Equitable Holdings Inc

NYSE:EQH

Earnings Call Transcript 2022-Q1

[Operator]

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.

[Isil Muderrisoglu, Head, IR]

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.

[Mark Pearson, President and CEO]

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, 81% of our equity assets outperformed over the 5-year period.

Our capital management strategy remains the same: to apply fair market values to our balance sheet, invest in our market-leading businesses, pay a competitive dividend and return excess capital to shareholders through stock buybacks.

Cash generated is on track for $1.6 billion in 2022, up approximately 30% since our IPO in 2018. Based on today's market capitalization, we are generating a free cash flow yield of approximately 12%. Furthermore, we've shown through the COVID period an ability to generate free cash flows across a variety of economic scenarios. We also have an update to the LDTI accounting changes. In February, we gave guidance that at 2021 year-end market levels, the adjustment to book value would be within our $2 billion AOCI balance with no impact to our cash flows. At first quarter end interest rate levels, our LDTI book value adjustment was neutral. And as of the end of April, we would, in fact, estimate a positive LDTI transition impact, that is book value would increase.

This reflects that actual interest rates have risen in the quarter and are higher than the 2.25% long-term assumption we've been using in our GAAP reserves. Equitable continues to create long-term value for all stakeholders. Our long-term guidance of 8% to 10% EPS CAGR is supported by growth in our leading retirement, asset management and affiliated distribution businesses. This diverse range of businesses is unique to EQH. In addition, we have productivity initiatives and incremental general account income through shifting the investment portfolio to higher quality, longer duration and more illiquid investments.

In the quarter, we expanded our private asset origination capabilities with AllianceBernstein reaching agreement to acquire CarVal Investors, which will add expertise in distressed credit, renewable energy, specialty finance and transportation.

Combined with CarVal, AB will now have an approximate $50 billion private markets platform and will be well placed to meet the growing demand for alternative investment strategies. I'm also pleased to report that MSCI has recognized our progress in our sustainability efforts and upgraded our rating from BBB to A.

Turning to Slide 4. Our retirement, asset management and affiliated distribution businesses differentiate EQH and drive our strategy to pivot to capital-light products, which accounted for more than 85% of premiums in the quarter. The acquisition of CarVal is a good example of synergies between our 2 operating companies.

Equitable Financial has committed $10 billion from its general account towards AB's private markets platform. Of this, $750 million will be allocated across CarVal strategies, improving risk-adjusted returns and strengthening our efforts to grow higher-multiple, higher-margin businesses.

We are benefiting from our early moves in the secure income market. AB closed a $10 billion custom target date fund and resulted in our Group Retirement business receiving a $530 million allocation. This is a perfect example of how we participate in the full value chain by having both asset management and retirement businesses.

We are proud to be an early innovator delivering in-plan guaranteed income solutions. AB has been offering secure income solutions for 10 years now. Obviously, we are meeting an important social need, providing participants with personalized target date funds during their working years, and a guaranteed income stream in their retirement years.

Through AB and Equitable Synergies and our partnership with BlackRock, we are well positioned to grow as lifetime income gains traction post the SECURE Act, which allows sponsors the ability to incorporate annuities into their 401(k).

Turning to our businesses. Our retirement business continues to be our most significant contributor, amounting to 80% of earnings and approximately 2/3 of free cash flow generated in a year. Following the Venerable transaction in the second quarter of last year, which unlocked $1.2 billion of value, account values today stand at $152 billion.

As a result of this reinsurance, and a decade-long derisking program, coupled with a change in sales mix and expected legacy outflows, our retirement business today has less than 18% of account value in legacy VA products. We had a strong quarter in both Individual and Group Retirement, with new sales up 35% over the prior year's first quarter and positive net inflows with new capital-light sales more than offsetting our expected legacy outflows.

Our RILA product, structured capital strategies continue to be the market leader in its category, and we saw our strongest month of sales on record in March. In Protection Solutions, we continue to see demand for our life products. First year premiums are up 23% year-over-year and total gross premiums are up nearly 36% over the same period to $1 billion. This quarter has seen net excess mortality on our in-force of $61 million on a post-tax basis and is within our COVID guidance of a $30 million to $60 million operating earnings impact per 100,000 U.S. deaths while still preliminary early indications of our realized excess mortality in the month of April remain within our guidance.

Despite turbulent markets, AB continues its standout performance record. Active equities grew for the ninth quarter in a row and municipals grew for the seventh, both bucking industry-wide outflow trend. Offsetting these results was taxable fixed income. We saw higher outflows in the face of the worst quarterly fixed income returns in 40 years.

Overall, annualized organic AUM growth was up 6% year-over-year, and the average fee rate grew 1%. Investment performance remains strong. And as of quarter end, 69% of U.S. assets and 63% of Luxembourg assets were rated 4 and 5 stars by MorningStar.

AB's 200-plus private wealth managers with a focus on high net worth clients, delivered $2 billion in net inflows in the quarter end and is responsible for $117 billion or 16% of AB's total AUM. Equitable advisors continue to show positive momentum in broker-dealer investment products with gross sales of $3 billion in the quarter. Strong net flows and favorable markets over the last year have continued to drive AUA growth, closing the quarter at $79 billion, up 13% year-over-year as we continue to see our affiliated distribution becoming a more significant component of the Equitable Holdings story.

We continue to see an increasing focus on holistic life planning through our 4,300 strong advisor force. As of the quarter end, we have over 1,500 advisors who have completed the initial phase of our holistic life planning training program. We also recently launched a coaching certification program in partnership with Columbia University and expect strong advisor engagement in this program, positioning us for increased demand for holistic life planning.

On Page 5, we show the growth in earnings and cash flow generation since our IPO. Throughout this period, with record low and volatile interest rates, a global pandemic and now rising inflation, our fair value economic management policy has protected earnings, cash flows and enabled consistent capital return to shareholders. We have grown our earnings over 30% from $1.9 billion at the time of the IPO to approximately $2.5 billion today. Cash generated by our businesses is on track for $1.6 billion in 2022, also up 30% since our IPO in 2018. And based on quarter end market cap, we are generating a free cash flow yield of 12%.

Importantly, we expect to generate this cash flow, absent the earnings from the legacy block we reinsured Venerable last year, which monetized $1.2 billion of value, leading to an additional $500 million of capital return last year with the remainder to be returned over time. We've also increased our nonregulated cash flow to approximately 50% of the total, thereby increasing our financial flexibility. While we recognize that markets are impacted by macroeconomics and we are not immune from equity and credit markets, we focus on long-term value. The condition of our balance sheet is not dependent on interest rates, protecting the promises we make to our clients and the certainty of our cash flows.

Further, our business is positioned to benefit from rising equity markets and higher new money yields as credit spreads widen. These turbulent markets remind consumers of the value of guarantees that only firms like Equitable can manufacture and paired with our growing financial planning orientation, and the rise in interest rates enabling stronger retirement guarantees. We remain optimistic about the vigor of our commercial businesses and our ability to generate fair value profits. We continue to believe that the ability to generate cash flows is the best way to value equitable holdings and indeed, our industry.

I will now turn the call to Robin for further details on our results. Robin?

[Robin Raju, CFO]

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 on future interest rate levels.

We remain well positioned for the upcoming LDTI transition in 2023 and expect our GAAP balance sheet to be more stable due to better alignment between our GAAP reserves and our fair value economic reserves. As a result, shareholders should expect to see consistently positive net income, reflecting a more economic match between our assets and liabilities.

Turning to Slide 7. I will review our consolidated results for the first quarter before providing more detail on segment results and our capital management program. Adjusting for notable items in the period, non-GAAP operating earnings were $615 million this quarter or $1.53 per share, up 13% year-over-year on a per share basis. We called out $67 million of notable items in the quarter primarily attributable to elevated mortality and DAC updates to our in-force, which were partially offset by higher alternative income. Adjusting for notables, our increase in earnings year-over-year was primarily driven by higher fee income on higher average AUM.

Turning to GAAP results. We reported net income of $573 million this quarter, and our hedge program performed as expected with a hedge effectiveness of approximately 95%. AUM increased to $856 billion over prior year quarter, supported by favorable equity markets and continued positive net flows reflecting the strength of our retirement and asset management businesses.

Our general account is benefiting from increasing rates and widening credit spreads with new money yields approximately 50 basis points higher than assets rolling off the portfolio as of quarter end. This creates a natural tailwind for our business and should benefit our rebalancing program.

We expect to reach our yield enhancement target earlier than anticipated with $180 million of our $180 million 2023 run rate target already achieved. We've also continued to make progress on our expense initiatives, realizing $35 million of our $85 million net target. Looking ahead, we expect to realize meaningful savings over the next 2 years as we optimize our real estate footprint and reap the benefits from an agile workforce.

Moving to the business segments. I will begin with Individual Retirement on Slide 8. As a reminder, the Venerable transaction closed in June of last year, unlocking $1.2 billion in value while reducing over 2/3 of our legacy VA risk resulting in an adjustment of $180 million to operating earnings per annum.

Adjusted for notable items, operating earnings were $307 million for the quarter, lower year-over-year, primarily due to the impact associated with the Venerable transaction. We continue to see strong demand for our Individual Retirement, all weather products with protected equity, guaranteed income and tax-efficient investment offerings resonating with clients during a period of volatility and rising interest rates.

We reported positive net flows in the quarter as we continue to benefit from our product suite and differentiated distribution with $655 million of inflows in our capital-light product offering, partially offset by the runoff of our legacy VA business.

In the quarter, we also maintained our #1 position in the protected equity RILA market reporting $2 billion in structured capital strategy sales, up 10% from prior year and record sales in the month of March. Total Individual Retirement first year premiums were $2.8 billion, a 17% increase year-over-year.

We continue to see rational pricing in the RILA market and our continued success is the testament to our distribution model, which pairs our 4,300 affiliated advisors with targeted third-party selling partnerships. Importantly, our strong new business activity is focused on creating value, not only volume. We build and price our products to maximize the value of new business, which measures the present value of risk-adjusted cash flows. As interest rates have increased in the quarter, our value of new business continues to be at record levels, which will improve future shareholder returns over time.

Turning to Group Retirement on Slide 9. We reported operating earnings less notable items of $149 million, up 7% versus the prior year quarter, driven by lower expenses and higher fee revenues. Positive net flows of $523 million in the quarter were primarily driven by inflows from AB's lifetime income strategies. This is another proof point of the synergies between our subsidiaries. AB's lifetime income provides a significant distribution channel for our retirement business, providing access to large 401(k) plans, which is a market, our retirement business did not serve today.

Furthermore, given our unique business model, EQH benefits from margins on both retirement and asset management manufacturing. Our tax-exempt market is driven by our industry-leading affiliated distribution. In the quarter, we reported positive net inflows with first year premiums up 7% year-over-year, which returned to pre-pandemic levels, outpacing first quarter 2019 sales.

Our continued leadership in the K-12 educator's market is a testament to our 1,100 dedicated Equitable advisors, specializing in the retirement needs of over 800,000 educators we serve.

Now turning to AllianceBernstein on Slide 10. Operating earnings were $136 million, up 12% year-over-year, primarily driven by an increase in base fees on higher average AUM and performance fees in the quarter. While interest rates moved significantly higher in the quarter, we maintained strong fixed income performance with 64% of fixed income assets outperforming over the 1-year period and stronger long-term performance with 72% and 71% of fixed income assets outperforming over the 3- and 5-year periods, respectively.

Equity performance remained strong relative to peers with 68% of equity assets outperforming on a 1-year basis and 81% of outperformance over 5 years. The strong investment outperformance is leading to strong flows across their retail, institutional and private wealth channels. Total gross sales of $41 billion were up 23% year-over-year, including $21 billion in retail sales, which is the fifth consecutive quarter of retail sales over $20 billion. Our Institutional channel reported $14 billion in gross sales including a $9.6 billion retirement mandate, supporting record net inflows of $10 billion and the seventh consecutive quarter of organic growth.

The private wealth channel, which represents approximately 1/3 of AB's fee-based revenues, reported gross sales of $6 billion, up 12% year-over-year with $2 billion of net inflows and 7% annualized organic growth year-over-year. Total assets under management at the end of the quarter were $735 billion, up 5% from the prior year quarter, attributable to positive net inflows for the last 12 months, including $11 billion this quarter and favorable markets.

Importantly, over this period, annualized organic AUM growth of 6% was supplemented by a 1% fee rate growth. Moving to Protection Solutions on Slide 11. We reported operating earnings less notable items of $96 million, up over prior year, primarily driven by higher net investment income and higher fee revenue and higher account value. Gross written premiums were $1 billion in the quarter, up 36% over prior year quarter as we continue to make strides shifting towards less interest-sensitive accumulation VUL products with first year premiums up 65% year-over-year.

We were saddened to see over 150,000 U.S. deaths in the first quarter. It's hard to believe that we've been at this pandemic for over 2 years now, with so many lives impacted across the world. Equitable's life products serve an important need during these difficult times and we will continue to be there for our clients in their times of need.

Through the end of March, excess COVID mortality was $61 million, which were made within our guidance of $30 million to $60 million operating earnings per 100,000 U.S. deaths. We maintain our current COVID guidance, but expect better mortality with the U.S. debt estimate in the second quarter, decreasing significantly and are encouraged by preliminary death claims we are seeing in April.

We remain confident in our $75 million quarterly earnings guidance going forward, but do expect some potential volatility due to mortality. Turning to Slide 12. Our fair value management of the business continues to support our capital management program. We have made significant progress towards our 2022 capital management targets to date. Returned $461 million to shareholders, including $279 million of first quarter repurchases and an additional $112 million of 2022 share repurchases that were accelerated into the fourth quarter of 2021.

To further support our capital return, we intend to increase our quarterly dividend to $0.20 per share at $0.02 per share increase. We have consistently increased our dividend since our IPO, up 50%, demonstrating the financial strength of our balance sheet and business model. We also continue to deliver on our 50% to 60% payout ratio. And as mentioned earlier, shareholders continue to benefit from our diverse businesses who have retirement, asset management and affiliated distribution, which resulted in our expected $1.6 billion of annual cash flow generation, up from $1.2 billion at our IPO.

We closed the quarter with $1.5 billion of cash at the holdco, which aligns with our capital management strategy of maximizing financial flexibility to support consistent capital return in various market cycles. Lastly, we continue to make progress on the redundant reserves associated with Reg. 213. We expect to announce mitigated actions for the remaining redunded reserves in the second half of 2022.

I'll now pass it back to Mark.

[Mark Pearson, President and CEO]

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]

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

[Ryan Krueger, 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?

[Robin Raju, CFO]

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.

[Ryan Krueger, KBW]

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?

[Mark Pearson, President and CEO]

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.

[Operator]

Our next question comes from Tom Gallagher.

[Tom Gallagher, Evercore ISI]

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?

[Mark Pearson, President and CEO]

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.

[Tom Gallagher, Evercore ISI]

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?

[Robin Raju, CFO]

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.

[Tom Gallagher, Evercore ISI]

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?

[Robin Raju, CFO]

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.

[Operator]

Our next question comes from Andrew Kligerman with Credit Suisse.

[Andrew Kligerman, 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?

[Robin Raju, CFO]

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.

[Andrew Kligerman, Credit Suisse]

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?

[Robin Raju, CFO]

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.

[Andrew Kligerman, Credit Suisse]

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?

[Mark Pearson, President and CEO]

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.

[Operator]

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

[Nigel Dally, 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?

[Robin Raju, CFO]

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.

[Nigel Dally, Morgan Stanley]

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?

[Robin Raju, CFO]

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.

[Operator]

Our next question comes from Suneet Kamath with Jefferies.

[Suneet Kamath, 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?

[Robin Raju, CFO]

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?

[Nick Lane, President, Equitable Financial]

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.

[Suneet Kamath, Jefferies]

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?

[Robin Raju, CFO]

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]

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

[Tracy Benguigui, 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?

[Robin Raju, CFO]

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.

[Tracy Benguigui, Barclays]

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?

[Robin Raju, CFO]

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.

[Tracy Benguigui, Barclays]

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

[Robin Raju, CFO]

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.

[Tracy Benguigui, Barclays]

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?

[Robin Raju, CFO]

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.

[Operator]

Our next question comes from Mark Hughes with Truist.

[Mark Hughes, 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.

[Mark Hughes, Truist]

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?

[Robin Raju, CFO]

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.

[Operator]

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