Expro Group Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 1, 2023

There are 15 speakers on the call.

Operator

Good morning. My name is Christa, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Equitable Holdings Third Quarter Earnings Call 2023. All lines have been placed on mute to prevent any background noise. After the speakers' remarks.

Operator

There will be a question and answer session. 3rd. Thank you. I will now turn the conference over to Eric Bass, Head of Investor Relations. You may begin your conference.

Speaker 1

Quarter. Thank you. Good morning and welcome to Equitable Holdings' Q3 2023 earnings call. Material for today's call can 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.

Speaker 1

Please refer 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 Robin Raju, our Chief Financial Officer Nick Lane, President of Equitable Financial Bill Siemers, AllianceBernstein's Interim Chief Financial Officer and Onur Arzon, Head of AllianceBernstein's Global Client Group and Private Wealth Business. 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 Robin for their prepared remarks.

Speaker 2

Good morning and thank you for joining today's call. This is a promising time for Equitable and the life insurance industry as the combination of higher interest rates and favorable demographic trends provides the best backdrop for growth we've seen in well over a decade. Equitable is particularly well positioned to capitalize on these tailwinds, given our unique business model, which allows us to monetize all three components of the insurance value chain, product manufacturing, Asset Management and Distribution. On Slide 3, we present an overview of the 3rd quarter. 3rd quarter non GAAP operating earnings were $413,000,000 or $1.15 per share, quarter, up 16% year over year, but down 2% compared to the 2nd quarter, modestly below our expectations.

Speaker 2

Adjusting for notable items in the period, which included lower alternative returns, elevated mortality and a higher tax rate, Non GAAP operating earnings per share was $1.30 which is up 15% compared to Q3 of last year and up 2% sequentially. Robin will touch on this in more detail in a few minutes. We continue to benefit from momentum in both our retirement and wealth management businesses with a combined $3,000,000,000 of net inflows in the quarter, supported by record demand for our industry leading Buffet Annuity and 4,100 proprietary advisors, which enable us to capture distribution margin for our retirement offerings and investment products. In Asset Management, we were not immune to industry wide pressures with $1,900,000,000 in outflows in quarter 3, But active flows were nearly flat in the quarter, a better result than for most peers. Turning to capital.

Speaker 2

Our businesses continue to deliver diverse sources of earnings, which ultimately leads to a more predictable cash flow. Year to date, we have generated approximately $1,000,000,000 of cash to holdings and remain on track for our $1,300,000,000 guidance for the year. Importantly, more than half of our cash flow now comes from non regulated entities, which makes it more predictable. Our cash generation and Holdco cash position of or above the high end of our 60% to 70% payout ratio target. Our Q3 results also reflect our annual assumption review, the first under the LDTI accounting framework.

Speaker 2

The minimal impact to operating results reflects the benefits of our conservative approach to setting assumptions and Designing Products with a Narrow Range of Outcomes. We continue to focus on driving profitable organic growth across our businesses, executing against the strategic priorities outlined at our Investor Day, including our yield enhancement and productivity initiatives. We are also benefiting from higher interest rates, which are at levels we haven't experienced in over 15 years and favorable demographics with 11,000 Americans turning 65 each day. In our general account, higher new money yields and the continued demand for our Ryler product furthers the shift in our retirement business towards spread based earnings. Higher interest rates have also been a tailwind for our Wealth Management segment With revenue on cash balances supporting operating earnings growth of over 80% over prior year quarter.

Speaker 2

Current interest rate levels put us ahead of plan relative to our 2027 target to double earnings to $200,000,000 per annum. On slide 4, I'll touch on the favorable impact of higher interest rates in a bit more detail. We have often talked about our market neutral balance sheet, which means that we hedge 1st dollar interest rate exposures and Equity market exposures on the guarantees we've made to our clients. This means that we are not making a bet on the direction of markets when we price products. As a result, our RBC ratio has remained in a narrow and comfortable range despite significant volatility in interest rates and markets over the past few years.

Speaker 2

This ultimately enables us to drive consistent cash generation and capital return to shareholders. While our balance sheet is neutralized from the impact of interest rate movements, Higher rates provide a meaningful tailwind to our earnings and growth outlook. Our retirement product offering is more attractive to clients, evidenced by our 2nd consecutive quarter of record sales and net flows. Importantly, higher rates also mean better economics for our shareholders, and we're generating IRRs above 15% and a record value of new business. As a reminder, Strong retirement sales also benefit AB and our Wealth Management business.

Speaker 2

In our general account, we're investing new money at levels that are 160 basis points above our portfolio yield, which is driving higher net investment income and wider spread. Finally, we are also realizing a benefit in wealth management with increased revenue on cash sweeps, as we continue to execute against our growth strategy. In retirement, we reported a record quarter with $1,500,000,000 of net inflows, a 5% annualized organic growth rate, with strong results in individual retirement offsetting typical 3rd quarter seasonality in our Group Retirement segment. Total premiums were $5,400,000,000 in the quarter, up 17% year over year, led by our industry leading Ryla product with $3,100,000,000 in premiums, up 37% year over year. In Asset Management, we continue to drive growth in our private markets platform with $8,000,000,000 of our initial $10,000,000,000 capital commitment from Equitable's general account deployed to date and an additional $10,000,000,000 committed at our Investor Day in May, bringing our cumulative commitment to $20,000,000,000 The acquisition of Carvel also significantly enhanced AB's offering, and private markets AUM has grown 11% year over year to $61,000,000,000 as of quarter end.

Speaker 2

Total net outflows at AB of $1,900,000,000 in the quarter were modest relative to the industry, with active flows nearly flat and Outpacing Peers. Organic growth in the retail channel was attributable to taxable fixed income and municipals and U. S. Retail flows have been positive for 12 of the last 13 quarters. Fixed Fixed income performance remains strong with nearly 75% of assets outperforming over the 1 3 year periods.

Speaker 2

In the institutional channel, fixed income and passive outflows offset organic growth in active equities. The pipeline remains strong with $12,500,000,000 of unfunded mandates and private alternatives comprise more than 80% of the fee base. Our Wealth Management segment, which is the fastest growing portion of our business, reported 8% annualized organic growth in the quarter with $1,600,000,000 of net inflows. Net inflows and market tailwinds over the last 12 months drove 16% year over year growth in assets under administration, Now $79,000,000,000 While operating earnings are benefiting from higher interest rates, We're also seeing improved advisor productivity, which was up 2% compared to the Q2 of this year. Increasing advisor productivity is a key lever to drive higher wealth management margins, and we are encouraged by the momentum in this business.

Speaker 2

I will now turn over to Robin to provide additional updates on the quarter. Robin?

Speaker 3

Thanks, Mark. Turning to Slide 6, I will touch on the results for the Q3. On a consolidated basis, Equitable Holdings reported non GAAP operating earnings of $413,000,000 in the quarter or $1.15 per share, up 16% year over year. After adjusting for $67,000,000 of unfavorable after tax notable items and a favorable assumption update of $12,000,000 Non GAAP operating earnings were $468,000,000 or $1.30 per share, up 15% on a comparable year over year per share basis. We also generated net income of $1,100,000,000 or $3.02 per share.

Speaker 3

Under LVTI, every quarter that we have reported has resulted in positive net income. This ensures we remain eligible for inclusion into S and P indices. Quarter. While pleased with the underlying growth momentum across our business, 3rd quarter EPS came in below consensus expectations and our review of the run rate earnings power for the business. This was a noisy quarter and on Page 7, I'll walk you through major moving pieces and how we're thinking about the outlook going forward.

Speaker 3

Turning to Page 7. There were 3 items that affected results across the enterprise. 1st, alternatives and prepayment income were $20,000,000 below our normal expectation. Our alternative portfolio had an annualized return of 6% in the quarter as solid private equity results were offset by the continued weakness in our real estate equity investments, which represent 20% of the alternatives portfolio. As a reminder, we normalized to the low end of our 8% to 12% normalized return expectation.

Speaker 3

Looking forward, we expect similar returns in the Q4, but project further recovery in performance in 2024. 3rd. 2nd, we completed our 2023 assumption update and made some model changes in the Q3, which resulted in $16,000,000 favorable adjustments. The modest changes reflect our fair value management philosophy, which incorporates emerging experience into our assumptions. This limits surprises like large unlocks for investors.

Speaker 3

Lastly, the consolidated tax rate in the quarter was 22%, above our 19% expectation. This quarter, we had an unfavorable dividend receipt deduction true up, which drove the higher rate. While taxes can bounce around each quarter, we continue to estimate a 19% consolidated tax rate and a 17% tax rate for the insurance business. We also had a few items that affected specific business segments that I wanted to highlight. Protection Solutions earnings were $34,000,000 higher than the 2nd quarter, but below our guidance of $50,000,000 to $75,000,000 per quarter near term.

Speaker 3

Overall, gross mortality claims were close to our updated assumptions, but net claims came in higher than expected But this quarter, we only had coverage on 10%. This was about a $23,000,000 after tax variance, adjusted for which segment earnings would have been at the lower end of our expected range. We still view $50,000,000 to $75,000,000 as our best estimate of near term quarterly earnings power of the business and we expect this to move higher over time. As a reminder, While we expect some continued drag from a pull forward in mortality in the next few quarters, this has a minimal impact on cash generation Since we have already adjusted the statutory assumptions to account for the increased COVID endemic related mortality. I would also note that we had a modest positive adjustment from our actuarial assumption update, underscoring the conservative assumptions 4R Block.

Speaker 3

Moving forward, we will explore ways to reduce the earnings volatility in this Protection Solutions segment, Such as by adding more reinsurance or reducing retention limits. In Individual Retirement, We delivered a 2nd straight quarter of record sales and net flows, highlighting the growing consumer demand for protected equity and secure income solutions. Total sales were $3,800,000,000 and net flows were $1,700,000,000 which continues to be driven by our spread based Rylo product, FCF. This momentum bodes well for the future growth in individual retirement earnings and cash generation. However, one of the dynamics we've seen is that as the terms we can offer to policyholders improves with higher interest rates, There is some increased lapse activity in our in force block, which we have factored into our near term assumptions.

Speaker 3

Under GAAP accounting, this requires us to amortize more DAC and we expect quarterly amortization expense to be roughly $5,000,000 higher going forward. While this is a modest near term headwind for earnings, I would emphasize 2 things. 1, as we mentioned earlier, we're seeing record net flows And the growth in this block will have a much bigger impact on earnings over time. Secondly, PAC amortization is a non cash expense In Wealth Management, we collected $5,000,000 of lower commission related earnings this quarter due to a lower level of 403b sales. This corresponds with the seasonality in our group retirement business related to teachers being off during the summer months.

Speaker 3

Going forward, you should assume some seasonal pressure on the wealth management results in the Q3, but we view $45,000,000 of earnings as a better run rate to think about for the Q4. Finally, on corporate and other, we generated a normalized loss of 109,000,000 which is worse than our expected quarterly run rate of roughly $100,000,000 This is due to timing of some expenses. Stepping back though, we remain confident in our ability to grow EPS at 12% to 15% annual rate through 2027. Across all our businesses, we continue to control the controllables. We are ahead of our plan for achieving the 110,000,000 general account yield enhancement target helped by the higher rate environment.

Speaker 3

Additionally, we're ahead of schedule on our $150,000,000 expense savings target and expect to capture our $30,000,000 run rate of savings this year. Finally, as Mark touched on earlier, the higher rate environment provides a strong tailwind for new business. Across all three retirement businesses, we are running well ahead of our projection for BNB in 2023, which will contribute to future earnings and cash flow. Turning to Slide 8, let's dive deeper into the diverse sources of earnings that lead to our consistent cash generation. Our deliberate actions over the last 5 years to shrink our legacy block, Grow our Wealth Management and Private Markets business and expand our core retirement and asset management markets have led us to meaningfully grow earnings and cash flows while also shifting to a higher quality mix.

Speaker 3

At the same time, we consistently convert earnings to cash flows in our retirement business for two reasons. First, the business is strongly capitalized and tightly hedged, 2nd, dollars 200,000,000 of the cash flows from these businesses are unregulated and go directly to the holding company through our investment management contract. As a result, our retirement cash flow is a much more consistent and higher quality than other retirement players in the industry. That comprise the remaining 40% of our anticipated $1,300,000,000 of cash flows this year. This business converts nearly 100% of their earnings to cash flow.

Speaker 3

The quality and durability of cash flows enabled us to increase our payout target earlier this year to 60% to 70% of operating This is a 20 percentage point increase since our IPO, demonstrating a significant shift in our business over time. This leads me to our next slide, where I'll dive deeper into our capital management program. Turning to Slide 9. Our strong cash generation continues to drive shareholder value. In the quarter, we returned $315,000,000 which includes $238,000,000 of share repurchases resulting in an $8,000,000 share count reduction.

Speaker 3

Over the last 12 months, we have returned $1,100,000,000 to shareholders, reducing our shares outstanding by 8%. At the same time, our holding company cash increased to $2,000,000,000 after taking a dividend from the insurance subsidiary. Our cash position gives us confidence to continue paying out 60% to 70% of non GAAP operating earnings even in volatile markets. It also enables us to play offense and be opportunistic rather than being on the defense. Year to date, We have up streamed $1,000,000,000 of dividends to the holding company and remain confident that we will hit our $1,300,000,000 target for the year.

Speaker 3

In the Q4, we will receive unregulated dividends from AllianceBernstein, our Wealth Management business and our investment management contract with the retirement company. From an investor perspective, we believe that Equitable Holdings which represents a 12% free cash flow yield. Our businesses have strong organic growth potential With that, I will now turn the call back to Mark for closing remarks. Mark?

Speaker 2

Thanks, Robin. In closing, We continue to benefit from momentum in both our retirement and wealth management businesses with a combined $3,000,000,000 of net inflows in the quarter. Our balance sheet and capital position remain robust with conservative assumptions resulting in no material assumption review impact. Our cash generation and HoldCo cash position of $2,000,000,000 continues to support consistent capital return to shareholders, tracking at or above the high end of our 60% to 70% target payout ratio. We remain on track for the financial guidance we outlined at our Investor Day as we continue to focus on driving growth across our businesses,

Operator

and we ask that you limit yourself to one question and one follow-up. Your first question comes from the line of Elyse Greenspan from Wells Fargo. Please go ahead.

Speaker 4

Hi, thanks. Good morning. My first question is on Protection Solutions. So If in the Q4, if mortality is expected to still remain elevated, and I know in the slides you guys pointed to alternative results being similar to the Q3 sequentially. So wouldn't that imply that in the Q4 you would still fall below that $50,000,000 to $75,000,000 target?

Speaker 4

Or Is there something I'm missing in there or is there normalizing on the reinsurance side? I'm just trying to piece that all together.

Speaker 3

Thanks, Elyse. So for protection in the Q4, we continue to expect to see some of the pull forward come through. That would put us in the range of the $50,000,000 to $75,000,000 guidance. We continue to expect that range over the near term in Protection Solutions. And then Obviously, some of the alts would come against that as well.

Speaker 3

And so from a normalized basis, we should be at the lower end of the range when considering alts As long as we remain at that midpoint. In the Q3, to give you comfort, as you see on a normalized basis, we are at The lower end of the range of $49,000,000 or $50,000,000 We continue to see good momentum and improvement in actually gross claims. But as you noted, we did see some of the reinsurance coming lower than expected. We're at 10% in the quarter versus 15% historically and we'd 3rd. But reminder again, the pull forward and what we see in the range has no impact on the cash flows and the cash flows Continue to grow strongly overall across our businesses.

Speaker 4

Thanks. And then, there was like around a $1,500,000,000 impact to net income from the VA product feature line this quarter. I had thought that that would be smoother under LDTI. Can you just give some color on what went on there in the quarter?

Speaker 3

Sure. So we as I mentioned on the call, this is the 7th straight quarter that we've seen positive net income post LVTI and so we're comforted and continuing to see positive results there. On our hedging program, we do hedge with the general account and some on the interest rate side. So the general account flows through AOCI versus the liability flowing through the VA product features. And then we do that purposely to avoid statutory volatility So we can have consistent capital returns.

Speaker 3

So it should be in line with the sensitivity that we've given for interest rates as it relates to LVTI.

Speaker 5

Quarter.

Speaker 4

Okay. Thank you.

Operator

Your next question comes from the line of Tom Gallagher from EVR. Please go ahead.

Speaker 6

Thanks. Robin, just following up on your comment on considering reinsurance, Additional reinsurance purchases on your protection block to lower volatility. Can you talk a little bit about what you're Considering there what pricing is like, is that likely to lower the earnings in the segment or would you not seeing

Speaker 3

Would you not expect it to have much of an impact? Sure, Tom. Look, for protection, We're obviously not happy with the results, for the business. And so therefore, we are exploring options to mitigate volatility of the results. And we'd hope to mitigate it by hopefully some point in the first half of next year.

Speaker 3

Certainly, indeed, if you look relative to peers, We've historically had higher retention limits on that business. That's a function of us being a subsidiary part of a big company previously before our IPO. And so we have to explore those retention limits. Obviously, if we give up and we reduce the volatility, you're giving up some long term economic returns. So that's the trade off that we'll continue to assess.

Speaker 3

But we're in discussions with reinsurers and assessing those trade offs.

Speaker 6

Okay. Thanks. And any I know it's early, it just came out yesterday, but any initial thoughts on this new Department of Labor proposal on retirement, and how that might impact either the industry or equitable?

Speaker 7

Sure, Tom. This is Nick. We are still digesting the almost 500 pages. With that said, initial reading, The main thrust from the DOL is that all rollovers from ERISA 401 plans will be considered fiduciary activities. And while in spirit, this aligns with the 2016 rule, what is different in this iteration, It does not include any private rights of actions.

Speaker 7

And since 2016, a majority of firms have revamped their compliant processes to align with the existing SEC and state best interest in fiduciary rules. What does this mean for the industry? The biggest impact appears to be that non security licensed insurance agents that sell non registered products like fixed index annuities will now be covered. There's also some interesting language Pulling robo advisors in scope. For Equitable, we see no material impact given the investments we've made and the changing landscape.

Speaker 7

As a reminder, Equitable Advisors operates today under the higher SEC Reg BI Fiduciary Standards. 403 plans are not in scope and our individual annuity products are registered product securities sold through registered broker dealer channels. Going forward, we'll continue to review the details And I do expect there to be significant industry comments over the next 60 day period on specific provisions that will provide more clarity.

Speaker 6

Great. Thanks, Nick. That was helpful.

Operator

Your next question comes from the line of Jimmy Bhullar from JPMorgan. Please go ahead.

Speaker 8

Hey, good morning. So first just a question on AB. Should we assume that flows in the business and obviously other asset managers have been affected by this, but should we assume the flows are going to be challenging until there's a little bit more stability and interest rates in the equity market or are there other things that suggest that things might improve in your business in the near term?

Speaker 9

Thanks, Jimmy. This is Onur Arzdan from AB. As you pointed out, it has been a tough environment. That said, if you look at our active flows in the Q3, we were roughly flat, which was better than 3rd. Other peers that reported so far.

Speaker 9

So we feel good about our relative performance on the business. And when we look at the growth engines, we feel pretty good about the momentum. We were top 5% in Equities and munis in the U. S. Retail, top 3% in cross border taxable fixed income.

Speaker 9

So definitely feeling good about those. Even in institutional, which led to the outflows overall, including passive, actually institutional equities had an annualized organic growth rate of 7%. So we feel confident about the diversity of our growth engines. And finally, our institutional pipeline Remains very strong at $12,000,000,000 and the effective fee rate on that is 3 times the effective fee rate we have today in the institutional business. So definitely Revenue accretive.

Speaker 9

So we have a lot of strength to feel good about. That said, we cannot predict the rates And the rate uncertainty definitely keeps the investors on the sidelines and skews the flows towards money market funds and low risk, low fee products. So cannot time it perfectly, feel confident in terms of our ability to Performed well, but definitely there could be some sluggish growth depending on the rate environment.

Speaker 5

Okay.

Speaker 8

And then Robin, on Protection, I think earnings have been weaker than your estimates or your guidance for 6 of the past 7 quarters. And there's always some reason, obviously for that, and it's varied over time. But what still gives you the confidence that $50,000,000 to $75,000,000 is the right range Or have you thought about lowering the range given results in the last several quarters?

Speaker 3

Sure, Jimmy. You're right. It's coming below our expectations over the last few periods. But on a normalized basis for those for the reinsurance that I mentioned, it did come in at the lower end 13% reinsurance coverage that we've had, we would have been at the lower end of the range and also seeing gross claims improved quarter over quarter. That's what gives us confidence in the range, but we're not just relying on confidence.

Speaker 3

We're going to obviously explore actions to reduce the volatility of the business because Honestly, it's a small part of Equitable Holdings. We generate $1,300,000,000 of cash flows. It's grown at $2,000,000,000 of cash flows and We're answering questions about volatility in a small segment here. So we'll look to reduce debt going forward and get the focus back on How we're growing cash flows by 50% to 2027.

Speaker 8

Okay. Thank you.

Operator

Your next question comes from the line of Alex Scott from Goldman Sachs. Please go ahead.

Speaker 10

Hey, good morning. First one I had is just a quick follow-up on the comments on the fiduciary rule. I think you mentioned there was no private right of action. I noticed in the I thought there was an enforcement section that mentioned the private right of action. I think there may be a nuance there with Title 1 versus Title 2 or something, but just interested in that piece of your comment and what your read of that language on enforcement was?

Speaker 7

Yes. At this time, we would view it as a nuance, but we'll be coming back with more details on that.

Speaker 10

Okay, understood. Second question I had was just on The environment for Ryla products and competition, are you seeing any more competition coming in from the private equity players? Search. Are they starting to get any more traction in some of the distribution channels where I think you all haven't had to compete as directly with them? Are you still able to avoid some of that pressure?

Speaker 10

Is there sort of lagging more into private debt allocations and able to provide pretty strong pricing?

Speaker 7

Yes. At this time, and per the comments Robin made, we had a record quarter in terms Close and sales, competitive dynamics continue to be positive visavisothermarkets. Given our edge in terms of being a pioneer in the market, given our distribution footprint, both equitable advisors and privileged 3rd party. And given our innovation in the space, we think we're uniquely captured to capture a disproportionate share of the value there.

Speaker 11

Nick, it's still the case that it's sort of 8 players in the market there against nearly 50 players in the fixed annuity market. So We're aware, Alex, of the possible new entrants. But at the moment, we don't see it and pricing remains

Speaker 2

Very strong.

Speaker 10

Thank you.

Operator

Your next question comes from the line of Suneet Kemath from Jefferies. Please go ahead.

Speaker 5

Thanks. Good morning. So Mark, I think in your closing comments, you talked about being opportunistic with Capital and clearly you have a lot of capital at the holding company. Is one way we might see that is you traveling above the 60% to 70% payout target for some period of time as we move into 2024?

Speaker 2

We're not changing any guidance, but if

Speaker 11

you look in this last A quarter, we actually did travel up slightly higher than that particular ratio. I think as both Robin and I have said with Healthy balance sheet as we have now and the excess cash that does enable us to look at opportunities. I mean, the most recent one we did, of course, 15 months or so ago was CarVal. That really was a way to accelerate our strategy in the build out of alts. That remains an area we're very interested in, And we remain very interested in wealth management and growing distribution in that side.

Speaker 11

So all I would say, Suneet, for The right deal at the right price and where we can see accretion for our shareholders, we would be very interested in looking at them. But it's not Our strategy remains to build out those businesses. And if we see a way to accelerate it, we will certainly look at it.

Speaker 5

Got it. Makes sense. And then I guess as we think about the build out of the private asset portfolio within the general account, I think you're marching towards that sort of $25,000,000,000 How should we think about the capital requirements associated with that growth in privates?

Speaker 3

Sure. So we're about 80% of the year through and getting to our $10,000,000,000 for the year. And so we have confidence in that. And then we have another $10,000,000,000 commitment to AB's business. And as you know, the big prize there is AB growing that to Almost $90,000,000,000 by 2027 and it being 20% of the revenues at AllianceBernstein.

Speaker 3

So that's the big prize for EQH. Obviously, as our business grows, we have to hold capital for the risk that we take. But this is Coming with the growth in our overall business and we're not fundamentally shifting the mix, that we see. So we don't see a significant capital constraint as a result in the movement of the general account. And so historically, if you look back, for every dollar that we put in, Into AllianceBernstein, they've grown $4 worth of 3rd party money.

Speaker 3

So we think it's a great value proposition for shareholders without constraining capital.

Speaker 5

Sorry, so the capital requirements and the privates are not materially different than what you guys were holding before?

Speaker 3

No, if you look at our business mix today in terms of what we have in private credit and what we have in alternatives, that mix in the general account

Speaker 5

Okay. Got it. Thanks.

Operator

Your next question comes from the line of Tracey Bongiecki from Barclays. Please go

Speaker 12

ahead. Good morning. Going back to Protection and your comment that gross claims were 10% 13% average. Did the lower reinsurance recovery have anything to do with risk recapture maybe under a YRT treaty?

Speaker 3

No, it's just a function of lower high face amount claims in the quarter.

Speaker 12

Okay, Got it. And just wondering on the comment about normalizing going forward, do you think the face amount might be lower or is your normalized recovery dependent upon the comment that you need to add more reinsurance or reduce retention limit?

Speaker 3

No, it has nothing to do If you look in the appendix, we put a slide in for the Protection Solutions business and it shows The historical reinsurance coverage that we had and on average we've been about 15%. And in the quarter you can see it sticks out to you, at 10% in the quarter. So we'd assume that we get back to that historical average just based on the mix of business that we have. And that should put us within that $50,000,000 to $75,000,000 guidance that we've given.

Speaker 12

Okay. I did see that. So your comment was just based on your track record?

Speaker 1

Correct.

Speaker 12

Yes. Okay. But also just to be sure, didn't your capital returns this quarter exceed your 60% to 70% payout because of just nuances with GAAP counting like Hire DAC. It doesn't translate to statutory cash flow generation.

Speaker 3

That's right. In the quarter on a reported basis, we paid more than the 60% to 70% payout ratio. On a normalized basis, we paid at the higher end of that range and continue to see returning cash to shareholders as a great rate to drive value Given where the stock trades today and so we'll continue to return capital to shareholders as we see fit.

Speaker 12

Thank you.

Operator

Your next question comes from the line of Will Murtis from Raymond James. Please go ahead.

Speaker 12

Hey, good morning. The assumption review could you just go into a little bit more detail on the assumption review? It's interesting to see a favorable assumption review, especially it seemed

Speaker 3

The net income impact of the assumption review across all of our business was $4,000,000 at the end and that's what You should expect, because that's how we manage, our assumptions. We manage on a conservative basis. We move to emerging experience, And we do not want to surprise investors, with negative unlocks that are large, they're distracting and they're not represented in our core business. So, If you look across every single business line that we have, we update assumptions on an annual basis and move towards emerging experience. So you're going to see Ins and outs, within every single assumption, but at the end of the day, it rounds to a very small number.

Speaker 12

Thank you. And then as well, could you talk about the opportunities to acquire wealth management teams versus the ability to grow organically?

Speaker 13

Sure.

Speaker 7

Our model is distinct because we both bring in new people into the industry And grow them into wealth managers. We've amplified that through our experienced advisor initiatives, which would be looking for a supported independence model. The opportunity for a differentiated device model, The platform that gives them open architecture to a full suite of fee based reoccurring investment Products plus our strength of our retirement platform. Year to date, we've recruited roughly 80 advisers on the experience side. So we see traction on that side.

Speaker 12

Thank you.

Operator

Your next question comes from the line of Maxwell Fritzer from Truist Securities. Please go ahead.

Speaker 14

Hi, good morning. I'm calling in for Mark Hughes. I joined a little late, so I apologize if you covered this. But in Wealth Management, You've had positive year over year sales growth in advisory, after contractions in the 1st 2 quarters of the year And strong growth in

Speaker 12

brokerage and direct. Is there anything in particular you're seeing there that you could share? I know you had just mentioned recruiting, but anything else?

Speaker 7

Yes. Structurally in the industry you've seen with interest rates up, people move cash into fixed maturity options, which are more on the which aren't fee based investments. So that shifted some of it from the fee based investment To the structure maturities. As Robin highlighted, we continue to see growth in our reoccurring fee based investment accounts in terms of positive net flows and that continues to be a growing percentage of our AUA.

Speaker 12

Thank you.

Operator

Your next question comes from the line of Mike Ward from Citi. Please go ahead.

Speaker 13

Hey, thanks guys. Good morning. Maybe back to the regulatory landscape. I know the focus has been on the DLL. I think I saw the SEC priorities for 2024 might include variable annuities too.

Speaker 13

Just wondering if you had any Inklings or communications on what they're interested there.

Speaker 7

At this time, the SEC has been focused on implementation of Reg BI and interpretations Of that regulation, that's been the major push. We'll have to come back to you On any specific variable annuity.

Speaker 13

Okay. I already sent notes early. And then just a second on some of the good guys in the net flow metrics. I think some areas like private credit, have been pretty strong and search. Might change if and when we get to a point of declining interest rates.

Speaker 13

And how do you guys sort of think through that?

Speaker 9

Hi, Micah. It's again Onur from AB. Yes, we feel pretty good about the outlook For our private alternatives platform, we have roughly $14,000,000,000 in dry So we can definitely deploy capital across all of our strategies ranging from real estate debt to corporate lending and CarVal. In terms of the declining rates, first of all, it's hard to predict when that's going to happen. I think the base case Seems to suggest it's more high for longer.

Speaker 9

But even in a relatively lower rate scenario, The attractiveness of private credit remains strong because we have a lot of floating rate exposures, but also we have the ability to go with fixed And we have seen this through the market cycle because if you think about history, we had these strategies, depending on the strategy, except CarVal, Going back to 2012, 2014, and we have generated consistent net flows regardless of the interest rate environment. So it's pretty rate agnostic. So we believe the momentum will continue.

Speaker 13

Thanks, guys.

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Earnings Conference Call
Expro Group Q3 2023
00:00 / 00:00