We're going to go ahead and get the session started. Thank you everybody for being here, both in person and virtually. Mark, thank you for joining us.
Thanks, Alex.
I'm getting a little bit of an echo. This is Mark Pearson, CEO of Equitable Holdings. I appreciate you being here. The format's going to be Q&A, and I'll just jump right over it, if that's all right. Maybe the first one is on product innovation. You touched briefly on this last earnings call. You mentioned some of the product innovation initiatives that you have going on. I'd just be interested to hear a little more on that, some of the products that you're focused on.
Thanks very much, Alex, good afternoon, everybody. Thanks for this opportunity, Alex. It's an important time for the country. We're happy to be here to be part of that debate of helping Americans during these unprecedented times. Product innovation is an important part of our history, our DNA. We were the company that invented variable life, variable products with living benefits, and more recently, the RILA category. Our RILA product is called SCS. We launched it in 2011. Alex, it really came out about a fair value economic risk philosophy, if you like, where we were looking for economically sound products, a way to help Americans with their retirement planning and do so in a way that was econometrically sound. It's now the fastest growing part of the retirement market. We're the number one player in it.
Not surprisingly, there's a lot of our peers have come in with their own versions of the product. That's inevitable when you have a successful product like this one. We're still maintaining our number one position there. I think that's down to our distribution model. It's obviously not too difficult to copy products, but very difficult to copy the distribution model we have. For us, that is our Equitable Advisors plus the third-party relationship we have. On the subject of innovation, one area we're excited about, SCS is out there in the market today. What we're excited about over the medium term is the opportunities provided by the SECURE Act. Thankfully, we're all living longer. Thankfully, people have greater aspirations for retirement. Unfortunately, people are not as well prepared as one would think.
We've recently partnered with BlackRock and our own subsidiary, AllianceBernstein, on providing income solutions through 401 accounts. We see this as a great opportunity for the medium to longer term. We think this is going to attract more clients and, in turn, attract more producers, advisors to this variable annuity space.
The next topic I had for you was on the expansion of non-regulated cash flows. I think some of this was in response to the New York Regulation 213.
Yeah.
There's also been a more broad push to make the cash flows more stable and consistent as well. I'd just be interested on the update there and where you see this going.
Just a quick history, Alex. Then I'll touch on those points. At the time of the IPO, the cash flow generated by Equitable Holdings was about $1.2 billion. During that time, we monetized some of that cash flow with the variable reinsurance transaction we did, about $100 million of that. The cash flow has now grown to $1.5 billion since the IPO. We've seen a nice growth. Before this restructure you spoke about $1 billion, $1 billion of the $1.5 billion came from our insurance operations and half a billion from AllianceBernstein. In October, we announced some internal restructuring. We basically were able to shift about $250 million of cash flow, which was previously in the insurance subsidiary, back up to our holding company.
The $1.5 billion of cash we're generating today, about half of it is coming from our insurance subsidiaries, and about half now is coming from our other subsidiaries. This obviously gives us much enhanced capital flexibility, because half of it's coming from non-regulated sources. Going forward, the position we think will get even better. We're now distributing more than 90% of our products, by the end of 2020, will be coming from entities outside of the New York regulated entity. This is going to give us nice growth opportunities and increasing our general account.
Maybe we could touch on the capital position. Even just at the holding company, there's a pretty strong excess capital position. Can you walk us through how much of that do you feel like is necessary to have, maybe while there's still some uncertainty around COVID-19, versus maybe over the medium term as we get more clarity? What are some of the ways you might put some of that excess capital position to work?
Yeah. Thanks, Alex. Yes. Our standard, if you like, is to hold $500 million at the holding company level. This is two years' worth of holding company expenses, which is put on our interest on debt. That's where we'd normally aim to hold the capital. It's $2 billion, as you say, today, quite substantially ahead of that one, and we're comfortable with this one. One thing to remember is because of the volatility of the New York dividend formula and the vagaries in there, we took two dividends out of this insurance company in 2020, which totaled about $2.1 billion, in anticipation of us unlikely to have dividend capacity under that formula in 2021. That's why it's high, and it's good to be in this position now. There is a lot of uncertainty.
We'll continue to be prudent with our approach to capital management, also continue to honor that guideline given to the market of paying out 50%-60% of our operating earnings in capital. We're very proud and pleased that even in the depths of the economic and the market downturn due to COVID in 2020, we continued on with our capital repayment program. It was uninterrupted during the pandemic. I think that speaks to how we manage capital and speaks to the strong balance sheet that we put in place.
One of the other things I wanted to ask you about is some of the risk decisions you've made over time. I think as part of a company that was under Solvency II, going back around the 2009 time period, you made the hard decision at that point to pivot to more capital-light product and the RILA product that frankly, a lot of peers have slowly over time gravitated towards as well. I'm wondering how, having made that decision quite some time ago and having a fairly mature block, you've done some de-risking around the variable annuities that you sold before that. How does that start to manifest itself in terms of building benefit of capital, kind of releasing and coming off some of that older business and, the benefits of that decision?
Yeah. I think that it's an interesting point. The decision really came about in the preparation to the IPO. We knew that we had to have a standalone risk philosophy, and we had operated under the AXA regime, as you mentioned, which is, as you know, called IFRS, where we were really on a fair value basis. As you know, the accounting systems today in the U.S. are based more on a reversion to mean, whatever that means on interest rates. We took the view and a conscious view that we were going to run the business on a fair value, on an economically sound basis. Coming out of that, our two main programs, which we've benefited extensively on, firstly, our hedging program. We hedged to real interest rates and protected the balance sheet that way. Secondly, the design on products.
As you say, the RILA product was the best example, but not the only one, but the best example of us putting a product out there that was in that sweet spot of meeting clients' needs, upside participation, some downside protection, but most importantly, value adding for shareholders in all circumstances. I think this has given rise to increased competition, but we're seeing it as being rational competition. It's increasing the addressable market for the whole industry. Most importantly, it's really an important part of the solutions for us and the industry in addressing what I see as a retirement crisis in America. 45% of Americans have no retirement account. Of those near retirement, the median account value is about $12,000. This is something where we're building the business by really meeting a need and being good for society.
I think those are always the best businesses to be in. It makes us come to work, and it makes us proud of what we're doing, and also, I think it's good for growth going forward.
Next question I had for you is on some of the sort of the final stages of variable annuity capital reform. I think they've gone through a lot. There's still this scenario generator that's sort of a legacy product of the American Academy and is being changed to Conning, and there's a whole process around this. I know that you guys are in N.Y. You've got N.Y. Reg 213, maybe you could comment on how does that process with the stochastic modeling work for you all? Do you have any exposure to that economic scenario generator changing? Any comments you can provide there?
I can. Look, we're strong supporters in this economic generator being updated and revised. It's long, long overdue. I mean, the old or the current one had 10,000 scenarios in them, all of them were pointing upwards, all of them were leading to an interest rate of 3.25% in the reasonably short-term future. That was far different from the forward rates that you can get in the marketplace. There's a distortion there, and we didn't think it was healthy at all. We ourselves are managing the business. We have not taken a position on interest rates. We align our assumptions to the forward curve, and we fully hedge the rate exposure.
Other companies may take a different stance, our point is if you take an exposure on interest rates, there should be adequate capital put to one side in case your assumption is wrong. We choose the forward curve because we can buy protection to that rate. We're very much in favor of the NAIC changes. It will give a wider range of outcomes and I think just more reflective of the economy and experience indeed. Of course, at the same time, we're looking at LDTI accounting changes coming in 2023, which again, on the core issue of interest rates will move the industry to accounting based on forward curve. We think this is again, long overdue. It will improve transparency and comparability for the industry, and we think lead to healthier product design and healthier reserves for the industry overall.
We're very much in favor of these two major regulatory initiatives coming along.
I guess one of the things I've heard is that, it could be years before this is rolled out, but one of the things I've heard is that maybe the CTE, Conditional Tail Expectation requirements being around 98 could be brought down to maybe CTE 95 or something, to maybe offset the overall potentially negative impact that process could have. If something like that happened, would there be any implications for you all in terms of the way you manage your business? Does Regulation 213 kind of dominate things in New York, so that's sort of a non-factor?
Well, in terms of how we're managing the company, we are managing today the company, based on the fair value and the economic base based on forward rates. It's not going to affect how we make decisions, nor is it going to affect our $1.5 billion cash generation. That's the important thing. On the CTE 98 levels, we think what's most important is not so much the level, but that the reserves are based on fair interest rates rather than an assumption. Our position has been very clear on this one. Reversion to mean confuses us because I've been working 40 years and I haven't seen any mean. I've not seen any cycle of interest rates. I've just seen interest rates come forward.
I don't think we should be in the position of second guessing the market if we are taking an interest rate position that is at risk. If there's a risk, there should be capital to back that up. As I say, we're very much in favor of the LDTI changes and the NAIC changes because they're economically sound. It's strange, Alex, hasn't it, having an accounting system where assets are marked to market and liabilities are not. It's meant that investors don't trust the gap of value, and I don't think that's in anybody's interest. We are, as you can tell from my reaction, we are strong supporters of this, and we think it's going to lead to fair competition. We think it's going to lead to greater transparency and greater comparability. We think that's great for consumers and great for investors as well.
We are really looking forward to it.
Maybe just on the topic of LDTI specifically, is there anything you can tell us about the impacts to Equitable? I think you've given a little bit of disclosure here and there around where your assumptions are relative to the forward curve.
Right.
Is there anything you can tell us about the way that that may impact your starting book value or maybe some of the disclosures that maybe eventually you'll come forward with as we move into 2022?
Yeah. We will be holding an investor day in mid-2022. It's difficult to be precise now because FASB is still finalizing the framework. Directionally moving to fair value accounting like this is much closer to our economic basis, much closer to the market, and addresses that mismatch I mentioned earlier of assets being marked to market and liabilities not. We're very pleased. It's a major move for the industry. We understand that one, but we are very much in favor.
Next, I thought I'd ask you about AllianceBernstein, and maybe you could just tell us about some of the initiatives that you all are working on, and how that benefits both companies. And maybe also just any comment around your stake at 65%. I know you guys have reviewed that in the past, and there was sort of some finality to that, but would be interested in any update there.
Yeah
of owning that stake.
Thanks, Alex. Yes. AllianceBernstein is a core part of our business model, and we've got a rather unique business model in having the retirement manufacturing business, asset management, and Equitable Advisors. I think we can do two things on that. One, we participate in more of the value chain. Secondly, we have the opportunity to devise solutions for clients, which are listed and pretty comprehensive. I think these are two, we think, huge advantages for us. In terms of synergies, if you like, between Equitable and AllianceBernstein, there are four or five. I'll touch on the main ones. Firstly, Equitable provides $120 billion of assets which act as semi-permanent capital for AB. This is money we invest in AB. Equitable has the ability to move it, but it doesn't. This is a huge advantage for AB. Any asset manager with scale manages this unit.
Secondly, we use the General Account. The General Account is looking to increase risk-weighted returns to provide benefits to both policyholders and shareholders. It is doing so and looking at investing in alternative investments, private credit, and other structured type investments. By taking the General Account from Equitable and investing it into these asset classes through AllianceBernstein, it enables AllianceBernstein to build up high multiple businesses on the alternative side. AllianceBernstein have a fabulous track record here. For every $1 of seed capital we've put in, they've been attracting another $4 of third-party money by building up the alternative side platform.
Other areas we look to for the two companies to add value for both shareholders is providing insurance products into AB's private client business, increasing opportunities for AB with some of our variable products, and then for AB to be the investment manager for the model wealth portfolios on our broker-dealer platform as well. We see very significant value upside in the two businesses being together and cooperating. The other 65% holding, delighted with the performance of AB and Seth and his team. In the last year, net flows in AB have been $21.8 billion. Performance inside the subsidiary is great. 70% of both fixed income and equity funds are outperforming one, three, and five-year benchmarks. Shareholders have benefited extremely well in terms of total shareholder returns, and that's flowed through to Equitable as well. We look at the 65% from time to time.
We're happy with our 65%, and we see value in maintaining AB's listing. I know Seth values it, both in terms of attracting talent, but also attracting mandates. That's where we want to.
Next, maybe we can move over to the expense initiative. Can you take us through some of your goals there and maybe some tangible examples of what you're doing to increase expense efficiency?
Yeah. It's an important topic, isn't it? At the time of the IPO, we set a target for the market of 75%. $75 million, sorry, net expense savings, which we achieved ahead of schedule. We have since told the market that we will deliver another $80 million efficiency target by 2023. Just a point of clarification here, Alex. This is a net saving, net of any incremental investments. It's not a gross number, it's the net number that we give. We've got really three levers driving this one. Firstly, technology. We had an opportunity at the time of separating from AXA. We had about 150 systems, Alex, that we had to move out of AXA. We had, if you remember that below-the-line budget, we had a budget of a one-off of $700 million to cover IPO brand and systems separation.
Our IT folks did a really good job of using that, not just to replicate the AXA systems, but to leapfrog. Back in 2016, we had none of our applications on the cloud, and now, next year it's approaching 80%. This has meant that we used the one-off separation budget to really leapfrog on technology, giving us lower expenses, more functionality, and the ability to look for more productivity savings as we go forward. We are planning for expense reductions like post-COVID, if you like, on travel and reduce real estate. We are fortunate here that most of our leases expire in 2023. We'll take that opportunity to refigure how employees use our space, particularly here in New York. Finally, we launched a program 18 months ago, which we call New Ways of Working.
It's a combination of agile methodologies, new design thinking, and adaptive leadership. We're rolling that out throughout the organization, and that's to increase both our flexibility of service to clients, and also more and more importantly, retain our top talent who want to be working on these new techniques that are going on. We think we have the opportunity going forward with those three main levers to not only improve productivity, but also in obtaining new functionality for us going out to our clients.
Got it. Maybe next we could discuss wealth management, which I think right now sits inside corporate. I think it's an area where you have expressed some ambition in terms of growing it. I'd just be interested in terms of AUM you have now, how it's growing at the moment, and is that an area where you could look to speed up with inorganic opportunities?
Yeah, thanks, Alex. Yes, it is in corporate and other now. If you look at the strategy being optimize our cash flows from our leading businesses now, retirement and asset management. Alongside that, build adjacent businesses. I mean, the three we talk about, wealth management, employee benefits, and alternatives in AB. The wealth management business for us now, let me just shape it for everybody. We have 500 advisors who are licensed and active in this area. It's a broker-dealer platform where we rent LPL's infrastructure for it. We have $77 billion of assets under management on there. It is profitable. It grew by 37% last year. Fueled, of course, by very strong equity markets, but also very strong net flows in there. You should start to see us talking about this as a new segment sometime next year. Around about 100 billion of assets under advice.
It's currently 77. It starts to get interesting from an earnings point of view. That's the way forward.
The next thing I wanted to ask you about is just the valuation and maybe to some degree, what you think people are missing or actions you can take. When we do our work around the value of your AllianceBernstein stake and we sort of look at what that implies, the insurance business is getting credit for it. It's somewhat underwhelming the way that it's being valued. I guess, how do you view that internally? I know you all have done, frankly, you've done a number of things already that have been pretty shareholder friendly in terms of actions to try to help eliminate the value. Is there more that can be done there? How do you view that? How do you see that getting corrected over time?
Yeah. Firstly, I want to give a nod to my colleagues over at AB. They've done an absolutely outstanding job compared to any of the peers in net flows, investment performance, and in growing their margin as well. Their margin, well over 30% now. That's come through in their share price, which has been extremely healthy. The last stat I saw, more than 140% TSR since our own IPO. It's been an outstanding performance by AB. Yes, Alex, you're right. When you look at that, is that reflected in the EQH share price? One would argue not fully yet. I think we have to look at a couple of things. Firstly, we at Equitable Holdings, we are looking to create value in the best way possible. Where we can use Equitable Life's general account to seed growth strategies in AB, we take it.
It turns up in the AB subsidiary, but we're really happy to be able to do that. As I mentioned earlier, this internal leverage is good. We have $120 billion of Equitable Life's capital in AB in permanent capital. My point is, you have to be a little bit careful in doing that sum of the parts and assuming all of the value is attributable to AB alone. It is doing fantastic as well, but some of this growth is coming from Equitable. When we look at valuations, it's clear to us that asset management analysts are looking at the earnings and valuing on a 15-plus times multiple. Us in the insurance industry, it's 9, 10 times cash, isn't it? That's a different way of looking at the valuations. That's just where we are.
I think as you heard me earlier, we're seeing the cash grow as well. From $1.2, we sold off and generated value for shareholders of about $100 million of cash flow, generated another $1.2 billion of economic value for shareholders, we've grown that to $1.5 now. What we in management need to do is continue to grow those cash flows, continue to de-risk the balance sheet so that we achieve that earnings per share target we've given everyone of 8%-10%. We're confident we have the way forward to do that.
Great. Maybe we have time for probably one or two more questions, I thought I'd ask you about the RILA market, broadly. You mentioned earlier there are more competitors coming in, I think you've been a leader there. How are you viewing the competition in that market? What's the growth potential look like over the next couple of years?
It is the fastest-growing part of the retirement market now. We are, Alex, very proud of our leadership position. We created that category in 2011. It took a few years to take off. One of the things to share with you is the absolute importance we have in working with Equitable Advisors on this. This was a new category. It didn't take off immediately, we worked and refined and got into the marketplace with our own advisors. My point being, at Equitable, we always stayed true to the strategic value of having affiliated distribution. If you are looking for certainty of revenues and the ability to change mix, it is very important to have affiliated distribution like this. We were able to do it wasn't easy in the first year or so.
To help Americans save at this time, we think is an important value that we add. In particular, where people are a little bit more wary to provide some downside protection and upside, we think is meeting the growing demand. Of course, the success we've had attracts attention of others. I have to say, the pricing in the market remains very rational. That's good. In the last few quarters, we've had record quarter of sales. Despite the competition coming in, I think it's creating much more attention on the product and that the pie is growing. We continue to compete in there and continue to innovate. Just last month, we launched our SCS Income product, again, aligning to our economic model, add some guaranteed income in retirement, which is needed and welcomed by distributors and consumers.
Maybe we could wrap it up with a quick conversation with the life business. Maybe you could tell us about some of the products and initiatives you have going on in life insurance products and where you see earnings going from here.
Yeah. This is our history, our legacy. We've been around 162 years now, helping people. Of course, the need for life insurance has never been more evident during this sort of devastating COVID time. This is something like over 750,000 Americans have lost their lives. We're committed to the life insurance market. In the last couple of years, we've pivoted towards less interest rate sensitive products. We're very active now in the accumulation-based products. Our VUL and COLI offerings are now 80% of the first-year premium for our life business. We're seeing double-digit growth on our premiums year-over-year. We recently upped our guidance to the market, Alex. We upped it to $75 million of earnings per quarter from $50 million. This is volatility on mortality, particularly during this COVID time.
We upped our guidance because of the higher investment income we anticipate to earn from the GA rebalancing I spoke of earlier and moving to improve risk-weighted margins from different asset classes. That's where we are on the life side.
Great. Well, look, we can leave it there. I really appreciate you being with us today.
Thanks, Alex.
Virtually. Thank you for the participation.
Thank you so much, Alex. Have a good evening.