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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good day, my name is Jack, and I will be your conference operator. At this time, I would like to welcome everyone to the AXA Equitable Holdings Second Quarter 2019 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]
Kevin Molloy, Head of Investor Relations, you may begin your conference.
Good morning and welcome to AXA Equitable Holdings second quarter 2019 earnings call. Materials for today's call can be found in 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 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 AXA Equitable Holdings; Anders Malmstrom, our Chief Financial Officer, and 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 like to now turn the call over to Mark and Anders for their prepared remarks.
Thank you, Kevin, and good morning everyone. Thank you for joining the call today. This morning, I'd like to begin by sharing some key highlights from our second quarter performance as well as give an update on progress against our strategic priorities and financial targets.
Before moving to the numbers, I'll start with some context around current capital market conditions and provide an update on more recent company developments. During the second quarter of 2019, we again show a mixed picture in the macroeconomic environment.
Equity markets continue to gain and provide favorable tailwinds with an S&P 500 rising 4% in the quarter. Meanwhile, treasury yields continued to weaken with the 10-year declining by over 40 basis points in the quarter or nearly 70 basis points year-to-date.
While there is no secret that higher rates are better for the interest rate dependent segments of our business, the real impact is felt by Americans, will now need to save more in a low interest rate environment to secure their income in retirement. This of course is our business and we are dedicated to educating and finding solutions for our clients. However, in this environment, much of our new business is not interest rate sensitive. For example, our buffered annuity SCS comprises over 60% of our new VA sales and it's not linked to interest rates.
The second quarter of 2019 also marked other important milestone in our continuing planned separation from AXA, which just completed its third secondary offering, reducing its ownership state to 38.9%. Our balance sheet today remains robust and well-protected with an RBC ratio of approximately 675% at the half year and capitalization levels in excess of CTE98 for our variable annuity business. With the strength of our balance sheet and strong cash flows from our operating subsidiaries, we are delivering on the commitment we made to return 50% to 60% of non-GAAP operating earnings to shareholders.
With $73 million in cash dividends paid out in the second quarter, we have returned nearly $900 million to shareholders through the first half of the year. In addition, we recently upstreamed $1 billion from our life insurance subsidiary in July, further reflecting our financial flexibility and the continued confidence we have in our expectations for operating cash flows.
And as Anders will present later, we've refreshed the three-year distributable earnings and lifetime cash flow projections for our variable annuity business which we originally presented at the time of the IPO. As you will see in a few moments, these projections have remained quite stable and continue to illustrate that our VA portfolio generated significant cash flows even in adverse scenarios and are expected to remain robust post-NAIC VA reform.
Turning now to Slide 4, and a summary of our performance in the second quarter of 2019. We delivered another quarter of strong results, improving non-GAAP operating earnings by 15% to $559 million, reflecting operating performance across our segments and continued execution against our long-term strategic objectives. This translates to $1.14 in non-GAAP operating earnings per share, a 31% increase over the comparable quarter from last year, aided by substantial share repurchases made possible by our capital management program.
Contributing today's results and the positive momentum we are generating across the business is the strength, diversity and performance of our business segments. Beginning with individual retirement, a leading distribution platform continues to accelerate sales growth with $2.1 billion in first-year premiums representing a 12% increase on the prior year quarter.
In addition to recording the highest ever quarter for sales in our Structured Capital Strategies product, we also reported our best quarter in terms of total sales in over a decade. We believe these achievements speak to the strength of our distribution network, the velocity of a capital light product portfolio, and our ability to consistently meet the evolving requirement needs of our clients.
In Group Retirement, operating earnings increased 23% to $95 million, as continued net inflows and market growth drove the account values higher. Net inflows also improved to $164 million, again demonstrating the strength and consistency of this business.
AllianceBernstein continues to deliver differentiated returns for clients through its diverse product set. The second quarter marked the fourth consecutive quarter of positive net flows with $9.5 billion in total net inflows driven by $10.2 billion in active net inflows.
On a year-to-date basis, AB delivered its best first half in more than a decade with $12.3 billion of active net inflows translating to a 5.4% annualized organic growth rate. With momentum in active equities, a pickup in fixed income and growth across a diverse space, we continue to scale and commercialize our offering, while remain focused on expense management and executing on the relocation to Nashville.
For our Protection Solutions segment, we reported a strong increase in operating earnings to $106 million. The growth outlook and stability of this business continues to improve even with several favorable drivers contributing to this quarter's results, the core performance remained solid.
From a topline perspective, we're already seeing positive near-term sales trends in our Life business despite to down quarter. And we continue to drive traction in our employee benefits business were annualized premiums increased by over 30% from the prior year quarter.
For the total company, we generated a non-GAAP operating ROE of 15.9% for the quarter, an attractive results in line with our mid-teens target. And on a consolidated basis, assets under management stud at $691 billion as of June 30, 2019. This quarter represented a continuation of the strong start to the year for AXA Equitable Holdings with good momentum across our businesses, positive outcome for our clients and consistent delivery on our commitments to shareholders.
Turning to Slide 5. We are now at the halfway point of the three-year aspirational targets we set at the time of our IPO. For our general account optimization initiative, we have achieved $125 million towards our stated $160 million goal.
In terms of execution and despite the interest rate decline, we expect to complete the rebalanced by the end of this year and we remain on track to realize the $160 million uplift by year-end 2020. From a productivity standpoint, we made meaningful progress reducing net costs in our insurance business in the second quarter, achieving $44 million of total cumulative run rate savings as of quarter end.
Overall, we remain on track to deliver on our $75 million pre-tax target net of reinvestment and expect to end the year had approximately this level before recognizing the remaining productivity gains throughout 2020. From a growth standpoint, the strength of momentum we are driving each of our four business segments continue to give us confidence in our ability to achieve our targets and generate sustainable organic earnings growth and attractive levels of capital deployment of the time.
I would now like to turn the call over to Anders to go through our results from the second quarter in more detail. Andres?
Thank you, Mark, and good morning, everyone. On Slide 6, I will review our consolidated results for the quarter before providing more detail on segment results. I will update the variable annuity cash flow projections and our capital management program. As Mark noted, we reported strong second quarter results with non-GAAP operating earnings of $559 million, up 15% from the prior year quarter, or 31% on a per share basis, as to impact from our share repurchases program has reduced outstanding shares by over 20% since the IPO.
This growth was primarily attributable to higher net investment income, due to the impact of higher asset balances and our general account portfolio optimization, lower DAC amortization and ongoing productivity improvements. GAAP net income was $363 million, up from $164 million in the prior year quarter. As with previous quarters, driving the difference between this finger and non-GAAP operating earnings are primarily non-economic items related to VA product features.
This includes the impact of our hedging program, which again performed as expected in the mixed macro environment and mixed declining interest rates and modest equity gains. We are attentive to the level of rates and routinely adjust our new business pricing to remain close to market conditions and hedge interest rate related exposures. In addition, the long term rate assumption for our SOP reserves on the GAAP is 3.45%.
Total company asset on the management ended the quarter at $691 billion, increasing 5% versus the prior quarter and 12% since the end of 2018. And finally, non-GAAP operating ROE increased 230 basis points to 15.9% driven by strong operating earnings growth over the past 12 months. This level of ROE remains in line with our mid-teens objective.
Moving on to Business segment performance, I will begin with Individual Retirement on Slide 7. Operating earnings of $359 million were down versus the prior year quarter as an increase in net investment income higher SCS account balances and improvements in GMxB results were offset primarily by lower fee type revenue as a result of lower separate account balances, higher interest credited and an increase in that amortization primarily due to the new SCS accounting methodology we introduced last quarter, which should reduce the volatility of tax going forward.
Both the full impact of the changes to previous quarters, please refer to our financial supplement and 10-Q. In the quarter, we continue to drive positive sales momentum with first-year premiums up 12% year-over-year to their highest level in over decade. Products without leaving benefits represented over 75% of new sales, led by the sales of our structured covenant strategies product, which increased 30% year-over-year and its record levels for the second straight quarter.
Our focus on differentiated distribution has enabled us to continue driving disciplined growth of capital light product and has substantially changed our mix of business over the past decade. Account values increased by approximately $1.2 billion year-over-year driven primarily by equity market appreciation. Net flows also improved year-over-year as outflows from the mature fixed rate block were partially offset by $845 million of net inflows on our current product offering of less capital-intensive products.
Moving to the Group Retirement segment on Slide 8, we reported operating earnings of $95 million, up 23% from the prior year quarter, primarily due to higher net investment income driven by higher average account values and continued execution of our GA optimization initiative.
We are also executing against our productivity targets which decreased operating expenses during the quarter. Account values increased $1.4 billion year-over-year due to market appreciation and continued net inflows. Net inflows, which are traditionally strongest in the first two quarters of the year, improved over the prior year quarter, driven by strong gross premiums and lower surrenders.
Looking ahead to the third quarter, we anticipate the usual flows seasonality as contributions decelerate over the summer months. Gross premiums also improved on a year-over-year basis from $885 million to $910 million driven by growth in both first-year and renewal contributions enabled by our continued focus on driving deeper planned penetration and increasing contributions through client engagement programs linked to our workplace advice model. Finally, segment operating return on capital improved from 27.5% to 32.1%, driven primarily by strong earnings growth over the trailing 12 months.
Now turning to Investment Management and Research, which is AllianceBernstein on Slide 9. Operating earnings decreased to $80 million from $97 billion in the prior quarter, primarily driven by lower revenue due to higher performance fees in the prior year quarter following adoption of the new revenue recognition standard ASC 606 and higher operating expenses, partially offset by higher base fees.
Net inflows of $9.5 billion were positive for the fourth straight quarter and were driven by $10.2 billion of active net inflows. On a year-to-date basis, $12.3 billion of active net inflows translates to a 5.4% annualized organic growth rate, which represents AB's best first half in more than a decade.
Average fee rates in the second quarter remained stable year-over-year and increased slightly on a sequential basis despite ongoing headwinds facing the industry. And as Mark pointed out earlier, AB's second quarter results reflect solid underlying momentum in several areas of the business.
In retail, gross sales reached record level and net inflows reached its highest level in 19 years. As AB continue to see diverse array of funds attracting assets that typically in 21 funds across asset-classes attracted more than a $100 million of net flows in the quarter, and 52 retail product and assets over $1 billion at quarter-end. In addition, AB continues to diversify and grow its institutional pipeline and drive organic growth in active equities.
Finally, AB's adjusted operating margin was 25.1%, up a 100 basis points sequentially, but down from 27.3% in the prior year quarter, primarily due to Nashville relocation expenses, lower performance-based fees and higher compression. Despite headwinds, we continue to believe that AB is a 30% plus margin business and with expense actions such as the relocation to Nashville on the way, we are confident that this is an attainable long-term objective.
Moving to Protection Solutions on Slide 10, where we reported strong operating earnings of $106 million for the quarter. We realized this is a much stronger result than you may have been expecting, but it is the result of several items all moving in the same direction this quarter.
Driving earnings was higher net investment income from higher asset balances and our GA optimization initiative, lower DAC amortization following our exit from loss recognition into third quarter of 2018 and improved expenses, which included a one-time release of litigation reserve of $11 million. The benefit ratio also improved to 64.8% from 68.2% in the prior year quarter, primarily reflecting higher revenues from our GA optimization.
Overall, we delivered sold operating performance in the quarter and maintain a positive and improving outlook on the business going forward with an upward bias to our prior $50 million guidance, subject to mortality variability.
Concluding with sales, annualized premiums decline year-over-year from $67 billion to $63 million, partially offset by strong sales growth in our employee benefits business. While Life sales dropped off slightly compared to the second quarter of 2018 the quarter ended strongly and we are seeing positive near-term momentum in the business.
Turning to Slide 11, I'd like to take a moment to present the post VA reform refresh of the next three years forecasted distributable earnings and also the lifetime cash flow projections, but our variable annuity portfolio. As a note, this will begins with the 2019 calendar year and include actual results from the first quarter of 2019. And we prior disclosure this illustrations have no assumption as to feature new business.
Because of the strength of our reserves, assumptions relative to NAIC and our robust hedging program, you will see that our VA portfolio continues to generate significant cash flows even in adverse scenarios. And as you’ll see on the page, the new projections remained largely in line with our previous disclosure hosts the impact of NAIC VA reform.
To illustrate this, I point you to the green bars on the page, which represent our updated projections. Focusing on the left side in our base case, we assume an equity return of 6.25% per annum and that 10-year treasury rates with follow the forward curve unchanged from our prior disclosure. Under this scenario, we will generate $5.2 billion of distributable cash flows during the period from 2019 to 2021, up from the $4.1 billion we previously reported.
Driving this favorable change are two key items. First, rolling forward the projection period to the first quarter of 2019 dropping 2018 and adding 2021 distributable earnings reduces cash by approximately $400 million. And second, the impact from VA reform was net positive in the amount of $1.5 billion on our three-year distributable earnings.
We were well positioned for VA reform due to our existing hedging program mitigating to lower long run NAIC interest rate target and our policy of the behavior assumptions being brought in line with the new standards. Based on this positioning, our projections reflect a one-time reduction in initial capital requirements due to our hedging strategy, partially offset by increased hedging costs as a result of greater market sensitivity in the post VA reform liability.
Moving now to the lifetime cash flows in our base case, we project a present value of $11.9 billion down from the $12.9 billion previously reported in 2018. Driving this change is primarily a $1.1 billion impact from VA reform due to the more market sensitive framework requiring additional hedging. In summary, our existing hedging strategy and assumptions positioned us well for the impact of VA reform.
Looking ahead, our distributable earnings over the next three years, unlike and cash flows remain robust across a wide range of scenarios, driving conviction in our ability to continue to generate cash and create long-term value for shareholders. Additionally, going forward, we will continue to evaluate opportunities as appropriate to further reduce the volatility of returns.
And finally, as a general practice, we may evaluate our future VA cash flow disclosure. By the methodology used until now what's valuable for the benefit of compatibility with recently listed pierce. We do think there are more complete ways of looking at the cash flows over our business at the total company level.
Before turning to call back to Mark for his closing comments, I would like to highlight our capital management program outlined on Slide 12. During the quarter, we returned $73 million to shareholders in the form of our quarterly common cash dividends, reflecting $0.15 per share, 15% from the prior quarter. On a year-to-date basis we've returned $891 million, which includes $141 million in cumulative quarterly dividends, $600 million share repurchase from AXA in conjunction with the secondary offering, and $150 million as part of an accelerated share repurchase agreement entered in January.
Taking together, this already places as well on track to deliver on our target payout ratio of 50% to 60% of non-GAAP operating earnings in 2019. And following the 600 million share repurchase in March we currently have $200 million remaining on our existing share repurchase program. Keeping with prior guidance, we would aim to primarily repurchase shares from AXA as it continues to execute on it stated intention to set it down while also being opportunistic in the open market.
Supporting this capital management program, this is strength of our balance sheet and robust operating cash flows. In July, we upstreamed $1 billion from our Life operating subsidiary to the holding company, in addition to the quarterly AB distribution enhancing our capital position and financial flexibility in anticipation of the continuation of our capital management program for the remainder of 2019 and into 2020. Further, as of June 30, our estimated combined RBC ratio was approximately 675% and I our dept to capital ratio was 25.8% both in line with our stated targets.
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 our strong results and some of the highlights from the second quarter. We continue to generate strong performance across the mixed market and macro environment and have accelerated momentum in each of our Business segments.
We continued to make significant progress against our strategic priorities and remain confident we will achieve our 2020 targets. We are delivering meaningful capital returns to our shareholders with nearly $900 million in dividends and share repurchases to the first half of the year and have illustrated that our businesses have and will continue to generate significant cash flows across a wide range of market environments.
Importantly, AXA equitable holdings continue to deliver on the shareholder commitments we articulated at the time of our initial public offering 15 months ago. As one of the largest independent publicly traded financial services companies in the country we are driving strong performance and continued momentum across our Business segments for the benefit of our many clients and stakeholders. And achieving these strong results we are enabling substantial capital generation to invest in the continued growth of our businesses and deliver consistent, attractive level of capital returns for our shareholders.
With that, we'll open it up for Q&A.
[Operator Instructions] Tom Gallagher with Evercore, your line is open.
Thanks. First question, Anders, you mentioned, I think it was 3.45% is the long-term interest rate assumption under GAAP SOP. That's a bit lower than most other companies in the industry, but it's above current interest rate levels. Would any perspective on whether or not you might change that assumption heading into your 3Q balance sheet review?
Good morning, Tom. Yes. So look, I think first of all, our long-term rate as we said is 3.45%. I think that's it. If you compare with that – in the industry, I think that's a quite conservative assumption. Obviously rates right now are lower. We are going right now through the process and see what we have to update and we're going to update that in Q3.
Got it. And then just on the distributable cash flow update, so that got a bit better under all the scenarios over a three-year basis. I know you mentioned that 50% to 60% capital return target. Does this change your view? Now there's differences between capital return and actual free cash flow you generate. Does this change your view of what that ratio is in terms of capital generation and would it be north of the 50% to 60%, which would maybe leave you a buffer, maybe allow you to raise that 50% to 60% capital return target at some point?
Look, I think, I mean first of all, I mean talking about the VA cash flows and – the main message we want to give here is, I think we are on track, I think the NAIC reform doesn't have a meaningful impact on our ability to generate cash, but it actually have more economic framework that we really like. But I would say it really confirms our long-term view that we can return 50% to 60% of our operating earnings. It's really a confirmation that we are well on track there.
Got you. Thank you.
Elyse Greenspan with Wells Fargo, your line is open.
Hi. Good morning. My first question kind of building upon the capital returns. You guys have $200 million left under your authorization for this year. You did just upstream a good amount in July. So just trying to get a sense, if there are some offerings from AXA, would there be the ability to maybe go above that 50% to 60% level this year. If you want to kind of pull forward some buybacks that maybe you had in mind for next year. Just how are you thinking about buybacks and a little more color on the second half of the year?
Yes. So look, I mean, first of all, I mean many things here that come together, so first of all, we have $200 million left from our authorization, which brings us pretty much in line with the overall target of 50% to 60%. As you know, we paid out most of it, but $200 million is still a sizable number.
And secondly, as you said, we upstreamed another $1 billion in July from our operating entity. As you know, I mean this is annual process usually, usually mid-year, and so this amount of money now basically helps for our capital management for the next nine months. So really way into 2020. So I think it's really confirmation that we can continue with our capital management program.
Now to your question about AXA, we don't know what their plans are. We know that they want to go out completely and we want to support them, and I think that's what we always said that the majority of the buyback capacity we're going to use with AXA, but we're going to use it opportunistically in the open market.
Okay, great. And then in protection, pretty strong quarter. You had mentioned kind of there is an upward bias to kind of the prior $50 million or so of earnings that you were targeting on a quarterly basis. Could you just give us a sense of kind of where you see the earnings of that segment coming in now on a quarterly basis?
Yes. Look, I think first of all, in the past, we always guided you to around $50 million. What you clearly see here now is that the GA optimization and our expense management is really coming through. Now as we told you, it’s not $100 million in the long run, but it's going to be higher than the $50 million that we previously said really because of the actions are coming through. In addition, we have a good mortality results in Q2.
Okay. Thank you for the color.
Welcome.
Andrew Kligerman with Credit Suisse, your line is open.
Thank you very much. Good morning. Anders, I guess I'm unclear on your commentary. You said we want to support them with AXA, so should I take that to mean if they were to come out and do a sizable offering, you would consider materially greater buyback not committing to anything, but you would consider materially higher buyback than the $200 million that you have authorized?
Look, I think, what I can confirm you is that I have the cash now for the next nine months, we have it in-house. I think that’s what I can tell you today. We have authorization of $200 million, but we actually have the cash for the next nine months. And I think that's the situation we're in right now.
Got it. All right. I'll read what I want to read into that one. And all right, the Group Retirement business, where I think the bulk of it is 403(b). In our model, we kind of noticed 1 basis point or 2 basis point downtick in fee income. And yes, flows were positive this quarter, but next quarter you mentioned Anders, the seasonality, so maybe – and the year kind of flattish. So what I'm interested in is the competitive environment in Group Retirement. Is there a pressure on those 403(b) fees? That's number one. And number two, do you think there's an opportunity here to get to positive flows or is it just too pressurized?
Maybe Mark, you want to take them?
Yes. Hi, Andrew. It's Mark Pearson here. Look, the 403(b) business for the last six, seven years is end of the year positive. You're right. There is some seasonality in quarter three, but we've got a good first half of the year.
In terms of pressure, I think it's about to understand the business model here. It's a very much a position where it's difficult to get to market. We have something like 8,000 plus school districts where we will be provider there. We have a national sales force or a 1,000 plus advisors dedicated to giving advice at the work site.
So, we wouldn't say that are seeing margin pressure in that business today. And we have a very strong position as you know we're number one nationwide in the K-12 educators markets. So I think it's the business model that protects the margins, rather than suffering from undue competitive pressure.
Thank you.
Ryan Krueger with KBW. Your line is open.
Hi, good morning. When I look at the cash flow scenarios and compare the three year distributable earnings to the lifetime cash flows and assets. I guess if you look at the three-year number tends – in most of those scenarios is around 40% of the lifetime total, it seems pretty high. So I was just wondering if you could piece together, I guess the disconnect there, why is that three-year distributable earnings such a large percentage of the lifetime cash flow?
Yes. Look, I think – I mean, the main reason really is that these are two different methodologies that we actually look at. The three years is really what we call distributable earnings and then the lifetime is discounted. So there's a different methodology. But I think what it tells you is that, I think the business is actually generating significant cash flows throughout them, the lifetime of the book. And I think that's what you probably would expect from the runoff book that they generate some cash flows up from.
Got it. And then just a couple of quick ones, the 3.45% SOP discount rate, do you assume a spread on top of that. Like a risk spread or is that the actual discount rates being used?
No. This is our reversion to the mean assumption under SOP for the 10 year treasury.
Got it.
That's really the underlying assumption that goes into the SOP reserve.
And then just last one, can you disclose what the mean reversion interest rate assumption you're now using under NAIC VA reform? I know you gave us the cash flows under different scenarios, but what the actual mean reversion is – there is interest rate assumption is in the CTE98 calculation now?
Right. So under the new NAIC VA reform, you have a mean reversion, but it's actually a moving average that's predefined by the NAIC, and as of now it's 3.5% and I think it will also stay by the end of the year, 3.5%. So even if rates move, it will not change and the mean reversion assumption.
Thank you.
Suneet Kamath with Citi. Your line is open.
Thanks. Good morning. I wanted to go back to the present value of cash flows of the VA business. It looks like based on the appendix, the VA assets, a $5.1 billion are quite a bit higher than where they were, I think at the end of 2017, which was $4.6 billion, I want to understand what caused that change? And also I was on the impression that you’re already at peak reserves there. So I want to understand if the $15.1 billion is assuming – if you're assuming that'll be kind of flat from here on now.
Right, so I think that the most importantly, I think we all have to understand that the CT number, it says its very market dependent. So the difference really from what we showed you in the S1, to what we show you in today is really market. And the up and down gets then supported by the hedging program. So if you have let's say, drop in equity, you have an increase in your CTE. You get that funded by the hedging programs. So the difference is really, really, really market. When we say it's at peak tar, it means if you don't see any change in market, it reduces over the lifetime of the policy. But not if you actually see a market change then obviously it can go up and down even over the next many, many years.
So what you're saying is the move from the $12.6 to $15.1 is that's just pure mark-to-market on the hedges, there's no additional assets or capital that you guys are using to back the VA business away from hedge marks.
Correct.
And then Anders, I think, in your prepared remarks, you talked about maybe some changes that you'd be making to this VA cash flow disclosure. Can you just give us a little insight in terms of what you're thinking there?
Yes. Look, I think first of all, when we updated the cash flows here. We said let's just do one more time these cash flows because they were out, people had them understanding and that show that the impact of the NAIC reform is not material to the cash flow generation. I personally don't think it's in particularly the lifetime. I don't think it's the right way to look at cash flows. I would rather have more kind of real world embedded value approach when we talk about cash flows for the full business and not just looking at them to VA's. That's how we think about and that's going forward. But here really we wanted to compare the old cash flows, of the VA reform show that it’s really didn't have a material impact but going forward we really have to talk about real the cash flows.
Okay. And so you're saying your company – for the company as a whole as opposed to just the individual and group VA businesses?
Right. So we are going to come back with – we want to talk about – but basically that's it, yes. All right. Thanks
Alex Scott with Goldman Sachs, your line is open.
Hi, good morning. First question, I had was just on the added, I guess, note in the press release in your comments that you might assess opportunities to reduce volatility. I'd just be interested in what's kind of is that – or should I read that as a change in approach or an increased interest in potential solutions to unlock the value of these cash flows and the variable annuity business and what type of things could you potentially do?
Yes. Good morning, Alex. So I think what we showed here is when we looked at the VA cash flow that actually the new framework is more sensitive to markets, but at the same time it recognizes more the actual hedging. I think that what's an important point here? So we actually have a very, I think I would say a very good hedging program in place and you see that that it now gets better recognized in the new framework, but it's still more sensitive to market. So what we are thinking is how can we update and the hedging program to take away some of that sensitivity after the VA reform. Because right now we assumed the same hedging strategy as we have today. So we didn't incorporate any changes in hedging strategy.
Got it. And so I would in general – would that reduce the cash flows by adding costs associated with adding hedges or I guess, the other piece of it is the SCS product you're writing. Could you talk about how adding incremental AUM there can help us the hedge offset I think that that probably helps you with effectively getting put options out of the money?
Yes. I think two things. First of all, I mean, as you know, our maturity of the hedging program is really a dynamic program. So there's no explicit cost related to that. We really just have the statutory overly where we have option costs and that the thinking is more, in particular, under the base case if you do more dynamic hedging that could in a way reduce volatility.
But I think it's too early to say what we’re going to do exactly. I think that's an interesting concept to use kind of a natural hedging in our portfolio. And I think SCS is a good product where we actually see a natural offset with the other products that will help them going forward. And that's an area we are going to go deeper and then make a decision how we want to implement that.
All right. Thank you.
Ian Ryave with Bank of America, your line is open.
Good morning. Thanks for taking my question. Just wanted to ask few on sales. So the SCS product has done pretty well. You had the strongest sales quarter. First, how did you envision the competitive environment as other companies get into this product category, and also on interest rates that have come down in equity market volatility, how do you think demand could be impacted?
Hi Ian. It's Mark Pearson. Yes, as you said, we had our strongest quarter ever in SCS despite the competition. Yes, we see competition coming in. But what we like to say, I think we have to think about not just the product. The product is easily copied. The distribution model we have, really is a competitive advantage for us. I mean a couple of savings on that. We have an affiliated salesforce, AXA Advisors. We get something like 90% on annuity sales. So when they are doing well, it comes through.
And we have a very broad range of distribution partners, ranging from wirehouses where everybody is doing, but also banks and partnerships with insurance companies and that's really a strength of ours, is sort of premier distribution channel that we have. So it's not just a question of can people copy us? That's easy to do, but trying to get our distribution reach is really coming through in terms of us increasing our sales and increasing market share despite the competitions. So that's really where we are now.
Interest rates, as you quite rightly said, I mean, the big seller SES is not interest-rate dependent. And as we said in the opening comments, I mean, if you really think about it, the low interest rate that you are seeing now is really the main challenges for the American public in terms of saving to retirement. They simply need to save more to secure the income mainly in the time. And it's really for us and our industry to find a solution. So that's how we approach it.
Okay. And then on employee benefits, obviously, there is some positive industry trends, underwriting expenses are good. I would consider that to be pretty accommodative to grow this business rather quickly. Would you consider the backdrop to be rather positive regarding this business? And I guess where do you envision the employee benefits kind of contributing to Protection Solutions results from a bottom line standpoint?
Yes. Ian, we agree with you. We like the business, I think as you know from a standing stock, we'd gone out with a very good technology platform. That’s our angle. We also had the ability to market into – a segment of the market, which is 500 employees and below. That is better margins for us as well. And we're really pleased with the progress.
We have something like 300,000 clients there now. So very good progress from a standing stock. In terms of coming through in earnings, we won't see anything significant by the end of 2020 the guidance we've given you. But this is really a business where we're happy to be, and the conditions are good, and it's a medium to long-term growth like our.
Great. Thank you.
This concludes the question-and-answer session and the AXA Equitable Holdings second quarter 2019 earnings call. We thank you for your participation. You may now disconnect.