Equitable Holdings, Inc. (EQH) Earnings Call Transcript & Summary

Good afternoon, everyone. I'm Ryan Krueger from KBW. I'm pleased to have Equitable with us this afternoon for our virtual conference. Representing the company is Anders Malmström, who is Chief Financial Officer. [Operator Instructions]

So to kick it off, Anders, when Equitable IPO-ed in 2018, you provided several 2020 financial targets, where -- with 6 months left or less than that now in 2020. Can you review your progress towards achieving those targets? And what has either gone better or worse than you had originally anticipated?

Yes. So good afternoon, Ryan, and good afternoon, everybody, and thanks for having me. So look, I think it's a good question. When we came out a few -- a couple of years ago with the IPO, we put out a number of targets. It was about growing the business. It was about productivity and optimizing capital. And I think where we are today, I actually feel very confident that we are right on track to basically achieve most of them, if not all of them, even though we had some difficulties along the past and just most recently with the COVID crisis, which clearly impacted the economy severely, but overall, I'm very happy where we are. So from an earnings growth, I think we had a decent earnings growth over the years. This translated then into cash that we were able to bring back to shareholders over the last few years. Now we have a range that we talk about 50% to 60% of operating earnings, well on track to achieve that. And even this year, with all the turmoil, we are still on track to achieve 50% to 60% payout. For the more specific targets that we had, mostly the general account rebalancing. As you know, we already finished that program by the end of last year. We're still working to optimize the GA, obviously, since then. And then also on expenses where we put out the target to achieve 75% net sales, I think we're well on track to achieve that by the end of the year. So overall, I'm very happy with the progress despite a very difficult environment. Now going forward, obviously, with LDTI coming, this will be kind of an inflection point to update all the targets, but until then, I think what I can expect is that we're going to continue to course, have similar long-term targets over the short term, we suspended any guidance just because of the crisis we are right now. Yes, I think with that, I think we're pretty much on track.

Following up there, as you do develop your future plans, can you go into what the company's key strategic objectives are going forward? And then do you -- I guess, do you expect to provide new financial targets if the environment improves, but ahead of LDTI?

Yes. Look, I think, first of all, I mean, during this crisis, I was very clear in all the presentations and talks we have, focus in this environment is balance sheet and liquidity. That's what each life insurance company needs to make sure to be able to fulfill our promises to policyholders and shareholders. And so I think that's what we did, but as I said before, I think once we get through this crisis, I think we have to go back to kind of normal. I mean we will be in the new normal, but we'll go back to targets similar that we had at the IPO. I would say from now till the end of that period and the LDTI will then change that. We will have similar earnings growth in the long term. In short term, as I said, focus more on balance sheet and capital, but then after we have LDTI, we're going to come back with new updated targets that will reflect the change to LDTI.

Got it. Got it. Maybe delving into your economic model, you've stressed that the company manages to an internal economic model? And can you elaborate on that more? And also touch on some of the key differences between your internal model versus GAAP and statutory accounting?

Yes, absolutely. Look, I think for us, I mean, it's really a cornerstone that we manage the company on an internal economic model. It is really a fair value-based economic model, which means we have both sides of the balance sheet, the assets and the liabilities and mark-to-market. Important, really, when you look at the economic balance sheet, it's really that, particularly on interest rate, where we just use the forward curve as the reference rate, so we don't have any interest rate assumptions that are reverting back to a mean. And that's by far the biggest difference between the statutory framework and particularly also on the GAAP side. And both of them have a reversion to the mean assumption. Statutory is given by the regulator, which has kind of 3.5% reversal over the next 10 years. And on GAAP, we actually reduced our long-term interest rate assumption significantly down to 2.25%, I think, which is much lower than the rest. I've seen to basically seeking that reversion to the mean is not the right approach. You have to have realistic assumptions for interest rate because our liabilities heavily depend on these, and we really want to be in a position to be able to commit to our promises that we make to our policyholders.

So sticking with that topic, there were several positive aspects of the NAIC's variable annuity capital reform, but they kept the prior interest rate generator that reacts pretty slowly to the current interest rate environment. What is your stance on that interest rate generator? Are you in favor of it being revised? And what is happening at the NAIC in that regard?

Look, I think, first of all, as we said, I think overall, we're pretty happy with the VAM reform, the NAIC reform, VM-21, because it really moves towards a more economic framework. And as you said, I think the one item that really stands out is really the interest rate generator. And today, interest rate generator still generates scenarios that all of them, all 1,000 scenarios actually above the current forward rate, which doesn't seem right. And I think that's why we really support the NAIC in that regard to update the interest they generate and make it much more realistic. So from that perspective, we really like that. Because otherwise, you are in a -- you get a false sense of security because your liability just don't reflect the reality. So we're very supportive of that.

Do you have any sense on the time frame that -- where this may be revised? And I guess, any interim steps that the NAIC may consider?

Yes. I don't have precise dates here. I know that the NAIC is working on 2 fronts. One is really the long-term update of the generator, really make it a sustainable generator, and then they're working on some short-term intermediary steps, which I think at least they want to make sure that the companies test and then show to the regulators, but I don't know exactly on the timing where they are.

Got it. So -- I mean, you've discussed that your variable annuity business, you feel like is fully hedged for interest rates. So it's from an in-force cash flow standpoint, is it -- are you truly agnostic about what interest rates do from here?

Yes. So I think if we really look at the in-force, I mean, we fully immunize the interest rates, which means whatever interest rates do, I mean the balance sheet moves up and down in parallel. So we are not sensitive to interest rates. And I think that's why also we believe if we would then change to the new generator at least from an interest rate perspective, it should have very minimal impact then on our statutory balance sheet. Yes, absolutely.

Could you expand on that a little bit because that has been one question I've received is, in general, is if you -- if you reflect a lower interest rate assumption, it would seem like that would still increase your statutory reserves or total asset requirement. So I guess, how would -- what would be the offset from a statutory standpoint for you that would negate the impact?

Right. I mean I think the way we look at it, and I think the way it would then manifest itself is obviously, the prehedge reserves would go up because you reflect the lower interest rates, but then at the same time, you get more interest rate hedge credit because you're hedging interest rates and because we already hedged these interest rates, we believe this should be pretty neutral. Everything else, equal.

Sticking with, I guess, legacy variable annuities, can you discuss how much of a priority a derisking transaction is for the company now that you're fully independent?

Yes. So I think, first of all, I mean, I think you're talking about our older and accumulative book -- legacy book or fixed rate and accumulative book as we target. As we said before, from a reserving and from a capitalization standpoint, I think we're well-reserved, well-capitalized. This book is generating significant cash flows. So we're in a very good position. We don't have to do anything here. I think the question is more because we believe that the public is kind of discounting this book relative to our internal valuation, [ could ] a insurance transaction. In our case, it would have to be a reinsurance transaction could that actually create values for shareholders. So that's the question. And I think our position was very clear on that since a while is that if we would get to a deal where we would be able to get close to our economic value that we internally attribute to this business, we would be definitely very open to that, but we don't have to. So we're not in a position where we have to do any transaction. The other thing we just have to keep in mind, because in our case, it has to be a reinsurance, we would have to be very comfortable with the counterparty because that basically becomes the risk once you do a transaction here. It's more a counterparty risk than a business risk.

How do you assess a situation where the transaction you think would be above the public market value today, but somewhat below your own internal view of the economic value? I guess is there a compromise in between those 2 points that you'd be willing to do? Or do you feel like a transaction really needs to be very close to your own economic value estimate?

Yes. Look, I would say, and obviously, this is a hypothetical question, but I would believe the transaction has to be close to the internal economic view, but look -- and that's true with each and every reinsurance transaction. I mean it creates certainty. So that's why you can attribute some value to that, but that's basically the difference to your own internal economic value, which still has some uncertainty because, I mean, the working change in the meantime. So yes, I think it has to be closed.

Okay. You recently issued $500 million of preferred stock. Can you discuss the motivation for doing so, and then how you're thinking about the leverage targets overall at Equitable?

Right. So look, I think when we IPO-ed, we basically had 2 sources of capital. We had common equity and we had common debt, and I think what we tried to do over the years now is really to diversify our capital base and we did that. So when we first issued them, preferred equity, I think, it was end of last year, which was really retail and preferred. And this time, we used institutional preferred really to diversify our capital base, but at the same time, it was a bit opportunistic because market term conditions are really, really strong right now. So we're very happy with the outcome, but the primary focus is really high here, diversification. Now to the -- to your question about the leverage ratio, where we want to be, and obviously, we want to be somewhere in the mid-20s. Obviously, I think because it's GAAP-driven. We always have to be conscious about the GAAP book value that is also driven by the hedging program. Long term, it's mid-20s and short term, it can vary. I think at the end of Q1, we were actually at 19% just because of the mismatch between hedging and the accounting, so at mid-20s.

How do you assess leverage in the context of LDTI because your GAAP balance sheet will change meaningfully after LDTI, so it would seem like traditional targets might become less relevant. I don't know how far along the rating agencies might be in this, but how do you think about that?

Look, I think the first question is just because you do an accounting change, economically, nothing changes. So your leverage -- your economic leverage ratio would not change. And so under that aspect, I don't expect that rating agencies would act immediately just upon once you apply LDTI, but obviously, I think it would then show maybe new differences between companies because every company reacts differently to applying LDTI. So I'm not overly worried. I think it's something we clearly monitor, but just in our case, look, I think we already took a step, even though it wasn't LDTI, but just taking the interest rate assumption down to 2.25% earlier in the year was a meaningful step towards more realistic assumptions with LDTI goes to the full fair value for the annuity business.

Got it. Got it. I guess after the preferred issuance, I just do pro forma, your holding company would have about $2.5 billion of liquidity, I believe. Should we continue to expect the 50% to 60% capital return target despite this? Or do you feel like you have potential capacity to do more than that over time?

Yes. Look, I think, first of all, I think it's -- as a CFO, during a crisis, I feel very good about having that much cash at the holding company. It just makes me sleep much better than otherwise. So I think overall, we're in a good situation. And clearly, we want to make sure that we can get through this crisis in a safe way. And by that, having more cash than usual at the holding company is really what we try to achieve here. So overall, I think we committed or we confirmed the 50% to 60% payout ratio as the right range. Going forward, we sometimes do tactical accelerations of buyback like we did last year with AXA when they sold down or like we did a bit in Q1 when the share price was lower, but overall, I think you can just expect us to stay the course here because we still have to monitor the economy, make sure that we are safe and we're not through that crisis. We're not through the health crisis. We're not through the economic crisis. I would argue we're still on life support by the [ Fed ] from an economy. So I think we have to be very cautious before we use cash again, above what we [indiscernible].

About a year ago, you started talking about doing a strategic review of the 65% ownership stake in AllianceBernstein. I think you commented that, that's probably a bit on hold now given the environment, but can you give us an update on how you're thinking about your stake in AllianceBernstein? And if there's any sort of time frame that you'd like to -- and make a decision one way or another about how you'd like to move forward there?

Yes. Look, I think I mean our ownership of AllianceBernstein of 65% is maybe not a natural one, but it's a good one. So I think it's -- to the point, natural, it's not maybe how you would start a relationship, but because this relationship is very old and very strong. And since -- I think since the beginning that AB was kind of created. AXA, now Equitable owns 65%. So it has been the situation for very long time. But having said that, I think we always have to assess is it the right ownership structure? Should we increase it? Should we decrease it? Should we change something else? But we clearly decide it for the time being. I think the focus is really not on AB ownership. The focus is on managing the company through that crisis. And so for the time being, we keep the 65% as is. And as you know, I think we have a strong relationship with AB. Both companies, Equitable and the AllianceBernstein really benefit from each other to -- on one hand, I mean, AB manages the general account, the same time Equitable seats new investments into AllianceBernstein. And then I think last but not least, we get unregulated cash flows to the holding company out of AllianceBernstein, which is very, very helpful, in -- particularly in times of uncertainty. So you get this amount of cash without going through a regulatory process. So overall, I think we're in a good position, and we don't see any need to change that in the short term.

The M&A was not part of your initial 3-year plan post IPO, but as we do get closer now to a new planning period, and you're fully independent. Is M&A something that you'd consider more? And are there any particular lines of business that you're interested in?

Yes. Look, I think we were very clear when we came out of the gate with the IPO that M&A is not an option. I want to make sure that we gain credibility in the market. We get good traction as a management team, and we're really able to show that we can organically grow that business. Now I would say, after the 2-, 3-year period where we've shown that, I think M&A becomes part of the game, and we will start monitoring the landscape and see if there are areas where we could -- where it could make sense to do acquisitions. I think 2 areas I just want to highlight, businesses that we are growing internally, one is employee benefit. We started an employee-benefit greenfield business a few years ago. It's actually growing really nicely. We have a nice track record, but in the grand scheme of the overall company is really not material. And in order to make it material, I think an inorganic boost to that business would really be very helpful. We're going to do it in any case, but that's an area we would like to accelerate that growth because we really like that business. The other area is what we call wealth management or broker-dealer business. We have about 400, 500 advisers within Equitable. Advisers that are solely focused on wealth management, broker-dealer business. And it's really a nice growing business, but again, it's not really material that we could talk about it as a separate segment. So that's also an area we would like to grow faster. And I think inorganic growth is a way to grow it faster. So just 2 examples where M&A could really help and boost our strategy.