Okay, we're going to get going. Before we start, just a quick disclosure. For important disclosures, please see Morgan Stanley Research Disclosure website at www.morganstanley.com/researchdisclosures. Taking of photographs and recording devices is also not allowed. If you have any questions, please reach out to your Morgan Stanley sales representative. With that, it is my pleasure to introduce the management of Equitable, Mark Pearson, CEO; Robin Raju, CFO. Mark, I believe, you'd like to start with some opening comments, and then we can jump to questions from there.
Thank you very much, Nigel. Good morning, everybody. I thought it'd be helpful, particularly for those new to Equitable, if I gave just a quick snapshot of the company, our recent journey, and where we're going. Equitable's mission is to help Americans secure their financial future so they live long and fulfilling lives. Our mission has never been more important now. There's 11,000 Americans turning the traditional age of 65 today, so it's a good market to be in. What distinguishes us is our unique business model. There are three I would draw attention to. Firstly, Equitable life insurance, a $200 billion size company, and a 76% awareness amongst financial intermediaries here in the U.S. We have two capital light businesses.
We own 61% of AllianceBernstein, the asset manager. AllianceBernstein operates in 21 countries around the world and has $676 billion of assets under management. Our third business unit is one we have newly disclosed this year, our wealth management business. The key numbers in there for you are, we have 4,100 affiliated advisors. This is unique, our distribution model in there. 700 of which are wealth managers and have gathered $76 billion of assets under management. The uniqueness I've mentioned distribution. Is the synergies that we're able to harvest between Equitable and AllianceBernstein. I'll give you two examples for this. Our ability to use the general account to seed the build-out of alternative strategies in AllianceBernstein.
That is good for policyholders in that the general account yield, risk-weighted yield improves, but it's very good for shareholders in that we are using policyholder money to build higher multiple, faster-growing businesses on the alts side. Nigel, if you look at the history of AB, for every $1 of seed capital we put into AB, they were able to attract another $4 of third-party money, such that the alts platform now in AllianceBernstein is $56 billion in size. In terms of shareholder returns, we've been listed now for 5 years. Total shareholder return (TSR) to Friday, over those five years is 49% against peers of 32%-33%.
Most notably, over that period, we have returned $6.5 billion in the form of dividends and share repurchases back to shareholders, which is a full 55% of our initial market cap. Looking forward, we've just held our Investor Day, and looking forward, we see this unique business model plus our investment performance and our affiliated distribution, helping drive free cash flow generated, which we see is growing by 50% to $2 billion by 2027. That gives rise to a 12%-15% CAGR in terms of operating earnings per share per share growth.
Fueling that is $150 million of productivity saves and another $110 million of additional investment income. We're gonna further seed the build-out of alts in AB with a further $10 billion investment from the general account. That's a very high-level view, Nigel, of who we are, what the recent journey has been, and the goals that we set out at our Investor Day, just a couple of weeks ago.
Fantastic. Perhaps if I can just, sort of like drill into one aspect about the $2 billion of free cash flow, was a particularly striking number, significant improvement from where you currently stand. Perhaps you can just run through some of the key drivers as to what's driving the large improvement there.
Sure, I'll take that, Nigel. Thanks again for having us today. The $2 billion of cash flow that Mark articulated is a 50% increase from this year's cash flow guidance of $1.3 billion. There are a few drivers that I would mention along with that. First is our retirement business. As you know, we operate in the largest and the fastest-growing retirement market in the world. Here in the U.S., 11,000 Americans turn 65 every day, and so it's a fast-growing market, and we're penetrating that market through our differentiated distribution, that we have through Equitable Advisors. Our retirement business is gonna improve cash flow by $200 million through 2027, and that's the biggest piece of our business line, but it's a function of the growth and us capturing it through our unique and integrated business model.
Second is our legacy business. We inherited a legacy business, legacy VA business, a big chunk of business that was run between 2004 and 2008. Through a decade-long program of risk management, we've now improved the cash flows of those businesses, and those businesses are actually gonna release capital over the next five years for our shareholders. It used to be a business that was a big piece of Equitable. Today, it's a much smaller piece, and by 2027, it's gonna be less than 5% of Equitable's earnings growth, and therefore, it's going to have high capital, free cash flow conversion as well. We're really excited of that shift. We have a fast-growing retirement business capturing the market and a legacy VA businesses that's running off and kicking up cash, and that's well reserved.
Those are two big pieces of our big U.S. business. Second is AllianceBernstein. AllianceBernstein, as Mark mentioned, continues to perform well and capture growth in the private alternative space. They're now $56 billion through their acquisition of CarVal. That's the fastest growing and highest fee portion of the asset management space, we're capturing that. By 2027, private alts is going to be greater than 20% of AllianceBernstein's total revenue, that's going to enable strong key cash flow growth as well. The last piece is our wealth management business. It's our smallest business today, about $100 million in cash, but it's our fastest growing. That's going to double in cash flow growth by 2027.
Really strong drivers, but it really comes down to real business growth, and we're capturing it through the products and the distribution that we have, and we're translating that into strong cash flows for shareholders. A 50% increase by 2027.
Great. I guess another, aspect of your capital is, a very strong risk-based capital ratio and also very strong HoldCo liquidity, which is leading investors to ask questions, when would you potentially draw that down? Maybe it's not the right time, given the concerns about a credit cycle right at the moment, but how do you think about drawing that down over time? If you were to draw it down, would it be used for acquisitions or for buybacks, or what would be kind of the use of that?
Just to give you some numbers behind that, Nigel, $1.8 billion held at the HoldCo. That is not our target. Our target is to hold about $500 million excess capital at the HoldCo. Why $500 million? That's roughly two times the interest we're paying on our debt. That's where we've positioned the company. In terms of the capital strength of the company, one of the things we're very proud of is the fact of our full reserving and our first dollar hedging. You've seen Equitable's risk-based capital north of 400% throughout the first five years of our, you know, of our existence as an independently listed company.
Whether interests are down at 40 basis points or 420 basis points or wherever the equity markets are, our capital management programs have protected that capital solvency and has remained above 400% throughout that. One of the benefits of that, obviously, that's peace of mind for all of us and for our clients, but it has meant that our capital return policy to shareholders, we were one of the few companies that did not halt capital returns during the COVID crisis. That gives you some measure of how we're managing the business and the importance of consistency. $1.8 billion is a good position to be in in these markets. We prefer to be a little bit prudent now.
There's a lot going on, but it's certainly not a change in any policy that we have as we move forward.
In terms of how we would likely draw that down, would it be incremental buybacks, or do you have acquisitions on in mind?
To date, incremental buybacks has been the policy we've adopted. In terms of M&A, maybe if I just touch quickly on that. M&A for us, we would always maintain economic discipline. We would always need to ensure that it's cash flow accretive. That would be important for us. We did two acquisitions in our first 5 years. The first one was with CarVal. This was a firm specializing in alternative strategies for AB, had about $16 billion of assets under management. We paid $700 million for that, plus an earn-out, can bring that slightly higher. That was a good bolt-on type of acquisitions, and it was accretive for both AB and Equitable.
Those types of transactions we would look at, but they would need to be accretive pretty quickly.
Great. I guess, sort of like if you look at the value of AB's obviously performed exceptionally well, and we can see the market value of that. If we extract that out from the market value of your own company, of the holding company, your own stock continues to trade at a heavily discounted valuation. To me, it looks very compelling, but the question I always get is: What can management do to unlock some of that value? I'd just be interested in your view as to what's driving the disconnect and what you can do to potentially unlock that value going forward.
Sure. As you say, it does, you know, the valuation does suggest upside for shareholders, but we are really focused on execution. I think if you look from our IPO, as Mark mentioned earlier, it has turned out to have strong returns for shareholders, 59% through Friday, and relative to 32% of our peer group, or 49 and 32 as of Friday. Strong outperformance. If you look relative to the Dow Jones U.S. Life Insurance Index, returned 14% over that time period. The performance is there, and it's coming through in value on shareholders. Where we can continue to focus on is execution against our priorities.
It starts with the $2 billion of cash that we came out and suggest for the HoldCo, continued productivity and investment income. That's where our time is really focused on execution. The second piece, Nigel, I think it's just looking at AB and the end. It's not exact science because the two businesses are complementary to each other, and there's value in the synergies that those two businesses generate. How you attribute one versus the other, AB's market cap is one way to do it, but there are other ways to do it. For example, the general account of Equitable and it's seeded $10 billion for AllianceBernstein private alts capabilities, and we announced another $10 billion at Investor Day. That's over $20 billion of internal general account funding to AllianceBernstein.
AllianceBernstein goes out and recruits teams, they raise 4 times third-party capital with those funds. It's an internal source of leverage that AllianceBernstein benefits from, that you don't benefit from if you don't have a large insurance asset manager and partner to go with it. That's enabled us to come out to market and say, AllianceBernstein can grow $90 billion to $100 billion in the alt space by 2027. It's taking the Equitable general account, combining with AB's capability, and creating deep value for shareholders. The last piece is something that we don't control. We tend to focus on where we can control, 'cause we know that's what we can execute on, is index inclusion.
We're one of the few that are not in the index. We know when looking at our peer group, about 50% of their float is coming from indexes relative to us at 20%. Now with the new accounting change, we'll continuously generate positive net index, net income. As a result, we'll be available to be included in the index. That's not something that's underneath our control. It starts with execution. There's a potential upside there for index inclusion as well.
Great. One of the things that you've done in the past, which has tended to attract a lot of investor interest, has been these block transactions, reinsurance transactions. You've done a number of those, which I think have been received well. Is there the opportunity for more of those, or where do we stand with regards to potentially assessing the opportunity to sell off some of that legacy business?
On the legacy VA business, perhaps if I just tell you the journey we've been on and where we are now, and then I'll get to your question. As part of this 5-year journey since our IPO back in 2018, we have significantly de-risked the balance sheet through hedging, reserving, and these block reinsurance transactions. Let me give you a stat for that one. If you take CTE 98, Conditional Tail Expectation 98, what level of assets do you need to cover the average of the 2 worst percent in the tail? Obviously, the tail goes like that. What assets do you need? Over that 5-year period, the CTE 98 assets we require have been reduced by 72%.
Significant reduction over that time through these block reinsurance and changing the mix. That's resulted in the legacy VA now being insignificant. It's $22 billion. It's 16% of the retirement assets and 12% of earnings. We have really broken the back of that. It is no longer relevant or significant for Equitable. In fact, Nigel is running off at $2 billion-$3 billion a year. Within 7-10 years, it's gonna be zero. To answer your question, I have to give you that background because it's not that significant, so it's not something we're hunting to do. We did 5 years ago because we needed to show to the market that our reserves would be recognized by smart money.
If you remember that big reinsurance transaction we did with Venerable, it resulted in us getting a positive seed. We got more than we were actually reserving for. That was an important benchmark for investors, and I think that's gone. One of the things we noticed since our Investor Day, on our Investor Day, we've taken the variable annuities, the legacy variable annuities out in its own segment to show how small it is and the fact that it's fully reserved, fully hedged, and not something Robin and I lose any sleep on at all at the moment. We don't have to do any transaction. If a transaction came along that was economically smart for us, we would do, but it's not a priority of ours at all. I hope that answers that question.
Interesting to note for investors, since our Investor Day, a few weeks back, the share price performance has really performed really well since we have shown investors that, our legacy VA portfolio should not be a basis for valuing the whole company.
How about the ongoing business then? I think a lot of concern has been that the competitive conditions have been heating up somewhat, a lot more competitors in the buffered annuity space, in the RILA space, and the like. I'd just be interested in your view as to where competition currently sits.
Sure. The buffered annuity space is the largest and fastest growing part of the variable annuity market in the retirement business. Today, Equitable, through its innovation, created that market back in 2010, 2011. We were first, and being a first mover, we have a lot of recognition with advisors out there. That's helped us as more folks have come in through competition. I think from Equitable, again, it goes back to our differentiators. What differentiates us is really Equitable Advisors. Having that distribution, affiliated distribution, who sells the home team's product, enables us to manage volume and mix at the end of the day. We're trying to maximize those components as we want to drive value of new business for our shareholders.
As you've seen through the market, I mean, it really started in 2021, everybody's in the buffered annuity space. Everybody's there. You have different pricing that happens, Equitable has maintained its number one position, and at the same time, we're growing value, and it's the highest margin product that we have in our platform right now. That differentiator in enabling us to maintain that margin has been very helpful for us, and we continue through Q1, Nigel, continue to see great momentum coming through that business. We're quite excited about the retirement market. It goes back to that affiliated distribution. If we didn't have that affiliated distribution, some of the P&C relationships where we have, then we'd be playing in the wirehouses.
Today we're number 9 or 10 in the wirehouses, but we're number one in the market, so it's really comes back to distribution.
Good. Yep. Just going back to another point that you made, just go to the margin expansion opportunity in AllianceBernstein. That seemed to be a very meaningful expansion. You know, hoping to just go through some of the key factors that are driving your confidence there.
Yes, at our Investor Day, we gave guidance on that we would see the operating margin improvement of 350-500 basis points in AB. I think driven by three things. AB continues to perform exceptionally well in terms of net flows coming in, reflecting, I think, their global reach, and their investment performance has been very good. Both fixed income and equities over five years or 70% or more of their funds are outperforming. AB has seen over the last five years a compound net inflows of 2.5% against its peers of -2.5%.
That continuation of the flows will give us operating leverage and give rise to an improvement in that margin. Secondly, we have told the market that about $75 million of cost saves will come from AB's move of its headquarters to Nashville. That move is done and should start being seen in the earnings in 2020.
25.
2025. That will come through. Finally, the announcement of the joint venture and eventual deconsolidation of Bernstein Research Services, which is a lower margin business, should improve that. I think those are the three things. One, additional scale, two, cost savings, and three, Bernstein Research.
Just sticking with AB, the alternative marketplace seems to be a major area of focus, and I've expected no growth. It also seems to be an area that a lot of other companies are going after. What is the differentiator that makes you confident in your ability to execute against it?
A great part of the market. Again, it's within the asset management space, alt is the fastest growing, but the highest fee portion of the market. It's a place that we really like and operate it in. To your question, I mean, the differentiator here is really Equitable and AB working together through its synergies. Again, Equitable, if I go back to 2015, started with $4 billion of seed. AB grew that to $20 billion of third-party capital. In 2020, we announced an additional $10 billion of seed. AB's continued to grow that, and at the same time, those announcements helped attract CarVal Investors to AllianceBernstein, and through a bilateral process, we're able to grow AB's platform to $58 billion today.
Our third leg is the new $10 billion that we just announced, and together, that's going to make AB's platform $90 billion-$100 billion by 2027. Really a major player in the alternative space with differentiated capabilities across their platform, and together with Equitable seed account and their good performance, will maintain and continue to be a driver of earnings and cash flows going forward.
Great. On the wealth management, that's also a major area of growth. Perhaps you can just highlight some of the key initiatives you have that supports your 15% growth guidance there.
Yes, for wealth management for Equitable, it's really powered by 700 wealth planners that we have inside the organization. We have $76 billion of assets under advice today. It's generating about $100 million of earnings. Nearly all of that converts to cash. We see that doubling in the next 5 years. The major initiatives in there, we share the LPL platform, that means we avoid some of these big step costs that you sometimes see with platform providers. It's very efficient in that sense as well.
We are really have an advantage in the fact that not only do we have the broker-dealer, we are also looking at insurance as an asset class for that category. We really target consumers who are in the half a million to $3 million of net investable assets. That's a part of the market that's growing and underserved. That's a good position we're in. Again, to Robin's earlier point, the power of our distribution is really the difference there.
How are you seeing competition, kind of emerge there? It does seem like an area that a lot of companies are talking about, growing. Has that led to any material deterioration in competitive conditions, or is it not?
We're very comfortable with the position we're in, and a lot of time our wealth managers have grown up with their clients over the years. They may have started as an insurance client, and as the client's life stages has, have moved, then our advisors continue to move with them and give them the advice then.
You know, you hear a lot of growth in that space for RIAs, but again, to Mark's point, we really focus on insurance as an asset class. Where we're growing is people that know how to do insurance, but want to expand on the wealth space, and that's what differentiates us and our growth relative to what you may hear in the RIAs that are just focused on the wealth space. Having insurance and wealth enables them to earn more money and provide more holistic advice to clients. That differentiates us when we're competing for advisors out there, because we're competing for the people that can do both.
Great. I guess, no insurance presentation is complete without discussion of commercial mortgage loans and liens. Just would appreciate any update you have as to current conditions in the market, how you're currently feeling about your exposures, and what we should expect over the next 12-24 months.
Probably we've gotten a lot of questions on this recently, Nigel, I know. For Equitable, let me just put things in perspective. 5% of our general account is in the office CML space, it's not a very significant portion of the portfolio. It's 54 loans within that space. All of them paid their mortgages last month, all the income and everything's been received as a result. It's a high-quality portfolio. The portfolio started with a 53% origination LTV, as the markets have moved a little bit, that's increased to now, as of year-end, 64% or 65%. We've seen the hit in the market come through in those LTVs, 53% origination and 65% today. We're quite comfortable with the space, it comes down to underwriting.
You need a long history in the commercial real estate place to really prove out over time. Equitable, through its history, had no delinquencies. Everybody's made their payments. Where we operate, real estate's about location, no space in San Francisco, no space in Los Angeles, no space in downtown Chicago. All right? Where we operate, we're in Class A buildings in growing markets across the U.S., and it's resulted in a high-quality portfolio that we're quite comfortable with and actually delivers good returns for us across the board. Whenever we get this question, I really like it because I'm quite comfortable with our position and where we stand, and, you know, look forward to seeing that market continue to expand. It depends where you play, Nigel. That's just like anything else in real estate.
Being in Class A buildings in the right locations, that differentiates and leads to strong returns for shareholders.
Outside of commercial real estate, any other areas of concern across the regards to credit quality that you're monitoring?
Look, Equitable has a conservative balance sheet across the board. The only place we don't hedge, as Mark mentioned, first dollar hedging for equity and interest rate exposures. Where we don't hedge, we don't hedge credit. We think credit is a good risk to take within an insurance company. That's where you wanna take that risk. When you double-click on Equitable's credit portfolio, 96% investment grade, conservative. As you know, we came out from AXA to Solvency II. We have a lot of treasuries. A big move for us is going into public credit. We've now gone to some private credit capabilities, but the resilience of that portfolio has been maintained.
In our last earnings call, we shared a sensitivity to the market, which was 2008 financial crisis for investment grade, dot-com crisis for below investment grade, and a 40% hit to the commercial real estate portfolio, and our RBC declined by 52 points within that scenario. On top of that, we generate 10 points of RBC every quarter. You know, we have a strong conservative portfolio. It's resilient, but we have the leverage in order, if a shock happened, to be prepared for it, to keep the consistency in our cash return to shareholders.
Just drilling into one of those points, the reallocation of the investment portfolio more into the private credit. Just an update as to where you stand there and the incremental net interest income uplift that you could get from that.
Sure. We completed, through year-end, our second leg of the investment income. Of the original $10 billion that we announced in 2020, we deployed $7 billion in the alternative space, a lot of it in private placement, also building on some of AB's unique capabilities that we have. We announced a new $10 billion of private alt space. I think the one thing to keep in mind, as we move to private alts, we're keeping the high-quality portion of our balance sheet. We're not moving and stretching for yield. In this environment, you can get good income on high-quality securities, that's where we're focused on. We wanna keep the resilience of the balance sheet.
As we move into alts, expect us to maintain the resiliency, and we're going to generate that additional $110 million of positive investment income that we announced to the market at Investor Day.
Why don't we pause here. Any questions from the audience? Not yet? Let me keep going then. Productivity improvements, another key element as to the story. Just, we're hoping to get an update as to where you currently stand, where the best opportunities are. You mentioned AB before.
Yeah.
You know, just more broadly, across the entity.
We gave our guidance of $150 million productivity improvement. As you mentioned, Nigel, I've already mentioned that $75 million of that is in connection with AB's move to Nashville. We've put that locked in. The leases that we currently overlap will start to run off, we're pretty confident on that as well. We have $25 million-$30 million of premises saves as well on the Equitable side. Equitable, we have lease breaks, from next year we'll be moving to smaller premises here in the city, that will throw off $25 million-$30 million or something like that.
The balance of the saves are really classical, classic productivity saves, where we look to take out bad expenses, anything that can be automated, anything that is overly bureaucratic. That will be using technology and process process improvements. One of the things we did inside the company is we brought what we call the new ways of working into the organization. This is an agile methodology. Many firms have agile methodology in their IT departments, but we apply it all the way through the organization. We marry that with design thinking as a part of that new ways of working methodology, that gives us the productivity improvements as we go through. We have very high conviction that we will deliver that $150.
One of the items that's been causing a little short-term volatility in the reported results has obviously been alternatives and mortality. Just hoping to get an update there as to what we should be expecting.
Sure. The alternative, what I define as alternatives to Nigel's question, it's about 3% of our general account. That's mostly private equity exposure that we have. Those usually report in a quarter or 2 lag, we saw in the first quarter across the industry and not Equitable as well, returns are sort of flattish in the quarter versus you'd normally expect an 8%-10% annualized return in that portfolio. I think in the second quarter, Nigel, we'd expect that to continue the same trend in the first quarter, roughly be flat until you have the recovery because of the marks coming in now. We're seeing a lot of the marks reflect in the higher interest rate environments in Q4, where the 10-year was at 3.88. Expect that to come through.
Similar returns in all. For Equitable, those returns impact all of our segments because we allocate that income after our segments. Expect individual and group retirement to look similar in Q1 for the all performance. Protection, protection, we have alts, but we also have mortality. Mortality was poor for us in the first quarter, but again, we've had nine quarters in total where mortality's been in line. When you look in aggregate, that's an area where we expect volatility. So far, we've seen mortality improve relative to Q1 and closer in line to our expectations. Protection, but with the alternative exposure, I'd put it in the range of, like, $50-$75, but more on the lower end at $50 million, but much improved from Q1, where we were negative in the quarter.
One, We're running out of time, but perhaps a question?
AllianceBernstein is publicly traded, trades 12 times earnings, throws off a lot of cash. Any reason why you wouldn't or shouldn't own 100% of that business?
We currently own 61% of AllianceBernstein, and we are extremely happy with that investment. As I mentioned earlier, from Equitable's point of view, the cash that Equitable has been collecting has grown from $300 million at the time of the IPO to $500 million in 2022. It's been a very strong performer of us. We hold 61%. It's actually come down from 65. We used 4% to acquire CarVal, to make sure that it was accretive for us. The 65%, there's no magic. That's just the total that AXA had at the time of the IPO. We didn't go in and say, "Let's buy 65, not 100 or not 51." That's what we inherited, and that's the card we're playing.
We've been very happy with the way the business is performing, very happy with the prospects going forward as well. Obviously, in meeting the needs of the shareholders of Equitable, we know that cash is important for those shareholders. Like I answered earlier with to Nigel, anything on the capital management side, M&A, et cetera, we have to measure it against a buyback. That's really the reason behind. Really happy with the investment we have.
We better wrap it up here. We're at time. Thank you so much for your views.
Thank you very much, Nigel.
Thank you.
Thank you all for coming along.
Thank you.