There you go. All right. Good morning, everybody. Before we get started, for important disclosures, please see the Morgan Stanley Research Disclosure websites at www.morganstanley.com/researchdisclosure. Taking photographs and use of recording devices is also not allowed. If you have any questions, please reach out to your Morgan Stanley sales representative. With that out of the way, we're privileged to have Robin Raju, the CFO of Equitable, here with us today. Maybe let's just dive right in. First of all, thank you for being here with us. On your investor day several years ago, you outlined a broader strategy with the goal for the next five years. You made quite a bit of progress along the way already, despite the fact that the market isn't smooth at all.
Can you maybe talk about how you're positioned going forward based on the investor day goals you've laid out and if there's any additional we can achieve?
No, thanks, Bob. Thanks for having me. I look forward to the discussion today. In May 2023, we had our first investor day as a public company. We really laid out a growth strategy to the market. It was about defending and growing our core businesses, which was retirement and asset management. It was seeding future businesses like in-plan guarantees and emerging markets. That was the third horizon. It was really scaling our wealth management and private credit capabilities. Those were the three pieces of our investor day strategy that we wanted to go out to the market. It was really a growth strategy. That is what pinned it, number one. The output of that strategy that we have communicated to the market was three main financial metrics. One was to grow cash flows from $1.3 billion to $2 billion by 2027.
Second was to increase our payout ratio to 60%-70%. That was 40%-60% when we IPO'd the company in 2018. The third was to grow earnings per share to 12%-15%. Those we thought were compelling financial targets to go out to the market with. How are we progressing versus those targets? Obviously, markets never go in the direction that you expect when you set these things. You have to be nimble and agile. From a cash flow perspective, that's the most important metric that we're focused on internally, the $2 billion by 2027. The first year out, when we started at $1.3 billion, we said we're going to grow to $1.4 billion-$1.5 billion. We hit the higher end of that range. This year, we said we're going to signal $1.6 billion-$1.7 billion.
We believe we have the levers in place to, and we have visibility into $2 billion of cash flows for 2027, really coming from the work that we're doing in the growth, expense efficiency, picking up net investment income yield, and also decreasing the capital allocated to our legacy businesses overall. The second metric was the 60%-70% payout ratio. I think that's pretty clear. Through nine quarters, we've achieved 68% of that. The third metric was 12%-15% EPS. Through the first two years of the plan, we achieved 12% earnings per share growth. In the first quarter and year to date, we did see some adverse mortality, which took away a little bit from that. If you exclude the mortality, given we have the RGA transaction that would have reduced that by 75% going forward, we'd still be at that 12% number.
In total, we're executing and we're focused on executing against that plan. We feel confident in achieving those growth ambitions that we laid out at investor day.
That actually is a nice segue into the RGA and life transaction. That should free about $2 billion of capital and really enhance the rest of your segments. As we continue to think about growth and earnings mix going forward, your aspiration at some point is 50/50 balance between the annuities and the retirement investment management and wealth management. Curious of your thoughts on the path going forward and then what will be the levers that you need to pull to eventually achieve that?
Sure. First, on the RGA transaction, that was both strategically and financially important for us. Strategically because it signaled us moving away from traditional life insurance, which was a low-return business for us and volatile as many of our investors have seen over the years. Also, redeploying and going into higher growth businesses like asset and wealth was a big piece of it. Within the RGA transaction, we unlocked $2 billion of capital, and we gave up $100 million of life earnings. With that, we have invested in increasing our ownership stake at AllianceBernstein from 62% to 69%, or about $800 million of those proceeds we used to do that. We have also committed to use those remaining proceeds in a way that is accretive for shareholders going forward. The asset and wealth businesses for us are the fastest growing parts of our segment.
By 2027, about a third of our earnings are going to come from asset and wealth management and the remainder from our retirement businesses. Part of that is due to the capital allocation and increased stake in AllianceBernstein. Also, in 2027, we're going to go to about 50%-60% of our cash flows coming from asset and wealth businesses. If you look from IPO, that was about 17%. We made a significant shift in increasing the asset and wealth management contribution in both earnings and cash flows. We would expect that to continue going forward. We do not have precise targets on the board to say we want to be X percentage this, X percentile that. In reality, we really like all three of the businesses that we're in: retirement, asset, and wealth management. We want to grow all three. Naturally, asset and wealth are faster growing.
Over time, those should be a higher contributor to our overall mix.
That business mix shifts so far. Actually, you didn't sacrifice anything for it either. In fact, there's a lot of incremental.
Yeah, look, I think that business mix has put us into faster growing markets, higher multiple markets, and better returns for shareholders.
Which is actually quite interesting because you have this integrated flywheel that essentially you have set up. It's the ability to really leverage your dominant position in annuities and really expand into the more durable asset retirement and wealth management businesses overall. From that perspective, are there anything within that that you think is incrementally interesting that could have much higher potential or something that you are very excited about going forward?
We are super excited about this flywheel effect that we now have coming in our business. It is really amplifying the returns overall. As you said, we have an integrated business model. We are one of the few with that unique business model pairing asset, wealth, and retirement businesses together. For example, the retirement market, as you know, at the highest level is the most important part of our investment thesis. You have to believe in the retirement market and the prospects of that in the U.S. There are 4 million Americans turning 65 this year. There is also $600 billion of assets in motion coming out of 401(k) plans into retirement retirees. Our individual retirement business over the last 12 months has $7 billion in net flows. That is an 8% organic growth rate. We are capturing that opportunity.
Also, that opportunity from within the retirement business links to asset and wealth. In individual retirement, about 35% of our distribution sales come from Equitable Advisors. In group retirement, it is about 90%. We are capturing a distribution margin there. We take those assets and they are primarily invested into AllianceBernstein. That is leading to positive net flows in AllianceBernstein. We are getting sales in through our retirement opportunity, and that is benefiting all aspects of that business. Now, to the flywheel effect that you spoke about, that flywheel effect also means that when we invest in AllianceBernstein, they are generating an attractive investment yield for our products. That means we can offer more attractive solutions for clients and then get more flows. It kind of replicates across the board. The flywheel effect is working very well right now. We feel quite good about it.
Maybe a few examples on that. The first one I'll give you with the benefits of having this integrated asset and retirement business is AllianceBernstein's ability to attract teams. Late last year, we hired a private ABS team that came to Equitable or came to AllianceBernstein. Part of the reason they came is because they were getting assets day one. Normally, when you do a team lift-out, you come into a company, then you spend the first year fundraising. We're able to put money to work with that team on day one across. That is able to attract and build new private credit capabilities. That private ABS gives us an attractive yield. They're already starting to attract third-party mandates with that private ABS team. The assets that Equitable contributes is very important to the strategy at AllianceBernstein.
The second example I would give you is the Ruby Reese ICAR investment that we made last year. That was a strategic investment that Equitable and AllianceBernstein made. It gives AB about $1 billion in private credit mandates. AB could not do that without Equitable's balance sheet and insurance expertise to help underwrite that deal. The flywheel effect keeps coming. Emerging in the future, we could see the potential of offering private credit into retirement accounts and also into our Equitable Advisors wealth management platform. It will continue to evolve going forward. We feel as though this gives us a competitive edge having asset management and retirement together in the marketplace.
There is really a compounding effect. Then you'll have that new business coming up as well. That is quite a bit of stuff. That's pretty impressive. Maybe if we focus on the retirement a little bit here, current market environment is quite interesting. We had a volatile March and volatile April. You've always maintained that buffered annuity products are really designed for volatilities like this. Is this something that currently customers are gravitating towards? Can you maybe talk about where we're going with the buffered annuity side of things and also what a competitive positioning and the overall market environment looks like so far?
Sure. Again, just taking a step out, the retirement market, we have $600 billion of assets in motion. That is a big piece. Retirees need to have equity exposure. They want protected equity solutions in their business or in their portfolio overall. If you get out of equities, you are not going to have enough in retirement. And RILAs provide that offering for retirees. That is a compelling proposition. In periods of volatility, like you saw in April, that actually even resonates even better. If you look in the depths of April, the market was down 15%. If they bought one of our buffered annuities, a client would be down zero because they would have been protected on the first 20% and with the upside participation. Times like April and volatility actually amplified a RILA story for clients and for advisors.
We saw momentum continue to progress well in the month of April. We feel good about that. From a competition standpoint, competition is good in my mind. We used to have a 100% share of the RILA market, but it was very small. Now we have 20% market share. We're still number one. The market was $65 billion last year. That was a 40% increase year- over- year. It is a pretty significant market. It is fast growing. That is benefiting from competition because competition is coming in. They are seeing it is a simple client story, and they can make an investment spread. Now, with these spread products, when you get into the market, there are three ways you need to—there are three capabilities you need to have to win. One, you need a low cost of funds. Second, you need to generate an attractive investment yield.
Third, you need a good expense discipline and a good expense place. If you look at Equitable, we have one of the lowest cost of funds in the industry in the RILA market. Why? It's because of our distribution edge in Equitable Advisors. That means we can have a higher margin when products are sold through Equitable Advisors, which is the low cost of funds. That's an edge we have. On the investment yield side, we're able to get competitive yield through AllianceBernstein. That keeps us in the market through their build-out of their private credit capabilities on it. From an expense side, as benchmarked by McKinsey, we're in the first quartile of expense. Generally, you need one or two of those capabilities to have a long-term sustainable edge. I think Equitable, we can say, at least has two of those.
We are very competitive on the investment yield side as well. We believe that sets us up for the long-term run in the RILA market. The RILA market is still in the early innings. This tailwind and demographics in the retirement market is just continuing. I mentioned that 4 million Americans turn 65 this year. There are also 4 million turning 35. This is not something that is going to stop here in the near term. This will continue. We feel we have an edge in the RILA market given our capabilities and the flywheel that we have going.
Essentially, those three points all should support very long-term durable earnings growth as well. For sure. One thing you've mentioned in the past was about the future growth around the 401(k) business and as well as the emerging asset market. Can you maybe talk about the opportunities in the 401(k) business here as well?
Sure. As part of the strategy that we laid out in Investor Day, the third leg was seeding for future growth. That goes to in-plan guarantees. This is very exciting for us. One, it's aligned to our mission in providing income solutions for retirees. It's a brand new market in many ways for us. The 401(k) market in the U.S. is an $8 trillion market. Annuities today have less than 1% of share in that market. It's a huge opportunity for us overall. With in-plan guarantees, we have three partnerships in there. AllianceBernstein was actually first to the market over 10 years ago. We have partnerships with BlackRock and JPMorgan. There's huge demand for these products over time. Congress, through the SECURE Act, we've had bipartisan passing of SECURE Acts that has actually progressed workplace retirement planning solutions for retirees.
The tailwind in multiple aspects continues to add in-plan guarantees in. We received $600 million of inflows from BlackRock last year. We're going to get $250 million in the second quarter. That is going to be lumpy in size. This is very early innings. In the future, it's just a brand new market for us. For example, today when we sell individual annuities, you have to go through an advisor because really it's for mass affluent clients that leverage advisors. Going forward, if in-plan guarantees can be a bigger part of 401(k) solutions, it opens us up to the middle market client potentially. That is a brand new market on top of the individual market that we have today. We're super excited about this market. It aligns well with the mission of providing income solutions for retirees.
We believe with the partnerships we have now and which we'll continue to expand, we're in a position to win.
Would you say that this particular business would be a bigger piece of your overall business mix in your view?
Yeah, over time. I mean, we don't need this business for our 2027 financial targets, to be clear. It's not embedded in that. Post-2027 is part of our strategy. It's certainly something that we want to accelerate and have a bigger side, be a bigger part of.
Sure. No, that's certainly helpful. Maybe pivot a little bit to the wealth management side. You're seeing some very strong net inflows, kind of like you said before. Advisor productivity is also increasing by about a high single digit. As far as you're attracting advisors, as we're looking at the next step in scaling the business, what are the key aspects that allow you to really win in an increasingly competitive environment here? It feels like everyone is really focused on this segment as well.
Yeah. Taking a step back there, we're a top 10 independent broker-dealer in the United States. We have 4,500 Equitable Advisors. We've focused on increasing productivity of that group over time. We feel as though we're outsized there. You've seen that come through in terms of results. When we IPO'd in 2018, we had $40 billion in assets under administration. Thanks to organic growth, but also equity markets, we're over $100 billion today. That wealth management business had a 12% organic growth rate over the last 12 months. That's best in class by some measures in terms of organic growth. Why? Because we're offering both retirement solutions and wealth management solutions. They're benefiting from the tailwind in both of those markets as well. As far as growth going forward in that market, we're really excited.
Early this year, we had the Head of Ameriprise's experience hire program come to Equitable. He's now going to build an experience hire program for us that's more competitive in the marketplace. We view experience hire as something in between organic and inorganic growth. It's a little bit of a sweet spot for us. Having that capability coming from someone that's done it for 10 years plus at a company like Ameriprise, we think is really going to accelerate our growth pattern in terms of the number of experience hires we have. This program has a short payback period and very good IRR. We'll also look at over time if bolt-on small acquisitions make sense. Those are very expensive in the wealth space, as many of you know. If we can make them make sense and be accretive, that's something we'll look at as well.
We think the combination of our organic growth strategy, which, as you see, is executing well, now supplementing with experience hires, will continue to accelerate our growth strategy there. We always had the potential for bolt-on acquisitions, if it makes sense.
Got it. No, that's very helpful. It's interesting because I think last year about half of your cash flow came from investment management and wealth management. As we look at the additional initiatives and growth trajectories you have, I feel it should be confident that you can't do more than half. Is that right? I don't want to put words in your mouth.
I think I said earlier, in 2027, just naturally with the increased investment moving from life to asset management, with the increased investment in AllianceBernstein, that number is going to be 55%-60% by 2027. As those businesses continue to grow, as AB continues to grow with its private credit capabilities, wealth management continues to accelerate growth. It should be a bigger portion over time.
Right. For sure. Maybe moving to the asset management side, like your current 69% ownership of AllianceBernstein. On the earnings call, you talked about there's really no near-term plans to increase the stake. Are there any other M&A opportunities outside of AllianceBernstein that can expand your asset management footprint? Is that something you've ever considered?
Sure. At AllianceBernstein, we've increased our stake from 62% to 69%. We bought 20 million units at $38.50. At this point in time, I don't see our stake changing materially at AllianceBernstein. We do like having a public float at AllianceBernstein. The employees enjoy having it. That's how they're compensated. We can use that public float for acquisitions like we've previously done. We also benefit from allowing buy side and sell side to do some of the parts valuation there as well. We like the stake where it is now. I don't see that changing meaningfully here in the short term. From an acquisition side at AllianceBernstein, we built out a lot of the private capabilities that we need at AllianceBernstein to date. If you look, we have middle market lending. We have private placement.
We have residential loans. We have commercial mortgages. We have NAB loans. We have a private ABS team that we just joined. We have a lot of the capabilities that we need today to support the liabilities that we have. What we do not have, we do not have private equity. We do not have real estate equity. We do not have infrastructure. Those do not specifically meet the liability needs that we have anyway. It is not really a core capability that we look to acquire. Anything that we did do at AllianceBernstein, or even on the wealth management side, we look to be accretive on an earnings per share basis.
If we can grow either in private credit, increase our scale there, or on wealth management, whether it be Equitable Advisors or the private wealth business at Bernstein, we look for it to be accretive over time. That is areas of acquisitions for us that we look at.
Got it. No, that's certainly very helpful. You mentioned private markets. This is something you've been putting a lot more emphasis on. Maybe can you give us a little bit more details on the environment here and how you think Equitable's positioning will evolve over time just from that marketplace?
Sure. The private markets have expanded significantly. By 2030, expected to be about almost $40 trillion. That ranges from asset classes like music royalties, aviation financing. Those are all things that fit the need for insurance companies. There are sticky asset classes that we benefit from having the liquidity premium because we have sticky liabilities to go with it. We think the combination of private credit and insurance is here to stay. The liabilities support them, at least from what Equitable underwrites as well. The flywheel model gives us an edge in acquiring those capabilities. If you look over time, we've expanded our capabilities in private credit through M&A. We've done that through the CarVal acquisition. We've done team liftouts, the private ABS transaction that I talked about earlier. We've also moved into adjacent markets.
Our middle market lending team created an NAB loan capability. That has attracted third-party capital as well. All this is a function of Equitable and the retirement business being able to see those capabilities at AllianceBernstein. The CarVal team comes. They know they are getting $750 million of assets. When they came over, we have deployed over $1 billion to them to date. The private ABS team comes. They know they have assets day one. The NAB loans are created. They know they have assets from Equitable. In addition, now AB is really getting that third-party value in place as they are winning third-party mandates on some of those propositions as well from both insurance companies and other institutions as well. It is a huge market. It is a growing market. We think we have the capabilities. That flywheel really cements our positioning there.
For sure. With the opportunities in the private market, obviously, some investors have voiced concern that maybe the entire industry is growing too fast. Are there any areas within private markets that you feel you might have to either keep an eye out for or maybe to avoid completely? Just curious of your view on the risk aspect of this market.
Look, I think we're fortunate through our ownership of AllianceBernstein. We're able to partner very closely when we go into new asset classes like private credit. So we get first-hand view of the underwriting that occurs. That's very different than if we just hired AllianceBernstein for a third-party mandate where you may have an IMA guidelines, but you're not getting a sense of who the teams are and the underwriting that occurs. I think that gives us an edge in assessing risk within that. That being said, I mean, Equitable still has a conservative posture towards its general account. We always stay on the higher-grade elements of private credit as well. We stay away from below investment grade. And below investment grade is an area that hasn't been tested very well. That's an area that I would be cautious of.
Now, private credit has a short history. There is not a lot of losses in that short history. Over time, when credit events come, losses could emerge. I would stay away from the below investment grade area. That is not a place where Equitable really has an edge in.
OK. No, that's very helpful there. Maybe if we think about the guidance on free cash flow, first quarter earnings call, you indicated that given market volatility previously, your free cash flow might come in at the lower end of the 2025 guidance. The market has kind of moved since. The rest of your business is obviously holding up very well. You talked about the past $2 billion free cash flow generation. Curious as to your view on that $1.6-$1.7 billion for 2025, specifically just for this year or for now.
Sure. No, so we feel comfortable with the $1.6 billion-$1.7 billion guide. Markets have rebounded. The underlying assumption in the $1.6 billion-$1.7 billion guide that we gave this year is a 2% equity market assumption every quarter. It looks like equities are coming back. That brings us to even be more comfortable with the $1.6 billion-$1.7 billion guide that we have there. I think going forward, if equity markets deviated on the negative side, we also have levers in place. We have a big expense efficiency program as well. It is targeting $150 million by 2027. We have achieved about $100 million of that to date. We have $50 million remaining that we have line of sight in. We can easily accelerate that if needed to achieve our targets that we have.
have also progressed quite well in deploying our private credit commitment to AllianceBernstein. We deployed about $14 billion of the $20 billion commitment. That picks up yield as well. I think we have levers to manage in different environments. As you have seen, since our IPO, we are laser-focused on executing and hitting the financial targets that we put out to the market. We feel quite comfortable with that.
With that, how about the expectation for alternative investment return? Obviously, second quarter will have some volatility due to what happened in the marketplace. Just curious about looking beyond second quarter, should we see a much smoother trend into the rest of the year for alternative investments?
Yeah. For the past two quarters, we had about a 5%-6% annualized return via II. I'd expect that to be the same in the second quarter. Going forward, what's really going to drive it is transaction activity. We're starting to hear from some. You told me a little bit earlier. Really, whether it's more IPOs, M&A, and real estate transaction activity will really get us back to that longer-term target of 8%-12% going forward. I think as the first half, with uncertainty in the macro environment, we haven't seen much so far in the first half. Hopefully, as there's more certainty in the macro environment, that'll be more certain going forward.
Got it. No, that's helpful. One other item would be the way we think about mortality. You obviously have the RGA transaction coming up. Assuming that closes soon, actually, how should we think about just mortality in general? We've had some large mortality impacts previously. As that transaction becomes history, should we just really think about a much smoother earnings from that perspective?
Sure. We continue to see mortality being adverse in a few ways in our business. One, we have concentrated policies in larger face amounts and older ages. In the first quarter, we saw higher claims. We saw that continue in the second quarter to date as well. We are seeing some adverse mortality relative to our budget here in the second quarter. We also see from the CDC data that the flu has lingered longer and came into April as well. That may be a contributing factor to the higher mortality that we are seeing in the month and so forth the quarter to date. The second area that we are seeing is a little bit more unique. We did have a vendor issue that we looked at in our COLI business. That is small businesses.
That had claims of approximately $50 million for claims that happened out of period. Those were claims from prior periods that we went out and we found due to a vendor issue that we had. Now we've identified and we'll have that as well. In total, if you put that together, our latest forecast for Protection Solutions would be a loss of about $40 million for the second quarter. The good news is we have the RGA transaction. That is scheduled to close in the second quarter. That will reduce 75% of the mortality volatility going forward. We still feel good about the $1.6 billion and $1.7 billion cash generation that we laid out for the year.
No, that's good color. Maybe a last point on capitals. Thinking beyond the reinsurance transaction, thinking beyond what just has happened in the market, you mentioned the potential for additional share repurchase above the $500 million. Curious about the progress on this. It feels like the balance sheet is incredibly strong in this environment, which leaves you more option for capital deployment, it feels like. Maybe just curious of your thoughts on that.
Sure. With the RGA transaction, as I mentioned earlier, $2 billion of value that we created through that transaction. We deployed $800 million in the investment in AllianceBernstein. We are committed to an additional $500 million of share buybacks on top of the 60%-70% payout ratio. That leaves about $1 billion remaining. It is not a bad situation to have $1 billion of extra capital, especially in these volatile market environments. As long as markets stabilize, our intent is to fully deploy the full $2 billion of proceeds. You would expect us to look at some debt repayment. We would also look at share buybacks on top of what we have already promised. Investing into future growth is compelling for us, especially with the growth we see in the different markets we are in. More importantly, this allows us to be offensive.
If markets turned on us, we have a lot of capital. We are sitting pretty good to be offensive as well with that capital. I would expect the combination of debt repayment, share buybacks, and investment for future growth as part of the remaining use of the proceeds.
A pretty enviable position to be in.
Yeah, quite happy to be in this position rather than other positions you could be in.
For sure. We have a couple more minutes left. I will leave questions on the floor if there are any. I do not know if that. If not, Robin, really appreciate your time here. It is certainly enlightening. Thank you very much.
Thanks very much for having me. Thank you, Bob.
Appreciate it.