarter earnings call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session.
If you'd like to ask a question. During this time simply press the star followed by the number one on your telephone keypad.
If you would like to withdraw your question. Please press the star followed by the one once again.
Thank you I will now hand, the call over to Tom Lewis Equitable Holdings Investor Relations you May begin your conference.
Good morning, and welcome to Equitable Holdings second quarter 2023 earnings call.
Materials for today's call can be found on our website at IR Dot equitable holdings Dot com.
Before we begin I would like to note that some of the information. We present today is forward looking and subject to certain SEC rules and regulations regarding disclosure.
May materially differ from those expressed in or indicated by such forward looking statements.
So I'd like to refer you to the Safe Harbor language on slide two of our presentation for additional information.
Joining me on today's call is Mark Pearson, President and Chief Executive Officer of Equitable Holdings Robin Rajiv <unk>, Our Chief Financial Officer, Nick Lane, President of Ecuador, Financial and built Seamers Alliance Bernstein, as interim Chief Financial Officer Controller, and Chief Accounting 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 measures reconciliations of these non-GAAP measures to the most directly comparable GAAP measures and related definitions may be found on the Investor relations portion of our website in our earnings release slide presentation.
And financial supplement.
I'd now like to turn the call over to Mark and Robin for their prepared remarks.
Good morning, and thank you for joining today's call on May 10th we held our Investor day and presented our strategy and go forward guidance for the next five years.
Today, we will provide both our quarterly results as well as progress against our strategic initiatives.
Highlights from the second quarter on slide two.
Equitable holdings is unique.
We have integrated advice retirement and asset management businesses.
Bring us to deliver superior client returns and participate in all parts of the value chain.
This quarter.
non-GAAP operating earnings were $441 million.
A $1 17 per share.
Adjusting for notable items in the period, which included lower alternative returns and elevated mortality non-GAAP operating earnings per share was $1 27.
Which is up 2% compared to prior year quarter.
<unk>, 5% compared to the first quarter of this year.
We've had a record quarter in retirement with record $1 4 billion of net inflows.
In asset management.
Reported net outflows of 4 billion, which includes $6 billion of pre announced low fee redemption in April with a return to positive flows in May and June as demand for fixed income offerings offset pressure from active equity outflows.
Collectively our businesses have delivered approximately $900 million of cash generation to holdings here to date.
Including a $600 million dividend from our insurance entity in July .
Given this progress we are confident in our ability to achieve our 2023 cash generation guidance of $1 $3 billion.
Our capital ratios remain resilient with a combined insurance company RBC ratio of approximately 425% to 450% as of quarter end.
We also continue to maintain financial flexibility at holdings with $1 6 billion of available cash.
We returned $304 million to shareholders in the quarter.
Including $226 million in share repurchases in line with our enhanced 60% to 70%.
Payout ratio.
We have taken meaningful actions of the last five years to optimize our capital structure.
And now over 50% of cash flows come from non insurance regulated sources today compared to only 17% at IPO.
With the completion of our internal reinsurance transaction this quarter, we further diversify and improve the stability of regulated cash flows moving forward.
We will provide more details on this in a few minutes.
While it is early days, we can report good initial progress against our growth strategy in both our core and adjacent businesses.
Our new wealth management segment, we continue to see demand for advice with one 3 billion of net inflows in the quarter.
Operating earnings this quarter were up 75% year over year, and 30% compared to prior quarter.
Benefiting from higher interest rates on cash sweep accounts.
Today out of our forecast of 100 equitable advisers.
700 wells to generate three times more revenue than the average advisor.
In private markets.
Continues to grow AUM now 61 billion.
13% following the acquisition of called out last year.
Which is behind a 2%.
The fee rate improvement at AEP.
Strategic initiatives, all on track, including productivity savings and generating incremental income from our general account.
We're very pleased with the reaction to our Investor day, and we intend to track progress against the guidance provided at least twice a year.
Turning to slide four.
Our growth strategy is built on a competitive edges.
Which enables us to one capture greater margin, who premier investment capabilities.
To protect policyholders and ensure cash generation.
Fair value economic management and three.
Leverage a large diversified distribution platform aligns across equitable advisers.
Private wealth and third party partnerships to drive profitable new business.
All of this is underpinned by our track record of execution.
We are focused on defending and growing our core businesses.
Ailing adjacent businesses and seeding future growth all while ensuring we are a force for good in the communities in which we live and work.
We have defined success through our new financial goals to.
To increase cash generation by 50%.
$2 billion by 2027.
To deliver on our increased payout ratio.
60% to 70% of non-GAAP operating earnings and to generate a 12% to 15% non-GAAP operating EPS annual growth rate.
2020.
On slide five I will highlight some early progress as we execute against our strategy.
Our first priority is to defend and grow our core retirement and asset management businesses.
These today drive over 90% of free cash flow generated.
Our core retirement businesses generated approximately two thirds of our earnings today.
Year to date core retirement, AUR is up 5% and with strong new business activity and current market conditions, we generated over $200 million and value of new business through the half year, putting us on track for our full costs at 2023 level a $400 million.
As we've seen from this quarter's earning cycle. This is a more challenging time for asset managers at.
At AAD.
AUM is up 7% year over year and margins are down 100 basis points compared to the prior year quarter.
Reflecting lower Bernstein research services revenues and lower performance fees combined with a higher compensation next year.
We expect the close of the Bernstein research joint venture with soft gel in the first half of 2024.
And once the consolidated.
This will improve <unk> margins by 200 to.
250 basis points.
Equitable's relocation of its headquarters is on track, helping to secure $30 million of savings on the first of January 2024.
The move to Nashville is now complete and in Q1 of 2025, we expect to realize the full run rate benefit from the completion of a $75 million annual savings initiatives.
One important synergy we have is the use of the general account to help build a faster growing high multiple alternative strategies and alliance Bernstein.
To date, we have deployed seven 5 billion of our initial $10 billion capital commitment and in May we announced a further $10 billion capital commitment, bringing the total to $20 billion.
The second element of our strategy is to scale adjacent businesses.
Smaller businesses, where we have the opportunity to grow at a faster rate.
Early contributions from the <unk> acquisition has been positive.
And private markets now constitute 13% of year to date asset management revenues at AEP.
ABS institutional pipeline of $14 billion.
As a fee rate that is three times the channel average with private alternatives representing over 80% of the pipeline fee base.
In wealth management, 7% annualized organic growth in the quarter and strong markets supported a 6% increase in <unk> compared.
Compared to Q1, now totally $80 billion.
This business provides good operating leverage given our technology platform is outsourced and our long term focus is to grow fee based advisory assets.
Please turn to slide six.
In order to ensure long term success. It's important we continue to invest through the cycle and seed businesses that we believe will provide significant opportunities for the future.
In asset management, we see opportunities to build on <unk> global footprint, leveraging the strong brand recognition in Asia.
And we are in the final phase of licensing agreements, which would enable us to serve chinas large and growing domestic market.
<unk> is also uniquely positioned to leverage over 40 years of expertise managing insurance assets benefiting from the relationship with equitable.
To grow third party insurance AUM.
Today, Matt.
Manages approximately $60 billion.
Our third party insurance AUM. In addition to the $115 billion managed for equitable.
Top quartile within our industry.
Turning to slide seven.
A product of our strategy since L. I P. O is to further diversify both earnings and cash flows.
Orienting our business towards lower capital high value statements.
<unk>, we have meaningfully shifted our business mix, the nearly 30% of earnings associated with a legacy business to only 8% today and we expect its contribution to be less than five per cent of total earnings after 2027.
I will now turn over to Robert to provide additional insights into the quarter Robert.
Thank you Mark.
Turning to slide eight I'll touch.
Touch on segment and consolidated results for the quarter.
At March is highlighted we continue to execute are capitalized strategy, which you can see in our improved cash flow and business mix profile.
Our second quarter non-GAAP operating earnings adjusted for notables at 480 million.
So our wealth management business, having a similar way to our legacy business.
Highlighting the different trajectories of those businesses.
While our capital like retirement and asset management businesses continue to grow.
Let me go deeper on the segment results first before turning to consolidated results.
Our core retirement businesses account for two thirds of the earnings mix. This.
This is led by strong earnings growth and individual retirement.
10% year over year, which is predominantly driven by the outperformance and our flagship at C. S products.
At T. S has continued to benefit from higher yields and industry, leading south enabling us to January higher spread income.
In total individual retirement had record sales of 3.6 billion and record nap loads of 1.5 billion in the corner.
Group retirement earnings were down year over year, which was expected you to have reinsurance transaction that close at the beginning of the fourth corner.
Taking that into account the business performed nicely led by net inflows anarchy to 12 tax exempt teachers market.
Protection earnings were 24 million hired in the first quarter, but still lowered into longterm expectations. As we continue to see mortality volatility, which I will touch on in a few moments.
Adjusting for notables protection solutions are in $77 million in the quarter.
Across our three retirement businesses, we have generated over 200 million a value of new business through the first half of the year.
Putting us on track for the $400 million for the full year guidance that we provided at Investor day.
Moving to our at the management business Alliance Bernstein generated 15% of the earnings makes this quarter.
Doing a chair to higher fee strategies in private markets, which is now 61 billion of a U N.
Additionally, the institutional pipeline is now 14 billion, which is up 10% sequentially. Even after some funding took place in the first quarter.
We are also executing on our strategy of growing in Asia and the Muni.
<unk> had $1 billion net inflows in the last quarter.
Our emerging wealth management business January to 7% of the Nick this corner benefiting from higher rate and our cash sweep accounts, improving earning by 11 million year over year and strong insurance sales, adding 12 million a distribution fee revenue year over year.
This again reflects the differentiation of equitable advisers distribution and decline demand for holistic advice are offering which includes both investment and insurance as asset classes.
Lastly, our runoff legacy business now represent just 8% of earnings this quarter.
Second quarter net outflows were $569 million in line with expectations.
Over the coming year, this business will release capital and contribute cash generation as dislike runs off.
Now looking at our results in a consolidated basis.
We reported non-GAAP operating earnings up $441 million, and a quarter or $1.17 per share.
Which is up 22% compared to the first quarter, but down 5% year over year.
After adjusting for 39 million of total after tax notable items non-GAAP operating earnings for $480 million or $1.27 per share.
2% on a comparable year over year per share basis, and 5% compared to the first quarter.
Results were impacted by net investment income notable items $38 million.
Switch draping predominantly by alternative returns that were positive in the quarter, but below our longterm expectations.
Our portfolio experienced gains in traditional private and growth equity strategies.
Which were offset by declines in a real estate equity investments.
Now, let me speak more to the heightened mortality we saw in the quarter, which resulted in a notable item of 53 million.
Discontinue the trend of higher volatility from the continued shift in COVID-19 at the transition from pandemic two endemic.
Civically, we're seeing higher mortality and the older age insured population, which we believe is a pull forward a future claims.
This is consistent with what we're hearing from our Rangers.
In a typical environment, we would affect one standard deviation in mortality results, which would mean, we would have a range of 50 to 100 million in earnings with 78 5 million being the center point.
Given this call forwarding claims we would expect to be on the lower end of the range over the next few quarters, which means we would point to a $50 million to $75 million of earnings as a near term guidance for the segment.
However, as a result of the pull forward of increasing near term claims we expect to exceed 75, knowing over time as claimed are reduced in later years.
It is important to note that this will only change our short term gap expectation for the next few quarters, not our statutory or economic balance sheet and they're more conservatively position.
Mean, there'll be limited impact on our cats generation guidance and if this trend continues protection solutions will have higher free cash flow conversion rate.
And now moving to GAAP results, we reported 759 million a positive net income in the quarter.
This demonstrates our ability to generate positive <unk> income under L. D T I, which brings accounting closer to fair value for our industry.
As a reminder, that will enable us to remain eligible for inclusion in <unk> as we know meet all criteria.
While inclusion isn't something we can control it does provide significant opportunity for our shareholders.
Finally, let me turn to what we can control and that's the execution of our strategy.
We continue to progress against 110 million yield enhancement program and are on track the cheap $45 million in incremental income by year end.
<unk> retirement business continues to benefit from higher risk adjusted yields due to strong fixed income underwriting capabilities from the lines Bernstein.
Additionally, productivity savings and equitable are on track for $30 million in annual fees by year end position.
Physician as well for 150 million expense target.
Turning to fly nine R Capital Management program has enabled us to consistently returned capital despite market volatility.
In the corner, we returned $304 million, which includes $226 million repurchases, resulting in a 9 million share count reduction.
Over the last 12 months, we have reduced our shared outstanding by 7% demonstrating the value of our capital return program.
Add Investor day, we increased our payout ratio to 60% to 70% of non-GAAP operating earnings.
Increase was driven vital mixed shift that we discussed today towards our capital light retirement wealth and asset management businesses and.
In addition to the Capitol optimization actions, we have taken the date, which I will discuss further in a moment.
In July we took in $600 million dividend out of the insurance company.
The remainder of the castle of this year will come from unregulated sources were nearly 300 million already collected today.
In total we have seen 900 million of cash flow upstream to the holding company.
East Cashflows support strong liquidity with 1.6 billion of cash up the holding company as a <unk> or 2.2 billion founded July dividend.
Additionally, or a half year combined RBC ratio was at approximately 425 to 450 per cent.
Reflecting are strong insurance company balance sheet.
As part of our strategy to optimize our capital position, we completed our internal reinsurance transaction in April which enables us to have to well capitalised insurance entities with RBC ratios above target.
Lastly, our first dollar hedging program maintain strong effectiveness throughout the quarter, despite market gain being driven by a select few sauce.
The success of our program can be attributed to our efficient product design.
With over 75% of underlying assets and passive embassies that are highly hedgeable and over 80 per cent of assets incorporating volatility management tools.
In summary, R capital position and balance sheet enabled us to create shareholder value through our capital return program, while position us for future growth in cash flows.
Turning to fly 10.
Al diabetes or in our internal reinsurance transaction, which is another milestone on our path of capital optimization to drive more efficient cash flow to the holding company.
Since I P O. We've taken several actions to increase the consistency of dividends to the holding company.
I'll also increasing our unregulated cash flows to be greater than 50% of the total upstream to the hotel.
These actions include first moving a b units out of the insurance company, bringing a dividend directly to the holding company.
Second or landmark legacy V a transaction with vulnerable, which <unk> the company and accelerated our legacy cash flows through a positive seating commission.
Third the creation of the investment contract with the retirement company, bringing the asset management fees straight to the holding company.
Fourth transactions with boats Swiss re and global planning to secure a longterm cashflows at a low funding costs.
A recent acquisition of car bound bachelors elite in private credit firm, which was funded efficiently with a b units.
And finally, the internal reinsurance transaction move the majority of our enforced out of our New York entity and into our Arizona Anthony.
This means that our insurance <unk> will be more RBC base and come from two different entities, therefore, diversifying our retirement cashflows.
Coupled with more than 50 per cent of our whole go dividends from unregulated sources like acid in wealth management type activities.
<unk> to the holding company will be much more consistent moving forward and they were at Ikea.
He's actions, we have taken allowed to progress towards no bathing or non your policies, which is expected to take place over the next few years <unk>.
This means that once you remove these policy from New York to Arizona, It will give us further flexibility for capital optimization.
Lastly, 100 per cent of our non New York business will be written out of our Arizona entity.
While New York is one of the most sophisticated regulators.
It does have some non economic element that we would like to avoid by shifting our new business.
Ultimately these actions enable us to enhance our legal entity structure into one that reflects a diversified financial services holding company.
We have cash flows from multiple capitalized businesses, enabling a consistent capital return program for our shareholders.
I will now turn to call back tomorrow for closing remarks.
Mark.
Thanks Robin.
Closing integrated advice retirement and asset management businesses delivered strong results this quota, including record net inflows in retirement and $900 million test generation today.
Giving us confidence in our ability to deliver on a $1.3 billion 20 twenty-three guidance.
Second a balance sheet and capital ratios remain resilient.
<unk> to a fair value management.
As a <unk> a combined insurance company will be C ratio of approximately 425 to 450 per cent.
Holding company cash at $1.6 billion.
More financial flexibility as we seek to consistently deliver on a capital management objectives.
Lastly, while it is still early days.
Think business model and growth strategy reinforced compelling and achievable 2027 financial targets.
We seek to grow cash generation to $2 billion.
Sisterly deliver on 60% to 70% payout ratio.
12% to 15% a P S growth.
With that we'll open the lines for questions.
Thank you at this time I would like to remind everyone in order to ask a question. Please press the start followed by the number one on your telephone keypad.
We will post so just a moment to compose the <unk>.
Our first question comes with a lot of L. Ellis Greenspan from Wells Fargo. Please go ahead with your question.
Hi, Thanks, Good morning, Uhm. My first question you know you guys. You know, we'll have 2.2 billion right.
Capital It at parent might following the July dividend that's obviously.
A very high amount above right the $5 million to $500 million minimum that you guys target. So could we you know see capital return pick up from here. Just how are you thinking about just you know what level you want to have it parent, giving chest volatile markets et cetera, and also relative to just perhaps pick up in the.
Level of capital return in the back half of the year.
Thanks for the question of <unk>, you're right. The 2.2 billion of cash flow with a strong position to be at as we sit here today and these volatile markets, where we still have uncertainty ahead of us but it is important to notice the benefit of these capitalized businesses that continue to kick up cash flows to the holding company and more.
And 50% of that is unregulated at this time.
No we want to be consistent with a capital return throughout the period and keep to our 60 to 70 per cent payout guidance. If you will.
Look into quarter on a reported basis, we paid out on the higher end of that guidance and even on a normalized paid out basis, we paid within that guidance of 60% to 70%. So uhm expect us to be consistent we think it's a good time to buy back our stock at these type of evaluations, but we're gonna be prudent as well given the uncertainty.
Environment right now.
[noise]. Thanks, and then you know with mortality Robyn you gave you know a lot of good color with what's going on within protection solutions Fine and you said right that he could still be elevated in the near term. So is your expectation that the level of mortality at least over the next few quarters will be within range of you know.
Be around 50 million or so that you guys saw this quarter.
Yes that is the expectation that we built in under GAAP results.
As I said it on the on the call we've seen the elevator mortality over the last few quarters and this is really a shift from COVID-19 pandemic endemic and it aligns well what we're hearing from the reinsurers. It did improve this quarter, but we're still seeing higher mortality netter older age insured population, which is concentrated into higher face value V U L.
<unk>. These are policies that we add on to bulk for 15 to 25 years. So these are good policies, which we collected a lot of fees from historically, but what we're seeing is predominantly a pull forward into claims which represents an acceleration of the claims that we would ordinary pay in future years.
So this is only a change in what I would say, they're short term gap expectation not anything to do with our statutory economic balance sheets.
We already hold the maximum reserves under gab, but under economic and statutory we can hold higher reserves for provisional adverse deviations, which we do and more <unk> more accurately reflects to pull forward of claims that were experiencing.
Four if this does continue and we see the short term volatility you're gonna see a higher free cash flow conversion rate. If this pull forward continues for mortality.
Thanks Robyn.
Thank you next question comes from the <unk> from ethical. Please go ahead with your question.
Good morning, you know just just a follow up on the mortality question.
And I I heard what you said so it sounds like this will not be a statutory issue from your perspective I either way.
But as we approached the three Q actuarial review.
Is there is there a chance you end up resetting somebody's assumptions.
For the gap reserves, and we get a charge and three Q.
I you know I I also heard what you said about the pull forward.
And the expectation that it will get better over time, but I guess, given the near term persistent adverse mortality is or should we have some expectation there could be a charge here on a gap basis.
No charge expectation on a <unk> basis, Tom nothing material that you should expect going forward. You know reminder, as I just mentioned we hold the maximum amount of reserves. So you can under GAAP rules for D. Z U L policies. So even if we wanted to hold more we we can't because by the gaff rules, we hold the maximum amount.
This is just to pull forward of expectation you shouldn't expect any changes material changes to the assumptions for mortality in the third quarter.
Gotcha and Robyn just to clarify this is <unk>.
Predominantly Z U L. This is not S. G well what are you seeing the the higher.
The worse than expected experience.
Correct view L. That's the majority of our very enforce S. U as you know as small for US we stop selling that in 2009.
Due to the economics of those products. So it's predominantly B U L. You know these are all policies that were in for 15 to 25 years. So they're just at the tail end of them.
Okay. Thanks, and one final one on this topic, if I could how much of your mortality block has the smoothed the counting under L. D. T. I from an 80 actual to expect a perspective versus how much.
Where the.
Immediate experience sketchbooks into current period earnings do you have a rough split on that.
Yeah, getting most of our D. L V T I really impacts the term in force, that's where you'll have that smoothing. That's a smaller part of our business is those are not capital efficient as we see them. The V. U L policy, which are good policies. You know 15 10 to 15 per cent irr's those at a policy.
Where do you see it's volatility come through and it's really just to pull forward based on what we see and based on what we hear from our Rangers.
Okay. Thanks.
[noise]. Thank you. How next question comes from the <unk> from <unk>. Please go ahead with your question.
Hey, Thanks, Good morning, I have a wealth management question, if you've got $200 million of annual earnings in 2027, Thank your quarter.
Annualized run rate is close to 165 $270 million. So it seems like you're barely ahead of pay so we just have the $200 million, but just curious.
Do anything is unsustainable in the current results or.
You are in fact running hesitate sir.
Yeah. This is Nick as you mentioned, we did have strong performance with positive net flows of 1.3 billion strong retirement sales their earnings growth is attributed to interesting.
<unk> sweeps from her growing C D. 's advisory accounts entire distribution fees like most wealth management peers. We've benefited from Verizon interest rates are going forward. We've provided guidance historically for every hundred basis point increase.
D F F. R. We would expect to capture 1.5 on revenue either increase or decrease relative to a change on that we think we're well positioned on track or goals to meet the growing demand for advice given the edge, we bring to the mortgage.
With our track record of developing wealth planters as differentiated advice model and the operating scale, we get from our investment partnership with L. T L and the scale of our retirement businesses.
Got it thanks, and then an S. S sales was was there anything in.
In particular that drove the pretty big uptick in volumes. This quarter did you introduce new new products or anything like that.
As we mentioned today, we think you know there's spoke structural demand as the baby boom generation moves to that accumulation for protected equity stories.
Side by the volatile times were seen in the macro political environment, and we're well positioned to continue to capture a disproportionate share.
Our distribution network as well as our constant innovation. So we continued to update our segments.
We see emerging demand, but I think it's it's more structural given the edge that we build over the last decade in this space.
This rate environment makes those products very competitive to fix oriented products that are out there. So we benefit from a better rate that we can offer to clients and then we're capturing the yield on the back end for shareholders. So it's a win win on both sides I think as well we're on a small <unk> when I look at it I think the momentum as being a few quotas for us.
Now uhm, but also we see growth across all of our distribution channels for them a retail site to to the institutional side. So it's not lumpy with one distribution. It's it's really across the board, which is encouraging for us going to war.
Thank you.
Thank you next question comes with a lot of Jimmy Paula from J P. Morgan.
Please go ahead with your question.
Hi, Thanks. Good morning. So the first question is just on the mortality issue.
Your results of obviously have been weak recently a lot of your peers have been weak as well what gives you the confidence that it's not more of a structural issue in terms of pricing of risk selection in your blog and it's just more related to what you've mentioned in terms of pull forward in Queens.
Sure Jamie I, you know I think there multiple things you have to do when you see volatility of mortality. One is it further diagnosis could I have your enforce block testing to teeth. Your thesis and stressing damn second is validation through to reinsurers.
Those are all things that we do the most important thing is this is just gap volatility.
No impact on cash aid if we continue to see this volatility because of our conservative statutory some changes we're just gonna have a higher payout ratio.
At the end of the day, so no impact on cash there'll be some gap volatility. If this continues we hope will see both sides of the volatility volatility works both ways. So we're looking forward to seeing both sides, but again no impact on cash.
Okay.
And then on a b, obviously industry buy clothes had been fairly weak for asset managers and you're seeing some of that same dynamic as well any comments you have on the pipeline or how the any visibility you have unhealth flows are looking into the second half or does it just gonna be more dependent on how old are you.
Overall the environment is.
With close friends.
<unk> <unk> <unk>.
Nice smart Alright, now we're pretty confident in our flows I'll look for the second half of a year as Mark mentioned, we have the 14th <unk> and in the pipeline.
A big part of that two thirds of that is in <unk> private off with over 80 per cent of it being C base.
And.
We have stronger in closing the second quarter, you know, we're hoping that follows through and the retail segment. We've had several growing areas despite slightly <unk>.
<unk> and the second half Moon are you familiar with those whose mentioned before is it.
Billion dollars of net flows with a strong.
Annual growth rate. So we're hoping that continues.
Positive it's been positive 11 in the last 12 quarters in 10 years in a row of organic growth.
American income net inflows of 1.5 billion in the second quarter 4 billion year to date that we're looking for that to continue.
And then U S retail, we have 9% annual organic growth with net inflows 11 in the last 13 quarters. So we're looking for that to continue its momentum.
And then a private wealth.
Increase in private at all.
And then you know investments in money markets and that they're organic growth Raiders is looking pretty good too. So we're we're pretty confident in the second half of the year.
Thank you.
Thank you next question comes from the line of <unk> come out from Jeffries. Please go ahead with your question.
Yeah. Thanks, just a circle back again on the mortality Robin is there a way to just dimension house Big This block is of older age B U L policies, and then any more specificity over how long or what period of time, you would expect this to play out.
Yeah, that's the way I would I'll just sum it up these are older age policies you know some of them 15 to 25 years that we expect uhm. Unfortunately, we expect that they will pass over the next five years and that's built into our 2.5 billion of earnings.
Guidance that we gave that invest today and our 2 billion of cash guidance that we gave that investor day. So what we're seeing is just an acceleration of some of those deaths, which means that to pull forward of earnings going forward. We haven't disclosed specific size of the the blocks any but I think the way to think about it.
This is an accent acceleration or pull forward, while we've already included in our earnings guidance and and cash flow guidance and it's really only again, it's only a gap volatility point at the statutory books or more prudently reserved.
Got it and then when we think about the free cash flow conversion improving as a result of this sort of phenomenon is that because the <unk>. The denominator is going down in the gap earnings are lower or is there some acceleration of cash generation related to this.
It's it's really just because of the gap earnings are lower and there's no change to the statutory earnings as a result, so that's that's really what it is and you saw that in the quarter and the quarter or payout ratio on a normalized basis within the 60% to 70%, but if I take the report a number it's close to 70 per cent. So we paid up.
On the higher end, reflecting the fact that it's really just a gaffe volatility not a cashpoint.
Got it thanks.
Huh.
Thank you next question comes from the line of Alex Scott from Goldman Sachs. Please go ahead with your question.
Hey, good morning.
Christian I had is on.
The the strong sales growth <unk>, particularly in the individual retirement.
Then yeah I'd just be interested if you could provide any color around you know the amount of capital that consumed her sudden otherwise the amount of capital you deployed towards that cause it seems like you're hitting on your cashflow objectives.
The other piece. So is it seems like the deploying you know more than you have it and a new business. So I'd be interested in.
Quantify that for US and also any comments on just the competitive environment and the opportunity you were saying there.
Thanks, Alex you know the businesses that we write are very capital efficient capitalized structures does that leading Ses Prada, if there's a 15% IRR on the capital uses if you recall and I think we shared it over the years the change in the amount of capital that we have to hold <unk>.
Dollar premium these products that we write whether it's in our individual retirement or in our group retirement, they're less than two two cents that we hold for every dollar premium so they're very capital efficient. If you compare that to you know fix products that are probably 10 to 12 cents per dollar premium. So we're playing in the right place we're generating good right.
Turns and we will continue to support the growth because it's generating future cash flows for shareholders.
Got it follow up I had as a dividend capacity out of the New York Kennedy I guess following the $600 million dividend could you frame for US you know how much ordinary dividend capacity is still there and if you're able to commented on how much of that will be needed for the the new vision of New York.
Sure. So we we Upstreamed total of 900 million to the hold go at through through July which include $300 million of unregulated the 600 million insurance dividend data lines with our free cash flow guidance of 1.3, we assumed that we'd have $600 million.
Place, we took that out in July so that that's the probably close to the maximum that we could take out to keep our our b C levels above their about the ratings for the ratings that we need and at 375% to 400%. So that's what you should expect on your end. We also include completed as I mentioned in accord.
Internal reinsurance transaction, where we move capital from the New York entity T D. Arizona, they need to help support that across the board. So you shouldn't expect any other ordinary dividend capacity from the retirement business from that a year and what you should expect is more unregulated cashless doubt from natty year, and we're gonna continue to see cash.
It was from the lines Bernstein, the retirement business three to asset management contract and then our wealth management business dividend, which comes up close to your end. So that's another in total $400 million of unregulated cash flows that we'll see from now to your end.
Got it thank you.
Thank you next question comes from the <unk> from <unk>. Please go ahead with your question.
Good morning, Robyn I believe after the fourth quarter earnings call you <unk> reiterated that you're operating earnings sensitivity of every 10% movement and equity markets. So about 150 million in earnings and in 2022. The equity markets were down 20 per cent and that was at 300 million impact here you have reached <unk>.
National expectation of 1.6 billion became 1.3 billion for twenty-three. However, we're seeing recovery and equity markets. So is that 1.3 billion a moving target clichy upside based on equity market recovery anything that's up 18% year to date.
Yeah, It's crazy that is our sensitivity of every 10%, it's about 150 million and as you. So we went from 1.6 to 1.3 this year, reflecting the lower equity markets from last year and if equity markets continue at these levels you should expect higher free cash flow next year.
In line with the guidance that we provide it.
Okay.
And congrats on wrapping up your internal reinsurance transaction I feel like that cash flow set split 50 50 between regulated and unregulated source is is not a new thing so just to be sure you're expecting a more meaningful shift in that composition filing your notation in two years.
Well the 50 per cent of unregulated casually words, it's now is 17% of I P. O said add a line as well with this strategy of unregulated cash. So then then within the 50% that was coming from the retirement business you should expect that to be split between the Arizona and New York entity.
D. As we moved as we shifted liabilities from the the new our company did Arizona company, that's really important because it means that we have more diversified regulated cashflow the more stable cash flows.
New York Formula has been historically volatile, but the Arizona dividend formula will be more RBC Bay. So it provides more consistency and more transparency for shareholders on the cash flows from the regulated entities.
Okay and real quick on D. O L. You mentioned large claims what does the average face amount of these claims just so I can understand the severity aspect.
When we look at large Queens M. B U L were looking 2 million plus face amount.
Excellent. Thank you.
Thank you next question comes from the <unk> from tourists Securities. Please go ahead with your question.
Yeah. Thank you good morning, thinking about the China initiative to sort of curious thank you <unk>.
The early approvals when do you think that'll get ramp up in any <unk>.
<unk> thoughts around.
<unk>.
Hi, Mark this bill Scammers again.
We received our approval of our application in China that was a few months ago. Currently we're waiting on to get her a license, but first that is subject to an inspection, which we've been geared up for but it hasn't occurred yet.
We are hoping to get this done and you know have a fun are released our first funded by the end of this year, but it's subject to you know the timing of this license, which where it might slip into next year.
Let me know.
[noise] wealth management, you touched on those may be given given us some of the pieces, but if you look at the.
Year over year growth, obviously quite strong if you took out the improvement in the cash speed to come and do you think would work real earnings growth was.
This interest rate impact.
Yeah, I think we had mark $42 million of wealth management earnings into quarter, I think I said year over year 11 million of that is coming from the interest rate sweep. It cast so even taking out the interest rate. So if the cats are you still seeing really strong growth I think it was about 12 million or so coming from the distribution revenue in that's real.
From our insurance sales the revenue that the wealth management business gets from that and again that's to Nick's point earlier that really differentiate what they do they're not only selling investment products, they're selling insurance as an asset class. If they have different sources of revenue that they can collect that drive future growth.
Very good thank you.
Thank you final question for today comes from the line of Microvolt Pharmacy. Please go ahead with your question.
Thank you guys. Good morning, just technical question I was wondering about the Venerable general account assets, where a D is the preferred manager just wondering are there any terms and that agreement that could allow venerable to quote unquote recapture that a U M for maybe.
No. It's part of the Venerable deal, we did enter into and I may for lines Bernstein. That's a longterm IMA contract I think a be performed well in that I think venerable would say so as well I can I can say that as well be in on their board that they're happy with it.
Performance of Alliance Bernstein. So we expect a V to continue to perform well and you know we're really looking forward to the 14 billion of institutional flows get funded and that's gonna <unk> improved a fee right over off our lines Bernstein going forward.
Okay, and then just with some of the internal reinsurance changes or I was wondering if if any anything has.
Changed sort of how do you think about are considered inbound potential derisking opportunities, whether it's annuities for life.
If not it just you know the <unk>.
Activity from third parties out there keeps picking up so just wondering if any changes on that front.
Yeah. It looked a big deal for us across the board with that Venerable deal that we just spoke about that was the big Derisking trade for us, but we're always going to look at ways to optimize capital of weekend deploy capital do wealth management or individual are all set a b by Derisking, we're always look at them but.
There's nothing on the table right now for US, we're really focused on executing against the strategy that mark laid out earlier in the call and we're focused on that execution at this point.
I think fair to say Robin on capital management. The focus has been on the internal reinsurance, which is a massive job. The teams delivered extremely well on secure in cash flows and just making the catch generation mobile bus going forward, that's really been the big shareholder value capital management issue.
And the last couple of quarters.
Okay, great. Thank you guys.
Thank you, ladies and gentlemen, as we have no further questions. At this time, we will conclude today's conference cool.
Thank you for participating you may now disconnect.
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