Hello, and thank you for standing by. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Equitable Holdings, Incorporated Third Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks there will be a question-and-answer session. [Operator Instructions]. I would now like to turn the conference over to Isil Muderrisoglu, Head of Investor Relations. Please go ahead.

Thank you. Good morning and welcome to Equitable Holdings third 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 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 and thank you for joining today's call. Conditions remain challenging with equities falling for a third consecutive quarter, and at the same time, bond markets providing their worst returns in 40 years. While our earnings are not immune to markets, our capital ratios are robust, and we remain focused on what we can control. Against this backdrop, our clients' need for advice, income, and protection has been heightened. Equitable is uniquely positioned to meet these demands with our integrated businesses and a conservative balance sheet. Turning to Slide 3, I will highlight the results from the quarter. With global equity and bond markets down 26% and 15% year-to-date, respectively, the value of Equitable Holdings assets under management declined by 21% this year. Non-GAAP operating earnings were $498 million this quarter, or $1.28 per share, down 2% from last quarter on a per share basis. Third quarter earnings benefited from a small positive impact from our annual assumption review as our reserving is based on actual emerging policyholder and market experience. Adjusting for onetime items, our results were in line with expectations with higher interest rates, wider spreads, and lower pandemic-related claims, partially offsetting weaker fee and alternative income. We recognize that this market requires a different playbook. We continue to have deep conviction on our strategy, and we are more aggressively managing our expenses. Offsetting the decline in fees on lower assets under management has been increased productivity saves and additional investment income growth through the optimization of our general account. AllianceBernstein was also not immune to industry conditions as net outflows were $6.6 billion in the quarter, excluding anticipated AXA redemptions. Growth in alternatives, multi-asset, and municipals were outweighed by redemptions in taxable fixed income and active equities. Pleasingly, overall fee rates improved by 7%, growing in…

Thanks, Mark. Turning to Slide 5, I will highlight total company results for the quarter. We reported non-GAAP operating earnings of $498 million or $1.28 per share, sequentially lower on a per share basis, primarily due to the impact from lower equity markets in the quarter which is partially offset by our favorable assumption update. Adjusting for the $13 million of notable items in the quarter, non-GAAP operating earnings were $511 million or $1.32 per share, down 15% on a comparable year-over-year per share basis. Turning to GAAP results, we reported $273 million in positive net income in the quarter. These results should be considered in light of two features of our business. First, most of our businesses are market-sensitive and derived fees from client accounts invested into stock and bonds. And second, that markets are down year-to-date, with global equities down 26% and bond markets down 15%. The net effect of market and our hedging is that our fee-based earnings and cash flows will adjust in line with the sensitivity we've given to markets of plus or minus 10%, having $150 million post-tax impact. Our results held up relatively well due to the fact that we can control, namely the economic hedging program that protects our balance sheet. The hedging program immunizes our VA guarantees and mutes the impact of severe market declines on our balance sheet, as our first dollar hedging is supplemented by our statutory protection program, which hedged some of the base fees. This program worked as expected during a market decline as we continuously updated our position to changes in equity and interest rate market levels. Turning to expenses. Our philosophy to continuously seek business efficiencies while investing where we see strong new business growth opportunities. This resulted in net savings of $43 million to…

Thanks, Robin. In closing, a solid quarter of performance despite continued market headwinds. The balance sheet remains robust. We have anticipated and prepared for challenges we see today in the markets. We are showing the resilience we have designed for and we are spending our time focusing on what we can control. Our integrated insurance, investment, and advisory model means we are uniquely placed to meet client needs in these times of great uncertainty. We continue to lead the market in the fastest-growing retirement segment, the RILA market. Our subsidiary AB continues to outperform peers and its diversified strategies, Asian footprint, and successful growth of its alternatives platform position us well in the asset management sector. Looking forward, there remains a great deal of uncertainty and risk of recession and rising credit losses. We have a lot of tools to manage this uncertainty. We shall continue to manage the business prudently and professionally. We shall also continue to be relentlessly committed to bringing the best of Equitable in order to deliver better outcomes that will benefit our clients, employees, and shareholders. With that, we will now open the line for questions.

[Operator Instructions]. Our first question will come from the line of Elyse Greenspan with Wells Fargo. Please go ahead.

Hi, thanks, good morning. My first question, you guys now have $2 billion at the Holdco, that's obviously well above your target. Obviously, recognizing, right, I think you said we're in some uncertain times. Over -- when would you look to, I guess, manage that down closer to your target and how do you balance just the uncertain markets and credit environment that we're in right now?

Hey Elyse, it's Robin. Thanks for the question. You're right, we have $2 billion of cash at the Holdco. We like that position in this type of market environment. We've also returned $1 billion to shareholders year-to-date, and as a result, we're on the higher end of our 50% to 60% payout ratio despite the volatility in markets, the S&P 500 declining over 25% and interest rate increasing quite a bit. And that's a testament of our hedging program, the conservative nature of a conservative -- of our investment portfolio, which enables us to have that consistent cash flow return to shareholders. We don't mind having $2 billion at the Holdco in this type of environment, we think it's prudent. We think it's better to have a cash buffer instead of trying to rebuild the capital position in this type of environment.

That's helpful. And then anything new, I guess, on the M&A side of things, I guess, following the CarVal deal that, I guess, would -- you might consider using some of that buffer towards additional transactions?

Good morning Elyse, it's Mark. Thanks for the question. Yes, you mentioned the success of the CarVal transaction. We are delighted with that. I mean, it fits the strategy to shift EQH towards capital-light businesses and particularly high multiple businesses as we see on the ultimate side. Seth and Kate and the team have done a fabulous job in completing that transaction and integrating it. We are in the position of being able to look for opportunities but obviously, in this market, as Robin said, we will be conservative and prudent in anything we look at. The areas we would look at would be asset management and wealth management. But you should expect us always to be very professional on it, and we will be mindful of using shareholder money in this market. So no announcements at this stage, but very, very pleased with how the CarVal acquisition has gone.

Thank you.

Your next question will come from the line of Jimmy Bhullar with JPMorgan Securities. Please go ahead.

Hey, good morning. So first, I had a question on AB and obviously, you had very strong flows over the past two years, even when many of your competitors were not doing as well, and recently those have gotten worse. So -- can you sort of discuss what your views are and what's causing this if you're seeing any sort of concentration of outflows from either -- from either a strategy or a region and not sure how much of this relates to business you might have put on in the last few years?

Sorry, Jimmy, we're just having a line problem with Kate, hang on.

Hi, sorry about that.

Okay, Kate is on now, thanks.

Yes. It's Kate Burke here. Overall, this quarter we had more challenging flows. They were largely related to -- on the institutional side, a couple of specific client mandates which from time to time happen, but we continue to see, I think, good strength on the active equity side. Where we also saw some challenges were in the retail, I don't think we are immune to that versus our peer group there. And then private wealth continues to put up reasonable flows. So we overall have, I think, confidence in the underlying business going forward. Obviously, we are subject to the challenges in this volatile market. But we do think that as clients are going to be looking to go towards a more risk on environment, again, that we're very well positioned to continue to have positive flows in the future.

Okay. But as long as we're sort of in an uncertain environment where there's peers of recession and sort of the overall industry is struggling for flows, I'm assuming that your results are going to follow a similar pattern?

Look, we are -- we have a very strong pipeline, as we highlight -- as Mark highlighted, that give us some confidence in our ability to continue to execute versus our peer group in this environment. But yes, we're subject to the same -- we are subject to the same challenges. But our pipeline at 25 billion is high and is at three times our normal fee rate. I think that highlights the repositioning that we've done over time towards alternatives, that is an important part of that pipeline, and we anticipate that we'll continue to show strength in that area on a go-forward basis.

Jimmy, it's -- maybe if I -- it's Mark. Maybe I'll just add a couple of things from the Equitable point of view. Yes, Kate is absolutely right, we can't be totally immune to the markets. But I think a couple of things in the AB Equitable framework, which differentiate from peers. Firstly, on the AB side, very strong major presence, strong long-term performance on equities and also our long-term performance on fixed income. So that's helping as well. And then I think our cadence have executed the build out of the alternatives platform over not many years and utilizing the synergies with Equitable's general account, really is a differentiator for us in the marketplace. So yes, we're in a tough market, but I think we've got some things in the business model which means if we execute well, we can continue to outperform peers.

Okay. And then on the Group Retirement business, the flows were negative this quarter. Is that mostly because of seasonality in the business and the working schedule for teachers or are you seeing underlying weakness in that part of the market as well?

This is Nick. The short answer is, yes, that's the seasonality. We saw an improvement of $78 million compared to last year. The fundamentals of our tax-exempt business is strong. We're back to our pre-pandemic levels. This is both driven by enhanced school access and a lot of investments we need in the technology platforms to better serve them. So year-to-date in that segment in tax exempt, which is our core, we have about $500 million of positive net flows, and we'll continue to build on that momentum.

Thank you.

Your next question will come from the line of Ryan Krueger with KBW. Please go ahead.

Hey, good morning. Robin, what's the dollar amount or percentage of your investment portfolio that's in floating rate assets at this point?

Hey Ryan, so within earlier this year, we're in a low interest rate environment. We did start purchasing some floating rate securities on the asset side, we also have liabilities which are floating rate. So the net exposure is approximately $3 billion. And in the quarter, that's benefited us on the upside in this high interest rate environment of approximately $25 million for earnings. So -- it's another tool we have in the kit that enables us to benefit from the upside in interest rates, along with our GA rebalancing and the new business value we're generating in this time period.

Thanks. And then in terms of expense actions, are there additional things that are being done outside of the expense plan that are more discretionary that you're taking to offset some of the impact of weaker market?

Sure. So we're on our total expense program. We have an $80 million net target by 2023. We've achieved $43 million a day, again, that's net of reinvestments that we have in the business as we are investing in our businesses to support the growth and value that we're seeing today. We remain on track for that $80 million. We have some big leases coming up in 2023 in the New York area. And we restructured those leases, which help us lock into those saves by 2023. So the business remains well positioned. And if needed, we'll take additional actions to secure earnings. In addition, at the AB side, by early 2025, they'll recognize $75 million to $85 million in expense efficiencies from the Nashville move. That remains on track. So there are good levers in the business to offset some of the inflation trends we're seeing, and we're going to continue to deliver net earnings growth as a result.

Thank you.

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

Hey, thanks for that. Good morning. So low lapses have been an issue across the industry for individual life insurance. You did your actuarial review, there was very little impact. So hoping you can provide some additional details there as to why your block is performing well, while other companies are taking sizable charges?

Sure, Nigel. I think it starts with the way Equitable has managed the business and positions ourselves. As you heard Mark and I mentioned earlier, we set assumptions based on emerging experience. Even if there's not credibility, we still believe that's appropriate because how we believe to create trust in the industry and in Equitable, we should avoid surprises for investors. And that's why you see Equitable's positive impact on assumption updates in the quarter across all of our business, individual, group, and protection. It includes any small USG exposure we have. So everything is set at emerging experience and that's intentional. We think avoiding surprises is a good thing for investors. And another thing as it relates to LDTI, Nigel, going forward in the disclosures and LDTI wanted the benefits for the industry is that you'll be able to see where people are off relative to their assumptions and the disclosure. So to build more transparency in the financial statements that isn't there today. So now you have to have trust in management teams but in addition, in the future, you'll be able to see if what they say is accurate in the financial statements coming through. And that's what you see here at Equitable, and that's our core belief on how we set assumptions in the business.

Okay, got it. Second question, individual retirement flows have been very strong. How much capital are those sales absorbing and at some point, could that new business strain challenge your 50% to 60% free cash flow target?

Yes. So on the flows and the retirement business, it's been tremendous. We see another record quarter, $3 billion of sales. But more importantly, the value that we're generating on that sales continues to be excellent for us in this high interest rate environment. We are not capital constrained for new business. We're able to support that new business and the growth that we get for it. And as long as we achieve these type of margins in that business, we'll continue to support it.

Yeah, thanks Robin.

Your next question will come from the line of Alex Scott with Goldman Sachs. Please go ahead.

Hey, good morning. I know you guys want to move on from the accounting conversation, but I did have what I wanted to ask on the accounting. Just given the decline in operating earnings, I think it sounded like that does have to do with the attributed fee versus the actual fees on annuities. And I just wanted to see, are you able to share anything around comparability across companies because I think that other companies are potentially defining operating earnings differently. And I just want to make sure I understand if what I'm looking at is going to be apples-to-apples across the industry.

Sure, Alex. So we -- despite not wanting to talk about accounting and focus on the business, we are very excited about the upcoming LDTI accounting effects that go into effect in January next year. While it's not perfect, it does bring the accounting closer to the fair value economics of the business that we manage against. And we should expect, as a result, that operating earnings across the industry is going to change. It's the first time the accounting standard is changing in 40 years and you're going to have liabilities mark-to-market, changes to DAC amortization, so as that function, the new metric should be different than the old metric. If it's the same as the old metric there is something that's wrong in the system at the end of the day. So we can't comment on other companies because I'm not an expert in their individual financial statements. But at Equitable, this moves us closer to cash, which for us results in a higher payout ratio post LDTI. And we're confident in the trust that this will bring in the industry as operating earnings will become more resilient and closer to cash.

Got it. That's helpful. And just in terms of the cash flow, as we think about 2023, the insurance company and sort of the ins and outs of the New York ordinary dividend capacity, where do you see that shaking out in terms of how much cash you'd be able to extract considering, I guess, the permitted practice that you have in New York as well as some of the actions you've taken to fund the redundant reserves?

Sure. So as Mark mentioned earlier, we remain on track for the $1.6 billion for 2022. As a reminder, that $1.6 billion, about 60% of that is unregulated. So a big piece of that is coming from AllianceBernstein, our investment services contract that we have with the insurance companies and our wealth management business. So we structured it exactly to that point to provide certainty on a big chunk of those cash flows. Going forward, we expect that $1.6 billion to obviously be impacted by markets, as I mentioned in my prepared remarks. It's in line with the plus or minus 10% sensitivity that we've given that has $150 million impact on operating earnings and cash. The insurance company specific dividend will be finalized in February. There are some nuances with the formula, but we should be on track for our cash flows given the -- given offset by the change in markets. That's the cash flow generation we see, and it should be approximately $1.3 billion cash flows in this current market environment, given the sensitivity that we've given.

Got it, okay, thank you.

Your next question will come from the line of Tracy Benguigui with Barclays. Please go ahead.

Good morning. Just wondering if you could touch upon the RILA market, how are you seeing the product evolving considering competition and to meet client preferences and specifically, I wanted to know if there's any changes in the risk characteristics of the product.

Great. This is Nick. First, as Mark and Rob had highlighted, we had another strong quarter led by our RILA sales of roughly $2 billion with very robust new business value. We see the pie continuing to grow given the demand drivers versus that structural shift of the 70 million baby boomers that continue to age and amplified by these volatile times. The core fundamentals perfectly ALM matched, that is the core in which we anchor our products and economic reality, and that does not change. The upside potential with downside protection is the right solution for these times. And we expect to continue to capitalize on these fundamentals given our history of innovation. When we pioneered this product over a decade ago, it was about building more resilient portfolios with products anchored in economic realities. And we continue to innovate on the segments to meet the need. We access that through our privileged distribution that's both Equitable advisers of [indiscernible] affiliated sales plus our third networks that allows us to meet this need in a profitable way.

Okay, great. And this is a little bit more technical question. IMR, the interest maintenance reserves on the stat side, I think normally, you can amortize those realized gains. It's a smoothing factor, but given where interest rates are right now, you can't neutralize a lot, so are you seeing any short-term pressure on capital because of that?

No, we currently have a positive IMR balance obviously, with interest rates increasing. We do have unrealized losses within the general account but for us, economically, those assets are being held to maturity. So we think that's okay and that's why we look at book value ex-AOCI as the appropriate metric to value insurance companies.

Great, thank you.

Our final question will come from the line of Suneet Kamath with Jefferies. Please go ahead.

Yeah, thanks. Good morning. I just wanted to start with the SCS product. One of the things that we are hearing in the market is that pricing and returns are maybe less favorable than they were when you guys innovated this product in the first place. And maybe that's changed with the move in rates that we've seen of late. But just wanted to get a sense of how the returns and the pricing compares today to maybe over the past few years, if you could provide that detail?

Yes, Suneet, as I mentioned, this quarter, even in the last few quarters, a testament to the great work done by the individual retirement business, the distribution and the pricing. It's our highest margins ever that we received in this product and it's a function, as Nick mentioned earlier, of a rational market, the pie growing, but higher interest rates as well certainly benefited that product, and it's become more appealing to consumers. But it's a great portfolio and a great product for consumers but also for shareholders, and that's demonstrated through the record margins.

Got it. And I guess on LDTI on Slide 7, I just want to make sure I understand this. I mean it looks like your operating earnings are coming down $150 million to $250 million. I get that free cash flow conversion is going higher, but it seems like that's because the denominator is lower. So maybe just want to understand exactly what's going on with that $150 million to $250 million and if that is, in fact, an operating earnings hit that you guys are expecting, does it give you any thought around risk transferring the remaining legacy block, just to kind of clean up the block, but also get this accounting pressure kind of behind you?

Sure, Suneet. As a reminder, no impact on cash, profitability as we view the business economically, nothing's changed. But the accounting standard on how they value liabilities have changed. And as a result, we've adopted to the new accounting standard, which moved to $150 million to $250 million closer to cash flows. The main driver is the attributed fees that I mentioned in my remarks. The new accounting allows you to accrue more of the base fees to cover some of the shortfalls in the rider charges on the legacy product that were at issuance. That's similar -- that new accounting framework is similar to VM-21, the statutory framework and how we view it economically. So it's quite natural that it moves it closer to cash. And we're quite comfortable with the metric, and we think that will create stability and a higher cash flow generation per share going forward.

But no change then on your view of the legacy block and whether it makes sense to just offload that?

No. I mean, again, this is just -- this is accounting and how the cash flows are reflected in the accounting. There's no change to cash flows or economic profitability within our blocks.

Okay, thanks.

Ladies and gentlemen, that will conclude today's conference call. We thank you all for joining. You may now disconnect.