Thank you for standing by, and welcome to the Equitable Holdings Strategic Update Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press the star one . Thank you. I'd now like to turn the call over to Eric Bass, Head of Investor Relations. You may begin.
Good morning, and thank you for joining Equitable Holdings Investor Call to discuss our individual life reinsurance transaction and redeployment of capital. 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 differ materially from those expressed in or indicated by such forward-looking statements. Please refer to the safe harbor language on slide two of our presentation for additional information. Joining me on today's call are Mark Pearson, President and Chief Executive Officer of Equitable Holdings, and Robin Raju, our Chief Financial 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 in related definitions may be found on the Investor Relations portion of our website and in our earnings release, slide presentation, and financial supplement. I'll now turn the call over to Mark.
Good morning, and thank you for joining today's call. We're very excited to discuss the transaction we announced this morning with RGA, which creates compelling strategic and financial value for Equitable, is accretive to our 2027 financial targets, and is a good outcome for our policyholders. This continues the journey we've been on since the IPO to shift Equitable towards faster-growing and higher return-on-capital businesses. We've reached agreement to reinsure 75% of our in-force individual life insurance block to RGA on a pro-rata basis, which will create over $2 billion of value for Equitable from a positive ceding commission and release of capital. RGA is a AA-rated traditional reinsurer and strong counterparty, and we view them as a good strategic partner for Equitable and AB. This transaction enhances our focus on our three core growth markets: Retirement, Asset Management, and Wealth Management.
As we highlight on slide three, these are high return-on-capital businesses with attractive secular growth dynamics. These are also businesses with strong synergies, and we believe there are significant benefits from participating in the full value chain across product manufacturing, asset management, and distribution. Importantly, Equitable has market-leading positions in each of our three businesses, giving us a clear right to win. I'll contrast this with how Equitable is positioned in the individual life market on page four. While the company has been in the life insurance business since 1859, this is not an area where we are focused for future growth. The U.S. individual life market faces several challenges. It's dominated by mutual insurers who have a lower cost of capital and lower target return thresholds. In addition, most products are capital-intensive and have high distribution costs and long payback periods.
Profitability is also contingent on future mortality experience and policyholder behavior, which creates uncertainty. Finally, it's a market that is only growing at a low single-digit rate. When we reviewed our life business, it became clear we needed to change strategy. Our in-force block produces a low return on capital, and it has volatile earnings due to high face value policies, many of which were written many years ago and have low reinsurance coverage. We also lack the scale of larger competitors, making us less efficient than peers from a cost perspective. RGA provides a much better home for this block, as they have the scale to manage it profitably and absorb the quarterly claims volatility. Their strong historical track record and AA financial strength rating should also provide confidence to our policyholders. We have a long relationship with RGA and look forward to expanding our partnership with this transaction.
Going forward, we will focus our life business narrowly on where we do have the right to win. Offering life insurance is an important component of providing holistic financial advice, and we will continue to manufacture select term and VUL products for Equitable Advisors. Our advisors will also have the ability to access products we don't underwrite, such as IUL and linked benefit offerings from a third-party insurer. By narrowing the scope of the business, we will reduce costs and the amount of capital committed to the new business. Turning to slide five, I'll briefly cover the key highlights of the transaction. As I mentioned earlier, we are reinsuring 75% of our in-force block on a pro-rata basis.
As part of the transaction, AB also expects to enter into an additional investment management agreement with RGA and will continue to manage approximately 70% of the general account assets backing the block. We expect the transaction to close in mid-2025. We're receiving a positive ceding commission from RGA, and we also expect to freeze some of the capital currently supporting the block. In total, we expect the transaction to result in over $2 billion of deployable proceeds. We plan to redeploy this capital in two primary ways. First, this morning we announced a tender offer for up to $1.8 billion of AB Holdings units. If fully subscribed, this will increase our ownership in AB to approximately 75%. In addition, following the close of the transaction, we expect to execute $500 million of incremental share repurchases. This is above and beyond our 60%-70% payout ratio.
This transaction will improve our return on capital and aligns with our strategy to increase the earnings and cash flow contribution from asset and wealth management. It is also expected to be accretive to both EPS and cash flow per share, accelerating our progress toward delivering on our 2027 financial targets. As shown on slide six, today's announcement furthers the journey Equitable has been on since our IPO. We recognize the most important role of management is allocating capital, and we have been very intentional about reducing exposure to lower return legacy blocks to fund growth in higher multiple businesses like AB's private markets platform and wealth management. The transformation of Equitable's business can be clearly seen in the evolution of our financial targets.
Our target for annual EPS growth has increased from 5%-7% at the IPO to 12%-15%, and our payout ratio has increased from 40%-60% to 60%-70% now. At the same time, we've been able to grow the business and now have over $1 trillion of assets under management and advice. Slide seven shows the shift in our business mix and sources of cash, which this transaction accelerates. By 2027, we expect asset and wealth management to produce approximately 35% of our operating earnings and 60% of annual cash generation. In our view, this creates a higher value business mix for our shareholders. We'll have more predictable earnings with less volatility from mortality, a higher cash flow conversion ratio, and faster growth potential, all of which should translate into faster growth and higher value for shareholders.
Turning to slide eight, I want to focus on the significant synergies between Equitable and AB. We're excited to increase our ownership stake and participate more in the shared growth opportunity for the two companies. As you know, AB manages $132 billion of our general and separate account assets, making Equitable their largest client. Equitable also uses its general account to provide seed capital that enables AB to launch and scale new investment platforms. The best example of this is AB's private markets platform. Equitable has committed to invest $20 billion into AB private markets strategies by 2027, and $12 billion of this has been deployed to date. This helps AB attract investment talent by giving them permanent capital to invest, and then they can leverage their track record to raise third-party capital.
Good recent examples are residential mortgages and NAV lending, two strategies which were launched with Equitable funds in 2024 and are now starting to win third-party insurance mandates. Equitable also provides AB with support for M&A and strategic investments, such as the acquisition of CarVal and the recent investment in the Ruby Re sidecar. This demonstrates the value of going to market with both insurance and investment expertise. The quality of the platform AB has built shows up in its results. It has generated positive organic growth over the past five years, outperforming industry peers, and in 2025 is on track to increase margins by over 400 basis points from the 2022 level. AB is also on pace to grow private market assets to $90 billion-$100 billion by 2027, at which point the business will contribute over 20% of total revenues.
Turning to slide nine, we are firm believers that combining insurance and asset management generates value for shareholders of both Equitable Holdings and AB. As we've talked about, AB's ability to produce strong investment returns allows us to offer competitive retirement products, driving sales and net flows for Equitable. This means more assets for AB to manage and allows us to allocate capital to seeding new strategies, which in turn will drive future third-party net flows. Equitable will continue to make growth investments in AB, as you've recently seen in our support of the CarVal acquisition, the build-out of the private markets business, and the Ruby Re sidecar. By increasing our ownership, we're further aligning our shared interest in growing AB.
At the same time, we continue to believe there is value in AB having a public listing, which provides it with a currency for M&A and employee compensation and highlights the value of the business. Therefore, investors should not see increasing our ownership stake in AB as a precursor to taking AB private. As you can tell from my comments, I'm very excited about how this transaction will enhance Equitable's focus on the tremendous growth opportunity in the retirement, asset management, and wealth management businesses and create value for our shareholders. I'll now turn it over to Robin to provide some more detail on the financial impacts.
Thanks, Mark. As Mark highlighted, the capital allocation shift we are executing in this transaction is accretive to shareholders and enhances our focus on retirement, asset management, and wealth management businesses.
I'll now spend a few minutes going through the key financial impacts on slide 10. Starting with the balance sheet, we expect to generate over $2 billion of deployable capital through this transaction, and it will add approximately 75 points-100 points to our combined NAIC-RBC ratio after paying a dividend to the holding company. Following the transaction, we will target an RBC ratio of at least 400%, which is up from our current target of 375%-400%. This reflects the shift in our business mix, as we've historically targeted 350% for the life business and 400% + for the retirement businesses. Our GAAP leverage ratio will also increase following the transaction, which is a function of lower shareholders' equity ex AOCI and the accounting for our stake in AllianceBernstein.
Going forward, we expect to target a GAAP leverage ratio of approximately 30%, up from 25%-30% currently. We feel this is appropriate given the higher level of earnings and cash flow coming from Asset Management, and it keeps us in line with the rating agency guidelines. Next, let me turn to GAAP earnings. We expect the transaction to have limited impact on non-GAAP operating earnings. The loss of earnings from the reinsured block will be largely offset by the amortization of the positive ceding commission. In addition, a large portion of the earnings in Protection Solutions comes from net investment income on surplus, which won't go away post the transaction. Post-close, we will reallocate the surplus NII along with the indirect expenses to the other business segments. We also plan to discontinue reporting the Protection Solutions segment and move the remaining business into Corporate and Other.
After redeploying the proceeds, we expect the transaction to be accretive to non-GAAP operating EPS. We also expect to report a GAAP net loss at close driven by recognizing a realized loss on some of the assets transferred to RGA that are currently in an unrealized loss position. As I noted earlier, this will increase our GAAP leverage ratio, but we view the impact as manageable. Turning to cash, we expect to receive higher cash flows from AB due to the higher ownership percentage, and we do not anticipate changes to near-term insurance subsidiary dividends. In total, we still expect to achieve our guidance of $1.6 billion-$1.7 billion of cash generation in 2025 and $2 billion by 2027, even after reinsuring 75% of our life block. This transaction is also accretive to cash flow per share.
In addition, we now expect closer to 60% of cash flows to come from asset management and wealth management businesses, supporting a payout ratio at the higher end of our 60%-70% target range. Now I will spend a minute reviewing the terms of the tender offer for units of AllianceBernstein Holding, which are outlined on slide 11. We announced the tender this morning and are offering the purchase up to $1.8 billion of AB Holdings at a premium to Friday's close. If the tender is fully subscribed, it will increase our ownership in AB to approximately 75%. The tender will be open for 20 business days. It will close before the reinsurance transaction, so we will fund it by using excess holding company cash and the $500 million bridge loan from Barclays.
We are excited for this transaction as it provides us an opportunity to increase our stake in AllianceBernstein, but we will be price sensitive. If we do not receive the full amount of units we're seeking, we will have alternative uses for free capital, including a combination of additional share repurchases and debt repayment. I also want to reiterate Mark's comment that we have no plans to take AB private. Turning to slide 12, this transaction accelerates our progress in delivering on our 2027 financial targets. Even after reinsuring our large block of business, we still expect to achieve $2 billion of annual cash generation by 2027. Importantly, we now expect approximately 60% of the cash flow to come from asset management and wealth management businesses. This gives us confidence in projecting a go-forward payout ratio at the higher end of our 60%-70% target range.
We will also be purchasing an additional $500 million of stock, which is above and beyond our ongoing capital return program. Finally, as we've indicated, we expect the transaction to be accretive to earnings per share, which should push us to the higher end of our 12%-15% annual growth CAGR for the 2023 to 2027 period. Turning to slide 13, let me conclude by recapping why we believe this transaction provides such a compelling opportunity to create shareholder value. It is accretive to both non-GAAP operating earnings per share and cash generation per share. In addition, we are reducing exposure to earnings volatility from mortality, which has been a source of frustration for investors. Finally, we're enhancing the focus on our key growth engines of retirement, asset management, and wealth management.
These are high-return on capital businesses with strong synergies, where we have market leadership positions and a clear right to win. Putting it all together, the actions we've outlined accelerate our progress towards achieving our 2027 financial targets while also increasing the earnings and cash flow contribution from our higher multiple asset management and wealth management businesses. Now we'll open the line for questions.
Thank you. We will now begin the question and answer session. If you'd like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star one again. We ask that you please limit yourself to one question and one follow-up. Your first question comes from Suneet Kamath from Jefferies. Your line is open.
Great. Thanks. Just to level set the guidance, when you talk about EPS accretion and free cash flow accretion from the transaction, is that just for the reinsurance deal, or are you combining the reinsurance deal with the AB tender?
Good morning, Suneet. We're excited to announce this transaction today that does allow us to reallocate capital from the life business and invest more in the faster-growing segment and higher return of capital segments in AllianceBernstein. The transaction and all the guidance that we've given on the call, the combination includes the reinsurance transaction and also the assumption that we tender up to $1.8 billion of AllianceBernstein shares and a $500 million share buyback at the transaction close, which makes it accretive from an operating EPS and a cash flow per share as well.
Okay. Got it. And then can you just size the stranded overhead that you expect? I think you had said in your comments that those expenses are going to be reallocated to the businesses, but just want to get a sense of how big that is. Thanks.
Sure. So as a reminder, the transaction itself is neutral from an earnings standpoint. From the life stranded expenses, it's actually offset by net investment income on surplus. And you'll see what's allocated to the business segments, the net investment income and surplus that gets allocated to the other segments is actually greater than the indirect expenses that'll stay within the business. So we haven't quantified the size, but expect us to quantify more as we get closer to the close of the transaction in the middle of the year.
Your next question comes from Elyse Greenspan from Wells Fargo. Your line is open.
Hi. Thanks. Good morning. My first question, years ago, you guys, if I remember correctly, had spoken about potentially taking the AB stake down to just over 50% or going up to 100%. In your comments today, you guys both said this isn't a precursor to taking the company private. So I was just hoping you could expand on that. And then how did you guys, when you were working through the math and the capital of this deal, settle on 75% being the right number?
Hi, Elyse. It's Mark. I think, as Robin said, look, we're very excited about this transaction. Overall, what we're doing is moving capital from a low-return life business, which has volatility in it, to higher return, higher multiple businesses in asset management. And of course, as you know, we have 62% of AB already, and we've shown over the years a very strong playbook in terms of the synergies that we've been able to get between the insurance and the asset management businesses. So us holding more of AB is a way in which we can participate in that. Look, the transaction freed up about $2.3 billion of capital as a result of the ceding commission and release of capital backing that block.
And we thought an appropriate use would be to give additional share buybacks for EQH over and above our target level and invest the rest back into AB. I mean, it's a very low execution risk for us. We already know AB, so it's quite a smart investment in that sense. There's no execution risk on it at all. But Elyse is very excited about this, and this positions us more firmly in the higher return, higher multiple businesses under the EQH umbrella.
Thanks. And then could you guys break down that $2.3 billion between capital that was freed up that was supporting the block as well as the size of the ceding commission?
Sure. As you know, we did receive a positive ceding commission, which will be amortized in the GAAP. It represents over $2 billion of value, as we spoke about, the positive ceding and the capital release. But we won't be given the precise details of the split until we get closer to the close of the transaction in the middle of the year.
Your next question comes from the line of Ryan Krueger from KBW. Your line is open.
Hey, thanks. Good morning. First, I just wanted to come back to your comment that it was relatively neutral to GAAP operating earnings. I think that comment sounded like it was specific to the loss of life earnings from the transaction, mostly offset by the positive amortization of the ceding commission. I just wanted to make sure that's correct because then I think on top of that, you would then get additional earnings from AB when you increase the stake. So I just wanted to clarify if there would then be if the neutral comment included the increased AB stake or that would be additional?
Sure. The neutral comment does include the additional AB stake and the earnings that we get from AllianceBernstein. I mean, I think investors and analysts should look at this as we're moving capital and earnings from the life business, and we're moving it into the asset management business, which for us is a faster-growing part of the business and a higher multiple business as well. So the earnings are the same, but you're going to get more from more certainty of those earnings with coming with less volatility in the asset management business. And then by, as you saw in our comments, what this transaction does across the board is by 2027, a third of our earnings is going to be from asset and wealth management businesses. And more importantly, 60% of the cash flows will come from asset and wealth management business as well.
The shift and the journey that we've been on and the business mix is going to come through in cash flows and earnings certainty for shareholders going forward.
Hi Ryan, it's Mark. I think this has been a big point we've been promising to come back to investors on, and this is this whole question on the volatility on the life block. As you know, in particular, in 2023, we suffered quite a lot of mortality on that life block. And as Robin has said, we've not only solved that mortality exposure, we've actually moved significant amounts of capital into higher return, higher multiple businesses. So what started off as trying to look for protection on mortality has turned into a very significant capital reallocation.
Thanks. And then can you comment on the employee benefits business and what your plans may be for that going forward?
No further comments on employee benefits at this stage. Not involved in this transaction. So nothing to update from the last quarter, Ryan.
Your next question comes from the line of Jimmy Bhullar from JP Morgan. Your line is open.
Hey, good morning. Most of my questions were answered, but just wanted to get some insight on in your thoughts on just how you decided to deploy the capital into buybacks and into buying AB. Why not spend more on buybacks given the valuation differential between your stock and the AB stock? So I don't know if you could just comment a little bit more beyond what you said in the previous question?
Sure. Let me just take a step back on both transactions because this has been a journey, as Mark just highlighted. Our initial solution segment that we spoke about was reducing earnings volatility from mortality. You saw that in 2023, so in the fourth quarter, and even in January, we had $30 million in excess mortality. This volatility has been a concern for shareholders, but we didn't find the pricing for additional excess loss reinsurance as compelling. Therefore, we pivoted to looking at broader solutions to reduce volatility and improve the returns on capital for our shareholders. As we spoke about in prior calls, we looked at reducing expenses, narrowing new business focus, and looking at Bermuda. In addition, we've had multiple discussions with reinsurers. That's why we believe the transaction we announced today achieves all the objectives we laid out.
It reduces the future earnings volatility. More importantly, it frees $2 billion of capital that we can redeploy to generate higher returns. When we thought about uses of proceeds, we certainly evaluated share buybacks and debt repayment, which is obviously good for shareholders as well. But we think the investment in AB really enhances the long-term strategic goals of Equitable while making it accretive for shareholders. And in addition, we're going to give $500 million of share buybacks back to shareholders above and beyond the 60%-70% that we committed at Investor Day. So when we thought about everything holistically, we think the go-forward strategy, the go-forward view of Equitable Holdings with a third of the earnings coming from asset and wealth and 60% of the cash flows is better strategically, enhances our business capability, and allows us to participate more in the synergy between the retirement and asset management business.
Okay. Thank you.
Your next question comes from the line of Thomas Gallagher from Evercore ISI. Your line is open.
Thanks. A few questions. First, can you size how big the amortization of the gain is going to be annually and how many years you're spreading that over?
Sure. That's going to be under GAAP accounting. It gets spread across the life of the policies. But as I mentioned earlier, we'll give more specifics on the moving parts between the segments as we get closer to the close of the transaction.
Okay. And so, Robin, a very long period of time, the amortization of the gain?
Correct.
Okay. Next question is just the 25% of pro- rata risk retained on individual life. Can we just simplistically view that as the old volatility that you saw? If you do have large life claims, will you now just retain 25% of what you used to retain, or is it more complicated than that? I'm just thinking, are we still potentially going to see some level of volatility going forward given the 25% retention?
No, this is very straightforward. 75% of this is reinsured, so assume the reduction of volatility is reduced by 75%, and it allows us to redeploy capital in these faster-growing areas.
Okay. Thanks. And then just if I could sneak in one final one, should we view the numbers here as I looked at the comments you made, the incremental $500 million of share repurchase, similar level of GAAP operating EPS or operating earnings, but EPS accretive? So can I just solve the accretion being the incremental buyback, something like 3% of earnings? And then if I solve for the accretion on the free cash flow side, it looks like it's a bit better than that because now you're at the high end of the range. Solving for that alone gives you about 6%-7% better free cash flow. So you could get something like 10% cash flow accretion. Are those approximately the right way to think about those numbers?
Yeah. The way I would think about it overall, from an earnings standpoint, we're trading life earnings for asset management earnings. And then from the most of the accretion is coming from the $500 million of additional share buybacks. And then it always depends on what you have in your models, I suppose. But yeah, those are the moving pieces.
Okay. Thanks.
Your next question comes from the line of Alex Scott from Barclays. Your line is open.
Hey, good morning. First one I had for you is just on this RBC ratio. This adds 75 points-100 points. Is that after any consideration of money that needs to go up for the $500 million buyback and buying the AB stake? And is there any assumption here of drawing down the holdco cash as part of this? I'm just trying to understand. That seems like you add excess at the operating company level, but maybe it's more of a geography change of where the excess capital is sitting. I'm just trying to understand if there's more benefit to capital here than even what's being redeployed.
Sure. Yeah. I think that's right. It's geography here. So we're launching a tender of $1.8 billion in AllianceBernstein stock. That's funded through $1.3 billion of the holdco cash and a $500 million bridge loan that we received from Barclays. Post-transaction, we expect to get additional dividends out of the life company on top of our $1.6 billion-$1.7 billion guidance for the year. And that's going to fund the additional share buyback and the bridge loan. And then post those dividends, the excess RBC benefit of the insurance company that we've given will be 75 points-100 points. So yes, you're going to see post this transaction a shift in geography as we'll be having more excess capital within the insurance company, which will come out over time.
Got it. That all makes sense. Maybe the next one on cash flow more broadly. I mean, the bullet that says neutral to total cash generation. But when I think about the bullets that you sort of have above that on page 10, AB cash flows are obviously going up with ownership increasing. If there's no change to the insurance subsidiary dividends, it sort of implies that there should be some upward momentum on cash generation. Can you help me think through that? I guess the subsidiary dividends, I guess, assume an excess drawdown, or how do I think through those dynamics?
Yeah. So in the near term, we're assuming no change in the insurance subsidiary dividends. That was part of that $2 billion of cash flow guidance that we've given at the Investor Day. And then in addition, we will have an increase of shares of cash flows coming from AllianceBernstein. But overall, we do expect to be neutral from an actual cash flow generation perspective because there'll be cash flows within the insurance company that we weren't planning on dividending up. So from a cash flow generation perspective, you are losing some cash flows from the life side that weren't planned to be dividending up as part of our $2 billion. And we're going to replace that with AllianceBernstein cash flows going forward.
Got it. Okay.
Your next question comes from line of Mark Hughes from Truist Securities. Your line is open.
Yeah. Thanks. Good morning. The investment management agreement that you have with RGA for 70% of the assets, is there a specific period on that, or is that over the life of the policies?
Sure, Mark. I'll take that. We're excited about this long-term partnership that we have with RGA. We've had a long history in working with RGA. It started with some reinsurance that we've had in some older life policies. We extended it with the $100 million investment that we made in Ruby Re, which provided AB of $1 billion of high-fee private credit assets that AB will get when the Ruby Re investment. And now, in addition, with this capital allocation, this signals a long-term partnership that we'll have with RGA and provide AB the opportunity to manage 70% of the assets. We haven't disclosed the timing of that, but this is a long-term partnership you should assume and provides other opportunities for both Equitable and AB to continue to work with RGA as we view them as a long-term partner for Equitable.
And then with the remaining 25% in corporate, potential for volatility there, is that something that could be adjusted or at least disclosed in terms of any future volatility when we think about operating or adjusted earnings?
Sure. So you should look at this as part of this deal. We're reducing the volatility from mortality by 75%. So anything that we'll see shouldn't be a real meaningful impact going forward to overall EQH. As you recall, we generated $2 billion of operating earnings and the life business with less than 10% of the earnings, and now, with the 75% reinsurance, the volatility coming from that mortality is just going to be insignificant going forward, and so we'll always have the option in case we wanted to do more than the 25% as an opportunity, but where we sit here today, we feel comfortable with the volatility reduction and capital deployment that we spoke about today as part of this transaction,
And we have reached the end of our question and answer session. This concludes today's conference call. Thank you for your participation. You may now disconnect.