EQUITABLE HOLDINGS, INC.
The following discussion and analysis of our financial condition and results of
operations should be read in its entirety and in conjunction with the
consolidated financial statements and related notes contained in Part I, Item
1 of this Quarterly Report on Form 10-Q, as well as "Management's Discussion
and Analysis of Financial Condition and Results of Operations" section contained
in our Annual Report on Form 10-K for the year ended December 31,
2020 ("2020 Form 10-K").
In addition to historical data, this discussion contains forward-looking
statements about our business, operations and financial performance based on
current expectations that involve risks, uncertainties and assumptions. Actual
results may differ materially from those discussed in the forward-looking
statements as a result of various factors. See the Note Regarding
Forward-Looking Statements and Information. Investors are directed to consider
the risks and uncertainties discussed in Part II, Item 1A of this Quarterly
Report on Form 10-Q, as well as in other documents we have filed with the SEC .
Executive Summary
Overview
We are one of America's leading financial services companies, providing:
(i) advice and solutions for helping Americans set and meet their retirement
goals and protect and transfer their wealth across generations; and (ii) a wide
range of investment management insights, expertise and innovations to drive
better investment decisions and outcomes for clients worldwide.
We manage our business through four segments: Individual Retirement, Group
Retirement, Investment Management and Research, and Protection Solutions. We
report certain activities and items that are not included in these segments in
Corporate and Other. See Note 13 of the Notes to the Consolidated Financial
Statements for further information on our segments.
We benefit from our complementary mix of businesses. This business mix provides
diversity in our earnings sources, which helps offset fluctuations in market
conditions and variability in business results, while offering growth
opportunities.
Reinsurance of Legacy Variable Annuity Block and Sale of Runoff Variable Annuity
Reinsurance Entity
On October 27, 2020 , Holdings entered into an MTA with VIAC pursuant to which,
among other things, VIAC will acquire all of the shares of the capital stock of
CS Life. Prior to the closing, CS Life will affect the recapture of all of the
business that is currently ceded to CS Life RE and sell 100% of the common stock
of CS Life RE to an affiliate.
Immediately following the sale of CS Life, CS Life and Equitable Financial will
enter into a coinsurance and modified coinsurance agreement (the "Reinsurance
Agreement"), pursuant to which Equitable Financial will cede to CS Life, on a
combined coinsurance and modified coinsurance basis, legacy variable annuity
policies sold by Equitable Financial in 2006-2008 (the "Block"). The Block is
comprised of non-New York "Accumulator" policies containing fixed rate GMIB
and/or GMDB guarantees. CS Life will deposit assets supporting the General
Account liabilities relating to the Block into a trust account for the benefit
of Equitable Financial to secure its obligations to Equitable Financial under
the Reinsurance Agreement. Equitable Financial will reinsure the separate
accounts relating to the Block on a modified coinsurance basis. At closing, VIAC
will contribute additional assets to the trust such that trust assets will
exceed the liabilities they secure. Venerable Holdings Inc. ("VHI") will provide
a parental guarantee of CS Life's obligation to Equitable Financial under the
Reinsurance Agreement. In addition, the investment of assets in the trust
account will be subject to investment guidelines and the requirements of the
trust will be strengthened upon certain triggers related to capital adequacy.
The Reinsurance Agreement also contains additional counterparty risk management
and mitigation provisions.
As part of the transaction, the Company is in discussions to acquire a 9.1%
equity interest in Venerable's parent holding company, VA Capital Company LLC ,
which may include a board seat, subject to reaching an agreement on the terms of
the investment.
Based on estimates as of June 30, 2020 , the Company expects to realize
approximately $1.2 billion in value from the transaction, which includes an
anticipated capital release of approximately $800 million , a positive ceding
commission in respect of the Block reinsurance transaction and consideration
payable by VIAC for the acquisition of CS Life totaling approximately $300
million , subject to adjustment, and approximately $100 million in tax benefits.
Equitable Financial will also acquire a surplus note in aggregate principal
amount of $50 million issued by VIAC.
Under the terms of the MTA, at closing of the transactions, ABLP will enter into
an investment advisory agreement with CS Life pursuant to which ABLP will serve
as the preferred investment manager for the majority of the general account
assets
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transferred to the trust account for, subject to certain provisions, a minimum
of five years. Equitable Financial will continue to administer the Block.
The transaction is expected to close in the second quarter of 2021. The
consummation of the closing under the MTA is subject to the satisfaction or
waiver of customary closing conditions specified in the MTA, including, among
other things, (i) the receipt of required regulatory approvals, without imposing
a burdensome condition, (ii) the expiration or termination of the applicable
waiting period (or extension thereof) under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended, and (iii) absence of a material adverse
effect on VHI (in the case of the Company) or CS Life (in the case of VHI and
VIAC), in each case subject to certain exceptions and qualifications.
COVID-19 Impact
We continue to closely monitor developments related to the COVID-19 pandemic.
The extent of the COVID-19 pandemic's impact on us will depend on future
developments that are highly uncertain, including the severity and duration of
the pandemic, actions taken by governments and other third parties in response
to the pandemic and the availability and efficacy of vaccines against COVID-19
including against variant strains of the virus. It is not possible to predict or
estimate the longer-term effects of the pandemic, or any additional actions
taken to contain or address the pandemic, on the economy and on our business,
results of operations, and financial condition, including the impact on our
investment portfolio or the need for us to revisit or revise targets previously
provided to the markets and/or aspects of our business model. For additional
information regarding the potential impacts of the COVID-19 pandemic and action
we have taken to mitigate certain impacts, see "Risk Factors-Risks Relating to
Conditions in the Financial Markets and Economy-The coronavirus (COVID-19)
pandemic", "Management's Discussion and Analysis of Financial Condition and
Results of Operations-Executive Summary-COVID-19 Impact" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations-General
Account Investment Portfolio" in the 2020 Form 10-K.
Revenues
Our revenues come from three principal sources:
• fee income derived from our retirement and protection products and our
investment management and research services;
• premiums from our traditional life insurance and annuity products; and
• investment income from our General Account investment portfolio.
Our fee income varies directly in relation to the amount of the underlying AV or
benefit base of our retirement and protection products and the amount of AUM of
our Investment Management and Research business. AV and AUM, each as defined in
"Key Operating Measures," are influenced by changes in economic conditions,
primarily equity market returns, as well as net flows. Our premium income is
driven by the growth in new policies written and the persistency of our in-force
policies, both of which are influenced by a combination of factors, including
our efforts to attract and retain customers and market conditions that influence
demand for our products. Our investment income is driven by the yield on our
General Account investment portfolio and is impacted by the prevailing level of
interest rates as we reinvest cash associated with maturing investments and net
flows to the portfolio.
Benefits and Other Deductions
Our primary expenses are:
• policyholders' benefits and interest credited to policyholders' account
balances;
• sales commissions and compensation paid to intermediaries and advisors that
distribute our products and services; and
• compensation and benefits provided to our employees and other operating
expenses.
Policyholders' benefits are driven primarily by mortality, customer withdrawals,
and benefits which change in response to changes in capital market conditions.
In addition, some of our policyholders' benefits are directly tied to the AV and
benefit base of our variable annuity products. Interest credited to
policyholders varies in relation to the amount of the underlying AV or benefit
base. Sales commissions and compensation paid to intermediaries and advisors
vary in relation to premium and fee income generated from these sources, whereas
compensation and benefits to our employees are more constant and impacted by
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market wages and decline with increases in efficiency. Our ability to manage
these expenses across various economic cycles and products is critical to the
profitability of our company.
Net Income Volatility
We have offered and continue to offer variable annuity products with GMxB
features. The future claims exposure on these features is sensitive to movements
in the equity markets and interest rates. Accordingly, we have implemented
hedging and reinsurance programs designed to mitigate the economic exposure to
us from these features due to equity market and interest rate movements. Changes
in the values of the derivatives associated with these programs due to equity
market and interest rate movements are recognized in the periods in which they
occur while corresponding changes in offsetting liabilities not measured at fair
value are recognized over time. This results in net income volatility as further
described below. See "-Significant Factors Impacting Our Results-Impact of
Hedging and GMIB Reinsurance on Results."
In addition to our dynamic hedging strategy, we have static hedge positions
designed to mitigate the adverse impact of changing market conditions on our
statutory capital. We believe this program will continue to preserve the
economic value of our variable annuity contracts and better protect our target
variable annuity asset level. However, these static hedge positions increase the
size of our derivative positions and may result in higher net income volatility
on a period-over-period basis.
Due to the impacts on our net income of equity market and interest rate
movements and other items that are not part of the underlying profitability
drivers of our business, we evaluate and manage our business performance using
Non-GAAP operating earnings, a non-GAAP financial measure that is intended to
remove these impacts from our results. See "-Key Operating Measures-Non-GAAP
Operating Earnings.
Significant Factors Impacting Our Results
The following significant factors have impacted, and may in the future impact,
our financial condition, results of operations or cash flows.
Impact of Hedging and GMIB Reinsurance on Results
We have offered and continue to offer variable annuity products with GMxB
features. The future claims exposure on these features is sensitive to movements
in the equity markets and interest rates. Accordingly, we have implemented
hedging and reinsurance programs designed to mitigate the economic exposure to
us from these features due to equity market and interest rate movements. These
programs include:
•Variable annuity hedging programs. We use a dynamic hedging program (within
this program, generally, we reevaluate our economic exposure at least daily and
rebalance our hedge positions accordingly) to mitigate certain risks associated
with the GMxB features that are embedded in our liabilities for our variable
annuity products. This program utilizes various derivative instruments that are
managed in an effort to reduce the economic impact of unfavorable changes in
GMxB features' exposures attributable to movements in the equity markets and
interest rates. Although this program is designed to provide a measure of
economic protection against the impact of adverse market conditions, it does not
qualify for hedge accounting treatment. Accordingly, changes in value of the
derivatives will be recognized in the period in which they occur with offsetting
changes in reserves partially recognized in the current period, resulting in net
income volatility. In addition to our dynamic hedging program, we have a hedging
program using static hedge positions (derivative positions intended to be HTM
with less frequent re-balancing) to protect our statutory capital against stress
scenarios. This program in addition to our dynamic hedge program has increased
the size of our derivative positions, resulting in an increase in net income
volatility. The impacts are most pronounced for variable annuity products in our
Individual Retirement segment.
•GMIB reinsurance contracts. Historically, GMIB reinsurance contracts were used
to cede to non-affiliated reinsurers a portion of our exposure to variable
annuity products that offer a GMIB feature. We account for the GMIB reinsurance
contracts as derivatives and report them at fair value. Gross GMIB reserves are
calculated on the basis of assumptions related to projected benefits and related
contract charges over the lives of the contracts. Accordingly, our gross
reserves will not immediately reflect the offsetting impact on future claims
exposure resulting from the same capital market or interest rate fluctuations
that cause gains or losses on the fair value of the GMIB reinsurance contracts.
Because changes in the fair value of the GMIB reinsurance contracts are recorded
in the period in which they occur and a majority of the changes in gross
reserves for GMIB are recognized over time, net income will be more volatile.
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Effect of Assumption Updates on Operating Results
During the third quarter of each year, we conduct our annual review of the
assumptions underlying the valuation of DAC, deferred sales inducement assets,
unearned revenue liabilities, liabilities for future policyholder benefits and
embedded derivatives for our Individual Retirement, Group Retirement, and
Protection Solution segments (assumption reviews are not relevant for the
Investment Management and Research segment). Assumptions are based on a
combination of Company experience, industry experience, management actions and
expert judgment and reflect our best estimate as of the date of the applicable
financial statements.
Most of the variable annuity products, variable universal life insurance and
universal life insurance products we offer maintain policyholder deposits that
are reported as liabilities and classified within either Separate Accounts
liabilities or policyholder account balances. Our products and riders also
impact liabilities for future policyholder benefits and unearned revenues and
assets for DAC and DSI. The valuation of these assets and liabilities (other
than deposits) are based on differing accounting methods depending on the
product, each of which requires numerous assumptions and considerable
judgment. The accounting guidance applied in the valuation of these assets and
liabilities includes, but is not limited to, the following: (i) traditional life
insurance products for which assumptions are locked in at inception;
(ii) universal life insurance and variable life insurance secondary guarantees
for which benefit liabilities are determined by estimating the expected value of
death benefits payable when the account balance is projected to be zero and
recognizing those benefits ratably over the accumulation period based on total
expected assessments; (iii) certain product guarantees for which benefit
liabilities are accrued over the life of the contract in proportion to actual
and future expected policy assessments; and (iv) certain product guarantees
reported as embedded derivatives at fair value.
For further details of our accounting policies and related judgments pertaining
to assumption updates, see Note 2 to the Notes to the Company's consolidated
financial statements and "-Summary of Critical Accounting Estimates-Liability
for Future Policy Benefits" included in the 2020 Form 10-K.
Assumption Updates and Model Changes
We conduct our annual review of our assumptions and models during the third
quarter of each year. We also update our assumptions as needed in the event we
become aware of economic conditions or events that could require a change in our
assumptions that we believe may have a significant impact to the carrying value
of product liabilities and assets and consequently materially impact our
earnings in the period of the change.
Impact of Assumption Updates and Model Changes on Income from Continuing
Operations before income taxes and Net income (loss)
The table below presents the impact of our actuarial assumption update during
the three months ended March 31,2020 to our Income (loss) from continuing
operations, before income taxes and Net income (loss). There was no assumption
update for the three months ended March 31, 2021 .
Three
Months
Ended
March
31, 2020
(1)
(in millions)
Impact of assumption update on Net income (loss):
Variable annuity product features related assumption update $ (1,468)
Assumption updates for other business (1,049)
Impact of assumption updates on Income (loss) from continuing operations, before income tax
(2,517)
Income tax benefit on assumption update 529
Net income (loss) impact of assumption update $ (1,988)
(1) During the first quarter of 2020, we updated interest rate assumption and
the impact was a decrease to Net income (loss) of $2.0 billion . See Note 2 of
the Notes to the Consolidated Financial Statements in this Form 10-Q.
2020 Assumption Updates
Due to the extraordinary economic conditions driven by the COVID-19 pandemic in
the first quarter of 2020, we updated our interest rate assumption to grade from
the current spot interest rate to an ultimate five-year historical average over
a 10-year period. As such, the 10-year U.S. Treasury yield grades from the
current level to an ultimate 5-year average of 2.25%.
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The low interest rate environment and update to the interest rate assumption
caused a loss recognition event for our life interest-sensitive products, as
well as to certain run-off business included in Corporate and Other. This loss
recognition event caused an acceleration of DAC amortization on our life
interest-sensitive products and an increase in the premium deficiency reserve on
the run-off business in the first quarter of 2020.
The impact of the economic assumption update in the first quarter of 2020 was a
decrease of $2.5 billion to income (loss) from continuing operations, before
income taxes and a decrease to net income (loss) of $2.0 billion .
The net impact of this assumption update on income (loss) from continuing
operations, before income taxes of $2.5 billion consisted of an increase in
policy charges and fee income of $46 million , an increase in policyholders'
benefits of $1.4 billion , a decrease in interest credited to policyholders'
account balances of $6 million and an increase in the amortization of DAC of
$1.1 billion .
Model Changes
In the first quarter of 2020, we adopted a new economic scenario generator to
calculate the fair value of the GMIB reinsurance contract asset and GMxB
derivative features liability, eliminating reliance on AXA Group for scenario
production. The new economic scenario generator allows for a tighter calibration
of U.S. indices, better reflecting our actual portfolio.
Impact of the First Quarter 2020 Assumption Update, and COVID-19 Impacts on
Pre-tax Non-GAAP Operating Earnings Adjustments
The unprecedented and rapid spread of COVID-19 and the related restrictions and
social distancing measures implemented throughout the world have caused severe,
lasting turmoil in the financial markets during the first three months of 2020.
The Company's accounting policy governing its Non-GAAP Operating Earnings
measure permits adjustments to Non-GAAP Operating Earnings if certain criteria
are met, which include if the proposed adjustment relates to a non-recurring
event or transaction. Management concluded that all impacts on the Company from
the COVID-19 pandemic and its effects on the economy meet the indicators of a
non-recurring event. Therefore, management has determined that the items set
forth in the table below should be included as adjustments to the Non-GAAP
Operating Earnings measure so that investors can more clearly see the
delineation between the operating results of the Company's core operations and
the impact of the items specific to the current COVID-19 pandemic crisis.
The table below presents the COVID-19 pandemic related impacts on Income (loss)
from continuing operations, before income taxes which all occurred during the
first three months of 2020 by segment and Corporate and Other, and the COVID-19
pandemic related adjustments included in the reconciliation of Net Income (loss)
attributable to Holdings to Non-GAAP Operating Earnings:
Three Months Ended March 31, 2020
COVID-19 Impacts
Impacts other
than Interest
Rate
Interest Rate Assumption
Assumption Update Update (1) Total
(in millions)
Net income (loss) from continuing operations, before
income taxes by Segment and Corporate and Other:
Individual Retirement $ (1,417) $ (44) $ (1,461)
Group Retirement (51) 3 (48)
Protection Solutions (1,016) (32) (1,048)
Corporate and Other (33) (13) (46)
Net income (loss) from continuing operations, before
income taxes $ (2,517) $ (86) $ (2,603)
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Three Months Ended
COVID-19 Impacts
Impacts other
than Interest
Rate
Interest Rate Assumption
Assumption Update Update (1) Total
COVID-19-related adjustments included in Reconciliation of Net income (loss) attributable to Holdings to Non-GAAP Operating Earnings: Variable annuities product features
$ (1,468) $ (35) $ (1,503)
Other adjustments (1,049) (51) (1,100)
Net income (loss) from continuing operations, before income
taxes $ (2,517) $ (86) $ (2,603)
_______________
(1) Includes adjustments to Non-GAAP Operating Earnings primarily due to
non-variable annuity hedging impacts resulting from unprecedented volatility in
equity markets
Adjustments related to the Individual Retirement and Group Retirement segments
are primarily included in the "Variable annuities product features" in the
reconciliation of Net income (loss) attributable to Holdings to Non-GAAP
Operating Earnings. All other adjustments are included in "Other". This impact
has been more than offset by hedging gains.
Macroeconomic and Industry Trends
Our business and consolidated results of operations are significantly affected
by economic conditions and consumer confidence, conditions in the global capital
markets and the interest rate environment.
Financial and Economic Environment
A wide variety of factors continue to impact global financial and economic
conditions. These factors include, among others, significant volatility in
financial markets and continued high unemployment levels as a result of the
COVID-19 pandemic, concerns over economic growth in the United States and
continued low interest rates.
Stressed conditions, volatility and disruptions in the capital markets,
particular markets, or financial asset classes can have an adverse effect on us,
in part because we have a large investment portfolio and our insurance
liabilities and derivatives are sensitive to changing market factors. An
increase in market volatility could continue to affect our business, including
through effects on the yields we earn on invested assets, changes in required
reserves and capital and fluctuations in the value of our AUM, AV or AUA from
which we derive our fee income. These effects could be exacerbated by
uncertainty about future fiscal policy, changes in tax policy, the scope of
potential deregulation and levels of global trade.
The potential for increased volatility, coupled with prevailing interest rates
falling and/or remaining below historical averages, could pressure sales and
reduce demand for our products as consumers consider purchasing alternative
products to meet their objectives. In addition, this environment could make it
difficult to consistently develop products that are attractive to customers.
Financial performance can be adversely affected by market volatility and equity
market declines as fees driven by AV and AUM fluctuate, hedging costs increase
and revenues decline due to reduced sales and increased outflows.
We monitor the behavior of our customers and other factors, including mortality
rates, morbidity rates, annuitization rates and lapse and surrender rates, which
change in response to changes in capital market conditions, to ensure that our
products and solutions remain attractive and profitable. For additional
information on our sensitivity to interest rates and capital market prices, see
"Quantitative and Qualitative Disclosures About Market Risk."
Interest Rate Environment
We believe the interest rate environment will continue to impact our business
and financial performance in the future for several reasons, including the
following:
•Certain of our variable annuity and life insurance products pay guaranteed
minimum interest crediting rates. We are required to pay these guaranteed
minimum rates even if earnings on our investment portfolio decline, with the
resulting investment margin compression negatively impacting earnings. In
addition, we expect more policyholders to
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hold policies with comparatively high guaranteed rates longer (lower lapse
rates) in a low interest rate environment. Conversely, a rise in average yield
on our investment portfolio should positively impact earnings. Similarly, we
expect policyholders would be less likely to hold policies with existing
guaranteed rates (higher lapse rates) as interest rates rise.
•A prolonged low interest rate environment also may subject us to increased
hedging costs or an increase in the amount of statutory reserves that our
insurance subsidiaries are required to hold for GMxB features, lowering their
statutory surplus, which would adversely affect their ability to pay dividends
to us. In addition, it may also increase the perceived value of GMxB features to
our policyholders, which in turn may lead to a higher rate of annuitization and
higher persistency of those products over time. Finally, low interest rates may
continue to cause an acceleration of DAC amortization or reserve increase due to
loss recognition for interest sensitive products, primarily for our Protection
Solutions segment.
For a discussion on derivatives we used to hedge interest rates, see Note 4 of
the Notes to the Consolidated Financial Statements in this Form 10-Q.
Regulatory Developments
Our life insurance subsidiaries are regulated primarily at the state level, with
some policies and products also subject to federal regulation. In addition,
Holdings and its insurance subsidiaries are subject to regulation under the
insurance holding company laws of various U.S. jurisdictions. Furthermore, on an
ongoing basis, regulators refine capital requirements and introduce new
reserving standards. Regulations recently adopted or currently under review can
potentially impact our statutory reserve, capital requirements and profitability
of the industry and result in increased regulation and oversight for the
industry. The following discussion on regulatory developments should be read in
conjunction with "Business-Regulation" and "Risk Factors-Legal and Regulatory
Risks" in the 2020 Form 10-K, as amended or supplemented in our subsequently
filed Quarterly Reports on Form 10-Q in "Management's Discussion and Analysis of
Financial Condition and Results of Operations-Macroeconomic and Industry
Trends-Regulatory Developments."
Regulation 213. In New York , Regulation 213, adopted in May of 2019 and as
amended on February 26, 2020 and March 31, 2021 , differs from the NAIC variable
annuity reserve and capital framework. The February 2020 and March 2021
amendments will not materially affect Holdings' GAAP financial condition,
results of operations or stockholders' equity. However, Regulation 213, as
amended, absent management action, will require Holdings' principal insurance
subsidiary, Equitable Financial, to carry statutory basis reserves for its
variable annuity contract obligations equal to the greater of those required
under (i) the NAIC standard or (ii) a revised version of the NYDFS requirement
in effect prior to the adoption of the first amendment for contracts issued
prior to January 1, 2020 , and for policies issued after that date a new standard
that we believe is more conservative than the NAIC standard. Absent management
action, we believe that Regulation 213 could (i) negatively impact Equitable
Financial's surplus level and RBC ratio and (ii) materially and adversely affect
Equitable Financial's dividend capacity from 2021 and moving forward. These
impacts would be more adverse in periods of rising equity and/or interest rate
markets, particularly following the equity market appreciation in the second
half of 2020 and the first quarter of 2021, and will be exacerbated upon closing
of the Venerable Transaction. As a holding company, Holdings relies on dividends
and other payments from its subsidiaries and, accordingly, any material
limitation on Equitable Financial's dividend capacity could materially affect
Holdings' ability to return capital to stockholders through dividends and stock
repurchases. The Company is considering management actions to mitigate the
impact of Regulation 213. These actions could include seeking further amendment
of Regulation 213 or exemptive relief therefrom to make the regulation's
application to Equitable Financial more consistent with the NAIC reserve and
capital framework, as well as changing the Company's underwriting practices to
emphasize issuing variable annuity products out of affiliates which are not
domiciled in New York , increasing the use of reinsurance and other corporate
transactions intended to reduce the impact of the regulation. There can be no
assurance that any management action individually or collectively will fully
mitigate the impact of Regulation 213. Other state insurance regulators may also
propose and adopt standards that differ from the NAIC framework.
Fiduciary Rules / "Best Interest" Standards of Conduct
In the wake of the March 2018 federal appeals court decision to vacate the 2016
DOL Fiduciary Rule, the DOL announced its intention to issue revised fiduciary
investment advice regulations. In December 2020 , the DOL finalized a "best
interest" prohibited transaction exemption ("PTE 2020-02") for investment advice
fiduciaries under ERISA, with an enforcement date of December 20, 2021 . The new
rule restores the five-part test for determining fiduciary status that was in
effect prior to the 2016 DOL Fiduciary Rule, although the scope of the PTE now
extends to rollover transactions if they constitute "investment advice" under
the five-part test. If fiduciary status is triggered, PTE 2020-02 prescribes a
set of impartial conduct standards and disclosure obligations that are intended
to be consistent with the SEC's Regulation Best Interest. We are currently
devoting
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significant time and resources towards coming into compliance with PTE 2020-02
but do not expect the new rules to have a material impact on our business.
However, in April 2021 , the DOL published a set of Frequently Asked Questions
document in which they indicated they are likely to further amend their
fiduciary regulations, including PTE 2020-02, and we are closely monitoring for
any such developments.
On April 29, 2021 , the Appellate Division of the NYS Supreme Court , Third
Department , overturned NY Department of Financial Services Regulation 187 -
Suitability and Best Interests in Life Insurance and Annuity Transactions
("Regulation 187") for being unconstitutionally vague. The NYDFS has thirty days
to file their appeal. It is anticipated that the state will file for and the
court will automatically grant a stay, which means that Regulation 187 will stay
in effect until the high court determines a final resolution.
Climate Risks. In September 2020 , the NYDFS announced that it expects insurers
to integrate financial risks from climate change into their governance
frameworks, risk management processes, and business strategies, and that it will
integrate questions on this topic into their examinations in 2021. On March 25,
2021 , the NYDFS issued for public comment proposed guidance for New York
domestic insurers, such as Equitable Financial, which states that insurers are
expected to take a proportionate approach to managing climate risks that
reflects its exposure to climate risks. For example, an insurer should integrate
the evaluation of climate risks into its governance structure and use scenario
analysis to guide risk assessment. We are reviewing the NYDFS' proposed
guidance.
NYDFS Guidance on Diversity and Corporate Governance. On March 16, 2021 , the
NYDFS issued a circular letter which states that the NYDFS expects the insurers
that it regulates to make diversity of their leadership a business priority and
a key element of their corporate governance. The NYDFS intends to collect data
regarding the diversity of corporate boards and management, and it will include
diversity-related questions in its examination process starting in 2022. We are
considering the NYDFS' guidance as part of our commitment to diversity and
inclusion.
Separation Costs
In connection with our separation from AXA, we have incurred and expect to
continue to incur one-time and recurring expenses. These expenses primarily
relate to information technology, compliance, internal audit, finance, risk
management, procurement, client service, human resources, rebranding and other
support services. The process of replicating and replacing functions, systems
and infrastructure provided by AXA or certain of its affiliates in order to
operate on a stand-alone basis is currently underway. These expenses, any
recurring expenses, including under the Transitional Services Agreement, and any
additional one-time expenses we may incur may be material. See "Risk Factors" in
the 2020 Form 10-K for additional information.
We estimate that the aggregate amount of the one-time expenses described above
will be approximately $700 million . Through March 31, 2021 , a total of
$661 million has been incurred, of which $21 million and $32 million was
incurred in the three months ended March 31, 2021 and 2020, respectively.
Productivity Strategies
Retirement and Protection Businesses
We continue to build upon our productivity improvements. Our productivity
strategy includes several initiatives, including relocating some of our real
estate footprint away from the New York metropolitan area, replacing or updating
less efficient legacy technology infrastructure and expanding existing
outsourcing arrangements, which we believe will reduce costs and improve
productivity. We anticipate that the savings from these initiatives will offset
any incremental ongoing expenses that we incur as a standalone company, and we
expect these initiatives to improve our operating leverage. During 2020 we
achieved our run rate productivity expense target of $75 million pre-tax per
annum net of reinvestment in the business announced at the time of our IPO.
Investment Management and Research Business
AB has announced that it will establish its corporate headquarters in and
relocate approximately 1,250 jobs located in the New York metro area to
Nashville, Tennessee . Beginning in 2025, AB estimates ongoing annual expense
savings at the higher end of the range of $75 million to $80 million which will
result from a combination of occupancy and compensation-related savings.
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Key Operating Measures
In addition to our results presented in accordance with U.S. GAAP, we report
Non-GAAP operating earnings, Non-GAAP Operating ROE, Non-GAAP Operating ROC by
segment for our Individual Retirement, Group Retirement and Protection Solutions
segments, and Non-GAAP operating common EPS, each of which is a measure that is
not determined in accordance with U.S. GAAP. Management principally uses these
non-GAAP financial measures in evaluating performance because they present a
clearer picture of our operating performance and they allow management to
allocate resources. Similarly, management believes that the use of these
Non-GAAP financial measures, together with relevant U.S. GAAP measures, provide
investors with a better understanding of our results of operations and the
underlying profitability drivers and trends of our business. These non-GAAP
financial measures are intended to remove from our results of operations the
impact of market changes (where there is mismatch in the valuation of assets and
liabilities) as well as certain other expenses which are not part of our
underlying profitability drivers or likely to re-occur in the foreseeable
future, as such items fluctuate from period-to-period in a manner inconsistent
with these drivers. These measures should be considered supplementary to our
results that are presented in accordance with U.S. GAAP and should not be viewed
as a substitute for the U.S. GAAP measures. Other companies may use similarly
titled non-GAAP financial measures that are calculated differently from the way
we calculate such measures. Consequently, our non-GAAP financial measures may
not be comparable to similar measures used by other companies.
We also discuss certain operating measures, including AUM, AUA, AV, Protection
Solutions Reserves and certain other operating measures, which management
believes provide useful information about our businesses and the operational
factors underlying our financial performance.
Non-GAAP Operating Earnings
Non-GAAP operating earnings is an after-tax non-GAAP financial measure used to
evaluate our financial performance on a consolidated basis that is determined by
making certain adjustments to our consolidated after-tax net income attributable
to Holdings. The most significant of such adjustments relates to our derivative
positions, which protect economic value and statutory capital, and are more
sensitive to changes in market conditions than the variable annuity product
liabilities as valued under U.S. GAAP. This is a large source of volatility in
net income.
Non-GAAP operating earnings equals our consolidated after-tax net income
attributable to Holdings adjusted to eliminate the impact of the following
items:
•Items related to variable annuity product features, which include: (i) certain
changes in the fair value of the derivatives and other securities we use to
hedge these features; (ii) the effect of benefit ratio unlock adjustments
related to extraordinary economic conditions or events such as COVID-19; and
(iii) changes in the fair value of the embedded derivatives reflected within
variable annuity products' net derivative results and the impact of these items
on DAC amortization on our SCS product;
•Investment (gains) losses, which includes credit loss impairments of
securities/investments, sales or disposals of securities/investments, realized
capital gains/losses and valuation allowances;
•Net actuarial (gains) losses, which includes actuarial gains and losses as a
result of differences between actual and expected experience on pension plan
assets or projected benefit obligation during a given period related to pension,
other postretirement benefit obligations, and the one-time impact of the
settlement of the defined benefit obligation;
•Other adjustments, which primarily include restructuring costs related to
severance and separation, COVID-19 related impacts, net derivative gains
(losses) on certain Non-GMxB derivatives, net investment income from certain
items including consolidated VIE investments, seed capital mark-to-market
adjustments, unrealized gain/losses associated with equity securities and
certain legal accruals; and
•Income tax expense (benefit) related to the above items and non-recurring tax
items, which includes the effect of uncertain tax positions for a given audit
period.
Because Non-GAAP operating earnings excludes the foregoing items that can be
distortive or unpredictable, management believes that this measure enhances the
understanding of the Company's underlying drivers of profitability and trends in
our business, thereby allowing management to make decisions that will positively
impact our business.
We use the prevailing corporate federal income tax rate of 21% while taking into
account any non-recurring differences for events recognized differently in our
financial statements and federal income tax returns as well as partnership
income taxed at lower rates when reconciling Net income (loss) attributable to
Holdings to Non-GAAP operating earnings.
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The table below presents a reconciliation of net income (loss) attributable to
Holdings to Non-GAAP operating earnings for the three months ended March 31,
2021 and 2020:
Three Months Ended
March 31,
2021 2020
(in millions)
Net income (loss) attributable to Holdings $ (1,488) $ 5,388
Adjustments related to:
Variable annuity product features (1) 2,267 (6,869)
Investment (gains) losses (183) (4)
Net actuarial (gains) losses related to pension and other postretirement benefit obligations
34 27
Other adjustments (2) (3) (4) 524 695
Income tax expense (benefit) related to above adjustments (5) (555) 1,292
Non-recurring tax items 1 6
Non-GAAP operating earnings ______________
(1)Includes COVID-19 impact on Variable annuity product features due to an assumption update of$1.5 billion and other COVID-19 related impacts of$35 million for the three months endedMarch 31, 2020 . (2)Includes assumption update due to COVID-19 of$1.0 billion and other COVID-19 related impacts of$51 million for the three months endedMarch 31, 2020 . (3)Includes separation costs of$21 million and$32 million for the three months endedMarch 31, 2021 and 2020, respectively. (4)Includes certain legal accruals related to the COI litigation of$180 million for the three months endedMarch 31, 2021 . No adjustments were made to prior period non-GAAP operating earnings as the impact was immaterial. (5)Includes income taxes of$(547) million for the above related COVID-19 items for the three months endedMarch 31, 2020 . Non-GAAP Operating ROE and Non-GAAP Operating ROC by Segment We report Non-GAAP Operating ROE and Non-GAAP Operating ROC by segment for our Individual Retirement, Group Retirement and Protection Solutions segments, each of which is a Non-GAAP financial measure used to evaluate our profitability on a consolidated basis and by segment, respectively. We calculate Non-GAAP Operating ROE by dividing Non-GAAP operating earnings for the previous twelve calendar months by consolidated average equity attributable to Holdings' common shareholders, excluding AOCI. We calculate Non-GAAP Operating ROC by segment by dividing Operating earnings (loss) on a segment basis for the previous twelve calendar months by average capital on a segment basis, excluding AOCI, as described below. AOCI fluctuates period-to-period in a manner inconsistent with our underlying profitability drivers as the majority of such fluctuation is related to the market volatility of the unrealized gains and losses associated with our AFS securities. Therefore, we believe excluding AOCI is more effective for analyzing the trends of our operations. We do not calculate Non-GAAP Operating ROC by segment for our Investment Management and Research segment because we do not manage that segment from a return of capital perspective. Instead, we use metrics more directly applicable to an asset management business, such as AUM, to evaluate and manage that segment. For Non-GAAP Operating ROC by segment, capital components pertaining directly to specific segments such as DAC along with targeted capital are directly attributed to these segments. Targeted capital for each segment is established using assumptions supporting statutory capital adequacy levels, reflecting the NAIC RBC framework adopted as of year-end 2019. To enhance the ability to analyze these measures across periods, interim periods are annualized. Non-GAAP Operating ROE and Non-GAAP Operating ROC by segment should not be used as substitutes for ROE. The following table presents return on average equity attributable to Holdings' common shareholders, excluding AOCI and Non-GAAP Operating ROE for the trailing twelve months endedMarch 31, 2021 . Trailing Twelve Months Ended March 31, 2021 (in millions) Net income (loss) available to Holdings' common shareholders $ (7,577) Average equity attributable to Holdings' common shareholders, excluding AOCI $ 10,868 78
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Trailing Twelve Months
Ended March 31, 2021 (in millions) Return on average equity attributable to Holdings' common shareholders, excluding AOCI
(69.7) %
Non-GAAP operating earnings available to Holdings' common shareholders $
2,314
Average equity attributable to Holdings' common shareholders, excluding
AOCI $ 10,868
Non-GAAP Operating ROE 21.3 %
The following table presents Non-GAAP Operating ROC by segment for our
Individual Retirement, Group Retirement and Protection Solutions segments for
the trailing twelve months ended
Trailing Twelve Months Ended
Individual Protection
Retirement Group Retirement Solutions
(in millions)
Operating earnings $ 1,526 $ 536 $ 138
Average capital $ 6,248 $ 1,090 $ 2,145
Non-GAAP Operating ROC 24.4 % 49.1 % 6.5 %
Non-GAAP Operating Common EPS
Non-GAAP operating common EPS is calculated by dividing Non-GAAP operating
earnings by diluted common shares outstanding. The following table sets forth
Non-GAAP operating common EPS for the three months ended March 31, 2021 and
2020.
Three Months Ended March 31,
2021 2020
(per share amounts)
Net income (loss) attributable to Holdings (1) $ (3.43) $ 11.62
Less: Preferred stock dividends 0.03 0.02
Net income (loss) available to Holdings' common shareholders (3.46) 11.60
Adjustments related to:
Variable annuity product features (2) 5.22 (14.82)
Investment (gains) losses (0.42) (0.01)
Net actuarial (gains) losses related to pension and other postretirement benefit obligations
0.08 0.06
Other adjustments (3) (4) (5) 1.21 1.50
Income tax expense (benefit) related to above adjustments (6) (1.28) 2.79
Non-recurring tax items - 0.01
Non-GAAP operating common EPS $ 1.35 $ 1.13 ______________
(1)Due to reporting a net loss for the three months endedMarch 31, 2021 , basic shares was used in the diluted earnings per common share calculation as the use of diluted shares would have resulted in a lower loss per share. (2)Includes COVID-19 impact on Variable annuity product features due to an assumption update of$3.17 and other COVID-19 related impacts of$0.08 for the three months endedMarch 31, 2020 . (3)Includes assumption update due to COVID-19 of$2.26 and other COVID-19 related impacts of$0.11 for the three months endedMarch 31, 2020 . (4)Includes separation costs of$0.05 and$0.07 for the three months endedMarch 31, 2021 and 2020, respectively. (5)Includes certain legal accruals related to the COI litigation of$0.41 for the three months endedMarch 31, 2021 . No adjustments were made to prior period non-GAAP operating EPS as the impact was immaterial. (6)Includes income taxes of$(1.18) for the above related COVID-19 items for the three months endedMarch 31, 2020 . 79 -------------------------------------------------------------------------------- Table of Contents Assets Under Management AUM means investment assets that are managed by one of our subsidiaries and includes: (i) assets managed by AB; (ii) the assets in our General Account investment portfolio; and (iii) the Separate Accounts assets of our Individual Retirement, Group Retirement and Protection Solutions businesses. Total AUM reflects exclusions between segments to avoid double counting.Assets Under Administration AUA includes non-insurance client assets that are invested in our savings and investment products or serviced by ourEquitable Advisors platform. We provide administrative services for these assets and generally record the revenues received as distribution fees. Account Value AV generally equals the aggregate policy account value of our retirement products. General Account AV refers to account balances in investment options that are backed by the General Account while Separate Accounts AV refers to Separate Accounts investment assets. Protection Solutions Reserves Protection Solutions Reserves equals the aggregate value of policyholders' account balances and future policy benefits for policies in our Protection Solutions segment. Consolidated Results of Operations Our consolidated results of operations are significantly affected by conditions in the capital markets and the economy because we offer market sensitive products. These products have been a significant driver of our results of operations. Because the future claims exposure on these products is sensitive to movements in the equity markets and interest rates, we have in place various hedging and reinsurance programs that are designed to mitigate the economic risk of movements in the equity markets and interest rates. The volatility in net income attributable to Holdings for the periods presented below results from the mismatch between: (i) the change in carrying value of the reserves for GMDB and certain GMIB features that do not fully and immediately reflect the impact of equity and interest market fluctuations; (ii) the change in fair value of products with the GMIB feature that have a no-lapse guarantee; and (iii) our hedging and reinsurance programs. Ownership and Consolidation of AllianceBernstein Our indirect, wholly-owned subsidiary,AllianceBernstein Corporation , is the General Partner of AB.Accordingly, AB's results are fully reflected in our consolidated financial statements. Our economic interest in AB was approximately 64% and 65% for the three months endedMarch 31, 2021 and 2020, respectively. Effective Tax Rates For interim reporting periods, we calculate income tax expense using an estimated annual ETR, with discrete items recognized in the period in which they occur. Consolidated Results of Operations The following table summarizes our consolidated statements of income (loss) for the three months endedMarch 31, 2021 and 2020: Consolidated Statement of Income (Loss)
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