Equitable Holdings, Inc.
Q4 2020 Earnings Call Transcript

Published: 24 Feb 2021

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to Equitable Holdings, Inc. Fourth Quarter 2020 Earnings Conference Call. At this time, all participant lines are on mute. Please be advised that today’s conference is being recorded. After the speakers’ presentation, there will be a question-and-answer session. . I would now like to turn the call over to your speaker today, Jessica Baehr, Head of Investor Relations. Please go ahead.

[Jessica Baehr:]

Thank you and good morning, and welcome to Equitable Holdings full year and fourth quarter 2020 earnings call. Materials for today's call can be found on our Web site 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 2 of our presentation for additional information. Joining me on today's call is Mark Pearson, President and Chief Executive Officer of Equitable Holdings; Anders Malmström, our Chief Financial Officer; and Nick Lane, President of Equitable Financial. Also on the line is Ali Dibadj, AllianceBernstein's Chief Financial Officer and Head of Strategy. 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. Reconciliations 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 Web site, in our earnings release, slide presentation, and financial supplement. I would now like to turn the call over to Mark and Anders for their prepared remarks.

[Mark Pearson:]

Thank you, Jessica, and good morning to all joining our call today. An important part of the CEO’s role in any year is to present the financial results and talk about the momentum of the company. I shall, of course, do that today. But the year 2020, with the global pandemic and the demands for more justice in society was unlike any other year that we have worked or lived in. At Equitable, this caused us to look inwards to really understand the value we add to our clients. And at the same time, have courageous conversations and start our journey to advance racial equity. So I wanted to take this opportunity to thank the people of Equitable and AllianceBernstein who have shown remarkable agility and commitment over the past year. Not one day was lost in serving our 5 million clients, an incredible achievement in the midst of the social isolation. I've been fortunate to be a CEO for a number of years now, and I have never felt prouder of our teams. We had a strong finish to the year. Given the turbulence of 2020, protecting shareholder capital and maintaining a strong balance sheet so that we can honor our commitments was paramount. Equitable is managed on a fair value basis. This means we take no bets on interest rates. And as such, our balance sheet remains resilient throughout.

[Anders Malmström:]

Thank you, Mark. Turning to Slide 6. On a full year basis, non-GAAP operating earnings were $2.3 billion, or $4.99 per share, up 5% for the year on a per share basis. Excluding notable items of $37 million in the year, non-GAAP operating earnings per share was $4.91, up 14% year-over-year on a normalized basis. Moving to GAAP results, we reported a net loss of $648 million in the year which was primarily driven by non-economic impacts from hedging and non-performance risk, in line with expectations. As Mark mentioned, assets under management increased 10% to $809 billion, supported by total company net flows of $8 billion unfavorable market. We also benefited from solid performance in each of our business segments. In individual retirement, operating earnings were $1.5 billion. We saw strong demand for buffered annuity product, evidenced by record Structured Capital Strategies sales in the fourth quarter, and retail full year sales up 19% year-over-year. Group retirement reported operating earnings of 491 million, up 26% year-over-year. Our ability to shift to a digital engagement model contributed to net flows of $296 million, up 11% year-over-year, marking the eighth consecutive year of positive flows.

[Mark Pearson:]

Thank you, Anders. As you can see, 2020 was another very strong year for our company despite the headwinds we faced. This is evidenced by the successful achievement of all our IPO targets and strategic priorities. This past year also provided us with the opportunity to demonstrate just how resilient our business model and balance sheet are, resulting in solid earnings and the continued execution of our capital management program. Looking ahead, I can say with confidence that we are continuing to operate from a position of strength, with a clear focus on positioning the business for the future. I look forward to the progress we will continue to make as we ensure the fortitude of Equitable for decades to come. With that, I'd like to open the line for questions.

[Operator:]

Thank you. At this time, we will be conducting a question-and-answer session. To allow for as many questions as possible, we ask that you please limit your questions to one question with one related follow up. . Your first question comes from the line of Nigel Dally with Morgan Stanley. Nigel, your line is open.

[Nigel Dally:]

Great. Thanks and good morning, everyone. So I had a question on buybacks. You have a substantial amount of cash, 2.9 billion at the Holdco, well above your target. So against that, it would seem that you could be more aggressive in buybacks than what you currently offer. So what's the rationale behind what seems to be an excess amount of liquidity at this point with the pandemic and related economic concerns, despite we see some portion of that used for incremental buybacks, or is that been earmarked for something else?

[Mark Pearson:]

Good morning, Nigel, and thank you very much for joining the call. Yes, look, we're very pleased to come through this pandemic was such a strong capital position. I think it's really a reflection of our fair value approach in capital management. So it's something we intend to take forward. Just a reminder, we have returned 3.1 billion since the IPO and we remain committed to returning that 50% to 60% payout ratio. We also announced as a result of the Venerable transaction, we would increase that by a further 500,000. Our focus now, Nigel, is really maintaining that financial flexibility and the balance sheet strength. We think it's critical at this time. It's still very uncertain in the markets, but we repeat our commitment to the 50% to 60% payout ratio, plus an additional 500 million related to -- once the Venerable transaction closes.

[Nigel Dally:]

Great. Thanks. And then just on individual retirement. We've seen a lot of new competitors enter the buffered annuity space. In your prepared remarks, you said that's resulting in a more competitive environment. If it gets more competitors entering or some of the new entrants being more aggressive on pricing, just trying to understand whether if the increased competition will result in some erosion of returns going forward?

[Mark Pearson:]

Nick, do you want to take that?

[Nick Lane:]

Yes, I'll take that. First, I believe it's a positive to see competitors in the market validating the growing need for buffered annuities. The upside potential with downside protections are right for this current dynamic environment, and I also think speak to the needs of consumers as they approach to live in retirement. While enhanced competition, we think both would agree that we expect enhanced competition. With that said, look, it’s the pioneer of launching this category. Over the last 10 years, we've built a privilege distribution network and believe we've got a track record on innovation, not just copying that gives us an edge. As both Mark and Anders referenced, we had a record SCS quarter, particularly in equitable advisors. So innovating resilient products anchored in economic realities is still at our core. As a leader in the fastest growing annuity segment, we think we start in a position of strength and remain focused on continuing to build solutions that create consumer and shareholder value.

[Nigel Dally:]

That's great. Thanks a lot.

[Operator:]

Your next question comes from the line of Elyse Greenspan with Wells Fargo. Elyse, your line is open.

[Elyse Greenspan:]

Hi. Thanks. Good morning. My first question was on M&A and also using some of your excess capital just in terms of M&A from here. I know in the past you guys have spoken about wealth management and employee benefits as potential uses of capital for M&A. Just interested to know if those are still kind of the target businesses? And then could you give us a sense of how much excess capital you kind of intend to use for M&A and any kind of timeline associated with M&A from here?

[Mark Pearson:]

Hi, Elyse. It’s Mark. Thank you very much for joining. Yes, you're right. At the time of the IPO, we said for the first three years, we're going to try and build credibility and execute on those financial targets we just talked about. And we did tell you not to expect any large M&A transactions at that time. So that's really what we've been doing. But yes, we are open to -- now particular strength of the balance sheet, we are open to some bolt-on M&A as a way to accelerate growth. We'd be very interested and consistent with our strategy on capital-like businesses, so yes, that pushes us towards looking at EB and wealth management. But I can assure you we will always do so if they make economic sense. So we'll maintain that discipline. We don't have to go into M&A. But if the right opportunity is there, we have the ability to actively look at it very, very seriously. First priority now remains on closing that legacy VA reinsurance deal. That's very important for us. 64% of the was to get that off the balance sheet. So that's our first priority. And that's sort of on track for close in first half of 2021.

[Elyse Greenspan:]

Okay. Thanks. And then my follow up, within group retirement, can you just give us a little bit of an update on the competitive environment and how are you seeing your ability to grow within school plans just given all the ongoing impacts of the pandemic?

[Nick Lane:]

Great. I’ll take that. This is Nick. First, teachers are working harder than ever and we're proud to serve them, especially for myself with three kids at home. I've never had more respect for distance learning and what teachers do every day. That segment we believe continues to be resilient. Teachers are employed. They're working hard. As you've seen, we have record net flows and record renewals, which I think speaks to the trust and the relationships that we've built over the last 30 years as well as our unique model. So we continue to see growth in that segment, and we continue to see the opportunity to serve teachers that do an important part in helping the future of the American public.

[Elyse Greenspan:]

Okay. Thanks for the color.

[Operator:]

Your next question comes from the line of Jimmy Bhullar with JPMorgan. Jimmy, your line is open.

[Jimmy Bhullar:]

Hi. Good morning. So first, I just had a question on your stake in AllianceBernstein. And I think in the past, there's been discussion about you've been potentially considering the sale of that stake or maybe buying in whole company. Just wanted to see where that stands currently.

[Mark Pearson:]

Hi, Jimmy. It’s Mark. AllianceBernstein has been enormously beneficial for Equitable Holdings. If you look at cash flows today, it's 30% of cash flows and total shareholder return in NAV since the IPO is 80%, 24% per annum. We have said in the past that we do the responsible thing and look at all options. But the best option we have at the moment is the Holding that we have and continuing to work closely with AllianceBernstein to get those synergies. There's a couple of things which both Anders and I referenced in the presentation. One is this ability to leverage the general account to help AllianceBernstein build out its Alts business. It's really a nice virtuous circle, Jimmy. We get additional yield for our policyholders, which is good. It makes us more competitive. And we are able to build high multiple businesses for shareholders in the Alts, and AB has been remarkably successful in that. Nick and Ali are on the line as well. They’re also spearheading for us much more commercial synergies between the two organizations using insurance as an asset class, for example. So we're very happy with the investment in AB. We, of course, always look at options. You would expect them to do so for our shareholders. But the Holding so far has been enormously beneficial to Equitable Holdings.

[Jimmy Bhullar:]

Okay. And then just on your tax rate, it was very low in the fourth quarter and I think there was a favorable settlement on an IRS audit. What's your expectation of the tax rate going forward? And if some of the -- or are you expecting a lower tax rate in the next few years?

[Mark Pearson:]

Yes, absolutely. As you said, I think it's true. We had a tax audit settlement, which is kind of normal course of business. And it just allows us to take in foreign tax credits into account which lowers the effective tax rate by about 1 percentage going forward. So you can expect the effective tax rate to be between 17% and 18% going forward, always assuming that everything else stays equal.

[Jimmy Bhullar:]

Okay. Thank you.

[Operator:]

Your next question comes from the line of Ryan Krueger with KBW. Ryan, your line is open.

[Ryan Krueger:]

Hi. Good morning. In the 10-K you put out this morning, there's some discussion around Reg 213 in New York and it seems to be cited as I guess a material risk factor if New York doesn't revise it in terms of your dividend capacity going forward. So I guess was hoping to get a little bit more color on I guess how Reg 213 is different from the NAIC VA regime? And what options do you have to mitigate this risk?

[Anders Malmström:]

Yes. Look, I think, Ryan, we talked about that before, but first of all, we are in a very strong capital position and you saw that. We have $2.9 billion at the Holding Company. So that allows us to maintain our capital management program going forward. The Reg 213 is a move that the New York put out that is just not as market sensitive as the VA , which is much more economic. So we pointed that out many times. In a way, it's almost like counterintuitive, because Reg 213 becomes I would say more prominent in a good market environment and less in a bad market environment. Having said that, it's not binding for year-end 2020. It's not binding right now, but it's something that could become binding. And particularly if you remember, we had a very strong market. So this non-economic impact actually becomes more of an issue. In addition, also this gets amplified with the VA transaction, which makes it even less kind of reasonable. And that's why we strongly believe from the discussions with VA, we're going to find a good solution with them that really makes an economic sense. That's why we pulled it out. Now, if it doesn't change, it's going to become a problem at some point. But we strongly believe we're going to find a good solution with DFS, because they want prudent risk management and we want prudent risk management. So our interests are aligned.

[Ryan Krueger:]

Got it. I appreciate that. And then just separately, on your commentary around productivity and expense ongoing initiatives, can you give us any sense of the potential magnitude that could have? And when you initially did the IPO, you talked about a $75 million expense save plan that you've now achieved. Is this something that could be as significant as 75 million going forward?

[Anders Malmström:]

So, look, I think at the IPO, we were very specific. I think this is obviously an expense management efficiency program and something that is always top of mind for management, and it continues to be for us. I think what we always said is that you clearly see benefits from, let’s say, the changing environment due to pandemic, we saw some long-term benefits, but a big piece of that I will say 30% to 50% will remain. As Mike pointed out in his remarks that I think there's going to be less travel, there's going to be less real estate costs going forward. We will continue to do efficiency programs and make sure that we are most efficient. It's not just about cost. It's also about reinvestment back into the business to become a more efficient company. This is a continuous path.

[Ryan Krueger:]

Got it. Thank you.

[Operator:]

Your next question comes from the line of Yaron Kinar with Goldman Sachs. Yaron, your line is open.

[Yaron Kinar:]

Good morning and thanks for taking my questions. My first question goes to the potential to grow the wealth management business. I guess if you go after that strategy, I guess can you at the same time continue to consider a potential decrease in your state of AllianceBernstein, or does AllianceBernstein then becomes an even crucial – greater, crucial portion of the organization?

[Mark Pearson:]

Let me touch on that. Then I'll pass to Nick about the wealth management. Obviously, having an asset manager and a subsidiary is extremely helpful in keeping as much of the margin as you can in a wealth management business. So you would understand the economics of that. And AllianceBernstein is also closely involved with the Equitable team in building out more wealth portfolios as well, which is both good service to our clients, but also a way for us to capture as much of the value chain as we particularly can. So yes, you’re right. Those two are pretty much linked. Let me pass to Nick now on our wealth management book itself and the trajectory we've been seeing there over the last few years.

[Nick Lane:]

Thanks, Mark. Look, we're encouraged by the growth that we see in wealth management, positive 3.5 in net flows that you can see from the numbers. I think that speaks to the strength of our affiliated distribution, equitable advisors and their ability to holistically serve clients. So positioning us as the primary relationship, it helps navigate them through different life stages. We continue to see opportunities in that space.

[Yaron Kinar:]

Got it. Thank you. And then my second question, probably more of a follow up to Ryan's last question on the expense save. I think in the prepared remarks, you talked about digitalization as well. So can you maybe talk about finding the balance between the expense saves and investment in the platform and what the priorities are as you think about both sides of that equation?

[Mark Pearson:]

Yes, it’s Mark again. Let me have a go with that. Obviously, digitalization came particularly to the four in the last year in our group retirement business when schools shut down. And you've heard a number of firms talk about decades of progress made in weeks and that was certainly the case at Equitable, where we had to pivot a face to face model to a digital model and the teams did an incredible job on that. So, both clients and advisors now are getting much used to working in a digital way and that is accelerating the progress in that particular area. So that's not unique to Equitable, but we've certainly accelerated our progress there. The other point which may be lost on some people, we've gone through a major technology separation from AXA. If you remember at the time of the IPO, we had one-time separation costs of $700 million below the line. That was to cover the brand establishment and the separation of the architecture from AXA. Our IT teams have done a superb job not just in separating from AXA, but in using this one-time opportunity to upgrade the technology. So that's giving us opportunities and confidence about our productivity space, because we had that big step change as a result of the separation. And then the third arrow to our quiver, if you like, is this agile working. We have bought him a new way of working into Equitable where we're applying design thinking, much more adaptive leadership to up the metabolism of the company, if you like. So those are the three things I would point to that give us confidence that we can continue to see productivity saves, and as Anders said, reinvest back in the business for productivity and for revenue gains going forward.

[Yaron Kinar:]

Thank you.

[Operator:]

Your next question comes from the line of Mark Hughes from Truist. Mark, your line is open.

[Mark Hughes:]

Yes. Thank you. Good morning. The general account optimization effort to build out of the Alts portfolio, can you talk about what are the prospects for more movement in that direction, say, over the next 12 months? And then the second question will be also – it sounds like they performed well in the fourth quarter. Was that above the expectations you might have for how those would perform on a run rate basis? What should we assume kind of on a go-forward basis?

[Mark Pearson:]

Sorry for that. Can you hear me now?

[Mark Hughes:]

Yes.

[Mark Pearson:]

Okay, good.

[Anders Malmström:]

On the general account optimization, this is a journey we started with the IPO. Obviously we moved from most -- lot of treasuries , we moved into corporates, into public corporates and the journey we’re doing now, which is a continuation, as we said in the remarks, is really going more into private, into liquid asset classes. And we can expect that to continue. Just to give you some numbers. At the IPO, we talked about the $160 million uplift from the by the end of end of '19. Since then, we continued with that. We accelerated that. We did another 80 million during 2020. Obviously, there was opportunity earlier in the year, which helped us, but this is a continuous path that we can go. And I think as Mark said, it's really to improve the risk adjusted return of the general account. So that's continued. Then the second question is on the alternatives performance. Generally for the fourth quarter, alternatives always get reported with the quarter last. So in Q4, we really saw strong market performance than Q3. But overall in the year, we’re still behind what we would expect a normal run rate. Q4 was above, but the full year was still behind on the normal run rate. So I would say going forward, alternatives will go back to what we expect. We might see a little bit of an uplift in Q1 just because Q4 wasn’t that strong, but then we expect to go back to normal run rate.

[Mark Hughes:]

Thank you.

[Operator:]

Your next question comes from the line of Tom Gallagher with Evercore. Tom, your line is open.

[Thomas Gallagher:]

Thanks. First question is on, would you consider doing further risk transfer deals after this one with Venerable closes? And I ask it for a few different reasons. But just curious if you're more, and if you would consider it, are you more inclined to do the rest of your legacy VA business or would you consider other lines like life insurance? And I guess my final point on that is with this whole Reg 213 sensitivity issue, Anders, I presume if you got rid of all your legacy VA business, that would maybe not eliminate it, but it would certainly lessen that as a concern.

[Anders Malmström:]

Thanks for the question, Tom. So first of all, I think the focus is really, as Mark said, is now on closing the current deal. I think we're well on track to do so. But we still want to do that. And as you remember, we link this to multiple things. It actually -- it reduced the balance sheet significantly but it also validated our reserves. It really showed us that our reserves are appropriate because it got validated by a third party. So we don't need to do further risk transfers going forward. We would obviously always look at it if it makes sense. And you just pointed out Reg 213 could, if we don't find a good solution for DFS, which is clearly our base case, because we strongly believe in that. But look, I think we always tried to optimize the capitalization, but the big question is really this first one because it took off so much risk to 64% that Mark mentioned and it validated our reserves. So that's really the focus right now.

[Thomas Gallagher:]

That makes sense. And just my follow up, I guess I just want to get a handle on these smaller businesses where you consider inorganic opportunities, employee benefits and wealth management. Are these businesses profitable on a standalone basis currently? And can you share, if so, how much, like what are those two businesses each earn on a standalone basis in 4Q?

[Anders Malmström:]

Yes, we don't disclose the detailed numbers. But you can basically see -- they are all margin profitable clearly, but in order to make them relevant, that's why we have to grow them. And that's really the focus right now. But right now, they're not relevant from a P&L perspective and that's why really, as Mark talked about, we need to make them relevant.

[Thomas Gallagher:]

Okay. Thanks.

[Operator:]

Your next question comes from the line of Suneet Kamath with Citi. Suneet, your line is open.

[Suneet Kamath:]

Great. Thank you. So I wanted to start with EPS. I guess on last year's fourth quarter call, you guys had given a target of 8% to 10% EPS growth in 2021. I think 2020 probably came in better than maybe you thought. So is that 8% to 10% range still a good target for you guys? And I'm assuming you’d be putting that against the $4.91 normalized EPS result for 2020?

[Anders Malmström:]

Look, I think as we said in the past, we don't give short-term targets or short-term guidance, but I think long term 8% to 10% is the right target. I think clearly that's what we aspire to get to, towards the 10% and you’re absolutely right.

[Suneet Kamath:]

Right. You gave a specific target for 2021 on that call. That's why I was asking a question. I know you don't give --

[Anders Malmström:]

Yes, but we always say that this is really a long-term view. We want to grow the business sustainably. And I think that's why 8% to 10% I think is the right target long term.

[Suneet Kamath:]

Okay. And my second question is, as we think about the stock in the company, it would seem to us that one of the biggest sources of potential upside is in the value that described to the legacy VA block, it seems to us that the market’s not giving full credit to that piece of the business, especially considering the value that you got for the block that you're reinsuring. So have you thought about maybe additional disclosures that you could provide to help the market understand kind of the quality of the business, maybe how much of the earnings comes from the SCS product? I think that's, in my mind, a real opportunity for the stock. And to the extent that you guys could provide some additional information, I think it would be very constructive. So just curious about your thoughts on that.

[Anders Malmström:]

Look, I think it's a good question. I usually don't comment on our stock that much. I think that's your job. I think what we strongly believe is I think we have the right business mix now. We continue to grow in the areas we want to grow. I think we validated that the reserving is absolutely appropriate. I think we saw the benefit from the Venerable transaction in the stock price. I'm convinced that if we just continue that path, it will come through. We're in here for the long term and I think that's why we just continue to be on that path and improve the business.

[Suneet Kamath:]

Are you able to tell us what percentage of the earnings comes from the SCS product?

[Anders Malmström:]

We don't disclose that, but we can talk in detail.

[Suneet Kamath:]

Okay. Thanks.

[Operator:]

Your final question comes from the line of Andrew Kligerman with Credit Suisse. Andrew, your line is open.

[Andrew Kligerman:]

Hi. Good morning, everyone. I guess first on the group retirement business, I'm kind of curious as to -- and again I'll stay with longer term. What's kind of a sustainable longer term earnings growth rate? You grew in the quarter about 25%, so just kind of curious long term. And then with that, you had clearly some COVID disruptions in the schools in a big way and first year premiums were down 29%. And I'm curious as to how you see that recovering this year.

[Anders Malmström:]

Maybe I’ll take the growth rate first and then Nick can talk about the business. So just from a growth rate, I think -- we talked about that before. Look, this business is a steady business that we like to grow the assets under management and initially have positive net flows now for eight years. So from a growth rate, what you can expect in a way to wage growth that comes from the wages of the participants, and then the market growth. That's really the underlying growth. And then you get some leverage balance sheet and to expenses. That's basically how I looked at the growth rate. But this is a fantastic business. It shows positive momentum. And I think, Nick, now you can talk about the details that we saw during the year.

[Nick Lane:]

Thanks, Anders. Clearly, obviously, access to schools remains dynamic. As Mark alluded to, I think one of the silver linings during this period is that our use of remote digital tools that's allowed us to extend and deepen the relationships we have with consumers. So we expect as schools start to reopen and we start to see a reentry in American society, that that will actually amplify our impact going forward.

[Andrew Kligerman:]

Got it. And then with regard to the protection solutions, I was just interested in a detail around profits followed by losses on that reserve accrual. Curious as to why and how much of an offset that PFBL item was to unfavorable mortality in the quarter? And then also curious, would results have been materially different if Equitable was already reporting under LDTI?

[Anders Malmström:]

Good question. And so first of all, what I think first on protection solutions, we saw some headwinds on the mortality side in Q4. And then the PFBL reserve offset some of that, but not all of that. It's kind of a little bit out over time. After LDTI, we won't see that that volatility coming from the reserves either increase or decrease anymore, because the way it works, it takes out the back and so it becomes much less volatile. So the mortality will probably then impact more the bottom line results.

[Andrew Kligerman:]

I see. And no specific number you can provide on the PFBL.

[Anders Malmström:]

I don't think – no, we don't provide but think about the mortality was -- I think we have excess mortality north of 14 million, which is mostly attributable to COVID. It's not always 100% here because people don't declare all the time, but we attribute that mostly to COVID, which was really very much in line with what we had and guided to for Q3 . But the PFBL then it offsets some of them.

[Andrew Kligerman:]

Got it. Thanks a lot.

[Operator:]

Ladies and gentlemen, this concludes today's conference call. On behalf of Equitable Holdings, we thank you for participating. You may now disconnect.