Hello, everyone. Thank you for joining us this afternoon. We have Anders Malmström of AXA Equitable here today, CFO. Thank you for joining. Anders is also a member of the management board. I think you joined the AXA Group about a decade ago via Winterthur.
Correct.
Before that, you were with Life, so a veteran of the industry. At any time, please interrupt me if you have questions. I have my own questions, but we'll see what happens. I guess you reminded me it's been a little more than a year since the IPO. Can we talk about what the goals were in year one, what was accomplished, where we're positioned today, and what you think about the plan is for the next 12 months or 12-36 months? You can frame it however you want.
Yeah, thanks. Good afternoon, everybody. You're absolutely right. It was May 10th last year when we went public, and it's already more than a year now. To be honest, this company is 160 years old, we always joke that it's kind of the oldest baby on Wall Street when we came public. During this year, when we came out, we actually put a plan together, and we called it the 2020 strategy. It was really a more short-term strategy, how we want to execute over the first three years. We had a clear focus on execution. Nothing crazy. Solid earnings growth of 5%-7% CAGR in the first three years. Solid capitalization. We put the target capitalization out at the CTE 98 level for VAs and the 350-400 RBC for non-VAs.
We gave ourselves a target of having a mid-20 leverage ratio, we also gave the target of 30% operating margin for AllianceBernstein. This is kind of the target we gave, the payout ratio, which is quite important. At that point of time, we set a payout ratio of 40%-60% of operating earnings in the forms of dividend and buybacks. I would say so far, we are on track to meet all of these objectives after one year. We actually narrowed the payout range to 50%-60%. We feel more comfortable, and we can talk about that a little bit later. Earnings-wise, we are on track. I think everything is really going well. Obviously, during this year, it was not just about executing the strategy. It was also AXA selling down. In March, basically, they went below 50%.
We are now a non-controlled, independent company, which triggers a lot of change internally as well. On the branding side, we have now only 18 months left where we can use the AXA brand. I don't think we need 18 months, but we can for another 18 months. After that, we're no longer able to use the AXA brand. Overall, I would say a very successful first year. I think we're well on track to meet our targets, obviously, we want to move forward now quickly, and we're working on the strategy post-2020. What are the areas we want to double down? What are the areas we want to focus on less now that we are an independent U.S. company?
In terms of those strategies, my personal thoughts on the life insurance industry for a lot of it is that there's this great opportunity of people who haven't saved, especially Americans, who are particularly good spenders. We're not such good savers, and when you think about the outlook for future retirees today compared to the outlook of future retirees 15 years ago, I guess, has the amount saved or the preparedness for retirement changed, gotten better or gotten worse? If we do have this impending sort of scenario where we have a lot of these retirees who are going to look to the government for support, what can the life insurance industry do that they're not already doing? Can the government work with the life insurance industry toward a happier end?
What are the opportunities to sort of avert this crisis if there is a crisis right now?
I think that's a very important and interesting question. Overall, I think it was never more important than today that people actually save for their retirement. I think today it's about 55% of baby boomers have no money actually saved for their retirement. I think a third of people cannot or do not want to retire before 70. People have to work much longer in order to get through that period and to retire at some point. I would say on one hand, there's a huge tailwind from a retirement need, which would benefit the whole industry, I think I can talk a little bit more about us. On the other hand, there's not that much money, or the money is very concentrated in some areas. I think that's an issue for the society, and I think everybody is focused on that.
There's a need to do so. I would say where we can provide a lot of value is through the advice. AXA Equitable really focuses not just on products and having good products. We focus a lot on advice because people need advice when it comes to retirement. You don't just walk into a store and buy retirement. I think you need somebody who actually tells you what you really need and when you need it. Our whole business model is focused around advice together with strong products that actually help deliver here in the long run for people.
In the advice business, how are the advisors at AXA set up differently from the competition to generate a better outcome for customers and a better outcome for shareholders as well? About training and channel and whatnot, where is the Equitable differentiation from your main competitors in those markets?
I think one of the core attributes to AXA Advisors is they actually have open architecture, so they don't have to use some Equitable products, but they do probably 70%-80% of the time, they actually use our products. They can always supplement with products from the outside. The focus is always about the need of the customer and what they need and is it suitable. We provide them with a lot of training to make sure that they sell the right thing that benefits customers. At the same time, they're a huge value to us because, as I said, they sell our products, but also they help if we want to introduce some new ideas. Let's just take the SCS product, the buffered annuities, which we introduced six-seven years ago.
I don't think we would have been able to sell that product in the open market to third-party distributors because nobody wanted it. Through AXA Advisors, it became popular. Today, it's the fastest-growing market in the insurance savings area. Many competitors copied the product, which is a good thing because you actually grow the market. AXA Advisors was crucial in getting there because they helped us to bring a new product and provide value there.
The education, since I've always been interested in, A, the combination of education for the benefit of the customer versus education for the benefit of the shareholder isn't always properly aligned. You would have agents selling certain products because they knew that the benefits were extremely
Right
weighted toward the customer. How does the alignment in that process work that you have the confidence with your sales force that there's an equal participation in the upside for both the customer and the shareholder?
Yeah, look, I think that's a good observation that there were times where there was no alignment. The older products, pre-crisis, they were so rich in guarantees that they actually overburdened the shareholders. They were very beneficial for clients, but if the equilibrium is not there, that has no future. I think one of the things that's very important is that when you manufacture products, you have to make sure that you get your return. When you go to your distributors, you have to make sure that even if it's a tied distributor, that you don't subsidize them. Our AXA Advisors, they basically cost us exactly the same amount of money than a third-party distributor. We don't subsidize them. I think that's very important when it comes to how you manage different distribution channels.
Obviously, we as a manufacturer, we have to make sure that we pay a decent amount of return to shareholders. This is not the job of the distributors. Distributors have the job to make sure they work within their allowable from an expense perspective and give the right advice to clients.
When we think about that older business and the newer business, that older business increasingly, people are claiming withdrawal benefits on that business. Maybe there's some lapsation and that business is becoming a smaller part of the book.
It's being replaced with brand new business, capital efficient, newer business. The fees on that older business are higher than the fees per asset on the new business. Can we talk a little bit about the ROE change, I guess the earnings versus capital support and the ROE change as the old business goes away and the new business comes on, except it frees more capital, but it also is less earnings generative. How does that affect the long term, I guess, if we just let things sort of run the way they're going, what happens to the earnings in the individual retirement segment?
Yeah, look, I think there is a mix shift going on in our portfolio. As the older book rolls off, the new book comes in. The new book is much more profitable from a ROC standpoint.
Obviously from a net earnings standpoint, the old book generates a lot of earnings. You basically see the mix from less profitable to more profitable, but then earnings kind of go the other way around. In the end, you have a positive business mix from a profitability standpoint, but the earnings are kind of flattish, slightly positive.
I think overall it's a positive shift mix. As you say, the capital requirements come down and will be paid off. You have new business coming in that has less capital needs.
As that older business lapses, that capital is free. You can't deploy it fast enough, I suppose. That gets returned to the shareholders, I suppose.
It's coming down over time. It's not billions every year, but it's a decent amount that rolls off every year. I think first and foremost, it's important that you don't have to put in capital. In our case, we actually release some of the capital, and we basically replace it by growth on the new business that needs much less capital.
You're confident that you went from a 40%-60% payout ratio to a 50%-60% payout ratio.
Yeah.
What changed in the past year to narrow the range and move you towards the upper bound?
I think one main reason was to restructure. We did with AllianceBernstein. We moved all the ownership of AllianceBernstein to the holding company, which doesn't change the cash flow in totality, but makes it more certain because the AB dividend, and AB pays a decent amount of dividend, don't have to go through the insurance company, which is the dividends are regulated or impacted by the regulators. They go straight and directly to the holding company. We have no more certainty that these cash flows come up, we are more confident that we get it without volatility. That's why we were able to reduce the range.
On the individual business, you've had success in growing the capital-lite annuity products. Life insurance sales have been sort of stable. Can we talk a little about the environment for the cross-sell and whether the two are related? I guess what would have to happen, and maybe it's not a focus, but what does growth in the life insurance industry, or I guess the life insurance segment require? Will life be a larger contributor, or is it kind of a mature business and this is where it's at?
It's actually, I think it's maybe two questions you ask here. One is about, you call it cross-sell, and the second is life in general. I would say I don't necessarily like the word cross-sell, but I like the word holistic advice because that goes back to Equitable Advisors. They holistically advise a client, and if they need annuities or if they need life insurance, that's why you have the advice process. Then you decide what suits best. Many of our clients, they have multiple products, annuities, and life insurance. Through Equitable Advisors, we are actually able to give this holistic advice, and that's kind of the cross-sell. It's not that you actively go and look after the life insurance customer and say, "Oh, how can I sell them an annuity?" That's not the purpose.
The purpose is to make sure that they have the holistic approach. I would say life insurance, I think where we play, we have a very selective approach where we basically go into variable universal life and index universal life. That's the areas we play. We do a little bit term. That's more the door opener, but that's not our focus. VUL, IUL, that's where we focus on because I think that's where we have a strong history. We were the first in the VUL business, and that's where we actually can generate value to the customer but also get the right return for our shareholders.
I'm afraid to look at my stock selector thing to see where the 10-year is at this very moment. Every time I look, it's down another basis point. I think it was at 227 the last time I looked. Can we talk a little about long-term assumptions around Treasury yield?
I guess, at the time of the IPO, I think we might have even been above 3% on the 10-year. What does that do to the product's returns? I guess it's possibly good for the index variable product, maybe.
Can you sort of-
Yeah.
Talk about, from the management level, how do we need to think about how that's affected the past year's outlook?
It's actually really interesting where we are today because I think it's not just where the 10-year Treasury is and the 30- year. It's also where the three-year, the one year, the three months is. The three months, and we were just chatting this morning, is actually higher than the 10-year right now. The three months is higher than 10-year. You have a very weird yield curve right now. Obviously, I think we as a life insurance company, we are much more interested and much more sensitive, kind of dependent on the long-term interest rate. I would say short-term, it has very limited impact. We hedge interest rates on our VA book. We have a strong ALM on the general account. I don't see immediate impact there. Earnings impact is actually quite limited.
In the long run, I think it's not good for the whole industry if interest rates are too low. You reinvest at a much lower level, which then impacts the future years. You don't want to go too short, even though you could from a pure earnings perspective, but from an ALM aspect, you don't want to open up your duration gap too much. That's kind of the dilemma the industry is in. I feel like we have a very sophisticated approach internally so that we understand the dynamics. Obviously, everybody would like to have higher rates, and in particular, also a steeper curve. It's not just the level, it's also steepness because right now it makes almost no sense to go long from an earnings perspective. From a risk, you have to. That's the dilemma you're in.
I wanted to give a chance to the audience to ask any questions. You don't have to be shy. You can raise your hand at any time. If you want to be shy, you can be. Because I see a very active audience. Okay. Can we talk a little about group retirement?
Changing course a little bit. We've seen in the past some deals. There was a deal about a year ago that was being widely discussed in the market that didn't happen. Can we talk a little about, first of all, how much moat there is in the parts of, I guess, 403, 457 to lesser extent, 401, where Equitable, we'll just start calling you Equitable, competes in?
Yeah.
Two, if we look forward, you have your Fidelity or your TIAA-CREF who are obviously huge in that market. Is everyone else a tier 2 competitor, or is there room for niche players to continue to be successful without consolidation?
I think that it's an excellent question. The market itself is actually more fragmented than you think. You obviously have the large 401 markets where you really need to have high volumes, and the margins are very thin. That's not where we play. We really play in a couple segmented areas. 401 we really do for small and medium enterprises, but our main focus is really on 403, the educators market.
K through 12.
K through 12 market. The interesting piece there is, because it's supplemental pension, all these teachers and administrators, they already have a pension, they need additional support. Again, this goes back to my advice model. What we do here is we go into the school districts. We have our advisor, special advisor, about 1,000 country-wide that are in the school districts, talk to the teachers and the administrators, advise them, in particular when they're new. Every year, we have short interactions if they should top up their contributions on an annual basis. It's not real group business because the actual sale is actually on the individual side. That's where we have I call it a niche market. It's a large niche market, but it's still a niche market, where we actually are able to compete.
We have six years now with positive net flows. This market is growing.
Again, the products are kind of plain vanilla. It's really the distribution model, the holistic advice that we provide here that actually makes a difference. That's very hard to compete.
Is that relationship, I guess, between the advisor and the administrator, or between the advisor and the end user?
It's between the advisor and the end user. That's why I say it's not a real You have to be in, but we have access to 7,000 school districts. We have access to more school districts that we can actually serve. What actually happens is the advisor sits in, talks to the teacher, and advises the teacher. This is an individual sale that's happening. That's why I think it's a different model than the traditional corporate pension.
Is there areas of the market that, A, first of all, is there a moat defending that for your relationship, that there's others who find it maybe too intensive to serve the K through 12 market in that manner? Two, is there any kind of consolidation that you would want to be a part of to gain scale in an adjacent area?
I would say we always look for growth if we can even do inorganic growth there, because obviously scale matters. Overall, we have a portfolio of $30 billion there, which is big and not. It's not really big, but it's also not small. If we can increase that, we would obviously always looking at that. At the same time, we don't have to. We're big enough to compete there. I think back to your question. In the end, there are not that many players that actually serve these school districts. We have a market share, I think, of the mid-20s in that area.
Moving to another business, the AllianceBernstein business. 1Q was a particularly weak quarter, particularly for this investment research business that some people may be familiar with.
Yeah.
I'm particularly interested in that weakness and whether it's a one-off and what strategies Bernstein might have for increasing the revenues in that particular area, and how much of a focus, I guess, that business is versus the asset management part of the business overall.
The Bernstein research business is a core part of AllianceBernstein, it was actually interesting when we did the IPO. We actually realized how important Bernstein is to AllianceBernstein. We haven't realized that before, we walked around, we had all these meetings, and the first reaction of many investors is always about Bernstein. I think the brand is extremely strong. Now, having said that, yes, they had a very weak Q1, I think it was mostly driven by low trading volumes that we saw throughout the market. I would not think that this is a systemic or a trend. This is really a one-off that we saw in Q1.
The Bernstein research business is core to AllianceBernstein, it's also one of the reasons why we actually doubled down by buying Autonomous because we believe that Having a strong research area actually helps the rest of the organization. You see that right now coming through. AllianceBernstein overall had a very strong Q1 when it comes to flows. It was a positive $1.1 billion. I don't think many other asset managers have positive flows. It's not just one or two products. It's about 13 products where they have an inflow of more than $100 million during the quarter. This really comes back to the depth we see in AllianceBernstein now, I think the Bernstein research helps here a lot and supports the product development.
On the Autonomous business, the plan is to not integrate it, or is it to integrate it? I know Bernstein will have its model, and Autonomous will be a subscription model, I guess.
Exactly. We're going to keep that. The brand's going to stay separate as a subscription model. It is very complementary because the market where Autonomous is in and what they cover is actually very complementary to Bernstein.
The investment management side of the business, obviously a lot of pressures on active management versus ETFs. I think we had a lunch panel about this today.
Long-term strategies to keep that business against the pressures. Is it possible, or is it a shrinking ice cube for everyone?
I think to answer that question, we probably have to wait another 5-10 years. I think there's a clear trend to more passive, clearly, worldwide. I would say it's mostly driven also through pension funds, just because board of trustees, they just don't want to take any risk, and they want to show that they have made sure that you don't pay too much fees. That pushes everybody into passive. We, on our side, we actually believe that there is value in active, and there will always be value in active. You have to prove it on a daily basis. You have to prove that you outperform your fees, because your fees will always be higher than in passive. It's hard to imagine a world where you only have passive management. I think there will be a coexistence of everything.
That's why we believe in the research business, which is the fundamental for the active management. It goes hand in hand.
Can we talk a little about the tax efficiency of the ownership in Bernstein?
Yeah.
If I'm a Bernstein shareholder, I have different incentives than if I'm an Equitable shareholder. I'm paying taxes on distributions.
What would be the ideal situation that aligns the incentive between shareholders to minimize tax obligation for that holding? I'm sure you've thought this through, and how should we think about that ownership stake?
Obviously, ownership should not be driven by tax standalone because tax rates can change. I would say that the current tax situation is actually quite efficient when you think it through. I think AB has a limited partnership, but they have a grandfathered IRS status. There's only, I think, three other companies that actually have the same status. They pay very limited tax. Now, obviously, we as the owner, we then pay tax on top. On a consolidated base, I would say if they would change to C corp, it's probably very similar from a tax perspective. I don't think tax would make me change the way we should own or we should have an AB structure within EQH.
Would there be any benefit to having Bernstein buy back its own shares as opposed to distributing its income fully?
They're not allowed to.
Under the current tax situation, yeah, right.
Under the current tax, they're not. What they do, they keep their amount of shares stable.
Yeah.
When they issue shares for remuneration, they buy the shares back in the open market. I actually think it's a very efficient way that they distribute their earnings. The valuation's pretty good.
In December, Lincoln entered into a very widely publicized transaction with Athene to reinsure a large block of its future earnings into the present, receive that cash up front, and as a result lower its future earnings but also lower its share count at a faster pace.
I think shareholders liked it. Life insurance stocks in general have not been They had a good January, though, for the most part.
Equitable stock is trading at five times earnings.
Yeah.
Is there any amount of future earnings that's not worth surrendering to accelerate your ability to buy back shares today? Look, I could ask this for almost anyone. You've had to think about it and evaluate it. Is it a yes or no sort of thing? How do you look at their transaction? How do you think about the opportunity it presents for you?
Look, I actually think I start on the other side. I think buybacks is a consequence but should never be the reason to do something.
First of all, when you look at your portfolio and transactions I think that's how we look at it. We have a back book, but yes, if somebody comes and pays me a decent amount of a fair market value, then I would probably look into that. Otherwise, if my own belief and valuation is significantly different from what I get, I don't think it would be right to sell it just for short-term shareholders increase. Over time, if I generate the earnings I believe I generate, and I generate the cash, I think shareholders are going to get that value back. If somebody pays me a close to what I feel is market value, I would probably do that. So far what we've seen in the market is near way close to that amount.
I would then say, secondly, it's always good to have some money for buybacks. For me, buyback is a consequence if I have no better options to invest back into. I think life insurance right now, they don't have a better option, because there is no growth.
I think what the industry really has to do is they have to think hard how we can translate all the tailwinds we actually have from a pure demographic standpoint back into growth. I think that's what the industry should really focus on instead of just buying back stock and give a technical uplift. I'm not saying we shouldn't do that, I just think the order should be different. The order should be, first, make sure you actually invest back into the business and get the right growth. If you have extra capital afterwards, buy it back.
Well, I would only say that at a certain price to earnings multiple, if you firmly believe in the future earnings of your company.
Isn't the market telling you that if you don't buy back the stock, nobody will in some ways?
Yeah.
The market's calling your bluff in some ways, saying that they Yeah, it means you think the stock might be fairly valued at five times earnings also. Whereas if you did, I mean.
No, no. I think, look, that's why I said I think it's never black and white. Clearly, we strongly believe that we should be valued higher. Also, I think we have to wait until AXA is completely out, because I don't know how much is actually related to the overhang.
I don't want to be forced into a transaction before I actually know what is coming from what. I think we all believe, and I'm sure a big piece is due to the VA overhang, but I think there's also a big piece due to the AXA overhang.
Let's talk about that a little bit. The board of directors at Equitable is nine members large.
Right.
By my calculation, I can't tell, it seems like there's three board members who are AXA executives or It seems like AXA has three board seats, per se. I'm not trying to kick anyone off the board of directors, is that the most sensible makeup of the board given what seems to be AXA's desire to eliminate their stake in the company entirely? Is there a plan for them to say, "Look, we understand that there's a main point in time when we're not shareholders anymore, and we'll surrender our board seats." How should we think about that?
Yeah, I think it's actually very simple. There's a shareholders agreement that has been put in place before that said until 50%, AXA has five board members, until 35% they have four, until 10% they have two, and then they have none. That's a non-negotiable, so I don't even argue with that. We can like it or not, it's a fact. The fact is that we have now six non-AXA directors, and they're pretty active and supportive, and I think they want to see this company moving forward. The three AXA directors as well, I think they want to see this company moving forward. It's actually very constructive board discussions right now.
In terms of Obviously, AXA does not consult with you in their planning, but in terms of lock-up dates, are you generally expecting to see a transaction follow lock-up dates? Is it your understanding, or what is your understanding of the plan to exit the stake?
My understanding is fairly simple, is that AXA decided to exit fully. I think so far they've done two transactions to go below 50%. I expect them to continue when they're happy with the price. I have no indication exactly when they want to go, and in what kind of steps they want to do that. It's clear they want to sell down 100%, that's my understanding.
In terms of coming back to the previous question, about not really knowing what to do with the valuation till after this overhang is off, also you have been a large participant in the blocks being offered by AXA, you have less excess capital now
Yeah
than you did in your previous participations. Will you be, hopefully, a participant in future offerings, or has your excess capital position reduced to a point where your participation? We know what your authorization is, and we know what your plans are.
The flexibility has declined by a great deal given your capital position?
No, look, I think we front-loaded a lot of the buybacks this year, I think for good reasons. We participated with $600 million in the last offering. We have $200 million left. I would see that. I think I made it clear on the call. We can't use anything in the short term because we first need the next dividend, but we clearly want to use the majority with AXA if they do a deal. If not, we're going to go open market. I think we have a clear strategy how we're going to execute there, but it's obviously not the same amount we had before.
Yep.
I think we did a great deal with twice $600 million participation, which really brought AXA down below 50%, which was part of the objective.
I'll open up the very exciting room to questions again. No one particularly. I can bribe anyone with ice cream and cookies outside, by the way. You might want to consider it. Let's close, I guess, on thinking about over the course of the next year, are there benchmarks that you would like to exceed, that you'll be able to come back one year from now and say, "The last 12 months, doing another checklist of what we've accomplished." Is there a clear path about what you intend to do for the next 12 months?
Look, I think it's very clear for the next 12 months, we want to continue to do what we've done. I think as I said in the beginning, we laid out the objectives for 2020. Want to make sure we achieve all of them. In parallel, we're working on the new strategy post-2020, which will come out in a year or so. I think for the next 12 months, it's pretty clear what we do execute, and execute and execute on our strategy. Make sure we hit on all of these and then have a new strategy that's clear and ambitious and brings us to the next horizon.
Great. Well, thank you very much. Thank you, Anders. Again, Kevin and Priya. I appreciate it