We'll go ahead and get started. I'd first like to say thank you for being here. We have Anders Malmström from AXA Equitable Holdings. He's the CFO. Maybe if we could just start with a general update on the objectives around the time of the IPO, just how it's all progressing, what you're focused on looking forward.
Yes. Good morning, everybody. Yeah, look, we IPO'd, I think, a little bit more than 18 months ago. We had some clear objectives over the first three years. Want to grow the earnings by 5%-7%. Want to have a capitalization at about above CTE98 for VAs and then 350-400 RBC for non-VAs. Want to give back about, at the beginning, we said between 40% and 60%, we then narrowed that range for 50%-60% of operating earnings in the form of dividend, then buybacks back to shareholders. I think so far everything is progressing pretty well. Earnings are on track to reach the 5%-7% by 2020. When you look at the overall payout to the shareholders, I think we're slightly ahead.
I think we will be in the range of the total 50-60 for the full range up to 2020. As you know, we accelerated some of that in conjunction with AXA-
Sure
Selling below, but this is going really well. When it comes to the earnings growth, we had three pillars, that we are based on. One is the general account rebalancing. As you know, being part of Solvency II, we were really low on credit and particular on longer credit, just because it's so penalized under the Solvency II framework. We decided to go more back into credit and have a general account that is similar to what people have here in the U.S. This gave an uplift of about $160 million. That was the plan. We already achieved that earlier, so we're good there. On the expense side, we put out a plan to save net $75 million. That's about a gross save of $180 million.
Yeah.
I think we're pretty much on track to get that as well in by end of next year. The business growth accounts for the remaining piece where we think we are. We see really good momentum in all four segments coming through. We feel very confident with the plan that we laid out.
Yep. I guess just to dig in a little bit on the EPS growth piece that I think it implied around, it was like $2.2 billion-$2.3 billion of operating earnings. I guess since you set those objectives, the macro environment from an interest rate standpoint at least, has been a bit of a headwind. I'd just be interested in what are the levers you've been able to pull to sort of offset some of the pressure? I know equities are a tailwind as well, so that's helpful.
Yeah. It's a good question because since we started, a lot has happened. I think you're right. Interest rates came down meaningfully. Equities in totality are up, but we had the dip in Q4 last year, which were a little bit of a headwind, but it reversed quickly afterwards. In interest rates, our position is really to be basically hedged on interest rates. You don't see immediate that impact coming through earnings. It's more, low interest rate makes it much more difficult on the new business side because it's just much more visible that the value, at least the perceived value for customers, is just lower with low interest rates.
Because we are hedged, our sensitivity to interest rate is pretty low as we laid out in the past. That doesn't mean that the net investment income will come down. It's just it comes down together with the liabilities that we have.
Right. Okay. I guess at the midpoint of your cash conversion guidance, there's pretty strong cash flow. The actual dividends recently, I think, have been even a little bit higher than some of what you laid out. Particularly if you consider the stake in AllianceBernstein that was also taken up to the holdco as well. I'd just be interested if you could discuss what's allowed for this more substantial cash generation. Are there any reasons that it would need to slow down in terms of the ordinary dividends that are coming out?
Yeah. I think. Let's start and take everything together. We can separate between dividends.
Okay
I think overall, our business is mature. It generates some cash flow, and that's something you can clearly see coming through. The AB transaction where we moved the AB shares up from the insurance company up to the holding company, didn't change the total cash because I can only generate.
Yeah
What it made, it made it much more predictable. At the holding company, because AB pays out 100%, they have the unregulated, they just come into the holding company. At the insurance company, it's a little bit more complicated just because we have the statutory framework that is always one year behind. We have the New York formula, which we have to.
Right
incorporate in our thinking. I think overall it's going really on plan. I think we can generate $1 billion plus from the operating entity, and then $400 million-$500 million from AB. That's the kind of the cash generation. The usage is clearly you need some of that for the interest at the holding company, but the rest goes back either into the business or back to shareholders. We want to keep the dividend pretty stable. We increased it slightly, but that was more because the number of shares came down. The total cash that we paid out in the form of dividends basically stayed flat.
The rest goes back as buybacks. We really wanted to use that to incentivize AXA to sell down, and we did that in quite meaningfully.
Got it. Maybe just one on capital ratios. There's a lot of moving parts right now. You've got the VA capital reform coming in at the end of this year. I think, it's been helpful the way you guys have talked about it in the past, where you have a target for life and a target for annuities. It's more based on CTE requirements. With all of that coming into the RBC framework, going forward after this year-end, can you give us a feel for where you would be comfortable with targeting? I don't think you've given actually where you think the RBC ratio would be, but it seems like it should be over 400% given your.
Yeah
on CTE98. If you have any comments there.
I think you're absolutely right. When we came out, it made no sense to just have one RBC target because RBC framework doesn't really incorporate the risk on the VA side. That's why we said for VAs, we target at least CTE98 for basically most scenarios, and really be protected even on the severe scenarios to go not below CTE95. For non-VAs, it's clear we have a target of between 350 and 400. Now, with the VA reform, where a CTE98 corresponds to a 400% RBC, we can bring that together and have one RBC target for the total company, which will be in the 375% to 400% range.
Okay.
That's the new RBC target. I think our RBC will be above that.
I think it's really now easier to talk about RBC targets than obviously.
Got it. Okay. Next on the annuity sales, could you just talk about the interest rate environment and how that may be impacting the distribution of your product?
Right. I think the important point is our main product on the annuity sale is the SCS, is the buffer annuity.
Has no interest rate risk. It's fully matched. We reprice it every two weeks.
Yep.
There's no market risk in there.
Do the rates have an impact on how attractive it is to the customer?
Absolutely. I think it's the rates have an impact, but what has actually a bigger impact is volatility.
Okay.
Basically, the way the product works is you buy a downside protection, let's say, of the first 10%, and you pay that by having a cap from your participation, or you participate in an S&P 500 up to a certain cap.
Sure.
What we do is we fully replicate that. We basically buy derivatives to offset each other. The higher the volatility, the better pricing you get, because then options are more expensive. Because I sell options.
I actually get a better price for that.
Yeah.
There is an interest rate sensitivity, but it's actually more for volatility. The interesting piece is, and we saw that a few years ago, is when interest rates are low, people find these kind of products more attractive. They're long-term and they're short-term product. They give a participation in the market, and they give me protection.
Because of low interest rates, they don't want to invest too long-term. That's why these kind of products become much more attractive. We clearly saw that five years ago the first time, and then now we see it very clearly.
The next one I have is just on the potential for a transaction. It seems like there's a fair amount of reinsurance capital that's on the sidelines. I think most of it's been focused on fixed annuities and fixed index annuities to date, but there's been some variable annuity transactions, and it sounds like there's interested parties. I'd just be interested to hear how you view those types of transactions and sort of what some of the hurdles are to be able to do something like that with the pre-2009 blocks.
Right. I think a couple of remarks. First of all, when we started, we said I take transactions as M&A, more in general.
We made it very clear that in the first two, three years, we don't want to do any M&A, don't want to do any transactions, just because we want to gain the credibility in the market. We also want to get AXA out to basically see what is the true valuation of our stock in the market, because there was a big overhang.
Sure.
You saw that, how it lifted. I'm not sure it's fully gone.
That's what we wanted to wait for. Now, when it comes to transaction, I think you mostly alluding to VA transactions. I think a couple of points we need to look at. The book, our book is mature. It generates cash flow, I think, so it really has value to us. Whenever I do a transaction, it really needs to make sense. Basically, what I have to compare is, what is my internal valuation? What would be the external valuation of a potential buyer? What's the valuation right now in the market? You have to triangulate there and then see if something would be feasible. We're obviously interested, but we are not in a rush to do anything here, because we feel comfortable with the book itself. It's clear that the market gives us a discount because of the VA book.
Okay. The next one is a higher level question on earnings in the individual retirement segment. When I think about the return on assets, I know there's a lot that plays into it because you have a mix shift going between, the fee-based variable annuities to the SCS general account type variable annuity. I guess, the reason I ask for some color on the trend is just that we've seen a couple peers, one peer in particular that's seen ROA come down more meaningfully and has highlighted some of the fee tiering and so forth.
Yeah.
I'd just be interested, is there anything like that that's affecting your business? How should we think about those factors that are moving ROA around?
Yeah, it's an interesting question because at the end, we have to look at earnings, but we also have to look at the returns and the profitability of the book. What you see in this book is that earnings are pretty much flat, maybe even going slightly down just because of the outflow of the old book that generates a lot of earnings, but also has a lot of risk.
It's really the mix shift that right now drives the strategy on our individual retirement segment. The newer book has a much better return profile.
It's very profitable, but much better return profile. The old book rolls off in meaningful ways. We have a $4 billion outflow per year. It generates strong earnings, but we're actually happy that it rolls off.
Yeah, sure.
It takes risk off the table. I would say from an earnings trajectory, it's more flattish, slightly down.
The risk shift or the mix shift actually helps the return on capital of this segment then over the next years.
Yeah. The next one I'm going to ask you, it's a little bit more nuanced on the GAAP accounting.
It's been a big focus, obviously, because of some of the changes that are being planned for or have been planned for 1Q 2022. I guess the question is really, is there any update you can provide on the impact of those accounting standards? You may not have quantification. I'd also just be interested to the extent you can talk about the portion of your Variable Annuities that you have today that are already fair value marked
Yeah
versus using this locked-in type accounting that I think people are more concerned is going to result in an equity hit.
Yeah. Look, I think it's too early to give a quantitative impact, but it will clearly have an impact.
Honestly, I'm not really concerned because right now I'm trading way below book, and particularly if you do a sum of the parts. This is already embedded.
Sure.
Which basically means people don't believe the book value.
Yeah.
We shouldn't be concerned that if something comes that gives me a better accounting and a better view of the book. Myself, and I think the company, we really believe in fair value. I think that's the way we have to account for this kind of businesses, and that's why I'm a big supporter of the change. There's a lot of details that might create some noise, but I'm a big supporter of this change. To your point, we already account a big piece of the book under fair value. It's somewhere between a third and half. Actually, it depends on interest rates. In a way this makes no sense. Either you have everything under the fair value concept or nothing.
We don't support. Anything we support, that's where we're going because that's how this book should be valued. I would say implicitly, the market does it already today.
Yep.
It's just very hard for you and others to actually do it with the information you have.
Sure. Okay. Maybe I'll switch gears and move over to group retirement. I'd just be interested if you could discuss sort of the trajectory you see there. Maybe some comments on the pipeline you see for net flow.
Yeah. Group retirement, again, had a tremendous year. Look, this is one of these businesses that they look very boring.
Yeah.
They bring steady inflows. I think it's the third year we're going to see, third or fourth, that we're going to see positive net flows coming in, which shows that this is a good business. We have a strong market position there. It's an interesting niche market because it's supplementary pensions. It's pensions where you actually need a distribution model. It's not like 401 where the employer-
basically buys the client. It's really the individual, we have a strong distribution model where our advisors, there are thousands that are really focused on that business. They go to the school districts, they talk to the teachers, they tell them what they need. I think that goes a bit to the discussion, that's probably your next question. These people, these teachers mostly, they wouldn't buy any additional protection if anybody would tell them what they need. They have a defined benefit plan. They have Social Security. They don't know exactly what this means, and they have no clue what the difference is. They need somebody who tells them about what they have and what they need and what options they have.
That's something that really adds a lot of value and gets forgotten when people say, "Oh, but they could also buy an ETF.
Yeah.
Yes, they could, but they will not.
Right.
If nobody tells them, they just wouldn't.
Right.
Nobody would pay for a single dollar if they wouldn't.
Yeah
know what they actually need. I think that's a business model that I think really provides a lot of value to the individuals. I think we have a really good combination here of a simple product with a distribution footprint that allows for that growth. We're very happy with it.
It sounds like you anticipated my next question, but one of your peers has received some scrutiny, it sounds like, from the SEC on the distribution of the 403 products. I think there's a New York DFS inquiry into getting some information around, it sounded like distribution. I know you spoke a little bit about it already on your earnings call, but would just be interested if you have any update, anything to add there.
Right. On the SEC, I can't really talk more than what you know. I think we only know that out of the newspapers, because we didn't get any questions from the SEC there. The DFS, that's regular market practice that they ask the participant in the market about everything. I think that we obviously work very closely with the DFS there. I don't feel any special kind of fear coming from the DFS. I think where we just need to do more and a better job is in the public perception. Because what you see right now is, it was just an article, I think yesterday, again, in The Wall Street Journal.
I almost call it it's politics, that you basically want to show that teachers or nurses or whatever get ripped off. I think you have to come from the other side. These are people that work hard. They have their passion for their jobs, and somebody needs to help them to retire in dignity.
Actually have enough to retire. I would say, if we wouldn't do that, nobody would do it, and they would just be here without enough coverage when they retire. I would say the industry probably needs to do a better job here in just explaining. When you break down, when people talk about the high fees, when you actually break it down into dollars, it's very small dollar amounts. You want someone. If you're not willing to pay for advice, you have to put it into the product.
I think that's the kind of dilemma we're sitting in here. You know what? We feel very proud about what we do, and we feel good about what we do. I think there's a public perception here that people pay too much.
Switching over to the life, or I guess, the protection segment. The run rate of earnings has really moved up pretty substantially over the past few quarters. While some of your peers have actually seen more pressure. I'd just be interested to hear what's been driving your positive performance. How do you think you've had some differentiation versus what's going on in the industry for mortality?
I would say, high level, what you clearly see on the protection segment is that the initiatives on the channel rebalancing and on the expenses is really coming through. That's probably the segment that gets the most of these initiatives.
Yeah.
That's why you see the uplift in earnings. Point 2, mortality in our case, was positive the last few quarters. We had a positive in, let's say, volatility, and where some of our competitors saw negative volatility. I think this also shows that just mortality is volatile, and we should accept that. It can be next year that we are on the other side. I don't know.
Right. Sure.
I feel very comfortable with the reserving, we just see here that the last year was a good one. Point 3, we were in loss recognition before we went out a year ago.
Earnings now became much more stable. Taking all of that together, that's how we were able then to basically also increase the run rate guidance that we gave them to the Street on that segment. It's really the channel rebalancing, and it's the expenses that really come through here.
Okay. Then the employee benefits business, it's still pretty small. I think it's part of that segment.
Yeah.
You talked a little bit about it on the 3Q call, getting to break even. I'd just be interested to hear how much more investing are you doing there? When will it hit a critical mass where you start to see more positive earnings growth out of there, even if it is coming off of a very modest base?
Yeah. It's a business we really like. We are ahead of plan, so from a sales perspective. As you say, it's just very hard to grow that business organically and make it to, I would say, bring it to the segment level.
I'm usually telling my people, "You want to be a segment, you have to generate at least $200 million, $300 million in earnings. Otherwise, we don't make you a segment." That's going to take a long time for that business. This business is.
Sure
It's really great business. We love it. It's going well. We have about 350,000 enrolled people here, nicely growing. Need another couple of years to be break-even. That's about a bit the dilemma.
Yeah.
It's not meaningful. It's really something we like. We have to find ways to grow that organically or maybe also inorganically. That's where we are.
The next one I have is on expenses and just sort of the systems. A lot of the life insurers have had to plug more money away into system revamps and so forth. Some of it to achieve efficiencies, some of it probably to bring it back up to where it needs to be. Just be interested on high-level thoughts on how do you think your systems stack up? Is there any need to accelerate anything there? Is there anything around GAAP accounting that causes a need to put more work into it as well?
This is, in our case, it's a bit particular because with the separation from AXA, we had to take some of the systems back. General ledger, mainframe. Many other systems have to be separated from AXA. We took that as an opportunity not just to separate, but also to bring the systems and the processes up to the necessary levels that you want to be, to a state-of-the-art level. We basically combine separation and transformation and bring that together. It takes a lot of work. It's going to cost a lot of money. Because we could do it with separation, I think we have a way-
Right
To optimize that. Separation cost and just make sure that this brings us more than just the standalone. Actually, the FASB targeted improvement, and we lump that in into the finance infrastructure. It all comes together nicely, in a way. It's a meaningful investment to bring the systems in to the level they have to be.
I guess you did outline how much the integration or how much the separation cost would be at the time of the IPO. Is that sort of all wrapped up into what you originally estimated there?
Yeah. The separation, I think that's what it is. There won't come more.
Got it.
That's-
Okay
that's it. Just for the full understanding, it is separation cost, but we used it as an opportunity to bring systems up to the modern. For example, the mainframe, instead of bringing the mainframe back, we've moved it into the cloud.
Yep.
On the general ledger, instead of just taking a general ledger that's based on IFRS back, you basically rebuild it to what we need as a U.S. company that accounts under US GAAP.
The next one I have is on AllianceBernstein. You own 65%. Can you just talk about how it fits into your business strategically, what benefits you get from having that. Do you consider one way or the other whether you would ever decrease or increase the stake that you have there?
Yeah. The 65% stake, there's no magic behind that. This is probably number two question I get on these things. It's not really logical to either own 100 or 51. That's what we have. Having said that, we feel very comfortable with it. It maybe fits into the overall strategy, for EQH, for Equitable Holdings. It generates the unregulated cash flow that we discussed before.
Okay
which I think are really helpful. It's also in the grand scheme of providing retirement solutions to customers in the U.S. I think it's a big contributor. There's some business synergies that people usually don't talk that much. When we think about business synergies, we talk less about on the sales side, on the product side. We, as an insurance company, our general account can invest into AB, getting a higher return, at the same time seeding new strategies at AB. We've done that very successfully in many areas, where basically the general account is the initial investor to grow a business in AB. We did it in, let's say, middle market lending and other areas in alternatives. Equitable and also AXA, in the past, they seeded money out of the general accounts to grow businesses.
I think we did about $4 billion seeding in alternatives, and this business is now $20 billion-$25 billion. That's a business synergy that's actually very powerful. It's a little bit below the radar-
not the traditional synergies that people look at. That works very successfully in both directions.
Okay. I guess when I think about capital and capital deployment, I think what you disclosed in the last earnings call, you can sort of triangulate. On the annuity side, I don't think you've said exactly how much you have above the buffer, but it sounds like it's at least around $1 billion, maybe a bit more. At the holding company, pro forma for the participation in the secondary, I think there's probably at least $400 million-$500 million above your minimum liquidity target there. It's a fair amount of flexibility. How do you think about deploying that capital? What are your priorities?
Yeah. Again, I think we want to make sure that we are adequately capitalized from a CTE standpoint.
We want to be above the CTE, CTE98, and with early adoption. In the end, I think we basically bring all of that together and then dividend the rest up to the holding company, and then deploy the 50%-60% to shareholders. I think capitalization, it's really important that we don't over deploy, but also we don't under deploy. I think we want to be a steady partner that people know what they can expect. That's why I think we try to deploy the 50%-60% in a constant way.
Okay. Maybe I'll stop there and see, are there any questions from the audience? Could we get a microphone?
Let's face it, the business is mature. 50%-60% return doesn't seem enough. Why not 90%? Why not 95%? Are you growing enough to justify withholding so much money?
Yes, I think first of all, there is a reinvestment back into the business. When I think about the business, there is a disconnect between GAAP and STAT, and you're totally right. Over time, this needs to come together. Right now, there is a disconnect, so I have to be somewhat prudent because that's actually behind the GAAP framework. I actually think that's a good balance, 50%-60%. When I look at most peers are in that range. They then reinvest a big piece back into the business and a big piece back to shareholders. I think we feel comfortable with that.
I guess maybe as a follow-up to that from me, I think at the time of the IPO, you talked a bit about variable annuity capital requirements and how it had sort of already crested, at least in the base case for you, and was coming down. I'd just be interested to hear, is that still the case, that it is decreasing despite rates maybe being a bit lower?
Right.
Does that become an incremental tailwind over time?
Absolutely. I think for the in-force business, we are beyond peak TAR, even after the new framework, which means the in-force is generating cash flow, and not just from the fees, but slowly but steadily, also from capital. Absolutely.
Okay. Do we have any other questions from the audience? Okay, one more.
Those of us that might follow banks more than insurance companies, can you explain CTE98 in layman's terms, please?
Yes, absolutely. CTE is what's called conditional tail expectation. Basically what you do, you take 1,000 scenarios, and for CTE98, I take the 2% worst scenarios and then take the average of the capital I need for these 2% worst scenarios. That's what we hold aside. That's slightly different to the banking, where you have the Value at Risk concept, where you basically just say, "I want to be able to withstand the first 98% or 99," or whatever. Here, you basically take the worst 2% and take the average, and you put that amount aside. The two concepts are very close if you have a normal distribution. If you have extreme tails within the 2%, that's when CTE becomes kind of stronger. Yeah.
Maybe one last one.
I was just wondering if there was any reason to consider other cash out offers to the in-force block, or is it at this interest rate level, is it just cost prohibitive?
This is a good question. A few years ago we did buyouts for individuals in the older VA book. I think we had a good take-up rate the first time. The second time it was lower. Something where you have to be really careful is if you do these offers on a regular basis, people expect them, and you actually get anti-selection. People who want to lapse, they just wait for the next offer because then they get a better offer. Don't make it predictable. That's why we will not announce it and we will not compete at some point we do it again. It should not be expected, because otherwise you get anti-selection.
I think that's a good place to stop it. Thanks everybody for being here. Thank you, Andres.
Thanks a lot. Thank you.