Good day and thank you for standing by. Welcome to the Equitable Holdings First Quarter Earnings Call. At this time all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to your speaker today, Jessica Baehr, Head of Investor Relations. Please go ahead.

Thank you. Good morning, and welcome to Equitable Holdings first quarter 2021 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; Robin Raju, our Chief Financial Officer; Nick Lane, President of Equitable Financial; and Ali Dibadj, AllianceBernstein'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 in the Investor Relations portion of our website, in our earnings slide presentation and financial supplement. I would now like to turn the call over to Mark and Robin for their prepared remarks.

Thank you, Jessica, and good morning, and thank you for joining our earnings call. I hope all of you and your families are continuing to stay safe and healthy. We've now passed the one-year anniversary of when our lives were first changed by the pandemic, and these remain challenging times. Sadly, the number of COVID-related deaths in the U.S. reached an all-time high in Q1, reflecting peak infections of the virus in late 2020. Since then, the health crisis in the U.S. has been improving, and the economic outlook is brighter with consumer confidence reaching a 14-month high. It's beginning to feel, here in the U.S. at least, that we are entering a more optimistic time. People are once again looking to the future with hope and assessing their goals, priorities and plans. It's been a year where the people of Equitable have come together and shown extraordinary resilience and innovation to connect with our clients. These relations and new digital capabilities are resulting in positive momentum inside the company. Please turn to Slide 3, so I can share some highlights of this momentum. It was a strong first quarter for Equitable. I'm pleased to report first quarter non-GAAP operating earnings of $600 million or $1.35 per share, up 19% over the previous year. Our subsidiary, AllianceBernstein, performed particularly well with first quarter earnings and distributions growing by 27%. Assets under management are up 27% year-over-year to $822 billion, supported by good net flows and strong equity markets this quarter. New business activity continues to trend positively and is now back to pre-COVID levels. Total company net flows were $4.6 billion in the quarter, with net inflows of $5.7 billion, excluding our legacy fixed rate GMxB runoff business. Capital ratios in the balance sheet remained strong, thanks to our economic…

Thank you, Mark. Turning to Slide 6. I will review our consolidated results for the first quarter before providing more detail on our segment results and capital management program. Non-GAAP operating earnings were $600 million for the first quarter, up from $535 million in the prior year quarter. Non-GAAP operating earnings per share increased by 19% to $1.35 per share, primarily driven by strong investment income attributable to alternatives, increased fee-type revenue on higher separate account balances and share repurchases. AUM increased to $822 billion, supported by strong equity markets and positive net flows. Moving to GAAP results. We reported a net loss of $1.5 billion in the quarter, which was primarily driven by the asymmetry in the accounting between our economic hedging and GAAP liabilities, which is in line with our expectations. As a reminder, Equitable is managed on a fair value basis, which means we do not take bets on interest rates, and we hedge our full economic liabilities. In the quarter, our hedging program performed as expected with a 95% effectiveness ratio. Our economic framework and prudent risk management continued to underpin our strong results. Moving on to the business segments. I will begin with Individual Retirement on Slide 7. Operating earnings of $363 million were down 3% versus the prior year quarter due to higher death claims and the impact of higher reserves from assumption updates in the first quarter of 2020. This offset strong growth from both SCS sales and separate account fees. First year premium improved 24% versus prior quarter, driven by record sales in structured capital strategies, reflecting the breadth and depth of our distribution and continuous innovation. SCS continues to resonate with clients, looking for protected equity solutions as they prepare for retirement. Net inflows on our current product offerings attributable to…

Thank you, Robin. Before opening up to questions, I would like to reiterate the highlights from this quarter. First, we've had another strong quarter supported by robust new business activity. Our fair value economic approach to managing the business with our strong capital position and legacy VA transaction close on the horizon, keeps us well positioned to manage through a wide range of economic scenarios. And finally, looking ahead, we continue to leverage our strength to deliver on our commitment to providing long-term shareholder value. With that, I'd like to open the line for questions.

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

Hey, thanks. Good morning. My first question is on capital return. You guys came in above the 50% to 60% payout target in the Q1. I'm assuming maybe that was just a function of where the stock price was. Can you just kind of give some more views on that? And just how we should think about the capital return relative to that 50% to 60% for the rest of the year and assuming, obviously, the $500 million would come on top of that?

Thank you, Elyse. It's Robin here. No, we're pleased with our capital position with $2.5 billion of cash and liquid assets at the holding company. As you saw in Q1, we returned $504 million back to shareholders, and we expect to be within our 50% to 60% payout ratio for the full year. In addition to that 50% to 60% payout ratio, as we announced, at the close of the Venerable deal, we'll have an additional $500 million share [indiscernible]. But as you know, expect us to be active every quarter in the market and we'd like to keep momentum in the market, and we're pleased with the returns we've seen to date.

Okay. That's helpful. And then my second question, if we went back to discussions over the past year, and as we talked about your stake in AllianceBernstein, you guys have kind of mentioned putting off kind of thinking through whether you would look to change from the size of your stake, just given the uncertainty with COVID. Now that it seems like, right, there's kind of line of sight into kind of coming the other side of this with the vaccines being rolled out, do you kind of have some updated thoughts just in terms of how you're thinking about what you might do with that stake and when you might come back to thinking through that decision?

Hi Elyse, it's Mark Pearson, thanks for the question. Firstly, whenever we talk about AB, I think it's important for us to acknowledge the business is traveling extremely well, 27% up on earnings, record levels flows across all three channels. So we're very, very happy with the investment in AllianceBernstein. For Equitable, obviously, our stake there gives us access to a very nice capital-light business. We have non-regulated cash flows coming through and investment expertise, which we think enables us to put together value propositions for clients that are better than many of our competitors. And on AB's side, we're obviously an anchor investor for them. We provide seed capital to build out the alternates business. And more and more, we are seeing the teams combine together for commercial offerings as well. So we're very happy with how the business is traveling. Yes, we look at our holdings from time to time. It's 65%. Don't expect any big announcement from us imminently. We just do what you would expect us to do to look at from time to time, which we've done, but we're very, very happy with our investment in AB and how the business is performing.

Okay. Thanks for the color.

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

Good morning. So another question on capital. Just wanted to come back to the issue of Regulation 213. I know it hasn't been the – necessarily the number one priority, getting the [indiscernible] transactions completed is at the top of the list, but any preliminary discussions that you've had with the DFS with regards to the regulation and how is your confidence in being able to arrive at a solution to that issue potentially change from where it was, say, three months back?

Good morning, Nigel. As you know, our priority with the DFS to this point has been on discussions for the Venerable deal. It's a significant derisking transaction, and that's where we remain focused on discussions with them. We have started preliminary discussions on Reg 213 as well. And as always, with the DFS, we'd hope we come with an economic solution that is what the DFS wants and that is what we want as it's closely aligned to how we manage the business on an economic basis.

Okay. That's helpful. Then just the second question, just on the overall buffered annuity space. It does seem like it's getting a little more crowded, I think they are getting to participate into any sort of pricing pressure or [indiscernible] that you're seeing from the base price?

I'll take that. This is Nick. First, we're proud to be the pioneers that founded the buffered annuity space. As we said, we view that the pie is continuing to grow, driven by core consumer demand with the peak baby boomers retiring. And competitor entrants are validating, I think, the client and advisor need for that product as an asset class. As a market leader, we continue to manage for value, not market share, and our differentiated capabilities, our affiliated distribution, our privileged space with third-party providers and our 10-year track record of delivering, I think, led to the record sales that you saw, 24% up and $1.8 billion in SCS. With that said, we're well positioned to meet demand out there given our range of products, and we'll continue to focus on generating shareholder value.

That's great. Appreciate the color. Thanks.

The next question comes from the line of Tom Gallagher with EVR.

Good morning. Question for Rob, and I know you're hedging interest rates to the mix, which is over-hedged for statutory accounting purposes. And I guess just relatedly, if interest rates keep rising, which I realize is positive for your economics, I'm guessing that will continue to have a negative impact on statutory capital and cash flow short-term anyway. If that scenario happens through the balance of the year, would the negative impact on RBC become a gating constraint, capital return and freeing up the excess from the Venerable deal? Or do you think that's likely to be a manageable situation for you?

Thank you, Tom. As you mentioned, we manage the business on an economic fair value basis, so we hedge fully the interest rates. Statutory is not economic. It has things like reversion to the mean, which assume interest rates go to 3.5%, and that's not how we manage the business. So from time to time, as interest rates increase, we're over-hedged on a statutory basis, and that may cause volatility in the RBC ratio. When we think about capital return though, RBC is one thing that we look at, but we manage it on our economic ratios, and we make all decisions on those economic ratios. That's what dictates our capital returns, not necessarily RBC.

So Robin, is it fair to say you don't see this having an impact on plans for capital return, including pulling the full amount that you expect to be freed up from the Venerable deal?

Correct. Capital deployment decisions at Equitable are made on an economic basis. We look at RBC, but we manage through the economics.

Got it. And my follow-up is, any – I guess, just on the death benefit guarantee, the adverse claim payments for variable annuities this quarter. Can you give us a sense of how big that was? And also when we think about the part of the block that sort of crystallized the higher death benefit claim payments, is most of that the block that's being transferred to Venerable? Thanks.

Sure. Yes. As you saw this quarter in Individual Retirement, we did see the impacts of COVID overall in the U.S. affect that business. The legacy fixed rate GMxB do have a death benefit associated with it, and we saw higher claims in this quarter as a result. The majority of that is part of the Venerable deal, as you mentioned, and we expect this and hope that this is a one-off as the vaccines improve the situation in the U.S.

And Robin, can you give a sense for the size of that? I was estimating $20 million or $30 million does that sound like in the ballpark?

We did not disclose the size. I mean – maybe the guidance I would tell you, as it links to protection overall, when we think about the guidance that we gave, $30 million to $60 million for 100,000 U.S. deaths, this falls within the total guidance that we gave as long – with Protection as well.

Okay. Thanks.

The next question comes from the line of Jimmy Bhullar with JPMorgan.

Hi, good morning. So first, I just had a question on the Retirement business. And you've had pretty strong flows in retirement over the past several years. This quarter, they were negative. And I understand the reasons for that. But if you could talk about what your views are and whether you – on retirement flows and whether you consider this quarter as more of a trend given your small business focus on the 401(k) market? Or is it more of an aberration?

Great. This is Nick. First, as you said, [Technical Difficulty] the outflows in our corporate business is driven by planned deconversions and participant terminations in the SME segment. I think as the economy continues to gain steam, we view a resumption to normal activity. In the tax-exempt market, which is our 403(b) business, as you stated, we continue to have positive flows, $70 million for the quarter that Robin alluded to. We are back to pre-COVID levels led by our 8% renewal increase. Teachers today continue to be busier than ever. And given the disjointed nature of school reopenings, we expect a more levelized return once we start reentering in the next school year. But we are greatly encouraged by the increased usage we see in our foundational digital tools [Technical Difficulty] digital appointment setting, virtual meetings, and we think those capabilities, plus our presence of the 1,000 advisors out there will amplify our activities going forward. So we remain committed and proudly serve the teachers.

Okay. And then just on New York Reg 213, I think you're fairly confident you'll be able to reach a solution with the DFS, but assuming you're not able to in a timely fashion, what's the impact of that on capital? And how much does that constrain you in terms of your ability on deployment if you could quantify or give a range or something?

Yes, Jimmy, what I would say is, as always, with New York, we've always had good discussions with them and good dialogue and – on any issues that's come up over the years. We believe New York wants a more economic reserve, and that's how we manage the business. So we're comfortable that we'll have to continue the discussions with them, and we'll come across with a good solution. As you've mentioned, if we don't have a solution, it would be a problem, but we believe we have management actions in place that we could take to address it as well. So we don't have a big concern on capital return.

Okay. Thanks. And if I could just ask one last one? You've been pretty active on buybacks as a source, the use of capital more so than like dividends and other actions. How much of like – and going forward, are you – should we assume you're going to be fairly consistent or does M&A come into the equation as well more – going forward more so in the past? And if that is the case, what are some of the markets you might be sort of interested in expanding through acquisitions?

Thanks Jimmy. It's Mark. Yes, you can assume that we'll be fairly consistent with our 50% to 60% payout ratio, which has held well for three, four years now. You'll remember, Jimmy, when we went out at the time of the IPO, we said do not expect any M&A or significant M&A activity from us. We wanted to establish ourselves as a listed management team and wanted to get credibility with investors, and I think we've done that well. We're past that three-year mark now, so we do look at opportunities, but – and it would be in the area of capital-light businesses, like supporting AB on the Alternative's buyout. Our wealth management business has been growing nicely, and Employee Benefits business now is at 515,000. So it's not in the category of never anymore, it is something we will look at. But, please, be assured we would remain very disciplined and financially prudent in looking at anything. And don't misinterpret my comments as we're about to make any big announcement. We're not, but we would look at opportunity.

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

Hi, good morning. I guess, first, the quarter came in at $1.35, that was $0.06 better than we had estimated, so really nice quarter. Some of your competitors are providing roll forwards, where we can kind of look at this quarter and then see where it's going next quarter as a foundation. So as I look at this $1.35, could you help dissect what was the Alt impact above what you expected? And then what was the COVID-19, less the offsetting PFBL, impact, just so that we could get a grounding in what the right number is going forward? Could you do that?

Thanks, Andrew. It was a strong quarter result overall with $1.35 per share result. We think that's a good number. It – behind it is strong AUM growth, strong investment income as well. On the Alternatives, I think you can expect us on the Alternatives to get an 8% to 10% return on an annualized basis. We've highlighted that before. But overall, in terms of guidance by segments, I'd probably want to wait till after the Venerable transaction as we'll come out with further guidance as that will impact some of the segments overall.

Okay. So Robin, I'm reading that you're kind of comfortable with that $1.35 as kind of a base number without getting into the details?

Correct.

Okay. And then the second one also kind of a quantitative number and I think Tom was asking this a little earlier, you thought it was maybe a $20 million, $30 million death benefits impact in Retirement. What strikes me is the death benefit – if you're looking at the pure death benefit, the markets are all-time high. So I guess if the markets are all-time highs and there's no real net amount of risk as a result, why would there be a material death impact? So what – I might be missing something there, so I'd be curious as to why it would be that high?

Yes, two things. As I mentioned early on the call, overall claims for Equitable are aligned with the guidance that we've given related to COVID. And it's probably on the lower end of that guidance overall. So I wouldn't read too much in any specific number for Individual Retirement above what I just gave. In this segment, when you have higher death claims accelerated, so the death claims came sooner than we expected, we earned less fees on the reserve from what we expected in the future, and that's what's causing the negative in the quarter.

Okay. Thanks Rob.

The next question comes from the line of Suneet Kamath with Citi.

[Technical Difficulty] you talked about an opportunity to improve the yield on the portfolio when the time is right by moving into less liquid assets. Can you size that opportunity for us? What amount of the portfolio are you looking to allocate? And then maybe some thoughts on the timing of that?

Sure. Thanks, Suneet. Since – when we announced the IPO, we gave guidance of the $160 million incremental GA yield, and that was primarily moving from treasuries to public corporate. And we wanted to get comfortable with the guidance we provided. Since then, we continue to evaluate the market together with AllianceBernstein. We do see opportunities in the alternative space, in the private credit space, and that creates that virtuous cycle that we've talked about with AllianceBernstein, where they bring on teams, we invest and seed, and they're able to grow third-party assets. And that's what they've done with their alternative business to date. We'd probably – again, I'd probably link to us providing more guidance on overall income post the Venerable transaction as some of the assets will change overall. But we see good returns in this space. But we want to make sure there are good quality returns and risk-adjusted when we invest in illiquid asset classes.

Got it. That makes sense. And then just on the Venerable transaction, I asked about this on the last quarter call, but it does strike me that the market may not be appreciating, just derisking that deal. How much derisking is included with that deal? So I'm wondering, have you given any thought to potentially updating those lifetime cash flows that you provided at the time of the IPO? I know it's an involved exercise, but at the same time, I think it could provide some transparency in terms of the quality of the retained book versus the book that includes the book before the reinsurance transaction? So just wanted to get your thoughts on that, Robin.

Yes. Thanks, Suneet. As you mentioned, the Venerable deal, it's a landmark transaction for us. It significantly reduces risk in the company, CTE98 reduction, 64% overall, and we're really happy with the deal, and we expect to close it in the second quarter. Going forward, the guidance on cash flows that I already gave, and we'd hope LDTI with implementation, as it becomes more economic, gives better guidance on cash flows for the overall book, not just the VA, but all the segments overall. And that's what we'd point out. I will evaluate additional disclosures again post the Venerable transaction what we want to provide in terms of guidance.

Yes, I would endorse that. I think that would be really helpful to the market. Thanks.

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

Hi, good morning. First question was a follow-up. Robin, I think you said that for Reg 213, if it wasn't changed, you think you have management actions that you could take. Does that primarily include additional reinsurance if Reg 213 was not revised? Or are there other things you can do beyond that?

Look, we have a set of management actions that we're evaluating, but we're comfortable that we're going to get to a right resolution with the DFS. We've continued to have discussions – positive discussions with them on the Venerable transaction, and we're going to – as we shift focus to Reg 213, the DFS wants a more economic reserve like we manage the business today. So we believe we'll get alignment overall. But if we don't, we're ready to take management actions to make sure that the reserve is more economic. I don't want to get into too much details on those actions now because I'm more hopeful that we'll come to a good economic solution with the DFS.

That makes sense. And then on VA, on the status, can you give us any sense of what the embedded gains you have on the treasury portfolio back in the VA hedging program that are not included in the RBC ratio today?

It's about $1 billion of gains in the investment portfolio on the treasuries. With the rise in interest rates that did decrease a bit, but it's about $1 billion today.

Thanks. And then I'll sneak in one last one. Are there any adjustments that could happen to the $1.2 billion freed up from the Venerable transaction before close or is that amount pretty locked in?

It should be – economically, there's no – we fully hedged the impact of the Venerable transaction overall. So we feel comfortable with those numbers.

Got it, thank you.

This concludes today's conference call. You may now disconnect.