EQUITABLE FINANCIAL LIFE INSURANCE CO – 10-Q – Management's Discussion and Analysis of Financial Condition and Results of Operations

Management's discussion and analysis of financial condition and results of
operations is presented pursuant to General Instruction (H)(2)(a) of Form 10-Q.
The management's narrative that follows should be read in conjunction with the
consolidated financial statements and the related Notes to Consolidated
Financial Statements included elsewhere herein, with the information provided
under "Note Regarding Forward-looking Statements and Information" included
elsewhere herein and Management's Discussion and Analysis of Financial Condition
and Results of Operations ("MD&A") in Part II, Item 7 and "Risk Factors" in Part
I, Item 1A included in Equitable Financial's   Annual Report on Form 10-K   for
the year ended December 31, 2020 ("2020 Form 10-K"). The management's narrative
that follows represents a discussion and analysis of Equitable Financial's
financial condition and results of operations and not the financial condition
and results of operations of Equitable Holdings, Inc. ("Holdings").
Executive Summary
Overview
We are one of America's leading financial services companies, providing advice
and solutions for helping Americans set and meet their retirement goals and
protect and transfer their wealth across generations. We operate as a single
segment entity based on the manner in which we use financial information to
evaluate business performance and to determine the allocation of resources. We
benefit from our complementary mix of product offerings. This mix in product
offerings 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 Holdings ("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"). VIAC issued a surplus note in aggregate principal
amount of $50 million to Equitable Financial 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. 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, the Company 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 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.
Transfer of Investment Management and Administration Agreements to EIM
On June 22, 2021, Holdings formed Equitable Investment Management, LLC ("EIM"),
a wholly owned indirect subsidiary of Holdings. Effective August 1, 2021, EIMG
terminated, and EIM, entered into certain administrative agreements with
separate accounts held by Equitable Financial. In addition, on October 1, 2021,
Equitable Financial entered into an investment advisory and management agreement
in which EIM will become the investment manager for the Equitable Financial's
general account portfolio. The impact in future net earnings is expected to be
immaterial.

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COVID-19 Impact
We continue to closely monitor developments related to the COVID-19 pandemic.
The extent of the pandemic's impact on us will depend 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" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations-Executive Summary-COVID-19 Impact" in the 2020 Form 10-K.
Revenues
Our revenues come from three principal sources:
•fee income derived from our products;
•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 life insurance and annuity products which 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
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
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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.
An additional source of net income (loss) volatility is the impact of the
Company's annual actuarial assumption review. See "-Significant Factors
Impacting Our Results-Assumption Updates and Model Changes", for further detail
of the impact of assumption updates on net income (loss) in first quarter 2020.
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
held-to-maturity 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.
•GMxB reinsurance contracts. Historically, GMIB reinsurance contracts were used
to cede to affiliated and 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.
Effect of Assumption Updates on Operating Results
Our actuaries oversee the valuation of the product liabilities and assets and
review the underlying inputs and assumptions. We comprehensively review the
actuarial assumptions underlying these valuations and update assumptions during
the third quarter of each year. 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. Changes in assumptions can result in a significant change to the
carrying value of product liabilities and assets and, consequently, the impact
could be material to earnings in the period of the change.
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:
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(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 of the Notes to the 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
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, (1)
                                                2021               2020                  2021                   2020
                                                                           (in millions)
Impact of assumption update on Net income
(loss):
Variable annuity product features related
assumption update                           $     (146)         $    (41)         $           (146)         $  (1,496)
All other assumption updates                       (16)              (83)                      (16)              (750)
Impact of assumption updates on Income
(loss) from continuing operations, before
income tax                                        (162)             (124)                     (162)            (2,246)
Income tax (expense) benefit on assumption
update                                              34                26                        34                472
Net income (loss) impact of assumption
update                                      $     (128)         $    (98)         $           (128)         $  (1,774)


______________
(1)During the first quarter of 2020, we updated interest rate assumption and the
impact was a decrease to Net income (loss) of $1.7 billion. See Note 2 for
further details on the assumption update.
2021 Assumption Updates
The impact of the economic assumption update in the third quarter of 2021 was a
decrease of $162 million to income (loss) from continuing operations, before
income taxes and a decrease to net income (loss) of $128 million. As part of
this annual 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 $162 million consisted of a decrease in
policy charges and fee income of $32 million, a decrease in policyholders'
benefits of $100 million, a decrease in net derivative gains of $249 million and
a decrease in the amortization of DAC of $19 million.
2020 Assumption Updates
Annual Update
The impact of the economic assumption update in the third quarter of 2020 was a
decrease of $124 million to income (loss) from continuing operations, before
income taxes and a decrease to net income (loss) of $98 million.
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The net impact of this assumption update on income (loss) from continuing
operations, before income taxes of $124 million consisted of a decrease in
policy charges and fee income of $21 million, an increase in policyholders'
benefits of $175 million, an increase in interest credited to policyholders'
account balances of $8 million, an increase in net derivative gains of $106
million and an increase in the amortization of DAC of $26 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
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 curve 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 subsequent 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. 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 $2.1 billion to income (loss) from continuing operations, before
income taxes and a decrease to net income (loss) of $1.7 billion.
The net impact of this assumption update on income (loss) from continuing
operations, before income taxes of $2.1 billion consisted of an increase in
policy charges and fee income of $54 million, an increase in policyholders'
benefits of $1.3 billion, a decrease in interest credited to policyholders'
account balances of $6 million and an increase in the amortization of DAC of
$840 million.
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 economic scenario generator allows for a tighter calibration of
U.S. indices, better reflecting our actual portfolio. The net impact of the
economic scenario generator resulted in an increase in income (loss) from
continuing operations, before income taxes of $165 million, and an increase to
net income (loss) of $130 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 Update and COVID-19 Impacts on Income from Continuing
Operations before income taxes and Net income (loss)
The table below presents the COVID-19 pandemic related impacts on income (loss)
from continuing operations, before income taxes and on net income (loss) during
the nine months ended September 30, 2020:
                                                                Nine Months Ended 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                                 $          (2,122)         $      (105)         $   (2,227)
Income tax (expense) benefit                                      446                   22                 468
Net income (loss) from continuing operations, net
of taxes                                            $          (1,676)         $       (83)         $   (1,759)


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(1)Includes amounts 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.

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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 AV 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 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 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.
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
We are regulated primarily by the NYDFS, with some policies and products also
subject to federal regulation. 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. For additional information on the
regulatory developments and risk we face, see "Business-Regulation" and "Risk
Factors-Legal and Regulatory Risks" in the 2020 Form 10-K, as amended or
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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' U.S.
GAAP financial condition, results of operations or stockholders' equity.
However, Regulation 213, absent management action, requires 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 nine months of 2021. Such impacts were
exacerbated upon closing of the Venerable transaction. 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 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 10 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.
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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, 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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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 Equitable Financial 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.
The following table summarizes our consolidated statements of income (loss) for
the nine months ended September 30, 2021 and 2020: