Equitable Holdings, Inc. (NYSE:EQH) Q3 2023 Earnings Call Transcript

Equitable Holdings, Inc. (NYSE:EQH) Q3 2023 Earnings Call Transcript November 1, 2023

Operator: Good morning. My name is Christa, and I will be your conference operator today. At this time, I would like to welcome everyone to the Equitable Holdings’ Third Quarter Earnings Call 2023. 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] Thank you. I will now turn the conference over to Erik Bass, Head of Investor Relations. You may begin your conference.

Erik Bass: Thank you. Good morning, and welcome to Equitable Holdings’ third 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. Please refer 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; Bill Siemers, AllianceBernstein’s Interim Chief Financial Officer, and Onur Erzan, Head of AllianceBernstein’s Global Client Group and Private Wealth business.

An elderly couple with their arms around each other, holding a frame of life insurance.

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 a promising time for Equitable and the life insurance industry, as the combination of higher interest rates and favorable demographic trends provides the best backdrop for growth we've seen in well over a decade. Equitable is particularly well positioned to capitalize on these tailwinds given our unique business model, which allows us to monetize all three components of the insurance value chain, product manufacturing, asset management, and distribution. On slide three, we present an overview of the third quarter. Third quarter non-GAAP operating earnings were $413 million or $1.15 per share up 16% year-over-year but down 2% compared to the second quarter, modestly below our expectations, adjusting for notable items in the period, which included lower alternative returns, elevated mortality and a higher tax rate.

Non-GAAP operating earnings per share was $1.30, which is up 15% compared to the third quarter of last year, and up 2% sequentially. Robin will touch on this in more detail in a few minutes. We continue to benefit from momentum in both our retirement and wealth management businesses with a combined $3 billion of net inflows in the quarter supported by record demand for industry leading buffered annuity. And 4,100 proprietary advisors, which enable us to capture distribution margin for our retirement offerings and investment products. And asset management we were not immune to industry wide pressures, with $1.9 billion in outflows in Q3, but active flows were nearly flat in the quarter a better result than for most peers. Turning to capital, our businesses continue to deliver diverse sources of earnings, which ultimately leads to a more predictable cash flow.

Year-to-date, we have generated approximately $1 billion of cash to holdings and we remain on track for our $1.3 billion guidance for the year. Importantly, more than half of our cash flow now comes from non-regulated entities, which makes it more predictable. Our cash generation and HoldCo cash position of $2 billion continue to support meaningful capital return to shareholders. We returned $315 million in the quarter and over $900 million year-to-date, putting us on track to come in at or above the high end of our 60% to 70% payout ratio target. Our third quarter results also reflect our annual assumption review, the first under the LDTI accounting framework. The minimal impact operating results reflects the benefits of a conservative approach to setting assumptions and designing products with a narrow range of outcomes.

We continue to focus on driving profitable, organic growth across our businesses executing against the strategic priorities outlined at our Investor Day, including a yield enhancement and productivity initiatives. We are also benefiting from higher interest rates, which are at levels we haven't experienced in over 15 years and favorable demographics with 11,000 Americans turning 65 each day. In our general account, higher new money yields and the continued demand for our RILA product furthers the shift in our retirement business towards spread based earnings. Higher interest rates have also been a tailwind for our wealth management segment. With revenue on cash balances supporting operating earnings growth of over 80% over prior year quarter.

Current interest rate levels put us ahead of plan relative to our 2027 target to double earnings to $200 million per annum. On slide four, I'll touch on the favorable impact of higher interest rates in a bit more detail. We have often talked about our market neutral balance sheet, which means that we hedge first dollar interest rate exposures, and equity market exposures on the guarantees we've made to our clients. This means that we are not making a bid on the direction of markets when we price products. As a result, our RBC ratio has remained in a narrow and comfortable range, despite significant volatility in interest rates and markets over the past few years. This ultimately enables us to drive consistent cash generation and capital return to shareholders.

While our balance sheet is neutralized from the impact of interest rate movements, higher rates provide a meaningful tailwind to our earnings and growth outlook. Our retirement product offering is more attractive to clients evidenced by our second consecutive quarter of record sales and net flows. Importantly, higher rates also mean better economics for our shareholders. And we're generating IRRs above 15% and a record value of new business. As a reminder, strong retirement sales also benefit AB and our wealth management business. In our general account, we're investing new money at levels that are 160 basis points above our portfolio yield, which is driving higher net investment income and wider spread. Finally, we're also realizing a benefit in wealth management with increased revenue on cash sweeps, supporting strong year-over-year earnings growth.

Turning to slide five, we highlight the strong results we're seeing across our businesses as we continue to execute against our growth strategy. In retirement, we reported a record quarter with $1.5 billion of net inflows, a 5% annualized organic growth rate, the strong results in individual retirement offsetting typical third quarter seasonality in our group retirement segment. Total premiums were $5.4 billion in the quarter, up 17% year-over-year, led by our industry leading RILA product, with $3.1 billion in premiums up 37% year-over-year. In asset management, we continue to drive growth in our private market’s platform, with $8 billion of our initial $10 billion capital commitment from Equitable’s general account deployed to date and an additional $10 billion committed at our Investor Day in May, bringing our cumulative commitment to $20 billion.

The acquisition of CarVal also significantly enhanced AB’s offering. And private markets AUM has grown 11% year-over-year to $61 billion as of quarter end. Total net outflows of AB of $1.9 billion in the quarter were modest relative to the industry, with active flows nearly flat and outpacing peers. Organic growth in the retail channel was attributable to taxable fixed income and municipals and U.S. retail flows have been positive for 12 of the last 13 quarters. Fixed Income performance remains strong with nearly 75% of assets outperforming over the one and three-year periods. In the institutional channel, fixed income and passive outflows offset organic growth in active equities. The pipeline remains strong, with $12.5 billion dollars of unfunded mandates, and private alternatives comprise more than 80% of the fee base.

Our wealth management segment which is the fastest growing portion of our business, reported 8% annualized organic growth in the quarter with $1.6 billion of net inflows. Net inflows and market tailwinds over the last 12 months drove 16% year-over-year growth in assets under administration, now $79 billion. While operating earnings are benefiting from higher interest rates. We're also seeing improved advisor productivity, which was up 2% compared to the second quarter of this year. Increasing advisor productivity is a key lever to drive higher wealth management margins. And we're encouraged by the momentum in this business. I will now turn it over to Robin to provide additional updates on the quarter. Robin.

Robin Raju: Thanks Mark. Turning to slide six, I will touch on the results for the third quarter. On a consolidated basis. Equitable holdings reported non-GAAP operating earnings of $413 million in the quarter, or $1.15 per share up 16% year-over-year, after adjusting for $67 million of unfavorable after-tax notable items and a favorable assumption update of 12 million. Non-GAAP operating earnings were $468 million or $1.30 per share up 15% on a comparable year-over-year per share basis. We’re also generated net income of $1.1 billion or $3.02 per share. Under LDTI every quarter that we have reported has resulted in positive net income. This ensures we remain eligible for inclusion into S&P indices. While pleased with the underlying growth momentum across our business, third quarter EPS came in below consensus expectations and our view of the run rate earnings power for the business.

This was a noisy quarter. And on page seven, I'll walk you through the major moving pieces and how we're thinking about the outlook going forward. Turning to page seven, there were three items that affected results across the enterprise. First, alternatives and prepayment income were $20 million below our normal expectation. Our alternative portfolio had an annualized return of 6% in the quarter, as solid private equity results were offset by the continued weakness in our real estate equity investments, which represent 20% of the alternatives portfolio. As a reminder, we normalize to the low end of our 8% to 12% normalized return expectation. Looking forward, we expect similar returns into fourth quarter, or project further recovery and performance in 2024.

Second, we completed our 2023 assumption update. I made some model changes in the third quarter, which resulted in 16 million favorable adjustments. The modest changes reflect our fair value management philosophy which incorporates emerging experience into our assumptions. This limit surprises like large unlocks for investors. Lastly, the consolidated tax rate in the quarter was 22% above our 19% expectations. This quarter we had an unfavorable dividend received deduction true-up, which drove the IRA. While taxes can bounce around each quarter, we continue to estimate a 19% consolidated tax rate and a 17% tax rate for the insurance business. We also had a few items that affected specific business segments that I wanted to highlight. Protection solution earnings were $34 million higher than the second quarter fell below our guidance of $50 million to $75 million per quarter near term.

Overall gross mortality claims were close to our updated assumptions, but net claims came in higher than expected due to less reinsurance coverage. In a typical quarter, about 15% of our gross claims are covered by reinsurance. But this quarter, we only had coverage on 10%. This was about a $23 million after tax variants adjusted for weight segment earnings would have been at the lower end of our expected range. We still viewed $50 million to $75 million as our best estimate of near term, quarterly earnings power of the business. And we expect this to move higher over time. As a reminder, while we expect some continued drag from a pull forward and mortality in the next few quarters based has a minimal impact on cash generation. Since we have already adjusted to statutory assumptions to account for the increased COVID endemic related mortality.

I would also note that we had a modest positive adjustment from our actuarial assumption update, underscoring the conservative assumptions for our block. Moving forward, we will explore ways to reduce the earnings volatility in the protection solution segments, such as by adding more reinsurance or reducing retention limits. In individual retirement, we delivered a second straight quarter a record sales in net flows, highlighting the growing consumer demand for protected equity and secure income solutions. Total sales were $3.8 billion and net flows were $1.7 billion, which continues to be driven by our spread based RILA product SCS. This momentum bodes well for the future growth in individual retirement earnings, and cash generation. However, one of the dynamics we've seen is that as the terms we can offer, the policyholder improves with higher interest rates.

There is some increased laps activity in our enforce block, which we have factored into our near-term assumptions. Under GAAP accounting this requires us to amortize more GAAP and we expect quarterly amortization expense to be roughly $5 million higher going forward. While this is in modest near-term headwind for earnings, I would emphasize two things. One, as we mentioned earlier, we're seeing record net flows, and the growth in this block will have a much bigger impact on earnings over time. Secondly, back amortization is a non-cash expense that had no change in projected cash flow for the business. Overall, we continue to be very bullish on the outlook for individual retirement. In wealth management, we collected $5 million of lower commission-related earnings this quarter, due to a lower level of [indiscernible] sales.

This corresponds with the seasonality in our group retirement business related to teachers being off during the summer months. Going forward, you should assume some seasonal pressure on the wealth management results in the third quarter. But we viewed $45 million of earnings as a better run rate to think about for the fourth quarter. Finally on corporate and other we generated a normalized loss of $109 million, which is worse than our expected quarterly run rate of roughly $100 million. This is due to timing of some expenses. That's been back though, we remain confident in our ability to grow EPS at 12% to 15% annual rate through 2027. Across all our businesses, we continue to control the controllables. We are ahead of our plan for achieving the $110million general account yield enhancement target held by the higher rate environment.

Additionally, we're ahead of schedule on our $150 million expense savings target and expect to capture our $30 million run rate of savings this year. Finally, as Mark touched on earlier, the higher rate environment provides a strong talent for new business across all three retirement businesses. We are running well ahead of our projection for D&B in 2023, which will contribute to future earning and cashflow. Turning to slide eight. Let's dive deeper into the diverse sources of earning that lead to our consistent cash generation. Our deliberate actions over the last five years to shrink our legacy block, grow our wealth management and private markets business and expand our core retirement and asset management markets have led us to meaningfully grow earnings and cashflow while also shifting to a higher quality mix.

At the same time, we consistently convert earnings to cash flows in our retirement business for two reasons. First, the business is strongly capitalized and tightly hedged ensuring our balance sheet is market neutral. This enabled our earnings and cash to remain stable through volatile markets. Second, $200 million of the cash flows from these businesses are unregulated and go directly to the holding company through our investment management contracts. As a result, our retirement cash flow is a much more consistent and higher quality than other retirement players in the industry. At the same time, we have two high quality unregulated businesses in asset and wealth management that comprise the remaining 40% of our anticipated $1.3 billion of cash flows this year.

This business converts nearly 100% of their earnings to cash flow. The quality and durability of cash flows enabled us to increase our payout target earlier this year to 60% to 70% of operating earnings. This is a 20-percentage point increase since our IPO, demonstrating a significant shift in our business over time. This leads me to our next slide, where I'll dive deeper into our Capital Management Program. Turning to slide nine, our strong cash generation continues to drive shareholder value. In the quarter we returned $315 million, which includes $238 million of share repurchases, resulting in an eight million share count reduction. Over the last 12 months, we have returned $1.1 billion to shareholders, reducing our shares outstanding by 8%.

At the same time, our holding company cash increased to $2 billion after taking a dividend from the insurance subsidiary. Our cash position gives us confidence to continue paying out 60% to 70% of non-GAAP operating earnings, even in volatile markets. It also enables us to play offense and be opportunistic rather than being on the defense. Year-to-date we have up streamed $1 billion of dividends to the holding company and remain confident that we will hit our $1.3 billion target for the year. In the fourth quarter, we will receive unregulated dividends from AllianceBernstein. Our wealth management business and our investment management contract with the retirement company, from an investor perspective. We believe that Equitable Holdings’ presents an excellent value proposition.

After paying interest expense, we expect to generate $1.1 billion of distributable free cash flow, which represents a 12% free cash flow yield. Our businesses have strong organic growth potential, and we expect cash generation to increase by 50% to $2 billion by 2027. With that, I will now turn the call back to Mark for closing remarks. Mark.

Mark Pearson: Thanks, Robin. In closing, we continue to benefit from momentum in both our retirement and wealth management businesses. With a combined $3 billion of net inflows in the quarter. Our balance sheet and capital position remained robust, with conservative assumptions resulting in no material assumption review impact. Our cash generation and HoldCo cash position of $2 billion continues to support consistent capital return to shareholders tracking at or above the high end of our 60% to 70% target payout ratio. We remain on track for the financial guidance we outlined at our Investor Day, as we continue to focus on driving growth across our businesses while capitalizing on the tailwind provided by higher interest rates. With that, we'll now open the line for questions.

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