Equitable Holdings Inc

NYSE:EQH

Earnings Call Transcript 2020-Q3

[Operator]

Good morning and welcome to Equitable Holdings' Third Quarter Earnings Call. [Operator Instructions] I would now like to turn the call over to Jessica Baehr, Head of Investor Relations.

[Jessica Baehr, executive]

Thank you. Good morning and welcome to Equitable Holdings Third 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 Ali Dibadj, AllianceBernstein's Head of Finance and Strategy.

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.

[Mark Pearson, executive]

Good morning, and thank you all for joining us today. We are clearly living in interesting times, with volatility and uncertainty unmatching anything we've seen in our 161-year history. However, with our prudent risk philosophy and the relationships and insights we have, I have no doubt Equitable will continue to protect and support our clients, deliver strong financial results and be a positive force for good in the communities in which we live.

I'd like to begin this morning by sharing highlights from our third quarter, which you can see on Slide 3. Overall, I am pleased to report third quarter non-GAAP operating earnings per share of $1.24 per share, or $1.31 per share excluding the impacts of the annual actuarial assumption update, up 5% year-over-year. Assets under management are up 6% year-over-year to $746 billion, supported by net flows.

Our strong performance this quarter continues to demonstrate our ability to adapt and deliver stable earnings. While uncertainty persists, we have seen new business activity trending upwards this quarter, now at 80% of normal levels, demonstrating the resiliency of our business model and the strength of our distribution. Offsetting the new business has been an improvement in client retention and top-up business, such that net flows across the organization, including AB, remain positive and continue to support AUM growth.

In terms of our balance sheet, we continue our prudent approach with interest rate assumptions on our GAAP reserves at 2.25%, the lowest amongst our peers in the industry. At Q3, we show healthy statutory RBC ratios and $2.3 billion of surplus cash at Holdings. We believe maintaining financial flexibility and balance sheet strength are critical during these times.

To this end, last week we announced a landmark transaction to reinsure a portion of our legacy variable annuity block to Venerable. As we shared last week, this transaction will reduce CTE98 tail risk by approximately 64% through the reinsurance of 13% of our in-force policies. This transaction validates our risk framework and unlocks $1.2 billion of statutory value and increases our RBC ratio by 60 percentage points.

I think it is very important to understand that we were only able to transact with a credible partner like Venerable because of the work we've done in the last 10 years, including fund substitution, first dollar dynamic hedging, volatility tools, and using our IPO to impose realistic reserve setting assumptions, both in respect of policyholder behavior and interest rates. Without any of these, the positive $300 million ceding commission we received would have been a very large payment the other way. Yes, there is a market for these books, but of course smart money will look first to the adequacy of the reserves.

We also announced the acceleration of $500 million of share repurchases in 2021, incremental to the 50% to 60% payout ratio target, which we continue to deliver on. Our focus remains on positioning our business for the future and enhancing long-term shareholder value as evidenced by the reinsurance transaction.

Despite the fall in interest rates and the impact of the global pandemic, we remain on track to deliver on all guidance we gave at the time of the IPO in 2018. I'm pleased to announce that as a result of our strong expense focus, we achieved our $75 million productivity target ahead of schedule, and we expect incremental expense savings post-2020. Looking ahead, we will enter 2021 with good momentum and balance sheet strength to be further bolstered by the expected close of our legacy VA transaction in the second quarter, meaningful expense savings, and acceleration of shareholder returns.

I will now pass it to Anders to give you some more detail including our annual assumption update, segment results, capital management and an update on our risk profile. Anders?

[Anders Malmström, executive]

Thanks, Mark. And good morning. On Slide 4, I will briefly review our consolidated results for the third quarter before providing more detail on the outcome of our actuarial assumption update, segment results, capital management program and recent reinsurance transaction with Venerable.

As Mark noted, non-GAAP operating earnings were $568 million for the third quarter, or $1.24 per share. Excluding the limited impact from assumption updates in the current and prior year quarter, non-GAAP operating EPS increased by 5%, primarily driven by share repurchases and strong net investment income. The increase in net investment income reflects higher asset balances and income from alternatives as well as the GA rebalance and the continuation of efforts to rerisk and derisk our portfolio, including the sale of an additional $500 million of potential fallen angels at a net gain in the quarter.

GAAP net loss was $779 million in the quarter and was primarily driven by noneconomic impact from hedging and nonperformance risk. AUM growth remained solid supported by total company net inflows, with assets up 6% year-over-year to $746 billion. Further, we continue to deliver on our return on equity target which improved 40 basis points from the prior year quarter to 16.3%.

Turning to Slide 5. I'd like to provide additional context and detail on our annual actuarial assumption review. As many of you know, we hedge to our full economic liabilities, meaning we immunize the balance sheet to interest rates. If you recall, in light of persistently low and declining rates, we realigned our GAAP long-term interest rate assumptions earlier this year to better reflect the economic realities. This change is reflected in our long-term assumption of current rate grading over 10 years to 2.25%, which remains the lowest among our peers by some margin.

With this realignment completed in Q1, our third quarter assumption update was primarily focused on policyholder behavior, mortality and other assumptions across the business. As you can see from our results, the impact was fairly benign and is reflective of changes made to better align our assumptions to our economic framework.

The total impact to non-GAAP operating earnings was a negative $31 million, and the impact to net income was negative $58 million. This was primarily driven by a true-up to policy surrender assumptions for certain vintages in our Individual Retirement business, reflecting an additional year of experience. Impact to our other segments were largely immaterial.

Moving on to the business segments. I will begin with Individual Retirement on Slide 6. Excluding assumption updates, operating earnings of $393 million were up 3% versus the prior year quarter, primarily driven by the GA rebalance and higher alternatives income as well as lower operating expenses. First year premiums improved sequentially from the second quarter, driven by an 18% increase in Structured Capital Strategies sales, reflecting the breadth and depth of our distribution. Importantly, nearly 85% of first year premiums this quarter were driven by non-GMxB products as we continue to concentrate our focus towards higher-growth, less capital-intensive products.

While net flows were down from last quarter, we continued to favorably shift mix as outflows from our mature fixed rate block were partially offset by inflows on our current product offering. Further, as previously discussed, we also announced the transaction to reinsure a portion of our legacy VA block, significantly derisking the fixed rate GMxB block.

Turning to Group Retirement on Slide 7. We reported operating earnings of $131 million, up 28% versus the prior year quarter excluding assumption updates in both periods. This was primarily driven by higher asset balances, the GA rebalance and an increase in alternatives income.

Net outflows increased versus the prior year quarter, consistent with the seasonality we expect in the third quarter due to the K-12 summer school break. Net outflows were partially offset by 3% growth in renewal contributions, benefiting from our digital engagement initiatives.

Account values increased by approximately $2.7 billion year-over-year due to market appreciation and continued net inflows over the trailing 12 months.

Now turning to Investment Management and Research or AllianceBernstein on Slide 8. Overall, AB delivered strong results with operating earnings of $104 million, up 12% year-over-year, primarily driven by higher base fees and higher average AUM and lower operating expenses. In the third quarter, AB generated $5.3 billion of net inflows excluding expected low-fee AXA redemption of $2.2 billion. Net flows were strong across all 3 client channels, led by another robust quarter for active equities in both retail and institutional.

Further, AB reported gross sales of $29.3 billion, up $3 billion or 11% from a year ago led by retail, which has also had positive net flows in 8 of the last 9 quarters. Finally, AB's adjusted operating margin expanded by 220 basis points to 29.7%, driven by lower operating expenses resulting from focused cost reduction initiatives, including the Nashville relocation.

Moving to Protection Solutions on Slide 9. We reported operating earnings of $48 million excluding assumption update, down from $104 million in the prior year quarter primarily due to the reestablishment of the PFBL reserve as well as lower premiums. While Protection Solutions exited loss recognition following the assumption update in this quarter, we expect ongoing earnings volatility due to the aforementioned PFBL reserve. We continue to experience lower-than-expected excess claims related to COVID-19. However, the PFBL reserve accruals more than offset the favorable mortality experience in the quarter. Even taking this into account, we believe our guidance of $30 million to $60 million in earnings impact per 100,000 excess U.S. deaths remains appropriate.

Gross written premiums decreased 10% versus the prior year quarter, and strong growth in employee benefits was offset by declines in life premiums. We continue to see strong momentum in the employee benefits business, which benefited from strong persistency and generated year-over-year growth in gross premiums.

Turning to Slide 10. I would like to highlight our strong capital and liquidity position that continues to give us confidence in the resiliency of our balance sheet despite the ongoing market uncertainty. Our balance sheet is well fortified, as evidenced by a combined RBC ratio of approximately 430% as well as holding company cash and liquid assets of $2.3 billion, well above our $500 million minimum target.

This quarter, we returned $176 million including $76 million of quarterly cash dividends and $100 million of share repurchases. In the context of our 2020 capital management program, we have now returned $552 million to shareholders year-to-date or $952 million total including the $400 million of repurchases accelerated into 2019.

In terms of our debt-to-capital ratio, we ended the quarter at 23.9%, in line with our target. We also raised $500 million of preferred stock in the quarter, capitalizing on attractive rates and favorable market conditions, while further optimizing our capital structure and enhancing financial flexibility. And finally, we plan to accelerate $500 million of share repurchases in 2021, following the close of the legacy VA reinsurance transaction, incremental to our 50% to 60% payout ratio target that we continue to deliver on.

Turning to Slide 11. I think it's important to reiterate the significant impact the legacy VA reinsurance transaction will have on our risk profile. The deal allows us to meaningfully derisk our balance sheet. This is evidenced by the 64% reduction in CTE98 required assets that we hold to cover tail risk. That is a reduction of over $12 billion of reserves backing the policies being reinsured, which further validates the level of reserves we hold against this liability. Importantly, we are able to achieve a reduction in our risk exposure by 2/3 by only reinsuring just 1/3 of our most capital-intensive policies.

Altogether, the transaction will result in an increase in our combined RBC ratio by approximately 60 RBC points. Against our third quarter RBC ratio of 430%, this equates to a pro forma RBC of approximately 490%, well above our minimum target of 375% to 400%.

We firmly believe that this transaction further demonstrates the benefits of how we manage the business and illustrates clearly our ability to manage risk and generate long-term value. Further, we are pleased to see these points recognized in our conversations with rating agencies, investors, partners and other stakeholders as we continue to execute on opportunities to enhance our business.

I will now turn it back to Mark for closing comments.

[Mark Pearson, executive]

Thank you, Anders.

Before taking your questions, I'd like to close by reiterating the key messages from the quarter. First, we have continued to demonstrate our ability to adapt to a wide range of economic scenarios and uncertainty while delivering strong results. Our balance sheet remains strong and will be bolstered further through our legacy VA transaction. And finally looking ahead, we remain steadfast in our focus on growing our value-accretive businesses and delivering value for our clients and shareholders.

With that, I will hand the call back to the operator to open the line for questions.

[Operator]

First question comes from the line of Nigel Dally with Morgan Stanley.

[Nigel Dally, analyst]

I wanted to touch first on the Group Retirement. Obviously very strong quarter in terms of earning that we saw come through this quarter. How should be we think about the sustainability of going forward? I think you mentioned alts as one of the drivers should that normalize down? I'm just trying to get an indication as to on a go-forward basis what's a reasonable run rate?

[Mark Pearson, executive]

Nigel, I think I'll ask Anders to answer that question for you.

[Anders Malmström, executive]

Yes. so look, I think we -- as we said on the call, we see continued strong momentum on the Group Retirement business, and it's really coming from strong net inflows over the years. And then in addition to that, I mean obviously we see good performance now coming from the general account rebalancing. And I think you can expect that to continue to see.

Now just specifically on alternatives, I think I would say we are back to normal on alternatives. So we can expect the normal returns that we planned from alternatives here.

[Mark Pearson, executive]

Maybe if I'd just add something there, Anders, if I could. I mean it's been a really remarkable response from our teams there. Obviously, Group Retirement is predominantly made up of the business we write with teachers. Schools across the nation closed. The response of our teams in moving to a digital offer to teachers through our advisers has been nothing short of remarkable. And we're really happy to see not only the response to the situation that we're in, but that business continues to go forward with very, very positive momentum. It's a really good response in that company.

[Nigel Dally, analyst]

Great. And then just second on expenses, you reached your initial target. You commented that there's additional meaningful expense saves in 2021 and beyond. Possible to add some dimensions and -- around the size of those saves? And what kind of timing are we looking at as well as to when it would actually flow through the bottom line?

[Mark Pearson, executive]

We're not ready to give a number yet, Nigel. We're working on it now. Obviously as you can imagine, the teams have been full out on this VA transaction.

But we can see in addition to the $75 million, we can see additional one-off savings coming through this year because of COVID, less travel, less entertaining, et cetera. So that's coming through as well.

And then we're working on now as to guidance we'll give you early in the new year on what the expense savings will be. But the momentum is with us there as well.

[Operator]

The next question comes from the line of Andrew Kligerman with Crédit Suisse.

[Andrew Kligerman, analyst]

I kind of think a little bit about capital, so $2.3 billion of, by our estimate, excess capital at this stage in the game. Post the Venerable transaction in 2Q, assuming that accelerated buyback, which is terrific with $500 million, maybe you invest in Venerable. You probably could be sitting at close to 3 billion of redeployable/excess capital. I'm trying to get a sense on what's your priorities, assuming we can get beyond COVID, and let's just assume that hopefully. What would your priorities be on capital, hold it? Buy back more stock? Or are there big acquisitions out there that you'd like to do?

[Mark Pearson, executive]

Thanks, Andrew. And look, first, we're very proud to be in such a strong capital position amidst, as you say, a global pandemic and historically low interest rates, which are always challenging for insurance companies. The reason we're in this position is because we manage to an economic framework. And we have, as Anders said in his opening comments, the most conservative interest rate assumptions. So we've been able to secure a strong position not by luck, but because of how we've managed the balance sheet.

In terms of capital deployment, we've returned nearly $3 billion to shareholders in the 2.5 years since the IPO. And I'm really, really proud that the team has been able to deliver to that 50% to 60% payout guidance ratio that we gave you. And this stability enables us to present the type of results that we have presented quarter after quarter after quarter.

You're right, following the close of the VA, we will accelerate an incremental $500 million there, and we will return the remainder of excess capital. We're going to use it across a variety of options that we have, but we are very conscious that we're in the middle of very uncertain time with the economy, very uncertain politically. Look at what's happening today. And of course the COVID isn't over.

So we feel it's proper and prudent that we do return capital in accordance with the guidance we gave. But we like where we are now. We're going to take a little bit of time to see what the best option is going forward.

[Andrew Kligerman, analyst]

Okay, Mark. But -- so no real priority right now as to what -- and these are crazy times. But no real priority as to what you want to do with that cash if we could get to normal? And that's a big if.

[Mark Pearson, executive]

I know. I don't want to be saying anything definitive now, Andrew, other than I'm really proud of what our finance and treasury team have done to put us in this position of real, real strength with our balance sheet at a time when we really need it. So we're going through, as you say, really crazy times, both across the economy and politically. we don't quite know how that's landed yet. And of course the COVID is on.

So we're in a good, strong position. And it's nice to have options, and we're going to keep that open as long as we can.

[Andrew Kligerman, analyst]

Okay. Fair enough. And then I want to ask one more about the Individual Retirement segment. And I looked at the current product offering sales flows at $802 million last year in the third quarter, moving down to $351 million in the third quarter of a 3Q20. And first year premiums, as you mentioned earlier, were about 80% of the 2 billion last year.

So the question is, it seems like a lot of your competitors are derisking. They want to put out buffered products. We're hearing it very regularly. Do you think that you might see a continued pressure on sales, even if we do get beyond COVID-19 as you're seeing a lot more competition?

[Mark Pearson, executive]

Yes. I mean you're right, Andrew, there is more competition on this product. I mean firstly, we're very, very proud to have brought this new category to the market. It's great for retirees and investors to be in growth assets like this with some downside protection. It was part of that decade-long program I mentioned earlier, fund substitution, getting out of those high-guarantee products, putting in win-win products for clients and for shareholders.

And you know we had a pretty much a free run at this, maybe 3, 4 years before competitors started to come in. So good credit to our product development side.

I think there's always 2 things, Andrew, on competition. One, products can be copied. And if we have a winner, we should not be surprised to see competitors come in and look to replicate that one. But what's harder for others to replicate is our distribution reach. I think the combination that really differentiates Equitable is that combination of having Equitable advisers, our own affiliated sales force and very, very strong third-party presence across banks, wirehouses, insurance companies. So we feel very good with the hand we have to play. But yes, I think it's true, a little bit more competition there.

[Operator]

The next question comes from the line of Elyse Greenspan with Wells Fargo.

[Elyse Greenspan, analyst]

My first question, I guess, continuing on the capital discussion, you guys have spoken numerous times about thinking about what to do with your AB stake. It sounded from the call last week that discussions -- you've been focusing on the VA deal and then also with the uncertainty of COVID. But is it safe to assume that decisions there will be put off, as you mentioned having some capital flexibility until things get back to normal? Or any kind of update you can just give us in terms of thought process around taking a decision on what to do with that stake in AB.

[Mark Pearson, executive]

Yes. Thanks very much, Elyse. Yes, you're right. And obviously this major step we've taken to derisk our balance sheet with the VA reinsurance transaction was the #1 priority for us to unlock meaningful value for shareholders on that.

And we do get the question from time to time on AB. As you know, we have 65% stake in AB. That's something that was put together at the time of the IPO.

We are very, very happy with our investment in AB. It is consistent with our strategy, it's low capital intensity. And the business under Seth and Ali's leadership has been performing relatively very, very well with its traditional strategies, but also its alts and its strength in private client and in Asia. It's doing extremely well.

So we certainly do not see any burning bridge here. There's nothing we think we have to do something quickly. But we will take a look at it from time to time. It just hasn't been the right time to be doing anything there.

And so we'll continue to do all we can to make sure the balance sheet is resilient. And unlikely that we'll be making very large portfolio changes at this time, it's just not the prudent thing to be doing.

[Elyse Greenspan, analyst]

Okay. And then my other one was just a numbers question. Within corporate, you guys have been coming in better than the guide for the past couple of quarters. Anything one-off there? Or how do we just think about that segment, I guess, for the fourth quarter and then kind of thoughts for 2021 as well?

[Anders Malmström, executive]

Yes. So look I think corporate and others, there is some volatility between the quarters. But overall, I think we gave you guidance that it will be for the full year somewhere around $350 million. And I think that's exactly what I can confirm. There's nothing special there.

[Operator]

The next question comes from the line of Jimmy Bhullar with JPMorgan.

[Jamminder Bhullar, analyst]

I just had a couple of questions around the lines of the discussion with other analysts. First, just on retirement, your flows were negative. And you mentioned it's partly because of seasonality, but deposits were down from last year as well. And wondering to what extent you feel that your business is susceptible to sort of the weaker economic environment and potential hardship withdrawals? If you've seen any of those, given that the makeup is a little different than a typical corporate 401(k) business?

[Mark Pearson, executive]

Jimmy, it's Mark. We did see withdrawals tick up a little bit in the last quarter, but I don't think it's something we would say there was a massive trend in there. And I think to be frank, Jimmy, retirement provision is of course dependent on the economy. So I don't think we're totally immune from that.

But what's encouraging for us is generally particularly this year, the stickiness of the business has been good. You should also take into account that a lot of our retirement flows, and our assets under management come from our 403(b) business, the teachers business, which arguably is not as impacted by the economy. Unlikely that teachers are let go to the extent that the economy comes down. So we have some protection there against economic winds.

Anders, do you have anything?

[Anders Malmström, executive]

Yes maybe just to add. I mean overall, I think Group Retirement has some seasonality. And it's clear, Q3 is usually the weakest, but we see some very promising initiatives or items in particular, I want to just call out again the renewal contributions that were again up, which is really a consequence of the outreach the team is doing in this environment through digital tools, which really picked up. Again, I think we saw a big uptick in Q2. But we see it continue in Q3, and that's very promising.

And so I think overall, we feel very strong that we will have good positive net flows for the full year and continue to perform well, despite the environment we're in. And Mark mentioned that, I mean COVID environment is difficult to get in. But the team is doing tremendous engagement and just to highlight again the renewal contribution is a clear sign that it's working.

[Jamminder Bhullar, analyst]

Okay. And then on SCS, Mark mentioned sort of competing products by other insurers. As you're seeing competition pick up, is it more just on more sort of copycat-type products by other companies? Or are you also seeing some of the newer competitors getting more aggressive on terms and conditions, and that's having an impact on your sales for SCS?

[Anders Malmström, executive]

Yes. Look, I think first of all, I mean as Mark said, I mean there is competition, but we are up quarter-over-quarter in SCS. I think SCS is still holding up very well. I think we introduced new features like the dual direction. So I think we're doing a really good job there to continue to innovate. And I think that's what you see with the up quarter over quarter.

Other than that, I mean it just shows that it's a good product. And other competitors are coming in because it's the need for clients there. But I would say it is a good environment and we're making really good progress there.

[Operator]

The next question comes from the line of Suneet Kamath with Citi.

[Suneet Kamath, analyst]

I wanted to start with Protection Solutions. You're highlighting the Employee Benefits segment a bit more in your commentary. So I'm just curious, I want to gauge your interest in using some of your capital to expand inorganically in that area to get scale, as we've seen a number of other group benefits players do in recent years?

[Mark Pearson, executive]

Suneet, it's Mark. I think we've said before that capital-light businesses like Employee Benefits, like wealth management and distribution would be an area of interest for us, providing they make economic sense. As you know, Suneet, they do sell still for very, very large multiples. So we have interest, but we would always be value-driven on something like this. So yes, we'd be interested, but please don't take that as a signal we're about to announce something.

[Suneet Kamath, analyst]

Okay. And then I guess for AB, the 29.7% margin in the third quarter is pretty close to your original target of 30%. And I think per your comments, a lot of that was due to cost savings from the Nashville move. But as we think about the next leg up in that margin, are there business mix shifts, either additions or subtractions, that you're considering as you think about improving beyond 30%?

[Mark Pearson, executive]

Suneet, I'm going to ask Ali, CFO for AB to answer that question. Over to you, Ali.

[Ali Dibadj, executive]

Thanks, Mark.

So look, I think as we planned on AllianceBernstein in the future and where we're trying to grow there, there are clearly business mix shifts we're focusing on, which should over time, benefit both the fee rate, but also because of that, the margin structure. So for example, alternatives is a place we're very much in collaboration with Equitable, in their case the strategy improving their yield, building an alternatives business, right? And over time when that's at scale, margins should improve. That should help us continue to march forward in terms of our margin increasing.

So yes, there'll be mix shifts across the board. Of course, you have to remember, and you've heard us talk about this of late on the AllianceBernstein and the Equitable calls to a certain extent as well, that a lot of our margin is market-sensitive. So as the market continues to track higher, hopefully we continue to hope to reach that 30% margin over time.

[Suneet Kamath, analyst]

And Mark, is there some -- would you be willing to put some of that capital to work for inorganic opportunities at AB?

[Mark Pearson, executive]

Yes, Suneet. We already do. If you look over the past few years, I think the total of cede capital, keep me honest here, Anders, that AXA and Equitable have put into AB is about $4 billion out of the general accounts. And AB today has done a fabulous job there, built an alts business around about $30 billion of assets under management now.

We see it as quite a win-win, Suneet. I mean we use the general accounts, so we're leveraging internal leverage there, which is very nice. The general account policyholders are getting a higher yield, and we're building a high multiple business for shareholders.

So yes, it is something that we have done, and it's certainly something we look forward to doing more as the opportunities arise. I think it's one of the big synergies between Equitable and AllianceBernstein. In this regard, it's really good for AB to have a partnership with an insurance company like Equitable. I mean we give them $120 billion of assets to manage, and they manage it well for us. Plus we can leverage cede capital out of the general account to give policyholders high returns and give additional returns for shareholders. So yes, absolutely.

[Operator]

The next question comes from the line of Thomas Gallagher with Evercore.

[Thomas Gallagher, analyst]

Just first, a question on the VA risk transfer deal, would you say we should view this as a likely permanent structure? Anders, as you said, this was reducing your tail risk by 2/3, so clearly that's a major positive from a tail risk reduction standpoint.

I'm just curious if you feel like this is kind of it and now you're properly positioned? Or would you consider doing additional risk transfer on, say, the rest of your legacy variable annuity business?

[Anders Malmström, executive]

Yes, on the asset side, I mean this is a math based on transaction that really reduces the risk by 2/3, while only impacting 1/3 of the legacy VA policies. So I think it really reduces and changes the risk profile of the company materially.

It also validates really the reserving structure we have. And that was always a requirement when we talked previously about should we do a transaction of because it really has to make sense for shareholders. With that transaction, we showed that it's possible.

So I think this will continue to be our premise. Right now, we don't see a need to make a statement one way or the other. I think it just shows that we are managing the business really appropriately, as validated by third-party investors. And so we are really happy that we can do this massive risk transaction. I think that's a key milestone here, and then we take it from there.

[Thomas Gallagher, analyst]

Got it. I guess my question is does it -- I view this more as tail risk reduction and clearly -- and demonstrating the value and the quality of the balance sheet while you're reducing tail risk. And is there also kind of a longer-term vision of remixing your business. It sounds like there is just based on the desire to move into higher multiple businesses. And so I guess my related question is that could include a more material reduction of Individual Retirement and upsizing your higher multiple businesses? But if you sort of get the gist of my question.

[Anders Malmström, executive]

Yes. Look, I think it's absolutely right. I mean we try to shift the business mix but not just at the total company level, but also look at the business risk shift we've done within Individual Retirement, which is tremendous, I mean we've shown that since 2008 and now, it's a massive risk shift within Individual Retirement. And we are very much committed to continue to be a large provider of Individual Retirement.

So I wouldn't just look at the highest level of them, of business mix. We really have to go deep. And I think that's what we're showing here. But obviously that's an important and continuous focus for us.

[Mark Pearson, executive]

I think this is an important point, Tom. I mean you -- obviously investors and analysts will have views on words like Individual Retirement and variable annuity. But if you look at our SCS product, which is in those categories, it has a very different risk profile to some of the stuff that was written in 2005 to 2007.

So Anders' point is when we say value-accretive businesses which are low in capital intensity, we also mean within that category, because it is possible to design economically sound products there that give Americans very good access to growth assets too like the SCS, but enable us to perfectly match them on an ALM point of view and eliminate tail risk.

So we'll do both. We'll look outside those sectors, but within as well.

[Thomas Gallagher, analyst]

That makes sense. And just my follow-up is I think you currently have it but your advice and wealth and broker-dealer business in corporate. Does this generate much of a profit, if at all? And I think you've mentioned the desire to grow that business. Do you see a path to actually having this as a stand-alone segment that produces profitability? And obviously that's valued by the market at a much higher level than anything within insurance, so just curious what you're thinking there.

[Mark Pearson, executive]

Yes, we do, Tom. It is profitable for us today. Have we given that number out before, Anders? How much it is? No, okay. But it is profitable for us today, approaching $50 billion of assets under management in there.

And obviously we're not going to play in that sector unless we can make it significant. We're not here to do meaningless stuff. So we do see a path, and we are already profitable on our Wealth Management side, just not big enough yet to show it as a separate segment.

[Operator]

Our final question comes from the line of Ryan Krueger with KBW.

[Ryan Krueger, analyst]

Mark, as a follow-up to your comments about SCS within Individual Retirement, can you give us a rough sense of -- if we look at the Individual Retirement segment maybe pro forma for the VA transaction, what percentage of earnings are driven by the SCS product at this point?

[Mark Pearson, executive]

Anders, do you have that number?

[Anders Malmström, executive]

Yes. I don't think, Ryan, we have the exact breakdown between SCS and the rest of the business there. And I think it becomes meaningful -- it is, it's a meaningful proportion of it, but we haven't disclosed that.

[Ryan Krueger, analyst]

Okay. And then just you were highlighting differences in how you're managed -- you've managed VA versus some of your competitors. Policyholder behavior is certainly a piece of that. So it would be useful, I think, if you -- could you highlight at all like some of your key assumptions on policyholder behavior, relative to the minimum floor requirements within NAIC VA reform, for example? Can you give us any sense of how much lower your lapse rate assumption is versus what is required in the VA capital requirements?

[Anders Malmström, executive]

Yes. Look, I think we -- I mean we don't disclose all the details. But what you can take from, our policyholders behavior assumptions is that first of all, I think they were validated by the transaction with Venerable. I think that's one important point.

And the second one, just when you look at the update we did this quarter, they were very, very small when you think about balances of $24 billion, and you have this kind of few million dollars of variability. So I think that really shows that our assumptions are trending well towards the experience, which is really what should guide that.

But I don't -- we can't show you how much this is different to the minimal requirement. But it's based on our experience and we're very confident with it.

[Mark Pearson, executive]

And the big issue of course, Ryan, is the assumption on interest rates where, as you know, we immunize our balance sheet by using the forward rate. We use where rates are and looking at the capital position of the company and not some arbitrary reversion to mean number. I mean that's a very, very significant factor in looking at the capital strength of a company.

[Operator]

That concludes today's conference. You may now disconnect.