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

Okay, we're going to be get going. Before we start, just a quick disclosure. For important disclosures please see MorganStanley Research Disclosure website at www.morganstanley/researchdisclosure.com Also taking a photopgraphs and recording devices also not allowed. If you have any questions, please reach out to Morgan Stanley sales representative. With that it is my pleasure to introduce the management of Equitable. Mark Pearson, CEO; Robin Raju, CFO. Mark, I believe you'd like to start with some opening comments, and then we can jump to questions from there.

Thank you very much, Nigel, and good morning, everybody. I thought it would be helpful, particularly for those new to Equitable if I gave just a quick snapshot of the company, our recent journey and where we're going. Equitable's mission is to help American secure their financial future. So they live long and fulfilling lives. And our mission has never been more important now. There's 11,000 Americans turning the traditional age of 65 today. So it's a good market to be in. What distinguishes us is our unique business model. There were 3, I would draw attention to. Firstly, equitable life insurance, $200 billion size company and a 76% awareness amongst financial intermediaries here in the U.S. We have 2 capital-light businesses. Firstly, we own 61% of AllianceBernstein, the asset manager. AllianceBernstein operates in 21 countries around the world and has $676 billion of assets under management. Our third business unit is 1 we have newly disclosed this year, our wealth management business. The key numbers in there for you are, we have 4,100 affiliated advisers. This is unique, our distribution model in there, 700 of which are wealth managers and have gathered $76 billion of assets under our management. The uniqueness, I've mentioned distribution; secondly, is the synergies that we are able to harvest between Equitable and AllianceBernstein. I'll give you 2 examples for this. Firstly, our ability to use the general account to seed the build-out of alternative strategies in AllianceBernstein. That is good for policyholders in that the general account yield risk-weighted yield improves. But it's very good for shareholders in that we are using policyholder money to build higher multiple, faster-growing businesses on the alts side. And Nigel, if you look at the history of AB for every $1 of seed capital we've put into AB, they were able to attract another $4 of third-party money such that the alts platform now in AllianceBernstein is $56 billion in size. In terms of shareholder returns, we've been listed now for 5 years. Total shareholder return to Friday over those 5 years is 49% against peers of 32%, 33%. And most notably, over that period, we have returned $6.5 billion in the form of dividends and share repurchases back to shareholders, which is a full 55% of our initial market cap. Looking forward, we've just held our Investor Day. And looking forward, we see this unique business model plus our investment performance and our affiliated distribution, helping drive free cash flow generated, which we see is growing by 50% to $2 billion by 2027. And that gives rise to a 12% to 15% CAGR in terms of operating earnings per share growth. Fueling that is $150 million of productivity saves and another $110 million of additional investment income. And we're going to further seed the build-out of alts and AB with a further $10 billion investment from the general account. That's a very high-level view, Nigel, of who we are, what the recent journey has been and the goals that we set out at our Investor Day just a couple of weeks ago.

Fantastic. Perhaps if I can just sort of like drill into 1 aspect that the $2 billion of free cash flow was particularly striking number, significant improvement from where you currently stand. Infact, can you just run through some of the key drivers as to what's driving the improvement there?

Sure. I'll take that, Nigel. Thanks again for having us today. So the $2 billion of cash flow that Mark articulated is a 50% increase from this year's cash flow guidance of $1.3 billion. And there are a few drivers that I would mention along with that. First is our retirement business. As you know, we operate in the largest and the fastest-growing retirement market in the world here in the U.S. 11,000 Americans turn 65 every day. And so it's a fast-growing market, and we're penetrating that market through our differentiated distribution that we have through Equitable advisers. So our retirement business is going to improve cash flow by $200 million through 2027, and that's the biggest piece of our business line, but it's a function of the growth and us capturing it through our unique and integrated business model. Second is our legacy business. We inherited a legacy business -- legacy VA business, a big chunk of business that was run between 2004 and 2008. And through a decade-long program of risk management, we've now improved the cash flow of those businesses and those businesses are actually going to release capital over the next 5 years for our shareholders. So it used to be a business that was a big piece of Equitable, today, it's a much smaller piece, and by 2027, it's going to be less than 5% of Equitable's earnings growth. And therefore, it's going to have high capital free cash flow conversion as well. So we're really excited of that shift. We have a fast-growing retirement business, capturing the market and the legacy VA businesses that's running off and kicking up cash, and that's well reserved. So those are 2 big pieces of our big U.S. business. Second is AllianceBernstein. AllianceBernstein, as Mark mentioned, continues to perform well and capture growth in the private alternative space. They're now $56 billion through their acquisition of CarVal. That's the fastest growing and highest fee portion of the asset management space, and we're capturing that. And by 2027, private alts is going to be greater than 20% of AllianceBernstein's total revenue, and that's going to enable strong cash flow growth as well. And then the last piece is our wealth management business. It's our smallest business today, about $100 million in cash, but it's our fastest growing. That's going to double in cash flow growth by 2027. So really strong drivers, but it really comes down to real business growth, and we're capturing it through the products and the distribution that we have, and we're translating that into strong cash flows for shareholders. So a 50% increase by 2027.

I guess another aspect of your capital is a very strong risk-based capital ratio and also very strong holdco liquidity, which is leading investors to ask a question when would you potentially draw that down. Maybe it's not the right time, given the concerns about credit cycle right at the moment. But how do you think about drawing that down over time? And would -- if you were to grow it down, would it be used for acquisitions or for buybacks or what would be kind of the use of that?

Yes. Just to give some numbers behind that, Nigel, $1.8 billion held at the holdco. That is not our target. Our target is to hold about $500 million excess capital at the holdco wide $500 million, that's roughly 2x the interest we're paying on our debt. So that's where we've positioned the company. In terms of the capital strength of the company, 1 of the things we're very proud of is the fact of our full reserving and our first dollar hedging, you've seen Equitable's risk-based capital north of 400% throughout the first 5 years of our existence as an independently listed company. Whether interests are down at 40 bps or 420 bps or whatever the equity markets are, our capital management programs have protected that capital solvency and has remained above 400% throughout that. One of the benefits of that, obviously, that's a peace of mind for all of us and for our clients. But it has meant that our capital return policy to shareholders. We were 1 of the few companies that did not halt capital returns during the COVID crisis. So that gives you some measure of how we're managing the business and the importance of consistency. So $1.8 billion is a good position to be in, in these markets. We prefer to be a little bit prudent now. There's a lot going on. But it's certainly not a change in any policy that we have as we move forward.

And in terms of how you'd likely draw that down, would it be incremental buybacks? Or do you have acquisitions on -- in mind?

To date, incremental buybacks has been the policy we've adopted. In terms of M&A, maybe if I just touch quickly on that. M&A for us, we would always maintain economic discipline. We would always need to ensure that it's cash flow accretive, that would be important for us. We did 2 acquisitions in our first 5 years. The first one was with CarVal. This was a firm specializing in alternative strategies for AB had about $16 billion of assets under management. We paid $700 million for that, plus an earn-out -- can bring that slightly higher. And that was a good bolt-on type of acquisitions, and it was accretive for both AB and Equitable. So those types of transactions we would look at, but they would need to be accretive pretty quickly.

I guess sort of like if you look at the value of AB, AB it's obviously performed exceptionally well. And we can see the market value of that. If you struck that out from the market value of your own company of the holding company, your own stock continues to trade at a heavily discounted valuation. To me, it looks very compelling, but the question I always get is what can management do to unlock some of the value? So I'd just be interested in your views as to what's driving the disconnect, and what you can do to potentially unlock that value going forward?

Sure. So as you say, it does -- the valuation does suggest upside for shareholders, but we are really focused on execution. And I think if you looked from our IPO, as Mark mentioned earlier, it has returned -- it has turned out to have strong returns for shareholders 59% through Friday and relative to 32% of our peer group of 49% and 32% as of Friday. So strong outperformance. And if you look relative to the Dow Jones U.S. Life Index, returned 14% and over that time period. So the performance is there and it's coming through in value on shareholders, where we can continue to focus on is execution against our priorities. It starts with the $2 billion of cash that we came out and suggest for the holdco, the continued productivity and investment income. So that's where our time is really focused on execution. The second piece, Nigel, I think it's just looking at AB and the end. It's not exact science because the 2 businesses are complementary to each other. And there is value in the synergies that those 2 businesses generate. So how you attribute 1 versus the other, AB's market cap is 1 way to do, but there are other ways to do it. So for example, the general count of Equitable it exceeded $10 billion for AllianceBernstein private alts capabilities, and we announced another $10 billion at Investor Day. So that's over $20 billion of internal general account funding to AllianceBernstein. AllianceBernstein then goes out and recruits teams, and they raised 4x third-party capital with those funds. So it's an internal source of leverage that AllianceBernstein benefits from that you don't benefit from if you don't have a large insurance asset manager and partner to go with it. And that's enabled us to come out to market and say, AllianceBernstein can grow $90 billion to $100 billion in the alt space by 2027. So it's taking the equitable general account combining with AB's capability and creating third-party value for shareholders. And then the last piece is something that we don't control. So we tend to focus on where we can control because we know that's what we can execute on is index inclusion. We're 1 of the few that are not in the index, and we know when looking at our peer group, about 50% of their float is coming from indexes relative to us at 20%. So now with the new accounting change, we'll continuously generate positive net index net income. And as a result, we'll be available to be included in the index, but that's not something that's underneath our control. So it starts with execution and then there's a potential upside there for index inclusion as well.

Great. One of the things that you've done in the past, which has tended to attract a lot of investment interest. There's been the block transactions, reinsurance transactions. You've done a number of those, which I think have been received well. Is there the opportunity for more of those? Or where do we stand with regards to potentially assessing the opportunity to sell off some of that legacy business?

So on the legacy VA business, perhaps if I just tell you the journey we've been on and where we are now, and then I'll get to your question. As part of this 5-year journey since our IPO back in 2018, we have significantly derisked the balance sheet through hedging, reserving and these block reinsurance transactions. So let me view a stat for that one. If you take CTE98 conditional tail exposure 98, what level of assets do you need to cover the average of the 2 worse percent in the tail. So obviously, the tail goes like that, what assets do you need. Over that 5-year period, the CTE98 assets we require have been reduced by 72%, significant reduction over that time through these block reinsurance and changing the mix. That's resulted in the legacy VA now being insignificant. It's $22 billion, it's 16% of the retirement assets and 12% of earnings. So we have really broken the back of that. It is no longer relevant or significant for Equitable. And in fact, Nigel is running off at $2 billion to $3 billion a year. So within 7 to 10 years, it's going to be 0. so to answer your question, I have to give you that background because it's not that significant. So it's not something we're hunting to do. We did 5 years ago because we needed to show to the market that our reserves would be recognized by smart money. And if you remember that big reinsurance transaction we did with Venerable, it resulted us in us getting a positive seed, we've got more than we were actually reserving for. So that was an important benchmark for investors, and I think that's gone. One of the things we noticed since our Investor Day on our Investor Day, we've taken the verbal annuities, the legacy variable annuities out in its own segment to show how small it is and the fact that it's fully reserved, fully hedged and not something Robin and I lose any sleep on at all at the moment. So we don't have to do any transaction if a transaction came along, that was economically smart for us, we would do, but it's not a priority of ours at all. So I hope that answers that question. Interesting to note for investors. Since our Investor Day, a few weeks back, the share price performance has really performed really well since we have shown investors that our legacy VA portfolio should not be a basis for valuing the whole company.

How about the ongoing business then, I think a lot of concern has been that the competitive conditions have been heating up somewhat a lot more competitors in the buffered annuity space and the roles and the like. I'd just be interested in your view as to where competition currently sits?

Sure. So the buffered annuity space is the largest and fastest-growing part of the variable annuity market in the retirement business today, Equitable through its innovation created that market back in 2010, 2011, we were first. And being -- have being a first mover, we have a lot of recognition with advisers out there that's helped us as more folks has come in through competition. But I think from Equitable, again, it goes back to our differentiators. What differentiates us is really Equitable advisers. So having that distribution affiliated distribution who sell it to HomeTeam's product enables us to manage volume and mix at the end of the day. So we're trying to maximize those components as we want to drive value of new business for our shareholders. So as you've seen through the market, I mean, it really started in 2021, everybody is in the buffered annuity space. Everybody is there. Do you have different pricing that happens. But Equitable maintained its #1 position. And at the same time, it's -- we're growing value. And it's the highest margin product that we have in our platform right now. So that differentiator and enabling us to maintain that margin has been very helpful for us. And we continue, through Q1, Nigel, continue to see great momentum coming through that business. And so we're quite excited about the retirement market. But it goes back to that affiliated distribution. If we didn't have that affiliated distribution, some of the P&C relationships where we have, then we'd be playing into wirehouses. And today, we're 9 or 10 in the wirehouses, but we're #1 in market. So it really comes back to distribution.

Okay. And then just going back to another point that you made, just to go to the margin expansion opportunity in the late expensing, as it seems to be a very meaningful expansion just go through some of the key factors that are driving your confidence there?

Yes. So at our Investor Day, we gave a guidance on that, that we would see the operating margin improvement of 350 to 500 basis points in AB. I think, driven by 3 things: AB continues to perform exceptionally well in terms of net flows coming in, reflecting, I think, the their global reach and the investment performance has been very good, both fixed income and equities over 5 years or 70% or more of their funds are outperforming. So AB has seen over the last 5 years, a compound net inflows of 2.5%. And against its peers of negative 2.5%. So that continuation of the flows will give us operating leverage and give rise to an improvement in that margin. Secondly, we have told that market that about $75 million of cost saves will come from AB's move of its headquarters to Nashville, that move is done and should start being seen in the earnings in 2025. So that will come through. And finally, the announcement of the joint venture and eventual deconsolidation of Bernstein Research Services, which is a lower-margin business. should improve that. So I think those are the 3 things. One, additional scale; two, cost savings; and three, Bernstein Research Services.

Then just sticking with AB, the alternative marketplace seems to be a major area of focus and of expected growth. It also seems to be an area that a lot of other companies going after. So what is the differentiator that makes you confident in your ability to execute against it?

A great part of the market, again, it's within the asset management space, alts is the fastest growing, but the highest fee portion of the market. So it's a place that we really like and operated in. But to your question, I mean, the differentiator here is really Equitable and AB working together through its synergies. Again, Equitable, if I go back to 2015, started with $4 billion of seed. AB grew that to $20 billion of third-party capital. Then in 2020, we announced an additional $10 billion of seed. AB has continued to grow that. And at the same time, those announcements helped attract CarVal investors to AllianceBernstein. And through a bilateral process, we're able to grow AB's platform to $58 billion today. And then our third leg is the new $10 billion that we just announced -- and together, that's going to make AB's platform $90 billion to $100 billion by 2027. So really a major player in the alternative space with differentiated capabilities across their platform. And together, with Equitable seed account and their good performance, we'll maintain and continue to be a driver of earnings and cash flows going forward.

Great. Then on the wealth management, that's also a major area of growth. Perhaps you can just highlight some of the key initiatives that you have that supports your 15% growth currency?

Yes. So for Wealth Management for Equitable, it's really powered by 700 wealth planners that we have inside the organization. We have $76 billion of assets under advice today. It's generating about $100 million of earnings nearly all of that converts to cash. And we see that doubling in the next 5 years. So the major initiatives in there, we shared the -- we used the LPL platform. So that means we avoid some of these big step debt costs that you sometimes see with platform providers. So it's very efficient in that sense as well. We are -- really have an advantage in the fact that not only do we have the broker dealer, we are also looking at insurance as an asset class for that category. And we really target consumers who are in the $0.5 million to $3 million of net investable assets. So that's a part of the market that's growing and underserved. So that's a good position we're in. And again, to Robin's earlier point, the power of our distribution is really the difference there.

And how are you seeing competition kind of emerge there? It does seem like an area that a lot of companies are talking about growing. Has that led to any material deterioration in competitive conditions or is it no?

No, we're very comfortable with the position we're in. And a lot of time, our wealth managers have grown up with their clients over the years. They may have started as a insurance clients and as the client's life stages has -- have moved, then our advisers continue to move with them and give them the advice they want.

You hear a lot of growth in that space for RIAs, but again, to Mark's point, we really focus on insurance as an asset class. So where we -- where we're growing is people that know how to do insurance, but want to expand on the wealth space. And that's what differentiates us in our growth relative to what you may hear in the RIAs that are just focused on the wealth space. So having insurance and wealth enables them to earn more money and provide more holistic advice to clients. And so that differentiates us when we're competing for advisers out there because we're competing for the people that can do both.

Then I guess no insurance presentation is complete without a discussion of commercial mortgage loans and like that. Just would appreciate any update you have as to current conditions in the market. How are you currently feeling about your exposures? And what we should expect over the next 12 to 24 months?

Yes. So probably we've gotten a lot of questions on this recently, Nigel, I don't know. But for Equitable, let me just put things in perspective, 5% of our general account is in the office CML space. So it's not a very significant portion of the portfolio. It's 54 loans within that space, all of them paid their mortgages last month. So all the income and everything has been received as a result. It's a high-quality portfolio. The portfolio has started with a 53% origination LTV. And as the markets have moved a little bit, that's increased to now as of year-end, 64% or 65%. So we've seen the hit in the market come through in those LTVs ,53% origination and 65% today. And we're quite comfortable with the space and it comes down to underwriting. So you need a long history in the commercial real estate place to really prove out over time, Equitable through its history at no delinquencies. Everybody's made their payments. Where we operate real estate is about location, no space in San Francisco, no space in Los Angeles, no space in downtown Chicago, all right? So where we operate, we're in Class A buildings in growing markets across the U.S., and it's resulted in a high-quality portfolio that we're quite comfortable with and actually delivers good returns for us across the board. So whenever we get this question, I really like it because I'm quite comfortable with our position and where we stand and look forward to seeing that market continue to expand. But it depends where you play, Nigel. That's just like anything else in real estate. Being in Class A buildings in the right locations, that differentiates and leads to strong returns for shareholders.

Outside of commercial real estate, any other areas of concern across the credit quality that you're monitoring?

Look, Equitable has a conservative balance sheet across the board within our -- the only place we don't hedge, as Mark mentioned, first dollar hedging for equity and interest rate exposures. Where we don't hedge, we don't hedge credit. We think credit is a good risk to take within an insurance company. That's where you want to take that risk. And then when you double-click on Equitable's credit portfolio, 96% investment grade, conservative. As you know, we came out from MAX under Solvency II. We have a lot of treasuries, a big move for us is going into public credit. We've now gone to some private credit capabilities, but the resilience of that portfolio has maintained in our last earnings call. We shared a sensitivity to the market which was 2008 financial crisis for investment in grade dot-com crisis for below investment grade and a 40% hit to the commercial real estate portfolio and our RBC declined by 52 points within that scenario. And on top of that, we generate 10 points of RBC every quarter. So we have a strong conservative portfolio. It's resilient, but we have the leverage in order if a shock happened to be prepared for it to keep the consistency in our cash return to shareholders.

Just drilling into 1 of those points, the reallocation of the investment portfolio more into the private credit just not that as to where you stand there and the incremental net interest income uplift that you could get from that?

Sure. So we completed through year-end, our second leg of the investment income. We -- of the original $10 billion that we announced in 2020 we deployed $7 billion in the alternatives space. Alot of it in private placement, but then also building on some of AB's unique capabilities that we have. We announced a new $10 billion private alts space. I think the one thing to keep in as we move to private alts, we're keeping the high quality portion of our balance sheet. We're not moving and stretching for yield. In this environment, you can get good income on high-quality securities, and that's where we're focused on. We want to keep the resilience of the balance sheet. So as we move into alts expect us to maintain the resiliency, and we're going to generate that additional $110 million of positive investment income that we announced to the market at Investor Day.

So why don't we pause here and any questions from the audience? Let me keep going then. So productivity improvements, not the key element is to the -- as to the story. Just hoping to get an update as to where you currently stand where the best opportunities are. You mentioned AB before, but just more broadly across the entity?

So we gave our guidance of $150 million productivity improvement. As you mentioned, Nigel, I've already mentioned that $75 million of that is in connection with AB's move to Nashville. So we've put -- that's locked in. The leases that we currently overlap will start to run off. So we're pretty confident on that as well. We have $25 million to $30 million of premises saves as well on the Equitable side. Equitable, we have lease breaks and then form next year, we'll be moving to smaller premises here in the city, and that will throw off $25 million to $30 million or something like that. The balance of the saves are really classical -- classic productivity saves where we look to take out bad expenses, anything that can be automated, anything that is overly bureaucratic. So that will be using technology and process improvements. One of the things we did inside the company is we bought what we call new ways of working into the organization. So this is an agile methodology. Many firms have agile methodology in their IT departments, but we apply it all the way through the organization. And then we marry that with design thinking a part of that new ways of working methodology, and that gives us the productivity improvements as we go through. So we have very high conviction that we will deliver that $150 million.

One of the items that has been causing a little short term volatility in the reported results has obviously been alternatives and mortality, just get an update there as to what we should be expecting?

Sure. So the alternative -- what I define as alternatives to Nigel's questions, it's about 3% of our general account. That's mostly private equity exposure that we have. Those usually report in a quarter or 2 lag. And we saw in the first quarter across the industry and not -- unequitable as well. Returns were sort of flattish in the quarter versus you normally expect an 8% to 10% annualized return in that portfolio. I think in the second quarter, Nigel, we'd expect that to continue the same trend in the first quarter or roughly be flat until you have the recovery because of the marks coming in. Now we're seeing a lot of the marks reflecting the higher interest rate environments in Q4 where the 10-year was at 388. So expect that to come through. So similar returns in all and for Equitable, those returns impact all of our segments because we allocate that income after our segments. So expect individual and group retirement to look similar in Q1 for the all performance. And then protection, protection, we have alts, but we also have mortality, mortality was poor for us in the first quarter. But again, we've had 9 quarters in total where mortality has been in line when you look in aggregate, that's an area where we expect volatility. So far, we've seen mortality improve relative to Q1 and closer in line to our expectations. So protection, but with the alternative exposure, I'd put it in the range of like $50 to $75 million, but more on the lower end at $50 million, but much improved from Q1 where we were negative in the quarter.

One, we're running out of time, but perhaps a question...

AllianceBernstein is a publicly traded, trades 12x earnings, throws off a lot of cash. Any reason why you wouldn't or shouldn't own 100% of that business?

We currently own 61% of AllianceBernstein, and we are extremely happy with that investment. As I mentioned earlier, from Equitable's point of view, the cash that Equitable has been collecting has grown from $300 million at the time of the IPO to $500 million in 2022. So it's been a very strong performer of us. We hold 61%. It's actually come down from 65. We used 4% to acquire CarVal to make sure that it was accretive for us. The 65%, there's no magic. That's just the total that acts ahead at the time of the IPO. So we didn't go in and say, let's buy 65%, not 100% or not 51%. So that's what we inherited, and that's the card we're playing. So we've been very happy with the way the business is performing, -- very happy with the prospects going forward as well. But obviously, in meeting the needs of the shareholders of Equitable, we know that cash is important for those shareholders. So like I answered earlier with to Nigel, anything on the capital management side, M&A, et cetera, we have to measure it against a buyback. So that's really the reason behind. But really, really happy with the investment we have.

It would be better if I wrap it up here. We're out of time, but thank you so much for your views.

Thank you very much, Nigel. Thank you all for coming.

Thank you.