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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Ladies and gentlemen, thank you for standing by, and welcome to Equitable Holdings First Quarter 2020 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Thank you.
I would now like to hand the conference over to your speaker for today, Jessica Baehr, Head of Investor Relations. Please go ahead.
Thank you. Good morning, and welcome to Equitable Holdings First quarter 2020 Earnings Call. Materials for today's call can be found on our website at ir.equitableholdings.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.
So I'd like to point out the Safe Harbor language on Slide 2 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 Equitable Holdings; Anders Malmstrom, our Chief Financial Officer; and Nick Lane, President of Equitable Life. 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, Anders and Nick for their prepared remarks.
Good morning everyone and thank you for joining the call. It is obviously a difficult time for most people, so first and most importantly I hope that you and your families are all safe and well.
We're going to try and do three things today. I am going to give an overview, then Anders will take you through our balance sheet and results and lastly Nick will give an update on what we're seeing in April and talk about the robustness of our business model.
So now, turning to Slide 3. During this terrible pandemic and its tremendous human and economic challenges, Equitable has a special role to play. It is times like this that we at Equitable show our role in society. Our purpose is to protect families and secure the financial well being of our clients, so they can live long and fulfilling lives. And I am so proud of the ingenuity and commitment of our people in delivering exactly this.
98% of the Equitable workforce is working remotely today and of course we are supporting our people with a comprehensive Stay Well program. They've done a remarkable job at accelerating our 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 a wider community and that many in society need an extra hand now.
Through the Equitable Foundation we have been providing financial support particularly geared towards feeding and educating children. Today we'll talk about earnings for the first quarter, but it is most important now that we cover the strength of our balance sheet and how our business model will fare in these volatile times.
Equitable has a resilient balance sheet. Our RBC ratio is approximately 450% to 475%. We have over $1 billion of liquidity at Equitable Holdings and nearly $7 billion at Equitable Life. Our stronger position today is the result of a decade long risk management program. This includes strategies to remove baseless risk exposure, pioneering volatility management tools and introducing new categories of products like buffered annuities. And at all times we've maintained a high quality fixed income portfolio with strong emphasis on diversification.
Most importantly we hedged to our full economic liabilities. This means that we immunize our balance sheet to interest rates. We manage to a near zero duration gap despite the regulatory framework that is slow to react to sharp falls in interest rates and today, still permits reverting to a 3.5% or higher interest rate level.
Our resilience comes not from what we've done in the past quarter, but what we have done over the past decade. Looking at the first quarter results, strong quarter. Non-GAAP operating earnings per common share amounted to $1.08, up 10% year-over-year, reflecting higher AUM and delivery of our productivity and GA rebalancing strategies.
In Q1 and through the end of April, we are seeing limited adverse experience of COVID-19 mortality and minimal increase in lapses or withdrawals. Recurring premium flows are solid. For April, the first month of significant disruption and social distancing, new business activity across the board was about 70% of normal levels. As of the quarter end our AUM across both Equitable and AllianceBernstein excluding any double count was $646 billion down 12% from December 31, 2019. Despite this, we remain on track to meet our stated capitalization payout ratio and $75 million net savings [to earnings] [ph].
Now looking forward, the economic outlook is of course uncertain, even unknown. We will not be providing today an economic forecast of what is to happen, we don’t know. We will however, reaffirm market sensitivity of our earnings in line with prior guidance of $150 million per annum or 10% equity market decline. We see no advantage in trying to anchor to one scenario. We know however, it is important today not only to give comfort about our balance sheet, but also to show you why we believe Equitable's business model is 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 our large in-force portfolio gives us stability. For the year 2020 95% of our operating revenues will come from our policies in force on January 1. Second, there are three features unique about our business model. One, we have a history of developing economically sound products which are even more in demand today. Consumers' reaction to this virus is translating into high demand for financial advice and family protection. Obviously, people have heightened awareness of the need to look after their families for known events like retirement and unknown events like pandemics and illnesses.
Two, our affiliated distribution and broad range of third-party partnerships gives us stability and privileged access to [indiscernible] clients. We also benefit from the ability to change our product mix cost. And three, we are a trusted leader in resilient sectors. We are the number one provider of retirement solutions to the K-12 public sector educators market and our variable annuity products provide added attraction for retirement planners in this volatile environment. We alone can provide a secure income for retirement.
Our subsidiary, AllianceBernstein, continues to perform well in its sector and offers us portfolio diversification and non-regulated cash flows. Finally, Equitable has benefited from our recent IPO. The whole process of setting up the company from our risk policy, establishing the initial balance sheet to CTE98 asset levels and putting in place a hedging program no longer reliant on a foreign parent has really caused us to think deeply about how we deliver value to both clients and shareholders.
So despite the significant dislocation and the uncertain short-term future, I'm confident that our robust business model and the fantastic people who make up this organization means Equitable will continue as a strong and meaningful player.
So in summary, a truly unprecedented quarter, a pandemic the like of which we've never seen and we certainly never planned for. But what we at Equitable had planned for is total immunization of our balance sheet, on falls in interest rates and equity markets. And this has proven extremely valuable.
Our hedging program is working as designed and today we find ourselves with over $7 billion of liquidity in the live company. No reliance on our future reversion to mean interest rate, and a business model which is proving its robustness at the time of extreme disruption.
Let me hand over now to Anders to go into more detail. Anders?
Thank you, Mark. Now turning to Slide 4. As Mark discussed, our economic model is the cornerstone of our prudent risk management protecting our balance sheet from declines in interest rates and equity markets, and this quarter perfectly demonstrated why managing to an economic framework is so critical.
Those who follow us have seen elements of this page before. As this slide shows reversion to mean interest rate assumptions under U.S.GAAP and statutory framework vary across the industry and provide a false sense of security in terms of reserving requirements. Our economic balance sheet is protected from interest rates as we use the forward curve and risk neutral scenarios including negative rates and do not make predictions about future interest rates. We are fully hedged and duration matched ensuring our economic assets match our economic liabilities protecting our balance sheet and future cash flows.
Risk GAAP and statutory frameworks both currently rely on reversion to mean assumptions to calculate reserves with some insurers still using long-term rates as high as 5%. This is completely disconnected from the reality of current rates. The truth is we simply do not know where interest rates are headed and we do not believe it is prudent for clients or shareholders to take a position here and expose our balance sheet to unnecessary risk.
As you can see on the slide, had do we managed to our liabilities under GAAP or stat we would have been under hedged to our true economic liability by approximately $7 billion and $2 billion respectively. Our U.S. GAAP financial results perfectly highlight this disconnect between the accounting treatment and the actual movement of our underlying assets and liabilities. Since we hedged our economic liabilities, the outright hedge gains we realized this quarter are not in fact real gains but instead reflect an increase in our economic assets to match our economic liabilities.
We believe it is important to move away from reversion to mean standards and we are strongly advocating for the reforms that move GAAP accounting and statutory basis closer to economic framework. We are pleased that FASB target improvements largely address if the uneconomic accounting mismatch of assets and liabilities and believe implementation will help to make GAAP accounting more transparent for investors and more relevant for the insurance sector.
Moving on to Slide 5. Our balance sheet strength and continued resilience is the result of intentional prudent management actions that has taken place over the past decade. In the midst of last financial crisis we successfully shifted to risk profile of our in force and new business. Notably we were one of the first in the industry to develop our own proprietary volatility managed funds. Through a series of fund actions that increased the passivity and volatility management coverage of our guaranteed assets and eliminated unhedgeable asset classes we reduced basis risk by between 85% and 90%. Had we not taken these actions, losses would have accrued in the hundreds of millions of dollars.
Over the past quarter, our volatility management tools not only protected our balance sheet, they also protected client assets from the severe market declines. As volatility spiked our volatility managed funds triggered helping to preserve clients' assets. Similarly our asset transfer program also initiated moving guaranteed assets under management and to fixed income allocation funds. The prudent risk management is not a zero sum game. Challenging times also present opportunities to innovate and emerge stronger as our history demonstrates.
Following the last financial crisis, we launched the industry's first floating rate variable annuity retirement cornerstone. That does comprise of 100% passive and 100% volatility managed funds enabling 100% hedgeabilty. In 2010 we also designed the industry's first buffered annuity, structured capital strategies. In introducing SCS we have steadily built diversified distribution partnerships that have proven difficult to replicate. As a result, we continue to have the leading position in the buffered annuity market despite increased competition.
As evidenced from the actions outlined above, our prudent risk culture has been in place long before our IPO that has served as the foundation for our economic model. We took additional measures to strengthen our balance sheet prior to the IPO including securing an injection of $2.3 billion from AXA Group and establishing CTE98 as our variable annuity capital standard. It requires time, fortitude and conviction to achieve this level of organizational transformation.
However, we recognize that we are stewards of the business and have the 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, we have the utmost confidence in our ability to continue delivering on these promises for the long term.
On Slide 6, I'll just provide a brief summary of our first quarter operating performance. Additional detail on the segment and total company basis can be found in the appendix and in our press release. Overall, we are pleased with how the business performed in the first quarter with non-GAAP operating earnings of $510 million translated into $1.08 per common share, an increase of 10% versus the first quarter of 2019.
Net income was $5.4 billion in the quarter driven primarily by significant hedge gains, which I will review in deeper detail on the following page. We maintained solid momentum in each of our segments even as we faced headwinds through the latter part of the quarter. Operating earnings were up at AV and in our Retirement segment, primarily driven by higher fee type revenues and new business activity across the business were solid.
SCS sales improved 11% year-over-year. Group Retirement increased inflows by 20% driven by growth in both, first year and renewal premiums. AB had its strongest retail gross sales quarter every with over $24 billion. And in Protection Solutions we continued to drive gross premium growth in our employee benefit business. All-in-all it was another strong quarter for Equitable and while the current social and economic environment will certainly present challenges going forward, we are navigating the uncertainty on strong footing thanks to the resilience of our balance sheet and business model.
Turning now to Slide 7. I would like to review the walk from net income to non-GAAP operating earnings. This slide perfectly illustrates the disconnect between the accounting treatment of insurance assets and liabilities under U.S. GAAP. As I previously mentioned, the hedge gains of $12 billion simply reflects an increase in our economic assets to cover our economic liability and should not be considered excess cash.
Included in the first quarter net income results of $5.4 billion were significant noneconomic items related to VA product interest driven by GMxB hedging, realigned 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 rates from the current spot rate to 2.25% over 10 years following the five-year historical average for the 10-year treasury.
This change resulted in unfavorable impact to net income of $1.9 billion more than offset by year-to-date economic interest rate hedge gains of $4.4 billion, resulting in a net impact of approximately $2.4 billion post tax this quarter. And reflecting the interest rate accounting impact today, our GAAP financial results move closer to FASB targeted improvement implementation and importantly more closely aligned 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 risk impacts the calculation of the estimated fair value of liabilities. For additional context, should credit spreads narrow, we would expect the opposite impact.
To reiterate, this impact during the quarter helps to illustrate precisely why we believe operating earnings is the best proxy for analyzing our performance. As equities sharply declined and interest rates fell in the first quarter, our adjustment was positive in line with our expectations and previously communicated guidance.
Finally, all the adjustments to net income this quarter primarily include impacts related to the realignment of GAAP interest rate assumptions in our Protection Solutions and Group Retirement segments and taxes.
I would now like to highlight our capital and liquidity position outlined on Slide 8. As Mark mentioned earlier, the challenging economic environment this quarter has truly allowed us to demonstrate the strength and resiliency of our balance sheet. Last quarter, we announced our new minimum capitalization target of 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 of 450% to 475% continuing to remain well in excess of our minimum target, including CTE98 for VAs.
Our hedging target is the economic liability, which is used to forward curve for interest rates compared to the statutory framework, which relies on a 3.5% reversion to mean assumption. Because we are fully hedged on interest rates, we are over-hedged on a statutory basis. This does not imply that we have more excess capital. Rather, the increase in assets matched to movements in our economic liabilities. As a result, the interest rate hedge gains protected our RBC during this highly volatile quarter.
In terms of liquidity, our well diversified sources helped to further fortify our balance sheet. As of the end of the first quarter, cash and liquid assets were approximately $1 billion at the holding company above our $500 million minimum target. At our insurance company, cash and liquid assets are nearly $7 billion as the result of hedging to our economic liabilities.
This is not distributable capital, as it is backing our economic liabilities. Between ongoing quarterly distributions from AllianceBernstein and the annual life company dividend, we anticipate mid-year, we are well-positioned to continue generating strong cash flow from our operating entities.
Our strong position is further enhanced by the additional liquidity levers we already have in place, including $4.4 billion of credit lines, and $1 billion in contingent capital to figures [ph]. In the first quarter, we returned $274 million to shareholders, including $69 million to quarterly cash dividends, and $205 million of share buybacks.
In addition, we intend to increase our quarterly dividends by $0.02 and $0.17 cents per share payable in the second quarter. As a result of our financial strength and cash flow generation, our capital management program remains on target. Furthermore, if equity markets are sustained at current levels through year-end, we expect to continue to deliver on the 50% to 60% target payout ratio.
Moving to our investment portfolio on Page 9, I want to continue to illustrate how our risk management framework has placed us in a strong position to withstand a wide range of adverse and severe credit scenarios, while still maintaining a robust capital position. We take a conservative approach to managing our channel account, actively managing risk, and investing in a diversified mix of high quality assets.
As of quarter-end, over 70% of our portfolio was invested in Corporates and Treasuries, and 98% of our fixed maturities were investment grade with an average portfolio rating of A2. Our corporate bond portfolio has an average credit rating of A3 and is well diversified across geography and industry, leaving us with limited exposure to challenged sectors such as energy and transportation.
Our commercial mortgage loans or characterized by high quality collateral, located in major metro areas, with well-capitalized borrowers, representing approximately 11% of our overall portfolio. We also have limited exposure to alternative at approximately 2% of our investment portfolio, which are highly diversified across strategies, geographies, and vintages.
Finally, we have limited investment in structured securities, including approximately 1.5% of CLO exposure, and 0% in CMBS. And while we can't know the full depth, magnitude or duration of impact, the current crisis represents, we can say that looking at the portfolio through the lens of historical [indiscernible], we feel confident that we are well prepared.
To illustrate this point, we show here two stress scenarios run on our investment portfolio reflecting default rates and ratings migration observed during the 2008 financial crisis. Leveraging two different methodologies, our analysis estimates the default losses in a 2008 type scenario, assuming no offsetting management actions would result in up to $150 million in losses in the first year, and up to $430 million over three years.
By most industry scenarios assume 2008 stress levels, we thought it prudent to evaluate a deep stress scenario that assumes impacts that are two times more severe than 2008. Under this deep stressed scenario, potential losses would be $300 million in the first year and up to $860 million over three years. While these figures are not insignificant, it's important to contextualize them with respect to the company's balance sheet, cash flow and earnings power.
Evaluating the impact of both default and migration on required capital, we estimate the cumulative three-year 77 point impact to our RBC ratio under the stress scenario, and $144.3 year impact under the deep stress scenario. Even assuming no equity market recovery from April levels, we would still expect the business to generate cash flows translating to 60 RBC points in year two and three, totaling an additional 120 RBC points before the dividend to the hold co.
Given our current RBC ratio of approximately 450% to 475%, this implies a pro forma RBC of approximately 390% to 520% under this total range of stress scenarios, maintaining our dividend capability and capitalization in excess of the company's 375% to 400% minimum RBC target.
Also, as a reminder, we were an early adopter of the NAIC VA reform, which utilizes a more conservative RBC calculation referenced here versus those who have not adopted. When we recognize that no two crisis or shocks are the same, and that you're certainly not immune to losses, we are defensively positioned, strongly capitalized and well prepared to both protect our balance sheet and capitalize on unique investment opportunities within our risk framework.
I will now hand the call over to Nick to shed more light on how the business is operating in the current landscape.
Thank you, Anders. As you saw, we had strong momentum in the first quarter, but we now face a very different environment. We remain steadfast in our focus on three areas outlined here on page 10. Guiding our clients through these volatile times and adapting our businesses to support them, magnifying our outreach to the communities we proudly serve and as always taking care of our employees ensuring their wellbeing.
On the first pillar, we've been pivoting or business processes, leveraging our remote capabilities to serve our clients. Our affiliated sales force with 4300 advisors nationwide is providing advice directly to roughly $3 million Americans. The health pandemic has generated increased interest in protection products. We have implemented refined COVID-19 underwriting policies, modifying the need for evasive blood and fluid requirements, while deploying new national and state policy guidelines on premium forbearance.
On our second pillar, we're magnifying our outreach to the communities we serve. Americans daily lives have 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 wellbeing. Through efforts such as our #PlanWhatWeCan program, we are helping people pull through this difficult period by planning new norms and rituals.
In addition, as a firm, we are active in direct relief efforts, donating supplies to local medical facilities and committing $1 million to help community activities, which keep kids learning, feed the hungry and support center for disease control activities.
Finally, ensuring our employees can deliver on our mission while remaining safe 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 actions. We expect this digital amplification to open up new opportunities for the future. As Mark mentioned, this is what our mission to help Americans secure long and fulfilling lives comes to the forefront, 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 resilient products anchored in economic realities has been at our core. Today, we are the market leader of structured annuities, providing upside potential and downside protection helping clients in these volatile markets. While on the Protection side, we have a robust product portfolio focused on capital like sectors like the BUL [ph] to address enhanced mortality concerns. As Anders highlighted, we have been a pioneer in taking meaningful products and enforce actions, drive better risk adjusted returns for our shareholders and clients.
Next, our distribution size and breadth provides privileged ways to access clients. Equitable Advisors, our affiliated sales force gives us direct access to end client needs and behaviors. Through many volatile times it has provided stable profitable growth as an anchor tenet in driving new commercial solutions, and pivoting our product mix.
In parallel, we have a deep third-party distribution partner network of over 1,100 firms with leading positions in key channels which cannot be quickly replicated. And finally, we have leadership scale and resilience segments. We have built scale in focused market segments. We're the number one provider of public sector retirement solutions for kindergartens to 12th 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 positioned to help people prepare for their next life chapters, especially in these volatile times, while AB given its global footprint and broad investment offers provides deep investment expertise. For the discrete month of April our core activity indicators remain solid. For Equitable Life, demand for advice remains 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 reoccurring premium aspect of our business lines, while our in force which represents 95% of our revenues has not experienced meaningful outflows. Sadly we have seen initial COVID related claims, which through April were approximately $40 million gross before accounting for any offsets. For our subsidiary AB, 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 our 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, Anders. Before opening to 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 to help them secure their financial futures, whilst providing our shareholders with attractive return on their investments.
Now I'd like to hand it back to the operator for questions and answers.
Certainly. [Operator Instructions] Elyse Greenspan with Wells Fargo, your line is open.
Hi, thanks, good morning. My first question, you mentioned that there was 40 million of losses in April from COVID. Can you just provide a little bit more color on where you're seeing the losses and how we should think about them hitting your segments? I'm assuming a good chunk would be in Protection. And then, just how we should think about modeling that for both April and then going forward through the balance of the year?
Thanks for your question, Elyse. Andres, will you deal with that one please?
Yes, of course Mark. Thanks, Elyse, good morning. So as Nick said, we saw about 40 million gross claims through April. If we take the [indiscernible] the lower end of the [indiscernible] or about 100,000 [indiscernible] and for the total U.S. and translate with what we know today, there is still a lot of uncertainty. We would probably get to somewhere between 100 million to 130 million in net impact to earnings. That's kind of the range I can give you right now. But there's still a lot of uncertainty around it.
Okay, that's helpful. And then my second question, you guys had mentioned in April that new business was around 70% of normal. Just hoping for if there's any more color you can give in terms of thinking about new business trends going forward beyond April? And then can you give us a like a rule of thumb as you write less new business how much capital that could potentially free up?
Elyse, why don’t I just set the context. I'll ask Nick just to talk quickly about the segments and then Anders can go. And obviously, it would not be prudent of us at this stage to give any forecast going forward. It's just too much unknown going on. I think the thing to remember is from Nick's comments in there we're 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 premiums are strong. We're not seeing any outflows or anything like that. So in the short-term our 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 upheaval to how people normally operate. So we're very, very happy with what we're seeing in that first month. And the adaptability and the ability to pivot that Nick spoke about is very, very evident, as we said. Nick, just give us a little bit of color across the segments. I think that will help.
Sure, first for Individual Retirement, 85% of our sales are coming from product lines like SCS or structured annuity notes. As you saw, we were up 11% last quarter. So, we've got confidence given the upside potential and downside protection that is right for these volatile times. Overall, Equitable advisors our affiliated sales force continues to give us access directly to clients needs and their behaviors. So prior, we're running about 70% of total capacity for normal business flows.
In the group retirement space, the public sector remains immune. Teachers are fully employed and extremely active. They're doing heroic things in distance learning as I can attest with three kids. Not surprisingly, we did see a decline in new teacher applications, as we continue to focus on our [existing million] [ph] educators through this period. And given as was mentioned, given the renewals and reoccurring nature of our retirement solutions, flows remain solid.
On Protection, we are seeing an enhanced interest in protection type products. We have pivoted towards our express underwriting for term and modified our – some of our policies capping the face amounts that we will provide without bloods and fluids. So the ranges within that 70 would be, down 50% in certain lines and to about 10%, but it's still unknown. We continue to focus on our clients. And we believe that given our remote outreach and magnifying our voice, that's going to present and position us well to emerge stronger on the other side. Anders, do you want to chip in there?
Yes, look, just quickly on your question about the impact from sales on our balance sheet. As we've said before, I mean the balance sheet is very strong and I don't think that the sales obviously we monitor the sales, but this will have no impact on the balance sheet in this period.
Okay, thank you for the color.
Tom Gallagher with Evercore, your line is open.
Good morning. Question on, Anders, if you are over-hedged on the new statutory framework because that's 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 - because it didn't is the difference due to the use of treasuries as part of the hedging program?
Yes, so Tom, look, I think they obviously as you said, I mean, uses the mean reversion still and going back to 3.5% and we hedged to the forward curve. So we over hedged statutory on the interest rates, but as you say, we use our treasuries, we need to hedge about 20%, 25% of it. So it's about $2 billion gains that we have- that didn't flow to the statutory and P&L it didn’t flow through the RBC. And then as you know, I mean we don't hedge to base products, so we have exposure on the base three, so that's why overall I think the balance sheet is very strong on RBC, but it doesn’t reflect the hedges that go through the general account.
That makes sense. So what would happen if rates continue to go down and it negatively impacted your RBC, would the plan be to sell and re-buy treasury securities to book the gain, or how should I think about that?
So first of all, I mean, as we said, we hedge to the economic liabilities. And I think that’s foremost that's our target. And then I said a portion goes through the general account. So I don't expect that this will change. I think that's a very strong hedge we have. I don't give you the projections on RBC, but I can guarantee you that we managed that to make sure that we are above our target.
Got it, and I know New York has implemented their own variable annuity standards. Just in light of what they've announced, are you still confident in getting dividends out of your New York subsidiary on a consistent basis despite that rule change? Thanks.
You’re right. Look as we discussed during the last call and a quarter ago, I mean New York has this new rollout. It's a New York floor. We discussed at that time as well, that I think in the short term, it's not that impactful, but it will - it can become problematic and particularly if markets go up. Right now, I think it's the opposite. So we feel very confident in the short-term, but it's something we have to work with New York and to make sure that we have sustainable dividends even in the long-term.
Okay, thanks. And then just if I could sneak one more in, regarding your 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 is probably some offsetting items there because there was a lower DAC asset, but probably the lower roll forward of discount rate, I presume would play some pressure on GAAP earnings?
Right. So maybe first and foremost, I think it's important that we have coded assumptions in our accounting claim, or even though I mean as we have said before, we manage to the forward right. But the GAAP is not the fair value framework that's why we I think we used a very prudent and interest rate assumption going forward. And this is just reflecting reality.
Now, the biggest impact is really on Protection Solutions, because of the accounting change, Protection Solutions falls back into loss recognition, and that makes Protection Solutions more volatile, but I think that's really the issue. What is important here as well, I mean, it really brings us just closer to capacity targeting framework, which we support them, as you know.
Okay, thanks.
Suneet Kamath 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 you'd said something along the lines of that assumes equity markets are stable to April. So, if we go back to say March 31 equity market levels, would you expect an impact on that payout ratio?
Hi, Suneet, it’s Mark. Let me deal with that one. Yes, as you said we expect to achieve our target payout ratio for the two conditions. Firstly, as always and we can maintain strong management all the capital and liquidity in particular that we can meet our true economic liabilities and so far so good there. Our portfolio continues to produce strong cash flows, hedging is working very well and as you heard from Anders, capital ratios are healthy.
And secondly, obviously we've got off with somewhat normal economic conditions. And for the past several weeks and certainly back in March time it certainly wasn't normal conditions, but markets have slowly come back. We've adapted and under current conditions, we should be able to meet our target for 2020 on the payout ratio.
Great, I'm just trying to get a sense of is that - if we do go back to March 31 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 what we said to earnings and that is, if markets are down 10% for a full-year that would hit earnings by $150 million. You can make your own assumptions from that.
Okay, and then the second question was on the AB stake. I think Anders earlier in the year you've 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 COVID and all the uncertainty that's causing is going to change the timing of any announcement that you guys might make on that?
Suneet, yes, your memory is correct. We didn't did say that. But as you indicated in your question, and quarter one has been really focused on maintaining the strength of the balance sheet. Secondly, supporting our people and our clients. And then as Nick outlined, adapting the business model. So I think as we said before in AB, we're comfortable with a 65% as more, we will get to look at it, but you're right. We haven't done anything in this quarter one. It's certainly not our priority.
Okay, got it. Thank you.
Thanks.
Ryan Krueger with KBW. Your line is open.
Hi, good morning. Anders, you mentioned that you're advocating for the NAIC to change the mean reversion interest rate assumptions under stat. I guess, can you just give us any update on if you think there is a chance that that would happen, and that they do kind of change the current methodology?
Yes, I would love to do so Ryan. Good morning. But then, I think this is outside of my range to predict and what regulators are doing. But look, again, I think what we just advocate here making sure that we appropriately evaluate our liabilities and make sure that on both sides of the balance sheet, we have a fair value approach. I think that's the only way we have a fair representation of our liabilities and we can actually manage our liabilities. And going forward and that's really what we're advocating for. Is it under stat, is it on the GAAP. And that's why we use our economic model, which is a fair value model. But I cannot predict what regulators are doing, I can just advocate in one direction.
Got it. Now on the $100 million to $130 million potential COVID claims for 100,000 deaths that seems kind of high, I guess is that because you have a higher market share in the New York Metro area, and you've adjusted the estimates to account for that.
What we did Ryan is really we just took the current data that we see coming out of April. So we just try to link that back to our portfolio. It is very hard right now to do that, because there is many factors that have to go in here. You know it's the age, it's the region, it's the social environment people live in. So that's why we gave this range. I feel confident with the range, but I - look I tell you this is lot of uncertainty here. That's why we gave you that range.
Got it. Thank you.
[Operator Instructions] Alex Scott with Goldman Sachs. Your line is open.
Hi, good morning. 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 if it's related to all the reallocation, if we should expect sort of a drag on the yield you are earning or if it's kind of incremental assets related to the hedge program, if there's some extra income that will be produced there, just help us think about that liquidity position and how it'll affects things?
Yes good morning, Alex and you’re right absolutely. Since we had the hedging program in place, we had a lot in flows in March. And so this additional liquidity is really coming from the hedging program sort of additional liquidity. It's really from the cash settlement of the derivatives and we want to keep that flexibility right now, because there's still a lot of uncertainty. That's why we have a much higher cash position than usual. So it is incremental. It's not difficult we liquidated the assets.
Got it, so no go forward, drag from that?
Right.
Okay. And then next question I had is just when I think about loss recognition and protection, and the comments that were made around, just increased volatility with protect, you know, I understand. Will that sort of change the way that the COVID-19 impacted your financial statement? And what I mean by that is, you gave your range in terms of like, what the incremental claims could be. But is there anything about being in loss recognition and that volatility that occurs from that, that they could cause the swings related to the COVID-19 claims to kind of come through in an abnormal way?
Yes, so as we said, I mean we went back into loss recognitions, really driven by the interest rate assumption change, so that's the main driver going forward. So that's what's going to create volatility in the future. And just to remind you, this volatility will go away on the LTTI, the loss recognition framework will change. And we won't be in that framework anymore. Look at volatility and volatility is going to be impacted by many things, mortality is just one of them, but I wouldn't see that as the biggest driver.
Got it, and maybe if I can ask one last one on dividend timing. I think you guys usually take that out midyear, any plans to make that more consistent over the course of the year?
Yes as we told you, I mean, usually, that's in the June/July framework, that's when we usually pay the dividend out, and that's our normal practice.
Okay, all right. Thank you.
Thank you.
Jimmy Bhullar with J.P. Morgan, your line is open.
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 planning on adjusting again as you go through your annual review process in 3Q. But obviously, as we get to 2022 based on current rates, 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 with what it was or does it increase or reduce as you go to lower and lower levels?
Yes, so Jim, yes, as we said, I mean we adjusted the assumptions really significantly this quarter, and I think we're probably the most conservative company right now when it comes to interest rate assumptions. The way we do it, we actually take the five-year average of the interest rate curve and take that as the long-term assumption created over 10 years. I don't see too much volatility in that. But you're right, I mean, they're great stay where they are. I mean it has to come down to current levels at the end of the day, so that's how I do it right.
Yes, no those will have to come down more, I'm just trying to see if someone were to guess the impact on your results, would it be fairly consistent with what like 100 basis points from 345 to you brought it down to 225? If you were to bring it down another 100, would it be some somewhat similar or does the impact increase as it declines as the assumption declines to lower and lower levels?
Yes, I'm not sure it's fully later and you have to differentiate between the Protection Solution piece and the rest. I think the rest is more linear. Protection Solution it’s mainly because you go into loss recognition, so that - you're writing down that. And so, but I think as a first guess, that's what I would do, but we haven't done, so I can't confirm that.
And then just on the SCS product, you had pretty strong growth in that product line over the past one – last year, but a lot of other companies have come out with similar products. How do you see that affecting your sales once you sort of get to somewhat of a - normalized activity later in the year? Do you expect to see weakness in your sales because other companies have similar products or not really?
Hi Jimmy, it's Mark hi. So we've had competition here for quite a few quarters now. Maybe if I had to Nick to explain, I mean, the answer topline is not just product design, its distribution, but let's ask Nick to give some colors as the distribution power we got behind this product.
Great, thank you. Yes as Mark said, look we're the innovator of the product. We're the market leader. We've got intense distribution and we believe the product, which provides upside potential and downside protection is really an asset during these volatile times.
Okay, thank you.
This concludes the Q&A, as well as the Equitable Holdings first quarter 2020 earnings call. We thank you for your participation. You may now disconnect.