Equitable Holdings Inc

NYSE:EQH

Earnings Call Transcript 2022-Q4

[Operator]

Good morning. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the Equitable Holdings Fourth Quarter and Full Year Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you.

Isil Muderrisoglu, Head of Investor Relations, you may begin your conference.

[Isil Muderrisoglu, Head-Investor Relations]

Thank you. Good morning, and welcome to Equitable Holdings fourth quarter and full year 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.

[Mark Pearson, President and Chief Executive Officer]

Good morning and thank you for joining today's call. On Slide 3, I will highlight results from the year. Non-GAAP operating earnings were $5.08 per share, or $5.55 per share after adjusting for notable items, down 8% in the year, a strong performance despite 2022's turbulent markets, which saw equity markets fall 20% and bond values down 13%. Managing what is within our control is particularly important now. We have achieved our $180 million incremental general account investment income target, one year ahead of schedule, and realized net expense savings of $50 million. Assets under management at the end of the period were $754 billion, down 17% year-to-date, but up 5% compared to quarter three. We had a strong year with $10 billion in total company inflows with $4.6 billion of inflows in our core retirement business in addition to $900 million in asset management and $4.5 billion in wealth management.

While we did see elevated mortality in the fourth quarter, this reversed favorable experience reported earlier in the year. And overall, our full year mortality experience was $20 million better than our expectations. The benefits of our economic management and hedging program continue. We have $2 billion of cash at holdings and the combined RBC ratio at the end of the year of 425%. In 2022, we returned $1.3 billion to shareholders, a 15% growth in free cash flow per share. This payout was 57% of our adjusted non-GAAP operating earnings, at the top end of our guidance range. Post LDTI accounting changes, we are increasing our payout guidance to 55% to 65% of operating earnings and expect 2023 cash generation of $1.3 billion.

We see continued momentum in our retirement and asset management businesses. We benefit from the increasing demand for advice orientated retirement products, with total premiums up 6% over the year to $19 billion. At AB, Seth and his team are navigating the industry-wide pressures on flows and margins extremely well. We've completed the acquisition of CarVal Investors, helping shift AB's asset mix over the year and improving its annual fee rate by 3%. Interest rate increased over 230 basis points in the year, benefiting both our general account and new business values. On the general account, new money yields are 190 basis points higher than the average portfolio yield. And interest rate rises, combined with strong sales, have resulted in record new business value for the year.

Turning to Slide 4. We highlight the unique opportunity we have to leverage synergies across our retirement, asset management and advice businesses. This demonstrates our businesses are stronger together and drive significant value for shareholders. As of the year-end, we have deployed 70% of our $10 billion capital commitment from our insurance business to see growth in AB's private markets platform, with meaningful impact coming through higher yields in our general account and supporting the acquisition of CarVal Investors. Similarly, AB's lifetime income solutions supports Equitable's institutional 401(k) business with nearly $800 million of premiums in the year. Looking forward, we see this as a largely untapped opportunity to benefit from the passage of the SECURE 2.0 Act.

Turning to advice. We continue to realize the benefits of our proprietary sales force with Equitable Advisors delivering approximately 50% of our $19 billion retirement premiums this year, in addition to $10.4 billion of wealth management sales. In retirement, our strong premium supported $4.6 billion in core retirement inflows, up 89% compared to prior year. And despite the falling markets, we are delivering a 4% organic growth rate. We also delivered record new business value from strong sales and the benefit of rising interest rates.

Turning to asset management. Flows and short-term performance remained under pressure, a consistent story for the industry, but AB's relative performance is strong, with $900 million in total inflows, driven by $3.2 billion in active strategies, excluding the expected redemptions from AXA. Despite fixed income outflows with rising rates putting pressure on performance this year, AB saw organic growth across the U.S. retail and Japanese markets, along with active equities and municipals, and the private wealth business grew organically for the fifth year in the last seven. Importantly, the strategic focus on AB's private markets and the acquisition of CarVal, brought our private markets platform to $56 billion, up 57% on the year, resulting in a 3% fee rate improvement and a healthy institutional pipeline.

Through AB's track record of attracting third-party teams and building internal capabilities, we see meaningful long-term growth opportunities for AB and Equitable, leading to higher multiple earnings and cash flows. In our Wealth Management business, we reported $10.4 billion in investment product sales, of which over 85% were fee-based advisory accounts, our second best year in sales after a record year in 2021. Despite challenging markets, our advisors delivered $4.5 billion in wealth management net inflows, driving a 5% organic growth rate and productivity was up 2% over prior year. We look forward to breaking out this segment next quarter, providing further disclosure and transparency around the importance of our 4,300 advisors to our business model.

I will now turn the call over to Robin to discuss the results from the year and fourth quarter in more detail. Robin?

[Robin Raju, Chief Financial Officer]

Thank you, Mark. Turning to Slide 5. We reported $2 billion in non-GAAP operating earnings this year, over $2.2 billion and $5.55 per share after adjusting for notable items in the period. As Mark mentioned, our earnings results performed as expected compared to prior year, impacted by market headwinds, which were partially offset by the continued execution of our general account rebalancing, achieving our target of $180 million incremental income a year ahead of plan. In addition, we realized $50 million of net expense savings in our retirement businesses as of year-end, and remain on track to achieve our $80 million target in 2023. Looking ahead, we also expect to benefit from $75 million in savings at AllianceBernstein in 2025 associated with our Nashville relocation.

Turning to segment results. Our businesses continued their strong performance, demonstrated the significant demand for the client solutions we provide during these volatile markets. In Individual Retirement, we reported operating earnings of $1.2 billion after adjusting for notable items. Total premiums were up 5% this year with record sales and structured capital strategies, up 12% year-over-year. Results reflect the benefit of rising rates, helping us achieve record new business value. In 2022, an individual with a 60:40 portfolio had a negative return of 16%. But if that same individual bought our SCS solution with a 20% buffer at the start of the year, the market impact would have been fully absorbed, demonstrating the all-weather portfolio we offer for clients.

In a market with heavy competition across variable and fixed products, Equitable is differentiated through our distribution, which allows us to operate in the most profitable part of the retirement market with RILA's and floating rate VAs. In Group Retirement, our operating earnings were $520 million after adjusting for notable items with total premiums up 16% year-over-year. Our primary market is our tax-exempt channel, serving the over 800,000 educators in the K-12 teachers market. Tax exempt delivered net inflows, benefiting from the differentiated advice Equitable Advisors provides to educators and schools across America.

We also introduced our institutional channel this year within the Group Retirement segment, which demonstrates the synergies between our subsidiaries. The AB 401(k) in-plan guarantee product allows clients to benefit through an AB managed retirement solution with an Equitable managed income allocation. This allows us to provide secure income to retirees so that they can live long and fulfilling lives.

Our retirement business benefited from nearly 800 million in premiums associated with the retirement plan AB1 earlier this year. And we expect to continue to see flows at the SECURE Act enabled us to address the growing need for income in the large 401(k) market.

Turning to asset management. Operating earnings were 424 million. Net flows were positive for the full year, excluding low fee AXA redemption. AB benefited from its fourth consecutive year of active organic growth. While short-term performance was challenged in line with the broader market. Long-term performance remains strong with 70% of fixed income and 77% of equity outperforming over the last five years. And we remain confident in AB’s ability to continue to deliver profitable organic growth, leveraging the strength of their distribution and permanent capital from Equitable.

In Protection Solutions, operating earnings were 307 million after adjusting for notable items this year. We continue to benefit from our strategic shift towards our accumulation oriented VUL offerings with total premiums and first year premiums up 3% and 8% year-over-year. In employee benefits, we’ve seen strong growth with 741,000 lives covered now, up 22% compared to prior year and premiums up 36% in the year.

Taking a step back, we continue to make progress on shifting our business mix with over 50% of earnings coming from our Group Protection and Asset Management businesses. Additionally, we look forward to making two enhancements to our disclosure in 2023 that will further highlight the value of our businesses. First, we will split the Individual Retirement segment between our core business, which is more spread oriented and our legacy business, which will continue to run off.

Second, we are going to break out our Wealth Management business from Corporate and Other. This is a business that generates a 100 million in cash annually. And when we break it out, you’ll see it’s a faster growing part of our overall business due to the strong organic growth the business unit has delivered. Together with the new segmentation and continued growth in free cash flows, Equitable Holdings offers an attractive value proposition for long-term shareholders.

Turning to Slide 6, our highlight total company results for the quarter. We reported non-GAAP operating earnings of 436 million or a $1.11 per share, lower than the third quarter on a per share basis, primarily due to elevated mortality, which I’ll provide further detail on in a moment and lower alternative returns in the quarter. Adjusting for 93 million of notable items in the quarter, non-GAAP operating earnings are 529 million or $1.36 per share, down 17% on a comparable year-over-year per share basis.

Turning to GAAP results. We reported a 789 million net loss in the quarter driven by higher equity markets on a point-to-point basis. Looking forward, our net income volatility will be reduced post LDTI due to GAAP liabilities being fair valued, which better matches our economic hedges. We have provided more detail on drivers and updated sensitivities in the appendix.

Quarter end AUM was in line with market movements, as continued market volatility was partially offset by strong ongoing business momentum across all of our lines. Our results for the quarter should be considered in light of our business model, which derives a majority of its earnings from fees based off of account values. Our earnings reflect lower average equity markets on both an annual and sequential basis.

That said, we are also benefiting from higher interest rates and spreads spearheaded by the continued demand for our leading SCS product, which generates spread based earnings and has a 35 billion general account value.

Within our general account as well, we’re investing a new money yields of 5% in the second half of the year. And we’re generating higher net investment income and record levels of new business value, which will result in future cash flows.

On Slide 7, I’ll dive deeper into our mortality experience over the last two years to better put in this perspective, the fourth quarter results. The chart on this page shows how actual mortality has fared each quarter versus what we expected in our GAAP reserving after accounting for our COVID-19 guidance. As you can see, looking back eight quarters, our experience is better than what we assumed in our GAAP reserving.

In the fourth quarter, we saw elevated claims due to higher frequency, which was likely flu-related at the fourth quarter saw flu cases peak earlier than historical trends. Mortality was 57 million higher than we expected, and which primarily is driven by larger older age policies. As a reminder, our Protection business primarily serves mass affluent clients through our VUL policies, which have higher face amounts.

GAAP reserving for these policies is based off the cash guided of the accounts and does not take into account the fees collected over the life of the contract. Therefore, you’ll see some volatility, but these policies generate double digit IRRs for our shareholders. Over the long term, our mortality has been better than our GAAP reserve expectations. In full year 2021, our mortality was 34 million more favorable than we expected. And in the past year, it was 20 million more favorable even after accounting for the fourth quarter results.

Additionally, preliminary results, year-to-date should have mortality is performing in line with expectations. Moving forward, we do expect volatility but are comfortable with our 75 million per quarter earnings guidance with Protection Solutions.

Turning to Slide 8. Our prudent capital management enabled us to return nearly 60% of our non-GAAP operating earnings adjusted for notable items to shareholders. At the higher end of our guidance, we are able to continue our consistency of capital return despite volatile markets and the health pandemic due to our economic management of the business. Throughout the year, we return 1.3 billion with 224 million in the fourth quarter, which includes 150 million of repurchases resulting in a 15% return to shareholders on a free cash flow per share basis in 2022. This brings our total capital return to shareholders since IPO to more than 6 billion or over 50% of our initial market cap in a span of less than five years.

On a free cash flow per share basis, this translates to over 120% return to shareholders. We closed the year with 2 billion of cash at the holding company and a strong RBC ratio of 425% each above their respective targets. This was enabled by our organic capital generation and the ability of our highly effective hedging program to match the market movements.

In January, we took advantage of market conditions to issue a 500 million of 10-year note to refinance our upcoming maturity in April. Looking forward, our next maturity comes due in 2028, meaning we will not need any new refinancing until then.

Earlier this week, our Board of Directors approved an additional 700 million share repurchase authorization bring in our total repurchase authorization of 1 billion, which has no expiry date.

Lastly, our continued mix shift towards a capital-light business model and unregulated cash flows enables us to generate more stable and predictable cash flows. Looking forward, we expect 1.3 billion of subsidiary dividends in 2023. Our cash flows will not be impacted by the upcoming LDTI accounting changes as the accounting moves closer to cash flows. As a result, our payout guidance increases to 55% to 65% post LDTI.

I will now turn the call back to Mark for closing remarks. Mark?

[Mark Pearson, President and Chief Executive Officer]

Thanks, Robin. In closing, we delivered a strong performance this year, despite turbulent markets. Through our fair value management, we continue to protect capital and consistently deliver value to shareholders. We have maintained a strong capital position through a volatile market and our expected $1.3 billion of cash generation this year supports our increased payout target of 55% to 65% post LDTI.

Additionally, our continued momentum in retirement and asset management can be seen as we remain a leader in the RILA market, pricing, economically sound, and in demand products. While our subsidiary AB continues to provide a strong value proposition for their clients with a favorable mix shift and private markets platform driving growth. We will continue our relentless commitment to bringing the best of Equitable in order to deliver results that benefit our clients, employees, and of course our shareholders.

Looking forward, we will provide a restated financial supplement, reflecting LDTI accounting changes in early April, ahead of our first quarter results. And we are pleased to announce that we will be hosting an Investor Day in early May to provide further insight on our businesses and the opportunity ahead.

With that, we will now open the line for questions.

[Operator]

[Operator Instructions] Your first question comes from the line of Ryan Krueger from KBW. Your line is open.

[Ryan Krueger, KBW]

Hi, good morning. My first question was on free cash flow. I think the $1.3 billion assumed markets are flat at year-end 2022 levels, is the sensitivity still about $150 million per 10%? And that's my first question and then I will follow up.

[Robin Raju, Chief Financial Officer]

Good morning, Ryan. Yes, we're pleased to provide the guidance of the $1.3 billion of free cash flow for 2023. That's based on year-end market levels and doesn't have any additional market sensitivity going forward built into it. Our sensitivity that we provided to the market previously, 10% of $150 million of cash flows remains. You've seen that last year when we had $1.6 billion, markets declined 20%. And as a result, the free cash flow guidance that we can give this year is $1.3 billion from our operating subsidiaries.

[Ryan Krueger, KBW]

Got it. And would the sensitivity be more current year or impact the next year?

[Robin Raju, Chief Financial Officer]

It would – some of it would impact this 2023 and some of it would impact 2024. As you recall part, less than 50% of the cash flows now are coming from the insurance company, which is based on the prior year's dividend formula. So that will be less sensitive to cash flows in 2023.

[Ryan Krueger, KBW]

Got it. And then on – now that you've completed the general account repositioning, is there more repositioning that you expect from here? And can you give any sense of further potential upside to NII?

[Robin Raju, Chief Financial Officer]

Yes. We're pleased to finish the $180 million target one year advance from 2023. Going forward, I think you can expect us to continue to benefit from higher yields in the general account. As Mark and I mentioned in the call, we're benefiting from high yields with new money yields coming in above 5% at the current period. And so that will flow through earnings over time, along with the continued growth from our SCS product. In addition, to date, we've completed 70% or $7 billion of the $10 billion in committed capital to AllianceBernstein. So once we complete that, there will be an additional upside to the $180 million, along with additional upside at AllianceBernstein as we continue to build the private markets platform, which is approximately $56 billion today. So we continue to see upside benefiting from the rising rate environment and the continued business growth. And we'll provide more guidance – Ryan, more guidance to come on the Investor Day in May.

[Operator]

Your next question comes from the line of Tom Gallagher from Evercore ISI. Your line is open.

[Tom Gallagher, Evercore ISI]

Good morning. First question is on Slide 11. Robin, it says, net income volatility under LDTI is going to decline around 80%. I just want to confirm how to interpret that. If I look at 4Q results, you had $436 million of operating earnings, but negative net income of $789 million. If you think about the new math and the new accounting, would – what kind of spread should we expect going forward? If you overlaid the new accounting on 4Q results, would it have been – can you give some directional indication?

[Robin Raju, Chief Financial Officer]

Yes. So what we tried to provide is for Equitable going forward under LDTI, as LDTI accounting GAAP moves closer to fair value, that our net income sensitivity will reduce going forward. And as you see in Slide 11, the guidance I'll just point you to is based on equity movements. So if equity markets increased by 6%, under the old GAAP accounting, we would have had a negative $1 billion adjustment in the net income. Now going forward, if equity markets increase 6.5%, the adjustment will be $200 million. That's the major difference on the equity assumption on a full year basis as the liabilities move closer to fair value, and our hedging program is still designed to protect our free cash flow growth going forward. And once we report our LDTI updated financials in the financial supplement in April, you will get to see the numbers on a quarterly basis going back in time as well.

[Tom Gallagher, Evercore ISI]

That's helpful, Robin. So if I use that math – and again, I'm just – I'm not looking for a precision here, just some directional indication. If I looked at the spread of $436 million translating to almost an $800 million negative net income number, using that rule of thumb you just gave me, at a minimum, net income would have been positive this quarter, I presume. Does that sound about right to you?

[Robin Raju, Chief Financial Officer]

That does sound about right to me that I think under post LDTI, Q4 would have been positive net income. The number I can give you as well to go back to as a proof point, if you look at 2021, under the old GAAP net income it would have been about negative $440 million for the full year. Under LDTI financials, it's a positive $1.7 billion net income gain under the full year. And that goes to our point that net income should be less volatile going forward as LDTI moves fair value accounting closer to our economic model.

[Tom Gallagher, Evercore ISI]

That's really helpful. If I could sneak one more in, just RBC ended at 425% that came in above what I would have expected. And I know you mentioned organic capital generation and hedging performance. Was there anything else that drove the strong RBC? Did you release AAT reserves? Was there another reinsurance deal? Any other one-off items? Or was it all organic capital and hedging?

[Robin Raju, Chief Financial Officer]

Yes. The capital position, as we ended the year, remained quite strong, $2 billion of cash at the Holdco, and the RBC came in at 425%, as you mentioned. That's all reflective of organic growth coming in within our businesses. No one-time items. And at the same time, in 2022, we were able to mitigate the redundant reserves of Reg. 213 through the actions that we've taken. So we're quite proud of the capital position that we stand. It reflects our economic management hedging program and actions we'll take to address uneconomic accounting issues.

[Tom Gallagher, Evercore ISI]

Okay. Thanks.

[Operator]

Your next question comes from the line of Jimmy Buller from JPMorgan Securities. Your line is open.

[Jimmy Buller, JPMorgan Securities]

Hi, good morning. I had a couple of questions. First, on just the competitive environment in the buffer annuity market. It seems like a lot of other companies have gotten into the market. And are you seeing them act fairly rational? Or are you seeing an uptick in competition or better terms and conditions? And partly asking just given the fact that your SCS sales, while strong in an absolute sense, were down from last year, I think, about 12% this quarter.

[Nick Lane, President-Equitable Financial]

Yes. This is Nick. First, as you highlighted, yes, the fourth quarter was a little soft, but we saw a positive improvement in our net flows, as Mark and Robin highlighted for the full year, record volume, record value of new business and over $4 billion in positive flows. And the higher interest rate environment helps our economics and/or the pricing benefits we give to consumers. We're focused on sustainable value and we really like where we play for the following reasons. First, being the competitive dynamics. We see the fixed annuity space as being crowded. There are over 40 players. The cost of entry is lower given the distribution dynamics they can be sold by non-registered advisors. Comparatively speaking, the RILA market is fewer main players and different distribution dynamics given the registered nature of the advisor to sell the product. And as a result, our belief is fixed annuity players are going to increasingly need to enhance our credit risk to make margin and create consumer value.

The second really is that consumer value proposition. We are a pioneer in launching the buffered annuity note. Fixed players are more focused on principal protection, whereas RILA players are focused on protected equities, which gives more upside potential. And finally, I would say, is our privileged distribution, specifically the strength of Equitable Advisors are over 4,000 advisors that understand the value proposition and have deep client relationships, which means we don't need to chase the market to deliver sales or cover costs. So we like where we play. We think we're well positioned to capitalize on the current volatility of the markets and the longer-term structural demographics.

[Jimmy Buller, JPMorgan Securities]

Okay. And then on capital and buybacks and free cash flow, should we assume that the main source of buybacks for 2023? Is this going to be your free cash flow minus Holdco expenses and dividends? Or do you expect – which would, I think, be around $800 million or so, given the $1.3 billion guidance? So what do you expect to tap into your Holdco liquidity as well, which is significantly higher than, I guess, you need to keep?

[Robin Raju, Chief Financial Officer]

Sure. So I think our guidance on a post LDTI basis is going to be that 55% to 65% payout ratio as not only on top of the free cash flow generation of $1.3 billion that we have from our subsidiaries, we have the Holdco flexibility as well depending on how earnings proceed during the year. So we feel quite comfortable, and we're quite happy with the upstreaming of cash from the Holdco.

[Jimmy Buller, JPMorgan Securities]

Okay. But in terms of buybacks, would those be limited from the cash that's coming up to the holding company? Or is there a possibility you tap into your existing Holdco liquidity as well?

[Robin Raju, Chief Financial Officer]

No, it's not limited. As I said, we'll stick with that guidance of both LDTI 55% to 65%, and that should give you comfort on how we're going to proceed going forward.

[Jimmy Buller, JPMorgan Securities]

Thank you.

[Operator]

Your next question comes from the line of Michael Ward from Citi. Your line is open.

[Michael Ward, Citi]

All right, thank you guys. I'm just wondering, the legacy annuity segment breakout, is the core spread-based segment is going to be purely SCS or might it include traditional VA? And should we think about it in any way as objecting you might look to further derisk legacy?

[Robin Raju, Chief Financial Officer]

Yes. So as we break out our Individual Retirement business, it's about $96 billion of AUM in the fourth quarter. Within the core business will be our leading SCS product that has about a $35 billion in general account AUM. In addition, our floating rate VA, which was business written outside the financial crisis and has downside protection related to interest rates. The legacy VA portion will be our pre-financial crisis, variable annuity legacy product. That's going to continue to be in runoff as we go forward. And we think by breaking those out along with wealth management, you'll be able to better value the businesses as we don't feel as though today that we're getting appropriate value for the strength of our distribution and franchise that we have in our variable annuity business overall. And as a reminder, that legacy business today is only 18% of our total AUM. And I think by providing more clarity at Investor Day and how that runs off over time should help.

[Michael Ward, Citi]

Great, thanks. And the – and related to derisking legacy, any further activity considering there?

[Robin Raju, Chief Financial Officer]

We'll always look at options to drive shareholder value over the long-term. A reminder, the policies are co-mingled between New York and non-New York. We'll continue to work on separating those policies. And over time that should give us optionality if we thought it drove shareholder value.

[Michael Ward, Citi]

Okay, thanks. And then – so my second one was on wealth management breakout. You mentioned $100 million of annual cash generation. Any sense of expected earnings – operating earnings from that segment?

[Robin Raju, Chief Financial Officer]

We'll provide more details on the operating earnings, the segmentation through Investor Day, but also in our LD – in our financial supplement that's going to be released in April, not only will we show the LDTI results, but we'll also break out the segmentation, so you'll be able to have that modeling ahead of Q1 earnings.

[Michael Ward, Citi]

Okay, thanks.

[Operator]

Your next question comes from the line of Michael Kligerman from Credit Suisse. Your line is open.

[Andrew Kligerman, Credit Suisse]

Michael Kligerman, okay. It’s Andrew. And I guess my first question is around that New York separation of the business. Robin, maybe an update on sort of the timing how that’s coming along? And then, in conjunction with that, are you having conversations with potential reinsurers about transactions? Is that something that’s a very active dialogue?

[Robin Raju, Chief Financial Officer]

Thank you, Andrew. Appreciate your question. Andrew, as you know in 2022, we were first focused on addressing the uneconomic Reg 213. We resolved that. In 2023, our focus is going to be on – and separating these businesses between New York and non-New York policies. We’ve already done it with new business with a 100% of our individual retirement. New business now being written outside of New York for the non-New York policies. And then we’ll work this year on separating that business at. That does take time. It’s a lot of operational work, client notifications, et cetera. So that’ll take some time and then that should provide us optionality over time.

[Mark Pearson, President and Chief Executive Officer]

It’s Mark, Andrew. I guess on the verbal annuity on the legacy side, we see no need to do anything. We’ll of course keep open to it. I think as we are showing right from the COVID year where we didn’t suspend buybacks and what we’ve seen last year in the 15% growth in the free cash flows, we show that we have de-risks [ph] portfolio through our reserving and through our hedging, and that we can continue to get cash out of it. So when we did the Venerable deal, Andrew, if you remember, we needed to prove to the market there was a positive seed and that someone else would pay money for that now. So we’re open to looking at it. But we’re not going to do something that is economically not sensible and we don’t need to. So that’s the position on it really.

[Andrew Kligerman, Credit Suisse]

Okay. So it just sounds…

[Mark Pearson, President and Chief Executive Officer]

It’ll run off naturally over time. It’s running off at like 3 billion a year.

[Andrew Kligerman, Credit Suisse]

Okay. So it just sounds like you’re being very thoughtful in the way you’re positioning those blocks by separating out New York and…

[Mark Pearson, President and Chief Executive Officer]

Yes, exactly. And if it was causing us pain on the cash flow generation or giving us terrible volatility, of course we would act as we’ve seen before. But it isn’t and it’s – there’s – the cash that we’re generating for you shareholders is consistently coming through. So we don’t feel it’s a burning bridge. We have to do something on it. But if there was a deal there that was attractive, we’d take it.

[Andrew Kligerman, Credit Suisse]

Makes a lot of sense. Maybe just shifting over to Group Retirement earnings at 115 million. It was kind of in line Q-over-Q, but down quite a bit relative to the 140 million, 150 million range seen in the seven quarters prior to that. And I get that the equity market headwinds are dragging – a real drag. But the substantial spread component I thought would’ve benefited the rate – the benefits of the rate environment would’ve had an offsetting effect. So maybe a little color on what’s driven the decline over the last two quarters and kind of how you see those earnings coming in going forward?

[Robin Raju, Chief Financial Officer]

Sure, Andrew. So the Group Retirement business came in at about 115 million in the quarter. That’s a good run rate going forward at that level of AUM that we have in that business. If you go back over eight quarters, what’s really made the difference when you see it is the AUM coming down along with markets. And in addition, the alternative income is a big component that drives variation.

As a reminder, we normalize to the bottom end of our alternative guidance. So we normalize the 5% on the low end and 15% on the high end. So that’s going to be a big delta as well when you look at it over time. In the fourth quarter, you did see the first impact from the Global Atlantic deal was roughly 4 million in the quarter as well. But we’re quite happy with the momentum we have in that business. The earnings power is there, but it’s certainly sensitive to equity markets. And just like all of our businesses, you’ll see we’ll benefit from the higher investment yield over time.

[Andrew Kligerman, Credit Suisse]

That’s helpful. Thank you.

[Operator]

Your next question comes from a line of Tracy Benguigui from Barclays. Your line is open.

[Tracy Benguigui, Barclays]

Thank you. Good morning. Just a quick follow-up on separating non-New York in-force from New York is one mechanic of getting that done, reestablishing an internal reinsurance agreement with your Arizona entity?

[Mark Pearson, President and Chief Executive Officer]

It’s not an easy process to separate business from New York to non-New York. We’ll continue to work with the regulator, certainly reinsurance to our Arizona company is part of it across the board. But we think it’s good practice and it’s prudent to separate those policies so we can have. The outside of New York policies operate in the same economic regime that the 49 other states operate and the New York policies will operate in the New York regime. So, as we mention mentioned earlier, we just think it’s good practice and prudent to do so.

[Tracy Benguigui, Barclays]

Okay. Also we’ve reviewed the statutory filings and it appears that Equitable lead New York insurer would have accumulated about 867 million in 2023 ordinary dividend capacity through the first nine months of 2022. And then it sounds like you had strong statutory organic surplus growth in the fourth quarter. So that would imply potentially greater than 50% of your cash flows coming from regulated subsidiaries. With the source of funds from regulated subsidiaries, is there any room to return in excess of 1.3 billion in 2023?

[Robin Raju, Chief Financial Officer]

Sure. The guidance that, again we’ll stick to is that 55% to 65% post LBTI earnings, reminder, we will always return capital when prudently to do so for shareholders, we returned 6 billion since our IPO, that’s 120% free cash flow per share. We’re one the few in the industry that has never shut down that program. So it’s not only a lot of cash that we’ve returned since IPO, but it’s been consistent and stable over time and will continue to do so.

The subsidiary dividends are now less than 50% coming from the regulated company. A big piece of that is coming from AllianceBernstein, our Wealth Management business now, which is about a 100 million of cash, and then also the investment management contracts we have with the sub. The New York entity is always subject to the New York formula, which we should finalize by the time we file the K and we expect it’ll support the 1.3 billion. And if it stares [ph] more, there’s more, but we’ll continue to be consistent and prudent over time in returning capital to shareholders.

[Tracy Benguigui, Barclays]

Thank you.

[Operator]

Your next question comes from the line of Suneet Kamath from Jefferies. Your line is open.

[Suneet Kamath, Jefferies]

Yes, thanks. Just first, I’m not sure if it’s a question or a comment, but would you consider when you separate the legacy VA from the new VA giving us not only the earnings, but the capital and the cash flows that are backing those businesses?

[Mark Pearson, President and Chief Executive Officer]

Well, you certainly see the earnings split when we split out the legacy VA’s business across the board. And those earnings are going to go down at a good rate over time, and we’ll share that more in Investor Day. And then when we separate the different pieces in the company, we’ll provide more detail at that time.

[Suneet Kamath, Jefferies]

Okay. And then if and when you separate the New York block from the non-New York block, is that like a capital freeing event for you guys or not?

[Mark Pearson, President and Chief Executive Officer]

No, I think again, we hold economic, we look at capital economically across all of our entities at once. So I wouldn’t relate that to freeing up capital. I would think of it more as prudent management. So we can operate on the NAIC regime like the other 49 states. And in addition, it gives us ability and optionality going forward if we chose to do so.

[Suneet Kamath, Jefferies]

Got it. And then maybe just the last one. I don’t know if it’s for Robin or for Kate. But on the AB operating margin, I think it came in at a little over 28% for the year. In the past we’ve talked about a 30% plus. I think Robin mentioned some Nashville savings. So maybe just give us a sense of what the current plan is maybe over the next couple years in terms of the margin, and then how does the Bernstein Research joint venture, if at all impact that margin go for it? Thanks.

[Kate Burke]

Hi, Suneet. Yes, I’m happy, Suneet, I’m happy to comment. Over the long run, we continue to want to be able to achieve that 30%. Clearly, the market environment has a major impact on our ability to do so. We’re happy with the 28.4% that we delivered this year. We do have a couple of margin improving things in the future. As you highlighted, the Nashville move will be completed and we will get those real estate savings coming through in 2025. That is a significant, that should have an impact on our ability to grind that margin higher. And then on the Bernstein Research, SocGen JV, we continue to make progress there. We’re hoping that it will close here in the fourth quarter of 2023. And we do anticipate that will also over time have improvement on our margins as well. So those are two margin improvement stories that are foreseeable in the future.

[Suneet Kamath, Jefferies]

Okay, thanks.

[Operator]

Your next question comes from the line of Mark Hughes from Truist. Your line is open.

[Mark Hughes, Truist]

Yes, thank you very much. Sort of curious your view on M&A at this point. You’ve got some nice businesses that are smaller that are emerging. You’re breaking up into some new segmentation. I’m thinking like employee benefits is growing pretty rapidly. How do you see potential for M&A and how do you view that as a use of capital?

[Mark Pearson, President and Chief Executive Officer]

It’s Mark Pearson. Mark, thanks for the question. We have two phases, really. The first phase coming out of the IPO we set for the first four, five years. We need to establish our credibility. We need to show that we can run this business outside of AXA and show that we can deliver those targets that we set out, which we’ve done all culminating in the 6 billion cash we’ve returned to shareholders.

The balance sheet is strong now, so we can look for M&A and we did so recently with the CarVal acquisition, and I think that would be a good model to – for us to look at it. We bought CarVal, it plugs into AB’s distribution and it’s in a part of the market where we have real strategic interest in particular on the private markets. Yes, you’re right, there could be opportunities on AB and asset management. But the only thing I would really emphasize on the call, we will always remain very, very disciplined in looking at acquisition opportunities. And we have to always compare it to what’s the hurdle rate on share buybacks. So, it’s a high hurdle to clear.

[Mark Hughes, Truist]

Understood. And then you might have provided this, but on the SCS sales, how much of that was through proprietary distribution, your advisors for instance?

[Nick Lane, President-Equitable Financial]

This is Nick. On average Equitable Advisors is roughly 30% to 40% of sales.

[Mark Hughes, Truist]

Excellent. Thank you.

[Operator]

And your final question comes from the line of Alex Scott from Goldman Sachs. Your line is open.

[Alex Scott, Goldman Sachs]

Hi, good morning. I had a follow-up just on the capital questions that we were already asked. You talked about the strong IRRs you got on some of the new product sales this year. I mean, could you give us a feel for how much capital you’re deploying behind new business and how that compares with sort of what running off and will that as the legacy block winds down, will that change that dynamic a bit? Could we think about that increasing free cash flow over the longer term or maybe even the medium term?

[Robin Raju, Chief Financial Officer]

Sure, Alex, so as you noted, the new business that we write today has strong IRR. We serve a highest value of new business in this year benefiting from higher rates, but also continued client demand across all of our business. We’ve had 10 billion of net inflows which is really a testament of our all-weather product portfolio and the business model that we have, which is unique and differentiated across our peers.

The capital that we invest in that business is included in the insurance side within that 425% strong RBC that we get. And what that means is that there’s going to be good returns for shareholders and increased free cash flow over time for shareholders as we proceed. We can provide and we’ll probably provide more details on the capital and that we invest in the new business and the value that’s generated on Investor Day as we think it’ll be a key component that you can see how Equitable is differentiated on how we deploy capital, but also how we get good returns from it.

[Alex Scott, Goldman Sachs]

Got it. That’d be helpful. That’s all I got. Thank you.

[Operator]

And this does conclude today’s conference call. Thank you for your participation. You may now disconnect.