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

So we'll go ahead and get started here. I'd first like to welcome Mark Pearson, CEO, Equitable. Thanks very much for being with us. Our session is going to be Q&A. But first, I'm going to turn it over to Mark for some opening remarks.

Thanks very much, Alex, and thank you for hosting us today, and thank you, everybody, for joining this session. We appreciate it. It's been an interesting 4-5 years at Equitable with the IPO. Before I talk about the impacts of this year, I thought I'd just give you an overview on the recent journey we've been on because it will add some color to where we are today and how we're placed. IPO out of AXA went extremely well. It was an opportunity to really reset the organization. Very huge galvanizing effect inside Equitable, and resulted in us having to make some important decisions, which stand us well now. Firstly, we set the company up on a fair value basis. We run through the economics which is recognizing actual interest rates and recognizing emerging policyholder experience, And that's been a cornerstone of what we've done subsequently. Secondly, we have a pretty unique business model, and we've been working hard over the years to look for synergies between our 2 main operating companies, Equitable and AllianceBernstein, and we've got some good progress to show on that side. And if you like taking ourselves out of the AXA Group, which meant setting up 150 or so different systems, enabled us to modernize the company and get some productivity saves as we are going. They have been the foundations, if you like, for how we find ourselves this year in 2022. Obviously, a very different year to last year. But I would say the big takeaway for Equitable is no surprises in this market. Our earnings are behaving as you would expect. Over the last 5 to 10 years, we have really shifted the organization towards capital-light products with a narrow range of outcomes. That means that we're more sensitive to the markets, and you see that coming through the earnings. On the fair value side, you see very robust capital ratios on our balance sheet. We had $2 billion of surplus cash at the Holdco level. No surprises in the last round of our assumption review as we've gone forward. And Alex, perhaps the nice upside this year has been our new business activities, both at AllianceBernstein and at Equitable. AllianceBernstein, I know you had set here yesterday at the 3.25 mark as positive net flows, which is one of the few in the industry, excluding some known outflows from AXA, and a 7% increase in the fee base level. And overall on the equitable side, we're seeing the market turmoil translate into much higher demand for advice and for our retirement products, and we're seeing record levels of new business on that side as well. So that's a nice upside as we go in. And looking forward, we recognize that there's some big changes coming in the industry with the LDTI next year, 3 weeks away when it comes in. And we welcome that. We welcome the -- any move where the industry is going to have greater transparency, and the LDTI accounting will move closer to the economics, which is how we value the business. And I think it's going to be good for the industry and hopefully bring more generalist investors into our sector. So we're very much looking forward to that as we go forward. That's the opening, and then we can dive down into any of the topics you would like.

Sure. So I thought maybe we could start with the annuities business and some of the growth you've been seeing. When you all first became a public company, there were more consistent outflows by nature of some of the decisions you made around the guaranteed minimum income benefit products over time. More recently, the annuity flows have turned positive on the back of really strong buffer annuity sales. Could you discuss what's driving that dynamic, and the extent to which you think that you can sustain this kind of organic growth?

Yes. So net flow is about $1.5 billion year-to-date. And as you say, that's a reversal of the outflows on the legacy being greater than on the new business. We're very proud of what we've done on the buffered annuity side. We created this whole sector nearly 10 years ago now. Protected equity story, if you like, for clients and some downside protection and participation into an index up to a cap. And of course, that resonates in these types of markets. But I think what's important is the value it brings shareholders. This is a product that we reprice every 2 weeks. This is a product that is ALM matched, and this is a product which has a narrow range of outcomes, which is part of the philosophy which we have. On top of that, Alex, the outflows have been impacted by the big reinsurance transaction we did. So that part of the book is no longer counted in our outflows. So the combination of good sales growth, 7% year-to-date on the individual retirement and less outflows is what's making up that net flow boost, if you like, this particular year.

Can you talk about the competitiveness of the RILA market? It feels like there's more players. There's certainly interest rates, benefits, the IRRs that you get as well, though. It maybe an offset to some of that competition pressure that you have. How does that all funnel into what you're seeing in terms of price adequacy?

Yes, definitely more competition in there with some copy of the product. That's to be expected. But I would say that pricing discipline is rationale in that part of the market. It's not as crowded, Alex, as the fixed annuity market where you would have like 10x more players in that particular market. So perhaps that's contributing as well. But we see the pricing as rationale there. So we're maintaining our #1 position in that market, not on pricing reasons, but because of the strength of our distribution. And just a reminder there, we have affiliated Equitable advisors, 4,100 advisors there. They give us 90% of their annuity business. And we have very strong networks into some of the P&C carriers where we wholesale to their advisors to get business. And we are, in terms of market share, relatively low in the [ wirehouses ] where it's a little bit more spreadsheeted and a little bit more cutthroat. So the combination of that distribution power being first in the market means our margins are pretty healthy and are being boosted by interest rates going up as well.

Next question I have for you is on capital and just your approach to capital deployment. I mean you mentioned Equitable's very sizable Holdco access position of around $2 billion. Can you discuss to what extent you'd like to keep that [ eligible ] buffer versus different ways that you could prioritize drawing some of that down over time?

I think 2 things. On capital management, what's been important for us to show as a -- relatively youngster into being a listed company has been how we've maintained our RBC ratios in the last 4-5 years. We have shown the market that when interest rates are up or down, markets moving through the COVID, that we've maintained both the RBC ratio and our cash generation capability. So that credibility, I think, is really, really important for us. We have $2 billion of surplus cash at the Holdco. Our target is $0.5 billion, which is 2x the debt coverage, if you like, in there. And we've taken the view -- particularly this last year or so, we had the Reg 213 which was floating around. So we had to keep some dry powder for that, if you like. We resolved that issue. And secondly, this is a market we've had some conservatism, some prudence -- is wise. We're planning to come back with an Investor Day next year, probably second quarter, and we'll give some more guidance there on the capital generation, how it looks under LDTI and that surplus cash. The true north for us at Equitable has been consistency of the cash generation and holding to the guidance we gave the market, which is a payout of 50%-60% of our non-GAAP operating earnings. And we've maintained that, Alex, over every quarter since the IPO. That's really been the true north for us. And we're in a position, which I think is a good position to be in, of having surplus above our target at a sort of volatile time at the moment and hard to predict time.

So we've heard some of your peers talk about different impacts to capital, whether it's, I think, some reference to noneconomic impacts from rates going up quickly, or whether it's principal-based reserve [ unit ] variable, universal life insurance. Some of these things sound like they're causing some bumps in the road for certain companies on RBC ratios. What's your perspective on that? What -- Are you feeling any of that? And if not, what's allowing you to sort of avoid some of those issues?

On ULSG, Universal Life Secondary Guarantee, on that specific issue, this is a product we withdrew in 2009 when I first came in. So we have very small exposure. And we're also, as you know, regulated by U.S. where -- New York where the stress testing is a 1% lapse ratio. So it's not an issue for us at all. I do think there's a wider issue for the industry, and that's to try and avoid surprises, whether they be on VA or ULSG. And I think it comes down to the transparency of the reporting, the adequacy of the reserves. And we've been very firm from the first day on our IPO that we are not going to steer the company towards the accounting result. We're going to steer towards the true economics. And I think there's 2 prime issues behind that. One is the recognition of interest rates. It is strange to me, Alex, coming to the U.S. market 11 years ago that -- we had this concept of reversion to mean. It's a strange concept that you can pick a number which is different to the market. We have always run to the forward curve of where the market is. And then on policyholder behavior to operate the company through emerging experience rather than any form of other estimates. And I think this is important for the industry to make sure we maintain the trust from investors and build an industry we can all be proud of.

So one of the strategies to give you more visibility in cash flow over time, I think, was to pivot some of the new business sales out of the New York operated entity.

Yes.

And I just wanted to maybe have you provide an update on that. And then also just help us think through where does the capital come from to fund the new business out of an entity that's probably going to be growing more substantially?

Yes. So we have an entity in New York and one in Arizona. Some investors would have heard the terminology 491. That's basically what we're planning to move to, which is to take the non-New York policies that are in the New York entity out of the New York entity and into Arizona. Perhaps the best way to explain why we're doing this is, you'll recall we had the difficulty with the Reg 213, which resulted in some redundant reserves, which we had to be quite clever and dance around and make sure that we could not track capital that way. So we're looking to, through this structure, which will be capital neutral by the way, to make sure that we have certainty of dividend capability. That's basically why are we doing it. A lot of administration behind it, probably take a year to do on that side. But from an investor's point of view, no additional capital and -- increases the certainty of the dividend payment capability going on. As one of my colleagues said this morning rather amusingly, we've dealt with Reg 213, but we don't know what Reg 214 will be. Kind of move a little bit out into Arizona.

Great. Shifting gears a little bit to Wealth Management. I think you mentioned recently that you're considering breaking that out into its own segment. So I just wanted to see if you could update us on the size of that business. And I assume it being broken out is probably an indication of some growth aspirations there. So I'd be interested in a counter you have on that.

Look, it's a good time for us now to look at the business. It will be 5 years since our IPO early next year. We're very proud of what we've done with the organization and delivered all of the financial targets that we indicated to the marketplace, and have a robust business there. We're going to -- we're looking at 2 things to do for the market. Firstly -- and I'll come back to your Wealth Management point. Firstly, we're looking to break out the legacy VA from the individual retirement business. The legacy VA today is less than 20% of the account values of the whole retirement, but it's all mixed in with the new buffered annuity business. So we're looking to break that out because they have different dynamics and different valuation prospects on there. So I think that the market is going to value that, and we certainly manage them very, very differently. And then secondly, we're pretty excited about our Wealth Management business. Today, it's $70 billion or so assets under advice. Its earnings are about $100 million a year, and it is growing faster than the rest of the business. So we think it's a good opportunity to highlight that and hold ourselves accountable to grow that. So that will be the 2 things we're working on next year to ring fence, if you like, the legacy, but then also on the growth point of view, showcase the Wealth Management.

And I'll go ahead and ask this question. I had a question on legacy AUM, and you touched on it a little bit there with breaking it out. So that will be interesting to look at. How quickly is that running off at this point? And are we anywhere close to the point where you sort of hit an inflection when it's actually releasing capital? So you're in ways getting back more cash than even the earnings because you're getting a combination of the capital and the earnings back from it.

So it's, as I say, less than 20% of the account values now, and it's running off at just over $3 billion a year on that side. In terms of the cash and the future projections, we'll give some update next year when we have that Investor Day.

Got it.

But it's an interesting inflection point now. It's -- The point I wanted to get over today is its significance now has diminished as we've grown the SCS business and as we did those 2 big reinsurance transactions.

So the next question I had is -- I asked a similar question to [ Rob ] at first, for some other kinds of reasons. When I look at your valuation, particularly when you look at the value of AllianceBernstein in the context of all of it, it feels like there's not a whole lot of depreciation and cost of capital for the kind of consistency that you're communicating here. How -- like what's your perspective on how to get that cost of capital down over time?

I'll be interested in [ Rob's ] answer. I'll read it later on tonight because he -- like Equitable -- he's done a lot of good things with the business there as we have now. And looking at the valuation, I think in view of where U.S. GAAP is now -- and it's a strange phenomenon where under U.S. GAAP we have assets mark-to-market but liability is not. So it's not looking at a traditional PE, it's not a great measure. But I think what is more -- probably more relevant now is the multiples of free cash flow. And last time I looked, we were 9.5x, 9.66x, but including AB to your point there. Of the $1.6 billion that we -- free cash flow generated this year, about $500 million is coming from AB. So $1.1 billion is coming from the Equitable side as we go forward. I do think there's a couple of things on valuation, which point to an upside. One, going back to the new accounting regime, I think, the faster we can get better transparency, more alignment to economics. That will bring traffic into our industry and hopefully to Equitable for more general investors. I really, really think this is important for us. And for AXA specifically, we're not included today in the S&P indices because the noise of our hedging program in the accounting regime comes through on our net income. So we have economic-based hedges in place, which are mark-to-market. The liabilities don't move, but the hedge moves all over the place, and that disqualifies us from the S&P index. Now some of our peers have 50%, 53% of their share registered from passive investors. We only have 23%. So the LDTI, in addition to improving the neighborhood, which we think is really important for Equitable specific, means that we will become eligible for inclusion in the indices. How you get in the index though is not entirely in our control. So I do want to put that caveat in there. But I think one of the -- we do see some upside on valuation, but one of the things is to look at ways in which we can bring more investors into the stock. And they are 2 things which are really top of mind for us. And then, finally, what is in our control is the extent to which we deliver on profitable sales growth, our productivity and the moves we're making on our general account to improve the risk-weighted yield [ base ].

So I wanted to circle back on Reg 213. I realized there was something I didn't ask you there. And really, as you're shifting business from New York entity to Arizona entity, what happens if that redundant reserve for Reg 213 -- And you've done some transactions to alleviate some of that. I mean, is there sort of a return of the redundant reserve that we need to consider?

No. And the move to 491 happens -- helps on that as well in some deep tail scenarios as well. So it's good from that point of view. It doesn't resurrect that particular challenge now.

Moving to group retirement, could you discuss the interest rate sensitivity and growth profile of that business?

Yes. So group retirement for Equitable, most of the value and the earnings and the cash flow are coming from our teachers business. So this is [ 43B ] business. We're the #1 provider of supplementary retirement income in the K-12 teachers market. Something like 800,000 educators are there with us. It's a worksite marketing model. We have 1,100 advisors dedicated to school districts around the country. That means it's quite difficult to displace us because you need a very large sales force to do that. So it's a privileged position that we go there. But it also means when the schools shut, we have to dance very, very quickly with digital connections with teachers. The good news for us was that teachers were also trying to figure out digital connections with their students. So we came along and we were talking the same language and figuring it out together. I'm very pleased to say that sales on our teachers business is now ahead of pre-COVID levels. So the combination of schools opening and digital connections has really made up that [ gap ]. So that's good from a shareholder value point of view. Inflation and interest rates going up. There's a couple of things that we have to watch out for, and that could be surrenders on some of the guaranteed income accounts. So we're watching that closely. There's no sign for alarm yet. And then in the event -- let's hope not -- in the event that inflation comes or there's even some recession, the teachers market is not a bad market to be in. So it doesn't respond as the general economy does. Teachers tend to hold their jobs. So that can give us some defenses on that side as well. But the business is going extremely well, very proud of that business. And as I say now, our new business volumes are ahead of pre-COVID levels as well.

Next one, turn to AllianceBernstein. Could you comment on the ways that Equitable is working with AllianceBernstein and how you benefit from the collaboration beyond just the 65% stake in the earnings?

Yes. So firstly, just to shout out to Seth and the team there, they've done an absolutely fantastic job over the last 4-5 years. Their investment performance, their net funds flow, their earnings and also the strategic moves that they've made on [ alts ] , really, really has been right out there with any of their peers. In most cases, ahead of their peers, Really done an outstanding job. And at the same time, move the middle and back office down to Nashville. So very, very fine opportunity there. 3 offsets team joined me with the Equitable team on the management committee. So we meet every single week. And of course, one of the things that we're really, really looking for is the synergies between the 2 operations. The first and most obvious one is that AV has about $100 billion of permanent capital from Equitable. 70% of the general account is managed by AB and 30% of the separate account. And what asset manager wouldn't want to have that -- a client like that? Secondly, we've made a commitment of at least $10 billion of investment from the general account into the alternate platform as seed capital over on the AB side. And AB have a very nice track record for every dollar of seed capital we put in. They attract another $4-$5 of third-party money. And Alex, it's a real win-win situation because the general account policyholders are benefiting from higher risk-weighted returns going into the [ alts ], and secondly, the shareholders are benefiting because policyholder money is building high multiple businesses on the [ alts ] side. So that's going well. It flows 2 ways. Going the other way, AB has been a pioneer in secure income strategies inside 401K accounts. And if you remember, quarter 1, we announced to the market that we've received -- Equitable had received $500 million from one of those secure income accounts on the AB side. So you can see the business is flowing both ways. And then I guess the final big one was the CarVal acquisition. And as a result of that acquisition, AB's alternatives platform now is over $50 billion. So they're a serious player. And we know that CarVal was attracted to joining us because they can plug into AB's distribution, private client, wholesalers, [ Asia ] and the Equitable relationship. And what Equitable did for that transaction is, firstly, part finance it from Equitable's own holding of AB. So that 65% could go down to 62%, which was a smart way to make that accretive for Equitable as well, plus Equitable earmarks $750 million of the general account money to go into CarVal acquisitions. So I just gave you a couple of examples there on organic growth, but also inorganic growth synergies between those 2 organizations.

So next, I wanted to ask you about sort of the private capital, private equity involvement in insurance. You all have obviously leveraged some during the transaction with Venerable, which I think was pretty transformative for your balance sheet. How do you view that aspect of the insurance market? And are there ways you can continue to leverage the availability of that kind of capital out there?

Yes. So the Venerable transaction, as you know, Alex, was a watershed moment for the industry because it was using variable annuities and all those. The real benefit for Equitable was in having smart money validate our reserves, because coming out of that transaction was a positive seed commission. So that was an important validation for investors that we are reserving appropriately as well. Venerable are excellent partners for us, and they look at the economics as we look at. But you'll also remember from that transaction that -- it's important, I think, insurance companies who are looking at reinsurance markets understand the counterparty risk of the transaction they're having. So the Venerable reinsurance with us has very strong protections around it, including the comfort, trust and including details and where not those assets can be invested. Because the last thing we want is that book to come back to us in the event [ often ]. The way we approach it is on a full risk evaluation, which is looking through everything to see where is the money being invested to support those liabilities that we have reinsured -- and is this a genuine risk transfer or not. That's how we look at it. And I think they are the main issues that the insurance industry should look at. There is some opportunities there, but we have to just be very careful that it's not a look-through into risky asset classes, which can effectively be risk that the insurance company is taking.

Yes. Got it. Next we turn to the expense initiative. Maybe a quick update on where you're at with some of the work there. And are there further opportunities as we look even beyond the current initiative?

2 main opportunities inside Equitable Holdings. The first one on the AB side. I mentioned earlier the move to Nashville has gone very, very well, providing labor and premises, productivity gains on there. [ Seth ] and the team are on track for $75 million savings. I think that starts to come through in 2025 in terms of hitting the bottom line, but it's looking highly probable. On Equitable side, we had an $18 million expense target, and it's a net target. It's after reinvestment, not before reinvestment. And at the last quarter end, we were $43 million out of that $80 million. We're pretty confident that we can deliver that. One of the capabilities we built since the IPO, Alex, was we knew we needed to raise the metabolism inside the organization, moving from being a subsidiary of AXA, always having -- [ mom ] you can call, to stand alone, you had to raise capability. And we took this opportunity to bring in agile working inside the organization. The entire organization is moving that way. So that provides us with tight teams, much more focused on client and much more flexibility when we're looking for productivity saves. So yes, we do think there is upside on that.

Got it. One other one that I want to make sure I asked you about was this idea of disintermediation risk. Rates, wherever they are -- potentially even can go higher. What's the risk of your business? Do you sort of have a call on some of the assets and so forth? And which products does that potentially affect?

Yes. So it's interesting, isn't it? After decades and decades of interest rate -- We're all having to look at it. So it's something we're aware of, it's something we watch. And it would -- the prime area we're watching is on the deposit accounts in the group retirement area, on that side. What's interesting though, when we look back at previous crisis, there hasn't been much movement in the [ surrenders ] there. And we do have the ability -- in those guaranteed investment option accounts, we do have the ability to increase rates as well. So we've got many levers to play on that side. But yes, it's one of the things we've identified that we need to watch and just be mindful that higher interest rates bring different exposures inside the company.

And with just a little bit of time left, maybe I'll end up with a question, sort of a little more broad. What are the biggest opportunities and challenges that you see heading into the next year here?

Obviously, everybody in the room is aware that the economy is a little bit on a precipice. So right now that's something that we're exposed to as well. We're looking at 3 horizons inside Equitable: growing our big retirement and asset management businesses; secondly, building emerging businesses in wealth management, you mentioned -- and alternatives. And in horizon 3, we're very excited about the secure income opportunity, to help Americans secure their income in retirement. Everybody plays in the accumulation phase of retirement. Very few are playing in what do we do now that people live longer and have greater aspirations in the later chapters of the year. And we have 2 fantastic partnerships there with AB and BlackRock, and we think secure income is something we need to get behind that we're excited about.

Very interesting. All right. We're just about the time. So I'll stop there. Thank you very much for joining us.

Thank you very much, Alex.