Q3 2020 Equitable Holdings Inc Earnings Call
[music].
For the third quarter earnings call all lines have been placed one needs to prevent any background noise. After.
The speakers remarks, there will be a question and answer session. If you would like asking question. During this time your lines will be placed.
Bar one thank you I would now like to turn the call over to Jessica Baron <unk> Investor relation.
Thank you good.
Good morning, and welcome to equitable holdings third quarter two.
2020 earnings call.
Materials for today's call can be found on our website at.
<unk> IR dot equitable holdings Dot com.
Before we begin I'd like to note that some of the information. We present today is forward looking and subject to certain FCC 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, and Andreas Malmstrom, Our Chief Financial Officer also on the line is Ali Dibadj Alliance Bernstein head of finance and 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 maybe found in the Investor relations portion of our website in our earnings release.
<unk> presentation and financial supplement.
I would now like to turn the call over to Mark and Islanders to their prepared remarks.
Good morning, and thank you all for joining us today.
We are clearly living in interesting times.
Volatility and uncertainty I'm not seeing anything we've seen in a 161 year history.
However, with our prudent risk philosophy.
The relationships and insights we have.
I have no doubt that.
Crude oil will continue to protect and support our clients.
Deliver strong financial results and.
And be a positive force for good in the communities in which we live.
I'd like to begin this morning by sharing highlights from our third quarter, which you can see on slide three.
Overall I am pleased to report third.
Third quarter non-GAAP operating earnings per share of $1.24 cents per share.
Or $1.31 cents per share excluding the impacts of the annual actuarial assumption update.
5% year over year.
Assets under management up 6% year over year to $746 billion supported by net flows.
Our strong performance this quarter continues to demonstrate our ability to adapt and deliver stable earnings.
While uncertainty persists we.
We have seen new business activity trending afterwards, this quarter now at 80% of normal levels, yes.
Demonstrating the resiliency of our business model and the strength of our distribution.
Offsetting the new business has been an improvement in client retention and top business such that net close across the organization.
The Navy remain positive and continue to support our UN book.
In terms of our balance sheet, we continue our prudent approach with interest rate assumptions on our gas reserves at 2.25%.
The lowest amongst our peers in the industry.
At Q3, we.
We show healthy statutory RBC ratios and 2.3 billion of surplus cash at holdings.
We believe maintaining financial flexibility and balance sheet strength of critical during these times.
To this end.
Last week, we announced a landmark transaction to reinsure a portion of our legacy variable annuity block two venerable.
As we shared last week this.
This transaction will reduce CTV non ta tail risk by approximately 64% to.
To the reinsurance of 13% of our in force policies.
This transaction validates our risk framework and unlocks 1.2 billion of statutory value and increases our RBC ratio by 60 percentage points.
I think it is very important to understand that we were only able to transact with a credible partner like valuable because of the work we've done in the last 10 years.
Including fun substitution first dollar dynamic hedging volatility tools and using our IPO to impose realistic reserve setting assumptions both in respect of policyholder behavior.
And interest rates.
Without any of these positive $300 million ceding Commission we received.
With this being a very large payment the other way.
Yes, there was a market for these books, but of course smart money, we'll look first to the adequacy of the reserves.
We also announced the acceleration of $500 million of share repurchases in 2021.
Incremental to the 50% to 60% payout ratio target.
Which we continue to deliver.
Our focus remains on positioning our business for the future.
And enhancing long term shareholder value.
As evidenced by the reinsurance transaction.
Despite the fall in interest rates and the impact of the global pandemic we.
We remain on track to deliver on all guidance, we gave at the time of the IPO in 2018.
I'm pleased to announce that as a result of our strong expense focus we achieved our $75 million productivity target ahead of schedule and we expect incremental expense savings post 2020.
Looking ahead we.
We will enter 2021 with good momentum and balance sheet strength to.
To be further bolstered by the expected close of our legacy VI transaction in the second quarter.
Meaningful expense savings and acceleration of shareholder returns.
I will now profit to end this to give you some more detail, including our annual assumption update.
Segment results.
Capital management, and an update on our risk profile and us.
Thanks, Mark and good morning.
On slide four I will briefly review our consolidated results for the third quarter.
Before providing more detail on the outcome of our churn assumption update second results.
That is management program and recent reinsurance transaction with numbers.
As Mark noted non-GAAP operating earnings were $568 million for the third quarter or $1.24 per share.
Excluding the limited impact from assumption updates in the current and prior year quarter.
Non-GAAP operating EPS increased by 5%, primarily driven by share repurchases and strong net investment income.
The increase in net investment income reflects higher asset balances.
On income from alternative advised us that year rebalance and the continuation of exports to Rerisk and de risk our portfolio, including the sale of an additional $500 million potential for nine shoes at the net gains in the quarter.
GAAP net loss was $779 million in the quarter and was primarily driven by non economic impact from hedging and nonperformance risk.
Thank you and growth remains solid.
Supported by total company net inflows with assets up 6% year over year to $746 billion.
Further weakening.
We continue to deliver on our return on equity target, which improved 40 basis points from the prior year quarter to 16.3%.
Turning to slide five I'd like to provide additional context and details on our annual return assumption review.
As many of you know the hedge to our full economic liabilities.
Joining me immunize the balance sheet to interest rates.
If you recall in light of persistently low and declining rate, we realigned our GAAP long term interest rate assumptions early this year to better reflect economic reality. These.
This change is reflected in our long term assumption.
Current rates trading over 10 years.
2.25%, which remains the lowest among our peers nicer margin.
With this realignment completed in Q1.
Our third quarter assumption update was primarily focused on policyholder behavior mortality and other assumptions across the business.
You can see from our results the impact was fairly benign when is reflective of changes made to better align our assumptions to a record on the framework.
The total impact to non-GAAP operating earnings was a negative $31 million and the impact to net income was negative 58 million.
This was primarily driven by a true up to policy surrender assumptions for certain vintages in our industry the retirement business.
Reflecting an additional year of experience.
Impacts to our other segments were largely immaterial.
Moving on to the business segments.
I will begin with individual retirement on slide six.
Excluding assumption updates operating earnings of $393 million were up 3% versus the prior year quarter.
Primarily driven by the Tia rebalance some higher alternative income.
As well as lower operating expenses.
First the premiums improved sequentially from the second quarter, driven by an 18% increase in structured cabling strategy sales.
Reflecting the breadth and depth of our distribution.
Importantly, nearly 85% first year premiums this quarter were driven by non Tms the product as we continue to concentrate our focus towards higher growth less capital intensive products.
While net flows were down from last quarter, we continued to favorably shift mix as outflows from our mature fixed rate lock were partially offset by inflows on our current product offering.
Further.
As previously discussed we also announced a transaction to reinsure a portion of our legacy via book significantly de risking the fixed rate Gxp block.
Turning to group retirement on slide seven.
We reported operating earnings of $131 billion up 28% versus the prior year quarter, excluding assumption updates in both periods.
This was primarily driven by higher asset balances did.
The tier rebalance and an increase in alternatives income.
Net outflows increased versus the prior year quarter consistent with the seasonality, we expect in the third quarter due to the K two thirds summer school break.
Net outflows were partially offset by 3% growth in renewing contribution.
Benefiting from our digital engagement initiatives.
Account values increased by approximately 2.7 billion year over year due to market depreciation and continued net inflows over the trailing 12 months.
Now turning to investment management and research or Alliance Bernstein on slide eight.
Overall, he delivered strong results with operating earnings of $104 million up 12% year over year, primarily driven by higher base fees on higher average AUM and lower operating expenses.
The third quarter JV generated $5.3 billion of net inflows, excluding expected low fee actually redemption.
Of $2.2 billion.
Net flows were strong across all three Cline channels led by another robust quarter for active equities in both retail and institutional.
Further JV reported gross sales of $29.3 billion up 3 billion.
For 11% from a year ago net retail, which has also had positive net flows in eight of the last nine quarters.
Finally babies adjusted operating margin expanded by 220 basis points.
To 29.7% driven by lower operating expenses, resulting from focused cost reduction initiatives, including the national relocation.
Moving to protection solutions on slide nine.
We reported operating earnings were $48 million, excluding assumption updates down from $104 million in the prior year quarter, primarily due to the reestablishment of the peer to peer reserve as well as lower premiums.
Brand protection solution exited loss recognition following the assumption update in this quarter, we expect ongoing earnings volatility due to the aforementioned peer to peer reserve.
We continue to experience lower than expected success claims related to COVID-19, how.
However, the PST as reserve for cool more than offset the favorable mortality experience in the quarter.
Even taking this into account, we believe our guidance for $30 million to $60 million in earnings impact per 100000 excess usdeight remains appropriate.
Gross written premiums decreased 10% versus the prior year quarter as strong growth in employee benefit was offset by declines in life premiums we.
We continue to see strong momentum in the employee benefits business, which benefited from strong persistency and generated year over year growth in gross premiums.
Turning to slide 10, I will.
I would like to highlight our strong constant and liquidity position.
Can you give us confidence in the resiliency of our balance sheet, despite the ongoing market uncertainty.
Our balance sheet is rental property high as evidenced by a combined RBC ratio of approximately 430%.
And our holding company cash and liquid assets of $2.3 billion, well above our 500 million dollar menu on target. These.
This quarter, we returned $176 million, including $76 million quarterly cash dividend.
And the 100 million of share repurchases.
In the context of our Twentytwenty capital Management program, we have now returned $552 million to shareholders year to date or.
For 952 million.
Total, including the $400 million repurchases.
Accelerated into 2019.
In terms of our debt to capital ratio, we ended the quarter of 23.9% inline with our target.
Also raised $500 million in preferred stock in the quarter capitalizing on attractive rates and favorable market conditions.
Further optimizing our capital structure and enhancing financial flexibility.
And finally, we plan to accelerate $500 million of share repurchases in Twentytwenty. One following the close of the legacy via reinsurance transaction incremental to our 50% to 60% payout ratio target.
We continue to deliver on.
Turning to slide 11, I think it's important to reiterate to significantly impact the legacy VHQ reinsurance transaction will have on our risk profile.
The deal allows us to meaningfully de risk our balance sheet.
As evidenced by the 64% reduction in CTG 98, recurrent assets that we hold to cover terrorists.
That is a reduction of over $12 billion of reserves backing the policy being reinsured.
Which further validates the level of reserves, we hold against these liabilities.
Importantly, we are able to achieve a reduction in our risk exposure by two thirds.
Only reinsuring just one third of our most capital intensive policies.
Altogether. This transaction will result in an increase in our combined RBC ratio by approximately 60 RBC points.
Again, our third quarter RBC ratio of 430% these.
This equates to a pro forma RBC of approximately 490% well above our minimum target of 375% to 400%.
We firmly believe that this transaction further demonstrates the benefits of how we manage the business and illustrates clearly our ability to manage risk and generate long term value.
Further we are pleased to see these points recognized in our conversations with rating agencies and investors partners and other stakeholders as we continue to execute on opportunities to enhance several business.
I will now turn it back to Mark for closing comments.
Thank you and EPS before taking your questions I'd like to close by reiterating the key messages from the quarter.
First we have continued to demonstrate our ability to adapt to a wide range of economic scenarios and uncertainty while delivering strong results.
Our balance sheet remains strong and we will be bolstered further through our legacy V.A. transaction.
And finally looking ahead.
We remain steadfast in our focus on growing our value accretive businesses and delivering value for our clients and shareholders.
With that.
I will hand, the call back to the operator to open the line for questions.
As a reminder, if you would like to ask a question press star one and its part once our question. The first question comes from the line of Nigel Dally with Morgan Stanley.
Great. Thanks, Good morning, I wanted to touch first on group retirement, obviously very strong quarter in terms of earnings that we saw come through this quarter. How should we think about the sustainability of that I didn't quote I think you mentioned alts as one of the drivers should that normalize down to try to get indication that.
On a go forward basis, what's a reasonable run rate.
Thanks, and good morning, Nigel I think a loss to Anders to to answer that question.
Yes, good morning, I should note.
Look I think we and as we said on the call you see continued its strong momentum on the opportunity retirement business and it's really coming from and strong net inflows over the over the over the years and then in addition to that I mean, obviously, we feel good performance coming from the genomic and rebalancing I think we can expect that to continue to see now.
Just specifically on alternative.
And I would say we are back to normal on alternatives that we can expect a moment returns that we that we plan.
But that is down from alternatives here.
Maybe if I just add something there and as if I could I mean, it's been a really remarkable.
Response from our teams. They are obviously group retirement is predominantly made up of the business, we watch with teachers schools across the nation.
Closed bullish.
The response of our change in moving to a digital offer to two teachers to our advisors has been nothing short of remarkable and we really happy to see not only the deep in response to tick to the situation that we're in but that business continues to go forward with very very positive momentum. It's a really good response from the company.
Great. Thanks, and then just second on expenses you are usually two initial target you commented that there is additional meaningful expense saves in 2021 beyond first want to put some dimensions and around the size of the assays and what kind of timing that we're looking at as well as to when you would actually flow through the bottom line.
We're not ready to give a number yet Nigel we're working on it now obviously as you can imagine the teams are big full out on the SBA transaction.
But we can see in addition to the $75 million we can see.
Additional one off savings coming through this year because salt.
Was it less travel less entertaining et cetera, so thats coming through as well and then we're working on now as to guidance. We'll give you early in the new year on what the expenses.
But the momentum it with us there as well.
Okay, great. Thanks.
Thanks.
The next question comes from the line of engine Sullivan with credit Suisse.
Hey, good morning.
I'm trying to think a little bit about capital.
So Q.
$2.3 billion of.
By our estimates excess capital at this stage in the game.
Post the venerable transaction into Q, assuming that accelerated buyback, which.
Is terrific the 500 million, maybe invest in Venerable you probably could be sitting at close to 3 billion.
Hoyer slash excess capital.
In a sense of what your priorities.
Assuming we can get beyond oncology.
Hopefully.
Well, if you're putting on R&D and capital.
Buyback more stock or why the big acquisitions out there that you'd like to do.
Thanks, Andrew and good.
Good morning look first where we're very we're very proud to be in such a strong capital position.
It's an offer is unknown, but so we feel its popular and a prudent that we do return capital in accordance with.
With the guidance we gave.
But.
We like where we are now going to take a little bit of time to see what the best option as guarantor.
Okay, Mark but.
So so no real priority right now is to what.
And these are.
Easy times, but no doubt our priority is to what you want to deal with that cash if we could get to normal and that's a big EPS.
I know I don't I don't want to be the same anything definitive definitive now enter other than I'm really proud of what our finance and Treasury team has done to put us in this position of real strength with our balance sheet at a time, when we really need it.
So we're going to as you say really crazy times, but of course the economy politically you don't quite know how that slanted, yet and across the Cobra dissolve so we're in a good strong position and it's nice to have options and we're going to keep that that open as long as we can.
Okay Fair enough and then I want to ask one more about the individual retirement segment.
Look at the current product offering sales or slows at 802 last year in third quarter.
Moving down to sweep 51 in the third quarter of two.
To keep growing and first year premiums as you mentioned earlier, we're about 80% of the the $2 billion last year.
So the question is it seems like a lot of your competitors are de risking they want to put out profit products, what we're hearing it very regularly.
Do you think that you might see continued pressure on sales, even if we do get beyond COVID-19, and you're seeing a lot more competition.
Yes, I mean, you're right to enter there is more competition on this product me. Firstly, we're very very proud to have bought this new category to the market its grateful for retirees and investors could be in growth assets like this with some downside protection.
It was part of that decade long program I mentioned earlier, some substitution getting out of those high guaranteed products, putting in wind wind products for short for clients and for and for shareholders and you know we had a we had a pretty much a to a free run at this maybe three four years before competitors Skoda to try.
So good credit to our product to product development side, I think there's always two things Andrew on on competition one.
The products can be copied and if we have a win win.
We should not be surprised to see competitors come in and and and look to replicate that launch, but what's harder for for others to replicate is our distribution reach.
I think the combination.
That really differentiates equitable is that combination of having equitable advisors are unaffiliated salesforce and very very strong third party presence across banks wire houses to insurance companies.
So we feel we feel very good with the with the hand, we have to play, but yes, I think it's too a little bit more competition there.
Thanks much.
The next question comes from the line of Ilios Greenspan with Wells Fargo.
Hi, Thanks, Good morning, Mike.
First question I guess on thinking on capital discussion on why that no gain on numerous times about on thinking about what to do with your 80 stake on your attendance on the call that need that.
And you know we've been focusing on it the idea and then also with the uncertainty of Kobe and then yeah. Thanks to the thing that we're sitting there we put up as you mentioned, having some capital flexibility until things get back to normal or any kind of update you kind of get back on that.
Background, making a decision on unless to that thanks.
Yes, thanks, Thanks, Ines LSC and you're right.
Obviously.
This may.
Major steps, we've taken to de risk our balance sheet with the VA reinsurance transaction was the number one priority for us and.
To unlock meaningful value for shareholders on that.
To get the question from time to time on on a BSG as you know we have 65% stake in a b.
Something that was put together at the time of the IPO.
We are very very happy with our investment in a b. It is.
Consistent with our strategy is low capital intensity and the business on the Seth and alleys leadership has been performing relatively very very well.
With its.
With its traditional strategies, but also its oats and its strength in private client and in Asia. It's it's doing it's doing extremely well. So we certainly do not see any burning bloodshed. There's nothing we think we have to do something some something quickly, but we will we will take a look at it from from time to time, it just hasn't been a right time to.
PPP doing doing anything there.
And so well continue.
To do all we can to make sure the balance sheet is resilient.
And.
Unlikely that we'll be making very large portfolio changes at this at this time, it's just not the prudent thing to bigger.
Okay. Thanks, and then annualize that number question within on corporate you guys have been coming in better than the guide to.
For the past couple of quarters on anything one off there or how should we think about that.
And then I guess for the fourth quarter, and then kind of thoughts for 2021 as well.
On on on the economy. So I don't think we totally immune from that but what's encouraging for US is you know generally, particularly the <unk>. The stickiness of the business has been has been good.
Uhm you should also take into account that a lot of a retirement flows and out assets under management come format for three B business, the teachers business, which arguably is not as as as as as impacted by the economy I'm actually that teaches.
Uhm.
I'll I'll I'll, let go to the extent that.
Economy comes down so we have we have some protection against the economic one.
And it's would you anything yeah, maybe maybe you know maybe just to add I mean overall, I think <unk>, who could come in and have some seasonality and it's clear inconvenienced, usually the mucus that'd be seen some very promising uhm.
And then she takes her items in particular.
And pulled out again convenient for them to do she said.
Again up which is really.
A consequence of the of the outreach to opinion is doing.
In this environment, <unk>, which really picked up again that could be a big uptick in queue to him. When he comes to continue their two three and that's very promising and so I think those are all you've seen and very strong that that'd be very good excellent for the full year and continues.
To perform that despite the environment to area and then Mark mentioned that I mean.
Typically to get in but.
Doing tremendous engagement just to highlight again to renew contributions to clear sound. It it's working.
Okay, and then on that see US Mark mentioned sort of competing products by other insurers as you were saying competition pick up is it more just on a more sort of copycat byproducts by other companies are are you also as being some of the newer competitors getting more aggressive on terms and conditions.
<unk> and that's having an impact on your sales for us yes.
Yeah, I think first of all I mean asthma accent I mean, there is competition, but we are all quarter over quarter notes here I think it's been holding up very well I think we you know we introduce new features like the and do a direction. So I think we were doing a really good show up there to to continue to innovate and I think that's going to see if.
Uhm corner over quota other than that I mean, it just shows that it's a good product and all the competitors are coming in because it's a need for clients there, but I will tell you. They said it was a good environment and we're making making really good progress it.
Okay. Thank you.
The next question comes from the line of some payment let's see D.
Thanks, Good morning, I wanted to start with protection solution is here highlighting the employee benefits secondhand a bit more in your commentary.
So I'm just curious I want a gauge your interest in using some of your capital to expand inorganically in that area to get scale.
As we've seen a number of other benefits players do in recent years.
Suddenly tie morning, it it it it smoke I think we've said before that capital like businesses like employee benefits like wealth management and distribution.
That would be an area of interest for providing them make economic sense G. As you notice any they do shell to still feel very very large multiple so we have insurance, but we would always be value driven on something like this so yeah, we'd be interested but please.
Don't forget as a signal we're about to announce something.
Okay, and then I guess for a D. The.
The 29.7 margin in the third quarter is pretty close to your original target of 30% and I think for your comments a lot of that was due to cost savings from the Nashville move, but as we think about the next leg up and that margin are there business mix shifts either additions or subtraction that you're considering as you.
Think about improving beyond 30%.
So now I'm Gonna ask Alley, CFO for maybe two till answer that question.
Like.
Thanks, Mark Kennedy Oh, how are you.
So like I think I think as we plan outlines burst in the future and we're we're trying to grow there there are clearly business fixture.
Perfect and on which should overtime benefit both the theory, but also because of that some art instructor. So for example.
Turn it or is.
There's a place where very much in collaboration with equitable and their status graduate Premier you know we're building an alternative right and over time I went at the scale Martin shouldn't crew that should help us continue to March forward in terms of our marching increasing.
So so yeah there'll be midships across the board of course, you have to remember.
And you've heard US talk about this like on your life Burstein calls on the equitable cause of starting step as well that a lot of our margin is market sensitive.
You know so as the market continues to to track higher hopefully we continue to cause I hope to reset it 30 per cent margin overtime.
And Mark is there some would you be willing to put some of that capital to work for inorganic opportunities at a D.
Yes, we already do if you look of the past few years I think the total of C capital keep keep me honest Joanne is an accident and equity Wanna put into a b is is about $4 billion out of the general accounts.
N a D. Today is gonna Fabulous job they both an ultra business around about 30 billion under management know, we'll see it is quite a win win so neat I mean, you use a general counsel leveraging internal leverage it is which is very nice the general account policyholders are getting a higher yields and.
Rebuilding hi, multiple business for shareholders. So yes. It is something that we have done and it's certainly something we look forward to doing more as the opportunities that lives.
Okay can you help me. It also validate we need the deserving talked to behalf and that was a long wait requirement. When we talked previously about should we do a transaction off because you're going to have to make sense for shareholders. If that transaction. We still got it's bullshit. So I think it's supposed to continue to be our premise right now we don't see a need two two.
To make a statement one way or the other or anything but just shows could be managing the business really appropriately is validated by third parties and investors and so it would be really happy that we can do this nasty transactions Augusta.
He might have some here until then be taken from there.
Got it I guess my my question is still good.
You know I I gave this more as Cal risk reduction and clearly and demonstrating the value and the quality of the balance sheet, while you're reducing calories.
And is there all show kind of a longer term vision of Remixing your business. It sounds like there is just based on the desire to move into higher multiple businesses. So I guess my related question is.
That could include.
Ah more material reduction of individual retirement and upsizing your higher multiple businesses, but if if you sort of get the gist of my question.
Sure look outside those sectors, but we didn't do it.
Yes that makes sense and just my follow up is I.
I think you currently have an invite your advice and wealth and broker dealer business and corporate.
Does this generate much of our profit if at all and I.
Competitors your policy hold their behavior is certainly a piece of that.
So it would be it would be useful I think if you could you highlight at all like some of your key assumptions on policyholder behavior relative too.
The minimum required for requirements within.
Yea Reform for example, can you give us any sense of how much lower your lapstrake assumption is versus what is required in in the big Apple requirement.
Yeah look I think we I mean, we don't disclose all the details, but what you can take from I would probably tend to begin your assumptions.
First if you want I think they've been validated by the.
The transaction [noise].
Right I think that's one important point and the second one just when you look at the update you did this this cool that they've been very very small when you think about balances of $24 billion.
You have to kind of $2 million variability. So I think that's really shows.
Our assumptions are trending well two words experience, which is really what should guide that.
But I don't use can be become show you how much it is different to the to the minimum requirement, but it's based on our experience and be very confident with it.
And the big issue of course, the line is the assumption on interest rates with and she and she no.
We immunize our balance sheet by using afford right, we use weird like Rachel I'm looking at the capital position of the company and not some arbitrary reversion to me number I mean, that's a very very significant factor in looking at the capital strength of the company.
Thank you.
That concludes today's conference you may now disconnect.
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Yeah.
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