Thank you for standing by, and welcome to the Equitable Holdings First Quarter Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] And finally, I would like to advise all participants that this call is being recorded. Thank you. I'd now like to welcome Isil Muderrisoglu, Head of Investor Relations, to begin the conference. Isil, over to you.

Good morning, and welcome to Equitable Holdings first quarter 2023 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 two 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. This is the first time we are presenting our results under the new LDTI accounting standard. And also this quarter, we provide additional disclosures to our new Wealth Management segment and separating our legacy VA portfolio from our core retirement business. Let's get straight into it. On slide three, we present highlights from this past quarter. Non-GAAP operating earnings were $364 million or $0.96 per share. Adjusting for notable items in the period, which included elevated mortality claims and lower alternative returns, earnings per share were $1.21, up 9% on quarter four, 2022 and down 18% compared to prior-year quarter, reflecting movements in equity markets and alternatives. Assets under management and administration ended the period at $864 billion, down 8% year-over-year but up 5% year-to-date. Our businesses delivered strong results this quarter, with $3.2 billion inflows in our core businesses, positive across retirement, asset and Wealth Management. With the collapse of SVB, Credit Suisse and Signature Bank, there has understandably been a lot of attention on the finance sector. Today, Robin and I will spend most of our time on our liquidity position and strength of our balance sheet. We are conservatively positioned with an A2-rated investment portfolio and a high-quality diversified mortgage portfolio. Lapse rates remain within expectations as well as historical averages, a testament to products that are ALM matched and hedged to protect both policyholders and shareholders. We will touch on this later in more detail. Turning to capital, we have $1.8 billion of cash at holdings, supporting financial flexibility and giving confidence that we can consistently deliver on our payout guidance across market cycles. In the quarter, we returned $286 million to shareholders, including $214 million in share repurchases. As such, we delivered a 63% payout in…

Thank you, Mark. Turning to slide seven, I will now spend a few minutes discussing the three areas Mark just highlighted. First on credit, we are well positioned to withstand a credit event and recover quickly from it. Generally, the insurance industry is well-capitalized. However, as you can see on the left-hand side of this page, Equitable can better withstand significant stress in our investment portfolio. At the top is an independent stress that by Autonomous, which shows that in a credit event that is similar to the global financial crisis of 2008, our RBC ratio holds up better than peers, with a drop of only 40 points versus peers at 48 points. In this event, we will stay within our target range of 375% to 400% RBC. We are also constantly performing internal stresses on our portfolio, which are more severe than this example. On the bottom, you can see one of our internal stresses, which tells a similar story to Autonomous. Equitable's portfolio and capital remains resilient through a scenario that is more severe than a global financial crisis. We define this stress as using the global financial crisis for investment grade. The dotcom crisis were below investment grade, which was more severe than the global financial crisis while also using a 40% valuation shock to the office TML portfolio and a meaningful shock to other TML types. And even in our internal stress scenario, our RBC ratio is only impacted by 52 points. There are few observations that we would make from these results. First, our high-quality investment portfolio is resilient. 96% of our fixed maturities are rated investment grade and the portfolio has a total credit rating of A3, which excludes treasuries. Second, we have a track record of maintaining a strong RBC ratio. Through every…

Thanks, Rob. In closing, our Retirement, Asset and Wealth Management businesses continued to deliver strong operating results while our fair-value balance sheet, conservative investment portfolio and HoldCo cash position give us confidence in our ability to navigate periods of market stress. We continue to execute on our stated targets, including productivity savings and consistently returning 55% to 65% of earnings to shareholders. Through enhanced disclosures, we are providing investors with additional information to value our growing Retirement, Asset and Wealth Management franchises. We're also looking forward to meeting again next week, as we host our Investor Day on our 5-year anniversary as a public company. I'm incredibly proud of what we have delivered to our clients and shareholders since our IPO, and our management team looks forward to highlighting the opportunity ahead for Equitable Holdings. Thank you, and we'll now open the line for your questions.

Thank you. [Operator Instructions] We will begin our first question from Elyse Greenspan from Wells Fargo. Your line is open.

Hi, thanks, good morning. My first question, so you guys have $1.8 billion at parent, right, net of the reset debt maturity. And so, that's obviously a good amount above your target. A couple of times in the prepared remarks, you guys had mentioned just uncertain and volatile times. So, how should we think about where you would want to be in reference to your $500 million target, just as we deal with a lot of uncertainties out there right now?

Sure, good morning, Elyse. We're quite pleased to be able to sit with $1.8 billion of cash at the holding company in this type of market environment, and that's a reflection of, one, the strong economic risk management that we have in hedging program, and two, the diversified sources of cash-flow that we have coming up to the HoldCo from AllianceBernstein and our Wealth Management business, along with continued dividends from the retirement business. Given the market environment, we prefer to have a buffer at the holding company until this uncertainty clears up. We still have -- we're still on track to generate the $1.3 billion of free cash flow this year, which will allow us to meet our 55% to 65% payout ratio. And over the long term, we will continue to reassess the HoldCo cash position as it relates to the market environment around us.

Could you also provide us an update, just on your progress on moving your business out of New York to Arizona?

Sure. So, there are multiple steps there. The first one was moving our Individual Retirement business, our new business, to be written out of Arizona. We completed that last year. So, all of our business from our Individual Retirement line, which is our largest line, $2.8 billion of sales this year came from the non-New York policies from the Arizona company. Second is our Group Retirement business, that will be on-track to be completed this year. And then there on our in-force, we're in process of restructuring the Company and working on our internal reinsurance. We continue to work on that and look forward to providing an update once completed.

Thank you.

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

Hi, good morning. So first, just a question on your commercial mortgage loan book. Are you able to provide any metrics on problem loans or those that are on your watchlist and how that's trended in recent months for the book overall, and specifically on the office portion of the portfolio?

Sure, thanks Jimmy. I'll just reiterate -- just a few comments on the CML portfolio. It's certainly a sector that we see risk in, especially in the office sector, over a wide spectrum. But just like any other credit, what's really important is to underwriting capabilities and in the asset and who your tenants are. And in our office sector, which is about 5% of our total general account, we're in nearly all Class-A buildings and we have a 90% occupancy rate and a strong debt-to-service coverage ratio, which means troubled loans would be limited when you have a strong debt-to-service coverage ratio of that amount. Less than 2% of our maturities come up-to-date in 2023. So, we feel well-positioned in that portfolio. And then also, if you look at the quality and the different pieces, most of it is CM1 and CM2, and our CM3 portion of the portfolio actually decreased from 8% in 2022 to 3% in the latest quarter. So, we've actually seen improvements. And at the same time, Jimmy, as you know, we update our appraisals on an annual basis and that's not something everybody does. And we think that's important.

And then on the Protection business, how much of the loss was because the normal seasonal volatility versus maybe poor mortality beyond seasonality? And what's your expectation for the earnings power of the Protection business on an annual or longer-term basis?

Sure. So, most of our Protection business is written on DUL policies, which are higher face amounts and naturally lead to more volatility. But we see it, few things occurring on the mortality side. One is COVID moving to -- up from a pandemic to an endemic state and did we come into higher mortality that would be on top of the normal first-quarter seasonality. In addition, we did see a higher flu season into 2022, 2023 year and which is particularly bad, especially impacting those higher face amounts. But I think it's important, if you look-back over the last nine quarters, our mortality has been in line with our GAAP reserve and expectations. So, although you see volatility and you see our two positive quarters consecutively in 2022 followed by two negative, the end of cumulative results is what's important and that shows our pricing in line and the profitability is in line for the business. As we look forward in the year, we expect mortality to normalize back to our protection run rate that we put out in the market. And so far in April, we see mortality in line with expectations.

Okay. And just on the mortgage loans, do you have any loans that are on the watchlist or are not performing currently or not?

We do. We have about four of our close to 188 loans on the watchlist and we continue to monitor, but everything -- I think that the overall book is high quality.

Okay, and that four has been fairly consistent or has it just come up in the last few months?

It's been consistent.

Okay, thank you.

Your next question is from the line of Tom Gallagher from EVR. Your line is open.

Good morning. Robin, just wanted to follow-up on that last answer you gave on ratings migration of the commercial mortgage loan book. Did I hear you correctly, you went from 8% at year-end 2022 in CM3 rated loans down to 3% in Q1?

That's right. Our ratings actually improved over the last year there. Our ratings were 8% in 2022 and it moved down to 3% in CM3, that our overall quality of the book actually improved, even despite this environment. So again, that goes back to the testament, it's all about the underwriting, who your tenants are and the quality of the office space that you are in.

Okay. I just want to make sure I'm clear on that timing now. Is that -- was that a year -- it was down 3% at year-end 2022, so that would have been reflected in your RBC at year-end 2022 or is that something that just happened at the end of this past quarter that we would then get an RBC tailwind on?

No, it's down -- it moved from 8% to 3% over the last year, so some of that is reflected as of year-end. And in the first quarter as we stand here today, it's at 3%.

Got it. So, that wasn't a big drop just in one quarter, that was over the course of the year?

Correct.

Okay. My other question is the $1.3 billion of cash generation that you're still reiterating for 2023, I think that implies a $600 million to $700 million dividend out of the life company. I think -- from what I recall reading, you've dividend capacity of $1.7 billion this year. So, just curious how you're thinking about as you approach that, I guess what mid-year decision of how much of a dividend to take out of the life company? Is it possible or you're going to get something a lot higher than the $1.3 billion depending on how your capital generation looks?

Sure. So the capital position is strong in the Company. We intend to meet our $1.3 billion of free cash flow guidance we've given to the market. And that assumes a $600 million dividend from the Retirement business. Keep in mind that although we have access to ordinary dividend capacity, if we're successful in moving the policies from our New York business to our non-New York business, we'll also need to fund the capital for those liabilities and we'll have to use the capital in New York. So, we'd like to use some of that extraordinary dividend capacity to back the capital that we -- the liabilities that we move to the non-New York entity as well. So I think the number you need look at from a free cash flow basis is $600 million, leading to the $1.3 billion of free cash flow guidance.

Okay, thanks.

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

Hey, thanks a lot and good morning. Just following up on the commercial mortgage loans, Robin, you mentioned that every year you re-evaluate these loans. So, how should we be thinking about the 62% LTVs? Is that a year-end number? Could it have potentially changed a lot in the first quarter?

Look, I think the year -- yes, 62% is the year -- is the first-quarter number as at the first quarter, but as you've seen historically, we update on an annual basis and it reflects the different market environment that we're in and the strength of the tenants that we have in these buildings with strong income coming in from those tenants. In addition, you should know that all of our appraisals are lower than any third-party appraisals that we received. So meaning, we're taking a conservative approach to our appraisal methodology as it relates those LTVs as well.

I'm sorry, Robin. So in other words, during the course of the year, you're getting updates on each property and each happens once a year, so there could be some that are several months old, that they're not completed in the course of 1Q 2023. Some of it could have been in 3Q 2022, for example, but they're all done within a year. Is that the right way to think about it?

Yes, that's the right way to about it.

Okay, got it. Thank you. And then, with regard to the Individual Retirement segment, it looks really solid in terms of first year premiums, $2.84 billion, up a little bit from last year. Could you talk a little bit about what's driving the strong RILA sales? Was -- were there any major -- one, any major product feature changes, and two, any color on the wholesaling...

Sure, this is not Nick. As you mentioned, we're building off of a record 2022 in volume and value, as you alluded to, evidenced by the 12% increase in RILA sales. Look, I think we're well-positioned to capture a disproportionate share of value, given our track record of innovation. We did come out with some new segments in the first quarter, but also our distinct distribution network of both affiliated distribution and Equitable advisors and our privileged space and third-party where we have a long track record of communicating protected equities stories. So given the macro trends and given our distinct position, we think we have a sustainable edge to continue to go forward.

And any particular feature you would call out that was different from the year ago?

I would attribute it to our structural modes of consistent performance. So, I think we've got a sustainable edge going forward. We obviously continue to innovate and I look forward to going into more detail at Investor Day next week.

Awesome. Thanks.

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

Thanks, good morning. So, on slide four of your deck, you spent a lot of time talking about capital light, which makes sense. But if I think about your payout ratio, that 55% to 65%, which got a lift from LDTI, it seems like that's maybe broadly in line with the life sector. So I guess, given the changes in your business mix, should we expect some upside eventually to that 55% to 65%, driven more by sort of the numerator as opposed to the denominator?

Sure. Thanks, Suneet. I'll just point to -- as you recall, at IPO, our payout ratio is 40% to 60%, representing the larger range of outcomes that we had from the business mix at that time. As we've improved business mix and yet LDTI as well as earnings move closer to cash, that payout ratio is now 55% to 65%. Over-time, as we continue to improve business mix, that could certainly lead higher. But for a business that writes a lot of profit-level retail-oriented sales that you just heard from Nick, it's never going to be 90% to a 100% in aggregate because we have to fund a new business in that given year, which isn't recognized under GAAP but is recognized under cash. But overall, I do think that could move as we continue to move the shift of our business mix over time.

Okay, that makes sense. And then I guess on the Wealth Management business, I was looking at your supplement that you put out when you gave the LDTI disclosures. And it just looks like the earnings in that business went from like $58 million in 2021 to $101 million in 2022. Revenues were flat, so the big driver there seem to be expenses and that growth came despite the market challenges. So, I just wanted to maybe unpack that a little bit, just so we get a sense of like, that's such a big move, like what's the trajectory of this business kind of going-forward and maybe what happened in 2022 on the expense side that caused that big earnings lift? Thanks.

Sure, this is Nick. As a reminder, our new Wealth Management segmentation is the comprehensive P&L of our entire assets through Equitable Advisors. It continues to be a fast and growing business, evidenced as you saw by the increase in net flows. The three main drivers there that we'll unpack in Investor Day are the distribution fees, the advisory fees and the cash sweep accounts. So, we're excited about the growth of that business and believe we have a distinctive edge to continue to move forward.

It's a pretty good model, Suneet. If you look year-over-year, despite AUA being down, earnings are flat and benefiting a big piece from the interest rate that Nick just mentioned, so I think we had an $11 million benefit year-over-year from interest-rate sweeps. So, it's a good model that -- in this type of market environment we'll continue to grow and it's our fastest-growing business line as we sit here today.

That makes sense. If I could just sneak one more in, and maybe you'll talk about this next week, but so many other companies that we cover that have wealth management businesses have kind of focused on growing bank sort of internally as just another sort of arrow in the quiver in terms of driving growth. Is that something that you guys are thinking about?

I couldn't imagine answering questions about a bank in addition to all the other questions that we get on our -- but look, we have -- and Nick will touch on it more on Investor Day. We have a pretty good model leveraging our relationship with LPL that gives us good internal leverage and benefiting from the sweep accounts at this type of interest rate level. So we feel pretty comfortable in the model that we have.

Okay, thanks, Robin.

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

Hi, good morning. First one I had is on the Legacy business. I just wanted to see if you could frame the amount of capital that's back in that business, whether GAAP allocations or stat allocation, just to help us think through the value of that. And as you kind of do some of this restructuring, what kind of amount of capital is back in it? Is that something you all could provide?

Sure. And I think we highlighted a bit on this call. Look, the Legacy business today is quite small at 16% of our total AUM. The capital behind it, as we measure by CTE98, has declined almost by 70% since IPO from $14 billion to about $4 billion as of year-end and it continues to run-off about $2 billion to $3 billion organically over the years. So, we're quite pleased with the work done on that business. It's fully reserved. That would validate it through to Venerable transaction. Over time, it'll run off and we'll continue to grow that core business and generate good cash flow for shareholders.

Got it. The second question I had, I mean, is really a more theoretical question. Your stock obviously is trade to the cash flow multiple that's a bit of a head scratcher at times. I mean, what's your perspective on how to fix it? I mean it seems like with the re-segmentation, you can show in a much better way you're shifting towards these higher multiple businesses, they're growing, et-cetera. I think some of the things you mentioned in response to Elyse's question suggested there is a variety of things being considered in terms of restructuring different parts of the business geographically and maybe some other things. I mean, I guess the question is can you speed that up in terms of the mix shift? Are there ways to do that using your excess capital on some of these restructuring transactions or is it going to just take some time before you're able to more fully make a shift towards more Wealth Management and Asset Management?

Alex, hi. It's Mark Pearson. Thanks for the question. This will be a big part of our Investor Day discussion next week, but just at a very high level. I think we'd agree with you the relative valuation metrics. And taking into account the strength of our flows suggest upside potential for shareholders. And that's certainly something we'll be talking about yesterday -- next week. I think if you look over the last five years, you've seen the cash flows grow. But we've also seen the percentage of cash flows from non-insurance regulated entities move from 17% to 50%. So, we have to move very, very fast in this transformation over those five years. And I think with the additional disclosures have given now, firstly on the more faster moving Wealth Management, AB has been performing relatively extremely strongly. We'll start to see that ratio even improve further as we move out. And I think as Robin has just alluded to on the Legacy side, we pull Legacy out now, 16% of the account value, so it's running off at $2 million to $3 million. It is not significant, it's fully reserved, and anybody using that to value EQH, it's just well. You'll get some more detail next week. It will be a big part of our Investor Day.

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

Good morning. On the topic of ALM, I would like to touch upon your funding agreements. I realize that FABN are not surrenderable. So, really there is no run-on deposits type of concept. But the key is the duration match, that operating debt with backed assets. And I noticed that your 2022 and 2023 FABN's due is $2.5 billion. So my question is, did you build-in any refinancing assumption in order to maintain a balance or do you approach the market more opportunistically and have assets backing those issues with the same duration so you could actually see that balance go down?

Hey, Tracy, thanks for the question. Our FABN book is perfectly matched. We have an opportunistic trade that we have in the marketplace and we ensure that it's perfectly duration-matched. And as you know, rating agencies require that as well.

Okay, awesome. Just a quick clarification on your comment about a higher flu season. I was actually just looking this morning at CDC data and it looks like it's towing to 19,000 deaths, which does feel low versus prior seasons pre-pandemic. So, you're just comparing what you're seeing to last year's season?

Yeah, we're comparing what we've seen over the last five years to seven years and combine with -- it's a combination of COVID going from pandemic to endemic, elevated flu season which was particularly bad In 2022, 2023 when you look at the standard deviation on it as well, and it's impacting some of our higher face amount clients, and that's what we saw in the mortality volatility in the quarter.

Okay. And just really, really quickly, can you just add more color what's driving 10 points of RBC generation a quarter within Individual Retirement? Is that just your typical statutory earnings generation and does not contemplate operating dividend?

That's right, that's across all the Retirement and Protection businesses. We expect to generate that 10 points of RBC that's purely from organic capital generation.

Thank you.

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

Thanks, good morning. I just had a quick one, and I'm not sure if I missed this, but do you still view $75 million of quarterly protection or means it's a good run rate with more quarterly volatility under LDTI or I guess, has the $75 million changed at all?

That's right. We still expect that $75 million to be a run rate, that's the guidance we gave. But as you mentioned, we expect higher volatility, given our higher face amounts and the way it's accounted for in LDTI. And over the last nine quarters, I think if you look back, that's what we delivered on the mortality front.

Okay, great, thank you.

Your next question comes from the line of Michael Ward from Citi. Your line is open.

Hey guys, thanks, good morning. I was just wondering -- on the stress test, I was wondering if you could isolate the office mortgage loan component in the RBC points?

We did not isolate the -- and call-out the office component. But if you look at the comparison of the independent stress test and the real estate stress test, we specifically ran that 40% valuation shock on the office portfolio, which comes through in some of the credit stress line and also the ratings migration line. But we didn't call out all the different pieces of it. We put it all together as one combined shock assuming dotcom for below-investment grade, which is almost 2 times data of the global financial crisis at 40% CML office portfolio and then 10% shock on the others. So, it's all combined at 52 points.

Got it, thank you. And then -- so the average office LTV I think is 65% and so you shocked them by 40%. So, I was just wondering, like how you would -- you might hypothetically expect that to flow through? Does it assume defaults maybe of LTVs that hit a 100, and does that assume that you take on equity after?

It doesn't assume we take on equity after. It assumes that above a 100, you take a hit on the loan and then it assumes some of migration as well that we have in our stress test, and that's what you see on the ratings migration line.

Okay, thanks. And then maybe one more, just have you extended any commercial or office property loans already?

Yes, I mean, we always work on the loans. We have a good long-standing history with the tenants. We work with them on extensions [indiscernible]. We have less than 2% of the overall portfolio coming up this year, and we'll continue to work on those as they come through.

Thanks, guys.

As there are no further questions, I would like to thank our speakers for today's presentation. And thank you all for joining us. This now concludes today's conference. Enjoy the rest of your day, and you may now disconnect.