Equitable Holdings, Inc.

Ladies and gentlemen, thank you for standing by and welcome to the Equitable Holdings, Inc. Fourth Quarter 2020 Earnings Conference Call. At this time, all participant lines are on mute. Please be advised that today's conference is being recorded. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. If you require any further assistance, please press star 0. I would now like to turn the call over to your speaker today, Jessica Baer, Head of Investor Relations. Please go ahead. Thank you and good morning and welcome to Equitable Holdings full year and fourth quarter 2020 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 materially differ from those expressed in or indicated by such forward-looking statements. So I'd like to refer you to the State Harbor language on slide two of our presentation for additional information. Joining me on today's call is Mark Pearson, President and Chief Executive Officer of Equitable Holdings, Anders Malmstrom, our Chief Financial Officer, and Nick Lane, President of Equitable Financial. Also on the line is Ali Dibaj, Elias Bernstein's Chief Financial Officer and Head of Strategy. 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 in our earnings release, slide presentation, and financial supplement. I would now like to turn the call over to Mark and Anders for their prepared remarks.

Thank you, Jessica, and good morning to all joining our call today. An important part of the CEO's role in any year is to present the financial results and talk about the momentum of the company. I shall, of course, do that today. But the year 2020, with the global pandemic and the demands for a more just society, was unlike any other year that we have worked or lived in. At Equitable, this caused us to look inwards to really understand the value we add to our clients. And at that same time, have courageous conversations, and start our journey to advance racial equity. So I want to take this opportunity to thank the people of Equitable and Alliance Bernstein who have shown remarkable agility and commitment over the past year. Not one day was lost in serving our 5 million clients, an incredible achievement in the midst of this social isolation. I've been fortunate to be a CEO for a number of years now, and I have never felt prouder of our teams. We had a strong finish to the year. Given the turbulence of 2020, protecting shareholder capital and maintaining a strong balance sheet so that we can honor our commitments was paramount. Equitable is managed on a fair value basis. This means we take no bets on interest rates. And as such, our balance sheet remained resilient throughout. I'm very pleased to report that despite the tough macro environment, We have delivered on all of our three-year commitments given at the time of the IPO. All financial targets have been achieved, and we have delivered on the strategic priorities we laid out in 2018. Full-year non-GAAP operating earnings per share of $4.99 is up 5% from 2019. Assets under management were up 10% year over year to a record high of $809 billion, supported by robust firm-wide net close of approximately $8 billion and the recovery in the equity markets. The strength of our balance sheet is evident by cash and liquid assets of $2.9 billion at our holding company, and our combined life subsidiary risk-based capital ratio is approximately 410%. This has allowed us to return $1.1 billion to shareholders in the year. And last week, we announced our board had approved a new share repurchase program of a further $1 billion. Looking forward, the VA re-insurance transaction we announced in the third quarter remains on target for completion and positions us with a significantly de-risk balance sheet and future better risk-weighted returns. It has been a remarkable year for Equitable and one which reinforces the purpose of our organization. Every day we hear from our clients heightened demand for advice and protection, and we remain very committed and energized in helping Americans secure their financial well-being so they can live long and fulfilling lives. Turning now to slide four, I would like to show what's behind the successful achievement of the goals we set at the time of our IPO. This was largely driven by professional management actions over the last decade and pivoting the company to a fair value basis. Firstly, we have built upon our leadership positions in the VA retirement market where we have distinguished ourselves through product innovation and the K through 12 supplementary retirement market where we proudly serve 800,000 educators. Our broad distribution reach, most importantly to our affiliated equitable advisors, has enabled us to change the mix of business from guaranteed products towards accumulation solutions for our clients and resulting in better risk-weighted returns for our shareholders. We have benefited enormously from our investment in Alliance Bernstein, which generates over 30% of our cash flows. AB's relative performance against its peers has been strong, with positive net flows of $9.2 billion in the year, excluding acts of redemption, buoyed by record gross sales in retail and the highest institutional active equity sales since 2008. These competitive strengths and the approach we take to managing the business has led us to meet or exceed each of our IPO targets. Operating earnings have been growing at 7% CAGR since the IPO, at the top end of the range we've provided, fueled by the completion of our $160 million general account rebalance target and net productivity saves of $75 million. We have met our payout target ratio and have returned $3.1 billion to shareholders to date. And as a result, our EPS has been growing at 14% CAGR over that period. Balance sheet strength is evident with our RBC ratio at approximately 410%, and surplus cash at holdings. Our non-GAAP operating ROE of 17.3% is ahead of target. In light of a strong final quarter, the adjusted operating margin in AB picked up to 30.1% for the year, ahead of the guidance we gave. So all in all, I'm very proud of what the management team has achieved over this period, and this provides confidence for the future. Now turning to slide five. In looking to the future, we have distinct capabilities and a number of drivers that give us confidence in our ability to grow. Firstly, our risk management capability. We still face uncertainty with the ongoing pandemic, so maintaining a fortress balance sheet and improving our risk profile are obviously critical. We will continue to manage the business on a fair value basis, recognizing shareholders do not reward us for our ability to forecast future interest rates. We remain on track for the closing of the VA reinsurance transaction in the first half of 2021. This transaction will reduce the CPE98 tail risk from our legacy VA portfolio by approximately 64%, and the positive seeding commission we will receive from Venable, backed by Apollo, validates the economic soundness of our research and asset liability management. Going forward, this transaction will provide more certainty as to the future cash flows of the business with a limited impact to earnings. Furthermore, in our life business, we will improve the risk profile of our portfolio by moving away from the IUL protection space and focusing on the VUL accumulation market through our affiliated advisors and third parties. This is a continuation of a 10-year journey. Today, over 85% of our new business is not interest-sensitive, whereas a decade ago, the overwhelming majority of our new business was interest-sensitive with rich guarantees. Moving to productivity, over the past year, we have been focusing on integrating an enterprise agile framework across our organization. To our knowledge, the first financial services company attempt to do so remotely. Our goal is to create a more efficient and impactful organization to drive innovation and attract the best talent for the future. On technology, we have benefited from the separation from AXA, as it gave us the opportunity to upgrade our capabilities, such as enhanced modeling to drive insights for growth and productivity. As an ongoing result of the pandemic, there will be a structural shift in how companies operate going forward. Of course, this means greater digitization of processes like electronic applications and reduction in certain corporate expenses like travel. We are also assessing the opportunities of a hybrid workforce and how we can optimize offices in the future. We have a good track record of improving risk profile and delivering on productivity. this will continue to be a focus of ours going forward. It is upon this foundation of improved risk profile and productivity that we look to the future towards accelerating GA optimization and business growth. Firstly, on optimization of our general account, the combination of equitable and AB investment teams provide us an attractive opportunity to improve the yield. Equitable's $95 billion general account remains predominantly invested in investment-grade corporates and is conservatively positioned. Our investment teams have created the opportunity to reallocate significant AUM to high-quality illiquid assets to further improve risk-adjusted returns. We have a virtuous circle here in managing our general account. The ability to deliver additional yields and at the same time see new alternative strategies for ABs and create high multiple businesses for our shareholders. ABE has a good track record here in integrating high-quality teams and building out our alternative investment business. On the business growth side, new business has largely recovered to pre-COVID levels. This is driven by our distribution reach and product innovation anchored in economic reality. Today, we have built out our individual retirement business, excluding legacy VA, to $73 billion of assets, which is fully ALM matched and low capital intensive. A newly launched dual direction Buffett annuity has helped to fuel record sales of SCS of $1.5 billion in the fourth quarter in what is an increasingly competitive market. We also continue to see growth in our group retirement business proudly providing 1 million clients with a secure income for retirement, which has grown to over $42 billion in assets. We continue to grow our alternatives business with AB, approximately $20 billion of assets today. Amplifying the success we have had in developing new alternative businesses, we are encouraged by our ESG efforts designed to meet the growing demand for these products and positions us as a responsible company. AB has been a leader in responsible investing with innovative partnerships such as Columbia University's Earth Institute. Today, AB has built strategies which amount to $16.5 billion in portfolios with purpose, which has grown 60% over the past year. Approximately 80% of AB's AUM uses ESG factors integrated into their investment process. On the equitable side, 80% of our general account investment-grade corporates are aligned to the UN Sustainable Development Goals. We see ESG continuing to grow in importance and value for us. With respect to our nascent businesses, employee benefits have now grown to 485,000 employees, and over the next few years will grow in significance. Our wealth management business, managing through our broker-dealer platform, has grown to $62 billion of assets under administration. And we continue to evaluate opportunities to expand both businesses organically and inorganically. Our focus on these elements will put the business in a strong position for the future, allowing us to deliver on our long-term financial targets and ensuring that Equitable will be a stable, value-generating company for decades to come. Overall, the demand for retirement products and advice remains strong, and we intend to maintain our reputation for distributing innovative products that are economically sound. I will now pass it to Anders to provide more detail on our financial results for the full year and fourth quarter. Anders?

Thank you, Mark. Turning to slide six. On a full year basis, non-GAAP operating earnings were $2.3 billion, or $4.99 per share. up 5% for the year on a per share basis. Excluding notable items of $37 million in the year, non-GAAP operating earnings per share was $4.91, up 14% year-over-year on a normalized basis. Moving to GAAP results, we reported a net loss of $648 million a year, which was primarily driven by non-economic impact from hedging and non-performance risk, in line with expectations. As Mark mentioned, assets under management increased 10% to $809 billion, supported by total company net flows of $8 billion and favorable markets. We also benefited from solid performance across each of our business segments. In individual retirement, operating earnings were $1.5 billion. We saw strong demand for buffered annuity product, evidenced by record structured capital strategy sales in the fourth quarter, and retailed full-year sales up 19% year-over-year. Group Retirement reported operating earnings of $491 million, up 26% year-over-year. Our ability to shift to a digital engagement model contributed to net flows of $296 million, up 11% year-over-year, marking the eighth consecutive year of positive flows. Lance Bernstein's operating earnings where $432 million, up 13% year-over-year, with 10% growth in AUM, supported by $14.9 billion in active net growth, excluding expected low-fee axle redemptions. And lastly, our protection solution segment reported $146 million of operating earnings, with continued growth in ample benefits and a pivot to less interest-sensitive accumulation products. Overall, across these businesses, we continue to drive strong results by leveraging our competitive strength to realize attractive returns. Turning to slide seven, I will review our consolidated results for the fourth quarter before providing more detail on our segment results and capital management program. Non-gas operating earnings were $748 million for the fourth quarter up from $653 million in the prior year quarter. Non-GAAP operating earnings per share increased by 20% to $1.65 per share, primarily driven by strong net investment income attributable to alternatives, increased fee-type revenue on higher separate account balances, and share repurchases. The outperformance of alternatives reflects strong private equity performance in the third quarter, which we report on a one-quarter lag. Notable items, net impact on earnings for the quarter was 110 million favorable adjustments, or 25 cents per share. Normalizing for these items, non-GAAP operating earnings was 638 million in the fourth quarter, or $1.40 per share. Moving to GAAP results, we reported a net loss of $1.2 billion in the quarter, which was primarily driven by non-economic impacts on hedging and non-performance risk in line with expectations. Our economic framework and prudent risk management underpin this result, and we reprice our product on a regular basis to align with economic reality. As a reminder, we hedge to our full economic liability, immunizing the balance sheet to interest rates, Our hedging program performed as expected with 96% effectiveness for the quarter. Moving on to the business segment, I will begin with individual retirement on slide 8. Operating earnings of $442 million were up 13% versus the prior year quarter, primarily driven by higher alternatives income and growth in SES account values. Results also included $73 million of notable items in the quarter related to positive equity markets, reducing DAC and higher net investment income. First-year premiums and current product offering net flows improved 19% and 52% respectively, versus prior quarter driven by record sales and structured capital strategies reflecting the breadth and depth of our distribution. Net inflows on our current product offering and lower surrenders were partially offset by expected outflows of our capital-intensive fixed rate block of $863 million in the quarter, or $3.3 billion in the year. Finally, our VA reinsurance transaction with Venable remains on track for a second quarter close, significantly de-risking our balance sheet and validating our reserves. Turning to group retirement on slide 9, we reported operating earnings of $166 million, up 52% versus the prior year quarter, driven by higher alternative income and fee revenue on higher account values. These strong results include notable items of $23 million, primarily driven by higher net investment income in the quarter. Net flows improved by $26 million year-over-year, with strong renewals and lower surrender rates, largely attributable to our digital engagement initiative. Account values increased by approximately $4.6 billion year-over-year due to market depreciation and continued net inflows over the trailing 12 months. Now turning to investment management and research, or AB, on slide 10. Overall, AP delivered strong results with operating earnings of $141 million, up 8% year-over-year, primarily driven by higher base fees on higher average AUM and lower operating expenses. AP experienced $20 million of lower COVID-related expenses in the quarter, which is accounted for in notable items, or $9 million for equitable holdings. In the fourth quarter, AB generated $3.9 billion of net inflows, excluding expected low fee AXA redemptions of 700 million attributable to strong performance in the institutional channel. Further, AB reported gross sales of 31 billion, up 4.3 billion or 16% from a year ago led by the retail channel. Moving to protection solutions on slide 11. We reported operating earnings of $58 million, down from $129 million in the primary quarter, primarily due to mortality experience and the PFBL reserve accrual, including $7 million included in notable items in the quarter. While we are encouraged by progress being made on COVID-19 vaccine distribution, we are very mindful that the negative impact on the people and communities we serve remains. In the quarter, we had higher mortality experience relative to expectations driven by COVID-19. The negative impact was more than offset by a CFL reserve release. While we expect some volatility to continue, we maintain our guidance of 30 to 60 million earnings impact to the 100,000 excess U.S. debt claims. Cross-written premiums decreased 5% versus the prior year quarter, But as mentioned previously, we continue to see strong momentum in the employee benefit business with 36% increase in annualized premiums versus the prior year quarter. Turning to slide 12, I would like to highlight our strong capital and liquidity position demonstrating our financial strength and the resiliency of our balance sheet. We remain committed to our capital management program returning $1.1 billion to shareholders, including $400 million of share repurchases accelerated into 2019. In the fourth quarter of 2020, we returned $175 million to shareholders, with $75 million of cash dividends and $100 million of share repurchases. We have also initiated our 2021 Capital Management Program, executing $170 million accelerated share repurchase earlier this quarter. Our financial strength is evidenced by a combined RBC ratio of approximately 410%. This includes an accelerated 949 million dividend upstream in December of last year, securing our ability to deliver on our commitments in 2021. We remain well positioned at the holding company with cash and liquid assets of $2.9 billion, well above our 500 million minimum target, and ended the quarter with our debt-to-capital ratio of 26%, in line with our target. In January of this year, we opportunistically raised another $300 million in preferred stocks, taking advantage of record low rates to further optimize our capital structure. As a reminder, we plan to execute an incremental $500 million of share repurchases in 2021 following the close of the legacy VIA reinsurance transactions, in addition to our 50% to 60% payout ratio target. With that, I will now turn the call back to Mark for closing remarks.