All right. We are going to get started. Great to have AXA Equitable with us this morning. I believe this is their first sell side conference as a new public company, so we're excited that we got the opportunity to host. Up with me, we have Anders Malmström, the CFO of the company. Also wanted to acknowledge Kevin Molloy and Priyam Rotra in the front row from Investor Relations. Figured just to set the stage, can you start by reviewing the financial targets that you guys laid out and established during the IPO process?
Yeah, sure. Good morning, everybody. It's really exciting to be here for the first. As you said, it's the first sell side conference after the IPO, but as we said during the roadshow, we are 159-years-old baby, it's really interesting. When we went through this S-1 process, the IPO process, we established our new financial targets. Basically, I want to categorize them into earnings, into capital, and into cash. From an earnings perspective, we gave ourselves a target of 5%-7% earnings growth over the next couple of years. This is after the initial uplift we get from the tax reform. I think the main sources for this earnings increase are really coming from three areas. One is about what we call the GA rebalancing, the general account rebalancing, coming out of a Solvency II framework.
We underinvested in corporate, maybe we're going to talk about that a little bit later. We're going to invest more into corporates and long iteration corporates in particular to get an uplift and to be at the par level with our U.S. peers. The second initiative is expense management. We gave us quite a meaningful target on efficiency, we have a good track record over the last couple of years, we're very confident that we can achieve that. The third one, which I think really is in the long-term outlook, is about the business growth. We want to grow the business, we have good initiatives there, I think the market is there to get that up and running. AllianceBernstein is going to have an operating margin target of 30%.
I think they are also well on track to achieve that by 2020. All this together brings us to an ROE of in the mid-teens, at Q2, we already had 14.6%. I think that's from an earnings perspective, our objective. Talking about shareholder payout, we gave ourselves the target of 40%-60% of operating earnings. We'll probably talk about that later today as well there. We think we're on track to do so. Really from a capitalization standpoint, which brings all of that together, we target to be at the CTE 98 level for our VA business and between 350 and 400 obviously for our non-VA business. I think that's all together a nice boundary for now till 2020, we will see after that.
I wanted to delve into each of these a little bit. I'll start with the General Account Optimization initiative. As of the second quarter, you were already 50% done with that. Can you talk about how the investment income uplift has come in so far relative to your expectations now that you've already got 50% of it complete?
As I said before, the general account uplift is really coming from two main initiatives. One is reduce the treasury ownership and go into corporate, and then within corporate, is to go to longer corporate. As of half year, we saw year-over-year an uplift of $48 million. I think we're well on track to achieve our target of $160 million by 2020. As you mentioned before, it's about halfway done. There's more to do. I would say overall, I'm very confident we'll get there. Obviously, we have to see a little bit how the market behaves. We saw a flattening of the curve, we might delay a little bit the duration extension. Overall, I'm very confident that we can achieve what we talked about.
Thanks. Just to follow up there, at least it seems like it's gone faster than maybe people like myself were expecting. Did you view that more as just a timing issue? Or have you actually seen potentially additional opportunities than when you first established the target?
No. I think timing helped us because we started the program last year.
Okay.
I think we were right on time with the uplift of interest rates.
Yeah
End of 2017. You're going to see the majority of the benefit actually coming in in the second half of 2018 and 2019.
Got it.
Yeah.
On the $75 million of expense efficiency guidance that you gave, can you talk a little bit about more detail on the actions that you're taking to achieve that?
Sure. First of all, I think it's important to see the 75 is a net number.
Okay.
We basically gave ourselves a target that our net expense is going to decrease by 75. This is after reinvestment. The initiatives, obviously we have to save much more because you're going to reinvest into business initiatives. I think there are multiple levers there. The first one is really on the people side. We announced that we make Charlotte our second hub. We announced, I think, more than a year ago that we're going to move around 500 jobs from New York metro area down to Charlotte. That's well on the way. We're going to get a significant benefit there. The second one is really on the technology side. We have to update the technology with more efficient technology to get the sales there. The third area is on the outsourcing offshoring.
We already work very closely with our AXA captive in India, but we're going to extend that to get more benefits from there. I think that's basically the three main areas. From a results perspective, we've already achieved $11 million year-over-year at Q2 efficiency, but obviously it's more to do to get to the 75. We have a good track record. If you look back the last couple of years, I think we took out more than $350 million out of the business.
Great. AXA Advisors is certainly a key part of your company. I think it hasn't probably been maybe appreciated that much by the investment community yet. Can you talk a little bit about AXA Advisors and how it fits into the company and how it plays a role in distribution?
Yeah, sure. I think as you know, AXA Advisors is a key part of the company since many, many years. It's really also a key part of our story going forward. Maybe just when we look back over the last years, having a captive sales force really helps you a lot in many areas. It helps you when you're in a crisis because it stabilizes your sales. It actually helps you when you want to shift the product mix, when you want to test something, new products, new initiatives. I think all that together really helps us over the last couple of years. One thing that's important, you have to manage the sales force, that it's in a way cost neutral. They have to work to their allowance. We never subsidize an AXA Advisors, but we have AXA Advisors.
They're open architecture, but they're very close to us.
Yeah.
I think something that's really important to us is that they are self-sustainable, but they are affiliated with us, and that helped us in the past very much. When you look into the different segments, you see that their contribution is different. On the individual retirement, they're about 40% of our overall sales, so a significant piece, but we have much more, also outside. When you go into group retirement, it's about 90%. In group retirement, which is a specific, and I think for us it's a very interesting business. AXA Advisors and the business success is very close together. It's really the advisors that drive that business model. On the lifestyle protection solutions, they contribute about 70% to our new business. Something that you always a bit forget is also in AllianceBernstein, we actually have our own advisors, and it's about 200 of these.
They provide about 20% of the asset under management from AllianceBernstein. For us, having our own sales force is really imperative to the strategy.
You mentioned it was self-sustaining. Do you think there's an opportunity over the longer term to make it into more of a profit center for the company? Or do you view it as more of a complement to selling the other products?
It's an interesting question. It's something we discuss on a regular basis. I don't think I want them to be a profit center. At the same time, I want them to be self-sustainable.
Yeah
I want to have this discussion. I never want to be in a situation, say, I only have them, kind of strategic reasons, but it costs me a lot. I don't think that's good. At the same time, I don't want to make them fully independent.
Got it.
We benefit on both sides from this affiliation.
Just shifting to Variable Annuities, I'll start with sales. The industry saw pretty good improvement in the second quarter.
You saw some improvement as well. Can you talk about some of the drivers of that and what your outlook is for growth in Variable Annuities going forward?
Look, I think from an industry perspective, I think it was the first quarter where we actually saw a real growth year-over-year there. The reason is clear. There was regulatory uncertainty over the last couple of years with the DOL, now that at least this one goes away, I think there's some relief in the market, with respect to regulatory. I think if you take a big picture, there's a huge demand in the society for income products, for products in that space. All the baby boomers going into retirement. The natural need is here. Regulatory environment is always difficult, but that's something I think we have to manage as a company. If I look back the last couple of years, I actually think we did that pretty well because our sales volumes were always decent.
Maybe that's also the reason why we didn't see that much of an uptick now in the Q2 than other markets.
Yeah.
We always maintained a decent level of sales. I see two reasons for that. One is straight on the product side. I think we brought new products into the mix, that were able to offset some of the kind of reductions in the market. SCS, and maybe we talk about that later, more short duration. Our distribution relationships are really, really strong, and that's what helps you when you go into this kind of uncertainty. I think overall, we're very happy with the sales, and the uptick is obviously good, and I think we see a positive outlook there.
On SCS, that's your buffer annuity product.
Yeah.
We've seen more competitors introduce similar types of products now. Do you see that as a risk to your sales outlook?
Yes. Look, I think first of all, it's always good if you get copied, because it tells you that you do something right. I think that's my starting point. If you look at the buffered annuities, this is the market we, in a way, invented. We started many years ago, and it took a while until it took off, but the last couple of years, we really saw strong sale. I think you can now say we created a market.
Yeah.
Before that, there was no market for buffered annuities. From that perspective, I actually welcome competition. Of course, if you have competitors, I think it becomes a bit more difficult, but we feel confident that we can keep our market share in that area. Look, I think for us, it's still important that value comes before volume. We try to be disciplined. Also, at the same time, we have to make sure that we bring new inventions into the market to kind of offset that. As I said, the market in itself is growing. Even if you lose some of the market share, I think you're actually growing there. It's a good market, and there's a huge need out there in society.
What about fixed indexed annuities? It's not a product that you sell. It seems like it would potentially be a fit for your company. Is that something that you look at?
Yes. You're right. Right now, we don't sell it. The reason is clear. In the Solvency II framework, you can't make the numbers work. I think now, as a public company in the U.S., we still manage, and I think that's very important. We still manage to economics. It's very important. We have our own economic framework, that we take as our measurement tool to manage profitability. With this change, fixed index annuities become an opportunity. We look into it, but we haven't made any decisions if we want to go into.
Yeah
that market. It's not just product, it's also distribution. You don't want to cannibalize.
Yeah
products you already have.
On the SCS product, it's a spread-based product from an earnings standpoint, even though it's considered part of the variable annuity product set.
Can you talk about the return dynamics of that product financially for you? Can you also help us think at all about how big of a contributor that is to the earnings of the individual retirement business? I think, probably there's a perception that that's all variable annuities.
Yeah
It's really a spread-based product.
Yeah. No, I think you're making a good point. When we talk about VAs, I think we need to specify what we mean by VAs.
Yeah.
There are multiple VAs. Today, SCS accounts for about two-thirds of our VA sales.
Yeah.
It's non-GMXP, as you said, it's spread-based. It has no policyholder behavior risk. It's fully ALM matched. It's a totally different risk profile than the accumulator we sold.
Yeah
the mid-2000s. As you said, it is spread-based, it is basically the underlying investment into corporates. That is how we get the return. We have a good IRR, something that is important, it is much more short duration. You sell them in tranches, like five, six years, you have renewals. It is not a long-term product like the older GMXP, where you sell it for 20, 30 years.
Yeah
A much shorter duration. Which I think helps from a risk perspective, you have to make sure that you actually get enough sales.
Got it.
Into the machinery. Today, from the in-force, it is about 25% of our individual retirement business. We have good profits. I think we are very happy with the returns because it helps us on the risk profile side.
Got it.
I think it's a good contribution. Yeah.
I guess shifting to GMIB accounting, I think we can all agree it's not a very good representation of the economics, but it does cause a significant amount of net income volatility for you. Can you remind us in a normal year, kind of how different you'd expect net income versus operating income to be on a GAAP basis, and then how much of that difference do you feel like is truly an economic difference?
Yeah. Look, I think this is one of the questions we get in each and every call. It's really highly problematic because the accounting just doesn't match the economics. As I said before, we manage our business to economics. The reason is really that you have a liability framework, which is based on SOP, which is very slow reacting. On the other hand, we have to hedge this product, and that's where you have mark-to-market. You have a disconnect between the accounting and Between the assets and the liability. That's why we use operating earnings, kind of the best proxy. It's not perfect. Maybe we talk about the fair value accounting later on. It's not perfect, but I think it's the best proxy. We always have to explain the difference between operating earnings and net income.
When you do a plan in a normal year, it's always an upmarket. In an upmarket, your hedging loses by default. We would say in a normal year, which is a year of, let's say, 6% in equity growth, you have a, I don't call it loss, you have a disconnect of about $700 million in a normal year. I think for me, this is purely a mismatch. On top of that, we have a static hedge program, which is really more supplement to make sure we have our CTE 98 covered, where we use options, out-of-the-money options, where you can really talk about the cost, and that's the $100-$150 we talked about. The $700 is really just timing because we use futures and swaps in our hedging program, so there are no real costs. There's not a premium we pay.
Over time, you should basically get it back.
Got it. I guess related question is, we have the NAIC rules changing and probably being a little bit closer to fair value than they used to be.
You have FASB with the final rules that are set to go into place in 2021 that are also fair value. You're going to have a convergence around closer to fair value accounting for variable annuities. I guess how does that relate to how you're currently managing the business at Equitable, and how are you prepared for those changes?
I think first of all, as I said before, we already manage the business to economics. I'm extremely supportive of both initiatives because they both go in the same direction. Let's start with the NAIC, because it's much more advanced.
Yeah.
As you said, it's much more an economic framework. We really support that. I think we are well-prepared there. Obviously, we still have to go through the details. The NAIC adopted the framework. The committees, they go through and define each and every parameter you have to use. Overall, I think it will be fine, and it will have impact clearly for all of us in the industry. As I mentioned at the earnings call, I don't expect that it's going to impact our dividend capacity.
Yeah.
That's, in a way, the most important piece. Again, I don't think we're going to change the way we manage the business because it's economic and it, in a way, brings the statutory framework closer to what we do. The second question to you on FASB. I'm really looking forward to the moment this is in place because then I don't have to talk anymore about the mismatch between net income and operating earnings. It's very early, so it's very hard to say right now what are the actual impacts. I expect that my mismatch going to reduce drastically based on that, because, again, it goes in the right direction with fair value.
Yeah.
It's going to help in particular the GMIB companies that have a lot of GMIB. That's good.
It will increase because it will move to fair value, your reserves will go up on a GAAP basis? Is there any potential impact?
Look, as I said, I think it's early. I have some expectations, but still the details need to-
Yeah
be fleshed out, so I'm not worried about it.
Okay.
Yes, I think we have to explain it.
Yeah.
We will see changes. I think in the long run, they will all be positive.
Okay.
Because it represents the business in a better way than before.
Yeah. As you were, I guess, last year, as you were preparing for the IPO, you contributed $2.3 billion of capital into the VA business. I think at least a chunk of that was for updated policyholder behavior assumptions. Can you talk about how you feel about your policyholder behavior assumptions at this point? I think there's some new mandated assumptions with, or at least.
Thresholds within the NAIC rules, do your assumptions kind of still look good.
Yeah
relative to that?
Yeah. As you mentioned, we injected $2.3 billion last year into the business for two reasons. One was really the kind of, we made an update of policyholder behavior. The main reason was really just become a standalone company. As a subsidiary, you need to be less capitalized than as a standalone company. That was a big piece, and as I mentioned before, we manage now to CTE 98 and feel very confident there. When it comes to these different assumptions on the NAIC, I think for all of them, there will be some small changes, we don't expect them to materially change our position. As I said, I don't expect any impact on our dividend capacity.
Okay.
Look, I think assumption is something you always go, and you look back.
Yeah.
You project forward, you have to update assumptions every year, we're doing that. I don't expect from the NAIC that it has.
Okay
material impact.
I guess on insurance subsidiary dividends, you took $1.1 billion out-
in July for the holding company. It seems like that's kind of in line with-
what you were talking about from a cash flow standpoint.
I guess, is that the right interpretation? That kind of your cash flow scenarios are playing out as you expected, do you view that level of dividends out of the insurance subsidiary as sustainable going forward?
Yeah, absolutely. We took out a little bit more than $1 billion, I mean, $1.1 billion out of the operating entities. I think that's what we expect on a sustainable basis that we can dividend out from the Equitable Life. Look, we manage the dividend capacity to our internal framework, the CTE 98 and the 350-400 non-VA. Obviously, we have to deal with the New York formula.
Yeah
We don't expect that this materially changes over time.
Is the GAAP earnings for AllianceBernstein, is that a reasonable proxy for the amount of earnings you'd expect to get to the holding company structure in place there?
Exactly. AllianceBernstein generates about $400. Our stake is about $400 million in GAAP earnings coming from there. This is a good proxy for the cash because AllianceBernstein, as a partnership, they have to pay out 100% of their earnings. Now, we just keep in mind the ownership of AllianceBernstein. We own 28% of AllianceBernstein in our insurance company, and the rest in the holding company.
Yeah.
The dividends that go into the holding-
Yeah
are obviously-
Okay
non-regulated. It's about $200 million.
Got it.
Maybe more than $200 coming to the holdco. The rest goes to the insurance company and then has to go through the insurance.
Okay. Got it. In your group retirement business, you don't get a lot of questions on this because the performance has been very stable. You've had good net flows. I think your ROE is in the 20%-25% range. Are you experiencing any fee pressure or other challenges in that business that would threaten the sustainability of those results at this point? Are things still pretty stable?
I think that this is a question we don't get a lot of questions, which I see as a good thing. It's a very interesting business, because the majority of our group retirement business really coming from the 403(b) area, and that's where AXA Advisors play a crucial role. The way we work is, it's a work site. It's after school, so the advisor has a very strong relationship to the school. They talk, they advise the teachers. I think by that, you have a strong affiliation, and your business model is not threatened by the same way like a 401(k), where you have some kind of large plans, and they talk about each basis point, because it's really driven by advice. It's complicated. The teachers, they want support, they want advice.
That's a way we can really protect our margins there and provide value to our customers. Obviously, I think there's always a macro fee pressure. I think with that business model, we're actually able to protect this business model pretty well, and we see steady inflow year-over-year. Something maybe that's just important here, the flows are very seasonal.
Yeah.
Usually, I think teachers, they have three times of the year when they contribute. Usually, early in the year. I think one month in the tax season, and then at the end of the year.
Okay.
You won't see a lot of inflows during the summer.
Yeah.
Overall, I think it's a very positive story. I hope I don't get too many questions.
On the protection business, there's been some volatility because you're in loss recognition on part of the block. When do you think you could emerge from loss recognition, and then where do you think you could improve the mid-single digit ROE too in that business over time?
Yeah. I think protection solution is a challenge business, and not just for us. I think the whole industry has very low ROEs there. I would say the main reason is really low interest rates. It's, in our case, because of low interest rates, we are in what is called loss recognition testing. I'm very promised by the new sales we've done. I think we have a sales increase there. It's profitable. It helps the overall business, but it's going to take another few quarters to get out. Obviously, also depends on where interest rates go.
Yeah.
Is it earlier? Is it later? The underlying, the fundamental, actually, indicators from the business are promising, but we're going to see a volatile quarter here just because of the loss recognition testing.
Okay.
Yeah.
You have mentioned in-force transactions as a possibility over time. When you talk about that, is that more on the individual life side, or is that also something you'd consider for the legacy variable annuity block?
Yeah. I think, first of all, generally speaking, we said for the next, let's say two, three years, we really want to focus on the execution.
Yeah.
We laid out a strategy. We laid out our targets. Let's execute and show that we basically walk the talk. M&A is really on the side right now. Obviously, we always look at the market and see if there are smaller opportunities there. I wouldn't focus on one or the other area. It has to make sense for our shareholders. If it makes sense, we look at it. I don't see anything in the short term that we anyway do there, because we really want to show that we can execute our strategy, and then I think on the next cycle, then we can talk about inorganic-
Okay
growth, yeah.
Are there any questions in the audience?
You talked about when you think about a holdco cash buffer and then your VA capital requirements and the non-VA RBC, how should we think about distributable cash flow when you put all those three together?
I think, as I said, the capitalization target is really the CTE 98 for the RBC, and then the 350%-400%. Basically, everything that's above is distributable. Now, as I mentioned before, it has to go through the insurance company, the New York formula, and then it goes up to the holding company. As we discussed before, we just upstreamed $1.1 billion from the operating entity to the holding company. I expect that this is a sustainable number. I think that's what you can expect going to the holdco. Obviously, at the holdco, I have some interest to pay, but then I think this then leads to the 40%-60% payout ratio relative to our operating earnings.
Thank you.
Okay.
I just had one on the buyback. You announced the $500 million buyback authorization through the first quarter of 2019. I just wanted to clarify. That really represents the buyback that you expect for 2018, and the fact that it runs through 2019 is really just timing, thinking about AXA potential secondaries and things like that?
Yeah, absolutely. We announced the buyback together with the dividend of $0.13 per share in Q2. It's really representative of the 2018 results. I think, as I said at the earnings call, the majority we expect to use with AXA-
Yeah
when they sell down. Because we don't know their timing, we extended it into Q1.
Okay.
You should really think about that as a payout based on 2018-
Got it
results. Absolutely.
Any other questions in the audience? If not, I think we're pretty much out of time, so we'll wrap it up there. Thanks a lot for participating.
Okay. Thank you.
Much appreciated.
Thank you.