Good morning. My name is Rob and I will be your conference operator today. At this time, I would like to welcome everyone to the Equitable Holdings, Inc. Second Quarter 2022 Results Conference Call. [Operator Instructions] Isil Muderrisoglu, Head of Investor Relations. You may begin your conference.

Thank you. Good morning and welcome to Equitable Holdings second 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, our President of Equitable Financial; and Kate Burke AllianceBernstein’s Chief Operating Officer and 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. 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.

Good morning. Thank you for joining. With a sharp decline in asset prices this year, we thought it is important today to highlight how our economic framework protects our balance sheet and ensures consistent cash returns to shareholders. Our operating subsidiaries Equitable and AB are not immune to these falling asset values, but are showing their resilience. We see strong demand across all Equitable lines and record sales in our Individual Retirement segment. AB reported a 2% fee rate improvement with growth in municipals, active equity and alternatives, offsetting outflows from fixed income. Turning to Slide 3, in a quarter that has seen equity markets fall by a further 16%, an inverted yield curve and persistent inflation, our attention naturally turns to protecting the balance sheet. Our economic management and hedging programs are working as intended, and we closed the quarterly with an RBC ratio above target at 440%. Our investment portfolio is relatively conservative and is geared towards high-quality investment-grade issuers with an average credit rating of A3. We ended the quarter with strong HoldCo cash of $1.3 billion and returned $295 million of capital in the quarter. Additionally, in July, we up streamed $930 million from our insurance subsidiary to the HoldCo. This will further support financial flexibility and provides confidence around our target 50% to 60% payout ratio. We continue to make progress towards mitigating the remaining $1 billion of redundant reserves associated with the Regulation 213 and remain on track to complete by year-end. Furthermore, as a result of our capital management program, and continued strong business performance, we maintain our $1.6 billion cash flow guidance for the year. Non-GAAP operating earnings for the quarter were $526 million or $1.31 per share, 4% lower than first quarter 2022. This primarily reflects a reduction in fees from…

Thanks Mark. Turning to Slide 6, I will highlight total company results for the quarter. Reported results were $1.31 per share, down 4% sequentially, primarily due to lower markets in the quarter. Adjusting for $5 million of notable items in the quarter, non-GAAP operating earnings were $531 million or $1.33 per share, down 10% on a comparable year-over-year per share basis. As expected, the year-over-year decrease in earnings per share less notable was primarily driven by lower fee revenue in both our retirement and asset management businesses. Additionally, prior year results included 2 months of earnings from the block that was reinsured to Venerable. Overall, results were within our expectations as market movements in the quarter impacted average AUM on a year-over-year basis. Turning to GAAP results, we reported $1.7 billion in GAAP net income this quarter, which was primarily driven by the non-economic accounting treatment of our GAAP liabilities. As a reminder, the large gain reflects the variance between the movements in our GAAP liabilities versus the movements in our economic hedging program. This mismatch is unintuitive, and will be reduced post LDTI implementation next year, as GAAP accounting will move closer to fair value. I can also confirm that our expected transition adjustment remains positive as current market conditions combined with our industry low 2.25% GAAP interest rate assumption continues to support a favorable impact to our book value on LDTI. Quarter-end AUM was down 13% as market movements were partially offset by positive net flows in our retirement and asset management businesses over the last 12 months. Looking ahead, we are mindful of potential headwinds that may impact fee-based earnings, but we continue to focus on the execution of our general account rebalancing program, which has achieved $141 million of the $180 million target and expense efficiencies…

Thanks, Robin. Before we open up the line for questions, I would like to summarize the highlights from the quarter. First, our economic reserving and fair value hedging program are unique to Equitable and protect our balance sheet. We have shown a consistent and strong RBC ratio 440% as of quarter end. Second, we focus on maximizing economic value to generate distributable cash flows. With our strong cash position at Holdings, we reaffirm a $1.6 billion of cash generation for the year. Last, our complementary retirement, asset management and advice businesses continue to perform as expected through these turbulent markets. We see strong new business activity and value of new business across our subsidiaries. With that, I would like to open the line for questions.

[Operator Instructions] Your first question comes from the line of Tom Gallagher from Evercore ISI. Your line is open.

Good morning. Just wanted to start on the RBC ending at 440%, I would concur with your comments that that was a pretty good result especially relative to some peers. But it also implies that you didn’t generate any capital during the first half of the year. So I just want to understand the components of this and how to think about it going forward? Can you talk about what the kind of normalized underlying earnings power you believe is in the business? Is it still running at around $800 million annually? And if that’s right, did the $400 million get consumed by hedge breakage and/or higher required capital? Any help thinking through that would be appreciated.

Thanks Tom. Good morning. So, our robust 440% RBC ratio as of half year is a reflection of the effectiveness and strength of our economic hedging program. As the hedge gains protected our stress statutory capital against the recent adverse market movements. In a half year where markets decreased by 20%, we are able to maintain our capital solvency and upstream additional capital to the holding company. Like any period, there are several positive and negative one-timers, which ultimately offset. The primary driver was the impact and the protection of the hedge program and the cash flow that our business generates. But it was offset slightly by adverse mortality in the first quarter, and also market impacts year-to-date, which impact the base fees that we generate. Looking ahead, we remain within our target range, and we are consistent, and we still see annual cash flows of $750 million of the guidance that we have within the insurance company.

Okay. Got it. And then my follow-up is, I just want to understand the parameters around this $2 billion higher reserve for Reg. 213. Are there certain scenarios where that will change over time? Can you give some guardrails under certain market scenarios where you would see that changing either positive or negative markets?

Sure. So, with Reg. 213, as you recall, we initially had $2 billion of redundant reserves. As of last year, we resolved about half of that through to $1 billion XXX reinsurance transaction with Swiss Re. In addition, we restructured the operating companies to now have 50% of the cash flows unregulated. And we remain on track, as we mentioned in the call, that fully mitigate the remaining. Reserves move with markets similar to the Reg. 213 reserves. But the important factor for us is the reserves required above CTE98. And that’s what we would need to solve for in $1 billion redundancy over time, and that’s what we plan to solve for. But you certainly have reserve movements between VM-21 and Reg. 213 below it, but it’s offset by the hedging results.

And Rob, just a quick follow-up on that if I could. Just are there scenarios where we will be talking about there is an extra $1 billion, let’s say, under certain market conditions that you will have to solve for again. I think that’s the concern in the market that you may fully solve for the $2 billion. But under certain market conditions, is it possible this reserve increases?

No, look, we are fully focused on resolving this. At the end of the – we are confident at the end of the year-end, we will be resolving this $1 billion redundant reserves, and we will no longer have to concern ourselves with Reg. 213.

Okay. Thank you.

Your next question comes from the line of Ryan Krueger from KBW. Your line is open.

Hi. Thanks. Good morning. I had a question on the general account repositioning. I think you achieved close to 80% of the originally guided NII upside, but have only redeployed about 50% of the assets. So, could you comment on, I guess – is that accurate? And then if so, I guess can you comment on the potential upside to the original NII upside target that you gave?

Sure, Ryan. So, the general account rebalancing program, we targeted $180 million by year-end 2023, of which we have achieved $141 million. So, good results to this point. We do expect that we would finish that $180 million earlier as a result of higher rates and spreads. So, there may be upside on top of that as we head into 2023. The second part of your question is the $10 billion that we committed to AB, that we are about 50% deployed, but there are two separate targets. We want to commit $10 billion to AB by 2023 and complete the $180 million, but the two don’t go together. So, we will get benefits from the $10 billion fully deployed, not only into additional income, but AB’s strong track record in raising 4x to 5x of third-party capital, which effectuates the synergies between the insurance company and the asset management company and delivering value for shareholders over the long-term.

Okay. Got it. And then could you just comment on your ULSG exposure? And any color you can give on your own last trends versus current assumption?

Sure. So, as we mentioned in the presentation, our economic management means that we manage our assumptions to emerging experience in order to minimize large deviations in our reserving. As such, our policyholder behavior assumptions for all of our life business are based on the recent experience. Our objective is we never want to surprise investors adversely. Additionally, while some of our peers do have large exposure to ULSG, our exposure is minimal. So, we remain quite confident in our reserving integrity due to our economic focus on the reserves.

Great. Thank you.

Your next question comes from the line of Alex Scott from Goldman Sachs. Your line is open.

Hey. First one I had for you is on the some of the cash conversion of earnings. The $1.6 billion that you are retaining is the capital deployment this year. I mean even relative to my estimates, which don’t have alternatives being bad in the back half of the year yet, it’s coming in above the 50% to 60% range that you guys have talked about? And when I consider all, it’s probably going to be bad in the back half. I mean it’s coming in materially better. So, I guess the question is, what is allowing that to happen despite you have got Reg. 213 going on, markets down, etcetera, what’s allowing that to happen at the end of the day? And why shouldn’t we believe that you could continue to be actually above that 50% to 60% range?

Look, Alex, the core at the end of the day is our hedging program, and how we manage the business. First dollar hedging helps protecting down equity markets and then supplement that with a statutory hedge helps protect the balance sheet. That’s why we were able to upstream the $930 million in July and felt comfortable to do so, and the regulator felt comfortable to do so. It’s because of the strength of our economic management. Our guidance maintains because we upstream more than our $750 million guidance from the retirement company, and we still expect to have $1.6 billion. And we would expect that we continue to stay within our 50% to 60% payout ratio. Our objective is always to maintain a consistency in returning cash to shareholders, and you have seen that over time, and that will continue.

Got it. Second question I had is on just a holding company liquidity position, you gave it at the end of the quarter, it obviously goes up because of the July dividend. Should we think about any of that being needed for a potential solution to Reg. 213? Like, is it possible some of that gets used to be put into an internal captive or something like that to facilitate a solution, or is that not in the picture?

I don’t see that in the picture right now. As I mentioned in the last call, then we continue, we have two options that we are working on to resolve Reg. 213, external reinsurance and internal reinsurance. We have made progress on both of them in the quarter. So, we feel confident that we have the solutions to resolve Reg. 213. And Reg. 213 will be behind us as of year-end.

Thanks.

Your next question comes from the line of Elyse Greenspan from Wells Fargo. Your line is open.

Hi. Thanks. Good morning. My first question, now that you guys closed the CarVal deal. And I know in your prepared remarks, right, you mentioned now you were able to complete that deal right without using any excess capital. Can you just update us right on just M&A thoughts from here in the pipeline, and where you might focus on transactions, and if there would ever be deals that you would consider actually using your excess capital to finance?

Hi Elyse, it’s Mark. I will take that one. Yes, you are right. The CarVal deal was really terrific deal for AB and for Equitable. On AB side, it really filled in some blank spaces on the private asset side. We have seen the power of CarVal and being able to raise to $2 billion since the date of the acquisition. And as you recall, we funded it from some of the units in our Equitable Holding of some of the units. So, it was positive on the Equitable side as well. Look, we have always said that now we are sort of 4 years, 5 years since the IPO, we will look at opportunities for inorganic growth. But we have always said that our strategy is not dependent on that. So, if something that comes along that makes sense, we will take a look at it as CarVal did, but it’s not needed for our strategy. The areas where we would be interested would of course be on wealth management. That’s an area which is – supports our low capital intense strategy and something where we have got a very solid unit to-date. Employee benefits would be something we would be interested in and just growing out our alternate platform at AB. So, they are the areas we look. But as I say, we would always do it in a way that is accretive for shareholders as well.

Okay. Thanks. And then my second question, mortality was favorable in the quarter. Can you just give us an update on what you are seeing with COVID. Obviously, we have seen the number of deaths really slow. And was the favorable mortality just driven off of some releases of IBNR for COVID as well?

Hey Elyse, I will take that. So, the favorable mortality that we experienced was solely in conjunction with the sharp decline in U.S. COVID deaths. We were obviously surprised with the U.S. COVID deaths in the first quarter at 158,000 and pleased to see that decrease to 30,000, but we continue to monitor COVID trends in the U.S. as cases and hospitalizations are on the rise, but deaths are still not trending upward. But that said, we are maintaining our $30 million to $60 million guidance per 100,000 U.S. deaths, and we will continue to support our clients through these uncertain times. But the favorability is linked to the lower U.S. deaths related to COVID.

Thanks for the color.

Your next question comes from the line of Jimmy Bhullar from JPMorgan. Your line is open.

Hey. Good morning. So Robin, you mentioned that despite the market being weak, your cash flow guidance of $1.6 billion hasn’t changed. Is it fair to assume that cash flow next year would still be impacted to the extent that in the unregulated subsidiaries, with the markets being weak earnings are probably going to be pressured. But then in the regulated businesses, the lack of increase in stat capital given the stable RBC despite no dividends being taken out, that and lower earnings in stat subs this year than you might have expected at the beginning of the year, still will have enough impact on your cash flows next year, or are there any other puts and takes that would be positive or negative?

Hey Jimmy. First, this year, the $1.6 billion, the reason we are able to still keep the $1.6 billion is because we are up-streaming more than the $750 million guidance we gave in the retirement company. But our businesses are not immune to markets. We have transitioned to a capital-light business, which means we are exposed to fee-oriented impacts from equity markets. So, both the retirement and asset management company will certainly be impacted by markets, but we will have a better feel for it as we get to the end of the year in terms of guidance for 2023.

Understood. And to the extent you take out more, then obviously less flexibility next year unless you want to deplete the capital base further.

Correct.

Okay. And then on buybacks, the amount in 2Q dropped below what you have done in 1Q and obviously, 1Q was lower than what you have done in 4Q or in the second half of last year. How should we think about the capital that you have at the holding company being used for buybacks? Should we assume that buyback – the pace of buybacks this year is not going to be impacted given your strong cash flow at the – overall for the year, or are you slowing down buybacks a little bit given the uncertain macro environment?

Yes. Thanks Jimmy. Obviously, we are cognizant of the market environment around us. But because we are able to protect our balance sheet through the hedging program, that first dollar hedging and then additionally, the statutory hedging, we are able to maintain buybacks at our pace. So, our goal is to be consistent in the market and deliver returns to shareholders as we have demonstrated over the past. On a year-to-date basis, we have returned a total of over $750 million to shareholders, including dividends. That’s slightly ahead of the pace for the year relative to our guidance. This also translates to a 13% free cash flow yield, which we believe provides a significant value for shareholders at a level that’s sustainable due to the strength of our hedging program and economic management. So, we remain fully committed to our 50% to 60% payout ratio and expect that to continue. I wouldn’t read too much in small timing difference between quarters, as we will continue to keep the pace and return capital to shareholders.

Okay. Thank you.

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

Hey. Good morning. It’s been some time since you did the transaction with Venerable on the variable annuity block. Are you getting much interest in any of your other legacy blocks, and what’s Equitable’s interest in divesting of another block at this stage?

Andrew, it’s Mark. As Robin has indicated, the priority for us has been mitigating the Reg. 213 redundant reserves. That’s where all of our focus has been. And as Robin said, we remain pretty confident that we will have a solution for the remaining half of that by the end of this year. That’s really where the team and myself have been working.

Okay. So, not much focus there then, correct, Mark?

Correct at the moment, it’s been Reg. 213. That’s been the dominant factor for us. That’s right.

Got it. And then just looking at SCS first year, premiums at $2.2 billion, that’s pretty robust, I think it’s a record year. Can you talk about market interest in the RILA product in general and how Equitable is doing in terms of its market share and competing?

Sure. I will take that one. We see demand for protected equity solutions continuing to grow, first, given the structural shift as baby boomers enter their next life stage. And then second, further amplified by the current market dislocation volatility, it’s really a solution that’s right for this time. As Mark and Robin highlighted, we had record second quarter sales over $3 billion. And as a pioneer in developing this market over a decade ago with solutions anchored and economic realities, we think we have got a sustainable edge given our focus, our continuous innovation and our differentiated distribution platform. This is both our over 4,000 Equitable advisers, as well as our long-standing privileged third-party distribution relationships.

Excellent. Thank you.

Your next question comes from the line of Suneet Kamath from Jefferies. Your line is open.

Yes. Thanks. Good morning. Just back on individual retirement. One issue we have seen with some companies that have sort of healthy blocks, is this concept of sort of floored out reserves, where you get this mismatch between hedges and reserve changes. Just wondering as your block evolves from – post reinsurance, is this something that could impact your capital position and your reserve position in that business?

Hey Suneet, it’s Robin. Yes, the CSB for – certainly, at some point, it could be in a period of highly rise in equity markets much farther away from we are today. But as your block becomes more healthier that is something that the NAIC regulation could be exposed doesn’t impact Equitable today, and we are far away from that point, as we sit here today.

Okay. Got it. And then I guess, in wealth management, one of the things that we have seen from other wealth management companies is sort of leverage to rising interest rates through either cash sweep programs or banks – the establishment of a bank. Is that something that you guys do or could do in this year? Just curious if that’s an opportunity ahead?

Great. I will take that one. This is Nick. In a rising interest environment, it does help our earnings from sweeps. Over the next several months, we expect to benefit from those. Additionally, I would say our advisors continue to generate strong gross flows and net flows adding to our overall AUA and earnings power of the business.

Can you quantify the benefit that you expect, or is it not material?

We don’t quantify it at this time.

Okay. Thanks.

Your next question comes from the line of Tracy Benguigui from Barclays. Your line is open.

Thank you. Nice achievement of upstreaming $930 million OpCo [ph] dividend, that’s above your $750 million guidance. Just a few questions there. Was part of that a special dividend since it was above your guide and it was above your $865 million ordinary dividend capacity, and I am just wondering if that a higher dividend may change the mix this year of cash flow sources, would it be more skewed towards regulated source versus non-regulated? I think your guide is 50-50 split, and you did reaffirm the $1.6 billion cash flow in total?

Sure, Tracy. So, the – our guidance from the retirement company in annual earnings that we expect is $750 million. To get to the $1.6 billion, you have to add back AllianceBernstein and then our investment management agreement that we have between the different life companies. This $750 million, our ordinary dividend capacity for the year, the actual formula ended up being $930 million. So, it’s purely a function of our ordinary dividend formula, and that’s what we have upstreamed. This year, yes, since we upstream more out of the regulated company, that percentage may be slightly higher this year. But over the long-term, our guide is 50-50 and the $1.6 billion of cash flows.

Got it. And on GA optimization, any comments if you could see room for further enhancements.

Yes. As I mentioned earlier, we were – we achieved $141 million in the quarter. We are delighted of the progress we have made in partnership with AB and Lifeco. We think we will come ahead of the target of $180 million, which was year-end 2023 as a function of rising rates and higher spreads that we are investing in today versus being forced run up. So, we are pleased with progress. There is certainly probably upside, but we are cautious in the current credit environment, too. We want to be cognizant of the risk that may be out there. So, we are focused on highly rated names and ensuring that we are taking appropriate credit risk in this time.

Okay. Just one more. I just wanted to make sure I understand the earlier conversation on favorable mortality that it was a function of lower COVID losses. But there will be a point in time where COVID will be an endemic from pandemic, like the flu. So, then I can imagine every quarter we will see favorable mortality at COVID to-date. So, I am wondering if there are other offsets in there like long COVID mortality that ran below trend.

Yes, both of them ran below to our non-COVID and COVID. The COVID mortality for us, though, was very minimal in the quarter. So, it is the mortality overall on non-COVID related came in under, and we continue to see good results through this month. So, we are pleased where we are, and we maintain our $75 million guidance for the Protection Solutions segment, but acknowledge the volatility around it with mortality.

Thank you.

Your next question comes from the line of Mark Hughes from Truist Securities. Your line is open.

Yes. Thanks. Good morning. Your guidance around the $150 million impact from a 10% market move. Is that pretty mechanical or given that we have had a lot of volatility. Do you see that, that is still pretty much on the mark, or is your experience perhaps a little bit different?

Hi Mark. Yes. No, we are still – we still believe in the 10%, $150 million guidance across the retirement and asset management company. And based on what we are seeing, it aligns pretty well.

Okay. And then any change you have seen, maybe either an individual retirement or group retirement around customer behavior perhaps withdrawals. I think you talked about lower outflows in the legacy VA block. You clearly seem to be getting more inflows, particularly with the SCS product. So, just sort of curious whether in these times of inflation, consumer stress, that sort of thing, whether you notice any behavioral changes in your customer base?

Yes, Mark, this is Nick. I think in these times, consumers are looking for more resilient portfolios. And I think it speaks to the power of insurances and asset class. So, we are seeing that in terms of demand for new products, and we are not seeing material changes in in-force behavior at this time.

Thank you.

And there are no further questions at this time. This does conclude today’s conference call. Thank you for your participation. You may now disconnect.