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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 the Equitable Holdings' second quarter earnings call. [Operator Instructions] Ms. Baehr, please go ahead.
Thank you. Good morning, and welcome to Equitable Holdings' Second 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 refer you to the safe harbor language on Slide 2 of our presentation for additional information.
Joining me on today's call is Mark Pearson, President and Chief Executive Officer of Equitable Holdings; and Anders Malmström, our Chief Financial Officer. Also on the line is Nick Lane, President of Equitable Financial; and 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.
Good morning, and thank you all for joining us today. I recognize that this is still a very difficult time for many, so I'd just like to start by saying that on behalf of all of us at Equitable, I hope you and your loved ones are safe and well. I'm extremely proud of how our employees and advisers have responded to these most challenging times. It is pleasing to report today's earnings and growth in assets under management, a testament to the commitment and agility of our people and robustness of our business model. Our resilient balance sheet means we are well prepared for any future turbulence, and Equitable remains well positioned to help our clients protect their families and secure their financial well-being.
Turning to Page 3. We came into this crisis from a position of strength, with strong capital ratios and a set of management values that underpin how we manage this institution. We have a strong emphasis on prudent financial risk management, and we always put the well-being and safety of our people at the forefront of everything we do. I'm also extremely proud of how my colleagues have responded to the cause for a more just society. Equitable will continue to be a force for good in developing programs and solutions that make a difference and create opportunities for those who have been disadvantaged for far too long.
Overall, I'm very pleased with the Q2 results. Non-GAAP operating earnings amounted to $459 million or $1 per share. I believe this to be a very credible performance, considering the headwinds facing the business and compares well to the $1.14 of earnings per share we saw in Q2 of 2019. Assets under management are up 10% since the first quarter to $711 billion, supported by the strong persistency of our in-force and good net flows in both Retirement and at AllianceBernstein. As a result of strong expense focus and less travel, operating expenses are down 9% year-over-year, and we remain well on track for our $75 million net savings target.
The impacts to date of the COVID health crisis are manageable and below previous guidance provided. Excess claims during the COVID period, net of reinsurance and reserves, amounted to $60 million post-tax impact to operating earnings in the quarter. New business activity remains around 70% of normal levels, and we are very pleased with the significant step change in our digital capabilities and adoption.
Over the past 10 years, we've developed a risk management framework which fully hedges to our economic liabilities and protects the balance sheet from record low interest rates. Equitable is not reliant on interest rates rising. We are executing our hedging program with over 95% effectiveness. Our statutory ratios remain strong with a combined RBC ratio of approximately 415% after a $1.2 billion distribution from Equitable Financial in May. Later on in the presentation, Anders will explain how we are responding to market volatility with speed and discipline to improve our risk-adjusted outcomes on our general account.
Please turn to Slide 4. I'd like to provide some detail to support why we are confident in our ability to adapt to an uncertain environment. You may recall from our Q1 release, Nick Lane presented the 3 pillars that differentiate Equitable: firstly, the ability to design and market economically sound products; the affiliated distribution strength we have; and the scale benefits of being a trusted leader in resilient sectors such as the teachers market. These trends are evidenced by strong net flows in the second quarter, with combined Retirement net flows of $163 million and AB delivering a particularly strong quarter with net flows of $4.6 billion, excluding low fee AXA redemptions.
The demand for advice remains high. Experienced Equitable advisers who comprise 65% of our sales force and 91% of production have successfully maintained their 2019 productivity levels, reflecting the deep client relationships they have built over many years. We also remotely onboarded over 100 new advisers in the quarter. We are magnifying our outreach to help clients navigate through these uncertain times. Advisers have increased virtual client meetings by 7x to prior periods and client engagement activities are up 9% year-over-year.
In response to the current environment, we are obviously changing processes to meet client needs. We have modified our underwriting policies to offer fluidless, touchless process to help more clients access the protection they need. With schools closed, we've worked fast to develop digital and remote engagement with our teacher clients, and as a result, we've seen contribution increases reach record highs, up over 25% year-over-year.
Our ability to innovate, that is, develop economically sound products that are in demand is best represented by our flagship product, Structured Capital Strategies. This is a protected equity strategy that effectively balances client value with responsible pricing and continues to be one of the top-selling products in the variable annuity market. Client demand remained strong with SCS sales up 7% in the retail channel year-over-year. We continue to introduce new features such as Dual Direction while developing new solutions to meet the evolving needs of our clients. While the outlook remains still uncertain, we must manage the variables within our control, especially expenses. Productivity initiatives are ahead of plan. We are on track to achieve our $75 million net savings and expect additional uplift from COVID-related savings, such as reduced travel.
Further, we are using the separation from AXA Group as an opportunity to seek to reduce our run rate expenses and upgrade our technology capabilities. For example, we are migrating 80% of applications to the cloud, which provides us with new tools, improved security and lower expenses. Additionally, we now have an enterprise data lake, robust reporting tools and enhanced modeling capabilities, which will further drive insights for business growth and productivity gains.
One silver lining of the COVID-19 pandemic has been the acceleration of digital adoption programs. We are seeing projects that would take many years to deliver achieved in a matter of weeks. Today, over 90% of retail applications are submitted electronically, including 100% in Individual Retirement, leading to improved outcomes and generating productivity gains for clients, advisers and the company. Throughout these past months, we really see the reinforcement of our mission and where we help clients protect their families and secure their financial well-being.
I'll now pass it to Anders to give some more detail, including our risk policy, segment results and capital management program. Anders?
Thank you, Mark. Now turning to Slide 5. The economic environment through the first half of the year has enabled us to demonstrate the strength and resiliency of our balance sheet, and this quarter has again exemplified why managing to an economic framework is so critical. This slide illustrates the effectiveness of our prudent risk management practices, and specifically, the positive impact of our GMxB hedging strategy. Because we hedged our full economic liabilities, our balance sheet continues to be immunized from interest rates despite the sustained low rate environment. This means we have no reliance on a reversion to mean assumption and make no predictions about future interest rates.
Our economic hedging program continues to work exactly as designed, with over 95% effectiveness in the quarter. Translating this to U.S. GAAP, we reported a below-the-line impact related to interest rate hedge gains of $1.9 billion in the first half of the year. This more than offset the impact of the realignment of our long-term GAAP interest rate assumption last quarter. While industry practices vary widely with respect to GAAP interest rate assumptions, with some relying on a reversion to mean as high as 5%, we believe our realigned assumption of 2.25% is more consistent with today's economic realities.
As expected, we also saw a reversal of the GAAP equity hedge gains from the first quarter, driven by the market recovery. This offset reflects the effectiveness of our hedging strategy across volatile markets. In addition, while the credit spreads narrowed in the second quarter, they remain elevated, resulting in a net $1 billion positive impact, including NPR on a half year basis.
Importantly, since we fully implemented our economic model and adopted NAIC VA reform, the mismatch between derivatives and GAAP liabilities has increased, thereby magnifying our GAAP net income sensitivity. As such, for modeling purposes, we would now guide to $1 billion to $1.3 billion in below-the-line adjustments to VA product features, assuming a base case scenario of 6.5% equity market and interest rates increasing 10 basis points. This is up from our prior 2018 guidance of $700 million. Further, following adoption of VA reform, our statutory sensitivity increased, resulting in new guidance for our options budget of $200 million to $250 million per annum versus the $100 million to $150 million previously, consistent with our 2019 VA cash flow disclosure. To summarize, our results through the first half of the year continue to illustrate the resiliency of our balance sheet and the prudence of our risk management practices. Amid volatile equity markets and record low interest rates, our economic hedging program has been extremely effective, translating to net positive GAAP impact, inclusive of the impact of realigning our interest rate assumptions to the most conservative in the industry.
On Slide 6, I review our consolidated results for the second quarter before providing more detail on our segment performance, capital management program and investment portfolio. Overall, we are pleased with how the business performed, particularly in light of turbulent markets, higher death claims and an uncertain economic outlook. This quarter, we reported non-GAAP operating earnings of $459 million, translating to $1 per common share. The results reflect a 12% decrease versus the second quarter of 2019, primarily driven by lower fee type revenue from lower average account values, lower net investment income resulting from losses on our alternative investment portfolio and an impact of approximately $60 million from excess claims related to COVID-19. Losses on our alternative portfolio were primarily driven by weakness in private equity, which was reported on a 1-quarter lag during the first quarter of the year. Going forward, while we expect a partial recovery in Q3, given market performance in the second quarter, I would note that much of the rebound has been driven by the technology sector, whereas the rest of the market is still significantly down.
On claims, we had excess net claims of approximately $60 million post-tax in the quarter, driven by COVID-related mortality experience. This came in below our prior guidance, primarily due to insured populations being significantly less impacted than the general population, more than offsetting our geographic concentration in the Northeast. We also benefited from positive reinsurance results this quarter. Taking these factors and our experience into consideration, we are revising our guidance to a $30 million to $60 million earnings impact per 100,000 excess U.S. deaths.
U.S. GAAP net loss was approximately $4 billion in the quarter, primarily driven by noneconomic impact from loan performance risk and the reversal of hedge gains, in line with expectations as I mentioned on the previous slide. And as Mark notes, we reported assets under management of $711 billion, a 3% improvement from the second quarter of 2019, driven by market performance and net inflows over the prior 12 months.
Moving on to the business segments. I will begin with Individual Retirement on Slide 7. Operating earnings declined by 3% year-over-year, primarily driven by lower fee type revenue on lower average account values and lower net investment income on alternative performance, as I mentioned on the prior slide. Net flows improved in the quarter as lower first year premiums were offset by greater retention. Overall, we continue to favorably shift mix as outflows from our mature fixed-rate block were partially offset by inflows on our current product offering. From this point, we continue to drive sales responsibly and launch new features to Structured Capital Strategies, an attractive and sought-after product, particularly in volatile markets. We grew sales of SCS by 7% year-over-year in the retail channel, and we will continue to innovate to meet the growing demand for protective equity strategies.
Turning to Group Retirement on Slide 8. We reported operating earnings of $90 million, down from $95 million in the prior year quarter, primarily due to lower net investment income on alternatives performance. Net flows increased by $52 million to $216 million, a 32% improvement versus the prior year period. This was primarily driven by strong renewal contributions across our in-force and improved retention. Renewal growth was driven by 7% growth in tax-exempt markets, which is a testament to the deep client relationships we have cultivated over decades and our ability to drive client engagement virtually.
Now turning to Investment Management and Research for AllianceBernstein on Slide 9. Overall, AB delivered solid results with operating earnings of $92 million, up 15% year-over-year, primarily driven by lower operating expenses and higher Bernstein Research revenues. In the second quarter, AB generated $4.6 billion of net inflows, excluding expected low fee AXA redemptions of $7.9 billion, representing 3% annualized organic growth. Further, the institutional pipeline grew to a record of $17.5 billion, and sales remained robust across both retail and institutional channels.
Gross sales of $31.8 billion represented the second strongest quarter in over a decade and was led by retail gross sales of $19.6 billion in the quarter, the third highest in retail history. Finally, AB's adjusted operating margin expanded by 280 basis points to 27.9%, driven by lower operating expenses, resulting from focused cost reduction initiatives such as the Nashville relocation.
Moving to Protection Solutions on Slide 10, where we reported an operating loss of $12 million, driven primarily by excess COVID-related claims and lower net investment income on alternatives performance. As I mentioned earlier, results include excess net claims related to COVID of $60 million post-tax, which is below our prior guidance and continues to be manageable. As a reminder, we expect ongoing earnings volatility in Protection Solutions due to the Life business reentering loss recognition following the realignment of our long-term GAAP interest rate assumption last quarter. Gross written premiums for the quarter declined year-over-year, driven by lower premiums in the Life business. However, this was partially offset by continued strong momentum in the Employee Benefits business, which benefited from strong persistency and generated significant year-over-year growth in gross premiums.
I would now like to highlight the strength of our capital and liquidity position outlined on Slide 11. This quarter, we returned $102 million to shareholders, including $77 million on quarterly cash dividends and $25 million on share repurchases. In the context of our 2020 capital management program, we have now returned $376 million to shareholders year-to-date or $776 million total, including the $400 million of repurchases we accelerated into 2019. Our balance sheet remains robust, evidenced by our combined RBC ratio of approximately 415%, which reflects early adoption of VA reform, hence the $1.2 billion distribution from Equitable Financial in May.
The dividend upstream, which is above our 2019 dividend and at the upper end of our historical range, provides additional financial flexibility and further demonstrate the ongoing strength and stability of our capital position. Further, we have well-diversified sources of liquidity, which gives us strong conviction in our ability to weather a wide range of economic scenarios. At the end of the second quarter, cash and liquid assets were $2.1 billion at the holding company, well above our $500 million minimum target. And at Equitable Financial, we had $3.6 billion of cash and liquid assets, primarily supporting our hedging program. Supported by our financial strength and stable cash flow generation, we continued to deliver on our 50% to 60% payout ratio. Finally, we ended the quarter with a debt-to-capital ratio of 23.1%, and we will continue to optimize our capital structure and financial flexibility over time.
Moving to our investment portfolio on Page 12. Throughout the first half of the year, we have been proactive in managing the investment portfolio and opportunistically taking advantage of market dislocations by reducing risk. We responded with both speed and rigor to capitalize on widened credit spreads to improve the quality of our portfolio without sacrificing income. This is evidenced by a $2.5 billion rebalancing program from U.S. treasuries to corporates and other high-quality investments that we began executing at the end of March.
Specifically, we initiated a derisking program to acquire attractive yielding assets at historically high spreads, picking up an additional 120 basis points when compared to current spread levels. By acting quickly and opportunistically, we were able to partially offset the impact of low rates on our book yield and stabilized the portfolio income despite market volatility. Importantly, we executed the rebalance while maintaining a high-quality fixed income portfolio that is consistent with our overall strategy, with new purchases averaging a rating of A2.
On the defensive side, we acted in anticipation of downward rating migrations in individual names related to economic pressure. As part of this program, we had identified BBB bonds with high potential of downgrade and executed on a plan to proactively reduce this exposure by selectively pruning for names expected to have low probability of default.
These efforts led to the strategic sale of over $500 million of potential fallen angels, resulting in a net realized capital gain of $0.5 million. Further, by selling in advance of price deterioration, we were able to reinvest the proceeds at higher book yields without incurring net realized losses. While the economic outlook remains largely unknown, we are continuously reassessing our fundamental views on our individual exposures and are proactively executing on additional opportunities. We have already identified incremental derisking opportunities to further improve the quality of our portfolio with attractive corporate spreads.
In addition, we reduced risk negotiating and executing forbearance agreements on 19 of our corporate mortgage loans, supporting borrowers impacted by the COVID crisis. This has enabled us to keep the loans in good standing, and as a result, we anticipate full recovery of principal on these loans. I would also like to highlight the launch of Equitable's first FABN, or Funding Agreement Backed Note, program in the second quarter, which we strategically launched during an attractive new issue market, taking advantage of the residual dislocation in structured credit. Due to a receptive market and our strong position with the existing portfolio, we were able to successfully execute a $650 million offering, yielding a net spread of 140 basis points above our funding costs.
Overall, our intentional actions throughout the quarter have resulted in improved portfolio quality during this volatile market while simultaneously improving income. We will continue to respond with speed, agility and discipline to maintain our strong position.
With that, I'd like to pass the call back to Mark for final comments.
Thanks, Anders. In closing, I remain inspired by the dedication and agility of our employees and advisers and the manner in which they have responded to the most challenging of circumstances. Despite these challenges, this quarter's results continue to demonstrate the resilience of our business and our ability to create value across a broad range of scenarios. We've acted with purpose to manage headwinds while pivoting processes, magnifying our outreach, accelerating our digital capabilities and capitalizing on expense and investment opportunities.
Meanwhile, our balance sheet remains robust, fortified by our risk management practices and economic hedging program. Supported by these factors and the exceptional people of Equitable, we are operating from a position of strength and remain well positioned to help our clients protect their families and secure their financial well-being. With that, I will hand the call back to the operator to open the line for questions.
[Operator Instructions] Your first question comes from the line of Elyse Greenspan with Wells Fargo.
My first question was on the capital side. Given the upstream of capital in the quarter, you guys have around $2.1 billion at the Holdco, which, as you guys said, is a good amount above that $500 million minimum target. So as you think about, I guess, maintaining some extra buffer right now but also counterbalancing against that -- against wanting to buy back more of your shares, could you just help us think through that a little bit more in your share repurchase outlook for the second half of the year?
Yes. So maybe, this is Anders speaking, I take that question. So as you said, I mean, we were able to upstream $1.2 billion during the last quarter up to the holding company. This is slightly more than we usually do on a regular basis. Just keep in mind, we usually get the dividend once a year. So when we get the dividend from the Opco to the holding, it basically has to last for 12 months until we can expect the next dividend. But as you said, I think we're in a good position here, and we confirm that we will maintain our 50% to 60% payout guidance, 50% to 60% of operating earnings for the full year and so I think we confirm that.
So would you expect, as we think about the back half, obviously, you guys were a little bit less active in the second quarter in terms of share repurchases, do you expect repurchases in the back half just kind of pick up from the Q2 levels?
Yes. So I think as we said during, I think, Q1 and during the last few months is we always expected to do the maturity in the second half of the year once we have the dividend. And so you can expect us to be in the market for Q3 and Q4.
Okay, great. And then my second question. Now you guys have COVID-related mortality losses, came in a good amount below what you guys had expected and you did provide a new sensitivity. So as we think about modeling from here where you fall within that $30 million to $60 million range, is that dependent upon, I guess, geographic locations and the states that get hardest hit relative to your footprint? Or is there anything else that we should think about just when thinking about losses over the balance of the year?
Yes. So look, I think you're absolutely right. I mean the guidance we gave in May was really based on the information we had at that time. And I think what we clearly saw in the meantime is that, which is in a way sad, that the insured population actually has a significantly lower mortality than the overall U.S. population, with people in the U.S. that died from COVID actually weren't insured. Now going forward, we expect that to continue. But to your point, I mean, geographic, we don't really know from a geographic perspective. We expect it because we have more exposure in the Northeast. We actually expected that in our original estimation to be bigger, it wasn't. But I think it's prudent to have that range of $30 million to $60 million because we really don't know exactly how COVID develops over the next few months.
Your next question comes from the line of Nigel Dally with Morgan Stanley.
You mentioned some potential upside in the expense reduction potential as it relates to COVID-related expenses and the like. Just wanted to get some additional detail as to what was driving that and whether you've had any -- whether you've been able to place any dimensions around that at this point.
Nigel, thanks for the question. It's Mark. Obviously, COVID has hit travel and some of our incentive programs we typically have for advisers. So that has come off as you would expect. And the other thing we're doing, particularly in these times, is we're having a close look at our expense base. I think we've got a couple of points to make to you there. Firstly, we're confident we will hit the $75 million expense target we have and we're looking for more. We can't give you a number yet but we're looking for more.
And secondly, the separation we took from AXA has been very well handled by our IT people. We have really moved to try and leapfrog our capability. We have a lot of capability now that is on the cloud, which gives us both more tools but also a more variable and a lower expense base. So we feel good about that. Anders, did we give out the impact of the one-off lower travel expenses? Have we given that number out?
Yes. So not specifically to travel, but I mean, we called out that we had a kind of a onetime benefit of about $25 million just from COVID, and we expect that a portion of that will be sustainable. Definitely not all of that and just travel is a good example. Travel will resume, the question is how much. But we really expect that a portion of that $25 million will become permanent, that a portion will also reverse back.
Your next question comes from the line of Andrew Kligerman with Crédit Suisse.
I'd like to follow up a little on the share repurchase question. I understand that in the fourth quarter, it could be accelerated, the repurchase of $400 million and that would towards the 50% to 60%. So if I kind of eyeball numbers, dividends and buybacks that you've done to date and what you plan to do with dividends in the back half, that would probably be in the $100 million to $150 million for share repurchases to get to that 50% to 60%, including the accelerated number. Is that the right way to think about it?
So look, I think and as I said before, I think we are very confident that we can hit the 50% to 60% and pay back to shareholders based on operating earnings. Obviously, I think all the calculations you made are based on your estimations where we're going to end up the year. We will not give guidance there. But overall, what I can tell you is what I said before. I think we're going to -- we will be in the market in Q3 and Q4, and we feel very confident about paying back 50% to 60%.
Right. And so 50% to 60% is where it stops, correct?
Yes. I think that's the range that we want to pay back on a sustainable basis, correct, yes.
Okay. And as it goes back to corporate and other segment in the quarter, Anders, it was interesting that you came in at a $61 million loss when your guidance is $350 million to $400 million for the year. And in the release, you cited lower crediting rates and lower policy for the benefits in the runoff blocks. So I assume the interest to credit will remain low so that's a good thing. And then the lower policyholder benefits in a very tough environment, I don't know, it looks to me like kind of sustainable. So is that guidance still appropriate at $350 million to $400 million for the year? And maybe you could give a little color on what the lower policyholder benefits were in the quarter.
Yes. So look, I think, overall, you're absolutely right. I mean corporate and other is a -- it consists of many other runoff blocks and these runoff blocks can be volatile, and that's also the reason why we don't give any guidance for the quarter. We really give a guidance for the full year, and the guidance is really around the $350 million for full year. That's also why we gave you the half year number here, that's much more in line with the guidance. Q2 was lighter than what you could expect and it's really coming from the volatility of these runoff blocks.
And any color around the policyholder benefits or that is kind of what was so low?
Yes. I don't think there's something specific here that I can call out. I think it's really just the volatility and how these blocks runoff in this environment.
[Operator Instructions] Your next question comes from Suneet Kamath with Citi.
So in your prepared remarks, you talked about new business activity at around 70% of normal levels. Is your sense that, that's kind of where we stay for the next couple of quarters? Or are there things that you can do, whether it's virtual, et cetera, that can push that number back up to where it normally is?
Look, I'll just give an overview and then I'll hand to Nick Lane to talk about some of the things we're doing. It's just too uncertain to give any guidance at the moment, but let me tell you what we are doing. I think, firstly, we've built the new business engine, if you like, around economically sound products. We have great innovation there, as you see in our SCS product.
The second thing, I think, we really have going for us is distribution. We have a wide reach in third party. But most importantly in these times, our aligned distribution is really, really an asset and that's coming through for us. And then thirdly, the leadership position we've got in sort of resilient segments like the teachers places us well. But maybe, Nick, I'll bring you into the call to talk about what we're doing on the digital side, innovation, et cetera.
Great. Thanks, Mark. Yes, we remain steadfast in guiding our clients through this period, and I would say the demand for advice is increasing. So magnifying our outreach, as Mark alluded to in the prepared remarks, we've seen a 7x increase in, I would say, remote meetings. And to provide a little color, our best advisers, I think, digital and remote, is making them better. And we're also seeing consumers, especially at the older age, more comfortable now to engage with advisers through Zoom meetings, Microsoft Teams. So it's continuing to go digital and magnifying our engagement as we focus on meeting the needs that exist out there.
Okay, got it. And then I guess for Mark, we are seeing more third-party capital enter the life insurance space. So I was just wondering, are you spending any time thinking through potential transactions of runoff blocks, be it the stuff in corporate or the GMxB? Or is that just not a priority right now, given COVID-19?
I think the priority, as you indicate, Suneet, has been on ensuring a resilient balance sheet and a robust business model. But yes, we do, we are aware, you're quite right, there is a lot more money in the market. And we keep a close eye on what the transactions are and what the opportunities are for us. I can't say any more than that but we watch it very, very closely.
[Operator Instructions] Your next question comes from the line of Tom Gallagher with Evercore.
First question is just on, I guess, the new statutory variable annuity framework. To me, it's kind of interesting how that's using a 3.25% mean reversion interest rate assumption, yet now you've moved your GAAP assumption to 2.25%, so you're sitting in a much more conservative place than the new statutory framework. And I guess my question on that is, does that create any challenges for how you deal with the economics of stat if you're trying to hedge the economics? And would you expect any change on the part of regulators, just given where interest rates are now?
Yes, Tom. I think -- this is Anders. So I think this is a good question. We talked about the reversion to the mean in Q1, where we really saw a large move in interest rates coming down. I mean, as you know, from our economic position, and we don't take an interest rate position, which means we fully hedge interest. And that was also one of the reasons why we were clearly overhedged in Q1. And so these large hedge gains relative to GAAP but also, and to some extent, relative to statutory.
Now when rates stay where they are, I think nothing materially happened in our case because we already protect it. I think the only statutory thing that would happen if rates would go back up, obviously, that would -- it would reverse some of that. But that's not our expectation. I don't think that's what we will see in the near future.
Now your question is about the regulators. They actually are and working on the interest rate assumption. I don't know exactly where they are but I think there were discussions at least that they're going to accelerate the RTM. This is a scenario generator that right now produces this RTM because it is, in a way, an unrealistic that right now, all the scenarios that we actually have to use are above the current forward rate, which means it's not very realistic when you see where rates are right now. So I know the regulators are working. We have a strong position here, and I think we feel well protected in whatever happens on interest rates.
Interesting. And then I guess just a product question. Your -- the SCS product, the buffer annuity, I know you said that's growing year-over-year. Just curious if you've seen competitors enter that space, or are they still mainly focused on FIAs and not the buffer annuity?
Tom, it's Mark. I'll just give an overview and Nick can give a lot more color. Yes, we're very proud of what we've done with SCS. We've gathered about $20 billion of assets through that. We led the market. We created the whole new segment, if you like, of the buffer annuity space. For sure, there's more competition coming in. We continue to innovate and we have very good distribution reach. Nick, could you add anything to that?
Sure. I would just point out, we're continuously in the market, working with our partners and clients to develop new solutions to meet their evolving needs. I think Mark referenced Dual Direction. Dual Direction is a unique index. It's got the same ALM matching and downside protection. But it meets a new need. It provides the ability for clients to enhance their account value if the market goes down up to a limit. So we see that the demand for those products continuing to grow and our ability to continue to innovate in that product going forward.
Okay. And just 1 more, if I could sneak it in. The $650 million funding agreement issuance, are you guys planning on growing that portfolio or is that a one-off?
Yes. So Tom, we're absolutely planning to growing that over the next 10, 5 years so that should become a meaningful contributor to earnings.
Our last question comes from the line of Ryan Krueger with KBW.
I had a follow-up on Tom's question on NAIC interest rate generator. Can you just help us think about the extent that the generator is revised and the interest rate is lower, that would also impact the -- at least the statutory liability that Equitable is holding for variable annuities? So I guess, can you help us think about the offsets that you would benefit from, given your economic interest rate hedging that would offset that within the staff framework?
Yes. Look, I think the way I think about it is, right now, we're basically overhedged under the statutory. And after -- when they change the interest rate generator, we're basically fully hedged under the new framework. That's how I look about it if it gets fixed, right.
And I think last quarter, you disclosed this. Can you just give us an update on -- I think there was a fairly material amount of treasury gains that are -- that you have that are not included in your RBC ratio, I think, that would be a part of the offset. Can you give us an update on that?
Yes, correct. I mean we disclosed last quarter that we had about $2 billion in unrealized gains in treasuries and because rates didn't materially move since then, this is still there.
Ladies and gentlemen, that does conclude today's conference call. We thank you for your participation, and we ask that you please disconnect your lines.