Equitable Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 3, 2023

There are 16 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. My name is Bhavesh, and I will be your conference operator today. At this time, I would like to welcome everyone to the Equitable Holdings Second Quarter Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer Quarter.

Operator

Thank you. I will now hand the call over to Tom Lewis, Equitable Holdings Investor Relations. You may begin your conference.

Speaker 1

Good morning, and welcome to Equitable Holdings 2nd quarter 2023 earnings call. Materials for today's call can be found on our website at ir.equitableholdings.com. Before we begin, I would like to note that some of the information we present today is forward looking and subject to certain SEC rules and regulations regarding disclosure. Our results may materially differ from those expressed in or indicated by such forward looking statements. So I'd like to refer you to the Safe Harbor language on Slide 2 of our presentation for additional information.

Speaker 1

Joining me on today's call is Mark Pearson, President and Chief Executive Officer of Equitable Holdings Robin Raju, our Chief Financial Officer Nick Lane, President of Equitable Financial and Bill Seamers, AllianceBernstein's Interim Chief Financial Officer, Controller and Chief Accounting Officer. During this call, we will be discussing certain financial measures that are not based on generally accepted accounting principles, also known as non GAAP measures. 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 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.

Speaker 2

Good morning and thank you for joining today's call. On May 10, we held our Investor Day and presented our strategy and go forward guidance for the next 5 years. Today, we will provide both our quarterly results as well as progress against our strategic initiatives. Highlights from the Q2 are on Slide 3. Equitable Holdings is unique.

Speaker 2

We have integrated advice, retirement and asset management businesses, enabling us to deliver superior client returns and participate in all parts of the value chain. This quarter, non GAAP operating earnings were $441,000,000 or $1.17 per share. Adjusting for notable items in the period, which included lower alternative returns and elevated mortality, Non GAAP operating earnings per share was $1.27 which is up 2% compared to prior year quarter and up 5% compared to the Q1 of this year. We've had a record quarter in retirement with record $1,400,000,000 of net inflows. In asset management, we reported net outflows of $4,000,000,000 which includes $6,000,000,000 of pre announced low fee redemptions in April, with a return to positive flows in May June, as demand for AB's fixed income offerings offset pressure from active equity outflows.

Speaker 2

Collectively, our businesses have delivered approximately $900,000,000 of cash generation to holdings year to date, including a $600,000,000 dividend from our insurance entity in July. Given this progress, We are confident in our ability to achieve our 2023 cash generation guidance of $1,300,000,000 Our capital ratios remain resilient with a combined insurance company RBC ratio of approximately 425 percent to 450 end as of quarter end. We also continue to maintain financial flexibility at Holdings with $1,600,000,000 of available cash. We returned $304,000,000 to shareholders in the quarter, including $226,000,000 in share repurchases, in line with our enhanced 60% to 70% target payout ratio. We have taken meaningful actions over the last 5 years to optimize our capital structure.

Speaker 2

And now over 50% of cash flows come from non insurance regulated sources today, compared to only 17% at IPO. With the completion of our internal reinsurance transaction this quarter, we further diversified and improved the stability of regulated cash flows moving forward. Robin will provide more details on this in a few minutes. While it is early days, we can report good initial progress against our growth strategy in both our core and adjacent businesses. In our new Wealth Management segment, We continue to see demand for advice with $1,300,000,000 of net inflows in the quarter.

Speaker 2

Operating earnings this quarter were up 75% year over year and 30% compared to prior quarter, benefiting from higher interest rates on cash sweep accounts. Today, out of our 4,100 Equitable Advisors, we have 700 wealth planners who generate 3 times more revenue under average advisor. In private markets, AB continues to grow AUM, now $61,000,000,000 up 13% following the acquisition of Carbel last year, which is behind a 2% year over year fee rate improvement at AB. Strategic initiatives are on track, including productivity savings and generating incremental income from our general accounts. We're very pleased with the reaction to our Investor Day, and we intend to track progress against the guidance provided at least twice a year.

Speaker 2

Turning to Slide 4. Our growth strategy is built on our competitive edges, which enables us to 1, capture greater margin through premier investment capabilities 2, protect policyholders and ensure cash generation through fair value economic management and 3, leverage a large diversified distribution platform aligned across Equitable Advisors, AB Private Wealth and 3rd party partnerships to drive profitable new business. All of this is underpinned by our track record of execution. We are focused on defending and growing our core businesses, scaling adjacent businesses and seeding future growth, all whilst ensuring we are a force for good in the communities in which we live and work. We have defined success through our new financial goals to increase cash generation by 50% to $2,000,000,000 by 2027, to deliver on an increased payout ratio of 60% to 70% of non GAAP operating earnings and to generate a 12% to 15% non GAAP operating EPS annual growth rate June 2027.

Speaker 2

On Slide 5, I will highlight some early progress as we execute against our strategy. Our first priority is to defend and grow our core retirement and asset management businesses. These today drive over 90% of free cash flow generated. Our core retirement businesses generated approximately 2 thirds of our earnings today. Year to date, core retirement AUM is up 5% and with strong new business activity and current market conditions, We generated over $200,000,000 in value of new business through the half year, putting us on track to our forecast at 2023 level of $400,000,000 As we've seen from this quarter's earnings cycle, this is a more challenging time for asset managers.

Speaker 2

At AB, AUM is up 7% year over year and margins are down 100 basis points compared to the prior year quarter, reflecting lower Bernstein Research Services revenues and lower performance fees, combined with a higher compensation ratio. We expect the close of the Bernstein Research joint venture with SocGen in the first half of twenty twenty four. And once deconsolidated, This will improve AB margins by 200 basis points to 2 50 basis points. Equitable's relocation of its headquarters is on track, helping to secure $30,000,000 of savings

Operator

on the

Speaker 2

1st January, 2024. The AB move to Nashville is now complete. And in Q1 of 2025, We expect to realize the full run rate benefit from the completion of AB's $75,000,000 annual savings initiative. One important synergy we have is the use of the general account to help build a faster growing high multiple alternative strategies in AllianceBernstein. To date, we have deployed $7,500,000,000 of our initial $10,000,000,000 capital commitment.

Speaker 2

And in May, we announced a further $10,000,000,000 capital commitment, bringing the total to 20,000,000,000 The second element of our strategy is to scale adjacent businesses. These are smaller businesses where we have the opportunity to grow at a faster rate. Early contributions from the Carville acquisition have been positive and private markets now constitute 13% of year to date asset management revenues at AB. AB's institutional pipeline of $14,000,000,000 as a fee rate that is 3 times the channel average with private alternatives representing over 80% of the pipeline fee base. In Wealth Management, 7% annualized organic growth in the quarter and strong markets supported a 6% increase in AUA compared to Q1, now totaling $80,000,000,000 This business provides good operating leverage given our technology platform is outsourced and our long term focus is to grow fee based advisory assets.

Speaker 2

Please turn to Slide 6. In order to ensure long term success, it's important we continue to invest through the cycle and seed businesses that we believe will provide significant opportunities for the future. In Asset Management, We see opportunities to build on AB's global footprint, leveraging their strong brand recognition in Asia, and we are in the final phase of licensing agreements, which would enable us to serve China's large and growing domestic market. AB is also uniquely positioned to leverage over 40 years of expertise, managing insurance assets, benefiting from the relationship with Equitable to grow 3rd party insurance AUM. Today, AB manages approximately $60,000,000,000 of 3rd party insurance AUM, in addition to the $115,000,000,000 managed for Equitable.

Speaker 2

We are also optimistic about the long term prospects for both AB and Equitable incorporating in plan guarantees into corporate retirement plans. AD is a leader in this space, pioneering this category over a decade ago, Equitable benefited from over $750,000,000 of premium last year. In addition to our partnership with AD, Equitable stands to benefit from progress being made by our partner BlackRock with 11 large plans sponsors to date and onboarding underway. We also believe delivering business performance and contributing to society are inextricably linked and that we bring value to each of our stakeholders through outstanding business performance and focusing on our mission to help our clients secure their financial well-being so they can live long and fulfilling lives. We released our 2nd sustainability report earlier this year, which included meaningful disclosures demonstrating our progress.

Speaker 2

And this resulted in improved ratings by firms like Sustainalytics, who have recently rated Equitable in the top quartile within our industry. Turning to Slide 7. A product of our strategy since our IPO is to further diversify both earnings and cash flows, orienting our business towards lower capital, higher value segments. Since our IPO, we have meaningfully shifted our business mix nearly 30% of earnings associated with our legacy business to only 8% today, and we expect its contribution to be less than 5% of total earnings after 2027. I will now turn over to Robin to provide additional insights quarter into the quarter.

Speaker 2

Robin? Thank you, Mark. Turning to Slide 8, I

Speaker 3

will touch on segment and consolidated results for the quarter. As Mark just highlighted, we continue to execute our capitalized strategy, which you can see in our improved cash flow and business mix profile. Our 2nd quarter non GAAP operating earnings adjusted for notables of $480,000,000 show our Wealth Management business having a similar weight to our legacy business, highlighting the different trajectories of those businesses. While our Capital Life Retirement and Asset Management businesses continue to grow. Let me go deeper on the segment results first before turning to consolidated results.

Speaker 3

Our core retirement businesses account for 2 thirds of the earnings mix. This is led by strong earnings growth in individual retirement, up 10% year over year, which is predominantly driven by the outperformance in our flagship SCS product. SCS has continued to benefit from higher yields and industry leading sales, enabling us to generate higher spread income. In total, individual retirement had record sales of $3,600,000,000 and record net flows of $1,500,000,000 in the quarter.

Operator

Group

Speaker 3

retirement earnings were down year over year, which was expected due to our reinsurance transaction that closed at the beginning of Q4. Taking this into account, the business performed nicely, led by net inflows in our K-twelve tax exempt teachers market. Protection earnings were $24,000,000 higher than the 1st quarter, It's still lower than the long term expectations as we continue to see mortality volatility, which I will touch on in a few moments. Adjusting for Notables, Protection Solutions earned $77,000,000 in the quarter. Across our 3 retirement businesses, We have generated over $200,000,000 of value of new business through the first half of the year, putting us on track for the $400,000,000 for the full year guidance that we provided at Investor Day.

Speaker 3

Moving to our Asset Management business. Align Ferns team generated 15% of the earnings mix this quarter, continuing its shift to higher fee strategies in private markets, which is now $61,000,000,000 of AUM. Additionally, the institutional pipeline is now $14,000,000,000 which is up 10% sequentially even after some funding took place in the Q1. We are also executing on our strategy of growing in Asia and in munis. Munis had $1,000,000,000 of net inflows in the last quarter.

Speaker 3

Our emerging wealth management business generated 7% of the mix this quarter, benefiting from higher rates in our cash sweep accounts, improving earnings by $11,000,000 year over year and strong insurance sales adding $12,000,000 of distribution fee revenue year over year. This again reflects the differentiation of Equitable Advisors distribution and the client demand for our holistic advisor offering, which included both investment and insurance as asset classes. Lastly, our Runoff legacy business now represents just 8% of earnings this quarter. 2nd quarter net outflows were $569,000,000 in line with expectations. Over the coming years, this business will release capital and contribute cash flow generation as this block runs off.

Speaker 3

Now looking at our results on a consolidated basis. We reported non GAAP operating earnings of $441,000,000 in the quarter or $1.17 per share, which is up 22% compared to the Q1, but down 5% year over year. After adjusting for $39,000,000 of total after tax notable items, non GAAP operating earnings were 480,000,000 or $1.27 per share, up 2% on a comparable year over year per share basis and 5% compared to the Q1. Results were impacted by net investment income notable item of $38,000,000 This was driven predominantly by alternative returns that were positive in the quarter, but below our long term expectations. Our portfolio experienced gains in traditional private and growth equity strategies, which were offset by declines in our real estate equity investments.

Speaker 3

Now let me speak more to the heightened mortality we saw in quarter, which resulted in a notable item of $53,000,000 This continued the trend of higher volatility from the continued shift in COVID As it transitioned from pandemic to endemic, specifically, we are seeing higher mortality in the older age insured population, which we believe is a pull forward of future claims. This is consistent with what we're hearing from our reinsurers. In a typical environment, we would expect one standard deviation in mortality results, which would mean we would have a range of $50,000,000 to $100,000,000 in earnings, with $75,000,000 being the center point. Given this pull forward in claims, we would expect to be on the lower end of the range over the next few quarters, which means we would point to a $50,000,000 to $75,000,000 of earnings as a near term guidance for the segment. However, as a result of the pull forward of increasing near term claims, we expect to exceed $75,000,000 over time as claims are reduced in later years.

Speaker 3

It is important to note that this will only change our short term GAAP expectation for the next few quarters, not our statutory or economic balance sheet as they are more conservatively positioned. This means there will be limited impact on our cash generation guidance. And if this trend continues, Protection Solutions will have quarter. And now moving to GAAP results. We reported 759,000,000 positive net income in the quarter.

Speaker 3

This demonstrates our ability to generate positive net income under LDTI, which brings accounting closer to fair value for our industry. As a reminder, this will enable us to remain eligible for inclusion in S and P indices as we now meet all criteria. While inclusion isn't something we can control, it does provide significant opportunity for our shareholders. Finally, let me turn to what we can control and that's the execution of our strategy. We continue to progress against the $110,000,000 yield enhancement program and are on track to achieve $45,000,000 in incremental income by year end.

Speaker 3

Equitable's retirement business continues to benefit from higher risk adjusted yields due to strong fixed income underwriting capabilities from AllianceBernstein. Additionally, productivity savings at Equitable are on track for $30,000,000 in annual saves by year end, position us well for our $150,000,000 expense target. Turning to Slide 9. Our capital management program has enabled us to consistently return capital despite market volatility. In the quarter, we returned $304,000,000 which includes $226,000,000 of repurchases, resulting in a 9,000,000 share count reduction.

Speaker 3

Over the last 12 months, we have reduced our shares outstanding by 7%, demonstrating the value of our capital return program. At Investor Day, we increased our payout ratio to 60% to 70% of non GAAP operating earnings. The increase was driven by the mix shift that we discussed today towards our capital light retirement, wealth and asset management businesses. In addition to the capital optimization actions we have taken to date, which I will discuss further in a moment, An output of these actions is more efficient cash generation, and we are confident in our ability to achieve our 2023 guidance of $1,300,000,000 In July, we took a $600,000,000 dividend out of the insurance company. The remainder of the cash flow this year will come from unregulated sources with nearly $300,000,000 already collected to date.

Speaker 3

In total, we have seen $900,000,000 of cash flow upstream to the holding company. These cash flows support strong liquidity with $1,600,000,000 of cash at the holding company as of quarter end or $2,200,000,000 following the July dividend. Additionally, our half year combined RBC ratio with approximately 425% to 4.50%, reflecting our strong insurance company balance sheet. As part of our strategy to optimize our capital position, we completed our internal reinsurance transaction in April, which enables us to have 2 well capitalized insurance entities with RBC ratios above target. Lastly, our 1st dollar hedging program maintained strong effectiveness throughout the quarter despite market gains being driven by a select view stock.

Speaker 3

The success of our program can be attributed to our efficient product design. With over 75% of underlying assets in passive indices that are highly hedgeable and over 80% of assets incorporating volatility management tools. In summary, our capital position and balance sheet enabled us to create shareholder value through our capital return program, while positioning us for future growth in cash flows. Turning to Slide 10. I'll dive deeper in our internal reinsurance transaction, which is another milestone on our path of capital optimization to drive more efficient cash flow to the holding company.

Speaker 3

Since IPO, we have taken several actions to increase the consistency of dividends to the holding company, while also increasing our unregulated cash flows to be greater than 50% of the total upstream to the HoldCo. These actions include: 1st, moving AB units out of the insurance company, bringing AB dividends directly to the holding company. 2nd, our landmark legacy VA transaction with Venable, which derisked the company and accelerated our legacy cash flows through a positive ceding commission. 3rd, the creation of the investment contract with the retirement company, bringing the asset management fees straight to the holding company. 4th, transactions with both Swiss Reit and Global Atlantic to secure our long term cash flows at a low funding cost.

Speaker 3

5th, our recent acquisition of Carval Investors, a leading private credit firm, which was funded efficiently with AB Units And finally, the internal reinsurance transaction moves the majority of our imports out of our New York entity and into our Arizona entity. This means that our insurance dividends will be more RBC based and come from 2 different entities, therefore diversifying our retirement cash flows. Coupled with more than 50% of our HoldCo dividends from unregulated sources like asset and wealth management type activities, Our cash flow to the holding company will be much more consistent moving forward than they were at IPO. These actions we have taken allow us to progress towards novating our non New York policies, which is expected to take place over the next 2 years. This means that once we move these policies from New York to Arizona, it will give us further flexibility for capital optimization.

Speaker 3

Lastly, 100% of our non New York business will be written out of our Arizona entity. While New York is one of the most sophisticated regulators, it does have some non economic elements that we would like to avoid by shifting our new business. Ultimately, these actions enable us to enhance our legal entity structure into one that reflects a diversified financial Services Holding Company. We have cash flows from multiple capitalized businesses, enabling a consistent capital return program for our shareholders. I'll now turn the call back to Mark for closing remarks.

Speaker 3

Mark?

Speaker 2

Thanks, Robin. In closing, our integrated advice, quarter. Retirement and Asset Management businesses delivered strong results this quarter, including record net inflows in retirement and $900,000,000 of cash generation to date, giving us confidence in our ability to deliver on our $1,300,000,000 2023 guidance. 2nd, our balance sheet and capital ratios remain resilient, a testament to our fair value management. As of quarter end, our combined insurance company RBC ratio of approximately 425% to 4.50% and holding company cash of $1,600,000,000 support financial flexibility as we seek to consistently deliver on our capital management objectives.

Speaker 2

Lastly, while it is still early days, our distinct business model and growth strategy reinforce compelling and achievable 2027 financial targets. As we seek to grow cash generation to $2,000,000,000 consistently deliver on our 60% to 70% payout ratio and drive 12% to 15% EPS growth. With that, we'll open the line for questions.

Operator

Thank you. Our first question comes from the line of Elyse Greenspan from Wells Fargo. Please go ahead with your question.

Speaker 4

Hi, thanks. Good morning. My first question, you guys will have $2,200,000,000 right, of capital at parent, right, following the July dividend. That's obviously a very high amount above, right, the $500,000,000 minimum that you guys target. So could we see capital return pick up from here?

Speaker 4

Just how are you thinking about just What level you want to have at parent given just volatile markets etcetera and also relative to just perhaps a pickup in the level of capital return in the back half of the year.

Speaker 3

Thanks for the question, Elyse. You're right, the $2,200,000,000 of cash flow is strong position to be at as we sit here today in these volatile markets where we still have uncertainty ahead of us. But it is quarter. Important to note, it's the benefit of these capital light businesses that continue to kick up cash flows to the holding company and more than 50% of that is unregulated At this time, as you know, we want to be consistent with capital return throughout the period and keep to our 60% to 70% payout guidance. If you look in the quarter on a reported basis, we paid out on the higher end of that guidance.

Speaker 3

And even on a normalized It's a good time to buy back our stock at these type of valuations, but we're going to be prudent as well given the uncertainty and environment right now.

Speaker 4

Thanks. And then with mortality, Robin, you gave a lot of good color with what's going on within Protection Solutions, right? And you said right that mortality could still be elevated in the near term. So is your expectation that the level of mortality at least over the next few quarters will be Within range of the around $50,000,000 or so that you guys saw this quarter.

Speaker 3

Yes. That is the expectation that we built in on the GAAP results. As I said on the call, we've seen the elevated mortality over the last few quarters and this is really a shift from COVID pandemic to endemic and it aligns well with what we're hearing from the reinsurers. It did improve this quarter, but we're still seeing higher mortality in that quarter. Older age insured population, which is concentrated in the higher face value VUL policies.

Speaker 3

These are policies that we had on the book for 15 to 25 years. So these are good policies, which we collected a lot of fees from historically. But what we're seeing is predominantly a pull forward into claims, which represents an acceleration of the claims that we would ordinarily pay in future years. So this is only a change in what I would say is our short term GAAP expectation, not anything to do with our statutory economic balance sheet As we already hold the maximum reserves under GAAP, but under economic and statutory, we can hold higher reserves for provisional adverse deviations, which we do. And more that more accurately reflects the pull forward of claims that we're experiencing.

Speaker 3

Therefore, if this does continue and we see the short term volatility, you're going to see

Operator

Thank you. Our next question comes from the line of Tom Gallagher from Evercore. Please go ahead with your question.

Speaker 5

Good morning. Just a follow-up on the mortality question. Robin, I heard what you So it sounds like this will not be a statutory issue from your perspective either way. But as we approach the 3Q actuarial review, Is there a chance you end up resetting some of these assumptions for the GAAP reserves and we get a charge in 3Q. I also heard what you said about the pull forward and the expectation that it will get Better over time, but I guess given the near term persistent adverse mortality, is there should we have some expectation there

Speaker 3

No charge expectation on a GAAP basis, Tom. Nothing material that you should expect Going forward, reminder, as I just mentioned, we hold the maximum amount of reserves that you can under GAAP rules for these VUL policies. So even if we wanted to hold more, we can't because by the GAAP rules, we hold the maximum amount. So this is just a pull forward of expectation. You shouldn't expect any changes, material changes to the assumptions, for mortality in the Q3.

Speaker 5

Got you. And Robin, just to Clarify, this is predominantly VUL, this is not SGUL, where you're seeing the higher, The worst than expected experience?

Speaker 3

Correct. VUL, that's the majority of our reinforced SGUL, as you know, is small for us. We stopped selling that in 2,009, due to the economics of those products. So it's predominantly the UL. These are all policies that were enforced 15 to 25 years.

Speaker 3

So, they're just at the tail end of them.

Speaker 5

Okay, thanks. And one final one on this topic, if I could. How much of your mortality block has the smooth accounting under LDTI from an actual to expected perspective versus how much where the immediate experience gets booked into current period earnings. Do you have a rough split on that?

Speaker 3

Now again, most of our the LDTI really impacts the term in force. That's where you'll have that smoothing. That's a smaller part of our business as those are not capital efficient as we see them. The BUL policies, which are good policies, 10% to 15% IRRs, those are the policies where you see, this volatility come through. And it's really just a pull forward based on what we see and based on what we hear from our reinsurers.

Speaker 5

Okay. Thanks.

Operator

Thank you. Our next question comes from the line of Ryan Krueger from KBW. Please go ahead with your question.

Speaker 6

Hey, thanks. Good morning. I have a wealth management question. If you guided the $200,000,000 of annual earnings in 20.27, I think your The quarter annualized run rate is close to $165,000,000 to $170,000,000 So it seems like you're Barely ahead of pace to get to the $200,000,000 So just curious if you view anything as unsustainable in the current results or if you think you are in fact running

Speaker 7

Yes. This is Nick. As you mentioned, we did have strong performance with positive net close of $1,300,000,000 in strong retirement sales. The earnings growth is attributed to interest income On our client suites from a growing fee based advisory accounts and higher distribution fees, like most wealth management peers, We've benefited from rising interest rates going forward. We've provided guidance historically for every 100 basis point increase in the FFR.

Speaker 7

We would expect to capture 1.5 on revenue either increase or decrease relative to a change on that. We think we're well positioned and on track to hit our goals to meet the growing demand for advice given the edge we bring to the market with our track record of developing wealth partnership with LPL and the scale in our retirement businesses.

Speaker 6

Got it. Thanks. And then on SCS sales, was there anything in particular that drove the pretty big uptick in volumes this quarter? Did you introduce New products or anything like

Speaker 7

that? As we mentioned in Investor Day, we think there's both structural demand as the baby boom generation moves to that accumulation for protected equity stories, Amplified by the volatile times we're seeing in the macro political environment and we're well positioned quarter. We continue to capture a disproportionate share given our distribution network as well as our Constant innovation. So we continue to update our segments as we see emerging demand, but I think It's more structural given the edge that we've built over the last decade in this space.

Speaker 3

And this rate environment makes those products very competitive to fixed oriented products that are out there. So we benefit from Better rate that we can offer to clients and then we're capturing the yield on the back end for shareholders. So it's a win win on both sides.

Speaker 8

I I think as well, Ryan, it's Mark here. Hi. When I look at it, I think the momentum has been a few quarters for us now. But also we see growth across all of our distribution channels from our retail side to the institutional side. So it's not lumpy with 1 distribution.

Speaker 8

It's really across the board, which is encouraging for us going forward.

Speaker 9

Thank you.

Operator

Our next question comes from the line of Jimmy Bhullar from JPMorgan. Please go ahead with your question.

Speaker 10

Hi, thanks. Good morning. So the first question is just on the mortality issue. Your results have obviously been weak Recently a lot of your peers have been weak as well. What gives you the confidence that it's not more of a structural issue in terms of pricing or risk selection in your block and it's just more related to what you've mentioned in terms of pull forward in claims.

Speaker 3

Sure, Jimmy. I think there are multiple things you have to do when you see volatility and mortality. 1 is to further diagnose it of your in force block, Testing your thesis and stressing them. 2nd is validation through the reinsurers. Those are all things that we do.

Speaker 3

The most important thing is, this is just GAAP volatility. No impact on cash. If we continue to see this volatility because of our conservative statutory assumptions. We're just going to have a higher payout ratio at the end of the day. So, no impact on cash.

Speaker 3

There'll be some GAAP volatility if this continues. We hope we'll see both sides of the volatility. Volatility works both ways. So we're looking forward to seeing both sides. But again, no impact on cash.

Speaker 10

Okay. And then on AB, obviously, industry wide flows have been fairly weak for asset managers and you're seeing some of that same dynamic as well. Any comments you have on the pipeline or how the any visibility you have on how closer looking into the second half or is it just going to be more dependent on however the overall environment is?

Operator

We'll talk to Bill and our

Speaker 2

team is this year. Go Bill.

Speaker 9

Thanks, Mark. Okay. No, we're pretty confident in our flows outlook for the second half of the year. As Mark mentioned, we have the $14,000,000,000 plus in the pipeline. Big part of that, 2 thirds of that is in alts, private alts, with over 80% of it being fee based.

Speaker 9

And we have strong inflows in the second quarter. We're hoping that The follow through in the Retail segment, we've had several growing areas despite slightly net outflows In the second half, muni SMAs, as was mentioned before, is $1,000,000,000 of net flows with a strong annual growth rate. So we're hoping that continues. It's been positive 11 in the last 12 quarters and 10 years in a row of organic growth. American Income, net inflows of $1,500,000,000 in the 2nd quarter, dollars 4,000,000,000 year to date that we're looking for that to continue.

Speaker 9

In the U. S. Retail, we have 9% annual organic growth with net inflows 11% in the last 13 quarters. So we're looking for that to continue its momentum. And then in Private Wealth, with the increase in Private Alts and then investments in money markets and that Their organic growth rate is looking pretty good too.

Speaker 9

So we're pretty confident in the second half of the year.

Speaker 10

Thank you.

Operator

Thank you. Our next question comes from the line of Suneet Kamath from Jefferies. Please go ahead with your question.

Speaker 11

Yes, thanks. Just to circle back again on the mortality. Robin, is there a way to just to mention how big this block is of older age VUL policies and then any more specificity over how long or what period of time you'd expect this to play out?

Speaker 3

Yes. Look, the way I would just sum it up, these are older age policies, Some of them, 15 to 25 years that we expect unfortunately, we expect that they will pass over the next 5 years and that's built into our $2,500,000,000 of earnings guidance that we gave at Investor Day and our $2,000,000,000 of cash guidance that we gave at Investor Day. So what we're seeing is just an acceleration of some of those debts, which means, that's a pull forward of earnings going forward. We haven't disclosed specific size of the blocks, Sunit, but I think the way to think about it, this is an acceleration or pull forward of what we've already included in our earnings guidance and cash flow guidance. And it's really only again, it's only a GAAP volatility point As the statutory books are more prudently reserved.

Speaker 3

Got it. And then when

Speaker 11

we think about the free cash flow conversion improving as a result of this sort of phenomenon. Is that because the gap or the denominator is going down and the GAAP earnings are lower? Or is there some acceleration of cash generation related to this.

Speaker 3

It's really just because the GAAP earnings are lower and there's no change to the statutory earnings as a result. So That's really what it is. And you saw that in the quarter. In the quarter, our payout ratio on a normalized basis was in the 60% to 70 But if I take the reported number, it's close to 70%. So we paid out on the higher end, reflecting the fact that it's really just a GAAP volatility, not a cash point.

Speaker 3

Got it. Thanks.

Operator

Thank you. Our next question comes from the line of Alex Scott from Goldman Sachs. Please go ahead with your question.

Speaker 12

Hey, good morning. First question I had is on The strong sales growth that you saw particularly in the individual retirement. And I'd just be interested if you could provide any color around The amount of capital that consumed or said another way, the amount of capital you deployed towards that, because it seems like you're hitting on your cash flow objectives. The other piece though is it seems like you're deploying more than you have been into new business. So I'd be interested in Quantify that for us and also any comments on just the competitive environment and the opportunity you're seeing there?

Speaker 3

Thanks, Alex. The businesses that we write are very capital efficient, capitalized structures. Those That leading SCS product is a 15% IRR on the capital uses. If you recall and I think we shared it over the years, the change in amount of capital that we have to hold per dollar premium. These products that we write, whether it's in our individual retirement or and our group retirement, they're less than $0.02 that we hold for every dollar of premium.

Speaker 3

So they're very capital efficient. If you compare that fixed products that are probably $0.10 to $0.12 per dollar premium. So we're playing in the right place. We're generating good returns. And we'll continue to support the growth because it's generating future cash flows for shareholders.

Speaker 12

Got it. Follow-up I had is on dividend capacity out of the New York entity. I guess following the $600,000,000 dividend, could you frame for us How much ordinary dividend capacity is still there? And if you're able to comment at all on how much of that will be needed for the innovation on New York?

Speaker 3

Sure. So we upstreamed total of $900,000,000 to the HoldCo through July, which include $300,000,000 of unregulated, the $600,000,000 insurance dividend. That aligns with our free cash flow guidance of $1,300,000 We assumed that we'd have $600,000,000 in place. We took that out in July, so that's probably close to the maximum that we could take out to keep our RBC levels quarter. For the ratings that we need and at 375% to 400%.

Speaker 3

So That's what you should expect on year end. We also included, as I mentioned in the quarter, the internal reinsurance transaction where we moved capital from the New York entity to the Arizona entity to help support that, across the board. So you shouldn't expect any Other ordinary dividend capacity from the retirement business from now to year end, what you should expect is more unregulated cash flows though from now to year end. We're going to continue to see cash flows from AllianceBernstein, the retirement business, through the asset management contract And then our wealth management business dividend, which comes up close to year end. So that's another in total $400,000,000 of unregulated cash flows that we'll see from now to year end.

Speaker 12

Got it. Thank you.

Operator

Thank you. Our next question comes from the line of Traci Bangui from Barclays. Please go ahead with your question.

Speaker 13

Good morning. Robin, I believe To the Q4 earnings call, you reiterated that your operating earnings sensitivity of every 10% movement in equity markets, so about $150,000,000 earnings. And in 2022, the equity markets were down 20% and that was a $300,000,000 impact. So your original cash flow expectation of $1,600,000,000 became $1,300,000,000 for 2023. However, we're seeing recovery in equity market.

Speaker 13

So is that $1,300,000,000 a moving target? Could we see upside based on equity market recovery? I think it's up 18% year to date.

Speaker 3

Yes, Tracy, that is our sensitivity of every 10%. It's about $150,000,000 And as you saw, we went from 1.6 to 1.3 this year reflecting the lower equity markets from last year. And if equity markets Continue at these levels, you should expect higher free cash flow next year in line with the guidance that we provided.

Speaker 13

Okay. And congrats on wrapping up your internal reinsurance transaction. I feel like that cash flow split fifty-fifty between regulated and unregulated sources Not a new thing. So just to be sure, you're expecting a more meaningful shift in that composition following your novation in 2 years?

Speaker 3

Well, the 50% of unregulated cash flow is where it sits now is 17% of the IPO. So that aligns well with the strategy of unregulated cash. So then within the 50% that was coming from the retirement business, you should expect that to be split between the Arizona and the New York entity as we moved as we shifted liabilities from The New York Company to the Arizona Company. That's really important because it means that we have more diversified regulated cash flow than more stable cash flows. As you know, the New York formula has been historically volatile, but the Arizona dividend formula will be more RBC based.

Speaker 3

So It provides more consistency and more transparency for shareholders on the cash flows from the regulated entities.

Speaker 13

Okay. And real quick on VUL, you Large claims, what is the average face amount of these claims? Just so I can understand the severity aspect.

Speaker 3

When we look at large Claims on VUL will look in $2,000,000 plus face amount.

Speaker 13

Excellent. Thank you.

Operator

Our next question comes from the line of Mark Hughes from Turis Securities. Please go ahead with your question.

Speaker 14

Yes. Thank you. Good morning. You talked about the China initiative. Just sort of curious, I think you've gotten some early approvals.

Speaker 14

When do you think that will get ramped up and any early thoughts around asset goals?

Speaker 9

Hi, Mark. This is Bill Seamers again. We've received our approval of our application in China. That was a few months ago. Currently, we're waiting on to get our license.

Speaker 9

But first, that is subject to an inspection, which we've been geared up quarter, but it hasn't occurred yet.

Speaker 3

We are

Speaker 9

hoping to get this done and have a fund or release our first fund by the end of this year, But it's subject to the timing of this license, which where it might slip into next year.

Speaker 14

Appreciate that. And then in the Wealth Management, I think you touched on this, maybe given us some of the pieces. But if you look at the year over year growth, obviously quite strong. If you took out the improvement in the cash sweep account, Any sense of what the earnings growth was aside from this interest rate impact?

Speaker 3

Yes, I think we had, Mark, dollars 42,000,000 of Wealth Management earnings in the quarter. I think I said year over year, dollars 11,000,000 of that is coming from the interest rate sweep accounts. So even in taking out the interest rate sweep accounts, you're still seeing really strong growth. I think it was about $12,000,000 or so coming from distribution revenue and that's really from our insurance sales, the revenue that the Wealth Management business gets from that. And Again, that's to Nick's point earlier, that really differentiates what they do.

Speaker 3

They're not only selling investment products, they're selling insurance as an asset class, so they have Different sources of revenue that they can collect that drive future growth.

Speaker 14

Very good. Thank you.

Operator

Our final question for today comes from the line of Michael Ward from Citi. Please go ahead with your question.

Speaker 15

Thank you, guys. Good morning. Just technical question. I was wondering about the venerable general account assets, where AB is the preferred manager. Just wondering, are there any terms in that agreement that could Allow Venerable to recapture that AUM from AB?

Speaker 3

Now as part of the Venerable deal, we did enter into an IMA for AllianceBernstein. That's a long term IMA contract. I think AB performed well on that. I think Vanderbilt would say so as well. I can say that as well, being on their board, that they're happy with the performance of AllianceBernstein.

Speaker 3

So we expect AB to continue to perform well and We're very looking forward to the $14,000,000,000 of institutional flows get funded, and that's going to improve the fee rate overall for AllianceBernstein going forward.

Speaker 15

Okay. And then just with some of the internal reinsurance changes, I was wondering If anything has changed sort of how you think about or consider inbound Potential de risking opportunities, whether it's annuities or life. And if not, it just the activity from third parties It keeps picking up. So just wondering if any changes on that front.

Speaker 3

Yes. Look, the big deal for us quarter. Across the board with that Venerable deal that we just spoke about, that was the big de risking trade for us. But we're always going to look at ways to optimize capital. If we can Deploy capital to wealth management or individual or all set AB by derisking, we'll always look at them, but there's nothing on the table right Now for us, we're really focused on executing against the strategy that Mark laid out earlier in the call, and we're focused on that execution at this point.

Speaker 8

I think fair to say, Robin, on capital management, the focus has been on the internal reinsurance, which is a massive job. The team's quarter. Delivered extremely well on securing cash flows and just making the cash generation more robust going quarter. That's really been the big shareholder value capital management issue in the last couple of quarters.

Speaker 15

Okay, great. Thank you, guys.

Operator

Thank you, ladies and gentlemen. As we have no further questions at this time, we will conclude today's conference call. Thank you for participating. You may

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Earnings Conference Call
Equitable Q2 2023
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