Q1 2021 Equitable Holdings Inc Earnings Call
Good day, and thank you for standing by and welcome to the Equitable Holdings first quarter earnings call. At this time all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session.
To ask a question during today's session you will need to press star one on your telephone if you require any further assistance. Please press star zero I would now like to hand, the conference over to your speaker today Jessica.
Behr paint ever relations. Please go ahead.
Thank you.
Morning, and welcome to Equitable Holdings first quarter 2021 earnings call.
Materials for today's call can be found on our website at IR Dot equitable holdings dotcom.
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.
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 Rob.
Robin Rajiv <unk>, our Chief Financial Officer.
Nick Wayne President of equitable financial.
And I'll leave the buys Alliance Bernstein, Chief Financial Officer, and head of strategy.
During this call we'll 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 slide presentation and financial supplement.
I would now like to turn the call over to Mark and Robin for their prepared remarks.
Thank you Jessica and good morning, and thank you for joining our earnings call I Hope all of you and your families are continuing to stay safe and healthy.
We've now passed the one year anniversary of when our lives with first changed by the pandemic and these remain challenging times.
Sadly the number of COVID-19 related deaths in the U S reached an all time high in Q1.
<unk> peak infections of the virus in late 2020.
Since then the health crisis in the U S has been improving and the economic outlook is brighter with consumer confidence, reaching a 14 month high.
It's beginning to feel here in the U S. At least that we are entering a more optimistic time.
People are once again looking to the future with hope and assessing the gold's priorities and plans.
It's been a year with the people of equitable have come together and shown extraordinary resilience and innovation to connect with our clients.
These relationships and new digital capabilities are resulting in positive momentum inside the company.
Please turn to slide three so I can share some highlights of this momentum.
It was a strong first quarter for equitable.
I'm pleased to report first quarter, non-GAAP operating earnings of $600 million or $1.35 per share up 19% over the previous year.
Our subsidiary Alliance Bernstein performed, particularly well with first quarter earnings and distributions growing by 27 per se.
Assets under management are up 27% year over year to $822 billion supported.
Supported by good net flows and strong equity markets this quarter.
New business activity continues to trend positively and is now back to pre COVID-19 levels.
Total company net flows were $4 6 billion in the quarter with net inflows of $5 7 billion excluding.
Excluding our legacy fixed rate <unk> run off business.
Capital ratios and the balance sheet remains strong thanks to our economic risk management policy the cornerstone of how we manage the business.
Our landmark Theyre able to newer T reinsurance transaction with Venerable, which improves our risk profile remains on track to close in the second quarter.
We returned $504 million to shareholders in the first quarter through dividends and share repurchases.
And as a reminder, we expect an incremental $500 million of repurchases following the close of the Venerable deal.
Importantly, we continue to focus on driving longer term shareholder value by maintaining our leadership position focusing on client engagement and innovation and growing our most capital resilient businesses.
Now turning to slide four I will provide more detail on this look forward view.
And driving long term shareholder value, we have a number of distinct capabilities and key enablers.
It gives us confidence in our ability to grow.
Two broad distribution reach and product innovation, we have leadership positions in a number of attractive markets.
Today, we are the number two player in the VA market, where we have approximately $75 billion of assets, excluding legacy GM XP block.
Which are fully island matched and low capital intensive.
Despite increased competition, our buffered annuity SCS product had record sales in the first quarter.
In group retirement, we are the number one provider of supplementary retirement solutions and educators K through 12 market and our business now has over $44 billion of assets.
We are benefiting here from the build out of our digital engagement with teachers in the past year.
In our life business.
We need to improve our risk profile pivoting from the <unk> protection to the <unk> accumulation market evidenced by the UL premiums up 11% in the quarter.
We continue to benefit from a <unk> heritage of research and investment in Genuity.
Active net inflows across all channels in a b totaling $6 5 billion.
For the first quarter.
With respect to our nascent businesses, our wealth management business has grown to $70 billion of assets under advice up 13% in the quarter.
Our advisors have pivoted well to virtual meetings and benefiting from clients seeking advice and these more complex types.
Our employee benefits Division has now grown to over 515000 enrollees and will continue to grow in significance over the next few years.
Our technology enabled approach is resulting in satisfactory loss ratios and strong persistency of accounts we've won.
We continue to grow our alternatives business inside ABB.
Now with approximately $20 billion of committed capital.
This business continues to grow through a combination of organic growth as well as targeted inorganic growth, including acquisitions team lift outs and team build outs.
Financial rigor and risk discipline remain two of our hallmarks and our embedded throughout our business.
The VA reinsurance transaction will reduce the Cte 98 tail risk from our legacy VA portfolio and the positive ceding commission from vulnerable who are backed by Apollo's validates economic soundness of our reserving.
Our $97 billion general accounts remains predominantly invested in investment grade corporates and is conservatively positioned.
At the appropriate time, we will reallocate to more illiquid assets to improve risk adjusted returns.
Our corporate structure is unique in having a strong asset manager and a strong insurance operations with an equitable holdings.
We are a virtuous cycle here and managing the general accounts to afford better risk adjusted yield and at the same time see new alternative strategies from a b and create high multiple businesses for our shareholders.
I'll focus on the strategy and our unique enablers. Most importantly, the agile working methodologies, we are implementing across the organization and our risk approach provide confidence at equitable will remain stable and value generating for shareholders.
Of course success of any strategy depends on the quality about people and.
And we know that the very best talent demands not only that we run our business well.
But that we do our part and being a force for good.
Let me provide more detail on the next page please turn to slide five.
Equitable purpose has never been more important.
People achieve financial wellness in order to live better lives.
But we also want to help build a more just sustainable and thriving society and we have the resources to make the difference.
So in addition to our financial results. We are using these Q1 earnings call to present for the first time, our environmental social and governance progress.
We will follow this up with an annual ESG report starting this year.
Environment.
Our approach is to improve the quality and returns of our investment portfolio by investing in companies that are also committed to improving the ESG impact so.
Approximately 70% of our general account investment grade corporates, all aligned to the UN sustainability goals.
<unk> has an established presence and operating portfolios with a purpose now amounting to $21 billion of assets under management.
And <unk> has integrated ESG factors into the overall investment process for around 80% of assets under management.
And we are especially proud of alliance Bernstein partnership with Columbia University's Earth Institute.
Which enables us to collaborate with renowned climate scientists to promote integration of climate risk and opportunities into portfolios.
Social we aspire to invest in our people and to build stronger communities, where we live and work.
By fostering economic growth.
Particularly among disadvantage and underrepresented groups.
We aim to fully equip hop people with the skills needed for the future from a.
It's holistic wellbeing and foster a more diverse workforce and inclusive culture.
During this period of remote working we did not slow down the enterprise rollout of agile working well.
So the importance of accelerating it.
A day one third of our workforce is working within a fully agile framework incorporating design thinking processes and we have supported this with over 20000 employee hours of training completed.
We've also made progress on diversity equity and inclusion with the creation of the CEO Task Force for racial equity.
Including a redesign of our foundation programs to better support disadvantaged communities.
Of late.
We have developed wellness programs to support our people during the COVID-19 crisis.
And we've also invested in fostering a healthy work environment evidenced by the well gold certification of our Charlotte campus Buildout.
Finally governance.
We took the opportunity of a IPO to set the highest standards of governance for the newly listed equitable include.
Including an independent chair diverse and experienced board leadership.
<unk> policies.
Clearly articulated business principles and strong information security protections.
We are also differentiated ourselves as an advocate for a more robust and sustainable risk management framework with the insurance sector.
Additionally, we seek to align management compensation with stakeholder interest through our balanced scorecard.
As our ESG efforts continued to materialize them progress I'm excited by all the opportunities in front of equitable.
Switching profit with purpose.
I'll now pass it to Robyn to true our first quarter results Robyn.
Thank you Mark.
Turning to slide six.
Ill review, our consolidated results for the first quarter before providing more detail on our segment results and capital management program.
Non-GAAP operating earnings were 600 million for the first quarter.
Up from $535 million in the prior year quarter.
Non-GAAP operating earnings per share increased by 19% to $1 35 per share.
Primarily driven by strong investment income attributable to alternatives increased fee type revenue on higher separate account balances.
And share repurchases.
AUM increased to 822 billion.
Ported by strong equity markets and positive net flows.
Moving to GAAP results.
We reported a net loss of $1 5 billion in the quarter.
Which was primarily driven by the asymmetry in the accounting.
I mean, our economic hedging and GAAP liabilities.
Which is in line with our expectations.
As a reminder, equitable is managed on a fair value basis, which means we do not take bets on interest rates and.
And we hedge our full economic liabilities.
In the quarter, our hedging program performed as expected with the 95% effective net ratio.
Our economic framework and prudent risk management continue to underpin our strong results moving on to the business segments.
I will begin with individual retirement on slide seven.
Operating earnings of $363 million were down 3% versus the prior year quarter.
Due to higher debt claims and the impact of higher reserves from assumption updates in the first quarter of 2020.
This offset strong growth from both SCS sales and separate account fees.
First year premium improved 24% versus prior quarter.
Driven by record sales and structured capital strategies, reflecting the breadth and depth of our distribution and continuous innovation.
SCS continues to resonate with clients looking for protected equity solutions as they prepare for retirement.
Net inflows on our current product offering attributable to the rapid sales were offset by expected outflows from our capital intensive fixed rate block of $1 1 billion, which is in line with our expectations and further derisk our in force.
Turning to group retirement on slide eight.
We reported operating earnings of $151 million.
Up 42% versus prior year quarter.
Driven by higher alternative income and fee revenue on higher account values.
Account value increased by approximately 10 8 billion year over year due to market appreciation and continued net inflows over the trailing 12 months.
Despite positive net flows in our tax exempt markets in the quarter.
Reported by gross premium in line with prior year quarter.
We experienced outflows in corporate 401k, primarily related to higher planned debt conversions and terminations.
We continue to see an increase in tax exempt renewal contributions up 8% year over year.
Demonstrating the effectiveness of our digital engagement model and the strength of our advisor relationships with clients.
Now turning to alliance Bernstein on slide nine.
Overall <unk> delivered strong results.
With operating earnings of $121 million.
Up 27% year over year, primarily driven by higher base fees on higher average AUM and lower operating expenses.
Both of these factors contributed to a strong adjusted operating margin in the quarter of 31, 7%.
In the first quarter <unk> generated $6 5 billion in active net inflows.
Moving to positive flows across all three distribution channels.
<unk> continues to deliver strong performance with approximately two thirds of <unk> active equity and fixed income outperforming on a five year basis.
<unk> net inflows were led by the retail channel, which reported the second strongest sales quarter to date with $23 billion in gross sales.
Up 30% sequentially.
And the 16th consecutive quarter of active equity net inflows.
Total assets under management at the end of the FERC quarter, we're at 697 billion.
Up 29% from prior year quarter attributable to a strong market performance.
Positive net flows.
Equitable remained a permanent capital provider for <unk> alternatives business.
Around 20 billion of AUM at quarter end.
This is a virtuous cycle supporting the growth of Abb's alternative investment platform and equitable as risk adjusted general account yield.
Moving to protection solutions on slide 10.
We reported operating earnings of $41 million.
Down from $49 million in the prior year quarter.
Primarily driven by unfavorable mortality experience largely due to COVID-19. While we are encouraged by the ongoing vaccine distribution efforts, we were saddened to see record COVID-19 related debt into U S.
With about 190000 in the first quarter.
We had higher excess net claims driven by COVID-19, but remain at the lower end of our guidance of 30% to 60 million earnings impact per 100000 access to U S. GAAP claims.
Our pivot away from interest sensitive <unk> impacted gross written premiums year over year.
But this is offset by our variable universal life product, which was up 11% year over year.
And our employee benefit business up 47% year over year.
Annualized premiums were up 22% versus prior year quarter.
Driven by continued momentum in the employee benefits business.
Which reached 515000 enrollees up 29% year over year.
Turning to slide 11.
I would like to highlight our strong capital and liquidity position, demonstrating our financial strength and the resiliency of our balance sheet.
We remain well positioned at the holding company.
With cash and liquid assets of $2 5 billion, well above our $500 million minimum target.
We continue to execute our capital management program.
Returning $504 million to shareholders Inc.
<unk> $430 million of share repurchases.
And in the second quarter, we intend to increase our quarterly dividend to <unk> 18 per share.
As a reminder, we plan to execute an incremental $500 million of share repurchases in 2021.
Moving to close the legacy VA reinsurance transaction.
In addition to our 50% to 60% payout ratio target.
Our financial strength is evidenced by a combined RBC ratio between $3 75, and 400% in line with the target, reflecting our strong cash position at holdings up $2 5 billion.
As Mark mentioned, we remain on track to close our VA reinsurance transaction with <unk> in the second quarter, which will further strengthen our balance sheet.
With that I'll now turn the call back to Mark for closing remarks.
Thank you Robin.
Before opening up to questions I would like to reiterate the highlights from this quarter.
First we had another strong quarter supported by robust new business activity.
Our fair value economic approach to managing the business with a strong capital position and legacy VA transaction close on the horizon.
Keeps us well positioned to manage through a wide range of economic scenarios.
And finally looking ahead.
We continue to leverage our strength to deliver on our commitment to providing long term shareholder value.
With that.
I'd like to open the line for questions.
As a reminder to ask a question. Please press star one that is star one for questions. The first question comes from the line of Elyse Greenspan with Wells Fargo.
Hey, Thanks. Good morning, My first question is on capital return.
<unk> came in above the 50% to 60% payout target in the Q1 I'm, assuming maybe that was just a function of where the stock price was.
Can you just kind of.
I'll give some more views on that and just how we should think about the capital return relative to that 50 to 60 for the rest of the year.
And assuming obviously the $500 million would come on top of that.
Thank you Alicia it's Robin here.
Pleased with our capital position with $2 5 billion of cash and liquid assets at the holding company. As you saw in Q1, we returned 504 million back to shareholders and we expect to be within our 50% to 60% payout ratio for the full year. In addition to that 50% to 60% payout ratio as we announced at the close of event.
<unk> will have an additional 500 million share buyback.
But as you now expect it to be active every quarter in the market and we like to keep momentum in the market and we're pleased with the returns we've seen it to date.
Okay. That's helpful.
And then my second question on <unk>.
I went back to discussions over the past year and as we talked about your stake in Alliance Bernstein, you guys had kind of mentioned putting off kind of thinking through whether you like book to change the size of your stake just given the uncertainty with COVID-19 now that it seems like by just kind of line of sight into kind of coming to the other side of this.
With the vaccines being rolled out.
Have some updated thoughts just in terms of how youre thinking about.
What you might do with that day, and when you might come back to thinking through that decision.
Hi, Elyse, it's mark here and thanks for the question.
Firstly whenever we talk about a b I think it's important for us to acknowledge the businesses travelling extremely well.
7% up on earnings.
Record levels flows across all free channels. So we're very very happy with the investment in our lunch Bernstein.
Full equitable, it's obviously a stake they gives us access to a very nice capital light business, we have nonregulated cash flows coming through and investment expertise, which we think enables us to put together value propositions for clients.
Or.
Better than many of our competitors and on <unk> side, we are obviously, an anchor investor for them, we provide seed capital to build out the ultimate business.
And more and more we're seeing the teams combined together full commercial offerings as well. So we're very happy with how the businesses traveling yes, we look at our holding from time to time at 65% don't expect any big announcement from US Imminently. We just do what you would expect us to do to look at from time to time.
Which we've done but we're very very happy with our investment in <unk> and how the business is performing.
Okay. Thanks for the color.
The next question comes from the line of Nigel Daily with volume.
Good morning.
Another question on capital just wanted to come back to the issue of regulation teaser attained I know it hasnt been day necessarily get the number one party getting the risk transfer transactions are completed.
Is it the total lease but any preliminary discussions that you've had with the DFS with regards to the regulations and how is your confidence moving out to arrive at a solution to do that.
At issue.
Potentially changed from where it was say three months right.
Morning, Nigel as you know our priority with the DFS to this point has been non discussion for the Venerable deal.
A significant derisking transaction, and that's where we remain focused on discussions with them. We have started preliminary discussions on <unk> 13, as well and as always with the DFS, we'd hope we come with an economic solution that is what the DFS once and that is what we want assets are closely aligned to how we manage the business on an ex.
<unk> basis.
Okay.
Helpful.
Second question just on the roadmap for the annuity space. It does seem like it's getting a little more crowded is beginning to translate into any sort of pricing pressure over 10 erosion that you're seeing from the price price.
I'll take that this is Nick first we're proud to be the pioneer that founded the buffered annuity space.
As we said we view the pie is continuing to grow driven by core consumer demand with the peak baby boomers retiring and competitor entrants are validating I think the client and advisor need for that product as an asset class.
As a market leader, we continue to manage for value not market share and our differentiated capabilities. Our affiliated distribution our privilege space with third party providers and our 10 year track record of delivering.
Think led to the record sales that you saw 24% up and $1 8 billion in SCS.
That said, we are well positioned.
To meet demand out there given our range of products and we will continue to focus on generating shareholder value.
That's great I appreciate the color. Thanks.
The next question comes from the line of Tom Gallagher with E V O O.
Good morning.
Question for Rob and I know you are hedging interest rates to the economics, which would you say over hedged for statutory accounting purposes, and I guess, just relatedly if interest rates keep rising.
Which I realize is positive for your economics.
I'm guessing that will continue to have a negative impact on statutory capital and cash flow short term anyway.
If that scenario happens through the balance of the year with the negative impact on RBC become a gating constraint for capital return and freeing up the excess from the Venerable deal.
Or do you think that's likely to be a manageable situation for you.
Yeah.
Thank you Tom as you mentioned, we manage the business on an economic fair value basis, So we've hedged fully to interest rates.
Statutory is non economic it has things like reversion to the mean, which assume interest rates go to three 5% and thats not how we manage the business. So from time to time as interest rates increase were over hedged on a statutory basis and that may cause.
Volatility in the RBC ratio when we think about capital returned out RBC is one thing that we look at but we manage it on our economic ratios and we make all decisions on those economic ratios, that's what dictates our catheter returns not necessarily RBC.
So Robyn is it fair to say you don't see this having an impact on plans for capital return, including deploying the full amount that you expect to be free it up from.
The venerable deal.
Net capital deployment decisions at equitable are made on an economic basis.
We look at RBC, but we manage to the economics.
Got it and my follow up is.
Any.
I guess just on the death benefit guarantee the adverse claim payments for variable annuities this quarter.
Can you give us a sense of how big that was.
And also when we think about.
The part of the block that.
Sort of crystallized the higher debt benefit claim payments is most of that.
The block that's being transferred to two two venerable thanks.
I understand the reasons for that but if you could talk about what your views are and whether you on retirement frozen whether you considered this quarter as more of a trend given your small business focused in the 401k market or is it more of an aberration.
Great. This is Nick first as as you stated we did see airflows in our corporate business driven by plan day conversions and participant terminations and the SME segments I think as the economy continues to gain steam we view it a resumption to normal activity.
<unk> and the tax exempt market, which is R. Four O. Three D business. As you stated we continue to have positive flow $70 million for the quarter that Robin alluded to.
We are back to to pre COVID-19.
Levels led by our 8% renewal increase.
Teachers today continue to be busier than ever and given the disjointed nature of school reopening.
We expect.
A more level is return once we start re re entering.
And the next school year, but we are greatly encouraged by the increase usage, we see in our foundational digital tools. This is digital appointment setting virtual meetings and we think.
Those capabilities plus our presence of a thousand advisors out there will will amplify.
Our activities going forward, so we remain committed and proudly serve the teachers.
Okay, and then just on New York Rug 213.
I think you're fairly confident deal to reach a solution solution would the DFS, but assuming you are not able to do in a timely fashion, what's the impact of that on capital and how much does that constrain you in terms of your ability.
Mm on deployment.
If you could quantify your give a range or something.
Yeah, Jimmy what I would say as always with New York and we've had we've always had good discussions with them and good dialogue and on any issues that come up over the years.
We believe New York wants a more economic reserve and that's how we manage the business. So uhm, we're comfortable that will have to continue to discussions with them and will come across with a good solution as you've mentioned if we don't have a solution. It would be a problem, but we believe we have management actions in place that we could take them to.
Drafted as well so we don't have a big concern on capital return.
Okay, Thanks, and if I could just ask one last one you've been pretty active on by back to the source the use of capital more so than like dividends and other actions how much.
You know Andrew kill agreement with.
With credit Suisse.
Hey, good morning.
I guess first the quarter came in at $1 35 that was <unk> <unk> better than we had estimated so really nice quarter.
Some of your competitors are.
<unk> roll forwards, where we can kind of look at this quarter and then see where it's going next quarter is as a foundation.
No.
As I look at this dollars 35.
<unk>.
Could you help dice.
Dissect.
What was the impact above what you expected and then what was the COVID-19, less the offsetting TF BL impact.
Just so that we could get a grounding in and what the right number is.
Going forward could you do that.
Thanks, Andrew.
Our strong quarter results overall with a $1 35 per se.
Watching any specific number for individual retirement.
Above what I just gave them in this segment when you have higher death claims accelerated debt games claims came sooner than we expected we earned less fees on the reserve from what we expected into future and that's what's causing the negative uhm in the quarter.
Okay. Thanks Robyn.
The next question comes from the line, so neat came with with city.
Once you talked about an opportunity to improve the yield on the portfolio. When the time is right by moving into less liquid assets can you size that opportunity for us what what what what amount of the portfolio or are you looking to allocate and then maybe some thoughts on the timing of that.
Sure. Thanks, you need you know since when when we Uhm announced D. I P. O. We gave guidance of the 160 million incremental G. A yield and now is primarily moving from treasuries to public corporate and we wanted to get comfortable with the guidance. We provided since then we continue to evaluate the market.
Together at Alliance Bernstein, we do see opportunities, India alternatives base in the private credit sprays and that creates that virtuous cycle that we've talked about with a line Bernstein where day bring on teams we invest in seed and they are able to grow third party assets and that's what they've done with the alternative business to date, we'd probably.
Again, I'd, probably link to us provide a more guidance on overall income post the venerable transaction has some of the assets will changed overall, but we see good returns into space, but we want to make sure they're good quality returns and risk adjusted when we invest in illiquid asset classes.
Got it that makes sense and then just on the the Venerable transaction.
I asked about this on the last quarter call, but it does strike me that.
The market may not be appreciating just how much derisking that deal.
Well how much Derisking is included with that deal. So I'm wondering if have you given any thought to potentially updating those lifetime cash flows that you've provided at the time of the IPO I know it's in involve exercise, but at the same time I think it could provide some transparency in terms of the quality of the retained book versus.
The book that includes the the book before the reinsurance transaction. So I just wanted to get your thoughts on that Roberts.
Okay. So today.
It's about a billion of gains an investment portfolio onto treasuries, you know with the rise in interest rates that the decrease of it but it's about 1 billion today.
Thanks, and then I'll just make it one last one are there any adjustments that could could happen to the 1.2 billion freed up from the venerable transaction before clothes or is that amount pretty locked him.
It should be you know economically there's no you know we fully hedged the impact of animal transaction Uhm overall, so we feel comfortable with those numbers.
Got it thank you.
This concludes today's conference calls you may now disconnect.
[noise].