Good morning. My name is Chantal, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Equitable Holdings First Quarter 2022 Results Conference Call. As a reminder, today's conference call is being recorded. [Operator Instructions] Isil Muderrisoglu, Head of Investor Relations. You may begin your conference.

Thank you. Good morning, and welcome to Equitable Holdings First Quarter 2022 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 Bill Siemers, AllianceBernstein's Interim Chief Financial Officer, Controller and Chief Accounting 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 Robin for their prepared remarks.

Thank you, Isil, and good morning, everyone. Thank you for joining our call today. Our first quarter results highlight the resiliency of our broad range of retirement, asset management and advice businesses against the backdrop of turbulent financial markets, inflationary pressures and rising interest rates, EQT continues to post positive net inflows and strong free cash flow generation. On Slide 3, I will provide a high-level overview of the results before handing over to Robert for a detailed look at the quarter. Equitable Holdings generated $548 million in non-GAAP operating earnings or $1.36 per share, up 1% year-over-year, reflecting a 4% increase in assets under management. As a reminder, we reinsured nearly 1/3 of our legacy block to Venerable last June and our earnings still increased year-over-year, even though the first quarter of 2021 reflected earnings from those reinsured policies. Adjusting for onetime items in the quarter, principally excess death claims relating to the ongoing pandemic, non-GAAP operating earnings were $1.53 per share, up 13% year-over-year on a comparable per share basis. We added $12 billion in net flows in the quarter, with positive net flows in both retirement and asset management, and this was our highest quarter of retirement net flows since our IPO. With our diverse businesses, we remain well positioned to advise and address the growing demand to protect the financial future of Americans who are confronting greater economic uncertainty. AB had another exceptional quarter. 7 straight quarters of positive net flows, realizing a 1% year-over-year fee rate increase enabled AB to post an adjusted margin of 31.5%, an impressive showing by Seth and his team. With the dramatic style shift we have seen in recent quarters, it is encouraging to see 75% of our value products outperforming their benchmarks in the quarter. And versus MorningStar peers,…

Thanks, Mark. Before highlighting results for the quarter, I would like to spend a moment discussing our estimated LDTI transition adjustment on Slide 6. Last quarter, we disclosed our estimated book value adjustment would be within our AOCI balance at year-end, which was approximately $2 billion. As Mark mentioned, interest rates increased significantly in the quarter with the 10-year up 80 basis points and the forward curve increasing from 2.5% to nearly 3% as of quarter end. As a result, the benefit of increasing our near industry low 2.25% GAAP interest rate assumption to the forward curve minimizes the impact of fair valuing our GMIB SOP reserves under LDTI leading to a neutral LDTI book value adjustment as of quarter end. I'm also pleased to report that as of April month end market conditions, our estimated LDTI book value adjustment is positive. Our positive book value adjustment highlights an important aspect that LDTI is trying to resolve. Today, companies have discretion and can choose the interest rate they incorporate into their reserves. If the assumption is higher than the forward curve, the assumption reflects a bet that interest rates will increase above and beyond current market expectations. Companies with higher interest rate assumptions hold less reserves, which in turn may put shareholder cash flows at risk. Equitable believe in a fair value approach, means we can appropriately reserve and deliver capital returns without making bets on interest rates. The forward curve represents the market view of interest rates and currently assumes the Fed will continue to increase interest rates approximately 7 more times over the next 2 years. Within our economic model, we manage our in-force and hedging program based on the forward curve as we believe managing to actual market rates is more appropriate than making our own assumptions…

Thank you, Robin. Before we turn to your questions, I would like to reiterate some highlights from the quarter. First, our business model benefits from our complementary asset management and retirement businesses, with strong net inflows in the quarter and an increasing contribution from our affiliated distribution. Second, our fair value economic approach, which is the result of management action over the last decade, is more toward today than it has ever been, protecting our balance sheet and preparing us well for alignment to LDTI with no impact on our hedging program or cash flows. And lastly, our unique business model, pairing asset management and retirement continues to drive long-term accretive growth to our shareholders. Going forward, we remain committed to acting as a force for good to bridge profits and purpose as we execute against our investment and expense initiatives to deliver on our 8% to 10% EPS growth. With that, I'd like to open the line for your questions.

[Operator Instructions] Our first question comes from Ryan Krueger with KBW.

I guess I'll ask probably the obvious one first. Robin, is there -- can you expand at all on the potential actions that you would take in the second half of the year to mitigate the Reg. 213 impact?

Ryan, thanks for the question. As we've mentioned in the past, we continue to work in parallel to address the remaining redundant reserves to Reg. 213. We've taken action last year to address 50% of it. The remaining actions will be resolved either through external or internal reinsurance. And we've continued to make progress in the first quarter and we're confident that our ability to mitigate it in the second half of the year.

Okay. Got it. And then can you give any more color on -- I know you don't give the RBC ratio quarterly, can you give any more color on the performance on a statutory basis given the volatile market environment?

Sure. As you mentioned, we don't disclose quarterly, and we haven't completed our control process. But what I could tell you is just a reminder that we do have 2 hedging programs in place that work well during these volatile times. The first one helps us fully hedge the economic risk associated with the liabilities on the guarantees. That's where we hedge fully equity and interest rates to the forward curve. And the second one is where we have the statutory hedge program designed to protect CTE98. Both performed well and exceeded the 95% efficiencies. And these programs gives us comfort in the $1.6 billion guidance that we've given to the market today on the 2022 cash flow generation and allows us to continue to invest in the strong new business profitability that we have coming out of our insurance and asset management companies.

Our next question comes from Tom Gallagher.

My first question is from Slide 5. It looks like $100 million of your $1.6 billion of cash flows is expected to come from your distribution business. Can you comment on whether or not that's some capital release there? Or is that actually a normalized free cash flow result from that business that you would expect to sustain?

Sure, Tom. That's right. Of the $1.6 billion, you could expect approximately $100 million coming from the distribution business. That is normal cash flow generation we'd expect on a run rate business from the business. And we expect that to continue to grow as our affiliated distribution continues to sell profitable products and help advise our clients during these volatile times.

Got you. And then -- and Robin, just on the $2 billion impact from Reg. 213. Is that -- should we think about that as being sort of permanently locked in? Or is that a sliding scale that might change, and in particular, just given how weak the markets have been lately would that $2 billion number potentially change if we were to mark that to market?

Sure. So just for context for everyone, the $2 billion of redundant reserves, of which we addressed $1 billion already through the actions we took in 2021, the remaining $1 billion would have some market movement, Tom, but I think it's still a good number because we look at it in relation to CTE98, and that's the number we anticipate in mitigating in the second half of the year.

Okay. And if I could just slip one more in. On the Reg. 213 initiative on freeing up that extra $1 billion of capital, should we assume that, that's kind of where you're going to stop here with strategic actions? Or would you be looking to do more, including the legacy VA block or other things from a risk transfer standpoint?

Sure. All deals that we look at need to be accretive on an economic basis. That's how we look at if a deal is good or not and when we should do a deal. We do like the position we are right now with our retirement business, only 18% of the AUM is in that legacy VA business with about $3 billion runoff on an annual basis. Over time, if we can accelerate that, again, being economically accretive, we'd certainly take a look.

Our next question comes from Andrew Kligerman with Credit Suisse.

Robin, maybe on the Individual Retirement segment, you had $307 million of earnings ex notables. And the number seems often, obviously, the equity markets are playing a big role in that. But barring the decline in equity markets now just assuming it didn't happen, could you give us a sense of where a run rate might be on that earnings number? I know you've got some expense savings to come. I know there's some seasonality. But I'd like to kind of -- if you could get a sense of where to kind of base that individual retirement going forward?

Sure. Difficult for me to ignore equity markets during this time, as you can imagine, Andrew, but I'll try the best. The $307 million, keep in mind, that excludes Venerable. Venerable unlocks $1.2 billion of value, reduced the risk of that segment by 2/3, but adjusted earnings by $180 million per annum. On a run rate perspective, you should expect seasonality for the fees charged on benefits. The benefit fees are charged annually, and Q2 and Q3 are generally the highest quarters when those fees are charged based on historical sales. More importantly, the risk profile and the cash generation on the $106 billion of AUM in the Retirement business remains strong. And as you can see, the new business returns are at record levels. And so we're really excited about the trajectory of that business.

And with that, Robin, the seasonality, I mean, should I be thinking about it in the magnitude of a few tens of millions in seasonality or something much smaller? Any kind of framing there?

Yes, that's probably about as much detail that I would provide at this time, especially given the equity market volatility that we see as it is something that I can't ignore. But the seasonality, Q2, Q3 expect to be higher. That's probably what I can provide at this time.

Got it. Okay. And then just a second question would be on Group Retirement and that lifetime income flow that appears to have been more than $500 million into -- through AllianceBernstein relationship. What's the pipeline like for that? And could we see more of these $0.5 billion-type inflows?

Andrew, it's Mark. Thanks for the question. Yes, I think as Robin said in the script, this is a perfect example of the benefits we have from our business model if you like getting margins from the full value chain there having both retirement and also asset management. You should expect that this type of business is lumpy. And when it comes, it will be large. And one thing I'd like to say on there is AB has been working in this area for 10 years now, way before the SECURE Act. So it's something AB and Equitable have a deserved market reputation for, and it's something we're excited about in the future. But it will be lumpy. That's for sure.

Our next question comes from Nicole Della Cava with Morgan Stanley.

It's Nigel Dally. I think that may be for me. I just wanted to follow up on Reg. 213. When the solution is in place, would that be a catalyst for you to be more aggressive on capital management, our excess capital on balance sheet is still very high. Or are we in a market environment where you prefer to hold on to a higher capital buffer at this point?

Sure. Reg. 213, the way we see it doesn't necessarily dictate how we distribute cash flows. It's based on our internal economic model, which continues to remain strong at healthy levels overall. The cash flow that we've generated within the business is $1.6 billion in 2022. That's up from the $1.2 billion or 30% since IPO after taking into account the Venerable transaction. So we feel really good about the cash flow generation of the business. We'll continue with our 50% to 60% payout and we've proven that since IPO that we continue to pay out regardless of market cycles.

Great. And just another one on cash flow. The acquisition at AB, does that change your expectation as to how much cash you would likely be getting from that this year?

It does not. One, let me just talk about the acquisition first. We are excited to bring on CarVal Investors, the acquisition scheduled to close early in Q3. It helps bring AllianceBernstein's platform up to $50 billion for private markets makes it meaningful. On top of that, Equitable in the general account will support with $750 million of investment. So it's a win-win because the general account will benefit from better risk-adjusted return for policyholders and then AB will go out and raise third-party money with this new platform as well. So it supports us building a higher multiple business at AB. Over the short term, from an EQH perspective, the business, the deal is neutral from an accretion perspective, so no impact on cash flows. But over the long term, we're excited about the prospects that, that franchise brings to AB.

Our next question comes from Suneet Kamath with Jefferies.

So I wanted to go back to the cash flows and the 6% from the affiliated distribution that you addressed earlier. So if that's the cash flow numbers, is there a way that we can think about the earnings that, that business generates? Or is there some sort of disconnect between the cash flows and the earnings that, that business produces?

Look, we're excited to talk to you today about that business. Number one, it's been a growing platform for us, $79 billion of AUA, $3 billion of gross sales. And today, we can give you guidance that we expect $100 million of cash flow generation. It is a fee-based oriented business that don't expect much differentiation between that business and the underlying cash flow generation. Nick, anything you want to add on that from an investment perspective?

Yes. I would just clarify, through Equitable advisors, we sell insurance products as well as investment fee-based products. We see the growth in the investment fee base as supporting the overall growth of managing the portfolio, but creating a due revenue in cash flow stream going forward.

Okay. And then I guess in terms of the cash generation, the $1.6 billion, I think that's just a touch higher than what you said last quarter, which I believe was $1.5 billion. Obviously, it's going up despite the fact that markets are lower. So just maybe want to understand what's going on there? Is this the lack of a market impact? Is that really because the statutory component of that is driven off of last year's results? Or what explains kind of the resilience and increase in that number despite the weaker markets?

Yes, Suneet. I think over the long term, I think the way we look at it is the mix of the business that we shifted to be more capital light. The legacy VA transaction or reducing the risk-oriented business gives us confidence in the cash flow generation of $1.6 billion, up 30% from IPO, as you mentioned, and will continue to drive cash flows. That's our focus, drive free cash flows for shareholders for best use.

[Operator Instructions] Our next question comes from Tracy Benguigui with Barclays.

In your prepared remarks, you mentioned that your free cash flow yield is 12%, but given where your market cap is today, that would imply $1.3 billion of free cash flow, but you actually read your guide to $1.6 billion from your prior $1.5 billion. So I'm just wondering what I'm missing?

I think if you looked at the free cash flow yield at 12%, the number in the script is as of quarter end, we thought that, that was probably the best number to give. So we took a spot as of quarter end. Yes, you're right, at $1.6 billion and volatile markets, the free cash flow yield is higher today, making Equitable a more attractive proposition for investors.

Got it. And also just back to Reg. 213. Since reviewing your disclosures, it looks like under your permitted practice, you received a $1.5 billion hedge credit due to DFS' recognition in your hedge effectiveness, and that amount is reflected in your special surplus funds. So I guess my question is, does your recent hedge effectiveness change that hedge credit?

No impact, Tracy. What that was, if you recall, when we first announced Reg. 213, we received a permitted practice from the DFS, which allowed us to defer the $2 billion in total redundant reserves. We've taken 50% of that action, and we expect to resolve this in the second half of the year.

Okay. So that's more static, that offset?

That's -- yes, that's part of the deferral that we had in the $2 billion. Hedge effectiveness -- yes, it has no impact on. Yes. The hedge, Tracy, just maybe hedge effectiveness that we quote to the market, that's how we perform economically versus our economic target in limiting the volatility of it. It's not related to Reg. 213, which is an economic reserve.

Okay. And then on your distributable earnings, and you mentioned 50% coming from nonregulated sources. Should I think about your $865 million of ordinary dividend capacity from Equitable Financial in 2022 that you may fully draw that down, as last year, you had no capacity?

That's correct. The dividend formula allows us to upstream dividends, and we plan to do so in the -- within the second quarter to support the $1.6 billion.

Our next question comes from Mark Hughes with Truist.

On the SCS product, you described a lot of strength in March. How much of that was just volatility in equity markets, rising interest rates? Is that momentum continued into 2Q? Is this a good product for this kind of market backdrop? Unidentified Company Representative Yes. This is a product that was built for this time, upside potential with downside protection to create more resilient portfolios. As a pioneer in the industry of creating this product in this segment over 10 years ago, we continue to benefit both through our affiliated distribution and our third-party networks. Structurally, we view the pie is continuing to grow based on the demographic shifts of baby boomers looking for protected equity stories amplified by the current market conditions. As Robin highlighted, we continue to manage this on an economic basis for sustainable profitability and remain confident going forward that we will be able to help Americans create more resilient portfolios during this period of dislocation.

And then on the Reg. 213, Robin, you talked about external or internal reinsurance. Any cost numbers associated with that, I assume it's contemplated in the 8% to 10% EPS guidance?

That's right, Mark. Anything that we take would be minimal, but it is -- everything we speak about is compensated in our 8% to 10% EPS guidance, and we'll look to resolve in the most economically accretive option that we have here in the second half.

We have reached the end of the question-and-answer session. This concludes today's conference call. You may now disconnect.