Equitable Holdings, Inc. Q2 FY2025 Earnings Call

Thank you for joining us for the Equitable Holdings, Inc. Second Quarter Earnings Call. All lines are muted to minimize background noise. Following the speakers' remarks, we will have a question and answer session. I now hand the call over to Erik Bass, Head of Investor Relations. Please go ahead, Erik.

Thank you. Good morning, and welcome to Equitable Holdings Second Quarter 2025 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 differ materially from those expressed in or indicated by such forward-looking statements. Please refer to the safe harbor language on Slide 2 of our presentation for additional information. Joining me on today's call are Mark Pearson, President and Chief Executive Officer of Equitable Holdings; Robin Raju, our Chief Financial Officer; Nick Lane, President of Equitable Financial; Tom Simeone, AllianceBernstein's Chief Financial Officer; and Onur Erzan, Head of AllianceBernstein's Global Client Group and Private Wealth business. 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 and in our earnings release, slide presentation, and financial supplement. I will now turn the call over to Mark.

Good morning, and thank you for joining today's call. This quarter marks the halfway point of our 5-year planning period. And we're pleased with the organic growth momentum across our businesses and the progress we've made on our strategic initiatives. In July, we closed our landmark Individual Life reinsurance transaction with RGA, which freed over $2 billion of capital and will significantly reduce future earnings volatility. Looking forward, we are excited about the growth prospects across our retirement asset management and wealth management businesses. And the flywheel benefits from our integrated business model position us well to be a long-term winner in each of these markets. Turning to Slide 3. Let me briefly cover our second quarter results. Non-GAAP operating earnings were $352 million or $1.10 per share, down 23% year-over-year on a per share basis. Adjusting for notable items, non-GAAP operating EPS was $1.41, which is down 8% compared to the prior year. But the primary driver of the decline was elevated individual life mortality claims. In addition, fee-based earnings were pressured by lower average equity market levels during the second quarter. While results this quarter came in below expectations, we see several positive leading indicators that suggest growth will accelerate in the second half of the year. Our mortality exposure has been reduced by 75%, and markets have had a strong recovery. Assets under management and administration at quarter end totaled a record $1.1 trillion, which is up 5% year-to-date and bodes well for future growth in spread and fee-based earnings. We also see healthy organic growth momentum, supported by our flywheel business model. Our Retirement businesses produced $1.9 billion of net inflows in the second quarter driven by strong wireless sales and $250 million of BlackRock, LifePath, Paycheck, net inflows. Wealth Management also had another very strong quarter with $2 billion of advisory net inflows and the trailing 12-month organic growth rate is 12%. We continue to see positive adviser recruiting trends and productivity increased 8% year-over-year. Turning to Asset Management. AB was not immune to the challenging market conditions in the second quarter and reported net outflows of $6.7 billion, which includes active net outflows of $4.8 billion. The outflows were concentrated in April, and the business returned to a net inflow in June. AB also continues to grow its private markets business with AUM up 20% year-over-year to $77 billion, and the total institutional pipeline increased to $22 billion, the highest level since 2022. Moving to capital. We returned $318 million to shareholders in the second quarter, which represents a 74% payout ratio above our 60% to 70% target. We are on track for $1.6 billion to $1.7 billion of organic cash generation in 2025, with over 50% coming from our asset and wealth management businesses. In addition, we expect to bring approximately $1 billion of additional insurance dividends to the holding company in the second half of 2025, following the close of the Individual Life reinsurance transaction. As Robin will discuss, we plan to execute at least $500 million of incremental share repurchases and repay some debt before year-end. We have already received regulatory approval for these dividends. Over the past few months, we have made significant progress executing against our strategic initiatives to reduce earnings volatility, improve our churn on capital, and drive future growth. I've already highlighted the Life reinsurance transaction with RGA, which closed on July 31. In addition, in June, we completed the first internal reinsurance transaction to our Bermuda entity, as well as the majority of our policy innovation initiative. These actions enhance our financial flexibility and visibility into future cash flows from our insurance entities. Finally, you're seeing evidence of the flywheel synergies between Equitable and AB. A good example is the Ruby Re Sidecar investment that yielded a $1 billion private credit investment management agreement with RGA, including mandates for newer strategies that have recently been ceded by Equitable. This has helped to accelerate momentum in AB's insurance business, which has added four new insurance general account relationships year-to-date. Turning to Slide 4, I'll provide an update on performance against our three primary financial targets, which are to grow annual cash generation to $2 billion by 2027, deliver a 60% to 70% payout ratio and grow non-GAAP operating earnings per share 12% to 15% annually. As I mentioned, we are on track for $1.6 billion to $1.7 billion of organic cash generation in 2025, and we have a good line of sight into achieving our $2 billion target for 2027, even after reinsuring 75% of our in-force individual life block. Our cumulative payout ratio over the past 10 quarters is 68% at the upper end of our 60% to 70% target range. As a reminder, the $500 million of additional share repurchases following the Individual Life transaction is on top of this target. The one metric where we are slightly below plan is EPS growth as we have a 10-quarter average growth rate of 11% versus our 12% to 15% target. Year-to-date, non-GAAP operating EPS, excluding notable items, is down 5% due to elevated mortality claims. If the reinsurance transaction had been in effect starting January 1 and our mortality claims were reduced by 75%, non-GAAP operating EPS growth would have been 3% in the first half of the year. Looking forward, we expect EPS growth to accelerate given the recovering markets and benefit from incremental share repurchases. Turning to Slide 5. We highlight some of the key performance indicators for our business segments and the progress we have made against our Investor Day targets. I won't cover everything on this page but want to call out a few items. Starting with retirement. We have delivered 5% organic growth year-to-date and 6% over the past 10 quarters. This has helped drive 13% annual growth in AUM, significantly ahead of plan. Not included in retirement net flows is our spread lending program. We have issued $3.4 billion of FABNs year-to-date and have approximately $9 billion outstanding. We expect to be a consistent issuer going forward, which will contribute to growth in future spread income. Turning to AB. While active net flows are modestly negative year-to-date, the base fee rate has remained relatively stable, and the business is on track for a 33% margin in 2025. This is up 410 basis points since 2022 and reflects the benefits from AB's office relocation strategy and the Bernstein Research JV. We have made significant progress in scaling our Wealth Management and AB Private Markets businesses. Wealth Management has delivered a 12% organic growth rate over the trailing 12 months, has grown AUA to $110 billion, and is on track to exceed $200 million of annual earnings ahead of schedule. Private markets AUM has grown to $77 billion, up 20% over the past year, and we expect it to reach $90 billion to $100 billion by 2027. Finally, we are seeding future growth by developing new markets for both AB and Equitable. We continue to see in-plan annuities as a growth market, and we have a first-mover advantage through our relationships with AB, BlackRock, and JPMorgan. Since launching the BlackRock, LifePath, Paycheck product in the second quarter of 2024, we have received over $800 million of inflows. We also expanded our institutional offering through a partnership with a leading HSA provider, which has yielded approximately $350 million of net inflows year-to-date. AB is making good progress in target growth areas like active ETFs and insurance mandates, which now have AUM of $8 billion and $48 billion, respectively. Moving to Slide 6. I want to reinforce the value created by our Individual Life reinsurance transaction and the benefits it will have for Equitable moving forward. By reinsuring 75% of our in-force Individual Life block on a pro-rata basis, we have significantly reduced our exposure to future mortality claims and the associated volatility. This should enable us to deliver more predictable earnings. We are also generating over $2 billion of value through a positive ceding commission and the release of capital supporting the block. This represents a multiple of approximately 20 times our lost earnings, a very attractive valuation. This free capital will be redeployed into higher return businesses and drive accretion for shareholders. We have already used $760 million to increase our ownership stake in AB from 62% to 69%, and we plan to execute $500 million of incremental share repurchases in the second half of 2025. We also expect to repay some debt. This leaves us with some remaining capacity for opportunistic growth investments or additional buybacks. I'm very excited about the road ahead for Equitable, and I'll now turn the call over to Robin to go through our financial results in more detail.

Thanks, Mark. Turning to Slide 7. I will provide some more detail on our second quarter results. On a consolidated basis, non-GAAP operating earnings were $352 million or $1.10 per share, and we reported a GAAP net loss of $349 million. We had a few notable items in the quarter. Our alternative investment portfolio returned 6.3% in the quarter, modestly below our 8% to 12% long-term expectation, but in line with our guidance for the second quarter. In Protection Solutions, we had $74 million after-tax of negative one-time items, driven primarily by the discovery of a third-party administrator issue that resulted in the late reporting of some COLI claims. We are confident that all outstanding claims have now been identified and that there won't be any impact in future quarters. We also identified a few other small items that were cleaned up ahead of the closing of the RGA transaction. Finally, in Corporate and Other, we had $16 million of notable items, primarily from one-off expenses related to a true-up of P-CAP issuance costs and an adjustment to the FABN currency hedges. After adjusting for these items, non-GAAP operating earnings per share would have been $447 million or $1.41 per share. Total assets under management and administration rose 8% year-over-year to $1.1 trillion. This bodes well for future earnings growth. Adjusted book value per share ex AOCI and with our AB ownership stake at market value was $40.89, up 11% year-over-year. In our view, this is a more meaningful number than reported book value per share ex AOCI, which reflects our AB holding at book value. Our adjusted debt-to-capital ratio with AB's ownership stake at market value was 23% in the quarter. On Slide 8, I'll provide some further details on our segment-level earnings drivers. Starting with mortality, we again experienced a higher-than-expected level of larger claims in our Individual Life insurance block primarily concentrated in older age policyholders. Excluding the late reported COLI claims that I mentioned previously, mortality came in about $35 million after tax worse than our normal expectations. Moving to Individual Retirement, earnings declined on a year-over-year basis, driven by a couple of factors that I'd like to dive deeper into. Fee-based revenues declined by 3%, reflecting lower average separate account balances due to outflows in our older GMxB block and the equity market decline through April. Fee-based products account for about half of our segment earnings and have a higher return on assets than spread products. Net interest margin, or NIM, was flat year-over-year as strong growth in net investment income was offset by higher interest accredited. We attribute this to three dynamics. First, we are starting to see more of our very profitable older RILA segments mature. These policies were written at a time when competition was limited, and we could achieve margins well above our normal hurdle rates. While we continue to earn attractive 15% IRRs on new business, this is below the returns earned when we had the market largely to ourselves. Second, a component of interest credited is market value adjustments or MDAs, which are collected if a contract is surrendered early or the policyholders change segments within their RILA contract. MDAs have been quite stable from the second half of 2022 through the first half of 2024, but they have declined in recent periods and were essentially at zero this quarter. This reduced year-over-year NIM growth by about 10%. We do not assume any benefit from MDAs in pricing and expect limited GAAP earnings contribution moving forward. Third, we have multiple product lines that drive individual retirement NIM, including RILAs and payout annuities, as well as income from surplus. So this can create noise on a quarterly basis. When we update our financial reporting next quarter, we plan to provide additional disclosure to help you model NIM across our retirement businesses. The final drag on earnings has been higher commission expense, which reflects strong sales volumes, particularly at Equitable Advisors, where not all payouts can be capitalized in DAC. This is ultimately a positive as we'll see higher earnings over time. But new business does not immediately start to contribute to GAAP profits. Looking forward, we view $220 million to $225 million as a good baseline for third-quarter earnings for Individual Retirement, assuming normal markets and our current segment reporting methodology. Keep in mind that not all the benefit from the strong organic growth in Individual Retirement shows up within the segment's earnings. Robust sales volumes benefit transactional revenues in Wealth Management and drive asset flows to AB. In addition, growth in our general account assets allows us to expand our spread lending program, which generates earnings that currently get allocated across all of our insurance segments. Turning to Group Retirement. Earnings declined sequentially due to lower average separate account balances in the second quarter, but the market rebound should lift third-quarter results. AB reported a solid quarter from an earnings perspective and remains on track to achieve its full-year margin target of 33%. AUM ended the second quarter at record levels, which should support growth in base fees, and AB now expects full-year performance fees of $110 million to $130 million, up from our prior forecast of $90 million to $105 million. Finally, wealth management had a very strong quarter with earnings up 16% year-over-year. We expect this momentum to continue given robust net new asset growth and supportive equity markets. Across our businesses, we expect earnings to improve in the second half of the year given record AUM levels, higher investment portfolio yields, benefits from expense actions, and reduced mortality exposure. Turning to Slide 9. We executed on several important capital management initiatives during the quarter, which will support growth and enhanced visibility into future cash flows. As Mark previously discussed, we are thrilled to have closed the Life reinsurance transaction with RGA, which we expect will reduce earnings volatility and will enhance returns on capital and be accretive to earnings and cash flow per share. In June, we also completed the first transaction with our Bermuda entity reinsuring approximately $30 billion of group annuity contracts. While this transaction does not impact our view of excess capital, it enhances our visibility into future cash generation and our ability to upstream excess surplus on a consistent basis. This is because of a better alignment between the Bermuda framework and how we economically hedge our annuity book. Looking ahead, having a Bermuda entity provides another tool in our capital management toolkit, and we'll be opportunistic in utilizing it. This could include seeding additional blocks of in-force business, seeding new business on a flow basis, or even reinsuring third-party business. Finally, we've completed the first wave of policy innovations. Moving a portion of our reinsured legacy VA policies to Venerable and a portion of internally reinsured policies from New York to Arizona. By novating these policies, we reduce counterparty risk, simplify our statutory accounting, and increase future financial flexibility. These strategic initiatives support Equitable's consistent capital management program, which is highlighted on Slide 10. During the quarter, we returned $318 million to shareholders, including $236 million of share repurchases. The payout ratio was 74% of earnings, excluding notable items in the quarter, above our 60% to 70% guidance range. Over the past year, we have reduced our share count by approximately 6%, helping us drive growth in earnings per share. We currently have about $800 million of cash at the holding company above our $500 million minimum target. During the quarter, we spent approximately $760 million to purchase additional AB units and $283 million to retire our standing Series B preferred stock. During the second half of the year, we expect to upstream $1.7 billion of excess surplus from our insurance subsidiaries to the holding company, which includes both organic cash generation and a portion of proceeds from the Life reinsurance transaction. We have received regulatory approval for any required extraordinary dividends. Following the Life reinsurance transaction and these planned dividends, we will have a pro forma combined NAIC RBC ratio of over 500%, above our 400% minimum target. This puts the enterprise in a strong capital position and provides capacity to fund growth and meet our payout ratio targets even during periods of market volatility. We plan to execute at least $500 million of incremental share repurchases in the second half of 2025, and we will also look to pay down some outstanding debt to manage our leverage ratio and maintain flexibility. We will be opportunistic in redeploying the remaining transaction proceeds in a timely manner to support growth and drive shareholder value. Now let me turn the call back over to Mark.

Thanks, Robin. Looking forward, Equitable is well positioned to capitalize on the growth opportunities across retirement, asset management, and wealth management, helped by the flywheel benefits of our integrated business model. We have strong organic growth momentum and the Individual Life reinsurance transaction will reduce the earnings volatility that has weighed on our year-to-date results. We also have a robust balance sheet and significant freed capital to redeploy, which will be accretive to earnings per share. As a result, we expect EPS growth to accelerate in the second half of 2025, and we remain confident about achieving our 2027 financial targets. We will now open the line for your questions.

We will now begin the question-and-answer session. Your first question comes from the line of Ryan Krueger with KBW.

Robin, thank you for the insights regarding the earnings in Individual Retirement. My question is about the baseline earnings for the third quarter you provided. How should we view the growth in earnings beyond that point? You have strong growth momentum in the business, but it seems that earnings will likely continue to grow at a slower pace than account value due to the factors you mentioned, such as the runoff of higher-margin legacy RILA business and the shift in the mix between variable annuities and RILA. If you could provide any additional context, it would help us understand the potential growth from that third-quarter starting point.

Sure, let me summarize what happened this quarter and how we should approach the future. We consider a range of 220 to 225 million as a reasonable baseline for the third quarter. As mentioned earlier, our results came in lower due to a few factors, including fee-based products and our historical closing rate on variable annuities, which are linked to separate accounts. The markets declined in April, falling short of our expectations by about 2% for the quarter, but this could provide support going forward, particularly with the equity market rebound. Our net interest margin was flat year-over-year, as strong growth in net investment income was countered by the interest credited. A significant aspect of this is the market value adjustments, which can fluctuate each quarter. Recently, these were about 10 million pretax but were zero this quarter, which affected our results. We don't expect much variation going forward, but a rebound could positively influence our outcomes. I believe our net interest margin spreads have stabilized and will continue to do so this year as we see the gradual decline of our highly profitable book, where margins have stabilized around a 15% internal rate of return. You can expect this to remain flat for the year, and for the next 9 to 12 months, we will see this transition. The net interest margin rate should remain consistent moving forward. Despite these challenges, business momentum stays strong as highlighted in our call. We anticipate growth in the general account, which will positively affect other facets of our business model, including assets under management in our advisory business, wealth management fees, and our spread lending capabilities going forward.

One related follow-up. I don't know if you have something approximate not looking for anything exact, but how much of your in-force RILA would you say is more of the older business when you had excess returns compared to business that's probably more in line with your pricing targets now?

Yes. Pre-2020, in-force accounted for about 15% of the total account value, which provided very good, high margins since we were the only players in the market at that time. As more entrants have joined, those margins have stabilized. However, it’s not a significant shift. Therefore, we believe that over the next few quarters, this should stabilize and the margins will adjust accordingly.

And your next question comes from the line of Suneet Kamath with Capri.

Robin, I want to revisit the spreads in IRR. It seems like you're suggesting that they should stabilize or flatten out moving forward. Is there any sensitivity to that outlook if the Fed starts cutting rates?

No, it's not just about the short-term rates for RILA products. It's more about something closer to the 10-year treasury. Additionally, we are considering volatility and corporate spreads. These three factors drive our RILA profitability and inform our product pricing. We adjust our pricing based on movements toward that 15% IRR, making us less sensitive to those changes and more focused on ensuring our pricing aligns with that hurdle rate.

That makes sense. And then I guess, sticking with IRR and RILA, how do the economics of the products that you sell through the Wealth Management business compare to the products that you sell through third parties? I'm assuming it's sort of a level commission. So that's not the difference, but there's probably other factors that we should think about in terms of the profitability. Can you just kind of talk about that?

Well, perfect. I'll ask Nick to jump in and talk about the growth that we're seeing within that segment. But within our Wealth Management franchise, those are where we're closer to the client, and we see better persistency. We do see higher margins as a result of that when we sell any of our products through our Wealth Management business. That's why owning and having affiliated distribution is a differentiator for Equitable and a key part of our flywheel going forward. And Nick, do you want to add on some of the growth we're seeing on the wealth management side?

Sure. As Mark and Robin highlighted, Equitable's RILA sales increased by 9% year-over-year, reaching a record high of $1.7 billion in net flows. We believe that for sustainable success, it's essential to generate attractive yields and have distribution that offers lower-cost liabilities. This involves both Equitable Advisors and third-party partners who provide a curated selection of products and scale. We believe Equitable benefits from this flywheel effect, positioning us as a sustainable success story in the business.

And your next question comes from the line of Tom Gallagher with Evercore ISI.

I have a question about your capital management strategy. After your significant dividends, I understand you still plan to maintain a pro forma RBC of 500%. Is your baseline plan to issue another exceptional dividend next year, which would allow for more buybacks in 2026 than typically expected? It seems like you'd also be making some debt repayments. How are you approaching the timing for distributing the excess capital from the RGA deal? Regarding the $1 billion that wasn’t used to increase the AB stake, would most of that be directed towards buybacks now, or are you still weighing the options between debt repayment and share repurchase?

I appreciate your questions, and I'm happy to address them all. We're excited to have closed the RGA transaction, which significantly enhances our position in asset retirement and wealth management while acknowledging that we don’t focus on mortality risk as a differentiator. This transaction is strategically important as it allows us to unlock $2 billion in value and decrease our future mortality risk. As you noted, we've invested $750 million in AllianceBernstein, raising our stake to 59%. We're also planning to do $500 million in share buybacks in the second half of the year, which will contribute to EPS growth in that period, above our typical 60% to 70% payout ratio. With the remaining $1 billion, one portion will be allocated as the transaction becomes effective in the third quarter, which will result in a GAAP-related loss due to asset transfers and the book value of AllianceBernstein units. This combination will affect our equity position. Consequently, we intend to reduce debt to align our leverage ratios with the expectations of rating agencies. We might consider up to $500 million for a tender offer in the second half of the year, depending on market conditions. The remaining $500 million will be directed toward opportunities in the wealth management sector, including potential sidecars and additional share buybacks to enhance our value given our current stock performance. Regarding future capital deployment, after the RGA transaction and the extraordinary and ordinary dividends totaling $1.7 billion from the insurance company, the RBC ratio for our combined entities exceeds 500%, indicating strong capital ratios at our subsidiaries. We have no plans to take out additional dividends from our insurance companies this year and will evaluate the situation next year based on ratio performance and organic cash flow generation. We'll consider upstreaming funds in the following year as we work towards our $2 billion cash flow target, which originates from both the insurance company and 50% from asset and wealth management.

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

Putting together, I guess, Robin, a lot of the comments that you gave, right? You guys said EPS growth should pick up in the back half. And then obviously, it takes time, right, for the full credit right for repurchase to work in as well as business growth, etc. So with how you see things, I guess, would you expect, I guess, the second half to be better than the first half, but I guess, below the 12% to 15% target for EPS and then we get back there in 2026. Is that kind of the right way to think about it when you think about the moving pieces?

Yes, I think that's correct. With the positive factors supporting our business, including growth momentum, higher equity markets, decreased mortality exposure, and additional share buybacks, we anticipate that EPS growth will significantly improve in the second half. We expect to be on track for the 12% to 15% range by 2026 and to fulfill our commitments by 2027. We also have strategies in place if the market does not perform as expected, including potential expense actions and ongoing investment initiatives. We are approximately $15 billion into our $20 billion commitment in the private credit sector at AB, which has contributed to the growth of that business to $77 billion, generating good investment income. Overall, we are positioned for solid growth in the second half and beyond, while also having contingency plans should our expectations not be met.

And then I was hoping just to get some incremental color just on wireless sales in the quarter as well as just what you're seeing from a competitive and just market standpoint?

Yes, thanks. Obviously, the competitive dynamics have changed since we pioneered the product over a decade ago. With that said, year-to-date, we haven't seen any material change in the relative competitive intensity. We continue to see strong demand and growth driven by the demographics. The baby boomers moving to their next chapter of their lives heightened by this current state of, I would say, macro uncertainty. I alluded to our strong sales already in the quarter, up 9%. We're very mindful of competitive trends on pricing. As we've mentioned, when we see new entrants enter, they tend to have a period of aggressive pricing. We've seen this before, and it tends to be temporary. We focus on value versus pure volume. And as the market leader, we've continued to benefit from the growing pie. I would highlight over the last three years, our sales have more than doubled over that period. So we believe looking forward, we're in a privileged position to capture a disproportionate share of the value given our asset origination capability, our distribution network, and our scale.

And your next question comes from the line of Jimmy Bhullar with JPMorgan.

So first, just a question for Robin on the buybacks. I think the $500 million extra that you've communicated, are you going to be opportunistic in terms of timing of that, depending on how the stock price behaves, or should we assume that that's going to be more flat lined?

Thanks, Jimmy. Yes, we're going to start the $500 million on top of our committed 60% to 70% in the third quarter. We'll run that through based on the trading volume that is. And obviously, that gives us a lot of good dry powder to be opportunistic depending on the share price as well. So you should expect us to be active in the market.

You certainly have the opportunity to do more. However, you need to address debt reduction due to the lower earnings from the reinsurance transaction. What potential acquisitions or other uses of capital do you have in mind aside from debt reduction? Have you set aside resources for potential acquisitions, or will the $500 million likely increase over time if no opportunities arise?

Jimmy, first, we need to navigate through the $500 million, which is in addition to the 60% to 70% payout. There are shares available for us to repurchase, but this process will take time. Therefore, anticipate that we will use the remaining funds by 2026, focusing on a mix of share buybacks and potential opportunities that could enhance our wealth management businesses, as well as Equitable, ED, or Sidecar, which align with our strategy to expand insurance and third-party insurance mandates. We have to complete the initial phase first, which will then provide us with options moving forward. Everything we pursue must be aimed at increasing shareholder value.

Jimmy, it's Mark. If I could just add to that. I think and I hope, as you've seen over the years, we will be incredibly disciplined. The fact that we've got the money does not burn a hole in our pockets. We will be very disciplined in anything we look at. And to Robin's point, we know we have to beat the baseline of the value that would be accretive to shareholders through a share buyback. So that provides a healthy discipline for us.

And your next question comes from the line of Jack Matten with BMO Capital Markets.

Just a follow-up on the individual retirement business. How much longer do you expect that RILA roll-off dynamics to continue? Is it fair to say it's mostly behind us now? Or is there just a little bit more to come over the next few quarters? And then on the earnings baseline for next quarter, just confirming that assumes no market value adjustments and that would, I guess, be less favorable compared to your kind of historical average experience?

I expect the older business to gradually wind down over the next few quarters. Additionally, we do not anticipate any market value adjustments in the $220 million to $225 million range mentioned during the call. However, we still expect to see the same trend. As I noted, about 15% of the book from before 2020 remains, and that will continue to decrease over the next few quarters. Despite this, we have strong underlying growth momentum, as Nick pointed out, which should be reflected in our earnings.

Got it. And then maybe just one on the Bermuda entity. I guess, are the benefits from that entity material enough that there could eventually be a step change higher in the cash conversion or payout ratio that you would expect longer term then any thoughts on the timing for additional transactions, particularly around potential third-party transactions with that entity?

First off, we really like the Bermuda system because it really allows us to manage economically. As you know, we're unique here, and we have an economic approach on how we manage liabilities and how we hedge. The Bermuda framework allows us to fully manage on an economic basis. It means we won't have volatility in any results related to our hedging program, and that gives us consistency of cash flow going forward, which is good for shareholders. So it's really about more consistency in cash flow and managing economically as the framework allows us to again. We just closed the first transaction in June. So there's still a lot more to be done. As I mentioned on the call, we'll look at flow reinsurance on new business. We'll look at other internal measures in '26 and '27. We'll execute again on those. And then it gives us optionality post-2027 and later on if we want to look at third parties as well.

And your next question comes from the line of Michael Ward with UBS. Let's go proceed to the next question. Our next question comes from the line of Cave Montazeri with Deutsche Bank.

I apologize. I think I missed Jack's question. Hopefully, it's not the same question I'm about to ask. But on this $30 billion of annuities reinsured to Bermuda, are you able to give us a bit of an estimate of the capital benefits from that transaction? Maybe not an exact number, but some kind of a range would be helpful.

Sure. As I mentioned, we don't view it as like an excess capital materialization because nothing changed in our economic capital for moving to Bermuda. It's more about having consistency of cash flows going forward. The capital benefits that we're going to get throughout the year is going to be coming from the RGA transaction, which, as we mentioned, unlocks $2 billion of value for us. And post dividends allowed us to run the company at a 500% RBC post all the dividends. So that's what puts us in a good capital position. And now the Bermuda transaction gives us the consistency of the cash flow on an economic framework going forward.

Okay. So there's no actual benefit from that transaction specifically then like internal lower capital requirement in Bermuda for that type of product?

Yes, the benefit is the consistency of cash flow aligning to our economic hedging program.

Okay. And now second question is on technology. Which part of your business I guess, could benefit most from the implementation of GenAI? And do you think it's more about improving efficiencies? Or can it also help you drive growth?

Great. Thanks for the question. Obviously, AI is rapidly evolving and being adopted in the space out there. We built the foundation, given that we're in a regulated space that allows us to seed and scale the benefits. Primarily in the last phase, we've seen it on the operational side, relative to doing mundane tasks, and we continue to explore the potential to use it for value-added services such as how we produce alpha or our advice model. Our conviction is that AI is not going to replace advisors out there, but people that use AI are going to replace people that don't. So we see the potential to continue to explore and accelerate in this space.

And your next question comes from the line of Mark Hughes with Truist Securities.

Not a big impact, but the surrenders in Group Retirement were a little lower than we've been seeing over the last several quarters. Anything in particular you'd call out there?

Sure. Mark, we've seen lower surrenders in the quarter. I think some of it has to do with the equity market decline in April, people are a bit more steady with their money. But we also have actions in place across our businesses to retain more clients as we continue to provide holistic advice for them. But nothing really to call out that's material there.

Yes. Understood. And then on the RILA side of the business, I saw LIMRA for what it's worth, was saying they expect continued expansion of more broker dealers offering these products. When you think about your distribution through those third parties, you've had a lot of success with BlackRock and elsewhere. But just as a kind of a general matter of the adoption of RILAs across the financial services space, anything you've seen different lately?

Yes, I'd comment on that. Look, net-net, I think as the demand has continued to grow given the value proposition of the protected equity story. We are seeing greater adviser awareness and consumer interest for the product, which is increasing the overall pie itself. Having been the pioneer in this market 10 years ago, we were able to secure what I would say, privileged distribution where the product aligns with the investment philosophy of the third-party firms for how they need to serve a consumer's best interest.

And your next question comes from the line of Wilma Burdis with Raymond James.

The stock is down a bit this morning. However, when I examine the core '25 segment results, they are significantly in line with my underlying EPS model estimates. Most of the fluctuations appear to be tied to the deal. Do you agree? Should we expect to see more consistent results once the deal is finalized? I know you've mentioned this before, but is there any additional fluctuation expected in the third quarter?

Yes, no, I expect the results to be stable going forward. Obviously, we essentially decreased by 75%, the most volatile part that we've seen in our results previously. So going forward, we expect strong results, again, coming from better equity markets, lower mortality exposure, and then the incremental share buybacks of $500 million above the 60% to 70% payout ratio.

Could you provide more details on the FABN program? Some competitors have mentioned experiencing drag from high volumes of FABN as they wait to deploy assets at higher spreads. Is this affecting Equitable, or has the company managed to invest the proceeds? If there is an impact, should we consider it when thinking about spread uplift?

Sure. We've been accessing the FABN market as an issuer since 2020. I think it's one, again, the benefits of having an in-house asset manager in AllianceBernstein that has that origination capability that we can continue to issue FABNs and achieve attractive IRRs similar to our retail business above 15%. We've achieved $3.4 billion year-to-date. We have $9 billion outstanding, and the AV team does a great job of putting that money to work to ensure that we get the yields that we price for.

And your next question comes from the line of Michael Ward with UBS.

I have another question regarding RILAs. I'm interested in your perspective on the current sales level. Are you satisfied with the sales growth given the more mature market? Do you anticipate it might be a bit inconsistent? It seems like you’re not overly worried about it. I’m also curious about how you plan to innovate on the product side.

Sure. We believe the market is going to keep expanding due to the structural factors we've discussed, especially since annuities currently represent only 10% of the overall retirement market. This indicates potential for growth. Regarding innovation, we consider it as a way to enhance our core businesses while also exploring new markets. We've been leaders in launching the RILA market, as well as in variable annuities historically. Recently, we partnered with BlackRock and introduced in-plan annuities and our pooled employer program. I think one of Equitable's advantages is our customer-driven innovation, which is supported by Equitable Advisors providing us with real-time insights into the needs of clients and advisers. This helps us to develop new value propositions and offerings.

There is no further question at this time. And that concludes today's call. Thank you all for joining. You may now disconnect.