We'll go ahead and get started here. I'd first like to welcome Mark Pearson, CEO, Equitable. Thanks very much for being with us. Our session's going to be Q&A, but first, I'm going to turn it over to Mark for some opening remarks.
Thanks very much, Alex, and thank you for hosting us today. Thank you everybody for joining this session. We appreciate it. It's been an interesting four or five years at Equitable with the IPO. Before I talk about the impacts of this year, I thought I'd just give you an overview on the recent journey we've been on because it'll add some color to where we are today and how we're placed. IPO out of AXA went extremely well. It was an opportunity to really reset the organization, a very huge galvanizing effect inside Equitable, and resulted in us having to make some important decisions which stand us well now. Firstly, we set the company up on a fair value basis. We run to the economics, which is recognizing actual interest rates and recognizing emerging policyholder experience. That's been a cornerstone of what we've done subsequently.
Secondly, we have a pretty unique business model, and we've been working hard over the years to look for synergies between our two main operating companies, Equitable and AllianceBernstein. We've got some good progress to show on that side. If you like, taking ourselves out of the AXA group, which meant setting up 150 or so different systems, enabled us to modernize the company and get some productivity saves as we are going. They've been the foundations, if you like, for how we find ourselves this year in 2022. Obviously, a very different year to last year. I would say the big takeaway for Equitable is no surprises in this market. Our earnings are behaving as you would expect. Over the last 5-10 years, we have really shifted the organization towards capital-like products with a narrow range of outcomes.
That means that we are more sensitive to the markets, and you see that coming through in earnings. On the fair value side, you see very robust capital ratios on our balance sheet. We have $2 billion of surplus cash at our holdco level. No surprises in the last round of our assumption review as we've gone forward. Alex, perhaps the nice upside this year has been our new business activities, both at AllianceBernstein and at Equitable. AllianceBernstein, I know you had Seth here yesterday, at the three-quarter mark, has positive net flows, which is one of the few in the industry, excluding some known outflows from AXA, and a 7% increase in the fee base level. Over on the Equitable side, we are seeing the market turmoil translate into much higher demand for advice and for our retirement products.
We're seeing record levels of new business on that side as well. That's a nice upside as we're going. Looking forward, we recognize that there's some big changes coming in the industry with the LDTI next year. Three weeks away is when it comes in. We welcome that. We welcome any move where the industry is going to have greater transparency, and the LDTI accounting will move closer to the economics, which is how we value the business. I think it's going to be good for the industry and hopefully bring more generalist investors into our sector. We're very much looking forward to that as we go forward. That's the opening. Then we can dive down into any of the topics you would like.
Sure. I thought maybe we could start with the annuities business and some of the growth you've been seeing. When you all first became a public company, there were more consistent outflows by nature of some of the decisions you made around the guaranteed minimum income benefit products over time. More recently, the annuity flows have turned positive on the back of really strong buffer annuity sales. Could you discuss what's driving that dynamic, and the extent to which you think you can sustain this kind of organic growth?
Yeah. Net flow's about $1.5 billion year to date. As you say, that's a reversal of the outflows on the legacy being greater than on the new business. We're very proud of what we've done on the buffered annuity side. We created this whole sector nearly 10 years ago now. Protected equity story, if you like, for clients. There's some downside protection and participation into an index up to a cap. Of course that resonates in these types of markets. I think what's important is the value it brings shareholders. This is a product that we reprice every two weeks. This is a product that is ALM matched. This is a product which has a narrow range of outcomes, which is part of the philosophy with which we have.
On top of that, Alex, the outflows have been impacted by the big reinsurance transaction we did. That part of the book is no longer encountered in our outflows. The combination of good sales growth, 7% year to date on the individual retirement, and less outflows is what's making up that net flow boost, if you like, this particular year.
Can you talk about the competitiveness of the RILA market? It feels like there's more players. There are certainly interest rates benefits, the IRRs that you get as well, though, as maybe an offset just from that competition pressure that you have. How does that all funnel into what you're seeing in terms of price adequacy?
Yeah. Definitely more competition in there with some copy of the product. That's to be expected. I would say that pricing discipline is rational in that part of the market. It's not as crowded, Alex, as the fixed annuity market, where you would have 10 times more players in that particular market. Perhaps that's contributing as well. We see the pricing as rational there. We're maintaining our number one position in that market, not on pricing reasons, but because of the strength of our distribution. Just a reminder there, we have affiliated Equitable Advisors, 4,100 advisors there. They give us 90% of their annuity business. We have very strong networks into some of the P&C carriers, where we wholesale to their advisors to get business.
We are, in terms of market share, relatively low in the wirehouses, where it's a little bit more spreadsheeted and a little bit more cutthroat. The combination of that distribution power being first in the market means our margins are pretty healthy and have been boosted by interest rates going up as well.
Next question I had for you is on capital and just your approach to capital deployment. You mentioned Equitable's very sizable holdco excess position of around $2 billion. Can you discuss to what extent you'd like to keep that large of a buffer versus different ways that you could prioritize drawing some of that down over time?
I think two things. On capital management, what's been important for us to show as a relative youngster into being a listed company has been how we've maintained our RBC ratios in the last 4 to 5 years. We have shown the market that when interest rates are up or down, markets moving through the COVID, that we've maintained both the RBC ratio and our cash generation capability. That credibility, I think, is really important for us. We have $2 billion of surplus cash at the holdco. Our target is $0.5 billion, which is 2 times the debt coverage, if you like, on there. We've taken the view, particularly this last year or so, we had the Reg 213, which was floating around. We needed to keep some dry powder for that, if you like. We resolved that issue.
Secondly, this is a market where perhaps some conservatism, some prudence is wise. We're planning to come back with an investor day next year, probably 2Q. We'll give some more guidance there on the capital generation, how it looks under LDTI and that surplus cash. The true north for us at Equitable has been consistency of the cash generation and holding to the guidance we gave the market, which is a payout of 50%-60% of our non-GAAP operating earnings. We've maintained that, Alex, over every quarter since the IPO. That's really been the true north for us. We're in a position, which I think is a good position to be in, of having surplus above our target at a volatile time at the moment, and hard to predict.
We've heard some of your peers talk about different impacts to capital, whether it's, I think, some reference to non-economic impacts from rates going up quickly, or whether it's principle-based reserving and variable universal life insurance. Some of these things sound like they're causing some bumps in the road for certain companies on RBC ratios. What's your perspective on that? Are you feeling any of that, and if not, what's allowing you to avoid some of those issues?
On ULSG, Universal Life with Secondary Guarantees, on that specific issue, this is the product we withdrew in 2009, when I first came here. We have very small exposure. We're also, as you know, regulated by U.S., where N.Y., where the stress testing is a 1% lapse ratio. It's not an issue for us at all. I do think there's a wider issue for the industry, that's to try and avoid surprises, whether they be on VA or ULSG. I think it comes down to the transparency of the reporting, the adequacy of the reserves. We've been very firm from the first day on our IPO that we are not going to steer the company towards the accounting result. We're going to steer towards the true economics. I think there's 2 prime issues behind that. One is the recognition of interest rates.
It is strange to me, Alex, coming to the U.S. market 11 years ago, that we had this concept of reversion to mean. It's a strange concept that you can pick a number which is different to the market. We have always run to the forward curve of where the market is. Then on policyholder behavior to operate the company to emerging experience rather than any form of other estimate. I think this is important for the industry to make sure we maintain the trust from investors and build an industry we can all be proud of.
One of the strategies to give you more visibility and cash flow over time, I think, was to pivot some of the new business sales out of the N.Y. operating entity.
Yeah.
I just wanted to maybe have you provide an update on that also just help us think through, where does the capital come from to fund the new business out of an entity that's probably going to be growing more substantially?
We have an entity in N.Y. and one in Arizona. Some investors would have heard the terminology 49-1. That's basically what we're planning to move to, which is to take the non-N.Y. policies that are in the N.Y. entity out of the N.Y. entity and into Arizona. Perhaps the best way to explain why we're doing this is, you'll recall we had the difficulty with the Reg 213, which resulted in some redundant reserves, which we had to be quite clever and dance around and make sure that we could not trap capital that way. We're looking to, through this structure, which will be capital neutral, by the way, to make sure that we have certainty of dividend capability. That's basically why we're doing it. A lot of administration behind it, probably take a year to do on that side.
From investors' point of view, no additional capital and increases the certainty of the dividend payment capability going on. As one of my colleagues said this morning, rather amusingly, we've dealt with Reg 213, we don't know what Reg 214 will be. We're going to move a little bit out into Arizona.
Great. Shifting gears a little bit to wealth management. I think you mentioned recently that you were considering breaking that out into its own segment. I just wanted to see if you could update us on the size of that business and, I assume it being broken out is probably an indication of some growth aspirations there, so I'd be interested in any commentary you have on that.
Look, it's a good time for us now to look at the business. It will be five years since our IPO, early next year. We're very proud of what we've done with the organization and delivered all of the financial targets that we indicated to the marketplace. Have a robust business there. We're looking at two things to do for the market. I'll come back to your wealth management point. Firstly, we're looking to break out the legacy VA, from the individual retirement business. The legacy VA today is less than 20% of the account values of the whole retirement. It's all mixed in with the new buffered annuity business. We're looking to break that out because they have different dynamics and different valuation prospects on there. I think that the market's going to value that, and we certainly manage them very differently.
Secondly, we're pretty excited about our wealth management business. Today, it's $70 billion or so assets under advice. Its earnings are about $100 million a year, and it is growing faster than the rest of the business. We think it's a good opportunity to highlight that and hold ourselves accountable to grow that. That'll be the two things we're working on next year to ring-fence, if you like, the legacy, but then also on the growth point of view, showcase the wealth management.
That's really helpful. I'll go ahead and ask this question. I had a question on legacy AUM, and you touched on it a little bit there with breaking it out, so that'll be interesting to look at. How quickly is that running off at this point? Are we anywhere close to the point where you sort of hit an inflection where it's actually releasing capital, so you're in ways getting back more cash than even the earnings because you're getting a combination of the capital and the earnings back from them?
It's, as I say, less than 20% of the account values now, and it's running off at just over $3 billion a year on that side. Yeah. In terms of the cash and the future projections, we'll give some update next year when we have that invested.
Got it.
It's an interesting inflection point now. The point I wanted to get over today is its significance now is diminished as we've grown the SCS business and as we did those two big reinsurance transactions.
The next question I had is, I asked a similar question of Voya for similar kinds of reasons. When I look at your valuation, particularly when you look at the value of AllianceBernstein in the context of all of it. It feels like there's not a whole lot of appreciation in cost of capital for the kind of consistency that you're communicating here. What's your perspective on how to get that cost of capital down over time?
I'll be interested in Rod's answer. I'll read it later on tonight. Because he, like Equitable, has done a lot of good things with the business there as we have now. In looking at the valuation, I think in view of where U.S. GAAP is now, and it's a strange phenomenon where under U.S. GAAP, we have assets marked to market, but liability is not. It's not looking at a traditional PE, it's not a great measure. I think what is probably more relevant now is the multiples of free cash. Last time I looked, we were 9.5, 9.66 times, but including AB to your point there. Of the $1.6 billion that we free cash flow generated this year, about $500 million is coming from AB. $1.1 is coming from the Equitable side as we go forward.
I do think there's a couple of things on valuation which point to an upside. One, going back to the new accounting regime, I think the faster we can get better transparency, more alignment to economics, that will bring traffic into our industry and hopefully to Equitable for more general investors. I really think this is important for us. For AXA specifically, we're not included today in the S&P indices because the noise of our hedging program in the accounting regime comes through on our net income. We have economic-based hedges in place, which are mark to market. The liabilities don't move, but the hedge moves all over the place. That disqualifies us from the S&P index. Some of our peers have 50%, 53% of their share register from passive investors. We only have 23%.
The LDTI, in addition to improving the neighborhood, which we think is really important for Equitable specific, means that we will become eligible for inclusion in the indices. How you get in the index, though, is not entirely in our control. I do want to put that caveat in there. I think we do see some upside on valuation, but one of the things is to look at ways in which we can bring more investors into the stock. They are two things which are really top of mind for us. Finally, what is in our control is the extent to which we deliver on profitable sales growth, our productivity, and the moves we're making on our general account to improve the risk-weighted yield there as well.
I wanted to circle back on Regulation 213. I realized there was something I didn't ask you there. It was really, as you're shifting business from N.Y. and into the Arizona entity, what happens with that redundant reserve for Regulation 213? You've done some transactions to alleviate some of that. Is there sort of a return of the redundant reserve that we need to consider?
No. The move to Form 49-1 happens, helps on that as well in some deep tail scenarios as well. It's good from that point of view. It doesn't resurrect that particular challenge, no.
Okay.
Yeah.
All right. Moving to group retirement, could you discuss the interest rate sensitivity and growth profile of that business?
Yeah. Group retirement for Equitable, most of the value and the earnings and the cash flow are coming from our teachers business. This is 403(b) business. We're the number 1 provider of supplementary retirement income in the K through 12 teachers market. Something like 800,000 educators are there with us. It's a work site marketing model. We have 1,100 advisors dedicated to school districts around the country. That means it's quite difficult to displace us because you need a very large sales force to do that. It's a privileged position that we go there. It also means when the schools shut, we have to dance very quickly with digital connections with teachers. The good news for us was that teachers were also trying to figure out digital connections with their students.
We came along, we were talking the same language and figuring it out together. I'm very pleased to say that sales on our teachers business is now ahead of pre-COVID levels. The combination of schools opening and digital connections has really made up that gap. That's good from a shareholder value point of view. Inflation and interest rates going up, there's a couple of things that we have to watch out for, that could be surrenders on some of the guaranteed income accounts. We're watching that closely. There's no sign for alarm yet. In the event, let's hope not, in the event that inflation comes or there's even some recession, the teachers market is not a bad market to be in. It doesn't respond as the general economy does. Teachers tend to hold their jobs.
That can give us some defenses on that side as well. The business is going extremely well, very proud of that business. As I say now, our new business volumes are ahead of pre-COVID levels as well.
Next, I wanted to turn to AllianceBernstein. Could you comment on the ways that Equitable is working with AllianceBernstein and how you benefit from the collaboration-
Yeah
beyond just the 65% stake in the earnings?
Firstly, just a shout-out to Seth and the team there. They've done an absolutely fantastic job over the last four or five years. Their investment performance, their net funds flow, their earnings, and also the strategic moves that they've made on ALTS really has been right up there with any of their peers, and in most cases, ahead of their peers. Really done an outstanding job. At the same time, moved the middle and back office down to Nashville. Very fine opportunity there. The three offsets team join me with the Equitable team on the management committee, so we meet every single week. Of course, one of the things that we are really looking for is these synergies between the two operations. The first and most obvious one is that AB has about $100 billion of permanent capital from Equitable.
70% of the general account is managed by AB and 30% of the separate account. What asset manager wouldn't want that, to have a client like that? Secondly, we've made a commitment of at least $10 billion of investment from the general account into the ALTS platform as seed capital over on the AB side. AB have a very nice track record. For every dollar of seed capital we put in, they attract another $4-$5 of third-party money. Alex, it's a real win-win situation because the general account policyholders are benefiting from higher risk-weighted returns going into the ALTS. Secondly, the shareholders are benefiting because policyholder money is building high multiple businesses on the ALTS side. That's going well. It flows two ways. Going the other way, AB has been a pioneer in secure income strategies inside 401 accounts.
If you remember quarter one, we announced to the market that Equitable had received $500 million from one of those secure income accounts on the AB side. You can see the businesses flowing both ways. I guess the final big one was the CarVal acquisition. As a result of that acquisition, AB's alternatives platform now is over $50 billion. They're a serious player. We know that CarVal was attracted to joining us because they can plug into AB's distribution, private client, wholesalers, Asia, and the Equitable relationship. What Equitable did for that transaction is firstly, part finance it from Equitable's own holding of AB, so that 65 could go down to 62, which was a smart way to make that accretive for Equitable as well. Plus, Equitable earmarked $750 million of the general account money to go into CarVal acquisitions.
I just gave you a couple examples there on organic growth, but also inorganic growth synergies between those two organizations.
Very helpful. Next I wanted to ask you about the private capital, private equity involvement in insurance. You all have obviously leveraged it some during the transaction
Yeah
with Venerable, which I think was pretty transformative for your balance sheet. How do you view that aspect of the insurance market and are there ways you can continue to leverage the availability of that kind of capital out there?
Yeah. The Venerable transaction, as you know Alex, was a watershed moment for the industry because it was using variable annuities and all those. The real benefit for Equitable was in having smart money validate our reserves, because coming out of that transaction was a positive ceding commission. That was an important validation for investors that we are reserving appropriately as well. Venerable are excellent partners for us. They look at the economics as we look at. You'll also remember from that transaction that it's important, I think insurance companies who are looking at reinsurance markets understand the counterparty risk of the transaction they're having. The Venerable reinsurance with us has very strong protections around it, including the comfort trust and including details on where and where not those assets can be invested.
Because the last thing we want is that book to come back to us. The way we approach it is on a full risk evaluation, which is looking through everything to see where is the money being invested to support those liabilities that we have reinsured, and is this a genuine risk transfer or not? That's how we look at it. I think they're the main issues that the insurance industry should look at. There is some opportunities there, we have to just be very careful that it's not a look through into risky asset classes, which can effectively be risk that the insurance company is taking.
Yep. Can we turn to the expense initiative, maybe a quick update on where you're at with some of the work there. Excuse me. Are there further opportunities as we look even beyond the current initiative?
Two main opportunities inside Equitable Holdings. The first one on the AB side I mentioned earlier, the move to Nashville has gone very well. Providing labor and premises productivity gains on there. Seth and the team on track for $75 million savings. I think that starts to come through in 2025, in terms of hitting the bottom line. It's looking highly probable. On Equitable's side, we had an $80 million expense target, it's a net target. It's after reinvestment, not before reinvestment. At the last quarter end, we were $43 million out of that $80 million. We're pretty confident that we can deliver that. One of the capabilities we built since the IPO, Alex, was we knew we needed to raise the metabolism inside the organization. Moving from being a subsidiary of AXA, always having mom you can call, to stand alone.
We knew we had to raise capability, we took this opportunity to bring in agile working inside the organization. The entire organization is moving that way. That provides us with tight teams, much more of a focus on client, much more flexibility when we're looking for productivity saves. Yes, we do think there is upside on that $80 million.
Got it. It's helpful. One other one that I wanted to make sure I asked you about was this idea of disintermediation risk. If rates, or maybe they are potentially even go higher, what's the risk to your business that you have a call on some of the assets and so forth, which products does that potentially affect?
Yeah. It's interesting, isn't it? After decades and decades and decades of interest rates.
I believe
Yeah, we're all having to look at it. It's something we're aware of. It's something we watch, the prime area we're watching is on the deposit accounts in the group retirement area, on that side. What's interesting, though, when we look back at previous crises, there hasn't been much movement in the surrenders there. We do have the ability in those guaranteed investment option accounts, we do have the ability to increase rates as well. We've got many levers to play on that side. Yes, it's one of the things we've identified that we need to watch and just be mindful that higher interest rates bring different exposures inside the company.
With just a little bit of time left, maybe I'll end it with a question. It's a little more broad. What are the biggest opportunities and challenges that you see heading into the next year here?
Obviously, everybody in the room is aware that the economy is a little bit on a precipice, so that's something that we're exposed to as well. We're looking at three horizons inside Equitable, growing our big retirement and asset management businesses. Secondly, building emerging businesses in wealth management, you mentioned, and alternatives. In horizon three, we're very excited about the secure income opportunity to help Americans secure their income in retirement. Everybody plays in the accumulation phase of retirement. Very few are playing in what do we do now that people live longer and have greater aspirations in the later chapters of their year. We have two fantastic partnerships there with AB and BlackRock, and we think secure income is something really to get behind, and we're excited about it.
Very interesting. All right, well, we're just about at time, so I'll stop there. Thank you very much for joining us.
Thank you very much, Alex.
Yeah. Thank you.
Thank you all very much.