Equitable Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
November 5, 2024

There are 14 speakers on the call.

Operator

Hello, and thank you for standing by. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Equitable Holdings Third Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer We do ask that you please limit yourself to one question and one follow-up.

Operator

I would now like to turn the conference over to Eric Bass, Head of Investor Relations. Please go ahead.

Speaker 1

Thank you. Good morning and welcome to Equitable Holdings' Q3 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.

Speaker 1

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 Onar Arzon, 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.

Speaker 2

Good morning and thank you for joining today's call. Equitable Holdings' 3rd quarter results demonstrate continued strong growth momentum, both in terms of new business activity and earnings per share. We once again had positive net flows across our retirement, asset management and wealth management businesses. And firm wide assets under management surpassed the $1,000,000,000,000 mark. Equitable's integrated business model positions us well to capitalize on the tremendous opportunity in the U.

Speaker 2

S. Retirement market and deliver value to all our stakeholders. On Slide 3, I'll provide a few highlights from the Q3. Non GAAP operating earnings were $501,000,000 or $1.53 per share, which is up 34% year over year on a per share basis. Adjusting for notable items, non GAAP operating EPS was $1.59 which is up 22% compared to the prior year and above our 12% to 15% annualized growth guidance.

Speaker 2

Assets under management and administration increased 20% year over year and now exceed $1,000,000,000,000 We returned $330,000,000 to shareholders during the quarter, which equates to a 65% payout ratio within our targeted range of 60% to 70%. Holding company cash increased to $2,000,000,000 from the 2nd quarter, reflecting a $440,000,000 ordinary dividend from our Arizona entity paid in July. For the full year, we now expect cash generation to come in at the high end of our $1,400,000,000 to $1,500,000,000 guidance range. During the Q3, we completed our annual assumption update, which resulted in no major changes and had only modest impact on our GAAP earnings. This validates our conservative approach to assumption setting, particularly for policyholder behavior.

Speaker 2

Turning to our reporting segments. We continue to execute well on our growth strategy. In retirement, sustained demand for our individual retirement offerings drove net inflows of $1,700,000,000 in the quarter. Across individual and group retirement, sales were up 25% year over year. As expected, we did not have any new BlackRock LifePath paycheck plans fund during the quarter, but we remain bullish on the in plan annuity opportunity.

Speaker 2

In August, JPMorgan Asset Management announced plans to collaborate with Equitable on its new smart retirement lifetime income offering. In Asset Management, AB reported its 3rd consecutive quarter of organic growth with total net inflows of $1,100,000,000 and active net inflows of $2,200,000,000 AB also completed its real estate relocation during the Q3, which will contribute 100 to 150 basis points of margin expansion on a go forward basis. AB now expects a baseline adjusted operating margin of 33% in 2025, assuming neutral markets, which is up more than 400 basis points compared to the full year 2022. Moving to Wealth Management. Our business reported record advisory net inflows of $1,900,000,000 and assets under administration now exceeds $100,000,000,000 We're seeing strong momentum in both advisor recruiting and productivity improvement, which are good leading indicators of future growth in earnings and margins.

Speaker 2

Turning to slide 4. I want to spend a couple of minutes discussing our competitive position in the U. S. Retirement market. This is a fantastic market with a growing need for the solutions we provide and emerging opportunities to reach customers in new ways.

Speaker 2

Not surprisingly, others have identified this as well and we expect competition. That said, we fully believe we have the right business model to be a long term winner. It starts with our ability to capture the full retirement value chain. We are a leading product manufacturer in the individual and group retirement space And we also capture economics as a distributor through equitable advisors and on the assets managed by AllianceBernstein. This provides significant advantage versus companies that are pure manufacturers, which shows up in multiple ways.

Speaker 2

There are 4 key drivers of economics in the retirement business. The investment yield you can generate, the fees you collect, the cost of funds on your liabilities and your G and A expense ratio. To be successful over time, a company needs to have advantages in at least one and ideally more than one of these areas. Equitable partners closely with AB to source the assets needed to generate competitive risk adjusted yields. And it's a symbiotic relationship as the capabilities built for our general account can also be monetized through 3rd party net flows.

Speaker 2

While there's been a lot of focus on the growth in our spread based earnings given the success of our Ryla product, we also generate a significant amount of high return fee based earnings from separate account products and through AB and Equitable Advisors. The value of Equitable Advisors also shows up in our low cost of funds. Having proprietary distribution provides better persistency and enables us to retain more of the economics. In addition, we can launch new products through equitable advisors, which allows us to innovate and create new markets like we did with the Ryla. Finally, Equitable has a top quartile expense ratio in individual retirement compared to our peers.

Speaker 2

Putting it all together, our company is well positioned to adapt and thrive as the competitive landscape evolves. Another area of focus for investors has been the sustainability of the recent strength in industry sales across individual retirement products. Turning to Slide 5. I want to highlight why we continue to be very bullish about the retirement growth story. As we've highlighted before, demographic trends create increased need for retirement savings and income solutions regardless of the macro environment.

Speaker 2

There are 4,100,000 Americans turning 65 each year and the large and growing retirement gap underscores the need for the advice and products we provide. This need has been recognized by the government with bipartisan support for the 2 SECURE Acts, which expanded access to workplace retirement savings plans and provide plan sponsors with a safe harbor to include annuities within 401 plans. We see this as creating a significant new market by enabling insurers to access the $7,000,000,000,000 of assets currently sitting in 401 plans. We're encouraged by the initial interest shown in guaranteed lifetime income options by both plan sponsors and asset managers with sizable target date fund complexes. During the Q3, we announced plans to develop a secure income solution with JPMorgan Asset Management, which will complement our existing offerings with AB and BlackRock.

Speaker 2

Equitable has had positive net flows in our retirement business every year since IPO during a period which covers a wide range of macro backdrops. Over the last 12 months, net inflows of $6,800,000,000 are more than double what we reported in 2018. A key reason we've been able to do this is the all weather portfolio of insurance and asset and wealth management solutions that we offer to our clients. Most of these fill a specific need such as for protected equity exposure or guaranteed lifetime income that is present regardless of the level of interest rates or equity markets. Looking ahead, I'm excited about the growth momentum in our business and continue to believe this is a fantastic time to be in the U.

Speaker 2

S. Retirement market. I'll now turn it over to Robin to discuss our financial results in more detail.

Speaker 3

Thanks, Mark. Turning to Slide 6. I will highlight our results from the quarter. On a consolidated basis, Equitable Holdings reported non GAAP operating earnings of $501,000,000 in the quarter or $1.53 per share, up 34% year over year. We had $20,000,000 of notable items, which includes $13,000,000 of lower than planned alternative investment returns and $10,000,000 of one time model updates, partially offset by $3,000,000 favorable impact from our annual assumption review.

Speaker 3

Adjusting for these items, non GAAP EPS was $1.59 per share, up 22% year over year, driven by organic growth across our businesses, favorable markets and share repurchases. We reported a GAAP net loss of $134,000,000 in the quarter, driven by non economic impacts from our hedge portfolio, which were largely offset by gains in OCI. The net income impact of our assumption updates were modestly positive and they had a neutral to slightly positive impact on statutory basis. Assets under management and administration increased 20% year over year to a record $1,000,000,000,000 dollars driven by market appreciation, positive net inflows across our retirement, asset management and wealth management businesses. Segment details are provided in the appendix, but I want to highlight a few items from the quarter.

Speaker 3

Starting with retirement, we experienced a 9% trailing 12 month organic growth rate in individual retirement, but it was a mixed quarter across the businesses in terms of earnings. Group Retirement continues to benefit from positive earnings leverage to rise in market, but individual retirement earnings declined on a sequential basis. We saw some quarterly noise in net interest margin, which I will discuss in more detail shortly. Commission expense also increased due to strong record sales, particularly at Equitable Advisors, where not all expenses are eligible to be capitalized in DAC. While this is a short term headwind for the individual retirement earnings, it will drive future growth in profits.

Speaker 3

Turning to asset management. AB had a strong result, delivering a 3rd consecutive quarter of positive net flows, a stable base fee rate and a 3 30 basis points year over year margin improvement. AB will begin to recognize the full benefit of its U. S. Real estate relocation strategy in the Q4 and we expect a baseline adjusted operating margin of 33% in 2025 assuming flat markets.

Speaker 3

In Protection Solutions, mortality came in at the favorable end of expectations and we reported 7% of operating earnings ex notables. Year to date, operating earnings ex notables are $196,000,000 putting the segment on track to be within our $200,000,000 to $300,000,000 annual guidance range. Finally, our consolidated tax rate was in line with our 19% guidance. The tax rate for our insurance segments came in below our 17% expectation due to some favorable tax settlements, but this was offset by a lower tax benefit in corporate and other. We now project the full year 2024 insurance tax rate to be below 17%, but it should revert to 17% in 2025.

Speaker 3

We still expect the full year tax rates for AAV and Wealth Management to be 29% 26% respectively. Turning to Slide 7, I will provide more details on the drivers of our earnings growth. Results continue to benefit from growth in both spread and fee based income. Individual Retirement net interest margin increased 5% year over year, supported by the continued growth of the RYLO business, while group retirement NIM was up 12% year over year. As I mentioned last quarter, we expect individual retirement spreads to be relatively stable moving forward as new business margins have normalized and are consistent with our 15% IRR target.

Speaker 3

However, we now have a $60,000,000,000 block of Rylo business and so there will be some quarterly noise in NIM. In the Q3, our underlying core spread was consistent with the first half of the year, but we had a couple of non trendable items that affected individual retirements reported spread income. Most notably, we saw a sharp decline in market value adjustment gains on early surrenders, which show up as an offset to interest credited. These can vary from quarter to quarter, but if we were to take an average level from the past 10 quarters, NIM would have been $15,000,000 higher this quarter. Turning to fee income.

Speaker 3

We saw healthy growth across retirement, asset management and wealth management. Fees are charged on average AUM levels, but they should continue to trend higher if markets remain at or above current levels. Finally, I want to provide an update on our outlook for variable investment income. Our alternatives portfolio produced an annualized return of 6% in the 3rd quarter. We saw solid private equity returns and real estate equity funds had slightly positive performance.

Speaker 3

We project a similar level of return for our portfolio in the 4th quarter. Turning to slide 8. I would like to discuss Equitable's macro sensitivities and how to think about the implications of different macro environments. 1st and foremost, we fully hedge the interest rate and equity market exposures underlying all product guarantees, protecting our balance sheet against any movements. Therefore, markets really only affect earnings and potentially sales.

Speaker 3

Starting with short term interest rates. Our primary exposure is through our wealth management cash sweep balances. We ended the Q3 with cash balances of $2,800,000,000 and they generate approximately only 1% to 2% of total company earnings. So it's a small exposure for our businesses. We also have exposure to floating rate assets, where yields are tied to short term interest rates, but these are largely matched with floating rate liabilities like FHLB lending and 1 year Ryla segments.

Speaker 3

Long term interest rates are more meaningful for our businesses as our portfolio duration is about 6 years, but the earnings impact is still relatively modest. A 50 basis point parallel shift in yield curve would have a $40,000,000 to $45,000,000 impact on annual after tax earnings, which represents less than 2% of total earnings. This does not include a potential offset from higher fixed income fees earned at AB. From a growth perspective, there are a few dynamics to consider. In general, a steeper yield curve is positive for annuity demand as the interest rate paid to policyholders is tied to the intermediate portion of the curve.

Speaker 3

Lower cash yield may also spur investors to put more money to work, which would be good for flows in wealth management and AB. On the other hand, if long rates come down, this would result in less attractive pricing for guaranteed variable annuities and life insurance products, which could hurt demand. For Equitable, the level of interest rates has limited impact on the demand in the primary markets we operate in, including Rylas, 403b Savings Plans and in plan annuities. Turning to equity markets. This is an important driver of the fee based earnings we generate in our retirement business, AB and Wealth Management.

Speaker 3

Each 10% change in market returns has about $150,000,000 impact on annual earnings. From a sales perspective, we could see lower flows for AB and Wealth Management if markets decline. But protected equity solutions like Ryla's could benefit. As a reminder, higher volatility is good for Ryla caps, allowing us to offer more attractive terms to policyholders. Overall, as Mark described, this is a great retirement market that we operate in with our diversified and integrated business model.

Speaker 3

We have an all weather portfolio of products that has been able to deliver profitable growth in a wide range of interest rate and equity market environments. On slide 9, we highlight Equitable's capital management program position and cash flow outlook. In the quarter, we returned $330,000,000 to shareholders, including $254,000,000 of share repurchases. This translates to a 65% payout ratio of non GAAP operating earnings, excluding notable items, consistent with our 60% to 70% payout target. We ended the quarter with $2,000,000,000 of cash and liquid assets at holdings, which is up from the 2nd quarter following the receipt of a $440,000,000 ordinary dividend from our Arizona insurance entity in July.

Speaker 3

We now expect to achieve the upper end of our $1,400,000,000 to $1,500,000,000 cash generation guidance for 2024, with about 50% of this coming from non insurance entities. We'll provide an outlook for 2025 cash generation next quarter, but we remain confident in achieving the $2,000,000,000 of annual cash generation by 2027. Our predictable cash flow in combination with our strong Holdco cash position enables us to consistently return capital to shareholders while also funding the growth in the retirement market. As we mentioned on previous calls, we're also exploring ways to further optimize our balance sheet, such as establishing a sidecar or an open REIT entity. We're also reviewing ways to improve our return on capital and reduce the earnings volatility in our Life businesses.

Speaker 3

We're making good progress and I expect we'll be in a position to provide updates early in 2025. Now let me turn the call back over to Mark for closing remarks.

Speaker 2

Mark? Thanks, Robin. In closing, Equitable delivered another solid quarter with sustained organic growth momentum across our businesses, translating into strong growth in earnings per share. Looking forward, I'm excited about the growth opportunities across U. S.

Speaker 2

Retirement, asset management and wealth management. I'm also convinced that Equitable's integrated business model provides us with real competitive advantages that will enable us to deliver value to all our stakeholders. We'll now open the line for questions.

Operator

Our first question will come from the line of Suneet Kamath with Jefferies. Please go ahead.

Speaker 4

Thanks. Good morning. I wanted to ask a couple on annuities. So first, Mark, we've seen industry sales, dollars 100,000,000,000 for 4 quarters in a row. I get all the information that you have on Slide 5, but frankly, we could have made a lot of these demographic arguments a few years ago.

Speaker 4

So what do you think is causing these sales to be as strong as they are? And what do you think is the biggest risk to this kind of growth outlook that you're talking about?

Speaker 2

Thanks for the question, Suneet. I think as we said on the prepared remarks there, we are very confident and optimistic about the market. The demographics have been around for a while, but they have not peaked. I think that's the key point here. Americans reaching age 65 is 4,100,000 a year and we have yet to reach that peak.

Speaker 2

So the demographics have been around for a while. You see that in the retirement savings gap, but they are actually increasing. And I think secondly, there's an awful lot more attention in this market. I mean, we're very proud that we were the people that innovated and created the Ryla market. You see new entrants coming in.

Speaker 2

That's creating a lot more awareness amongst distributors. And you see that coming through and money coming out of 401s and into these types of products. So looking out, we remain very bullish and very confident on the market demographics, awareness and the distributors are reacting to the products we have out there.

Speaker 4

And then on the risk side?

Speaker 2

Risks for I think as Robin said in that particular slide, you can see risks if interest rates would have come down sort of fixed annuity type products tend to be less attractive, but protected equity stores like Ryla tend to do well in those markets as we showed through 2021 2022. So it's looking very positive, Suneet. We're feeling very good about the market. I think it's the best conditions for the industry for many decades.

Speaker 4

Got it. And then my second question is just on your product lineup in annuities. We are hearing other companies talk about having the full gamut of annuity products from fixed indexed, traditional VA Ryla. It seems like you guys are more focused on the Ryla. Have you given any thought to expanding your product portfolio?

Speaker 5

Sure. This is Nick. Look, we're very intangibles about focusing on segments where we can leverage our unique business model to generate attractive returns for both shareholders and clients. As you highlighted, we're the market leader in the fastest growing segment of the annuity market. Sales were up 45% year to date, so we continue to focus on that and leverage the strength of the privileged distribution that we've created over the last decade to include equitable advisors.

Speaker 5

In terms of the emerging needs within retirement that Mark mentioned, look, it's a $30,000,000,000,000 U. S. Retirement market. And so we are seeing money in motion. As Mark alluded to, Cerule projects that there's over $500,000,000,000 of assets coming out of 401s every year, which is creating new opportunities for both forms of secure income, income and protected equity stories as well as advice to guide clients through that next stage.

Speaker 5

So, we like where we're at and we continue to focus on those areas.

Operator

Our next question comes from the line of Tom Gallagher with Evercore ISI. Please go ahead.

Speaker 6

Good morning. Robin, just a follow-up to your point you made on market value adjustment gains in early surrenders. I think you said it was $15,000,000 Should we assume that these go away based on what you're seeing? Or do you think you'll see a bounce back and we'll see some level of that coming back through earnings in individual retirement?

Speaker 3

Thanks, Tom. So just as a reminder, if I take a step back, we're seeing this strong growth that Mark and Nick spoke about in the RYLA market and it's really shifted the mix of the earnings in the individual retirement business. So it's great that we can finally talk about spread income in that business because it's now about 50% of the general account business across the board. In the quarter, we continue to see strong growth in NIM. It's up 5% year over year driven by the strong inflows.

Speaker 3

And IR sales have nearly doubled over the past 3 years, which drove has driven that asset base to about $60,000,000,000 of AUM. So as you noted in the quarter and as I noted before, we're going to see some noise on a quarterly basis, but margins are still strong and we're right in business at a 15% IRR target. The market value adjustment, we see we're going to see some noise quarter to quarter. But as I mentioned over the last 10 quarters, it's averaged about $15,000,000 So given where interest rates are, I think adding $15,000,000 back would be a good, would be something good to do in your models going forward, I suppose. But there's going to be noise, but over time, we're just going to continue to grow NIM, with the growth in the RILO business.

Speaker 6

Okay. That's helpful. And then the I guess just a follow-up question on competition. Corbridge announced they're entering the Rylo business. Apollo in their Investor Day talked about growing Ryla being a big strategic imperative.

Speaker 6

Just curious, and I Mark, I heard what you said about the market. I agree. I think it's a very good future path. But do you think while these new like strong competitors are entering, would you expect to lose share? Are you going to have to adjust pricing to deal with that?

Speaker 6

Or do you think you'll be able to see similar growth at similar returns in 2025? Thinking more near term and less long term, maybe it is things will be good enough for everyone to get their fair share. But what do you think will happen in 2025 based on the competitive dynamics? Thanks.

Speaker 2

Thanks very much, Tom. I'll give just an overview and then I'll ask Nick to follow-up. Look, it's a very, very big market. It's not going to be a market where there's only one player wins. It's a huge market.

Speaker 2

It's a growing market, 45% up year to date. And we see that huge retirement savings gap. And also, as I should have mentioned in my answer with Suneet, we have bipartisan support for SECURE Act in planned guarantees. So there's a lot of momentum in the market. Yes, there's a lot of competition.

Speaker 2

There's bound to be. To answer your question directly, will market share come down? Yes, I think it will. But the growth will not slow for us. If you think about it, Tom, we're the 100% of this market because we were the only player.

Speaker 2

We were the ones who innovated. So it's going to come down as more competitors come in. But I think we had something like 28% sales growth year to date. And margins are meeting our 15% IRR hurdle. So the competition hasn't been hurting us on that side.

Speaker 2

I think there's 3 things which are really going for us. 1 is the business model we have. So we participate in all parts of the value chain. We source yield from AB. We get distribution margin through Equitable Advisors and we're a manufacturer as well.

Speaker 2

So we participate more in the economics that many of our competitors can do, including the ones you just mentioned. And secondly, we have the established position. So I think that makes us good. Maybe, Nick, do you want to add a few things in terms of what we see on the competitive side?

Speaker 5

Sure. First, I'd highlight, look, we have benefited from the growing pie over the last 3 years. We've more than doubled our sales volume. Look, we are mindful of competitive trends on pricing as new entrants come in. There does tend to be a period of teaser rate pricing as they attempt to gain a foothold.

Speaker 5

We've seen this before and it tends to be temporary because it's not sustainable. As both Mark and Robin alluded to, we're generating attractive returns and continue to hit our 15% IRRs. I think our business model gives us a competitive edge and that allows us to focus on value and remain disciplined on our cap rates. Over the last year to date, we've generated $5,400,000,000 of individual net flows. It's you can file a product, but it's hard to build distribution.

Speaker 5

And with equitable advisors and the

Speaker 7

3rd

Speaker 5

party privileged distribution that we've created over the last decade. These are 3rd party partners that have a more curated shelf space. We think we're well positioned to capture a disproportionate share of the value as the pie continues to grow.

Operator

Our next question comes from the line of Ryan Krueger with KBW. Please go ahead.

Speaker 3

Hey, thanks. Good morning. I'm not sure I don't think you said this in the prepared remarks, but can you give us any insight into the expected flows from the BlackRock LifePath Paycheck product in the Q4?

Speaker 2

Hi, it's Mark. Thanks for the question. As we mentioned earlier, we're very excited to be working with BlackRock. I think one of the patterns I hope you see with Equitable is this innovation and first mover advantage we look to gain as we've seen in Vila. We feel the same way about the in plan guarantees.

Speaker 2

We have partnership with BlackRock. We have a partnership with AB. And we're working now with JPMorgan as well. So we're well, well positioned on this. And as I say to the team internally, when you have innovation, you've got to move fast on 1st mover because the competition follows soon after.

Speaker 2

Specifically with Black Quark, as we mentioned, it will it is going to be lumpy. And we're not anticipating any flows in this quarter, but we are anticipating flows starting again in first half of twenty twenty five. And we remain very bullish on the longer term outlook for this. The other thing just to remember, Ryan, on the implant guarantees, none of our 2027 targets are reliant on this business, in particular the $2,000,000,000 cash generation target we gave you. So this really is a future and additional growth.

Speaker 3

Great. Thank you. And then just a quick one on the floating rate assets and liabilities. It sounds like you don't expect much impact from that over time. Would you anticipate any noise initially?

Speaker 3

Just want to make sure there's no are there any timing differences between the floating rate assets and the liabilities or anything like that we should be thinking about for the Q4 following the Fed's cut? Hey, Ryan. Yes. No, as I mentioned earlier related to individual retirement, you could see some noise on a quarterly basis. But since we're matched, over a 12 month period, you're not going to you should be continue to have stable NIM in that business across the board.

Speaker 3

But yes, in any given quarter, if rates go lower, depending on the reset to the liabilities, there could be some quarterly noise, but I don't expect it to be material given the size of our floating rate exposure.

Operator

Our next question comes from the line of Joel Horowitz with Dowling and Partners. Please go ahead.

Speaker 8

Hey, good morning. Robin, one more on the market value adjustment. Would you say this quarter was driven by the decline in rates? And if we were to see rates pull back again, do you think you would see a similar market value adjustment impact and that become more of a recurring trend?

Speaker 3

Hey, Joe. Yes. No, as I mentioned earlier in the question, look, the Rylab business is now $60,000,000,000 spread oriented product for the individual retirement and we continue to capitalize on that opportunity. Yes, you'll see some noise here and there. I wouldn't attribute it to one specific thing.

Speaker 3

Yes, lower interest rates, but also you had a mix of where the surrenders are coming from. So it could be multiple factors in there across the board. As I guided earlier, over the last 10 quarters, we saw that having about a $15,000,000 impact. So I would add back $15,000,000 and I would expect that's probably the best guidance we can give you at this time. And yes, you'll see some noise, but overall you see a 5% growth in NIM year over year and you can continue to expect us to grow spread related income in the individual retirement business.

Speaker 8

All right, got it. And then just shifting to group. So earnings and group retirement were very strong. Obviously, you have some fee based tailwinds there. But anything else you would call out as driving the strong growth in that business?

Speaker 8

Or do you think this level is sustainable at current market levels?

Speaker 3

Yes, the earnings, we continue to see high leverage in those earnings related to equity markets and spread related income. These are spread related income up 12% year over year and strong fee based income. So as you've seen historically with that business, it's pretty stable, sticky and we get good leverage on the fees related. So we continue to expect that going forward.

Operator

Our next question comes from the line of Alex Scott with Barclays. Please go ahead.

Speaker 9

Hi, good morning. First one I had is on Protection. I just wanted to see on mortality. It seems like it's gotten better. Would just be interested if you have any additional color you could provide on the performance you're seeing there and the sustainability of the better performance?

Speaker 3

So protection continues to be about 10% of our earnings in aggregate for the company, so a small amount. In total, we guided the year to have a $200,000,000 to $300,000,000 annual earnings guidance and it looks like through the year we expect to be in that range. We've gone away from the quarterly guidance because for that business, you can have one case with the large face amounts and it could throw off any given quarter's earnings. So there's still some volatility in it. But if you look back over the last 2 years, we guided that we saw a pull forward in mortality and you're really seeing that come through as you saw it pull forward last year and now you see back to some normalized mortality results coming through.

Speaker 3

So we feel good about where we are. We're sticking to that $200,000,000 to $300,000,000 annual guidance going forward and we'll continue to look at ways to reduce volatility in that business.

Speaker 9

Got it. That's helpful. And apologies if I missed some of this earlier on the call, but I just was interested if you have an update on the amount of cash that you expect to be able to take out at the end of the year and just an update on capital management priorities as we think through 2025?

Speaker 3

Sure. So we continue to benefit from the diverse and predictability of our cash flows. Reminder, 50% of our cash flows come from non insurance businesses, asset and wealth. And so in the call, what we mentioned is we guided towards the high end of our $1,400,000,000 to $1,500,000,000 guidance for the full year. A big piece of that coming from the extraordinary dividend that we received approval in and we'll take out in the Q4 here.

Speaker 3

So we feel good about the cash flow, the diverse sources, the predictability and that allows us to meet our cash flow commitments and we feel really good about our $2,000,000,000 cash flow guidance for 2027.

Operator

Our next question comes from the line of Nick Aneta with Wells Fargo. Please go ahead.

Speaker 10

Hey, good morning. I guess maybe just another follow-up on capital. You guys have been running at a pretty strong buffer for I guess the past like 2 years now. And just thinking about that and the $2,000,000,000 guidance for cash generation for $27,000,000 I guess what do you guys have to see like going forward to maybe bring that buffer down a bit? And is there any plan to bring it down?

Speaker 10

Or should we just assume that that's going to be the buffer for here on out?

Speaker 3

Thanks for the question, Nick. So look, we feel really good about our strong capital position. It gives us confidence to capitalize on this attractive growth market that we've seen and what Mark and Nick spoke about earlier, while also delivering on our 60% to 70% payout ratio. If you look year to date, we funded record levels of sales in individual retirement business and the $500,000,000 of inflows in the LifePath Paycheck product. At the same time, we paid out a 65% payout ratio at the midpoint of our earnings target.

Speaker 3

So our HoldCo cash does fluctuate on a quarterly basis depending on the timing that we receive dividend from the subsidiaries. The balance this quarter is at $2,000,000,000 which we feel good about, but that's because we got $440,000,000 from Arizona in July. So that's at an elevated level. We do expect to reduce the current excess cash position towards target levels, but we're cognizant that the markets and the macro environments can change quickly. So we'd rather do this in a disciplined way over time as opposed to a one time extraordinary dividend or accelerated share repurchase.

Speaker 3

So again, this is a phenomenal growth environment. We're investing in the growth. We're returning capital to shareholders and we'll look to bring down the excess cash over time in a systematic way.

Speaker 10

That's helpful. Thanks. Maybe just switching to individual retirement, it seemed like total surrenders picked up a bit in the quarter, I guess year over year and sequentially. Anything to call out there? Or is that just is that a restatement issue?

Speaker 10

Or is that just normal business growth?

Speaker 3

Now you're seeing, look, with the interest rates, where they are, the growth that you see on top line, you're always going to see some increased level of surrender activity across the industry. Nothing out of the ordinary to call out here. We continue to retirement market and you see that with the $1,900,000,000 of positive net flows coming through individual retirement.

Operator

Our next question will come from the line of Wilma Burdes with Raymond James. Please go ahead.

Speaker 11

Hey, good morning. Can you talk a little bit more

Speaker 12

about the mortality and protection? Was it favorable, or is there any other trends to note there? Thanks.

Speaker 3

Wilma, yes, as I mentioned, protection, it continues to be a small part of our overall business here at Equitable. Results have come in line with expectations. We gave the $200,000,000 to $300,000,000 of guidance and we expect to be within that range for the full year. So and mortality continues to fall in line with expectations this quarter. But as we've seen historically, there could be some volatility given our exposure to high face amount policies, but we feel good about where we stand here today.

Speaker 11

And just a quick follow-up

Speaker 12

on that one. I mean, it seems like it's pretty much in the range now. I know for a few quarters, it seemed like there was a little bit of COVID, maybe excess weighing on it.

Speaker 11

Just feels like it's

Speaker 12

been normal for a couple of quarters. Does that feel like a pretty good trend? And then got one more quick one for you after that. Thanks.

Speaker 3

Yes. We feel comfortable with the $200,000,000 to $300,000,000 guidance that we've given to the market and we'll stick with that.

Speaker 12

Okay. All right. Sounds good.

Speaker 11

And then could you dig

Speaker 12

a little bit more into what's driving the flows in Investment Management? Just maybe talk a little about products and other things. Thanks.

Speaker 13

Onurazan from AllianceBernstein. Yes, we had a strong active net flow quarter in the 3rd quarter, 2.2 net positive. This quarter marked our 3rd consecutive net flow quarter in the year. So we have been on a positive streak. And if you look at our asset management business, active flows in total were around $8,500,000,000 net and that is a much better outcome than many of our public peers.

Speaker 13

So we feel pretty good about our momentum. The momentum remains relatively broad based. So we benefited from the strong demand in fixed income backed by our strong performance. If you look at 1 year performance, we've been beating in more than 90% of our assets. So that continues to support our continued fixed income growth.

Speaker 13

This is both Asia ex Japan domestic tax exempt, so it's multiple channels. In equities, actually, we had another positive quarter in retail. So it's good to see we benefited from some of the continued bull run-in the equity markets, at least in our retail business. And then we continue to build our alternatives franchise. We are on track to our $100,000,000,000 goal for Private Alts.

Speaker 13

We closed the quarter at 68 and Private Wealth had a record annual fundraising in Alts with $2,300,000,000 So that demonstrates again the breadth and depth of our growth engines at AllianceBernstein. In terms of the product pipeline, our ETF platform had a 2 year mark in September, dollars 5,000,000,000 plus with 15 products. So very pleased with the buildup of the ETF franchise as a new start up. Our alternatives product lineup continue to expand. Now we have a perpetual vehicle in the market from CarVal Credit Opportunities Funds and that already has assets in it and we are seeing some third party interest.

Speaker 13

We already onboarded into a large custodian platform and other few clients are in the pipeline, both other custodians as well as RIA clients. And then finally, last but not the least, obviously, a great synergy area for EQH is AB and insurance synergies, and we continue to expand our investment grade lineup in private alts, whether it's with mortgages, net financing, specialty finance and extension of our private placement platform on the structured side. So you will continue to see us get deeper and broader in insurance through private alts.

Operator

Our next question will come from the line of Mark Hughes with Truist Securities. Please go ahead.

Speaker 7

Yes, thank you. Good morning. Also on AB, you described a 33% baseline operating margin for 2025, assuming flat markets. If we do see continued good performance in the markets and some faster top line growth, is that what's the sensitivity of margins to that top line? Should there be improvement off that baseline?

Speaker 11

Hi, this is Jackie here from AB. Yes, we did guide 2025 at 33%, which represents over 400 basis points of margin expansion, which is near the midpoint of what we gave at Investor Day in 2023 of 3.50 to 500 basis points. We do still accept further margin expansion over time as we continue to scale the business and as our private markets business continues to scale. That would then by 2027 push us to the higher range that we gave at Investor Day.

Speaker 7

Understood. And then a quick question, this may be a small matter, but from what I understand within legacy when folks annuitize those balances being captured in the individual retirement business, which makes perfect sense. Could that be material at all? And maybe the broader question of your experience with annuitization out of individual retirement, how much that perhaps extends the duration of those assets?

Speaker 3

Yes. So when people do annuitize, it goes into a payout annuity and it's issued a new contract. We have that already in individual retirement. So you saw us move some of the annuitization from legacy to individual retirement in the quarter. It's roughly $10,000,000 in the quarter and it's been pretty consistent over time.

Speaker 3

Yes, you do end up being into a spread based product, which we like, spread based earnings and at a longer duration as well along those products.

Operator

And that will conclude our question and answer session. We'd like to thank you all for joining Equitable Holdings 3rd quarter earnings call. You may now disconnect.

Powered by Quartr
Earnings Conference Call
Equitable Q3 2024
00:00 / 00:00