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EQUITABLE HOLDINGS, INC. – 10-Q – Management's Discussion and Analysis of Financial Condition and Results of Operations
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,
2022 ("2022 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.
As previously announced, effective January 1, 2023 , our financial reporting
presentation was revised to reflect the reorganization of the Company's
reportable segments to reflect how the Company's chief operating decision maker
now makes operating decisions and assesses performance. We now manage our
business through six segments: Individual Retirement, Group Retirement,
Investment Management and Research, Protection Solutions, Wealth Management and
Legacy. We report certain activities and items that are not included in these
segments in Corporate and Other. Prior period results have been revised in
connection with updates to our reportable segments. See Note 17 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.
Long - Duration Targeted Improvements ("LDTI") Adoption
EffectiveJanuary 1, 2023 , the Company adopted ASU 2018-12 and elected a transition date ofJanuary 1, 2021 , thereby permitting the Company to implement the standard only for the last two fiscal years rather than the customary last three fiscal years. The Company adopted ASU 2018-12 for liability for future policy benefits, additional insurance liabilities, DAC and balances amortized on a basis consistent with DAC on a modified retrospective basis. ASU 2018-12 was adopted for MRBs on a full retrospective basis. See Note 2 of the Notes to the Consolidated Financial Statements for further information on the adoption of LDTI. The following table presents the balances and changes to the balances for the market risk benefits for the GMxB benefits on deferred variable annuities for the three months endedMarch 31, 2023 . 81
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March 31, 2023
Individual
Retirement Legacy
GMxB Core GMxB Legacy Purchased MRB Net Legacy
(in millions)
Balance, beginning of the period ("BOP") $ 530
Balance BOP before changes in the instrument specific
credit risk
529 15,314 (10,358) 4,956 Model changes and effect of changes in cash flow assumptions - - - - Actual market movement effect (211) (744) 387 (357) Interest accrual 18 197 (153) 44 Attributed fees accrued 95 209 (83) 126 Benefit payments (12) (342) 185 (157)
Actual policyholder behavior different from expected
behavior
7 21 (18) 3 Changes in future economic assumptions 125 944 (530) 414 Issuances (1) - - -
Balance EOP before changes in the instrument-specific
credit risk
550 15,599 (10,570) 5,029
Changes in the instrument-specific credit risk (233) (1,517) (99) (1,616)
Balance, end of the period ("EOP") $ 317
The following discussion provides an overview on the table above.
The effect of actual market movement in equity is materially offset by hedging
gains/losses, which are not shown in the table above.
"Attributed fees accrued" represents the portion of the fees set aside to fund future GMxB claims. For our Core business, the$95 million for the three months endedMarch 31, 2023 , attributed fees set aside is less than the explicit GMxB Rider fees we actually collect from policyholders. For our Core business, the net riders fees (rider fees charged minus attributed fees) reported in our Policy charges and fee income line is$18 million for the three months endedMarch 31, 2023 . This means that the GMxB rider fees we charge more than cover the future claims and hedging costs associated with the GMxB riders. For our Legacy business, the attributed fees of$209 million set aside to fund future GMxB claims is more than the rider fees actually collected from policyholders. This is because the product was not sufficiently priced for the claims we now expect. This required us to attribute a portion of the base contract fees, in addition to the rider fees, to reserve for the rider claims. Net rider fees (rider fees charged minus attributed fees), net of reinsurance, for Legacy business reported in the Policy charges and fee income line are a loss of$68 million for the three months endedMarch 31, 2023 , and are more than covered by base contract fees. "Actual policyholder behavior different from expected behavior" measures the effectiveness of our modeling of policyholder behavior. Put differently, it measures the difference between our expectations about how our MRB rider reserves would change in response to policyholder behavior, and how our MRB rider reserves actually changed in response to policyholder behavior. For our Core business in the quarter endedMarch 31, 2023 , the MRB rider reserve was$7 million higher than we expected after accounting for actual policyholder behavior. The unfavorable impact of this actual policyholder behavior was more than covered by the excess rider fees noted above. For our Legacy business, the impact on our GAAP earnings from policyholder behavior was$21 million , which was largely absorbed by our reinsurance treaty with Venerable and other reinsurers. The net loss of$3 million that was not absorbed by reinsurance was covered by our base contract fees. "Changes in future economic assumptions" represents the impact from interest rates on the MRB balance. These fluctuations are offset through our interest rate hedging program which is reflected partially in GAAP Net Income with the remainder reflected in OCI.
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.
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Financial and Economic Environment
A wide variety of factors continue to impact financial and economic conditions. These factors include, among others, concerns over increased volatility in the capital markets, equity market declines, rising interest rates, inflationary pressures, plateauing or decreasing economic growth, high fuel and energy costs, changes in fiscal or monetary policy and geopolitical tensions. Market volatility, particularly duringMarch 2023 , was driven by instability in the banking sector following continued interest rate increases by theU.S. Federal Reserve , as a run on some mid-sizeU.S. banks resulted in regulatory intervention, including the guarantee of all deposits by theFDIC . The ongoing military conflict between theUkraine andRussia and the sanctions and other measures imposed in response to this conflict also continue to contribute to geopolitical tensions and market volatility. 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. In addition, our insurance liabilities and derivatives are sensitive to changing market factors, including equity market performance and interest rates, which continued to rise during the first quarter 2023. 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 could pressure sales and reduce demand for our products as consumers consider purchasing alternative products to meet their objectives. In addition, this environment could make it difficult to consistently develop products that are attractive to customers. Financial performance can be adversely affected by market volatility and equity market declines as fees driven by AV and AUM fluctuate, hedging costs increase and revenues decline due to reduced sales and increased outflows. We monitor the behavior of our customers and other factors, including mortality rates, morbidity rates, annuitization rates and lapse and surrender rates, which change in response to changes in capital market conditions, to ensure that our products and solutions remain attractive and profitable. For additional information on our sensitivity to interest rates and capital market prices, see "Quantitative and Qualitative Disclosures About Market Risk" in the 2022 Form 10-K. 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 variousU.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 NAIC is evaluating the appropriate accounting treatment of an insurer's negative interest maintenance reserve ("IMR") balance, since a rising interest rate environment may cause an insurer's IMR balance to become negative as a result of bond sales executed at a capital loss. If this occurs, current statutory accounting guidance requires the non-admittance of negative IMR, which can impact an insurer's surplus and financial strength reflected in its financial statements and result in lower reported surplus and RBC ratios. The NAIC has exposed new statutory accounting guidance that would permit an insurer with an RBC greater than 300% to admit negative IMR up to 5% of its general account capital and surplus, subject to certain restrictions and reporting obligations. Comments on the proposal are due inJune 2023 . The NAIC is focused on identifying an interim solution for year-end 2023 statutory reporting, although it also intends to develop a long-term solution even if interest rates change. The NAIC is also evaluating the risks associated with insurers' investments in certain categories of structured securities, including CLOs. InMarch 2023 , the NAIC adopted an amendment to the Purposes and Procedures Manual to give theNAIC's Structured Securities Group , housed within the SVO, responsibility for modeling CLO securities and evaluating tranche level losses across all debt and equity tranches under a series of calibrated and weighted collateral stress scenarios in order to assign NAIC designations. Under the amended Purposes and Procedures Manual, which will become effective no earlier than year-end 2024 financial reporting, CLO investments will no longer be broadly exempt from filing with the SVO based on ratings from Credit Rating Providers. The NAIC's goal is to ensure that the weighted average RBC factor for owning all tranches of a CLO more closely aligns with what would be required for directly owning all of the underlying loan collateral, in order to avoid RBC arbitrage. The NAIC is collaborating with interested parties to develop and refine the process for modeling CLO investments. 83 -------------------------------------------------------------------------------- Table of Contents The NAIC has also proposed an interim change to their RBC requirement for equity tranches of all securitizations, including CLOs. If adopted, this would increase the capital charge for these equity tranches from 30% to 45%. This proposal remains subject to comment from regulators, insurance companies, and other interested parties and thus may still be revised or delayed. An interim charge will likely have to be approved byJune 30 for it to be effective for year-end 2023 statutory filings. The interim charge is intended to remain in effect until the NAIC finalizes and adopts its modeling framework for CLOs which is not expected to be completed until at least year-end 2024. InMarch 2023 , theSecurities and Exchange Commission (SEC) reopened the comment period for the Investment Management Cybersecurity Release proposing new rules under the Investment Advisers Act of 1940 and the Investment Company Act of 1940 that would require registered investment advisers and investment companies to adopt and implement written cybersecurity policies and procedures reasonably designed to: (1) address cybersecurity risk management, (2) disclose information about cybersecurity risks and incidents, (3) report information confidentially to theSEC about certain cybersecurity incidents, and (4) maintain related records. In addition, inMarch 2023 , theSEC proposed rule amendments that would require brokers and dealers, investment companies, and investment advisers registered with theSEC to adopt written policies and procedures for incident response programs to address unauthorized access to or use of customer information, including procedures for providing timely notification to individuals affected by an incident involving sensitive customer information with details about the incident and information designed to help affected individuals respond appropriately. The proposal also would broaden the scope of information covered by amending requirements for safeguarding customer records and information, and for properly disposing of consumer report information, as well as impose requirements to maintain written records documenting compliance with the proposed amended rules. Finally, the proposed amendments would conform annual privacy notice delivery provisions to the terms of an exception provided by a statutory amendment to the Gramm-Leach-Bliley Act. Finally, inMarch 2023 , theSEC proposed a new rule and form and amendments to existing recordkeeping rules to require broker-dealers, clearing agencies, major security-based swap participants, theMunicipal Securities Rulemaking Board , national securities associations, national securities exchanges, security-based swap data repositories, security-based swap dealers, and transfer agents to address cybersecurity risks through: (1) policies and procedures, (2) immediate notification to theSEC of the occurrence of a significant cybersecurity incident, (3) as applicable, reporting detailed information to theSEC about a significant cybersecurity incident, and (4) public disclosures with respect to cybersecurity risks and significant cybersecurity incidents. The public comment period for this proposed rule will end inMay 2023 . We cannot predict what form the final new or amended rules may take, or what affect such developments in the law may have on our business or compliance costs. For additional information on regulatory developments and the risks we face, see "Business-Regulation" and "Risk Factors-Legal and Regulatory Risks" in the 2022 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.
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Table of Contents 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, together with the GMxB MRBs assets and liabilities are recognized in the periods in which they occur. This results in net income volatility as further described below. In addition net income is impacted by changes in our reinsurers credit spread, while changes in the Company's credit spread is recorded in other comprehensive income. 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 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 recognized in the current period. In addition, we utilize
AFS fixed maturity securities in our General Account to mitigate the economic
impact unfavorable
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changes in GMxB features' exposures attributable to movements in interest rates. However, the economic effect of interest rate changes on such securities is reflected in OCI, which results in net income volatility as the economic effect of interest rates on our GMxB MRB liabilities is reflected in net income. •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 additional net income volatility. The impacts are most pronounced for variable annuity products. •GMxB reinsurance contracts. Historically, GMxB reinsurance contracts were used to cede to non-affiliated reinsurers a portion of our exposure to variable annuity products that offer a GMxB feature. We account for the reinsurance contracts as MRBs and report them at fair value. In addition, onJune 1, 2021 , we ceded legacy variable annuity policies sold by Equitable Financial between 2006-2008 (the "Block"), comprised of non-New York "Accumulator" policies containing fixed rate GMIB and/or GMDB guarantees.
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 market risk benefits for our Individual Retirement, Group Retirement, and Protection Solutions, and Legacy segments (assumption reviews are not relevant for the Investment Management and Research and Wealth Management segments). 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, market risk benefits and unearned revenues and assets for DAC and DSI. The valuation of these assets and liabilities (other than deposits) is 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 updated annually to estimate the value of future death, morbidity or income benefits; (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 reported as market risk benefits at fair value; 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 2022 Form 10-K.
Productivity Strategies
Retirement and Protection Businesses
As part of our continuing efforts to drive productivity improvements, inJanuary 2021 , we began a new program expected to achieve$80 million of targeted run-rate expense savings by 2023, of which$60 million has been achieved as ofMarch 31, 2023 . We expect to achieve these savings by shifting our workforce into an agile working model, leveraging technology-enabled capabilities, optimizing our real estate footprint, and continuing to realize a portion of COVID-19 related savings. 86
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Key Operating Measures
In addition to our results presented in accordance withU.S. GAAP, we report Non-GAAP Operating Earnings, Non-GAAP Operating ROE, and Non-GAAP operating common EPS, each of which is a measure that is not determined in accordance withU.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 relevantU.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 withU.S. GAAP and should not be viewed as a substitute for theU.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 the variable annuity product MRBs. This is a large source of volatility in net income.
Non-GAAP Operating Earnings equals our consolidated after-tax net income
attributable to Holdings adjusted to eliminate the impact of the following
items:
•Items related to variable annuity product features, which include: (i) changes in the fair value of market risk benefits and purchased market risk benefits, including the related attributed fees and claims, offset by derivatives and other securities used to hedge the market risk benefits which result in residual net income volatility as the change in fair value of certain securities is reflected in OCI and due to our statutory capital hedge program; and (ii) market adjustments to deposit asset or liability accounts arising from reinsurance agreements which do not expose the reinsurer to a reasonable possibility of a significant loss from insurance risk;
•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, lease write-offs related to non-recurring
restructuring activities, 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 and realized capital gains/losses from sales
or disposals of select securities, certain legal accruals; and a bespoke deal to
repurchase UL policies from one entity that had invested in numerous policies
purchased in the life settlement market, which disposed of the risk of
additional COI litigation by that entity related to those UL policies; 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, and a decrease of a deferred tax valuation allowance.
Because Non-GAAP Operating Earnings excludes the foregoing items that can be
distortive or unpredictable, management believes that this measure enhances the
understanding of the Company's underlying drivers of profitability and trends in
our business, thereby allowing management to make decisions that will positively
impact our business.
We use the prevailing corporate federal income tax rate of 21% while taking into
account any non-recurring differences for events recognized differently in our
financial statements and federal income tax returns as well as partnership
income taxed at lower rates when reconciling Net income (loss) attributable to
Holdings to Non-GAAP Operating Earnings.
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The table below presents a reconciliation of net income (loss) attributable to
Holdings to Non-GAAP Operating Earnings for the three months ended March 31,
2023 and 2022:
Three Months Ended
March 31,
2023 2022
(in millions)
Net income (loss) attributable to Holdings $ 177 $ 530
Adjustments related to:
Variable annuity product features 861 (616)
Investment (gains) losses 87 326
Net actuarial (gains) losses related to pension and other
postretirement benefit obligations
9 19 Other adjustments (1) 45 228 Income tax expense (benefit) related to above adjustments (210) 9 Non-recurring tax items (2) (605) 3 Non-GAAP Operating Earnings$ 364 $ 499 ______________ (1)Includes certain legal accruals to the cost of insurance litigation of$59 million for the three months endedMarch 31, 2022 . Includes policyholder benefit costs of$75 million for the three months endedMarch 31, 2022 stemming from a deal to repurchase UL policies from one entity that had invested in numerous policies purchased in the life settlement market. (2)For the three months ended March, 31 2023, non-recurring tax items reflects the effect of uncertain tax positions for a given audit period and a decrease of a deferred tax valuation allowance.
Non-GAAP Operating ROE
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. 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. The following table presents return on average equity attributable to Holdings' common shareholders, excluding AOCI and Non-GAAP Operating ROE for the trailing twelve months endedMarch 31, 2023 .
Trailing Twelve Months Ended
(Dollars in millions)
Net income (loss) available to Holdings' common shareholders $ 1,720
Average equity attributable to Holdings' common shareholders, excluding
AOCI
$ 8,641
Return on average equity attributable to Holdings' common shareholders,
excluding AOCI
19.9 %
Non-GAAP Operating Earnings available to Holdings' common shareholders $
1,511 Average equity attributable to Holdings' common shareholders, excluding AOCI $ 8,641 Non-GAAP Operating ROE 17.5 %
Non-GAAP Operating Common EPS
Non-GAAP operating common EPS is calculated by dividing Non-GAAP Operating
Earnings by diluted common shares outstanding. The following table sets forth
Non-GAAP operating common EPS for the three months ended
2022.
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Three Months Ended
March 31,
2023 2022
(per share amounts)
Net income (loss) attributable to Holdings (1) $ 0.49 $ 1.35
Less: Preferred stock dividends 0.04 0.04
Net income (loss) available to Holdings' common shareholders 0.45 1.31
Adjustments related to:
Variable annuity product features 2.36 (1.57)
Investment (gains) losses 0.24 0.83
Net actuarial (gains) losses related to pension and other
postretirement benefit obligations
0.02 0.05 Other adjustments (2) (3) 0.13 0.58 Income tax expense (benefit) related to above adjustments (0.58) 0.02 Non-recurring tax items (4) (1.66) 0.01 Non-GAAP operating common EPS$ 0.96 $ 1.23
______________
(1)For periods presented with a net loss, basic shares are used for EPS. (2)Includes certain gross legal expenses related to the cost of insurance litigation and claims related to a commercial relationship of$0.00 and$0.15 for the three months endedMarch 31, 2023 and 2022, respectively. Includes policyholder benefit costs of$0.00 and$0.19 for the three months endedMarch 31, 2023 and 2022 stemming from a deal to repurchase UL policies from one entity that had invested in numerous policies purchased in the life settlement market. (3)Includes Non-GMxB related derivative hedge losses of$0.01 and$(0.01) for the three months endedMarch 31, 2023 and 2022, respectively. (4)For the three months ended March, 31 2023, non-recurring tax items reflects the effect of uncertain tax positions for a given audit period and a decrease of a deferred tax valuation allowance.
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.
AUA includes non-insurance client assets that are invested in our savings and investment products or serviced by ourEquitable Advisors platform. We provide administrative services for these assets and generally record the revenues received as distribution fees.
Account Value
AV generally equals the aggregate policy account value of our retirement
products. General Account AV refers to account balances in investment options
that are backed by the General Account while Separate Accounts AV refers to
Separate Accounts investment assets.
Protection Solutions Reserves
Protection Solutions Reserves equals the aggregate value of policyholders'
account balances and future policy benefits for policies in our Protection
Solutions segment.
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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. For additional information on our economic interest in AB, see Note 1 of the Notes to the Consolidated Financial Statements.
Consolidated Results of Operations
The following table summarizes our consolidated statements of income (loss) for
the three months ended
EQUITABLE FINANCIAL LIFE INSURANCE CO – 10-Q – Management's Discussion and Analysis of Financial Condition and Results of Operations
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