Equitable - Q3 2023

Transcript

Operator (participant)

Good morning. My name is Krista, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Equitable Holdings Third Quarter Earnings Call 2023. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during that time, simply press star followed by the number one on your telephone keypad. And if you would like to withdraw your question, please press star one again. Thank you. I will now turn the conference over to Erik Bass, Head of Investor Relations. You may begin your conference.

Erik Bass (Head of Investor Relations)

Thank you. Good morning, and welcome to Equitable Holdings Third Quarter 2023 Earnings Call. Material 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. Please refer 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, Bill Siemers, AllianceBernstein's Interim Chief Financial Officer, and Onur Erzan, Head of AllianceBernstein's Global Client Group and Private Wealth business.

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. Reconciliations 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.

Mark Pearson (President and CEO)

Good morning, and thank you for joining today's call. This is a promising time for Equitable and the life insurance industry, as the combination of higher interest rates and favorable demographic trends provides the best backdrop for growth we've seen in well over a decade. Equitable is particularly well positioned to capitalize on these tailwinds, given our unique business model, which allows us to monetize all three components of the insurance value chain: product manufacturing, asset management, and distribution. On Slide 3, we present an overview of the third quarter. Third quarter non-GAAP operating earnings were $413 million or $1.15 per share, up 16% year-over-year, but down 2% compared to the second quarter, modestly below our expectations.

Adjusting for notable items in the period, which included lower alternative returns, elevated mortality, and a higher tax rate, Non-GAAP operating earnings per share was $1.30, which is up 15% compared to third quarter of last year and up 2% sequentially. Robin will touch on this in more detail in a few minutes. We continue to benefit from momentum in both our retirement and wealth management businesses, with a combined $3 billion of net inflows in the quarter, supported by record demand for our industry-leading buffer annuity and 4,100 proprietary advisors, which enable us to capture distribution margin for our retirement offerings and investment products.

In asset management, we were not immune to industry-wide pressures, with $1.9 billion in outflows in quarter three, but active flows were nearly flat in the quarter, a better result than for most peers. Turning to capital, our businesses continue to deliver diverse sources of earnings, which ultimately leads to a more predictable cash flow. Year to date, we have generated approximately $1 billion of cash to holdings and remain on track for our $1.3 billion guidance for the year. Importantly, more than half of our cash flow now comes from non-regulated entities, which makes it more predictable. Our cash generation and holdco cash position of $2 billion continue to support meaningful capital return to shareholders.

We returned $315 million in the quarter and over $900 million year to date, putting us on track to come in at or above the high end of our 60%-70% payout ratio target. Our third quarter results also reflect our annual assumption review, the first under the LDTI accounting framework. The minimal impact to operating results reflects the benefits of our conservative approach to setting assumptions and designing products with a narrow range of outcomes. We continue to focus on driving profitable organic growth across our businesses, executing against the strategic priorities outlined at our Investor Day, including our yield enhancement and productivity initiatives.

We are also benefiting from higher interest rates, which are at levels we haven't experienced in over 15 years, and favorable demographics, with 11,000 Americans turning 65 each day. In our general account, higher new money yields and the continued demand for our RILA product furthers the shift in our retirement business towards spread-based earnings. Higher interest rates have also been a tailwind for our wealth management segment, with revenue on cash balances supporting operating earnings growth of over 80% over prior year quarter. Current interest rate levels put us ahead of plan relative to our 2027 target to double earnings to $200 million per annum. On slide four, I'll touch on the favorable impact of higher interest rates in a bit more detail.

We have often talked about our market neutral balance sheet, which means that we hedge first dollar interest rate exposures and equity market exposures on the guarantees we've made to our clients. This means that we are not making a bet on the direction of markets when we price products. As a result, our RBC ratio has remained in a narrow and comfortable range, despite significant volatility in interest rates and markets over the past few years. This ultimately enables us to drive consistent cash generation and capital return to shareholders. While our balance sheet is neutralized from the impact of interest rate movements, higher rates provide a meaningful tailwind to our earnings and growth outlook. Our retirement product offering is more attractive to clients, evidenced by our second consecutive quarter of record sales and net flows.

Importantly, higher rates also mean better economics for our shareholders, and we're generating IRRs above 15% and a record value of new business. As a reminder, strong retirement sales also benefit AB and our wealth management business. In our general account, we're investing new money at levels that are 160 basis points above our portfolio yield, which is driving higher net investment income and wider spread. Finally, we are also realizing a benefit in wealth management, with increased revenue on cash sweeps, supporting strong year-over-year earnings growth. Turning to Slide 5. We highlight the strong results we are seeing across our businesses as we continue to execute against our growth strategy.

In retirement, we reported a record quarter with $1.5 billion of net inflows, a 5% annualized organic growth rate, with strong results in individual retirement, offsetting typical third quarter seasonality in our group retirement segment. Total premiums were $5.4 billion in the quarter, up 17% year over year, led by our industry-leading RILA product, with $3.1 billion in premiums, up 37% year over year. In asset management, we continued to drive growth in our private markets platform, with $8 billion of our initial $10 billion capital commitment from Equitable's general account deployed to date, and an additional $10 billion committed at our Investor Day in May, bringing our cumulative commitment to $20 billion.

The acquisition of CarVal also significantly enhanced AB's offering, and private markets AUM has grown 11% year-over-year to $61 billion as of quarter end. Total net outflows at AB of $1.9 billion in the quarter were modest relative to the industry, with active flows nearly flat and outpacing peers. Organic growth in the retail channel was attributable to taxable fixed income and municipals, and U.S. retail flows have been positive for 12 of the last 13 quarters. Fixed income performance remains strong, with nearly 75% of assets outperforming over the one- and three-year periods. In the institutional channel, fixed income and passive outflows offset organic growth in active equities. The pipeline remains strong, with $12.5 billion of unfunded mandates and private alternatives comprise more than 80% of the fee base.

Our wealth management segment, which is the fastest-growing portion of our business, reported 8% annualized organic growth in the quarter, with $1.6 billion of net inflows. Net inflows and market tailwinds over the last 12 months drove 16% year-over-year growth in assets under administration, now $79 billion. While operating earnings are benefiting from higher interest rates, we are also seeing improved advisor productivity, which was up 2% compared to the second quarter of this year. Increasing advisor productivity is a key lever to drive higher wealth management margins, and we are encouraged by the momentum in this business. I will now turn over to Robin to provide additional updates on the quarter. Robin?

Robin Raju (CFO)

Thanks, Mark. Turning to slide six, I will touch on the results for the third quarter. On a consolidated basis, Equitable Holdings reported non-GAAP operating earnings of $413 million in the quarter, or $1.15 per share, up 16% year-over-year. After adjusting for $67 million of unfavorable after-tax notable items, and a favorable assumption update of $12 million, non-GAAP operating earnings were $468 million, or $1.30 per share, up 15% on a comparable year-over-year per share basis. We also generated net income of $1.1 billion or $3.02 per share. Under LDTI, every quarter that we have reported has resulted in positive net income. This ensures we remain eligible for inclusion into S&P indices.

While pleased with the underlying growth momentum across our business, third quarter EPS came in below consensus expectations and our view of the run rate earnings power for the business. This was a noisy quarter, and on page seven, I'll walk you through the major moving pieces and how we're thinking about the outlook going forward. Turning to page seven, there are three items that affected results across the enterprise. First, alternatives and prepayment income were $20 million below our normal expectations. Our alternative portfolio had an annualized return of 6% in the quarter, as solid private equity results were offset by the continued weakness in our real estate equity investments, which represent 20% of the alternatives portfolio. As a reminder, we normalize to the low end of our 8%-12% normalized return expectation.

Looking forward, we expect similar returns in the fourth quarter, but project further recovery and performance in 2024. Second, we completed our 2023 assumption update and made some model changes in the third quarter, which resulted in $16 million favorable adjustments. The modest changes reflect our fair value management philosophy, which incorporates emerging experience into our assumptions. This limits surprises like large unlocks for investors. Lastly, the consolidated tax rate in the quarter was 22%, above our 19% expectation. This quarter, we had an unfavorable dividend received deduction true-up, which drove the higher rate. While taxes can bounce around each quarter, we continue to estimate a 19% consolidated tax rate and a 17% tax rate for the insurance business. We also had a few items that affected specific business segments that I wanted to highlight.

Protection Solutions earnings were $34 million, higher than the second quarter, but below our guidance of $50-$75 million per quarter near term. Overall, gross mortality claims were close to our updated assumptions, but net claims came in higher than expected due to less reinsurance coverage. In a typical quarter, about 15% of our gross claims are covered by reinsurance, but this quarter, we only had coverage on 10%. This was about a $23 million after-tax variance, adjusted for which segment earnings would have been at the lower end of our expected range. We still view $50-$75 million as our best estimate of near term quarterly earnings power of the business, and we expect this to move higher over time.

As a reminder, while we expect some continued drag from a pull forward in mortality in the next few quarters, this has a minimal impact on cash generation, since we have already adjusted the statutory assumptions to account for the increased COVID endemic-related mortality. I would also note that we had a modest positive adjustment from our actuarial assumption update, underscoring the conservative assumptions for our block. Moving forward, we will explore ways to reduce the earnings volatility in the Protection Solutions segment, such as by adding more reinsurance or reducing retention limits. In individual retirement, we delivered a second straight quarter of record sales and net flows, highlighting the growing consumer demand for protected equity and secure income solutions. Total sales were $3.8 billion, and net flows were $1.7 billion, which continues to be driven by our spread-based RILA product, SCS.

This momentum bodes well for the future growth in individual retirement earnings and cash generation. However, one of the dynamics we've seen is that as the terms we can offer to policyholders improves with higher interest rates, there is some increased lapse activity in our in-force block, which we have factored into our near-term assumptions. Under GAAP accounting, this requires us to amortize more DAC, and we expect quarterly amortization expense to be roughly $5 million higher going forward. While this is a modest near-term headwind for earnings, I would emphasize two things. One, as we mentioned earlier, we're seeing record net flows, and the growth in this block will have a much bigger impact on earnings over time. Secondly, DAC amortization is a non-cash expense that has no change in projected cash flow for the business. Overall, we continue to be very bullish on the outlook for individual retirement.

In wealth management, we collected $5 million of lower commission-related earnings this quarter due to a lower level of 403(b) sales. This corresponds with the seasonality in our group retirement business related to teachers being off during the summer months. Going forward, you should assume some seasonal pressure on the wealth management results in the third quarter, but we viewed $45 million of earnings as a better run rate to think about for the fourth quarter. Finally, on corporate and other, we generated a normalized loss of $109 million, which is worse than our expected quarterly run rate of roughly $100 million. This is due to timing of some expenses. Stepping back though, we remain confident in our ability to grow EPS at 12%-15% annual rate through 2027. Across all our businesses, we continue to control the controllables.

We are ahead of our plan for achieving the $110 million general account yield enhancement target, helped by the higher rate environment. Additionally, we're ahead of schedule on our $150 million expense savings target and expect to capture a $30 million run rate of savings this year. Finally, as Mark touched on earlier, the higher rate environment provides a strong tailwind for new business. Across all three retirement businesses, we are running well ahead of our projection for VNB in 2023, which will contribute to future earnings and cash flow. Turning to Slide 8, let's dive deeper into the diverse sources of earnings that lead to our consistent cash generation.

Our deliberate actions over the last five years to shrink our legacy block, grow our wealth management and private markets business, and expand our core retirement and asset management markets, have led us to meaningfully grow earnings and cash flows while also shifting to a higher quality mix. At the same time, we consistently convert earnings to cash flows in our retirement business for two reasons: First, the business is strongly capitalized and tightly hedged, ensuring our balance sheet is market neutral. This enables our earnings and cash to remain stable through volatile markets. Second, $200 million of the cash flows from these businesses are unregulated and go directly to the holding company through our investment management contract. As a result, our retirement cash flows are much more consistent and higher quality than other retirement players in the industry.

At the same time, we have two high-quality, unregulated businesses in asset and wealth management that comprise the remaining 40% of our anticipated $1.3 billion of cash flows this year. This business converts nearly 100% of their earnings to cash flow. The quality and durability of cash flows enabled us to increase our payout target earlier this year to 60%-70% of operating earnings. This is a 20 percentage point increase since our IPO, demonstrating a significant shift in our business over time. This leads me to our next slide, where I'll dive deeper into our capital management program. Turning to Slide 9, our strong cash generation continues to drive shareholder value. In the quarter, we returned $315 million, which includes $238 million of share repurchases, resulting in an 8 million share count reduction.

Over the last 12 months, we have returned $1.1 billion to shareholders, reducing our shares outstanding by 8%. At the same time, our holding company cash increased to $2 billion after taking a dividend from the insurance subsidiary. Our cash position gives us confidence to continue paying out 60%-70% of non-GAAP operating earnings, even in volatile markets. It also enables us to play offense and be opportunistic rather than being on the defense. Year to date, we have upstreamed $1 billion of dividends to the holding company and remain confident that we will hit our $1.3 billion target for the year. In the fourth quarter, we will receive unregulated dividends from AllianceBernstein, our wealth management business, and our investment management contract with the retirement company. From an investor perspective, we believe that Equitable Holdings presents an excellent value proposition.

After paying interest expense, we expect to generate $1.1 billion of distributable free cash flow, which represents a 12% free cash flow yield. Our businesses have strong organic growth potential, and we expect cash generation to increase by 50% to $2 billion by 2027. With that, I will now turn the call back to Mark for closing remarks. Mark?

Mark Pearson (President and CEO)

Thanks, Robin. In closing, we continue to benefit from momentum in both our retirement and wealth management businesses with a combined $3 billion of net inflows in the quarter. Our balance sheet and capital position remain robust, with conservative assumptions resulting in no material assumption review impact. Our cash generation and Holdco cash position of $2 billion continues to support consistent capital return to shareholders, tracking at or above the high end of our 60%-70% target payout ratio. We remain on track for the financial guidance we outlined at our Investor Day as we continue to focus on driving growth across our businesses while capitalizing on the tailwind provided by higher interest rates. With that, we'll now open the line for questions.

Operator (participant)

Thank you. As a reminder, if you would like to ask a question, please press star followed by the number one on your telephone keypad, and we ask that you limit yourself to one question and one follow-up. Your first question comes from the line of Elyse Greenspan from Wells Fargo. Please go ahead.

Elyse Greenspan (Managing Director and Senior Equity Analyst)

Hi. Thanks, good morning. My first question is on Protection Solutions. So if, you know, in the fourth quarter, if mortality is expected to still remain elevated, and I know in the slides you guys pointed to alternative results being similar to the Q3 sequentially, so wouldn't that imply that in the fourth quarter you would still fall below that $50 million-$75 million target? Or is there something I'm missing in there, or is there, you know, normalizing on the reinsurance side? I'm just trying to piece that all together.

Robin Raju (CFO)

... Thanks, Elise. So for protection in the fourth quarter, we continue to expect to see some of the pull forward come through. That would put us in the range of the $50 million-$75 million guidance. We continue to expect that range over the near term in Protection Solutions, and then obviously some of the alts would come against that as well. And so from a normalized basis, we should be at the lower end of the range when considering alts, as long as we remain at that midpoint. In the third quarter, to give you comfort, as you see on a normalized basis, we are at the lower end of the range of 49, at $49 million or $50 million. We continue to see good momentum and improvement in actually gross claims.

But as you noted, we did see some of the reinsurance come in lower than expected. We're at 10% in the quarter versus 15% historically, and we'd expect that to normalize going forward as well. But reminder, again, the pull forward and what we see in the range has no impact on the cash flows, and the cash flows continue to grow strongly overall across our businesses.

Elyse Greenspan (Managing Director and Senior Equity Analyst)

Thanks. And then, there was, like, around a $1.5 billion impact to net income for the VA product feature line this quarter. I had thought that that would be smoother under LDTI. Can you just give some color on what went on there in the quarter?

Robin Raju (CFO)

Sure. So we, you know, as I mentioned on the call, this is the seventh straight quarter that we've seen positive net income post LDTI, and so we're, we're comforted and continuing to see positive results there. On our hedging program, we do hedge with the general account, and some on the interest rate side. So the general account flows through AOCI versus the liability flowing through the VA product features. And then we do that purposely to avoid statutory volatility, and so we can have consistent capital returns. So it should be in line with the sensitivity that we've given for interest rates, in as it relates to LDTI.

Elyse Greenspan (Managing Director and Senior Equity Analyst)

Okay, thank you.

Operator (participant)

Your next question comes from the line of Tom Gallagher from EVR. Please go ahead.

Tom Gallagher (Senior Managing Director and Senior Equity Analyst)

Thanks. Hey, Robin, just following up on your comment on considering reinsurance, additional reinsurance purchases on your protection block to lower volatility. Would, can you talk a little bit about what you're considering there? What pricing's like? Is that, is that likely to lower the earnings in the segment, or, or do- would you not seeing have, how, would you not expect it to have much of an impact?

Robin Raju (CFO)

Sure, Tom. Look, at for protection, we're not, we're obviously not happy with the results, for the business, and so therefore, we are exploring options to mitigate volatility of the results, and we'd hope to, mitigate it by hopefully at some point in the first half of next year. Certainly in the... If you look relative to peers, we've historically had higher retention limits on that business. That's a function of us being a subsidiary part of a big company at, previously, before our IPO, and so we have to explore those retention limits. Obviously, if we give up and, and we reduce the volatility, you're giving up some long-term, economic returns. So that's the trade-off that we'll continue to assess, but we're in discussions with reinsurers and assessing those trade-offs.

Tom Gallagher (Senior Managing Director and Senior Equity Analyst)

Okay, thanks. And I know it's early, it just came out yesterday, but any initial thoughts on this new Department of Labor proposal on retirement, and how that might impact either the industry or Equitable?

Nick Lane (President of Equitable Financial)

Sure, Tom, this is Nick. We are still digesting the almost 500 pages. With that said, initial reading, the main for us from the DOL is that all rollovers from ERISA 401 plans will be considered fiduciary activities. And while in spirit, this aligns with the 2016 rule, what is different in this iteration, it does not include any private rights of actions, and since 2016, a majority of firms have revamped their compliance processes to align with the existing SEC and state best interest and fiduciary rules. What does this mean for the industry? The biggest impact appears to be that non-securities licensed insurance agents that sell non-registered products, like fixed index annuities, will now be covered. There's also some interesting language pulling robo-advisors in scope.

For Equitable, we see no material impact given the investments we've made and the changing landscape. As a reminder, Equitable Advisors operates today under the higher SEC Reg BI fiduciary standards. 403(b) plans are not in scope, and our individual annuity products are registered product, registered product securities sold through registered broker-dealer channels. Going forward, we'll continue to review the details, and I do expect there to be significant industry comments over the next 60-day period on specific provisions that will provide more clarity.

Tom Gallagher (Senior Managing Director and Senior Equity Analyst)

Great. Thanks, Nick. That was helpful.

Operator (participant)

Your next question comes from the line of Jimmy Bhullar from JPMorgan. Please go ahead.

Jimmy Bhullar (Equity Research Analyst)

Good morning. So first, just a question on AB. Should we assume that flows in the business, and obviously other asset managers have been affected by this, but should we assume that flows are going to be challenging until there's a little bit more stability in interest rates in the equity market? Or, are there other things that suggest that things might improve in your business in the near term?

Onur Erzan (Head of Global Client Group and Private Wealth Business)

... Thanks, Jimmy. This is Onur Erzan from AB. As you pointed out, it has been a tough environment. That said, if you look at our active flows in the third quarter, we were roughly flat, which was better than other peers that reported so far. So we feel good about our relative performance on the business. And when we look at the growth engines, we feel pretty good about the momentum. We were top 5% in equities and munis in the U.S. retail, top 3% in cross-border taxable fixed income. So definitely feeling good about those. Even in institutional, which led to the outflows overall, including passive, actually, institutional equities had an annualized organic growth rate of 7%, so we feel confident about the diversity of our growth engines.

It's and finally, our institutional pipeline remains very strong at $12 billion, and the effective fee rate on that is 3x the effective fee rate we have today in the institutional business, so definitely revenue accretive. So we have a lot of strength to feel good about. That said, we cannot predict the rates, and the rate uncertainty definitely keeps the investors on the sidelines and skews the flows towards money market funds and low risk, low fee products. So cannot time it perfectly, feel confident in terms of our ability to perform well, but definitely there could be some sluggish growth depending on the rate environment.

Suneet Kamath (Senior Research Analyst)

Okay. And then, Robin, on protection, I think earnings have been weaker than your estimates or your guidance for six of the past seven quarters, and there's always some reason, obviously, for that, and it's varied over time. But what still gives you the confidence that 50-75 is the right range? Should or have you thought about lowering the range given results in the last several quarters?

Robin Raju (CFO)

Sure, Jimmy. You're right, it's come in below our expectations over the last few periods. But on a normalized basis for those for the reinsurance that I mentioned, it did come in at the lower end of our range, even taking into account the alternative portfolio. So seeing that come through and knowing if we went back to our 15% reinsurance coverage that we've had, we would've been at the lower end of the range. And also seeing gross claims improved quarter-over-quarter, that's what gives us confidence in the range. But, you know, we're not just relying on confidence. We're going to obviously explore actions to reduce the volatility of the business, because honestly, it's a small part of Equitable Holdings. We generate $1.3 billion of cash flows.

It's grown to $2 billion of cash flows, and, you know, we're answering questions about volatility in a small segment here. So we'll look to reduce that, going forward and get the focus back on how we're growing cash flows by 50% to 2027.

Suneet Kamath (Senior Research Analyst)

Okay. Thank you.

Operator (participant)

Your next question comes from the line of Alex Scott from Goldman Sachs. Please go ahead.

Alex Scott (Equity Research Analyst)

Hey, good morning. First one I had is just a quick follow-up on the comments on the fiduciary rule. I think you mentioned there was no private right of action. I noticed in the rule, I thought there was an enforcement section that mentioned the private right of action. I think there may be a nuance there with, like, Title I versus Title II or something, but just interested in that piece of your comment and what you read of that language on enforcement was.

Nick Lane (President of Equitable Financial)

Yeah, at this time, we would view it as a nuance, but we'll be coming back with more details on that.

Alex Scott (Equity Research Analyst)

Okay, understood. Second question I had was just on the, the environment for RILA products and, and competition. Are you seeing any more competition coming in from the private equity players? Are they, are they starting to get any more traction in some of the distribution channels where I think you, you all haven't had to compete as directly with them? Are you, are you still able to avoid some of that pressure? Is there a sort of legging more into private debt allocations and, you know, able to provide pretty, pretty strong pricing?

Nick Lane (President of Equitable Financial)

Yeah, at this time, you know, and per the comments Robin made, you know, we had a record quarter in terms of flows and sales. Competitive dynamics continue to be positive vis-a-vis other markets. Given our edge in terms of being a pioneer in the market, given our distribution footprint, both Equitable Advisors and privileged third party, and given our innovation in the space, we think we're uniquely captured to capture a disproportionate share of the value there.

Onur Erzan (Head of Global Client Group and Private Wealth Business)

Nick, it's still the case that it's sort of 8 players in the market there against nearly 50 players in the fixed annuity market. So, we're aware, Alex, of the, you know, the possible new entrants, but at the moment, we don't see it, and pricing remains very, very strong.

Alex Scott (Equity Research Analyst)

Thank you.

Operator (participant)

Your next question comes from the line of Suneet Kamath from Jefferies. Please go ahead.

Suneet Kamath (Senior Research Analyst)

Thanks. Good morning. So, Mark, I think in your closing comments, you talked about being opportunistic with capital, and clearly you have a lot of capital at the holding company. Is one way we might see that is you traveling above the 60%-70% payout target for some period of time as we move into 2024?

Onur Erzan (Head of Global Client Group and Private Wealth Business)

We're not changing any guidance, but if you look in this last quarter, we actually did travel up slightly higher than that particular ratio.

Mark Pearson (President and CEO)

... I think as both Robin and I have said, with a healthy balance sheet, as we have now and the excess cash, that does enable us to look at opportunities. I mean, the most recent one we did, of course, 15 months or so ago, was CarVal. That really was a way to accelerate our strategy in the build-out of ALTS. That remains an area we're very interested in, and we remain very interested in wealth management and growing distribution in that size. So, all I would say, Suneet, for the right deal at the right price, and where we can see accretion for our shareholders, we would be very interested in looking at them. But it's not our strategy.

Our strategy remains to build out those, those businesses, and if we see a way to accelerate it, we will, we will certainly look at it.

Wilma Burdis (Equity Research Analyst)

Got it. Makes sense. And then, I guess as we think about the build-out of the private asset portfolio within the general account, I think you're marching towards that sort of $25 billion. How should we think about the capital requirements associated with that growth in privates?

Robin Raju (CFO)

Sure. So we're, we're about 80% of the year through in getting to our $10 billion for the year, and so we have confidence in that, and then we have another $10 billion commitment to AB's business. And as you know, the big, the big prize there is AB growing that to, you know, almost $90 billion by 2027, and it being 20% of the revenues at AllianceBernstein. So that's the big prize for EQH. Obviously, as our business grows, we have to hold capital for the, for the risk that we take, but this is coming with the growth in our overall business, and we're not fundamentally shifting the mix, that we see. So we don't see a significant capital constraint as a result in the movement of the general account.

And so, historically, if you look back, for every dollar that we put in into AllianceBernstein, they've grown four dollars' worth of third-party money. So we think it's a great value proposition for shareholders, without constraining capital.

Wilma Burdis (Equity Research Analyst)

Sorry, so the capital requirements on the privates are not materially different than what you guys were holding before?

Robin Raju (CFO)

No, if you look at our business mix today, in terms of what we have in private credit and what we have in alternatives, that mix in the general account isn't shifting significantly from now to 2027. So it's coming, a lot of it's coming from growth in our underlying business.

Wilma Burdis (Equity Research Analyst)

Okay. Got it. Thanks.

Operator (participant)

Your next question comes from the line of Tracy Benguigui from Barclays. Please go ahead.

Tracy Benguigui (Director and Senior Equity Research Analyst in Insurance and Financials)

Good morning. Going back to protection and your comment that gross claims were 10% reinsured versus your 15% average, did the lower reinsurance recovery have anything to do with risk recapture, maybe under a YRT treaty?

Robin Raju (CFO)

No, it's just a function of lower, high face amount claims in the quarter.

Tracy Benguigui (Director and Senior Equity Research Analyst in Insurance and Financials)

Okay. Got it. And just wondering on the comment about normalizing going forward, do you think the face amounts might be lower, or is your normalized recovery dependent upon the comment that you need to add more reinsurance or reduced retention limits?

Robin Raju (CFO)

No, it has nothing to do with the actions that we take. If you look in the appendix, we put a slide in for the Protection Solutions business, and it shows the historical reinsurance coverage that we had. And on average, we've been about 15%. And in the quarter, you can see it sticks out to you at 10% in the quarter. So we'd assume that we get back to that historical average just based on the mix of business that we have. And that should put us within that $50 million-$75 million guidance that we've given.

Tracy Benguigui (Director and Senior Equity Research Analyst in Insurance and Financials)

Okay, I did see that. So your comment was just based on your track record?

Robin Raju (CFO)

Correct.

Tracy Benguigui (Director and Senior Equity Research Analyst in Insurance and Financials)

Yeah. Okay. But also, just to be sure, didn't your capital returns this quarter exceed your 60%-70% payout because of just nuances with GAAP accounting, like higher DAC? It doesn't translate to statutory cash flow generation.

Robin Raju (CFO)

That's right. In the quarter, on a reported basis, we paid more than the 60%-70% payout ratio. On a normalized basis, we paid at the higher end of that range, you know, and continue to see returning cash to shareholders as a great way to drive value, given where the stock trades today. So we'll continue to return capital to shareholders as we see fit.

Tracy Benguigui (Director and Senior Equity Research Analyst in Insurance and Financials)

Thank you.

Operator (participant)

Your next question comes from the line of Wilma Burdis from Raymond James. Please go ahead.

Wilma Burdis (Equity Research Analyst)

Hey, good morning. The assumption review, could you just go into a little bit more detail on the assumption review? It's interesting to see a favorable assumption review, especially it seemed like it was related to lapse in utilization.

Robin Raju (CFO)

Sure. So I, I would take the assumptions review in aggregate, the way I look at it. In, in aggregate, the net income impact of the assumption review across all of our business was $4 million at the end, and that's what you should expect, because that's how we manage our assumptions. We manage on a conservative basis, we move to emerging experience, and we do not want to surprise investors with negative unlocks that are large, they're distracting, and they're not represented in our core business. So, if you look across every single business line that we have, we update assumptions on an annual basis and move towards emerging experience. So you're going to see ins and outs within every single assumption, but at the end of the day, it rounds to a very small number.

Wilma Burdis (Equity Research Analyst)

Thank you. And then as well, could you talk about the opportunities to acquire wealth management teams versus the ability to grow organically?

Nick Lane (President of Equitable Financial)

... Sure. Our model is distinct because we both bring in new people into the industry and grow them into wealth managers. We've amplified that through our experienced advisor initiatives, which would be looking for a supported independence model. The opportunity for a differentiated advice model, the platform that gives them open architecture to a full suite of fee-based, recurring investment products, plus our strength of our retirement platform. Year to date, we've recruited, you know, roughly 80 advisors on the experienced side, so we see traction on that side.

Operator (participant)

Thank you. Your next question comes from the line of Maxwell Fritscher from Truist Securities. Please go ahead.

Maxwell Fritscher (Research Analyst)

Hi, good morning. I'm calling in for Mark Hughes. I joined a little late, so I apologize if you covered this, but in wealth management, you've had positive year-over-year sales growth and advisory, after contractions in the first two quarters of the year, and strong growth in brokerage and direct. Is there anything in particular you're seeing there that you could share? I know you had just mentioned recruiting, but, but anything else?

Nick Lane (President of Equitable Financial)

Yeah, structurally in the industry, you've seen with interest rates up, people move cash into fixed maturity options, which aren't fee-based investments. So that, that's shifted some of it from the fee-based investment to the structured maturities. As Robin highlighted, we continue to see growth in our recurring fee-based investment accounts, in terms of positive net flows, and that continues to be a growing percentage of our AUA.

Maxwell Fritscher (Research Analyst)

Thank you.

Operator (participant)

Your next question comes from the line of Mike Ward from Citi. Please go ahead.

Mike Ward (Equity Research Analyst)

Hey, thanks, guys. Good morning. Maybe back to the regulatory landscape. I know the focus has been on the DOL. I think I saw the SEC priorities for 2024 might include variable annuities, too. Just wondering if you had any, you know, inklings or communications on what they're interested there.

Nick Lane (President of Equitable Financial)

You know, at this time, the SEC has been focused on implementation of Reg BI and the interpretations of, of that regulation. That's been the major, major push. We'll have to come back to you on, on any specific variable annuity.

Mike Ward (Equity Research Analyst)

Okay. No worries, I know it's early. And then just a second on some of the good guys in the net flow metrics. I think some areas like private credit have been pretty strong in helping you guys strategically. You dug into this at the Investor Day. What I'm wondering is, kind of, you know, how the outlook for these asset classes might change, you know, if and when we get to a point of declining interest rates, and how do you guys sort of think through that?

Onur Erzan (Head of Global Client Group and Private Wealth Business)

Hi, Mike, it's again, Onur from AB. Yes, we feel pretty good about the outlook for our private alternatives platform. We have roughly $14 billion in dry powder there, so we can definitely deploy capital across all of our strategies, ranging from real estate debt to corporate lending and CarVal. In terms of the declining rates, first of all, it's hard to predict when that's going to happen. I think the base case seems to suggest it's more high for longer. But even in a relatively lower rate scenario, the attractiveness of private credit remains strong because we have a lot of floating rate exposures, but also you have the ability to go with fixed.

We have seen this through the market cycle, because if you think about history, we had these strategies, depending on the strategy, except CarVal, going back to 2012, 2014, and we have generated consistent net flows regardless of the interest rate environment. So, it's pretty rate agnostic. So, we believe the momentum will continue.

Mike Ward (Equity Research Analyst)

Thanks, guys.

Operator (participant)

This concludes today's conference call. Thank you for your participation, and you may now disconnect.