Equitable Holdings, Inc. (NYSE:EQH) Q1 2024 Earnings Call Transcript May 1, 2024
Equitable Holdings, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning. My name is Dennis and I will be your conference operator today. At this time, I would like to welcome everyone to the Equitable Holdings’ First Quarter 2024 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the conference over to Erik Bass, Head of Investor Relations. Please go ahead.
Erik Bass: Thank you. Good morning and welcome to Equitable Holdings’ first quarter 2024 earnings call. Materials for today’s call can be found on our website at ir.equitableholdings.com. Before we begin, I would like to note that some of the information we present today is forward-looking and subject to certain SEC rules and regulations regarding disclosure. Our results may differ materially from those expressed in or indicated by such forward-looking statements. Please refer to the Safe Harbor language on Slide 2 of our presentation for additional information. Joining me on today’s call are Mark Pearson, President and Chief Executive Officer of Equitable Holdings; Robin Raju, our Chief Financial Officer; Nick Lane, President of Equitable Financial; Jackie Marks, AllianceBernstein’s Chief Financial Officer; and Onur Erzan, Head of AllianceBernstein’s Global Client Group and Private Wealth business.
During this call, we will be discussing certain financial measures that are not based on Generally Accepted Accounting Principles also known as non-GAAP measures. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures and related definitions may be found on the Investor Relations’ portion of our website and in our earnings release, slide presentation, and financial supplement. I will now turn the call over to Mark.
Mark Pearson: Good morning and thank you for joining today’s call. Equitable Holdings delivered strong first quarter results and I’m pleased that the organic growth momentum in our businesses is beginning to translate into higher earnings. Across Equitable and AllianceBernstein, we continue to see strong demand for our Retirement, Asset Management, and Wealth Management solutions helped by favorable demographic trends and a supportive macro environment. This is enabling Equitable to generate strong value of new business, which will drive future growth in earnings and cash flows, while also delivering on our mission to help our clients live fulfilling lives and retire with dignity. Turning to Slide 3. First quarter non-GAAP operating earnings were $490 million or $1.43 per share, which is up 49% year-over-year on a per share basis.
There were offsetting notable items in the quarter and non-GAAP operating EPS after adjusting for notables was also $1.43, which is up 18% compared to the prior year. As discussed last quarter, we expect non-GAAP EPS growth to accelerate in 2024, driven by strong organic growth, ongoing benefits from productivity saves and general account optimization, and easing headwinds from the adverse mortality and lower alternative investment returns experienced in 2023. You saw that this quarter and we continue to forecast 12% to 15% annual EPS growth through 2027. Looking forward, Equitable and AB should both benefit from growth in assets under management and administration, which increased 13% year-over-year to $974 billion. In addition the favorable interest rate environment remains a tailwind for retirement sales and investment income.
Equitable also continues to consistently return capital and in the first quarter, we bought back $253 million of stock and paid $73 million of common dividends. This equates to a total payout ratio of 68% at the upper end of our 60% to 70% guidance. We ended the quarter with $1.9 billion of cash and liquid assets at the holding company, providing ample flexibility to both continue returning capital and take advantage of the attractive growth environment. Equitable remains on track to generate $1.4 billion to $1.5 billion of cash in 2024, with roughly half of this coming from asset and wealth management. Turning to our growth strategy. We continue to see good momentum in our core businesses, while scaling emerging higher-growth businesses. In retirement, our largest business, we had another strong quarter with net inflows of $1.5 billion, which translates into a 5% annualized organic growth rate.
Sales and deposits were up 42% year-over-year, and continue to be driven by our spread-based RILA product although, we’re seeing growth across all products. Robin will expand on this later in our presentation. In asset management, AB’s overall net flows were slightly positive, with very strong active net inflows of $3.7 billion being partially offset by the loss of a large low-fee passive mandate. Retail flows continue to be very strong and private wealth also had a solid quarter. The institutional pipeline currently sits at $11.5 billion, with the majority in private market strategies. AB also closed the Bernstein research joint venture on April 1, which will result in margin expansion of 200 to 250 basis points on an annualized basis. Wealth management earnings continue to track well ahead of our 2027 target, helped by favorable markets and strong organic growth in fee-based investment accounts.
Over the past year, the advisory business has grown 4% organically. This is slightly lower than the recent trend, due to an adviser group departure this quarter, but the growth outlook remains strong with earnings up 34% compared to the prior year quarter and AUA up 22% to $92 billion. We’ve also made good progress on our strategy to seed future growth. AB received its China license earlier this year, and launched its first mutual fund in March. Additionally, we received initial flows from BlackRock’s LifePath Paycheck offering in April, and continue to be excited about the in-plan guarantee growth opportunity. Before turning the call over to Robin, I’d like to spend a couple of minutes discussing the US retirement market and the growth opportunities I see for Equitable and AB.
Please turn to Slide 4. I’ve had the privilege of working in retirement businesses across the globe, and the US is by far the most attractive market I’ve seen for a few reasons. First, it’s a huge market, with over $35 trillion of assets nearly 10 times the size of the next largest market. Secondly, there’s a clear need for private market solutions. The US has an aging population that is living longer, which necessitates a higher level of retirement savings. Social security will not meet this need and the shift from defined benefit to defined contribution plans has transferred that savings burden to individuals. The lack of traditional pensions means that Americans also need to figure out, how to convert their savings into lifetime income, which is something most people are not equipped to do on their own.
Solving this need presents a critical challenge for the country, and is central to Equitable’s mission. We are reaching the peak period for baby boomer retirements, with 4.1 million Americans turning 65 every year, through 2027. By 2050, the US, is projected to have a retirement gap of $137 trillion by far the largest amongst developed countries. Turning to Slide 5. I’d like to focus on how Equitable and AB are positioned to capture this retirement opportunity through our unique integrated business model that combines wealth management, product manufacturing and proprietary asset management. It all starts with our advice-driven model, and ability to engage directly with our clients on their retirement savings, income and intergenerational wealth transfer needs.
Equitable has 4,300 affiliated advisers and access to over 14,000 actively producing third-party agents through targeted distribution relationships. This enables us to reach a wide range of clients to provide tailored solutions whether they are just starting their careers or in the midst of retirement. In our Individual and Group Retirement businesses, we have chosen to focus on three segments of the retirement market that leverage our distribution strengths, have compelling growth potential and offer attractive returns on capital. In Individual Retirement, we are the leading provider of registered index-linked annuities, or RILAs. We believe RILAs offer a compelling consumer value proposition by providing an opportunity to grow retirement income, while also having partial downside protection against the market decline.
From Equitable’s perspective, RILAs are a spread-based capital-light product allowing us to generate 15% plus IRRs with a narrow range of outcomes. Over the last 12 months, our Individual Retirement segment has delivered 8% organic growth, while generating higher spread income and strong value of new business. LIMRA projects RILAs to be the fastest-growing segment of the annuity market over the next few years. We are also the market leader in providing supplemental retirement savings for K-12 educators. We operate through a worksite advice model with 1,100 dedicated advisers that understand educators’ specific needs. And today we work with over 900,000 teachers across 9,000 school districts. This is a steady growth market where Equitable’s distribution provides a real competitive advantage.
Finally, we are very excited about the emerging in-plan guarantee market. The passage of the SECURE Act makes it easier for plan sponsors to add a decumulation option to define contribution plans by placing annuities inside 401(k) plans. Over $7 trillion of assets sit in 401(k) plans today. So this represents a tremendous opportunity for us and our industry. Equitable currently has offerings with BlackRock and AB both leading asset managers in the 401(k) market. BlackRock has 14 plans with $27 billion of target-date fund AUM signed up for its LifePath Paycheck solution and we received initial inflows in April. Beyond the business opportunity, we are very proud that across Equitable and AB, we are innovating to address a real social need that all working people can understand.
We can protect them from the risk of outliving their savings. Underpinning everything we do in retirement is one of Equitable’s greatest assets, AllianceBernstein. AB currently manages $123 billion of AUM for Equitable. And as we continue to grow in spread-based products like RILAs and in-plan annuities, AB will capture most of those general account inflows. AB also directly benefits from the growth in retirement savings market as it manages over $200 billion of third-party retirement assets. Despite the challenges facing the active asset management industry, AB has delivered 2% average annual organic growth over the past five years, much better than most peers. Putting it all together, I truly believe Equitable is in a privileged position.
The U.S. retirement market presents a huge growth opportunity, and Equitable is unique in being able to participate across distribution, product manufacturing and asset management. I’ll now turn it over to Robin to go through our results in more detail.
Robin Raju: Turning to Slide 6. I will highlight results for the quarter. On a consolidated basis, Equitable Holdings reported non-GAAP operating earnings of $490 million in the quarter or $1.43 per share, up 49% year-over-year. While we had a couple of notable items, these offset one another, and non-GAAP EPS ex notable items was also $1.43 per share. This is up 18% on a year-over-year basis and 7% sequentially, as we’re seeing the benefits of strong organic growth, favorable markets and ongoing share repurchases reflected in the results. Details by segment are included in the appendix, but there are a few items I want to highlight. Operating earnings increased on a year-over-year basis in each of our core businesses, indicating healthy fundamental trends across the company.
Mortality was in line with expectations. As a reminder, we assume higher claims in the first quarter due to impacts from the winter flu season. We’ve now had two consecutive quarters where mortality has been in line with our expectations, which supports our view that the elevated claims experienced in the first half of 2023 was a temporary pull forward. For the full year, we still expect Protection Solutions operating earnings of $200 million to $300 million with some volatility on a quarterly basis. Investment income was also up over $200 million year-over-year. Base net investment income continues to benefit from growth in the general account assets and higher new money yields, which were 180 basis points above the portfolio yield in the quarter.
Annualized alternative returns were 5.8%, which is still below our 8% to 12% expectation but improved relative to recent quarters. Turning to taxes. We reported a consolidated tax rate of 19% for the first quarter, in line with our full year guidance. Our Insurance segment had a tax rate of approximately 14%, which is below the 17% rate expected for the full year due to timing of tax refund benefits. On the other hand, AB had a slightly elevated tax rate in the quarter of 29%, which is above our full year guidance of 27%. Net income was $114 million in the quarter as the benefit from higher interest rates was more than offset by the impact of higher equity markets. Total assets under management and administration increased 13% year-over-year and 5% year-to-date, driven by equity market tailwinds and net inflows in retirement and wealth management.
We remain on track to achieve the general account yield enhancement and productivity targets outlined at our Investor Day and continue to execute against our strategic priorities. As of quarter end, we deployed $9.6 billion of our $20 billion commitment to AB’s Private Markets platform. We expect to finish deploying the first $10 billion of the commitment in the second quarter. In April, AB closed the Bernstein Research Services joint venture with SocGen. This transaction will have an immaterial impact on go-forward earnings but improved AB’s operating margin by 200 to 250 basis points on an annual basis. In the first quarter, AB’s adjusted operating margin improved to 30%, supported by growth in AUM and active net inflows of $3.7 billion during the quarter.
Turning to slide 7. The combination of robust retirement sales and net flows supported interest rates and equity market tailwinds are translating into higher earnings. Spread income is up 26% year-over-year in Individual Retirement and up 48% in Group Retirement. This reflects a shift in our retirement business towards more spread-based products, driven by the growth in RILA sales. As a reminder, the RILA products, provide good economic returns for shareholders and has a very different risk profile than variable annuities sold pre-financial crisis. Unfortunately, investors still tend to lump all BAs together. So I want to spend a minute highlighting why we like the RILA products. RILAs address a client need for protected retirement solutions.
And from our perspective, it is purely a spread-based product similar to fixed annuities. All the assets are invested in the general account and a product fixed maturity date and short average duration enable tight ALM matching. The equity market exposure is fully hedged at the time of issuance. We reprice the product every two weeks based on current interest rates and option costs, ensuring we can deliver a consistent IRR of at least 15%. Finally, RILAs are capital light for Equitable and have less than half the required capital of a fixed annuity. RILAs now account for roughly 50% of Individual Retirement AUM and growth in this product has been a key driver of higher net investment margin. In addition, we’re seeing the benefit from higher interest rates and actions we’ve taken to enhance portfolio yields by allocating more of our general account to private assets managed by AllianceBernstein.
Looking forward, we expect growth in spread income to roughly track growth in general account assets as spreads stabilize. Individual Retirement had an 8% organic growth rate over the past year. And this is even faster if you look at spread-based assets. In Group Retirement, we expect the general account growth to accelerate as inflows from BlackRock’s LifePath Paycheck have begun in the second quarter. It’s important to note that, this growth in the general account assets also directly benefit AB, which manages the vast majority of Equitable’s portfolio. With the help of Equitable, AB’s Private Markets business has grown to $63 billion, and we expect this to reach $90 billion to $100 billion by 2027. These are high-margin assets and the growth in private markets will support AB’s fee rates and boost margins over time.
While retirement new business has shifted more towards spread-based products, we still have a sizable block of in-force policies in separate accounts that generate fee-based income and are benefiting from strong market returns. Similarly, we are seeing healthy year-over-year growth in fee-based revenues for AB and wealth management. Since fees are charged based on average AUM levels, they should continue to build if markets remain at or above current levels. Finally, as I noted earlier, we saw some recovery in variable investment income this quarter as our alt portfolio delivered a 5.8% annualized return. We currently expect second quarter results to be similar to the first quarter, with full year returns coming in slightly below our 8% to 12% target range.
Turning to slide 8. Equitable continues to generate predictable cash flow and consistently return capital to shareholders. During the first quarter, we returned $326 million, which equates to a 68% payout ratio at the upper end of our 60% to 70% non-GAAP operating earnings guidance. Buybacks continue to be an accretive form of capital return, and we have reduced our share count by approximately 9% over the last 12 months. We also plan to increase the quarterly cash dividend on common shares to $0.24 in May, pending Board approval, which will maintain our annual dividend payout at approximately $300 million. We closed the quarter with $1.9 billion of cash and liquid assets at holdings, which remains above our minimum target. Our insurance subsidiaries are also well capitalized.
We ended the year with a combined RBC ratio of 411% and an NAIC-based RBC ratio of over 425%. This gives us ample capital flexibility to fund growth, upstream cash and meet our payout ratio commitments. We continue to forecast $1.4 billion to $1.5 billion of cash generation this year, with about 50% of that coming from our asset and wealth management businesses. Finally, AB received a $304 million equalization payment from the closing of Bernstein research joint venture, which is used to pay down debt. There is no impact to Equitable Holdings cash position, but this transaction provides AB more financial flexibility in the future. Now, let me turn the call back over to Mark for closing remarks.
Mark Pearson: Thanks, Robin. Equitable delivered strong first quarter results as organic growth momentum across our businesses is beginning to translate into higher non-GAAP EPS, which increased 18% versus first quarter 2023 after adjusting for notable items in both periods. We also delivered on our 60% to 70% payout ratio target and are on track for $1.4 billion to $1.5 billion of cash generation in 2024 with approximately half of that coming from non-insurance businesses. Looking ahead, I remain confident in our growth strategy and ability to deliver on our 2027 financial guidance. This is the best environment we’ve seen for growth in well over a decade and Equitable’s unique ability to capture the full value chain across distribution, manufacturing and asset management leaves us well positioned to take advantage of it. We’ll now open the line for questions.
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