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

Well, it's a great pleasure to have here with us Equitable CFO, Robin Raju. And I will get started on the Q&A, and then we'll open it up toward the end for questions.

Robin, maybe you could just quickly give an overview of the growth and return outlook for. And then I'll dive into a few of the segments.

Sure. Thanks for having me, Andrew. Great to be here in Miami as well after the Chief Super Bowl win. I'm sure everybody stayed up and watched that, it was a good game. Just -- if anyone is new to the company, I just want to give just a quick overview, Equitable Holdings, who we are. So Equitable Holdings is comprised of 3 unique subsidiaries, our retirement business, which is focused on the U.S. retirement opportunity. We're #1 in leadership positions in the markets that we operate in on those businesses. It's about $200 billion of assets on the retirement side. We own 62% of Alliance Bernstein, that's our asset management subsidiary. They have over $650 billion of AUM, leading global asset manager and unique synergies between those 2 operating companies. And then our third subsidiary is our distribution business, that's Equitable advisers. It's 4,300 advisers that service and provide advice to Americans all over the U.S. I think if I took a step back, maybe there are 3 things that I'd want to leave with you. One is 2022, we had strong resilience that came through in our results. We reported $2 billion of operating earnings, $2.2 billion on a non-GAAP basis, and that's a miss to market backdrop with 20% equities down, bond returns down 13% and the average client moves into 16% in their retirement [indiscernible] client lost 16% in their retirement account. If there were Equitable Holdings and one of our all-weather product portfolios, they would have been -- they would have lost 0 in 2022 and had all the upsides from our products that we provide. So the value proposition that we offer our clients has been really strong, and we've seen that momentum through a $10 billion of inflows. Within that $10 billion, about $4 billion was in our core retirement business. That's where we're a leader with our RILA product, [ our ] SCS product. We had record sales last year. We've generated record value of new business from the higher interest rate environment as well. And then within that retirement business, we completed our general account rebalancing program 1 year in advance. So we achieved $180 million a year in advance what we told in the market. So we're benefiting quite a bit from the solutions that we offer to clients, but also from the strong interest rates, increasing our margins in that business quite a bit. In our wealth management business, we had $4.5 billion of net inflows in the year. Strong productivity generated about $85 million in cash flows, and we're excited to break that out going forward. And then in our Asset Management business, AB, had $900 million of positive net flows, excluding some low fee AXA redemptions, and AB story and their momentum has been tremendous. Seth and the team have done a fabulous job in managing that business across the board. We have $56 billion in private markets or private alternative platform now grown significantly. Our fee rate has been up 3% year-over-year, and organic growth continues. So AB is going against the grind on the asset management standpoint with higher fee rates, and it's a function of the mix of their business towards alternatives. And then the last point I would leave with you is, going forward, Equitable remains well positioned to provide value upside for our investors. We're going to generate $1.3 billion of free cash flow in 2023. That will help but support our new LDTI payout ratio of 55% to 65%. So strong cash flow generation again. We're also going to provide enhanced disclosures for investors to better value our business. So we're going to break out our core retirement business, that's our more spread-oriented products. And we're also going to break out our wealth management business, which currently sits in corporate and other to provide investors more visibility on 2 growth areas for Equitable that's growing earnings and cash flows at a faster rate compared to the rest of the business. And then that will come together with an Investor Day we'll hold in May this year, where we'll provide more insight into how we're driving free cash flow going forward, so investors can better value the business. So Andrew, that's an overview I want to provide rate. Hopefully, that's helpful.

It's a great overview. And so maybe I'll touch a little bit on the 3 key segments: Individual Retirement. Robin, maybe talk a little bit about earnings growth over the long term. And along with that, you've got this phenomenal registered index-linked annuity, the SCS product. How do you see that driving growth? And could you pivot into another product? So 2 questions, long term and SCS.

Sure. The long-term prospects of that individual retirement business are tremendous. 11,000 Americans retire every day. It's a $30 trillion retirement market, and it's growing 30% by 2030. I mean, if you look at those stats on a piece of paper, that's the market you want to be in. It's a fast-growing market that we serve. Our differentiator is our distribution. We differentiate through Equitable advisers. That enables us to manage volume and mix, so we can create the most amount of value for shareholders. And as you see that core business, as we split that out, that will enable us to continue to show you how we're growing earnings and cash flows over the near, medium and long term as a result. That business certainly benefits from the higher interest rate environment, both in the value proposition and the demand that, that creates for clients, but also in the yields that we pick up in the general account. We're investing almost 5% in new money yields as we ended the yield, and that will translate into future earnings growth for our clients. The proof point of that differentiation in that market is, if you look at our total business and our Individual Retirement, we grew sales 5% year-over-year. If you compare that to the market, RILA and total VA sales were down 20% to 30%. So we really bucked the trend, and that's because of that distribution that we have. To your question on products, we have differentiated products. We call it an all-weather product portfolio today. So we can shift depending on consumer demand on the market environment. We offer buffered annuities, we offer guaranteed income, and then we offer tax-efficient distribution vehicles. Those are the main 3 product categories. And then -- but depending on demand from advisers and consumers, those are available for them as we continue to go forward. Where we're differentiated, though, and this is really innovation. Innovation Equitable was one of the first to create the variable universal life policies, variable annuities and then the RILA product in 2010. So we really pride ourselves in innovation. We're always ahead of the market in that category, and we want to continue to be as consumer demand, and preferences always evolved as we go forward.

So if there's something new, you'll be innovating on it. and no interest in the FIA product?

The FIA market compared to where we play, it's a crowded space, over 40 different distributors in that market, you're rushing for yield or credit, everything you get to the policyholder to compete in across the board versus where we play, we can differentiate through our distribution. And it's a much more profitable part of the market. So if you look at where the biggest profit pools are in the market, we need to sell 3 to 5x the amount of volume in an FIA product today to get the same amount of margin that we get in an SCS product. It's just not worth it for us considering the margin dynamics and the profit pool and the retirement market that we see today.

Makes a lot of sense. And then maybe shifting over to the Group Retirement business. You did a quarter of earnings at about $115 million, and that's versus -- and they were basically 2 quarters in that range, and that's versus close to $140 million in the second quarter. I suspect that, that's mostly given due to the equity markets coming off. So should we think about that as a run rate number? Is there anything in the equation that we should think about otherwise?

Sure. So the $115 million, if you take a look at that business, the sensitivity is purely fee rate, because it's a capital-light business. We generate earnings from the fees in those client accounts across the board. So if you looked at the average account balance, sort of the average AUM balance for the fourth quarter, that's where that $115 million comes from in terms of earnings. And so if that average account balance stayed the same, the $115 million number is still good, but it's going to go up or down just related towards equity markets and fees. The other little nuance that we have, which is the way we normalize alternative returns. Historically, what we've done in normalization, we use a corridor of 5% to 15%. So if all are at 0%, we'll normalize to 5%. If all are 20%, we'll normalize to 15%. The reason we use that corridor is because our alternative book is pretty well diversified between real estate, some growth equity, credit. So as a result, we -- it's not good to just say 10%. We give a range of 5% to 15%, so that could move to that normalized number around a bit as well. But I think $115 million, where we are. And plus, there will be some higher amortization under LDTI as well when we come up with our LDTI financials. But the core business, it's $115 million as of the fourth quarter.

Makes a lot of sense. Robin, how should we think about the long-term growth potential of this business? And how is Secure Act 2.0 helping it?

[indiscernible] within group retirement, there are 2 core pieces I'd highlight. We're #1 in the K-12 market. That's where we service over 800,000 teachers across America, and we have 1,300 dedicated advisers that work -- that are dedicated towards working with teachers in that market for us. Not everybody has people on the ground and you need people on the ground, because it's an individual sale within the K-12 market. It's not like a 401(k) plan, that's RFP. So it's an individual sale, you need an adviser on the ground. That's probably -- we're #1 in that market today. That's probably a 3% type growth over time as we continue to expand in that marketplace. The second area that we announced this year is our institutional channel. That's where we're really excited about the long-term prospects, and that really benefited from the Secure Act 1.0, I'll get to 2.0, but 1.0 that was passed last year. What Secure Act 1.0 did, it enabled implant guarantees to be the default option in a 401(k) account. And so what that does is that it provides Erisa protection for planned fiduciaries when putting an implant guarantee in their account, which they didn't have before. And we're really fortunate. We partner with AB. AB has been in that space for 10 years. They celebrated their tenth anniversary in 2022. And last year, AB won a $10 billion plan within their implant guarantee space and Equitable benefited with an $800 million income allocation that you saw in the Group Retirement business. So that's 1 testament of the synergies within that business. And then we also have announced a partnership with BlackRock, where we're partnered with BlackRock, and we customized a solution with them to help service their target day funds and their retirement plans. So if you think about where the market is going, what everybody is trying to solve for is deaccumulation in the retirement space. This is an untapped opportunity in a place where you can operate with margin in the large 401(k) market. And we've partnered now with AllianceBernstein and BlackRock to we think, we have 2 winning partners to win in that space. Now that's not going to translate into huge earnings over the next couple of years. But over the long term, we think that's a great area for us to operate in and differentiate in with the right asset management partnerships.

And 2.0 adds another element to it?

The 2.0, the great thing about 1.0 and 2.0, it's the only thing people in Washington can agree with. It passed like full bipartisan across. And why is that good is because it just promotes more retirement and accessibility for retirement for retirees. So 2.0, a major changes was auto enrollment for folks, increase the age of RMDs that people can have. And then auto escalation, meaning automatic increases in planning as well. So what does it mean? At the end of the day, it's all everybody in Washington and everybody in U.S. is opening up access to the 401(k) market to more people, making it easier. And I fully expect there to be a 3.0, 4.0, 5.0, because that's where the space is going. And it's a huge market. It's a huge need that even everybody in Washington can agree. The more we can make this easier, the better we prepare people for retirement. So we're really excited where regulation is going in that space.

So a lot of good trends there. And AllianceBernstein, you talked about being net positive in flows last year, a very tough year for the industry. Maybe a little color about what AllianceBernstein is doing in the alternatives area and how that's a big growth opportunity for them.

Yes. So we just linked to the synergies between Equitable and AllianceBernstein. So it started Equitable seeded AllianceBernstein's alternative portfolio with about $4 billion of seed capital in 2014 or 2015. AB was able to take that and grow at 4 to 5x with third-party money. And at the same time, they're able to recruit teams, because they know Equitable is going to give them money to manage right off the gate. So it's a great value proposition for EQH shareholders, because the general account gets a better yield and a better risk-adjusted return. And at the same time, AllianceBernstein can grow its alts business and enhance their overall product proposition. That's helped AllianceBernstein. We've also completed our first acquisition since we had the IPO with last year with the CarVal acquisition. CarVal came and was attracted to AllianceBernstein, because they knew Equitable was going to commit capital towards the platform as well. So it helped differentiated AllianceBernstein in winning that deal. And as a result, the platform is now over $50 billion and that enables AllianceBernstein to buck this trend and to shift product mix to a higher fee rate across the board. So we've seen great prospects since we announced the CarVal transaction. They've already [ add ] $2 billion of committed flows to them as well. So great prospects. The business is growing, and we think AB can really differentiate from a lot of the traditional asset managers in the space by having more alternatives on their platform and direct origination, because we think not only insurers but also pension players, et cetera, direct origination is going to be -- is going to help differentiate AB from a lot of other players in the marketplace.

So they're doing some awesome stuff. And I think I'll throw this question out just because it's been a while since it's been asked. About a year or 2 ago, repeatedly, everybody was asking, do you stay, or do you go with AllianceBernstein? Is there any development there in terms of your ownership stake, is it now about 62%?

Yes. It's about 62% now because we used a small percentage in the CarVal acquisition as is a way to do the transaction on a neutral basis for Equitable shareholders are now accretive. Look, when you think of our business model, retirement, asset management and advice, we love those 3 stools at a model, and all 3 are performing really great. Again, I mean, Seth and the team have done a tremendous job there. They have margin levers to go forward with the announcement of Bernstein Research and also their Nashville move. And then even though, look, they're not immune to the market, they've had some short-term performance [ across ] fixed income and equity. But over the long term, fixed income and equity on a 5-year basis is outperforming peers on 70% of their AUM. So good long-term results and differentiated positioning in Asia. We really love the business at the end of the day. The cash flows are tremendous for EQH shareholders. And if we can get cash flows from AllianceBernstein and use that to buy back EQH stock at a lower multiple, it creates value for shareholders.

Got it. And maybe the hot topic of dejour with Equitable are these non-New York policies in the individual segment that you want to separate out. And Robin, maybe give us a little bit more detail on exactly how that's going to work. And then if possible, maybe timing, what are you thinking on timing?

Sure. So in 2022, we were really focused on resolving the redundant reserves of Reg 213. That's a New York specific regulation that was put in place. We took care of that in 2022, but then it forced us to look in the future, and how do we want to set up our capital structure? So what we started working on is a plan where we separate our policies between New York and non-New York. And that's not just individual retirement. That's across our businesses, across the board. We really want to operate with all of our business that covers to 49 other states outside of New York and the New York business solely in New York across the board. The reason why we do that, if you can have your capital structure split between New York and non-New York, the dividends that you can get from your subsidiaries becomes more transparent. Right now in our New York entity, there's a complicated uneconomic dividend formula, and that's historically led us to take 2 dividends out 1 year, 0 dividends out another year, and it provides angst amongst investors. If we had most of that business outside of New York, it's really just an RBC type formula. So if the RBC is X, you can take out the difference between what you need to hold on a minimum basis. So it provides more visibility in cash flows. Where I get asked the question a lot is, "Okay, does that lead you to do another VA transaction across the board?" And certainly, if we do that, that provides optionality for us to do another transaction in the future. But the primary goal is to really separate those policies and give us better visibility on the dividends that we see across the board. Reminder, the legacy VA for us now is only 18% of the AUM, runs off $2 billion to $3 billion. It's well reserved for, kicks up cash and earnings. So to do another deal given the size of that right now, we need to make sure it's accretive to shareholders and that it was worth the value.

And how is the process going? I mean, do you think that at some point this year, you'll have segmented the New York, non-New York pieces?

We hope so. We're doing the work. It's a lot of operational work to separate the policies. There's regulator approvals, mail outs to consumers. So there's a lot of work that we're currently scoping out and planning. We started that work late in the fourth quarter. And we continue to do some of that planning work, so that we can try to execute this in 2023.

And Robin, do you get the sense that there is interest on the part of acquirers for a block at this stage? I know post the Equitable deal when the markets came down quite a bit, the appetite, the bid-ask kind of widened a bit. Is there interest out there?

I think they're certainly -- the private markets certainly still have interest for insurance liabilities across the board. You see that across any company and certainly for Equitable. I think the key for variable annuities, just to keep in mind, private players want to manage general account assets. So you need blocks that are really deep into money, that have reserves that they can use to invest in at a higher yield. If you have a block that doesn't have any moneyness to it, meaning you don't have a lot of general accounts associated with it, and it's just separate account fees, it's less attractive to a private buyer in that space, because they're not investing the money at a higher yield across the board. I think that's what really drives the buyer universe, and it's very specific [ buy ] policy. But there's certainly a lot of money out there to be invested in the insurance space.

And then the last part before I open it up to everyone. You mentioned dividends being important. It seems like a much more efficient way to do business going forward. But Isn't there a redundancy in the reserves in New York? Once you separate, could there be a capital unlocking event? And any detail would be great.

Sure. I think the one thing to keep in mind is when you separate policies, you also lose some diversification benefits as well, because when you have everything together, the good thing is you get a lot of diversification benefits. But if you're exposed to uneconomic regulation, you don't want to have that exposure at the end of the day. So when you separate policies, you do have diversification, some diversification benefits [ or ] a loss. And then for redundant reserves, those should be released over time, but not right away, because you have the diversification benefits that you need to keep in tack as well. But when we separate the policies, we fully expect both entities to be capitalized appropriately. We'll still have the capital flexibility with the $2 billion of cash at the Holdco. And then next year is $1.3 billion or this year is $1.3 billion of cash -- free cash flow that we expect to generate.