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

Good morning. I'm Tracy Benguigui, Insurance Analyst at Barclays, and I'm pleased to host this fireside session with Mark Pearson. CEO of Equitable. We have a lot to cover, but I'll just remind some folks some housekeeping items. We could submit questions up on your screen. We will also be looking at some polling questions, which is the survey button. We have about 40 minutes dedicated for this session. We will take the audience questions the last 10 minutes. And with that, we're going to -- I'm going to turn it over to Mark for some opening remarks.

Morning, Tracy. Good morning, everyone. Thank you for having me today, and thank you for joining me. It's remarkable, listen, this is the second Barclays Global Financial Services Conference I've held remotely. I'd like to start my early comments by just sitting on my thanks and saying how proud I am with the Equitable team, how they've responded to these unprecedented times. And despite those external challenges, we have achieved all of our 3-year financial targets we set at the time of the IPO. And we're in a strong position for the future. Since the IPO in May 2018, our total shareholder return is up 67% ahead, well ahead of our core average of 36% at the end of August. And I think this has made possible by 4 key areas that set Equitable apart from others. And these drive our ability to generate value. First, our stable and predictable cash flow generation. It's about $1.5 billion a year from our operating subsidiaries, of which 50% will be from unregulated entities. Second, our business model. We have leading positions in retirement and also asset management through our subsidiary AllianceBernstein. AB has been performing exceptionally well with 17 consecutive quarters now of positive active equity net flows from the retail chain. And most importantly, the synergies between Equitable and AllianceBernstein is participating in the full value chain and can find what is to buy better solutions. Thirdly, our affiliated distribution. We have over 4,300 Equitable advisers and a broad range of third part partnerships. This provides us with stability and privileged access to clients. And I think in -- in this time of a lot of market uncertainty, we have the opportunity to design economically sound products in partnership with our affiliated distribution. And fourth, I think what sets Equitable apart is our economic risk management program. This is evidenced recently by our landmark VA reinsurance insurance transaction, which reduced 2/3 of our tail risk and our comprehensive hedging program, all based on the fair value. Looking ahead, our focus is to use these strengths to drive shareholder value in our core capital-light business -- businesses. That is leading positions we have in the VA market. We're the #1 provider of retirement plans to teachers in the K-12 market. With approximately 1 million live clients. And of course, our investment in AllianceBernstein, which has been a top performing asset manager, providing 1/3 of the $1.5 billion in cash we generate each year. We're also starting to see additional growth from our [indiscernible] businesses in wealth management, employee benefits and alternative investment strategies. And so we have plenty of opportunities to growth that cash in. And in addition to running our business, we want to contribute and lead in the development of our ESG program and contribute to the ongoing debate to make our industry healthy and strong. We think the upcoming LDTI change is a step in the right direction towards transparency and fair value reserving. And we'll continue to advocate for fair value return because we believe it's likely to be for client's insurance. So thank you for the chance Tracy, to have these opening comments. I'll hand it now back to you.

Thank you, Mark. And we're going to look at many of the themes that you just discussed. And I guess I'll start with the topic that's near and dear to your heart, interest rates. And I'm curious to hear your forecast, how quickly do you think the Fed will begin tapering and institute rate hikes? And does your interest rate forecast change your hedging philosophy or are you sticking with your preference to be immune to interest rate movements?

Yes. This is such an important subject for the insurance industry. It's critical for shareholder returns, for confidence in our industry and for the protection of policy holders. Tracy, we approach interest rates with humility. We have no superior knowledge that enables us to predict where interest rates will be tomorrow, let alone 10, 20, 30 years time. And the insurance industry is a unique industry. We make promises that last for decades, protecting families, enabling people to retire with dignity, allowing people that peace of mind to live their lives. And in order to do this, the industry has to be strong and properly positioned. So our position is, just as we set aside prudent reserves on mortality and morbidity, we believe that exposure to interest rates should be reflected in proper [indiscernible]. So for us, we look at the forward curve, what's available in the market, including negative rates to set our economic reserves in our hedge program to mitigate interest rate exposure. And I've been working more than 40 years now. And there's no evidence to me -- as an interest rate cycle or reversion to me, that I can see. And I don't think the industry should be built in reliance of a key driver increasing that it doesn't change. To your point, we're aware that the Fed reserve officials have indicated potential plans to pull back the pace of the monthly bond purchases, but there's still many uncertainties in the market, the latest Delta variant. So we'll continue to manage our business based on the economic realities. We'll continue to be fully reserved, and we'll continue to run our hedge program so that we're fully immunized on interest rate exposure against that economy. We are not reliant on rising interest rates to meet our commitments to shareholders or to policyholders.

Got it. And on this topic, Equitable has been quite vocal about the industry practice of using reversion in the mean and formulating long-term rate assumptions. While the last time most industry participants update their assumptions was in the third quarter of 2020. Equitable actually accelerate its review back in the trough at the first quarter of last year, resulting in Equitable taking down long-term rate assumptions to 2.25%. So even though interest rates are a much higher spot now than 18 months ago, how are you thinking about your lower rate assumption?

Yes, rates are higher but I think we should put it in context, even the tenure treasuries around 1.3%, now [ 70 ] and so it's higher than the all-time low. So yes, that come out but still extremely low on the historical side. So our management of the business are not going to change. Our strategy is to manage to true economics using the market rates that is so rich. Yes, for GAAP, we have 2 level assumption, 1 of the lowest in the industry and for statutory, which drives our cash position, we reflect hedging, which should not [indiscernible]. I'm aware that some companies are managing to so-called reversion to be [ above] 3%. And as I said, we're very humble on this. That may be correct, we don't know. But if it isn't correct, there will be pressure in the industry in the future. And we prefer not to expose investors and policy holders to aggressive assumptions. And I think we really have a duty -- insurance companies have a duty to the shareholders and policyholders. And I think anybody reliant on rates rising significantly and not hedging against this should simply reflect this risk of the capital [indiscernible].

Yes. Equitable has been supportive of NAIC's efforts on the new VA economic scenario generator. Can you provide some context of what you like and any drawbacks for Equitable?

Yes. We are strong supporters of the work the NAIC is doing to develop a new economic scenario generator. It will provide a wider range of outcomes, which we believe is more realistic of the future. The all generator, the American Academy of Actuaries Generator is just update all 10,000 scenarios of interest rate rising. And this creates a bit -- of a more risk out there of maybe people devoting resources to model the hedge program to look good within the economic generator rather than to adequately protect and hold reserves for the future. So we are a strong advocate of the NAIC economic scenario generator. And as I mentioned in my opening, Tracy, strong supporter of the new LDTI accounting point. And I think I feel very strongly that the industry has to get to a position of transparency and comparability and avoid the likelihood of surprises that have hurt investors in the past. And quite frankly, it's amazing that this is even a debate. Surely, reserves and capital should be set aside when there was an exposure to risk whether that risk is mortality, mobility, credit or interest rates.

We've actually done some work on them. Maybe you could clarify for us. I guess it's my impression that the NAIC's proposing a hybrid approach. So the 3.25% statutory median sticking, like there was only changes to reflect the universe of scenarios or calibrations. Is that a fair way to look at it?

Yes. I've seen the hybrid commentary. Discussions are still ongoing, as you know. Look, we appreciate that the NAIC has recognized the need for more lower for longer scenarios and to incorporate those in more realistic interest rate assumptions. They've also included increased the volatility and broaden the range of interest rates in this scenario. And I mean to be clear, lower for longer scenarios means industry will have to hold more capital for any open interest rate exposure. And this really comes to my point. We continue to advocate for frameworks that promote fair value reserve as we believe that this is in the best interest of policyholder, shareholders and the industry.

Okay. Maybe we should move on to Reg 213. I know that's top of mind for many investors. Equitable has reached an important milestone by entering into a permitting practice with the New York DFS on Reg 213, which essentially allows Equitable to phase the impact of reserving rules over 5 years. While this achievement provides some breathing room, Equitable still has a lot to do. Can you recap for us the tools at your disposal and what progress you have made?

Thanks, happy to. Yes, we've been working very closely with the DFS and they were helpful in providing the permitted practice for what are redundant statutory reserves. We also start from a very strong RBC of 450 and surplus cash of $2.5 billion at the holdco. So there's no immediate concern about meeting our current target payout ratio of 50% to 60%. I mentioned a couple of times today, we manage the business to economic [indiscernible]. And we know the importance of cash returns to shareholders. And Reg 213, unfortunately has unintended consequences resulting in redundant statutory reserves, i.e., higher than [indiscernible] New York [indiscernible] business. We're taking 3 actions to address this. One, increasing the percentage of cash flows from unregulated entities from 35% to 50%. And we did this through internal restructuring. We're pursuing internal and external reinsurance. And we're targeting 90% of new business to be written outside of our New York Insurance Company by the end of 2022. These are all within our control to execute and we don't need to align with DFS for any of these. To date, we've completed some of the internal restructuring, so we've increased unregulated cash flows. And we hope to be in a position shortly to advise the market on further initiatives to complete. Bottom line, these actions, along with the $2.5 billion cash at the holdco, strong RBC ratio, strong economic coverage ratio, no threat to our cash payout. And we're moving on with the management actions to accelerate the release of [indiscernible].

Thinking about your statutory dividend capacity in your -- under the lens of this permitted practice 5-year phase in.

So we have -- our strategy really ensures that we have a broad range of stable sources of capital to support our guidance to the market. If you take the broad mix of the business and our economic reserving, we generate $1.5 billion of cash, which is roughly a 50% to 60% conversion of operating. Approximately 1/3 of the sources of capital, 1/3 of the $1.5 billion comes from AllianceBernstein, our asset management subsidiary. They provide unregulated dividends of $500 a year, which kind of [indiscernible]. We've consistently in the past been able to upstream approximately $1 billion annually from the regulated life entities. And as a reminder, as we contact dividends, we're still generating cash and not losing. As I mentioned a minute ago, we're taking management and actions, which will largely offset the negative impact of the unwinding of the practice. And this will ultimately decrease our alliance and dividends from our New York insurances. An example of that, some of the services for the separate account, which were previously completed by the insurance company will now being managed by new internal asset management company, that says the [indiscernible] increasing the unregulated cash flows from 35% up to 50%. So under normal conditions, we would expect to upstream approximately $1.5 billion from our subsidiaries with half from unregulated entities, but a dividend is not needed for next year's payout ratio.

Great. Maybe we -- based on some of the tools at your disposal, it's probably important to talk about block sales.

Yes.

As part of -- part of Reg 213 mitigation plan, you mentioned reinsurance under the management action. How do you think about potential reinsurance opportunities?

Well, just to remind, we were industry leader in managing the complex liabilities associated with legacy VA blocks, evidenced by the landmark, the insurance transaction. We completed with [indiscernible] level. So we'll continue to look for innovative ways to use the insurance to improve shareholder returns, including ways to accelerate the [indiscernible] Reg 213 [indiscernible] Any in-force block has a potential option, but it's important that I note for investors, any action we pursue will not impair our economic balance sheet as we look to solve an uneconomic accounting issue. So our corporates remain unchanged. We'll continue to manage on an economic basis, deliver on that 50% to 60% payout ratio and focus on long term [indiscernible]

With Venerable, I think it took 12 months of discussion to get to the point of making an announcement and then several months after that to close a deal. Is it fair to say that since you already did a lot of groundwork with Venerable transaction, you can transact quicker for future deals for Reg 213?

Yes, it did take the 12 months. I mean it was a pivotal milestone for us in the industry first of its kind, very complex, but complex -- and comfort trust in place, the investment criteria, hedging criteria important to that transaction. And this is -- this really was the combination of a decade-long risk management program driven by that fair value price. And in Venerable, backed by Apollo, we found a partner that validated, if you like [indiscernible] And we've got a positive situation [indiscernible] So it's always hard to comment on time line of potential transactions. But the first of any first of its kind, generally takes longer. So -- and I just remain confident we can mitigate the impacts of the Regulation but more than that, really look for ways to add shareholders.

Great. When entering into any new bluff transaction, how important is it for AB to be the preferred asset manager when evaluating a potential transaction?

Right. Well, first and foremost, the criteria is that it has to make economic sense resulting in an accretive outcome for us. However, in any deal, we -- we've looked to take the opportunity to support AB. They've been an extremely beneficial partner to Equitable that can add value for others. AB has great investment capabilities, proven track record now of growing its private alts platform. And this is all the reason more for us and others in the industry to select AB as a preferred asset manager for these types of transaction. AB has been a significant driver of growth for us, and we have long-standing, mutually beneficial relationship. And the business is great for us, both strategically and financially. And we're confident that the synergies we see between the 2 entities will continue to generate value for both policyholders and shareholders. So bottom line, we would make sure a deal make economic sense. But of course, we would look to support AB when the opportunity is economical.

There is still [Indiscernible] Equitable compete with the PE-backed insurances may operate under a different capital requirement mandate. Who can excel at privately sourced asset origination capabilities, an equation that could more effectively manage long-dated insurance risk as permitted sources of capital.

Thanks. Interesting topic, isn't it? And obviously, a lot of activity in the insurance market for PE plays, which really also contribute to through our deal with equity. Maybe I break it down in terms of competing for investors and competing for [indiscernible]. PE backed insurance provide a different proposition to investors. Many do have privately sourced asset origination capabilities and innovative investment structures, which offer the potential for [indiscernible] but through lower asset quality compared to a, let's say, traditional life insurer. I think what we're excited about is finding good quality private investment opportunities to enhance [indiscernible] for our shareholders and policyholders and having an asset manager subsidiary with AB's pedigree and track record, in building out these alternates is the real strength of our business. So our proposition to investors is to provide attractive risk-weighted returns and consistent cash generation. In terms of competing with PE-backed firms for attracting new clients, they are most impactful in parts of the industry. We don't really participate like fixed equities. Equitable provides wise investment and insurance solutions. And through our affiliated distribution, we have a low-cost source of funds without having to rely on lower asset quality investment portfolios. So with our affiliated distribution with Equitable, we sort of marrying product and advice to deliver value for the client. And we're not forced to rely on pricing alone to win sales, and we take a much more holistic approach to it. So we'll continue to offer good advice to our clients, attractive returns to shareholders, well-designed products economically on economic sound basis, we'll take a fair value approach. And by that, Tracy, I mean we're going to look through the regulatory capital, which -- regulated capital in all markets can sometimes lag investment innovation. But our goal will be to seek attractive risk-weighted -- risk-adjusted returns for our shareholders.

Putting some attention to AB. It seems like Equitable's strategic alignment with AB is growing, given your recent commitment to add $10 billion of GA assets to AB's illiquid platform, which helps Equitable's portfolio optimization effort. Basically adds $180 million NII by '23. It adds fee income to AB and it tracks of the third-party investors. So I guess my question is, looking at GA optimization and AB's role there, could you highlight anticipated changes in your asset allocation?

Yes. It's correct. The strategic alignment with the AB is growing, and we see a lot of value there. So just a reminder, AB manages $120 billion of assets for Equitable, 70% of the general account and 30% of the [indiscernible]. As you said, we're committing $10 billion of general account assets to help build out these higher multiple businesses attract third-party capital and that will translate to greater earnings potential for AB and Equitable. AB has a good track record here. For every dollar of seed capital we've put into AB, they've been able to attract 4 additional dollars from third parties. So the seeding is really, really working on this, in particular businesses. We've got a great track record. With regards to our general account, we completed the first phase of what we call the optimization. We delivered $240 million of increment annual yield, $80 million or so above our target. And that was really a shift from treasuries to public corporates. We're now entering the second phase, leveraging AB's investment capabilities to capture the liquidity at and that's moving from public corporates to private credit structured assets and alternatives. And we're going to do so without sacrificing quality of [indiscernible]. And as a result of this, we are targeting an additional $180 million of investment income by 2023. So we really think this business model of ours is a significant asset and we have the opportunity to really leverage the synergies between AB and Equitable to drive value for shareholders.

But could you envision a scenario where you will take up your ownership from 65% to 100%?

Tracy, we've been very happy with our investment in AB. They have been a significant driver of growth for us, synergies of getting meaningful amount. We look at this from time to time, but we've concluded that the current structure is the best one for us and our shareholders going forward. AB has been a top performer in the active asset management space. 17 consecutive quarters of net flows and a strong contributor overall. So it's a great business for us strategically and financially synergies will create more value to [indiscernible]. What I've done to make 2 companies come closer together earlier this year, AB management joined my management committee. So we need every week to look at these strategic initiatives, remote collaboration, driving execution of strategic preferences. So we like the current ownership structure, but we'll always evaluate opportunities that make good economic sense [indiscernible].

Got it. Equitable's strong holdco liquidity makes your 50% to 60% tail look quite achievable, but it's noteworthy that you raised some capital to get there. What is your headroom to use that lever again if needed?

Yes, we have -- the important thing to understand now is the strong position we started with $2 billion, $2.5 billion in that public [indiscernible] And these are dividends that we've collected for [indiscernible]. The additional contingent capital that we added is referred as really just diversify our capital structure. And that really was important test for us, showing the confidence in our financial stand. So we're going to be opportunistic in accessing capital markets to optimize the capital structure if we see attractive market. But I think the most important thing is we have a solid track record of consistently generating operating cash flows of $1.5 billion a year with now 50% of that from the nonregulated initiatives. But our capital management program is a primary objective. It continues to focus on maximizing financial flexibility and consistently deliver on our 50% to 60% payout ratio.

What would it take for Equitable to fully distribute capital unlock from the Venerable deal as the $500 million targeted represents half of the amount unlocked. And what is the anticipated timing of releasing the $500 million portion?

Yes, as you noted, the Venerable transaction freed up $1 billion of value and enabled us to announce an incremental $500 million buyback, but on top of our normal 50% to 60% payout ratio. We expect the remaining $500 million to flow up to the holding company over time. And as we laid out at the time of the transaction announcement, the $500 million incremental buyback commitment. It's very strong, and it is above our covenant payout ratio. And as I've said, we'll deploy capital to maximize long-term shares.

So we're already getting some audience questions and there's one on capital management. So I'll just weave that in here rather than waiting till the end. Any updates on capital returns and share buyback amount after executing the internal restructuring options to increase unregulated cash flows?

Yes. So I think investors should be aware of the cash generation capability of $1.5 billion. And our commitment to the 50% to 60% payout ratio. And we have the tools to deliver that. We're very, very confident that we can -- that we can deliver. In terms of the internal restructuring, that didn't increase the $1.5 billion. It just moved it from a regulated to a nonregulated. So we took services that we provide out of the life company [indiscernible] So that means now that instead of 35% of our cash coming from noninsurance regulated entities, it's now 50% of [indiscernible].

Okay. But I think the question was maybe more around your payout. Does that change your payout having greater sources of unregulated cash flow?

We're sticking to our 50% to 60% payout ratio. And when we view it from time to time, but that's what investors should assume.

Okay. And when I asked you last year about your M&A appetite, I've heard bolt-on, nothing transformational. Is this still true? And what could change that? And maybe if I could tag on, does the Reg 213 overhang have anything to do with your ability to complete an M&A deal?

No, I think you summed it up well. We're open to strategic bolt-on M&A to accelerate growth or add capabilities to our capital-light businesses, but don't expect any big transformational deals are not about to announce it. Areas of interest would be employee benefits, wealth management, alternative teams. But we are -- we're very, very aware of the importance of our buyback program to investors. And we would only ever look at M&A that makes good economic sense. And some of the multiples we're seeing for some of these businesses are extremely high, so expect us to remain prudent and disciplined in our approach where benefits transaction versus the CapEx will return consistent, if you like, with our overall management philosophy. So yes, I think you summarized it well. And the fact that what year has gone on Tracy, haven't done anything in the year, we'll show you.

I can't help but notice that on sum of the parts approach, your business effects AB is valued by the market at like 2.5x P/E, which really does not make a lot of sense. I know that's a question more than I should be fielding. But what do you think the market is missing?

Yes, to point tend to comment on valuation. We manage the business on a sound economic basis and in the market and determined that we've been doing well. I mean shareholder returns since our IPO is 67% against a peer average of 36%. It's come off a little bit this year. I think it's a little bit of a hang on Reg 213. So we'll focus on control and executing our targets, including the $80 million productivity, $100 million of G&A rebalance target. And this brings me back to the adoption of the FASB LDTI. It's not good for the industry that all player -- that there isn't any belief in [indiscernible]. So I think the market is valuing us on cash flow and our cash flow is consistently at $1.5 billion. Whether there's upside in the valuation then I have to leave it to you Tracy and others for -- to determine.

Okay. And I'll just take a few more audience questions. You've mentioned that your priorities before exploring further back book deals are close -- was close -- to close the Venerable transaction and address Reg 213. Now that these are completed or dealt with in some fashion, what is the potentially on the table for other back book deals? You said you're exploring other potential reinsurance deals if it makes sense. Can you provide further detail?

Yes. As you say, we're always going to look to increase shareholder value and pursue transactions regardless of the block. And we've got a great track record here. And as you saw with the Venerable deal, these are complex liabilities. We unlocked $1 billion of value and reduced 2/3 of our tail risk. So it was an exceptional deal for us. I can't give any update other than to tell you we are working on things, and if it makes economic sense, we'll do it because that will drive value to our shareholders.

And also another question. What can you do to show how much less risk the SCS product has versus traditional VA or SCS ends up being less of a VA type of product. And I mean, it's kind of like a hybrid product, has some elements of fixed index annuities, which may, I guess, highlight -- we're in a higher multiple because these risk attributes being closer to an FIA, could you take on more invested asset to equity risk, even though it's in a separate account, similar to how FIA players typically do it?

Yes. I mean it's an interesting point you made and an underlying your question is that for all annuities aren't the same risk control. We're very proud of the work we did on SCS, the product design has no guarantee of [indiscernible] benefits and is fully ALM-matched. So it's great for shareholders. It's great for clients too versus downside protection and upside anticipation in the market. And it's -- to your point, it's essentially a great product that's repriced every 2 weeks to take account of current market conditions and limiting the risk of having dislocation. We think the beauty of the product is a simplicity, attractive to clients, particularly in volatile markets. And as you know, it's the fastest-growing part of our usual the time and business, and we had record sales of $1.9 billion in the second quarter. And we've got the #1 position in this line of market. We continue to try and educate investors that it has much less risk as you to say than traditional VA and we'll continue to do that.

Yes, maybe sticking with the theme of buffered annuities. There's just been more entrants in the space, but it seems like the pie is also growing. And you've certainly innovated with dual direction. What other products tweaks would you consider to remain competitive? And I guess my follow-up there is, if competitive conditions intensify, would you consider expanding your risk appetite and start offering GLV riders?

Yes. Look, we're very proud of the work we did being first to market and above the annuity space and projected equity story for clients and great for shareholders. Yes, you're right, the overall size of the pie is growing. Over 1/3 of VA sales today are in buffered annuity products compared to less than 10% a few years ago. We reported another record quarter of sales in SCS with $1.9 billion in the second quarter. And that's up 90% or so since the IPO. We see copy products come in, it's understandable. If somebody is having success with the product, others have come in on that. But look, I think our unique differentiator is our distribution, affiliated distribution of 4,300 advisers and a broad range of over 1,000 third party partnerships giving us some stability and privileged access, if you like. As a result, we're the #1 [indiscernible] provider and #2 VA. Yes, our dual direction feature is doing well in the market. It helps us differentiate above the new offering. And it's accounting for approximately 30% of our SCS sales this year. And of course, we look at market share, but our real focus and our priority to maximize. And we'll continue to maintain pricing at this discipline and continue to innovative ways to offer great products to clients, but that may [indiscernible]. So we should expect more innovation from us with those [indiscernible].

Yes. I just couldn't help to repeat the second part of the question, when you think about innovation, do you have a risk appetite to introduce GLBs on this product?

I think importantly, we are in the retirement savings and securing income solutions for clients. But they have to be economically sound. And I think this is a big societal need, there's a retirement gap, responsibility has shifted as you know. [indiscernible] We like the structured capital product because of the product design, is shorter duration. And looking at GLBs with interest rates where they are, it's difficult in these markets. So it's not something we're actively looking to.

Great. I think we're a little bit over time. If I could just squeeze in one other investor question, I don't know how much you can state. They're looking for any type of update for third quarter earnings.

The momentum inside the business has been good this year. I'm not allowed to give any updates as you know but we're happy with the momentum.

Okay. With that, I think we're out of time. This conversation went by really quickly. I know I had a lot at my end, but hopefully, we'll touch base soon again in person. So I'd like to thank you. And with that, this session concludes.

Thank you, Tracy. Thank you, everyone.