Equitable Holdings, Inc. (NYSE:EQH) Q1 2023 Earnings Call Transcript May 6, 2023

Operator: Thank you for standing by, and welcome to the Equitable Holdings First Quarter Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] And finally, I would like to advise all participants that this call is being recorded. Thank you. I’d now like to welcome Isil Muderrisoglu, Head of Investor Relations, to begin the conference. Isil, over to you.

Isil Muderrisoglu: Good morning, and welcome to Equitable Holdings first quarter 2023 earnings call. Materials for today’s call can be found on our website at ir.equitableholdings.com. Before we begin, I would like to note that some of the information we present today is forward-looking and subject to certain SEC rules and regulations regarding disclosure. Our results may materially differ from those expressed in or indicated by such forward-looking statements. So, I’d like to refer you to the Safe-Harbor language on slide two of our presentation for additional information. Joining me on today’s call is Mark Pearson, President and Chief Executive Officer of Equitable Holdings; Robin Raju, our Chief Financial Officer; Nick Lane, President of Equitable Financial; and Kate Burke, AllianceBernstein’s Chief Operating Officer and Chief Financial Officer.

During this call, we will be discussing certain financial measures that are not based on generally accepted accounting principles, also known as non-GAAP measures. Reconciliation of these non-GAAP measures to the most directly comparable GAAP measures and related definitions may be found on the Investor Relations portion of our website in our earnings release, slide presentation and financial supplement. I would now like to turn the call over to Mark and Robin for their prepared remarks.

Mark Pearson: Good morning, and thank you for joining today’s call. This is the first time we are presenting our results under the new LDTI accounting standard. And also this quarter, we provide additional disclosures to our new Wealth Management segment and separating our legacy VA portfolio from our core retirement business. Let’s get straight into it. On slide three, we present highlights from this past quarter. Non-GAAP operating earnings were $364 million or $0.96 per share. Adjusting for notable items in the period, which included elevated mortality claims and lower alternative returns, earnings per share were $1.21, up 9% on quarter four, 2022 and down 18% compared to prior-year quarter, reflecting movements in equity markets and alternatives.

Assets under management and administration ended the period at $864 billion, down 8% year-over-year but up 5% year-to-date. Our businesses delivered strong results this quarter, with $3.2 billion inflows in our core businesses, positive across retirement, asset and Wealth Management. With the collapse of SVB, Credit Suisse and Signature Bank, there has understandably been a lot of attention on the finance sector. Today, Robin and I will spend most of our time on our liquidity position and strength of our balance sheet. We are conservatively positioned with an A2-rated investment portfolio and a high-quality diversified mortgage portfolio. Lapse rates remain within expectations as well as historical averages, a testament to products that are ALM matched and hedged to protect both policyholders and shareholders.

We will touch on this later in more detail. Turning to capital, we have $1.8 billion of cash at holdings, supporting financial flexibility and giving confidence that we can consistently deliver on our payout guidance across market cycles. In the quarter, we returned $286 million to shareholders, including $214 million in share repurchases. As such, we delivered a 63% payout in the quarter, which is at the upper end of our stated guidance. Our RBC ratios remain above target levels. This quarter sees the introduction of the new LDTI accounting standards, the most meaningful change in over 40 years. Equitable welcomes the greater transparency and the closer alignment between accounting and fair-value management. We are also taking this opportunity to show our businesses and what we think will be a better way for investors.

Firstly, we are splitting out our capital-intensive legacy VA business from our core retirement business. This reflects the fact that five years since the IPO, we have been very successful in reducing the risks on the legacy portfolio, and it is now no longer significant. The book is only $22 billion in account value, 16% of the total. Through reinsurance hedging and buyback programs, we have reduced CTE98, that is assets needed to withstand the average of the worst 2% of scenarios by over 70% since our IPO. The data before this was the capital-intensive legacy was lumped with an upscale in the value in a more capital-light and spread-based individual retirement products. Products like our market-leading SCS are perfectly ALM matched and have no living benefits.

As such, there is a very narrow range of financial outcomes, very different profile to the legacy VA. Our revised disclosures provide greater visibility into the drivers of value within our business. As a reminder, over 50% of our annual cash flows come from unregulated sources, primarily wealth and asset management. Our new Wealth Management segment highlights one of the faster-growing and higher-multiple portions of our business and demonstrates the synergies and strong client persistency we realize from one of our biggest assets, that is our 4,100 affiliated advisors. We are excited about the growth prospects here and believe that our holistic life planning advice model and investment capabilities should translate into attractive growth in the future.

Turning to slide four, you will see an overview of what has changed in our new disclosures. In our largest segment, Individual Retirement, investors now have greater visibility into the size, earnings power and momentum of our core retirement offerings. This segment has $79 billion of AUM in a mix of fee-based and spread-based earnings and totals approximately 38% of operating earnings in the quarter. We expect to see continued growth in this segment to our privileged distribution, meeting the demand for tax-deferred accumulation and income. In Wealth Management, we capture investment advisory fees, income on cash sweeps and distribution margin on insurance sales. We have grown from approximately $40 billion of assets under administration at IPO to $76 billion today.

This segment contributed $32 million of operating earnings in Q1 and net flows have been growing at an 8% CAGR over the last five years. Last is our Legacy segment. This includes capital-intensive fixed-rate, variable annuities issued prior to 2011 which were previously included in Individual Retirement. Legacy represents approximately 12% of operating earnings, adjusting for notable items. This segment continues to generate earnings and cash flow, and we are comfortable with the reserving and hedging of these liabilities. In 2021, we completed the Venerable transaction, which significantly reduced our risk profile. This is our smallest segment, with $22 billion of account value and running off at $2 billion to $3 billion per year. We look forward to providing more detail on these segments and the border opportunity ahead at our Investor Day next week.

Please turn to slide five. To understand EQH, it is important to understand the benefit from synergies we get between our businesses. We are uniquely positioned in advice, retirement and asset management. 85% of Equitable advisor annuity sales go to Equitable and nearly 100% of life insurance sales. Equitable has also received new business from approximately 14,000 third-party advisors in the last year. Equitable uses its general account to see the build-out of AB’s private markets in return for higher-risk weighted returns. AB has been very successful in attracting $4 of third-party funds for every $1 of seed money and has now built a broad alternatives platform including the CarVal acquisition, which now stands at $58 billion. We have deployed over 70% of our $10 billion capital commitment to AB, which provides higher general account yields and attractive high multiple fee revenue at AB.

Beyond our capital commitment from the general account, continued growth in structured capital strategies product range is benefiting AB, as they manage over 90% of our SCS account values. Turning to our businesses, in Retirement we delivered $4.7 billion in premiums, led by our suite of RILA products, up 12% year-over-year, as we continue to innovate and capitalize on the demand for protected equity. Approximately 50% of our sales come from all affiliated distribution. We had another strong quarter with $1 billion of net inflows, benefiting from strong demand and client persistency. We also continue to progress on our expense initiatives, achieving $60 million run rate savings through quarter-end. We remain on-track to achieve this target by year end.

Turning to Asset Management, AB’s global platform generated positive net flows of $0.8 billion, with $1.8 billion of active inflows, as retail and high-net worth investors became more comfortable taking on risk and were keen to take advantage of higher fixed-income yields. AB’s realized fee rate improved by 4% year-over-year, driven by the addition of CarVal. In AB’s institutional channel, pipeline remains strong with $13 billion, two-thirds of which is comprised of private alternatives, which continues to give us confidence in the growth of our $58 billion private markets platform. In our new Wealth Management segment, we generated $1.4 billion of net inflows in the quarter, with assets under administration growth of 4% year-to-date to $76 billion.

In Equitable Advisors, we now have 700 wealth planners, advisors focused on financial planning and investment products. Through continued productivity improvements and the shift towards fee-based advice, we expect to continue to improve our margin in this 90% free-cash flow conversion business. In summary, our unique Retirement, Asset and Wealth Management businesses continued to be resilient in all markets. Turning to slide six, Robin and I will spend a few minutes discussing the current market environment and addressing a few areas of focus for investors. The banking crisis that commenced on March 8th has clearly impacted our sector. As we’ve seen, our business tracks the broader market and with the S&P 500 up 9% year-to-date, our fee-based businesses like AB and Wealth Management benefited.

On credit quality, we are conservatively positioned and can withstand very severe shocks. We maintain a high-quality commercial mortgage loan portfolio. And on liquidity, we are structurally very different to a bank, as our mainly retail clients or products which have market value adjustments also in the charges. Let me pass over to Robin to go into the data for you. Robin?

Robin Raju: Thank you, Mark. Turning to slide seven, I will now spend a few minutes discussing the three areas Mark just highlighted. First on credit, we are well positioned to withstand a credit event and recover quickly from it. Generally, the insurance industry is well-capitalized. However, as you can see on the left-hand side of this page, Equitable can better withstand significant stress in our investment portfolio. At the top is an independent stress that by Autonomous, which shows that in a credit event that is similar to the global financial crisis of 2008, our RBC ratio holds up better than peers, with a drop of only 40 points versus peers at 48 points. In this event, we will stay within our target range of 375% to 400% RBC.

We are also constantly performing internal stresses on our portfolio, which are more severe than this example. On the bottom, you can see one of our internal stresses, which tells a similar story to Autonomous. Equitable’s portfolio and capital remains resilient through a scenario that is more severe than a global financial crisis. We define this stress as using the global financial crisis for investment grade. The dotcom crisis were below investment grade, which was more severe than the global financial crisis while also using a 40% valuation shock to the office TML portfolio and a meaningful shock to other TML types. And even in our internal stress scenario, our RBC ratio is only impacted by 52 points. There are few observations that we would make from these results.

First, our high-quality investment portfolio is resilient. 96% of our fixed maturities are rated investment grade and the portfolio has a total credit rating of A3, which excludes treasuries. Second, we have a track record of maintaining a strong RBC ratio. Through every period since our IPO, we have delivered an RBC ratio above 400%, a testament to our economic management of the balance sheet. And last, our statutory capital generation remain strong. In 2023, we will generate roughly 10 RBC points per quarter in the retirement company. This means that should a material credit event arise, we will likely be able to fully build back our regulatory capital to the current excess levels within one year’s time. So in summary, our portfolio is high quality and able to withstand stresses in the credit cycle.

The next topic I will address is our real-estate exposure through our mortgage loan portfolio, which represents approximately 17% of our highly-diversified general account. Within our $17 billion portfolio, we hold agricultural loans and a diversified portfolio of commercial mortgage loans, which have allocations to resilient sectors by multifamily housing and industrial. These CMLs provide an attractive risk-adjusted investment for Equitable. The portfolio is resilient, which is reflected in the underlying fundamentals with an average loan-to-value ratio of 62%, a debt service coverage ratio of 2.1 times and 97% of the loans rated investment grade. It is important to note that we update our loan-to-value every year, which not everyone does.

This means that our loan-to-values reflect the impact of recent market developments like COVID and rising rate, and we feel it is appropriate way to measure the portfolio, giving our shareholders the highest level of transparency. From a relative value perspective, CMLs typically earn over 50 basis points more in comparable quality fixed maturity, making them an attractive use of capital. They also have an excellent historical performance across multiple down-cycles. Additionally, the asset class provides more flexibility than many others. CMLs have manageable maturity, resulting in tighter asset liability matching. Diving deeper in the office portion of our portfolio, our investments in the new office space are high quality with strong credit metrics.

Our office portfolio has an average loan-to-value of 65%, a debt service coverage of 2.3 times, while 99% of our loans are investment grade. Additionally, like any type of underwriting, we focus on the high-quality properties and tenants, with nearly all of our loans being tied to Class-A building with an average occupancy rate of around 90%. Looking to the future, 2023 office maturities represent only 2% of our overall CML portfolio upcoming due this year. In summary, Equitable has a long history in this space and we have expertise to manage through turbulent markets. Our track record of having no losses or delinquencies through the global financial crisis or COVID-19 pandemic is proof of this. The last area I would like to highlight is policyholder lapses, given what has happened in the banking sector.

Insurers have more structural protection from severe lapses than bank deposits do. And the markets that we operate in have generated consistently stable lapse rates historically. In a rapidly changing market like we just experienced, our products have features called market value adjustments, which means that clients can only with draw the current value of their policy rather than the full benefit. This reduces the incentives that the clients — to move their money. Next, we provide millions of Americans an individual retirement accounts. As a result, more than 98% of our client balances are in retail. This means that we aren’t susceptible to a couple of large institutions on their money, as seen with dominant banks affected by the crisis. These retirement accounts are sold primarily through financial advisors and are tax advantaged accounts.

This creates operational friction for clients to move money and tax consequences if they would like to liquidate their funds into cash. Lastly, our policies are protected by surrender charges for early lapses that lasts for more than six years on average. In all, 90% of the account value in our retirement product have lapse protection. This has resulted in consistent lapse rate hovering around 8% since early 2000s. In this time, we’ve experienced the global financial crisis, a decade-long bull market, an global pandemic and rapid rate hikes. These features enable us to entirely match our assets and liabilities. Our current duration gap is less than half a year. This means our investment portfolio can hold high-quality assets to maturity and is not required to necessarily sell assets to meet obligations.

In summary, the structure of our products protect us from lapses and this has proven to be true over the long term through different market cycles. Turning to slide 10, I will highlight total Company results for the quarter. This is our first quarter in the new accounting regime, the biggest accounting change for the industry in over 40 years, which we believe will increase transparency to the market for the entire industry. We’re excited this is finally here. And as you know, for Equitable, this change has no impact to our hedging program or cash flows because it moves closer to fair value. We reported non-GAAP operating earnings of $364 million or $0.96 per share, up 10% compared to the fourth quarter. On a year-over-year basis, we saw volatility, mortality and lower alternative returns, offsetting our higher RILA spread income in the quarter.

As I discussed previously, you can expect volatility and mortality as our protection business focuses on VUL policies with higher face amounts. These are accumulation-oriented policies which are reserved at cash surrender values, leading to volatility in results under LDTI. We had positive mortality experience in Q2 and Q3 in 2022, which helped offset the last two quarters of adverse experience. Over the last nine quarters, mortality continues to be in line with expectation on a cumulative basis, taking into account our COVID sensitivities. Additionally, alternatives were lower year-over-year, as you would expect. Our portfolio experienced gains in our traditional, private and growth equity strategies, which was offset by declines in our real estate equity investments, which had strong performance in 2022.

Adjusting for $92 million of notable items in the quarter, non-GAAP operating earnings were $456 million or $1.21 per share, down 18% on a comparable year-over-year per share basis but up 9% over the fourth quarter. This was largely driven by the impact of lower market and alternative returns, offset by share buyback, which reduced our share count by 7% year-over-year. In our results, you can also see the benefit of our growing spread business in SCS and productivity which we captured an additional $10 million of savings in the quarter, as we continue to execute against our strategy. Turning to GAAP results, we reported a $177 million of positive net income in the quarter. This reflect LDTI’s reduced sensitivity to equity movements by 80%, and our general account interest-rate hedges which are captured in OCI.

Quarter-end assets under management and under administration was in line with market movement, as year-over-year market declines drove assets lower. However, elevated markets and net inflows in each of our businesses in the first quarter drove assets under management and administration up 5% versus the last quarter. Turning to slide 11, our prudent capital management has enabled us to consistently return capital despite the ongoing market volatility. In the quarter, we returned $286 million, which includes $214 million of repurchases, resulting in a 6 million share count reduction in the quarter. As I highlighted earlier, over the last 12 months we have reduced our shares by 7%, demonstrating our ability to create shareholder value through challenging markets.

We have $1.8 billion of cash at the holding company. This is a net cash number following the repayment of our latest debt maturity in April. As a reminder, we have no more debt maturities until 2028. This provides us financial flexibility to navigate through various market cycles going forward. Additionally, we are on track for our guidance of $1.3 billion of cash generation to the holding company this year. This is enabled by our diverse cash generation sources, with nearly 50% coming from unregulated entities of AB, Wealth Management and the investment contract for our Retirement business. Later this month, we intend to increase our dividend to $0.22 per share, up from $0.20. This will bring our dividend yield up to nearly 3.5%, which is above the 2% yield for the average S&P 500 company.

I will now turn the call back to Mark for closing remarks. Mark?

Mark Pearson: Thanks, Rob. In closing, our Retirement, Asset and Wealth Management businesses continued to deliver strong operating results while our fair-value balance sheet, conservative investment portfolio and HoldCo cash position give us confidence in our ability to navigate periods of market stress. We continue to execute on our stated targets, including productivity savings and consistently returning 55% to 65% of earnings to shareholders. Through enhanced disclosures, we are providing investors with additional information to value our growing Retirement, Asset and Wealth Management franchises. We’re also looking forward to meeting again next week, as we host our Investor Day on our 5-year anniversary as a public company.

I’m incredibly proud of what we have delivered to our clients and shareholders since our IPO, and our management team looks forward to highlighting the opportunity ahead for Equitable Holdings. Thank you, and we’ll now open the line for your questions.

Q&A Session

Operator: Thank you. [Operator Instructions] We will begin our first question from Elyse Greenspan from Wells Fargo. Your line is open.

Operator: Your next question comes from the line of Jimmy Bhullar from JP Morgan. Your line is open.

Operator: Your next question is from the line of Tom Gallagher from EVR. Your line is open.

Operator: Your next question comes from the line of Andrew Kligerman from Credit Suisse. Your line is open.

Operator: Your next question comes from the line of Suneet Kamath from Jefferies. Your line is open.

Operator: Your next question comes from the line of Alex Scott, Goldman Sachs. Your line is open.

Operator: Your next question comes from the line of Tracy Benguigui from Barclays. Your line is open.

Operator: Your next question comes from the line of Ryan Krueger from KBW. Your line is open.

Operator: Your next question comes from the line of Michael Ward from Citi. Your line is open.

Operator: As there are no further questions, I would like to thank our speakers for today’s presentation. And thank you all for joining us. This now concludes today’s conference. Enjoy the rest of your day, and you may now disconnect.