Ladies and gentlemen, thank you for standing by, and welcome to the Equitable Holdings' Second Quarter Earnings Call. [Operator Instructions] Ms. Baehr, please go ahead.

Thank you. Good morning, and welcome to Equitable Holdings' second 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 safe harbor language on Slide 2 of our presentation for additional information. Joining me on today's call is Mark Pearson, President and Chief Executive Officer of Equitable Holdings; and Anders Malmstrom, our Chief Financial Officer. Also on the line is Nick Lane, President of Equitable Financial; and John Weisenseel, AllianceBernstein's Chief Financial Officer. 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.

Good morning and thank you all for joining us today. I recognize that this is still a very difficult time for me. So I'd just like to start by saying that on behalf of all of us at Equitable, I hope you and your loved ones are safe and well. I'm extremely proud of how our employees and advisors have responded to these most challenging times. It is pleasing to report today's earnings and growth in assets under management, a testament to the commitment and agility of our people and robustness of our business model. Our resilient balance sheet means we are well prepared for any future turbulence and Equitable remains well positioned to help our clients protect their families and secure their financial well-being. Turning to Page 3. We came into this crisis from a position of strength with strong capital ratios and a set of management values that underpin how we manage this institution. We have a strong emphasis on prudent financial risk management and we always put the well-being and safety of our people at the forefront of everything we do. I'm also extremely proud of how my colleagues have responded to the course for a more just society. Equitable will continue to be a force for good in developing programs and solutions that make a difference and create opportunities for those who have been disadvantaged for far too long. Overall, I'm very pleased with the Q2 results. Non-GAAP operating earnings amounted to $459 million or $1 per share. I believe this to be a very credible performance considering the headwinds facing the business and compares well to the $1.14 of earnings per share we saw in Q2 of 2019. Assets under management are up 10% since the first quarter to $711 billion, supported by the strong…

Thank you, Mark. Now turning to Slide 5. The economic environment through the first half of the year has enabled us to demonstrate the strength and resiliency of our balance sheet and this quarter has again exemplified why managing through an economic framework is so critical. This slide illustrates the effectiveness of our prudent risk management practices and specifically, the positive impact of our GMxB hedging strategy. Because we hedged our full economic liabilities, our balance sheet continues to be immunized from interest rates, despite the sustained low rate environment. This means we have no reliance on a reversion to mean assumptions and make no predictions about future interest rates. Our economic hedging program continues to work exactly as designed with over 95% effectiveness in the quarter. Translating this to U.S. GAAP, we reported a below the line impact related to interest rate hedge gain of $1.9 billion in the first half of the year. This more than offset the impact of the realignment of our long-term GAAP interest rate assumption last quarter. While industry practices vary widely with respect to GAAP interest rate assumptions, with some relying on the reversion to mean as high as 5%, we believe our realigned assumptions of 2.25% is more consistent with today's economic realities. As expected, we also saw a reversal of the GAAP equity hedge gains from the first quarter, driven by the market recovery. This offset reflects the effectiveness of our hedging strategy across volatile markets. In addition, our credit spreads narrowed in the second quarter. They remain elevated, resulting in a net $1 billion positive impact, including NPR on a half-year basis. Importantly, since we fully implemented our economic model and adopted NAIC VA reform, the mismatch between derivatives and GAAP liabilities has increased, thereby magnifying our GAAP net income…

Thanks, Anders. In closing, I remain inspired by the dedication and agility of our employees and advisors and the manner in which they have responded to the most challenging of circumstances. Despite these challenges, this quarter's results continued to demonstrate the resilience of our business and our ability to create value across a broad range of scenarios. We've acted with purpose to manage headwinds, our pivoting processes, magnifying our outreach, accelerating our digital capabilities and capitalizing on expense and investment opportunities. Meanwhile, our balance sheet remains robust, fortified by our risk management practices and economic hedging program. Supported by these factors and the exceptional people of Equitable, we are operating from a position of strength and remain well positioned to help our clients protect their families and secure their financial well-being. With that, I will open the line for questions.

[Operator Instructions] Your first question comes from the line of Elyse Greenspan with Wells Fargo.

Hi, thanks. Good morning. My first question was on the capital side, given the upstream capital in the quarter, you guys have around $2.1 billion at the holdco, which as you guys said is good amount above that $500 million minimum target. So as we think about, I guess maintaining some extra buffer right now, but also counterbalancing against -- that against wanting to buy back more of your shares. Could you just help us think through that a little bit more and your share repurchase outlook for the second half of the year?

Yes. So maybe, this is Andres speaking, I'll take that question. So as you say, I mean, we were able to upstream $1.2 billion during the last quarter up to the Holding company. This is slightly more than we usually do on the regular basis. Just keep in mind; we usually get the dividend once a year. So when we get the dividend from the opca to the holding, it basically has to last for 12 months until we can expect the next dividend. But as you said, I think we're in a good position here and we confirm that we will maintain our 50% to 60% payout guidance, 50% to 60% of operating earnings for the full year. So I think we confirm that.

So would you expect as we think about the back half, obviously, you guys were a little bit less active in the second quarter, in terms of share repurchases? Do you expect repurchases in the back half kind of pick up from Q2 levels?

Yes. So, I think as we said during, I think, Q1 and then during the last few months, is we always expected to do the majority in the second half of the year once we have the dividend and so you can expect us to be in the market for the -- for Q3 and Q4.

Okay, great. And then my second question, maybe you guys have COVID-related mortality losses came in a good amount below what you guys had expected and you did provide the new sensitivity. So as we think about modeling from here, where you fall within that $30 million to $60 million range? Is that depending upon, I guess geographic locations in the state that get hardest hit relative to your footprint or is there anything else that we should think about just when thinking about losses over the balance of the year?

So, look, I think, you're absolutely right. I mean the guidance we gave in May was really based on the information we had at that time. And I think what we clearly saw in the meantime is that, which is in a way sad, that the insured population actually has a significantly lower mortality than the overall U.S. population. We have people in the U.S. that died from COVID actually weren't insured. Now going forward, we expect that to continue, but to your point, I mean geographic and we don't really know from a geographic perspective, we expected because we have more exposure in the Northeast. We actually expected that in our original estimation to be bigger, it wasn't. But I think it's prudent to have that range of $30 million to $60 million, because we really don't know exactly how COVID develops over the next few months.

Your next question comes from the line of Nigel Dally with Morgan Stanley.

Great, thanks, and good morning. You mentioned some potential upside in the expense reduction potential as it relates to COVID-related expenses and alike. Just wanted to get some additional detail as to what was driving that and whether you've had any -- whether you'd be able to place any dimensions around that at this point?

Hi, yes. Hi, Nigel. Thanks for the question. It's Mark. Obviously, COVID has hit travel and some of our incentive programs we typically have for advisors. So that has come off as you would expect. And the other thing we're doing particularly in these times is we're having a close look at our expense base. I think we've got a couple of points to make to you there. Firstly, we're confident we will hit the $75 million expense target we have and we're looking for more. We can't give you a number yet, but we are looking for more. And secondly, the separation, we took from AXA has been very well handled by our IT people. We have really moved to try to leap for the capability. We have a lot of capability now that is on the cloud, which gives us both more tools, but also a more variable and a lower expense base. So we feel good about that. Anders, did we give out the impact of the one-off lower travel expenses, have we given that number out?

Yes. So not specifically to travel, but I mean we called out that we had a kind of a one-time benefit of about $25 million just from COVID and we expect that a portion of that will be sustainable. Definitely not all of that and just travel is a good example. Travel will resume. The question is how much. But we would expect that a portion of that $25 million will become permanent, but a portion will also reverse back.

Your next question comes from the line of Andrew Kligerman with Credit Suisse.

Hi, good morning. I'd like to follow up a little on the share repurchase question. I understand that in the fourth quarter you could be accelerated repurchase of $100 million and that we plan toward the 50% to 60%. So if I kind of eyeball numbers of dividends and buybacks even to date. And what you plan to do with dividends in the back half that would probably be in the $100 million to $150 million for share repurchases to get to that 50% to 60% including the accelerated number. Is that the right way to think about it?

So, good morning, Andrew. So look, I think, and as I said before, I think we are very confident and we can hit the 50% to 60% and payback to shareholders based on operating earnings. All the tracking -- all the calculations you made are based on your estimation where we going to end up the year. We will not give guidance there. But, overall, what I can tell you is what I said before, I think, we're going to -- we will be in the market in Q3 and Q4 and we feel very confident about paying back 50% to 60%.

Right. And so 50% to 60% is where it stops, correct?

Yes. I think that's the range that we want to payback on a sustainable basis, correct, yes.

Okay. And let me reverse back to the corporate and other segment in the quarter, Anders. It was interesting that you came in at a $61 million loss, when your guidance is $350 million to $400 million for the year and in the release you cited lower crediting rates and lower policy or the benefits in the run-off blocks. So I assume the interest of credit will remain low. So, that's a good thing. And then the lower policyholder benefits in a very tough environment, I don't know you feel like that, so is that guidance still appropriate of $350 million to $400 million for the year, and maybe you could give a little color on what the lower policyholder benefits were in the quarter?

Yes. So look, I think overall you are absolutely right. I mean, in corporate and other is -- it consists of many also run-off blocks, and these run-off blocks can be volatile and that's also the reason why we don't give any guidance for the quarter. We really give the guidance for the full year. And the guidance really around the $350 million for full year. That's also why we gave you the half-year number here that's much more in line with the guidance. Q2 was lighter than what you could expect, and then it's really coming from the volatility of these run-off blocks.

Any color around the policyholder benefits or that is kind of what was so low?

I don't think there is something specific here that I can call out. I think it's really just the volatility and how this blocks run off in this environment side.

Your next question comes from Suneet Kamath with Citi.

Thanks, good morning. So in your prepared remarks you talked about new business activity at around 70% of normal levels, is your sense that that's kind of where we stay for the next couple of quarters or are there things that you can do whether it's virtual etc., that can push that number back up to where it normally is?

Good morning, Suneet. Thanks for joining the call. Look, I'll just give an overview and then I'll hand to Nick Lane to talk about some of the things we are doing. It's just too uncertain to give any guidance at the moment, but let me tell you what we are doing. I think firstly, we've built the new business engine if you like around economically sound products. We have great innovation there as you've seen obviously is product. The second thing, I think we really have going for us is distribution. We have a wide reach in third-party, but most importantly in these times our aligned distribution is really, really an asset and that are coming through for us. And then thirdly, the leadership position, we've got in sort of resilient segments like the teachers, places as well. But maybe Nick brings you into the call to talk about what we're doing on the digital side, innovation, etc.

Great. Thanks Mark. Yes, we remain steadfast in guiding our clients through this period. And I would say, the demand for advice is increasing. So magnifying our outreach, as Mark alluded to in the prepared remarks, we've seen a 7 times increase in I would say remote meetings. And to provide a little color, our best advisors I think digital and remote is making them better. And we're also seeing consumers, especially at the older-age more comfortable now to engage with advisors so through Zoom meetings, Microsoft Teams. And so it's continuing to go digital and magnifying our engagement as we focus on meeting the needs that exist out there.

Okay. Got it. And then I guess for Mark, we are seeing more third-party capital enter the life insurance space. So I was just wondering are you spending any time thinking through potential transactions of run-off blocks, be it the stuff incorporate or the GMxB or is that just not a priority right now given COVID-19?

I think the priority, as you indicate Suneet, has been on ensuring our resilient balance sheet and our robust business model. But yes, we do, we are aware, you're quite right; there is a lot more money in the market. And we keep close eye on what the transactions are and what the opportunities are for us. I won't say any more than that, but we watch it very, very closely.

Your next question comes from the line of Tom Gallagher with Evercore.

Good morning. First question is just on, I guess, the new statutory variable annuity framework. To me, it's kind of interesting how that choosing a three in a quarter mean reversion interest rate assumption yet, now you've moved your GAAP assumption to two in a quarter. So you're sitting in a much more conservative place than the new statutory framework. And I guess, my question on that is, does that create any challenges or how you deal with the economics of stat if you're trying to hedge the economics? And would you expect any change on the part of regulators just given where interest rates are now?

Yes. Tom, I think, this is Anders. Good morning. How are you? So I think this is a good question. We talked about the reversion to the mean in Q1, where we really show and sold a large move in, in interest rates coming down. I mean, as you know from our economic position and we don't take an interest rate position, which means we fully hedge interest rate and that was also one of the reason why we were clearly over hedged in Q1 and saw this large hedge gains, relative to GAAP, but also on to some extent relative to statutory. Now when rates stay where they are, I think nothing materially happened in our case because we already protected. I think the only statutory thing that would happen with rates is it would go back up, obviously that would and we would reverse some of that, but that's not our expectation, and I think that's what we will see in the near future. Now, your question is about the regulators, they actually are and working on the interest rate assumptions, I don't know exactly where they are, but I think there were discussions at least that then they are going to accelerate the RTM to-date that has been our generate so that right now produces this RTM, because it is in a way an unrealistic that right now all the scenarios that we actually have to use are above the current forward rate, which means it's not very realistic and when you see where rates are right now. So I know the regulators are working with. We have a strong position here. And I think we feel well protected in whatever happens on interest rate.

Okay. Interesting, thanks. And then I guess, just a product question, your -- the SCS product, the buffer annuity, I know you said that's growing year-over-year. Just curious, if you've seen competitors enter that space, are they still mainly focused on FIAs and not a buffer annuity?

Tom, it's Mark. I'll just give an overview and Nick can give a lot more color. Yes, we're very proud of what we've done with SCS. We've got at about $20 billion of assets through that. We led the market. We created a whole new segment if you like of the buffered annuity space. For sure, there is more competition coming in. We continue to innovate and we have very good distribution reach. Nick, could you add anything to that?

Sure. I would just point out, we're continuously in the market working with our partners and clients, develop new solutions to meet their evolving needs. I think Mark referenced Dual Direction. Dual Direction is a unique index. It's got the same ALM matching and downside protection, but it meets the new need to provide the ability for clients to enhance their account value if the market goes down up to a limit. So we see that the demand for those products is continuing to grow and our ability to continue to innovate in their products going forward.

Okay, thanks. And just one more if I could sneak it in, the $650 million funding agreement issuance, are you guys plan on growing that portfolio or is that a one-off?

Yes. So, Tom, we are absolutely planning to growing that over the next 10, five years, so that should become a meaningful contributor to earnings.

Your last question comes from the line of Ryan Krueger with KBW.

Hi, good morning. I had a follow-up on Tom's question on NAIC interest rate generator. Can you just help us think about to the extent that the generator is there buys and the interest rate is lower that would also impact the -- at least the statutory liability that Equitable is holding per variable recently? I guess, can you help us think about the offset that you would benefit from given your economic interest rate hedging that would offset that within the stat framework?

Yes. Look, I think, the way I think about it is, right now, we're basically over hedged under the statutory and after -- when they changed in interest rate generator, we basically fully hedged under the new framework. That's how I look about it if it gets fixed, right.

And you, I think last quarter you disclosed this, can you just give us an update on, I think there is a fairly material amount of treasury gains that are -- that you have that are included in your RBC ratio I think that would be a part of the offset, can you give us an update on that?

Yes, correct. I mean we disclosed last quarter that we had about $2 billion in unrealized gains in treasuries and because rate didn't materially move since then this is still there.

Ladies and gentlemen, that does conclude today's conference call. We thank you for your participation. And we ask that you please disconnect your lines.