Equitable Holdings Inc (EQH) 2018 Q1 法說會逐字稿

Good morning. My name is Michelle and I will be your conference operator today. At this time I would like to welcome everyone to the AXA Equitable Holdings, Inc. first-quarter 2018 results. (Operator Instructions).

I would now like to turn the call over to Mr. Kevin Molloy. Please go ahead.

Thank you. Good morning and welcome to AXA Equitable Holdings' first-quarter 2018 earnings call. Materials for today's call can be found on our website at ir.axaequitableholdings.com.

Turning to page 2, I have an important reminder. Our discussion during this call will include forward-looking statements within the meaning of the federal securities laws. AXA Equitable Holdings' actual results may differ materially from the results anticipated in the forward-looking statements as a result of risks and uncertainties, including those described in AXA Equitable Holdings' filings with the US Securities and Exchange Commission.

Information discussed on today's call is current only as of today, June 20, 2018. The Company undertakes no obligation to update any information discussed on today's call.

Joining me on today's call is Mark Pearson, President and Chief Executive Officer of AXA Equitable Holdings; and Anders Malmstrom, our Chief Financial Officer. Also in the room is John Weisenseel, Chief Financial Officer of AllianceBernstein.

During this call we will be discussing certain financial measures that are not based on generally accepted accounting principles, also known as non-GAAP financial measures. Reconciliations of these non-GAAP financial 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 the financial supplement.

I would like now to turn the call over to Mark and Anders for their prepared remarks.

Thank you, Kevin, and good morning, everyone. I'm pleased to be with you today for our first quarterly earnings call since becoming public on May 10. We are aware that there may be a number of investors listening who are just getting to know us. So we thought it would be helpful to provide a quick overview of our business operations before getting into our first-quarter results.

AXA Equitable has been around for 159 years now, providing advice and solutions that help our clients retire with dignity, protect their families, and prepare for their financial futures with confidence. Today we serve more than 5 million clients, have over 12,100 employees and financial advisors, and total assets under management of $665 billion.

Moving to slide 4, AXA Equitable Holdings operates through two well-established and iconic brands. Firstly, 100% ownership of AXA Equitable Life, which serves 2.8 million clients with individual retirement, group retirement, and protection solutions. Secondly, we own 65% of AllianceBernstein investment management and research house, itself listed on the New York Stock Exchange with a market cap of over $8 billion.

Although our subsidiaries are distinct businesses, they have grown up together and complement each other well. AB manages approximately 69% of AXA Equitable's general account and 29% of the separate account. AB also provides deep expertise for our hedging and asset liability matching. And, in return, AXA Equitable provides a source of seed capital for new product development, a key part of AB's recent success.

Both subsidiaries have very strong financial strength ratings. AXA Equitable Life is rated A2 for Moody's and A+ from S&P, both with a stable outlook. AllianceBernstein has also received A2 stable for Moody's and an A stable from S&P.

We are differentiated by the breadth and size of our businesses. Our insurance operations are conducted through three segments. Through our individual retirement business, we are a top three provider in the variable annuity market with $102 billion in account values. In group retirement, we are the number-one provider in the teachers K-12 supplementary retirement market and have $34 billion of assets under management. In protection solutions, we have a long heritage in the life insurance market. And today we play in more select markets, where we are the number-four player in the variable universal life market.

And finally, AllianceBernstein has a global presence in 22 countries with $549 billion of assets under management and best-in-class private wealth management and sell-side research that sets them apart from other asset managers. And we support these leading positions through multichannel distribution platform, including one of the largest affiliated salesforces in the country.

Turning to slide 5. Prior to our listing, there were a number of reorganization transactions necessary to establish us as independent and standalone from AXA. It is important to understand that these milestones were completed in the second quarter of 2018 and are not reflected in the results we are presenting today. In April, we raised $3.8 billion in public long-term debt to repay internal loans to AXA SA; and purchased AXA's remaining interest in AllianceBernstein, bringing our ownership of AB to approximately 65%.

We also merged our primary variable annuity reinsurer into AXA Equitable Life, which positions us well ahead of the upcoming anticipated NAIC variable annuity reform. These activities enabled us to list on the New York Stock Exchange on May 10, 2018, at $20 per share.

Turning now to slide 6 and first-quarter results. During this first quarter, we saw several important developments impacting our industry. First, we estimate the benefit of corporate tax reform to be circa $150 million per annum; and, going forward, we estimate our effective tax rate will be approximately 19%.

Second, our industry continues to work through important regulatory reforms, including the NAIC's new variable annuity capital standards. We support these efforts to better align capital standards with the economics of variable annuity products, as they are closer to how we manage and hedge our products.

The various proposed fiduciary standards have created an uncertain regulatory environment which has impacted industry sales for the past two years. While we have successfully weathered this uncertainty through product innovation, such as our industry-leading indexed linked annuity, we are beginning to see an improved operating environment for our Company financial advisors, and the solutions they offer.

Finally, the markets. After a robust 2017, mounting concerns over inflation, rising interest rates, and geopolitical uncertainty made for volatile markets in the first quarter of 2018. In this environment, I am proud of how our investment teams have managed to maintain strong, longer-term track records. Through the quarter-end at AllianceBernstein, 76% of our US retail mutual fund assets and 89% of our Luxembourg-based fund assets held 4- or 5-star Morningstar ratings.

Against this backdrop on slide 7, we show highlights of our first-quarter results. Total AUM at the end of the first quarter was $665 billion, down 1% since December 31, 2017, and up 9% compared to the first quarter of 2017, reflecting market performance and positive net flows across our businesses. I am pleased to report strong non-GAAP operating earnings, which increased to $464 million from $304 million for the quarter 2017. We are measured against our pro forma equity, which adjusts for our pre-IPO reorganization transactions. Our pro forma operating return on equity for the quarter was 13.6%, in line with our goal to generate mid-teens ROE by 2020.

As previously mentioned, we have fully executed on strategic priorities, including issuance of debt and launch of the IPO. Throughout a volatile quarter, we maintained a strong capital position in excess of CTE98 for variable annuities, and 350% to 400% RBC for our non-variable annuity businesses. Our hedging program worked as expected, with an overall effectiveness ratio of 94%.

At the business level, there was several bright spots during our earnings. Individual retirement operating earnings grew to $360 million from $202 million, driven by higher account values and improved variable annuity hedge margins. Group retirement account values were up 9% due to market appreciation and positive net flows. And new annualized premiums and protection solutions increased 10%, driven by sales from our new employee benefits division.

For AllianceBernstein, our share of operating earnings increased to $81 million from $32 million, reflecting higher performance fees and higher fees on assets under management. As a result, AB's adjusted operating margin, as reported in its 10-Q, was up 600 basis points to 30.1% for the period.

We remain on track to commence our dividend and share repurchase program later this year.

Turning to slide 8. I will shortly pass over to Anders Malmstrom, our CFO, to go into some details on these highlights; but before doing so, just a reminder on the priorities and guidance we have given to the market. We have multiple levers to drive earnings growth. And our priorities are to optimize our capital, improve productivity, and grow the business. We are targeting 5% to 7% compound annual growth in non-GAAP operating earnings through 2020, after the benefits of tax reform.

In terms of the general account optimization, and we anticipate generating a $160 million pre-tax benefit by 2020, by transitioning US treasuries to high-quality corporates. This will better align our GA portfolio with industry peers; and in terms of progress, we are approximately one-third complete. On productivity initiatives, we are expecting to generate a $75 million pre-tax benefit, net of any reinvestment, by 2020.

Earnings CAGR from growth will be reasonable, in the 3% to 4% range, allowing for AB's publicly reported margin improvement to 30% by 2020. Calculating this out, we should see earnings in the $2.2 billion to $2.3 billion range by 2020, giving rise to a non-GAAP operating ROE in the midteens.

Finally, we have committed to returning substantial capital to our shareholders in the range of 40% to 60% of our non-GAAP operating earnings, which will include a quarterly dividend; and, subject to Board approval, we will start paying a dividend of $0.13 per share based on our second-quarter results.

I will now turn the call over to Anders to go through our quarterly results in more detail. Over to you, Anders.

Thank you, Mark. To first give you a sense of our overall results, I will discuss the consolidated results for the first quarter on slide 9. Non-GAAP operating earnings in the first quarter of 2018 increased 53% to $464 million, excluding the benefit of tax reform. Earnings were up 32% relative to the first quarter of 2017. First-quarter 2018 results reflect the benefit of higher assets under management relative to the first quarter of 2017, as well as higher operating earnings from the individual retirement segment which increased due to improved variable annuity hedging margins.

Additionally, during Q1 we recorded two nonrecurring costs through net income: first, a pension settlement for a portion of our employee pension plan liability for $100 million; and, second, $61 million of separation costs. Total AUM grew 9% year-over-year to approximately $665 billion, driven by strong market appreciation and positive net flows, which was an important revenue driver across all of our asset gathering businesses. Due to the stable share count over the period, per-share metrics reflect similar trends.

Pro forma non-GAAP ROE improved to 13.6% in the first quarter of 2018. This compares well with the 12.3% pro forma ROE we highlighted during our IPO process for the full year of 2017, and is in line with our midteens by 2020 objective.

On slide 10 I would like to briefly walk you through our variable annuity hedging program, which is a part of our overall approach to risk management and supports our financial strength. This program seeks to protect the strong capitalization level of the Company while allowing us to generate free distributable cash flows across a wide range of scenarios.

As you can see in the top left of the slide, the program is calibrated to maintain CTE98 under most economic scenarios, and keeps a CTE95 level under all scenarios. The hedging program performed as expected during a volatile first quarter, with hedge effectiveness of 94% relative to the movement in the economic liability. Our hedging program consists of two strategies: the dynamic hedging strategy and the static strategy.

The most significant part of our program, the dynamic strategy, is a true economic hedge where we forgo the upside and downside using futures and swaps. The fine-tuning element of the program, the static hedge, is used to maintain our target CTE levels, which is CTE98 under most economic scenarios, and CTE95 under the most extreme scenarios.

However, this generates net income volatility under GAAP accounting. The market movements of the hedge instruments, which are designed to match the economic liability of the VA riders, do not match the accounting for the GAAP reserves under the SOP reserve framework, which is much less reactive to market movements. This is why we believe that non-GAAP operating earnings is the best way to represent the economics of our VA business.

Turning to our segments, I will begin with individual retirement on slide 11. AXA Equitable Life is the third-largest provider of variable annuities by sales in the $90 billion US VA market and serves over 750,000 clients. Account value increased $5.1 billion year-over-year, largely driven by market appreciation.

The positioning of our VA business continues to shift as we continue to see net outflows from our mature fixed GMxB block, partially offset by $579 million of inflows to newer, less-capital-intensive product during the first quarter. This trend is an important driver for the continued evolution and positioning of our business towards less capital-intensive product and lowering the risk profile of our individual retirement business.

Year-over-year, deposits and first-year premiums were lower following exceptionally strong sales in Q1 2017, prior to the Department of Labor rule implementation. But this mix remains well balanced at 62% of products sold without GMxB features. Overall, operating earnings grew 78%, driven by higher account values and improved variable annuity hedge margins.

Turning to our group retirement segment on slide 12. AXA Equitable Life is the number-one player in the US 403(b) K-12 educators market, with unique positioning serving over 1 million teachers, public sector employees, and small businesses with supplementary retirement products. Account value increased $2.7 billion year-over-year due to market appreciation and continued positive net flows. The segment continued to experience strong net flows in the first quarter, increasing to $101 million from $55 million in the year-ago quarter, driven by an increase in gross premiums and a reduction in surrenders and withdrawals.

Gross premiums were driven by continued strong sales and higher renewals from client retirement awareness initiatives. Our renewal rate was higher than the prior year in all markets due to client engagement and retention. Overall, operating earnings grew approximately 29% due to higher fee income, due to asset growth from positive net flows, and market appreciation.

Now turning to investment management and research, which consists of AllianceBernstein, on page 13. AB's deep commitment to research excellence is reflected in superior investment performance. The depth and global presence of AB's distribution and best-in-class sell-side research sets them apart from other asset managers.

Please note, these first-quarter results do not reflect the impact of the additional AB units we purchased in April, which increased our economic interest to approximately 65%.

First-quarter segment revenues of $909 million increased 22% from the first quarter of 2017, driven by higher performance-based fees, investment advisory base fees, and Bernstein research revenues. Net outflows of $2.4 billion during the quarter were driven by outflows from taxable fixed income and passive equity funds.

Active equity and tax-exempt fixed income funds were net flow positive, translating to positive organic revenue growth as higher fees on these inflows more than offset lower fees on larger outflows. Overall, operating earnings grew 153% in the quarter as double-digit revenue growth outpaced increased expenses.

And finally, we'll turn to protection solutions on slide 14. Through this business, AXA Equitable plays in select parts of the life insurance market where we are the number-four player in the less-capital-intensive variable universal life and indexed universal life accumulation space.

For the quarter, higher annualized premiums in the growing employee benefit business were partially offset by lower annualized premiums for life insurance. Operating earnings declined, primarily driven by higher DAC amortization costs associated with our ongoing loss recognition testing. We expect to remain in LRT for the foreseeable future, which will create some volatility in the results of this segment.

So overall, our first-quarter results were strong. And I believe the underlying trends of our businesses demonstrate good momentum for achieving our strategic objectives.

Now I will turn the call back to Mark for some concluding remarks. Mark?

Thanks, Anders. Before breaking for questions, I'd like to be clear on our goals and performance. On slide 15, we summarize our key financial targets. We've positioned the Company to maintain a strong balance sheet while delivering disciplined financial growth. We are holding ourselves accountable to deliver 5% to 7% compound annual growth in operating earnings through 2020, supported in part by the 30% adjusted operating margin target that AB has publicly reported. And with a target payout ratio of 40% to 60%, this should result in a pro forma non-GAAP operating ROE in the midteens by 2020. We expect to maintain strong capitalization of CTE98 for the variable annuity business, and 350% to 400% RBC for the other insurance businesses.

And finally, on slide 16, just a reminder of the highlights from the first quarter. As a newly public company, I'm very pleased to deliver such strong results, driven by continued solid performance across our two principal operating subsidiaries. We are confident that our leading positions in select markets, premium multichannel distribution platform, and investment expertise, position us well to continue to generate earnings growth, maintain financial stability through market cycles, and generate attractive returns and strong cash flows for shareholders.

With that, I'll hand it over to the operator to open the call to Q&A.

(Operator Instructions). Erik Bass, Autonomous Research.

First question, can you talk about the time frame for potential capital return. And are there any restrictions on when you could begin share repurchase? And do you have a preferred approach between being in the market on a regular basis or waiting and participate in future stock offerings from AXA?

Yes, thank you, Erik. This is Anders speaking. So first of all, as we already talked in the S-1, we're going to intend to start paying dividends from Q2 on, which means the first time will be in August. And as we indicated, it will be most probably around $0.13 per share, per quarter. We also said that we're going to start using buybacks in the second half of the year. We're going to come back in Q2 with a more detailed plan how we're going to do that. But I'd tell you it will be in H2, so later in the year from that. But we come back in the Q2 earnings call and going to give you more details.

Got it, thank you. And just to follow up on that, with the 40% to 60% of operating earnings that you expect to deploy, I think you're talking about doing that for 2018. Obviously you won't have paid a dividend in each of the four quarters. But should we still use that as the rough range to size total capital deployment for 2018?

Yes, absolutely. Absolutely. This is the right range. And think about we're going to do 75% this year because basically we're public for three quarters.

Got it, thank you. And if I could sneak in just one more. Over what time frame do you expect to complete the investment portfolio optimization? And could you provide some more color on just the geography of where the benefits will show up in your results?

Yes. So as we as we already said in the S-1 and I think during the roadshow, this is a three year program. We've completed about one-third of the program, which means on a run rate basis, on an annualized basis, this is a pickup of about $50 million. You're going to see the impact in the net investment income over all segments. I think you can expect the biggest impact obviously on the protection solution segment, but it will impact all three segments.

Now, you will not see -- we cannot call out the impact of the program standalone because obviously there is an underlying [performance yield] coming from the [joint] account, but it's a pickup of about $160 million on a pre-tax basis. And as I said, about a one-third is implemented, which is, on an annualized basis, about $50 million.

Great. Thank you very much.

Ryan Krueger, KBW.

When we think about the difference between net income and operating income, can you help dimension how much of that you would view as true cash items versus more accounting differences that result from the GMIB business?

Yes. This is again Anders speaking. So as I said in my -- in the presentation, I think it's really -- really the right way to look at the business is from an economic point of view, and that's what we try then to use operating earnings as the best proxy. Now, I know GAAP in the end is that what we have to report on, but GAAP doesn't really reflect the economics of the business. So that's why we really think the operating earnings is the best way to look at.

Now, you see in the reconciliation, when we go down from operating earnings to net income, that the impact coming from the VA business is about $212 million. And think about the majority of it as really mark-to-market. I think about $186 million is mark-to-market and about $26 million is coming from the static hedge program. But you can argue this is a cash item, because really for options you pay a premium. So $26 million is a cash item; the rest is mark-to-market for that reconciliation.

But again, as I said, I don't think net income is the right way to look at it. It's really the economic view, and we try to use operating [earning] as the best proxy to reflect that.

Got it, thanks. And then on VA sales, they were down from the quarter. I know you noted a strong year-ago comparison. Seems like we're starting to see some improvement in overall market VA sales. Can you talk a little bit about your outlook going forward and if you'd expect to grow VA sales this year?

Yes, hi, it's Mark. I'll take that question. Yes, you're right. First-quarter 2017 was a particularly strong quarter for us, ahead of the proposed DoL changes, if you remember. Those changes were substantially altered and less disruptive to the industry. And yes, as you say, we are seeing some signs of improvement in sales conditions in the VA business since the first quarter end. And we're very positive that over the long term, there is significant demand for these products. And we're very well placed with our product range and our distribution reach.

Great. Thank you.

Andrew Kligerman, Credit Suisse.

A follow up on that annuity question. As I looked at slide 11 in the net flows, the new products -- it looked like the flow of the new product was $579 million this quarter versus $1.14 billion last quarter. Are you seeing more competition in the structured product area? Can you talk a little bit about that and (technical difficulty)?

Yes, hi, it's Mark. I'll follow up on that one. Yes, there is more competition, particularly in the space where we have our SCS product. A number of competitors have come out with similar products in there, so a little bit more crowdy there.

And the other point behind that reduction in the net flows on the current product line is the maturities on our SCS that we sold five years ago. So some of that business was planned to mature and come off, and we're starting to see that. So I think it's a combination of the two things: the sales being down slightly on a very strong quarter in 2017, and the natural outflows that we expected on the SCS.

I think also on the competition side, I mean it's two things, isn't it? One, it's the product range you have, but also the distribution capability you have. You'll see, I think, our sales over the last few years are less volatile than some others because we have AXA Advisors and we have distribution relationships broader than just warehouses. So I think we are well placed; but yes, I think there is more competition there.

Got it. And then at AllianceBernstein, it was interesting. The net flows in taxable fixed income were negative 9.6. And then on the active equity, you were positive 2.9. And of course that was great because your net fees were better. That said, I was just curious as to what was driving the pressure in taxable fixed income and the strength in active equity.

This is -- Andrew, it's John from AB. I think the pressure on taxable fixed income was just driven by the increase that we saw in rates during the quarter. And then the strength in the equity side, we had actually won two large institutional equity mandates. And one was a value mandate, international value mandate. And those were really what was driving the equity numbers as well.

So do we have a trend going forward?

Well, we had positive active equity flows last year of $800 million. Obviously that's going against what we're seeing in the industry and against our peers, so we're quite pleased with that. Again, not quite sure if that will continue, but time will tell.

One thing that's helped us, I think, is that our performance in the active equity space has improved over the course of the past two years, and I think we're seeing that in our flows. In fact, one of the large institutional mandates that we did win in the first quarter was actually a (technical difficulty) that had left us many years ago, and now has come back to us. So that was a very good sign.

Great. Thanks a lot.

Jay Gelb, Barclays.

Can you give us any perspective on how quickly the AXA parent company may sell down its remaining stake?

Hi, Jay, it's Mark Pearson. I can't give you any more than AXA's already put out, which is its intention to fully exit over the next few years, subject to market conditions. I think -- well, I know, AXA are out publicly with that, and we don't have any more information other than that.

Okay. Next question: it appears, looking at AXA Equitable's current valuation, that the valuation of AllianceBernstein is not really reflected at all in the stock. I wonder if that might drive your thinking at some point as whether to buy in the rest of AllianceBernstein or perhaps spin it off.

Obviously we don't -- we can't comment on valuation. That's for the market to set. But in terms of our ownership of AB, Jay, it's been 65% under the AXA umbrella for some years now. When we've looked at this topic before, we were aware of financial evaluation (technical difficulty) to do, but [buy the minorities out]. But we know that there is very good currency for AB in being listed, both externally in winning mandates and internally with the senior team.

And in terms of -- within our portfolio, we really like the business. It fits -- ticks on lots of boxes for us. It's low capital intensity. It gives us nonregulated cash flows into the holding company. And although the businesses are distinct, they are pretty complementary and support each other very well in terms of the funds under management that AB look after on the life side; and also the seed capital that the life business is able to provide, from time to time, to support the strategy.

So, we're happy with where we are now. We will look at it from time to time, I'm sure; but no plans to do so now.

I appreciate that. And then my final question is -- just trying to get a perspective on AXA Equitable's sensitivity from an earnings-per-share perspective on a given move in equity markets or fixed income yields, if you happen to have that.

Yes, look, I think as we talked before, I think our business is sensitive to equity markets. I think the most of our segments actually have quite a high portion of separate accounts, so I think the sensitivity there is pretty obvious. The same is true for AllianceBernstein. We don't give a number on that. But I think you probably can calculate it by yourself, because fees are directly linked to equities. And then maybe just of the sensitivity to interest rate is, on the insurance side, pretty limited. From an earnings perspective, this is more long-term -- a long-term impact I think on AllianceBernstein is obviously slightly higher because of all the fixed income in the underlying funds. But then, yes, we are sensitive in particular to equity markets.

Okay. If at some point, down the road, perhaps you can give us the details on that, that'd be helpful. Thanks very much.

Mark Hughes, SunTrust.

Just a quick follow-up on that question. Is it just the impact on account balances that drives the earnings effect related to market movements? Or are there other fees or revenue items to consider?

This is again Anders speaking. I think it's really the impact on the underlying asset balances, and then directly impacting the fees coming therefore. As we talked before, our hedging program really tries to immunize all the impact on the rider, which means on the guarantee, so there is the impact should be very limited. So it's really coming from the fees. And then the interest rate obviously going to impact the yield on the general account, but that's much, much slower. Because that's only for the new money you're going to invest and where you are going to see the impact on interest rates. But, yes, it's coming from the underlying asset balance.

And then compensation expense came in a little lower perhaps this quarter than we might have looked for. Is there any sort of seasonality or one-time items that might have impacted that? Or is that the cost efficiency measures?

No. So I think if you look at the expenses, I mean expenses overall are slightly up. But if you take out the impact from AllianceBernstein, it's actually down quarter-over-quarter, which really goes back to the efficiency measures we are taking at the insurance side.

And maybe, John, you want to comment on expenses on AllianceBernstein.

I think AllianceBernstein is just the -- the comp expense was up because of the revenues were so much higher, and you are supplying a comp ratio to it. And just as far as the other expense lines, the G&A expense was flat for the quarter, quarter over quarter. And then the [promotion] servicing was up I think just about $3 million. And that was really due to higher trade execution expenses at the Bernstein research business because of the -- they were trading more market volume, and obviously some of their trading expenses are variable. And that's reflected there, as well.

Thank you.

(Operator Instructions). Suneet Kamath, Citi.

I wanted to start with the AllianceBernstein stake. Our understanding is about 45% of that investment is sitting in a regulated insurance subsidiary, so two questions on that. One, any thoughts in terms of why that is? And then second, can you tell us which businesses that asset is supporting?

This is Anders speaking. Look, I think, Suneet, you are correct. It's about 28% out of the 65% owned by the insurance company. The rest, the 37%, are owned by the holding company. Now, the reason for that is really historical, so that's how it got built up, the whole ownership structure. And the only thing I can tell you about that is we are actively looking at changing that. Because from our perspective, we would like to move the AB shares to the holding company, but it's something that is more complicated than just do it in one single step. So that something we're looking at.

Now, when it comes to your question about where it -- I mean, what kind of business it supports, it does not. It's really part of the surplus. That's the way you have to think about it. And under statutory, which means the earnings coming out of it provide the statutory. Statutory surplus. But it not allocated to business. Our general account is not segregated to businesses. But the AB shares you can think about as a surplus item.

And just perhaps a comment on the -- obviously impact if it were to move. I think we've given the market some guidance on it as well.

As you know, because AllianceBernstein is equity, the RBC treatment is pretty high. So even though it's a significant stake, the RBC impact is actually pretty small. If you were to exclude them, it would move up the AB shares from Equitable into the holding company. It's a low-double-digit number in terms of RBC points.

Okay. So I may follow up on that, but just -- so we should not think about the stake as being included in any of the available resources backing the VA block?

Correct.

Okay. And then my separate question is just on the free cash flow conversion of 40% to 60%. And I get that it's an at-least kind of number. Given your business and mix, especially with the AllianceBernstein piece, I would've thought that maybe that was higher because the -- or should be higher. Because the 40% to 60% is pretty close to what we see from insurance companies that don't have sizable asset management operations. So is there something that we're missing there, or is it just conservatism?

So maybe I start. This is again Anders speaking. Look, I think the 40% to 60% is really the range we gave when we went out. I think it is a range that we can definitely hit. And I will say if everything works well [we're in the operating] of this range. So I think that's what I want to give you. But certainly, yes, I think there is upside there.

Okay. And then just the last just on the capital, just to follow up. Is there any excess capital that you would point to, either in the insurance subsidiaries or elsewhere? Your 40% to 60% is obviously based on the earnings that you generate; just want to make sure maybe there's not a piece of excess capital that we're -- is not contemplated in that 40% to 60%.

Look, the 40% to 60% is really the guidance we give you over the next couple of years. Now, when it comes to capitalization, I think you heard me talking about CTE98, which is really the target capitalization for VAs. And then for non-VAs, we target between 350% and 400% RBC.

Now if you take that together, you end up at an RBC ratio of about 550 points. Now, as you pointed out, in the S-1, at year-end 2017 we were at about 650 RBC points. If we incorporate the VA recapture, which adds another 50 points, you're close to 700 points. Now obviously we're going to pay out the dividend and during this year out of the insurance company, but we also generate earnings.

So with that, I think we are in a good position, above our target capitalization. But keep in mind there is the impact of the tax reform. That has to be reflected, at some point, once it's final.

And then also the NAIC reform is coming. I'm not afraid of it. I think we are in a good position there. But from that perspective, I see maybe some capitalization above our target range. But this is all reflected that we can solidly perform our range we gave you on the 40% to 60%.

Okay, thanks.

Alex Scott, Goldman Sachs.

First question was just on the hedge effectiveness. I get that US GAAP accounting makes it a bit difficult for us to assess hedge performance using US GAAP numbers, and that's part of the reason it's below the line. But could you shed some light on this hedge effectiveness metric you gave us? And am I right to interpret 94% hedge effectiveness this quarter, in a quarter where like equity markets are moving in an okay direction, and interest rates moved up, does that mean that the 6% breakage was actually a positive this quarter?

I would say: think about it as a volatility measure when we talk about hedge effectiveness. Basically what we measure here is on a 12-month trailing -- the 12-month trailing ratio where we measure the movement in liability versus the movement in our hedge assets. And the liability is really the economic liabilities, now we manage our program. So every month you have liabilities up and down; you have hedges up and down; and then you take the difference, and you take this ratio and have a 12-month rolling average.

Now by that, the number is always below 100, even though if it's a gain our it's a loss, it's always below 100, because you can never be above 100. But I wouldn't say it was a gain or a loss this quarter, but it's pretty much -- think of it as a volatility measure, as I said. And I think, overall, we were actually pretty flat for this quarter on an economic basis.

Okay, thanks. And just on the NAIC capital reform, can you provide an update at all just based on -- I think the NAIC recently put out some recommendations of their own, as opposed to I think previously was mostly Oliver Wyman's stuff. So is there any additional clarity that you got from reviewing that? And any update on the direction of it?

As I said before, I think overall I think we are in a good position. Now, as you pointed out, the NAIC came out with their detailed report. We're still going through the [qualifications] so I cannot give you any update then from that perspective. I hope I can give you that at the Q2 call. My understanding is that the NAIC is going to put it final I think in their August meeting, and after that obviously we then have to do the final calculation. But as I said, I think we're in a good position there. The NAIC reform goes in the right direction; it's a much more economic framework which supports the economic hedging we're doing.

So from that perspective we are fine from an assumption (technical difficulty) behavior assumption setting. I think we -- as well, we are thinking of being in a good position. So, overall, we support that initiative. I think it goes in the right direction. It supports economic hedging. But the quantification I have to give you once we have the final regulation has done all the numbers calculation.

Okay. And maybe if I could sneak one last one in. Just in terms of seasonal considerations, is there anything you'd highlight, thinking about going from Q1 to Q2?

No. Look, I think the quarter was a -- from the market perspective, it was a benign quarter from that perspective. Slightly down, obviously. I think the biggest change is really coming from all the restructuring elements we've done in Q2. I think we increased the AB ownership and the AXA Equitable Holdings level from 45% -- 48% to 65%. I think that has the biggest impact; and, also, the debt issuance that took place in Q2. So you're going to see all of that reflected in Q2. I think Mark talked about the sales. So I think overall nothing's really -- really the majority will be coming from the restructuring.

Okay. Thanks very much.

(Operator Instructions). I have no questions in queue at this time. I turn the call back over to Kevin Molloy for closing remarks.

Okay. Thank you, Michelle. Thanks, everyone, for joining us this morning. As always, if you have any follow-up questions, please do not hesitate to call or email. You can reach us at 212-314-2476 or through email at ir@AXA-Equitable.com. Thank you and have a great day.

Thank you, everyone. This will conclude today's conference call. You may now disconnect.