Equitable Holdings Inc

NYSE:EQH

Earnings Call Transcript 2021-Q3

[Operator]

Good morning. My name is Brent, and I will be your conference operator today. At this time, I would like to welcome everyone to the Equitable Holdings Third Quarter Earnings Call. [Operator Instructions] I would now like to turn the call over to Isil Muderrisoglu, Head of Investor Relations. Please go ahead.

[Isil Muderrisoglu, executive]

Thank you. Good morning, and welcome to Equitable Holdings' Third Quarter 2021 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 Ali Dibadj, AllianceBernstein's Chief Financial Officer and Head of Strategy. 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, executive]

Thank you, Isil. Good morning, everyone, and thank you for joining our call today. I am pleased to present our results for the third quarter of 2021 and I would like to begin by providing some key highlights on Slide 3. Product innovation across both our insurance and asset management subsidiaries continues to resonate well with clients and our distribution strength and economic management of the business continues to generate value for shareholders. This is reflected in record operating earnings in the third quarter, with strong results in our retirement and asset management businesses supported by favorable equity markets. Our third quarter non-GAAP operating earnings of $818 million or $1.94 per share were 56% up year-over-year and 13% up sequentially on a per share basis. Assets under management increased 17% year-over-year to $871 billion, driven by strong net flows of $7.1 billion in the quarter, equity markets and continued momentum in our capital-light businesses.

Secondly, I'm very pleased to highlight our progress on the mitigation of Regulation 213 redundant reserves. As a reminder, these are uneconomic reserves that would not be required if we were domiciled outside of New York filed outside of New York State. We announced at the half year that we received a permitted practice with the New York DFS, which provides us with a 5-year phase-in of this new regulation. Since the half year, we have delivered on our commitment to execute management actions to secure our future cash flows. In support of these efforts, yesterday, we announced a XXX financing transaction via reinsurance with Swiss Re, which unlocks $1 billion of statutory value and offsets approximately half of the Regulation 213 redundant reserves. We have also completed our previously announced internal restructuring and now expect 50% of annual cash flows from noninsurance regulated subsidiary of our holdings company. That is of the $1.5 billion cash we generate each year, approximately $750 million now comes from our insurance entity and the balance from AB and noninsurance subsidiaries. Robin will provide more detail on these actions later in our call.

Our fair value economic framework continues to be the compass by which we steer the business. This ensures sound economic pricing of our products, a robust capital position and that we are closely aligned and look forward to the forthcoming adoption of LDTI accounting changes in 2023. We are very much for fair value and transparent reporting. The results of our annual assumption update this quarter has had a minimal impact and is testament to the effectiveness of our fair value management. The capital position remains strong, with $2 billion in cash and liquid assets at Equitable Holdings. We continue to consistently deliver on our 50% to 60% payout ratio target, plus an incremental $500 million from the Venerable transaction.

In this last quarter, $534 million was returned to shareholders in the form of dividends and buybacks and $4.5 billion has been returned since our IPO. And the final point I would like to highlight is our business model, which differentiates Equitable and positions us to deliver superior client outcomes and capture the full value chain for our shareholders. When we think of Equitable, naturally we think of insurance and retirement segments. But the reality is we have three businesses: Retirement, Asset Management and our Affiliated Distribution. Collectively, these three businesses deliver a unique value proposition to capture the growing retirement opportunity while differentiating Equitable from our peers, which I will highlight in further detail on the following page.

So turning to Slide 4. First, our insurance business. Equitable has been providing life and retirement solutions to help clients secure their financial well-being for more than 160 years now. We have a history of innovation, pioneering the first variable life product in the 1970s, the variable annuity with living benefit in the 1990s and creating the buffered annuity market in 2010, demonstrating our ability to not just succeed but also shape the markets we play in.

Today, Equitable holds the #1 position in the RILA market, #2 position in the variable annuity market and the #1 position in the K-12 403(b) educators market. Underlying all of these businesses is our fair value economic framework. Over the last decade, we have shifted to businesses that are more capital efficient and less interest sensitive. As a result, Equitable Life subsidiaries have historically generated stable cash flows of around $1 billion per year despite historic low interest rates and volatile equity markets.

What is unique is that our insurance operations are enhanced by our 65% ownership of AllianceBernstein, a globally renowned asset manager. There were three strategic advantages to this. First, we were able to develop more attractive solutions for our clients. Capabilities such as our volatility management tools, model wealth portfolios and buffered annuities are complex to design and need both insurance and investment expertise. We have that expertise.

Secondly, AllianceBernstein provides diversified and attractive returns from a capital-light business. The returns from AB have been very impressive. Since our IPO, AB has delivered a total shareholder return of over 180%. Assets under management have grown from $540 billion to $742 billion over that period. This directly benefits EQH shareholders. This performance is reflected in enhanced cash flows, which have grown from approximately $300 million per annum received by the holding company at the time of our IPO to approximately $500 million per year now, cash flows that are outside of the insurance regulated entities.

Finally, there are attractive synergies between the two businesses, the virtuous cycle we've described in the past. Equitable serves as a source of permanent capital for AB, now $121 billion of Equitable's AUM. And recall our announcement last quarter to use $10 billion of general account capital to further seed and grow AB's private alternatives business. We utilize the general account to seed and build higher multiple alternative businesses in AB with, in turn, Equitable policyholders benefiting from enhanced risk-adjusted returns and Equitable shareholders benefiting from this 65% stake in AB.

The final pillar to our unique business model is, of course, our affiliated distribution. Equitable Advisors represents approximately 70% of sales year-to-date and provides certainty of revenues and the ability to better manage mix, both of which enable us to improve capital efficiency and deliver better risk-weighted returns for our shareholders. For example, our leadership position in the K-12 educators market is a direct result of our 1,100 dedicated retirement benefit group financial professionals. And growth in our broker-dealer business remains strong, up 37% year-over-year to $77.4 billion of assets under administration, primarily driven by our 500 wealth management advisers. Insurance, asset management and affiliated distribution is what sets Equitable apart. And looking forward, we will continue to leverage these differentiators and drive long-term shareholder value.

I will now turn to Robin to cover the third quarter results. Robin?

[Robin Raju, executive]

Thank you, Mark. Turning to Slide 5. I will review our consolidated results for the third quarter before providing more detail on the outcome of our actuarial assumption update, segment results and capital management program. Non-GAAP operating earnings were $818 million for the third quarter, up 44% from $568 million in the prior year quarter. On a per share basis, earnings were $1.94, up 56% from $1.24 in the prior year quarter. The record performance in this quarter was aided by higher net investment income, reflecting our continued general account optimization as well as one-time impact from favorable alternatives performance and prepayments in addition to increased fee revenue on higher account values.

As Mark mentioned, our fair value approach to assumption setting, which I will highlight in a moment on the following page, resulted in a minimal non-GAAP earnings impact of $6 million or $0.01 per share. Other notable items in the quarter were primarily driven by higher alternative performance and prepayments with a net impact on earnings of $153 million or $0.37 per share. Adjusting for notable items, the non-GAAP earnings were $660 million or $1.56 per share, up 23% year-over-year on a comparable basis.

Moving to GAAP results, net income was $672 million gained in the quarter, which was primarily driven by strong non-GAAP operating earnings and flat equity markets, resulting in a limited impact in the asymmetry in the accounting between our economic hedging and our GAAP liabilities. Our hedging program performed as expected with a hedge effectiveness of 95%. AUM increased to $871 billion, supported by strong equity market and positive third quarter net flows of $7.1 billion, reflecting the strength of our Retirement and Asset Management businesses.

Turning to Slide 6, I'd like to briefly review the outcome of our annual assumption update in the context of our economic reserving framework. As we previously highlighted, our fair value model incorporates realistic reserves both in terms of policyholder behavior and interest rates. This approach is not only prudent but also positions us well for the industry's upcoming LDTI accounting changes in 2023. As evident from our results, the impact from this year's assumption updates were nominal, only a $6 million impact to non-GAAP operating earnings and an $85 million impact to net income, largely attributable to behavioral adjustments made to further align our assumptions to emerging experience.

As consumer behavior and capital markets continually evolve, we believe it is appropriate to reflect emerging experience in our assumptions. This not only protects the integrity of our reserves but also ensures we remain appropriately capitalized and immunizes our balance sheet in all environments. Further demonstrating our fair value approach is our GMxB reserving assumptions. As we've illustrated in the past, interest rate assumptions under GAAP and statutory accounting are disconnected from economic realities. For example, we hedge to our economic model, which uses the forward curve, currently at approximately 2.5% compared to 3.25% under the NAIC framework. As a result, our statutory balance sheet reflects reserves that are more aligned with today's reality and not dependent on bets that interest rates will rise. This also positions us well for the changes the NAIC will make to its scenario generator.

Further, our lapse assumptions, which represents a percent of policyholders we expect to surrender when guarantees are deeply in the money, is among the lowest in the industry at approximately 55 basis points compared to the NAIC assumption, which is over 2x higher at 120 basis points. The net result is we hold appropriate reserving levels that are approximately $2 billion to $3 billion higher than under the NAIC framework, accurately reflecting the true economics of the business and current realities, which are not captured under the antiquated industry frameworks. Overall, Equitable's position on interest rates and policyholder behavior assumptions results in stronger reserves and aligns us well to the upcoming accounting changes.

Moving to the business segments, I will begin with Individual Retirement on Slide 7. As a reminder, the Venerable transaction closed in June, unlocking $1.2 billion in value, reducing over 2/3 of our legacy risk and resulting in $180 million of annual impact to earnings. On a reported basis, operating earnings were $316 million. Excluding the Venerable transaction, earnings would have been higher year-over-year, primarily driven by higher net investment income and strong equity markets. Results also included $22 million of notable items in the quarter, including $15 million of favorable net investment income from alternatives and prepayments, offset by negative $37 million of assumption updates.

Turning to new business activity. We continue to benefit from strong consumer demand for our all-weather retirement product portfolio. This includes our #1 position in the protected equity RILA market, where we saw another record quarter of sales in our Structured Capital Strategies product of $1.9 billion and total sales in the segment of $2.8 billion. Our leadership position and strong new business activity reflects the strength and breadth of our distribution. As a result, we reported net inflows of $702 million in the quarter in our more capital resilient product, the first quarter of positive net flows in the individual retirement since IPO.

Turning to Group Retirement on Slide 8. We reported operating earnings of $192 million, up 49% versus the prior year quarter, driven by an increase in net investment income from alternatives and fee revenue on higher account values. Results also include $43 million of notable items, including $16 million of higher net investment income from alternatives and prepayments and $27 million of assumption updates. Gross premiums remained strong with $831 million in the quarter, driven by first year premiums of $352 million, up 39% year-over-year and continued persistency, with renewal premiums up 6% year-over-year. As with prior years, net outflows for the third quarter were primarily driven by seasonality in the 403(b) market, with schools closed in the summer. Despite higher account values leading to slightly elevated withdrawals during the quarter, persistency rates in the business remain high at over 90%, in line with historical experience. The business has remained resilient, thanks to our 1,100 dedicated Equitable advisers helping educators across America to save for retirement.

Now turning to AllianceBernstein on Slide 9. In the third quarter, operating earnings were $134 million, up 29% year-over-year, primarily driven by an increase in base fees on higher average AUM, offsetting increased operating expenses. AB had gross sales of $32.3 billion, up 10% year-over-year, led by another record quarter sales in retail channel, up $25.6 billion, up 7% sequentially. Additionally, AB generated net inflows of $7.2 billion, with $6.7 billion of active net inflows attributable to positive flows across all 3 distribution channels. In the retail channel, AB net flows of $6.6 billion, supported by strong net flows in the U.S. and Asia. This is the 18th consecutive quarter of positive active equity net flows in the retail channel.

AB continues to deliver strong investment performance for its clients. Over 70% or more of fixed income and equity assets are outperforming on a 1-, 3- and 5-year basis. Total assets under management at the end of the third quarter were $742 billion, up 18% from the prior year quarter, attributable to strong market performance and over $21 billion of net inflows over the trailing 12-month period. Net inflows and operating leverage contributed to a strong adjusted operating margin of 31.8% in the quarter.

Moving to Protection Solutions on Slide 10. We reported operating earnings of $160 million, up from $51 million in the prior year quarter, primarily driven by higher net investment income and higher fee revenue on higher account values. Results include $59 million of notable items in the quarter with $43 million attributable to higher net investment income from alternatives, prepayments and lower reserve accruals and $16 million from assumption updates.

We continue to see strong premiums in our variable universal life and COLI products with gross premiums up 13% year-over-year, highlighting our shift to less interest-sensitive products. Annualized premiums were $67 million in the quarter, up 37% year-over-year, driven by continued momentum in our employee benefits business, which generated 50% year-over-year sales growth and now covers approximately 570,000 employees. Going forward, the expected impact of assumption updates, continued benefit of our general account rebalancing program and improved value of our new business sales has led us increased our earnings guidance to $75 million per quarter.

Turning to Slide 11, our strong capital and liquidity position continues to support our ability to deliver on our commitments. We continue to execute on our capital management program, returning $534 million to shareholders this quarter, including $460 million of buybacks executed through accelerated share repurchases. In the context of our 2021 capital management program, we've returned $1.4 billion to shareholders to date, and we remain on track to deliver on our 50% to 60% payout ratio plus an incremental $500 million stemming from the close of the VA reinsurance transaction. We closed the quarter with $2 billion of cash and liquid assets at the holding company, well above our $500 million minimum target, and maintained our leverage ratio in line with our long-term targets. Our strong position has further enabled us to quickly and effectively execute our balance sheet initiatives such as restructuring and reserve financing, which I will review on the following page.

Turning to Slide 12, we've made good progress on delivering on our action plan to mitigate the uneconomic redundant reserves from Reg 213, reaching a permitted practice with the New York regulator, restructuring to increase our unregulated cashflows and now a $1 billion reserve financing transaction with Swiss Re. As a reminder, Reg 213 became effective for New York domiciled companies at the end of 2020. However, Reg 213 became binding for Equitable following the close of the Venerable transaction in June, effectively introducing redundant reserves that would not be required if we were domiciled in any of the other 49 states. Since we reached the permitted practice with the New York Regulator at the end of June, we began internal restructuring and evaluating reinsurance transaction to mitigate such unintended consequences, thereby securing future cash flows. We are pleased to report we completed our internal restructuring actions, which ensures approximately 50% of our cash flows come from nonregulated entities.

In August, we announced moving our separate account administration out of the Life company to Holdings. In addition, we have now moved our general account investment advisory service to Holdings. Together, these actions, along with the AllianceBernstein cash flows, result in approximately 50% of our cash flows coming from nonregulated entities. Further, yesterday, we announced a XXX reserve financing transaction with Swiss Re, which unlocks $1 billion of statutory value, addressing approximately 50% of the remaining redundant reserves related to Reg 213. Importantly, this transaction aligns with our fair value model and will have nominal impact on non-GAAP operating earnings.

In the 4 months since the Reg became effective, we have been diligent in managing the uneconomic redundant reserves. Our actions to date further illustrate our commitment to managing the business on an economic basis and generating long-term value for our shareholders. Overall, our balance sheet remains strong, with $2 billion of cash at the holding company and deep actions secure our future cash flows from our subsidiaries.

I will now turn it back to Mark for closing comments. Mark?

[Mark Pearson, executive]

Thank you, Robin. Before opening up the line for your questions, I would like to reiterate some highlights from our third quarter results. First, supported by strong equity markets and the need for our products and services, we have delivered a record quarter, driven by strong results across our retirement and asset management businesses. Second, our newly announced $1 billion financing transaction and completed internal restructuring actions further secure our cash flows and mitigate impact from Regulation 213. Third, we continue to employ our fair value economic framework, which reinforces our robust capital position and enables us to consistently deliver on our commitments to the market. And lastly, our business model and affiliated distribution are key differentiators, which uniquely position Equitable Holdings to capture the full value chain for our stakeholders.

With that, I'd like to open the line for your questions.

[Operator]

[Operator Instructions] Your first question comes from Elyse Greenspan with Wells Fargo.

[Elyse Greenspan, analyst]

My first question, you guys mentioned that you're positioned well for the upcoming LDTI accounting changes. I was just wondering if you could expand on that? And I know some companies have started to give details on the specific financial impact that they expect; if you guys are ready to provide some quantitative disclosure or even qualitative just to help us further understand the impact that you guys would expect.

[Robin Raju, executive]

Elyse, it's Robin here. As we've mentioned before, we're really excited about the changes in the accounting in 2023. The reason being is that it aligns to our fair value framework of managing the business to the economic realities today. And so how we manage the business -- and as I've illustrated related to our interest rate assumption, our policyholder assumptions -- we believe it positions us well for the accounting change, and we're excited for it going forward. We will come out with a full Investor Day in mid-2022. We will provide more detailed elements of the accounting change for investors.

[Elyse Greenspan, analyst]

Okay. And then my second question, you guys took a lot of action related to Reg 213 this quarter. Following the Swiss Re deal, would you guys look into additional reinsurance transactions to address the remaining redundant reserves? Or how should we think about that going forward?

[Robin Raju, executive]

Sure. So we are quite pleased with the actions we've taken to date. We received a permitted practice with the New York department. We restructured our subsidiaries to ensure that 50% of our unregulated cash flows remain unregulated of that $1.5 billion. And now this $1 billion reinsurance transaction with Swiss Re positions us well going forward. We continue to talk to the DFS, and they've been helpful for us in these actions that we've taken to date. Going forward, we still have a menu of options that we'll look to deploy. But most importantly, we'll continue to assess it on an economic basis to ensure we deliver long-term value for our shareholders.

[Operator]

Your next question comes from the line of Andrew Kligerman with Credit Suisse.

[Andrew Kligerman, analyst]

And I guess the billion dollar question is timing around the next $1 billion? And maybe with that, why a XXX transaction as opposed to a variable annuity transaction?

[Robin Raju, executive]

Andrew, so let me address your first one on timing. The benefit of the permitted practice we received from the New York regulator meant that we have a 5-year phase-in for the $2 billion redundant reserves. So it gives us time to assess options and ensure that any action we take is aligned to our economics in which we manage the business.

As a result of having redundant reserves or additional redundant reserves which are economic, it allows us to evaluate options with existing redundant reserves that we had on the balance sheet. So having more redundant reserves allowed us to assess in total what redundant reserves we wanted to take action on. And a XXX financing transaction with Swiss Re was the one that we can do quickly and at a good economic cost for shareholders over the long term. So at the end of the day, we're quite pleased with the $1 billion transaction, and we'll assess, as I mentioned, the menu of options that we have to address the redundant reserves that we have on the balance sheet.

[Andrew Kligerman, analyst]

And Robin, where would you like to deploy that capital? Any thoughts on that and timing? It's not likely to just sit on the balance sheet for a long time. Would you agree with that?

[Robin Raju, executive]

Correct. No, you should assume that in the fourth quarter, we'll accelerate some of the redundant reserves of Reg 213 to offset the $1 billion unlock that we have from this transaction. So it directly addresses 50% of the redundant reserves that are going to come through Reg 213.

[Andrew Kligerman, analyst]

I'm sorry, Robin, what I meant was deploying that capital, meaning would you buy back shares, would you do an acquisition? What are you thinking about with that capital now? I assume you want to deploy that and would do so quickly or take your time?

[Robin Raju, executive]

No. So you should think about two things. One is we're committed to delivering on our 50% to 60% payout ratio. As you see from this year, we returned $1.4 billion to shareholders year-to-date. And we have probably an additional $400 million to go in the fourth quarter on that. As we continue to deliver, we'll continue to assess the market for options to accelerate inorganic options if they drive economic value for shareholders over the long term. But our first commitment is to continue to deliver on the 50% to 60% payout.

[Andrew Kligerman, analyst]

Okay. And just lastly, amazing sales on the buffered annuity, $2.8 billion versus $1.65 billion. Competition is jumping into this market, so could you give a little backdrop on what you're seeing out there and why you've been so successful?

[Mark Pearson, executive]

Nick, could you take that one?

[Nicholas Lane, executive]

Sure. First, I would say we continue to see the overall pie growing. I think it's driven by two factors. First, it's a product that's right for the times, providing upside potential with downside protection, given this period of market instability. Second is the fundamental demographics of more pre-retirees looking for protected equity stories as they approach that next phase. Our differentiator continues to be our affiliated distribution and strong third-party networks where we have privileged relationships. We're proud to be the innovator of the RILA market back in 2011 and continue to deliver the value proposition to our consumers. So as you mentioned, we saw a record third quarter sales, and we've got confidence that will continue.

[Operator]

Your next question comes from the line of Tom Gallagher with Evercore.

[Thomas Gallagher, analyst]

Just first, just a follow-up, Robin, to understanding the mechanics of this deal. First question, has this been approved by the NYDFS?

[Robin Raju, executive]

Thanks, Tom. Yes, it has been approved by the New York Department, and we expect to close the deal in December.

[Thomas Gallagher, analyst]

Okay. And Robin, if I understood you correctly, so the $1 billion is going to go to offset half of the Reg 213, $2 billion. And so should we then think about the annual amortization dropping from $400 million to $200 million, is that effectively how this is going to work?

[Robin Raju, executive]

That's right. And that's what we'll do in the fourth quarter through the acceleration with this $1 billion unlock that we have from the reinsurance deal.

[Thomas Gallagher, analyst]

Okay. And then in terms of range or menu of options beyond this, are you just trying to solve for a transaction that would fill in the remaining $1 billion? Or are you thinking if the economics are right, you might do something bigger and more strategic that could address both the remaining 213 Reg and also, we'll say, do something more shareholder-friendly if the terms are right? I'm thinking like, whether it's potentially a part of your buffer annuity block, if the economics were right? Or can you talk a little bit more about is it -- what you're thinking? Is it just trying to solve for the remaining $1 billion? Or are you thinking potentially doing something bigger than that?

[Robin Raju, executive]

Sure. So Tom, as you know, we manage the business on an economic basis and any action that we take will ensure to drive future economics for shareholders over the long term. We have several options that we can execute against. But the option that we'll pick from similar to this XXX reserve financing transaction will have to meet our economic hurdle rate going forward. We would look to do -- if the options were available, to do more, but it has to drive economics to shareholders over the long term for us to pull any lever.

[Thomas Gallagher, analyst]

That makes perfect sense. And if I could slip in just one last one. The -- just to confirm, the life raising guidance, the $75 million, if COVID mortality remains elevated, would you expect that to be lower than that over the near term? Or does that already contemplate some COVID impacts?

[Robin Raju, executive]

Sure. So let me address the $75 million first. We've made good progress since IPO on the Life business. Three actions that drive that higher guidance to the mark of $75 million. One is the re-risking that we took into general account allows us to assume higher future earnings on yields from -- for the Life business. Two is the pivot the team made to shifting away from interest-sensitive products to VUL. We're a leader in the VUL market supported by Equitable Advisors, and that assumes -- that allows us to assume higher margins going forward. And three, the assumption updates that we made had a positive impact on run rate earnings because it assumes higher persistency on our business. So that allowed us -- the actions we've taken since IPO and the work with the teams had allowed us to come out and have confidence in the future $75 million earnings guidance that we provided.

On the COVID front, as you've seen in the past, we've been on the lower rate of the guidance we've given. We continue to stick to that guidance, though, and we feel as though the $75 million is appropriate, taking everything into account.

[Operator]

Your next question comes from the line of Tracy Benguigui with Barclays.

[Tracy Dolin-Benguigui, analyst]

Slide 6 demonstrates the strength of your fair value framework. And it'd probably be helpful to see another call on Reg 213 as DM21 matters less for you given your New York domicile. So under Reg 213, my understanding that your CPE scenarios look better for older risk that went to Venerable rather than newer risk, which is counterintuitive. And Robin, you said earlier, when you're looking at your menu of options, you will only look at those that you view as economic. But I'm wondering how you may weigh in any type of Reg 213 arbitrage to potentially newer blocks of business, even though that makes no sense under your economic framework where intuitively the older blocks [Technical Difficulty] more economic capital?

[Robin Raju, executive]

Sure. Thank you, Tracy. As a company, we're not here to arbitrage the different uneconomic frameworks of U.S. GAAP statutory or Reg 213. Our first priority is to manage for the economic value to business and return 50% to 60% for shareholders. So you can assume that that's going to be the driver of our motivation of actions, driving economic value, not trying to address Reg 213 itself or any other uneconomic antiquated industry frameworks that are existing today. It's to really drive long-term economic value for our shareholders.

[Tracy Dolin-Benguigui, analyst]

Got it. And also, I'm thinking about the $1 billion internal loan you took from the opco to the holdco. Am I thinking about this the right way? Since you have 10 years to pay it back, it's really not an issue in your ability to deploy holding company liquidity that's now $2 billion in terms of your 50% to 60% payout?

[Robin Raju, executive]

That's correct. The $2 billion that we have today at the holdco, which was -- which is there as a result of the annual $1.5 billion of cash flows that we receive from our subsidiaries, is there to support our payout ratio of 50% to 60% for shareholders.

[Tracy Dolin-Benguigui, analyst]

Right. And that internal loan doesn't impede their ability given the term structure of it being 10 years?

[Robin Raju, executive]

Correct.

[Operator]

Your next question comes from the line of Ryan Krueger with KBW.

[Ryan Krueger, analyst]

First a follow-up on protection. Is this part of the business that's still in loss recognition? Or did this update cause you to exit loss recognition?

[Robin Raju, executive]

We are no longer in loss recognition, but we still had that PFBL reserve that we accrued on a quarterly basis. So these assumption updates that we've made in addition to the VUL sales that we have today within the business and the general account rebalancing allow us to accrue a less -- a lower PFBL reserve going forward. So it generates higher run rate earnings of $75 million as a result.

[Ryan Krueger, analyst]

Got it. And then on your wealth management business that's reported within the corporate segment, can you give any update on the rough amount of earnings being generated by that business at this point and some of the actions you're taking to grow that business?

[Robin Raju, executive]

Sure. We're really proud of our position there that's built with the Equitable Advisors distribution force that Mark mentioned earlier and supports our business model. We have $77 billion of AUA and if you look, that's grown pretty significant throughout the year, generated by positive net flows into that business. We haven't disclosed operating earnings of that business, so we look to do so in the future. But we want to try to get that business to be more material. We're really targeting $100 billion to $150 billion of AUA for that business so we can break out the operating earnings for investors.

[Operator]

[Operator Instructions] Your next question comes from Mark Hughes with Truist.

[Mark Hughes, analyst]

You had pointed out in the [ individual retirement ] I think that this was the first quarter of positive net flows, but presumably definitely helped by your strong new sales and new express comp that will continue. Do you think you're in a position at this point to maintain the positive net flows, that the balance of new business versus the run off? And does that turn the quarter or is this just this particular quarter?

[Nicholas Lane, executive]

Great, this is Nick. I'll take that question. As you mentioned, we continue to be encouraged by the new sales momentum and our core differentiators in our distribution footprint. We are continuing to see strong growth in our core flows and expect that to continue as we continue to innovate our product line and address the growing retirement need that's out there. So we are confident we will continue to grow that core business going forward.

[Mark Hughes, analyst]

So, into positive net flow territory more consistently, is that the way to think about it?

[Nicholas Lane, executive]

I think positive more consistently. Obviously we continue to focus on value and run the business on an economic basis and we think it's only about our core and our legacy blocks.

[Mark Hughes, analyst]

And then the -- any update on the expense reduction initiative? Any milestones you've hit so far?

[Robin Raju, executive]

Sure. It's Robin here. I'll take that. As -- early in the year, we announced 3 initiatives to support our long term 8% to 10% EPS growth. It was expenses of $80 million, general account optimization, the second stage of our rebalancing of $180 million, and then we have growth coming in for our business, and you see that with the $7.1 billion of flows that we had in the quarter overall.

On the expenses, expect that to come through evenly over the next 3 years. We remain on track and you see that across our expense line, and good operating leverage coming in, with lower fixed expenses and then more variable expenses aligned to revenue overall. So we remain on track for all 3 initiatives.

[Operator]

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.