EQUITABLE HOLDINGS, INC. – 10-Q – Management report and analysis of the financial position and operating results


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 14 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 June 1, 2021, Holdings completed its previously announced sale (the
"Transaction") of Corporate Solutions Life Reinsurance Company, an insurance
company domiciled in Delaware and wholly owned subsidiary of the Company
("CSLRC"), to Venerable Insurance and Annuity Company, an insurance company
domiciled in Iowa ("VIAC"), pursuant to the Master Transaction Agreement, dated
October 27, 2020 (the "Master Transaction Agreement"), among the Company, VIAC
and, solely with respect to Article XIV thereof, Venerable Holdings, Inc., a
Delaware corporation ("Venerable").
Pursuant to the Master Transaction Agreement, immediately prior to the closing
of the Transaction, CSLRC effected the recapture of all of the business that was
ceded to CS Life Re Company, an insurance company domiciled in Arizona and
wholly owned subsidiary of CSLRC ("Reinsurance Subsidiary"), and sold 100% of
the equity of the Reinsurance Subsidiary to another wholly owned subsidiary of
the Company.
VIAC paid the Company a cash purchase price of $215 million for CSLRC at
closing. The post-closing true-up adjustment is expected to be immaterial. VIAC
also issued a surplus note in aggregate principal amount of $50 million to
Equitable Financial Life Insurance Company, a New York-domiciled life insurance
company and a wholly owned subsidiary of Holdings, for cash consideration.
Immediately following the closing of the Transaction, CSLRC and Equitable
Financial entered into a coinsurance and modified coinsurance agreement (the
"Reinsurance Agreement"), pursuant to which Equitable Financial ceded to CSLRC,
on a combined coinsurance and modified coinsurance basis, legacy variable
annuity policies sold by Equitable Financial between 2006-2008 (the "Block"),
comprised of non-New York "Accumulator" policies containing fixed rate
Guaranteed Minimum Income Benefit and/or Guaranteed Minimum Death Benefit
guarantees. At the closing of the Transaction, CSLRC deposited assets supporting
the general account liabilities relating to the Block into a trust account for
the benefit of Equitable Financial, which assets will secure its obligations to
Equitable Financial under the Reinsurance Agreement. At the closing of the
Transaction, AllianceBernstein L.P., a subsidiary of the Company ("AB"), entered
into an investment advisory agreement with CSLRC pursuant to which AB will serve
as the preferred investment manager of the general account assets transferred to
the trust account. The Company transferred assets of $9.5 billion, including
primarily available for sale securities and cash, to a collateral trust account
as the consideration for the reinsurance transaction. In addition, we recorded
$9.6 billion of direct insurance liabilities ceded under the reinsurance
contract, of which $5.3 billion is accounted at fair value, as the reinsurance
of
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GMxB with no lapse guarantee riders are embedded derivatives. Additionally,
$16.9 billion of Separate Account liabilities were ceded under a modified
coinsurance portion of the agreement.
In addition, upon the completion of the Transaction, Equitable Investment
Management Group, LLC ("EIMG"), a wholly owned subsidiary of the Company,
acquired an approximate 9.09% equity interest in Venerable's parent holding
company, VA Capital Company LLC. In connection with such investment,EIMG
designated a member to the Board of Managers of VA Capital Company LLC.
COVID-19 Impact
We continue to closely monitor developments related to the COVID-19 pandemic.
The pandemic's impact on us depends on future developments that remain highly
uncertain. 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
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
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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 GMxB 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.
•GMxB 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. In
addition, on June 1, 2021, we ceded legacy variable annuity policies sold by
EFLIC between 2006-2008 (the "Block"), comprised of non-New York "Accumulator"
policies containing fixed rate GMIB and/or GMDB guarantees. As this contract
provides full risk transfer, the benefits of this treaty are accounted for in
the same manner as the underlying gross reserves.
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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 and nine months ended September 30, 2021 and 2020 to our income (loss)
from continuing operations, before income taxes and net income (loss).
                                              Three Months Ended September 30,        Nine Months Ended September 30,
                                                   2021               2020                 2021              2020 (1)
                                                                            (in millions)
Impact of assumption update on Net income
(loss):
Variable annuity product features related
assumption update                             $       (91)         $    (63)         $         (91)         $ (1,531)
Assumption updates for other business                 (17)              (11)                   (17)           (1,060)
Impact of assumption updates on Income (loss)
from continuing operations, before income tax        (108)              (74)                  (108)           (2,591)
Income tax benefit on assumption update                23                16                     23               544

Impact on net income (loss) of updating assumptions $ (85) $ (58) $ (85) $ (2,047)

______________

(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.
2021 Assumption Updates
The impact of the economic assumption update in the third quarter of 2021 was a
decrease of $108 million to income (loss) from continuing operations, before
income taxes and a decrease to net income (loss) of $85 million. As part of this
annual
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update, the reference interest rate utilized in our GAAP fair value calculations
was updated from the LIBOR swap curve to the US Treasury curve due to the
impending cessation of LIBOR and our GAAP fair value liability risk margins were
increased, resulting in little impact to overall valuation as our view regarding
market participant pricing of our guarantees has not changed at this time.

The net impact of this assumption update on income (loss) from continuing
operations, before income taxes of $108 million consisted of a decrease in
policy charges and fee income of $28 million, a decrease in policyholders'
benefits of $62 million, an increase in net derivative losses of $200 million
and a decrease in the amortization of DAC of $58 million.
2020 Assumption Updates
Annual Update
The impact of the economic assumption update in the third quarter of 2020 was a
decrease of $74 million to income (loss) from continuing operations, before
income taxes and a decrease to net income (loss) of $58 million.
The net impact of this assumption update on income (loss) from continuing
operations, before income taxes of $74 million consisted of a decrease in policy
charges and fee income of $23 million, an increase in policyholders' benefits of
$193 million, an increase in interest credited to policyholders' account
balances of $5 million, a decrease in net derivative losses of $112 million and
a decrease in the amortization of DAC of $35 million.
Our annual review in 2020 resulted in the removal of the credit risk adjustment
from our fair value scenario calibration to reflect our revised view of market
participant practices, offset by updates to our mortality and policyholder
behavior assumptions to reflect emerging experience.
First Quarter Update
In 2020, in addition to the annual review, we updated our assumptions in the
first quarter due to the extraordinary economic conditions driven by the
COVID-19 pandemic. The first quarter update included an update to the interest
rate assumption to grade from the current interest rate environment at that time
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%.
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.
2021 Model Changes
There were no material model changes in the first nine months of 2021.
2020 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 for scenario
production. The new economic scenario generator allows for a tighter calibration
of U.S. indices, better reflecting our actual portfolio. The net impact of the
new economic scenario generator resulted in an increase in income (loss) from
continuing operations, before income taxes of $201 million, and an increase to
net income (loss) of $159 million for the nine months ended September 30, 2020.
There were no other model changes that made a material impact to our income
(loss) from continuing operations, before income taxes or net income (loss).
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Impact of Assumption Updates and Model Changes on Pre-tax Non-GAAP Operating
Earnings Adjustments
The table below presents the impact on pre-tax Non-GAAP operating earnings of
our actuarial assumption updates during the first nine months of 2021 and 2020
by segment and Corporate and Other.
                                                                  Nine 

Ended months September 30, (1)

                                                                       2021                     2020
                                                                              (in million)
Impact of assumption updates by segment:
Individual Retirement                                          $              (47)         $       (28)
Group Retirement                                                               35                   (3)
Protection Solutions                                                           20                    4
Impact of assumption updates on Corporate and Other                             -                  (12)
Total impact on pre-tax Non-GAAP Operating Earnings            $            

8 $ (39)

________

(1) The amounts for the three months and the nine months ended September 30 of
each year represented the same amounts. We only had our third quarter annual
updates for 2021 and the first quarter 2020 assumption update did not impact
Non-GAAP Operating Earnings.
2021 Assumption Updates
The impact of our 2021 annual review on Non-GAAP operating earnings was
favorable by $8 million before taking into consideration the tax impacts or $6
million after tax. For Individual Retirement segment, the impacts primarily
reflect updated mortality on our older payout business. For Group Retirement
segment, the impacts reflect updated economic assumptions. The annual update for
Protection Solutions segment reflects favorable economic conditions and
surrenders primarily on the VUL line. This, in turn, creates future profits and
lowers the accrual on our PFBL reserve.
The net impact of assumption changes on Non-GAAP Operating Earnings in the third
quarter of 2021 decreased Policy charges and fee income by $28 million,
increased Policyholders' benefits by $22 million, and decreased Amortization of
DAC by $58 million. Non-GAAP Operating Earnings excludes items related to
Variable annuity product features, such as changes in the fair value of the
embedded derivatives associated with the GMIBNLG liability and the effect of
benefit ratio unlock adjustments.
2020 Assumption Updates
The impact of our 2020 annual review on Non-GAAP Operating Earnings was
unfavorable by $39 million before taking into consideration the tax impacts or
$31 million after tax. For the Individual Retirement segment, the impacts
primarily reflect higher surrenders at the end of the surrender charge period on
Retirement Cornerstone policies. The impact of our 2020 annual review was not
material for our Group Retirement and Protection Solutions segments.
The net impact of assumption changes on Non-GAAP Operating Earnings in the third
quarter of 2020 decreased Policy charges and fee income by $23 million,
increased Policyholders' benefits by $46 million, increased Interest credited to
policyholders' account balances by $5 million and decreased Amortization of DAC
by $35 million. Non-GAAP Operating Earnings excludes items related to Variable
annuity product features and the impact of COVID-19, such as changes in the fair
value of the embedded derivatives associated with the GMIBNLG liability and the
effect of benefit ratio unlock adjustments.
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 caused severe,
lasting turmoil in the financial markets during the first six 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.
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The table below presents the COVID-19 pandemic related impacts on income (loss)
from continuing operations, before income taxes 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:
                                                                     Nine 

Ended months September 30, 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)         $       (43)         $ (1,460)
Group Retirement                                                        (51)                   -               (51)
Protection Solutions                                                 (1,016)                 (75)           (1,091)
Corporate and Other                                                     (33)                  (3)              (36)

Net profit (loss) from continuing operations, before
income taxes

                                              $          

(2,517) $ (121) $ (2,638)

COVID-19 related adjustments included in the Reconciliation
net income (loss) attributable to non-GAAP investments
Operating profit :
Product characteristics of variable annuities

                       $          (1,468)         $       (35)         $ (1,503)
Other adjustments                                                    (1,049)                 (86)           (1,135)
Net income (loss) from continuing operations, before
income taxes                                              $          (2,517)         $      (121)         $ (2,638)


_______________
(1)Includes adjustments to Non-GAAP Operating Earnings primarily due to
non-variable annuity hedging impacts resulting from unprecedented volatility in
equity markets and accelerated amortization of DAC due to loss recognition in
the first half of 2020 resulting from first quarter 2020 interest rate
assumption update.
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 financial and economic conditions.
These factors include, among others, significant volatility in financial
markets, economic growth, inflation rates, supply chain disruptions, continued
low interest rates and changes in fiscal or monetary policy.
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.
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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 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
subsequently amended, differs from the NAIC variable annuity reserve and capital
framework. Regulation 213, as amended, will not materially affect Holdings' GAAP
financial condition, results of operations or stockholders' equity. However,
Regulation 213, absent management action, requires our 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 in current market conditions imposes more conservative reserving
requirements for variable annuity contracts than the NAIC standard. Absent
management action, Regulation 213 will (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, as was the case following the equity market appreciation in the second
half of 2020 and the first nine months of 2021. Such impacts were exacerbated
upon closing of the Venerable transaction. As a holding company, we rely on
dividends and other payments from our subsidiaries and, accordingly, any
material limitation on Equitable Financial's dividend capacity could materially
affect our ability to return capital to stockholders through dividends and stock
repurchases. Equitable Financial was granted a permitted practice by the NYDFS
which partially mitigates the Regulation 213 impact of the Venerable transaction
to make the regulation's application to Equitable Financial more consistent with
the NAIC reserve and capital framework. Equitable Financial also entered into a
reinsurance agreement with Swiss Re Life & Health America Inc. ("Swiss Re")
effective October 1, 2021, and we completed certain internal restructurings that
increase cash flows to Holdings from non-life insurance
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entities, which further mitigate the impacts from Regulation 213. We are
considering additional management actions intended to reduce the impact of the
regulation which could include seeking further amendment of Regulation 213 or
exemptive relief therefrom, changing our underwriting practices to emphasize
issuing variable annuity products out of affiliates which are not domiciled in
New York, increasing the use of reinsurance and pursuing other corporate
transactions. 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. See Note 11 of the Notes to the Consolidated Financial
Statements for additional detail on the permitted practice granted by the NYDFS
and Note 17 of the Notes to the Consolidated Financial Statements for additional
detail on the reinsurance agreement with Swiss Re.
Fiduciary Rules / "Best Interest" Standards of Conduct
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 PTE 2020-02 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 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 June 2021 the
DOL updated its formal regulatory agenda to include issuance of a proposed rule
making by year-end 2021 that would further amend its fiduciary regulations,
including PTE 2020-02 and, possibly, other existing prohibited transaction
exemptions.
In April 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. In June 2021, the NYDFS
appealed this ruling to the New York State Court of Appeals, which automatically
granted a stay, meaning that Regulation 187 remains in effect pending a decision
by the Court of Appeals.
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. In March
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 provided comments after reviewing the
NYDFS' proposed guidance designed to ensure that such guidance is consistent
with our existing risk management framework. The NYDFS intends to formally adopt
the guidance, as modified by the comment process, in the fourth quarter of 2021.
On July 14, 2021, the NYDFS published notice of the adoption of amendments to
the regulation governing enterprise risk management, effective August 13, 2021.
The amendments require that certain additional risks, including climate change,
be included in an insurance group's enterprise risk management function, among
other requirements.
NYDFS Guidance on Diversity and Corporate Governance. In March 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 is collecting data from New
York domestic and authorized foreign insurers that meet certain premium
thresholds, including Equitable Financial, 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.
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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 September 30, 2021, a total of
$702 million has been incurred, of which $25 million, $37 million, $62 million
and $108 million was incurred in the three and nine months ended September 30,
2021 and 2020, respectively.
Productivity Strategies
Retirement and Protection Businesses
As part of our continuing efforts to drive productivity improvements, as of
January 2021, we have begun a new program expected to achieve $80 million of
targeted run-rate expense savings by 2023. We expect to achieve these saving by
shifting our workforce into an agile working model, leveraging
technology-enabled capabilities, augmenting our real estate footprint, and
continuing to realize a portion of COVID-related savings.
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 of approximately $75 million to $80 million, which will result from a
combination of occupancy and compensation-related savings.
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.
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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,
including 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.
The table below presents a reconciliation of net income (loss) attributable to
Holdings to Non-GAAP operating earnings for the nine months ended September 30,
2021 and 2020:
                                                       Three Months Ended September         Nine Months Ended September
                                                                    30,                                 30,
                                                           2021              2020              2021              2020
                                                                                 (in millions)
Net income (loss) attributable to Holdings             $     672          $  (779)         $    (693)         $   590
Adjustments related to:
Variable annuity product features (1)                        172            1,620              3,632              473
Investment (gains) losses                                   (164)             (17)              (767)            (190)
Net actuarial (gains) losses related to pension
and other postretirement benefit obligations                  27               31                 87               86
Other adjustments (2) (3) (4) (5)                            141               66                672              836
Income tax expense (benefit) related to above
adjustments (6)                                              (35)            (357)              (761)            (253)
Non-recurring tax items                                        5                4                  6               12
Non-GAAP operating earnings                            $     818          $ 

568 $ 2,176 $ 1,554

______________

(1)Includes COVID-19 impact on Variable annuity product features due to a first
quarter 2020 assumption update of $1.5 billion and other COVID-19 related
impacts of $35 million for the nine months ended September 30, 2020.
(2)Includes COVID-19 impact on Other adjustments due to a first quarter 2020
assumption update of $1.0 billion and other COVID-19 related impacts of $86
million for the nine months ended September 30, 2020.
(3)Includes separation costs of $25 million,$37 million,$62 million and $108
million for the three and nine months ended September 30, 2021 and 2020.
(4)Includes certain legal accruals related to the cost of insurance litigation
of $180 million for the nine months ended September 30, 2021. No adjustments
were made to prior period non-GAAP operating earnings as the impact was
immaterial.
(5)Includes Non-GMxB related derivative hedge losses of ($4) million, $10
million, $140 million, and ($461) million for the three and nine months ended
September 30, 2021 and 2020.
(6)Includes income taxes of ($554) million for the above related COVID-19 items
for the nine months ended September 30, 2020.
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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 ended September 30, 2021.
                                                                         

End of the last twelve months

September 30, 2021

                                                                                 (in millions)
Net income (loss) available to Holdings' common shareholders             $              (2,003)

Average equity attributable to common shareholders of Holdings, excluding
AOCI

                                                                     $               8,816

Return on average equity attributable to common shareholders of Holdings,
excluding AOCI

                                                                           (22.7)      %

Non-GAAP operating income available to common shareholders of Holdings $

              2,852
Average equity attributable to Holdings' common shareholders, excluding
AOCI                                                                     $               8,816
Non-GAAP Operating ROE                                                                    32.4       %


The following table presents the non-GAAP operational ROC by segment for our
Individual Retirement, Group Retirement and Protection Solutions segments for
the last twelve months have ended September 30, 2021.

End of the last twelve months September 30, 2021

                                                              Individual                                      Protection
                                                              Retirement           Group Retirement           Solutions
                                                                                     (in millions)
Operating earnings                                          $     1,535           $          680           $       322
Average capital                                             $     6,304           $        1,132           $     2,150
Non-GAAP Operating ROC                                             24.4   %                 60.0   %              15.0    %


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 nine months ended September 30, 2021 and
2020.
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                                                 Three Months Ended September               Nine Months Ended September
                                                              30,                                       30,
                                                     2021              2020                    2021              2020
                                                                          

(amounts per share)
Net income attributable to Holdings (1) $ 1.62 $ (1.74)

               $   (1.64)         $  1.30
Less: Preferred stock dividends                       0.03             0.03                     0.12             0.08
Net income (loss) available to Holdings' common
shareholders                                          1.59            (1.77)                   (1.76)            1.22
Adjustments related to:
Variable annuity product features (2)                 0.41             3.62                     8.58             1.04
Investment (gains) losses                            (0.41)           (0.04)                   (1.81)           (0.42)
Net actuarial (gains) losses related to pension
and other postretirement benefit obligations          0.07             0.07                     0.21             0.19
Other adjustments (3) (4) (5) (6)                     0.35             0.15                     1.59             1.85
Income tax expense (benefit) related to above
adjustments (7)                                      (0.08)           (0.80)                   (1.80)           (0.56)
Non-recurring tax items                               0.01             0.01                     0.01             0.03
Non-GAAP operating common EPS                    $    1.94          $  1.24                $    5.02          $  3.35


______________

(1)For periods presented with a net loss, basic shares was used for the three
months ended September 30, 2020 and nine months ended September 30, 2021.
(2)Includes COVID-19 impact on Variable annuity product features due to a first
quarter 2020 assumption update of $3.23 and other COVID-19 related impacts of
$0.08 for the nine months ended September 30, 2020.
(3)Includes COVID-19 impact on Other adjustments due to a first quarter 2020
assumption update of $2.31 for the nine months ended September 30, 2020 and
other COVID-19 related impacts of $0.00 and $0.19 for the three and nine months
ended September 30, 2020.
(4)Includes separation costs of $0.06, $0.08, $0.15 and $0.24 for the three and
nine months ended September 30, 2021 and 2020.
(5)Includes certain legal accruals related to the cost of insurance litigation
of $0.43 for the nine months ended September 30, 2021. No adjustments were made
to prior period non-GAAP operating EPS as the impact was immaterial.
(6)Includes Non-GMxB related derivative hedge losses of ($0.01), $0.02, $0.31,
and ($1.02) for the three and nine months ended September 30, 2021 and 2020.
(7)Includes income taxes of $0.00 and $(1.22) for the above related COVID-19
items for the three and nine months ended September 30, 2020.
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 our Equitable 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.
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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 65% during the three and nine
months ended September 30, 2021 and 2020.
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 and nine months ended September 30, 2021 and 2020:
                    Consolidated Statement of Income (Loss)


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