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

Good morning. I'm Tracy Benguigui, insurance analyst at Barclays. Welcome to Day 2 of Barclays Global Financial Services Conference. I'm pleased today to have a fireside chat with Mark Pearson, CEO of Equitable Financial. Welcome, Mark.

Thank you very much, Tracy. Good morning.

Good morning. Maybe just some quick housekeeping items before we kick off. On the left side of your screen, you will have two options. One would be to submit questions in the Q&A box. And the second would be to follow along our audience response system, which is our polling question. And with that, I'll kick off with the first question, Mark. We're witnessing a trend of U.S. life insurance subsidiary separating from European owned larger insurance companies. Given your IPO two years ago, how has the former European parent shaped your risk philosophy and business acumen? And at the same time, Equitable brand has a deep heritage. How do you blend both worlds?

Well, thanks, Tracy, and thank you for this opportunity. Yes, Equitable does have a deep heritage. We were established in 1859, the year before Abraham Lincoln was inaugurated. So a long time ago. In those 161 years, there has only been 16 CEOs. So I'm very conscious of being a steward, if you like, of a great institution, and just absolutely privileged, as you say, to have experienced the IPO two years ago. And my mission is clear, to leave this organization strong and thriving for the future. Yes, for 30 of those years, AXA was our parent and a good parent. I think some of the things to your question that the qualities that AXA had which I'd like to continue into the new Equitable are very strong risk management orientation. AXA is a good corporate citizen and a progressive organization. I think these are important qualities for the future. And we will take from AXA as we go forward. You mentioned about a trend of European insurers divesting. I think of it more as strategic choices. If you look at AXA's situation, AXA saw its strengths in P&C and health and hence decided to spin-off Equitable where our strengths are so on protection and retirement and asset management. And in that regard, not too dissimilar to the Met. The MET focusing on capital-light businesses and spinning off Brighthouse. So I see it more as strategic choices rather than a trend. And of course, there are plenty of European insurers still here in the marketplace, AEGON and a Jackson and others, for example. You asked about the differences, I think it's more -- it's important as well to look at the similarities. I mean you probably know, Tracy, I've worked in 15 different markets around the world when I was with AXA. And what is struck with the similarities, I think insurance and asset management companies add to society with the protection we offer, helping people retire with dignity and look after their wealth. So there's a lot of similarities in terms of all markets. I guess what's unique and different between Europe and the U.S. is on the regulatory side, where, as you know, it's quite a different story between Solvency II and U.S. GAAP and our statutory, particularly on the treatment of interest rates. And this can lead to different risk profiles that people take. From our point of view, going back to AXA, if you like, we manage the business -- we at Equitable manage on a fully economic basis, a fair value approach, if you like.

Excellent. Now you've mentioned the Solvency II and IFRS, growing up in that framework. So I guess, it's no surprise that you're used to a market consistency way of looking at the balance sheet, which led to, in my view, Equitable updating your interest rate assumptions in the first quarter from 3.45% to 2.25%. At the same time, you've actually been quite vocal to regulators, rating agencies, et cetera, that the industry should abandon a reversion of the mean mindset. For example, the NAIC's interest rate scenario generator has a 3.5% interest rate floor under the VA capital reform. And I guess, my question to you is, why is it so important to you that others in the industry follow your lead?

I'm glad you asked that question, Tracy. I think it's the number one issue facing insurance companies in the market today. Why? Because we write long-term liabilities, 30, 40, 50 years. Just last week, Tracy, we paid out on a policy that had been with us for 85 years. Now that is extreme, but I'm illustrating the fact that we are in the business of providing long-term protection and long-term solutions for American families as we go. And with that in mind, we must ensure that we are properly reserved and properly capitalized, if we are going to meet those promises in the future. Today, as you say, the U.S. statutory regime permits using an arbitrary 3.5% in the calculation of reserves and capitalization. And a 30-year U.S. treasury today, as you know, is around about 1.4%. Now we at Equitable, we are saying, we don't know if interest rates will rise. But we have seen the 10-year treasury going one way. I've been working for 40 years now. When I came in the business in the late 1970s, the U.S. 10-year treasury was 16%. Today around about 0.6%. So what we are saying is, we don't know which way interest rates are going. We are saying 3.5% is totally arbitrary. We see no reversion to me, no cycle of interest rates whatsoever. And we are saying that the people who manage insurance companies, and we're not alone in the market, many others also adopt this, should not gamble. We should reserve and make sure that we're able to withstand current rates, where the market is today, not an arbitrary 3.5% in the future. So yes, you're right. The arbitrary 3.5% is within the rules, but we think it's unnecessarily risky to rely on that. And we hope this dialogue continues because it's important, and it's our responsibility to contribute to a strong financial system. And going back to my answer to the first question, we are stewards of these institutions and we need to pass them on in a strong and vibrant way and relying, and I use the word relying, relying on an arbitrary 3.5% is unnecessarily risky.

Got it. This is actually a good bridge for my next question. Equitable has mentioned that LDTI adoption protection solutions will no longer be in loss recognition. And now that given the impacts of COVID-19, LDTI has been delayed further to January 2023, but there's actually options to early adopt. And maybe just bridging what you said on where you're at on your interest rate assumption and maybe the fact that you like to take the lead on certain positions to the rest of the market, would Equitable be in the position to early adopt? And when should we expect you to provide updated guidance on this?

As you say, Tracy, in quarter 1, we reduced our interest rate assumption on GAAP to 2.25%. I believe it's the most conservative in the market and closer to the fair market rates I just mentioned. And because of that, no surprise, we are very much in favor of the new LDTI fair market principles. We think it will vastly improve shareholder transparency. And I'm a little bit disappointed that it was delayed, but understanding with the COVID and everything going on, it's a reasonable thing. We don't expect to early adopt unless the majority in the industry do. I don't think there's any point in being out there as the only one in an accounting change like that. But we look forward to adopting LDTI. This transparency, I think, is important. And as you know, Tracy, the book values are not believed by investors, and that cannot be a good thing for the long term. So I think when we move to LDTI and a more fair market principle based, I think we'll have greater transparency and greater interest from investors. And I think that's a good thing for the long term.

Great. And what about just even sharing some early guidance with the market on maybe non-GAAP measures that you would introduce or a way to interpret the day 1 impact?

Well, the information we share quite a lot with the market is our cash flow projections and what we anticipate going forward. Obviously, in this COVID time, we are prudent and cautious in giving out sensitivities because it's just too uncertain. And in giving out our cash flows, we really are signaling to the market that we are taking a good look at the economic side of our business, the economic liabilities, and this is the cash flow that's coming out on top of that. That's how we really address it in the meantime.

Okay. Great. I think maybe it's a good time to turn to some of the polling questions and answers. And the first one, just to remind folks, on the left side of your screen, you could fill that out. The first question is my confidence that Equitable's ROE will be in the mid-teen range by 2021 is, and the choices are very high, high, medium, low, very low? With 80% so far at high and 20% response is medium. And then moving on to the next polling question. What measures should Equitable pursue? Organic growth, closed block risk transfer, disposal of AllianceBernstein, buying remaining stake in AllianceBernstein, share buybacks and dividend increases. And you wouldn't have a virtual conference if I got closed out of a polling [indiscernible]. So I'm going to get back in, but maybe I'll just get your take on the second polling question. And I guess, if you had to pick and choose where you think Equitable should pursue on a capital management perspective, what do you think is, in your mind, most attractive out of those options I shared?

I think the most important thing in these times, Tracy, is to make sure we maintain a strong balance sheet, all other options flow from the strength of the balance sheet. And the work we've done as a team over the past 10 years in putting in our hedging program based on the economic liabilities and in changing the profile of our product mix means that we are in a position of having a very robust balance sheet. I think that's evidenced by $2.5 billion at the holdco over and above our normal levels of capital. So our number one priority, no surprise, in a time of this coronavirus, is to make sure that we have a strong, resilient balance sheet. That's really what we're gearing to. Secondly is to control those things we can control. So you'll know that our program is -- has been to secure productivity gains. We're on track for the $75 million net savings that we guided the market towards and improving the investment yield on our portfolio. We delivered the $160 million general account optimization target one year ahead of plan. But I think that -- to really answer your question, the resilience of the balance sheet is really the most important thing for us to do in these times.

Okay. And then, I guess, one thing that I'd like to touch upon a little bit further on capital management is M&A. How has the current environment impacted your appetite for M&A? And how do you view or think about M&A in the context of your overall growth strategy going forward?

Okay. Tracy, when we IPO-ed the company two years ago, we said to the market, look, we're going to take three years to establish ourselves as an independent entity from AXA to get the credibility of the marketplace by delivering on the growth targets, the 5% to 7% CAGR on our operating earnings, the 50% to 60% buyback program we have in place, those two combined giving us double-digit EPS growth, $75 million net savings and the $160 million improvement to our general account yield. And we told the market at that time not to expect us to be active in the M&A side. And that's how it's played out. We're delivering on those particular promises. Now we're in the position where we do have strength on the balance sheet in the holding companies. I mean I mentioned the $2.5 billion. But I do want to stress, we have not established that as a war chest. It is not there to go out on M&A. It is really to make sure we have resilience during these unprecedented, volatile times. We always said to the market if we can find a way through M&A to accelerate growth, particularly in capital-light businesses, like employee benefits or wealth management, that would be something we would consider. So no change in our strategy there. And also no change -- the market should expect us to be prudent and disciplined and that anything we do would complement the existing strategy, would make economic sense and be value-accretive to the shareholders over the long term. So there hasn't been a change in our strategy at all. It is something we always said we may consider, I use the word may consider, if the conditions and the target allows.

Got it. I actually was able to pull in the polling results. And it seemed like the favored response was closed block risk transfer. So I guess, I would like to get your reaction, particularly into the context of current economic conditions, how attractive would that be or unattractive given the bid-ask spread for something like that?

Yes. I think it's a value point, Tracy. I mean we are well reserved on our VA block, and we are well capitalized, and we have a hedging program in place that immunizes us from changes in interest rates and the market on that particular block. So there's no burning platform here, if you like. If there was some value to us looking at disposing of the VA, we're aware that there's a lot of money in the market, we're aware that there have been other transactions. We don't have to do a transaction. But if something came along that was economically attractive, of course, we would consider it.

Okay. Excellent. And just reminding folks that you could submit questions in the Q&A box, and that will be e-mailed to me. I guess moving on and staying in the theme of capital management, in a very uncertain market, what gives you confidence in your ability to deliver on your 50% to 60% target payout of earnings to shareholders?

I think the actions taken to fortify the balance sheet give us that confidence to deliver on those particular commitments. I think the evidence of that is, earlier this year, we upstreamed $1.2 billion from the life company to the holdco, that's higher than in previous years. And it's an uncertain environment, but we do expect to continue to be able to meet that 50% to 60% payout. In the half year-to-date, we've returned $776 million to shareholders. That includes $400 million acceleration we did in 2019. And we continue to deliver on our -- on what we've told the market. We continue to be in the market buying back shares on a consistent basis. But I think it's the strength of the balance sheet and the management of the organization to the economic realities with the hedge program we have in place that give us the confidence that we can meet that goal.

Okay. Maybe I just wanted to bat out a little bit. The $1.2 billion that you dividend up, that actually represents half of your ordinary dividend capacity. And just looking a little bit ahead into 2021, how do you think just mechanically, you will be able to continue that 50% to 60% target? Do you think you would extract the remaining capacity later on this year? Or should we be concerned given there's like a 1-year lag in that calculation that you wouldn't be able to have that dividend capacity next year to continue funding payout to shareholders?

So two points on that, Tracy. Firstly, we have quite a lot of excess capital at the holdco now. And secondly, in terms of the ability to take more dividends out of the life co, and it's something we're constantly watching with where the markets are now and working with the DFS. But I think the combination of the buffer we have at the holdco, plus however markets evolve and our continued discussions with the DFS, I think we remain confident in our ability to deliver on that.

Great. All right. Let's shift gears a little bit. Is there a silver lining in a period of market dislocation? I mean where are you seeing opportunities either on sales, asset allocation or expenses?

I guess on this -- at these times, myself and the management team, we have to really focus on those things we can control. There's a lot we cannot control, but what we can control, we have to be even better at it. So we've been very focused on managing those variables. So firstly, you mentioned on expenses. We're on track to achieve that $75 million target I mentioned. This -- we mentioned in Q2, there's about $25 million incremental savings because we're not traveling as much and all of those sort of normal business activities are giving us a one-off windfall, if you like, on there. I think the other thing that Equitable has going from it, we had this very big program to separate from AXA. We've about 150 different systems, technology platforms we shared that we had to separate. And our teams have done an absolutely incredible job in not just separating from AXA, but upgrading the technology at the same. So for example, now, 80% of our applications are on the cloud. And that gives us access to tools, variable costs and the ability to renegotiate deals, which has really been to the benefit both of our productivity drives, but also our new business initiatives. That's been a real one-off benefit for us. You wouldn't ordinarily do that, but we had to because of the separation from AXA, so we decided let's leapfrog rather than just replace what we had on that. I think the other area you mentioned on the investment side, yes, we -- earlier in the year, we capitalized on the dislocation in the market. You'll remember, we saw very wide credit spreads there. So we were able to improve our yield without compromising the quality of the portfolio. We shifted about $2.5 billion from treasury to corporates and other high-grade quality. And we also taken this opportunity to launch our second funding agreement-backed notes as well to improve the yield. So very busy here, focusing on those things we can control, but also taking advantage of the separation from AXA as well.

Yes. Maybe, I just want to follow-up on a few of your comments.

Sure.

Because I know one of your stated objectives were -- was the GA rebalancing. Is that still -- even though you met your target, will there be a second round? Is this still a work-in-progress? Since you do still have a lot of concentration in government bonds.