Equitable Holdings, Inc. Q3 FY2022 Earnings Call

Hello, and thank you for joining us. My name is Regina, and I will be your conference operator today. I would like to welcome everyone to the Equitable Holdings, Incorporated Third Quarter Earnings Conference Call. All lines have been muted to minimize background noise. After the speaker's remarks, there will be a question-and-answer session. I now turn the conference over to Isil Muderrisoglu, Head of Investor Relations. Please go ahead.

Thank you. Good morning and welcome to Equitable Holdings third quarter 2022 earnings call. Materials for today's call can be found on our website at ir.equitableholdings.com. Before we begin, I would like to note that some of the information we present today is forward-looking and subject to certain SEC rules and regulations regarding disclosure. Our results may materially differ from those expressed in or indicated by such forward-looking statements. So I'd like to refer you to the Safe Harbor language on Slide 2 of our presentation for additional information. Joining me on today's call is Mark Pearson, President and Chief Executive Officer of Equitable Holdings; Robin Raju, our Chief Financial Officer; Nick Lane, President of Equitable Financial; and Kate Burke, AllianceBernstein's Chief Operating Officer and Chief Financial Officer. During this call, we will be discussing certain financial measures that are not based on generally accepted accounting principles, also known as non-GAAP measures. Reconciliation of these non-GAAP measures to the most directly comparable GAAP measures and related definitions may be found on the Investor Relations portion of our website, in our earnings release, slide presentation, and financial supplement. I would now like to turn the call over to Mark and Robin for their prepared remarks.

Good morning and thank you for joining today's call. Conditions remain challenging with equities falling for a third consecutive quarter, while the bond markets are providing their worst returns in 40 years. While our earnings are not immune to markets, our capital ratios are robust, and we remain focused on what we can control. Against this backdrop, our clients' need for advice, income, and protection has been heightened. Equitable is uniquely positioned to meet these demands with our integrated businesses and a conservative balance sheet. Turning to Slide 3, I will highlight the results from the quarter. With global equity and bond markets down 26% and 15% year-to-date, respectively, the value of Equitable Holdings assets under management declined by 21% this year. Non-GAAP operating earnings were $498 million this quarter, or $1.28 per share, down 2% from last quarter on a per share basis. Third quarter earnings benefited from a small positive impact from our annual assumption review as our reserving is based on actual emerging policyholder and market experience. Adjusting for one-time items, our results were in line with expectations, with higher interest rates, wider spreads, and lower pandemic-related claims partially offsetting weaker fee and alternative income. We recognize that this market requires a different playbook. We continue to have deep conviction in our strategy, and we are more aggressively managing our expenses. Offsetting the decline in fees from lower assets under management has been increased productivity savings and additional investment income growth through the optimization of our general account. AllianceBernstein was also not immune to industry conditions as net outflows were $6.6 billion in the quarter, excluding anticipated AXA redemptions. Growth in alternatives, multi-asset, and municipals were outweighed by redemptions in taxable fixed income and active equities. Pleasingly, overall fee rates improved by 7%, growing in each channel driven by the addition of CarVal and a favorable asset mix. AB’s financial performance reflected lower asset prices, with Q3 adjusted operating earnings declining by 9% compared to Q2. Our capital management strategy continues to protect our balance sheet, enabling us to focus on organic growth and returning excess cash to shareholders through a combination of dividends and share repurchases. We returned $1 billion to date this year, including $275 million in the third quarter, in line with our payout guidance of 50% to 60% of non-GAAP operating earnings. As of the quarter end, we held $2 billion in cash at Holdings, which is above our $500 million target. Supporting this financial flexibility and capital strength is our hedging philosophy. Our first dollar hedging program immunizes our VA guarantees from the impacts of the markets. This quarter, our hedge effectiveness reduced volatility by more than 95% within our income-oriented offerings. Turning to our general account, new money yields are now 200 basis points above portfolio yields on our fixed income portfolio. With 15% of the portfolio turning over each year, this will benefit net investment income and earnings over time. Our investment portfolio is relatively conservative. 96% of our general account credit portfolio is in investment-grade securities, and we have limited exposure to subordinated CLOs and equity-like alternatives. We benefit from an integrated insurance investment and advisory business to meet our clients' holistic needs across all market environments. Equitable's third quarter retirement net inflows of $1.2 billion demonstrate our product innovation, strong distribution, and alignment with client needs. Our RILA product, structured capital strategies provides downside protection and upside participation and continues to lead the market in meeting client preferences during these volatile times. We also have significant capital aggregation benefits between our businesses. This, in conjunction with our product design results in greater capital efficiency across our retirement and life insurance segments. Importantly, we manage on an economic basis. By that we mean the fair value of our liabilities based on actual emerging experience and avoid making bets on external market factors or making heroic assumptions about policyholder behavior. This approach, combined with our integrated businesses, has resulted in total cash flows increasing by 30% since the IPO. Turning to Slide 4, we highlight key results from the quarter and a breakdown of our growth in cash flow since our IPO, which is displayed in the waterfall at the bottom of the slide. At the time of the IPO, our cash flows were approximately $1.2 billion. Our guidance for 2022 is that our cash flow will be $1.6 billion, supported by a $930 million dividend from our insurance company, which we completed in July. Back in October 2020, we reinsured one-third of our legacy VA portfolios and removed two-thirds of the tail risk by entering into a reinsurance transaction with Venerable. This accelerated $100 million of cash flows and unlocked $1 billion of economic value. As a result, we returned an incremental $500 million in share repurchases in 2021. Since our IPO, organic growth and equity market performance have increased cash flows by $500 million with the most significant contributions coming from Equitable's Individual and Group Retirement segments. AllianceBernstein’s stellar performance over this period has added an additional $200 million in cash flow and dividends from AB to EQH now total approximately $500 million in the year. We've also seen increased demand for advice with our wealth management business contributing an additional $50 million of cash flows. Since the IPO, we have returned $6 billion to shareholders and reduced outstanding shares from $561 million to $370 million. As a result, the growth in free cash flow and lower shares outstanding have increased our free cash flow per share by approximately 120% since the IPO, offering an attractive return for long-term shareholders. Our cash flows are, of course, sensitive to markets, which have been challenged over the last year. However, our hedging program and fair value management have enabled us to maintain our RBC ratios and cash returns to shareholders consistent with 50% to 60% of operating earnings. Turning to our retirement businesses, we are also diversifying our earnings through our SCS product which captures less equity-sensitive credit spreads. Retirement sales were $4.8 billion this quarter, up 6% compared to last year. With rising interest rates, this translated into another record quarter of new business value. Managing what is within our control is even more important in these markets. We have achieved $167 million of our $180 million incremental investment income target and remain on track to achieve our 2023 goal ahead of schedule. We also continue to thoughtfully manage expenses, realizing a net expense savings of $43 million as of quarter end. Turning to Asset Management. As I mentioned earlier, AB was not immune to industry-wide outflows in the quarter but remains in positive territory for the year-to-date and continues to outperform peers. Equitable continues to support the growth of AB's private markets platform, deploying nearly 60% of our $10 billion seed capital commitment, which has helped support a 7% year-over-year fee rate improvement. While near-term investment performance reflects a challenging environment, long-term performance remained strong in equities and above average in fixed income. AB's institutional pipeline remains strong, doubling in the quarter to $25 billion, with over 80% of the pipeline fee-based attributable to private alternatives, highlighting the benefits again of our acquisition of CarVal. Within our Wealth Management business, we reported $2.4 billion in investment product sales, of which over 85% were in fee-based advisory accounts. While markets weighed on assets under advice, closing the quarter at $69 billion, down 3% compared to the prior quarter, we have benefited from net inflows as demand for advice continues. Subject to market conditions, we plan to break out our affiliated distribution channel as its own segment in the next year, providing further transparency into the sources of value generation. I will now turn the call over to Robin to discuss the results from the quarter in more detail.

Thanks, Mark. Turning to Slide 5, I will highlight total company results for the quarter. We reported non-GAAP operating earnings of $498 million or $1.28 per share, sequentially lower on a per share basis, primarily due to the impact from lower equity markets in the quarter, which is partially offset by our favorable assumption update. Adjusting for the $13 million of notable items in the quarter, non-GAAP operating earnings were $511 million or $1.32 per share, down 15% on a comparable year-over-year per share basis. Turning to GAAP results, we reported $273 million in positive net income in the quarter. These results should be considered in light of two features of our business. First, most of our businesses are market-sensitive and derive fees from client accounts invested in stocks and bonds. And second, that markets are down year-to-date, with global equities down 26% and bond markets down 15%. The net effect of market and our hedging is that our fee-based earnings and cash flows will adjust in line with the sensitivity we've given to markets of plus or minus 10%, having a $150 million post-tax impact. Our results held up relatively well due to the fact that we can control, namely the economic hedging program that protects our balance sheet. The hedging program immunizes our VA guarantees and mutes the impact of severe market declines on our balance sheet, as our first dollar hedging is supplemented by our statutory protection program, which hedges some of the base fees. This program worked as expected during a market decline as we continuously updated our position to changes in equity and interest rate market levels. Turning to expenses, our philosophy is to continuously seek business efficiencies while investing where we see strong new business growth opportunities. This has resulted in net savings of $43 million to date, as we remain on track to achieve our $80 million net savings target by 2023, while continuing investment in our individual retirement and affiliated distribution, which is benefiting from sales and margin opportunities not observed in more than a decade. Our general account rebalancing program has achieved $167 million of the $180 million 2023 target. With wider spreads, we have been able to achieve these improvements without sacrificing credit quality. As mentioned earlier, our annual assumption update increased our non-GAAP operating earnings by $23 million or $0.06 per share. This reflects our approach of incorporating emerging experience into our assumptions, which ensures that we avoid surprises in our reserving. As a result, we hold $2 billion to $3 billion more in reserves than NAIC requirements for our VA businesses, which should give investors confidence in Equitable's approach. Quarter-end AUM was in line with the declines in equity and fixed income markets that I mentioned earlier, as continued market volatility was partially offset by continued momentum in our business. We delivered another quarter of record net inflows within our Individual Retirement business, led predominantly by our industry-leading SCS product, which is a protected equity solution that resonates with clients during these uncertain times. AB continues to deliver strong long-term growth through market headwinds, with higher fee active equities and alternatives generating organic growth on a trailing 12-month basis. This is evident in a 7% fee improvement year-over-year. The alternatives growth is another strong example of our synergies, supported by Equitable's $10 billion commitment. AB has delivered nine straight quarters of net inflows in alternatives and multi-asset solutions. Lastly, interest rates have increased by over 200 basis points through the first nine months of the year. Equitable's economic balance sheet is immune to the impact of changes in rates, both up and down. However, we do benefit from higher interest rates in three areas; first, through new business with record margins in our retirement products and opportunities to manufacture innovative income solutions. This means higher cash flow to shareholders over time. Second, our investment portfolio is now investing 200 basis points above our in-force runoff. This will allow us to achieve the $180 million GA target before year-end 2023 with additional upside. And third, we increased our exposure to floating rate securities in the low interest rate environment, which has proved to translate into higher yields for investors as rates have continued to rise. These three areas of upside in the higher interest rate environment have been evidenced by another quarter of record net inflows in Individual Retirement and increased shareholder value through another quarter of record new business value. I will now turn to Slide 6 and highlight our approach to capital management and how it drives long-term shareholder value. We have a prudent approach to risk and balance sheet management given the ongoing macroeconomic uncertainties. As such, we have positioned Equitable to be appropriately capitalized to its credit, equity, or macro recession-type events. We believe our $2 billion of cash at the Holdco, supported by our $930 million insurance dividend in July, and our strong RBC ratio is a testament to both our hedging program and high-quality investment portfolio, with 96% of fixed maturities being investment grade. This positions us well relative to peers to manage through market volatility. In the quarter, we returned $275 million of capital to shareholders, which includes $200 million of share repurchases. This brings the total capital return to shareholders year-to-date to $1 billion, which is on the higher end of our 50% to 60% payout target, despite the S&P 500 declining 25%. This has also enabled us to reduce our share count by 21 million or 5% for the year-to-date, driving a free cash flow yield of 12%. This is another example of Equitable's strong value proposition for shareholders. Our consistent capital return is supported by our fair value hedging program in conjunction with product design that delivers a narrow range of outcomes, which has resulted in our hedging program reducing over 95% of volatility this quarter. Additionally, our conservative general account is well positioned for the current market environment with an average credit rating of A3. One area to highlight in our portfolio is commercial mortgages, which are well diversified and allocated to resilient subsectors like multifamily housing. The conservative portfolio has a debt-to-service coverage ratio of 2.1 times and a 60% loan-to-value ratio, which ensures that general accounts remain strong across different credit cycles. Lastly, we are on track for 100% of our individual retirement products and over 90% of our total products to be distributed outside of our New York entity by year-end. This will drive further consistency in our ability to upstream future regulated cash flows to the holding company. On Slide 7, I will provide an update on the upcoming LDTI adoption next year and how it benefits both Equitable and our industry. One of the key aspects of LDTI is the adoption of many fair value-based principles. As a result, Equitable's economic-based measures and hedging program will remain unchanged, while our GAAP metrics will reflect new measures that are closer to fair value. This means our cash flow generation is unchanged and our cash flow conversion to the new GAAP earnings will be higher as the new measure for operating earnings is better aligned to cash generation. The driver of our consistent cash flows is that the new LDTI earnings moves closer to our economic-based hedging program as most liabilities will now be marked-to-market, which matches the assets. Turning to our new measures, first, there will be a new net income that better reflects market-based movements and liabilities. Since our hedging program already targets fair value, our net income will be more consistently positive and less volatile. This will remove a barrier for inclusion into some of the largest indices as consistently positive net income is a prerequisite. We also introduced a new non-GAAP operating earnings measure that will be more closely aligned to cash and economics. The new measure moves closer to cash generation by approximately $150 million to $250 million per year, translating to a higher payout ratio post-LDTI adoption. Our legacy block is the main driver for the change in operating earnings. Under LDTI, the legacy block will accrue more attributed fees than it does today, but we expect minimal impact on our core business as it is already priced economically at product issuance. Lastly, we expect LDTI book value transition impact to be roughly neutral or zero at quarter-end market levels, primarily driven by our industry-low 2.25% GAAP interest rate assumption. Additionally, we continue to believe that book value ex AOCI is the correct measure to use post-LDTI adoption. While Equitable is positioned well for LDTI, the overall industry and investors will also benefit from the new standard, providing greater transparency into an insurance accounting framework that frankly required too much explanation. The adoption of fair value reserving will better reflect the true economics of life insurers through liabilities that reflect market movements. We think this is a valuable precursor to similar changes on the horizon within the NAIC model law. Through increased disclosure and more consistent assumptions, investors will be able to better understand and compare company-specific risks throughout the industry. And then we can stop talking about accounting so much and focus more on the core business that should ultimately drive informed investment decisions and cash flows. I will now turn it back to Mark for closing remarks.

Thanks, Robin. In closing, a solid quarter of performance despite continued market headwinds. The balance sheet remains robust. We have anticipated and prepared for the challenges we see today in the markets. We are showcasing the resilience we have designed for and we are focusing on what we can control. Our integrated insurance, investment, and advisory model means we are uniquely placed to meet client needs in these times of great uncertainty. We continue to lead the market in the fastest-growing retirement segment, the RILA market. Our subsidiary AB continues to outperform peers, and its diversified strategies, Asian footprint, and successful growth of its alternatives platform position us well in the asset management sector. Looking forward, there remains a great deal of uncertainty and risk of recession and rising credit losses. We have a lot of tools to manage this uncertainty. We shall continue to manage the business prudently and professionally. We shall also continue to be relentlessly committed to bringing the best of Equitable in order to deliver better outcomes that will benefit our clients, employees, and shareholders. With that, we will now open the line for questions.

Our first question will come from Elyse Greenspan with Wells Fargo. Please go ahead.

Hi, thanks, good morning. My first question is about the $2 billion at the Holdco, which is significantly above your target. Considering the current uncertain times, when do you plan to manage that amount down closer to your target, and how do you balance that with the existing market and credit environment?

Hey Elyse, it's Robin. Thanks for the question. You're right, we have $2 billion of cash at the Holdco. We like that position in this type of market environment. We've also returned $1 billion to shareholders year-to-date, and as a result, we're on the higher end of our 50% to 60% payout ratio despite the volatility in markets, with the S&P 500 declining over 25% and interest rates increasing quite a bit. And that's a testament to our hedging program and the conservative nature of our investment portfolio, which enables us to have that consistent cash flow return to shareholders. We don't mind having $2 billion at the Holdco in this type of environment, we think it's prudent. We think it's better to have a cash buffer instead of trying to rebuild the capital position in this type of environment.

That's helpful. Is there any update on the M&A front following the CarVal deal? Would you consider using some of that buffer for additional transactions?

Good morning Elyse, it's Mark. Thanks for the question. Yes, you mentioned the success of the CarVal transaction. We are delighted with that. I mean, it fits the strategy to shift EQH towards capital-light businesses and particularly high multiple businesses as we see on the ultimate side. Seth and Kate and the team have done a fabulous job in completing that transaction and integrating it. We are in the position of being able to look for opportunities, but obviously, in this market, as Robin said, we will be conservative and prudent in anything we look at. The areas we would explore would be asset management and wealth management. However, you should expect us always to act very professionally on it, and we will be mindful of using shareholder money in this market. So no announcements at this stage, but we are very pleased with how the CarVal acquisition has progressed.

Thank you.

Your next question will come from the line of Jimmy Bhullar with JPMorgan Securities. Please go ahead.

Good morning. I have a question about AB. You've experienced strong flows over the last two years, especially compared to many of your competitors, but recently there has been a decline. Could you share your thoughts on what might be causing this? Are you noticing any particular concentration of outflows from specific strategies or regions? I'm also curious about how much of this might relate to business you've taken on in the past few years.

Sorry, Jimmy, we're just having a line problem with Kate, hang on.

Hi, sorry about that. Yes, it's Kate Burke here. Overall, this quarter we had more challenging flows. They were largely related to, on the institutional side, a couple of specific client mandates, which from time to time happen. But we continue to see strong performance on the active equity side. Where we also saw some challenges were in the retail segment; I don't think we are immune to that compared to our peer group there. Private wealth continues to demonstrate reasonable flows. Overall, we have confidence in the underlying business going forward. Obviously, we are subject to the challenges in this volatile market. But we do think that as clients are looking towards a more risk-on environment, we are very well positioned to continue to have positive flows in the future.

Okay. But as long as we're sort of in an uncertain environment where there are peers of recession and where the overall industry is struggling for flows, I’m assuming that your results are going to follow a similar pattern?

Look, we have a very strong pipeline, as we highlight —as Mark highlighted, that gives us some confidence in our ability to continue to execute versus our peer group in this environment. But yes, we are subject to the same challenges. Our pipeline at $25 billion is high and is three times our normal fee rate. I think that highlights the repositioning we have done over time towards alternatives, which is an important part of that pipeline, and we anticipate that we'll continue to show strength in that area moving forward.

Jimmy, it's Mark. Maybe I'll add a couple of things from the Equitable point of view. Yes, Kate is absolutely right; we can't be totally immune to the markets. However, a couple of things in the AB-Equitable framework differentiate us from peers. Firstly, on the AB side, we have a very strong presence and long-term performance on equities and also solid long-term performance on fixed income, which is helping as well. Moreover, the cadence with which we executed the build-out of the alternatives platform over recent years has provided significant synergies with Equitable’s general account, which is a differentiator for us in the marketplace. So yes, we're in a tough market, but we have some elements in our business model that could enable us to outperform peers if we execute well.

Okay. And then on the Group Retirement business, the flows were negative this quarter. Is that mostly because of seasonality in the business and the working schedule for teachers or are you seeing underlying weakness in that part of the market as well?

This is Nick. The short answer is, yes, that's primarily due to seasonality. We saw an improvement of $78 million compared to last year. The fundamentals of our tax-exempt business are strong. We're back to our pre-pandemic levels, driven predominantly by enhanced school access and a lot of investments we've made in the technology platforms to better serve them. So year-to-date in that segment in tax-exempt, which is our core, we have about $500 million of positive net flows, and we'll continue to build on that momentum.

Thank you.

Your next question will come from the line of Ryan Krueger with KBW. Please go ahead.

Hey, good morning. Robin, what's the dollar amount or percentage of your investment portfolio that's in floating-rate assets at this point?

Hey Ryan, so earlier this year, we were in a low interest rate environment. We did start purchasing some floating rate securities on the asset side, and we also have liabilities which are floating rate. So the net exposure is approximately $3 billion. In the quarter, that's benefited us on the upside in this high-interest rate environment of approximately $25 million for earnings. So it's another tool we have to enable us to benefit from the upside in interest rates, along with our GA rebalancing and the new business value we're generating in this time period.

Thanks. And then in terms of expense actions, are there additional measures being implemented outside of the expense plan that are more discretionary to offset some of the impact of weaker markets?

Sure. We're on our total expense program. We have an $80 million net target by 2023. We've achieved $43 million to date, again, that's net of reinvestments that we have in the business as we are investing in our businesses to support the growth and value we are seeing today. We remain on track for that $80 million. We have some big leases coming up in 2023 in the New York area. We restructured those leases, which helps us lock in those savings by 2023. The business remains well positioned. And if needed, we'll take additional actions to secure earnings. Additionally, on the AB side, by early 2025, they'll recognize $75 million to $85 million in expense efficiencies from the Nashville move. That remains on track. There are good levers in the business to offset some of the inflation trends we're seeing, and we're going to continue to deliver net earnings growth as a result.

Thank you.

Your next question comes from the line of Nigel Dally with Morgan Stanley. Please go ahead.

Hey, thanks. Good morning. So low lapses have been an issue across the industry for individual life insurance. You did your actuarial review, and there was very little impact. I'm hoping you can provide additional details as to why your block is performing well while other companies are taking sizable charges?

Sure, Nigel. I think it starts with the way Equitable has managed the business and positions ourselves. As you heard Mark and I mention earlier, we set assumptions based on emerging experience. Even if there's not credibility, we still believe that's appropriate because we believe it creates trust in the industry and in Equitable, and we should avoid surprises for investors. This is why you see Equitable's positive impact on assumption updates in the quarter across all of our business segments: individual, group, and protection. This includes any small USG exposure we have. Everything is set at emerging experience, and that's intentional. We think avoiding surprises is a positive for investors. Another aspect related to LDTI, Nigel, going forward in the disclosures and LDTI, is that one of the benefits for the industry will be the ability to see where companies are off relative to their assumptions in the disclosures, which will build more transparency in the financial statements that isn't there today. With that, you will have trust in management teams, but in addition, in the future, you'll be able to see if what they say is accurate in the financial statements.

Okay, got it. Second question, individual retirement flows have been very strong. How much capital are those sales absorbing, and at some point could that new business strain challenge your 50% to 60% free cash flow target?

Yes. So on the flows in the retirement business, they have been tremendous. We're seeing another record quarter, $3 billion of sales. But more importantly, the value that we're generating from those sales continues to be excellent for us in this high-interest rate environment. We are not capital constrained for new business; we're able to support that new business and the growth that we get from it. As long as we achieve these types of margins in that business, we'll continue to support it.

Yeah, thanks Robin.

Your next question will come from the line of Alex Scott with Goldman Sachs. Please go ahead.

Hey, good morning. I know you guys want to move on from the accounting conversation, but I did have one question regarding the accounting. Just given the decline in operating earnings, I think it sounded like that does have to do with the attributed fee versus the actual fees on annuities. I wanted to see if you could share anything regarding comparability across companies, as I think other companies are potentially defining operating earnings differently. I just want to ensure I understand if what I'm looking at is going to be apples-to-apples across the industry.

Sure, Alex. So we, despite not wanting to talk about accounting and focus on the business, are very excited about the upcoming LDTI accounting effects that go into effect in January next year. While it's not perfect, it does bring the accounting closer to the fair value economics of the business that we manage. As a result, we should expect that operating earnings across the industry will change. It's the first time the accounting standard has changed in 40 years, and you'll have liabilities marked to market and changes to DAC amortization, so as that function, the new metric should differ from the old metric. If it's the same as the old metric, there is something wrong in the system at the end of the day. We cannot comment on other companies because I'm not an expert in their individual financial statements, but at Equitable, this move takes us closer to cash, which for us results in a higher payout ratio post-LDTI. We're confident that this will bring trust back into the industry as operating earnings will become more resilient and closer to cash.

Got it. That's helpful. And just in terms of cash flow, as we think about 2023, the insurance company, and sort of the ins and outs of the New York ordinary dividend capacity, where do you see that shaking out in terms of how much cash you'd be able to extract, considering the permitted practice you have in New York, as well as some of the actions you've taken to fund redundant reserves?

Sure. As Mark mentioned earlier, we remain on track for the $1.6 billion for 2022. As a reminder, that $1.6 billion, about 60% of that is unregulated. Thus, a big piece of that is coming from AllianceBernstein, our investment services contract with the insurance companies and our wealth management business. We structured it exactly to that point to provide certainty on a big chunk of those cash flows. Going forward, we expect that the $1.6 billion will obviously be impacted by markets, as I mentioned in my prepared remarks. It's in line with the plus or minus 10% sensitivity that we've given, which has a $150 million impact on operating earnings and cash. The insurance company-specific dividend will be finalized in February. There are some nuances with the formula, but we should be on track for our cash flows, offset by changes in markets. That's the cash flow generation we see, which should be approximately $1.3 billion in this current market environment, considering the sensitivity we've discussed.

Got it, okay, thank you.

Your next question will come from the line of Tracy Benguigui with Barclays. Please go ahead.

Good morning. Just wondering if you could touch upon the RILA market; how are you seeing the product evolve considering competition and to meet client preferences? Specifically, I wanted to know if there are any changes in the risk characteristics of the product.

Great. This is Nick. First, as Mark and Robin highlighted, we had another strong quarter led by our RILA sales of roughly $2 billion with very robust new business value. We see the pie continuing to grow given the demand drivers versus that structural shift of the 70 million baby boomers that continue to age, amplified by these volatile times. The core fundamentals are perfectly ALM matched, which is the core on which we anchor our products and economic reality—this does not change. The upside potential with downside protection is the right solution for these times. We expect to continue to capitalize on these fundamentals given our history of innovation. When we pioneered this product over a decade ago, it was about building more resilient portfolios with products anchored in economic realities. We continue to innovate in segments to meet the need, accessed through our privileged distribution that includes both Equitable advisers and affiliated sales plus our third-party networks, allowing us to meet this need profitably.

Okay, great. This is a little bit more technical question. IMR, the interest maintenance reserves on the stat side, I think normally you can amortize those realized gains. It's a smoothing factor, but given where interest rates are right now, you can't neutralize a lot, so are you seeing any short-term pressure on capital because of that?

No, we currently have a positive IMR balance, obviously, with interest rates increasing. We do have unrealized losses within the general account, but for us, economically, those assets are being held to maturity. So we think that's okay, and that's why we look at book value ex-AOCI as the appropriate metric to value insurance companies.

Great, thank you.

Our final question will come from the line of Suneet Kamath with Jefferies. Please go ahead.

Yeah, thanks. Good morning. I just wanted to start with the SCS product. One of the things that we are hearing in the market is that pricing and returns are maybe less favorable than they were when you guys innovated this product in the first place. And maybe that's changed with the move in rates that we've seen of late. But just wanted to get a sense of how the returns and the pricing compare today to maybe over the past few years, if you could provide that detail?

Yes, Suneet. As I mentioned, this quarter, even in the last few quarters, it speaks to the great work done by the individual retirement business regarding distribution and pricing. It's our highest margins ever in this product and it's a result of, as Nick mentioned earlier, a rational market, growing demand, but also the higher interest rates certainly benefiting that product, making it more appealing to consumers. It's a great portfolio and product for consumers but also for shareholders, and that's demonstrated through the record margins.

Got it. And I guess on LDTI on Slide 7, I just want to make sure I understand this. It looks like your operating earnings are coming down $150 million to $250 million. I get that free cash flow conversion is going higher, but it seems like that's because the denominator is lower. So maybe just want to understand exactly what's going on with that $150 million to $250 million. If that is, in fact, an operating earnings hit that you guys are expecting, does it give you any thought around risk transferring the remaining legacy block, just to clean up the block, but also to get this accounting pressure behind you?

Sure, Suneet. As a reminder, there is no impact on cash, profitability as we view the business economically; nothing's changed. However, the accounting standard on how they value liabilities has changed. As a result, we've adopted to the new accounting standard, which moves the cash flows closer by $150 million to $250 million. The primary driver is the attributed fees I mentioned in my remarks. The new accounting allows you to accrue more of the base fees to cover some of the shortfalls in rider charges on the legacy product that were at issuance. This new accounting framework is similar to VM-21, the statutory framework in how we view it economically. It is naturally moving closer to cash. We are comfortable with the metric and believe it will create stability and higher cash flow generation per share moving forward.

But no change then on your view of the legacy block and whether it makes sense to just offload that?

No. This is just accounting and how the cash flows are reflected in the accounting. There's no change to cash flows or economic profitability within our blocks.

Okay, thanks.

Ladies and gentlemen, that will conclude today's conference call. We thank you all for joining. You may now disconnect.