Ladies and gentlemen, thank you for standing by, and welcome to the AXA Equitable Holdings third quarter earnings call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one on your telephone. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Jessica Baehr, Head of Investor Relations. Thank you. Please go ahead, ma'am.
Thank you. Good morning and welcome to AXA Equitable Holdings' third quarter 2019 earnings call. Materials for today's call can be found on our website at ir.axaequitableholdings.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. Our results may materially differ from those expressed in or indicated by such forward-looking statements. 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 Mark Pearson, President and Chief Executive Officer of AXA Equitable Holdings, and Anders Malmström, our Chief Financial Officer. Also on the line is John Weisenseel, AllianceBernstein's 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 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 would now like to turn the call over to Mark and Anders for their prepared remarks.
Thank you, Jessica, and good morning, everyone. Thank you for joining the call today. I'd like to begin by sharing four key highlights for the quarter. Firstly, third quarter non-GAAP operating earnings were strong, helped by strong flows and positive equity markets. Our target to deliver $160 million annualized benefit from the rebalancing of our general account had been achieved one year ahead of schedule. The quarter also saw record sales in our structured annuity product, SCS. Overall, new sales across our insurance segments are up 7% year-over-year, with over 85% of sales from our life subsidiary coming from products like SCS without interest rate guarantees. Obviously, interest rates dominate the macroeconomic picture. The 10-year treasury was down 100 basis points through the first nine months of the year, including a 30-basis-point decline in the third quarter. We have completed our annual actuarial assumption review.
We're taking a prudent approach to strengthen our U.S. GAAP accounting reserves, principally on our legacy VA portfolio, to reflect changes in policyholder utilization, which have been magnified by low interest rates. However, the way in which we manage the business is not to U.S. GAAP, but to our fully mark-to-market economic framework, where economic liabilities are higher than U.S. GAAP reserves. We believe that our economic framework best protects 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 CTE 98 for our VA business, and an OBC target of 350%-400% for our non-VA business.
We reaffirm our commitment to meet our target payout ratio of 50%-60% of non-GAAP operating earnings, supported by the new NAIC standards, which we will early adopt and which will give full credit for our economic hedging. In addition, the EQH board has approved an additional share buyback authorization of $400 million on November 6th. Turning now to slide four and a summary of our financial performance in the third quarter of 2019. Third quarter U.S. GAAP net loss was $384 million. Included in this number is the strengthening of U.S. GAAP reserves and the accounting impact of the fall in short-term rates, which was offset by economic interest rate hedging gains. Anders 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.
We remain on track to deliver our 5%-7% operating earnings CAGR target. On a consolidated basis, assets under management stood at $701 billion as of September 30th, driven by very strong AB net inflows of $8.1 billion for the quarter. This resulted in a non-GAAP operating ROE of 16%, well in line with our mid-teens target. Finally, supported by the strength and stability of our balance sheet and strong operating results, our board authorized an additional $400 million share buyback program, accelerating our 2020 capital management program. Given the fall in interest rates, the management of risk and protection of the balance sheet is critical for insurance companies. I'd like to take a moment to explain how we manage risk, and why we can be confident that our cash flows and balance sheet are secure even under stress scenarios. 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 manage the business, and most importantly, the basis for our hedging program is our economic framework. We moved to this economic basis in 2017, just prior to the IPO. At that time, we also increased the balance sheet of our life business by $2.3 billion to provide a buffer above the required RBC levels. A key proposition of our IPO was our ability to generate significant cash flows. We use the economic model to ensure we protect these cash flows from market movements and deviations of policyholder behavior experience. Interest rates are a good way to show the benefits of economic risk management.
Rates, of course, have a profound effect on reserving for long-term liabilities, which often exist for 30 to 40 years or more. Economic model is more realistic as it is based on current market rates, which we can hedge, and as such, better protect shareholders and our future cash flows. By current market rates, we mean the forward curve and risk neutral scenarios, which include possible negative rates. As of the quarter end, this meant 1.7% for the 10-year Treasury and 1.9% for the 20-year Treasury. We make no predictions of future interest rates, and we have no floor on these interest rates. This is true for all our assets and all our liabilities without exception. On this slide, we show how the current U.S. GAAP and statutory rules deviate from market-based standards, and how new rules begin to converge towards a more economic view, which we believe is sensible.
Interest rates behind U.S. GAAP reserves are not consistent. Rates vary markedly across product lines and across companies. SOP 03-1 uses stochastic scenarios at management discretion. FAS 157 is in fact market-based. It is a hodgepodge. The statutory framework is also not mark to market. As you can see from the slide, current statutory practice use reversion to mean assumptions with rates varying significantly across the industry up to 5.5% and above. Although the new NAIC standard coming in 2020 will harmonize rates across the industry, they still take a reversion to mean of past averages, which today calculates out to 3.5%, significantly higher than the current 20-year rate. The new NAIC standard will also test for different scenarios, but effectively has a long-term floor of 1.9%, as 99.8% of scenarios project that long-term interest rates will rise relative to September 30th levels.
Not testing capital adequacy for interest rates below these levels can create a false sense of security, especially now as we've seen interest rates below this level, and of course, they could even go negative. The second profound impact on reserves and cash flows is the extent to which policyholders utilize options embedded in the contracts they buy. We use the term policyholder behavior as an abbreviation for utilization of options. Our economic model also deviates from public financials in considering these complex long-term actuarial assumptions. U.S. GAAP and statutory reserves are based on aggregate past experience. Our economic model uses risk-weighted assumptions, including stress scenarios. As such, economic model liabilities are higher than U.S. GAAP and statutory reserves. Put simply, the liabilities we place under the economic model are prudent and include a true margin.
With regards to our capitalization, we hold economic surplus to withstand very severe scenarios, defined as 40% equity shock and a 50% drop in rates, well in excess of the required RBC. Finally, hedging. Mark differences also exist across the industry on hedging. We use the higher economic liabilities as the basis for our hedging program. That is risk neutral scenarios and higher economic reserves to reflect risk-weighted policyholder assumptions. Net result of this is that investors and other stakeholders can have greater confidence that our surpluses is secure and will be distributable in the future regardless of the path of the markets or if policyholder behavior deviates from best estimates. In summary, Equitable is a mark to market business. This reflects the 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 and advocate for the reforms enacted by the FASB and the NAIC that will move accounting and statutory bases closer to an economic framework. We look forward to sharing further details of our economic framework over the next year or so as we approach adoption of the FASB targeted improvements. With that, I will turn the call over to Anders 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, segment 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 $1.26 per share. On a GAAP basis, we reported a net loss for the quarter of $384 million.
Driving 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 impact driven by our hedging program, which again performed well amidst falling rates, delivering a 97% hedge effectiveness. Turning to slide seven, I'd like to provide additional detail on our economic hedging and the outcome of our annual actuarial assumption review. For background, we completed our comprehensive annual assumption and model update process in the third quarter, reviewing all material assumptions across our business and making updates where warranted. As a result of the review, we made several updates, with the most material impacts related to fixed rate GMXP policyholder behavior assumptions and interest rates, which I will review on this page.
Together, these items resulted in a year-to-date negative $420 million post-tax impact to net income, primarily driven by four main components. First, the economic benefit of fully hedging interest rates amidst the declining interest rate environment. Specifically, because our economic hedging resulted in us being overhedged on a 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 this year's review of economic assumptions, which resulted in an update to our short-term SOP interest rate assumption to reflect current rates grading back to our long-term assumption of 3.45%. Next, we made updates to certain policyholder behavior assumptions to reflect emerging experience. As a result, we updated withdrawal assumptions and reduced our lapse floor from 1% to 0.8%. These updates resulted in an unfavorable $472 million U.S. GAAP impact.
Further magnifying the policyholder behavior updates was the impact of interest rates falling from approximately 3% over the last year, coupled with a shift for certain GMXP features from SOP to fair value, which together enhanced the liability cost of these features by approximately $338 million. As a result of the accounting treatment of these updates, we also recognized a favorable $60 million impact to non-GAAP operating earnings, primarily driven by a DAC benefit. Translating these changes to a statutory basis, these updates resulted in the strengthening of reserves by approximately $500 million. The economic hedging credit we will receive from the adoption of NAIC VA reform will more than offset this impact. Assessing these items holistically, I'd like to reiterate some of Mark's early points and key takeaways within the context of this year's assumption review on slide eight.
First, the year-to-date economic benefit of fully hedging interest rates more than offsets the cumulative GAAP impacts directly related to interest rate declines. Second, early adoption of the new NAIC standards will fully reflect our economic hedging in statutory reserves and will more than offset the total statutory impact of these updates. Lastly, the strength and stability of our balance sheet. Our VA capitalization remains in excess of CTE 98, and the RBC ratio for our non-VA businesses is in line with our target 350%-400%. This, taken together with managing to an economic framework, gives us confidence in our capital position and our ability to deliver on our target payout ratio of 50%-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. As an increase in net investment income on higher SCS account balances and improvements in GMXP results were offset primarily by lower fee type revenue as a result of lower separate account balances. We continued to drive sales momentum in the quarter 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 through the breadth and depth of our distribution, enabling us to continue de-risking our in-force as we replace fixed rate GMXP 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 block 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 million, primarily due to higher net investment income driven by higher average account values and our GA rebalance, as well as ongoing efficiency gains. Account values increased by 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 in the third quarter due to the K-12 summer school 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 model. Turning to investment management and research, or AllianceBernstein, on slide 11. Operating earnings decreased to $93 million from $96 million in the prior year quarter, primarily driven by higher compensation and G&A expenses and lower performance fees, partially offset by higher base fees. $8.1 billion of inflows marked the fifth straight quarter of positive net flows and helped drive AUM to its highest levels since the financial crisis.
Active net inflows were $9.3 billion for the quarter and $21.6 billion on a year-to-date basis, which translates to a 6.3% annualized organic growth rate. Despite industry-wide fee rate contraction, AB's 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, spread across a diverse array of funds attracting assets. In addition, AB continues to diversify and grow its institutional pipeline and drive momentum in active equities. Finally, AB's adjusted operating margin was 27.5%, down from the prior year quarter due to flat revenue and higher expenses.
AB continues to scale and commercialize its offering and execute on expense actions such as the relocation to Nashville, we remain confident that a 30%+ margin target is an attainable long-term goal. Moving to protection solutions on slide 12, we 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 to $117 million. We recognize that these results may again be stronger than expected, but similar to last quarter, we had 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 GA rebalance, productivity improvements, and a meaningful decrease in policyholders' benefits.
This decrease to policyholders' benefits was driven by a one-time reserve adjustment of $23 million, as well as favorable life claims and reserve developments. 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. Concluding with sales, annualized 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 benefit business. Before turning the call 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 dividends 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%-60% of non-GAAP operating earnings in 2019 and beyond. As of quarter end, we had approximately $163 million remaining on our $800 million 2019 share repurchase program. Looking ahead, our board of directors has authorized an additional $400 million share repurchase program. This authorization is an acceleration of our 2020 repurchase program and provides us with additional capital flexibility for repurchases in the short term. Keeping with prior guidance, we will aim to primarily repurchase shares from AXA as it continues to execute on its stated intention to sell down by continuing to be opportunistic in the open market. Supporting this capital management program are our 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 cash needs through the first half of 2020. As we move to early adopt the new NAIC standards, statutory cash flows will be better aligned with economics, and our economic hedging will be fully reflected in statutory reserves. Finally, with capitalization levels in excess of CTE 98 for VAs and 350%-400% RBC for our non-VA business, our balance sheet remains strong and well-protected through our economic framework. With that, I will turn the call back to Mark for closing remarks.
Thanks, Anders. Before taking your questions, I'd like to close by reiterating the key messages from the quarter. First, our operating earnings remain strong. We are delivering on our strategic priorities, including the completion of our GA rebalance over one year ahead of time. We are driving strong momentum across the business in sales and net flows. We continue to benefit from actions we have 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 remain 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.
As we move to early adopt the NAIC standards, our 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%-60%. 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 line for questions.
As a reminder, to ask a question, you will need to press star one on your telephone. To withdraw your question, press the pound or hash key. Please stand by while we compile the Q&A roster. Your first question comes from Andrew Kligerman with Credit Suisse.
Hey, good morning. Maybe just a little color around your interest rate sensitivity. Could you talk 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 do to your EPS?
Morning, Andrew. It's Mark Pearson. Thanks very much for joining. I'll pass to Anders to handle that. The question is on yield on new portfolio.
Right. Good morning, Andrew. Look, I think from an interest rate sensitivity, before I go and give you some of the numbers, I think it's really important that we think about our asset and liability management, because we're really matching assets and liabilities from an interest rate sensitivity. From a balance sheet and from a cash perspective, we're pretty insensitive, which means if rates go down, yes, your liabilities go up, but your assets go up as pretty much the same way. The impact, even though you might see it under the accounting, is pretty limited. Now, of course, if you're in that position, what is really important is the new money yield. The new money then yield also then translates into what can you put into your pricing going forward because you have to adjust your product because of the lower yield.
The new money yield is roughly, I would say, 100, 120 basis points above the risk-free. That's what you can expect, and I think that's what is reasonable. We adjust, obviously, then pricing according to that so that we can maintain our margin. On the in-force, just to complete your question, I think right now it's about 350, 383. 380, I think that's what we had on the yield.
Just to Andrew, it's Mark again. Just to Anders' point, if you're looking at new business, 85% of our new sales are not interest rate sensitive. Principally through that SCS product, which is dynamically priced and, as Anders said, fully matched.
A sensitivity component, if we saw like a 50 or another 100 basis points drop in interest rates, would it have a sharp impact on earnings?
Yeah. The sensitivity, I would confirm the sensitivity we gave you probably a year ago, which is still through the 50 basis points has a $10 million earnings impact.
Okay. Got it.
I think that's really the impact from an earnings perspective, taking out the accounting mismatch. Yeah.
Great. Then just shifting over to group retirement, you had some pretty solid sales growth. Year-over-year growth in 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, why you're confident in your business with regard to these investigations into 403(b) books might be a concern.
Andrew, it's Mark. On group retirement, it's really our 403(b) business where we are the number one provider of supplementary retirement income for teachers in the K-12 market. By work site marketing, we mean we have school districts who prefer to deal with us, and we have an advisor force of 1,000 or so advisors who actually go into the schools to talk to teachers and the administrators. It's a terrific business we have there, and we see funds under management growing nice and steady year after year. I think the press article you referred to refers to an SEC investigation with VALIC. We honestly don't know any more than you know. We're not part of that. We just know what you know through the newspapers. We have had inquiries from DFS in this area, but we don't see anything unusual there.
We maintain a very strong relationship with the DFS. Yeah, it's a very strong business for us. We're very proud of it. We have something like 1.1 million teachers now in that particular segment.
Okay. Thank you.
Your next question comes from Ryan Krueger with KBW.
Hi. Thanks. Good morning. I had a couple questions on the policyholder behavior update. I guess first, the $500 million 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 VA cash flows?
Morning, Ryan. I think, as I said in the call, I think the $500 million impact, that's the real impact from the assumption change. That's what will also impact our cash flows, the cash flows we presented after Q2 earnings. That's really the impact. I don't see any impact afterwards coming from the assumption change. Very little because if policies stick around longer, you actually get more fees. I don't think that has a material impact here for the VA cash flows.
Thanks. On the lapses, I know you said you lowered your floor to 0.8%. Can you give us a sense of how that compares to what is required under NAIC VA reform?
You're absolutely right. We lowered our lapse floor from 1% to 0.8%. I think the NAIC requirement is around 1.2%, so we are below what the NAIC requires. Correct.
All right. Great. Thanks.
Your next question comes from Tom Gallagher with Evercore.
Good morning. Just a follow-up to Ryan's question. Anders, the 80 basis point assumption you're now using on ultimate lapses, can you comment on, is that consistent with the current experience you're seeing emerge on some of these older age policyholders? Are you just taking it to the trend you're seeing, or does that have some cushion? I ask simply because, if that trend were to worsen, would you have to strengthen reserves further?
Yeah. Good question, Tom. Good morning. Look, I think what we did is really based on emerging experience. We took a view to basically reflect what we currently see, then we put that into our assumptions because we think once we see something, we have to reflect it. I wouldn't say that this is a trend that we see right now that goes further, but it's really reflecting our current experience in our current assumptions.
Got it. Would you be able to quantify now, I think this would be the major final piece of the puzzle for determining your capital adequacy post VA reform. Can you provide some quantification of how much excess you think you might have within the operating companies or some way of dimensioning that, even if it's a ± some level?
Yeah, I can walk you through kind of what goes in and what goes out. Remember when We were always clear, and even today, it's very clear we are above our CTE 98 target for VAs and 350-400 for non-VAs. Now taking into account the VA reform that reflects better our hedging, we actually get a benefit of $1.5 billion. That was already reflected in the cash flows we presented to you in Q2. That's from the adoption of the VA reform. As I told you in the call, we're going to early adopt that piece. Now, the update of the assumptions had a negative $0.5 billion to this And benefit. The net positive is $1 billion by early adopting the NAIC VA reform and updating the assumptions. That's really the net change of the reform.
Would it be fair to assume then that you have at least $1 billion? Are there other offsets? Could it be less than that? Much greater than that? Just on a consolidated basis.
Okay. Look, usually we don't give you the RBC numbers and the cash, the capitalization at Q3, but you can assume that even before all of that, we were above our target capitalization. This comes now on top of that. This is really also what gives us.
Got it. It's incremental.
It's incremental. This is really also what gives us confidence that we can actually accelerate the buyback authority from next year into this year.
Okay, thanks. Just one final one, if I could sneak it in. Anders, did you say $1.9 billion of cash distributions from the subs to the holdco year to date?
Yes, that's correct. We had, early in the year, I think in March, we had the surplus note repayment, which was, I think, $572. We had the dividend of $1 billion in July. Then we had AllianceBernstein contributions. This all to every quarter, that this brings it to $1.9 billion.
Okay, thanks.
You're welcome.
Your next question comes from Ian Ryave with Bank of America.
Thanks for taking my questions. I want to go back to what Andrew was talking about from an earnings rate sensitivity. When you guys did your sensitivity back in December, it basically suggested for 100 basis points, it quite simply would be a 1% growth impact. It's probably fair not to extrapolate that forward, because some of your peers that have, are less general account exposed. You're looking at a 1% incremental earnings impact per year. I guess my question is it fair to say that the incremental growth impact for, say, 2020 and 2021 would be greater than an additional 1%?
Yes, maybe let's unpack this a little bit. I think from a growth perspective, we believe we can meet the 5% to 7% earnings growth, going forward. I think we still believe that this is a fair assumption, and we feel very confident with doing that. Now, the interest rate impact, as I gave the sensitivity, has an impact. It's really the $10 million for 50 basis points. This is a small headwind. I think if I take everything together with the GA rebalancing and all of that, I think we're pretty confident that it actually shouldn't have too much of an impact going forward for our earnings growth.
Your next question comes from Alex Scott with Goldman Sachs.
Yeah, Alex?
Alex, your line is 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.
Good morning, Alex. In Q3, we don't update the statutory capital. I think I can repeat what I said before. Really, that should give you comfort. Our target capitalization is really above the CTE 98 and 350-400 RBC for non VAs. That's where we are, and then based on the VA reform and the updates to the assumptions, we will strengthen that capitalization by about $1 billion. You will see the final stat numbers, we will publish them at year-end. We don't do them at Q3.
Okay. Maybe just on protection, could you talk about what's sort of driving earnings upwards there and how you see that sort of trending over time? How much of this feels sustainable versus maybe something more one-time? I know you guys got a loss recognition recently, just interested in any color there.
Thanks very much, Alex. Yeah, it was a good quarter for protection, $117 million, I think. A couple of things which helped boost that. Firstly, there was a credit on underwriting mortality. It was a good underwriting quarter, and I think there was a one-off reserve release of $23 million in there. Perhaps, Anders, if you can give some color on a reasonable run rate going forward.
As Mark said, it was a really good quarter, and what you really see here is the GA rebalancing and the expense actions coming through. That's really what's driving the earnings. If I take this one-time kind of benefit out of the $117 million, I get to around $75 million. I think that's a good run rate going forward that you can expect from that segment.
Obviously, mortality has some volatility, but if I adjust for that, I would say you can expect the $75 million going forward. A really strong performance. What we see really is that also the employee benefits business is now coming through and helps this segment.
Maybe one last quick one. Can you guys update where holdco cash is relative to the $500 million liquidity minimum? I think it probably was over $1 billion or around $1 billion at July 1. Was just interested to understand where that sits today.
Right. At half year, we were slightly north of $500 million. We got a dividend, which brought it to $1.5 billion, and then we obviously had some obligations at the holdco, like paying interest, which brought it slightly down. That's where we are right now.
Okay. Thank you.
Your next question comes from Suneet Kamath with Citi.
Thanks. I wanted to go back to Group Retirement, if I could. I get that your model is different, but if I just look at your fee rates in that business and I compare it to other companies, it just sort of jumps out as significantly higher. My question is, given all of the focus on fees across asset gathering segments, what gives you confidence that you're not going to see that fee rate start to come down at some point?
Thanks very much, Suneet. Look, I think this is not a 401 service. I think it's very important to understand what we provide to the teachers. Firstly, they have a complex situation. They have defined benefit schemes with the state, which are inadequate. They need help to supplement the retirement income. There's a very big component of advice in our margin. Secondly, what we offer is strategic asset allocation to those teachers, which is very important for them going forward. This is not a 401 product. It does have higher margins in it, but we work hard for those margins, so we're comfortable with where we are.
Okay, just to come back to the consolidated results. You're hitting your mid-teens ROE target. I think you've consistently done that. I think one of the consequences of your model are these sizable below-the-line charges, and you're at a 16% ROE. You've been buying back stock below book value, but your book value per share is actually down year-to-date. My question is, at what point do we start to see growth in book value per share?
Yeah, maybe I take that. I think, Suneet, the biggest, let's say, obstacle or the issue we have in this aspect is really the mismatch on the accounting side, because our hedging program, as Mark alluded in the beginning, is really tailored towards the economics. Whenever we have positive markets, you see a negative book value development. When you have negative markets, you see a positive book value development. We clearly saw that a year ago in Q4, where our book value grew tremendously, but not because we had underlying business growth. It's really just because of the hedging program. As long as this isn't fixed, I think you always see this mismatch on the book value side. I think that's one area where we really look forward to the FASB change. Even so, there will be many other things changing.
I think after the FASB, you're going to have an accounting regime that truly reflects the economics. If the business grows, you're going to see book value growth. If the business shrinks, you see book value reduction. Much better reflection than today. It's a long answer for that, but I think that's where we feel strongly that we need a more economic model to reflect the business.
If we move away from an environment with these below-the-line charges, you're confident that you can still be at mid-teens ROEs, because I think these cumulative charges have certainly helped that ratio.
Right. I think, look, it's too early to give you the full number indication because book value going to change, earnings going to change. What I can tell you is we really plan to take everything above the line that makes sense and not have these adjustments we have today. I'm very confident that we will show positive on the new framework. Giving you the exact numbers, I think it's too early.
Okay. Thanks.
Your next question comes from Jimmy Bhullar with JPMorgan.
Hi. Good morning. First, I just had a clarification. I thought your long-term rate assumption was 3.45, but it seems like you mentioned something else on the call. Could you clarify what your long-term rate assumption is?
Good morning, Jimmy Bhullar. You're absolutely correct. Our long-term rate assumption on the US GAAP is 3.45. Correct.
What's the grading period for that?
We grade there over 5 years. Yeah.
It is more conservative than other companies, but in an absolute sense, it still seems somewhat optimistic relative to where rates are right now. What was the reasoning to keep it where it was versus maybe adjusting it down a little bit? I do recognize that others are even higher than that.
Right. Look, I think, first of all, this is really under the GAAP standard, where we feel very comfortable with this assumption. As you say, it's more conservative than others. Again, from a management perspective, really look at the economics where we take the straightforward rate. Because that's what we know right now and nothing else, and taking a view on interest rate is not the way we manage the business here. Now, having said that. It would be unwise to take the forward rate on the GAAP, because on the asset side, right now, I also don't fair value my assets for my P&L. I have right now, I think about $1.5 billion in AOCI. Just this year, we had unrealized gains of $500 million.
If I really want to go to an economic model, I have to fair value both sides, and that's what will come. That's why we feel very confident that assumption.
On the fees, this came up a few times on the call already. On fees and retirement, even other than any regulatory pressure, it seems like fees in the 403(b) market are coming under a little bit of pressure, maybe not as much as the 401(k) market, but it seems like the trend is lower. I'm wondering if you're seeing that in your business as well, and whether you feel that you can sort of maintain your margins even if fees come down. They're not going to come down to 401(k) levels, but it's like many companies have seen fees drift a little bit lower over the last few years.
Yeah. Thanks, Jimmy. I won't repeat what I said earlier about the advice and the strategic asset allocation, I guess the other thing we have going for us is we are at scale in this business. There is really nice operating leverage in there. When we are attracting funds under management, it is helping move the margin up as well. That gives us a little bit of room. If there is pressure on there, we have room because we are at scale. Secondly, we would respond on the expense side if needs to. I think the other thing in there, Jimmy, is that the group retirement business has benefited by the General Account rebalancing. If you take the combination of scale, General Account rebalancing, and the productivity we've put, you see that coming through that margin.
It's not that we're charging the teachers any more. It's just operating leverage in there. That gives us room if there is pressure going forward.
Just lastly, on your protection division, obviously a majority of that is just individual life. You had talked about growing the group business a little bit within that division, and you're getting good growth. It's a small business. 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.
Yeah. Look, I think the group business is an area where we see growth. We invested heavily into it. We're mostly in the small to medium enterprise area, so in the below 500 million employees. We have a really state-of-the-art front-end infrastructure here that is very appealing to brokers in that area, and we get very positive feedback. I think right now we have about 350,000 kind of lives underwritten. Obviously, this is still very small for this kind of business, but we see a really good growth. The business is almost break even. It will really ramp up over the next five, six years and become a big component of the protection solution business. That's our plan. I think we work hard to get there. So far, we see really good progress.
Really, it's seen as an attractive infrastructure for distributors.
Thank you.
Your next question comes from Joshua Shanker with Deutsche Bank.
Thank you for taking my question. At the risk of betraying my own ignorance, you gave a lot of detail, more than others, on your assumption review. On a GAAP basis, there was a large charge. On an adjusted basis, it was a slight benefit. On a STAT basis, there's a charge that's going to be reversed when you adopt NAIC reform. Can you tell me what the major takeaways, which numbers should I be focusing on? Should I be focusing on none of them? Are they all non-cash in the end? I'm just trying to line up which thing I should be looking at and taking the most furious look at.
Josh, yes, it is confusing. We understand it, we did try through the presentation to show you and compare side by side from GAAP and STAT. The fundamental point here is in GAAP and STAT, there are reversion to mean assumptions on interest rates. For us, it's 3.45, 3.5. We are at the conservative end of that reversion to mean. That's why Anders says when we're looking at the business, we are looking at the economic position, i.e., using the forward rate, which tops out at about 225 today. When we have analysts like yourself, we steer you towards the cash we're generating because it is confusing looking at them. The good news is with both the NAIC reform and with the FASB targeted improvement changes coming in, both of those regimes are going to move closer to a more fair value.
That's in a nutshell why they're different and what we look at and why we manage. Very importantly, Josh, is our hedging program, which of course protects the balance sheet and protects the cash flows we can distribute. It's based on the economic position. That's why in addition to the actuarial assumption, you see a very big credit from our hedging because we are hedging more than the reserves under GAAP or STAT.
The benefit that's coming from the adoption of the NAIC reform to the STAT numbers was that immaterially changed by the assumption review? Would that have been approximately the same amount whether or not the numbers change over the past nine months, or I should say 12 months? The assumptions are immaterially different either way?
Yes. Maybe just let me walk through again. I think what Mark just was talking about on the stat side, the reflection of the hedging under stat, that's what has this $1.5 billion benefit under the statutory framework. It's really important, basically before the hedging positions we took were not fully reflected in the requirements. That's why the CTE 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. That's a real cash impact. That's a real impact, and that's what reduced the $1.5 billion to still a billion-dollar benefit if you take everything together. What we try to do here is we basically take everything apart, and you really get to the essence of what's the impact of the changes.
In the end, you see that everything else equal, we actually get a billion-dollar benefit under the statutory framework.
Well, thank you for the answers. Appreciate the clarity.
Thanks for listening.
Your next question is a follow-up question from Ian Ryave with Bank of America.
Thanks for letting me take a follow-up. Just wanted to go to the 472 unfavorable withdrawal experience, the charge you took. I just want to know if you didn't see any of that last year when you did your review. In other words, was it something that's developed recently? I only ask that because it was the largest component of the assumption review, at least the largest impact, and it is a reason for your stat charge.
Yeah, absolutely. I take that, Ian. Look, I think we, as you know, once a year, we update our assumptions based on recent experience. I think we have one more year experience. Based on that experience we see, we decided to take that charge because we actually have emerging experience that we want to have fully reflected, and we think it's prudent to fully reflect if you see emerging experience. I hope this clarifies.
Great. Thank you.
Your next question is a follow-up from Ryan Krueger with KBW.
Hi, thanks. I just had a quick question. The Corporate and Other segment, excluding the assumption review, was a loss of $69 million, which is I think 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. The run rate, you see some seasonality in it, but I think as a run rate for the full year, you can expect about $350 million negative for the full year. I think that's what we can confirm.
Okay, great. Thank you.
Yeah.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.