Good morning, and thank you for standing by. Welcome to the Equitable Holdings Second Quarter Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] Now I would like to hand today's conference over to Head of Investor Relations, Isil Muderrisoglu. Please go ahead.

Thank you. Good morning, and welcome to Equitable Holdings Second 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. Reconciliation 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 Robin for their prepared remarks.

Thank you, Isil. Good morning, and thank you for joining our second quarter earnings call. While there have been some signs of returning to normalcy, of course, as pandemic is not over, and we all know we need to be vigilant and especially watch the Delta variant. That said, the consistently strong results we have delivered over the last 18 months, including those of the second quarter we will present today, were made possible by the extraordinary efforts of our Equitable team and our continued economic management of the business. Turning to Slide 3. There are 4 points which highlight our results for the quarter. Firstly, strong results supported by robust net flows. Our second quarter non-GAAP operating earnings of $758 million or $1.71 per share were up 74% on a year-over-year share basis, driven by strong performance from both Equitable and AllianceBernstein. Assets under management increased 22% year-over-year to $869 billion, driven by strong net flows of $6.1 billion attributable to robust first year premiums and another quarter of strong inflows at AllianceBernstein as well as positive equity markets. These comparisons to a year ago are flattering because we were in the middle of the COVID lockdown this time last year. Perhaps it is more meaningful to look at the momentum from Q1 this year. Operating earnings are up 26% quarter-over-quarter and assets under management are up 6% this quarter. Second highlight, we continue to optimize shareholder returns. We were very pleased to announce the close of our landmark variable annuity reinsurance transaction with Venerable in June. As a reminder, this transaction significantly derisked our balance sheet, reducing CTE98 capital by more than 64% and unlocking $1 billion of economic value. Our relationship with AllianceBernstein also provides us with an opportunity to optimize risk-adjusted returns. We have committed a…

Thank you, Mark. Turning to Slide 6. I will review our consolidated results for the second quarter before providing more detail on segment results, the capital management program and updates to Reg 213. Non-GAAP operating earnings were $758 million for the second quarter, up 68% from $451 million in the prior year quarter. Non-GAAP operating earnings per share increased by 74% to $1.71 per share, primarily driven by strong net investment income attributable to strong performance from our alternative investments, higher prepayments, increased fee revenue on higher assets and share repurchases from our buyback program. The strong performance for the quarter reflects notable positive onetime impact of $100 million or $0.23 per share, resulting from prepayments and alternatives. The strong performance for the quarter reflects notable positive onetime impact of $100 million or $0.23 per share resulting from prepayments and alternatives. Normalizing for these items, non-GAAP operating earnings were $658 million in the second quarter or $1.48 per share, benefiting from strong new business flows, growth in our general account and continued focus on expense management. Keep in mind, going forward, we will have an annual impact of $180 million per annum resulting from the Venerable deal or approximately $45 million per quarter, which we expect to decrease over time due to the claims patterns of the business. The Venerable deal unlocked $1 billion in economic value for us, but has a negative short-term impact on GAAP. AUM in the quarter increased to $869 billion, supported by strong equity markets and positive net flows of $6.1 billion, increasing 22% versus the prior year quarter. Moving to GAAP results. We reported $123 million gain in the quarter, which was primarily driven by the asymmetry in accounting between our economic hedging and GAAP liabilities. With the close of our legacy variable annuity…

Thank you, Robin. Before opening up the line for your questions, I would like to reiterate some highlights on our second quarter results. First, we have delivered another strong quarter, driven by solid performance and new business flows. Second, in alignment with our strategic priority to optimize shareholder returns, we are proud to have closed our landmark VA reinsurance transaction, which meaningfully strengthens our balance sheet. We are continuing to build upon synergies between Equitable and AllianceBernstein with a further $10 billion commitment to AB to drive higher earnings potential for both companies. Third, the permitted practice of Reg 213 redundant reserves along with our strong capital position and management actions, allows us to reaffirm our target payout ratio. And lastly, we are continuing to execute on our strategy to drive long-term growth, supported by our shift to capital resilient businesses and new GA and expense targets. With that, I'd like to open the line for your questions.

[Operator Instructions] And our first question will come from the line of Elyse Greenspan with Wells Fargo.

My first question is on the capital side. So I just wanted to get an update. You guys have also since the Venerable deal spoken about looking at M&A as well. Just an update on what you're seeing on the deal side of things over the last quarter or so.

Elyse, it's Mark Pearson. Thank you for the question. Obviously, a lot of activity in the market place is behind your question. We like the possibility of bolt-on deals as a way to accelerate growth and add capabilities. So we remain open to M&A. But consistent with our strategy, areas of interest for us would be employee benefits and wealth management and obviously, supporting the build-out of alternatives on the AB side. So we continue to look. We have no -- nothing to brief you on today. But always with us, I think you can be assured, you would need to compliment us that the strategy make economic sense and most importantly, provide long-term value creation for our shareholders. That's really our position.

And then I was hoping to get just some additional color, just the SCS sales were really strong in the quarter. Just what are you seeing from the competitive environment there? Just how do you think sales should trend over the balance of the year, even initial thoughts in 2022 as well?

Nick, do you want to take that?

Sure. Thank you. As Mark and Robin stated, we saw record sales in the quarter led by our $1.9 billion of SCS sales. We continue to see strong consumer demand out there. We expect the pie to continue to grow. We believe competitors entering the space is a net positive because it validates the asset class demand for advisers. And given our strong distribution network, we are continued to be well positioned, and it allows us to focus on profitable growth going forward.

And our next question will come from the line of Nigel Dally with Morgan Stanley.

So with the uncertainty of Reg 213 now resolved or at least in the process of being addressed, the natural question is why not be more aggressive with buybacks. It seems like you're still sitting on a large amount of excess capital, yet the incremental buybacks is only half of the economic capital which you released from the Venerable transaction. Wouldn't it make sense to return a little more of that back to shareholders now that Reg 213 uncertainty has been resolved?

Thank you, Nigel, for your question. It's Robin here. Most importantly for us is continue to manage on an economic basis and consistently deliver 50% to 60% payout to shareholders. As you know, this year, we committed on top of our normal 50% to 60% payout, $500 million more on top of that as a result of the Venerable deal. And over time, as capital gets freed up, we'll continue to return capital to shareholders.

I guess just to follow up on that, the -- getting the permitted practice is encouraging, but the best outcome would have been a change in the regulation. Is that still a possibility? Or are there, I guess, fundamental differences in your view of economic capital relative to DFS, that's what are appropriate reserves for [indiscernible] block.

Sure. I think -- we think the DFS was well intentioned with Reg 213. However, it clearly has unintended consequences and it's been economic. And we don't see any other reserve that's comparable in any other state. Overall, the relationship with the DFS is good, they approved the Venerable deal and this permitted practice, all through a health pandemic. They have indicated to us at the staff level that they don't intend to turn Reg 213 now. So we'll continue to work with them on a more economic reserving framework in the future. But I think most importantly, with the $2.5 billion of cash, the 450 RBC and the permitted practice, this enabled us to keep our payout ratio for shareholders over short, medium and long term.

And our next question will come from the line of Jimmy Bhullar with JPMorgan.

So I had a question on the Group Retirement business. And I think through most of the last few years, your flows have actually been much more stable and healthier than most of your peers. And I understand the makeup of the business is different, given the teachers exposure. But they've been fairly weak this year and they're down through both quarters of the year versus last year. So I think last quarter, you mentioned you had seen some weakness because of small businesses. But just if you could talk about what's going on there and what your outlook is for the business?

Great. Thanks, Jimmy. This is Nick. As we reported, we saw $119 million improvement in net flows and group retirement quarter-to-quarter. In our tax-exempt business, which is our teacher, we saw strong renewals, up 9%. That sector continues to be resilient. Teachers are busier than ever. And I think we're well positioned given our investment in remote technologies to continue to go deeper and broader across our 800-plus-thousand clients. In the corporate segment, which is our SME, we did see an improvement in surrenders. Last quarter, we had some expected planned deconversions. We saw improvement there. So we look at our business. I think our core is -- our core tax exempt is strong. We see digital has given us an opportunity for the future, and we're continuing to penetrate the SME space.

Okay. And on the 213 resolution with New York, the initial impact that you're talking about phased in over the next few years, is that on the overall in force? And should that impact increase as you're still selling some business through New York? Or is that already taken into account?

Jimmy, yes, that's already taken into account. But as I mentioned, in the presentation, we have plans in place to write about 90% of our business outside of New York next -- by the end of 2022. So we remain well positioned on a new business perspective and on the imports, as I mentioned earlier, the permitted practice along with our strong capital position sets us up here to continue to deliver capital to shareholders.

And some capital obviously still is tied in -- tied up because of it, and then it increases over time. But if you are able to find a solution, then that gets released. But barring a solution, then it's -- then more capital gets tied up because of the differences in regulations between states.

That's right.

And our next question will come from the line of Suneet Kamath with Citi.

Maybe circling back to 213 to start. So Robin, can you just talk about the outlook for dividends from your New York sub over the next couple of years? And of those strategies that you mentioned, I guess, on Slide 12, how long is it going to take to execute against some of these things? Is this a sort of 2021, '22 event? Or could it take longer than that?

Sure. Thanks, Suneet. I think the key is, historically, we've always as a holding company received $1.5 billion of upstreams from our subsidiaries. We continue to expect that from the subsidiaries, but expect it to be shifted as we'll have more unregulated cash flows as a result of some of the management actions that we're taking. And that should put us -- that should position us well for the future. The management actions from the 35% to 50% for unregulated cash flow should be completed by year-end. Any of the reinsurance transaction, if they make economic sense we'll look at in 2021, 2022 time period.

So just to be clear, you're still focused on the $1.5 billion on an annual basis?

Correct.

Got it. And is there any earnings impact from any of these actions that you're taking? Or is it sort of earnings neutral?

No. I mean the redundant reserves of Reg 213 is purely statutory, no impact on GAAP or the economics and all the actions that we take will not impair any of our management of the stated balance sheet on an economic basis.

Okay. Got it. And then my second question, I guess, for either Mark or Ali or both. So clearly, you guys have done a lot with the Equitable, AllianceBernstein partnership in terms of managing the general account. But one of the things that you've talked about is trying to scale up Equitable advisers. And obviously, AB has a private client business. Is there any way to sort of think about using those 2 business to scale the wealth management of both operations? Or are they just so different that you can't really think about some sort of a combination of the 2?

Ali, do you want to have a go at that? It would be good to hear from you.

Sure. Hi, Suneet. So -- okay, I think there are a couple of things to think about. One is, it is a complementary client set on average. There is certainly some overlap, but it is a little bit complementary in terms of what products are being served and what clients are being served. That's one thing. Now on the one hand, that offers you opportunity to progress the client perhaps across income levels or like stages, and that's something that we're certainly thinking through and trying to capitalize on. On the other hand, the second point is that the products are also different, right? So something that you'd offer perhaps to ultra-high net worth client, which is a little bit more intune to what we do at the AllianceBernstein private wealth side. It's going to be different than what might happen on the Equitable adviser side. That doesn't mean there aren't any, to your point, opportunities there. It's something that the 2 firms are working more and more cohesively on and thinking through from a client segmentation perspective, from a model up portfolio perspective, et cetera. There are opportunities, but we haven't quite capitalized on those at this point. So the short answer is, yes, there's opportunity, but we haven't quite fleshed it out and it's something we're looking forward to trying to do going forward.

And our next question comes from the line of Ryan Krueger with KBW.

Could you provide any more detail on, I guess, what you're doing specifically to increase the unregulated cash flows?

Sure, Ryan. It's been a key focus for us since IPO on increasing unregulated cash flows. You saw us do it in the past by upstreaming the AB units for the holdco. And now we're taking that next step. And specifically, what we're doing, we're providing administrative services for our mutual funds in the insurance separate account from another subsidiary in the holdco. This enables us to service both the business outside of New York, but also the new business that we'll be selling outside of New York going forward. So specifically, their service administration contracts that we're providing for the mutual funds underlying our separate accounts, and they were approved by the independent board of the mutual funds in the second quarter.

Got it. And then in terms of potential internal and external reinsurance, would this be more focused on annuities? Or could this be on the life block?

I think anything that we do will be on an economic basis, number one. The second aspect, we're going to look at all blocks from an in-force perspective, life and annuities. And if something makes economic sense that impacts the redundant reserves related to Reg 213, we'll take a serious look and consider actions.

Just last one quick, I may have missed this, but do you still expect corporate segment annual losses to be around $300 million a year?

That's right. That's our expectation. There's obviously some seasonality, as you saw in this quarter, but $300 million on an annual basis for corporate and other.

And our next question will come from the line of Thomas Gallagher with Evercore.

Just some questions on this 213. The -- so the 5-year permitted practice from the NYDFS, that was already, I guess, on the books in early 2021. Is that just you requesting to use the 5-year phase-in? Or is it something different and apart from that, that was granted to Equitable?

Sure. So Tom, as part of the Venerable transaction, it unlocks $1 billion of economic value, significantly reduced the risk in the company, but accelerated the Reg 213 reserve as it wasn't aligned through economic hedging. So the permitted practice allows us to defer that acceleration and align it better through our interest rate hedging, specifically on an economic basis and that we get to phase in those redundant reserves over a 5-year period as a result.

Okay. And so Robin, the 450 RBC would reflect what, 20% of the initial impact of this so far then? Would that be about $400 million of the $2 billion is reflected in your 450 RBC at this point?

No, it did minimally impact the Reg 213 reserve as of half year because of the permitted practice that you received. You do see the increase as a result of the Venerable transaction, but minimal impact from Reg 213 as of half year.

Got you. So that's going to be a year-end event when you start to see the impact coming through?

Correct. That will be a part of the $2 billion [indiscernible]

Okay. And then the $1.5 billion of annual dividends from subs that you said you still expect to get. I presume 2021 is still -- is going to be only AB? And then would you expect to get the full be back to $1.5 billion by 2022? Or how would you expect the timing of that to look? And would you -- is the plan to still just to draw down on the access at the holding company for 2021?

That's right. As you remember, last year, we took 2 dividends out of the life company in New York. As a result, this year, the upstreams are mainly coming from AllianceBernstein. And then going forward in 2022, we still expect upstream about $1.5 billion, but more unregulated cash flows as a result of the management actions that we're taking. The existing strong cash position of $2.5 billion is there to support a consistent payout ratio for our shareholders.

But Robin, do you think you'll be in a position where you're back to getting $1.5 billion up to the holding company? I know the, I guess, where they come from is probably going to change based on some of this restructuring. But would you expect normal dividend flows of $1.5 billion or so to be back in 2022? Or is it potentially going to take a bit longer?

No. Yes, under normal market conditions, all out equal, I'd expect to have $1.5 million in 2022. But more unregulated cash flows to providing more certainty as well.

Got you. And then just one final one, if I could. The AB announcement, is there anything -- when I think about the $10 billion of redeployed investments, is the way this is going to work that you would potentially sell public corporate bonds and then buy less liquid, higher-yielding securities? And if so, is that going to result in you crystallizing gains on your current portfolio? Will that have any statutory impacts if that's the way it's going to work?

Sure. So as Mark mentioned and Ali as well on the AB earnings call, we're really pleased with the synergies between the firms and this is one of the major areas. We -- and it enables us to enhance risk-adjusted returns for the Equitable insurance company and AB goes out and builds higher multiple building -- businesses with this $10 billion that we give them. The majority of the $10 billion is a reallocation from public corporate into illiquid private credit and also alternatives that AB can build upon with third-party funds as well. And I expect that to be completed by 2023.

And our last question this morning will come from the line of Tracy Benguigui with Barclays.

Look, your VA in force, most of that was written out of your New York entity. Can you share with us what percentage of your VA reserves within Equitable Financial Life Insurance Co. is for New York policies versus non-New York policies?

We haven't shared that split, but the majority in the life company is from non-New York policies as it sits today, but we haven't shared the exact split of that.

Okay. And I guess that dovetails to my next question. I want to make sure I'm thinking about this correctly. You mentioned internal reinsurance. So how feasible is it to reinsure your non-New York policies that was written on New York entity to your Arizona entity under a captive structure?

I think we're looking at both internal and external reinsurance, as I mentioned. I don't want to go into specific details on any one that we're evaluating, but everything that we do will be judged against our economic basis, ensuring that we can deliver long-term shareholder value while addressing these redundant reserves in New York.

Okay. And then I guess just maybe one quick follow-up there. Just looking at external reinsurance. Should we think about a block size similar to your Venerable deal? Or could that differ?

It could be similar, it could differ. It depends always on the economic value that we receive for any block that we cut out.

And with that, we will conclude today's Equitable Holdings Second Quarter Earnings Conference Call. We appreciate your participation and ask that you please disconnect. Thank you.