Equitable Holdings, Inc.: Form 10-Q for the period ended Sep 30, 2023

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 the Recast 2022 Annual Report.

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 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. 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

Effective January 1, 2023, the Company adopted ASU 2018-12 and elected a transition date of January 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:

(in millions)

(1) The effect of actual market movement in equity is materially offset by hedging gains/losses, which are not shown in the table above.

(2) Attributed fees accrued represents the portion of the fees set aside to fund future GMxB claims. For our Core business, the $100 million 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 is $20 million. 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 $212 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 are a loss of $70 million, and are more than covered by base contract fees.

(3) 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, 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, net of reinsurance, was a net gain of $15 million.

(4) 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.

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. Amidst ongoing concerns about inflation and the U.S. Federal Reserve’s tightening monetary policies, the S&P 500, the Dow Jones Industrial Average, and Nasdaq experienced losses during the third quarter, driven primarily by continued interest rate increases by the Federal Reserve. Thirty year mortgage rates hit their highest level since 2000 and the 10-year Treasury yield rose its highest level since 2007. The U.S. economy has weathered higher interest rates well, emboldening the

Federal Reserve to tighten monetary policies. While inflation is trending lower, core inflation remains over 4%, well above the Federal Reserve’s 2% target.

Geopolitical tensions are also contributing to market volatility due to the ongoing military conflict between the Ukraine and Russia and Hamas’s attack on Israel and the ensuing conflict and the sanctions and other measures imposed in response to these conflicts.

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 third 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 Recast 2022 Annual Report.

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.

On August 13, 2023, the NAIC adopted a short-term solution related to the accounting treatment of an insurer’s negative interest maintenance reserve (“IMR”) balance, which may occur when a rising interest rate environment causes an insurer’s IMR balance to become negative as a result of bond sales executed at a capital loss. If this occurs, previous statutory accounting guidance required the non-admittance of negative IMR, which can impact how accurately an insurer’s surplus and financial strength are reflected in its financial statements and result in lower reported surplus and RBC ratios. The NAIC’s new interim statutory accounting guidance, which is effective until December 31, 2025, allows an insurer with an authorized control level RBC greater than 300% to admit negative IMR up to 10% of its general account capital and surplus, subject to certain restrictions and reporting obligations. The NAIC intends to develop a long-term solution for the accounting treatment of negative IMR, which may nullify the application of the proposed short-term solution if implemented prior to December 31, 2025.

The NAIC has been focused on a macro-prudential initiative since 2017, that is intended to enhance risk identification efforts through proposed enhancements to supervisory practices related to liquidity, recovery and resolution, capital stress testing and counterparty exposure concentrations for life insurers. In 2020, the NAIC adopted amendments to the Model Holding Company Act and Regulation that implement an annual filing requirement related to a liquidity stress-testing framework (the “Liquidity Stress Test”) for certain large U.S. life insurers and insurance groups (based on amounts of certain types of business written or material exposure to certain investment transactions, such as derivatives and securities lending). The Liquidity Stress Test is used as a regulatory tool in jurisdictions which have adopted the holding company amendments.

The NAIC developed a group capital calculation tool (“GCC”) using an RBC aggregation methodology for all entities within the insurance holding company system, including non-U.S. entities. The GCC provides U.S. solvency regulators with an additional analytical tool for use in solvency monitoring activities. The NAIC’s amendments to the Model Holding Company Act and Regulation in 2020 also adopted the GCC Template and Instructions and implemented the annual filing requirement with an insurance group’s lead state regulator. The GCC filing requirement becomes effective when the holding company amendments have been adopted by the state where an insurance group’s lead state regulator is located.

In August of 2023, the state of New York adopted legislation codifying the Liquidity Stress Test and the GCC. The first GCC filing will be required on June 30, 2024.

The NAIC’s Privacy Protections (H) Working Group (“PPWG”) is developing a new Consumer Privacy Protections and Model Law (“Model 674”) to replace the existing privacy models, #670 (Insurance Information and Privacy Protections Model Act) and #672 (Privacy of Consumer Financial and Health Information Regulation). Following meetings in the spring of 2023, the PPWG rewrote Model 674 to incorporate industry feedback and exposed a new draft in July 2023. Due to the large number of comments received, the PPWG intends to ask for an extension of time to develop the new model law at the NAIC’s Fall National Meeting in December 2023. We cannot predict whether Model 674 will be adopted, what form it will take, or what effect it would have on our business or compliance efforts in the form adopted by states whose laws apply to our insurance subsidiaries.

For additional information on regulatory developments and the risks we face, see “Business—Regulation” in the Recast 2022 Annual Report and our Quarterly Reports on Form 10-Q for the months ended March 31, 2023 and June 30, 2023 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, the amount of AUM and AUA in our Wealth Management business, 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

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 GMxB 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 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, on June 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, 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; and (iii) certain product guarantees reported as market risk benefits 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 Recast 2022 Annual Report.

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 nine months ended September 30, 2023 and 2022 to our income (loss) from continuing operations, before income taxes and net income (loss).

(in millions)

2023 Assumption Updates

The impact of the economic assumption update in the third quarter 2023 was a decrease of $5 million to income (loss) from continuing operations, before income taxes and a decrease to net income (loss) of $4 million.

The net impact of this assumption update on income (loss) from continuing operations, before income taxes of $5 million consisted of a decrease in other income of $9 million, an increase in remeasurement of liability for future policy benefits of $51 million, a decrease in policyholders’ benefits of $2 million and an decrease in change in market risk benefits and purchased market risk benefits of $53 million.

2022 Assumption Updates

The impact of the economic assumption update in the third quarter 2022 was a decrease of $206 million to income (loss) from continuing operations, before income taxes and a decrease to net income (loss) of $163 million.

The net impact of this assumption update on income (loss) from continuing operations, before income taxes of $206 million consisted of a increase in remeasurement of liability for future policy benefits of $14 million, a decrease in policyholders’ benefits of $13 million, an increase in change in market risk benefits and purchased market risk benefits of $204 million and an increase in interest credited to policyholder’s account balances of $1 million.

Model Changes

There were no material model changes in the first nine months of 2023 and 2022.

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 nine months ended September 30, 2023 and 2022 by segment and Corporate and Other.

2023 Assumption Updates

The impact of our 2023 annual review on Non-GAAP operating earnings was favorable by $15 million before taking into consideration the tax impacts, or $12 million after tax.

The net impact of assumption changes on Non-GAAP operating earnings increased other income by $4 million, decreased remeasurement of liability for future policy benefits by $10 million, and decreased policyholders’ benefits by $1 million. Non-GAAP operating earnings excludes items related to variable annuity product features, such as changes in the market risk benefits and purchased market risk benefits.

2022 Assumption Updates

The impact of our 2022 annual review on Non-GAAP operating earnings was unfavorable by $2 million before taking into consideration the tax impacts or $1 million after tax.

The net impact of assumption changes on Non-GAAP operating earnings increased remeasurement of liability for future policy benefits by $14 million, decreased policyholders’ benefits by $13 million and increased interest credited by to policyholder’s account balances by $1 million. Non-GAAP operating earnings excludes items related to variable annuity product features, such as changes in the market risk benefits and purchased market risk benefits.

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, 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 a 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 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; 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, impact of the annual actuarial assumption updates attributable to LFPB; 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 deferred tax valuation allowance.

In the third quarter 2023, the Company updated its operating earnings measure to exclude the impact of the annual actuarial assumption update attributable to LFPB as the majority of the earnings volatility attributable to these assumption updates relate to the Company’s Legacy and non-business segment products and as such do not represent the Company’s ongoing revenue generating activities or future business strategy, and impedes comparability of operating results period over period. Non-GAAP Operating Earnings were favorably impacted by this change in the amount of $61 million for the three and nine months ended

September 30, 2023, respectively. The presentation of operating earnings in prior periods was not revised to reflect this modification because the impact to those periods was immaterial.

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:

(in millions)

(1) Includes certain legal accruals related to the COI litigation of $— million and $35 million for the three and nine months ended September 30, 2023, respectively and $2 million and $168 million for the three and nine months ended September 30, 2022, respectively. Includes policyholder benefit costs of $75 million for the nine months ended September 30, 2022 stemming from a deal to repurchase UL policies from one entity that had invested in numerous policies purchased in the life settlement market. Includes the impact of unfavorable annual actuarial assumptions updates related to LFPB of $61 million for the three and nine months ended September 30, 2023. Prior period impact was immaterial and was not revised.

(2) For the three and nine months ended September 30, 2023, non-recurring tax items reflect primarily the effect of uncertain tax positions for a given audit period and an increase of the deferred tax valuation allowance of $20 million and a decrease of $970 million, respectively.

(3) Includes the impact of favorable assumption updates of $40 million for the three and nine months ended September 30, 2023. Includes the impact of unfavorable assumption updates of $204 million for the three and nine months ended September 30, 2022.

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:

(Dollars in millions)

103

(Dollars in millions)

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:

(1) For periods presented with a net loss, basic shares are used for EPS.

(2) Includes certain gross legal expenses related to the COI litigation and claims related to a commercial relationship of $0.00 and $0.10 for the three and nine months ended September 30, 2023, respectively and $0.01 and $0.44 for the three and nine months ended September 30, 2022, respectively. Includes policyholder benefit costs of $0.20 for the nine months ended September 30, 2022 stemming from a deal to repurchase UL policies from one entity that had invested in numerous policies purchased in the life settlement market. Includes the impact of unfavorable annual actuarial assumptions updates related to LFPB of $0.18 and $0.17 for the three and nine months ended September 30, 2023. Prior period impact was immaterial and was not revised.

(3) For the three and nine months ended September 30, 2023 and 2022, non-recurring tax items reflects the effect of uncertain tax positions for a given audit period and an increase of a deferred tax valuation allowance of $0.06 and a decrease of $2.73.

(4) Includes the impact of favorable assumption updates of $0.11 and $0.67 for the three and nine months ended September 30, 2023. Includes the impact of unfavorable assumption updates of $0.54 and $0.53 million for the three and nine months ended September 30, 2022.

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.

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):

Consolidated Statements of Income (Loss)

(in millions, except per share data)

105

(in millions, except per share data)

(in millions)

The following table summarizes our Non-GAAP Operating Earnings per common share:

Three Months Ended September 30, 2023 Compared to the Three Months Ended September 30, 2022

Net Income (Loss) Attributable to Holdings

Net income attributable to Holdings increased $470 million to $1.1 billion for the three months ended September 30, 2023 from $594 million in the three months ended September 30, 2022. The following notable items were the primary drivers for the change in net income (loss):

Favorable items included:

• Net derivative gains increased by $416 million mainly due to reduced rates derivatives positions during the third quarter 2023 compared to the third quarter 2022, during which rates rose significantly.
• Change in market risk benefits and purchased market risk benefits decreased by $326 million mainly due to higher interest rate increases during third quarter 2023 compared to third quarter 2022.
• Net investment income increased by $229 million mainly due to higher assets, higher investment yields and higher alternative investment income, partially offset by lower income from TIPS offset in derivatives.
• Fee-type revenue increased by $66 million mainly due to higher investment advisory base fees driven by higher average AUM in our Investment Management and Research segment and higher Advisory fee type revenue in our Wealth Management segment attributed to higher average assets balances combined with increased interest income from sweep accounts.
• Compensation, benefits, interest and other operating expenses decreased by $17 million mainly due to a decrease in other operating expenses, partially offset by an increase in compensation and benefits and interest expense.

These were partially offset by the following unfavorable items:

• Interest credited to policyholders’ account balances increased by $178 million mainly due to higher interest rates on funding agreements in Corporate and Other and growth of SCS account values in our Individual Retirement segment, partially offset by the impact of the Global Atlantic Transaction in our Group Retirement segment.
• Investment losses increased by $79 million mainly due to higher losses on our rebalancing program to reduce duration during third quarter 2023 compared to third quarter 2022.
• Policyholders’ benefits increased by $64 million mainly due to higher net mortality in our Protection Solutions segment.
• Commissions and distribution-related payments increased by $37 million mainly due to higher average Separate Accounts account values in our Individual Retirement segment, higher Advisory fee type revenue in our Wealth Management segment and higher premiums from employee benefits in our Protection Solution segment.
• Remeasurement of liability for future policy benefits increased by $29 million mainly due to higher unfavorable assumption updates in third quarter 2023 versus third quarter 2022.
• Amortization of DAC increased by $17 million mainly due to growth in the Individual Retirement segment from sales momentum.
• Net income attributable to noncontrolling interest increased by $17 million mainly due to higher pre-tax earnings and an increase of noncontrolling interest and gains from AB’s consolidated VIEs.
• Income tax expense increased by $163 million mainly due to higher pre-tax income for the third quarter 2023 compared to third quarter 2022.

Non-GAAP Operating Earnings

Non-GAAP Operating Earnings increased by $27 million to $413 million for the three months ended September 30, 2023 from $386 million in the three months ended September 30, 2022. The following notable items were the primary drivers for the change in Non-GAAP Operating Earnings:

Favorable items included:

• Net investment income increased by $194 million mainly due to higher assets, higher investment yields and higher alternative investment income, partially offset by lower income from TIPS offset in derivatives.
• Fee-type revenue increased by $84 million mainly due to higher investment advisory base fees driven by higher average AUM in our Investment Management and Research segment and higher Advisory fee type revenue in our Wealth Management segment attributed to higher average assets balances combined with increased interest income from sweep accounts.
• Remeasurement of liability for future policy benefits decreased by $35 million mainly due to favorable assumption updates and model changes in third quarter 2023 compared to third quarter 2022 in our Protection Solutions segment.
• Net derivative gains increased $35 million mainly due to lower losses from TIPS hedging, offset in net investment income.

These were partially offset by the following unfavorable items:

• Interest credited to policyholders’ account balances increased by $178 million mainly due to higher interest rates on funding agreements in Corporate and Other and growth of SCS account values in our Individual Retirement segment, partially offset by the impact of the Global Atlantic Transaction in our Group Retirement segment.
• Policyholders’ benefits increased by $69 million mainly due to higher net mortality in our Protection Solutions segment.
• Commissions and distribution-related payments increased by $37 million mainly due to higher average Separate Accounts values in our Individual Retirement segment, higher Advisory fee type revenue in our Wealth Management segment and higher premiums from employee benefits in our Protection Solution segment.
• Amortization of DAC increased by $17 million mainly due to growth in the Individual Retirement segment from sales momentum.
• Net income attributable to the noncontrolling interest increased by $18 million mainly due to higher pre-tax earnings and an increase of noncontrolling interest.

Nine Months Ended September 30, 2023 Compared to the Nine Months Ended September 30, 2022

Net Income (Loss) Attributable to Holdings

Net income attributable to Holdings decreased by $91 million to a net income of $2.0 billion for the nine months ended September 30, 2023 from a net income of $2.1 billion for the nine months ended September 30, 2022. The following notable items were the primary drivers for the change in net income (loss):

Unfavorable items included:

• Net derivative losses increased by $3.4 billion mainly due to equity market appreciation during the nine months ended September 30, 2023 compared to equity market depreciation during the nine months ended September 30, 2022.
• Interest credited to policyholders’ account balances increased by $519 million mainly due to higher interest rates on funding agreements in Corporate and Other and growth of SCS account values in our Individual Retirement segment, partially offset by the impact of the Global Atlantic Transaction on our Group Retirement segment.
• Fee-type revenue decreased by $187 million mainly driven by lower investment advisory fees from our Investment Management and Research segment primarily driven by lower average AUM, and lower assets from the Global Atlantic Transaction in our Group Retirement segment.
• Policyholders’ benefits increased by $87 million mainly due to higher net mortality and growth in Employee Benefits in our Protection Solutions segment and higher benefits from GMIB annuitizations, which is offset by higher premiums, in our Legacy segment.
• Amortization of DAC increased by $36 million mainly due to growth in the Individual Retirement segment from sales momentum.
• Net income attributable to noncontrolling interest increased by $67 million mainly due to gains from AB’s consolidated VIEs, partially offset by lower AB pre-tax income.

These were partially offset by the following favorable items:

• Change in market risk benefits and purchased market risk benefits decreased by $1.6 billion mainly due to an increase in equity markets during 2023 compared to a decrease during 2022, partially offset by a lower increase in interest rates from 2023 compared to 2022.
• Net investment income increased by $740 million mainly due to higher assets, higher investment yields, and higher income from seed capital investments, partially offset by lower alternative investment income and lower income from TIPS, offset in derivatives.
• Investment losses decreased by $336 million mainly due to rebalancing in 2022 versus sales to reduce duration in 2023.
• Compensation, benefits, interest and other operating expenses decreased by $191 million mainly due to lower litigation accrual in the second quarter 2022 in Corporate and Other, partially offset by an increase in pension costs resulting from the higher interest rate environment.
• Income tax expense decreased by $1.3 billion primarily due to a partial release of the valuation allowance of $970 million on the deferred tax asset, and lower pre-tax income for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022.

See “—Significant Factors Impacting Our Results—Effect of Assumption Updates on Operating Results” for more information regarding assumption updates.

Non-GAAP Operating Earnings

Non-GAAP Operating Earnings decreased by $160 million to $1.2 billion for the nine months ended September 30, 2023 from $1.4 billion in the nine months ended September 30, 2022. The following notable items were the primary drivers for the change in Non-GAAP Operating Earnings.

Unfavorable items included:

• Interest credited to policyholders’ account balances increased by $519 million mainly due to higher interest rates on funding agreements in Corporate and Other and growth of SCS account values in our Individual Retirement segment and higher interest rates in our Protection Solutions segment, partially offset by the impact of the Global Atlantic Transaction in our Group Retirement segment.
• Policyholders’ benefits increased by $162 million mainly due to higher net mortality and growth in Employee Benefits in our Protection Solutions segment and higher benefits from GMIB annuitizations, which is offset by higher premiums, in our Legacy segment.
• Fee-type revenue decreased by $85 million mainly driven by lower investment advisory fees from our Investment Management and Research segment primarily driven by lower average AUM, and lower assets from the Global Atlantic Transaction, partially offset by higher equity markets, in our Group Retirement segment.
• Net derivative losses increased by $38 million primarily from our Investment Management and Research segment driven by higher losses from economically hedging seed capital investments in rising equity markets.
• Amortization of DAC increased by $36 million mainly due to growth in our Individual Retirement segment from sales momentum.
• Net income attributable to the noncontrolling interest increased by $13 million mainly due to higher pre-tax earnings and an increase of noncontrolling interest.

These were partially offset by the following favorable items:

• Net investment income increased by $509 million mainly due to higher assets, higher investment yields and higher income from seed capital investments, partially offset by lower alternative investment income and lower income from TIPS, offset in derivatives.
• Remeasurement of liability for future policy benefits decreased by $67 million mainly due to favorable assumption updates and model changes in 2023 compared to 2022 and unfavorable experience in prior period in our Legacy assumed life insurance business.
• Compensation, benefits, interest expense and other operating costs decreased by $37 million mainly due to lower general and administrative costs primarily relating to lower portfolio servicing fees primarily offset by higher interest rates in our Investment Management and Research segment, partially offset by an increase in pension cost.
• Income tax expense decreased by $74 million mainly driven by lower pre-tax earnings and a lower effective tax rate in 2023.

Results of Operations by Segment

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 have six reportable segments. Prior period results have been revised in connection with updates to our reportable segments.

We manage our business through the following 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 our six segments in Corporate and Other. The following section presents our discussion of operating earnings (loss) by segment and AUM, AV and Protection Solutions Reserves by segment, as applicable. Consistent with U.S. GAAP guidance for segment reporting, operating earnings (loss) is our U.S. GAAP measure of segment performance. See Note 17 of the Notes to the Consolidated Financial Statements for further information on our segments.

The following table summarizes operating earnings (loss) on our segments and Corporate and Other:

(in millions)

Effective Tax Rates by Segment

Income tax expense is calculated using the ETR and then allocated to our business segments using a 17% ETR for our retirement and protection businesses (Individual Retirement, Group Retirement, Protection Solutions and Legacy), a 24% ETR for Wealth Management and a 24% ETR for Investment Management and Research.

Individual Retirement

The Individual Retirement segment includes our variable annuity products which primarily meet the needs of individuals saving for retirement or seeking retirement income.

The following table summarizes operating earnings (loss) of our Individual Retirement segment:

(in millions)

110

Key components of operating earnings (loss) were:

(in millions)

The following table summarizes AV for our Individual Retirement segment:

(in millions)

(1) AV presented are net of reinsurance.

The following table summarizes a roll-forward of AV for our Individual Retirement segment:

(in millions)

(1) For the nine months ended September 30, 2023, amounts reflect a total special payment applied to the accounts of active clients during the three months ended March 31, 2023 as part of a previously disclosed settlement agreement between Equitable Financial and the SEC.

Three Months Ended September 30, 2023 Compared to the Three Months Ended September 30, 2022 for the Individual Retirement Segment

Operating earnings

Operating earnings increased $27 million to $210 million during the three months ended September 30, 2023 from $183 million in the three months ended September 30, 2022. The following notable items were the primary drivers of the change in operating earnings:

Favorable items included:

• Net investment income increased by $155 million mainly due to higher SCS asset balances and higher investment yields, partially offset by lower income from TIPS offset in derivatives.
• Fee-type revenue increased by $15 million due to higher average Separate Accounts values as a result of higher equity markets in third quarter 2023.
• Net derivative losses decreased by $11 million mainly due to lower losses from TIPS hedging, offset in net investment income.

These were partially offset by the following unfavorable items:

• Interest credited to policyholders’ account balances increased by $101 million mainly due to the growth of SCS account values.
• Amortization of DAC increased by $17 million mainly driven by growth in the business from sales momentum.
• Commissions and distribution-related payments increased by $15 million mainly due to higher average Separate Accounts values.
• Income tax expense increased by $10 million mainly driven by higher pre-tax earnings and a higher effective tax rate in third quarter 2023.

Net Flows and AV

• Total AV as of September 30, 2023 was $83.2 billion, a decrease of $741 million, compared to June 30, 2023. The decline in AV was primarily due to $2.4 billion of equity markets deprecation in third quarter 2023, partially offset by net inflows of $1.7 billion.
• Net inflows of $1.7 billion were $401 million higher than in the three months ended September 30, 2022, mainly driven by higher gross premiums on our newer, less capital-intensive products.

Nine Months Ended September 30, 2023 Compared to the Nine Months Ended September 30, 2022 for the Individual Retirement Segment

Operating earnings

Operating earnings increased $72 million to $644 million during the nine months ended September 30, 2023 from $572 million in the nine months ended September 30, 2022. The following notable items were the primary drivers of the change in operating earnings:

Favorable items included:

• Net investment income increased by $421 million mainly due to higher SCS asset balances and higher investment yields, partially offset by lower income from TIPS offset in derivatives.
• Net derivative losses decreased by $19 million mainly due to increased losses from TIPS hedging which is offset in net investment income.

These were partially offset by the following unfavorable items:

• Interest credited to policyholders’ account balances increased by $264 million mainly due to growth of SCS account values.
• Amortization of DAC increased by $36 million mainly due to growth in the business from sales momentum.
• Compensation, benefits, interest expense and other operating costs increased by $23 million mainly due to an increase in pension costs resulting from the higher interest rate environment.
• Commissions and distribution-related payments increased by $20 million mainly due to growth in the SCS business.
• Policyholders’ benefits increased by $18 million mainly due to higher non-GMxB benefit elections, which is offset by higher premiums.

Net Flows and AV

• The increase in AV of $8.9 billion in the nine months ended September 30, 2023 was driven by an increase in investments performance as a result of equity market appreciation of $4.8 billion in the first nine months of 2023, as well as net inflows of $4.1 billion.
• Net inflows of $4.1 billion were $1.0 billion higher than in the nine months ended September 30, 2022, mainly driven by higher sales in the first nine months of 2023 as compared to the first nine months of 2022.

Group Retirement

The Group Retirement segment offers tax-deferred investment and retirement services or products to plans sponsored by educational entities, municipalities and not-for-profit entities, as well as small and medium-sized businesses.

The following table summarizes operating earnings (loss) of our Group Retirement segment:

(in millions)

Key components of operating earnings (loss) are:

(in millions)

113

The following table summarizes AV and AUA for our Group Retirement segment:

(in millions)

(1) AV presented are net of reinsurance.

The following table summarizes a roll-forward of AV and AUA for our Group Retirement segment:

(in millions)

(1) For the three and nine months ended September 30, 2023, net outflows of $172 million and $492 million and investment performance, interest credited and policy charges of $275 million and $474 million, respectively, are excluded as these amounts are related to ceded AV to Global Atlantic.

(2) For the nine months ended September 30, 2023, amounts reflect a total special payment applied to the accounts of active clients as part of a previously disclosed settlement agreement between Equitable Financial and the SEC.

Three Months Ended September 30, 2023 Compared to the Three Months Ended September 30, 2022 for the Group Retirement Segment

Operating earnings

Operating earnings increased by $6 million to $105 million during the three months ended September 30, 2023 from $99 million in the three months ended September 30, 2022. The following notable items were the primary drivers of the change in operating earnings:

Favorable items included:

• Interest credited to policyholders’ account balances decreased by $24 million mainly due to the portion of policies ceded in the Global Atlantic Transaction.
• Net derivative losses decreased by $13 million due to lower losses from TIPS hedging which is offset in net investment income.

These were partially offset by the following unfavorable items:

• Net investment income decreased by $32 million due to lower assets from the Global Atlantic Transaction and lower income from TIPS offset in derivatives, partially offset by higher investment yields.

See “—Significant Factors Impacting Our Results—Effect of Assumption Updates on Operating Results” for more information regarding assumption updates.

Net Flows and AV

• The decrease in AV of $1.1 billion in the three months ended September 30, 2023 was driven by equity market depreciation of $961 million and net outflows of $175 million.
• Net outflows of $175 million for the three months ended September 30, 2023 increased by $118 million compared to the three months ended September 30, 2022, driven by higher surrender activity, partially offset by higher gross premiums in our institutional market.

Nine Months Ended September 30, 2023 Compared to the Nine Months Ended September 30, 2022 for the Group Retirement Segment

Operating earnings

Operating earnings decreased by $53 million to $301 million during the nine months ended September 30, 2023 from $354 million during the nine months ended September 30, 2022. The following notable items were the primary drivers of the change in operating earnings:

Unfavorable items included:

• Net investment income decreased by $131 million due to lower alternative investment income, lower income from TIPS partially offset in derivatives and lower assets from the Global Atlantic Transaction, partially offset by higher investment yields.
• Fee-type revenue decreased by $44 million primarily due to lower assets from the Global Atlantic Transaction, partially offset by higher equity market performance.

These were partially offset by the following favorable items:

• Interest credited to policyholders’ account balances decreased by $72 million mainly due to the portion of policies ceded in the Global Atlantic Transaction.
• Net derivative losses decreased by $26 million due to lower losses from TIPS hedging which is offset in net investment income.
• Income tax expense decreased by $18 million driven by lower pre-tax earnings and a lower effective tax rate in 2023.

Net Flows and AV

• The increase in AV of $1.8 billion in the nine months ended September 30, 2023 was driven by equity market appreciation of $2.0 billion, slightly offset by net outflows of $211 million.
• Net outflows of $211 million for the nine months ended September 30, 2023 increased $821 million compared to the nine months ended September 30, 2022, driven by a large lump sum premium in our institutional market in 2022 and higher surrender activity in 2023.

Investment Management and Research

The Investment Management and Research segment provides diversified investment management, research and related services to a broad range of clients around the world. Operating earnings (loss), net of tax, presented here represents our average economic interest in AB of approximately 61% and 65% during the nine months ended September 30, 2023 and 2022.

(in millions)

Key components of operating earnings (loss) were:

(in millions)

Changes in AUM in the Investment Management and Research segment were as follows:

(in billions)

Average AUM in the Investment Management and Research segment for the periods presented by distribution channel and investment services were as follows:

(in billions)

(1) Includes index and enhanced index services.

(2) Includes certain multi-asset solutions and services not included in equity of fixed income services.

Three Months Ended September 30, 2023 Compared to the Three Months Ended September 30, 2022 for the Investment Management and Research Segment

Operating earnings

Operating earnings increased $5 million to $99 million during the three months ended September 30, 2023 from $94 million during the three months ended September 30, 2022. The following notable items were the primary drivers of the change in operating earnings:

Favorable items included:

• Fee-type revenue increased by $44 million primarily due to higher investment advisory base fees driven by higher average AUM partially offset by lower portfolio fee rates, higher performance based fees due to increased performance fees earned on Private Credit Funds, partially offset by lower performance fees on U.S. Real Estate Funds and higher other income from higher net interest earned on customer margin balances.

These were partially offset by the following unfavorable items included:

• Compensation, benefits, interest expense and other operating costs increased by $17 million mainly due to higher expense related to higher average outstanding borrowings and higher interest rates and higher incentive and base compensation expense, partially offset by lower general and administrative costs related to lower portfolio servicing fees and professional fees.
• Net derivative gains decreased by $6 million mainly due to lower gains from economically hedging seed capital investments.
• Net income attributable to noncontrolling interest increased by $11 million due to higher pre-tax earnings and an increase of noncontrolling interest.

Long-Term Net Flows and AUM

• Total AUM as of September 30, 2023 was $669.0 billion, down $22.5 billion or 3.3%, compared to June 30, 2023. During the third quarter 2023, AUM decreased as a result of market depreciation of $20.6 billion and net outflows of $1.9 billion. Market depreciation was attributed to Retail of 9.0 billion, Institutions of 8.8 billion, and Private Wealth of 2.8 billion. Net outflows were due to Institutions net outflows of $3.5 billion, Retail net inflows of $1.6 billion and Private Wealth net inflows of $0.0 billion.

Nine Months Ended September 30, 2023 Compared to the Nine Months Ended September 30, 2022 for the Investment Management and Research Segment

Operating earnings

Operating earnings decreased $34 million to $297 million during the nine months ended September 30, 2023 from $331 million in the nine months ended September 30, 2022. The following notable items were the primary drivers of the change in operating earnings:

Unfavorable items included:

• Fee-type revenue decreased by $92 million primarily due to lower investment advisory base fees driven by lower average AUM partially offset by higher portfolio fee rates, lower performance based fees due to lower performance fees earned on U.S. Real Estate Funds partially offset by higher performance fees on Private Credit Funds and Global Core Equity Funds, partially offset by higher other income from higher net interest earned on customer margin balances.
• Net derivative gains decreased by $59 million mainly due to lower income from economically hedging the seed capital investments (partially offset by net investment income).
• Compensation, benefits, interest expense and other operating costs increased by $3 million mainly due to higher expense related to higher average outstanding borrowings and higher interest rates as well as higher incentive and base compensation expense, primarily offset by lower general and administrative costs related to lower portfolio servicing fees and professional fees.

These were partially offset by the following favorable items:

• Net investment income increased by $60 million mainly due to higher income from seed capital investments (partially offset by net derivative losses).
• Commissions and distribution-related payments decreased by $33 million mainly due to lower payments to financial intermediaries for the distribution of AB mutual funds.
• Income tax expense decreased by $25 million due to lower pre-tax earnings and a lower effective tax rate in 2023.

Long-Term Net Flows and AUM

• Total AUM as of September 30, 2023 was $669.0 billion, up $22.6 billion, or 3.5%, compared to December 31, 2022. The increase is a result of market appreciation of $27.8 billion, partially offset by net outflows of $5.2 billion. Market appreciation attributed to Retail of $13.9 billion, Institutions of $8.9 billion and Private Wealth of $5.0 billion. Institutions net outflows of $9.4 billion were partially offset by Private Wealth and Retail net inflows of $2.5 billion and $1.7 billion , respectively.

Protection Solutions

The Protection Solutions segment includes our life insurance and employee benefits businesses. We provide a targeted range of products aimed at serving the financial needs of our clients throughout their lives, including VUL, IUL and term life products. In 2015, we entered the employee benefits market and currently offer a suite of dental, vision, life, as well as short- and long-term disability insurance products to small and medium-size businesses.

In recent years, we have refocused our product offering and distribution towards less capital intensive, higher return accumulation and protection products. For example, in January 2021, we discontinued offering our most interest sensitive IUL product. We plan to improve our operating earnings over time through earnings generated from sales of our repositioned product portfolio and by proactively managing and optimizing our in-force book.

The following table summarizes operating earnings (loss) of our Protection Solutions segment:

(in millions)

118

Key components of operating earnings (loss) were:

(in millions)

The following table summarizes Protection Solutions Reserves for our Protection Solutions segment:

(in millions)

(1) Does not include Protection Solutions Reserves for our employee benefits business as it is a scaling business and therefore has immaterial in-force policies.

The following table presents our in-force face amounts for our individual life insurance products:

(in billions)

(1) Includes individual life insurance and does not include employee benefits as it is a scaling business and therefore has immaterial in-force policies.

(2) UL includes GUL.

(3) VUL includes VL and COLI.

Three Months Ended September 30, 2023 Compared to the Three Months Ended September 30, 2022 for the Protection Solutions Segment

Operating earnings (loss)

Operating earnings increased by $4 million to $34 million during the three months ended September 30, 2023 from $30 million in the three months ended September 30, 2022. The following notable items were the primary drivers of the change in operating earnings:

Favorable items included:

• Remeasurement of liability for future policy benefits decreased by $38 million mainly due to favorable assumption updates in third quarter 2023 compared to third quarter 2022.
• Net investment income increased by $24 million mainly due to higher alternative investment income and higher investment yields, partially offset by lower income from TIPS offset in derivatives.
• Net derivative lossses decreased by $20 million mainly due to lower losses from TIPS hedging which is offset in net investment income.
• Fee-type revenue increased by $19 million mainly driven by Employee Benefits premium growth.

These were partially offset by the following unfavorable items:

• Policyholders’ benefits increased by $82 million mainly due to higher net mortality.
• Commissions and distribution-related payments increased by $6 million mainly due to higher premiums in Employee Benefits.

Nine Months Ended September 30, 2023 Compared to the Nine Months Ended September 30, 2022 for the Protection Solutions Segment

Operating earnings (loss)

Operating earnings decreased $114 million to $23 million during the nine months ended September 30, 2023 from $137 million in the nine months ended September 30, 2022. The following notable items were the primary drivers of the change in the operating loss:

Unfavorable items included:

• Policyholders’ benefits increased by $155 million mainly due to higher net mortality and growth in Employee Benefits.
• Net investment income decreased by $41 million mainly due to lower alternative investment income, lower income from TIPS partially offset in derivatives, partially offset by higher investment yields.
• Compensation, benefits, interest expense and other operating costs increased by $26 million mainly due to higher pension and other benefit costs.
• Interest credited to policyholders’ account balances increased by $12 million mainly due to higher interest rates.

These were partially offset by the following favorable items:

• Fee-type revenue increased by $50 million mainly driven by higher premiums due to growth in Employee Benefits (offset in policyholders’ benefits).
• Remeasurement of liability for future policy benefits decreased by $47 million mainly due to favorable assumption updates in 2023 compared to 2022.
• Income tax expense decreased by $26 million primarily due to a lower pre-tax earnings.

Wealth Management

The Wealth Management segment is an emerging leader in the wealth management space with a differentiated advice value proposition that offers discretionary and non-discretionary investment advisory accounts, financial planning and advice, insurance, and annuity products. In 2023, we began reporting this business separately from our other segments and Corporate and Other.

The following table summarizes operating earnings (loss) of our Wealth Management segment:

(in millions)

Key components of operating earnings (loss) were:

(in millions)

The following table summarizes a revenue by activity type for our Wealth Management segment:

(in millions)

121

The following table summarizes a roll-forward of AUA roll-forward for our Wealth Management segment:

(in millions)

Three Months Ended September 30, 2023 Compared to the Three Months Ended September 30, 2023 for the Wealth Management Segment

Operating earnings

Operating earnings increased by $18 million to $40 million during the three months ended September 30, 2023 from $22 million in the three months ended September 30, 2022. The following were notable changes:

Favorable items included:

• Investment management, service fees and other income increased by $34 million mainly due to higher Advisory fee type revenue attributed to higher average assets balances combined with increased interest income from sweep accounts.
• Net investment income increased by $3 million mainly due to higher interest rates.

These were partially offset by the following unfavorable items:

• Commissions and distribution-related payments increased by $13 million mainly due to higher Advisory fee type revenue.
• Income tax expense increased by $5 million primarily due to higher pre-tax earnings.

Net Flows and AV

• The decrease in AUA of $1.1 billion in the three months ended September 30, 2023 was driven by equity market depreciation in 2023 of $2.6 billion as well as net inflows of $1.6 billion.
• Net inflows of $1.6 billion were $443 million higher than in the three months ended September 30, 2022 mainly driven by increased sales.

Nine Months Ended September 30, 2023 Compared to the Nine Months Ended September 30, 2022 for the Wealth Management Segment

Operating earnings

Operating earnings increased $36 million to $114 million during the nine months ended September 30, 2023 compared to $78 million in the nine months ended September 30, 2022. The following were notable changes:

Favorable items included:

• Investment management, service fees and other income increased by $38 million mainly due to higher interest income from sweep accounts combined with increased distribution fees from higher retirement sales.
• Net investment income increased by $8 million mainly due to higher interest rates.

These were partially offset by the following unfavorable items:

• Income tax expense increased by $8 million primarily due to higher pre-tax earnings, partially offset by a lower effective tax rate.

Net Flows and AV

• The increase in AUA of $7.0 billion in the nine months ended September 30, 2023 was driven by net inflows of $4.3 billion in 2023 and equity market appreciation of $2.6 billion.
• Net inflows of $4.3 billion were $386 million higher than in the nine months ended September 30, 2022 mainly driven by increased sales.

Legacy

The Legacy segment consists of our capital intensive fixed-rate GMxB business written prior to 2011. In 2023, we began reporting this business separately from our Individual Retirement business.

The following table summarizes operating earnings (loss) of our Legacy segment:

(in millions)

Key components of operating earnings (loss) were:

(in millions)

123

The following table summarizes AV for our Legacy segment:

(in millions)

(1) AV presented are net of reinsurance.

The following table summarizes a roll-forward of AV for our Legacy segment:

(in millions)

Three Months Ended September 30, 2023 Compared to the Three Months Ended September 30, 2023 for the Legacy segment

Operating earnings

Operating earnings decreased $9 million to $41 million during the three months ended September 30, 2023 from $50 million in the three months ended September 30, 2022. The following notable items were the primary drivers of the change in operating earnings:

Unfavorable items included:

• Policyholders’ benefits increased by $8 million mainly due to higher GMIB annuitizations, which is offset by higher premiums.
• Net investment income decreased by $6 million mainly due to lower assets.

These were partially offset by the following favorable items:

• Compensation, benefits, interest expense and other operating costs decreased by $6 million mainly due to lower pension and other benefit costs.

Net Flows and AV

• The decrease in AV of $1.5 billion in the three months ended September 30, 2023 was driven by a decrease in investments performance of $909 million as a result of equity market depreciation in third quarter 2023, and net outflows of $554 million.
• Net outflows of $554 million were $55 million higher than in the nine months ended September 30, 2022, mainly driven by continuing runoff of the business.

Nine Months Ended September 30, 2023 Compared to the Nine Months Ended September 30, 2022 for the Legacy segment

Operating earnings

Operating earnings decreased $24 million to $146 million during the three months ended September 30, 2023 from $170 million in the nine months ended September 30, 2022. The following notable items were the primary drivers of the change in operating earnings:

Unfavorable items included:

• Policyholders’ benefits increased by $41 million mainly due to higher benefits from GMIB annuitizations, which is offset by higher premiums.
• Fee-type revenue decreased by $11 million mainly driven by lower average Separate Accounts values as a result of lower equity markets and net outflows, partially offset by higher premiums from the GMIB annuitizations.

These were partially offset by the following favorable items:

• Commissions and distribution-related payments decreased by $13 million mainly due to lower average Separate Accounts values as result of lower equity markets and net outflows, partially offset by lower commission reimbursements recorded in other income.
• Income tax expense decreased by $10 million primarily due to lower pre-tax earnings and a lower effective tax rate in 2023.

Net Flows and AV

• The decrease in AV of $573 million in the nine months ended September 30, 2023 was driven by net outflows of $1.6 billion, partially offset by an increase in investments performance and interest credited to account balances, net of policy charges, of $1.1 billion.
• Net outflows of $1.6 billion were consistent with the nine months ended September 30, 2022.

Corporate and Other

Corporate and Other includes some of our financing and investment expenses. It also includes: the Closed Block, run-off variable annuity reinsurance business, run-off group pension business, run-off health business, benefit plans for our employees, certain strategic investments and certain unallocated items, including capital and related investments, interest expense and financing fees and corporate expense. AB’s results of operations are reflected in the Investment Management and Research segment. Accordingly, Corporate and Other does not include any items applicable to AB.

The following table summarizes operating earnings (loss) of Corporate and Other:

(in millions)

125

General Account Investment Portfolio

Our investment philosophy is driven by our long-term commitments to clients, robust risk management and strategic asset allocation. Our General Account investment portfolio investment strategy seeks to achieve sustainable risk-adjusted returns by focusing on principal preservation and investment return, subject to duration and liquidity requirements by product as well as diversification of investment risks. Investment activities are undertaken based on established investment guidelines and are required to comply with applicable laws and insurance regulations.

Risk tolerances are established for credit risk, market risk, liquidity risk and concentration risk across issuers and asset classes, each of which seek to mitigate the impact of cash flow variability arising from these risks. Significant interest rate increases and market volatility since 2022 have reduced the fair value of fixed maturities from a net unrealized gain position to a net unrealized loss. As a part of asset and liability management, we maintain a weighted average duration for our General Account investment portfolio that is within an acceptable range of the estimated duration of our liabilities given our risk appetite and hedging programs.

The General Account investment portfolio consists largely of investment grade fixed maturities, short-term investments, commercial, agricultural and residential mortgage loans, alternative investments and other financial instruments. Fixed maturities include publicly issued corporate bonds, government bonds, privately placed notes and bonds, bonds issued by states and municipalities, agency and non-agency mortgage-backed securities and asset-backed securities. In addition, from time to time we use derivatives to hedge our exposure to equity markets, interest rates, foreign currency and credit spreads.

We incorporate ESG factors into the investment processes for a significant portion of our General Account portfolio. As investors with a long-term horizon, we believe that companies with sustainable practices are better positioned to deliver value to stakeholders over an extended period. These companies are more likely to increase sales through sustainable products, reduce energy costs and attract and retain talent. This belief underpins our approach to sustainable investing, where we seek to enhance the sustainability and quality of our investment portfolio.

Investments in our surplus portfolio are generally comprised of a mix of fixed maturity investment grade and below investment grade securities as well as various alternative investments, primarily private equity and real estate equity. Although alternative investments are subject to period over period earnings fluctuations, they have historically achieved returns in excess of the fixed maturity portfolio.

The General Account investment portfolio reflects certain differences from the presentation of the U.S. GAAP Consolidated Financial Statements. This presentation is consistent with how we manage the General Account investment portfolio. For further investment information, see Note 3 and Note 4 of the Notes to the Consolidated Financial Statements.

Investment Results of the General Account Investment Portfolio

The following table summarizes the General Account investment portfolio results with Non-GAAP Operating Earnings adjustments by asset category for the periods indicated. This presentation is consistent with how we measure investment performance for management purposes.

(Dollars in millions)

127

(Dollars in millions)

(1) Includes, as of September 30, 2023, September 30, 2022 and December 31, 2022 respectively, $436 million, $370 million and $400 million of other invested assets. Amounts for certain consolidated VIE investments are shown net of associated non-controlling interest.

(2) Amount for fixed maturities and mortgages represents original cost, reduced by repayments, write-downs, adjusted amortization of premiums, accretion of discount and allowances. Cost for equity securities represents original cost reduced by write-downs; cost for other limited partnership interests represents original cost adjusted for equity in earnings and reduced by distributions.

(3) Cash and Short-term net of collateral expense.

(4) Investment fees are inclusive of investment management fees paid to AB.

AFS Fixed Maturities

The fixed maturity portfolio consists largely of investment grade corporate debt securities and includes significant amounts of U.S. government and agency obligations. The below investment grade securities in the General Account investment portfolio consist of loans to middle market companies, public high yield securities, bank loans, as well as “fallen angels,” originally purchased as investment grade investments.

AFS Fixed Maturities by Industry

The following table sets forth these fixed maturities by industry category along with their associated gross unrealized gains and losses:

AFS Fixed Maturities by Industry (1)

(Dollars in millions)

(1) Investment data has been classified based on standard industry categorizations for domestic public holdings and similar classifications by industry for all other holdings.

(2) Includes publicly traded agency pass-through securities and collateralized obligations.

(3) Includes credit-tranched securities collateralized by sub-prime mortgages, credit risk transfer securities and other asset types.

Fixed Maturities Credit Quality

The SVO of the NAIC evaluates the investments of insurers for regulatory reporting purposes and assigns fixed maturities to one of six categories (“NAIC Designations”). NAIC Designations of “1” or “2” include fixed maturities considered investment grade, which include securities rated Baa3 or higher by Moody’s or BBB- or higher by Standard & Poor’s. NAIC Designations of “3” through “6” are referred to as below investment grade, which include securities rated Ba1 or lower by Moody’s and BB+ or lower by Standard & Poor’s. As a result of time lags between the funding of investments and the completion of the SVO filing process, the fixed maturity portfolio typically includes securities that have not yet been rated by the SVO as of each balance sheet date. Pending receipt of SVO ratings, the categorization of these securities by NAIC designation is based on the expected ratings indicated by internal analysis.

The following table sets forth the General Account’s fixed maturities portfolio by NAIC rating:

AFS Fixed Maturities

(in millions)

Mortgage Loans

The mortgage portfolio primarily consists of commercial, agricultural, and residential mortgage loans. The investment strategy for the mortgage loan portfolio emphasizes diversification by property type and geographic location with a primary focus on asset quality. The commercial mortgage loan portfolio is backed by high quality properties located in primary markets typically owned by experienced institutional investors with a demonstrated ability to manage their assets through business cycles. Our commercial loan portfolio is monitored on an ongoing basis, assigning credit quality ratings for each loan, with the particular emphasis on loans that are scheduled to mature in the next 12 to 24 months. Scheduled maturities for the remainder of 2023 and full year 2024, respectively are $306 million and $1.3 billion, or 2% and 8% of the commercial mortgage portfolio. The commercial mortgage portfolio consists of 87% fixed rate loans and 13% floating rate loans. For floating rate loans, the borrower is typically required to purchase an interest rate cap to the scheduled maturity of the loan to protect against rising rates.

Commercial mortgage loans are evaluated annually to determine a current LTV ratio. Property financial statements, current rent roll, lease maturities, tenant creditworthiness, property physical inspections, and forecasted leasing market strength are used to develop projected cash flows. A discounted cash flow methodology which incorporates market data is used to determine property values. The average LTV ratio at origination provided by a certified appraisal firm was 53%. The average LTV ratio was 62% and 62% at September 30, 2023 and December 31, 2022, respectively, which reflects the most recent opinion of value on the underlying collateral.

Over the past year, we began working with CarVal to establish investment programs in residential whole loans and other private and public securities. These programs allow us to leverage CarVal’s expertise in asset classes where we are looking to increase exposure. The residential mortgage portfolio primarily consists of purchased closed end, amortizing residential mortgage loans. The investment strategy for the mortgage loan portfolio emphasizes high credit quality borrowers, conservative LTV ratios, superior ability to repay and geographic diversification.

Residential mortgage loans are pooled by loan type (i.e., Jumbo, Agency Eligible, Non-Qualified, etc.) and pooled by similar risk profiles (including consumer credit score and LTV ratios). The portfolio is monitored monthly primarily based on payment activity, occurrence of regional natural disasters and borrower interactions with the mortgage servicer.

The tables below show the breakdown of the amortized cost of the General Account’s investments in mortgage loans by geographic region and property type:

Mortgage Loans by Region and Property Type

(Dollars in millions)

131

Liquidity and Capital Resources

Liquidity refers to our ability to generate adequate amounts of cash from our operating, investment and financing activities to meet our cash requirements with a prudent margin of safety. Capital refers to our long-term financial resources available to support business operations and future growth. Our ability to generate and maintain sufficient liquidity and capital is dependent on the profitability of our businesses, timing of cash flows related to our investments and products, our ability to access the capital markets, general economic conditions and the alternative sources of liquidity and capital described herein. When considering our liquidity and cash flows, we distinguish between the needs of Holdings and the needs of our insurance and non-insurance subsidiaries. We also distinguish and separately manage the liquidity and capital resources of our retirement and protection businesses (our Individual Retirement, Group Retirement, Protection Solutions and Legacy segments) and our Investment Management and Research and Wealth Management segments.

Sources and Uses of Liquidity

The Company has sufficient cash flows from operations to satisfy liquidity requirements in 2023.

Cash Flows of Holdings

As a holding company with no business operations of its own, Holdings primarily derives cash flows from dividends from its subsidiaries and distributions related to its economic interest in AB, all of which is currently held outside our insurance company subsidiaries. These principal sources of liquidity are augmented by cash and short-term investments held by Holdings and access to bank lines of credit and the capital markets. The main uses of liquidity for Holdings are interest payments and debt repayment, payment of dividends and other distributions to stockholders (which may include stock repurchases) loans and capital contributions, if needed, to our insurance subsidiaries. Our principal sources of liquidity and our capital position are described in the following paragraphs.

Sources and Uses of Holding Company Highly Liquid Assets

The following table sets forth Holdings’ principal sources and uses of highly liquid assets:

(in millions)

132

(in millions)

(1) Represents net activity of draws and repayments of existing credit facilities between Holdings and affiliates.

Capital Contribution to Our Subsidiaries

During the nine months ended September 30, 2023, Holdings made cash capital contributions of $1.1 billion to Equitable America to support the Reinsurance Treaty. This transaction moved 50% of the account value from Equitable Life to Equitable America. This capital contribution enabled the Company to move capital to match the liabilities moved and maintain an RBC ratio above 400%.

Loans from Our Subsidiaries

There were no loans from our subsidiaries during the nine months ended September 30, 2023.

Cash Distributions from Our Subsidiaries

During the nine months ended September 30, 2023, Holdings received cash distributions from AB of $292 million and distributions from EFIM of $57 million, and EIM of $85 million.

Distributions from Insurance Subsidiaries

Our insurance companies are subject to limitations on the payment of dividends and other transfers of funds to Holdings and other affiliates under applicable insurance law and regulation. Also, more generally, the ability of our insurance subsidiaries to pay dividends can be affected by market conditions and other factors beyond our control.

Under New York’s insurance laws, which are applicable to Equitable Financial, a domestic stock life insurer may not, without prior approval of the NYDFS, pay an Ordinary Dividend. Extraordinary Dividends require the insurer to file a notice of its intent to declare the dividends with the NYDFS and obtain prior approval or non-disapproval from the NYDFS. Due to a permitted statutory accounting practice agreed to with the NYDFS, Equitable Financial will need the prior approval of the NYDFS to pay a Permitted Practice Ordinary Dividend. Applying the formula above, Equitable Financial could pay an Ordinary Dividend of up to approximately $1.7 billion in 2023. Holdings received a cash dividend distribution from Equitable Financial of $1.1 billion during May 2023 to support the Reinsurance Treaty. This transaction moved 50% of the account value from Equitable Life to Equitable America. This capital contribution enabled the Company to move capital to match the liabilities moved and maintain an RBC ratio above 400%. Holdings also received a dividend distribution from Equitable Financial of $600 million during July 2023.

Distributions from AllianceBernstein

ABLP is required to distribute all of its Available Cash Flow, as defined in the Amended and Restated Partnership Agreement of ABLP, to the holders of AB Units and to the General Partner. Available Cash Flow is defined as the cash flow received by ABLP from operations minus such amounts as the General Partner determines, in its sole discretion, should be retained by ABLP for use in its business, or plus such amounts as the General Partner determines, in its sole discretion, should be released from previously retained cash flow. Distributions by ABLP are made 1% to the General Partner and 99% among the limited partners.

Typically, Available Cash Flow has been the adjusted diluted net income per unit for the quarter multiplied by the number of general and limited partnership interests at the end of the quarter. In future periods, management of AB anticipates that Available Cash Flow will be based on adjusted diluted net income per unit, unless management of AB determines, with the concurrence of the Board of Directors of AB, that one or more adjustments that are made for adjusted net income should not be made with respect to the Available Cash Flow calculation.

AB Holding is required to distribute all of its Available Cash Flow, as defined in the Amended and Restated Agreement of Limited Partnership of AB Holding, to holders of AB Holding Units pro rata in accordance with their percentage interest in AB Holding. Available Cash Flow is defined as the cash distributions AB Holding receives from ABLP minus such amounts as the General Partner determines, in its sole discretion, should be retained by AB Holding for use in its business (such as the payment of taxes) or plus such amounts as the General Partner determines, in its sole discretion, should be released from previously retained cash flow. AB Holding is dependent on the quarterly cash distributions it receives from ABLP, which is subject to the performance of capital markets and other factors beyond our control. Distributions from AB Holding are made pro rata based on the holder’s percentage ownership interest in AB Holding.

As of September 30, 2023, Holdings and its non-insurance company subsidiaries hold approximately 170.1 million AB Units, 4.1 million AB Holding Units and the 1% General Partnership interest in ABLP.

As of September 30, 2023, the ownership structure of ABLP, including AB Units outstanding as well as the general partner’s 1% interest, was as follows:

Including both the general partnership and limited partnership interests in AB Holding and ABLP, Holdings and its subsidiaries had an approximate 62% economic interest in AB as of September 30, 2023. The issuance of AB Units relating to the CarVal acquisition is not expected to have a significant impact on the Company’s cash flows.

Holdings Credit Facilities

On June 24, 2021, Holdings entered into the Amended and Restated Revolving Credit Agreement with respect to a five-year senior unsecured revolving credit facility (the “Credit Facility”), which lowered the facility amount to $1.5 billion and extended the maturity date to June 24, 2026, among other changes. The Amended and Restated Revolving Credit Agreement amends the Revolving Credit Agreement entered into by Holdings on February 16, 2018, as amended on March 22, 2021.

The Credit Facility may provide significant support to our liquidity position when alternative sources of credit are limited. In addition to the Credit Facility, we have letter of credit facilities with an aggregate principal amount of approximately $1.9 billion (the “LOC Facilities”), primarily to be used to support our life insurance business reinsured to EQ AZ Life Re in April 2018. In June 2021, Holdings entered into amendments with each of the issuers of its bilateral letter of credit facilities to effect changes similar to those effected in the Amended and Restated Revolving Credit Agreement. The respective facility limits of the bilateral letter of credit facilities remained unchanged. On May 12, 2023, the Company entered into an amendment to the Credit Facility and LOC Facilities to replace remaining LIBOR-based benchmark rates with SOFR-based benchmark rates and to make certain other conforming changes.

The Credit Facility and LOC Facilities contain certain administrative, reporting, legal and financial covenants, including requirements to maintain a specified minimum consolidated net worth and to maintain a ratio of indebtedness to total capitalization not in excess of a specified percentage, and limitations on the dollar amount of indebtedness that may be incurred by our subsidiaries and the dollar amount of secured indebtedness that may be incurred by us, which could restrict our operations and use of funds. The right to borrow funds under the Credit Facility and LOC Facilities is subject to the fulfillment of certain conditions, including compliance with all covenants, and the ability to borrow thereunder is also subject to the continued ability of the lenders that are or will be parties to the facilities to provide funds. As of September 30, 2023, we were in compliance with these covenants.

Contingent Funding Arrangements

For information regarding activity pertaining to our contingent funding arrangements and other off-balance sheet commitments, see “Commitments and Contingent Liabilities” in Note 16 of the Notes to the Consolidated Financial Statements in this Form 10-Q.

Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock

For information pertaining to our Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock see Note 13 of the Notes to the Consolidated Financial Statements.

Capital Position of Holdings

We manage our capital position to maintain financial strength and credit ratings that facilitate the distribution of our products and provide our desired level of access to the bank and capital markets. Our capital position is supported by the ability of our subsidiaries to generate cash flows and distribute cash to us and our ability to effectively manage the risk of our businesses and to borrow funds and raise capital to meet our operating and growth needs.

Our Board and senior management are directly involved in the development of our capital management policies. Accordingly, capital actions, including proposed changes to the annual capital plan, capital targets and capital policies, are approved by the Board.

Dividends Declared and Paid

The declaration and payment of future dividends is subject to the discretion of our Board of Directors and depends on our financial condition, results of operations, cash requirements, future prospects, regulatory restrictions on the payment of dividends by Holdings’ insurance subsidiaries and other factors deemed relevant by the Board.

The payment of dividends will be substantially restricted in the event that we do not declare and pay (or set aside) dividends on the Series A , Series B and Series C Preferred Stock for the last proceeding dividend period. For additional information on our preferred stock, see “—Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock”.

For information regarding activity pertaining to common and preferred dividends declared and paid, see Note 13 of the Notes to the Consolidated Financial Statements.

Share Repurchase Programs

For information regarding activity pertaining to share repurchase programs, see Note 13 of the Notes to the Consolidated Financial Statements.

Sources and Uses of Liquidity of Our Insurance Subsidiaries

The principal sources of liquidity for our insurance subsidiaries are premiums, investment and fee income, deposits associated with our insurance and annuity operations, cash and invested assets, as well as internal borrowings. The principal uses of that liquidity include benefits, claims and dividends paid to policyholders and payments to policyholders in connection with surrenders and withdrawals. Other uses of liquidity include commissions, general and administrative expenses, purchases of investments, the payment of dividends to Holdings and hedging activity. Certain of our insurance subsidiaries’ principal sources and uses of liquidity are described in the paragraphs that follow.

We manage the liquidity of our insurance subsidiaries with the objective of ensuring that they can meet payment obligations linked to our Individual Retirement, Group Retirement and Protection Solutions businesses and to their outstanding debt and derivative positions, including in our hedging programs, without support from Holdings. We employ an asset/liability management approach specific to the requirements of each of our insurance businesses. We measure liquidity against internally-developed benchmarks that consider the characteristics of our asset portfolio and the liabilities that it supports in both the short-term (the next 12 months) and long-term (beyond the next 12 months). We consider attributes of the various categories of our liquid assets (for example, type of asset and credit quality) in calculating internal liquidity indicators for our insurance and reinsurance operations. Our liquidity benchmarks are established for various stress scenarios and durations, including company-specific and market-wide events. The scenarios we use to evaluate the liquidity of our subsidiaries are defined to allow operating entities to operate without support from Holdings.

Liquid Assets

The investment portfolios of our insurance subsidiaries are a significant component of our overall liquidity. Liquid assets include cash and cash equivalents, short-term investments, U.S. Treasury fixed maturities, fixed maturities that are not designated as HTM and public equity securities. We believe that our business operations and the liquidity profile of our assets provide sufficient liquidity under reasonably foreseeable stress scenarios for each of our insurance subsidiaries.

See “—General Account Investment Portfolio” and Note 3 and Note 4 of the Notes to the Consolidated Financial Statements for a description of our retirement and protection businesses’ portfolio of liquid assets.

Hedging Activities

Because the future claims exposure on our insurance products, and in particular our variable annuity products with GMxB features, 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 risks of movements in the equity markets and interest rates. We use derivatives as part of our overall asset/liability risk management program primarily to reduce exposures to equity market and interest rate risks. In addition, we use credit derivatives to replicate exposure to individual securities or pools of securities as a means of achieving credit exposure similar to bonds of the underlying issuer(s) more efficiently. The derivative contracts are an integral part of our risk management program, especially for the management of our variable annuities program, and are collectively managed to reduce the economic impact of unfavorable movements in capital markets. These derivative transactions require liquidity to meet payment obligations such as payments for periodic settlements, purchases, maturities and terminations as well as liquid assets pledged as collateral related to any decline in the net estimated fair value. Collateral calls represent one of our biggest drivers for liquidity needs for our insurance subsidiaries. Our derivatives contracts reside primarily within Equitable Financial, which has a significantly large investment portfolio.

FHLB Membership

Equitable Financial and Equitable America are members of the FHLB, which provides access to collateralized borrowings and other FHLB products.

See Note 16 of the Notes to the Consolidated Financial Statements for further description of our FHLB program.

FABN

Under the FABN program, Equitable Financial may issue funding agreements in U.S. dollar or other foreign currencies.

See Note 16 of the Notes to the Consolidated Financial Statements for further description of our FABN program.

FABCP

Under the FABCP program, Equitable Financial and Equitable America may issue funding agreements in U.S. dollars to the SPLLC.

See Note 16 of the Notes to the Consolidated Financial Statements for further description of our FABCP program.

Sources and Uses of Liquidity of our Investment Management and Research Segment

The principal sources of liquidity for our Investment Management and Research business include investment management fees and borrowings under its credit facilities and commercial paper program. The principal uses of liquidity include general and administrative expenses, business financing and distributions to holders of AB Units and AB Holding Units plus interest and debt service. The primary liquidity risk for our fee-based Investment Management and Research business is its profitability, which is impacted by market conditions and our investment management performance.

AB Commercial Paper

As of September 30, 2023 and December 31, 2022, AB had no commercial paper outstanding. The commercial paper is short term in nature, and as such, recorded value is estimated to approximate fair value (and considered a Level 2 security in the fair value hierarchy). Average daily borrowings for the commercial paper outstanding during the third quarter 2023 and full year 2022 were $277 million and $190 million, respectively, with weighted average interest rates of approximately 5.1% and 1.5%, respectively.

AB Credit Facility

AB has an $800 million committed, unsecured senior revolving credit facility (the “AB Credit Facility”) with a group of commercial banks and other lenders which matures on October 13, 2026. The Credit Facility was amended and restated on February 9, 2023, to reflect the transition from US LIBOR, which was retired as of June 30, 2023, to the term Secured Overnight Financial Rate ("SOFR”). Other than this immaterial change, there were no other significant changes included in the amendment. The credit facility provides for possible increases in the principal amount by up to an aggregate incremental amount of $200 million. Any such increase is subject to the consent of the affected lenders. The AB Credit Facility is available for AB and SCB LLC for business purposes, including the support of AB’s commercial paper program. Both AB and SCB LLC can draw directly under the AB Credit Facility and AB management expects to draw on the AB Credit Facility from time to time. AB has agreed to guarantee the obligations of SCB LLC under the AB Credit Facility.

The AB Credit Facility contains affirmative, negative and financial covenants, which are customary for facilities of this type, including, among other things, restrictions on dispositions of assets, restrictions on liens, a minimum interest coverage ratio and a maximum leverage ratio. As of September 30, 2023, AB was in compliance with these covenants. The AB Credit Facility also includes customary events of default (with customary grace periods, as applicable), including provisions under which, upon the occurrence of an event of default, all outstanding loans may be accelerated and/or lender’s commitments may be terminated. Also, under such provisions, upon the occurrence of certain insolvency- or bankruptcy-related events of default, all amounts payable under the AB Credit Facility would automatically become immediately due and payable, and the lender’s commitments would automatically terminate.

Amounts under the Credit Facility may be borrowed, repaid and re-borrowed by us from time to time until the maturity of the facility. Voluntary pre-payments and commitment reductions requested by AB are permitted at any time without a fee (other than customary breakage costs relating to the pre-payment of any drawn loans) upon proper notice and subject to a minimum dollar requirement. Borrowings under the AB Credit Facility bear interest at a rate per annum, which will be, at AB’s option, a rate equal to an applicable margin, which is subject to adjustment based on the credit ratings of AB, plus one of the following indices: SOFR; a Prime rate; or the Federal Funds rate.

As of September 30, 2023 and December 31, 2022, AB had no amounts outstanding under the AB Credit Facility. During the nine months ended September 30, 2023 and the full year 2022, AB and SCB LLC did not draw upon the AB Credit Facility.

In addition, SCB LLC currently has five uncommitted lines of credit with five financial institutions. Four of these lines of credit permit borrowing up to an aggregate of approximately $315 million, with AB named as an additional borrower, while the other line has no stated limit. AB has agreed to guarantee the obligations on SCB LLC under these lines of credit. As of September 30, 2023 and December 31, 2022, SCB LLC had no outstanding balance on these lines of credit. Average daily borrowings during the nine months ended September 30, 2023 and the full year 2022 were $2 million and $1 million with weighted average interest rates of approximately 7.8% and 3.7%, respectively.

EQH Facility

AB has a $900 million committed, unsecured senior credit facility (the “EQH Facility”). The EQH Facility matures on November 4, 2024 and is available for AB’s general business purposes. Borrowings under the EQH Facility generally bear interest at a rate per annum based on prevailing overnight commercial paper rates.

The EQH Facility contains affirmative, negative and financial covenants which are substantially similar to those in AB’s committed bank facilities. As of September 30, 2023, we were in compliance with these covenants. The EQH Facility also includes customary events of default substantially similar to those in AB’s committed bank facilities, including provisions under which, upon the occurrence of an event of default, all outstanding loans may be accelerated and/or the lender’s commitment may be terminated.

Amounts under the EQH Facility may be borrowed, repaid and re-borrowed by AB from time to time until the maturity of the facility. AB or Holdings may reduce or terminate the commitment at any time without penalty upon proper notice. Holdings also may terminate the facility immediately upon a change of control of AB’s general partner.

As of September 30, 2023 and December 31, 2022, AB had $900 million outstanding under the EQH Facility, with interest rates of approximately 5.3% and 4.3%, respectively. Average daily borrowing of the EQH Facility during the nine months ended 2023 and the full year 2022 were $779 million and $655 million, respectively, with a weighted average interest rates of approximately 4.8% and 1.7%, respectively.

EQH Uncommitted Facility

In addition to the EQH Facility, AB entered into a $300 million uncommitted, unsecured senior credit facility (the “EQH Uncommitted Facility”) with EQH. The EQH Uncommitted Facility matures on September 1, 2024 and is available for AB’s general business purposes. Borrowings under the EQH Uncommitted Facility bear interest generally at a rate per annum based on prevailing overnight commercial paper rates. The EQH Uncommitted Facility contains affirmative, negative and financial covenants, which are substantially similar to those in the EQH Facility.

As of September 30, 2023 and December 31, 2022, AB had $0 million and $90 million outstanding balance on the EQH Uncommitted Facility, with interest rates of approximately 0.0% and 4.3%, respectively. Average daily borrowing of the EQH Uncommitted Facility during the nine months ended September 30, 2023 and full year 2022 were $5 million and $1 million, respectively, with weighted average interest rate of approximately 4.6% and 4.3%.

Statutory Capital of Our Insurance Subsidiaries

Our capital management framework for our insurance subsidiaries is primarily based on statutory RBC standards and the CTE asset standard for our variable annuity business.

RBC requirements are used as minimum capital requirements by the NAIC and the state insurance departments to evaluate the capital condition of regulated insurance companies. RBC is based on a formula calculated by applying factors to various asset, premium, claim, expense and statutory reserve items. The formula takes into account the risk characteristics of the insurer, including asset risk, insurance risk, interest rate risk, market risk and business risk and is calculated on a quarterly basis and made public on an annual basis. The formula is used as an early warning regulatory tool to identify possible inadequately capitalized insurers for purposes of initiating regulatory action, and not as a means to rank insurers generally. These rules apply to our insurance company subsidiaries and not to Holdings. State insurance laws provide insurance regulators the authority to require various actions by, or take various actions against, insurers whose total adjusted capital does not meet or exceed certain RBC levels. At the date of the most recent annual statutory financial statements filed with insurance regulators, the total adjusted capital of each of these insurance company subsidiaries subject to these requirements was in excess of each of those RBC levels.

See Note 18 of the Notes to the Consolidated Financial Statements for additional information relating to Prescribed and Permitted Statutory Accounting practices and its impact on our statutory surplus.

Captive Reinsurance Company

We use a captive reinsurance company to more effectively manage our reserves and capital on an economic basis and to enable the aggregation and transfer of risks. Our captive reinsurance company assumes business from affiliates only and is closed to new business. Our captive reinsurance company is a wholly-owned subsidiary located in the United States. In addition to state insurance regulation, our captive reinsurance company is subject to internal policies governing its activities. We continue to analyze the use of our existing captive reinsurance structure, as well as additional third-party reinsurance arrangements.

Borrowings

Our financial strategy going forward will remain subject to market conditions and other factors. For example, we may from time to time enter into additional bank or other financing arrangements, including public or private debt, structured facilities and contingent capital arrangements, under which we could incur additional indebtedness.

The following table sets forth the Company’s total consolidated borrowings. Short-term and long-term debt consists of the following:

(in millions)

138

(1) CLO Warehousing Debt related to VIE consolidation of CLO investment.

(2) Current portion of long-term debt relates to the 3.9% Senior Notes which have a maturity date within one year of December 31, 2022. The 3.9% Senior Notes were repaid April 20, 2023. For additional information regarding activity pertaining to the debt repayment, see Note 14 of the Notes to the Consolidated Financial Statements.

Notes and Debentures

The Senior Notes and Senior Debentures contain customary affirmative and negative covenants, including a limitation on certain liens and a limit on the Company’s ability to consolidate, merge or sell or otherwise dispose of all or substantially all of its assets. The Senior Notes and Senior Debentures also include customary events of default (with customary grace periods, as applicable), including provisions under which, upon the occurrence of an event of default, all outstanding Senior Notes and Senior Debentures may be accelerated. As of September 30, 2023, the Company is in compliance with all debt covenants.

Ratings

Financial strength ratings (which are sometimes referred to as “claims-paying” ratings) and credit ratings are important factors affecting public confidence in an insurer and its competitive position in marketing products. Our credit ratings are also important for our ability to raise capital through the issuance of debt and for the cost of such financing.

Financial strength ratings represent the opinions of rating agencies regarding the financial ability of an insurance company to meet its obligations under an insurance policy. Credit ratings represent the opinions of rating agencies regarding an entity’s ability to repay its indebtedness. The following table summarizes the ratings for Holdings and certain of its subsidiaries. AM Best, S&P and Moody’s have a stable outlook.

Material Cash Requirement

Our material cash requirements include policyholder obligations, long-term debt, commercial paper, employee benefits, operating leases and various funding commitments. See “Material Cash Requirement” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Recast 2022 Annual Report.

Summary of Critical Accounting Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to adopt accounting policies and make estimates and assumptions that affect amounts reported in our consolidated financial statements included elsewhere herein. For a discussion of our significant accounting policies, see Note 2 of the Notes to the Consolidated Financial Statements. The most critical estimates include those used in determining:

• market risk benefits and purchased market risk benefits
• accounting for reinsurance;
• estimated fair values of investments in the absence of quoted market values and investment impairments;
• estimated fair values of freestanding derivatives and the recognition and estimated fair value of embedded derivatives requiring bifurcation;
• goodwill and related impairment;
• measurement of income taxes and the valuation of deferred tax assets; and
• liabilities for litigation and regulatory matters.

In applying our accounting policies, we make subjective and complex judgments that frequently require estimates about matters that are inherently uncertain. Many of these policies, estimates and related judgments are common in the insurance and financial services industries while others are specific to our business and operations. Actual results could differ from these estimates.

Market Risk Benefits

Market risk benefits include contract features that provide minimum guarantees to policyholders and include GMIB, GMDB, GMWB, GMAB, and ROP DB benefits. MRBs are measured at estimated fair value with changes reported in the change in market risk benefits and purchased market risk benefits on the Consolidated Statement of Income (Loss), except for the portion of the fair value change related to the Company’s own credit risk, which is recognized in OCI.

MRBs are measured at fair value on a seriatim basis using an ascribed fee approach based upon policyholder behavior projections and risk neutral economic scenarios adjusted based on the facts and circumstances of the Company’s product features. Market conditions including, but not limited to, changes in interest rates, equity indices, market volatility and variations in actuarial assumptions, including policyholder behavior, mortality and risk margins related to non-capital market inputs, as well as changes in our nonperformance risk adjustment may result in significant fluctuations in the estimated fair value of the MRBs that could materially affect net income.

Risk margins are established to capture the non-capital market risks of the instrument which represent the additional compensation a market participant would require to assume the risks related to the uncertainties in certain actuarial assumptions. The establishment of risk margins requires the use of significant management judgment, including assumptions of the amount needed to cover the guarantees.

We ceded the risk associated with certain of the variable annuity products with GMxB features described in the preceding paragraphs. The value of the MRBs on the ceded risk is determined using a methodology consistent with that described previously for the guarantees directly written by us with the exception of the input for nonperformance risk that reflects the credit of the reinsurer.

Nonperformance Risk Adjustment

The valuation of our MRBs includes an adjustment for the risk that we fail to satisfy our obligations, which we refer to as our nonperformance risk. The nonperformance risk adjustment, which is captured as a spread over the risk-free rate in determining the discount rate to discount the cash flows of the liability, is determined by taking into consideration publicly available information relating to spreads on corporate bonds in the secondary market comparable to Holdings’ financial strength rating.

The table below illustrates the impact that a range of reasonably likely variances in credit spreads would have on our consolidated balance sheet, excluding the effect of income tax, related to the GMxB Core and GMxB Legacy MRBs measured at estimated fair value. Even when credit spreads do not change, the impact of the nonperformance risk adjustment on fair value will change when the cash flows within the fair value measurement change. The table only reflects the impact of changes in credit spreads on our consolidated financial statements included elsewhere herein and not these other potential changes. In determining the ranges, we have considered current market conditions, as well as the market level of spreads that can reasonably be anticipated over the near term. The ranges do not reflect extreme market conditions such as those experienced during the 2008–2009 financial crisis as we do not consider those to be reasonably likely events in the near future.

NPR Sensitivity

December 31, 2022

(in millions)

Sensitivity of MRBs to Changes in Interest Rates

The following table demonstrates the sensitivity of the MRBs to changes in long-term interest rates by quantifying the adjustments that would be required, assuming an increase and decrease in long-term interest rates of 50bps. This information considers only the direct effect of changes in the interest rates on MRB balances, net of reinsurance.

Interest Rate Sensitivity

December 31, 2022

(in millions)

Sensitivity of MRBs to Changes in Equity Returns

The following table demonstrates the sensitivity of the MRBs to changes in equity returns:

Equity Returns Sensitivity

December 31, 2022

(in millions)

Sensitivity of MRBs to Changes in GMIB Lapses

Lapse rates are adjusted at the contract level based on a comparison of the value of the embedded GMIB rider and the current policyholder account value, which include other factors such as considering surrender charges. Generally, lapse rates are assumed to be lower in periods when a surrender charge applies. A dynamic lapse function reduces the base lapse rate when the guaranteed amount is greater than the account value as in-the-money contracts are less likely to lapse.

GMIB Lapse floor Sensitivity

December 31, 2022

(in millions)

There have been no material changes to the quantitative and qualitative disclosures about market risk described in the Recast 2022 Annual Report in "Quantitative and Qualitative Disclosures About Market Risk".

Management, with the participation of the Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as defined in Rule 13a-15(e) of the Exchange Act. Based on such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of September 30, 2023, the Company’s disclosure controls and procedures were effective.

No change in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) and Rule 15d-15(f) under the Exchange Act) occurred during the quarter ended September 30, 2023 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

You should carefully consider the risks described in the “Risk Factors” section included in the Recast 2022 Annual Report. Risks to which we are subject also include, but are not limited to, the factors mentioned under “Note Regarding Forward-Looking Statements and Information” above and the risks of our businesses described elsewhere in this Quarterly Report on Form 10-Q.